-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JmL79wRMfwyzvuKnDqtbnCVMP2FpRF2vx7KMpe0rWZ6i9NEHIG7uaEthZss7j7IQ TjfzsDD3H2iPiWyz5g0K4A== 0001201800-07-000138.txt : 20070827 0001201800-07-000138.hdr.sgml : 20070827 20070827170126 ACCESSION NUMBER: 0001201800-07-000138 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20070531 FILED AS OF DATE: 20070827 DATE AS OF CHANGE: 20070827 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VASOMEDICAL INC CENTRAL INDEX KEY: 0000839087 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 112871434 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-18105 FILM NUMBER: 071081312 BUSINESS ADDRESS: STREET 1: 180 LINDEN AVENUE CITY: WESTBURY STATE: NY ZIP: 11590 BUSINESS PHONE: 5169974600 MAIL ADDRESS: STREET 1: 150 MOTOR PARKWAY STREET 2: SUITE 408 CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: FUTURE MEDICAL PRODUCTS INC /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FUTURE MEDICAL PRODUCTS INC /NY/ DATE OF NAME CHANGE: 19920506 10KSB 1 vaso10k-may2007.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 31, 2007 [ ] 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. (Exact name of small business issuer 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) Issuer's telephone number, including area code: (516) 997-4600 Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock, $.001 par value (Title of Class) Check whether the issuer is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ] Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained in this Form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ X ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] State issuer's revenues for its most recent fiscal year. $6,354,083 The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the closing sale price of $0.11 as of August 17, 2007, was approximately $7,009,469. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliates status is not necessarily a conclusive determination for other purposes. At August 17, 2007, the number of shares outstanding of the issuer's common stock was 93,618,004. DOCUMENTS INCORPORATED BY REFERENCE Part III - (Items 9, 10, 11, 12 and 14) Registrant's definitive proxy statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934. Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]. {THIS PAGE LEFT INTENTIONALLY BLANK} INDEX TO FORM 10-KSB
Page PART I Item 1. Business..........................................................................................1 Item 2. Properties.......................................................................................25 Item 3. Legal Proceedings................................................................................25 Item 4. Submission of Matters to a Vote of Security Holders..............................................25 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities...................................................26 Item 6. Management's Discussion and Analysis or Plan of Operation........................................27 Item 7. Financial Statements.............................................................................41 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............41 Item 8A. Controls and Procedures..........................................................................41 Item 8B. Other Information................................................................................41 PART III Item 9. Directors and Executive Officers of the Registrant...............................................42 Item 10. Executive Compensation...........................................................................42 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ..42 Item 12. Certain Relationships and Related Transactions...................................................42 Item 13. Exhibits Item 14. Principal Accountant Fees and Services...........................................................43 Signatures .................................................................................................44 EXHIBITS Exhibit 23 Consent of Independent Registered Public Accounting Firm........................................E-1 Exhibit 31 Certifications Pursuant to Securities Exchange Act Rule 13A-14(A)/15D-14(A).....................E-2 Exhibit 32 Certification of Periodic Report................................................................E-4
-i- PART I ITEM 1 - BUSINESS Except for historical information contained in this report, the matters discussed are forward-looking statements that involve risks and uncertainties. When used in this report, words such as "anticipates", "believes", "could", "estimates", "expects", "may", "plans", "potential" and "intends" 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 effect of the dramatic changes taking place in the healthcare environment; the impact of competitive procedures and products and their pricing; medical insurance reimbursement policies; unexpected manufacturing or supplier problems; 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. General Overview Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the context requires otherwise, all references to "we", "our", "us", "Company", "registrant", "Vasomedical" or "management" refer to Vasomedical Inc. and its subsidiaries. Since 1995, we have been primarily engaged in designing, manufacturing, marketing and supporting EECP(R) enhanced external counterpulsation systems based on our unique proprietary technology currently indicated for use in cases of stable or unstable angina (i.e., chest pain), congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack, (MI)) and cardiogenic shock. The EECP(R) therapy system is a non-invasive, outpatient therapy for the treatment of diseases of the cardiovascular system. The therapy serves to increase circulation in areas of the heart with less than adequate blood supply and helps to restore systemic vascular function. The therapy also increases blood flow and oxygen supply to the heart muscle and other organs and decreases the heart's workload and need for oxygen, while also improving function of the endothelium, the lining of blood vessels throughout the body, lessening resistance to blood flow. We provide hospitals, clinics and physician private practices with EECP(R) equipment, treatment guidance, and a staff training and equipment maintenance program designed to provide optimal patient outcomes. EECP(R) is a registered trademark for Vasomedical's enhanced external counterpulsation systems. For more information visit www.vasomedical.com. We have Food and Drug Administration (FDA) clearance to market our EECP(R) therapy for use in the treatment of stable and unstable angina, congestive heart failure, acute myocardial infarction, and cardiogenic shock, however our current marketing efforts are limited to the treatment of chronic stable angina and congestive heart failure. Medicare and other third-party payers currently reimburse for the treatment of angina symptoms in patients with moderate to severe symptoms who are refractory to medications and not candidates for invasive procedures. Patients with primary diagnoses of heart failure, diabetes, peripheral vascular disease, etc. are also reimbursed under the same criteria, provided the primary indication for treatment with EECP(R) therapy is angina symptoms. During the last two fiscal years ended May 31, 2007 and 2006 we incurred large operating losses. We attempted to achieve profitability by reducing operating costs and halting the trend of declining revenue, to reduce cash usage through bringing our cost structure more into alignment with current revenue by engaging in restructurings during January 2006, March 2007 and April 2007 to substantially reduce personnel and spending on sales, marketing and development projects. In addition, we sought to obtain a strategic alliance within the sales and marketing areas and/or to raise additional capital through public or private equity or debt financings. Subsequent to May 31, 2007 the following events took place which allowed us to raise additional capital through a private equity financing and by the sale of our facility under a leaseback agreement. 1 o On June 21, 2007 we entered into a Securities Purchase Agreement with Kerns Manufacturing Corp. ("Kerns"). Concurrently with our entry into the Securities Purchase Agreement, we also entered into a Distribution Agreement and a Supplier Agreement with Living Data Technology Corporation, an affiliate of Kerns ("Living Data"). We sold to Kerns pursuant to the Securities Purchase Agreement, 21,428,572 shares of our common stock at $.07 per share for an aggregate of $1,500,000 as well a five-year warrant to purchase 4,285,714 shares of our common stock at an initial exercise price of $.08 per share (the "Warrant"). We also have an option to sell an additional $1 million of our common stock to Kerns. The agreement further provided for the appointment to our Board of Directors of two representatives of Kerns. In furtherance thereof, Mr. Jun Ma and Mr. Simon Srybnik, Chairman of both Kerns and Living Data, have been appointed members of our Board of Directors. Pursuant to the Distribution Agreement, we have become the exclusive distributor in the United States of the AngioNew ECP systems manufactured by Living Data. As additional consideration for such agreement, we agreed to issue an additional 6,990,840 shares of our common stock to Living Data. Pursuant to the Supplier Agreement, Living Data now will be the exclusive supplier to us of the ECP therapy systems that we market under the registered trademark EECP(R). The Distribution Agreement and the Supplier Agreement each have an initial term extending through May 31, 2012. Pursuant to a Registration Rights Agreement, we granted to Kerns and Living Data, subject to certain restrictions, "piggyback registration rights" covering the shares sold to Kerns as well as the shares issuable upon exercise of the Warrant and the shares issued to Living Data. o On August 15, 2007 we sold our facility under a five-year leaseback agreement for $1.4 million. The net proceeds from the sale was approximately $425,000 after payment in full of the two secured notes on our facility, brokers fees, closing costs, and the opening of a certificate of deposit in accordance with the provisions of the new lease. Market Overview Cardiovascular disease (CVD) is the leading cause of death in the world and is among the top three diseases in terms of healthcare spending in nearly every country. CVD claimed approximately 2.4 million lives in the United States in 2003 and was responsible for 1 of every 2.7 deaths, according to The American Heart Association (AHA) Heart and Stroke Statistical 2006 Update (2006 Update). Approximately 71.3 million Americans suffer from some form of cardiovascular disease. Among these, 12.0 million have coronary heart disease (CHD). We have Food and Drug Administration (FDA) clearance to market our EECP(R) therapy for use in the treatment of stable and unstable angina, congestive heart failure, acute myocardial infarction, and cardiogenic shock, however our current marketing efforts are limited to the treatment of chronic stable angina and congestive heart failure. Medicare and other third-party payers currently reimburse for the treatment of angina symptoms in patients with moderate to severe symptoms who are refractory to medications and not candidates for invasive procedures. Patients with primary diagnoses of heart failure, diabetes, peripheral vascular disease, etc. are also reimbursed under the same criteria, provided the primary indication for treatment with EECP(R) therapy is angina symptoms. The Company sponsored a pivotal, randomized clinical trial to demonstrate the efficacy of EECP(R) therapy in the most prevalent types of heart failure patients. This trial, known as PEECH(TM) (Prospective Evaluation of EECP(R) in Congestive Heart Failure), was intended to provide additional evidence of the safety and efficacy of EECP(R) therapy in the treatment of NY Heart Association (NYHA) class II and III patients with systolic heart failure. The preliminary results of the PEECH(TM) trial were presented at the American College of Cardiology scientific sessions in March 2005. On June 20, 2005, the Centers for Medicare and Medicaid Services (CMS) accepted our application for expansion of reimbursement coverage of EECP(R) therapy. On March 2 20, 2006, the Centers for Medicare and Medicaid Services (CMS) issued their Decision Memorandum regarding this reconsideration with the opinion that the evidence is not adequate to extend coverage to include CHF as a primary indication and to keep the existing coverage in the NCP (National Coverage Policy) intact. They commented in their decision memorandum that they were not able to apply full weight to the evidence generated by the PEECH(TM) trial, as it had not yet been published in a peer-reviewed medical journal by the time they were required to issue a final decision on this application. On August 25, 2006 the results of the trial were initially published on line by the Journal of the American College of Cardiology (JACC), and in print in its September 19, 2006 issue. In the November-December 2006 issue of the journal Congestive Heart Failure, a second report of the results from the PEECH(TM) trial was published, focusing on the results of a prespecified subgroup analysis in trial patients age 65 and over. We will continue to educate the marketplace that EECP(R) therapy is a therapy for ischemic cardiovascular disease and that patients with a primary diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also eligible for reimbursement under the current coverage policy, provided the primary indication for treatment with EECP(R) therapy is angina or angina equivalent symptoms and the patient satisfies other listed criteria. Additionally, we will continue to pursue expansion of coverage for EECP(R) therapy with Medicare and other third-party payers as evidence of its clinical utility develops. Angina Angina pectoris is the medical term for a recurring pain or discomfort in the chest due to coronary artery disease (CAD). Angina is a symptom of a condition called myocardial ischemia, which occurs when the heart muscle or myocardium doesn't receive as much blood, hence as much oxygen, as it needs. This usually happens because one or more of the heart's arteries, the blood vessels that supply blood to the heart muscle, is narrow or blocked. Insufficient blood supply to meet the need of the organ to function is called ischemia. The cardinal symptom of stable CAD is anginal chest pain or equivalent symptoms, such as exertional dyspnea or fatigue. Angina is uncomfortable pressure, fullness, squeezing or pain, usually occurring in the center of the chest under the breastbone. The discomfort also may be felt in the neck, jaw, shoulder, back or arm. Often the patient suffers not only from the discomfort of the symptom itself but also from the accompanying limitations on activities and the associated anxiety that the symptoms may produce. Uncertainty about prognosis may be an additional source of anxiety. For some patients, the predominant symptoms may be palpitations or syncope that is caused by arrhythmias or fatigue, edema, or orthopnea caused by heart failure. Episodes of angina occur when the heart's need for oxygen increases beyond the oxygen available from the blood nourishing the heart. Physical exertion is the most common though not only trigger for angina. For example, running to catch a bus could trigger an attack of angina while walking might not. Angina may happen during exercise, periods of emotional stress, exposure to extreme cold or heat, heavy meals, alcohol consumption or cigarette smoking. Some people, such as those with a coronary artery spasm, may have angina when they are resting. There are approximately 6.4 million angina patients in the United States and our EECP(R) therapy currently competes with other technologies in the market for approximately 130,000 new angina patients annually who do not adequately respond to or are not amenable to medical and surgical therapy and have the potential to meet the guidelines for reimbursement of EECP(R) therapy. Most angina patients are treated with medications, including beta blockers to slow and protect the heart and vasodilators, which are often prescribed to increase blood flow to the coronary arteries. When drugs fail or inadequately correct the problem the patients are considered unresponsive to medical therapy. Most angina patients are readily amenable by invasive revascularization procedures such as angioplasty and coronary stent placement, as well as coronary artery bypass grafting (CABG). However, there are approximately 130,000 angina patients each year whose angina can not be stopped by medication and they are no longer amenable by invasive procedures. In February 1999, the Centers for Medicare and Medicaid Services (CMS), the federal agency that administers the Medicare program for more than 39 million beneficiaries, issued a national coverage policy for the use of external counterpulsation therapy in the treatment of angina. Medicare reimbursement guidelines have a significant impact in determining the available market for EECP(R) therapy. We believe that over 65% of the patients that receive EECP(R) 3 therapy are Medicare patients and many of the third-party payers follow Medicare guidelines, which limits reimbursement for EECP(R) therapy to patients who do not adequately respond to or are not amenable to medical therapy and are not readily amenable to invasive therapy. As a result, an important element of our strategy is to grow the market for EECP(R) therapy by expanding reimbursement coverage to include a broader range of angina patients than the current coverage policy provides and enabling EECP(R) therapy to compete more with other therapies for ischemic heart disease. Please see the heading "Reimbursement" in the "Item-1 Business" section of this Form 10-KSB for a more detailed discussion of reimbursement issues. Congestive Heart Failure CHF is a condition in which the heart loses its full pumping capacity to supply the metabolic needs of all other organs. The condition affects both sexes and is most common in people over age 50. Symptoms include angina, shortness of breath, weakness, fatigue, swelling of the abdomen, legs and ankles, rapid or irregular heartbeat and low blood pressure. Causes range from chronic high blood pressure, heart-valve disease, heart attack, coronary artery disease, heartbeat irregularities, severe lung disease such as emphysema, congenital disease, cardiomyopathy, hyperthyroidism, severe anemia and others. CHF is treated with medication and, sometimes, surgery on heart valves or the coronary arteries and, in certain severe cases, heart transplants. Left ventricular assist devices (LVADs) and the use of cardiac resynchronization and implantable defibrillators are useful in selected patients with heart failure. Still, no consensus therapy currently exists for CHF and patients must currently suffer their symptoms chronically and have a reduced life expectancy. According to the 2006 Update, in 2003 approximately 2.4 million men and 2.6 million women in the US had CHF and about 550,000 new cases of the disease occur each year. Deaths caused by the disease increased 20.5% from 1993 to 2003. The prevalence of the disease is growing as a result of the aging of the population and the improved survival rate of people after heart attacks. Because the condition frequently entails visits to the emergency room and in-patient treatment centers, two-thirds of all hospitalizations for people over age 65 are due to CHF. The economic burden of congestive heart failure is enormous with an estimated cost to the health care system in 2005 in the United States of $29.6 billion. Congestive heart failure offers a good strategic fit with our current angina business and offers an expanded market opportunity for EECP(R) therapy. Unmet clinical needs in CHF are greater than those for angina, as there are few consensus therapies, invasive or otherwise, beyond medical management for the condition. It is noteworthy that data collected from the International EECP(R) Patient Registry(TM) (IEPR) at the University of Pittsburgh Graduate School of Public Health shows that approximately one-third of angina patients treated with EECP(R) also have a history of CHF and 70% to 80% have demonstrated positive outcomes from EECP(R) therapy. We sponsored a pivotal, randomized clinical trial to demonstrate the efficacy of EECP(R) therapy in the most prevalent types of heart failure patients. This trial, known as PEECH(TM) (Prospective Evaluation of EECP(R) in Congestive Heart Failure), was intended to provide additional evidence of the safety and efficacy of EECP(R) therapy in the treatment of mild-to-moderate heart failure and to support our application for expansion of the Medicare national reimbursement coverage policy to include mild-to-moderate heart failure as a primary indication. The PEECH(TM) trial was a positive clinical trial, having met the statistical requirement of meeting at least one of its co-primary endpoints, a significant difference in the proportion of patients satisfying a prespecified threshold of improvement in exercise duration. The trial also demonstrated significant improvements in favor of EECP(R) therapy on several important secondary endpoints, including exercise duration and improvement in symptom status and quality of life. Measures of change in peak oxygen consumption were not statistically significant in the overall study population, though a trend favoring EECP(R) therapy was present in early follow-up. Patients in the trial who had an ischemic etiology, i.e. pre-existing coronary artery disease, demonstrated a greater response to EECP(R) therapy than those who had an idiopathic (non-ischemic) etiology. The preliminary results of the PEECH trial were presented at the American College of Cardiology scientific sessions in March 2005. On June 20, 2005, the Centers for Medicare and Medicaid Services (CMS) accepted our application for expansion of reimbursement coverage of EECP(R) therapy to include patients with New York Heart Association (NYHA) Class II/III stable heart failure symptoms with an ejection fraction of less than or equal to 35%, i.e. chronic, stable, mild-to-moderate systolic heart failure as a primary indication, as well as patients with Canadian Cardiovascular Society Classification (CCSC) II, i.e. chronic, stable mild angina. 4 On June 23, 2005, CMS also received a request from a competing manufacturer of external counterpulsation therapy equipment, to reconsider the reimbursement coverage policy. They requested expansion of coverage to include 1) treatment of congestive heart failure, to include NYHA Class II, III with a left ventricular ejection fraction (LVEF) less than or equal to 40%, and acute heart failure; 2) treatment of stable angina to include CCSC II angina; 3) treatment of acute myocardial infarction; 4) treatment of cardiogenic shock. On September 15, 2005, they amended their request to include NYHA Class IV heart failure. On March 20, 2006, the Centers for Medicare and Medicaid Services (CMS) issued their Decision Memorandum regarding this reconsideration with the opinion "that the evidence is not adequate to conclude that external counterpulsation therapy is reasonable and necessary for the treatment of: o Canadian Cardiovascular Society Classification (CCSC) II angina o Heart Failure o New York Heart Association Class II/III stable heart failure symptoms with an ejection fraction of less than or equal to 35% o New York Heart Association Class II/III stable heart failure symptoms with an ejection fraction of less than or equal to 40% o New York Heart Association Class IV heart failure o Acute heart failure o Cardiogenic shock o Acute myocardial infarction." They commented in their decision memorandum that they were not able to apply full weight to the evidence generated by the PEECH(TM) trial, as it had not yet been published in a peer-reviewed medical journal by the time they were required to issue a final decision on this application. Moreover, they did not opine on whether they would consider the results of the trial when published to be sufficient evidence to conclude that external counterpulsation therapy is reasonable and necessary for the treatment of New York Heart Association Class II/III stable heart failure symptoms with an ejection fraction of less than or equal to 35%. They did, however, reiterate in the decision memorandum that "Current coverage as described in Section 20.20 of the Medicare National Coverage Determination (NCD) manual will remain in effect.", for refractory angina patients. On August 25, 2006 the results of the trial were initially published on line by the Journal of the American College of Cardiology (JACC), and in print in its September 19, 2006 issue. JACC is the official journal of the American College of Cardiology. In the November-December issue of the journal Congestive Heart Failure, a second report of results from the PEECH(TM) trial was published, focusing on the results of a prespecified subgroup analysis in trial patients age 65 and over. This analysis demonstrated a statistically positive response on both co-primary endpoints of the trial in patients receiving EECP(R) therapy versus those who did not, i.e. a significantly larger proportion of patients undergoing EECP(R) therapy met or exceeded prespecified thresholds of improvement in exercise duration and peak oxygen consumption. Moreover, the patients age 65 and older who received EECP(R) therapy demonstrated the greatest differences in exercise duration, peak oxygen consumption and functional class (symptom status) compared with those who did not receive EECP(R) therapy. We will continue to educate the marketplace that EECP(R) therapy is a therapy for ischemic cardiovascular disease and that patients with a primary diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also eligible for reimbursement under the current coverage policy, provided the primary indication for treatment with EECP(R) therapy is angina or angina equivalent symptoms and the patient satisfies other listed criteria. Additionally, we will continue to pursue expansion of coverage for EECP(R) therapy with Medicare and other third-party payers as evidence of its clinical utility develops. 5 The EECP(R) Therapy Systems The EECP(R) therapy systems are noninvasive treatment systems utilizing fundamental hemodynamic principles to augment coronary blood flow and at the same time reduce the workload of the heart while improving the overall vascular function. The treatment is completely noninvasive and is administered to patients on an outpatient basis, usually in daily one-hour sessions, five days per week over seven weeks for a total of 35 treatments. The procedure is well tolerated and most patients begin to experience relief of chest pain due to their coronary artery disease after 15 to 20 hours of therapy. As demonstrated in our clinical studies, positive effects have been shown in most patients to continue for years following a full course of therapy. During EECP(R) therapy, the patient lies on a contoured treatment table while three sets of inflatable pressure cuffs, resembling oversized blood pressure cuffs, are wrapped around the calves, and the lower and upper thighs, including the buttocks. The system is synchronized to the individual patient's cardiac cycle triggering the system to inflate the cuffs rapidly and sequentially -- via computer-interpreted ECG signals -- starting from the calves and proceeding upward to the buttocks during the relaxation phase of each heartbeat (diastole). This has the effect of creating a strong retrograde counterpulse in the arterial system, forcing freshly oxygenated blood towards the heart and coronary arteries at a time when resistance to coronary blood flow is at its lowest level. The counter pulse also simultaneously increases the volume of venous blood return to the heart when the heart is filling up for ejection in the contracting phase. Just prior to the next heartbeat when the heart begins to eject blood by contracting (systole), all three cuffs simultaneously deflate, leaving an empty vascular space to receive blood ejecting from the heart, thereby significantly reducing the workload of the heart. This is achieved because the vascular beds in the lower extremities are relatively empty when the cuffs are deflated, significantly lowering the resistance, and provide vascular space to receive the blood ejected by the heart, reducing the amount of work the heart must do to pump oxygenated blood to the rest of the body. The inflation/deflation activity is monitored constantly and coordinated by a computerized console that interprets electrocardiogram signals from the patient's heart, monitors heart rhythm and rate information, and actuates the inflation and deflation in synchronization with the cardiac cycles. The end result of this sequential "squeezing" of the legs is to create a pressure wave that significantly increases peak diastolic pressure benefiting circulation to the heart muscle and other organs, increases venous return so that the heart has more blood volume to eject out, and increases cardiac output. The release of external pressure produces reduction of systolic pressure, thereby reducing the workload of the heart. This reduction of vascular resistance insures that the heart does not have to work as hard to pump large amounts of blood through the body to help supply its metabolic needs. While the precise scientific means by which EECP(R) therapy achieves its long-term beneficial effects are only partially explained, there is evidence to suggest that the EECP(R) therapy triggers a neurohormonal response that induces the production of growth and vasodilatation factors that promotes recruitment of new arteries and dilates existing blood vessels. The recruitment of new arteries known as "collateral blood vessels" bypass blocked or narrowed vessels and increase blood flow to ischemic areas of the heart muscle that are receiving an inadequate supply of blood. There is also evidence to support a mechanism related to improved function of the endothelium (the inner lining of the blood vessels), which regulates the luminal size of the arteries and controls the dilation of the arteries to insure adequate blood flow to all organs, thus reducing constriction of blood vessels that supply oxygenated blood to the body's organs and tissues and as a result the required workload of the heart. Clinical Studies Early History 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 forty 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 current EECP(R) systems, such as the computerized electrocardiographic signal for triggering, and the use of pneumatic versus hydraulic actuating media that makes sequential cuff inflation possible. As the technology improved, however, it became apparent that both internal (i.e. intra-aortic balloon pumping) and 6 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" sequentially inflating EECP(R) device that incorporated three sets of cuffs including the buttocks cuff instead of a single cuff used in the previous system. The Chinese investigators were able to show that a 36-hour course of treatment with the EECP(R) system reduced the frequency and severity of anginal symptoms during normal daily functions and also during exercise, and also that the improvements were sustained for years after therapy. These results prompted a group of investigators at the State University of New York at Stony Brook (Stony Brook) to undertake a number of open label studies with the EECP(R) system between 1989 and 1996 to reproduce the Chinese results, using both subjective and objective endpoints. These studies, though open label and non-randomized, showed significant improvement in exercise tolerance by patients as evidenced by exercise treadmill stress testing, improvement in the perfusion of ischemic regions of the heart muscle by thallium radionuclide imaging stress testing, and partial or complete resolution of coronary perfusion defects. All of these results have been reported in medical literature and support the assertion that EECP(R) therapy is an effective and durable treatment for patients suffering from chronic angina pectoris. The MUST-EECP(R) Study In 1995, we began a randomized, controlled and double-blinded multicenter clinical study (MUST-EECP(R)) at seven leading university hospitals in the United States to confirm the patient benefits observed in the open studies conducted at Stony Brook and to provide definitive scientific evidence of EECP(R) therapy's effectiveness. MUST-EECP(R) was completed in July 1997 and the results presented at the annual meetings of the American Heart Association in November 1997 and the American College of Cardiology in March 1998. The results of MUST-EECP(R) were published in the Journal of the American College of Cardiology (JACC), a major peer-review medical journal, in June 1999. This 139 patient study, which included a sham-EECP(R) control group, demonstrated that patients treated with EECP(R) therapy were able to increase the amount of time on exercise testing before they showed signs of cardiac ischemia (i.e. ST-segment depression on their electrocardiogram) and experienced a reduction in the frequency of their angina attacks compared to patients who did not receive EECP(R) therapy. In 1999, physician collaborators completed a quality-of-life study with the EECP(R) system in a subset of the same patients that participated in MUST-EECP(R). Two highly regarded standardized means of measurement were used to gauge changes in patients' outlook and ability to participate in normal daily living during the treatment phase and for up to 12 months after treatment. Results of this study, which have been presented at major scientific meetings and published in the January 2002 Journal of Investigative Medicine, show that after one-year of follow-up the group of patients receiving EECP(R) therapy enjoyed significantly improved aspects of health-related quality of life compared to those who received a sham treatment. The PEECH(TM) Study As part of our program to expand the therapy's indications for use beyond the treatment of angina, we applied for and received FDA approval in April 1998 to study, under an Investigational Device Exemption (IDE) protocol, the application of EECP(R) therapy in the treatment of CHF. A 32 patient feasibility study was conducted simultaneously at the University of Pittsburgh, the University of California San Francisco and the Grant/Riverside Methodist Hospitals in Columbus, Ohio. The results of this study were presented at the 49th Scientific Sessions of the American College of Cardiology in March 2000 and the Heart Failure Society of America's Annual Meeting in September 2000 and were published in the July/August 2002 issue of Congestive Heart Failure. This study indicated that EECP(R) therapy could improve exercise capacity, increase functional capacity was beneficial to left ventricular function in patients with New York Heart Association (NYHA) Class II and III (i.e. mild to moderate) heart failure and a reduced left ventricular ejection fraction (i.e. LVEF = 35% or less). In summer 2000, an IDE supplement to proceed with a pivotal study to demonstrate the efficacy of EECP(R) therapy in the most prevalent types of heart failure patients was approved. This study, known as PEECH(TM) (Prospective Evaluation of EECP(R) in Congestive Heart Failure), began patient enrollment in March 2001. The PEECH(TM) clinical trial involved nearly thirty centers including: the Cleveland Clinic, Mayo Clinic, Scripps Clinic, Thomas Jefferson University Hospital, the University of North Carolina at Chapel Hill, the Minnesota Heart Failure Consortium, Advocate Christ Hospital, Hull Infirmary (UK), the University of California at San Diego Medical Center, the University of Pittsburgh Medical Center, the Lindner Clinical Trial Center and the Cardiovascular Research Institute. Vasomedical obtained 510(k) clearance for CHF from FDA in June 2002, obviating the need to continue this trial for FDA 7 regulatory reasons. However, we decided to complete the clinical trial in order to use the anticipated clinical outcomes to help establish the clinical validation of EECP(R) therapy as a treatment for CHF and to provide additional scientific support for Medicare, Medicaid and other third-party payers to expand reimbursement coverage of EECP(R) therapy to include the CHF indication. The protocol for the study required that patients have NYHA II or III symptoms, have an LVEF of 35% or less, be able to undergo exercise testing and complete patient examinations 1-week, 3-months and 6-months following treatment that evaluated changes from baseline in exercise capacity, symptom status and quality of life. Patients were randomized to receive either optimal (i.e. guideline-recommended) medical therapy (OPT) or EECP(R) therapy in addition to OPT. Enrollment of patients into the PEECH(TM) trial was completed in February 2004, with 187 patients, and the six-month follow-up examinations were completed by the end of December 2004. The preliminary results of the PEECH(TM) trial were presented at the American College of Cardiology scientific sessions in March 2005. On June 20, 2005, the Centers for Medicare and Medicaid Services (CMS) accepted our application for expansion of reimbursement coverage of EECP(R) therapy to include patients with New York Heart Association (NYHA) Class II/III stable heart failure symptoms with an ejection fraction of less than or equal to 35%, i.e. chronic, stable, mild-to-moderate systolic heart failure as a primary indication, as well as patients with Canadian Cardiovascular Society Classification (CCSC) II, i.e. chronic, stable mild angina. In designing the PEECH(TM) trial, success was demonstrated if the difference between EECP(R) therapy combined with optimal medical therapy compared to optimal medical therapy alone achieved a p-value less than 0.025 in at least one of two pre-defined co-primary endpoints: 1. percentage of subjects with greater than or equal to 60 seconds improvement in exercise duration from baseline to six months, or 2. percentage of subjects with at least 1.25 mL/kg/min increase in peak oxygen consumption from baseline to six months. Additional secondary endpoints were actual changes in exercise duration and peak oxygen consumption, changes in New York Heart Association ("NYHA") functional classification, changes in quality of life, adverse experiences and pre-defined clinical outcomes. The study was a positive clinical trial on the basis that a significantly greater proportion of patients who underwent EECP(R) therapy improved their exercise duration by 60 seconds or more six months following completion of therapy compared to those who received OPT alone (35.4% vs. 25.3%, p=0.016). The proportion of patients achieving a 1.25 mL/kg/min improvement in peak oxygen consumption was not significantly different between the two groups at six months. Consistent with the results on the primary endpoint of exercise duration, statistically significant differences favoring the EECP(R)-treated group were seen in changes in average exercise duration, symptom status and quality of life during follow-up. Average peak oxygen consumption showed a trend favoring the EECP(R) group at 1 week, but there were no differences detected at later follow-up. Results in patients with heart failure of ischemic etiology were noted to be clearly superior to those patients of idiopathic etiology though the benefit in these later patients could not be ruled out statistically. Lastly, EECP(R) therapy was deemed safe and well tolerated in this group of patients, as patients in the EECP(R)-treated group did not suffer more adverse events than those in the control group. Moreover, results of a predefined subgroup analysis showed that patients 65 years of age or older not only had a significantly greater response rate (co-primary endpoint) and average change in exercise duration favoring EECP(R)-treated patients, but the response rate (co-primary endpoint) and average change in peak oxygen consumption were also significantly better out to completion of the study at six months follow-up. The results of the PEECH(TM) trial indicate that EECP(R) therapy provides beneficial adjunctive therapy in patients with NYHA Class II-III systolic heart failure receiving optimal pharmacological therapy, especially in those 65 years of age or older. There can be no assurance that the results of the PEECH(TM) clinical trial will be sufficient to expand reimbursement coverage or the adoption by the medical community of EECP(R) therapy for use in the treatment of congestive heart failure. 8 The International EECP(R) Patient Registry (IEPR(TM)) The International EECP(R) Patient Registry at the University of Pittsburgh Graduate School of Public Health was established in January 1998 to track the outcomes of angina patients who have undergone EECP(R) therapy. More than one hundred centers have participated in the registry and data from more than 5,000 patients from an initial cohort enrolled between 1998 and 2001 (IEPR-1) have been tabulated and reported in several peer-reviewed publications. The American Journal of Cardiology published a report in February of 2004 on the two-year outcomes after EECP(R) therapy observed in 1,097 patients with two-year follow-up enrolled in IEPR-1. The authors noted that 73% of patients in this cohort had a decrease in their angina symptom status upon completion of EECP(R) therapy and that the average number of angina episodes for the group was reduced from 10.6 to 2.8 per week. They characterized this improvement as a "significant and dramatic reduction in CCSC" and stated that the adverse clinical event rate was low. (CCSC, or Canadian Cardiovascular Society Classification, is a rating scale used by physicians to assess the limitations imposed on patients' lives by angina.) Patients also reported improvement in health status, quality of life and satisfaction with life. At two-years follow-up, 74.9% of patients reported their angina symptom status (CCSC class) was improved compared to before EECP(R) therapy, and the accompanying improvements in angina frequency and quality of life measures were largely sustained as well. Nine per cent of patients had died over the two-year follow-up and 15% had undergone a revascularization procedure (angioplasty, stenting or coronary bypass surgery). The authors summarize the results by stating "Most patients experienced a significant reduction in angina and improvement in quality of life after EECP(R) therapy, and this reduction was sustained in most patients at 2-year follow-up." In a separate report that appeared in The American Journal of Cardiology in 2005, physician investigators participating in the IEPR(TM) reported on the results of EECP(R) therapy in patients with angina who also had severe left ventricular dysfunction (LVD, a reduced pumping capacity of the heart). Previously it was thought that such patients, and those with a diagnosis of heart failure, would be put at risk if treated with EECP(R) therapy, due to the increase in venous return to the heart caused by compression of the leg veins by enhanced external counterpulsation. The 363 patients in this cohort had long-standing and extensive coronary artery disease, had a high prevalence of cardiovascular disease risk factors, were not amenable to invasive revascularization procedures, and suffered from severe angina. Following completion of EECP(R) treatment, 77% decreased their CCSC angina class by at least one severity rating. The average number of angina episodes per week was greatly reduced and many were able to discontinue the use of nitroglycerin pills designed to relieve angina. As in the overall IEPR population, measures of quality of life were significantly improved after treatment. The rate of major adverse clinical events, while somewhat more frequent in this group of patients with significant comorbid disease, was characterized as low over the course of EECP(R) therapy. Exacerbation of heart failure was significantly more frequent in patients who did not complete therapy compared to those who did (16% vs. 0%) in patients with a previous history of heart failure. At two-years of follow-up, 83% remained alive and 70% were free of death, heart attack or invasive revascularization procedures (coronary artery bypass surgery, angioplasty and/or stenting) during that period. The majority of patients experienced sustained relief of their angina and improved quality of life. Twenty per cent of the group underwent repeat EECP(R) therapy during the two-year follow-up, mostly due to failure to complete the original course of therapy. A second phase of enrollment into the registry (IEPR-2) enrolled approximately 2,500 patients between 2002 and 2004 and these patients are currently being followed to 2-year follow-up. IEPR-2 incorporates sub-studies regarding treatment beyond 35 hours, possible predictors of response, effects on certain aspects of peripheral vascular disease and sexual dysfunction in men. Notably, the data set was modified in February 2003 to capture information on changes in heart failure symptom status, occurrence of clinical events due to heart failure and to include a heart failure-specific quality of life questionnaire in IEPR-2 patients with concomitant heart failure. 9 Vasomedical considers the IEPR(TM) to be a vital source of information about the effectiveness and safety of EECP(R) therapy in a real-world environment for the medical community at large. To date, twenty full-length articles reporting data from the IEPR(TM) have been published in peer-review medical journals and more than seventy-eight abstracts have been presented at a variety of major cardiovascular scientific conferences. For this reason, we continue to provide an ongoing grant to fund the registry to publicize data that assists clinicians in delivering optimal care to patients. Registry data, while considered a valuable source of complementary clinical data, is deemed by scientific cardiologists and others to be less convincing than data from randomized, blinded, clinical trials and from certain other well-controlled clinical study designs. There can be no assurance that the Company will be able to obtain regulatory, reimbursement or other types of approvals, or a favorable standing in medical professional practice guidelines, based upon results observed in patients enrolled in registries. Other studies and publications A search on the term "external counterpulsation" of the PubMed database available through the National Library of Medicine conducted on August 21, 2006, identified one-hundred-ninety-eight (198) citations of articles published in the medical scientific literature, including 28 review articles. The vast majority of these publications have reported results in patients with chronic stable angina and/or heart failure treated with EECP(R) therapy, while others have reported use of the device in other cardiovascular or non-cardiovascular indications. The vast majority of these reports are generated using Vasomedical EECP(R) therapy systems and equipment. In summary, this body of literature contains evidence from a variety of institutions and investigators demonstrating that EECP(R) therapy can provide benefit to appropriate patients in the following ways: o Enhancement of coronary and peripheral circulation, myocardial perfusion, ventricular function and hemodynamics, o Improvement in endothelial function and vascular reactivity o Elimination or reduction of cardiac ischemia, o Elimination or reduction in symptoms and improved functional class in angina and heart failure, o Resolution of reversible ischemic defects found on quantitative myocardial perfusion studies, o Increased exercise duration and increased time to ischemic changes during treadmill exercise in angina and increased exercise duration and peak oxygen consumption in heart failure in properly selected patients, o Elimination or reduction in use of anti-angina medications, o Improved quality of life in patients with angina and heart failure. Strategic Initiatives Our short- and long-term plans are to: a) reduce the cash burn and bring our cost structure into alignment with current revenue in the short term by: i) reducing or eliminating spending on all but critical new product development and clinical research projects, ii) focusing on rebuilding our revenue base through supporting our direct sales effort and expanding our use of independent sales representatives, and iii) maintaining tight cost control on all areas of personnel cost and spending. b) pursue possible strategic investments and creative partnerships with others who have distinctive competencies or delivery capabilities for serving the cardiovascular and disease management marketplace, as opportunities become available. c) Increase market penetration in the domestic reimbursable user base for EECP(R) therapy by: i) expanding reimbursement to include coverage for the treatment of ischemic NYHA Class II and III CHF patients, ii) marketing directly to third-party payers to increase third-party reimbursement, and 10 iii) expanding reimbursement coverage in the angina market to include patients with CCS Class II angina. d) Increase the clinical and scientific understanding of EECP(R) therapy by: i) resubmitting data to insurers, including Medicare, for favorable coverage policies; ii) continuing to support on a limited basis academic reference centers in the United States and overseas in order to accelerate the growth and prestige of EECP(R) therapy and e) Increase awareness of the benefits of the EECP(R) therapy in the medical community by: i) developing campaigns to market the benefits of EECP(R) therapy directly to clinicians, third-party payers and patients; ii) engaging in educational campaigns for providers and medical directors of third-party insurers designed to highlight the cost-effectiveness and quality-of-life advantages of EECP(R) therapy; and iii) continuing the development of EECP(R) therapy in certain international markets, principally through the expansion of our distribution network and obtaining of reimbursement approvals. f) Maintain development efforts to improve the EECP(R) system and expand its intellectual property estate by filing for additional patents in the United States and other countries. These listed strategic objectives are forward-looking statements. We review, modify and change our strategic objectives from time to time based upon changing business conditions. There can be no assurance that we will be able to achieve our strategic objectives and even if these results are achieved risks and uncertainties could cause actual results to differ materially from anticipated results. To a large extent limited financial resource availability reduces our ability to achieve these strategic objectives. Please see the section of this Form 10-KSB entitled "Risk Factors" for a description of certain risks among others that may cause our actual results to vary from the forward-looking statements. Sales and Marketing Domestic Operations We sell EECP(R) therapy systems to treatment providers such as hospitals, clinics and physician private practices in the United States through a direct and indirect sales force. Our sales force has consisted of a combination of employees and independent sales representatives managed by a vice president of sales plus in-house administrative support. The efforts of our sales organization are further supported by clinical educators who are responsible for the onsite training of physicians and therapists as new centers are established. This clinical applications group is also engaged in training and certification of new personnel at each site, as well as for updating providers on new clinical developments relating to EECP(R) therapy. Our marketing activities support physician education and physician outreach programs, exhibition at national, international and regional medical conferences, as well as sponsorship of seminars at professional association meetings. These programs are designed to support our field sales organization and increase awareness of EECP(R) therapy in the medical community. Additional marketing activities include creating awareness among third-party payers to the benefits of EECP(R) treatment for patients suffering from CHF as well as angina. We employ service technicians responsible for the repair and maintenance of EECP(R) systems and, in some instances, on-site training of a customer's biomedical engineering personnel. We provide a service arrangement (usually one year) that includes: service by factory-trained service representatives, material and labor costs, emergency and remedial visits, software upgrades, technical phone support and preferred response times. We service our customers after the service arrangement expires either under separately purchased annual service contracts or on a fee-for-service basis. 11 International Operations We distribute our product internationally through a network of independent distributors. It has generally been our policy to appoint distributors exclusive marketing rights to EECP(R) therapy systems in their respective countries, in exchange for their commitment to meet the duties and responsibilities required of a distributor. Each distribution agreement contains a number of requirements that must be met for the distributor to retain exclusivity, including minimum performance standards. In most cases, distributors must assist us either to obtain an FDA-equivalent marketing clearance, country registration or to establish confirmatory clinical trials, conducted by local key opinion leaders in cardiology, required to obtain Ministry of Health approval, certification or reimbursement. Each distributor is responsible for registering the product and obtaining any required regulatory or clinical approvals, supporting local reimbursement efforts for EECP(R) therapy and maintaining an infrastructure to provide post-sales support. To date, revenues from international operations have not been significant, but did increase during fiscal 2007. Revenues from non-domestic markets were 16%, 8% and 9% for the fiscal years ended May 31, 2007, 2006, and 2005, respectively. Our international marketing activities include, among other things, assisting in obtaining national or third-party healthcare insurance reimbursement approval and participating in medical conferences to create greater awareness and acceptance of EECP(R) therapy by clinicians. International sales may be subject to certain risks, including export/import licenses, tariffs, other trade regulations and local medical regulations. Tariff and trade policies, domestic and foreign tax and economic policies, exchange rate fluctuations and international monetary conditions have not significantly affected our business to date. In addition, there can be no assurance that we will be successful in maintaining our existing distribution agreements or entering into any additional distribution agreements, or that our international distributors will be successful in marketing EECP(R) therapy. Competition Presently, we are aware of at least four direct competitors with an external counterpulsation device on the market, namely Cardiomedics, Inc., ACS, Scottcare and Living Data Technology Corporation. As of June 2007 Vasomedical and Living Data Technology Corporation entered into a Securities Purchase Agreement with Kerns Manufacturing Corp. ("Kerns"). Concurrently with our entry into the Securities Purchase Agreement, we also entered into a Distribution Agreement and a Supplier Agreement with Living Data Technology Corporation, an affiliate of Kerns ("Living Data"). We sold to Kerns pursuant to the Securities Purchase Agreement, 21,428,572 shares of our common stock at $.07 per share for an aggregate of $1,500,000 as well a five-year warrant to purchase 4,285,714 shares of our common stock at an initial exercise price of $.08 per share (the "Warrant"). We also have an option to sell an additional $1 million of our common stock to Kerns. The agreement further provided for the appointment to our Board of Directors of two representatives of Kerns. In furtherance thereof, Mr. Jun Ma and Mr. Simon Srybnik, Chairman of both Kerns and Living Data, have been appointed members of our Board of Directors. Pursuant to the Distribution Agreement, we have become the exclusive distributor in the United States of the AngioNew ECP systems manufactured by Living Data. As additional consideration for such agreement, we agreed to issue an additional 6,990,840 shares of our common stock to Living Data. Pursuant to the Supplier Agreement, Living Data now will be the exclusive supplier to us of the ECP therapy systems that we market under the registered trademark EECP(R). The Distribution Agreement and the Supplier Agreement each have an initial term extending through May 31, 2012. Pursuant to a Registration Rights Agreement, we granted to Kerns and Living Data, subject to certain restrictions, "piggyback registration rights" covering the shares sold to Kerns as well as the shares issuable upon exercise of the Warrant and the shares issued to Living Data. In addition, other companies have received FDA 510(k) clearance for external counterpulsation systems since 1998, although we have not seen these systems commercially in the marketplace. While we believe that these competitors' involvement in the market is limited, there can be no assurance that these companies will not become a significant competitive factor or that other companies will not enter the external counterpulsation market. We view other companies engaged in the development of device-related, biotechnology and pharmacological approaches to the management of cardiovascular 12 disease as potential competitors in the marketplace as well. These include such common and well established medical devices and treatments as the intra-aortic balloon pump (IABP), ventricular assist devices (VAD), coronary artery bypass graft surgery (CABG), coronary angioplasty, mechanical circulatory support (MCS), transmyocardial laser revascularization (TMR), total artificial hearts, cardiac resynchronization devices, ranolazine and nesiritide (Natrecor(R)); as well as newer technologies currently in FDA-approved clinical trials such as spinal cord stimulation (SCS). There can be no assurance that other companies will not develop new technologies or enter the market intended for EECP(R) therapy systems. Such other companies may have substantially greater financial, manufacturing and marketing resources and technological expertise than those possessed by us and may, therefore, succeed in developing technologies or products that are more efficient than those offered by Vasomedical and that would render our technology and existing products obsolete or noncompetitive. Government Regulations We are subject to extensive regulation by numerous government regulatory agencies, including the FDA and similar foreign agencies. Where applicable, we are required to comply with laws, regulations and standards governing the development, preclinical and clinical testing, manufacturing, quality testing, labeling, promotion, import, export, and distribution of our medical devices. Device Classification FDA regulates medical devices, including the requirements for premarket review, according to their classification. Class I devices are generally lower risk products for which general regulatory controls are sufficient to provide reasonable assurance of safety and effectiveness. Most Class I devices are exempt from the requirement of 510(k) premarket notification clearance; however, 510(k) clearance is necessary prior to marketing a non-510(k) exempt Class I device in the United States. Class II devices are devices for which general regulatory controls are insufficient, but for which there is sufficient information to establish special controls, such as guidance documents or standards, to provide reasonable assurance of safety and effectiveness. A premarket notification clearance is necessary prior to marketing a non-510(k) exempt Class II device in the United States. Class III devices are devices for which there is insufficient information demonstrating that general and special controls will provide reasonable assurance of safety and effectiveness and which are life-sustaining, life-supporting or implantable devices, are of substantial importance in preventing impairment of human health, or pose a potential unreasonable risk of illness or injury. The FDA generally must approve a premarket approval or PMA application prior to marketing a Class III device in the United States. A medical device is considered by FDA to be a preamendments device, and generally not subject to premarket review, if it was commercially distributed before May 28, 1976, the date the Medical Device Amendments of 1976 became law. A postamendments device is one that was first distributed commercially on or after May 28, 1976. Postamendments device versions of preamendments Class III devices are subject to the same requirements as those preamendments devices. FDA may require a PMA for a preamendments Class III device only after it publishes a regulation calling for such PMA submissions. Persons who market preamendments devices must submit a PMA, and have it filed by FDA, by a date specified by FDA in order to continue marketing the device. Prior to the effective date of a regulation requiring a PMA, devices must have a cleared premarket notification or 510(k) for marketing. Certain external counterpulsation devices were commercially distributed prior to May 28, 1976. Our external counterpulsation devices were marketed after 1976; however, they were found to be substantially equivalent to a preamendments Class III device and therefore are subject to the same requirements as the preamendments external counterpulsation devices. Premarket Review The 510(k) premarket notification process requires an applicant to give notice to FDA of its intent to introduce its device into commerce. In its premarket notification, the applicant must demonstrate that its new or modified medical device is substantially equivalent to a legally marketed or predicate device marketed before May 28, 1976. Prior to beginning commercialization of the new or modified product it must receive an order from the FDA classifying the device under section 510(k) in the same classification as the predicate device, 13 and as a result, the new device will be cleared for marketing. Modifications to a previously cleared medical device that do not significantly affect its safety and effectiveness or constitute a major change in the intended use can be made without having to submit a new 510(k). In February 1995, the Company received 510(k) clearance to market the second-generation version of its EECP(R) therapy system, the MC2, which incorporated a number of technological improvements over the predicate system. In addition, in December 2000, the Company received 510(k) clearance to market its third generation system, the TS3. The FDA's clearance in these cases was for the use of EECP(R) therapy in the treatment of patients suffering from stable or unstable angina pectoris, acute myocardial infarction and cardiogenic shock. In June 2002, the FDA granted 510(k) market clearance for an upgraded TS3, which incorporated the Company's patented CHF treatment and oxygen saturation monitoring technologies, and provided for a new indication for the use of EECP(R) in CHF, which applied to all then-current models of the Company's EECP(R) therapy systems. Modifications to a previously cleared medical device that do not significantly affect its safety and effectiveness or constitute a major change in the intended use can be made without having to submit a new 510(k). FDA publishes guidance for medical device manufacturers on the types of changes that meet the requirements for a new 510(k) prior to introduction of a device for marketing distribution. Vasomedical followed FDA's guidance on when to submit a new 510(k) for changes to a device and concluded that the changes incorporated into its Model TS4 did not require a new 510(k) prior to its introduction to market. Vasomedical subsequently obtained a 510(k) that applied to the Model TS4 and all of its models in March 2004, when it made changes to the labeling of all of its EECP(R) therapy systems. In November 2004, the Company introduced its Model Lumenair, and again concluded that the changes did not require a new 510(k) at that time. There can be no assurance that the FDA will agree with Vasomedical's conclusions that a new 510(k) was unnecessary on these occasions or in other similar instances, or that our products will not be subject to a regulation requiring a PMA for preamendments Class III external counterpulsation devices. If a device does not receive a clearance order because the FDA determines that the device is not substantially equivalent to a predicate device and thus the device automatically is considered a Class III device, the applicant may ask the FDA to make a risk-based classification to place the device in Class I or II. However, if a timely request for risk-based classification is not made, or if the FDA determines that a Class III designation is appropriate, an approved PMA will be required before the device may be marketed. The more rigorous premarket review process is the PMA process. The FDA approves a PMA if the applicant has provided sufficient valid scientific evidence to prove that the device is safe and effective for its intended use(s). Applications for premarket approval generally contain human clinical data. This process is usually much more complex, time-consuming and expensive than the 510(k) process, and is uncertain. Both 510(k)s and PMAs now require the submission of user fees in most circumstances. There can be no assurance that all the necessary FDA clearances or approvals, including approval of any PMA required by the promulgation of a regulation, will be granted for our products, future-generation upgrades or newly developed products, on a timely basis or at all. Failure to receive, or delays in receipt of such clearances, could have a material adverse effect on our financial condition and results of operations. Clinical Trials If human clinical trials of a device are required, whether to support a 510(k) or PMA application, the trials' sponsor, which is usually the manufacturer of the device, first must obtain the approval of the appropriate institutional review boards. If a trial is of a significant risk device, the sponsor also must obtain an investigational device exemption or IDE from FDA before the trial may begin. A significant risk device is a device that presents a potential for serious risk to the subject and is an implant; is life-sustaining or life-supporting; or is for a use of substantial importance in diagnosing, curing, mitigating, or treating disease, or otherwise preventing impairment of human health. For all clinical testing, the sponsor must obtain informed consent from the patients participating in each trial. The results of clinical testing that a sponsor undertakes may be insufficient to obtain clearance or approval of the tested product. Pervasive and Continuing FDA Regulation We are also subject to other FDA regulations that apply prior to and after a product is commercially released. These include Current Good Manufacturing Practice (CGMP) requirements set forth in FDA's Quality System Regulation (QSR), that require manufacturers to have a quality system for the design, manufacture, 14 packaging, labeling, storage, installation and servicing of medical devices intended for commercial distribution in the United States. This regulation covers various areas including management and organization, device design, purchase and handling of components, production and process controls such as those related to buildings and equipment, packaging and labeling control, distribution, installation, complaint handling, corrective and preventive action, servicing, and records. We are subject to periodic inspection by the FDA for compliance with the CGMP requirements and Quality System Regulation. The FDA also enforces post-marketing controls that include the requirement to submit medical device reports to the agency when a manufacturer becomes aware of information suggesting that any of its marketed products may have caused or contributed to a death or serious injury, or any of its products has malfunctioned and that a recurrence of the malfunction would likely cause or contribute to a death or serious injury. The FDA relies on medical device reports to identify product problems and utilizes these reports to determine, among other things, whether it should exercise its enforcement powers. The FDA also may require postmarket surveillance studies for specified devices. We are subject to the Federal Food, Drug, and Cosmetic Act's, or FDCA's, general controls, including establishment registration, device listing, and labeling requirements. If we fail to comply with any requirements under the FDCA, we, including our officers and employees, could be subject to, among other things, fines, injunctions, civil penalties, and criminal prosecution. We also could be subject to recalls or product corrections, total or partial suspension of production, denial of premarket notification clearance or PMA approval, and rescission or withdrawal of clearances and approvals. Our products could be detained or seized, the FDA could order a recall, repair, replacement, or refund of our devices, and the agency could require us to notify health professionals and others that the devices present unreasonable risks of substantial harm to the public health. The advertising of our products is subject to regulation by the Federal Trade Commission, or FTC. The FTC Act prohibits unfair or deceptive acts or practices in or affecting commerce. Violations of the FTC Act, such as failure to have substantiation for product claims, would subject us to a variety of enforcement actions, including compulsory process, cease and desist orders and injunctions, which can require, among other things, limits on advertising, corrective advertising, consumer redress and restitution, as well as substantial fines or other penalties. Foreign Regulation In most countries to which we seek to export the EECP(R) system, we must first obtain approval from the local medical device regulatory authority. The regulatory review process varies from country to country and can be complex, costly, uncertain, and time-consuming. We are also subject to periodic audits by organizations authorized by foreign countries to determine compliance with laws, regulations and standards that apply to the commercialization of our products in those markets. Examples include auditing by a European Union Notified Body organization (authorized by a member state's Competent Authority) to determine conformity with the Medical Device Directives (MDD) and by an organization authorized by the Canadian government to determine conformity with the Canadian Medical Devices Regulations (CMDR). There can be no assurance that we will obtain desired foreign authorizations to commercially distribute our products in those markets or that we will comply with all laws, regulations and standards that pertain to our products in those markets. Failure to receive or delays in receipt of such authorizations or determinations of conformity could have a material adverse effect on our financial condition and results of operations. Patient Privacy Federal and state laws protect the confidentiality of certain patient health information, including patient records, and restrict the use and disclosure of that protected information. The U.S. Department of Health and Human Services (HHS) published patient privacy rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA privacy rule) and the regulation was finalized in October 2002. The HIPAA privacy rule governs the use and disclosure of protected health information by "Covered Entities," which are (1) health plans, (2) health care clearinghouses, and (3) health care providers that transmit health information in electronic form in connection with certain health care transactions such as benefit claims. Currently, the HIPAA privacy rule affects us only indirectly in that patient data that we access, collect and 15 analyze may include protected health information. Additionally, we have signed some Business Associate agreements with Covered Entities that contractually bind us to protect protected health information, consistent with the HIPAA privacy rule's requirements. We do not expect the costs and impact of the HIPAA privacy rule to be material to our business. Practice Guidelines Medical professional societies periodically issue Practice Guidelines to their members and make them available publicly. The American College of Cardiology (ACC) and the American Heart Association (AHA) have jointly engaged in developing practice guidelines since 1980 to critically evaluate the use of diagnostic procedures and therapies in the management or prevention of cardiovascular diseases. These guidelines are meant to "improve the effectiveness of care, optimize patient outcomes and affect the overall cost of care favorably by focusing resources on the most effective strategies". Recommendations incorporated into the guidelines are based upon an assessment of the strength of evidence for or against a treatment or procedure and estimates of expected health outcomes stemming from a formal review of peer-reviewed published literature. These guidelines may not be updated for some time. The "ACC/AHA 2002 Guideline Update for the Management of Patients with Chronic Stable Angina" was last issued in 2003. Comments on external counterpulsation appear in a section entitled " Recommendations for Alternative Therapies for Chronic Stable Angina in Patients Refractory to Medical Therapy Who Are Not Candidates for Percutaneous Intervention or Surgical Revascularization" and include a so-called Class IIb recommendation. ACC/AHA guideline classifications I, II and III are used to "provide final recommendations for both patient evaluation and therapy" and a Class IIb rating is defined as "Usefulness/efficacy is less well established by evidence/opinion". The ACC/AHA 2005 Guidelines for the Diagnosis and Management of Chronic Heart Failure in the Adult were issued in 2005. External counterpulsation is listed as one of the devices under investigation in a section entitled "Drugs and Interventions Under Active Investigation". The 2006 Comprehensive Heart Failure Practice Guideline issued in February 2006 by the Heart Failure Society of America does not include any comments on the use of external counterpulsation therapy for treating heart failure patients. In summary, while evaluations of the use of EECP(R) therapy in patients with chronic angina and heart failure continue to appear in several oral or poster presentations at major scientific meetings and in peer-reviewed publications each year, there continues to be skepticism in the cardiology community about its broader use. Additional evidence regarding the efficacy of EECP(R) therapy continues to appear, however the evidence may not be sufficient to warrant a modification of practice guidelines to a more favorable recommendation and increased acceptance by the medical community. Reimbursement In addition to regulatory approvals for commercialization by government agencies, reimbursement coverage and payment rates are factors in the sales of our products and we depend in large part on the availability of reimbursement programs. Medicare, Medicaid, as well as private health care insurance and managed-care plans determine eligibility for coverage of a product or therapy based on a number of factors, including the payer's determination that the product is reasonable and necessary for the diagnosis or treatment of the illness or injury for which it is administered according to the scope of clinical evidence available, accepted standards of medical care in practice, the product's cost effectiveness, whether the product is experimental or investigational, impact on health outcomes and whether the product is not otherwise excluded from coverage by law or regulation. The coverage process for Medicare reimbursement is legislated by Congress and administered by the Centers for Medicare and Medicaid Services (CMS), and is highly variable in the commercial market. There may be significant delays in obtaining coverage for newly-approved products, and coverage may be more limited than the purposes for which the product is approved or cleared by FDA. Even when we obtain authorization from the FDA or a foreign authority to begin commercial distribution, there may be limited demand for the device until reimbursement approval has been obtained from governmental and private third-party payers. Moreover, eligibility for coverage does not imply that a product will be reimbursed in all cases or at a rate that allows us to market our EECP(R) systems at a price that will enable us to make a profit or even cover our costs. Reimbursement rates may vary according to the use of the product and the 16 clinical setting in which it is used, may be based on payments allowed for lower-cost products that are already reimbursed, may be incorporated into existing payments for other products or services, and may reflect budgetary constraints and/or imperfections in Medicare or Medicaid data. Even if successful, demand for products may be driven more by the scope of peer-reviewed evidence and acceptance, endorsement by regulatory and clinical bodies, or foreign country authorities than by the reimbursement rates available. Securing coverage at adequate reimbursement rates from government and third party payers can be a time consuming and costly process that could require us to provide supporting scientific, clinical, and cost-effectiveness data for the use of our products to each payer. Our inability to promptly obtain coverage and profitable reimbursement rates from government-funded and private payers for our products could have a material adverse effect on our financial condition and operating results. Our reimbursement strategies are currently focused in the following primary areas: expanding Medicare coverage to include congestive heart failure and mild angina, expanding coverage with other third-party payers, expanding Medicare coverage for angina and obtaining coverage in selected international markets. Current Medicare Coverage in Angina In February 1999, the Centers for Medicare and Medicaid Services (CMS), the federal agency that administers the Medicare program for more than 39 million beneficiaries, issued a national coverage policy under HCPCS code G0166 for the use of the EECP(R) therapy system. Key excerpts from the coverage read as follows: "Although ECP devices are cleared by the Food and Drug Administration (FDA) for use in treating a variety of cardiac conditions, including stable or unstable angina pectoris, acute myocardial infarction and cardiogenic shock, the use of this device to treat cardiac conditions other than stable angina pectoris is not covered, since only that use has developed sufficient evidence to demonstrate its medical effectiveness." "for patients who have been diagnosed with disabling angina (class III or class IV, Canadian Cardiovascular Society Classification or equivalent classification) who, in the opinion of a cardiologist or cardiothoracic surgeon, are not readily amenable to surgical interventions such as balloon angioplasty and cardiac bypass because: 1. their condition is inoperable, or at high risk of operative complications or post-operative failure; 2. their coronary anatomy is not readily amenable to such procedures; or 3. they have co-morbid states, which create excessive risk." The 2007 national average payment rate per hourly session in the physician office setting and the hospital outpatient facility is approximately $147 and $107, respectively. Reimbursement rates vary throughout the country and range from $98 to $215 per hourly session. The 2006 national average payment rate per hourly session in the physician office setting and the hospital outpatient facility is approximately $138 and $104, respectively. Reimbursement rates vary throughout the country and range from $113 to $231 per hourly session. Under the Medicare program, physician reimbursement of the provision of EECP(R) therapy is higher if the therapy is performed in a physician office setting as compared to a hospital outpatient facility in order to reflect higher costs associated with the physician office. Since January 2000, the national average payment rate has varied considerably. The initial national average payment rate for the physician office setting and the hospital outpatient facility in 2000 was approximately $130 and $112, respectively per hourly session. The average payment rate for the physician office setting climbed to $208 per treatment session in 2003 before being reduced approximately 37% in 2004 to $132 per treatment session. In 2005 the physician rate increased approximately 5% and remained unchanged in 2006. The average payment rate for the hospital outpatient facility declined steadily to 2005 before increasing approximately 2% in 2006. In order to bill and receive payment from Medicare, an individual or entity must be enrolled in the Medicare program for EECP(R) therapy. The physician office setting and the hospital outpatient facility are the only entities currently authorized to receive reimbursement for the EECP(R) therapy under the Medicare program and reimbursement is not permitted to other individuals or entity types, which include, but are not limited to, nurse practitioners, 17 physical therapists, ambulatory surgery centers, nursing homes, comprehensive outpatient rehabilitation facilities, outpatient dialysis facilities, and independent diagnostic testing facilities. For each of these provider types there is statutory authorization and accompanying regulations that govern the terms and conditions of Medicare program participation. If there were any material change in the availability of Medicare coverage, or if the reimbursement level for treatment procedures using the EECP(R) therapy system is determined to be inadequate, it would adversely affect our business, financial condition and results of operations. Moreover, we are unable to forecast what additional legislation or regulation, if any, relating to the health care industry or Medicare coverage and payment level may be enacted in the future, or what effect such legislation or regulation would have on us. Application to Expand Medicare Coverage to include Class II Angina and Class II/III CHF On May 31, 2005, we submitted an application to CMS to expand the national coverage policy for external counterpulsation treatment to patients with Canadian Cardiovascular Class II stable angina and to patients with New York Heart Association (NYHA) Class II and III stable heart failure symptoms with an ejection fraction less than 35%. On June 20, 2005, the Centers for Medicare and Medicaid Services (CMS) accepted our application for expansion of reimbursement coverage of EECP(R) therapy to include patients with New York Heart Association (NYHA) Class II/III stable heart failure symptoms with an ejection fraction of less than or equal to 35%, i.e. chronic, stable, mild-to-moderate systolic heart failure as a primary indication, as well as patients with Canadian Cardiovascular Society Classification (CCSC) II, i.e. chronic, stable mild angina. On June 23, 2005, CMS also received a request from a competing manufacturer of external counterpulsation therapy equipment, to reconsider the reimbursement coverage policy. They requested expansion of coverage to include 1) treatment of congestive heart failure, to include NYHA Class II, III with a left ventricular ejection fraction (LVEF) less than or equal to 40%, and acute heart failure; 2) treatment of stable angina to include CCSC II angina; 3) treatment of acute myocardial infarction; 4) treatment of cardiogenic shock. On September 15, 2005, they amended their request to include NYHA Class IV heart failure. On March 20, 2006, the Centers for Medicare and Medicaid Services (CMS) issued their Decision Memorandum regarding this reconsideration with the opinion "that the evidence is not adequate to conclude that external counterpulsation therapy is reasonable and necessary for the treatment of: o Canadian Cardiovascular Society Classification (CCSC) II angina o Heart Failure o New York Heart Association Class II/III stable heart failure symptoms with an ejection fraction of less than or equal to 35% o New York Heart Association Class II/III stable heart failure symptoms with an ejection fraction of less than or equal to 40% o New York Heart Association Class IV heart failure o Acute heart failure o Cardiogenic shock o Acute myocardial infarction." They commented in their decision memorandum that they were not able to apply full weight to the evidence generated by the PEECH(TM) trial, as it had not yet been published in a peer-reviewed medical journal by the time they were required to issue a final decision on this application. Moreover, they did not opine on whether they would consider the results of the trial when published to be sufficient evidence to conclude that external counterpulsation therapy is reasonable and necessary for the treatment of New York Heart Association Class II/III stable heart failure symptoms with an ejection fraction of less than or equal to 35%. They did, however, reiterate in the decision memorandum that "Current coverage as described in Section 20.20 of the Medicare National Coverage Determination (NCD) manual will remain in effect.", for refractory angina patients. On August 25, 2006 the results of the trial were initially published on line by the Journal of the American College of Cardiology (JACC), and in print in its September 19, 2006 issue. JACC is the official journal of the American College of Cardiology. 18 In the November-December issue of the journal Congestive Heart Failure, a second report of results from the PEECH(TM) trial was published, focusing on the results of a prespecified subgroup analysis in trial patients age 65 and over. This analysis demonstrated a statistically positive response on both co-primary endpoints of the trial in patients receiving EECP(R) therapy versus those who did not, i.e. a significantly larger proportion of patients undergoing EECP(R) therapy met or exceeded prespecified thresholds of improvement in exercise duration and peak oxygen consumption. Moreover, the patients age 65 and older who received EECP(R) therapy demonstrated the greatest differences in exercise duration, peak oxygen consumption and functional class (symptom status) compared with those who did not receive EECP(R) therapy. We will continue to educate the marketplace that EECP(R) therapy is a therapy for ischemic cardiovascular disease and that patients with a primary diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also eligible for reimbursement under the current coverage policy, provided the primary indication for treatment with EECP(R) therapy is angina or angina equivalent symptoms and the patient satisfies other listed criteria. Additionally, we will continue to pursue expansion of coverage for EECP(R) therapy with Medicare and other third-party payers as evidence of its clinical utility develops. Expanding Coverage with Other Third-Party Payers Some private insurance carriers continue to adjudicate EECP(R) treatment claims on a case-by-case basis. Since the establishment of reimbursement by the federal government, however, an increasing number of these private carriers now routinely pay for use of EECP(R) therapy for the treatment of angina and have issued positive coverage policies, which are generally similar to Medicare's coverage policy in scope. We estimate that over 300 private insurers are reimbursing for EECP(R) therapy for the treatment of angina today at favorable payment levels and we expect that the number of private insurers and their related health plans that provide for EECP(R) therapy as a covered benefit will continue to increase. In addition, we are aware of two third-party payers that have begun limited coverage of EECP(R) therapy for the treatment of CHF. We intend to pursue a constructive dialogue with many private insurers for the establishment of positive and expanded coverage policies for EECP(R) treatment that include CHF patients. If there were any material change in the availability of third-party private insurers or the adequacy of the reimbursement level for treatment procedures using the EECP(R) therapy system it would adversely affect our business, financial condition and results of operations. Moreover, we are unable to forecast what additional legislation or regulation, if any, relating to the health care industry or third-party private insurers coverage and payment levels may be enacted in the future or what effect such legislation or regulation would have on us. Reimbursement in International Markets The reimbursement environment for EECP(R) therapy in international markets is fragmented and coverage varies as a mix of available private and public healthcare providers may not yet be aware of coverage of this therapy. Our reimbursement strategy has been opportunistic and responsive to the selling opportunities presented through our distribution partners. During this fiscal year our efforts on behalf of EECP(R) therapy in both the private and public healthcare sectors of selected international markets have been initiated by our distributors, in support of the therapy, in their designated territory. Additionally, efforts have been initiated to obtain coverage in the public sector in certain overseas markets; however, we do not anticipate an impact on financial performance in the next fiscal year, given the long lead times from submission to approval of international dossiers for each reimbursement authority. Patents and Trademarks We own eleven US patents including eight utility and three design patents that expire at various times between 2006 and 2021. In addition, more than 20 foreign patents have been issued that expire at various times from 2007 to 2022. We are also planning to file other patent applications regarding specific enhancements to the current EECP(R) models, future generation products, and methods of treatment in the future. Moreover, trademarks have been registered for the names "EECP(R)" and "Natural Bypass". 19 We pursue a policy of seeking patent protection, both in the US and abroad, for our proprietary technology. We believe that we have a solid patent foundation in the field of external counterpulsation devices and that the number of patents and applications demonstrates our technical leadership, dating back to the mid-1980s. Our patent portfolio focuses on the areas of external counterpulsation control and the overall design and arrangement of the external counterpulsation apparatus, including the console, treatment bed, fluid distribution, and inflatable cuffs. None of our current competitors have a significant patent portfolio in the area of external counterpulsation devices. There can be no assurance that our patents will not be violated or that any issued patents will provide protection that has commercial significance. As with any patented technology, litigation could be necessary to protect our patent position. Such litigation can be costly and time-consuming, and there can be no assurance that we will be successful. The loss or violation of our EECP(R) patents and trademarks could have a material adverse effect upon our business. Employees As of May 31, 2007, we employed 18 full-time and 1 part-time persons with 2 in direct sales, sales and clinical applications support, 7 in manufacturing, quality control and technical service, 1 in marketing and customer support, 2 in engineering, regulatory and clinical research and 7 in administration. None of our employees are represented by a labor union. We believe that our employee relations are good. Manufacturing We manufacture our EECP(R) therapy systems in a single facility located in Westbury, New York. Manufacturing operations are conducted under the Current Good Manufacturing Practice (CGMP) requirements as set forth in the FDA Quality System Regulation. These regulations subject us to inspections to verify compliance and require us to maintain documentation and controls for the manufacturing and quality activities. ISO 13485 is the international quality standard for medical device manufacturers, based upon the ISO 9001 quality standard with specific requirements consistent with the FDA Quality System Regulation. While previously we were certified to comply with ISO 9001 requirements, we have applied and received ISO 13485 certification in February 2003. We are also certified to conform with the full quality assurance system requirements of the EU Medical Device Directive and can apply the CE mark to certain of our products. Lastly, we are certified to comply with the requirements of the Canadian Medical Device Regulations (CMDR). We believe our manufacturing facility, is adequate to meet the current and immediately foreseeable future demand for the production of these systems. RISK FACTORS Investing in our common stock involves risk. You should carefully consider the following information about these risks together with the other information contained in this Report. If any of the following risks actually occur, our business could be harmed. This could cause the price of our stock to decline, and you may lose part or all of your investment. Financial Risks We have incurred recurring losses over the past few years and continue to sustain losses which could result in a further decline in the value of our common stock. During the last two fiscal years we incurred large operating losses. We currently anticipate that we will continue to sustain operating losses. Our ability to achieve profitability is largely dependent on our ability to reduce operating costs sufficiently as well as halting the current trend of declining revenue. Our ability to maintain our current base of revenue and increase revenue is largely dependent upon restructuring our sales and marketing efforts in the angina market where reimbursement is currently available and operating in a more efficient manner. Risks Related to Our Business We are materially dependent on medical reimbursement for treatment procedures using EECP(R) therapy on patients with congestive heart failure in order to achieve continued growth. We are currently dependent on a single product platform which, based on current medical reimbursement policies, provides coverage for a restricted class of heart patients. On May 31, 2005, we submitted an application to CMS to expand the national coverage policy for external counterpulsation treatment to patients with Canadian Cardiovascular Class II stable angina and to patients with New York Heart Association (NYHA) Class II and III stable heart failure symptoms with an ejection fraction less than 35%. The application was accepted by CMS effective June 20, 2005, and CMS announced their decision to maintain the existing coverage as stated prior to the application and not to expand it to 20 include Class II Angina and Class II/III CHF on March 20, 2006. Results of the PEECH(TM) trial have been published in the Journal of the American College of Cardiology in September 2006, and the subgroup analysis of CHF patients age 65 and over has also been published in the November-December 2006 issue of the Journal of Congestive Heart Failure. These two papers have been submitted to CMS for reconsideration of our application. We had met with representatives from CMS in February 2007 and presented our case. CMS has requested additional data from us. We will continue our dialogue with CMS to obtain coverage for heart failure patients. However, there is no assurance that the Company will have sufficient resources to gather the necessary data to be sufficient to support expansion of the Medicare National Coverage Policy for EECP(R) treatment for NYHA class II and III heart failure patients. If we do not receive medical coverage for treatment procedures using EECP(R) therapy on patients with CHF, it will adversely affect our future business prospects. Material changes in the availability of Medicare, Medicaid or third-party reimbursement at adequate price levels could adversely affect our business. Health care providers, such as hospitals and physician private practices, that purchase or lease medical devices such as the EECP(R) therapy 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. If there were any material change in the availability of Medicare, Medicaid or other third-party coverage or the adequacy of the reimbursement level for treatment procedures using the EECP(R) therapy system, it would adversely affect our business, financial condition and results of operations. Moreover, we are unable to forecast what additional legislation or regulation, if any, relating to the health care industry or Medicare or Medicaid coverage and payment level may be enacted in the future or what effect such legislation or regulation would have on our business. Even if a device has FDA clearance, Medicare, Medicaid and other third-party payers may deny reimbursement if they conclude that the device is not "reasonable and necessary" according to their criteria. In addition, reimbursement may not be at, or remain at, price levels adequate to allow medical professionals and hospitals to realize an appropriate return on the purchase of our products. Increased acceptance by the medical community is important for continued growth. While many abstracts and publications are presented each year at major scientific meetings worldwide with respect to EECP(R) treatment efficacy, there is continued skepticism concerning EECP(R) therapy methodology. The American Heart Association and the American College of Cardiology Practice Guidelines currently list EECP(R) as a therapy currently under investigation for treatment of heart failure and have a classification rating of IIb as a treatment for patients who are refractory to medical therapy and are not candidates for percutaneous intervention or revascularization. A classification rating of IIb indicates the usefulness/efficacy of EECP(R) therapy is less well established by evidence/opinion. The medical community utilizes these guidelines when considering the various treatment options for their patients. Certain cardiologists, in cases where the EECP(R) therapy is a viable alternative, still appear to prefer percutaneous coronary interventions (e.g. balloon angioplasty and stenting) and cardiac bypass surgery for their patients. Additional evidence regarding the efficacy of EECP(R) therapy continues to evolve, however the evidence may not be sufficient to warrant a modification of these guidelines to a more favorable recommendation and increased acceptance by the medical community. We are dependent on consistency of favorable research findings about EECP(R) therapy and increasing acceptance of EECP(R) therapy as a safe, effective and cost effective alternative to other available products by the medical community for continued growth. We face competition from other companies and technologies. We compete with at least four other companies that are marketing external counterpulsation devices. We do not know whether these companies or other potential competitors who may be developing external counterpulsation devices, may succeed in developing technologies or products that are more efficient than those offered by us, and that would render our technology and existing products obsolete or non-competitive. Potential new competitors may also have substantially greater financial, manufacturing and marketing resources than those possessed by us. In addition, other technologies or products may be developed that have an entirely different approach or means of accomplishing the intended purpose of our products. Accordingly, the life cycles of our products are difficult to estimate. To compete successfully, we must keep pace with technological advancements, respond to evolving consumer requirements and achieve market acceptance. 21 As of June 2007 the Company entered into a distribution and supplier agreement with Living Data Technology Corporation, a competitor as of May 31, 2007. This arrangement has subsequently reduced the competitors to at least three other companies. We may not continue to receive necessary FDA clearances or approvals, which could hinder our ability to market and sell our products. If we modify our external counterpulsation devices and the modifications significantly affect safety or effectiveness, or if we make a change to the intended use, we will be required to submit a new premarket notification or 510(k) to FDA. We would be unable to market the modified device until FDA issues a clearance for the 510(k). Additionally, if FDA publishes a regulation requiring a premarket approval application or PMA for external counterpulsation devices, we would then need to submit a PMA, and have it filed by the agency, by the date specified by FDA in its regulation. A PMA requires us to prove the safety and effectiveness of a device to the FDA. The process of obtaining PMA approval is expensive, time-consuming, and uncertain. If FDA were to require a PMA application, we may be required to undertake a clinical study, which likely will be expensive and require lengthy follow-up, to demonstrate the effectiveness of the device. If we did obtain PMA approval, any change after approval affecting the safety or effectiveness of the device will require approval of a PMA supplement. If we offer new products that require 510(k) clearance or PMA approval, we will not be able to commercially distribute those products until we receive such clearance or approval. Regulatory agency approval or clearance for a product may not be received or may entail limitations on the device's indications for use that could limit the potential market for any such product. Delays in receipt of, or failure to obtain or maintain, regulatory clearances and approvals, could delay or prevent our ability to market or distribute our products. Such delays could have a material adverse effect on our business. If we are unable to comply with applicable governmental regulation, we may not be able to continue our operations. We also must comply with Current Good Manufacturing Practice (CGMP) requirements as set forth in the Quality System Regulation (QSR) to receive FDA approval to market new products and to continue to market current products. The QSR imposes certain procedural and documentation requirements on us with respect to manufacturing and quality assurance activities, including packaging, storage, and record keeping. Our products and activities are subject to extensive, ongoing regulation, including regulation of labeling and promotion activities and adverse event reporting. Also, our FDA registered facilities are subject to inspection by the FDA and other governmental authorities. Any failure to comply with regulatory requirements could delay or prevent our ability to market or distribute our products. Violation of FDA statutory or regulatory requirements could result in enforcement actions, such as voluntary or mandatory recalls, suspension or withdrawal of marketing clearances or approvals, seizures, injunctions, fines, civil penalties, and criminal prosecutions, all of which could have a material adverse effect on our business. Most states also have similar postmarket regulatory and enforcement authority for devices. We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. We may be slow to adapt, or we may never adapt to changes in existing requirements or adoption of new requirements or policies. We may incur significant costs to comply with laws and regulations in the future or compliance with laws or regulations may create an unsustainable burden on our business. We may not receive approvals by foreign regulators that are necessary for international sales. Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary from country to country. Premarket approval or clearance in the United States does not ensure regulatory approval by other jurisdictions. If we, or any international distributor, fail to obtain or maintain required pre-market approvals or fail to comply with foreign regulations, foreign regulatory authorities may require us to file revised governmental notifications, cease commercial sales of our products in the applicable countries or otherwise cure the problem. Such enforcement action by regulatory authorities may be costly. 22 In order to sell our products within the European Union, we must comply with the European Union's Medical Device Directive. The CE marking on our products attests to this compliance. Future regulatory changes may limit our ability to use the CE mark, and any new products we develop may not qualify for the CE mark. If we lose this authorization or fail to obtain authorization on future products, we will not be able to sell our products in the European Union. We depend on management and other key personnel. We are dependent on a limited number of key management and technical personnel. The loss of one or more of our key employees may hurt our business if we are unable to identify other individuals to provide us with similar services. We do not maintain "key person" insurance on any of our employees. In addition, our success depends upon our ability to attract and retain additional highly qualified sales, management, manufacturing and research and development personnel. We face competition in our recruiting activities and may not be able to attract or retain qualified personnel. We may not have adequate intellectual property protection. Our patents and proprietary technology may not be able to prevent competition by others. The validity and breadth of claims in medical technology patents involve complex legal and factual questions. Future patent applications may not be issued, the scope of any patent protection may not exclude competitors, and our patents may not provide competitive advantages to us. Our patents may be found to be invalid and other companies may claim rights in or ownership of the patents and other proprietary rights held or licensed by us. Also, our existing patents may not cover products that we develop in the future. Moreover, when our patents expire, the inventions will enter the public domain. There can be no assurance that our patents will not be violated or that any issued patents will provide protection that has commercial significance. Litigation may be necessary to protect our patent position. Such litigation may be costly and time-consuming, and there can be no assurance that we will be successful in such litigation. The loss or violation of certain of our patents and trademarks could have a material adverse effect upon our business. Since patent applications in the United States are maintained in secrecy until such patent applications are issued, our current product development may infringe patents that may be issued to others. If our products were found to infringe patents held by competitors, we may have to modify our products to avoid infringement, and it is possible that our modified products would not be commercially successful. We do not intend to pay dividends in the foreseeable future. We do not intend to pay any cash dividends on our common stock in the foreseeable future. Risks Related to Our Industry Technological change is difficult to predict and to manage. We face the challenges that are typically faced by companies in the medical device field. Our product line has required, and any future products will require, substantial development efforts and compliance with governmental clearance or approval requirements. We may encounter unforeseen technological or scientific problems that force abandonment or substantial change in the development of a specific product or process. We are subject to product liability claims and product recalls that may not be covered by insurance. The nature of our business exposes us to risks of product liability claims and product recalls. Medical devices as complex as ours frequently experience errors or failures, especially when first introduced or when new versions are released. We currently maintain product liability insurance at $7,000,000 per occurrence and $7,000,000 in the aggregate. Our product liability insurance may not be adequate. In the future, insurance coverage may not be available on 23 commercially reasonable terms, or at all. In addition, product liability claims or product recalls could damage our reputation even if we have adequate insurance coverage. We do not know the effects of healthcare reform proposals. The healthcare industry is undergoing fundamental changes resulting from political, economic and regulatory influences. In the United States, comprehensive programs have been suggested seeking to increase access to healthcare for the uninsured, control the escalation of healthcare expenditures within the economy and use healthcare reimbursement policies to balance the federal budget. We expect that the United States Congress and state legislatures will continue to review and assess various healthcare reform proposals, and public debate of these issues will likely continue. There have been, and we expect that there will continue to be, a number of federal and state proposals to constrain expenditures for medical products and services, which may affect payments for products such as ours. We cannot predict which, if any of such reform proposals will be adopted and when they might be effective, or the effect these proposals may have on our business. Other countries also are considering health reform. Significant changes in healthcare systems could have a substantial impact on the manner in which we conduct our business and could require us to revise our strategies. Risks Related to Stock Exchange and SEC Regulation We were de-listed from Nasdaq and may be subject to regulations that could reduce our ability to raise funds. By letter dated May 2, 2005, we received written notification from Nasdaq that the bid price of our common stock for the last 30 consecutive business days had closed below the minimum $1.00 per share required for continued inclusion under Marketplace Rule 4310(c) (4) (the Rule). In accordance with Marketplace Rule 4310 (c) (d), we were provided an initial period of 180 calendar days to regain compliance plus an automatic extension for additional period of 180 calendar days since we met the Nasdaq Capital Markets initial listing criteria except for the bid price requirement. During this period our common stock did not rise above the $1.00 per share minimum and on May 26, 2006, our common stock was delisted and our stock is currently traded on the Over-the-Counter Bulletin Board. As a result of our de-listing from the Nasdaq Capital Market due to low stock price, we may become subject to special rules, called "penny stock" rules that impose additional sales practice requirements on broker-dealers who sell our common stock. Penny stocks generally are equity securities that are not registered on certain national securities exchanges or quoted by Nasdaq and have a price per share of less than $5.00. The rules require, among other things, the delivery, prior to the transaction, of a disclosure schedule required by the Securities and Exchange Commission relating to the market for penny stocks. The broker-dealer also must disclose the commissions payable both to the broker-dealer and the registered representative and current quotations for the securities, and monthly statements must be sent disclosing recent price information. In the event that our common stock becomes characterized as a penny stock, our market liquidity could be severely affected. The regulations relating to penny stocks could limit the ability of broker-dealers to sell our common stock and thus the ability of purchasers of our common stock to sell their common stock in the secondary market. Additionally, Nasdaq's delisting of our common stock could have an adverse effect on our ability to raise additional equity capital. We are subject to stock exchange and SEC regulation. Recent Sarbanes-Oxley legislation and stock exchange regulations have increased disclosure control, financial reporting, corporate governance and internal control requirements that will increase the administrative costs of documenting and auditing internal processes, gathering data, and reporting information. Our inability to comply with the requirements would significantly impact our market valuation. 24 Our common stock is subject to price volatility. The market price of our common stock historically has been and may continue to be highly volatile. Our stock price could be subject to wide fluctuations in response to various factors beyond our control, including, but not limited to: o medical reimbursement o quarterly variations in operating results; o announcements of technological innovations, new products or pricing by our competitors; o the rate of adoption by physicians of our technology and products in targeted markets; o the timing of patent and regulatory approvals; o the timing and extent of technological advancements; o results of clinical studies; o the sales of our common stock by affiliates or other shareholders with large holdings; and o general market conditions. Our future operating results may fall below the expectations of securities industry analysts or investors. Any such shortfall could result in a significant decline in the market price of our common stock. In addition, the stock market has experienced significant price and volume fluctuations that have affected the market price of the stock of many medical device companies and that often have been unrelated to the operating performance of such companies. These broad market fluctuations may directly influence the market price of our common stock. Additional Information We are subject to the reporting requirements under the Securities Exchange Act of 1934 and are required to file reports and information with the Securities and Exchange Commission (SEC), including reports on the following forms: annual report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, and amendments to those reports files or furnished pursuant to Section 13(a) or 15(d) of the Securities Act of 1934. ITEM 2 - PROPERTIES We have historically owned our 18,000 square foot headquarters and manufacturing facility at 180 Linden Avenue, Westbury, New York 11590. Additionally, we leased approximately 3,500 square feet of additional warehouse space under an operating lease with a non-affiliated landlord that expired in September 2006, which we did not renew. On August 15, 2007 we sold our facility under a five-year leaseback agreement for $1.4 million. The net proceeds from the sale was approximately $425,000 after payment in full of the two secured notes on our facility, brokers fees, closing costs, and the opening of a certificate of deposit in accordance with the provisions of the new lease. The annual rental expense for the lease is approximately $138,600. We believe that our current facility is adequate to meet our current needs and should continue to be adequate for the immediately foreseeable future. ITEM 3 - LEGAL PROCEEDINGS There were no material legal proceedings under applicable rules. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year. 25 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES Our common stock currently trades on the Over-the-Counter Bulletin Board under the symbol VASO.OB. On May 26, 2006, our common stock ceased trading on the Nasdaq Capital Market tier of the Nasdaq Stock Market and began trading on the NASD Pink Sheets. Effective June 20, 2006, our common stock began trading on the Over the Counter Bulletin Board (OTCBB). The number of record holders of common stock as of August 1, 2007, was approximately 1,066, which does not include approximately 24,755 beneficial owners of shares held in the name of brokers or other nominees. The table below sets forth the range of high and low trade prices of the common stock for the fiscal periods specified.
Fiscal 2007 Fiscal 2006 ----------- ----------- High Low High Low First Quarter $0.17 $0.08 $0.88 $0.53 Second Quarter $0.15 $0.08 $0.65 $0.38 Third Quarter $0.12 $0.07 $0.53 $0.16 Fourth Quarter $0.09 $0.07 $0.35 $0.10
The last bid price of the Company's common stock on August 17, 2007, was $0.11 per share. De-listing from the Nasdaq Capital Market By letter dated May 2, 2005, we received written notification from Nasdaq that the bid price of our common stock for the last 30 consecutive business days had closed below the minimum $1.00 per share required for continued inclusion under Marketplace Rule 4310(c) (4) (the Rule). In accordance with Marketplace Rule 4310 (c) (d), we were provided an initial period of 180 calendar days to regain compliance plus an automatic extension for additional period of 180 calendar days since we met the Nasdaq Capital Markets initial listing criteria except for the bid price requirement. During this period our common stock did not rise above the $1.00 per share minimum and on May 26, 2006, our common stock was delisted and our stock is currently traded over-the-counter. As a result of our de-listing from the Nasdaq Capital Market due to low stock price, we may become subject to special rules, called penny stock rules that impose additional sales practice requirements on broker-dealers who sell our common stock. The rules require, among other things, the delivery, prior to the transaction, of a disclosure schedule required by the Securities and Exchange Commission relating to the market for penny stocks. The broker-dealer also must disclose the commissions payable both to the broker-dealer and the registered representative and current quotations for the securities, and monthly statements must be sent disclosing recent price information. The regulations relating to penny stocks could limit the ability of broker-dealers to sell our common stock and thus the ability of purchasers of our common stock to sell their common stock in the secondary market. Additionally, Nasdaq's delisting of our common stock could have an adverse effect our ability to raise additional equity capital. Dividend Policy We have never paid any cash dividends on our common stock. While we do not intend to pay cash dividends in the foreseeable future, payment of cash dividends, if any, will be dependent upon our earnings and financial position, investment opportunities and such other factors as the Board of Directors deems pertinent. Stock dividends, if any, also will be dependent on such factors as the Board of Directors deems pertinent. 26 Sale of Convertible Preferred Securities On July 19, 2005, we entered into a Securities Purchase Agreement that provided us with gross proceeds of $2.5 million through a private placement of preferred stock with M.A.G. Capital, LLC through its designated funds, Monarch Pointe Fund Ltd., Mercator Momentum Fund III, LP, and Mercator Momentum Fund, LP (the "Investors"). The agreement provided for a private placement of 25,000 shares of our Series D Preferred Stock at $100 per share plus warrants. As of February 7, 2006, all of the preferred shares had been converted into common shares and there are no preferred shares currently outstanding. Entry Into A Material Definitive Agreement On June 21, 2007 we entered into a Securities Purchase Agreement with Kerns Manufacturing Corp. ("Kerns"). Concurrently with our entry into the Securities Purchase Agreement, we also entered into a Distribution Agreement and a Supplier Agreement with Living Data Technology Corporation, an affiliate of Kerns ("Living Data"). We sold to Kerns pursuant to the Securities Purchase Agreement, 21,428,572 shares of our common stock at $.07 per share for an aggregate of $1,500,000 as well a five-year warrant to purchase 4,285,714 shares of our common stock at an initial exercise price of $.08 per share (the "Warrant"). We also have an option to sell an additional $1 million of our common stock to Kerns. The agreement further provided for the appointment to our Board of Directors of two representatives of Kerns. In furtherance thereof, Mr. Jun Ma and Mr. Simon Srybnik, Chairman of both Kerns and Living Data, have been appointed members of our Board of Directors. Pursuant to the Distribution Agreement, we have become the exclusive distributor in the United States of the AngioNew ECP systems manufactured by Living Data. As additional consideration for such agreement, we agreed to issue an additional 6,990,840 shares of our common stock to Living Data. Pursuant to the Supplier Agreement, Living Data now will be the exclusive supplier to us of the ECP therapy systems that we market under the registered trademark EECP(R). The Distribution Agreement and the Supplier Agreement each have an initial term extending through May 31, 2012. Pursuant to a Registration Rights Agreement, we granted to Kerns and Living Data, subject to certain restrictions, "piggyback registration rights" covering the shares sold to Kerns as well as the shares issuable upon exercise of the Warrant and the shares issued to Living Data. ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION This Management's Discussion and Analysis or Plan of Operations contains descriptions of our expectations regarding future trends affecting our business. These forward looking statements and other forward-looking statements made elsewhere in this document are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Please read the section titled "Risk Factors" in "Item One - Business" to review certain conditions, among others, which we believe could cause results to differ materially from those contemplated by the forward-looking statements. Except for historical information contained in this report, the matters discussed are forward-looking statements that involve risks and uncertainties. When used in this report, words such as "anticipates", "believes", "could", "estimates", "expects", "may", "plans", "potential" and "intends" 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 effect of the dramatic changes taking place in the healthcare environment; the impact of competitive procedures and products and their pricing; medical insurance reimbursement policies; unexpected manufacturing or supplier problems; 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. The following discussion should be read in conjunction with financial statements and notes thereto included in this Annual Report on Form 10-KSB. 27 Overview Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the context requires otherwise, all references to "we", "our", "us", "Company", "registrant", "Vasomedical" or "management" refer to Vasomedical Inc. and its subsidiaries. Since 1995, we have been primarily engaged in designing, manufacturing, marketing and supporting EECP(R) enhanced external counterpulsation systems based on our unique proprietary technology currently indicated for use in cases of stable or unstable angina (i.e., chest pain), congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack, (MI)) and cardiogenic shock. The EECP(R) therapy system is a non-invasive, outpatient therapy for the treatment of diseases of the cardiovascular system. The therapy serves to increase circulation in areas of the heart with less than adequate blood supply and helps to restore systemic vascular function. The therapy also increases blood flow and oxygen supply to the heart muscle and other organs and decreases the heart's workload and need for oxygen, while also improving function of the endothelium, the lining of blood vessels throughout the body, lessening resistance to blood flow. We provide hospitals, clinics and physician private practices with EECP(R) equipment, treatment guidance, and a staff training and equipment maintenance program designed to provide optimal patient outcomes. EECP(R) is a registered trademark for Vasomedical's enhanced external counterpulsation systems. For more information visit www.vasomedical. com. We have Food and Drug Administration (FDA) clearance to market our EECP(R) therapy for use in the treatment of stable and unstable angina, congestive heart failure, acute myocardial infarction, and cardiogenic shock, however our current marketing efforts are limited to the treatment of chronic stable angina and congestive heart failure. Medicare and other third-party payers currently reimburse for the treatment of angina symptoms in patients with moderate to severe symptoms who are refractory to medications and not candidates for invasive procedures, including patients with serious comorbidities, such as heart failure, diabetes, peripheral vascular disease, etc. Patients with primary diagnoses of heart failure, diabetes, peripheral vascular disease, etc. are also reimbursed under the same criteria, provided the primary indication for treatment with EECP(R) therapy is angina symptoms. During the last two fiscal years ended May 31, 2007 and 2006 we incurred large operating losses. We attempted to achieve profitability by reducing operating costs and halting the trend of declining revenue, to reduce cash usage through bringing our cost structure more into alignment with current revenue by engaging in restructurings during January 2006, March 2007 and April 2007 to substantially reduce personnel and spending on sales, marketing and development projects. In addition, we sought to obtain a strategic alliance within the sales and marketing areas and/or to raise additional capital through public or private equity or debt financings. Subsequent to May 31, 2007 the following events took place which allowed us to raise additional capital through a private equity financing and by the sale of our facility under a leaseback agreement. o On June 21, 2007 we entered into a Securities Purchase Agreement with Kerns Manufacturing Corp. ("Kerns"). Concurrently with our entry into the Securities Purchase Agreement, we also entered into a Distribution Agreement and a Supplier Agreement with Living Data Technology Corporation, an affiliate of Kerns ("Living Data"). We sold to Kerns pursuant to the Securities Purchase Agreement, 21,428,572 shares of our common stock at $.07 per share for an aggregate of $1,500,000 as well a five-year warrant to purchase 4,285,714 shares of our common stock at an initial exercise price of $.08 per share (the "Warrant"). We also have an option to sell an additional $1 million of our common stock to Kerns. The agreement further provided for the appointment to our Board of Directors of two representatives of Kerns. In furtherance thereof, Mr. Jun Ma and Mr. Simon Srybnik, Chairman of both Kerns and Living Data, have been appointed members of our Board of Directors. Pursuant to the Distribution Agreement, we have become the exclusive distributor in the United States of the AngioNew ECP systems manufactured by Living Data. As additional consideration for such agreement, we agreed to issue an additional 6,990,840 shares of our common stock to Living Data. Pursuant to the Supplier Agreement, Living Data now will be the exclusive supplier to us of the ECP therapy systems that we market under the registered trademark EECP(R). The Distribution Agreement and the Supplier Agreement each have an initial term extending through May 31, 2012. 28 Pursuant to a Registration Rights Agreement, we granted to Kerns and Living Data, subject to certain restrictions, "piggyback registration rights" covering the shares sold to Kerns as well as the shares issuable upon exercise of the Warrant and the shares issued to Living Data. o On August 15, 2007 we sold our facility under a five-year leaseback agreement for $1.4 million. The net proceeds from the sale was approximately $425,000 after payment in full of the two secured notes on our facility, brokers fees, closing costs, and the opening of a certificate of deposit in accordance with the provisions of the new lease. Results of Operations Fiscal Years Ended May 31, 2007 and 2006 Net revenue from sales, leases and service of our EECP(R) systems for the fiscal years ended May 31, 2007 and 2006, was $6,354,083 and $10,942,997, respectively, which represented a decline of $4,588,914 or 42%. We reported a net loss attributable to common stockholders of $1,571,066 and $11,579,011 for fiscal 2007 and 2006, respectively. Our net loss per common share was $0.02 for the fiscal year ended May 31, 2007 compared to a net loss of $0.19 per share for the fiscal year ended May 31, 2006. The decrease in the net loss per share is primarily due to a $7,082,138 income tax valuation reserve established in fiscal 2006 for the remaining value of the deferred tax asset. The gross profit declined to $3,450,970 or 54% of revenues for the fiscal year ended May 31, 2007, compared to $6,168,668 or 56% of revenues for the fiscal year ended May 31, 2006. The decline in gross profit primarily reflects the reduced sales volume, however the loss from operations was reduced in the fiscal year ended May 31, 2007 to $1,534,339 compared to the loss from operations in fiscal year 2006 of $3,612,849. Total operating expenses in the fiscal years ended May 31, 2007 and 2006 were $4,985,309 and $9,781,517, respectively, reflecting a decline of $4,796,208 due primarily to two major cost saving restructuring programs initiated in March 2007 and April 2007. Revenues Revenue from equipment sales declined approximately 62% to $2,561,064 for the fiscal year ended May 31, 2007 as compared to $6,820,980 for the prior year. The decline in equipment sales is due primarily to a 52% decline in the number of equipment shipments and a 23% decrease in average sales prices. The overall decrease in average sales prices is primarily due to the decline of equipment sales as well as the reduction in sales price due to competition in both the domestic and international markets, from the prior fiscal year. We believe the decline in domestic units shipped reflects weakened demand in the refractory angina market as existing capacity is more fully utilized, coupled with increased direct and indirect competition. We anticipate that demand for EECP(R) systems will remain soft unless there is greater clinical acceptance for the use of EECP(R) therapy in treating patients with angina or angina equivalent symptoms who meet the current reimbursement guidelines or an expansion of the current CMS national reimbursement policy to include some or all Class II & III heart failure patients. Patients with angina or angina equivalent symptoms eligible for reimbursement under current policies include many with serious comorbidities, such as heart failure, diabetes, peripheral vascular disease and/or others. Despite this, many cardiology clinicians appear to be waiting for approval of reimbursement coverage for heart failure as a primary indication before they will move forward with the treatment of ischemic heart failure patients with angina equivalent symptoms. Reluctance to bill for ischemic heart failure patients under the current coverage guidelines, and failure to get or maintain adequate reimbursement coverage for angina and heart failure would adversely affect our business prospects. We anticipate that a prevailing trend of declining prices will continue in the immediate future as our competition attempts to capture greater market share through pricing discounts. The average price of new systems sales declined by 7%, in fiscal 2007, compared to prior year and the average sales price of used systems declined 43% in fiscal 2007. We continue to reorganize certain territory responsibilities in our sales department due to vacant and/or unproductive territories. 29 Our revenue from the sale of EECP(R) systems and related products to international distributors in fiscal 2007 increased approximately 15% to $991,000 compared to $863,000 in the prior year reflecting increased sales volume. The above decline in revenue was also a result of an 8% decrease in revenue from equipment rental and services to $3,793,019 in fiscal 2007 from $4,122,017 in fiscal year 2006. Revenue from equipment rental and services represented 60% of total revenue in fiscal 2007 compared to 38% in fiscal 2006. The increase in the percentage of revenue generated from equipment rentals and services is due to decreased unit sales volume and decreased total revenues. The decrease in the absolute amounts and the decrease in the percentage of total revenue resulted primarily from a 31% decline in service related revenue, and a 74% decline in rental revenue. The decline was due to a decrease in the rental install base from the prior fiscal year ended May 31, 2006. Gross Profit Gross profit declined to $3,450,970 or 54% of revenues for the fiscal year ended May 31, 2007, compared to $6,168,668 or 56% of revenues for the fiscal year ended May 31, 2006. Gross profit margin as a percentage of revenue for the fiscal year ended May 31, 2007, decreased compared to the prior fiscal year mainly due to the higher fixed production unit costs associated with reduced production due to decreasing sales in the last fiscal year, offset minimally by the adoption of SFAS No. 151 which increased the amount of fixed overhead costs absorbed into inventory in fiscal 2007. The decline in gross profit when compared to the prior year in absolute dollars is principally due to the lower sales volume. Gross profits are dependent on a number of factors, particularly the mix of EECP(R) models sold domestically and internationally and their respective average selling prices, the mix of EECP(R) units sold, rented or placed during the period, the ongoing costs of servicing such units, and certain fixed period costs, including facilities, payroll and insurance. Gross profit margins are generally less on non-domestic business due to the use of distributors resulting in lower selling prices. Consequently, the gross profit realized during the current period may not be indicative of future margins. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses for fiscal years ended May 31, 2007 and 2006, were $4,051,570 or 64% of revenues and $7,865,533 or 72% of revenues, respectively reflecting a decrease of $3,813,963 or approximately 48%. The decrease in SG&A expenditures in fiscal 2007 compared to fiscal 2006 resulted primarily from decreased direct expenditures of $2,354,828 due to reduced sales personnel and associated travel plus lower sales commission due to reduced sales volume. Marketing expenses decreased $975,971 due to reduced personnel in the marketing and clinical application support areas, as well as associated travel, plus lower market research, product promotion, advertising, and trade show expenses. Administrative expenses decreased $483,164 as a result of decreased expenditures in professional fees related to accounting and outside consulting, along with reduced personnel and their associated costs. Research and Development Research and development ("R&D") expenses of $933,316 or 15% of revenues for the fiscal year ended May 31, 2007, decreased by $872,351 or 48%, from $1,805,667 or 17% of revenues for the fiscal year ended May 31, 2006. The decrease is primarily attributable to fewer engineering personnel, lower new product development spending, and reduced spending on clinical trials. Provision for Doubtful Accounts During the fiscal years ended May 31, 2007 and 2006, the Company recorded a provision for doubtful accounts of $423 and $110,317, respectively. The change in the provision is a primarily a result of the fiscal 2007 decrease in sales. 30 Interest Expense and Financing Costs Interest expense and financing costs decreased to $69,767 in the fiscal year ended May 31, 2007, from $81,662 for the prior year. Interest expense primarily reflects interest on loans secured to refinance the November 2000 purchase of the Company's headquarters and warehouse facility. The majority of the decrease is a result of the loans secured to finance the cost of implementation of a new management information system being paid in full during fiscal 2007. Interest and Other Income, Net Interest and other income for the fiscal years ended May 31, 2007 and 2006, were $53,648 and $75,508, respectively. Interest income primarily reflects interest earned on the Company's cash balances. As cash balances have declined, the direct impact has been a decrease in interest income. Income Tax Expense, Net During the fiscal years ended May 31, 2007 and 2006, we recorded a provision for income taxes of $20,608 and $7,082,138, respectively. As of May 31, 2007, the recorded deferred tax assets were $19,589,352, reflecting an increase of $29,894 during the fiscal year ended May 31, 2007, which was offset by the valuation allowance of the same amount. Ultimate realization of any or all of the deferred tax assets is not assured, due to significant uncertainties and material assumptions associated with estimates of future taxable income during the carryforward period. In November 2005, we concluded that, based upon the weight of available evidence, it was "more likely than not" that the net deferred tax asset would not be realized and increased the valuation allowance to bring the net deferred tax asset carrying value to zero. Liquidity and Capital Resources Cash and Cash Flow We have financed our operations in fiscal 2007 and 2006 primarily from working capital and in fiscal 2006 from the issuance of preferred stock. At May 31, 2007, we had cash of $850,288 and working capital of $1,320,347 as compared to cash and cash equivalents of $2,385,778 and working capital of $2,867,288 at May 31, 2006. Our cash and cash equivalents decreased $1,535,490 in fiscal year 2007. Our net loss of $1,571,066 was partially offset by adjustments to reconcile the net loss to net cash and changes in working capital accounts of $337,772. Cash used in investing activities was $10,593 and financing activities was $291,603. The adjustments to reconcile net loss to net cash used in operating activities was $294,596 in non-cash adjustments to reconcile the net loss to net cash used in operating activities, primarily due to $315,269 in depreciation and amortization. In addition, changes in our operating assets and liabilities produced net cash of $43,176. The changes in the accounts balances primarily reflect a decrease in accounts receivable of $147,805, lower inventory of $606,580 and lower other current assets of $265,408, which were partially offset by a decrease in accounts payable, accrued expenses, deferred revenues-ST and other current liabilities of $721,970 and a decrease in deferred revenues-LT and in other liabilities of $253,575. Net accounts receivable were 12% of revenues for the period ended May 31, 2007, as compared to 8% for the period ended May 31, 2006, and accounts receivable turnover improved to 8.1 times as of May 31, 2007, as compared to 7.9 times as of May 31, 2006. Standard payment terms on our domestic equipment sales are generally net 30 to 90 days from shipment and do not contain "right of return" provisions. We have historically offered a variety of extended payment terms, including sales-type leases, in certain situations and to certain customers in order to expand the market for our EECP(R) products in the US and internationally. Such extended payment terms were offered in lieu of price concessions, in competitive situations, when opening new markets or geographies and for repeat customers. Extended payment terms cover a variety of negotiated terms, including payment in full - net 120, net 180 days or some fixed or variable monthly payment amount for a six to twelve month period followed by a balloon payment, if applicable. During fiscal 2007 and 2006, there were no revenues generated from sales in which initial payment terms were greater than 90 days and we offered no sales-type leases during either period. In general, reserves are calculated on a 31 formula basis considering factors such as the aging of the receivables, time past due, and the customer's credit history and their current financial status. In most instances where reserves are required, or accounts are ultimately written-off, customers have been unable to successfully implement their EECP(R) program. As we are creating a new market for the EECP(R) therapy and recognizing the challenges that some customers may encounter, we have opted, at times, on a customer-by-customer basis, to recover our equipment instead of pursuing other legal remedies, which has resulted in our recording of a reserve or a write-off. Investing activities used net cash of $10,593 during the fiscal year ended May 31, 2007 for the purchase of property and equipment. Our financing activities used net cash of $291,603 during the fiscal year ended May 31, 2007, reflecting payments on our outstanding notes and loans. We do not have an available line of credit. Sale of Convertible Preferred Stock and Warrants On July 19, 2005, we entered into a Securities Purchase Agreement that provided us with gross proceeds of $2.5 million through a private placement of preferred stock with M.A.G. Capital, LLC through its designated funds, Monarch Pointe Fund Ltd., Mercator Momentum Fund III, LP, and Mercator Momentum Fund, LP (the "Investors"). The agreement provided for a private placement of 25,000 shares of Vasomedical's Series D Preferred Stock at $100 per share. The preferred stock was convertible into shares of Vasomedical's common stock at 85 percent of the volume weighted average price per share for the five trading days preceding any conversion, but not at more than $0.6606 or less than $0.40 per share. After registration in August 2005 the shares of common stock could be acquired through conversion of the preferred shares. The Investors also acquired warrants for the purchase of 1,892,219 shares of common stock. The warrants may be exercised at a price of $0.69 per share for a term of five years, ending July 18, 2010. By the placement of the preferred stock described above, we became obligated to pay a cash dividend monthly on the outstanding shares of preferred stock. The dividend rate was the higher of (i) the prime rate as reported by the Wall Street Journal on the first day of the month, plus three percent or, (ii) 8.5% times $100 per share, but in no event greater than 10% annually. During the period beginning on September 14, 2005, and ending February 7, 2006, all the preferred stock issued under this financing were converted into a total of 6,112,209 shares of common stock and the are no remaining shares of preferred stock outstanding. These securities were offered and sold to the Investors in a private placement transaction made in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933. The Investors are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933. Vasomedical intends to apply the funds for working capital. Liquidity During the last two fiscal years ended May 31, 2007 and 2006 we incurred large operating losses. The Company attempted to achieve profitability by reducing operating costs and halting the trend of declining revenue, to reduce cash usage by bringing its cost structure more into alignment with current revenue by engaging in restructurings during January 2006, March 2007 and April 2007 to substantially reduce personnel and spending on sales, marketing and development projects. In addition, the Company was seeking to obtain a strategic alliance within the sales and marketing areas and/or to raise additional capital through public or private equity or debt financings. Subsequent to May 31, 2007 the following events took place which allowed us to raise additional capital through a private equity financing and by the sale of our facility under a leaseback agreement. 32 o On June 21, 2007 we entered into a Securities Purchase Agreement with Kerns Manufacturing Corp. ("Kerns"). Concurrently with our entry into the Securities Purchase Agreement, we also entered into a Distribution Agreement and a Supplier Agreement with Living Data Technology Corporation, an affiliate of Kerns ("Living Data"). We sold to Kerns pursuant to the Securities Purchase Agreement, 21,428,572 shares of our common stock at $.07 per share for an aggregate of $1,500,000 as well a five-year warrant to purchase 4,285,714 shares of our common stock at an initial exercise price of $.08 per share (the "Warrant"). We also have an option to sell an additional $1 million of our common stock to Kerns. The agreement further provided for the appointment to our Board of Directors of two representatives of Kerns. In furtherance thereof, Mr. Jun Ma and Mr. Simon Srybnik, Chairman of both Kerns and Living Data, have been appointed members of our Board of Directors. Pursuant to the Distribution Agreement, we have become the exclusive distributor in the United States of the AngioNew ECP systems manufactured by Living Data. As additional consideration for such agreement, we agreed to issue an additional 6,990,840 shares of our common stock to Living Data. Pursuant to the Supplier Agreement, Living Data now will be the exclusive supplier to us of the ECP therapy systems that we market under the registered trademark EECP(R). The Distribution Agreement and the Supplier Agreement each have an initial term extending through May 31, 2012. Pursuant to a Registration Rights Agreement, we granted to Kerns and Living Data, subject to certain restrictions, "piggyback registration rights" covering the shares sold to Kerns as well as the shares issuable upon exercise of the Warrant and the shares issued to Living Data. o On August 15, 2007 we sold our facility under a five-year leaseback agreement for $1.4 million. The net proceeds from the sale was approximately $425,000 after payment in full of the two secured notes on our facility, brokers fees, closing costs, and the opening of a certificate of deposit in accordance with the provisions of the new lease. Based on the above transactions, we believe that we have sufficient working capital to continue our operations through at least May 31, 2008. Off-Balance Sheet Arrangements As part of our on-going business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (`SPES"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of May 31, 2007, we are not involved in any unconsolidated SPES. Effects of Inflation We believe that inflation and changing prices over the past three years have not had a significant impact on our revenue or on our results of operations. Critical Accounting Policies Financial Reporting Release No. 60, which was released by the Securities and Exchange Commission, or SEC, in December 2001, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note B of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-KSB for the year ended May 31, 2007, includes a summary of our significant accounting policies and methods used in the preparation of our financial statements. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Our critical accounting policies are as follows: 33 Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the price is fixed or determinable and collectibility is reasonably assured. In the United States, we recognize revenue from the sale of our EECP(R) systems in the period in which we deliver the system to the customer. Revenue from the sale of our EECP(R) systems to international markets is recognized upon shipment of the product to a common carrier, as are supplies, accessories and spare parts delivered to both domestic and international customers. Returns are accepted prior to the in-service and training subject to a 10% restocking charge or for normal warranty matters, and we are not obligated for post-sale upgrades to these systems. In addition, we use the installment method to record revenue based on cash receipts in situations where the account receivable is collected over an extended period of time and in our judgment the degree of collectibility is uncertain. In most cases, revenue from domestic EECP(R) system sales is generated from multiple-element arrangements that require judgment in the areas of customer acceptance, collectibility, the separability of units of accounting, and the fair value of individual elements. Effective September 1, 2003, we adopted the provisions of Emerging Issues Task Force, or EITF, Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", ("EITF 00-21"), on a prospective basis. The principles and guidance outlined in EITF 00-21 provide a framework to determine (a) how the arrangement consideration should be measured (b) whether the arrangement should be divided into separate units of accounting, and (c) how the arrangement consideration should be allocated among the separate units of accounting. We determined that the domestic sale of our EECP(R) systems includes a combination of three elements that qualify as separate units of accounting: i. EECP(R) equipment sale, ii. provision of in-service and training support consisting of equipment set-up and training provided at the customer's facilities, and iii. a service arrangement (usually one year), consisting of: service by factory-trained service representatives, material and labor costs, emergency and remedial service visits, software upgrades, technical phone support and preferred response times. Each of these elements represent individual units of accounting as the delivered item has value to a customer on a stand-alone basis, objective and reliable evidence of fair value exists for undelivered items, and arrangements normally do not contain a general right of return relative to the delivered item. We determine fair value based on the price of the deliverable when it is sold separately or based on third-party evidence. In accordance with the guidance in EITF 00-21, we use the residual method to allocate the arrangement consideration when it does not have fair value of the EECP(R) system sale. Under the residual method, the amount of consideration allocated to the delivered item equals the total arrangement consideration less the aggregate fair value of the undelivered items. Assuming all other criteria for revenue recognition have been met, we recognize revenue for: i. EECP(R) equipment sales, when delivery and acceptance occurs based on delivery and acceptance documentation received from independent shipping companies or customers, ii. in-service and training, following documented completion of the training, and iii. the service arrangement, ratably over the service period, which is generally one year. In-service and training generally occurs within a few weeks of shipment and our return policy states that no returns will be accepted after in-service and training has been completed. The amount related to in-service and training is recognized as service revenue at the time the in-service and training is completed and the amount related to service arrangements is recognized ratably as service revenue over the related service period, which is generally one year. Costs associated with the provision of in-service and training and the service arrangement, including salaries, benefits, travel, spare parts and equipment, are recognized in cost of equipment sales as incurred. The Company also recognizes revenue generated from servicing EECP(R) systems that are no longer covered by the service arrangement, or by providing sites with additional training, in the period that these services are provided. Revenue related to future commitments under separately priced extended service agreements on our EECP(R) system are deferred and recognized ratably over the service period, generally ranging from one year to four years. Costs associated with the provision of service and maintenance, including salaries, benefits, travel, spare parts and equipment, are recognized in cost of sales as incurred. Amounts billed in excess of revenue recognized are included as deferred revenue in the consolidated balance sheets. 34 Revenues from the sale of EECP(R) systems through our international distributor network are generally covered by a one-year warranty period. For these customers we accrue a warranty reserve for estimated costs to provide warranty parts when the equipment sale is recognized. The Company has also entered into lease agreements for our EECP(R) systems, generally for terms of one year or less, that are classified as operating leases. Revenues from operating leases are generally recognized, in accordance with the terms of the lease agreements, on a straight-line basis over the life of the respective leases. For certain operating leases in which payment terms are determined on a "fee-per-use" basis, revenues are recognized as incurred (i.e., as actual usage occurs). The cost of the EECP(R) system utilized under operating leases is recorded as a component of property and equipment and is amortized to cost of sales over the estimated useful life of the equipment, not to exceed five years. There were no significant minimum rental commitments on these operating leases at May 31, 2007. Accounts Receivable, Net The Company's accounts receivable - trade are due from customers engaged in the provision of medical services. Credit is extended based on evaluation of a customer's financial condition and, generally, collateral is not required. Accounts receivable are generally due 30 to 90 days from shipment and are stated at amounts due from customers net of allowances for doubtful accounts, returns, term discounts and other allowances. Accounts that remain outstanding longer than the contractual payment terms are considered past due. Estimates are used in determining the allowance for doubtful accounts based on the Company's historical collections experience, current trends, credit policy and a percentage of its accounts receivable by aging category. In determining these percentages, we look at historical write-offs of our receivables. The Company also looks at the credit quality of its customer base as well as changes in its credit policies. The Company continuously monitors collections and payments from our customers. While credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. Inventories, net The Company values inventory at the lower of cost or estimated market, cost being determined on a first-in, first-out basis. The Company often places EECP(R) systems at various field locations for demonstration, training, evaluation, and other similar purposes at no charge. The cost of these EECP(R) systems is transferred to property and equipment and is amortized over the next two to five years. The Company records the cost of refurbished components of EECP(R) systems and critical components at cost plus the cost of refurbishment. The Company regularly reviews inventory quantities on hand, particularly raw materials and components, and record a provision for excess and obsolete inventory based primarily on existing and anticipated design and engineering changes to its products as well as forecasts of future product demand. Effective June 1, 2005, we adopted the provisions of Statement of Financial Accounting Standards No. 151, "Inventory Costs", on a prospective basis. The statement clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. As a result of adopting SFAS No. 151, we absorbed approximately $3,000 more in fixed production overhead into inventory during fiscal year 2007 and $256,000 less in fixed production overhead into inventory during fiscal year 2006. Deferred Revenues The Company records revenue on extended service contracts ratably over the term of the related contract period. Effective September 1, 2003, we prospectively adopted the provisions of EITF 00-21. Upon adoption of the provisions of EITF 00-21 we began to defer revenue related to EECP(R) system sales for the fair value of installation and in-service training to the period when the services are rendered and for warranty obligations ratably over the service period, which is generally one year. 35 Warranty Costs Equipment sold is generally covered by a warranty period of one year. Effective September 1, 2003, the Company adopted the provisions of EITF 00-21 on a prospective basis. Under EITF 00-21, for certain arrangements, a portion of the overall system price attributable to the first year service arrangement is deferred and recognized as revenue over the service period. As such, we no longer accrue warranty costs upon delivery but rather recognize warranty and related service costs as incurred. Prior to September 1, 2003, we accrued a warranty reserve for estimated costs to provide warranty services when the equipment sale was recognized. Equipment sold to international customers through our distributor network is generally covered by a one-year warranty period. For these customers the Company accrues a warranty reserve for estimated costs of providing a parts only warranty when the equipment sale is recognized. The factors affecting our warranty liability included the number of units sold and historical and anticipated rates of claims and costs per claim. Net Loss per Common Share Basic loss per share is based on the weighted average number of common shares outstanding without consideration of potential common stock. Diluted loss per share is based on the weighted number of common and potential dilutive 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. 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 is established, when necessary, to reduce deferred tax assets to the amount expected to be realized. In estimating future tax consequences, we generally consider all expected future events other than an enactment of changes in the tax laws or rates. The deferred tax asset is continually evaluated for realizability. To the extent our judgment regarding the realization of the deferred tax assets changes, an adjustment to the allowance is recorded, with an offsetting increase or decrease, as appropriate, in income tax expense. Such adjustments are recorded in the period in which our estimate as to the realizability of the asset changed that it is "more likely than not" that all of the deferred tax assets will be realized. The "more likely than not" standard is subjective, and is based upon our estimate of a greater than 50% probability that our long range business plan can be realized. Deferred tax assets and liabilities are classified as current or non-current based on the classification of the related asset or liability for financial reporting. A deferred tax asset or liabilty that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, are classified according to the expected reversal date of the temporary difference. The deferred tax asset the Company previously recorded, and then reversed fully in fiscal 2006, related primarily to the realization of net operating loss carryforwards, of which the allocation of the current portion, if any, reflected the expected utilization of such net operating losses for the following twelve months. Such allocation was based on the Company's internal financial forecast and may be subject to revision based upon actual results. Stock-based Employee Compensation In December 2004, the FASB issued Statement of Financial Standards No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123 (R)"), which is a revision of SFAS No. 123. SFAS No. 123 (R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach to accounting for share-based payments in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees including grants of 36 employee stock options, to be recognized in the financial statements based on their fair values. Pro forma disclosure of the fair value of share-based payments is no longer an alternative to financial statement recognition. The Company has five stock-based employee compensation plans. Prior to second quarter of fiscal 2007 the Company accounted for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB No. 25") and adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." Under APB No. 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Accordingly, no compensation expense has been recognized in the consolidated financial statements in connection with employee stock option grants prior to fiscal 2007. In May 2006, the compensation committee of the board of directors accelerated the vesting provision of all outstanding stock options and warrants so that they were fully vested at May 31, 2006, and as a result the Company expects that the adoption of SFAS No. 123(R) will not have an immediate material effect on its financial statements. However, as new stock options are issued by the Company this may have a material effect on its quarterly and annual financial statements, in the form of additional compensation expense. It is not possible to precisely determine the expense impact of adoption since a portion of the ultimate expense that is recorded will likely relate to awards that have not yet been granted. The expense associated with these future awards can only be determined based on factors such as the price for the Company's common stock, volatility of the Company's stock price and risk free interest rates as measured at the grant date. However, the pro forma disclosures related to SFAS No. 123 included in the Company's historic financial statements are relevant data points for gauging the potential level of expense that might be recorded in future periods. For purposes of estimating the fair value of each option on the date of grant, the Company utilized the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options. Equity instruments issued to non-employees in exchange for goods, fees and services are accounted for under the fair value-based method of SFAS No. 123 (R). Recently Issued Accounting Pronouncements Not Yet Effective Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments--an amendment of FASB Statements No. 133 and 140, was issued in February 2006 and is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. Certain parts of this Statement may be applied prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The Company does not expect that SFAS 155 will have any significant effect on future financial statements. Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets--an amendment of FASB Statement No. 140, pertains to the servicing of financial assets and was issued in March 2006 and should be adopted as of the beginning of its first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The Company does not expect that SFAS 156 will have any significant effect on future financial statements. 37 Statement of Financial Accounting Standards No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Company does not expect that SFAS 157 will have any significant effect on future financial statements. Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB Statements No. 87, 88, 106, and 132(R). This Statement requires employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment to FASB Statement No. 115. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board's long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. The Company does not expect that SFAS 159 will have any significant effect on future financial statements. FASB Staff Position No. FIN 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R). This FASB Staff Position (FSP) addresses how a reporting enterprise should determine the variability to be considered in applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. The variability that is considered in applying Interpretation 46(R) affects the determination of (a) whether the entity is a variable interest entity (VIE), (b) which interests are variable interests1 in the entity, and (c) which party, if any, is the primary beneficiary of the VIE. That variability will affect any calculation of expected losses and expected residual returns, if such a calculation is necessary. Retrospective application, if elected, must be completed no later than the end of the first annual reporting period ending after July 15, 2006. The Company does not expect that FIN 46(R )-6will have any significant effect on future financial statements. FASB Staff Position (FSP) No. FTB 85-4-1, Accounting for Life Settlement Contracts by Third-Party Investors, was posted in March 27, 2006 and is effective for fiscal years beginning after June 15, 2006. It provides initial and subsequent measurement guidance and financial statement presentation and disclosure guidance for investments by third-party investors in life settlement contracts. This FSP also amends certain provisions of FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance, and FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company does not expect that FSP 85-4-1 will have any significant effect on future financial statements. 38 FASB Staff Position (FSP) No. AUG AIR-1, Accounting for Planned Major Maintenance Activities, was posted on September 8, 2006 and is effective for the first fiscal year beginning after December 15, 2006. This FSP addresses the accounting for planned major maintenance activities and amends certain provisions in the AICPA Industry Audit Guide, Audits of Airlines (Airline Guide), and APB Opinion No. 28, Interim Financial Reporting. The Airline Guide permits four alternative methods of accounting for planned major maintenance activities: direct expense, built-in overhaul, deferral, and accrual (accrue-in-advance). Those methods are widely used by other industries. The FSP prohibits the use of the accrue-in-advance method. The Company does not expect that FSP No. AUG AIR-1 will have any significant effect on future financial statements. FASB Staff Position No. FAS 126-1, Applicability of Certain Disclosure and Interim Reporting Requirements for Obligors for Conduit Debt Securities, was posted on October 25, 2006. This FASB Staff Position (FSP) clarifies the definition of a public entity in certain accounting standards to include entities that are conduit bond obligors for conduit debt securities that are traded in a public market. The guidance in this FSP is to be applied prospectively in fiscal periods beginning after December 15, 2006. The Company does not expect that FAS 126-1 will have any significant effect on future financial statements. The FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109 (FIN 48) in June 2006. This Interpretation primarily relates to tax positions taken or expected to be taken in a tax return and clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. Under this Interpretation the effects of a tax position would be recognized or derecognized depending on what outcome is more likely than not to occur with respect to the position. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. It requires that all tax positions be evaluated using the more-likely-than-not recognition threshold, and that the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information for recognition, derecognition, and measurement using consistent criteria. Disclosures are required about the effect of unrecognized tax benefits related to tax positions as well as information about the nature of the uncertainties related to tax positions where it is reasonably possible that changes in the tax provision will occur in the next 12 months of this Interpretation will provide more information about the uncertainty in income tax assets and liabilities. This Interpretation is effective for fiscal years beginning after December 15, 2006. Earlier application of the provisions of this Interpretation is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period this Interpretation is adopted. The Company is currently evaluating whether the adoption of Interpretation No. 48 will have a material effect on our consolidated financial position, results of operations and cash flows. EITF Issue 05-1, Accounting for the Conversion of an Instrument That Became Convertible upon the Issuer's Exercise of a Call Option. The Task Force reached a consensus that the issuance of equity securities to settle a debt instrument (pursuant to the instrument's original conversion terms) that became convertible upon the issuer's exercise of a call option should be accounted for as a conversion if the debt instrument contained a substantive conversion feature as of its issuance date, as defined herein. That is, no gain or loss should be recognized related to the equity securities issued to settle the instrument. The issuance of equity securities to settle a debt instrument that became convertible upon the issuer's exercise of a call option should be accounted for as a debt extinguishment if the debt instrument did not contain a substantive conversion feature as of its issuance date. That is, the fair value of the equity securities issued should be considered a component of the reacquisition price of the debt. This Issue applies to all conversions within the scope of this Issue that result from the exercise of call options and is effective in interim or annual reporting periods beginning after June 28, 2006 (the Board ratification date of the consensus), irrespective of whether the instrument was entered into prior or subsequent to Board ratification of this Issue. For instruments issued prior to the effective date of this consensus, the assessment as to whether a substantive conversion feature exists at issuance should be based only on assumptions, considerations, and/or marketplace information available as of the issuance date. The Company does not expect that pronouncement EITF Issue 05-1 will have any significant effect on future financial statements. EITF Issue 06-1, Accounting for Consideration Given by a Service Provider to a Manufacturer or Reseller of Equipment Necessary for an End-Customer to Receive Service from the Service Provider. The Task Force reached a consensus 39 that if the consideration given by a service provider to a manufacturer or reseller (that is not a customer of the service provider) can be linked contractually to the benefit received by the service provider's customer, a service provider should use the guidance in Issue 01-9 to determine the characterization of the consideration (that is, "cash consideration" or "other than cash" consideration). Issue 01-9 presumes that an entity should characterize "cash consideration" as a reduction of revenue unless an entity meets the requirements of paragraph 9 of Issue 01-9. Under Issue 01-9, "other than cash" consideration should be characterized as an expense. In applying that guidance, the service provider should characterize the consideration given to a third-party manufacturer or reseller based on the form of consideration directed by the service provider to be provided to the service provider's customer. If the form of the consideration is directed to be anything other than "cash consideration" (as defined in Issue 01-9), then the form of the consideration should be characterized as "other than cash" consideration. If the service provider does not control the form of the consideration provided to the service provider's customer, the consideration should be characterized as "other than cash" consideration. In reaching this conclusion, Task Force members observed that consideration paid by a service provider that results in a customer receiving a reduced price on equipment purchased from a manufacturer or reseller should be characterized as "other than cash" consideration for purposes of applying Issue 01-9. The consensus in this Issue is effective for the first annual reporting period beginning after June 15, 2007. Earlier application is permitted for financial statements that have not yet been issued. Entities should recognize the effects of applying the consensus in this Issue as a change in accounting principle through retrospective application to all prior periods unless it is impracticable to do so. The Company does not expect that pronouncement EITF Issue 06-1 will have any significant effect on future financial statements. EITF Issue 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, "Accounting for Compensated Absences". An employer may provide its employees with sabbatical leave or other similar benefits. Sabbatical leave involves an employee receiving time off upon working at the employer for a specific period of time. When an employer provides sabbatical leave or another similar benefit, the employer must determine whether such benefit should be accrued based on the guidance in FASB Statement No. 43, Accounting for Compensated Absences. The Task Force reached a consensus that an employee's right to a compensated absence under a sabbatical or other similar benefit arrangement (a) that requires the completion of a minimum service period and (b) in which the benefit does not increase with additional years of service accumulates pursuant to Statement 43 for arrangements in which the individual continues to be a compensated employee and is not required to perform duties for the entity during the absence. Therefore, assuming all of the other conditions of Statement 43 are met, the compensation cost associated with a sabbatical or other similar benefit arrangement should be accrued over the requisite service period. This Issue should be effective for fiscal years beginning after December 15, 2006. An entity should apply the consensus reached in this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position at the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. Earlier adoption of this guidance is permitted as of the beginning of an entity's fiscal year provided that the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The Company does not expect that pronouncement EITF Issue 06-2 will have any significant effect on future financial statements. EITF Issue 06-3, How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation). The issue concerns whether various non-income taxes assessed by governmental authorities should be presented gross or net in an entity's income statement. Non-income taxes on which this question has arisen include sales tax, use tax, excise tax, value added tax, and various taxes related to specific industries (e.g., the severance tax in the oil and gas industry and the franchise tax in the cable industry). The Task Force reached a consensus that the scope of this Issue includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. The Task Force also reached a consensus that the presentation of taxes on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to Opinion 22. In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The disclosure of those taxes can be done on an aggregate basis. The consensuses in this Issue should be applied to financial reports for interim 40 and annual reporting periods beginning after December 15, 2006. Earlier application is permitted. The Company does not expect that pronouncement EITF Issue 06-3 will have any significant effect on future financial statements. EITF Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. An endorsement split-dollar life insurance should be recognized as a liability for future benefits in accordance with Statement 106 (if, in substance, a postretirement benefit plan exists) or Opinion 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. The consensus in this Issue is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. The Company does not expect that pronouncement EITF Issue 06-4 will have any significant effect on future financial statements. EITF Issue 06-5, Accounting for Purchases of Life Insurance--Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4. A policyholder should consider any additional amounts included in the contractual terms of the policy in determining the amount that could be realized under the insurance contract. When it is probable (as is used in FASB Statement No. 5) that contractual terms would limit the amount that could be realized under the insurance contract, the Task Force agreed that these contractual limitations should be considered when determining the realizable amounts. Those amounts that are recoverable by the policyholder at the discretion of the insurance company should be excluded from the amount that could be realized under the insurance contract. The consensus in this Issue is effective for fiscal years beginning after December 15, 2006. Earlier application is permitted as of the beginning of a fiscal year for periods in which interim or annual financial statements have not yet been issued. The Company does not expect that pronouncement EITF Issue 06-5 will have any significant effect on future financial statements. ITEM 7 - FINANCIAL STATEMENTS The consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this report. ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 8A - CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures are effective to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and are also effective to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to the Company's management, including the principal executive and principal financial officers, to allow timely decisions regarding required disclosure. During the fourth fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 8B - OTHER INFORMATION None. 41 PART III ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item will be included in our definitive Proxy Statement, which will be filed with the Securities and Exchange Commission in connection with our 2007 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 10 - EXECUTIVE COMPENSATION The information required by this Item is intended to be included in our definitive Proxy Statement, which will be filed with the Securities and Exchange Commission in connection with our 2007 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item is intended to be included in our definitive Proxy Statement, which will be filed with the Securities and Exchange Commission in connection with our 2007 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is intended to be included in our definitive Proxy Statement, which will be filed with the Securities and Exchange Commission in connection with our 2007 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 13 - EXHIBITS (a) Financial Statements and Financial Statement Schedules ------------------------------------------------------ (1) See Index to Consolidated Financial Statements on page F-1 at beginning of attached financial statements. (b) 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 (7) (d) Form of Rights Agreement dated as of March 9, 1995, between Registrant and American Stock Transfer & Trust Company (5) (e) Certificate of Designation of the Preferred Stock, Series C (8) (f) Certificate of Designation of the Preferred Stock, Series D (15) (g) Form of Stock Purchase Warrant (18) (10) (a) 1995 Stock Option Plan (6) (b) Outside Director Stock Option Plan (6) (c) Employment Agreement dated February 1, 1995, as amended March 12, 1998, and October 10, 2001, between Registrant and John C.K. Hui (4) (9) (13) (d) 1997 Stock Option Plan, as amended (10) (e) 1999 Stock Option Plan, as amended (11) (f) 2004 Stock Option/Stock Issuance Plan (12) (g) Credit Agreement dated February 21, 2002, between Registrant and Fleet National Bank (12) (h) Securities Purchase Agreement dated June 21, 2007 between Registrant and Kerns Manufacturing Corp. (14) (i) Form of Common Stock Purchase Warrant dated June 21, 2007 (14) (j) Registration Rights Agreement dated June 21, 2007 between Registrant, Kerns Manufacturing Corp. and Living Data Technology Corporation (14) (k) Purchase and Sale Agreement dated June 1, 2007 between 180 Linden Avenue Corp. and 180 Linden Realty LLC (l) Lease Agreement dated August 15, 2007 between 180 Linden Realty LLC and Registrant (21) Subsidiaries of the Registrant 42
Percentage Name State of Incorporation Owned by Company ---- ---------------------- ---------------- Viromedics, Inc. Delaware 61% 180 Linden Avenue Corp. New York 100%
(23) Consent of Miller Ellin & Company, LLP (31) Certification Reports pursuant to Securities Exchange Act Rule 13a - 14 (32) Certification Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 __________________________ (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 Registration Statement on Form 8-A dated May 12, 1995. (6) Incorporated by reference to Notice of Annual Meeting of Stockholders dated December 5, 1995. (7) Incorporated by reference to Report on Form 8-K dated June 25, 1997. (8) Incorporated by reference to Report on Form 8-K dated April 30, 1998. (9) Incorporated by reference to Report on Form 10-K for the fiscal year ended May 31, 1998. (10) Incorporated by reference to Report on Form 10-K for the fiscal year ended May 31, 1999 (11) Incorporated by reference to Report on Form 10-K for the fiscal year ended May 31, 2000. (12) Incorporated by reference to Notice of Annual Meeting of Stockholders dated October 28, 2004. (13) Incorporated by reference to Report on Form 10-K for the fiscal year ended May 31, 2002. (14) Incorporated by reference to Report on Form 8-K dated June 21, 2007. (15) Incorporated by reference to Report on Form 8-K dated July 19, 2005. ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is intended to be included in our definitive Proxy Statement, which will be filed with the Securities and Exchange Commission in connection with our 2007 Annual Meeting of Stockholders, and is incorporated herein by reference. 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 23rd day of August, 2007. VASOMEDICAL, INC. By: /s/ John C.K. Hui -------------------------------- John C.K. Hui President, Chief Executive Officer, and Director (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on August 23, 2007, by the following persons in the capacities indicated: /s/ John C.K. Hui President, Chief Executive Officer, Chief - --------------------------- Technology Officer and Director John C.K. Hui (Principal Executive Officer) /s/ Abraham E. Cohen Chairman of the Board - --------------------------- Abraham E. Cohen /s/ Tricia Efstathiou Chief Financial Officer (Principal - --------------------------- Financial and Accounting Officer) Tricia Efstathiou /s/Photios T. Paulson Director - --------------------------- Photios T. Paulson /s/ Martin Zeiger Director - --------------------------- Martin Zeiger /s/ Simon Srybnik Director - --------------------------- Simon Srybnik /s/ Jun Ma Director - --------------------------- Jun Ma /s/ Behnam Movaseghi Director - --------------------------- Behnam Movaseghi /s/ Derek Enlander Director - --------------------------- Derek Enlander Vasomedical, Inc. and Subsidiaries INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Registered Public Accounting Firm F-1 Financial Statements Consolidated Balance Sheet as of May 31, 2007 F-2 Consolidated Statements of Operations for the years ended May 31, 2007 and 2006 F-3 Consolidated Statement of Changes in Stockholders' Equity for the years ended May 31, 2007 and 2006 F-4 Consolidated Statements of Cash Flows for the years ended May 31, 2007 and 2006 F-5 to F-6 Notes to Consolidated Financial Statements F-7 to F-28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Vasomedical, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheet of Vasomedical, Inc. and Subsidiaries (the "Company") as of May 31, 2007 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended May 31, 2007 and 2006. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 Vasomedical, Inc. and Subsidiaries as of May 31, 2007 and the consolidated results of their operations and their consolidated cash flow for the years ended May 31, 2007 and 2006 in conformity with accounting principles generally accepted in the United States of America. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedules, Schedule II, Valuation and Qualifying Accounts, are presented for the purposes of additional analysis and are not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Miller Ellin & Company, LLP CERTIFIED PUBLIC ACCOUNTANTS New York, New York August 23, 2007 F - 1 Vasomedical, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET May 31, 2007
ASSETS CURRENT ASSETS Cash $850,288 Accounts receivable, net of an allowance for doubtful accounts of $364,809 733,655 Inventories, net 2,117,627 Other current assets 34,761 ---------------- Total current assets 3,736,331 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,836,938 1,286,880 OTHER ASSETS 260,240 ---------------- $5,283,451 ================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $575,793 Current maturities of long-term debt and notes payable 65,769 Sales tax payable 159,542 Deferred revenue 1,286,726 Accrued director fees 79,000 Accrued warranty and customer support expenses 15,750 Accrued professional fees 143,521 Accrued commissions 89,883 ---------------- Total current liabilities 2,415,984 LONG-TERM DEBT 785,246 DEFERRED REVENUE 469,626 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; 65,198,592 shares issued and outstanding 65,198 Additional paid-in capital 46,165,998 Accumulated deficit (44,618,601) ---------------- Total stockholders' equity 1,612,595 ---------------- $5,283,451 ================
The accompanying notes are an integral part of these financial statements. F-2 Vasomedical, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended May 31, 2007 2006 ---------------- ----------------- Revenues Equipment sales $2,561,064 $6,820,980 Equipment rentals and services 3,793,019 4,122,017 ---------------- ----------------- Total revenues 6,354,083 10,942,997 Cost of Sales and Services Cost of sales, equipment 1,457,279 3,374,194 Cost of equipment rentals and services 1,445,834 1,400,135 ---------------- ----------------- Total cost of sales and services 2,903,113 4,774,329 ---------------- ----------------- Gross profit 3,450,970 6,168,668 Operating Expenses Selling, general and administrative 4,051,570 7,865,533 Research and development 933,316 1,805,667 Provision for doubtful accounts 423 110,317 ---------------- ----------------- Total operating expenses 4,985,309 9,781,517 ---------------- ----------------- Loss from operations (1,534,339) (3,612,849) Other Income (Expenses) Interest and financing costs (69,767) (81,662) Interest and other income, net 53,648 75,508 ---------------- ----------------- Total other income (expenses) (16,119) (6,154) ---------------- ----------------- Loss before income taxes (1,550,458) (3,619,003) Income tax expense, net (20,608) (7,082,138) ---------------- ----------------- Net Loss (1,571,066) (10,701,141) Preferred stock dividend -- (877,870) ---------------- ----------------- Net Loss Attributable to Common Shareholders $(1,571,066) $(11,579,011) ================ ================= Net loss per common share - basic $(0.02) $(0.19) ================ ================= - diluted $(0.02) $(0.19) ================ ================= Weighted average common shares outstanding - basic 65,198,592 61,351,323 ================ ================= - diluted 65,198,592 61,351,323 ================ =================
The accompanying notes are an integral part of these financial statements. F-3 Vasomedical, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Total Preferred Stock Common Stock Paid-in- Accumulated Stockholders' Share Amount Shares Amount Capital Deficit Equity --------- --------- ---------- --------- ----------- ------------- -------------- Balance at May 31, 2005 -- -- 58,552,688 $58,552 $51,450,639 $(32,346,394) $19,162,797 Issuance of Series D convertible preferred stock, net of costs 25,000 $250 1,613,209 1,613,459 Warrants issued in connection with the issuance of Series D convertible preferred stock issued 411,158 411,158 Beneficial conversion feature embedded in Series D convertible preferred stock 786,247 786,247 Dividends of Series D convertible preferred stock (877,870) (877,870) Issuance of common stock in connection with the conversion of Series D convertible preferred stock (25,000) (250) 6,112,209 6,112 (5,862) -- Issuance of common stock in payment of outside director fees 225,000 225 101,025 101,250 Issuance of common stock in payment of a consulting fee 308,695 309 150,691 151,000 Issuance of stock options in payment of a consulting fee 8,256 8,256 Reserve for tax benefit of stock options and warrants exercised in prior years (7,489,000) (7,489,000) Net loss (10,701,141) (10,701,141) --------- --------- ---------- --------- ----------- ------------- -------------- Balance at May 31, 2006 -- -- 65,198,592 $65,198 $46,148,493 $(43,047,535) $3,166,156 Issuance of stock options in payment of outside director fees 11,445 11,445 Issuance of stock options in payment of salaries to company officers 6,060 6,060 Net loss (1,571,066) (1,571,066) --------- --------- ---------- --------- ----------- ------------- -------------- Balance at May 31, 2007 -- $-- 65,198,592 $65,198 $46,165,998 $(44,618,601) $1,612,595
The accompanying notes are an integral part of this financial statement. F-4 Vasomedical, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31, 2007 2006 ------------- --------------- Cash flows from operating activities Net loss $(1,571,066) $(10,701,141) ------------- --------------- Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 315,269 518,176 Provision for doubtful accounts, net of write-offs (38,178) 110,317 Reserve for excess and obsolete inventory -- 152,004 Deferred income taxes -- 7,093,000 Common stock issued for services -- 126,250 Stock options granted for services 17,505 8,256 Changes in operating assets and liabilities Accounts receivable 147,805 938,403 Inventories 606,580 699,371 Other current assets 265,408 115,853 Other assets (1,072) (28,883) Accounts payable, accrued expenses, deferred revenues - ST, and other current liabilities (721,970) (1,070,978) Deferred revenues - LT and other liabilities (253,575) (236,501) ------------- --------------- 337,772 8,425,268 ------------- --------------- Net cash used in operating activities (1,233,294) (2,275,873) ------------- --------------- Cash flows provided by (used in) investing activities Redemptions of certificates and deposit and treasury bills -- 1,758,443 Purchase of property and equipment (10,593) -- ------------- --------------- Net cash provided by (used in) investing activities (10,593) 1,758,443 ------------- --------------- Cash flows provided by (used in) financing activities Payments on long term debt and notes payable (291,603) (447,363) Payments of preferred stock dividends -- (91,623) Payments of preferred stock issue costs -- (349,382) Proceeds from notes payable -- 302,052 Proceeds from sale of convertible preferred stock -- 2,500,000 ------------- --------------- Net cash provided by (used in) financing activities (291,603) 1,913,684 ------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,535,490) 1,396,254 ------------- --------------- Cash and cash equivalents - beginning of year 2,385,778 989,524 ------------- --------------- Cash - end of year $850,288 $2,385,778 ============= ===============
The accompanying notes are an integral part of these financial statements. F-5 Vasomedical, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Years ended May 31, 2007 2006 --------------- ------------- NON-CASH INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS: Inventories transferred (to)/from property and equipment, attributable to operating leases - net $(24,534) $190,776 Issue of note for purchase of insurance policy $192,120 $302,052 Preferred stock dividends $-- $786,247 Preferred issue costs $-- $227,087 SUPPLEMENTAL DISCLOSURES: Interest paid $69,767 $81,662 Income taxes paid $10,079 $22,923
The accompanying notes are an integral part of these financial statements. F-6 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 NOTE A - ORGANIZATION AND PLAN OF OPERATIONS Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the context requires otherwise, all references to "we", "our", "us", "Company", "registrant", "Vasomedical" or "management" refer to Vasomedical Inc. and its subsidiaries. Since 1995, we have been primarily engaged in designing, manufacturing, marketing and supporting EECP(R) enhanced external counterpulsation systems based on our unique proprietary technology currently indicated for use in cases of stable or unstable angina (i.e., chest pain), congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack, (MI)) and cardiogenic shock. The EECP(R) therapy system is a non-invasive, outpatient therapy for the treatment of diseases of the cardiovascular system. The therapy serves to increase circulation in areas of the heart with less than adequate blood supply and helps to restore systemic vascular function. The therapy also increases blood flow and oxygen supply to the heart muscle and other organs and decreases the heart's workload and need for oxygen, while also improving function of the endothelium, the lining of blood vessels throughout the body, lessening resistance to blood flow. We provide hospitals, clinics and physician private practices with EECP(R) equipment, treatment guidance, and a staff training and equipment maintenance program designed to provide optimal patient outcomes. EECP(R) is a registered trademark for Vasomedical's enhanced external counterpulsation systems. For more information visit www.vasomedical.com. We have Food and Drug Administration (FDA) clearance to market our EECP(R) therapy for use in the treatment of stable and unstable angina, congestive heart failure, acute myocardial infarction, and cardiogenic shock, however, our current marketing efforts are limited to the treatment of chronic stable angina and congestive heart failure. Medicare and other third-party payers currently reimburse for the treatment of angina symptoms in patients with moderate to severe symptoms who are refractory to medications and not candidates for invasive procedures, including patients with serious comorbidities, such as heart failure, diabetes, peripheral vascular disease, etc. Patients with primary diagnoses of heart failure, diabetes, peripheral vascular disease, etc. are also reimbursed under the same criteria, provided the primary indication for treatment with EECP(R) therapy is angina symptoms. During the last two fiscal years ended May 31, 2007 and 2006 we incurred large operating losses. The Company has attempted to achieve profitability by reducing operating costs and halting the trend of declining revenue, to reduce cash usage through bringing its cost structure more into alignment with current revenues by engaging in restructurings during January 2006, March 2007 and April 2007 to substantially reduce personnel and spending on sales, marketing and development projects. In addition, the Company was seeking to obtain a strategic alliance within the sales and marketing areas and/or to raise additional capital through public or private equity or debt financings. Subsequent to May 31, 2007 the following events took place which allowed us to raise additional capital through a private equity financing and by the sale of our facility under a leaseback agreement. o On June 21, 2007 we entered into a Securities Purchase Agreement with Kerns Manufacturing Corp. ("Kerns"). Concurrently with our entry into the Securities Purchase Agreement, we also entered into a Distribution Agreement and a Supplier Agreement with Living Data Technology Corporation, an affiliate of Kerns ("Living Data"). We sold to Kerns pursuant to the Securities Purchase Agreement, 21,428,572 shares of our common stock at $.07 per share for an aggregate of $1,500,000 as well a five-year warrant to purchase 4,285,714 shares of our common stock at an initial exercise price of $.08 per share (the "Warrant"). We also have an option to sell an additional $1 million of our common stock to Kerns. The agreement further provided for the appointment to our Board of Directors of two representatives of Kerns. In furtherance thereof, Mr. Jun Ma and Mr. Simon Srybnik, Chairman of both Kerns and Living Data, have been F-7 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 appointed members of our Board of Directors. Pursuant to the Distribution Agreement, we have become the exclusive distributor in the United States of the AngioNew ECP systems manufactured by Living Data. As additional consideration for such agreement, we agreed to issue an additional 6,990,840 shares of our common stock to Living Data. Pursuant to the Supplier Agreement, Living Data now will be the exclusive supplier to us of the ECP therapy systems that we market under the registered trademark EECP(R). The Distribution Agreement and the Supplier Agreement each have an initial term extending through May 31, 2012. Pursuant to a Registration Rights Agreement, we granted to Kerns and Living Data, subject to certain restrictions, "piggyback registration rights" covering the shares sold to Kerns as well as the shares issuable upon exercise of the Warrant and the shares issued to Living Data. o On August 15, 2007 we sold our facility under a five-year leaseback agreement for $1.4 million. The net proceeds from the sale was approximately $425,000 after payment in full of the two secured notes on our facility, brokers fees, closing costs, and the opening of a certificate of deposit in accordance with the provisions of the new lease. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting policies consistently applied in the preparation of the consolidated financial statements follows: Reclassifications Certain reclassifications have been made to prior years' amounts to conform with the current year's presentation. Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary and its inactive majority-owned subsidiary. Significant intercompany accounts and transactions have been eliminated. Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the price is fixed or determinable and collectibility is reasonably assured. In the United States, we recognize revenue from the sale of our EECP(R) systems in the period in which we deliver the system to the customer. Revenue from the sale of our EECP(R) systems to international markets is recognized upon shipment, during the period in which we deliver the product to a common carrier, as are supplies, accessories and spare parts delivered to both domestic and international customers. Returns are accepted prior to the in-service and training subject to a 10% restocking charge or for normal warranty matters, and we are not obligated for post-sale upgrades to these systems. In addition, we use the installment method to record revenue based on cash receipts in situations where the account receivable is collected over an extended period of time and in our judgment the degree of collectibility is uncertain. In most cases, revenue from domestic EECP(R) system sales is generated from multiple-element arrangements that require judgment in the areas of customer acceptance, collectibility, the separability of units of accounting, and the fair value of individual elements. Effective September 1, 2003, we adopted the provisions of Emerging Issues Task Force, or EITF, Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", ("EITF 00-21"), on a prospective basis. The principles and guidance outlined in EITF 00-21 provide a framework to determine (a) how the arrangement consideration should be measured (b) whether the arrangement should be divided into separate units of accounting, and (c) how the arrangement consideration should be allocated among the separate units of accounting. We determined that the domestic sale of our EECP(R) systems includes a combination of three elements that qualify as separate units of accounting: i. EECP(R) equipment sale, F-8 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 ii. provision of in-service and training support consisting of equipment set-up and training provided at the customer's facilities, and iii. a service arrangement (usually one year), consisting of: service by factory-trained service representatives, material and labor costs, emergency and remedial service visits, software upgrades, technical phone support and preferred response times. Each of these elements represent individual units of accounting as the delivered item has value to a customer on a stand-alone basis, objective and reliable evidence of fair value exists for undelivered items, and arrangements normally do not contain a general right of return relative to the delivered item. We determine fair value based on the price of the deliverable when it is sold separately or based on third-party evidence. In accordance with the guidance in EITF 00-21, we use the residual method to allocate the arrangement consideration when it does not have fair value of the EECP(R) system sale. Under the residual method, the amount of consideration allocated to the delivered item equals the total arrangement consideration less the aggregate fair value of the undelivered items. Assuming all other criteria for revenue recognition have been met, we recognize revenue for: i. EECP(R) equipment sales, when delivery and acceptance occurs based on delivery and acceptance documentation received from independent shipping companies or customers, ii. in-service and training, following documented completion of the training, and iii. the service arrangement, ratably over the service period, which is generally one year. In-service and training generally occurs within a few weeks of shipment and our return policy states that no returns will be accepted after in-service and training has been completed. The amount related to in-service and training is recognized as service revenue at the time the in-service and training is completed and the amount related to service arrangements is recognized ratably as service revenue over the related service period, which is generally one year. Costs associated with the provision of in-service and training and the service arrangement, including salaries, benefits, travel, spare parts and equipment, are recognized in cost of equipment sales as incurred. The Company also recognizes revenue generated from servicing EECP(R) systems that are no longer covered by the service arrangement, or by providing sites with additional training, in the period that these services are provided. Revenue related to future commitments under separately priced extended service agreements on our EECP(R) system are deferred and recognized ratably over the service period, generally ranging from one year to four years. Costs associated with the provision of service and maintenance, including salaries, benefits, travel, spare parts and equipment, are recognized in cost of sales as incurred. Amounts billed in excess of revenue recognized are included as deferred revenue in the consolidated balance sheets. Revenues from the sale of EECP(R) systems through our international distributor network are generally covered by a one-year warranty period. For these customers we accrue a warranty reserve for estimated costs to provide warranty parts when the equipment sale is recognized. The Company has also entered into lease agreements for our EECP(R) systems, generally for terms of one year or less, that are classified as operating leases. Revenues from operating leases are generally recognized, in accordance with the terms of the lease agreements, on a straight-line basis over the life of the respective leases. For certain operating leases in which payment terms are determined on a "fee-per-use" basis, revenues are recognized as incurred (i.e., as actual usage occurs). The cost of the EECP(R) system utilized under operating leases is recorded as a component of property and equipment and is amortized to cost of sales over the estimated useful life of the equipment, not to exceed five years. There were no significant minimum rental commitments on these operating leases at May 31, 2007. Accounts Receivable, Net The Company's accounts receivable - trade are due from customers engaged in the provision of medical services. Credit is extended based on evaluation of a customer's financial condition and, generally, collateral is not required. Accounts receivable are generally due 30 to 90 days from shipment and are stated at amounts due from customers net of allowances for doubtful accounts, returns, term discounts and other allowances. Accounts that remain outstanding longer than the contractual payment terms are considered past due. Estimates are used F-9 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 in determining the allowance for doubtful accounts based on the Company's historical collections experience, current trends, credit policy and a percentage of its accounts receivable by aging category. In determining these percentages, we look at historical write-offs of our receivables. The Company also looks at the credit quality of its customer base as well as changes in its credit policies. The Company continuously monitors collections and payments from our customers. While credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. The changes in the Company's allowance for doubtful accounts are as follows:
May 31, 2007 ------------------- Beginning balance $410,691 (Reversal)/Provision for losses on accounts receivable (7,421) Direct write-offs, net of recoveries (38,461) ------------------- Ending balance $364,809 ===================
Concentrations of Credit Risk We market the EECP(R) system principally to hospitals and physician private practices. We perform credit evaluations of our customers' financial condition and, as a consequence, believe that our receivable credit risk exposure is limited. Receivables are generally due 30 to 90 days from shipment. For the year ended May 31, 2007 no customer accounted for 10% or more of revenues or accounts receivable. Our revenues were derived from the following geographic areas:
Years Ended May 31, ----------------------------------- 2007 2006 --------------- --------------- Domestic (United States) $5,363,138 $10,079,789 Non-domestic (foreign) 990,945 863,208 --------------- --------------- $6,354,083 $10,942,997 =============== ===============
Cash and Cash Equivalents Cash and cash equivalents represent cash and short-term, highly liquid investments in certificates of deposit, treasury bills, money market funds, and investment grade commercial paper issued by major corporations and financial institutions that generally have maturities of three months or less. Dividend and interest income are recognized when earned. The cost of securities sold is calculated using the specific identification method. Certificates of Deposit Included in this caption are all certificates of deposit that have original maturities of greater than three months. Realized and unrealized gains and losses and declines in value, if any, are included in earnings. Dividend and interest income are recognized when earned. The cost of securities sold is calculated using the specific identification method. Inventories, net The Company values inventory at the lower of cost or estimated market, cost being determined on a first-in, first-out basis. The Company often places EECP(R) systems at various field locations for demonstration, training, evaluation, and other similar purposes at no charge. The cost of these EECP(R) systems is transferred to property and equipment and is amortized over the next F-10 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 two to five years. The Company records the cost of refurbished components of EECP(R) systems and critical components at cost plus the cost of refurbishment. The Company regularly review inventory quantities on hand, particularly raw materials and components, and record a provision for excess and obsolete inventory based primarily on existing and anticipated design and engineering changes to its products as well as forecasts of future product demand. Effective June 1, 2005, we adopted the provisions of Statement of Financial Accounting Standards No. 151, "Inventory Costs", on a prospective basis. The statement clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. As a result of adopting SFAS No. 151, we absorbed approximately $3,000 more in fixed production overhead into inventory during fiscal year 2007 and $256,000 less in fixed production overhead into inventory during fiscal year 2006. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the consolidated balance sheets. Depreciation is provided over the estimated useful lives of the assets, which range from two to thirty-nine years, on a straight-line basis. Accelerated methods of depreciation are used for tax purposes. We amortize leasehold improvements over the useful life of the related leasehold improvement or the life of the related lease, whichever is less. (See Note E) Deferred Revenues We record revenue on extended service contracts ratably over the term of the related warranty contracts. Effective September 1, 2003, we adopted the provisions of EITF 00-21. Upon adoption of the provisions of EITF 00-21 we began to defer revenue related to EECP(R) system sales for the fair value of installation and in-service training to the period when the services are rendered and for warranty obligations ratably over the service period, which is generally one year. (See Note F) Warranty Costs Equipment sold is generally covered by a warranty period of one year. Effective September 1, 2003, we adopted the provisions of EITF 00-21 on a prospective basis. Under EITF 00-21, for certain arrangements, a portion of the overall system price attributable to the first year service arrangement is deferred and recognized as revenue over the service period. As such, we do not accrue warranty costs upon delivery but rather recognize warranty and related service costs as incurred. Prior to September 1, 2003, we accrued a warranty reserve for estimated costs to provide warranty services when the equipment sale was recognized. Equipment sold to international customers through our distributor network is generally covered by a one-year warranty period. For these customers we accrue a warranty reserve for estimated costs of providing a parts only warranty when the equipment sale is recognized. The factors affecting our warranty liability includes the number of units sold and the historical and anticipated rates of claims and costs per claim. (See Note G) Research and Development Research and development costs attributable to development are expensed as incurred. Included in research and development costs is amortization expense related to the capiltalized cost of EECP(R) systems under loan for clinical trials. F-11 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 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 is established, when necessary, to reduce deferred tax assets to the amount expected to be realized. In estimating future tax consequences, we generally consider all expected future events other than an enactment of changes in the tax laws or rates. The deferred tax asset is continually evaluated for realizability. To the extent our judgment regarding the realization of the deferred tax assets changes, an adjustment to the allowance is recorded, with an offsetting increase or decrease, as appropriate, in income tax expense. Such adjustments are recorded in the period in which our estimate as to the realizability of the asset changed that it is "more likely than not" that all of the deferred tax assets will be realized. The "realizability" standard is subjective, and is based upon our estimate of a greater than 50% probability that our long range business plan can be realized. Deferred tax assets and liabilities are classified as current or non-current based on the classification of the related asset or liability for financial reporting. A deferred tax asset or liability that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, are classified according to the expected reversal date of the temporary difference. The deferred tax asset the Company previously recorded, and then reversed fully in fiscal 2006, related primarily to the realization of net operating loss carryforwards, of which the allocation of the current portion, if any, reflected the expected utilization of such net operating losses for the following twelve months. Such allocation was based on the Company's internal financial forecast and may be subject to revision based upon actual results. (See Note L) Shipping and Handling Costs All shipping and handling expenses are incurred as a component of cost of sales. Amounts billed to customers related to shipping and handling costs are included as a component of sales. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturities of the instruments. The carrying amount of the financing receivables approximates fair value as the interest rates implicit in the leases approximate current market interest rates for similar financial instruments. The carrying amounts of notes payable approximates their fair value as the interest rates of these instruments approximate the interest rates available on instruments with similar terms and maturities. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates and assumptions relate to estimates of collectibility of accounts receivable and financing receivables, the realizability of deferred tax assets, and the adequacy of inventory and warranty reserves. Actual results could differ from those estimates. Net Loss Per Common Share Basic loss per share is based on the weighted average number of common shares outstanding without consideration of potential common stock. Diluted loss per share is based on the weighted number of common and potential dilutive 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. F-12 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 Stock-Based Employee Compensation As of June 1, 2006 the Company has adopted Statement of Financial Standards No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123 (R)"), which is a revision of SFAS No. 123. SFAS No. 123 (R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach to accounting for share-based payments in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Pro forma disclosure of the fair value of share-based payments is no longer an alternative to financial statement recognition. Prior to first quarter of fiscal 2007 the Company accounted for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB No. 25") and adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." Under APB No. 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Accordingly, no compensation expense has been recognized in the consolidated financial statements in connection with employee stock option grants prior to fiscal 2007. The following table illustrates the effect on net income and earnings per share had we applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
May 31, 2006 ---------------- Net loss attributable to common shareholders, as reported $(11,579,011) Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards (2,173,828) ---------------- Pro forma net loss $(13,752,839) ================ Loss per share: Basic and diluted - as reported $(0.19) ================ Basic and diluted - pro forma $(0.22) ================
During the twelve-month period ended May 31, 2007, the Board of Directors granted non-qualified stock options under the 1997 Stock Option/Stock Issuance Plan to one director to purchase an aggregate of 150,000 shares of common stock, at an exercise price of $.09 per share, and granted non-qualified stock options under the 1999 Stock Option/Stock Issuance Plan to three directors to purchase an aggregate of 450,000 shares of common stock, at an exercise price of $.09 per share, and granted non-qualified stock options under the 2004 Stock Option/Stock Issuance Plan to one officer to purchase an aggregate of 200,000 shares of common stock, at an exercise price of $.11 per share, which represented the fair market value of the underlying common stock at the time of the respective grants. These options vest over a two-year period, and expire ten years from the date of grant. Stock-based compensation expense recognized under SFAS 123(R) for the fiscal year ended May 31, 2007 was $17,505, which comprised the fair value of the stock options issued during the year. For purposes of estimating the fair value of each option on the date of grant, the Company utilized the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the F-13 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The fair value of the Company's stock-based awards were estimated using the following weighted-average assumptions:
Years Ended May 31, 2007 2006 --------------- -------------- Expected life (years) 5 5 Expected volatility 99% 83% Risk-free interest rate 4.5% 4.5% Expected dividend yield 0.0% 0.0%
Recently Issued Accounting Pronouncements Not Yet Effective Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments--an amendment of FASB Statements No. 133 and 140, was issued in February 2006 and is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. Certain parts of this Statement may be applied prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The Company does not expect that SFAS 155 will have any significant effect on future financial statements. Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets--an amendment of FASB Statement No. 140, pertains to the servicing of financial assets and was issued in March 2006 and should be adopted as of the beginning of its first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The Company does not expect that SFAS 156 will have any significant effect on future financial statements. Statement of Financial Accounting Standards No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Company does not expect that SFAS 157 will have any significant effect on future financial statements. Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB Statements No. 87, 88, 106, and 132(R). This Statement requires employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit F-14 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 organization. This Statement also requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment to FASB Statement No. 115. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board's long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. The Company does not expect that SFAS 159 will have any significant effect on future financial statements. FASB Staff Position No. FIN 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R). This FASB Staff Position (FSP) addresses how a reporting enterprise should determine the variability to be considered in applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. The variability that is considered in applying Interpretation 46(R) affects the determination of (a) whether the entity is a variable interest entity (VIE), (b) which interests are variable interests1 in the entity, and (c) which party, if any, is the primary beneficiary of the VIE. That variability will affect any calculation of expected losses and expected residual returns, if such a calculation is necessary. Retrospective application, if elected, must be completed no later than the end of the first annual reporting period ending after July 15, 2006. The Company does not expect that FIN 46(R )-6will have any significant effect on future financial statements. FASB Staff Position (FSP) No. FTB 85-4-1, Accounting for Life Settlement Contracts by Third-Party Investors, was posted in March 27, 2006 and is effective for fiscal years beginning after June 15, 2006. It provides initial and subsequent measurement guidance and financial statement presentation and disclosure guidance for investments by third-party investors in life settlement contracts. This FSP also amends certain provisions of FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance, and FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company does not expect that FSP 85-4-1 will have any significant effect on future financial statements. FASB Staff Position (FSP) No. AUG AIR-1, Accounting for Planned Major Maintenance Activities, was posted on September 8, 2006 and is effective for the first fiscal year beginning after December 15, 2006. This FSP addresses the accounting for planned major maintenance activities and amends certain provisions in the AICPA Industry Audit Guide, Audits of Airlines (Airline Guide), and APB Opinion No. 28, Interim Financial Reporting. The Airline Guide permits four alternative methods of accounting for planned major maintenance activities: direct expense, built-in overhaul, deferral, and accrual (accrue-in-advance). Those methods are widely used by other industries. The FSP prohibits the use of the accrue-in-advance method. The Company does not expect that FSP No. AUG AIR-1 will have any significant effect on future financial statements. F-15 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 FASB Staff Position No. FAS 126-1, Applicability of Certain Disclosure and Interim Reporting Requirements for Obligors for Conduit Debt Securities, was posted on October 25, 2006. This FASB Staff Position (FSP) clarifies the definition of a public entity in certain accounting standards to include entities that are conduit bond obligors for conduit debt securities that are traded in a public market. The guidance in this FSP is to be applied prospectively in fiscal periods beginning after December 15, 2006. The Company does not expect that FAS 126-1 will have any significant effect on future financial statements. The FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109 (FIN 48) in June 2006. This Interpretation primarily relates to tax positions taken or expected to be taken in a tax return and clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. Under this Interpretation the effects of a tax position would be recognized or derecognized depending on what outcome is more likely than not to occur with respect to the position. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. It requires that all tax positions be evaluated using the more-likely-than-not recognition threshold, and that the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information for recognition, derecognition, and measurement using consistent criteria. Disclosures are required about the effect of unrecognized tax benefits related to tax positions as well as information about the nature of the uncertainties related to tax positions where it is reasonably possible that changes in the tax provision will occur in the next 12 months of this Interpretation will provide more information about the uncertainty in income tax assets and liabilities. This Interpretation is effective for fiscal years beginning after December 15, 2006. Earlier application of the provisions of this Interpretation is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period this Interpretation is adopted. The Company is currently evaluating whether the adoption of Interpretation No. 48 will have a material effect on our consolidated financial position, results of operations and cash flows. EITF Issue 05-1, Accounting for the Conversion of an Instrument That Became Convertible upon the Issuer's Exercise of a Call Option. The Task Force reached a consensus that the issuance of equity securities to settle a debt instrument (pursuant to the instrument's original conversion terms) that became convertible upon the issuer's exercise of a call option should be accounted for as a conversion if the debt instrument contained a substantive conversion feature as of its issuance date, as defined herein. That is, no gain or loss should be recognized related to the equity securities issued to settle the instrument. The issuance of equity securities to settle a debt instrument that became convertible upon the issuer's exercise of a call option should be accounted for as a debt extinguishment if the debt instrument did not contain a substantive conversion feature as of its issuance date. That is, the fair value of the equity securities issued should be considered a component of the reacquisition price of the debt. This Issue applies to all conversions within the scope of this Issue that result from the exercise of call options and is effective in interim or annual reporting periods beginning after June 28, 2006 (the Board ratification date of the consensus), irrespective of whether the instrument was entered into prior or subsequent to Board ratification of this Issue. For instruments issued prior to the effective date of this consensus, the assessment as to whether a substantive conversion feature exists at issuance should be based only on assumptions, considerations, and/or marketplace information available as of the issuance date. The Company does not expect that pronouncement EITF Issue 05-1 will have any significant effect on future financial statements. EITF Issue 06-1, Accounting for Consideration Given by a Service Provider to a Manufacturer or Reseller of Equipment Necessary for an End-Customer to Receive Service from the Service Provider. The Task Force reached a consensus that if the consideration given by a service provider to a manufacturer or reseller (that is not a customer of the service provider) can be linked contractually to the benefit received by the service provider's customer, a service provider should use the guidance in Issue 01-9 to determine the characterization of the consideration (that is, "cash consideration" or "other than cash" consideration). Issue 01-9 presumes that an entity should characterize "cash consideration" as a reduction of revenue unless an entity meets the requirements of paragraph 9 of Issue 01-9. Under Issue 01-9, "other than cash" consideration should be characterized as an expense. In applying that guidance, the service provider should characterize the consideration given to a third-party manufacturer or reseller based on the form of consideration directed by the service provider to be provided to the service provider's customer. If the form of the consideration is directed to be anything other than "cash F-16 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 consideration" (as defined in Issue 01-9), then the form of the consideration should be characterized as "other than cash" consideration. If the service provider does not control the form of the consideration provided to the service provider's customer, the consideration should be characterized as "other than cash" consideration. In reaching this conclusion, Task Force members observed that consideration paid by a service provider that results in a customer receiving a reduced price on equipment purchased from a manufacturer or reseller should be characterized as "other than cash" consideration for purposes of applying Issue 01-9. The consensus in this Issue is effective for the first annual reporting period beginning after June 15, 2007. Earlier application is permitted for financial statements that have not yet been issued. Entities should recognize the effects of applying the consensus in this Issue as a change in accounting principle through retrospective application to all prior periods unless it is impracticable to do so. The Company does not expect that pronouncement EITF Issue 06-1 will have any significant effect on future financial statements. EITF Issue 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, "Accounting for Compensated Absences". An employer may provide its employees with sabbatical leave or other similar benefits. Sabbatical leave involves an employee receiving time off upon working at the employer for a specific period of time. When an employer provides sabbatical leave or another similar benefit, the employer must determine whether such benefit should be accrued based on the guidance in FASB Statement No. 43, Accounting for Compensated Absences. The Task Force reached a consensus that an employee's right to a compensated absence under a sabbatical or other similar benefit arrangement (a) that requires the completion of a minimum service period and (b) in which the benefit does not increase with additional years of service accumulates pursuant to Statement 43 for arrangements in which the individual continues to be a compensated employee and is not required to perform duties for the entity during the absence. Therefore, assuming all of the other conditions of Statement 43 are met, the compensation cost associated with a sabbatical or other similar benefit arrangement should be accrued over the requisite service period. This Issue should be effective for fiscal years beginning after December 15, 2006. An entity should apply the consensus reached in this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position at the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. Earlier adoption of this guidance is permitted as of the beginning of an entity's fiscal year provided that the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The Company does not expect that pronouncement EITF Issue 06-2 will have any significant effect on future financial statements. EITF Issue 06-3, How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation). The issue concerns whether various non-income taxes assessed by governmental authorities should be presented gross or net in an entity's income statement. Non-income taxes on which this question has arisen include sales tax, use tax, excise tax, value added tax, and various taxes related to specific industries (e.g., the severance tax in the oil and gas industry and the franchise tax in the cable industry). The Task Force reached a consensus that the scope of this Issue includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. The Task Force also reached a consensus that the presentation of taxes on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to Opinion 22. In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The disclosure of those taxes can be done on an aggregate basis. The consensuses in this Issue should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006. Earlier application is permitted. The Company does not expect that pronouncement EITF Issue 06-3 will have any significant effect on future financial statements. EITF Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. An endorsement split-dollar life insurance should be recognized as a liability for future benefits in accordance with Statement 106 (if, in substance, a postretirement benefit plan exists) or Opinion 12 (if the arrangement is, in F-17 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 substance, an individual deferred compensation contract) based on the substantive agreement with the employee. The consensus in this Issue is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. The Company does not expect that pronouncement EITF Issue 06-4 will have any significant effect on future financial statements. EITF Issue 06-5, Accounting for Purchases of Life Insurance--Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4. A policyholder should consider any additional amounts included in the contractual terms of the policy in determining the amount that could be realized under the insurance contract. When it is probable (as is used in FASB Statement No. 5) that contractual terms would limit the amount that could be realized under the insurance contract, the Task Force agreed that these contractual limitations should be considered when determining the realizable amounts. Those amounts that are recoverable by the policyholder at the discretion of the insurance company should be excluded from the amount that could be realized under the insurance contract. The consensus in this Issue is effective for fiscal years beginning after December 15, 2006. Earlier application is permitted as of the beginning of a fiscal year for periods in which interim or annual financial statements have not yet been issued. The Company does not expect that pronouncement EITF Issue 06-5 will have any significant effect on future financial statements. NOTE C - LOSS PER COMMON SHARE The following table sets forth the computation of basic and diluted loss per share:
Years Ended May 31, 2007 2006 --------------- --------------- Numerator: Net loss $(1,571,066) $(11,579,011) --------------- --------------- Denominator: Basic - weighted average shares 65,198,592 61,351,323 Stock options -- -- Warrants -- -- --------------- --------------- Diluted - weighted average shares 65,198,592 61,351,323 =============== =============== Loss per share - basic $(0.02) $(0.19) =============== =============== - diluted $(0.02) $(0.19) =============== ===============
Options and warrants to purchase 8,846,876 and 10,466,613 shares of common stock were excluded from the computation of diluted earnings per share for the years ended May 31, 2007 and 2006, respectively, because the effect of their inclusion would be antidilutive. NOTE D - INVENTORIES, NET Inventories, net consist of the following:
May 31, 2007 ----------------- Raw materials $794,188 Work in process 915,744 Finished goods 407,695 ----------------- $2,117,627 =================
At May 31, 2007 the Company has recorded reserves for excess and obsolete inventory of $677,166. F-18 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 NOTE E - PROPERTY AND EQUIPMENT Property and equipment is summarized as follows:
May 31, 2007 ---------------- Land $ 200,000 Building and improvements 1,394,569 Office, laboratory and other equipment 1,436,360 EECP(R) systems under operating leases or under loan for clinical trials 813,020 Furniture and fixtures 162,066 Leasehold improvements 117,803 --------------- 4,123,818 --------------- Property and equipment - net $1,286,880 ===============
NOTE F - DEFERRED REVENUE The changes in the Company's deferred revenues are as follows:
May 31, 2007 ---------------- Deferred revenue at beginning of year $2,322,588 Additions Deferred extended service contracts 1,977,341 Deferred in-service and training 45,000 Deferred service contract promotion 9,300 Deferred service arrangement obligations 143,000 Recognized as revenue Deferred extended service contracts (2,450,010) Deferred in-service and training (47,500) Deferred service contract promotion (2,700) Deferred service arrangement obligations (240,667) ---------------- Deferred revenue at end of year 1,756,352 Less: current portion (1,286,726) ---------------- Long-term deferred revenue at end of year $469,626 ===============
NOTE G - WARRANTY LIABILITY The changes in the Company's product warranty liability are as follows:
May 31, 2007 ---------------- Warranty liability at the beginning of the year $32,000 Expense for new warranties issued 42,000 Warranty claims (58,250) ---------------- Warranty liability at the end of the year 15,750 ---------------- Long-term warranty liability at the end of the year $ -- ===============
F-19 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 NOTE H - LONG-TERM DEBT Long-term debt consists of the following:
May 31, 2007 ----------------- Facility loans (a) $851,015 Term loans (b) -- ----------------- 851,015 Less: current portion (65,769) ----------------- $785,246 ================= (a) The Company purchased its headquarters and warehouse facility with secured notes of $641,667 and $500,000, respectively, under two programs sponsored by New York State. These notes, which bear interest at 7.8% and 6%, respectively, are payable in monthly installments consisting of principal and interest payments over fifteen-year terms, expiring in September 2016 and January 2017, respectively, and are secured by the building. (b) In fiscal years 2003 and 2004, the Company financed the cost and implementation of a management information system and secured several notes, aggregating approximately $305,219. The notes, which bore interest at rates ranging from 7.5% through 12.5%, were payable in monthly installments consisting of principal and interest payments over four-year terms, expiring at various times between August and October 2006.
Maturities of long-term debt are as follows at May 31, 2007:
Fiscal Year Amount ------------------- -------------- 2008 $65,769 2009 70,524 2010 75,629 2011 81,110 2012 86,995 Thereafter 470,988 -------------- $851,015 ==============
NOTE I - SERIES D PREFERRED STOCK AND WARRANTS On July 19, 2005, we entered into a Securities Purchase Agreement that provided us with gross proceeds of $2.5 million through a private placement of preferred stock with M.A.G. Capital, LLC through its designated funds, Monarch Pointe Fund Ltd., Mercator Momentum Fund III, LP, and Mercator Momentum Fund, LP (the "Investors"). The agreement provided for a private placement of 25,000 shares of Vasomedical's Series D Preferred Stock at $100 per share. The preferred stock was convertible into shares of Vasomedical's common stock at 85 percent of the volume weighted average price per share for the five trading days preceding any conversion, but not at more than $0.6606 or less than $0.40 per share. The Investors also acquired warrants for the purchase of 1,892,219 shares of common stock. The warrants may be exercised at a price of $0.69 per share for a term of five years, ending July 19, 2010. As of February 28, 2006, all of the Series D Preferred Stock had been converted into 6,112,209 shares of common stock. Under the terms of a Registration Rights Agreement with the Investors, Vasomedical filed a Form S-3 registration statement with the Securities and Exchange Commission (SEC) on August 22, 2005, for 10,787,871 shares of common stock representing up to 8,533,333 shares issuable in connection with conversion of our Series D Convertible Preferred Stock and up to 2,254,538 shares issuable upon the exercise of our common stock purchase warrants. The SEC declared the registration statement effective on September 1, 2005. The total number of F-20 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 shares registered was based on a conversion price of $0.30 per share, which would only have an affect in the event of default by Vasomedical of its obligation to holders of the Series D Convertible Preferred Stock. These securities were offered and sold to the Investors in a private placement transaction made in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933. The Investors are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933. Vasomedical applied the funds to working capital. Warrants and Beneficial Conversion Feature The Company applied Emerging Issues Task Force Issue No. 98-5 "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios"(EITF No. 98-5) and Emerging Issues Task Force (EITF 00-27) Application of Issue No. 98-5 to Certain Convertible Instruments in accounting for the preferred stock issuance. EITF No. 98-5 provides that detachable warrants issued with convertible securities are valued separately, and that the beneficial conversion feature of the convertible security be measured and recognized over the minimum period over which the shareholders can realize the return. The Task Force reached a consensus that convertible preferred securities with a non-detachable conversion feature that is in-the-money at the commitment date represents an embedded beneficial conversion feature that should be recognized as a dividend and recorded to additional paid-in capital. That amount should be calculated at the commitment date as the difference between the allocated portion of the gross proceeds to the convertible preferred stock and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which the security is convertible (intrinsic value method). The beneficial conversion feature is treated analogous to a dividend and is recognizable immediately over the minimum period during which the preferred shareholders can realize that return. The imputed dividend will increase the Company's loss for the purpose of computing the loss-per-share applicable to common shareholders. The beneficial conversion feature is calculated at its intrinsic value at the commitment date (that is, the difference between the total gross proceeds allocated to the preferred stock as compared to the total market value of the common stock into which the Preferred Stock is convertible on the commitment date). The computed value of the beneficial conversion feature is treated as a deemed dividend immediately with a corresponding increase to paid-in capital. No additional amount will be recognized at the conversion date in recognition of an increase in the fair value of the stock conversion. In circumstances in which convertible securities are issued with detachable warrants, the Task Force noted that in order to determine the amount to be allocated to the beneficial conversion feature, the issuer must first allocate the proceeds between the convertible instrument and the detachable warrants using the relative fair value method of APB Opinion Number 14. The investors and consultants acquired detachable warrants for the purchase of 1,892,219 and 362,319 shares of common stock, respectively, which were valued at $345,071 and $66,087, respectively. The warrants may be exercised at a price of $0.69 per share for a term of five years, ending July 18, 2010. For purposes of estimating the intrinsic fair value of these warrants as of July 19, 2005, we utilized the Black-Scholes option-pricing model. We estimated the fair value of the warrants using the following weighted-average assumptions: Expected life (years) 2.5 Expected volatility 66% Risk-free interest rate 4.16% Expected dividend yield 0.0% F-21 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 We determined the intrinsic fair value of the convertible preferred stock as of July 19, 2005, to be $2,941,176 based on the number of common shares that could be acquired as of the date of closing times $0.63, the closing price of the common stock on the date preceding the close of the transaction. In applying EITF No. 98-5, we then allocated the gross proceeds of $2,500,000 between the warrants and preferred stock based on intrinsic value of each instrument. As a result, we allocated $2,154,929 of gross proceeds to the convertible preferred stock and $345,071 to the detachable warrants. The beneficial conversion feature of $786,247 was then determined by subtracting the allocated proceeds of convertible preferred stock from the intrinsic fair value of convertible preferred stock. The beneficial conversion feature was immediately recognized as a preferred stock dividend, as the preferred stock can be converted immediately. Dividends By the placement of the convertible preferred stock described above, we became obligated to pay a cash dividend monthly on the outstanding shares of convertible preferred stock. The dividend rate was the higher of (i) the prime rate as reported by the Wall Street Journal on the first day of the month, plus three percent or, (ii) 8.5% times $100 per share, but in no event greater than 10% annually. For the fiscal year ended May 31, 2006, cash dividends of $91,623 were paid. Preferred stock dividends for the fiscal 2006 are summarized as follows:
Amount -------------- Cash dividends paid $91,623 Beneficial conversion feature 786,247 -------------- $877,870 ==============
Common stock The Company issued 200,000 shares of common stock in lieu of cash for $126,000 in consultant services associated with the issuance of the Series D Convertible Preferred Stock. These issue costs were treated as a reduction in the paid-in capital associated with the preferred stock issuance. NOTE J - STOCKHOLDERS' EQUITY AND WARRANTS On July 19, 2005, we granted warrants for the purchase of 2,254,538 shares of common stock to investors and consultants associated with the issuance of Series D Preferred Stock, (See Note I). The warrants may be exercised at a price of $0.69 per share for a term of five years, ending July 19, 2010. The remaining 200,000 warrants expired in October 2006. Warrant activity for the years ended May 31, 2006 and 2007 is summarized as follows:
Employees Consultants Total Price Range ----------------- ------------------- ------------------------ ---------------- Balance at May 31, 2005 -- 200,000 200,000 $0.91 ----------------- ------------------- ------------------------ ---------------- Warrants granted 2,254,538 2,254,538 $0.69 ----------------- ------------------- ------------------------ ---------------- Balance at May 31, 2006 -- 2,454,538 2,454,538 $0.71 ----------------- ------------------- ------------------------ ---------------- Warrants expired -- (200,000) (200,000) $0.91 ----------------- ------------------- ------------------------ ---------------- Balance at May 31, 2007 -- 2,254,538 2,254,538 $0.69 ================= =================== ======================== ================ Number of shares exercisable -- 2,254,538 2,254,538 $0.69 ================= =================== ======================== ================
NOTE K - OPTION PLANS F-22 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 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 with respect to new option grants. In fiscal 2006, options to purchase 155,000 shares of common stock at an exercise price of $3.44 under the 1995 Stock Option Plan were retired or cancelled. In fiscal 2007, options to purchase 286,000 shares of common stock at an exercise price of $3.43750 under the 1995 Stock Option Plan were retired or cancelled. Outside Director Stock Option Plan In May 1995, the Company's stockholders approved an Outside Director Stock Option Plan (the "OD 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 OD Plan with respect to new option grants. In fiscal 2006, options to purchase 155,000 shares of common stock at an exercise price of $2.21 under the OD Plan were retired unexercised. In fiscal 2007, options to purchase 28,250 shares of common stock at an exercise price of $1.77 under the OD Plan were retired unexercised. 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 a committee of the Board of Directors of the Company will administer it 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. In January 1999, the Company's Board of Directors increased the number of shares authorized for issuance under the 1997 Plan by 1,000,000 shares to 2,800,000 shares. In May 2006, the Board of Directors accelerated the vesting period for all unvested options to May 31, 2006. In fiscal 2006, options to purchase 4,500 shares of common stock under the 1997 Plan at exercise prices ranging from $0.88 to $1.91 were retired or cancelled. In fiscal 2007 the Board of Directors granted non-qualified stock options under the 1997 plan to a Director to purchase 150,000 shares of common stock at an exercise price of $0.09 per share (which represent the fair market value of the underlying common stock at the time of the respective grants). These options expire 10 years from grant date. In fiscal 2007, there were no options to purchase shares of common stock under the 1997 Plan. In fiscal 2007, options to purchase 175,192 shares of common stock under the 1997 Plan at exercise prices of $0.88 to $1.91 were retired or cancelled. At May 31, 2007, there were 328,360 shares available for future grants under the 1997 Plan. F-23 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 1999 Stock Option Plan In July 1999, the Company's Board of Directors approved the 1999 Stock Option Plan (the "1999 Plan"), for which the Company reserved an aggregate of 2,000,000 shares of common stock. The 1999 Plan provides that a committee of the Board of Directors of the Company will administer it 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 1999 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 1999 Plan expires July 12, 2009. In July 2000, the Company's Board of Directors increased the number of shares authorized for issuance under the 1999 Plan by 1,000,000 shares to 3,000,000 shares. In December 2001, the Board of Directors of the Company increased the number of shares authorized for issuance under the 1999 Plan by 2,000,000 shares to 5,000,000 shares. In May 2006, the Board of Directors accelerated the vesting period for all unvested options to May 31, 2006. In fiscal 2006, the Company's Board of Directors granted non-qualified stock options to purchase under the 1999 Plan to officers, directors and employees to purchase an aggregate of 1,260,000 shares of common stock, at an exercise price of $0.20 to $0.22 per share, which represented the fair market value of the underlying common stock at the time of the respective grants. These ten years from the date of grant. In fiscal 2006, options to purchase 1,173,250 shares of common stock under the 1999 Plan at an exercise price of $0.20 to $4.69 were retired or cancelled. In fiscal 2007, the Board of Directors granted non-qualified stock options under the 1999 Plan to directors to purchase an aggregate of 450,000 shares of common stock, at an exercise price of $0.09 per shares (which represented the fair market value of the underlying common stock at the time of the respective grants). In fiscal 2007, there were no options to purchase shares of common stock under the 1999 Plan. In fiscal 2007, options to purchase 996,279 shares of common stock under the 1999 Plan at an exercise price of $0.20 to $5.00 were retired or cancelled. At May 31, 2007, there were 412,032 shares available for future grants under the 1999 Plan. 2004 Stock Option and Stock Issuance Plan In October 2004, the Company's stockholders approved the 2004 Stock Option and Stock Issuance Plan (the "2004 Plan"), for which the Company reserved an aggregate of 2,500,000 shares of common stock. The 2004 Plan is divided into two separate equity programs: (i) the Option Grant Program under which eligible persons ("Optionees") may, at the discretion of the board of directors, be granted options to purchase shares of common stock; and (ii) the Stock Issuance Program under which eligible persons ("Participants") may, at the discretion of the board or directors, be issued shares of common stock directly, either through the immediate purchase of such shares or as a bonus for services rendered to the Corporation. Options granted under the 2004 Stock Plan shall be non-qualified or incentive stock options and the exercise price is the fair market value of the common stock on the date of grant except that for incentive stock options it shall be 110% of the fair market value if the Optionee owns 10% or more of our common stock. The term of any option may be fixed by the board of directors or committee but in no event shall exceed ten years from the date of grant. Stock options granted under the 2004 Plan may become exercisable in one or more installments in the manner and at the time or times specified by the committee. 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 2004 Plan expires July 12, 2014. F-24 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 Under the stock issuance program, the purchase price per share shall be fixed by the board of directors or committee but cannot be less than the fair market value of the common stock on the issuance date. Payment for the shares may be made in cash or check payable to us, or for past services rendered to us and all shares of common stock issued thereunder shall vest upon issuance unless otherwise directed by the committee. The number of shares issuable is also subject to adjustments upon the occurrence of certain events, including stock dividends, stock splits, mergers, consolidations, reorganizations, recapitalizations, or other capital adjustments. The term for which shares may be issued under the 2004 Plan expires July 12, 2014. The 2004 Plan provides that a committee of the Board of Directors of the Company will administer it and that the committee will have full authority to determine and designate the individuals who are to be granted stock options or qualify to purchase shares of common stock under the 2004 Stock Plan, the number of shares to be subject to options or to be purchased and the nature and terms of the options to be granted. The committee also has authority to interpret the 2004 Plan and to prescribe, amend and rescind the rules and regulations relating to the 2004 Plan. In May 2006, the Board of Directors accelerated the vesting period for all unvested options to May 31, 2006. In fiscal 2006, the Company's Board of Directors granted an aggregate of 225,000 shares of common stock under the 2004 Plan directors of the Company having a fair market value of $0.45 per share at the time of the respective grants. In fiscal 2006, the Company's Board of Directors granted non-qualified stock options under the 2004 Plan to Officers and employees to purchase an aggregate of 2,118,045 shares of common stock, at exercise prices of $0.20 to $0.58 per share, which represented the fair market value of the underlying common stock at the time of the respective grants. These options expire ten years from the date of grant. In fiscal 2006, options to purchase 266,496 shares of common stock under the 2004 Plan at exercise prices of $0.45 to $0.58 were retired or cancelled. In fiscal 2007, the Company's Board of Directors granted non-qualified stock options under the 2004 Plan to an Officer to purchase an aggregate of 200,000 shares of common stock, at an exercise price of $0.11 per share, (which represented the fair market value of the underlying common stock at the time of the respective grants). These options expire ten years from the date of grant. In fiscal 2007, options to purchase 733,716 shares of common stock under the 2004 Plan at exercise prices of $0.20 to $0.58 were retired or cancelled. At May 31, 2007, there were 957,457 shares available for future grants under the 2004 Plan. Activity under all the plans for the years ended May 31, 2006 and 2007, is summarized as follows:
Outstanding Options ------------------------------------------------------------ Shares Range of Weighted Available for Number of Exercise Average Grant Shares Price per Share Exercise Price ----------------- ------------------- ---------------------- ----------------- Balance at May 31, 2005 2,614,503 6,545,544 $0.71 - $5.15 $1.86 Common shares granted (225,000) -- -- -- Options granted (3,378,045) 3,378,045 $0.20 - $0.58 $0.34 Options exercised -- -- -- -- Options canceled 1,738,414 (1,911,514) $0.20 - $5.15 $0.70 ----------------- ------------------- ---------------------- ----------------- Balance at May 31, 2006 749,872 8,012,075 $0.20 - $5.15 $1.20 Options granted (800,000) 800,000 $0.09 - $0.11 $0.10 Options exercised -- -- -- -- Options canceled 1,747,987 (2,219,737) $0.20 - $5.00 $1.28 ----------------- ------------------- ---------------------- ----------------- Balance at May 31, 2007 1,697,859 6,592,338 $0.20 - $5.00 $1.04 ================= =================== ====================== =================
F-25 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 (1) May be issued under the Stock Issuance Program. The following table summarizes information about stock options outstanding and exercisable at May 31, 2007:
Options Outstanding Options Exercisable --------------------------------------------------- -------------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Outstanding at Contractual Exercise Exercisable at Exercise Range of Exercise Prices May 31, 2007 Life (yrs.) Price May 31, 2007 Price ------------------ ---------------- --------------- ----------------- -------------- $0.09 - $0.58 2,748,171 8.8 $0.26 2,748,171 $0.26 $0.71 - $0.97 752,500 4.6 $0.89 752,500 $0.89 $1.00 - $1.49 1,887,500 6.2 $1.09 1,887,500 $1.09 $1.53 - $2.49 541,167 1.0 $1.87 541,167 $1.87 $2.66 - $5.15 663,000 3.8 $3.66 663,000 $3.66 ------------------ ---------------- --------------- ----------------- -------------- 6,592,338 5.3 $1.03 6,592,338 $1.03 ================== ================ =============== ================= ==============
The weighted-average fair value exercise price of options granted during fiscal years 2007 and 2006 was $0.10 and $0.34, respectively. At May 31, 2007, there were approximately 34,256,673 remaining authorized shares of common stock after reserves for all stock option plans and stock warrants. NOTE L - INCOME TAXES During the fiscal years ended May 31, 2007 and 2006, the Company recorded income tax expense of $20,608 and $7,109,176, respectively. The fiscal 2006 tax expense consists mainly of $7,093,000 in additional valuation allowance provided for the deferred tax asset in the second fiscal quarter. The income tax expense for fiscal 2006 does not include $7,489,000 added to the deferred tax valuation allowance for tax benefits associated with prior years' exercises of stock options and warrants, which was charged directly to additional paid-in capital. As of May 31, 2005, we had recorded deferred tax assets of $14,582,000 net of a $3,774,000 valuation allowance related to the anticipated recovery of tax loss carryforwards. No deferred tax assets have been recorded for state income tax net operating losses since it was determined that the amounts were not material and the Company could not be sure that any benefit from the losses would be utilized. On December 20, 2005, Centers for Medicare and Medicaid Services (CMS) issued a Proposed Decision Memorandum (PDM) for External Counterpulsation in response to Vasomedical's application to expand reimbursement coverage to include Canadian Cardiovascular Society (CCSC) Class II angina and New York Heart Association (NYHA) Class II/III congestive heart failure (CHF). The PDM stated that the evidence was not adequate to conclude that external counterpulsation therapy is reasonable and necessary to expand reimbursement coverage to CCSC Class II angina and NYHA Class II/III CHF and that current coverage for CCSC class III/IV refractory angina would remain in effect. Consequently, at the end of the second fiscal quarter of fiscal 2006, we concluded that, based upon the weight of available evidence, it was no longer "more likely than not" that the net deferred tax asset of $14,582,000 would be realized, and added $14,582,000 to the valuation allowance to bring the net deferred tax asset carrying value to zero. On March 20, 2006, CMS issued its final decision, which upheld the PDM. As of May 31, 2007, the recorded deferred tax asset was $19,589,352, reflecting an increase of $29,894 during fiscal 2007, which was offset by the valuation allowance of the same amount. F-26 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 The Company's deferred tax assets are summarized as follows:
2007 2006 --------------- --------------- Net operating loss and other carryforwards $18,120,000 $17,850,000 Accrued compensation 2,400 6,900 Bad debts 125,000 140,000 Other 1,341,952 1,562,558 --------------- --------------- Total gross deferred tax assets 19,589,352 19,559,458 Valuation allowance (19,589,352) (19,559,458) --------------- --------------- Net deferred tax assets $-- $-- =============== ===============
At May 31, 2007, the Company had net operating loss carryforwards for Federal and state income tax purposes of approximately $53,290,050, expiring at various dates from 2008 through 2027. In fiscal 2007 $517,934 of net operating loss carryforwards expired. Expiration of net operating loss carryforwards are as follows:
Fiscal Year Amount ------------------- -------------- 2008 $ 558,968 2009 470,994 2010 2,454,162 2011 5,449,051 2012 6,084,213 Thereafter 38,272,662 -------------- $ 53,290,050 ==============
Under current tax law, the utilization of tax attributes will be restricted if an ownership change, as defined, were to occur. Section 382 of the Internal Revenue Code provides, in general, that if an "ownership change" occurs with respect to a corporation with net operating and other loss carryforwards, such carryforwards will be available to offset taxable income in each taxable year after the ownership change only up to the "Section 382 Limitation" for each year (generally, the product of the fair market value of the corporation's stock at the time of the ownership change, with certain adjustments, and a specified long-term tax-exempt bond rate at such time). The Company's ability to use its loss carryforwards could be limited in the event of an ownership change. The following is a reconciliation of the effective income tax rate to the federal statutory rate:
2007 2006 % % ----------------- --------------- Federal statutory rate (34.0) (34.0) State taxes, net 1.3 0.3 Permanent differences 2.7 0.6 Change in valuation allowance relating to operations 31.4 229.0 Other (2.7) (0.6) ----------------- ---------------- (1.3) (195.3) ================= ================
NOTE M - COMMITMENTS AND CONTINGENCIES Leases As of May 31, 2007 the company was not obligated under any lease agreements. F-27 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 and 2006 The Company leased additional warehouse space under a no cancelable-operating lease, which expired on September 30, 2006. Rent expense was $17,000 and $94,000 in fiscal 2007and 2006, respectively. Litigation The Company is currently, and has been in the past, a party to various routine legal proceedings incident to the ordinary course of business. The Company believes that the outcome of all such pending legal proceedings in the aggregate is unlikely to have a material adverse effect on the business or consolidated financial condition of the Company. NOTE N - 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. In fiscal year 2007 and 2006, the Company made discretionary contributions of approximately $15,000 and $27,000, respectively, to match a percentage of employee contributions. NOTE O - SUBSEQUENT EVENT On June 21, 2007 we entered into a Securities Purchase Agreement with Kerns Manufacturing Corp. ("Kerns"). Concurrently with our entry into the Securities Purchase Agreement, we also entered into a Distribution Agreement and a Supplier Agreement with Living Data Technology Corporation, an affiliate of Kerns ("Living Data"). We sold to Kerns pursuant to the Securities Purchase Agreement, 21,428,572 shares of our common stock at $.07 per share for an aggregate of $1,500,000 as well a five-year warrant to purchase 4,285,714 shares of our common stock at an initial exercise price of $.08 per share (the "Warrant"). We also have an option to sell an additional $1 million of our common stock to Kerns. The agreement further provided for the appointment to our Board of Directors of two representatives of Kerns. In furtherance thereof, Mr. Jun Ma and Mr. Simon Srybnik, Chairman of both Kerns and Living Data, have been appointed members of our Board of Directors. Pursuant to the Distribution Agreement, we have become the exclusive distributor in the United States of the AngioNew ECP systems manufactured by Living Data. As additional consideration for such agreement, we agreed to issue an additional 6,990,840 shares of our common stock to Living Data. Pursuant to the Supplier Agreement, Living Data now will be the exclusive supplier to us of the ECP therapy systems that we market under the registered trademark EECP(R). The Distribution Agreement and the Supplier Agreement each have an initial term extending through May 31, 2012. Pursuant to a Registration Rights Agreement, we granted to Kerns and Living Data, subject to certain restrictions, "piggyback registration rights" covering the shares sold to Kerns as well as the shares issuable upon exercise of the Warrant and the shares issued to Living Data. On August 15, 2007 we sold our facility under a five-year leaseback agreement for $1.4 million. The net proceeds from the sale was approximately $425,000 after payment in full of the two secured notes on our facility, brokers fees, closing costs, and the opening of a certificate of deposit in accordance with the provisions of the new lease. F-28 Vasomedical, Inc. and Subsidiaries Schedule II - Valuation and Qualifying Accounts
- ---------------------------------------- ---------------- -------------------------------- ----------------- --------------- Column A Column B Column C Column D Column E - ---------------------------------------- ---------------- -------------------------------- ----------------- --------------- Additions -------------------------------- (1) (2) Balance at Charged to costs Charged to beginning of and expenses other Balance at period accounts Deductions end of period - ---------------------------------------- ---------------- ------------------ ------------- ----------------- --------------- Allowance for doubtful accounts Year ended May 31, 2007 $410,691 (a) $ (7,421) $-- $38,461 $364,809 Year ended May 31, 2006 $394,692 $110,317 $-- (b) $94,318 $410,691 Reserve for excess and obsolete inventory Year ended May 31, 2007 $677,166 $-- $-- $-- $677,166 Year ended May 31, 2006 $566,149 $152,004 $-- $40,987 $677,166 Valuation Allowance - Deferred Tax Asset Year ended May 31, 2007 $19,559,458 $29,894 $-- $-- $19,589,352 Year ended May 31, 2006 $3,774,000 $8,296,458 $7,489,000 $-- $19,559,458 Provision for warranty obligations Year ended May 31, 2007 $32,000 $42,000 $-- (c) $58,250 $15,750 Year ended May 31, 2006 $118,333 $33,000 $-- (c) $119,333 $32,000 (a) reversal of overaccrual from prior years balance (b) financing receivables written off (c) warranty claims
S-1 EX-10.(K) 2 vaso10k07ex10-k.txt AGREEMENT EXHIBIT 10(k) PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT is made as of the 1st day of June, 2007, by and between 180 LINDEN AVENUE CORP., a New York Corporation ("Seller"), and 180 LINDEN REALTY, LLC, a New York limited liability company ("Purchaser"). WITNESSETH: WHEREAS, the Seller is the owner of the Premises (this and other capitalized terms used and not otherwise defined herein having the meaning as described to such terms in Section 1); and WHEREAS, the Purchaser desires to acquire the Premises from the Seller and the Seller wishes to sell the Premises to the Purchaser, subject to and upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, the Seller and the Purchaser hereby agree as follows: SECTION 1 DEFINITIONS. Capitalized terms used in this Agreement shall have the meanings set forth below or in the Section of this Agreement referred to below: 1.1 "Agreement" shall mean this Purchase and Sale Agreement, together with Schedules A through F attached hereto, as it and they may be amended from time to time as herein provided. 1.2 "Business Day" shall mean any day other than a Saturday, Sunday or any other day on which banking institutions in the State of New York are authorized by law or executive action to close. 1.3 "Closing" shall have the meaning given such terms in Section 2.2. 1.4 "Closing Date" shall mean a day which is on or before thirty (30) days after the expiration of the Review Period. 1.5 "Deposit" shall have the meaning given such term in Section 2.3. 1.6 "Escrow Agent" shall mean Seller's attorneys, a Title Company, or such other person as shall be reasonably acceptable to the Purchaser and the Seller. 1.7 "Lease" shall mean the lease, dated as of the Closing Date, by and between Purchaser and Vasomedical, Inc. ("Vaso") in substantially the form annexed hereto as Schedule B. 1.8 "Permitted Encumbrances" shall mean (a) applicable zoning regulations and ordinances provided the same do not prohibit or impair in any material respect the use of the Premises as currently operated and constructed or as contemplated by this Agreement; (b) such other non-monetary encumbrances with respect to such Premises which are not objected to by the Purchaser in accordance with Sections 3.2 and 3.3. 1.9 "Premises" shall mean the following: (a) The certain real property commonly known as 180 Linden Avenue, Village of Westbury, Town of North Hempstead, County of Nassau, State of New York, described on Schedule A attached hereto (the "Real Property"). (b) All of Seller's rights, privileges and easements appurtenant to the Real Property, including, without limitation, all mineral, oil, gas and other hydrocarbon substances as well as all development rights and air rights relating to the Real Property and any easements, rights-of-way, strips, gores, or other appurtenances used in connection with the beneficial use and enjoyment of the Real Property. (c) All improvements and fixtures located on the Real Property, including all buildings and structures presently located on the Real Property, all apparatus, equipment and appliances used in connection with the operation of the Real Property, such as heating and air conditioning systems and facilities used to provide any utility services, refrigeration, ventilation or other services on the Real Property (all of which are collectively referred to as the "Improvements"), except any and all trade fixtures owned by any of the Tenants, herein called the "Vasomedical Assets." (d) Any tangible personal property owned by Seller and located at the Real Property and relating to the ownership, use and occupancy of the Real Property and the Improvements (collectively, the "Personal Property") except for any tangible personal property used by Seller in the conduct of its business, herein called the "Vaso Personal Property." (e) Any intangible personal property owned by Seller and relating to the ownership, use and occupancy of the Real Property and the Improvements, including without limitation, any permits, approvals and warranties with respect to the Improvements or Personal Property (collectively, the "Intangibles"), except for any intangible property user by Seller in the conduct of its business, herein called the "Vaso Intangibles". 1.10 "Purchase Price" shall have the meaning given such term in Section 2.3 1. 2 1.11 "Review Period" shall mean that period commencing on the date of this Agreement and expiring sixty (60) days thereafter. 1.12 "Survey" shall have the meaning given such term in Section 3.3. 1.13 "Tenants" shall mean any person or entity using or occupying all or any portion of the Premises pursuant to any Lease or any other lease, license or agreement to which the Landlord has actual knowledge and consented thereto. 1.14 "Title Commitment" shall have the meaning given such term in Section 3.2. 1.15 "Title Company" shall mean such title insurance agency as may be selected by Purchaser and licensed to sell title insurance in the State of New York. 1.16 "Effective Date" shall mean the first business day after the date that Purchaser receives from Seller a fully executed copy of this Agreement. SECTION 2 PURCHASE AND SALE; CLOSING. 2.1 Purchase and Sale. In consideration of the payment of the Purchase Price by the Purchaser to the Seller and for other good and valuable consideration, the Seller hereby agrees to sell to the Purchaser, and the Purchaser hereby agrees to purchase from the Seller, the Premises, subject to and in accordance with the terms and conditions of this Agreement. 2.2 Closing. The purchase and sale of the Premises shall be held either at the office of Seller's counsel through an in person at a closing ("Closing") to or held at the offices of Purchaser's Lender or Lender's attorneys, or at such other location as the Seller and the Purchaser may reasonably agree, at 10:00, local time, on the Closing Date. 2.3 Purchase Price. (a) The purchase price to be paid for the Premises (the "Purchase Price") shall be One Million, Four Hundred Thousand Dollars and 00/100 ($1,400,000). The Purchase Price shall be paid as follows: (i) Within five (5) business days after the effective date of this Agreement, the Purchaser shall deposit with the Escrow Agent the sum of Seventy Thousand Dollars and 00/100 ($70,000) (such amount, together with all interest earned thereon, the "Deposit"); and (ii) The Purchase Price, less the Deposit and subject to adjustment as provided in Article 9, shall be paid by the Purchaser to or at the direction of the Seller at the Closing. 3 (b) The Purchase Price shall be payable in immediately available federal funds by New York Clearing House bank checks or by wire transfer to an account or accounts to be designated by the Seller. 2.4 Duties of Escrow Agent. (a) The Escrow Agent shall hold the Deposit in an interest-bearing account and shall pay the Deposit to the party entitled thereto in accordance with the terms of this Agreement; provided however, Escrow Account shall not pay any portion of the Deposit or all of the Deposit to either party without the written consent of the other party. (b) The acceptance by the Escrow Agent of its duties as such under this Agreement is subject to the following terms and conditions, which all parties to this Agreement hereby agree shall govern and control with respect to the rights, duties, liabilities and immunities of the Escrow Agent: (i) The Escrow Agent acts hereunder as a depository only, and is not responsible or liable in any manner whatever for the sufficiency of any amounts deposited with it. (ii) The Escrow Agent shall not be liable for acting upon any notice, request, waiver, consent, receipt of other instrument or document which the Escrow Agent in good faith believes to be genuine and what it purports to be. (iii) The Escrow Agent shall not be liable for any error in judgment, or for any act done or step taken or omitted by it in good faith, or for any mistake of fact or law, of for anything which it may do or refrain from doing in connection herewith, except its own bad faith, gross negligence or willful misconduct. (iv) The Escrow Agent may consult with, and obtain advice from, legal counsel in the event of any dispute or question as to the construction of any of the provisions hereof or its duties hereunder, and it shall incur no liability and shall be fully protected in acting in good faith in accordance with the opinion and advice of such counsel. (v) In the performance of its duties hereunder, the Escrow Agent shall be entitled to rely upon any document, instrument or signature believed by it to be genuine and signed by either of the other parties hereto or their successors. 4 (vi) The Escrow Agent may assume that any person purporting to give any notice of instructions in accordance with the provisions hereof has been duly authorized to do so. (vii) The Seller and the Purchaser hereby release the Escrow Agent from any act done or omitted to be done by the Escrow Agent in good faith in the performance of its duties hereunder. (c) The Seller and the Purchaser may, but only upon mutual consent, remove the Escrow Agent at any time upon not less than five (5) days notice to the Escrow Agent; in such case, the Seller, by notice to the Purchaser, shall appoint a successor Escrow Agent, reasonably satisfactory to the Purchaser, which shall accept such appointment and agree in writing to be bound by the terms of this Agreement. In the event no successor Escrow Agent is appointed and acting hereunder within five (5) days after resignation by the Escrow Agent or there is a dispute among the parties with respect to payment of the Deposit, the Escrow Agent shall pay and deliver the Deposit into a court of competent jurisdiction. Upon delivery of the Deposit to a successor agent or court of competent jurisdiction, the Escrow Agent shall be released and discharged from all further obligations hereunder. (d) The Escrow Agent agrees to serve without compensation for its services; provided, however, that the Purchaser and the Seller hereby agree to reimburse, or to advance to, the Escrow Agent all reasonable expenses of the Escrow Agent incurred in the performance of its duties hereunder. SECTION 3 DILIGENCE, ETC. 3.1 Due Diligence. (a) From and after the date of this Agreement, the Seller shall permit the Purchaser and its representatives to inspect the Premises (including, without limitation, all roofs, electric, mechanical and structural elements, and HVAC systems), to perform due diligence, soil analysis and environmental investigations, to examine the records of the Seller with respect to the Premises, and make copies thereof, at such reasonable times as the Purchaser or its representatives may request. Any such inspections shall be performed in a manner consistent with this Agreement and shall be performed in such a manner to minimize any interference with the use of the Premises by Vaso. The Purchaser shall provide the Seller with copies of all written reports prepared by third party consultants with respect to the Premises. The Purchaser and its employees, agents and representatives 5 shall, until Closing, keep all such information, sampling, test results and reports confidential, provided, however, that Purchaser, its agents and representatives may disclose such information and data (i) to Purchaser's employees, accountants, attorneys, prospective lenders, investment bankers, underwriters, rating agencies, partners, consultants and other advisors in connection with the transactions contemplated by this Agreement (collectively, "Representatives") to the extent that such Representatives reasonably need to know such information and data in order to assist, and perform services on behalf of, Purchaser; (ii) to the extent required by any applicable statute, law, regulation or governmental authority; (iii) in connection with any litigation that may arise between the parties in connection with the transactions contemplated by this Agreement, and (iv) to any prospective transferee or assignee of Purchaser. Notwithstanding the prior sentence, information that is or becomes publicly available or is obtained by or furnished to Purchaser on a non-confidential basis shall not be subject to this provision. To the extent that the Purchaser damages or disturbs the Premises, the Purchaser shall, to the extent practicable, return the same to substantially the same condition which existed immediately prior to such damage or disturbance. The Purchaser shall indemnify, defend and hold harmless the Seller from and against any and all expense, loss or damage which the Seller may incur as a result of any act or omission of the Purchaser or its representatives, agents or contractors, other than any expense, loss or damage to the extent arising from any act or omission of the Seller during any such inspection. Such indemnification agreement shall survive the termination of this Agreement. (b) On or before the Effective Date, Seller shall deliver to Purchaser true and correct copies of all Contracts, affecting the Premises, as well as the current Certificate of Occupancy, Seller's most recent title insurance policy and survey, any environmental and engineering reports in Seller's possession, the most recent two years' real estate tax bills, and Vaso's most recent three years' financial statements. 3.2 Title Matters. (a) New Title Commitment. Promptly following the execution of this Agreement, Purchaser shall order a new title commitment with respect to the Premises (the "Title Commitment"), and Purchaser may also order a new survey of the Premises (the "Survey"). (b) Notice of Objection; Seller's Response. If the Title Commitment or Survey contain exceptions which are not acceptable to Purchaser or there are exceptions to title that appear or are created after the effective date of the title commitment ("Unpermitted Exceptions"), Purchaser shall, at least five (5) days prior to the expiration of the Review Period (or, with 6 respect to any exceptions to title that appear or are created after the effective date of the title commitment, five (5) days after Purchaser receives notice of such exceptions), deliver to Seller written notice of Purchaser's objections (a "Notice of Objection"), if any, to such exceptions. Any exceptions to which Purchaser does not so object within the aforesaid time periods are referred to as "Permitted Exceptions". If Purchaser fails to deliver a Notice of Objection to Seller within the aforesaid time periods, Purchaser shall be deemed to have waived its right to object to any exceptions which would otherwise be Unpermitted Exceptions, and such exceptions shall thereafter be deemed Permitted Exceptions. Notwithstanding the foregoing, on or before the Closing Seller shall pay and satisfy all mortgages, federal tax liens, mechanic's liens and other encumbrances that can be satisfied by the payment of money, and any exceptions to title that have been created or consented to by Seller after the Effective Date, same shall under no circumstances be considered Permitted Exceptions, and same shall not be the subject of a Response Notice under subsection (c) below. (c) Notice Period. Within ten (10) days following the date of receipt of a Notice of Objection (the "Seller Notice Period") from Purchaser, Seller shall give notice (a "Response Notice") advising Purchaser that either (a) Seller will cause the Unpermitted Exceptions to be removed from the Title Commitment at or prior to Closing, or (b) Seller does not agree to cause the Unpermitted Exceptions to be removed from the Title Commitment at or prior to Closing. If Seller fails to give the Response Notice during the Seller Notice Period, Seller shall be deemed to have not agreed to cause all Unpermitted Exceptions to be removed from the Title Commitment at or prior to Closing. (d) Title Termination Notice. If, pursuant to Subsection 3.2(c) of this Agreement, Seller notifies Purchaser that Seller does not agree to cause the Unpermitted Exceptions to be removed from the Title Commitment or is deemed to have not agreed to do so, Purchaser may terminate this Agreement by giving notice in writing to Seller (the "Title Termination Notice") within ten (10) days following Purchaser's receipt of the Response Notice, or if Seller does not provide a Response Notice, within twenty (20) days following the expiration of the Seller Notice Period. If Purchaser gives a Title Termination Notice, this Agreement shall terminate and Escrow Agent shall promptly return the Deposit to Purchaser. If Purchaser does not give a Title Termination Notice within the period set forth in this Subsection, the Unpermitted Exceptions will thereafter be deemed Permitted Exceptions, and this Agreement shall remain in full force and effect. 3.3 Other Diligence Materials. Throughout the Review Period and through and until the Closing, the Seller shall permit the Purchaser and its representatives to review and examine all environmental assessment reports, building evaluations, financial data and other investigations 7 and materials pertaining to the Premises as are in the possession of the Seller and shall permit the Purchaser, at its sole cost and expense, to make copies of any such materials as the Purchaser or its representatives may request. 3.4 Termination of Agreement. If the results of the inspections performed by or on behalf of the Purchaser pursuant to Section 3 shall be unsatisfactory to the Purchaser, in Purchaser's sole determination, the Purchaser shall have the right to terminate this Agreement at any time prior to the expiration of the Review Period by the giving of written notice thereof to the Seller and upon such termination Escrow Agent shall promptly return the Deposit to Purchaser. In the event that the Purchaser shall fail so to terminate this Agreement, the Purchaser shall have no further right to terminate this Agreement pursuant to this Section 3.4 and the Deposit shall thereafter be nonrefundable to the Purchaser, except as otherwise provided in Sections 4.4, 8.4, 8.5 and 10.1. SECTION 4 CONDITIONS TO PURCHASER'S OBLIGATION TO CLOSE. The obligation of the Purchaser to acquire the Premises on the Closing Date shall be subject to the satisfaction of the following conditions precedent on and as of such Closing Date: 4.1 Closing Documents. The Seller shall have delivered to the Purchaser the following: (a) A Bargain and Sale Deed with covenants against grantor's acts in proper form for recording, duly executed and acknowledged by the Seller, conveying good and marketable title to such Premises, free from all liens and encumbrances other than the Permitted Encumbrances; (b) The Lease, duly executed and acknowledged by Vaso, and a termination of any other lease under which Vaso or any other tenant occupies the Premises; (c) An assignment by the Seller and an assumption by the Purchaser, in the form attached hereto as Schedule C, duly executed and acknowledged by the Seller and the Purchaser, of all of the Seller's right, title, and interest in, to and under all of the Intangibles; (d) A bill of sale, in the form attached hereto as Schedule D, with respect to all of the Personal Property, on an "as is, where is" condition with "all faults" (it being understood and agreed that no portion of the Purchase Price is allocated to the Personal Property); (e) To the extent the same are in the Seller's possession, original, fully executed copies of all material documents and agreements, warranties and guarantees, or letters of credit from Tenants, if 8 any, plans and specifications, certificates of occupancy, and other governmental licenses and permits pertaining to the Premises; (f) An assignment by Seller and an assumption by the Purchaser in the form attached hereto as Schedule E, duly executed and acknowledged by the Seller and the Purchaser of all Seller's right, title and interest in, to and under the Contracts that are being assigned to and assumed by Purchaser in accordance with the terms hereof, together with true, correct and complete copies of the Contracts being assumed by Purchaser; (g) A certification, duly executed and acknowledged by Seller, in the form attached hereto as Schedule F that Seller is not a foreign person within the meaning of Section 1445 of the United States Revenue Code of 1986, as amended; (h) Such other conveyance documents, certificate, deeds, tax returns and other instruments as the Purchaser, the Seller or the Title Company may reasonably require and as are customary in like transactions in the greater New York area; (i) A certificate confirming that all of Seller's representations and warranties to the Purchaser are true and correct on the Closing Date; and (j) All keys and combinations to all locks on the Premises. 4.2 Condition of Premises, Etc. (a) The Premises, including all Improvements located thereon, shall be in substantially the same physical condition on the date of this Agreement, ordinary wear and tear excepted; (b) No action shall be pending or threatened for the condemnation or taking by power of eminent domain of all or any material portion of the Premises; (c) All representations and warranties of the Seller herein shall be true, correct and complete in all material respects on and as of the Closing Date and the Seller shall have performed all material covenants and obligations required to be performed by the Seller as to the Premises on or before the Closing Date; and (d) No material litigation shall have been instituted against Seller which would prevent Seller from being able to convey the Premises pursuant to this Agreement. 9 4.3 Title Policies. The Title Company shall be prepared, subject only to payment of the applicable premium and delivery of all conveyance documents in recordable form, to issue a title insurance policy to the Purchaser for the Premises, in form and substance satisfactory to the Purchaser in accordance with Section 3.2, together with such affirmative coverages as the Purchaser may reasonably require. 4.4 (a) Vaso shall not have (i) made an assignment for the benefit of creditors, (ii) filed or acquiesced to a petition in any court (whether or not pursuant to any statute of the United States or of any state) in any bankruptcy, reorganization, composition, extension, arrangement or insolvency proceedings, or (iii) made an application in any such proceedings for or acquiesce to the appointment of a trustee or receiver for it or all of any portion of its property; (b) no petition shall be filed against Vaso in any bankruptcy, reorganization, composition, extension, arrangement or insolvency proceedings; or (c) no proceeding shall have been filed against Vaso seeking the appointment of a receiver or trustee for Vaso, or for all or any portion of the property of Vaso. 4.5 If Conditions Not Satisfied. If by the Closing Date the conditions to Closing set forth in this Section 4 have not been satisfied or waived in writing by Purchaser, then Purchaser shall have the right to (i) waive the unsatisfied condition, (ii) postpone Closing for a reasonable period of time (but not more than thirty (30) days) to allow Seller additional time to satisfy the conditions, or (iii) terminate this Agreement by notice to Seller and Escrow Agent, and upon such termination Escrow Agent shall promptly return the Deposit to Purchaser. SECTION 5 CONDITIONS TO SELLER'S OBLIGATION TO CLOSE. The obligation of the Seller to convey the Premises on the Closing Date to the Purchaser is subject to the satisfaction of the following conditions precedent on and as of such Closing Date: 5.1 Purchase Price. The Purchaser shall deliver to the Seller the Purchase Price payable hereunder, adjusted as herein provided. 5.2 Closing Documents. The Purchaser shall have delivered to the Seller duly executed and acknowledged counterparts of the documents described in Section 4.1, where applicable. 5.3 Representations and Warranties. The representations and warranties of the Purchaser in this Agreement shall be true, correct and complete in all material respects on as of such Closing Date and the Purchaser shall have performed all covenants and obligations required to be performed by the Purchaser prior to such Closing Date. SECTION 6 REPRESENTATIONS AND WARRANTIES OF SELLER. To induce the Purchaser to enter into this Agreement, the Seller represents and warrants to the Purchaser as follows: 10 6.1 Ownership and Occupancy. The Seller holds fee title to the Premises. Other than Vaso, the Premises has no tenants or occupants. 6.2 Status and Authority of the Seller. The Seller is a corporation organized, validly existing and in good standing under the laws of its state of formation, and has all requisite power and authority to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. 6.3 Action of the Seller. The Seller has taken all necessary action to authorize the execution, delivery and performance of this Agreement, and upon the execution and delivery of any document to be delivered by the Seller on or prior to the Closing Date, such document shall constitute the valid and binding obligation and agreement of the Seller, enforceable against the Seller in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors. 6.4 No Violations of Agreements. Neither the execution, delivery or performance of this Agreement by the Seller, nor compliance with the terms and provisions hereof, will result in any breach of the terms, conditions or provisions of, or conflict with or constitute a default under, or result in the creation of any lien, charge or encumbrance upon the Premises pursuant to the terms of any indenture, mortgage, deed of trust, note, evidence of indebtedness, lease or any other agreement or instrument by which any of the Seller is bound. 6.5 Litigation. The Seller has received no written notice of and, to the best of Seller's knowledge, no action or proceeding is pending or threatened and no investigation looking toward such an action or proceeding has begun, which questions the validity of the Agreement or any action taken or to be taken pursuant hereto, will result in any material adverse change in the business, operation, affairs or condition of Seller or the Premises, result in or subject the Premises to a material liability, or involves condemnation or eminent domain proceedings against any part of the Premises. 6.6 Not a Foreign Person . The Seller is not a "foreign person" within the meaning of Section 1445 of the United States Revenue Code of 1986, as amended, and the regulations promulgated thereunder. 6.7 No Other Agreements. Seller warrants that no person or entity has any option or other right to purchase or lease the Premises or any part of the Premises. 6.8 No Condemnation. To the best of Seller's knowledge, there is no pending condemnation, expropriation, eminent domain, or similar proceeding affecting all or any portion of the Premises. Seller has not received any written or oral notice of any of the same and has no 11 knowledge that any such proceeding is contemplated. 6.9 Contracts. As of the Closing Date, there shall be no construction, management, utility, leasing, service, equipment, supply, maintenance or concession agreements (oral or written, formal or informal) with respect to or affecting all or any portion of the Premises except as set forth in Schedule G (the "Contracts"). Each Contract is valid and subsisting and all amounts due thereunder have been paid. To the best of Seller's knowledge, neither Seller, nor any of its agents is in default under any Contract or has received any notice from any party to any Contract claiming the existence of any default or breach hereunder and no event or omission has occurred which, with the giving of notice or the lapse of time would constitute a default. Except as disclosed on Schedule G, all Contracts are terminable without cause on thirty (30) days' notice or less without payment of any penalty or termination payment. Except as to Contracts that Purchaser notifies Seller to continue, each of which shall be assigned to Purchaser at Closing (the "Assigned Contracts"), such notice to be in writing and given to Seller no later than fifteen (15) days prior to Closing, all parties to such agreements will be notified prior to Closing that their agreements will be subject to termination as of Closing. 6.10 Employees. There are no persons employed or engaged by Seller in connection with the management, operation or maintenance of all or any portion of the Premises except as set forth in the Contracts, or except as employed on an at will basis. 6.11 Permits. Seller will deliver to Purchaser, within one (1) business day following the Effective Date, copies of all permanent certificates of occupancy and all other licenses, permits, authorizations, consents, approvals and other grants of authority (the "Permits") issued by all governmental or quasi-governmental authorities having jurisdiction, and certificates of the local board of fire underwriters (or other body exercising similar functions), if any, have been issued for the Premises which are in its possession. Seller has not received, and to the best of Seller's knowledge none of the Permits are subject to any notice of violation or penalty. 6.12 Compliance. To the best of Seller's knowledge: (a) no variance, special use permits or special exceptions were issued for the construction or present use of the Premises; and (b) the continued maintenance, operation and use of any buildings, structures or other improvements on the Premises for their respective present purposes does not violate any federal, state, county or municipal laws, ordinances, orders, codes, regulations or requirements affecting all or any portion of the Premises, including, without limitation, violations of the housing, building, safety, health, environmental, fire or zoning ordinances, codes and regulations of the respective jurisdictions within which the Premises is located (collectively, "Applicable Laws") or the certificate(s) of occupancy issued for the Premises. Seller has received no notices of requests, violations, orders, claims, citations, penalty assessments, orders, investigations 12 or proceedings under any Applicable Laws. Seller shall cure or comply with, prior to Closing or as soon thereafter as reasonably practical, any violation or notice of which Seller or Purchaser receives written notice prior to the Closing from any of the foregoing governmental, quasi-governmental or nongovernmental authorities. 6.13 Taxes. All state, township, county, school district and other taxes levied or assessed against the Premises and any penalties or interest due and payable thereon prior to Closing, and all assessments of any kind levied prior to Closing, if any, will have been paid in full by Seller and all appropriate tax returns relating to the same have been filed with the proper authorities. Seller has no notice of any proposed increase in the assessed valuation of the Premises. There is no proceeding pending for the reduction of the assessed valuation of all or any portion of the Premises. No portion of the Premises is subject to or is affected by any special assessment whether or not there is presently a lien thereon and, to the best of Seller's knowledge, no such assessment has been proposed. 6.14 Insurance. Each insurance policy maintained by Seller with respect to the Premises is in full force and effect and all premiums due thereunder have been paid. No notice has been received from the insurance company which issued any of such policies, or from any agent, stating in effect that such policy will not be renewed or will be renewed at a higher premium than is presently payable therefor, nor is Seller aware, of defects or inadequacies in the Premises which if not corrected would result in termination of insurance coverage or increase in the cost thereof. 6.15 Environmental Matters. To the best of Seller's knowledge, no polluting, toxic or hazardous substances were used, generated, treated, stored, released, discharged or disposed of by the businesses conducted on the Premises by the Seller or, to the best of Seller's knowledge, by others, at any time. No notification of release of a "hazardous substance" or "hazardous waste" as such terms are defined in and pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., ("CERCLA"), the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., or the federal Clean Water Act (33 U.S.C. Section 1251 et seq.), or any state or local environmental law, regulation or ordinance has been received by Seller and, to the best of Seller's knowledge, none has been filed as to the Premises, and the Premises is not listed or formally proposed for listing on the National Priority List promulgated pursuant to CERCLA or on any state list of hazardous substance sites requiring investigation or clean-up. No PCB-contaminated, friable asbestos or formaldehyde-based insulation items are present at the Premises. To the best of Seller's knowledge, no activities or occurrences are taking place or have taken place at the Premises which might give rise to any basis for any of the foregoing. In the event that Purchaser's environmental investigations show the existence or potential existence of "hazardous substance" or "hazardous waste" at the Premises in violation of any of the above laws, regulations or ordinances, and same can be remediated for less than $25,000, Seller shall remediate same in accordance with the 13 applicable laws, regulations or ordinances prior to Closing. 6.16 Utilities. All water, sewer, gas, electric, telephone, and other public utilities and all storm water drainage required by law or necessary for the operation of the Premises (i) either enter the Premises through open public streets adjoining the Premises, or, if they pass through adjoining private land, do so in accordance with valid public or private easements or rights of way which will inure to the benefit of Purchaser, (ii) are installed, connected and operating, in good condition, with all installation and connection charges paid in full, including, without limitation, connection and the permanent right to discharge sanitary waste into the collector system of the appropriate sewer authority, and (iii) are adequate to service the Premises as an office building. No moratorium, proceeding or other fact or condition exists which threatens to impair continued furnishing of such services to the Premises at regular rates and fees. Water and sanitary sewer services are provide to the Premises via publicly operated and maintained sewer and water systems. 6.17 No Flood Hazard Area. No portion of the Premises is located in an area designated by any governmental entity as a flood hazard area. 6.18 Financial Information. The financial statements, if any, provided to Purchaser by Seller are current, correct and complete, and fairly present the financial condition of the Premises and Vaso for the periods covered thereby. There has been no material adverse change in the operation of the Premises or Vaso since the effective date of the Financial Statements. All of the financial and operating statements for the Premises and Vaso are kept and maintained at the Seller's address identified above, and no statements affecting or relating to the Premises or Vaso which are to be delivered to Purchaser have been withheld. 6.19 Mechanics' Liens. No work has been performed or is in progress at, and no materials have been furnished to, the Premises which, though not presently the subject of, might give rise to, mechanics', material suppliers', or other liens against the Premises or any portion thereof. If any lien for such work is filed before or after Closing hereunder, Seller shall promptly discharge the same at its cost. 6.20 Accuracy. No representation or warranty by Seller contained herein, and no statement or other information contained in any Schedule, certificate or other instrument furnished or to be furnished to Purchaser pursuant hereto or in connection with the transactions contemplated hereunder contains, or at the Closing shall contain, any knowingly untrue statement of a material fact or intentionally omits or shall intentionally omit to state a material fact necessary to make it not misleading. The representations and warranties made in this Agreement by the 14 Seller shall survive Closing for a period of one (1) year. Except as otherwise expressly provided in this Agreement or in any other documents previously provided, or hereafter provided, by or on behalf of Seller to Purchaser, the Seller disclaims the making of any representations or warranties, express or implied, regarding the Premises or matters affecting the Premises, whether made by the Seller, on the Seller's behalf or otherwise, including, without limitation, the physical condition of the Premises, title to or the boundaries of the Real Property, pest control matters, soil conditions, the presence, existence or absence of hazardous wastes, toxic substances or other environmental matters, compliance with building, health, safety, land use and zoning laws, regulations and orders, structural and other engineering characteristics, traffic patterns, market data, economic conditions or projections, and any other information pertaining to the Premises. The Purchaser acknowledges (i) that the Purchaser has entered into this Agreement with the intention of making and relying upon its own investigation or that of third parties with respect to the physical, environmental, economic and legal condition of the Premises and (ii) that the Purchaser is not relying upon any statements, representations or warranties of any kind, other than those specifically set forth in this Agreement or in any document to be delivered to the Purchaser at the Closing made (or purported to be made) by the Seller or anyone acting or claiming to act on the Seller's behalf. The Purchaser further acknowledges that it has not received from or on behalf of the Seller any accounting, tax, legal, architectural, engineering, property management or other advice with respect to this transaction and is relying solely upon the advice of third party accounting, tax, legal, architectural, engineering, property management and other advisors, Subject to the provisions of this Agreement, the Purchaser shall purchase the Premises in its "as is" condition and "with all faults" on the Closing Date. SECTION 7 REPRESENTATIONS AND WARRANTIES OF PURCHASER. To induce the Seller to enter in this Agreement, the Purchaser represents and warrants to the Seller as follows: 7.1 Status and Authority of the Purchaser. The Purchaser is a limited liability company duly organized, validly existing under the laws of the State of New York and has all requisite power and authority under the laws of such state under its formation documents to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. The Purchaser has duly qualified and is in good standing as a limited liability company in each jurisdiction in which the nature of the business conducted by it requires such qualification. 7.2 Action of the Purchaser. The Purchaser has taken all necessary action to authorize the execution, delivery and performance of this Agreement, and upon the execution and delivery of any document to be delivered by the Purchaser on or prior to the Closing Date such document shall constitute the valid binding obligation and agreement 15 of the Purchaser, enforceable against the Purchaser in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors. 7.3 No Violations of Agreements. Neither the execution, delivery or performance of this Agreement by the Purchaser, nor compliance with the terms and provisions hereof, will result in any breach of the terms, conditions or provisions of, or conflict with or constitute a default under, or result in the creation of any lien, charge or encumbrance upon any property or assets of the Purchaser pursuant to the terms of any indenture, mortgage, deed of trust, note, evidence of indebtedness or any other agreement or instrument by which the Purchaser is bound. 7.4 Litigation. No investigation, action or proceeding is pending and, to the Purchaser's actual knowledge, no action or proceeding is threatened and no investigation looking toward such an action or proceeding has begun, which questions the validity of this Agreement or any action taken or to be taken pursuant hereto. The representations and warranties made in this Agreement by the Purchaser shall survive Closing for a period of one (1) year. SECTION 8 COVENANTS OF THE SELLER. The Seller hereby covenants with the Purchaser between the date of this Agreement and the Closing Date as follows: 8.1 Approval of Agreements. Except as otherwise authorized by this Agreement, not to enter into, modify, amend or terminate the Contracts or any other agreement with respect to the Premises which would encumber or be binding upon the Purchaser from and after the Closing Date without in each instance obtaining the prior written consent of the Purchaser, which consent may be withheld in Purchaser's sole discretion. 8.2 Operation of Premises. To continue to operate the Premises as currently operated in a good and businesslike fashion consistent with its past practices and to cause the Premises to be maintained in good working order and condition in a manner consistent with its past practices. 8.3 Maintenance. Prior to Closing, Seller shall (i) maintain property and liability insurance policies as currently in effect through the Closing Date, (ii) correct any violations of any Applicable Laws of which Seller receives notice prior to Closing, (iii) notify the Purchaser of any change in condition with respect to the Premises, including any casualty or condemnation, and (iv) perform all routine maintenance necessary to maintain the Premises in its current condition, and repair any damage to the Premises caused by casualty or condemnation. 8.4 Casualties. If, between the Effective Date and the Closing, any material portion of any Premises is damaged or destroyed by fire or other casualty, the repair and restoration of which will cost less 16 than $50,000 (the "Threshold"), the Purchaser shall purchase the Premises at Closing, whereupon the Seller shall assign to Purchaser any insurance proceeds to which Seller may be entitled as a result of such damage, destruction, casualty or loss to the Premises, and Purchaser shall receive a credit against the Purchase Price in the amount of the applicable deductible (unless previously paid by such Seller toward the cost of restoration). If, however, such cost will exceed the Threshold, Purchaser shall have the option, exercisable by notice to Seller within five (5) days after Purchaser receives notice from Seller of such casualty, to either: (a) elect not to purchase the Premises, whereupon the Deposit shall be returned to Purchaser and thereafter this Agreement shall be deemed terminated, or (b) elect to purchase the Premises, whereupon the Seller shall assign to Purchaser any insurance proceeds to which such Seller may be entitled as a result of such damage, destruction, casualty or loss to the Premises, and Purchaser shall receive a credit against the Purchase Price in the amount of the applicable deductible (unless previously paid by Seller toward the cost of restoration). Notwithstanding the foregoing, Purchaser cannot terminate if Seller restores Premises (and notifies Purchaser that Seller elects to restore) within ninety (90) days of the casualty, and the Closing shall occur within a reasonable time after the completion of the restoration, as evidenced by the issuance of a Certificate of Occupancy or Certificate of Completion for the restoration work or earlier, at Purchaser's sole option. 8.5 Condemnation. If, between the Effective Date and the Closing, a portion of the Premises which (a) is less than the Threshold, (b) does not affect access to the Premises, and (c) does not render the Premises non-compliant with Applicable Laws, shall be taken by reason of the exercise of the power of eminent domain, Purchaser shall purchase the Premises and pay the full Purchase Price for the Premises at Closing, whereupon the Seller shall assign to Purchaser all damages, if any, to which Seller may be entitled and that may be assigned by Seller pursuant to the applicable eminent domain law; provided, however, that such taking that reduces or impairs parking, the adequacy of utilities or ingress/egress, or zoning compliance, shall be deemed to exceed the Threshold. If, between the Effective Date and the Closing, a portion of the Premises (x) in excess of the Threshold, (y) which affects access to the remainder of the Premises, or (z) renders the Premises non-compliant with Applicable Laws, shall be taken by reason of the exercise of the power of eminent domain, Purchaser shall have the option, exercisable by notice to Seller within five (5) days after Purchaser learns of such taking, to either (a) elect not to purchase the Premises, whereupon the Deposit shall be returned to Purchaser and thereafter this Agreement shall be deemed terminated, or (b) elect to purchase the Premises and pay the full Purchase Price at Closing, whereupon the Seller shall assign to Purchaser all damages, if any, to which Seller may be entitled and that may be assigned by Seller pursuant to the applicable eminent domain law. Within five (5) days after notification of any such taking, but in no event later than the Closing, Seller shall notify Purchaser thereof. 17 SECTION 9 APPORTIONMENTS. 9.1 Real Property Apportionments. (a) The following items shall be apportioned at the Closing as of the close of business on the day immediately preceding the Closing Date: (i) municipal assessments and governmental license and permit fees; (ii) real estate taxes and assessments other than special assessments, based on the rated and assessed valuation applicable in the fiscal year for which assessed; (iii) water rates and charges; and (iv) sewer taxes and rents. If any of the foregoing cannot be apportioned at Closing because of the unavailability of the amounts which are to be apportioned, such items shall be apportioned on the basis of a good faith estimate by the parties and reconciled as soon as practicable after such Closing Date but, in any event, no later than one year after such Closing Date. (b) If any refunds of real property taxes or assessments, water rates and charges or sewer taxes and rents shall be made after such Closing, the same shall be held in trust by the Seller or the Purchaser, as the case may be, and shall first be applied to the unreimbursed costs incurred in obtaining the same, then to any required refunds to the Tenants in accordance with the Leases, and the balance, if any, shall be paid to the Seller (for the period prior to such Closing Date) and to the Purchaser (for the period commencing with such Closing Date). (c) If, on the Closing Date, the Premises shall be or shall have been affected by any special or general assessment or assessments or real property taxes payable on a lump sum or which are or may become payable in installments of which the first installment is then a charge or lien and has become payable, the Seller shall pay or cause to be paid at such Closing the unpaid installments of such assessments due up to the Closing Date and the Purchaser shall be responsible to pay all installments thereof which are to become due and payable after such Closing Date. (d) No insurance policies of the Seller are to be transferred to the Purchaser, and no apportionment of the premiums therefore shall be made. 18 (e) If a net amount is owed by the Seller to the Purchaser pursuant to this Section 9.1, such amount shall be credited against the Purchase Price of the Premises. If a net amount is owed by the Purchaser to the Seller pursuant to Section 9.1, such amount shall be added to the Purchase Price. 9.2 Closing Costs. Seller shall pay New York State transfer taxes and shall be responsible for any charges normally imposed on Seller. Purchaser shall pay any charges normally imposed on Purchaser. The obligations of the parties under this Section 9 shall survive Closing. SECTION 10 DEFAULT 10.1 Default by the Seller. If the Seller shall have made any representation or warranty herein which shall be materially untrue or misleading in any material respect, or if the Seller shall fail to perform any of the covenants and agreements contained herein to be performed by it and such failure continues for a period of ten (10) days after notice thereof from the Purchaser, the Purchaser shall have the right to (i) terminate this Agreement and receive the return of the Deposit, unless Seller shall take steps to cure such default within the ten (10) day period, but if not completed by said period, such right to terminate shall extend until after a reasonable period of time to cure has expired (and, in any event, hold cured such default within thirty (30) days following such Notice from Purchaser), or (ii) the Purchaser may pursue a suit for specific performance or other equitable relief; provided, however, that in addition to the aforesaid remedies, Purchaser shall be entitled to recover from Seller reimbursement for all costs and expenses incurred by Purchaser in connection with the negotiation of this Agreement, the performance of due diligence, and fees payable to title companies, surveyors and lenders with respect to the anticipated purchase of the Premises, in the aggregate maximum amount of not more than $50,000. 10.2 Default by the Purchaser. If the Purchaser shall have made any representation or warranty herein which shall be untrue or misleading in any material respect, or if the Purchaser shall fail to perform any of the covenants and agreements contained herein to be performed by it and such failure shall continue for a period of ten (10) days after notice thereof from the Seller, the Seller may terminate this Agreement. The damages that the Seller would sustain as a result of any such termination would be substantial but would be impracticable and excessively costly and difficult to establish or ascertain and the parties hereto agree that the Seller's sole remedy at law and in equity, shall be to retain any unapplied portion of the Deposit as liquidated damages and not as a penalty. 19 SECTION 11 MISCELLANEOUS. 11.1 Brokers. The broker is Newmark of Long Island LLC d/b/a Newmark Knight Frank LI ("NKF"), and such firm shall be paid by Seller at closing pursuant to a separate agreement. Each party shall indemnify, defend and hold harmless the other party from and against any and all claims, loss, costs and expenses, including reasonable counsel fees, resulting from any claims that may be made against such party by any broker claiming a commission by, through or under the other party. 11.2 Publicity. The parties agree that no party shall, with respect to this Agreement and the transactions contemplated hereby, contact or conduct negotiations with public officials, make any public pronouncements, issue press releases or otherwise furnish information regarding this Agreement or the transactions herein contemplated to any third party without the consent of the other party, which consent shall not be unreasonably withheld or delayed. 11.3 Notices. (a) Any and all notices, demands, consents, approvals, offers, elections and other communications required or permitted under this Agreement shall be deemed adequately given if in writing and the same shall be delivered either in hand, by telecopier with written confirmation of receipt, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of the notice, postpaid and registered or certified with return receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier). Notices, demands and other communications may be sent by the attorneys for the parties hereto with the same force and effect as though sent by the parties. (b) All notices required or permitted to be sent hereunder shall be deemed to have been given for all purposes of this Agreement upon the date of acknowledged receipt, in the case of a notice by telecopier, and, in all other cases, upon the date of receipt or refusal, except that whenever under this Agreement a notice is either received on a day which is not a Business Day, the day of receipt or required delivery shall be extended automatically to the next Business Day. (c) All such notices shall be addressed, if to the Seller: 180 Linden Avenue Corp. 180 Linden Avenue Westbury, NY Attn: Tricia Efstathiou Facsimile: 516-997-9038 with a copy to: 20 Beckman, Lieberman & Barandes, LLP Suite 1313 116 John Street New York, NY 10038 Attn: Michael Beckman Facsimile: (212) 406-3750 if to the Purchaser: 180 Linden Realty LLC 2545 Hempstead Turnpike East Meadow, NY 11554 Attn: Mr. Scott Burman Facsimile: (516) 731-9400 with a copy to: Farrell Fritz, P.C. 1320 RexCorp Plaza Uniondale, NY 11556-1320 Attn: Peter L. Curry, Esq. Facsimile: (516) 336-2208 (d) By notice given as herein provided, the parties hereto and their respective successor and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses effective upon receipt by the other parties of such notice and each shall have the right to specify as its address any other address within the United States of America. 11.4 Waivers, Etc. Any waiver of any term or condition of this Agreement, or of the breach of any covenant, representation or warranty contained herein, in any open instance, shall not operate as or be deemed to be or construed as a further or continuing waiver of any other breach of such term, condition, covenant, representation or warranty or any other term, condition, covenant, representation or warranty, nor shall any failure at any time or times to enforce or require performance of any provision hereof operate as a waiver of or affect in any manner such party's right at a later time to enforce or require performance of such provision or any other provision hereof at any time prior to the Closing. This Agreement may not be amended, nor shall any waiver, change, modification, consent or discharge be effected, except by an instrument in writing executed by or on behalf of the party against whom enforcement of any amendment, waiver, change, modification, consent or discharge is sought. 21 11.5 Assignment; Successors and Assigns. (a) This Agreement and all rights and obligations hereunder shall not be assignable by any party without the written consent of the other parties, except that at Closing the Purchaser may assign this Agreement or designate to receive title to the Premises to any person or entity owned by or affiliated with the Purchaser. No assignment (including any assignment permitted hereunder) shall release the Purchaser named herein from any liability or obligation under this Agreement. (b) The Purchaser may elect to effect the Seller's transfer and conveyance of the Premises as part of an exchanged under Section 1031 of the Internal Revenue Code of 1986, as amended (the "Code"), in lieu of purchasing such Premises. If the Purchaser so elects, it shall provide notice to the Seller of such election, and thereafter may at any time at or prior to the Closing assign its rights (but such assignment shall not relieve the Purchaser of its obligations) under this Agreement with respect to the Premises to a "qualified intermediary" as defined in Treas. Reg. 1.1031(k)- 1(g)(4), subject to all rights and obligations hereunder of the Seller and shall promptly provide written notice of such assignment to the Seller. The Seller shall cooperate with all reasonable requests of the Purchaser and the "qualified intermediary" in arranging and effecting the transfer of the Premises to the "qualified intermediary". Without limiting the generality of the foregoing, if the Purchaser has given notice of its intention to effect the acquisition of the Premises as part of an exchange under Section 1031 of the Code, the Seller shall (i) promptly provide the Purchaser with written acknowledgment of such notice and (ii) at the Closing, transfer and convey the Premises to the "qualified intermediary" rather than to the Purchaser. (c) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, successors and permitted assigns. This Agreement is not intended and shall not be construed to create any rights in or to be enforceable in any part by any other persons. 11.6 Severability. If any provision of this Agreement shall be held or deemed to be, or shall in fact be, invalid, inoperative or unenforceable as applied to any particular case in any jurisdiction or jurisdictions, or in all jurisdictions or in all cases, because of the conflict of any provision with any constitution or statute or rule of public policy or for any other reason, such circumstance shall not have the effect of rendering the provision or provisions in question invalid, inoperative or unenforceable in any other jurisdiction or in any other case or circumstance or of rendering any other provision or provision herein contained invalid, inoperative or unenforceable to the extent that such other provisions are not themselves actually in 22 conflict with such constitution, statute or rule of public policy, but this Agreement shall be reformed and construed in any such jurisdiction or case as if such invalid, inoperative or unenforceable provision had never been contained herein and such provision reformed so that it would be valid, operative and enforceable to the maximum extent permitted in such jurisdiction or in such case. 11.7 Counterparts, Etc. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and shall supersede and take the place of any other instruments purporting to be an agreement of the parties hereto relating to the subject matter hereof. This Agreement may not be amended or modified in any respect other than by the written agreement of all of the parties hereto. 11.8 Governing Law. (a) This Agreement shall be interpreted, construed, applied and enforced in accordance with the laws of the State of New York applicable to contracts between residents of the State of New York which are to be performed entirely within New York, regardless of (i) where this Agreement is executed or delivered; or (ii) where any payment or other performance required by this Agreement is made or required to be made; or (iii) where any breach of any provision of this Agreement occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principal domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of a jurisdiction other than the State of New York; or (vii) any combination of the foregoing. (b) To the maximum extent permitted by applicable law, any action to enforce, arising out of, or relating in any way to, any of the provisions of this Agreement may be brought and prosecuted in such court or courts located in the State of New York, County of Nassau, as is provided by law; and the parties consent to the jurisdiction of such court or courts located in the State of New York, County of Nassau, and to service of process by registered mail, return receipt requested, or by any other manner provided by law. 11.9 Performance on Business Days. In the event the date on which performance or payment of any obligation of a party required hereunder is other than a Business Day, the time for payment or performance shall automatically be extended to the first Business Day following such date. 11.10 Attorney's Fees. If any lawsuit or arbitration or other legal proceeding arises in connection with the interpretation or enforcement of this Agreement, the prevailing party therein shall be entitled to receive from the other party the prevailing party s costs and 23 expenses, including reasonable attorneys fees incurred in connection therewith, in preparation therefor and on appeal therefrom, which amounts shall be included in any judgment therein. 11.11 Section and Other Headings. The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 11.12 Time is of the Essence. Time is of the essence with respect to each and every obligation of the Seller and the Purchaser under this Agreement. 11.13 No Recordation. The Seller and the Purchaser agree not to record this Agreement or any memorandum hereof. [Signatures lines are on the next succeeding page.] 24 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as a sealed instrument as of the date first above written. SELLER: 180 LINDEN AVENUE CORP. By: /s/ ----------------------------- John C. K. Hui PURCHASER: 180 LINDEN REALTY LLC By: /s/ ----------------------------- Scott Burman 25 JOINDER THE UNDERSIGNED ESCROW AGENT HEREBY ACKNOWLEDGES AND AGREES TO BE BOUND BY THE PROVISIONS OF SECTION 2.4 OF THE FOREGOING AGREEMENT. ESCROW AGENT: BECKMAN, LIEBERMAN & BARANDES, LLP By:/s/ David H. Lieberman ---------------------------------- Authorized Officer 26 EX-10.(L) 3 vas010k07ex10-l.txt AGREEMENT Exhibit 10(l) LEASE AGREEMENT ================================== Dated as of August 15, 2007 ================================== between 180 LINDEN REALTY LLC Landlord and VASOMEDICAL, INC. Tenant ================================== LEASE AGREEMENT --------------- This Indenture of Lease (the "Lease") dated as of the 15th day of August, 2007 by and between 180 LINDEN REALTY, INC., a New York limited liability company having an address at 2545 Hempstead Turnpike, Suite 401, East Meadow, New York 11554 or its assignee ("Landlord"), and VASOMEDICAL, INC., a Delaware corporation having an address at 180 Linden Avenue, Westbury New York 11590. W I T N E S S E T H: - - - - - - - - - - In consideration of ten ($10.00) dollars, other good and valuable consideration, and the mutual covenants contained herein, Landlord and Tenant, intending to be legally bound, hereby agrees as follows: ARTICLE 1. CERTAIN DEFINITIONS Section 1.01. As used in this Lease: A. "Commencement Date" has the meaning set forth in Article 2; B. "Demised Premises" means the existing building, storage shed, and any other structures or improvements now or hereafter erected or situated on the Land (hereinafter defined), the foundations and footings of the structures and improvements so included, and any and all fixtures, equipment and machinery of every kind and nature owned by Landlord whatsoever now or hereafter affixed or attached thereto, or now or hereafter used in connection with the operation use or occupancy thereof, and the appurtenances thereto;; C. "Event of Default" has the meaning set forth in Article 16; D. "Expiration Date" means the last day of the Term. If the Lease is cancelled or terminated prior to the originally fixed Expiration Date, then the Expiration Date shall be the date on which the Lease is so cancelled or terminated. If the Lease is cancelled or terminated prior to the originally fixed Expiration Date by reason of the occurrence of an Event of Default, Tenant's liability under the provisions of the Lease shall continue until the date the Term would have expired and such cancellation or termination would have occurred; E. "Fee Mortgage" means a mortgage on Landlord's fee ownership of the Property or any part thereof and the term "Fee Mortgagee" shall mean any holder of such mortgage; F. "Insurance Requirements" means the applicable provisions of the insurance policies carried by Landlord and/or Tenant covering the Property; all requirements of the issuer of any such policy; and all orders, rules, regulations, and other requirements of any insurance service office which serves the community in which the Property is situated; 1 G. "Landlord" means only the owner or lessor for the time being of the Property so that from and after the later to occur of (1) any sale of the Property or (2) an assignment of this Lease and (3) notice to Tenant of said sale or assignment, Landlord shall be and hereby is entirely freed and relieved of all obligations of Landlord hereunder and it shall be deemed without further agreement between the parties and such purchaser(s) or assignee(s) that the said purchaser or assignee has assumed and agreed to observe and perform all obligations of Landlord hereunder; H. "Parking Area" means all portions of the Property other than the Building; I. "Person" means an individual, fiduciary, estate, trust, partnership, firm, association, corporation, or other organization, or a government or governmental authority; J. "Prime Rate" shall mean the prime rate set forth in the Wall Street Journal or such other standard as shall then be recognized by the banking community as having replaced the "prime rate"; K. "Property" shall mean all those lands (the "Land") and premises together with the Building situate, lying and being in Westbury, Town of North Hempstead, County of Nassau, State of New York, known by the street address of 180 Linden Avenue, Westbury, New York 11590; L. "Repair" includes the words "replacement and restoration", "replacement or restoration", "replace and restore", "replace or restore", as the case may be, unless specifically indicated to the contrary herein; M. "State" means New York State; N. "Tenant's Agents" includes Tenant's employees, servants, licensees, tenants, subtenants, assignees, contractors, heirs, successors, legatees, and devisees; O. "Term of this Lease" has the meaning set forth in Article 2; and P "Termination of this Lease" means the expiration of the term of this Lease and any sooner termination of the term of this Lease pursuant to any of the provisions of this Lease. ARTICLE 2. LEASE OF DEMISED PREMISES, TERM OF LEASE Section 2.01. The Landlord, for and in consideration of the rent to be paid and of the covenants and agreements hereinafter contained to be kept and performed by the Tenant, hereby leases to the Tenant, and the Tenant hereby hires from the Landlord, the Demised Premises. 2 Section 2.02. This Agreement shall be in full force and effect as of the date of full execution of this Lease. The primary term ("Primary Term") of this Lease shall be for a period commencing on August 15, 2007 (the "Commencement Date"), and ending at midnight on August 31, 2012 (the "Expiration Date"). Section 2.03. Notwithstanding the foregoing, provided that no Event of Default shall be in existence at the time of either the exercise or the effective date of Tenant's notice to cancel, Tenant may cancel this Lease at any time upon six (6) months' prior written notice. In such event, Landlord shall draw down on the full face amount of the Security Letter at the time of Tenant's exercise of its termination right as consideration for the early termination, but same shall not excuse Tenant from its payment obligations hereunder until the effective date. ARTICLE 3. USE Section 3.01. The Demised Premises shall be used only for the assembly, repair and warehousing of medical equipment and parts, and for general and executive offices. Tenant acknowledges that Landlord has not made any representations as to whether the Demised Premises may be used for the aforesaid uses pursuant to applicable zoning and building laws, rules and regulations. Tenant shall not use or allow the Demised Premises or any part thereof to be used or occupied for any unlawful purpose, or in violation of any certificate of occupancy affecting the use of the Demised Premises. Tenant shall occupy and operate the entire Demised Premises continuously throughout the Term of this Lease in the manner set forth hereinabove. ARTICLE 4. RENT, SECURITY, TAXES, INSURANCE, ETC. Section 4.01. RENT. A. "Rent" means Fixed Rent, Operating Expenses and Taxes. This Lease is intended to be a "triple net" lease, where Landlord has only the responsibility to pay real estate taxes and for its insurance, and only to the extent that Tenant has made prior payment of the amounts necessary to pay same. Tenant is responsible for all other costs and actions necessary to maintain the Premises in the condition required under this Lease. B. Rent shall be paid automatically without written or oral notice, demand, counterclaim, offset, deduction, defense, or abatement. C. All Rent and all other amounts payable under the Lease shall be payable at Landlord's address as set forth in the Lease or at such other address as Landlord shall designate by giving notice to Tenant. D. If Tenant shall fail to pay any Operating Expenses, Taxes or any other charges payable hereunder, whether or not same are called Rent or additional rent, Landlord shall have all remedies provided for in the Lease or at law in the case of nonpayment of Fixed Rent. Tenant's obligations under this Article shall survive the Expiration Date of the Lease. 3 E. The Rent or other payments reserved hereunder shall be paid to the Landlord without any claim on the part of the Tenant for diminution or abatement. The Tenant's obligation to pay the Rent hereunder and to perform the covenants and agreements on its part to be performed hereunder shall in no way be affected, impaired or excused in any respect because the Landlord is unable, for any reason whatsoever, to fulfill any of its obligations hereunder or because the Tenant's use and occupancy of the Demised Premises shall be disturbed or prevented from any cause whatsoever, except as otherwise specifically provided in this Lease. The Rent is deemed to be absolutely "net" to Landlord, and, except for the payment to landlord of items of additional rent to Landlord, Tenant is obligated to pay all expenses of the operation of the Demised Premises. F. Any sums of money required to be paid under this lease by Tenant in addition to the rent herein provided, shall be deemed "additional rent due and payable". It shall be paid after demand therefore with the rent next due or as may be otherwise provided herein. If Landlord receives from Tenant any payment less than the sum of the Fixed Rent, additional rent, and other charges then due and owing, Landlord, in its sole discretion, may allocate such payment in whole or in part to any Fixed Rent, any additional rent, and/or other charge or to any combination thereof. Landlord's failure to deliver to Tenant a statement showing Tenant liability for additional rent for any portion of the term of this Lease during the term of this Lease shall neither prejudice nor waive Landlord's right to deliver any such statement for a subsequent period or to include in such subsequent period of a previous period. Section 4.02. FIXED RENT. Fixed Rent shall thereafter be payable during the Term at the rate set forth in Exhibit A annexed hereto. Fixed Rent shall be payable in equal monthly installments. Each monthly installment shall be due in advance on the first day of each month during the Term. If the Expiration Date occurs on a day other than the last day of any month, Fixed Rent for the last month during the Term shall be pro-rated in the same manner. Section 4.03. OPERATING EXPENSES: A. The term "Operating Expenses" shall mean all costs and expenses paid or incurred with respect to the building insurance contemplated in Section 4.05 hereof solely in connection with the operation of the Demised Premises. B. The term "Operating Year" shall mean each period of twelve (12) months, commencing on the Commencement Date and running until the day immediately prior to each anniversary thereof which occurs during any part of the Term of this Lease. C. Tenant shall pay the Operating Expenses for each Operating Year commencing on the Commencement Date within ten (10) days of the presentation of landlord's invoice therefore, which invoice shall include a copy of landlord's insurance bill. Section 4.04. TAXES. A. The term "Taxes" shall include the sum of all real estate taxes and assessments, special assessments, water and sewer rents and each and every installment thereof which shall or may during the term of this Lease be levied, assessed, imposed, become due and payable, or liens upon or arising in connection with the use, occupancy or possession of or grow out of, or for the Demised Premises as if the Demised Premises were the sole asset of Landlord. If at any time during the Term of this Lease the methods of taxation prevailing at 4 the execution of this Lease shall be altered so that in lieu of or as a substitute for the whole or any part of the taxes, assessments, levies, impositions or charges now levied, assessed or imposed on real estate or the improvements thereon there shall be levied, assessed or imposed (i) a tax, assessment, levy, imposition or charge wholly or partially payable as a capital levy or otherwise on the rents received therefrom, or (ii) a tax, assessment, levy, imposition or charge measured by or based in whole or in part upon the Demised Premises and imposed upon Landlord, or (iii) a license fee or charge measured by the rents payable by Tenant to Landlord, or (iv) a license fee or charge measured by the rent receivable by Landlord for the Building or any portion thereof and/or the Land or any other building or other improvements constructed on the Land, or (v) a tax, license fee or charge imposed on Landlord which is otherwise measured by or based in whole or in part, upon the Building or any portion thereof and/or the Land or any other building or other improvements constructed on the Land, or (vi) any other tax or levy imposed in lieu of or as a substitute for Taxes which are levied, assessed or imposed as of the date of this Lease, then in any such event, the same shall be included in the computation of Taxes hereunder. A tax bill or copy thereof shall be conclusive evidence of the amount of Taxes or installments thereof. B. The Tenant shall pay the Landlord the Taxes levied against the Property ("Tenant's Tax Payment" or "Tax Payment"). The Tenant shall have paid to the prior landlord of the Demised Premises all taxes due through the end of the tax year or semi-annual tax period during which the Commencement Date shall occur. Thereafter, Landlord shall render to Tenant a statement containing a computation of Tenant's Tax Payment ("Landlord's Statement"), which statement shall be based upon bills or assessments for future bills for the applicable annual period rendered by the applicable collector of taxes for Nassau County, the Westbury School District and The Town of North Hempstead. Within thirty (30) days after the rendition of the Landlord's Statement, Tenant shall pay to Landlord the amount of Tenant's Tax Payment due for the first half of each tax bill or assessment. After such initial annual payment, on the first day of each month following the rendition of each Landlord's Statement, Tenant shall pay to Landlord, on account of Tenant's next Tax Payment, a sum equal to one-twelfth (1/12th) of Tenant's last Tax Payment due hereunder, which sum shall be subject to adjustment for subsequent increases or decreases in Taxes. In the event the aggregate amount of all payments made by Tenant on account of a particular Tax Payment exceeds the actual amount of such Tax Payment, Landlord shall credit the entire amount of such excess against the next installment(s) of Tenant's Tax Payment becoming due under this lease. C. Only Landlord shall be eligible to institute proceedings to reduce the assessed valuation of the Land or the Building. In the event Landlord shall obtain a tax refund as a result of any such reduction proceedings, then, provided Tenant is not then in default under the terms of this Lease, and after all applicable grace periods have expired, and after the final conclusion of all appeals or other remedies, Tenant shall be entitled to the net refund obtained. As used herein, the term "net refund" means the refund plus interest, if any, thereon, paid by the governmental authority less appraisal, engineering, expert testimony, attorney, printing and filing fees and all other Landlord costs and expenses of the proceeding. Tenant shall pay to Landlord Tenant's appraisal, printing and filing fees of the proceeding incurred by Landlord in the event 5 said proceeding does not result in any net refund. Notwithstanding anything contained to the contrary herein, Tenant shall not be entitled to any refund in excess of monies paid by Tenant hereunder. D. Landlord's failure during the Term of this Lease to submit tax bills or copies thereof to Tenant, or Landlord's failure to make demand under this Article or under any other provision of this Lease shall not in any way be deemed a waiver of, or cause Landlord to forfeit or surrender its rights to collect any items of additional rent which may have become due pursuant to this Article during the term of this Lease. Tenant's liability for the additional rent due under this Article shall survive the expiration or sooner termination of this Lease. Section 4.05. LANDLORD'S INSURANCE. During the term of this Lease, the Landlord shall procure and maintain the following types of insurance ("Insurance") in the amounts specified, and for which all losses shall be adjusted with the insurance companies by Landlord and shall be paid to Landlord or as directed by Landlord: A. Keep insured the Building on the Property and building equipment against loss or damage by fire (and against such other risks as would be covered by "ALL-RISK" insurance to the extent that such insurance is reasonably available), in an amount not less than 100% of the then full insurable value of said Building and building equipment. The term "full insurable value" shall mean the actual replacement value (excluding foundation and excavation costs) and said "full insurable value" shall be reasonably determined by Landlord's engineers, or if Landlord also desires by one of the insurers acceptable to Landlord. B. Maintain sprinkler leakage insurance upon the Building and building equipment in an amount not less than 90% of their then full insurable value; C. Maintain flood insurance, as may be required by any Fee Mortgagee; and D. Maintain "rent loss" insurance in the amount of one year's Rent. Section 4.06. SECURITY DEPOSIT - LETTER OF CREDIT. A. Upon the execution hereof by Tenant, Tenant shall deliver to Landlord and, subject to the provisions of this Section, shall maintain in effect at all times during the Term hereof, an unconditional, irrevocable standby letter of credit in an amount (the "Security Amount") equal to Sixty Eight Thousand Eight Hundred Fifty Dollars ($68,850.00) as security for the faithful performance and observance by Tenant of the terms of this Lease. Said letter of credit shall be in form reasonably satisfactory to Landlord, shall name Landlord as the beneficiary thereunder, and shall be issued by a banking corporation reasonably satisfactory to Landlord having a counter upon which the letter of credit may be drawn and presented in the City of New York or on Long Island. Such initial letter of credit shall have an expiration date no earlier than August 15, 2008 and shall be automatically renewed thereafter for successive periods of at least one year until the date which is thirty (30) days following the Expiration Date hereof (herein the "L/C Maintenance Date") unless terminated by the issuer thereof by notice to Landlord given not less than forty-five (45) days prior to 6 the stated expiration thereof. In the event of the termination of any such letter of credit, Tenant shall throughout the term of this Lease deliver to Landlord replacement letters of credit in lieu thereof (each such letter of credit and such replacements thereof, as the case may be, is herein referred to as a "Security Letter") no later than thirty five (35) days prior to the expiration date of the preceding Security Letter so that at all times until the L/C Maintenance Date, Landlord shall be holding a Security Letter meeting the requirements hereof. If Tenant shall fail to obtain any replacement of a Security Letter within the time limits set forth in this Section, Landlord may draw down the full amount of the existing Security Letter and retain the same as security hereunder. B. In the event Tenant defaults (beyond any applicable notice and period of cure) in respect to any of the terms, provisions, covenants and conditions of this Lease, including, but not limited to, the payment of Fixed Rent and Additional Rent or any other charges or damages, Landlord may draw down on the Security Letter and may use, apply or retain the whole or any part of the security for the payment of any Fixed Rent and Additional Rent or any other sum as to which Tenant is in default or for any sum which Landlord expends or is required to expend by reason of Tenant's default in respect of any of the terms, provisions, covenants and conditions of this Lease, including, but not limited to, any damages or deficiency accrued before or after summary proceedings or other re-entry by Landlord. To insure that Landlord may utilize the security represented by the Security Letter in the manner, for the purpose, and to the extent provided in this Section, each Security Letter shall, without limitation, provide (i) that the full amount (or any portion) thereof may be drawn down by Landlord upon the presentation to the issuing bank of Landlord's draft drawn on the issuing bank with accompanying statement purportedly executed by an officer of beneficiary to the effect that the beneficiary is entitled to draw under the Security Letter in accordance with the term of the Lease, and (ii) that the Security Letter shall be transferable by Landlord to any transferee of Landlord's interest in the Premises, without cost to Landlord, in the event of a transfer of Landlord's interest in the Premises. In the event of any such transfer, Landlord shall transfer any interest it may have in the Security Letter to the transferee thereof and Landlord (upon such transfer) shall thereupon be released by Tenant from all liability for the return of such Security Letter, and Tenant agrees to look solely to the new Landlord under the Lease for the return of said Security Letter; and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the Security Letter to a new Landlord. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the monies (or Security Letter) deposited herein as security and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. C. In the event that Tenant defaults in respect of any of the terms, provisions, covenants and conditions of this Lease and Landlord utilizes all or any part of the security represented by the Security Letter, Landlord may, in addition to exercising its rights as herein, retain the unapplied and unused balance of the principal amount of the Security Letter as security for the faithful performance and observance by Tenant thereafter of the terms, provisions and conditions of this Lease, and may use, apply or retain the whole or any part of said balance to the extent required for payment of Fixed Rent, Additional Rent or any other sum as to which Tenant is in default or for any sum which Landlord may expend or be required to expend by reason of Tenant's default in respect of any of the terms, covenants and conditions of this Lease. In the event Landlord utilizes all or any part of the security represented by the Security Letter, Tenant shall immediately deposit with Landlord a further Security Letter (or cash) equal to the amount so drawn, used or applied, as aforesaid so that at all times Landlord shall have in its possession Security 7 Letter(s) (and cash security) totaling the Security Amount, failing which Landlord shall have the same rights and remedies against Tenant as for the nonpayment of Fixed Rent beyond the applicable grace period. D. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this Lease, the Security Letter shall be returned to Tenant within thirty (30) days after the later to occur of (i) the Expiration Date hereof and (ii) the delivery of the entire possession of the Lease Premises to Landlord in the condition and in accordance with the provisions hereof. Section 4.07. TENANT'S INSURANCE. During the term of this Lease, Tenant shall, at Tenant's sole cost and expense for the mutual benefit and protection of Landlord, Fee Mortgagee and Tenant, maintain: A. Public Liability Insurance, such insurance to afford protection in an amount of not less than a Three Million ($3,000,000) Dollar combined single limit of liability for bodily injury or property damage arising out of any one occurrence. This limit can be achieved by any combination of primary and excess insurance. Tenant shall also carry Fire and Extended Coverage Insurance on Tenant's property, insuring against damage by fire, and such other risks and hazards as are insurable under present and future standard forms of fire and extended coverage insurance policies, for the full insurable value thereof. Landlord shall be added as an additional insured to protect its interest in regards to any improvements and betterments made to the Demised Premises. B. Tenant agrees to deliver to Landlord, at least thirty (30) days prior to the time such insurance is first required to be carried by Tenant, and thereafter at least thirty (30) days prior to expiration of any such policy, either a duplicate original or a certificate of insurance and certified true copies of all policies procured by Tenant, in compliance with its obligations hereunder, together with evidence of payment therefor, or, if Landlord so requires, to the Fee Mortgagee, except that if insurance is in blanket form, Tenant shall promptly provide Landlord suitable certificates from the insurer to evidence coverage of the Landlord. All of said policies of insurance shall name the Landlord and its designee as additional insureds, as their interest may appear, and shall be in form and with insurance companies satisfactory to Landlord. All such policies shall contain an endorsement stating that such insurance may not be cancelled or amended except upon not less than thirty (30) days prior written notice to Landlord and any designee of Landlord. C. All insurance provided for in this paragraph shall be effected under valid and enforceable policies issued by insurers of recognized responsibility. D. During the term of this Lease, Tenant shall maintain workman's compensation insurance covering all persons employed by the Tenant and with respect to whom death or bodily injury claims could be asserted against Landlord. In addition to which, prior to any construction, repairs, alterations and additions to the Demised Premises by Tenant, Tenant shall restrict access to the Demised Premises by any contractor unless such contractor has a certificate of insurance on file with the Tenant covering workman's compensation insurance. 8 E. Upon Tenant's failure to comply in full with this subparagraph, the Landlord shall have the right to obtain said insurance as required to protect the Landlord's interests, pay the premiums therefor, and add said premiums to the monthly installment of Fixed Rent next due. Section 4.08. Neither the Tenant nor the Landlord, nor their respective agents or employees, shall be liable to the other or to anyone claiming through or under them by way of subrogation or otherwise, for loss or damage of the type normally covered by fire and "ALL-RISK" and public liability insurance covering buildings or contents. Landlord and Tenant shall each cause their insurance policies to contain clauses or endorsements that the aforesaid releases shall not adversely affect or impair a party's rights to recover under said insurance policies. In addition, it is understood and agreed that if any such liability shall exceed the amount of the effective and collectable insurance in question, the party responsible shall be liable for such excess. ARTICLE 5. LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS Section 5.01. If Tenant shall at any time fail to (a) pay any Operating Expenses or Taxes in accordance with Article 4, (b) take out, pay for, maintain, or deliver any of the insurance policies provided for in Article 4, (c) cause any lien of the character referred to in Article 12 to be discharged as provided, or (d) perform any other act on its part to be performed under this Lease, then Landlord may after fifteen (15) days notice to Tenant (or without notice in case of an emergency), but shall not be obligated to do so, and without further notice or demand upon Tenant and without waiving or releasing Tenant from any obligations of Tenant in this Lease contained, (i) pay any Operating Expenses or Taxes payable by Tenant pursuant to Article 4, (ii) take out, pay for and maintain any of the insurance policies provided for in Article 4, (iii) discharge any lien of the character referred to in Article 12 as provided or (iv) perform any such other act on Tenant's part to be performed under this Lease. Section 5.02. All sums paid by Landlord pursuant to Section 5.01 and all necessary incidental costs and expenses paid or incurred by Landlord in connection with the performance of any act by Landlord pursuant to that section, together with interest thereon at the rate of the lesser of (a) eighteen (18%) percent or (b) the maximum rate allowed by law from the date of making of that expenditure by Landlord, shall constitute additional rent and shall be payable by Tenant to Landlord in accordance with Article 4. ARTICLE 6. COVENANTS AGAINST WASTE AND TO REPAIR AND MAINTAIN THE DEMISED PREMISES Section 6.01. Tenant shall not cause or permit any waste, damage, or injury to the Demised Premises. Tenant shall not cause or permit any debris or garbage to litter the Demised Premises or the exterior of the Building. 9 Section 6.02. Tenant shall make all structural and non-structural repairs and replacements necessary to maintain the Building in a condition appropriate for buildings of similar construction, use, and class in the area of the Demised Premises; and in any event shall make all repairs necessary to avoid any structural damage or injury to the Building, and shall provide landscaping, parking lot maintenance, in connection with the operation of the Demised Premises. Section 6.03. Tenant hereby assumes the full and sole responsibility for the condition, operation, repair, replacement, maintenance and management of the Demised Premises. Section 6.04. Tenant shall hire, at its own cost and expense, a reputable service contractor or contractors to maintain and repair the heating, ventilating and air conditioning equipment, sprinkler systems and all other building systems that service the Demised Premises, as well as the roof. ARTICLE 7. COMPLIANCE WITH ORDERS, ORDINANCES, ETC. Section 7.01. On and after the Occupancy Date, Tenant shall promptly comply with (a) all laws and ordinances and the orders, rules, regulations, and requirements of all federal, state, and municipal governments and appropriate departments, commissions, boards, and officers thereof, and the orders, rules, and regulations of the Board of Fire Underwriters which has jurisdiction, or any other body hereafter constituted exercising similar functions, which may be applicable to its use or manner of use of the Demised Premises (collectively "Laws"), and (b) the requirements of all policies of public liability, fire, and all other policies of insurance at anytime in force with respect to the Demised Premises as required under Article 4. Section 7.02. Tenant shall have the right, after written notice to Landlord, to contest by appropriate legal proceedings, in the name of Tenant or Landlord or both, without cost or expense to Landlord, the validity or application of any law, ordinance, order, rule, regulation, or requirement referred to, and if, by the terms of any such law, ordinance, order, rule, regulation, or requirement, compliance therewith pending the prosecution of any such proceeding may legally be held in abeyance without the incurrence of a lien, charge, or liability of any kind against the Demised Premises and without subjecting Landlord to any criminal liability of whatsoever nature for failure so to comply, Tenant may postpone compliance until the final determination of any proceedings, provided that all such proceedings shall be prosecuted with reasonable diligence and dispatch, and if any lien, charge or civil liability is incurred by reason of non-compliance, Tenant may nevertheless make the contest and delay compliance as described above, provided that Tenant furnishes to Landlord security, reasonably satisfactory to Landlord, against any loss or injury by reason of such noncompliance or delay and prosecutes the contest with reasonable diligence. Landlord, without cost to it, shall execute and deliver any papers which may be necessary or proper to permit Tenant to contest the validity or application of any such law, ordinance, order, rule, regulation, or requirement. Section 7.03. Tenant shall indemnify Landlord and hold it harmless from and against any and all liabilities, costs and expenses (including reasonable 10 attorney's fees and disbursements) incurred in connection with Tenant's failure to comply with Sections 7.01 and 7.02 hereinabove. ARTICLE 8. DAMAGE TO OR DESTRUCTION OF THE BUILDING Section 8.01. If at any time during the term of this Lease, if more than twenty five (25%) percent of the Demised Premises shall be damaged or destroyed from fire or other casualty (including any casualty for which insurance coverage was not obtained) of any kind or nature, regardless of whether said damage or destruction resulted from an act of God, the fault of the Tenant, the Landlord or from any cause whatsoever, then the Landlord may, at its option, rebuild the Demised Premises or terminate this Lease. Landlord shall notify Tenant within sixty (60) days of such damage or destruction whether it intends to rebuild the Demised Premises. If Landlord fails to so notify Tenant, or if the time to rebuild shall be estimated to be more than six (6) months from the date of such notice, Tenant shall have the right to cancel this Lease, be relieved of its obligations hereunder, and receive the return of any portion of the Security Deposit not otherwise due Landlord. Section 8.02. No provision of this Article shall be construed to entitle the Tenant to any abatement, allowance, reduction or suspension of Rent unless and until this Lease is terminated by the Landlord. Notwithstanding the foregoing, in the event and to the extent that Landlord receives proceeds from its "rent loss" insurance, same will be credited against the amounts due from Tenant. ARTICLE 9. CONDEMNATION Section 9.01. If more than twenty five (25%) percent of the Demised Premises shall be taken under the exercise of the power of eminent domain by any competent governmental authority, each of Landlord and Tenant shall have the option to terminate this Lease as of the date of such taking. In that event, the Rent due hereunder shall be apportioned as of the date of such taking and any balance of the prepaid Rent not theretofore applied towards the payment of accrued installments of Rent in accordance with the provisions hereof shall be repaid to the Tenant. Section 9.02. If any portion of the Demised Premises shall be taken under the exercise of the power of eminent domain and the Lease is not terminated in accordance with Section 9.01 above, the Rent shall be reduced in proportion to the portion of the Demised Premises taken. Section 9.03. In the event of any taking, whether total or partial, the Tenant shall have no claim in or to any award of damages for such taking other than for Tenant's leasehold improvements and moving expenses. The Tenant hereby expressly assigns any and all of its right, title and interest in and to such award or any part thereof (other than for such leasehold improvements or moving expenses), to the Landlord. 11 ARTICLE 10. CHANGES AND ALTERATIONS Section 10.01. Tenant shall not make any changes or alterations to the improvements existing on the Demised Premises at the Occupancy Date except in accordance with this Article. Section 10.02. All changes, alterations, demolition or new construction, structural or otherwise, to the Building other than decorations, painting and other non-structural activities aggregating less than $35,000 shall be subject to Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed. All changes, alterations, demolition, or new construction (collectively "changes or alterations") shall be made in all cases subject to the following conditions: A. No changes or alterations shall be undertaken until Tenant shall have procured and paid for, so far as the same may be required from time to time, all municipal and other governmental permits and authorizations of the various municipal departments and governmental subdivisions having jurisdiction. Landlord shall, at Tenant's sole cost and expense, except as otherwise provided herein, join in the application for such permits or authorizations whenever such action is necessary. B. Any structural changes or alterations, or any changes or alterations undertaken as a single project and involving an estimated cost aggregating more than five (5%) percent of the then full insurable value of the Building (other than decorations, painting and other non-structural activities aggregating less than $35,000), shall be conducted under the supervision of an architect or engineer licensed as such in the State (who may be an employee of Tenant or its managing agent) selected by Tenant, and no such work shall be undertaken until preliminary plans and outline specifications and budget estimates therefor, prepared and approved in writing by such architect or engineer stating that in the opinion of such architect or engineer, the same shall comply with this Article, shall have been submitted to Landlord. C. All changes or alterations shall be of such a character that, when completed, the economic value of the Building shall be not less than the value of the Building immediately prior to any such changes or alterations. D. All work done in connection with any changes or alterations shall be done in a good and workmanlike manner and in compliance with applicable building and zoning laws and all other applicable laws, ordinances, orders and requirements of all federal, state, and municipal governments and the appropriate departments, commissions, boards, and officers thereof; the Demised Premises shall at all times be free of liens for labor and materials supplied or claims to have been supplied, and Tenant shall obtain lien waivers from all contractors upon the completion of their activities at the Premises; and the work shall be prosecuted with reasonable dispatch, unavoidable delays excepted. E. Worker's compensation insurance covering all persons employed in connection therewith and with respect to whom death or bodily injury claims could be asserted against Landlord, Tenant, or the Demised Premises and general liability and property damage insurance (which may be effected by endorsement, if obtainable, on the insurance required to be carried pursuant to Article 4 for 12 the mutual benefit of Landlord and Tenant with limits of not less than those required to be carried pursuant to Section 4.07A shall be maintained by Tenant at all times when any work is in process in connection with any changes or alterations. F. No changes or alterations undertaken as a single project and involving an estimated cost aggregating more than five (5%) percent of the then full insurable value of the Building shall be undertaken until Tenant shall have furnished to Landlord, (i) cash, (ii) a completion bond issued by a bonding company reasonably satisfactory to the Landlord, or (iii) such other security reasonably acceptable to the Landlord, in each case in an amount at least equal to the estimated cost of such changes or alterations. Section 10.03. In performing any work or repairs to, or restoration, replacement, or rebuilding of, the Building required to be performed by Tenant pursuant to the terms of this Lease, Tenant shall observe and perform, in so far as the nature of such repairs, restoration, replacement, or rebuilding make such observance and performance appropriate, the conditions relating to changes or alterations set forth in this Article. Section 10.04. Prior to submitting to the appropriate governmental agency any plans and drawings for Governmental Approvals, Tenant shall submit to Landlord said plans and drawings ("Proposed Specifications"). Landlord shall have a period of fifteen (15) days either to approve or to disapprove the Proposed Specifications, any such approval not unreasonably to be withheld or delayed. If Landlord does not approve the Proposed Specifications, Landlord shall return the Proposed Specifications to Tenant and notify Tenant of any reasonable changes it desires to the Proposed Specifications. In that event, Tenant shall modify the Proposed Specifications in accordance with Landlord's requirements and shall return them as modified to Landlord within the following ten (10) days. All changes to the Proposed Specifications, whether required by any governmental agency having jurisdiction over the Demised Premises or as otherwise made during the term of this Lease, shall also be submitted to Landlord for its review and approval as provided hereinabove. Section 10.05. Promptly upon the completion of all alterations, additions, changes or improvements performed by Tenant at the Demised Premises, Tenant shall deliver to Landlord a Certificate of Occupancy, the Certificate of Fire Underwriters and all other certificates and approvals of any other appropriate governmental or supervisory agency having jurisdiction thereof, certifying the proper completion of such work in accordance with all applicable laws, rules and regulations. In addition, upon completion of any and all such work Tenant shall promptly deliver to Landlord a set of "as built" plans and specifications. Section 10.06. All permanent installations affixed to the Demised Premises at any time, either by Tenant or by Landlord on behalf of Tenant, shall, upon installation, become the property of Landlord and shall remain upon and be surrendered with the Demised Premises unless Landlord, by written notice to Tenant no later than twenty (20) days prior to the Expiration Date, elects to have them removed by Tenant, in which event the same shall be removed by Tenant at Tenant's expense prior to the Expiration Date. Nothing in this Article shall be construed to give Landlord title to or prevent Tenant's removal of trade fixtures, moveable office furniture and equipment, but upon removal of any such equipment from the Demised Premises or upon removal of other installations as 13 may be required by Landlord, Tenant shall immediately and at its expense, repair and restore the Demised Premises to the condition existing prior to such installation and shall repair any damage to the Demised Premises or the Building due to such removal. Section 10.07. Tenant shall pay to Landlord on demand, as additional rent, a supervisory fee of 10% of the cost of any alterations, additions, changes or improvements made to the Demised Premises other than decorations, painting and other non-structural activities aggregating less than $35,000. Tenant shall also pay to Landlord Landlord's cost for reviewing any plans submitted by Tenant. ARTICLE 11. RESERVED Section 11.01. RESERVED ARTICLE 12. MECHANICS' LIENS Section 12.01. Tenant shall not suffer or permit any mechanics' liens to be filed against the Property or Demised Premises by reason of work, labor, services, or materials supplied or claimed to have been supplied to Tenant or anyone holding any interest in the Property or Demised Premises or any part thereof through or under Tenant. If any such mechanics' lien shall at any time be filed against the Demised Premises, Tenant shall, within forty five (45) days after notice to it of the filing, cause the same to be discharged of record by payment, deposit, bond, order of a court of competent jurisdiction, or otherwise. If Tenant shall fail to cause such lien to be discharged within the period aforesaid, then Landlord may discharge the same either by paying the amount claimed to be due or by procuring the discharge of such lien by deposit or by bonding proceedings, and in any such event Landlord shall be entitled, if Landlord so elects, to compel the prosecution of an action for the foreclosure of such lien by the lienor and to pay the amount of the judgment in favor of the lienor with interest, costs, and allowance. Nothing in this Lease shall be deemed or construed in any way as constituting the consent or request of Landlord, express or implied by inference or otherwise, to any contractor, subcontractor, laborer, or materialman for the performance of any labor or the furnishing of any materials for any specific improvement, alteration to, or repair of the Demised Premises or any part thereof, nor as giving Tenant a right, power, or authority to contract for or permit the rendering of any services or the furnishing of any materials that would give rise to the filing of any mechanics' lien against Landlord's interest in the Demised Premises. ARTICLE 13. SURRENDER OF THE DEMISED PREMISES; INSPECTION OF THE DEMISED PREMISES Section 13.01. Upon the expiration or earlier termination of this Lease, Tenant shall surrender the Demised Premises to Landlord in good order and 14 repair, reasonable wear and tear excepted. Tenant shall remove all of its property and shall repair all damage to the Demised Premises or the Building occasioned by such removal. Any property not removed from the Demised Premises shall be deemed abandoned by Tenant and may be disposed of in any matter deemed appropriate by Landlord, the costs of removal occasioned by such removal to be at Tenant's expense. Section 13.02. Tenant shall permit Landlord and its authorized representatives to enter the Demised Premises at all reasonable times during usual business hours upon reasonable advance notice for the purpose of (a) inspecting the same, (b) making any necessary repairs thereto and performing any work therein that may be necessary by reason of Tenant's failure to make any such repairs, perform any such work, or comply with any Laws pursuant to Article 7 or Environmental Laws pursuant to Article 29 (or without notice in case of emergency). Nothing herein shall imply any duty upon the part of Landlord to do any such work; performance thereof by Landlord shall not constitute a waiver of Tenant's default in failing to perform the same. Tenant shall permit Landlord and its authorized representatives to enter the Demised Premises at all reasonable times during usual business hours upon reasonable advance notice for the purpose of exhibiting the same to prospective purchasers or Fee Mortgagees. ARTICLE 14. ASSIGNMENT AND SUBLETTING Section 14.01. A. Tenant shall not sublet the Demised Premises or any part thereof, or assign, mortgage or hypothecate, or otherwise encumber this Lease or any interest therein nor grant concessions or licenses for the occupancy of the Demised Premises or any part thereof, without the prior written consent of Landlord in each instance. Any attempted transfer, assignment or subletting shall be void and confer no rights upon any third person. No assignment or subletting shall relieve Tenant of any obligations herein. The consent by Landlord to any transfer, assignment or subletting shall not be deemed to be a waiver on the part of Landlord of any prohibition against any future transfer, assignment or subletting. If Tenant is a corporation or a partnership, and if at any time during the Term, the person or persons who, on the date of this Lease, owns or own a majority of such corporation's voting shares or such partnership's partnership interest, as the case may be, ceases or cease to own a majority of such shares (whether such sale occurs at one time or at intervals so that, in the aggregate, such a transfer shall have occurred), or interest, as the case may be, then in any such event, Tenant shall so notify Landlord and Landlord shall have the right, at its option, to terminate this Lease by notice to Tenant given within thirty (30) days thereafter, except that this sentence shall not be applicable to any corporation, the majority of outstanding voting stock of which is listed on a recognized securities exchange. For the purposes of this Section, stock ownership shall be determined in accordance with the principles set forth in Section 544 of the Internal Revenue Code of 1954, and the term "voting stock" shall refer to shares of stock regularly entitled to vote for the election of the directors of the corporation. B. If Tenant should assign its interest in this Lease, or if all or any part of the Demised Premises be underlet or occupied by anybody other than Tenant, Landlord may, after default by Tenant, collect rent from the assignee, under-tenant or occupant, as the case may be, and apply the net amount collected to the Rent herein reserved, but no such assignment, underletting, occupancy or 15 collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, under-tenant or occupant as Tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant contained herein. The consent by Landlord to any assignment or underletting shall not in any way be construed to relieve Tenant from obtaining the express consent in writing of Landlord to any further assignment or underletting. In no event shall any permitted sublessee assign or encumber its sublease or further sublet all or any portion of its sublet space, or otherwise suffer or permit the sublet space or any part thereof to be used or occupied by others, without Landlord's prior written consent in each instance. C. If Tenant shall desire to assign this Lease, or to sublet the Demised Premises, it shall no later than forty five (45) days prior to the proposed effective date of the assignment or sublet, submit to Landlord a written request for Landlord's consent to such assignment or subletting, which request shall contain the following information: (i) the name and address of the proposed assignee or subtenant; (ii) the terms and conditions of the proposed assignment or subletting; (iii) the nature and character of the business of the proposed assignee or subtenant and its proposed use of the Demised Premises; and (iv) current financial information and any other information Landlord may reasonably request. Landlord may then, by notice to such effect given to Tenant within thirty (30) days after either the receipt of Tenant's request for consent or the receipt of such further information as Landlord may request pursuant to this Section, whichever is later, terminate this Lease on a date to be specified in said notice (hereinafter, the "Termination Date") which date shall be not earlier than one (1) day before the effective date of the proposed assignment or subletting nor later than sixty-one (61) days after said effective date. Tenant shall then vacate and surrender the Demised Premises on or before the Termination Date and the Term of this Lease shall end on the Termination Date as if that were the Expiration Date. Landlord shall be free to, and shall have no liability to Tenant if Landlord should, lease all or any part of the Demised Premises to Tenant's prospective assignee or subtenant. D. If Landlord shall not exercise its option to terminate this Lease pursuant to subsection C. above, Landlord shall not unreasonably withhold or delay its consent to the proposed assignment or subletting referred to in Tenant's notice given pursuant to said subsection, provided that the following further conditions shall be fulfilled: (1) Tenant shall not then be in default hereunder beyond the time herein provided, if any, to cure such default; (2) The proposed assignee or subtenant shall have a financial standing, be of a character, reasonably satisfactory to Landlord; (3) The proposed assignee or subtenant shall (i) not be a tenant or an affiliate of any tenant in any building owned by Landlord or Landlord's affiliates, or (ii) not be presently negotiating with Landlord or any affiliate of Landlord for space in any building owned by Landlord or its affiliates. 16 (4) No subletting shall end later than one (1) day before the Expiration Date of this Lease or shall be for a term of less than two (2) years unless it commences less that two (2) years before the Expiration Date; (5) No subletting shall be for less floor space than the entire Demised Premises; (6) Tenant shall reimburse Landlord on demand for any costs that may be incurred by Landlord in connection with said assignment or sublease, including, without limitation, the costs of making investigations as to the acceptability of the proposed assignee or subtenant, and legal costs incurred in connection with the granting of any requested consent; (7) Neither the proposed assignment or subletting nor the proposed use of the Demised Premises by the proposed assignee as sublessee shall be prohibited by the Fee Mortgage; (8) The form of the proposed sublease shall be in form reasonably satisfactory to Landlord and shall comply with the applicable provisions of this Article; (9) In Landlord's reasonable judgment the proposed assignee or subtenant is engaged in a business and the Demised Premises, or the relevant part thereof, will be used in a manner which (i) is in keeping with the then standards of the Demised Premises; and (ii) is limited to the use expressly permitted under this Lease; and (11) Tenant shall have complied with the provisions of Section 14.01 and Landlord shall not have exercised its option to terminate under said Section 14.01.C. within the time permitted therefor. E. Every subletting hereunder is subject to the express condition, and by accepting a sublease hereunder each subtenant shall be conclusively deemed to have agreed, that if this Lease should be terminated prior to the Expiration Date or if Landlord should succeed to Tenant's estate in the Demised Premises, then at Landlord's election the subtenant shall either surrender the Demised Premises to Landlord within thirty (30) days of Landlord's request therefor, or attorn to and recognize Landlord as the subtenant's landlord under the sublease and the subtenant shall promptly execute and deliver any instrument Landlord may request to evidence such attornment. F. Tenant shall furnish Landlord with a counterpart (which may be a reproduced copy) of each sublease or assignment made hereunder within ten (10) days after the date of its execution. G. Notwithstanding any assignment and assumption by the assignee of all or any part of the obligations of Tenant hereunder, Tenant herein named, and each immediate or remote successor in interest of Tenant named herein, shall remain liable jointly and severally (as a primary obligor) with its assignee and all subsequent assignees for the performance of Tenant's obligations hereunder, and, 17 without limiting the generality of the foregoing, shall remain liable to Landlord for all acts and omissions on the part of any assignee subsequent to it in violation of any of the obligations of this Lease. H. If Tenant shall sublet the Demised Premises to anyone for rents which for any period shall exceed the Fixed Rent payable under this Lease for the same period, Tenant shall pay Landlord, as additional rent hereunder, fifty (50%) percent of the amount of any rents, additional charges or other consideration payable under the sublease to Tenant by the sublessee which is in excess of the Base Rent and additional rent accruing during the term of the sublease in respect of the Demised Premises pursuant to the terms hereof. If Tenant shall assign its interest under this Lease, Tenant shall pay Landlord, as additional rent, fifty (50%) percent of the amount by which the consideration paid in connection therewith, whether designated as an assignment fee, a payment for fixtures, or for any other consideration exceeds the amount of any brokerage commission paid to an unrelated party and the costs of any "build out" or alterations undertaken for the assignee. The sums payable under this Section 14.01.H. shall be paid to Landlord as additional rent as and when payable by the subtenant to Tenant. I. Notwithstanding the provisions of this Article 14, if Tenant is a corporation, Tenant shall have the right, without the consent of Landlord, to assign its interest in this Lease to a parent, subsidiary or affiliate of Tenant or any corporation which is a successor to Tenant either by merger or consolidation, or in connection with the transfer of all of the business and assets of the Tenant or a public offering of Tenant's stock, provided that the successor shall have a tangible net worth, determined in accordance with accepted accounting standards, at least equal to the tangible net worth of Tenant at the time of the transaction. No such assignment shall be valid unless, within ten (10) days prior to the effective date thereof, Tenant shall deliver to Landlord (i) a duplicate original instrument of assignment in form and substance satisfactory to Landlord, duly executed by Tenant, (ii) an instrument in form and substance satisfactory to Landlord, duly executed by the assignee, in which such assignee shall assume observance and performance of and to be personally bound by, all of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed. Section 14.02. The Lease and Tenant's rights under the Lease are subject and subordinate to the lien of any present or future mortgage, indenture or other such lien encumbrance, together with any renewals, extensions, modifications, consolidations and replacements of such lien encumbrance, now or after the Commencement Date, affecting, placed or enforced against the Demised Premises, or any interest of Landlord in the Demised Premises, or Landlord's interest in the Lease and the leasehold estate created by the Lease (except to the extent any such instrument will expressly provide that the Lease is superior to such instrument). This provision will be self-operative and no further instrument of subordination will be required in order to effect it. Nevertheless, Tenant will execute, acknowledge and deliver to Landlord, at any time and from time to time, upon demand by Landlord, such documents as may be requested by Landlord, or any Fee Mortgagee to confirm or effect any such subordination. If Tenant fails or refuses to execute, acknowledge and deliver any such document within twenty (20) days after written demand, Landlord, its successors and assigns will be entitled to execute, acknowledge and deliver any and all such documents for and on behalf of Tenant as attorney-in-fact for 18 Tenant. Tenant does hereby constitute and irrevocably appoint Landlord, its successors and assigns as Tenant's attorney-in-fact to execute, acknowledge and deliver any and all documents described in this Section 14.02 for and on behalf of Tenant, as provided in this Section 14.02. Landlord agrees to use reasonable business efforts to obtain a non-disturbance agreement from the mortgagee in the mortgagee's standard form. Section 14.03. If the Demised Premises are encumbered by a Fee Mortgage and such Fee Mortgage is foreclosed, or if the Demised Premises is sold pursuant to such foreclosure or by reason of a default under said mortgage, then notwithstanding such foreclosure, such sale, or such default (i) Tenant shall not disaffirm the Lease or any of its obligations thereunder, and (ii) at the request of the applicable Fee Mortgagee or purchaser at such foreclosure or sale, Tenant shall attorn to such Fee Mortgagee or purchaser and execute a new lease for the Demised Premises setting forth all of the provisions of the Lease except that the term of such new lease shall be for the balance of the Term. Section 14.04. The term "Landlord" as used in this Lease means only the owner for the time being or the Fee Mortgagee in possession for the time being of the Demised Premises. In the event of any sale of the Demised Premises, then, subject to its obligations under Section 4.06 hereof, said Landlord shall be and hereby is entirely freed and relieved of all of its covenants, obligations and liability hereunder. This subsection shall be applicable to each owner of the Demised Premises, from time to time, and shall not be limited to the first owner of the Demised Premises. Section 14.05. If Landlord shall notify Tenant that the Demised Premises is encumbered by a Fee Mortgage and in such notice set forth the name and address of the Fee Mortgagee thereof; then, notwithstanding anything to the contrary, no notice intended for Landlord shall be deemed properly given unless a copy thereof is simultaneously sent to such Fee Mortgagee by certified or registered mail, return receipt requested. If any Fee Mortgagee shall perform any obligation that Landlord is required to perform hereunder, such performance by Fee Mortgagee, insofar as Tenant is concerned, shall be deemed performance on behalf of Landlord and shall be accepted by Tenant as if performed by Landlord. ARTICLE 15. NO WAIVERS BY LANDLORD Section 15.01. Except as otherwise provided in this Lease, no act or thing done by Landlord or its agents during the term hereof shall constitute an eviction by Landlord, nor shall be deemed an acceptance of a surrender of the Demised Premises, and no agreement to accept such surrender shall be valid unless in writing signed by Landlord. The delivery of keys to an employee of Landlord or of its agents shall not operate as a termination of this Lease or a surrender of the Demised Premises. Section 15.02. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease, or to insist upon the strict performance by Tenant or any other Tenant, of the Rules and Regulations annexed hereto or hereafter adopted by Landlord shall not prevent a subsequent act or omission which would have originally constituted a violation, from having all the force and effect of an original violation. 19 Section 15.03. The receipt by Landlord of rent with knowledge of breach of any covenant of this Lease shall not be deemed a waiver of such breach. Section 15.04. No payment by Tenant or receipt by Landlord of a lesser amount than the Fixed Rent and additional rent shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without any prejudice to Landlord's right to recover the balance or pursue any other remedy provided in this Lease. ARTICLE 16. DEFAULT PROVISIONS - CONDITIONAL LIMITATION Section 16.01. Subject to the provisions of Sections 16.02 and 16.03, if one or more of the events in Section 16.01.A, B or C (an "Event of Default") shall have occurred and shall not have been remedied, within any applicable cure period, then Landlord may, at Landlord's option, give to Tenant a notice of election to end the term of this Lease at the expiration of five (5) days from the date of service of such notice, and, if that notice is given, if same is not cured within such time, then, at the expiration of those five (5) days the term of this Lease and all right, title, and interest of Tenant under it shall expire as fully and completely as if that day were the date specifically fixed for the expiration of the term of this Lease, and Tenant will then quit and surrender the Demised Premises to Landlord, but Tenant shall remain liable as hereinafter provided. A. Default shall be made in the payment of the Rent or any other fixed financial obligation of Tenant to Landlord when due and such default shall continue for a period of five (5) days after the due date, or default shall be made n the payment of any non-recurring financial obligation for a period of five (5) days after notice; or B. Default shall be made in the performance of any other covenant or agreement on the part of Tenant to be performed under this Lease, and such default shall continue for a period of thirty (30) days after notice thereof, specifying such default, shall have been given to Tenant; provided, however, in the case of a default which cannot with reasonable diligence be remedied by Tenant within a period of thirty (30) days, if Tenant shall commence within such period of thirty (30) days to remedy the default and thereafter shall prosecute the remedying of such default with all reasonable diligence, the period of time after the giving of such notice within which to remedy the default shall be extended for such period as may be necessary to remedy the same with all reasonable diligence, but in no event longer than an additional thirty (30) days. C. (1) If Tenant, shall (a) make an assignment for the benefit of creditors, (b) file or acquiesce to a petition in any court (whether or not pursuant to any statute of the United States or of any state) in any bankruptcy, reorganization, composition, extension, arrangement or insolvency proceedings, or (c) make an application in any such proceedings for or acquiesce to the appointment of a trustee or receiver for it or all of any portion of its property. 20 (2) If any petition shall be filed against Tenant, to which Tenant does not acquiesce in any court (whether or not pursuant to any statute of the United States or any state) in any bankruptcy, reorganization, composition, extension, arrangement or insolvency proceedings, and (a) Tenant or any guarantor of Tenant, if any, shall thereafter be adjudicated a bankrupt, or (b) such petition shall be approved by any such court, or (c) such proceedings shall not be stayed, dismissed, discontinued or vacated within sixty (60) days. (3) If, in any proceeding, pursuant to the application of any person other than Tenant, to which Tenant does not acquiesce, a receiver or trustee shall be appointed for Tenant, or for all or any portion of the property of either and such receivership or trusteeship shall not be set aside within sixty (60) days after such appointment. (4) Except as otherwise provided herein, if Tenant transfers by sale, assignment, operation or otherwise, fifty (50%) percent or greater interest (whether of stock, a partnership interest or otherwise) either in one transaction or in any aggregation or series of transactions without Landlord's consent. (5) If Tenant shall abandon the Demised Premises and/or permit the same to be unoccupied, unattended, vacant or deserted. Section 16.02. Upon the termination of this Lease pursuant to any of the provisions of this Article, it shall be lawful for Landlord, without formal demand or notice of any kind, to re-enter the Demised Premises by summary dispossess proceedings or any other action or proceeding authorized by law and to remove Tenant without being liable for any damages. Section 16.03. Nothing in this Article shall limit the right of Landlord to recover possession of the Demised Premises for nonpayment of the Rent pursuant to any summary dispossess proceedings or other proceeding or remedy available to it by law or by statute at any time after the occurrence of an Event of Default of the character specified in section 16.01.A. and the expiration of all periods of time within which Tenant shall be entitled to remedy such default. Section 16.04. A. Upon the termination of this Lease by reason of the happening of any Event of Default not timely cured, or in the event of the termination of this Lease by summary dispossess proceeding or under any provision of law now or at any time hereafter in force, by reason of or based upon or arising out of the occurrence of an Event of Default, or upon Landlord recovering possession of the Demised Premises in the manner or in any of the circumstances mentioned previously, or in any other manner or circumstances whatsoever pursuant to legal process, by reason of or based upon or arising out of the occurrence of an Event of Default, Landlord may, at Landlord's option, at any time and from time to time, relet the Demised Premises or any part of parts thereof, and receive and collect the rents therefor. Landlord shall apply the Rents so received first to the payment of such reasonable expenses as Landlord may have incurred in recovering possession of the Demised Premises, and for putting the same in good order or condition or preparing or altering the same for re-rental, and reasonable expenses, commissions, and charges paid by Landlord in and about the reletting thereof and then to the fulfillment of the covenants and agreements of Tenant under this Lease. 21 B. Any such reletting as provided by section 16.04.A. may be for the remainder of the term of this Lease or for a longer or shorter period. In any such case and whether or not the Demised Premises, or any part thereof, be relet, Tenant shall pay to Landlord the Rent, all other charges required to be paid by Tenant up to the time of such termination of this Lease, or of such recovery of possession of the Demised Premises by Landlord, as the case may be, and thereafter Tenant shall, if required by Landlord, pay to Landlord until the end of the term of this Lease the equivalent of the amount of all the Rent reserved herein, and all other charges required to be paid by Tenant, less the net avails of reletting, if any, and the same shall be due and payable by Tenant to Landlord on the several rent days above specified, that is to say, upon each of such rent days Tenant shall pay to Landlord the net amount of the deficiency then existing after crediting any surplus of the net avails of reletting, if any, over the amount of all the Rent and all other charges required to be paid by Tenant which may have theretofore accrued. C. Under any of the circumstances mentioned previously in which Landlord shall have the right to hold Tenant liable upon the several rent days specified to pay Landlord the equivalent of the amount of the Rent and all other charges required to be paid by Tenant, Landlord shall have the election in place and instead of holding Tenant so liable, forthwith to recover against Tenant as damages for loss of the bargain and not as a penalty an aggregate sum which, at the time of such termination of this lease, or of such recovery of possession of the Demised Premises by Landlord, as the case may be, represents the then present worth of the excess, if any, of the aggregate of the Rent and all other charges payable by Tenant under this Lease that would have accrued for the balance of the term of this Lease over the aggregate rental value of the Demised Premises for the balance of such term. Section 16.05. Tenant waives the service of notice of Landlord's intention to reenter as provided for in any statute, or to institute legal proceedings to that end, and also waives any and all right of redemption in case Tenant shall be dispossessed by a judgment or by warrant of any court or judge. Landlord and Tenant each waives and shall waive any and all right to a trial by a jury in the event that summary proceedings shall be instituted by Landlord. The terms "enter," "reenter," "entry," or "reentry," as used in this Lease are not restricted to their technical legal meanings. ARTICLE 17. INDEMNIFICATION Section 17.01. A. Tenant shall indemnify and save harmless Landlord against and from any and all liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including reasonable attorneys' fees ("Liabilities"), which may be imposed upon or asserted against Landlord by reason of any work or thing whatsoever done in or about the Demised Premises by Tenant or any party other than Landlord or its agents, and shall also indemnify and save Landlord harmless against and from any and all Liabilities arising during the term of this Lease (i) from any condition of the Demised Premises first existing after the date hereof, or (ii) any sidewalk adjoining the Land, or of any vaults, passageways, or space therein or appurtenant to or adjoining the Land, and arising from any act or omission of Tenant, or any occupant of the Demised Premises or any part thereof, or of its or their agents, contractors, servants, employees, invitees, licensees, or of trespassers or arising from any 22 accident, injury, or damage whatsoever caused to any person or property occurring during the term of this Lease in or about the Demised Premises, or upon or under the sidewalks adjoining the Land, and from and against all judgments, costs, expenses, and liabilities incurred in or about any such claim or action or proceeding brought therein. B. Landlord shall indemnify and save harmless Tenant against and from any and all Liabilities, which may be imposed upon or asserted against Tenant by reason of any work or thing whatsoever done in or about the Demised Premises by Landlord or its agents, and shall also indemnify and save Tenant harmless against and from any and all Liabilities arising during the term of this Lease any sidewalk adjoining the Land, or of any vaults, passageways, or space therein or appurtenant to or adjoining the Land, and arising from any act or omission of Landlord or of its agents, contractors, servants, employees, invitees, licensees. C. If any action or proceeding is brought against an indemnified party by reason of any claim described in this Section 17.01, the indemnifying party, upon notice from the indemnified party, shall defend such action or proceeding by counsel reasonably satisfactory to the indemnified party. ARTICLE 18. RULES AND REGULATIONS Section 18.01. Tenant shall strictly observe the rules and regulations set forth in Schedule B annexed hereto and such other and further reasonable rules and regulations as Landlord or Landlord's agents may from time to time adopt (such rules and regulations as have been or may hereafter be adopted or amended are hereinafter the "Rules and Regulations"). ARTICLE 19. REMEDIES; LIMITATION OF LIABILITY Section 19.01. The specified remedies to which Landlord or Tenant may resort under the terms of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which the party may be lawfully entitled in case of any breach or threatened breach by the other party of any provision of this Lease. The failure of a party to insist in any one or more cases upon the strict performance of any of the covenants of this Lease or to exercise any option in this Lease shall not be construed as a waiver or a relinquishment for the future of such covenant or option. A receipt by Landlord of the Rent with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach, and no waiver by either party of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by such party. In addition to the other remedies in this Lease provided, either party shall be entitled to the restraint by injunction of the violation, or attempted or threatened violation, of any of the covenants, conditions, or provisions of this Lease. Section 19.02. Landlord (and, in case Landlord shall be a joint venture, partnership, tenancy-in-common association or other form of joint ownership) and the members of any such joint venture, partnership, tenancy-in-common, association or other form of joint ownership shall have absolutely no personal liability with respect to any provision of this Lease, or any obligation or liability arising therefrom or in connection therewith. Tenant shall look solely 23 to the equity of the then owner of the Property in the Property (or if the interest of the Landlord is a leasehold interest, Tenant shall look solely to such leasehold interest) for the satisfaction of any remedies of Tenant in the event of a breach by the Landlord of any of its obligations. Such exculpation of liability shall be absolute and without any exception whatsoever. Section 19.03. With respect to any provision of this Lease which provides, in effect, that Landlord shall not unreasonably withhold or unreasonably delay any consent or any approval, Tenant, in no event, shall be entitled to make, nor shall Tenant make, any claim for, and Tenant hereby waives any claim for money damages; nor shall Tenant claim any money damages by way of set-off, counterclaim or defense, based upon any claim or assertion by Tenant that Landlord has unreasonably withheld or unreasonably delayed any consent or approval; but Tenant's sole remedy shall be an action or proceeding to enforce any such provision, or for specific performance, injunction or declaratory judgment. ARTICLE 20. CERTIFICATES OF LANDLORD AND TENANT Section 20.01. Either party shall, at any time and from time to time, upon not less than ten (10) days' prior notice from the other party, execute, acknowledge, and deliver to the other party a statement in writing certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that this Lease is in full force and effect as modified and stating the modifications), and the dates to which the Fixed Rent and other charges have been paid in advance, and stating whether or not to the best knowledge of the signer of such statement the other party is in default in keeping, observing, or performing any covenant or agreement contained in this Lease and, if there be a default, specifying each such default, it being intended that any such statement delivered pursuant to this section may be relied upon by the other party or any purchaser, subtenant or mortgagee of its estate, but reliance on such statement may not extend to any default as to which the signer shall have had no actual knowledge, after due inquiry. ARTICLE 21. NOTICES Section 21.01.A. Any notice, demand, request, approval, or other communication (a "Notice") which, under the terms of this Lease or under any statute, must or may be given by the parties, must be in writing, and must be given by (i) mailing the same by registered or certified mail return receipt requested addressed, (ii) delivering same by any nationally recognized overnight carrier, or (iii) by telecopier, to the respective parties at their addresses above set forth. A copy of any notice to Landlord shall also be given to Farrell Fritz, P.C., 1320 RexCorp Plaza, Uniondale, New York 11556-1320, Attn: Peter L. Curry, Esq (Telecopier # (516) 336-2208). The notice to Tenant shall be given to Beckman, Lieberman & Barandes, LLP, 100 Jericho Quadrangle, Suite 329, Jericho, New York 11753, Attn: David H. Lieberman, Esq. (Telecopier # (516) 433-5858) 24 B. Either party, and the holder of any Fee Mortgage who shall have made the request referred to in Section 21.02, may designate by notice in writing given in the manner specified a new or other address to which a notice shall thereafter be so given. All notices shall be deemed given (i) forty-eight (48) hours after having been duly deposited in the mails, or (ii) twenty-four hours after having been delivered to the overnight carrier. Section 21.02. If requested in writing by Landlord, Tenant, or the holder of any Fee Mortgagee (which request shall be made in the manner provided in Section 21.01 and shall specify an address to which notices shall be given) any such notice to Landlord shall also be given contemporaneously to the Fee Mortgagee in the manner herein specified. ARTICLE 22. BROKER Section 22.01. Landlord and Tenant covenant and agree that Newmark Knight Frank is the sole broker (the "Broker") that brought about this Lease. Landlord agrees to pay the Broker a commission pursuant to separate agreement. Tenant further covenants and agrees that to the extent any other party claims a broker or finder's fee through a party, Tenant will defend, indemnify and hold Landlord harmless from any and all claims, losses, judgments, liabilities, suits, costs of suits, and all other costs and expenses which Landlord may incur in connection therewith, including attorney's fees and costs to enforce this indemnity. This indemnification shall survive the termination of this Lease. ARTICLE 23. QUIET ENJOYMENT Section 23.01. Tenant, upon paying the Rent and all other charges provided for in this Lease and upon observing and keeping all of the covenants, agreements, and provisions of this Lease on its part to be observed and kept, shall lawfully and quietly hold, occupy, and enjoy the Demised Premises during the term of this Lease without hindrance or molestation by anyone claiming by through or under Landlord as such, subject, however, to the exceptions, reservations and conditions of this Lease. ARTICLE 24. INVALIDITY OF PARTICULAR PROVISIONS Section 24.01. If any provision of this Lease or its application to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected, and each provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 25 ARTICLE 25. COVENANTS TO BIND AND BENEFIT THE RESPECTIVE PARTIES Section 25.01. The covenants and agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and their respective successors and assigns. ARTICLE 26. UTILITIES Section 26.01. Tenant shall contract directly with and shall pay the applicable utility companies or governmental agencies for all utilities consumed on the Demised Premises, other than water. Landlord shall not be liable to Tenant for any interruption in or curtailment of any utility service, nor shall any such interruption or curtailment constitute a constructive eviction or grounds for rental abatement in whole or in part hereunder. ARTICLE 27. CONDITION OF DEMISED PREMISES Section 27.01. Tenant represents that the Demised Premises, the title thereto, any sidewalks, parking areas adjoining the same, and subsurface conditions thereof, and the present permitted uses and prohibited uses thereof, have been examined by Tenant and that Tenant accepts the same "AS IS" in the condition or state in which they or any of them now are, without representation or warranty, express or implied in fact or by law, by Landlord and without recourse to Landlord, as to the title thereto, the nature, condition or usability thereof or the use or uses to which the Demised Premises or any part thereof may be put. Section 27.02. Tenant is fully familiar with the physical condition of the Demised Premises and with each and every part thereof, and accepts same in the condition in which they are in on the date of this Lease, and Landlord makes no representation or warranty with respect to the condition of the Demised Premises or of its fitness or availability for any particular use, and Landlord shall not be liable for any latent or patent defects therein, except as otherwise provided herein. Section 27.03. Nothing in this Lease contained shall be deemed or construed in any way as constituting the consent or request of Landlord, express or implied, by inference or otherwise, to any contractor, subcontractor, laborer or materialman for the performance of any labor or the furnishing of any materials for any specific improvement, alteration to or repair of the Demised Premises or any part thereof, nor as giving Tenant any right, power or authority to contract for or permit the rendering of such services or the furnishing of any materials that would give rise to the filing of any lien against the Demised Premises or any part thereof. 26 ARTICLE 28. LATE FEE AND CHARGES Section 28.01. Any payment required to be made by Tenant under the provisions of this Lease not paid by Tenant when and as required hereunder, shall, at Landlord's option, thereupon be deemed to be due and payable on demand with interest per annum thereon equal to five (5%) percent in excess of the Prime Rate computed from date when the particular amount became due to the date of payment thereof to Landlord. Section 28.02. In order to cover the extra expense involved in handling delinquent payments, Tenant, at Landlord's option, shall pay a "late charge" of $250.00, provided said Rent is paid more than ten days after the due date thereof. Said late charge shall be charged only once for each overdue payment. It is understood and agreed that this charge is for additional expenses incurred by Landlord and shall not be considered interest. ARTICLE 29. COMPLIANCE WITH ENVIRONMENTAL LAWS Section 29.01. Tenant agrees that it shall, at its sole cost and expense, promptly comply with all federal, state and local laws, ordinances, rules, regulations and any requirements and any directive, order or governmental instruction issued under any of the foregoing, relating to health or safety, hazardous or toxic substances or wastes, or air, ground and water pollution, protection and/or preservation of the environment (hereinafter collectively referred to as "Environmental Laws") applicable to its business and properties, wheresoever located, or its use of the Demised Premises. Section 29.02. Without limiting the foregoing, Tenant agrees: A. that it shall not allow to occur any action or omission in the Demised Premises or by it, its agents or invitees anywhere on the Property which is prohibited by or may result in any liability under any Environmental Law; B. whenever an Environmental Law requires any action of either or both of the owner or operator of the Demised Premises, Tenant shall fulfill all such obligations resulting from its activities or business at the Building at its sole cost and expense, it being the intention of the parties hereto that the Landlord shall be free of all expenses or obligations arising from or in connection with compliance with any Environmental Law with respect to such Tenant activities and Tenant shall bear all such expenses and obligations as if it is the sole owner and operator of the land and the Demised Premises; C. at its sole cost and expense to promptly discharge and remove any lien or encumbrance against the Demised Premises, the Building or any property owned or controlled in whole or in part by the Tenant, imposed by reason of Tenant's failure to comply with any Environmental Law or any provision of this Section 29.02; 27 D. to defend, indemnify and hold Landlord harmless from and against any and all liabilities, penalties, losses, expenses, damages, costs, claims, causes of actions, judgments and/or the like, of whatever nature, including but not limited to attorneys' fees and other expenses of litigation or preparation thereof however arising including any action brought under this Section 29.02, to the extent such costs arise from or are in connection with Tenant's failure to comply with any Environmental Law or any provision of this Article. Section 29.03. Within ten (10) days after a written request by the Landlord, or the Fee Mortgagee, if any, Tenant shall deliver to Landlord a duly executed acknowledged affidavit of Tenant's chief officer, certifying that the Tenant is not in violation of any Environmental Law and that no person or entity is asserting or has asserted that Tenant is or may be in violation of any Environmental Law. Tenant shall supply Landlord and the Fee Mortgagee, if any, with all information relating to any alleged or actual violation of any Environmental Law as the Landlord or Landlord's Mortgagee reasonably requests within ten (10) days of a written request for such information. Section 29.04. Tenant agrees that each and every provision of this Article shall survive the expiration or earlier termination of the Term of this Lease. The parties hereto expressly agree and acknowledge that the Landlord would not enter into this Lease but for the provision of this Article and the survival thereof. Section 29.05.A. If Tenant receives any notice of the happening of any event involving an emission, spill, release or discharge into or upon (i) the air, (ii) soils or any improvements located thereon, (iii) surface water or ground water, or (iv) the sewer, septic system or waste treatment, storage or disposal system servicing the Demised Premises, of any toxic or hazardous substances or wastes (intended hereby and hereafter to include any and all such material listed in any federal, state or local law, code and ordinance and all rules and regulations promulgated thereunder, as hazardous or potentially hazardous) (any of which is hereafter referred to as a "Hazardous Discharge"), or any complaint, order, directive claim, citation or notice by any governmental authority or any other person or entity with respect to (a) air emissions, (b) spills, releases or discharges to soils or any improvements located thereon, surface water, ground water or the sewer, septic system or waste treatment, storage or disposal systems servicing the Demised Premises, (c) noise emissions, (d) solid or liquid waste disposal, (e) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes or (f) or other environmental, health or safety matters affecting Tenant, the Demised Premises, any improvements located thereon, or the business therein conducted (any of which is hereafter referred to as an "Environmental Complaint"), then Tenant shall give immediate oral and written notice of same to Landlord, detailing all relevant facts and circumstances and, if Tenant is obligated to do so hereunder, initiate and complete all steps and actions necessary or advisable to clean up, remove, restore, resolve and minimize the impacts of the Hazardous Discharge or Environmental Complaint to the extent said Hazardous Discharge or Environmental Complaint shall have been due to a breach by Tenant of its obligations to be performed under the terms of this Lease. B. Without limitation of the foregoing, Landlord shall have the option, but shall not be obligated, to exercise any of its rights as provided in Article 13 of this Lease and may enter onto the Demised Premises and/or take any actions as 28 it deems necessary or advisable to clean up, remove, resolve or minimize the impact of, or otherwise deal with, any Hazardous Discharge or Environmental Complaint upon Landlord's receipt of any notice from any person or entity asserting the happening of a Hazardous Discharge or an Environmental Complaint on or pertaining to the Demised Premises. All costs and expenses incurred by Landlord in the exercise of any such rights shall be deemed to be additional rent hereunder and shall be payable by Tenant to Landlord upon demand, provided that Tenant is otherwise responsible for same pursuant to the terms and conditions of this Lease. ARTICLE 30. LAWS Section 30.01. This Lease shall be construed and enforced in accordance with the laws of the State in which the Demised Premises are situated. ARTICLE 31. LANDLORD'S FEES Section 31.01. Whenever Tenant requests Landlord to take any action or give any consent required or permitted under this Lease, Tenant will reimburse Landlord for all of Landlord's reasonable costs incurred in reviewing the proposed action or consent, including, without limitation, reasonable attorneys', engineers' or architects' fees, within ten (10) days after Landlord's delivery to Tenant of a statement of such costs. Tenant will be obligated to make such reimbursement without regard to whether Landlord consents to any such proposed action. ARTICLE 32. AUTHORITY Section 32.01. Each party hereto represents to the other that the representing party is authorized to execute this Lease, perform the terms and conditions set forth herein by requisite action of the board of directors, or partners, as the case may be, and agrees upon request to deliver to the other party a resolution of similar document to that effect. ARTICLE 33. FORCE MAJEURE Section 33.01. In the event that Landlord or Tenant shall be delayed, hindered in or prevented from the performance of any act required hereunder by reason of acts of God, blackouts, inability to procure materials or obtain labor, failure of power, riots, insurrection, the act, failure to act or default of a third party utility or other party contractually obligated to provide services to the Property, war or other reason beyond their control, the performance of such act shall be excused for the period of the delay and the period of or the performance of any such act shall be extended for a period 29 equivalent to the period of such delay but in no event shall this clause postpone, delay or excuse payment of Rent by Tenant to Landlord or any other sums or charges, payable by Tenant hereunder. ARTICLE 34. MODIFICATIONS TO LEASE Section 34.01. If, in connection with obtaining financing for the Building, any bank, insurance company or other lending institution shall request reasonable modifications in this Lease as the conditions of such financing, Tenant will not unreasonably withhold, delay or defer its consent hereto, provided that such modifications do not increase the obligations of Tenant hereunder or materially adversely effect the leasehold interest hereby created. ARTICLE 35. HOLDING OVER Section 35.01. If Tenant holds over after the term of this Lease, and fails to vacate the Demised Premises after the expiration or sooner termination of this Lease for any cause or after Tenant's right to occupy the same ceases, thereafter, and notwithstanding anything to the contrary contained elsewhere in this Lease, such tenancy shall be a tenancy in sufferance terminable immediately by Landlord upon notice to Tenant and by Tenant upon thirty (30) days notice to Landlord, and Tenant shall be liable to Landlord for Fixed Rent at twice the monthly installment of Fixed Rent as provided in this Lease for the last month of the term hereunder in addition to Taxes, and all other charges required herein. If the Demised Premises are not surrendered at the end of the term, Tenant shall be responsible to Landlord for all damage which Landlord shall suffer by reason hereof, and Tenant hereby indemnifies Landlord against all claims made by any succeeding tenant against Landlord, resulting from delay by Landlord in delivering possession of the Demised Premises to such succeeding tenant. ARTICLE 36. SIGNS Section 36.01. Other than for the existing signage, the location, design and content of any signs hereafter located at the Demised Premises, other than the existing signage, shall be approved by Landlord, in its reasonable discretion. Any signs placed by the Tenant at the Demised Premises shall at all times conform to all applicable requirements of governmental authorities having jurisdiction and Tenant shall obtain any necessary permits for such purposes. Tenant shall be responsible for the cost of all repairs, replacement or maintenance of signs at the Demised Premises. Prior to the expiration or sooner termination of this Lease, Tenant shall, upon notice from Landlord, remove any signs requested by Landlord not less than ten (10) days prior to the expiration or sooner termination of this Lease. 30 ARTICLE 37. EXECUTION OF LEASE Section 37.01. The Lease shall be of no force and effect unless and until it is executed by both Landlord and Tenant. ARTICLE 38. WAIVERS BY TENANT Section 38.01. Tenant, for itself, and on behalf of any and all persons claiming through or under it, including creditors of all kinds, does hereby waive and surrender all right and privilege which they or any of them might have under or by reason of any present or future law, to redeem the Demised Premises or to have a continuance of this Lease for the term hereby after having been dispossessed or ejected therefrom by process of law or after the termination of this Lease as provided herein. Section 38.02. Tenant hereby waives the right to trial by jury in any action, summary proceeding, legal proceeding or counterclaim between or among the parties hereto or their successors or assigns on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use of or occupancy of the Demised Premises and any emergency statutory or any other statutory remedy. Section 38.03. Supplementing and in furtherance of the provisions of Section 38.02, hereof, Tenant hereby waives the right to interpose a counterclaim of whatever nature or description (other than counterclaims which are compulsory in nature) in any summary proceeding instituted by Landlord against Tenant for possession of the Demised Premises or in any action or proceeding instituted by Landlord for unpaid Fixed Rent, additional rent or other sums or charges payable by Tenant under this Lease. Section 38.04. In the event Tenant claims or asserts that Landlord has violated or failed to perform a covenant of Landlord not to unreasonably withhold or delay Landlord's consent or approval, or in any case where Landlord's reasonableness in exercising its judgment is in issue, Tenant's sole remedy shall be an action for specific performance, declaratory judgment or injunction and in no event shall Tenant be entitled to any money damages for a breach of such covenant and in no event shall Tenant claim or assert any claims in any money damages in any action or by way of set off, defense or counterclaim (other than counterclaims which are compulsory in nature) and Tenant hereby specifically waives the right to any money damages or other remedies. 31 IN WITNESS WHEREOF, Landlord and Tenant have duly executed and delivered this Lease as of the day and year first above written. LANDLORD: 180 LINDEN REALTY, LLC By: /s/ ------------------------------------------------- Name: Scott Burman Title: Manager TENANT: VASOMEDICAL, INC. By: /s/ ------------------------------------------------- Name: John C. K. Hui Title: President 32 EXHIBIT A Rent Schedule
- ---------------------------------------- -------------------------------------- -------------------------------------- Year Per Month Per Annum - ---------------------------------------- -------------------------------------- -------------------------------------- ______1________ $11,551.50 $138,618.00 - ---------------------------------------- -------------------------------------- -------------------------------------- ______2________ $12,013.56 $144,162.72 - ---------------------------------------- -------------------------------------- -------------------------------------- ______3________ $12,494.10 $ 149,929.63 - ---------------------------------------- -------------------------------------- -------------------------------------- 4 $12,993.87 $155,926.40 - ---------------------------------------- -------------------------------------- -------------------------------------- 5 $13,513.62 $162,163.45 - ---------------------------------------- -------------------------------------- --------------------------------------
33 EX-23 4 vaso10k07-ex23.txt ACCOUNTANT'S CONSENT Exhibit 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated August 23, 2007, accompanying the consolidated financial statements and schedule included in the Annual Report of Vasomedical, Inc. and Subsidiaries on Form 10-KSB for the fiscal year ended May 31, 2007. We hereby consent to the incorporation by reference of said report in the Registration Statements of Vasomedical, Inc. and Subsidiaries on Forms S-8 (File No. 333-86152, effective April 12, 2002, File No. 333-42692, effective August 1, 2000, File No. 333-85457, effective August 18, 1999, File No. 333-85455, effective August 18, 1999, File No. 333-60471, effective August 3, 1998). /s/ Miller Ellin & Company, LLP MILLER ELLIN & COMPANY, LLP New York, New York August 23, 2007 EX-31 5 vaso10k07ex31.txt CERTIFICATIONS Exhibit 31 CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14(A)/15D-14(A) I, John C.K. Hui, certify that: 1. I have reviewed this report on Form 10-KSB of Vasomedical, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15e) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 23, 2007 /s/ John C.K. Hui John C.K. Hui President and Chief Executive Officer CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14(A)/15D-14(A) I, Tricia Efstathiou, certify that: 1. I have reviewed this report on Form 10-KSB of Vasomedical, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15e) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 23, 2007 /s/ Tricia Efstathiou Tricia Efstathiou Chief Financial Officer EX-32 6 vaso10k07ex32.txt CERTIFICATIONS Exhibit 32 CERTIFICATION OF PERIODIC REPORT I, John C.K. Hui, President and Chief Executive Officer of Vasomedical, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-KSB of the Company for the fiscal year ended May 31, 2007, (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 23, 2007 /s/ John C.K. Hui ------------------------------------- John C.K. Hui President and Chief Executive Officer I, Tricia Efstathiou, Chief Financial Officer of Vasomedical, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-KSB of the Company for the fiscal year ended May 31, 2007, (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 23, 2007 /s/ Tricia Efstathiou ------------------------------------- Tricia Efstathiou Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----