U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934. (FEE REQUIRED).
For the fiscal year ended September 30, 1995
__________________________________________________
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. (NO FEE REQUIRED).
For the transition period from to
_________________________ _________________
Commission file number 0-14210
_____________________________________________
COMPUMED, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 95-2860434
___________________ __________________________________
(State of Incorporation or (I.R.S. Employer Identification No.)
Organization)
1230 Rosecrans Avenue, Suite 1000, Manhattan Beach, California 90266
___________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(310) 643-5106
___________________________________________________________________________
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
COMMON STOCK PURCHASE WARRANTS
___________________________________________________________________________
Title of Class
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months), and (2) has been subject to such filing requirements for the past
90 days.
[X] YES [ ] NO
Check if there is no disclosure of delinquent filers in response 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. [ ]
As of December 26, 1995, 8,345,668 common shares were outstanding and the
aggregate market value of the common shares (based upon the average bid and
asked prices on such date) of the Registrant held by nonaffiliates was
approximately $36,050,000.
Revenues for the fiscal year ended September 30, 1995 totaled $3,010,000.
Documents incorporated by reference: Certain responses to Part III are
incorporated herein by reference to information contained in the Company's
definitive proxy statement for its 1996 annual meeting of stockholders to
be filed with the Securities and Exchange Commission on or before January
29, 1996.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
CompuMed, Inc. (the "Company") was incorporated in the State of
Delaware on July 21, 1986. The Company is a medical systems company
engaged primarily in the application of computer technology to medicine.
The main aspects of the Company's business are (i) the licensing of its
proprietary technology in the OsteoGramR, a bone density test that was
developed by the Company as a means of aiding physicians in diagnosing and
monitoring osteoporosis, (ii) the computer interpretation of
electrocardiograms ("ECGs"), (iii) TeleCor Services Division ("TeleCor"),
which is engaged in transtelephonic cardiac event monitoring, and (iv) the
development of DetoxaholTM, a substance and delivery technology intended to
facilitate the rapid lowering of blood alcohol levels of people who have
been drinking alcohol. In addition, the Company owns and manages a small
industrial park complex located in the Los Angeles area.
Major business developments that have occurred over the past twelve
months include the private placement of $5.1 million worth of the Company's
Common Stock, $.01 par value ("Common Stock"), and the Company's OsteoGramR
licensing arrangement with Merck & Co., Inc. ("Merck") pursuant to which
the Company has licensed its proprietary technology in the OsteoGramR to
Merck and has sold Merck certain assets used in conducting and analyzing
OsteoGramsR (such assets together with the proprietary technology are
hereinafter referred to as the "OsteoSystem"). The financing will enable
the Company to accelerate its research and development efforts for a second
generation OsteoSystem. Management expects its near-term growth to come
from the licensing of the OsteoGramR and intends to solidify its position
in the bone density testing field with the development of a second
generation OsteoSystem.
THE OSTEOGRAMR
The OsteoGramR is a bone density test developed by the Company, which
involves taking a standard hand X-ray with an aluminum alloy calibration
wedge in the field of view utilizing existing and widely available standard
X-ray equipment. Physicians utilizing the OsteoGramR X-ray the patient's
hand and then the developed film is analyzed by Merck with proprietary
software to accurately determine bone density, using the calibration wedge
to adjust for any differences among X-ray machines, exposures, types of
film and development. An OsteoGramR report is then delivered to the
patient's physician.
The scientific name for the testing technique utilized by the
OsteoGramR is radiographic absorptiometry. It is capable of detecting
changes in bone mineral density as small as approximately 1.5%. Since
1985, the OsteoGramR has been cleared for reimbursement by Medicare. To
the best of the Company's knowledge, the OsteoGramR is the only bone
density test that can be performed without any specialized medical
equipment. The OsteoGramR can be taken using an OsteoGramR Starter Kit
with standard X-ray equipment which could be found at any of an estimated
100,000 locations in the U.S., including hospitals, clinics and doctors'
offices. The OsteoGramR Starter Kit includes a proprietary aluminum alloy
calibration wedge, instructions, billing information, and pre-addressed
envelopes for mailing developed X-rays of the hand to a Merck facility for
scanning and computer analysis.
MERCK LICENSE AGREEMENT
On September 22, 1995, the Company entered into a Technology License
Agreement with Merck, effective September 27, 1995 (the "Merck License
Agreement"), pursuant to which Merck has been granted a perpetual,
exclusive license of the OsteoSystem. The Company understands that Merck
will offer the OsteoGramR and related services to physicians on a per-test
basis. The Company will receive a royalty payment from Merck for each
OsteoGramR test sold by Merck to a physician during the years 1996 through
2000 at which time royalties shall cease. The royalties will escalate from
$2 to $4 per test over that period. The royalty payments are not capped
for years 1996 through 1998, but they are subject to a cap in 1999 equal to
the lesser of ten percent of Merck's total collected revenues for that year
or $3 million and a cap in year 2000 equal to the lesser of ten percent of
Merck's total collected revenues for that year or $4 million. The Company
is not entitled to a minimum royalty payment. Since the Merck License
Agreement provides Merck with full control over the operation of, marketing
and sales for, the OsteoSystem, the Company does not have a basis to
adequately estimate the amount of revenues that it will receive as
royalties over the term of the Merck License Agreement. Merck has the
right to terminate the Merck License Agreement at any time without cause.
The Company received a $250,000 payment upon entering into the
Merck License Agreement as a one-time fee plus an amount equal to the book
value of certain OsteoSystem-related equipment sold to Merck, including
computer equipment, office equipment and high-tech imaging equipment,
subject to a $175,000 limit. Merck is required to spend $750,000
(including expenditures made by Merck prior to entering into the Merck
License Agreement) over the first three years of the Merck License
Agreement for product development, regulatory compliance and clinical
studies in connection with the OsteoSystem; provided, however, that none of
such expenditures need be made with the Company and the Company is required
to pay Merck the sum of $250,000 for the first year of the Merck License
Agreement as a contribution toward Merck's costs and expenses incurred in
marketing and marketing support for the OsteoSystem.
The Company has retained the right to perform developmental work on
the proprietary technology licensed to Merck and thereby form a second
generation OsteoSystem. The Company has begun to research and develop a
second generation OsteoSystem and has been involved in negotiations with
other parties with respect to the development of a specialized X-ray device
and the use of new technology for the second generation OsteoSystem. The
Company intends to license any second generation OsteoSystem developed by
it. The Company's right to license a second generation OsteoSystem is
subject to a right of first refusal held by Merck, which requires the
Company to notify Merck of (i) any second generation prototypes that are in
the developmental stage and (ii) any completed second generation products
and gives Merck the right to negotiate with the Company on an exclusive
basis over a period of sixty days (A) the terms under which Merck would
fund the development stage prototype or (B) the terms under which Merck
would acquire an exclusive license to the completed second generation
product.
In connection with entering into the Merck License Agreement, the
Company paid $100,000 and issued five year warrants for the purchase
of 83,000 shares of the Company's Common Stock at an
exercise price of $2.50 per share to Skeletal Assessment Services Co.
("SASCO") and forgave $30,000 of indebtedness owed to it by SASCO as
a modification of payments due to SASCO for assets the Company purchased
from SASCO in 1991 in connection with the development of the
OsteoSystem. In addition, the Company agreed to pay SASCO, as
additional consideration for such modification, eight percent (8%)
of all royalties paid by Merck to the Company under the Merck License
Agreement and extended by five years the term of warrants to purchase
64,000 shares of the Company's Common Stock at an exercise price of
$2.50 issued to SASCO under the Company's original agreement
with SASCO.
INTERNATIONAL OSTEOSYSTEM SALES
Product sales increased in 1995 as the result of the sale of
OsteoSystem processing units to companies in Mexico, Switzerland and the
Netherlands. The Company's rights under agreements with such companies
have been assigned to Merck in connection with the Merck License
Agreement. The Company will benefit from any additional foreign sales
indirectly in the form of royalties that may be receivable from Merck
pursuant to the Merck License Agreement.
OTHER OSTEOPOROSIS DETECTION AIDS
The only present methods used to assist physicians in detecting
osteoporosis are bone mineral density measurement and bone biopsy. Because
of patient risk, pain and cost, the latter method is rarely used. Bone
mineral density is measured by passing nuclear radiation or X-ray beams
through bone and determining how much energy is absorbed by the bone. In
classical techniques a carefully calibrated source enables determination of
how much energy is absorbed by the bone before reaching the detector. The
use of a calibrated source necessitates the purchase of costly special
equipment for bone density measurement.
TREATING OSTEOPOROSIS
Osteoporosis treatment alternatives include estrogen replacement
therapy, calcitonin, bisphosphonates, diet, calcium supplements,
weight-bearing exercises. In addition, many new medication alternatives
such as Merck's FosamaxTM are being offered as alternative treatments for
osteoporosis.
Pharmaceutical companies have estimated that only about 5% of patients
requiring medical treatment for osteoporosis receive prescriptions today.
They ascribe this low treatment level to a lack of knowledge about
osteoporosis by the primary care physician and the patient, limited
availability of convenient affordable tests for osteoporosis, limited
amount of FDA approved medications and poor patient compliance when
medication is prescribed. The OsteoGramR introduces a convenient
affordable test for osteoporosis.
Current FDA approved medications for osteoporosis include the female
hormone estrogen, in pill and patch forms, and the bone metabolism hormone,
calcitonin, administered by injection or through a nasal spray. The
estrogen pill market is dominated by Premarin (American Home Products) and
also includes Estrace (Bristol Myers Squibb Company), Ogen (The Upjohn
Company) and Ortho-EST (Johnson & Johnson). The estrogen transdermal patch
is produced by Estaderm (CIBA-Geigy Limited Group). Approved calcitonin
medications are Calcimar (Rhone Poulenc Rorer Pharmaceuticals, Inc.) and
Miacalcin (Sandoz Pharmaceutical Corporation). Estrogen medication is also
approved for problems associated with menopause, such as hot flashes.
COMPETITION
The OsteoGramR competes with specialized capital equipment used for
bone density measurement such as single photon absorptiometry nuclear
scanners (SPA), dual photon absorptiometry nuclear scanners (DPA),
quantitative computed tomography scanners (QCT) and dual energy X-ray
absorptiometry scanners (DXA). Of these techniques, only the OsteoGramR
and SPA are currently approved for Medicare reimbursement. There are
several manufacturers of bone density testing equipment. The most popular
of these technologies is DXA, which is manufactured principally by Hologic,
Inc., Lunar Corp., and Ostech, Inc.
Management believes that the OsteoGramR has several competitive
advantages over other existing bone density tests, including that the
OsteoGramR is the only test for the measurement of bone density that can be
administered using standard X-ray equipment. This factor alone makes the
OsteoGramR available to large segments of the population who cannot, or
will not, go to hospitals or radiology centers that have specialized
capital equipment to measure bone density. The OsteoGramR also provides an
easy "low cost" way for primary care physicians, who have patients at risk
for osteoporosis, to initiate the first steps for testing and treating the
disease. The per test cost of the OsteoGramR is approximately one-third
that of the DXA scanners, which also require capital investments of up to
approximately $100,000 or a long-term leasing arrangement and have no
function other than testing bone density.
Many radiology centers (in hospitals and free standing) may consider
their services to be in competition with the OsteoGramR because of their
capital investment in expensive bone scanning equipment. However,
management believes that because the OsteoGramR is more widely available as
a result of the accessibility of standard X-ray devices and is relatively
lower in cost, it should appeal to a larger market. In addition, some
radiology centers offer the OsteoGramR as a complement to other bone
density scanning tests.
There is no assurance that other companies, some of which are better
known and financed than the Company, will not develop tests similar to the
OsteoGramR which also use X-ray devices or some other widely-available
devices or equipment to test bone density.
ECG SERVICES
GENERAL
Through its ECG computer diagnostic services, the Company currently
serves approximately 1,600 health care providers nationwide. The Company
provides primary care physicians, clinics, institutions, small hospitals
and industrial health care facilities with a line of fully-automated,
solid-state microprocessor terminals, which access the Company's five host
computers and custom software to provide medical users with on-line ECG's
and computer interpretations, in less than three minutes. The Company's
ECG terminal products are connected by phone to its ECG analysis computer
center. Physicians, nurses or technicians can apply ECG electrodes on a
patient at their office, transmit the ECG by phone to the Company, and
receive a printed computer interpretation within three minutes. The
principal ECG terminal models are the System 107 and System 307, both
designed and manufactured by the Company. System 107 uses with single-
channel trace printout for low to moderate volume applications. System 307
adds a thermal graphics printer to generate an 8.5 x 11-inch unit record
for high volume accounts. Both units are available for either rental or
sale. System 307 offers a Pulmonary Function Analysis option for
performing pulmonary tests as well as ECGs.
The Company provides physicians with what it believes to be the most
up-to-date electrocardiography interpretation software programs available.
The software is customized and periodically updated by the Company, with
the advice of its Cardiology Advisory Board. The Company has no formal
agreements with the members of its Cardiology Advisory Board and such
members are not contractually obligated to spend any time on the affairs of
the Company.
ECG analysis services are available to users by telephone 24 hours a
day, seven days a week. The computer center located on site at the
Company, which is staffed at all times, currently includes five on-line
computers, with a sixth used for backup and off-line research and
development. The Company has also contracted with Sisters of Providence
Medical Center of Seattle, Washington, to provide processing and to
interpret ECG's for certain ECG accounts. Pursuant to the agreement with
Sisters of Providence Medical Center, the medical center provides
computerized ECG analysis to subscribers on a continuous twenty-four hour
per day basis at a specified rate and emergency overread and routine
overread services to subscribers at rates published by the Company. In
addition to basic ECG analysis, the Company offers its customers a range of
optional services, including ECG overreads (reviews by a cardiologist),
network transmission (to a local cardiologist with a special remote
printer), FAA transmission (for FAA examiners performing pilot physicals),
and long-term storage of ECGs on laser optical disk.
Upon the request of a physician, the Company provides the services of
a cardiologist to assist the attending or examining physician in
overreading the ECG interpretation for a fee, which is billed by the
Company directly to the physician. The Company periodically retains
cardiologists from Harbor-UCLA Medical Center and Sisters of Providence
Medical Center for advice regarding its ECG interpretation software
programs and to perform overreads of certain ECG readings. Presently, two
cardiologists from such medical centers are parties to consulting
agreements with the Company. Michael Laks, M.D. is the Chairman of the
Company's Cardiology Advisory Board, a director of the Heart Station of
Harbor-UCLA Medical Center, Professor of Medicine at UCLA Medical School
and President of the International Society for Computerized
Electrocardiography. James Clifton, M.D. is a Director of Non-Invasive
Cardiology at Sisters of Providence Medical Center.
The Company's current liability insurance policy does not cover losses
due to erroneous overreads. Medical professional liability claims which
may be brought against the Company for erroneous overreads, which are not
covered by or exceed the coverage amount of a medical professional
liability insurance policy held by the physician performing the overread,
could have a material adverse effect on the Company's business, financial
condition or operating results. Since commencing ECG services, no medical
professional liability claims have been made against either physicians who
perform overreads for the Company or the Company with respect to erroneous
overreads.
The Company offers physicians a full range of disposable
cardiopulmonary supplies including electrodes, ECG recording paper, gel,
and patient cables.
MARKETING
The Company's sales efforts for its ECG products and services are
aimed principally at primary care physicians, clinics, institutions, small
hospitals and industrial health care facilities.
The Company's revenues are generated mostly by the Company's direct
sales efforts. Approximately 5% of the Company's revenues result from non-
exclusive commissioned dealers who are independent contractors and receive
commissions ranging from twenty to thirty-five percent of the sales
generated by such persons. The Company markets products to the health care
facilities of large national companies such as Ingersoll-Rand Corporation,
Ethyl Corporation, General Motors Corporation, and other multi-installation
users such as major governmental institutions and agencies, including
prisons. The Company attends national and regional medical conventions to
generate leads for its services, equipment and supplies.
System 107 and System 307 are sold directly to the Company's clients
at a cost of approximately $3,500 or 5,000, respectively, or leased on a
fee-for-use basis to medical users. A user who leases, commits to a
minimum monthly payment of $100 or $200 for the System 107 and System 307,
respectively, for a minimum period of one year. The Company does not
require the payment of a security deposit upon leasing a System 107 and
System 307. Maintenance of the leased ECG system is provided by the
Company at no additional cost as part of the leasing arrangement. The
charge for ECGs in excess of those included in the monthly fee varies with
the volume of usage.
COMPETITION
The computer interpreted ECG business has attracted a number of
companies, domestic and foreign. A number of medical equipment
manufacturers are presently offering ECG terminals and systems, some of
which perform computer-assisted ECG analysis. Some of these competitors
market their products primarily to hospitals, whereas the Company markets
primarily to physicians' offices and government and industrial health care
facilities. The Company estimates that its form of business, computerized
ECG analyses via a service bureau, constitutes only 1.5% of the total
number of ECGs taken each year in the United States. As of 1994, the
Company had approximately 30% of this service bureau market. Its major
competitor, Merx Diagnostics, Inc. has about 40% and a number of smaller
companies share the balance of the market. The principal methods under
which the Company competes are service, product and software performance,
and price.
ASSEMBLY, REPAIR AND CUSTOMER SERVICE
Assembly operations conducted by the Company are typical of the
electronics industry and require no extraordinary methods, procedures or
equipment. The Company's systems consist primarily of a number of
electronic component parts assembled on Company-designed printed circuit
boards, as well as printer and recorder components. The bare circuit
boards, which are modified by the Company prior to use, are manufactured
for the Company by different manufacturers, including Century Circuit Corp
and Abaca Manufacturing Contractor. The Company has never experienced any
problems with the quality of the bare circuit boards manufactured for it
and the manufacturers have been able to maintain a readily available supply
of bare circuit boards that meets the Company's demand for such product.
The component parts, except for the finished circuit boards, sheet metal
chassis and equipment cases, are standard items. After assembly, the
Company's systems undergo extensive testing by personnel skilled in the
electronics industry before they are sold or leased. The Company has
developed several types of specialized tests to facilitate this process and
does limited internal engineering for continuing support and new product
development. All assembly operations are conducted at the Company's
headquarters in the Los Angeles area. Quality control procedures used in
testing the products have been approved by the FDA and are subject to
yearly inspections by the FDA.
The Company provides a one year warranty on its ECG systems. All of
the equipment is repaired at the Company's facility. Loaner equipment is
available under the Company's maintenance programs and leasing
arrangements.
The Company uses a "hot line" and customer service staff to handle
most customer equipment and training problems. Initial installation and
set up is handled with videotape, and in some instances with visits by
customer service sales or distributor personnel. The Company's customer
support services are an important aspect of the ultimate successful
installation and operation of its products, which are sold with a warranty
covering both parts and labor.
TELECOR
In February 1995, the Company entered into an Assignment of Exclusive
Marketing Rights Agreement (the "Assignment") with Jacob Meller, the holder
of the exclusive marketing rights in the United States for TeleCor products
pursuant to a Licensing Agreement (the "TeleCor Licensing Agreement") with
Aerotel Ltd, a medical device and telecommunications company based in
Holon, Israel ("Aerotel"). The TeleCor Licensing Agreement will be
terminated as of January 1996 because the Company failed to meet certain
minimum sales amounts in 1995. Aerotel, however, has agreed to extend the
license on a non-exclusive basis directly with the Company. Such
arrangement is terminable at any time by Aerotel, however, other event
recorder devices may be purchased in lieu of Aerotel event recorders.
TeleCor is a division of the Company which offers physicians
transtelephonic cardiac event monitoring equipment and services for their
patients. The Company provides physicians with a pocket-sized cardiac
event recorder, which is a device that continuously monitors the
physician's patients' heart rate and rhythms to detect arrhythmias and
other cardiac abnormalities, and other supplies. The physician gives the
patient the cardiac event recorder and instructs the patient to either wear
the cardiac event recorder continuously over an extended period of time and
call in for a reading in the event of a specified cardiac event or wear the
cardiac event recorder for a shorter period of time after a cardiac event
has occurred so that multiple cardiac readings can be taken and compared.
The Company's technicians transtelephonically monitor signals received from
the cardiac event recorder.
The telemetry technicians who monitor the results of the event
recorders have all attended two-year training programs in ECG monitoring.
In the event of a cardiac abnormality, the patient's attending physician
will consult with the Company's TelCor Services Division physician, who may
perform an overread.
The Company's current liability insurance policy does not cover losses
due to erroneous overreads. Medical professional liability claims which
may be brought against the Company for erroneous overreads, which are not
covered by or exceed the coverage amount of a malpractice insurance policy
held by the physician performing the overread, could have a material
adverse effect on the Company's business, financial condition or operating
results. Since the commencement of the TeleCor Division, no medical
professional liability claims have been made against physicians who perform
overreads for the Company or the Company with respect to erroneous
overreads.
The Company has retained James Clifton, M.D. to provide TeleCor
overreads. Dr. Clifton is a Director of Non-Invasive Cardiology at Sisters
of Providence Medical Center.
TeleCor analysis services are available to users by telephone 24 hours
a day, seven days a week. The computer center used for TeleCor analysis
services is the same center used for ECG services. The computer center is
staffed at all times, currently includes five on-line computers, with a
sixth used for backup and off-line research and development. The Company
provides physicians who subscribe to TeleCor, free of charge, a full range
of disposable cardiopulmonary supplies, including electrodes, and other
miscellaneous supplies.
MARKETING
The Company's sales efforts for TeleCor are aimed principally at home
health agencies and primary care physicians.
Marketing for TeleCor is handled exclusively by the Company. As with
its ECG Services, the Company attends national and regional medical
conventions to generate leads for its services, equipment and supplies.
The Company sells and leases the cardiac event monitor and related
equipment required to obtain TeleCor services. As part of the leasing
arrangement, the Company provides the services of a board-certified
cardiologist to assist the attending or examining physician in overreading
the TeleCor interpretation.
COMPETITION
The TeleCor business, like the ECG services, has attracted a number of
companies, domestic and foreign. The Company's major competitors in the
field of cardiac event monitoring include Instromedix, Inc. and Raytel
Medical Corp., which have approximately 75% of the market, with
approximately 20 other companies having the remaining 25% of the market.
DETOXAHOLTM
In March 1994, the Company acquired the rights to a potential new
pharmaceutical product called DetoxaholTM through the acquisition of MB
Nutraceuticals, Inc. ("MB"). In June 1995, a patent application was filed
on behalf of the Company covering the technology underlying DetoxaholTM.
DetoxaholTM is a substance intended to facilitate the rapid lowering of
blood alcohol of people who have been drinking alcohol. DetoxaholTM is
currently under development at the University of Georgia, with the Company
funding the research and development. DetoxaholTM is intended to augment
the liver's natural function of removing alcohol from the blood by creating
an "auxiliary liver function" in the small intestine. Its efficacy would
depend on the amount of DetoxaholTM taken compared to the amount of alcohol
consumed; since large doses of DetoxaholTM can be taken, alcohol
detoxification would occur quickly.
There is no assurance that the Company will continue to develop
DetoxaholTM technology or that if any DetoxaholTM product is ultimately
developed by the Company such product will be cleared by the appropriate
regulatory agencies.
Management expects that the initial market for DetoxaholTM would be
for emergency rooms and ambulances as well as niche markets in the far
east. Management does not know of any other current method or existing
drug or product that would rapidly remove alcohol from the blood. However,
there is no assurance that other universities and/or pharmaceutical
companies are not currently working on a similar drug or product. The
DetoxaholTM compound is currently in the development phase with pre-
clinical testing expected to begin in 1996.
Before commencing marketing and sales efforts for DetoxaholTM or any
DetoxaholTM product that is eventually developed by the Company, the
Company must obtain FDA clearance of DetoxaholTM. The FDA and
corresponding regulatory bodies in other countries require that the drug
for which clearance is sought be shown to be safe and effective in
adequately controlled clinical trials. Prior to initiation of clinical
trials, extensive basic research and development information must be
submitted to the FDA in an Investigational New Drug Application ("IND").
If clearance is obtained to proceed to clinical trials based on the IND,
Phases 1 through 3 clinical trials are performed. If Phases 1 through 3
are successfully completed, the data from these trials is collected into a
New Drug Application ("NDA"), which is filed with the FDA in an effort to
obtain marketing clearance. The FDA reported industry average for
intervals between filing of an IND and submission of an NDA is about five
years and about two years between NDA filing and FDA clearance. If a drug
is designated for fast track clearance the process can be faster. Since
pre-clinical testing of DetoxaholTM has not yet commenced, it is premature
to estimate when the Company will file an IND with respect to DetoxaholTM,
assuming the Company decides to continue to develop DetoxaholTM.
Pursuant to a Research Agreement with the University of Georgia,
through December 31, 1995 the Company will have funded $260,000 for the
research and development of DetoxaholTM, which includes expenses associated
with the filing of a patent application for DetoxaholTM. The Company has
agreed to fund up to an additional $740,000 over the next year of which
$250,000 will be released only for FDA preclinical testing if the results
of the research of the project are satisfactory to the Company and the
University. Upon material breach or default of the Research Agreement by
the Company, the University of Georgia has the right upon notice to
terminate the Research Agreement and all of the rights and privileges of
the Company thereunder, including the Company's licensing rights, unless
the Company cures the breach within a specified period. Pursuant to the
terms of the Research Agreement, the University of Georgia retains all
right and title to any DetoxaholTM product developed by it, subject to the
terms and conditions of an Exclusive License Agreement, dated as of January
3, 1994 (the "Detoxahol License Agreement"), between the parties. Pursuant
to the Detoxahol License Agreement the Company has received an exclusive,
perpetual, worldwide license to use, make and sell any DetoxaholTM products
developed by the University of Georgia and the University of Georgia is
entitled to royalty payments based on the annual net sales resulting from
each sale of a licensed DetoxaholTM product of 5% of the first $1 million,
4% of the second $1 million, 3% of the third $1 million and 2% of all
additional net sales up to an aggregate royalty amount of $ 1 million.
Thereafter, the Company must pay the University of Georgia 2% of all net
sales. In addition to the royalties payable under the Detoxahol License
Agreement, the Company must also bear all expenses incidental to the filing
and upkeep of a DetoxaholTM patent.
INDUSTRIAL PROPERTY - IRSCO DEVELOPMENT COMPANY, INC.
In August 1994, the Company acquired Irsco Development Company, Inc.
("Irsco") whose principal asset is a 6.3 acre industrial park, consisting
of nine buildings comprising a total of 118,270 sq. ft. plus parking (the
"Irsco Property"). The buildings have been divided into 25 separate units,
ranging from 1,900 sq. ft. to 10,000 sq. ft. The property is located in
Irwindale, California, approximately 18 miles from downtown Los Angeles.
The units of the industrial park are rented to commercial tenants.
Presently, approximately 80% of the units are rented at current market
rates and management is making efforts to find tenants for the remaining
vacant units. The total costs associated with owning and operating the
Irsco Property, including debt service, were $419,000 in 1995 as compared
with $50,000 in 1994 with rental proceeds of $431,000 in 1995 and $66,000
in 1994. The depreciation taken by Irsco on the Irsco Property was
$197,000 in 1995 and $24,000 in 1994. The costs, rental proceeds and
depreciation taken in 1994 is for the period commencing on the date the
Company acquired Irsco, August 12, 1994, and ending on September 30, 1994.
The Company acquired Irsco in exchange for 52,333 shares of the
Company's $3.50 Series B Convertible Preferred Stock (the "Preferred
Stock"). As a result of a one-for-ten reverse stock split, each share of
Preferred Stock is convertible into ten shares of the Company's Common
Stock. The Preferred Stock is presently redeemable by the Company upon
thirty days notice, at a price of $3.85 per share. In addition to the
Preferred Stock, the Company issued warrants to purchase 22,000 shares of
Common Stock at an exercise price of $3.75 per share expiring in August
1999.
On November 29, 1995, Irsco received two Notices of Default and
Election to Sell Under Deed of Trust, dated November 16, 1995
(collectively, the "Notices of Default"). The Notices of Default involve
claimed defaults by Irsco on (i) a Second Deed of Trust, dated December 16,
1986, between Irsco and Max Guefen, as substituted trustee, to secure
obligations in favor of IRSC Shareholders Liquidating Trust successor in
interest to Interstate Restaurant Supply Company, Inc. in the amount of
$139,684 (the "Second Deed of Trust") and (ii) a Third Deed of Trust, dated
August 12, 1994, between Irsco and Max Guefen, as substituted trustee, to
secure obligations in favor of Eric Guefen and Winston and Roslyn Millet
Family Trust in the amount of $505,485 (the "Third Deed of Trust" and
together with the Second Deed of Trust, the "Deeds of Trust"). The Deeds
of Trust are both secured by the Irsco Property. The Notice of Default
under the Second Deed of Trust claims that Irsco breached its obligations
thereunder by failing to pay the principal sum of $136,878, which came due
on August 13, 1995, with accrued interest from July 13, 1995, plus related
fees and costs of the trustee. The Notice of Default under the Third Deed
of Trust claims that the default under the Second Deed of Trust constitutes
a default under the Third Deed of Trust, and consequently Irsco is in
default in the principal amount of $470,000 plus accrued interest of
$35,849 and related costs of the trustee.
Irsco has not received notice of default under the Secured Promissory
Note, dated December 31, 1986 (the "Note"), by Irsco in favor of the
Principal Mutual Life Insurance Company. The Note, which secures
obligations in the outstanding amount of $2,971,489, gives the holder
thereof a security interest in the Irsco Property, which ranks prior to the
security interest created by the Deeds of Trust. Defaults under the Deeds
of Trust constitute a default under the Note. Consequently, the holder of
the Note has the option of accelerating amounts owed thereunder.
Irsco and the Company have been evaluating their options in relation
to the Irsco Property. Based upon the results of this evaluation Irsco and
the Company will determine whether to oppose the foreclosure. Irsco
has until February 14, 1996 to respond to the Notices of Default.
At the end of fiscal year 1995, based on impairment indicators, the
Company recorded a write down on the Irsco Property of $1.5 million to
reduce the carrying value of such property to net realizable value.
GOVERNMENT REGULATION
The Health Care Finance Administration approves diagnostic tests for
reimbursement by Medicare. The OsteoGramR and the Company's ECG and
TeleCor Services have been approved for reimbursement by Medicare.
Government regulations may change at any time and Medicare reimbursement
for the OsteoGramR or the Company's ECG or TeleCor services may be
withdrawn or reduced. Furthermore, other forms of testing for bone mineral
density as an indicator of osteoporosis and/or services similar to the
Company's TeleCor and ECG Services may be approved for reimbursement and
may reduce the market share or profit margins for such services.
Congress and President Clinton are presently at an impasse over
Congress' proposed long-term budget bill. President Clinton has vetoed the
measure on the grounds that, among other things, benefits like Medicare and
Medicaid would be limited. The Company cannot predict the outcome of this
debate or the effect that it may have, if any, on the approval for
reimbursement by Medicare of the OsteoGramR or the Company's ECG or TeleCor
services.
The FDA registers medical devices used for diagnostic testing and
pharmaceutical products for safety and efficacy. In December 1993, the FDA
issued a "Warning Letter" to the Company relating to the OsteoGramR (the
"Warning Letter"). The Warning Letter primarily concerned two areas. One
concern of the FDA was labeling. The FDA has required all companies
involved in the measurement of bone density to eliminate from their
advertising reference that such measurements can "detect osteoporosis." In
order to comply with this FDA requirement the Company has removed the
reference to "detection of osteoporosis" from all of its advertising
literature. The second concern of the FDA was the Company's lack of
documentation relating to an exemption for the Company from the 510-K
filing requirements. The OsteoGramR was in use prior to 1976 when the 510-
K regulations were established concerning certain medical devices and thus
the Company believes that the OsteoGramR is "grand-fathered" in without
having to file under 510-K. In addition, the Company considers the
OsteoGramR to be a medical service, which in the opinion of management and
its consultants is not subject to the requirements of a 510-K. The Company
and Merck have recently provided additional information in support of their
position to the FDA, and management expects that the Company and Merck will
be able to resolve the FDA concerns. There is, however, no assurance that
there will not be future FDA concerns having an adverse effect on license
revenues the Company would receive from Merck on OsteoGramR sales.
The Company has no present plans for the development of specific
DetoxaholTM products. The core technology behind DetoxaholTM must be
further developed, however, before the specifics of any DetoxaholTM product
can be more concretely defined. Prior to marketing, any DetoxaholTM
products that are eventually developed, the Company must undergo an
extensive regulatory clearance process conducted by the FDA and comparable
agencies in other countries. This process, which generally includes a
review of preclinical and clinical testing and confirmation by the FDA that
Good Laboratory Practices established by the FDA and Good Clinical
Practices were maintained during testing, can take many years and require
the expenditure of substantial resources. The Company is dependent on the
laboratory and medical institutions that will conduct its preclinical and
clinical testing to maintain both Good Laboratory Practices and Good
Clinical Practices. Data obtained from preclinical and clinical testing
are subject to varying interpretations that can result in delays in the
regulatory clearance process or limitations on, or even prevention of,
regulatory clearance. In addition, delays or rejections may be encountered
as a result of changes in regulatory review policies during the period of
development and regulatory review of an IND. Each DetoxaholTM product that
is produced by the Company must go through separate clinical trials. The
clearance of any particular DetoxaholTM product by the FDA will not
necessarily facilitate the clearance of other DetoxaholTM products.
There can be no assurance that regulatory clearance will be obtained
for any DetoxaholTM products developed by the Company. In the
pharmaceutical industry, only a small percentage of the new products for
which INDs are submitted to the FDA to commence human testing ultimately
are cleared for marketing. Moreover, regulatory clearance may be
conditioned upon the imposition of restrictions on the indicated uses for
which a product may be marketed. Any significant delays in obtaining
regulatory clearances or limitations imposed on indicated uses could result
in the Company incurring substantial additional expenditures or in
diminishing any competitive advantage that the Company's products might
otherwise enjoy.
Even if regulatory marketing clearance is obtained, a marketed product
and its manufacturer are subject to continual review. Subsequent discovery
of previously unknown problems with a product or its manufacture may result
in restrictions on such product or manufacture, including withdrawal of
such products from the market. Every manufacturing or labeling change by
the Company of any product cleared for marketing also would be subject to
regulatory review.
PATENTS AND PROPRIETARY RIGHTS
The Company does not have any patents for the OsteoGramR as it was
determined that it would be to the Company's competitive advantage to
maintain the proprietary of such information by keeping it as a trade
secret. The Company does have proprietary rights to the algorithms and
software which have been developed and refined over a 10 year period. Such
proprietary rights are licensed to Merck under the Merck License Agreement.
The OsteoGramR trade mark, which is also licensed to Merck, is a registered
trade mark.
The Company believes that others may attempt to develop X-ray scanning
and computer analysis systems similar to the OsteoGramR. This will take
time and money for development, clinical studies and government clearance.
Meanwhile the Company expects to develop, patent and/or copyright a second
generation OsteoSystem. The second generation OsteoSystem would
incorporate new technology both in software and hardware including possible
in-licensing of existing relevant patents. The Company's right to license
a second generation OsteoSystem is subject to a right of first refusal held
by Merck, which requires the Company to notify Merck of (i) any second
generation prototypes that are in the developmental stage and (ii) any
completed second generation products and gives Merck the right to negotiate
with the Company on an exclusive basis over a period of sixty days (A) the
terms under which Merck would fund the development stage prototype or (B)
the terms under which Merck would acquire an exclusive license to the
completed second generation product.
In June 1995, a patent application was filed on behalf of the Company
covering the technology underlying DetoxaholTM. There can be no assurance
that such patent application will be approved, that the Company can develop
or acquire DetoxaholTM products or methods of use that are patentable, or
even if patents are issued that they will afford the Company's DetoxaholTM
products any competitive advantage or will not be challenged by third
parties, or that patents issued to others will not adversely affect the
development or commercialization of the Company's products. In the event
that a patent for DetoxaholTM is not granted, the proprietary information
relating to DetoxaholTM could be protected to a certain extent by putting
procedures into effect which are designed to maintain the key enzymes,
delivery systems and manufacturing process of DetoxaholTM as a trade
secret. In addition, to the extent that the Company develops uses of
DetoxaholTM in combination with other products, if such products are
covered by third-party patents, the Company could be required to obtain
licenses from the owners of such patents in order to market such
combination products. In the event that the Company does have to obtain
such licenses, the overall profitability of any DetoxaholTM product that is
eventually developed by the Company would be diminished by the cost of
obtaining such licenses and any royalties payable by the Company in
connection therewith.
RESEARCH AND DEVELOPMENT
The Company funded research and development of DetoxaholTM, the
OsteoSystem and ECG Services in the aggregate amount of $250,000 in 1995
and $551,000 in 1994 with approximately 65%, 20% and 15% of such amounts,
respectively, attributable to research and development in connection with
each of the aforementioned services. None of such amount is attributable
to research and development of TeleCor. Amounts to be funded on research
and development in 1996 will vary depending upon the amount of working
capital available to the Company in 1996.
EMPLOYEES
At September 30, 1995, the Company had 26 full-time and 6 part-time
employees. None of the Company's employees is represented by a labor union
and the Company has experienced no work stoppages. The Company considers
its relations with its employees to be good. The Company also retains
consultants from time to time when necessary.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's only facilities are located in 18,000 square feet in a
modern office building located at 1230 Rosecrans Avenue, Manhattan Beach,
California 90266. This facility is leased through August 1996 at a monthly
rental of $25,693, plus a cost-of-living adjustment. The Company intends
to renew the lease at the expiration of its term. This is a full service
lease including utilities, maintenance and taxes on the property,
janitorial and security service.
The Company has allowed its month to month lease of the 1,200
square foot facility in Yellow Springs, Ohio to expire by its terms.
Management has determined that it no longer requires such facility,
which was used for OsteoGramR processing, because Merck became
responsible for OsteoGramR processing as a result of the Merck
License Agreement. The Company believes that the Manhattan Beach facility
is sufficient for its existing activities and potential growth, and that
such facility is well maintained and in good condition. See "ITEM 1.
DESCRIPTION OF BUSINESS - INDUSTRIAL PROPERTY -IRSCO DEVELOPMENT COMPANY,
INC."
ITEM 3. LEGAL PROCEEDINGS
From October 18 through November 3, 1995, the following complaints
(collectively, the "Complaints") were filed in the United States District
Court for the Central District of California against the Company:
1. Jeffrey Lynn v. Rod Raynovich and CompuMed, Inc., filed on
October 18, 1995 (Civ. No. 95-7034);
2. CPA Data Systems, Inc. v. CompuMed, Inc., Rod N. Raynovich,
DeVere B. Pollom, Robert G. Funari, Howard Mark, Robert
Stuckelman and Russell Walker, filed on October 18, 1995 (Civ.
No. 95-7071);
3. Dana Bruno v. CompuMed, Inc., Rod N. Raynovich, DeVere B. Pollom,
Robert G. Funari, Howard L. Mark and Robert G. Stuckelman, filed
on October 18, 1995 (Civ. No. 95-7051);
4. Arthur Shinensky v. Rod Raynovich and CompuMed, Inc., filed on
October 19, 1995 (Civ. No. 95-7069);
5. JDA Systems Corp. Pension Plan Trust v. CompuMed, Inc., Rod N.
Raynovich, DeVere B. Pollom, Howard Mark, M.D., Robert G. Funari,
Robert Stuckelman, and Russell Walker, filed on October 20, 1995
(Civ. No. 95-7034);
6. Ronald M. Sherin v. CompuMed, Inc and Rod N. Raynovich, filed on
October 23, 1995 (Civ. No. 95-7164);
7. Leon Berger v. CompuMed, Inc., Rod N. Raynovich, DeVere B.
Pollom, Robert G. Funari, Howard L. Mark, Robert Stuckelman,
Russell Walker, Robert Goldberg, Winston Millet and John Minnick,
filed on October 23, 1995 (Civ. No. 95-7175);
8. Kensington Trading-ABE II, et. al. v. CompuMed, Inc., Robert
Stuckelman, Rod N. Raynovich, DeVere B. Pollom, Howard Mark and
Robert G. Funari, filed on October 23, 1995 (Civ. No. 95-7171);
9. Pano Stephens v. CompuMed, Inc., Rod N. Raynovich, DeVere B.
Pollom, Robert G. Funari, Howard Mark, Robert Stuckelman and
Russell Walker, filed on October 24, 1995 (Civ. No. 95-7207);
10. Stuart Schacter, Myron Kavalgin, and Reba A Pressman v. CompuMed,
Inc., Robert Stuckelman, Rod N. Raynovich, DeVere B. Pollom,
Howard Mark, and Robert G. Funari filed on October 31, 1995 (Civ.
No. 95-7424); and
11. Charles Robert Farr, derivatively on Behalf of CompuMed, Inc. v
Robert Stuckelman, Robert G. Funari, Howard L. Mark, Russell
Walker, DeVere B. Pollom and Rod N. Raynovich and CompuMed, Inc.
(as nominal defendant) filed on November 3, 1995 (Civ. No. 95-
7538) (the "Farr Complaint").
The Complaints were filed by the named plaintiffs on behalf of persons
who purchased Common Stock during various time periods spanning from June
27, 1995 through October 20, 1995 with the exception of the Farr Complaint
which is brought derivatively on behalf of the Registrant.
The Complaints allege violations of federal securities laws by the
Registrant and certain of its officers and directors. The claims made in
the Complaints are alleged to arise under Sections 10, 20 and 20A of the
Securities Exchange Act of 1934. The Complaints generally relate to the
nature and the extent of the disclosure of certain caps on the royalties
receivable by the Registrant under the terms of its License Agreement
with Merck.
The Complaints are in the process of being consolidated for pre-trial
purposes before a single Federal judge. It is anticipated that
consolidated and amended class action and derivative complaints will be
filed and that the Company will then respond to those complaints. At the
present time, discovery is proceeding and the Company is defending itself
against the allegations.
In July 1994, an alleged former associate of the principals of MB, a
company acquired by the Company in March 1994, filed an action against the
Company, its officers and directors and the former principals of MB. The
action was filed in the Los Angeles County Superior Court, seeking
unspecified damages and injunctive relief based on numerous alleged causes
of action, including intentional interference with contract, intentional
interference with prospective economic advantages, and aiding and abetting
breach of fiduciary duties.
The Company denies the allegations and contends that the lawsuit has
no merit. In accordance with its acquisition agreement with MB (the "MB
Acquisition Agreement"), the Company has demanded indemnification for any
costs, expenses or awards relating to this matter. The Company has also
notified its insurance carrier in regard to indemnification. The former
principals of MB have settled the claims against them. Under the terms of
such settlement, the former principals of MB must give the plaintiff
120,000 shares of Common Stock of the Company which they obtained in March
1994 when the Company acquired MB. The Company is presently engaged in
settlement negotiations with the plaintiff. The Company is unable to
determine the ultimate outcome of such negotiations.
The Company's right to indemnification and the scope of such
indemnification pursuant to the MB Acquisition Agreement are in dispute.
The principals of MB, Howard Mark, M.D. and Mark C. Branigan have asserted
that no indemnification obligation exists without explaining the basis for
that assertion. The Company has asserted that the indemnification
obligation is clear and has been insisting that the indemnification
obligation be fulfilled.
See "ITEM 1. BUSINESS -- INDUSTRIAL PROPERTY - IRSCO DEVELOPMENT
COMPANY, INC." for a discussion of certain notices of default and
foreclosure proceedings received by the Company relating to the Irsco
Property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to stockholders during the fourth
quarter of the fiscal year ended September 30, 1995.
PART II
_______
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The Common Stock and Common Stock Purchase Warrants (the "Warrants")
are listed on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") Small Cap Market under the symbols "CMPD"
and "CPMDW", respectively. The following table sets forth the range of
high and low bid prices for the Common Stock and the Warrants during the
periods indicated, and represents inter-dealer prices, which do not
include retail mark-ups and mark-downs, or any commission to the
broker-dealer, and may not necessarily represent actual transactions.
Common Stock Warrants
____________ ________
High Low High Low
____ ___ ____ ___
Year ended September 30, 1994:
Quarter Ended:
_____________
December 31, 1993 10 15/16 1 1/4 17/32 1/32
March 31, 1994 11 7/8 3 1/8 9/16 1/8
June 30, 1994 5 5/16 2 3/16 3/16 1/16
September 30, 1994 2 13/16 1 9/16 1/16 1/32
Year ended September 30, 1995:
Quarter Ended:
_____________
December 31, 1994 2 1/4 1 1/16 1/32
March 31, 1995 1 3/4 7/8 3/64 3/64
June 30, 1995 6 9/16 15/16 N/A N/A
September 30, 1995 13 1/8 3 15/16 15/16 1/8
The above bid prices of the Common Stock and the Warrants are adjusted
to reflect the bid prices after the one-for-ten reverse stock split of
October 17, 1994.
As of December 28, 1995, there were approximately 876 record holders
of Common Stock and 38 record holders of Warrants. Such amounts do not
include Common Stock or Warrants held in "nominee" or "street" name.
The Company has not paid cash dividends on its Common Stock since its
inception. At the present time, the Company's anticipated working capital
requirements are such that it intends to follow a policy of retaining any
earnings in order to finance the development of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This analysis should be read in conjunction with the consolidated
financial statements and notes thereto. See "ITEMS 7 and 13 Financial
Statements, and Exhibits and Reports on Form 8-K".
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1995 AS COMPARED TO 1994
________________________________________________________
Operating results were affected by continuing marketing efforts and
developmental costs associated with the Company's OsteoSystem business and
the entry by the Company into cardiac transtelephonic event monitoring
services. In the fourth quarter of 1995 certain non-recurring charges of
$1,500,000 relating to the impairment of the Irsco Property, and $228,000
of certain rights related to the TeleCor division were taken. The loss of
$3,390,000 for fiscal year 1995 as compared to the loss of $3,864,000 for
fiscal year 1994 was down 12%.
Revenue for fiscal year 1995 increased by 27% or $647,000 primarily as
a result of increased product sales of OsteoSystem processing units in the
international market and a full year's rental income from Irsco. Rental
revenue related to Irsco was $431,000 in 1995 as compared to $66,000 for
the period commencing on August 12, 1994, the date of the acquisition of
Irsco, through year end 1994. ECG services revenue increased to $1,643,000
in fiscal year 1995 from $1,446,000 in fiscal year 1994 due to a slight
increase in the customer base. A decrease in Osteo Services revenue
resulted from a lower test volume and certain adjustments relating to the
licensing of the OsteoSystem to Merck.
The total expenses for fiscal year 1995 were similar to those incurred
in fiscal year 1994, after taking into account the 1995 non-recurring
charges previously noted and the 1994 charge of $1,696,000 related to
DetoxaholTM research and development expense. An increase in interest and
depreciation occurred in fiscal year 1995 of $369,000 for Irsco for a full
fiscal year and in the cost of sales of $128,000 related to the three
international sales of the OsteoSystem processing units. The decreases in
1995 resulted primarily from $300,000 less in expenses for Detoxahol
research and development.
Further losses are anticipated from research and development in
connection with second generation OsteoSystem, ECG Systems and DetoxaholTM.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
____________________________________________________
At September 30, 1995, the ratio of current assets to current
liabilities was 2.7 to 1.0 as compared to 0.6 to 1.0 at September 30, 1994.
This increase was primarily the result of a $5.1 million private placement
of August 1995 and other smaller private placements throughout 1995. These
funds have and will be used primarily for research and development on the
second generation OsteoSystem technology and to move the Company forward in
the area of telemedicine. Additional funds will be used to support the
further development of the DetoxaholTM project.
The Company's primary capital resource commitments at September 30,
1995 consist of remaining lease commitments, primarily for computer
equipment and the commitments with regards to liabilities assumed pursuant
to the Irsco acquisition. See Note C to the Consolidated Financial
Statements for information about the Company's obligations under such
leases. On November 29, the Notices of Default were filed by the holder of
the Second and Third Deeds of Trust. The Company has $641,000 in current
liabilities related to the payment of these Deeds of Trust (See Note B).
The Company is currently evaluating its options in relation to the Irsco
Property. The Irsco Property is not essential to the Company's core
business. Revenues for Irsco in fiscal year 1995 were $431,000, and costs
were $419,000, excluding $197,000 of depreciation. The Company currently
does not have, and does not anticipate significant commitments for capital
expenditures.
For the last few years, the Company has financed its operations
primarily through private and public sales of securities, and revenues from
sales of its services. Since August 1991 the Company received net proceeds
of approximately $10,400,000 from the private and public sale of equity
securities. The Company may raise additional capital through private
placements in the future.
The Company's ongoing research and development activities associated
with DetoxaholTM and the second generation OsteoSystem technology and the
current manufacture of its ECG terminals are all subject to federal, state,
local and in some instances, foreign authorities. In June the Company
filed patent applications on DetoxaholTM. Subject to obtaining such
patents, the Company would seek strategic partners to help fund the
research and development of DetoxaholTM at the University of Georgia. The
regulatory approval process for DetoxaholTM can take years and require
expenditure of substantial resources.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included as a separate section
following the signature page to this Form 10-KSB:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors for the years ended
September 30, 1995 and 1994 . . . . . . . . . . . F-2
Consolidated Balance Sheet as of
September 30, 1995 . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended
September 30, 1995 and 1994 . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1995 and 1994 . . . . . . . . F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 1995 and 1994 . . . . . . . . F-7
Notes to Consolidated Financial Statements F-8 to F-16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
________
The information called for by Part III (Items 9, 10, 11 and 12) of
Form 10-KSB is hereby incorporated by reference from the Company's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission by not later than January 29, 1996 in connection with the
election of directors at the 1996 Annual Meeting of Stockholders of the
Company.
PART IV
_______
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
________ ______________________
3.1 Certificate of Incorporation of the Company [Incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement of Form S-1 (File No. 33-46061), effective May 7,
1992]
3.2 Certificate of Amendment of Certificate of Incorporation
[Incorporated by reference to Exhibit 3.1a to Amendment No.
1 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-2 (File No. 33-48437),
filed June 28, 1994]
3.3 Certificate of Amendment of Certificate of Incorporation
[Incorporated by reference to Exhibit 3.1b to Amendment No.
2 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-2 (File No. 33-48437),
filed November 7, 1994]
3.4 Certificate of Correction of Certificate of Amendment
[Incorporated by reference to Exhibit 3.1c to Amendment No.
2 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-2 (File No. 33-48437),
filed November 7, 1995]
3.5 By-Laws of the Company, as currently in effect [Incorporated
by reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (File No. 33-46061), effective May 7,
1992]
4.1 Form of Underwriter's Warrant Agreement [Incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-2 (File No. 33-48437), effective August
3, 1992]
4.2 Form of Warrant Agreement and Warrant [Incorporated by
reference to Exhibit 4.5 to the Company's Registration
Statement on Form S-2 (File No. 33-48437), effective August
3, 1992]
EXHIBIT DESCRIPTION OF EXHIBIT
NUMBER
________ ______________________
4.3 Specimen Common Stock Certificate [Incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (File No. 33-46061), effective May 7, 1992]
4.4 Form of Preferred Stock Certificate [Incorporated by
reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1 (File No. 33-46061), effective May 7,
1992]
4.5* Certificate of Designation of Class A Preferred Stock
4.6* Certificate of Designation of Class B Preferred Stock
10.1 Lease Agreement, dated December 31, 1990, by and between the
Company and Hughes Aircraft Company for the premises located
at 1230 Rosecrans Avenue, Suite 1000, Manhattan Beach,
California 90266 [Incorporated by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-1 (File
No. 33-46061), effective May 7, 1992]
10.2 Agreement, dated May 23, 1991 (the "SASCO Agreement"), for
the purchase by the Company of substantially all of the
assets of Skeletal Assessment Services Company ("SASCO")
[Incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (File No. 33-46061),
effective May 7, 1992]
10.3* Amendment to the SASCO Agreement, dated August 11, 1995,
between the Company and SASCO
10.4* First Amendment to Warrant to Purchase Common Stock, dated
as of June 1, 1995, between the Company and SASCO
10.5 Private Placement Memorandum, dated August 1, 1991
[Incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-1 (File No. 33-46061),
effective May 7, 1992]
10.6 1992 Stock Option Plan [Incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-1
(File No. 33-46061), effective May 7, 1992]
10.7 Form of Non-Qualified Stock Option Agreement [Incorporated
by reference to Exhibit 10 to the Company's Registration
Statement on Form S-8 (File No. 33-63435), filed October 14,
1995]
_______________________________
* Filed herewith.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
_______ ______________________
10.8 Agreement and Amendment, dated October 26, 1992 and June 10,
1993, respectively, between the Company and Rhone-Poulenc
Rorer Pharmaceuticals, Inc. ("RPR") [Incorporated by
reference to Exhibit 10.16 to Amendment No. 1 to Post-
Effective Amendment No. 1 to the Company's Registration
Statement on Form S-2 (File No. 33-48437), filed June 28,
1994]
10.9* Termination Agreement, dated August 16, 1995, between the
Company and RPR
10.10 Agreement, dated April 27, 1993 between the Company and OCG
Technology, Inc. [Incorporated by reference to Exhibit 10.18
to Amendment No. 1 to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-2 (File No. 33-
48437), filed June 28, 1994]
10.11 Agreement and Plan of Reorganization and Amendment Number
One and Specific Release Agreement, dated March 18, 1994 and
June 15, 1994, respectively, between the Company, MB
Nutraceuticals, Inc., Howard Mark and Mark Branigan
[Incorporated by reference to Exhibit 10.19 to Amendment No.
1 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-2 (File No. 33-48437),
filed June 28, 1994]
10.12 Research Agreement, dated January 3, 1994, between the
Company and the University of Georgia Research Foundation,
Inc. [Incorporated by reference to Exhibit 10.20 to the
Company's Annual Report on Form 10-KSB for fiscal year 1994]
10.13 Exclusive License Agreement, dated January 3, 1994, between
the Company and the University of Georgia Research
Foundation, Inc. [Incorporated by reference to Exhibit 10.21
to the Company's Annual Report on Form 10-KSB for fiscal
year 1994]
10.14 Employment Agreement, dated October 14, 1994, between the
Company and Rod N. Raynovich [Incorporated by reference to
Exhibit 10.22 to Amendment No. 2 to Post-Effective Amendment
No. 1 to the Company's Registration Statement on Form S-2
(File No. 33-48437), filed November 7, 1994]
___________________________________
* Filed herewith.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
_______ ______________________
10.15* Agreement, dated August 12, 1994, for the acquisition of
Irsco
10.16 Technology License Agreement, dated September 22, 1995,
between the Company and Merck & Co., Inc. [Incorporated by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K for an event of September 27, 1995]
10.17* Assignment of Exclusive Marketing Rights, dated February 9,
1995, between the Company and Jacob Meller.
10.18 Stock Purchase Agreement, dated as of August 9, 1995,
relating to the Company's private placement of $5.1 million
worth of Common Stock [Incorporated by reference to Exhibit
10 to the Company's Current Report on Form 8-K for an event
of August 9, 1995]
21* Subsidiaries of the Company
23* Consent of Ernst & Young LLP
____________________________________
* Filed herewith.
B. REPORTS ON FORM 8-K
On August 16, 1995, the Company filed a Current Report on Form 8-K for
an event of August 9, 1995, disclosing in Item 5 thereof facts relating to
the Company's private placement of $5.1 million worth of Common Stock.
On October 17, 1995, the Company filed a Current Report on Form 8-K
for an event of September 27, 1995, disclosing in Item 5 thereof facts
relating to the Merck License Agreement.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
COMPUMED, INC.
____________________________
Registrant
By: /s/ ROD N. RAYNOVICH
____________________________
Rod N. Raynovich, President
Date: December 29, 1995
_____________________
In accordance with Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ ROD N. RAYNOVICH President, Chief Executive December 29, 1995
______________________ Officer and Director
Rod N. Raynovich
/s/ DeVERE B. POLLOM Vice President, Chief December 29, 1995
______________________ Financial Officer and
DeVere B. Pollom Secretary
______________________ Chairman of the Board December , 1995
Robert G. Funari
______________________ Director December , 1995
Robert B. Goldberg
/s/ HOWARD MARK, M.D. Director December 29, 1995
______________________
Howard Mark, M.D.
/s/ WINSTON MILLET Director December 29, 1995
______________________
Winston Millet
/s/ JOHN D. MINNICK Director December 29, 1995
______________________
John D. Minnick
/s/ ROBERT STUCKELMAN Director December 29, 1995
______________________
Robert Stuckelman
/s/ RUSSELL WALKER Director December 29, 1995
______________________
Russell Walker
COMPUMED, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
____
Report of Independent Auditors for the years ended
September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of
September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended
September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for
the years ended September 30, 1995 and 1994 . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . F-8 to F-16
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CompuMed, Inc.
We have audited the accompanying consolidated balance sheet of CompuMed,
Inc. and subsidiaries as of September 30, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the two years in the period ended September 30, 1995. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CompuMed,
Inc. and subsidiaries at September 30, 1995, and the consolidated results
of their operations and their cash flows for each of the two years in the
period ended September 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note H, there is litigation pending against the Company and
certain of its officers related to several different actions. The ultimate
outcomes of the litigation cannot presently be determined. Accordingly, no
provision for liability that may result has been made in the consolidated
financial statements.
Los Angeles, California
November 29, 1995
/s/Ernst & Young LLP
CONSOLIDATED BALANCE SHEET
COMPUMED, INC. AND SUBSIDIARIES
September 30,
1995
__________
ASSETS
CURRENT ASSETS
Cash $ 299,000
Marketable securities 4,723,000
Accounts receivable, less allowance of
$218,000 469,000
Other receivables 433,000
Inventory 123,000
Prepaid expenses and other current assets 48,000
________
TOTAL CURRENT ASSETS 6,095,000
PROPERTY AND EQUIPMENT - Notes A and C
Machinery and equipment 2,944,000
Furniture, fixtures and leasehold
improvements 199,000
Equipment under capital leases 562,000
Rental Property - Note F
Land 1,022,000
Building 2,828,000
__________
7,555,000
Less allowance for depreciation and
amortization 3,516,000
_________
4,039,000
OTHER ASSETS
Reacquired franchises, net of accumulated
amortization of $117,000 210,000
Other assets 154,000
________
$10,498,000
===========
See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEET
COMPUMED, INC. AND SUBSIDIARIES
September 30,
1995
__________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $465,000
Deferred revenue 95,000
Other accrued liabilities 952,000
Current portion of long term debt-Note B 704,000
Current portion of capital lease
obligations-Note C 22,000
________
TOTAL CURRENT LIABILITIES
TRUST DEED NOTES PAYABLE, less current
portion-Note B 2,932,000
CAPITAL LEASE OBLIGATIONS, less current
portion-Note C 69,000
OTHER LIABILITIES 58,000
COMMITMENTS AND CONTINGENCIES-Note C and Note H
STOCKHOLDERS' EQUITY-Note E
Preferred stock, $.10 par value--authorized
1,000,000 shares
Class A $3.50 cumulative convertible voting
preferred stock, issued and outstanding --
8,400 shares 1,000
Class B $3.50 convertible voting preferred
stock, issued and outstanding - 52,333 5,000
Common Stock, $.01 par value--authorized
50,000,000 shares, issued and outstanding--
8,235,937 82,000
Additional paid in capital 24,633,000
Retained deficit (19,520,000)
_____________
STOCKHOLDERS' EQUITY 5,201,000
_____________
$10,498,000
=============
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
COMPUMED, INC. AND SUBSIDIARIES
Year Ended September 30,
1995 1994
---- ----
REVENUES
ECG services $ 1,643,000 $ 1,446,000
Osteo services, net 327,000 580,000
Product sales 573,000 266,000
Rental property - Note F 431,000 66,000
Other income 36,000 5,000
________ ________
3,010,000 2,363,000
COST AND EXPENSES
Cost of services 1,416,000 1,499,000
Cost of sales 284,000 156,000
Selling expenses 418,000 394,000
Research and development 250,000 551,000
Cost of rights - Note E 228,000 1,696,000
General and administrative expenses 1,392,000 1,388,000
Depreciation and amortization 538,000 359,000
Interest expense 374,000 184,000
Loss on impairment of asset - Note F 1,500,000
___________ _________
6,400,000 6,227,000
NET LOSS $ (3,390,000)$ (3,864,000)
============ ============
NET LOSS PER SHARE $ (.55) $ (.90)
============ ============
Weighted average number of common
shares outstanding 6,150,500 4,315,200
============ ============
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMPUMED, INC. AND SUBSIDIARIES
Additional
Preferred Common Paid Retained
Stock Stock in Capital (Deficit) Total
--------- ------ ---------- -------- ----
Balance at
September 30, 1993: $1,000 $33,000 $13,175,000 $(12,258,000) $951,000
Proceeds from
issuance of 571,289
shares of Common
Stock in a
Regulation "S" offering 6,000 1,426,000 1,432,000
Additional
Preferred Common Paid Retained
Stock Stock in Capital (Deficit) Total
--------- ------ ---------- -------- ----
Issuance of 737,913
shares of common
stock for acquisition of
MB Nutraceuticals, Inc. 7,000 1,689,000 1,696,000
Proceeds from issuance
of 20,000 shares of
Common Stock for
exercise of warrants 75,000 75,000
Proceeds from issuance
of 31,328 shares
of Common Stock upon
exercise of stock options 44,000 44,000
Issuance of 3,087 shares
of Common Stock for
services 14,000 14,000
Issuance of 52,333 shares
of Class B preferred
stock for the acqui-
sition of IRSCO
Development
Company, Inc. 5,000 1,565,000 1,570,000
Dividends paid on Class A
preferred stock (5,000) (5,000)
Net Loss
(3,864,000) (3,864,000)
----- --------- ---------- -----------
Balance at September
30, 1994: $6,000 $46,000 $17,988,000 $(16,127,000)$1,913,000
Proceeds from issuance
of 1,735,029 shares
of Common Stock in a
Regulation "S" offering 17,000 962,000 979,000
Issuance of 400,000
shares of Common Stock for
acquisition of TeleCor
marketing rights 4,000 224,000 228,000
Proceeds from issuance of
1,236,000 shares of
Common Stock in a
Regulation "D" offering 12,000 5,066,000 5,078,000
Proceeds from issuance of
66,010 shares of
Common Stock upon
exercise of warrants 1,000 166,000 167,000
Proceeds from issuance
of 156,405 of common
stock upon exercise of
stock options 2,000 227,000 229,000
Dividends paid on
Class A preferred (3,000) (3,000)
stock
Net Loss (3,390,000) (3,390,000)
-------- ------ -------- ---------- ----------
Balance at
September 30,
1995: $ 6,000 $82,000 $24,633,000 $(19,520,000) $5,201,000
======= ====== ========== =========== =========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMPUMED, INC. AND SUBSIDIARIES
Year Ended September 30,
1995 1994
_______ ______
OPERATING ACTIVITIES:
Net Loss (3,390,000)$(3,864,000)
Net adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 538,000 359,000
Cost of rights 228,000 1,696,000
Loss on impairment of asset 1,500,000
Issuance of Common Stock for services 14,000
Changes in operating assets and liabilities:
Interest receivable 7,000 25,000
Notes receivable 460,000
Accounts receivable (45,000) (7,000)
Other receivables (378,000) 65,000
Inventories and prepaid expenses 88,000) 86,000
Accounts payable and other liabilities
270,000 242,000
Other assets 116,000 (59,000)
--------- --------
NET CASH USED IN OPERATING ACTIVITIES (1,066,000) (983,000)
INVESTING ACTIVITIES:
Purchase of marketable securities
(4,823,000)
Sale of marketable securities 100,000
Purchases of property, plant and equipment (270,000) (122,000)
_________ _________
NET CASH USED IN INVESTING ACTIVITIES (4,993,000) (122,000)
FINANCING ACTIVITIES:
Net proceeds from sale of stock 6,057,000 1,432,000
Dividends on Class A preferred stock (3,000) (5,000)
Proceeds from short term borrowings 100,000 45,000
Payments on short term borrowings (100,000) (446,000)
Principal payments on capital lease obligations (25,000) (26,000)
Principal payments on trust deeds payable (62,000) (2,000)
Principal payments on notes payable (21,000) (16,000)
Exercise of stock options and warrants 396,000 119,000
_________ ________
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,342,000 1,101,000
_________ ________
INCREASE (DECREASE) IN CASH 283,000 (4,000)
Cash at beginning of year 16,000 20,000
_________ _________
CASH AT END OF YEAR $ 299,000 $ 16,000
========= =========
Cash paid for interest $ 374,000 $ 168,000
========= =========
During 1995 and 1994 computer and office equipment were acquired under
capital lease obligation for $32,000 and $76,000, respectively.
During 1994 Irsco Development Company, Inc. was acquired with the issuance
of 50,000 shares of Class B $3.50 preferred stock for a value of
$1,500,000. This included $5,200,000 in property received and the
assumption of $3,700,000 in Trust Deed Notes.
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPUMED, INC. AND SUBSIDIARIES
NOTE A-BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
--------------------------- the accounts of the Company and its wholly-
owned subsidiaries. All material intercompany transactions and accounts
have been eliminated.
Business Segment and Credit Risk: The Company operates primarily in one
-------------------------------- business segment. The Company is engaged
in the assembly, sale, distribution and service of ECG computer analysis
equipment, and in the distribution and processing of bone density tests.
These OsteoSystems customers are the physicians who take the OsteoGramR and
send it to Merck for diagnostic laboratory processing; however, payment is
made in nearly all cases by the medical insurance carrier of the patient.
Accounts receivable related to OsteoSystem consist of approximately sixty
percent (60%) from two Medicare intermediaries and approximately forty
percent (40%) from about 250 nation-wide private insurance companies. The
Company's ECG customer base is comprised of a large group of single site
users, none of which is individually significant. Receivables are
generally not collateralized. In August of 1994 the Company acquired a
business that owns a commercial rental property. Rental revenue is
received on approximately 25 separate units pursuant to primarily month to
month leases. (See Note F.)
Inventories: Inventories consist of ECG terminals, component parts and ECG
----------- medical supplies. Inventories are stated at cost (weighted
average or first-in first-out method) which is not in excess of market.
Property and Equipment: Property and Equipment are stated at cost.
---------------------- Depreciation and amortization are computed based on
the following useful lives:
Buildings 20 years
Improvements 10 years
Equipment 5 to 7 years
Reacquired Franchises: The reacquired franchises are being amortized over
--------------------- a seven year period.
Revenue Recognition: ECG and healthcare services are recorded when billed
------------------- to the customer in conjunction with services performed.
Product sales are recorded upon shipment of product and passage of title to
the customer. OsteoSystem services are recorded when processing is
completed and claims are submitted to the third party payors. Other income
is recorded when accrued or received. Rental revenue is recognized on a
straight-line basis pursuant to the terms of the underlying leases.
Income Taxes: In February 1992, the Financial Accounting Standards Board -
------------ issued Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." The Company adopted the provisions of the
standard in fiscal year 1994. The adoption of FAS 109 did not have a
material impact on the financial position or results of operations of the
Company for any period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE A-BASIS OF PRESENTATION SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FAS 109 provides that the liability method is used in accounting for income
taxes whereby deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
Securities Available-for-Sale: Management determines the appropriate
----------------------------- classification of equity securities at the
time of purchase and reevaluates such designation as of each balance sheet
date. Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported in a separate component
of stockholders' equity. There were no unrealized gains or losses on the
Company's equity securities at September 30, 1995 and the Company had no
equity securities at September 30, 1994. The marketable securities held
for sale at September 30, 1995 are invested in a Merrill Lynch
Institutional Fund which invests in short-term government and other debt
securities. Interest and dividends on securities classified as available-
for-sale are included in other income.
Per Share Data: Per share data is based on the weighted average of the
-------------- number of common shares outstanding during each year.
Options and warrants are excluded as they are antidilutive.
Reclassifications: Certain reclassifications have been made in the 1994
----------------- financial statements to conform with the 1995
presentations.
NOTE B-DEBT
In connection with the acquisition of Irsco (see Note F), the Company
assumed several notes payable, consisting of the following at September 30,
1995:
Secured promissory note payable at 9.25% interest
rate with payments of $26,737 a month, including
interest $2,995,000
Second Deed of Trust note payable (former owner of Irsco)
at 6% interest rate with variable payments of $2,000
to $10,000 a month, including interest 139,000
Third Deed of Trust note payable (former owner of Irsco)
Including accrued interest with 9% interest rate
with principal maturing in August 1997 502,000
_________
3,636,000
Less current portion 704,000
_________
$2,932,000
==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE B-DEBT (CONTINUED)
On November 29, 1995, holders of the Deeds of Trust filed a Notice of
Default and Election to Sell under Deed of Trust. The Company has been
evaluating its options in relation to the property and has not yet
determined whether to oppose the foreclosure. (See Note F.)
Maturities over the next five years on these notes, including the
acceleration of the Second and Third Deeds of Trust to current pursuant to
the notice of default, are as follows:
1996 $ 704,000
1997 2,932,000
___________
$3,636,000
Defaults under the Deeds of Trust constitute a default under the Note.
Consequently, the holder of the Note has the option of accelerating amounts
owed. The Note is classified as long term given the probability of cure
through payment of the Second and Third Deeds of Trust or foreclosure which
would satisfy the obligation with a noncurrent asset. The notes payable
are secured by all of the assets of Irsco, a wholly owned subsidiary of
the Company.
NOTE C-COMMITMENTS
Capital leases cover computer and office equipment and expire through 2000.
The Company has a noncancelable facility lease accounted for as an
operating lease expiring in August 1996 which is included in the operating
lease amounts below.
The following is a summary as of September 30, 1995 of future minimum lease
payments together with the present value of the net minimum lease payments
on capital leases:
Capital Operating
Year ending September 30 Leases Leases
______ _________
1996 $31,000 $286,000
1997 27,000
1998 27,000
1999 21,000
2000 8,000
------- --------
Total minimum lease payments 114,000 $286,000
=======
Less amount representing interest 23,000
-------
Net minimum lease payments 91,000
Less current portion 22,000
-------
Present value of net minimum
payments, less current portion $69,000
=======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE C-COMMITMENTS (CONTINUED)
Included in accumulated depreciation and amortization is $470,000 (1995)
related to capital leases. Amortization of capital leases is included in
depreciation and amortization expense. Rental expense under operating
leases was $245,000 (1995) and $245,000 (1994).
Through September 30, 1995 the Company has expensed approximately $330,000
for research and development related to DetoxaholTM rights. The Company
has agreed to fund an additional $740,000 over the next year of which
$250,000 will be released only for FDA preclinical testing upon meeting
certain conditions to the satisfaction of the Company.
NOTE D-INCOME TAXES
At September 30, 1995, the Company has available for federal income tax
purposes, net operating loss carryforwards of approximately $13,459,000
which expire between 1998 and 2011 and tax credit carryforwards of
approximately $165,000, which expire between 1997 and 2001. The
utilization of the above net operating loss and tax credit carryforwards
are subject to significant limitations under the tax codes due to changes
in ownership.
Significant components of the Company's deferred tax liabilities and assets
as of September 30, 1995 and 1994 are as follows:
Deferred tax liabilities: 1995 1994
----------- --------
Property and Equipment $(913,000) $(1,509,000)
Deferred tax assets:
Account receivable allowance 94,000 66,000
Accrued expenses 59,000 127,000
Other 41,000 31,000
Net operating loss carryforwards5,380,000 4,506,000
---------- ---------
Total deferred tax assets 5,574,000 4,730,000
Valuation allowance for
deferred tax assets (4,661,000) (5,221,000)
---------- ----------
Net deferred tax assets 913,000 1,509,000
---------- ----------
Total $ 0 $ 0
========== ==========
NOTE E-STOCKHOLDERS' EQUITY
Common Stock: On August 13, 1992, the Company issued 8,000,000 units, each
------------ unit consisting of one share of Common Stock and one warrant
to purchase one share of Common Stock. This offering was sold at $.25 per
unit for net proceeds of $1,505,000. On September 17, 1992, the 8,000,000
shares of Common Stock became separately tradeable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE E-STOCKHOLDERS' EQUITY (CONTINUED)
After the one for ten reverse stock split of October 17, 1994, the
8,000,000 warrants were exercisable to purchase 800,000 shares of Common
Stock until August 3, 1997. This entitles a holder of 10 warrants to
purchase one share of the Company's Common Stock at $3.75 per share. The
outstanding warrants were callable by the Company at any time after August
3, 1994, at a price of $.05 per warrant. A total of 67,910 of the warrants
were exercised as of September 30, 1995.
The Company issued to the underwriter 800,000 units, each unit consisting
of the right to purchase one share of Common Stock at a price of $.30 per
share and one warrant to purchase one share of Common Stock for $.375 per
share. The units and underlying warrants are exercisable until August 2,
1997. After the one for ten reverse stock split of October 17, 1994, the
800,000 units were exercisable into 80,000 shares of Common Stock at
$3.00 per share and warrants to purchase 80,000 shares of Common Stock
at $3.75 per share.
Pursuant to an Agreement and Plan of Reorganization entered into on March
18, 1994, the Company acquired all of the issued and outstanding common
stock of MB Neutraceuticals, Inc. ("MB") in exchange for 635,380 shares of
the Company's Common Stock. MB had only two shareholders of which its
President and principal shareholder was Dr. Howard Mark, a Director and
Medical Director of the Company. The MB shareholders also received 102,532
shares of Common Stock for their assistance in raising, prior to June 15,
1994, $200,000 for the Company through a Regulation S offering.
Independent appraisers valued the acquisition of MB and its rights to
DetoxaholTM at $1,696,000; however, in accordance with industry practices
regarding research and development expenses, the Company immediately
expensed this amount. An additional 265,000 shares were reserved for issue
on the basis of .16 shares of Common Stock for every currently outstanding
warrant or option that is exercised prior to June 15, 1995. As of
September 30, 1995, none of these shares have been issued.
In 1994, the Company sold 571,289 shares of Common Stock pursuant to
Regulation "S" under the Securities Act. Net proceeds of $1,452,000 were
used for the funding of research and development, prepayment of debt and
payment of operating expenses
From December 1994 through June 1995 the Company sold 1,735,029 shares of
Common Stock at $.60 per share pursuant to Regulation "S" under the
Securities Act. In addition, warrants to purchase 142,000 shares of Common
Stock at an exercise price of $1.10 were issued as a finders fee in the
transaction. Net proceeds of $979,000 were used for the funding of
research and development and payment of operating expensed.
In February 1995 the Company issued 400,000 shares of Common Stock for the
acquisition of certain exclusive rights for the marketing of certain new
products of Aerotel Ltd., a medical device and telecommunications company
based in Israel. The original term of the license has expired as a result
of the Company's failure to meet certain minimum sales amounts in 1995.
Costs associated with obtaining the license ($228,000) were expensed in
fiscal year 1995.
In August 1995 the Company sold 1,236,000 shares of Common Stock pursuant
to Regulation "D" under the Securities Act. Net proceeds of $5,078,000
will be used for research and development and operating expenses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE E-STOCKHOLDERS' EQUITY (CONTINUED)
Class A $3.50 Cumulative Convertible Voting Preferred Stock: The holders of
----------------------------------------------------------- Class A
Preferred Stock are entitled to receive, when and as declared by the Board
of Directors of the Company, dividends at an annual rate of $.35 per share,
payable quarterly. Dividends are cumulative from the date of issuance.
Every two shares of the Class A Preferred Stock are presently convertible,
subject to adjustment, into one share of Common Stock. In the event of any
liquidation, the holders of the Class A Preferred Stock are entitled to
receive $2.00 in cash per share plus accumulated and unpaid dividends out
of assets available for distribution to stockholders, prior to any
distribution to holders of Common Stock or any other stock ranking junior
to the Class A Preferred Stock. The Class A Preferred Stock may be
redeemed by the Company, upon 30-days' written notice, at a redemption
price of $3.85 per share. Class A Preferred Stock stockholders have the
right to convert their shares into Common Stock during such 30-day period.
Shares of Class A Preferred Stock have one vote each. Shares of Class A
Preferred Stock vote along with shares of Common Stock and shares of Class
B Preferred Stock as a single class on all matters presented to the
stockholders for action except as follows: Without the affirmative vote of
the holder of a majority of the Class A Preferred Stock then outstanding,
voting as a separate class, the Company may not (i) amend, alter or repeal
any of the preferences or rights of the Class A Preferred Stock, (ii)
authorize any reclassification of the Class A Preferred Stock, (iii)
increase the authorized number of shares of Class A Preferred Stock or (iv)
create any class or series of shares ranking prior to the Class A Preferred
Stock as to dividends or upon liquidation.
Of the 437,500 shares of Class A Preferred Stock issued on September 30,
1991, a total of 429,100 were converted into 429,100 shares of Common
Stock. A total of 4,200 shares of Common Stock are currently issuable upon
conversion of the remaining 8,400 shares of the Class A Preferred Stock.
Class B $3.50 Convertible Voting Preferred Stock: In August, 1994, the
---------------------------------------------------- Company issued 52,333
shares of Class B $3.50 Convertible Preferred Stock ("Class B Preferred
Stock") in connection with the acquisition of Irsco (See Note F). The
holders of Class B Preferred Stock are entitled to receive dividends only,
when and as declared by the Board of Directors of the Company. Each share
of Class B Preferred Stock is convertible, subject to adjustment, into ten
shares of Common Stock. In the event of any liquidation, the holders of
the Class B Preferred Stock are entitled to receive $3.50 in cash per share
plus accumulated and unpaid dividends out of assets available for
distribution to stockholders, prior to any distribution to holders of
Common Stock or any other stock ranking junior to the Class B Preferred
Stock. Each share of Class B Preferred Stock may be redeemed by the
Company, upon 30-days' written notice, at a redemption price of $3.85 per
share. Class B Preferred Stock stockholders have the right to convert
their shares into Common Stock during this 30-day period.
Shares of Class B Preferred Stock are entitled to one vote each. Shares of
Class B Preferred Stock vote as a single class on all matters presented to
the stockholders for action except as follows: Without the affirmative
vote of the holder of a majority of the Class B Preferred Stock then
outstanding, voting as a separate class, the Company may not (i) amend,
alter or repeal any of the preferences or rights of the Class B Preferred
Stock, (ii) authorize any reclassification of the Class B Preferred Stock,
(iii) increase the authorized number of shares of Class B Preferred Stock
or (iv) create any class or series of shares ranking prior to the Class B
Preferred Stock as to dividends or upon liquidation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE E-STOCKHOLDERS' EQUITY (CONTINUED)
Stock Options and Warrants: Pursuant to the 1992 Stock Option Plan, the
---------------------------- Company may grant qualified or non-qualified
options for the purchase of 480,000 shares of Common Stock. The number of
shares available upon the exercise of options granted under the Plan were
increased from 360,000 to 480,000 shares. Such increase was approved by
the Company's stockholders at its Annual Meeting in March 1995. Options
are granted at prices equal to the fair market value of the stock on the
date the options are granted. The options generally are exercisable in
three equal annual installments commencing one year from date of grant and
expire 10 years after the date of grant. At the year ended September 30,
1995, there were 301,801 shares reserved for exercise of options granted,
of which 96,021 were exercisable, and 50,630 were available for grant under
such plan.
In addition to options issued pursuant to the Plan, in March 1995, the
board approved the grant of 175,000 non-qualified stock options that vest
over three years to members of the Board. In addition, officers and
certain employees and consultants were granted 467,599 non-qualified
options, 50,000 of which vest from one to six months and the remainder vest
from one to three years. All of the options were granted at an exercise
price equal to the current market value. A total of 50,000 options were
exercisable at September 30, 1995.
The following table summarizes the activity related to the Company's
qualified and nonqualified stock options and warrants issued. The Company
has reserved shares of Common Stock for all options and warrants
outstanding.
Year Ended September 30,
1995 1994 1993
____ ____ ____
Options and warrants outstanding
at beginning of year
($1.00 to $11.90 per share) 1,695,400 1,662,800 1,369,200
Options granted
($1.00 to $11.90 per share) 694,200 95,500 243,600
Warrants issued
($.50 to $3.75 per share) 375,900 22,000 167,300
Options and warrants exercised (222,400) (51,300) (43,200)
Options canceled (33,600) (74,100)
__________ ____________ ________
2,543,100 1,695,400 1,662,800
========= =========== ==========
NOTE F-RENTAL PROPERTY (IRSCO)
On August 12, 1994 the Company acquired Irsco in exchange for 52,333 shares
of the Company's $3.50 Class B Convertible Preferred Stock. Each share of
Preferred Stock is convertible into ten shares of the Common Stock. The
Company can redeem the Preferred Stock after one year, upon thirty days
notice, at a price of $3.85 per share. In addition to the Preferred Stock,
the Company issued warrants to purchase 22,000 shares of Common Stock at an
exercise price of $3.75 per share. These warrants terminate five years
from date of issue. Irsco's principal asset is a 6.3 acre industrial park,
consisting of nine buildings comprising a total of 118,270 sq. ft. plus
parking. The buildings have been divided into 25 separate units, ranging
from 1,900 sq. ft. to 10,000 sq. ft. The property is located in Irwindale,
California, approximately 18 miles from downtown Los Angeles. The
acquisition has been accounted for under the purchase method and,
accordingly, the operating results of Irsco have been included in the
consolidated operating results since the date of acquisition. The cost of
the acquisition has been allocated on the basis of the estimated fair
market value of the asset acquired and liabilities assumed.
The following table summarizes the unaudited consolidated proforma results
of operations assuming the acquisition of Irsco had occurred at the
beginning of fiscal year 1993 (in thousands):
Fiscal Year Ended
September 30,
1994
-------------
Revenues $2,804
Net loss (3,988)
Net loss per share (.92)
On November 29, 1995 holders of the Second and Third Deeds of Trust filed a
notice of default and election to sell under Deed of Trust against Irsco.
The Company is evaluating its options in relation to the property and
whether to oppose the foreclosure. Given the recent licensing arrangement
with Merck (See Note I) the property no longer fits with the strategic
priorities of the Company. Based on these factors and other impairment
indicators the Company reduced the value of the rental property to net
realizable value and recorded a loss on impairment of $1.5 million.
Total rental income from the property was $431,000 (1995) and $66,000
(1994) with rental expenses related to the property including interest and
depreciation of $616,000 (1995) and $74,000 (1994).
NOTE G-OTHER INFORMATION
Savings and Retirement Plans
----------------------------
The Company has a Savings and Retirement Plan (the "Plan") under which
every full-time salaried employee who is 18 years of age or older may
contribute up to 15 percent of his or her annual salary to the Company's
Plan. For an employee contribution of up to but not exceeding 6 percent of
the employee's annual salary the Company will make a matching contribution
of $.25 for every $1.00 of the employee's contribution. The Company's
contributions are 100% vested after 60 months of contributions to the Plan.
Benefits are payable under the Plan upon termination of a participant's
employment with the Company or at retirement. The Plan meets the
requirements of Section 401(k) of the Internal Revenue Code.
In March 1993, the Company established a defined compensation plan for
executives to defer part of their compensation up to 15% of their annual
salary, less any monies withheld under the Company's 401(k) Plan. In
addition to executive's compensation, the Company contributes $.25 to the
plan for each $1.00 of executive compensation contribution. The Company
has elected to invest the amount in the executive's account in a life
insurance policy in the name of the executive with assignment to the
Company. The Company is obligated to pay to the executive or any
beneficiary any credit balance in the executive's account.
The Company's matching contribution which was charged to expense was $7,000
and $13,000 in fiscal 1995 and 1994, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE H-CONTINGENCIES
In July 1994, an alleged former associate of the principals of MB, a
company acquired by the Company in March 1994, filed an action against the
Company, its officers and directors and the former principals of MB. The
action was filed in the Los Angeles County Superior Court, seeking
unspecified damages and injunctive relief based on numerous alleged causes
of action, including intentional interference with contract, intentional
interference with prospective economic advantages, and aiding and abetting
breach of fiduciary duties.
The Company denies the allegations and contends that the lawsuit has no
merit. In accordance with its acquisition agreement with MB, the Company
has demanded indemnification for any costs, expenses or awards relating to
this matter. The Company has also notified its insurance carrier in regard
to indemnification. The Company's right to indemnification and the scope
of such indemnification have not been resolved. The Company is unable to
determine the ultimate outcome of this litigation or the effect on its
financial condition, as discovery is in an early stage.
In October and November 1995, several securities class actions have been
brought against the Company and certain executive officers and directors
concerning certain alleged misrepresentation and omission of material facts
concerning the terms of the Company's right to receive royalties pursuant
to the Merck License Agreement. The case is in the early stages of
discovery although the Company denies the allegations and contends that the
lawsuit has no merit. The Company is unable to determine the ultimate
outcome of this litigation or the effect on its financial condition.
NOTE I-MERCK LICENSE ("Merck")
On September 22, 1995, the Company entered into an agreement with Merck
whereby Merck was granted a perpetual, exclusive license of the Company's
OsteoGramR technology and was assigned the Company's software copyright and
OsteoGramR trade name. The Company retains the right to make major
enhancements to the technology and to use or license such enhancements,
subject to Merck approval.
Under the license agreement for the first-generation OsteoGramR, Merck will
pay the Company royalties for each revenue-producing test using the
OsteoGramR technology during the years 1996 through 2000. The royalties
will escalate from $2 to $4 per test over that period. These royalty
payments have no maximum amount during 1996 through 1998, but they are
subject to a maximum in the year 1999 equal to the lesser of 10 percent of
Merck's total collected revenues in that year or $3 million and a maximum
in the year 2000 equal to the lesser of 10 percent of Merck's total
collected revenues in that year or $4 million. There are no minimum
royalties under the agreement.
In connection with entering into the Merck License Agreement, the
Company paid $100,000 and issued five year warrants for the purchase
of 83,000 shares of the Company's Common Stock at an exercise price of
$2.50 per share to Skeletal Assessment Services Co. ("SASCO") and forgave
$30,000 of indebtedness owed to it by SASCO as a modification of
payments due to SASCO for assets the Company purchased from SASCO in
1991 in connection with the development of the OsteoSystem. In
addition, the Company agreed to pay SASCO, as additional consideration
for such modification, eight percent (8%) of all royalties paid by
Merck to the Company under the Merck License Agreement and extended
by five years the term of warrants to purchase 64,000 shares of the
Company's Common Stock at an exercise price of $2.50 issued to SASCO
under the Company's original agreement with SASCO. Amounts paid were
expensed in 1995.
EXHIBIT INDEX
_____________
Exhibit Page
Number Description of Exhibit Number
________ ______________________ _______
4.5 Certificate of Designation of Class A
Preferred Stock
4.6 Certificate of Designation of Class B
Preferred Stock
10.3 Amendment to the SASCO Agreement, dated
August 11, 1995, between the Company
and SASCO
10.4 First Amendment to Warrant to Purchase
Common Stock, dated as of June 1, 1995,
between the Company and SASCO
10.9 Termination Agreement, dated August 16,
1995, between the Company and RPR
10.15 Agreement, dated August 12, 1994, for
the acquisition of Irsco
10.17 Assignment of Exclusive Marketing Rights,
dated February 9, 1995, between the
Company and Jacob Meller
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
Exhibit 4.5
CERTIFICATE OF DESIGNATION
of
Class A $3.50 Cumulative Convertible Preferred Stock
of
COMPUMED, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
Compumed, Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), does hereby certify that,
pursuant to the authority conferred on the Board of Directors of the
Corporation by the Certificate of Incorporation, of the Corporation and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, the Board of Directors of the Corporation adopted the following
resolution establishing a series of 437,500 shares of Preferred Stock of
the Corporation designated as
CONVERTIBLE PREFERRED STOCK
RESOLVED, that pursuant to the authority conferred on the Board of
Directors of this Corporation by the Certificate of Incorporation, a
series of Preferred Stock, $.10 par value, of the Corporation be and
hereby is established and created, and that the designation and number
of shares thereof and the voting and other powers, preferences and
relative, participating, optional or other rights of the shares of
such series and qualifications, limitations, and restrictions thereof
are as follow:
1. DESIGNATION AND AMOUNT. There shall be a series of Preferred Stock
designated as "Class A $3.50 Cumulative Convertible Preferred Stock", and
the number of shares constituting such series shall be 437,500. Such
series is referred to herein as the "Class A Preferred Stock".
2. PAR VALUE. The par value for each share of Class A Preferred Stock
shall be $.10.
3. RANK. All shares of Preferred Stock shall rank prior to all of the
Corporation's Common Stock, $.01 par value (the "Common Stock"), now or
hereafter issued, both as to payment of dividends and as to distributions
of assets upon liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary.
4. DIVIDENDS. The holders of Class A Preferred Stock are entitled to
receive, when and as declared by the Board of Directors of the Company,
dividends at an annual rate of $.35 per share, payable quarterly.
Dividends will be cumulative from the date of issuance of the Class A
Preferred Stock and will be payable quarterly to holders of record on the
stock records of the Company on such record dates as shall be fixed by the
Board of Directors of the Company.
Shares redeemed or converted after the record date for a dividend and
before the payment date will be entitled to the dividend but no adjustment
will be made on account of dividends with respect to the period after the
last record date before the redemption or conversion, as the case may be.
Unless all annual cumulative dividends on the Class A Preferred Stock
have been paid, no dividends or other distributions may be paid or declared
and set apart for payment on the Common Stock or any other capital stock of
the Company ranking junior to the Class A Preferred Stock as to dividends.
Delaware law provides that a corporation may pay dividends in cash or
shares of its stock. Such dividends may be paid from either surplus or net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year, provided, however, that if the capital of the
corporation shall have been diminished by depreciation in the value of its
property, or by losses, or otherwise, to an amount less than the aggregate
amount of the capital represented by the outstanding stock of all classes
having a preference upon the distribution of assets, the directors of such
corporation shall not declare and pay out of such net profits any dividends
upon any shares of any classes of its capital stock until the deficiency in
the amount of capital represented by the outstanding stock of all classes
having a preference upon the distribution of assets shall have been
repaired. Surplus is defined as the excess of the net assets of the
Company over the amount determined to be capital. The capital of the
Company will be the aggregate of the par values of the shares of Common
Stock and Class A Preferred Stock issued. Net assets means the amount by
which total assets exceed total liabilities. Neither capital nor surplus
are liabilities for this purpose. Thus, the amount by which the net
proceeds received by the Company as a part of this offering exceeds the par
value of the Common Stock and the par value of Class A Preferred Stock
issued is included in surplus from which dividends may be paid.
5. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of the Company, holders of the Class A Preferred Stock are
entitled to receive $2.00 in cash per share plus accumulated and unpaid
dividends out of assets available for distribution to shareholders, prior
to any distribution to holders of Common Stock or any other stock ranking
junior to the Class A Preferred Stock. If, upon any liquidation,
dissolution or winding up of the Company, the amounts payable with respect
to the Class A Preferred Stock (and with respect to any other Preferred
Stock ranking on a parity with the Class A Preferred Stock in any such
distribution) are not paid in full, the holders of the Class A Preferred
Stock (and of such other Preferred Stock) will share ratably in any such
distribution of assets in proportion to the full preferential amounts to
which such shares are entitled. After payment of the full amount of the
liquidating distribution to which they are entitled, the holders of shares
of Class A Preferred Stock will not be entitled to any further
participation in any distribution of assets by the Company.
A consolidation or merger of the Company with or into any other
corporation or a sale of all or any part of the assets of the Company
(which shall not in fact result in the liquidation of the Company and the
distribution of assets to stockholders) shall not be deemed to be a
liquidation, dissolution or winding up of the Company.
6. REDEMPTION. The Class A Preferred Stock may be redeemed upon 30-days'
written notice at a redemption price of $3.85 per share. Preferred Stock
shareholders shall have the right to convert into common stock during this
30-day period. The redemption price shall be payable together with
accumulated and unpaid dividends to the date fixed for redemption. If full
cumulative dividends on the Class A Preferred Stock through the most recent
dividend payment date have not been paid, the Class A Preferred Stock may
not be redeemed in part unless approved by the holders of a majority of
shares of the Class A Preferred Stock then outstanding and the Company may
not purchase or acquire any share of Class A Preferred Stock other than
pursuant to a purchase or exchange offer made on the same terms to all
holders of the Class A Preferred Stock. If less than all the outstanding
shares of Class A Preferred Stock are to be redeemed, the company will
select those to be redeemed by lot or a substantially equivalent method.
The shares of Class A Preferred Stock are not subject to any sinking
fund or any other similar provision.
The redemption by the Company of all or any part of the Class A
Preferred Stock is subject to the availability of cash. Moreover, under
Delaware law, shares of capital stock shall not be redeemed when the
capital of the Company is impaired or when the redemption would cause any
impairment of capital.
7. CONVERSION RIGHTS. Holders of the Class A Preferred Stock will have
the right, at their option, to convert such shares into shares of Common
Stock at any time at the conversion rate then in effect, provided that, if
any of the Class A Preferred Stock is redeemed, the conversion rights
pertaining thereto will terminate on the third business day preceding the
redemption date.
Each share of Class A Preferred Stock will be initially convertible
into ten (10) shares of Common Stock for the first two (2) years and into
five (5) shares thereafter. No fractional share or script representing a
fractional share will be issued upon conversion of the Class A Preferred
Stock; therefore, holders of shares of Class A Preferred Stock must convert
one (1) share of Class A Preferred Stock for each ten (10) or five (5)
shares of Common Stock. Cash will be paid in lieu of fractional shares.
The conversion rate will be appropriately adjusted if the Company (a)
pays a dividend or makes a distribution on its shares of Common Stock (but
not the Class A Preferred Stock) which is paid or made in shares of Common
Stock, (b) subdivides or reclassified its outstanding shares of Common
Stock, (c) combines its outstanding shares of Common Stock into a smaller
number of shares of Common Stock, (d) issues shares of Common Stock, or
issues rights or warrants to all holders of its Common Stock entitling them
to subscribe for or purchase shares of Common Stock (or securities
convertible into Common Stock), at a price per share less than the market
price (as hereinafter defined) of a share of Common Stock on August 1,
1991, or (e) distributes to all holders of its Common Stock evidences of
its indebtedness or assets (excluding any dividend paid in cash out of
legally available funds) subject to the limitation that adjustments by
reason of any of the foregoing need not be made until they result in a
cumulative change in the conversion rate of at least five percent (5%).
The conversion rate will not be adjusted upon the conversion of shares of
Class A Preferred Stock or presently outstanding stock options or warrants.
For the purpose of making the above adjustments, the market price of a
share of Common Stock shall be the average of the closing bid and asked
prices for the Common Stock on NASDAQ as of August 1, 1991.
In case of any consolidation or merger to which the company is a party
other than a merger or consolidation in which the Company is the surviving
corporation, or in case of any sale or conveyance to another corporation of
the property of the Company as an entirety or substantially as an entirety,
on in case of any statutory exchange of securities with another
corporation, there will be no adjustment of the conversion price, but each
holder of shares of Class A Preferred Stock then outstanding will have the
right thereafter to convert such shares into the kind and amount of
securities, cash or other property which he would have owned or have been
entitled to receive immediately after such consolidation, merger, statutory
exchange sale or conveyance had such shares been converted immediately
prior to the effective date of such consolidation, merger, statutory
exchange, sale or conveyance. In the case of a cash merger of the Company
into another corporation or any other cash transaction of the type
mentioned above, the effect of these provisions would be that the
conversion features of the Class A Preferred Stock would thereafter be
limited to converting the Class A Preferred Stock at the conversion price
in effect at such time into the same amount of cash per share that such
holder would have received had such holder converted the Class A Preferred
Stock into Common Stock immediately prior to the effective date of such
cash merger or transaction. Depending upon the terms of such cash merger
or transaction, the aggregate amount of cash so received in conversion
could be more or less than the liquidation preference of the Class A
Preferred Stock.
Class A Preferred Stock may be converted upon surrender of the stock
certificate at least three (3) days prior to the redemption date at the
offices of U. S. Stock Transfer Company, Glendale, California, the
Company's Transfer Agent, with the form of "Election to Convert" on the
reverse side of the stock certificate completed and executed as indicated.
Shares of Common Stock issued upon conversion will be fully paid and non-
assessable.
8. VOTING RIGHTS. Shares of Common Stock and of Class A Preferred Stock
have one non-cumulative vote each. Shares of Common Stock and Class A
Preferred Stock vote as a single class on all matters presented to the
stockholders for action. Without the affirmative vote of the holders of a
majority of the Class A Preferred Stock then outstanding, voting as a
separate class, the Company may not (i) amend, alter or repeal any of the
preferences or rights of the Class A Preferred Stock, (ii) authorize any
reclassification of the Class A Preferred Stock, (iii) increase the
authorized number of shares of Class A Preferred Stock or (iv) create any
class or series of shares ranking prior to the Class A Preferred Stock as
to dividends or upon liquidation.
9. STATUS OF ACQUIRED SHARES. Shares of Class A Preferred Stock redeemed
by the Company or received upon conversion Pursuant to Section 6 or
otherwise acquired by the Company will be restored to the status of
authorized but unissued shares of Preferred Stock, without designation as
to class, and may thereafter be issued, but not as shares of Class A
Preferred Stock.
10. PREEMPTIVE RIGHTS. The Class A Preferred Stock is not entitled to any
preemptive or subscription rights in respect of any securities of the
Company.
11. SEVERABILITY OF PROVISIONS. Whenever possible, each provision hereof
shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision hereof is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only the
extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof. If a court of
competent jurisdiction should determine that a provision hereof would be
valid or enforceable if a period of time were extended or shortened or a
particular percentage were increased or decreased, then such court may make
such change as shall be necessary to render the provision in question
effective and valid under applicable law.
IN WITNESS WHEREOF, CompuMed, Inc. has caused this certificate to be
signed by Robert Stuckelman, its President, and its corporate seal hereunto
affixed and attested by William B. Barnett, its Secretary, this 6th day of
August, 1992.
COMPUMED, INC.
By:/s/ Robert Stuckelman
_______________________
ROBERT STUCKELMAN
President
Attest:
By:/s/ William B. Barnett
_________________________________
WILLIAM B. BARNETT
Secretary
Exhibit 4.6
CERTIFICATE OF DESIGNATION
OF
CLASS B $3.50 CONVERTIBLE PREFERRED STOCK
OF
COMPUMED, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
CompuMed, Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), does hereby certify that,
pursuant to the authority conferred on the Board of Directors of the
Corporation by the Certificate of Incorporation of the Corporation and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, the Board of Directors of the Corporation adopted the following
resolution establishing a series of 523,333 shares of Preferred Stock of
the Corporation designated as
CONVERTIBLE PREFERRED STOCK
RESOLVED, that pursuant to the authority conferred on the Board of
Directors of this Corporation by the Certificate of Incorporation, a series
of Preferred Stock, $.10 par value, of the Corporation be and hereby is
established and created, and that the designation and number of shares
thereof and the voting and other powers, preferences and relative,
participating, optional or other rights of the shares of such series and
qualifications, limitations and restrictions thereof are as follows:
1. Designation and Amount. There shall be a series of Preferred Stock
designated as "Class B $3.50 Convertible Preferred Stock", and the number
of shares constituting such series shall be 523,333. Such series is
referred to herein as the "Class B Preferred Stock".
2. Par Value. The par value for each share of Class B Preferred Stock
shall be $.10.
3. Rank. All shares of Preferred Stock shall rank prior to all of the
Corporation's Common Stock, $.01 par value (the "Common Stock"), now or
hereafter issued, both as to payment of dividends and as to distributions
of assets upon liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary.
4. Dividends. The holders of Class B Preferred Stock are only entitled
to receive dividends, when and as declared at the discretion of the Board
of Directors of the Company. Dividends are payable only to holders of
record on the stock records of the Company on such record dates as shall be
fixed by the Board of Directors of the Company.
Shares redeemed or converted after the record date for a dividend and
before the payment date will be entitled to the dividend but no adjustment
will be made on account of dividends with respect to the period after the
last record date before the redemption or conversion, as the case may be.
Unless all annual dividends on the Class A or Class B Preferred Stock
have been paid, no dividends or other distributions may be paid or declared
and set apart for payment on the Common Stock or any other capital stock of
the Company ranking junior to the Class A and Class B Preferred Stock as to
dividends.
Delaware law provides that a corporation may pay dividends in cash or
shares of its stock. Such dividends may be paid from either surplus or net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year, provided, however, that if the capital of the
corporation shall have been diminished by depreciation in the value of its
property, or by losses, or otherwise, to an amount less than the aggregate
amount of the capital represented by the outstanding stock of all classes
having a preference upon the distribution of assets, the directors of such
corporation shall not declare and pay out of such net profits any dividends
upon any shares of any classes of its capital stock until the deficiency in
the amount of capital represented by the outstanding stock of all classes
having a preference upon the distribution of assets shall have been
repaired. Surplus is defined as the excess of the net assets of the
Company over the amount determined to be capital. The capital of the
Company will be the aggregate of the par values of the shares of Common
Stock and any Preferred Stock issued. Net assets means the amount by which
total assets exceed total liabilities. Neither capital nor surplus are
liabilities for this purpose. Thus, the amount by which the net proceeds
received by the Company as a part of this offering exceeds the par value of
the Common Stock and the par value of any Preferred Stock issued is
included in surplus from which dividends may be paid.
5. Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Company, holders of the Class A Preferred Stock are
entitled to receive $3.50 in cash per share plus declared and unpaid
dividends out of assets available for distribution to shareholders, prior
to any distribution to holders of Common Stock or any other stock ranking
junior to the Class B Preferred Stock. The $3.50 cash per share will be
appropriately adjusted if the Company (a) subdivides or reclassifies its
outstanding shares of Common Stock or (b) combines its outstanding shares
of Common Stock into a smaller number of shares of Common Stock. If, upon
any liquidation, dissolution or winding up of the Company, the amounts
payable with respect to the Class B Preferred Stock (and with respect to
any other Preferred Stock ranking on a parity with the Class B Preferred
Stock in any such distribution) are not paid in full, the holders of the
Class B Preferred Stock (and of such other Preferred Stock) will share
ratably in any such distribution of assets in proportion to the full
preferential amounts to which such shares are entitled. After payment of
the full amount of the liquidating distribution to which they are entitled,
the holders of shares of Class B Preferred Stock will not be entitled to
any further participation in any distribution of assets by the Company.
A consolidation or merger of the Company with or into any other
corporation or a sale of all or any part of the assets of the Company
(which shall not in fact result in the liquidation of the Company and the
distribution of assets to stockholders) shall not be deemed to be a
liquidation, dissolution or winding up of the Company.
6. Redemption. The Class B Preferred Stock may be redeemed after one
year upon 30-days' written notice at a redemption price of $3.85 per share.
Preferred Stock shareholders shall have the right to convert into common
stock during this 30-day period. The redemption price shall be payable
together with accumulated and unpaid dividends to the date fixed for
redemption. If full declared dividends on the Class B Preferred Stock
through the most recent dividend payment date have not been paid, the Class
B Preferred Stock may not be redeemed in part unless approved by the
holders of a majority of shares of the Class B Preferred Stock then
outstanding and the Company may not purchase or acquire any share of Class
B Preferred Stock other than pursuant to a purchase or exchange offer made
on the same terms to all holders of the Class B Preferred Stock. If less
than all the outstanding shares of Class B Preferred Stock are to be
redeemed, the Company will select those to be redeemed by lot or a
substantially equivalent method.
The redemption price will be appropriately adjusted if the Company (a)
subdivides or reclassifies its outstanding shares of Common Stock or (b)
combines its outstanding shares of Common Stock into a smaller number of
shares of Common Stock.
The shares of Class B Preferred Stock are not subject to any sinking
fund or any other similar provision.
The redemption by the Company of all or any part of the Class B
Preferred Stock is subject to the availability of cash. Moreover, under
Delaware law, shares of capital stock shall not be redeemed when the
capital of the Company is impaired or when the redemption would cause any
impairment of capital.
7. Conversion Rights. Holders of the Class B Preferred Stock will have
the right, at their option, to convert such shares into shares of Common
Stock at any time at the conversion rate then in effect, provided that, if
any of the Class B Preferred Stock is redeemed, the conversion rights
pertaining thereto will terminate on the third business day preceding the
redemption date.
Each share of Class B Preferred Stock will be initially convertible
into ten (10) shares of Common Stock. No fractional share or scrip
representing a fractional share will be issued upon conversion of the Class
B Preferred Stock; therefore, holders of shares of Class B Preferred Stock
must convert one (1) share of Class B Preferred Stock for each ten (10)
shares of Common Stock. Cash will be paid in lieu of fractional shares.
The number of shares of outstanding Preferred Stock will be
appropriately adjusted if the Company (a) pays a dividend or makes a
distribution on its shares of Common Stock (but not the Class B Preferred
Stock) which is paid or made in shares of Common Stock, (b) subdivides or
reclassifies its outstanding shares of Common Stock, (c) combines its
outstanding shares of Common Stock into a smaller number of shares of
Common Stock, or (d) distributes to all holders of its Common Stock
evidences of its indebtedness or assets (excluding any dividend paid in
cash out of legally available funds).
In case of any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the surviving
corporation, or in case of any sale or conveyance to another corporation of
the property of the Company as an entirety or substantially as an entirety,
or in case of any statutory exchange of securities with another
corporation, there will be no adjustment of the conversion price, but each
holder of shares of Class B Preferred Stock then outstanding will have the
right thereafter to convert such shares into the kind and amount of
securities, cash or other property which he would have owned or have been
entitled to receive immediately after such consolidation, merger, statutory
exchange sale or conveyance had such shares been converted immediately
prior to the effective date of such consolidation, merger, statutory
exchange, sale or conveyance. In the case of a cash merger of the Company
into another corporation or any other cash transaction of the type
mentioned above, the effect of these provisions would be that the
conversion features of the Class B Preferred Stock would thereafter be
limited to converting the Class B Preferred Stock at the conversion price
in effect at such time into the same amount of cash per share that such
holder would have received had such holder converted the Class B Preferred
Stock into Common Stock immediately prior to the effective date of such
cash merger or transaction. Depending upon the terms of such cash merger
or transaction, the aggregate amount of cash so received in conversion
could be more or less than the liquidation preference of the Class B
Preferred Stock.
Class B Preferred Stock may be converted upon surrender of the stock
certificate at least three (3) days prior to the redemption date at the
offices of U.S. Stock Transfer Corporation, Glendale, California, the
Company's Transfer Agent, with the form of "Election to Convert" on the
reverse side of the stock certificate completed and executed as indicated.
Shares of Common Stock issued upon conversion will be fully paid and non-
assessable.
8. Voting Rights. Shares of Common Stock and of Class B Preferred Stock
have one non-cumulative vote each. Shares of Common Stock and Class B
Preferred Stock vote as a single class on all matters presented to the
stockholders for action. Without the affirmative vote of the holders of a
majority of the Class B Preferred Stock then outstanding, voting as a
separate class, the Company may not (i) amend, alter or repeal any of the
preferences or rights of the Class B Preferred Stock, (ii) authorize any
reclassification of the Class B Preferred Stock, (iii) increase the
authorized number of shares of Class B Preferred Stock or (iv) create any
class or series of shares ranking prior to the Class B Preferred Stock as
to dividends or upon liquidation.
9. Status of Acquired Shares. Shares of Class B Preferred Stock redeemed
by the Company or received upon conversion pursuant to Section 6 or
otherwise acquired by the Company will be restored to the status of
authorized but unissued shares of Preferred Stock, without designation as
to class, and may thereafter be issued, but not as shares of Class B
Preferred Stock.
10. Preemptive Rights. The Class B Preferred Stock is not entitled to any
preemptive or subscription rights in respect of any securities of the
Company.
11. Severability of Provisions. Whenever possible, each provision hereof
shall be interpreted in a manner as to be effective and valid under
applicable law but, if any provision hereof is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity without invalidating or
otherwise adversely affecting the remaining provisions hereof. If a court
of competent jurisdiction should determine that a provision hereof would be
valid or enforceable if a period of time were extended or shortened or a
particular percentage were increased or decreased, then such court may make
such change as shall be necessary to render the provision in question
effective and valid under applicable law.
IN WITNESS WHEREOF, CompuMed, Inc. has caused this certificate to be
signed by Robert Stuckelman, its President, and its corporate seal
hereunder affixed and attested by William B. Barnett, its Secretary, this
12th day of August, 1994.
COMPUMED, INC.
By: /s/ Robert Stuckelman
____________________________
ROBERT STUCKELMAN
President
Attest:
By: /s/ William B. Barnett
_______________________________
WILLIAM B. BARNETT
Secretary
Exhibit 10.3
AGREEMENT
August 11, 1995
Recitals:
---------
A. The Parties
-----------
CompuMed, Inc., a California corporation ("CompuMed") having its
principal place of business at 1230 Rosencrans Avenue, suite 1000,
Manhattan Beach, California, purchased certain Assets from Skeletal
Assessment Services Corporation, an Ohio corporation ("SASCo") having its
principal place of business in Yellow Springs, Ohio, pursuant to an
Agreement for Sale of Assets dated May 23, 1991 (the "Agreement").
Capitalized terms used herein without definition have the meanings ascribed
to them in the Agreement.
Under a June 3, 1991 security agreement between SASCo and CompuMed
(the "Security Agreement"), SASCo retained a security interest in the
Assets to secure CompuMed's payment of Percentage Amounts.
B. The Merck License
-----------------
CompuMed is currently negotiating a transaction with Merck & Co., Inc.
("Merck") concerning a transaction in which, pursuant to a Technology
License Agreement between Merck and CompuMed (the "License Agreement"),
Merck would be granted a perpetual, exclusive license of the RA and
purchase the equipment, and copyright and the OsteoGram tradename from
CompuMed. CompuMed would retain the right to make major enhancements to
the RA, and use or license that enhancement, subject to providing Merck
with the first opportunity to license or acquire the enhancement.
C. Description of License Agreement
--------------------------------
Under the License Agreement:
(a) Merck will pay CompuMed a one-time license fee of $250,000;
(b) Merck will pay CompuMed per-test royalties for the years 1996-
2000, based upon the following schedule:
Year
1996 1997 1998 1999 2000
---- --- ---- ---- ----
Per Test Royalty Payment $2.00 $2.50 $3.00 $3.50
$4.00
The royalty payments will be capped at the lesser of 10% of Merck's
total collected revenues and $3 million during 1999; at the lesser of 10%
of Merck's total collected revenues and $4 million during 2000. Royalties
are due only on tests for which an invoice with an amount payable is
rendered.
(c) For the hardware, Merck will pay CompuMed's book value, subject
to a limit of $175,000.
(d) Merck will commit to spending $750,000 on the product for product
development, regulatory compliance and clinical studies. Merck will be
allowed to count monies it has already spent on these items towards the
fulfillment of that obligation.
(e) CompuMed will be obligated to spend $250,000 on marketing the
product during the first year of the agreement.
(f) Merck will enter into a transition operating agreement with
CompuMed wherein Merck will agree to pay a flat rate of $1,000 per month
for access to certain CompuMed software, $660 per month to keep the Yellow
Springs, Ohio facility operating, and various hourly or monthly rates for
the services of certain personnel. This agreement will be terminable in
whole or in part by Merck at any time.
Merck retains a right of offset against CompuMed to cover any breaches of
CompuMed's representations, warranties and covenants. Merck requires as a
condition of closing that SASCo release its security interest in the
Assets.
Agreement:
----------
Now therefore, in consideration of the foregoing and the mutual
covenants contained herein, the parties hereby agree as follows:
ARTICLE I. Amendment of 1991 Agreements
----------------------------------------
Section 1.1 Payment at Closing
----------- ------------------
At the closing called for in the License Agreement (the "Closing"),
CompuMed shall pay SASCo one hundred thousand dollars ($100,000) by wire
transfer or by certified check.
Section 1.2 Change in Payment Rate
----------- ----------------------
At the Closing, section 5 of the Agreement shall be amended, effective
as of the Closing, by deleting the words "the sum of $900,000 from the
gross revenues generated from the testing and analyzing of tests for
osteoporosis" and the remaining text of the paragraph in which those words
appear, and substituting in their place the following:
eight percent (8%) (the "Royalty Payment") of all amounts paid by
Merck & Co., Inc. to CompuMed under the License Agreement dated as of
August __, 1995 (the "License Agreement") (including any amounts paid by
Merck to CompuMed in order to discharge, prepay, settle, eliminate or
compromise any such amounts), other than:
1) a one-time license fee of $250,000,
2) the amount (not to exceed $175,000) payable for equipment,
furniture and fixtures, and
3) the amounts payable under the transition operating agreement
between CompuMed and Merck, as defined in the License Agreement.
Seller shall have a first security interest in the royalties payable
by Merck to Purchaser under the License Agreement to secure payment of the
Royalty Payments until Merck has no further obligation to make royalty
payments to CompuMed under the License Agreement. Royalty Payments shall
not be computed to include amounts, if any, paid by Merck to CompuMed for
research and development work that is later requested by Merck or that
relates to enhancements to the RA that are developed after the date hereof
by CompuMed.
Section 1.3 Substitution of Collateral.
----------- --------------------------
At the Closing, SASCo and CompuMed will execute and deliver (i) a
termination of the Security Agreement, and (ii) a new security agreement
identifying the payments to be made by Merck pursuant to the License
Agreement as the collateral; and (iii) appropriate statements on Forms UCC-
3 and UCC-1 reflecting this termination and new security agreement.
Section 1.4 Forgiveness of $30,000 Obligation
----------- ---------------------------------
At the Closing, CompuMed shall forgive the $30,000 obligation of SASCo
to CompuMed described in section 5(b) of the Agreement.
Section 1.5 Extension of Warrant; Issuance of Additional Warrants
----------- -----------------------------------------------------
At the Closing, CompuMed shall execute and deliver to SASCo an amended
and restated stock warrant in substantially the form of the warrant
delivered pursuant to the Agreement (with appropriate adjustments to
reflect a subsequent 1.10 reverse stock split) but with a term extending to
a date five years from the Closing (as such, the "Amended Warrant"). In
addition, CompuMed shall issue a new warrant (collectively with the Amended
Warrants, the "Warrants") to SASCo in a form substantially similar to the
Amended Warrant for an additional 83,000 shares of CompuMed common stock,
with an exercise price of $2.50 per share.
Section 1.6 Registration of Warrant Shares
----------- ------------------------------
(a) CompuMed shall use reasonable efforts to register the sale of the
shares underlying the Warrants (the "Warrant Shares")in an S-3 registration
statement with the Securities and Exchange Commission within 180 days of
the Closing (other than shares the sale of which has previously been
registered under CompuMed's August 1992 registration statement). CompuMed
shall, to the extent permissible, take the position that the 1992
registration statement covers 25,000 Warrant Shares. If CompuMed has not
effected a registration of the sale of all of the Warrant Shares within 180
days of the Closing, then at any time thereafter,but only once, SASCo may
request that CompuMed so register the sale of the Warrant Shares, in which
case CompuMed shall use its best efforts to so register the sale of the
Warrant Shares at its sole cost and expense, and shall "blue sky" such sale
in Ohio, California and such other States as SASCo may reasonably request;
provided, however, that CompuMed shall not be required to incur the expense
of a special audit of its books to effect such registration, and provided
further that CompuMed shall not be required to endeavor to register such
sale if within three weeks of SASCo's request CompuMed shall deliver to
SASCo (i) an opinion of its counsel that the transaction or transactions
with respect to which such registration is requested constitutes a
transaction or transactions as to which registration is not required under
the Securities Act of 1933, and (ii) there is simultaneously delivered to
SASCo a letter from the transfer agent of CompuMed assuring the
transferability of the Warrant Shares. CompuMed shall not be required to
include in any registration statement any Warrant Shares unless SASCo shall
have at its expense provided CompuMed with a written statement of all
material facts required to be stated in such registration statement
concerning SASCo, its officers, directors and shareholders, the Warrant
Shares and the sale of same, and agreed to defend, indemnify and hold
harmless the underwriters participating in such offering and CompuMed and
each of its directors and officers against any loss, cost or expense that
may arise because of any untrue or allegedly untrue statements or omission
or alleged omission of a material fact made by SASCo in a written statement
to CompuMed for inclusion in such registration statement; provided that
CompuMed agrees to defend, indemnify and hold SASCo, and each of its
directors and officers against any loss, cost or expense that may arise
because of any untrue or allegedly untrue statements or omission or alleged
omission of a material fact made in the registration statement other than
any untrue or allegedly untrue statements or omission or alleged omission
of a material fact made by CompuMed in reliance upon a written statement of
SASCo to CompuMed provided for inclusion in such registration statement.
(b) If at the time a request is made for registration CompuMed is
engaged in any activities (including, without limitation, activities
related to an acquisition by or of CompuMed) which the Board of Directors
of CompuMed reasonably and in good faith determines would cause the
registration so requested to have a materially adverse effect on CompuMed
or its business (other than by reason of the expense of registration),
CompuMed may postpone such registration until its Board of Directors
determines that the circumstances no longer require such postponement;
provided, however, that no such postponement may extend for a period in
-------- -------
excess of one hundred twenty (120) days.
(c) CompuMed will use its best efforts to maintain the effectiveness
for up to nine months, of any registration statement pursuant to which any
of its securities are being offered, and from time to time will amend or
supplement such registration statement and the prospectus contained therein
as and to the extent necessary to comply with the Securities Act of 1933
(the "1933 Act") and any applicable state statute or regulation. CompuMed
will also provide SASCo with as many copies of the prospectus contained in
any such registration statement as it may reasonably request.
ARTICLE II, Post-Closing Obligations
------------------------------------
Section 2.1 Financial Records
----------- -----------------
CompuMed shall keep adequate and complete records showing all revenue
received from Merck under the License Agreement. Such records shall
include all information necessary to verify the total amount and
computation of Royalty Payments due, and shall be open to inspection on
behalf of SASCo upon reasonable notice during reasonable business hours to
the extent necessary to verify the amount thereof. Such inspection shall
be made not more than once each calendar year at the expense of SASCo by a
certified public account appointed by SASCo and to whom CompuMed has no
reasonable objection. CompuMed shall not be required to retain such
records for more than three (3) years after the close of any calendar
quarter.
Section 2.2 Reports.
----------- -------
Within sixty days after the closing of each calendar quarter during
the years 1996-2000 inclusive, CompuMed shall furnish SASCo with a written
report, signed by an authorized representative of CompuMed, showing;
(a) the gross revenue received from Merck under the License Agreement
during the preceding calendar quarter;
(b) the number of tests that generated that revenue; and
(c) the Royalty Payments due to SASCo in connection therewith.
Section 2.3 Royalty Payment Payments.
----------- ------------------------
With each such quarterly report, CompuMed shall remit to SASCo the
total amount of Royalty Payments shown thereby to be due.
ARTICLE III. Miscellaneous
---------------------------
Secton 3.1 Severability.
---------- ------------
If any one or more of the provisions of this Agreement shall be held
to be invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions of this Agreement shall not in
any way be affected or impaired thereby.
Section 3.2 Successors and Assigns.
----------- ----------------------
This Agreement shall be binding upon and inure the benefit of the
parties hereto and their successors and assigns.
Section 3.3 Merger.
----------- ------
This instrument and the Agreement contain the entire agreement between
the parties hereto with respect to the subject matter set forth herein and
therein. No verbal agreement, conversation or representation between any
officers, agents, or employees of the parties hereto either before or after
the execution of this Agreement shall affect or modify any of the terms or
obligations herein contained.
Section 3.4 Amendment and Waiver.
----------- --------------------
No change, modification, extension, termination or waiver of this
Agreement, or any of the provisions herein contained, shall be valid unless
made in writing and signed by a duly authorized representative of each
party.
Section 3.5 Captions.
----------- --------
The captions are provided for convenience and are not to be used in
construing this Agreement.
Secion 3.6 Counterparts.
---------- ------------
This Agreement may be signed in counterparts which collectively shall
constitute a single agreement.
Section 3.7 Force Majeure.
----------- -------------
Neither party shall be in breach hereof by reason of its delay in the
performance of or failure to perform any of its obligations hereunder, if
that delay or failure is caused by strikes, acts of God or the public
enemy, riots, incendiaries, interference by civil or military authorities,
compliance with governmental priorities for materials, or any fault beyond
its control or without its fault or negligence.
Section 3.8 Further Assurances.
----------- ------------------
The parties each, at any time or from time to time, shall execute and
deliver or cause to be delivered such further assurances, instruments or
documents as may be reasonably necessary to fulfill the terms and
conditions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first
above written.
COMPUMED, INC.
By: /s/ Rod Raynovich
___________________________
Rod Raynovich, President
SKELETAL ASSESSMENT SERVICES CORPORATION
By: /s/ Richard S. Bachtell
__________________________
Richard S. Bachtell, President
Exhibit 10.4
FIRST AMENDMENT TO
WARRANT TO PURCHASE COMMON STOCK OF
COMPUMED, INC.
As of June 1, 1995
Recitals:
CompuMed, Inc., a California corporation (the "Company") having its
principal place of business at 1230 Rosencrans Avenue, suite 1000,
Manhattan Beach, California, purchased certain assets from Skeletal
Assessment Services Corporation, an Ohio corporation ("CRTIL") having its
principal place of business in Yellow Springs, Ohio, pursuant to an
Agreement for Sale of Assets dated May 23, 1991 (the "Agreement").
Capitalized terms used herein without definition have the meanings ascribed
to them in the Agreement.
Pursuant to the Agreement, the Company issued a warrant (the
"Warrant") dated June 5, 1991 to CRTL for the purchase of up to 640,000
shares of Common Stock (as defined therein) at a purchase price of $0.25
per share. Since that date, the Company engaged in a 1:10 reverse stock
split, so that the Warrant now represents a right to purchase up to 64,000
shares of Common Stock at a purchase price of $2.50 per share.
The parties now wish to amend the Warrant.
Agreement:
----------
Now therefore, in consideration of the foregoing and the mutual
covenants contained herein and other good and valuable consideration, the
parties hereby agree that the Warrant is hereby amended as follows:
Section 1 Extension of Expiration Date.
---------------------------------------
All references in the Warrant (and in the Warrant Certificate attached
thereto as Exhibit A) to "June 4, 1995", including the reference in the
definition of "Expiration Date"), are hereby amended to refer to "September
22, 2000".
Section 2 Registration Rights.
------------------------------
The registration rights with respect to the Common Stock underlying
the Warrant shall be as follows:
(a) Registration of Warrant Shares
------------------------------
(1) the Company shall use reasonable efforts to register the sale of
the shares underlying the Warrant (the "Warrant Shares") in an S-3
registration statement with the Securities and Exchange Commission by March
20, 1996 (other than shares the sale of which has previously been
registered under the Company's August 1992 registration statement). If the
Company has not effected a registration of the sale of all of the Warrant
Shares by March 20, 1996, then at any time thereafter, but only once, CRTL
may request that the Company so register the sale of the Warrant Shares, in
which case the Company shall use its best efforts to so register the sale
of the Warrant Shares at its sole cost and expense, and shall "blue sky"
such sale in Ohio, California and such other States as CRTL may reasonably
request; provided, however, that the Company shall not be required to incur
the expense of a special audit of its books to effect such registration,
and provided further that the Company shall not be required to endeavor to
register such sale if within three weeks of CRTL's request the Company
shall deliver to CRTL (i) an opinion of its counsel that the transaction or
transactions with respect to which such registration is requested
constitutes a transaction or transactions as to which registration is not
required under the Securities Act of 1933, and (ii) there is simultaneously
delivered to CRTL a letter from the transfer agent of the Company assuring
the transferability of the Warrant Shares. The Company shall not be
required to include in any registration statement any Warrant Shares unless
CRTL shall have at its expense provided the Company with a written
statement of all material facts required to be stated in such registration
statement concerning CRTL, its officers, directors and shareholders, the
Warrant Shares and the sale of same, and agreed to defend, indemnify and
hold harmless the underwriters participating in such offering and the
Company and each of its directors and officers against any loss, cost or
expense that may arise because of any untrue or allegedly untrue statements
or omission or alleged omission of a material fact made by CRTL in a
written statement to the Company for inclusion in such registration
statement; provided that the Company agrees to defend, indemnify and hold
CRTL, and each of its directors and officers against any loss, cost or
expense that may arise because of any untrue or allegedly untrue statements
or omission or alleged omission of a material fact made in the registration
statement other than any untrue or allegedly untrue statements or omission
or alleged omission of a material fact made by the Company in reliance upon
a written statement of CRTL to the Company provided for inclusion in such
registration statement.
(2) If at the time a request is made for registration the Company is
engaged in any activities (including, without limitation, activities
related to an acquisition by or of the Company) which the Board of
Directors of the Company reasonably and in good faith determines would
cause the registration so requested to have a materially adverse effect on
the Company or its business (other than by reason of the expense of
registration), the Company may postpone such registration until its Board
of Directors determines that the circumstances no longer require such
postponement; provided, however, that no such postponement may extend for a
-------- -------
period in excess of one hundred twenty (120) days.
(3) The Company will use its best efforts to maintain the
effectiveness for up to nine months, of any registration statement pursuant
to which any of its securities are being offered, and from time to time
will amend or supplement such registration statement and the prospectus
contained therein as and to the extent necessary to comply with the
Securities Act of 1933 (the "1933 Act") and any applicable state statute or
regulation. The Company will also provide CRTL with as many copies of the
prospectus contained in any such registration statement as it may
reasonably request.
(4) The provisions of section 4(C) of the Warrant shall apply to the
foregoing registration rights.
Section 3. Confirmation of Recitals.
------------------------------------
The parties hereto hereby confirm the accuracy of the recitals set
forth at the beginning of this instrument.
Section 4. No other Changes.
----------------------------
Except as modified herein, the Warrant remains in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to Warrant Agreement to be executed by their duly authorized
representatives as of the date first above written.
COMPUMED, INC.
By: /s/ Rod Raynovich
_________________________
Rod Raynovich, President
SKELETAL ASSESSMENT SERVICES CORPORATION
By: /s/ Sam Bachtell
________________________
Sam Bachtell, President
Exhibit 10.9
[Letterhead of Rhone-Poulenc Rorer]
August 16, 1995
Robert Stuckelman
President and CEO
COMPUMED
1230 Rosecrans Avenue
Suite 1000
Post Office Box 10037
Manhattan Beach, California 90266
Re: TERMINATION OF AGREEMENT
Dear Mr. Stuckelman:
Reference is made to your correspondence dated July 26, 1995,
regarding CompuMed, Inc.'s wish to terminate the Agreement dated October
26, 1992, and subsequent amendment thereto dated June 10, 1993
(collectively hereinafter referred to as the "Agreement"), by and between
Rhone-Poulenc Rorer Pharmaceuticals Inc. ("RPR") and CompuMed, Inc.
("COMPUMED") as of October 26, 1995.
RPR is willing to accommodate COMPUMED wishes, provided, that,
pursuant to Paragraph 5, entitled "Books, Records and Payments" a complete
accounting is promptly performed and payment of all moneys due and owing to
RPR is made within ten (10) days of the date of this letter. Further, all
future royalty payments due and owing under Article 3, entitled "Royalties
on Sales of Ostegrams" shall be paid by COMPUMED within the stated time
frame, as described under Paragraph 5.2 and a final accounting is promptly
performed as of the date of termination. Finally, COMPUMED, for the
remaining term of this Agreement, shall perform the services to RPR's
satisfaction.
It is important to note, that Paragraphs 3, 4, 5, 6, 8, and 9
shall continue to survive beyond the termination of this Agreement and
nothing in this letter is intended to waive any rights or remedies that RPR
has under such Agreement.
If this letter memoralizes our understanding of the conditions of
termination, please so signify COMPUMED's acceptance by signing in the
space indicated below.
Sincerely,
/s/ Steve Downs
Steve Downs
Vice President, Marketing
AGREED:
COMPUMED, INC.
By: /s/ DeVere B. Pollom
____________________________
Title: Vice President Finance
_________________________
Date: 9/8/95
__________________________
[Letterhead of CompuMed]
September 11, 1995
Rhone-Poulenc Rorer, Inc.
500 Arcola Road
Post Office Box 1200
Collegeville, PA 19426-0107
Attention: Steve Downs, Vice President Marketing
Dear Mr. Downs:
Enclosed please find a countersigned copy of your letter dated August
16, 1995 pertaining to the termination of the agreement between CompuMed
and RPR (the "Agreement").
Also enclosed are checks for $21,229.85 payable to RPR, representing
the amount payable pursuant to Article 3 of the Agreement, along with a
statement showing how this amount was computed.
We understand the final sentence of the second paragraph of your
letter to refer to CompuMed's performing analysis for tests that have
already been done or ordered through RPR. CompuMed will continue to
perform analysis on those tests in accordance with past practice, and will
pay royalties on those tests to RPR in accordance with the Agreement. We
also understand that, by virtue of the enclosed termination, no further
tests will be originated through RPR hereafter.
Because of vacation schedules and other delays, we have not been able
to respond within the ten day period specified in your August 16 letter.
In order to avoid any ambiguity concerning this termination, I would
appreciate your signing the acknowledgment line on the enclosed copy of
this letter and returning it to me by telecopier and in the enclosed self-
addressed, stamped envelope.
Sincerely,
/s/ Rod N. Raynovich
Rod N. Raynovich
President and CEO
Enclosures
ACCEPTED:
Rhone-Poulenc Rorer
By: /s/ Steve Downs
_____________________
Steve Downs
Marketing Manager
Exhibit 10.15
PURCHASE AGREEMENT OF IRSCO DEVELOPMENT COMPANY BY COMPUMED
1. CompuMed shall acquire Irsco Development Company, Inc. ("Irsco") for
an exchange of stock.
2. CompuMed shall issue 500,000 shares of its $3.50 preferred stock,
series B, to the owners of 100% of the stock of Irsco Development
Corporation for all of their stock. These shares shall be divided equally
between Winston Millet and Max Guefen. The preferred stock is convertible
into common stock at the rate of ten shares for one. CompuMed, upon 30
days notice, has the right of redemption after one year at $3.85 per share
subject to the stockholders option to convert to common. In addition,
CompuMed shall issue 220,000 five year warrants exercisable at $.37 1/2
cents per share.
3. CompuMed understands that Irsco has agreed to a three year 9% interest
third trust deed for $470,000 less any accrued liabilities to be placed
against the property. Payments by Irsco of 3% will be due monthly for
three years.
4. David Edelstein will be receiving upon closing a finder's fee of
23,333 shares of CompuMed convertible preferred stock, series B. The
parties hereto represent that there are no other finders or agents entitled
to any fees in regard to this transaction.
5. The property owned by Irsco Industrial Park is subject to the
following trust deeds including the third trust deed set forth in paragraph
3, above:
1st and 2nd trust deed 3,220,000
3rd trust deed 470,000
---------
Total $3,690,000
6. The exchange of stock is specifically subject to an appraised value of
the Irsco Industrial Park of not less than $5.2 million.
7. Sellers represent and warrant the validity of the Irsco financial
statement on a full accrual basis as of August 12, 1994, and that there are
no other encumbrances on Irsco or the property, and that there are no
financial commitments or obligations other than those disclosed in the
financial. The balance sheet is an approximation as of August 12, 1994 and
adjustments to the third trust deed will be made as necessary to conform
with the final audited statement for a $1.5 million net worth of Irsco.
8. Winston Millet agrees to manage the property for 3% of revenue with
Irsco/CompuMed keeping the books. Management fees shall only be due out of
positive cash flow and shall otherwise accrue.
9. CompuMed and Irsco represent that they are corporations duly
organized, validly existing and in good standing under the laws of Delaware
and California, respectively. CompuMed and Irsco represent that the
execution and delivery of this agreement by them and the conveyance of
stock provided in it have been duly authorized by all necessary corporate
action, and is a valid and binding agreement on both CompuMed and Irsco at
the closing.
10. The two Irsco stockholders ("stockholders") acknowledge that the
CompuMed Preferred Stock received by them has not been registered under the
Securities Act of 1933, as amended (the "Act") or qualified under the
California Securities Law of 1968, as amended, and that the stockholders
are acquiring the Preferred Stock for their own accounts for investment
purposes and not with a view to, or for sale in conjunction with, any
distribution thereof in a manner contrary to the Act. Stockholders
represent that they have acquired sufficient information about CompuMed to
reach an informed decision to acquire the CompuMed Preferred Stock.
Agreed to this 12 of August 1994
COMPUMED, INC. IRSCO Development Co., Inc.
By /s/ Robert Stuckelman
_____________________ By /s/ Winston Millet
Robert Stuckelman, ______________________________
President Winston Millet, President
By /s/ Max Guefen
______________________________
Max Guefen, Secretary
Exhibit 10.17
ASSIGNMENT OF
EXCLUSIVE MARKETING RIGHTS
Effective as of the 9th day of February, 1995, CompuMed Inc.
("Compumed"), a Delaware corporation having offices in Manhattan Beach,
--------
California, and Jacob Meller ("Meller"), a non United States resident,
------
hereby agree as follows:
1. Background Information.
----------------------
1.1 Meller. Meller is the owner of the exclusive marketing
------
rights in the United States of America for the products identified in
Exhibit 1 hereto of Israeli Aerotel Inc., a corporation organized under the
laws of Israel ("Aerotel"). A copy of the entire agreement (the "Exclusive
------- ---------
Marketing Agreement") with Aerotel including all its additions and
-------------------
amendments granting such rights to Meller is attached hereto as Exhibit 1.
The Exclusive Marketing Agreement gives Meller the exclusive right through
the end of 1999 to market Aerotel products in the United States, provided
that yearly sales increase by 20% per year.
1.2 Compumed. CompuMed is a NASDAQ-listed company that has
--------
approximately 5,200,000 outstanding shares of common stock, $.01 par value
per share (the "Common Stock"). CompuMed currently has a business line
------------
involving [telephonic interpretation of EKG data] (the "EKG Business"). As
------------
part of that business, CompuMed manufactures devices that it designates its
107 and 307 series.
1.3 Regulation S Offering. CompuMed has recently received an
---------------------
equity investment of $350,000 as part of a planned Regulation S offering
(the "Offering") of $1,000,000 through Israel-Trading Co.
2. Assignment.
----------
Meller hereby assigns to CompuMed all of his right, title and interest in
and to the Exclusive Marketing Agreement between Meller and Aerotel for
sales within the United States of America. CompuMed hereby agrees to
perform all of the obligations of Meller set forth therein with respect to
such sales except that Meller shall remain solely responsible for
liabilities and penalties arising under the Exclusive Marketing Agreement
arising out of any failure to meet minimum sales figures, which liabilities
and penalties Meller agrees to pay, unless Aerotel enters into a separate
and superseding agreement directly with CompuMed, in which case CompuMed
shall be responsible for such liabilities and penalties.
3. Consideration.
-------------
3.1 Shares. As consideration to Meller for the assignment set
------
forth herein, CompuMed is issuing Four Hundred Thousand (400,000) shares of
its Common Stock (the "Meller Shares") simultaneously with the execution of
this agreement. The Meller Shares are being issued in Meller's name and
being delivered to Thomas C. Carey, Esq. and Irachmil B. Taus, II, Esq.
(collectively, the "Escrow Agent"), as co-escrow agents, pursuant to the
escrow agreement attached hereto as Exhibit 2 (the "Escrow Agreement"),
with irrevocable instructions to release them to Meller as follows: (a) One
Hundred Thousand (100,000) of the Meller Shares shall be released and
delivered to Meller at his address set forth in section 9.5 below 41 days
after the date of this Agreement, provided that Meller confirms that he is
then at a non-U.S. address for bona fide business or personal reasons; (b)
Two Hundred Thousand (200,000) Meller Shares shall be released and
delivered to Meller at his address set forth in section 9.5 below provided
that Meller confirms that he is then at a non-U.S. address for bona fide
business or personal reasons upon the last to occur of (i) completion of a
Two Hundred and Fifty Thousand U.S. Dollars ($250,000.00) investment in the
Offering through Israel Trading Company, (ii) a demonstration that the
TeleCor telemetry station is operational, with all necessary FDA approvals,
so that medical doctors can prescribe cardiac event monitors in reliance
upon it, all as set forth in greater detail in the Escrow Agreement (but in
no event sooner than 41 days after the date of this Agreement) and (iii) in
the case of 100,000 of such 200,000 shares, the date one year from the date
of this agreement; and (c) One Hundred Thousand (100,000) shares are being
delivered to the Escrow Agent pursuant to the Escrow Agreement with
irrevocable instructions to release and deliver the shares to Meller at his
address set forth in section 9.5 as Meller may direct, provided that Meller
confirms that he is then at a non-U.S. address for bona fide business or
personal reasons upon the last to occur of (i) sales revenue of the TeleCor
division (as defined hereinafter) having reached Forty Thousand U.S.
Dollars ($40,000.00) for two successive months, and (ii) the date one year
from the date of this agreement, all as set forth in greater detail in the
Escrow Agreement. (All 400,000 shares being delivered herewith are
referred to herein collectively as the "Shares").
------
Nothing in the foregoing timetable or in the Escrow Agreement shall be
construed as requiring that Meller provide additional consideration for the
issuance of any of the Shares. It is expressly understood that the parties
are relying upon the availability of Regulation S promulgated by the U.S.
Securities Exchange Commission ("Reg S") as the basis for not registering
-----
the issuance of the Shares, the Warrant (as defined hereinafter) and the
Common Stock that is subject to the Warrant (collectively, the "Meller
------
Securities"). It is the belief of the parties that all of the Shares and
----------
the Warrant shall, for purposes of Regulation S, be deemed to have been
issued to Meller in Israel at the time of the execution of this Agreement,
and that the escrow conditions will serve as a condition subsequent which
may defeat Meller's entitlement to a portion of the Shares.
3.2 Meller Warrant. As consideration to Meller for the assignment
--------------
set forth herein, CompuMed will also issue a warrant (the "Meller Warrant")
--------------
in the same form as is being issued to Israel Trading Company in connection
with the Offering, subject only to such differences as may be legally
required because of differing circumstances applicable to Meller. The
Meller Warrant will be issued when the warrant to Israel Trading is issued.
When issued, the Meller Warrant will give Meller the right to purchase up
to One Hundred Fifty Thousand (150,000) shares of additional Common Stock
at $0.50 per share when the gross revenues of the TeleCor division have
reached $2.5 million during a 12-month period on at least a break-even
operational basis. The Common Stock subject to the Meller Warrant (the
"Meller Warrant Shares") shall, when issued, be fully paid and non-
---------------------
assessable and of the same par value as the shares of Common Stock that are
publicly traded. The Meller Warrant will be delivered to the Escrow Agent
pursuant to the Escrow Agreement with irrevocable instructions to release
and deliver the Warrant to Meller 41 days after the date of this Agreement
at his address set forth in section 9.5 below, provided that Meller
confirms that he is then at a non-U.S. address for bona fide business or
personal reasons.
4. Restrictions on Transfer of Securities.
--------------------------------------
Meller hereby represents to CompuMed that (i) he is not a U.S.
Person, as that term is defined in Reg S, (ii) he is not, at the time of
execution of this Agreement, physically present in the United States; (iii)
he is acquiring the Meller Shares and the Meller Warrant (collectively, the
"Meller Securities") for his own account, an not on behalf of any U.S.
-----------------
Person, as that term is defined in Reg S, (iv) he is the sole beneficial
owner of the Meller Securities, and has not pre-arranged any sale to any
purchaser within the U.S.; (v) Any transfer of the certificates
representing any Meller Securities that he may transfer into street name
will be solely to enable Meller to comply with the requirements of certain
offshore portfolio management regulations and the security requirements of
offshore lenders for margin loans; (vi) Meller is not an underwriter of, or
dealer in, the Meller Securities, and is not purchasing pursuant to a
contractual arrangement for the distribution of such securities; and (vii)
he is not acquiring any of the Meller Securities as part of a plan to evade
the registration provisions of the Securities Act of 1933 (the "1933 Act").
--------
Meller agrees that these representations will be deemed to be re-made at
the time of the issuance of any Meller Warrant Shares. CompuMed is issuing
the Meller Securities without registering their issuance under the 1933 Act
in reliance upon these representations and in reliance upon the exemption
from such registration requirements set forth in Reg S. Therefore no Meller
Securities can be transferred within the United States or to a U.S.
resident unless the transfer has been registered under the 1933 Act or is
exempt from the registration requirements set forth therein; and CompuMed
may issue stop transfer orders to its transfer agent restricting transfer
or sale of the Meller Securities until 41 days after issuance. Meller
acknowledges that he has received copies of CompuMed's most recent Annual
Report of form 10-KSB filed with the SEC, and the Forms 10-QSB and 8-K
filed thereafter, and other publicly-available documents.
Notwithstanding the foregoing, the parties acknowledge that Meller may
have to travel to the United States to ascertain that certain operational
aspects of the Aerotel technology are operating successfully. He is not
obligated hereunder to remain outside the United States while the Warrant
is outstanding; and he is not making any representation that he will do so.
5. Representations and Warranties.
-------------------------------
5.1 Representations and Warranties of Meller. Meller hereby
----------------------------------------
represents and warrants to CompuMed that:
(a) The background information set forth in sections 1.1 and 1.3
is true and not misleading;
(b) No separate consideration will be owed to Aerotel as a
result of the consummation of the transactions contemplated
herein;
(c) His execution, delivery and performance of this Agreement,
and the consummation of the transactions contemplated hereby
(i.e., the assignment of the Aerotel Agreement), will not
result in a breach of any of the terms, conditions or
provisions of any law, order, writ, injunction, judgment or
decree of any court or governmental authority or any
arbitration award applicable to him;
(d) Except as otherwise disclosed in this Agreement, he has good
title (whether in absolute form or in the form of license
rights) to all computer software programs necessary for him
to carry out the provisions of this Agreement;
(e) All Aerotel products to be sold in the United States have or
shall have all necessary approvals and clearances from the
U. S. Food and Drug Administration;
(f) A Heartline Center Aerotel Model, including lay-out, and
software, and but excluding hardware, shall be installed and
set up at CompuMed's headquarters after CompuMed has
provided the hardware needed and the location of the
Center);
(g) Attached as Exhibit 3 hereto is a valid and binding written
agreement of Aerotel confirming that the Exclusive Marketing
Agreement set forth on Exhibit 1 hereto is a true, correct
and complete copy of agreement between it and Meller
concerning the subject matter addressed therein;
(i) confirming that the agreement remains in full force and
effect, and does not conflict with any other agreement,
judgment or court order binding upon it or its assets;
(ii) confirming that Aerotel has the right to grant the
marketing rights granted therein to Meller; and
(iii) consenting in writing to the assignment of Meller's
rights therein to CompuMed.
5.2 Representations and Warranties of CompuMed. CompuMed hereby
------------------------------------------
represents and warrants to Meller that:
(a) The background information set forth in section 1.2 and 1.3
is true and not misleading;
(b) All shares of Common Stock to be issued hereunder or
pursuant to the Meller Warrant have been duly authorized
and, when issued in accordance with this Agreement and all
the exhibits attached hereto, will be and are validly
issued, fully paid and non-assessable; and
(c) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will
result in a breach of any of the terms, conditions or
provisions of (a) its Certificate of Incorporation or
by-laws, or (b) any law, order, writ, injunction, judgment
or decree of any court or governmental authority or any
arbitration award applicable to it. No consent, approval,
order or authorization of any governmental authority is
required to be obtained by CompuMed in order to consummate
the transactions contemplated herein.
(d) Its Common Stock is registered pursuant to section 12 of the
Securities Exchange Act of 1934 (the "Exchange Act").
(e) It has made all filings required to be made under the
Exchange Act for a period of twelve months preceding the
date hereof (the "SEC Filings"). The Company will continue
-----------
to make such filings on a timely basis.
(f) It agrees, pursuant to the sale of its securities under Reg
S, to make all necessary filings in connection with the sale
of its securities as required by the laws and regulations of
all appropriate jurisdictions.
(g) If Meller decides to engage in a sale of any Shares or
Warrant Shares that is registered under the 1933 Act,
CompuMed will provide reasonable cooperation, at CompuMed's
expense, such as causing its counsel to issue an opinion
that the Shares or Warrant Shares have been duly authorized
and are validly issued, fully-paid and non-assessable.
Otherwise, Meller shall be generally responsible for the
costs of such a registered offering.
6. Future Obligations.
------------------
6.1 CompuMed. CompuMed shall:
--------
(a) The Telecor Division. Establish a TeleCor division as a
--------------------
vehicle for marketing products that combine the Aerotel and
CompuMed technologies for computer interpretation of
transtelephonic EKG data, cardiac monitoring and emergency
response of cardiac patients in the home. The TeleCor
Division will market CompuMed's 107 and 307 product series
and the Aerotel products. CompuMed will fund the TeleCor
division with the net proceeds of the next $500,000 portion
of the Offering raised hereafter (it being understood that
Compumed may use the last $150,000 of the Offering for its
general corporate purposes). Both parties acknowledge
(without thereby modifying their rights and obligations
hereunder) that execution of the TeleCor business plan will
require more funds than will be available through the
Regulation S Offering, and that there is no assurance that
such capital will be available to CompuMed;
(b) Technology Sharing. Cooperate as required in making its
------------------
technology available to the TeleCor division and assisting
in the conversion of the Heartline system described below.
(c) Grimes Warrant. As an incentive to the TeleCor sales force,
--------------
CompuMed will issue a warrant (the "Grimes Warrant")
--------------
pursuant to which Roger Grimes and his associates ("Grimes")
------
will have the right, upon the achievement of certain sales
revenue and profitability milestones, to purchase up to Six
Hundred Fifty Thousand (650,000) shares of additional Common
Stock at $0.50 per share (such shares being referred to
herein collectively as the "Grimes Warrant Shares").
---------------------
6.2 Meller. As part of the assignment of the Exclusive
------
Marketing Agreement, and to demonstrate that the Aerotel
product is functioning and operative, Meller shall cause
Aerotel to:
(a) Training. Set up the operation and provide the technical
--------
skills necessary to run the TeleCor operations. This will
involve locating and obtaining operating experts in the
local (U. S. labor) market and if necessary bring over from
Israel (at no expense to CompuMed) such experts to run the
application of the operations. This will also involve
training employees of TeleCor (as a division of CompuMed) as
needed to provide an efficient and proficient operation; and
having representatives participate in, and cause Aerotel to
participate in, the semi-annual trade shows presently
conducted in Dallas, Texas, and New Orleans, Louisiana, in
the same manner and to the same extent that they have done
so in the recent past, with no charge to CompuMed;
(b) Heartline Conversion. Use best efforts to achieve
--------------------
conversion of the algorithm of the Heartline system to
operate on common PC computers (it being understood by the
parties that such conversion may require the use of software
copyrighted by third parties).
7. Arbitration.
-----------
Any controversy or claim arising out of or relating to this Agreement, or
the breach hereof, which the parties are unable to resolve themselves shall
be finally settled by arbitration ("Arbitration") in accordance with this
Section and (except to the extent inconsistent with the express provisions
of this Section) the Commercial Arbitration Rules of the American
Arbitration Association ("AAA"), by a three-person arbitration panel,
except that no controversy or claim, the manner of resolution of which is
expressly provided for herein otherwise than under this Section, or is
expressly excluded from Arbitration, shall be arbitrable hereunder.
The party seeking arbitration shall give notice thereof and of the
issues it wishes arbitrated, and shall designate an arbitrator in such
notice. The other party shall designate its arbitrator, and any additional
issues it wishes arbitrated in the same proceeding, within thirty (30) days
after receipt of such notice. The two arbitrators so selected shall agree
upon a third arbitrator within fifteen (15) days thereafter. If a second
arbitrator has not been designated within the thirty (30) day period
provided therefore, the first arbitrator may unilaterally designate a
second arbitrator and such two arbitrators shall constitute the arbitration
panel. If the arbitrators selected by each of the parties cannot agree upon
a third arbitrator, they shall request the Regional Director of the AAA to
designate the third arbitrator. The arbitration panel may, with the consent
of the parties, agree on such modifications to or exceptions from the
Arbitration Rules of the AAA as the panel may deem appropriate. The award
of the arbitrators shall be in writing and shall include written findings
of fact to the extent the arbitration required the resolution of factual
disputes.
The agreement to arbitrate disputes as provided in this Agreement
shall be specifically enforceable in any court having jurisdiction.
No individual who is, or has at any time been, an officer, employee or
consultant of either party shall be an arbitrator without the express
written consent of both parties.
All arbitration proceedings shall be held in Los Angeles, California.
Each of the parties shall produce such records and witnesses as the
arbitrators may request and as are available to them.
The arbitrators shall determine a fair and equitable allocation of the
reasonable fees and expenses of each party incurred in connection with any
Arbitration hereunder, and such allocation shall be binding upon the
parties.
Each party submits to the jurisdiction of the arbitrators appointed in
accordance herewith. The determination of the arbitrators shall be final
and binding upon the parties and may be entered in any court having
jurisdiction.
8. Indemnification.
---------------
8.1 Indemnification Covenants.
-------------------------
Each party shall defend, indemnify, save and keep the other harmless
against and from all liabilities, demands, claims, actions or causes of
action, assessments, losses, fines, penalties, costs, damages and expenses,
including, without limitation, those asserted by any Federal, state or
local governmental entity or third party, including reasonable attorneys'
and expert witness fees, sustained or incurred as a result of or arising
out of or by virtue of:
(a) the inaccuracy of any representation or warranty made by the
indemnifying party herein or in any document delivered
herewith;
(b) the unexcused failure of the indemnifying party to comply
with any of the covenants of this Agreement to be performed
by it or him (including, without limitation, this Section);
and
(c) the invalidity, unenforceability or lack of authorization of
this Agreement, or any document delivered in connection
herewith.
9. General
-------
9.1 Applicable Law.
--------------
The law of the State of California (excluding conflict of law rules
thereof) shall govern the validity, interpretation, construction and
performance of this Agreement.
9.2 Compliance with Laws.
--------------------
In the performance of this Agreement, each party shall comply with all
federal, state and local laws, rules, ordinances, regulations and all
administrative and judicial positions known to it, except for such period
as it may in good faith be contesting the validity or application thereof.
9.3 Severability.
------------
If any provision of this Agreement is held invalid by any court or body of
competent jurisdiction, the remainder of this Agreement shall remain in
full force and effect.
9.4 Headings.
--------
The section headings in this Agreement are for convenience and reference
only and in no way define or limit the scope or content of this Agreement
or in any way affect its provisions.
9.5 Notices.
-------
All Notices hereunder shall be in writing, and may be delivered by U.S.
Mail (certified or registered mail), FedEx, DHL or confirmed telecopier
transmission, thereto, within accordance of the Notice provisions of this
paragraph. Notices shall be deemed given upon receipt if sent by
telecopier, FedEx or DHL, and three days after having been deposited in the
U.S. mails, postage prepaid, if sent by U.S. mail. All notices shall be
addressed as follows:
If to CompuMed: Rod N. Raynovich, President
CompuMed, Inc.
1230 Rosecrans Ave., suite 1000
Manhattan Beach, CA 90266
with a copy to: Bruce Sunstein, Esq.
Bromberg & Sunstein
125 Summer St.
Boston, MA 02110
If to Meller: Jacob Meller
55 Ahad Haam St.
Raanana, Israel 43210
with a copy to: Irachmil B. Taus II
6380 Wilshire Blvd., #1407
Los Angeles, CA 90048
Changes in the respective addresses to which such notices shall
be sent may be made from time to time by either party by notice to the
other party(s).
9.6 Entire Agreement.
----------------
This Agreement contains the entire understanding of the parties with
respect to the subject matter hereof, and supersedes all prior agreements,
representations and understandings of the parties with respect to the
subject matter hereof. This Agreement may be amended or modified only by
written instrument duly executed by the parties hereto.
9.7 No Third Party Beneficiaries.
----------------------------
This Agreement is intended to be an Agreement between CompuMed and Meller,
and it is not the intent of the parties that any individual or company be a
third party beneficiary of this Agreement.
9.8 Waiver.
------
Failure of either party to provide notice to the other of a breach of this
Agreement shall not act as a waiver of any prior or subsequent breach nor
of any other legal or equitable remedy which it may have.
9.9 Cooperation.
-----------
Each party will cooperate with all reasonable requests of the other for
information regarding the other party or the transactions contemplated
hereby.
9.10 Expenses.
--------
Each party shall pay its own expenses incident to preparing for, entering
and formulating this Agreement.
9.11 Miscellaneous Agreements and Consents.
-------------------------------------
Subject to the terms and conditions herein provided, each of the parties
hereto agrees to use all reasonable efforts to take, or cause to be taken,
all action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement.
9.12 Press Releases.
--------------
The parties shall consult with each other as to the form, substance and
timing of any press release or other public disclosure of matters related
to this Agreement or any of the transactions contemplated hereby; provided,
however, that either party may make such disclosures as are required by
law.
* * * * * * *
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
caused this Agreement to be executed as a sealed instrument as of the day
and year first above written.
COMPUMED, INC.
By: /s/ Rod N. Raynovich
___________________________
Rod N. Raynovich, President
/s/ Jacob Meller
______________________________
Jacob Meller
SCHEDULE OF EXHIBITS
1. Exclusive Marketing Agreements and all its Amendments
2. Escrow Agreement
3. Aerotel Consent
Exhibit 21
SUBSIDIARIES OF COMPUMED, INC.
Percentage
Name State of Incorporation Owned
---- ---------------------- ----------
Irsco Development Company, Inc. California 100%
CompuMed Systems California 100%
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-57896) and related Prospectus pertaining to the 1982 Stock
Option Plan, 1992 Stock Option Plan, Non-Qualified Stock Option Plan
Agreements and Consultant Agreement of CompuMed, Inc. and subsidiaries of
our report dated November 29, 1995, with respect to the consolidated
financial statements of CompuMed, Inc. and subsidiaries included in its
Annual Report (Form 10-KSB) for the year ended September 30, 1995, filed
with the Securities and Exchange Commission.
Los Angeles, California
December 29, 1995 /s/ Ernst & Young LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
COMPUMED, INC. FORM 10-KSB FOR THE YEAR ENDED SEPTEMBER 30, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 299,000
<SECURITIES> 4,723,000
<RECEIVABLES> 687,000
<ALLOWANCES> 218,000
<INVENTORY> 123,000
<CURRENT-ASSETS> 6,095,000
<PP&E> 7,555,000
<DEPRECIATION> 3,516,000
<TOTAL-ASSETS> 10,498,000
<CURRENT-LIABILITIES> 2,238,000
<BONDS> 3,001,000
<COMMON> 82,000
0
6,000
<OTHER-SE> 5,113,000
<TOTAL-LIABILITY-AND-EQUITY> 10,498,000
<SALES> 2,543,000
<TOTAL-REVENUES> 3,010,000
<CGS> 1,700,000
<TOTAL-COSTS> 1,700,000
<OTHER-EXPENSES> 4,700,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 374,000
<INCOME-PRETAX> (3,390,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,390,000)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> 0
</TABLE>
