Filed pursuant to Rule 424(b)(4)
Registration No. 33-48437
P R O S P E C T U S
COMPUMED, INC.
960,000 SHARES OF COMMON STOCK
($.01 PAR VALUE)
This Prospectus relates to the offering by CompuMed, Inc., a Delaware
corporation (the "Company"), of 800,000 shares of its Common Stock, $.01
par value per share ("Common Stock"), issuable upon exercise of outstanding
common stock purchase warrants (the "Warrants"). The Warrants were issued
in connection with the Company's public offering in August 1992 of
8,000,000 Units (the "Units"), each Unit consisting of one share of Common
Stock and one Warrant. As a result of a one for ten reverse stock split
effected in October 1994 (the "Reverse Stock Split"), a Warrantholder must
exercise ten Warrants in order to purchase one share of Common Stock of the
Company at an aggregate exercise price of $3.75. The Warrants expire on
August 2, 1997. The Warrants are presently redeemable by the Company upon
30 days prior written notice at a redemption price of $.05 per Warrant.
This Prospectus also relates to 160,000 shares of Common Stock which
may be offered for sale from time to time for the account of Paulson
Investment Company, Inc. ("Paulson") which may be issued upon full exercise
of 800,000 Representative's Warrants granted to Paulson in its capacity as
representative of several underwriters in the Company's August 1992 public
offering (the "Representative's Warrants"). As a result of the Reverse
Stock Split, the Representative must exercise ten Representative's Warrants
at an aggregate exercise price of $3.00 in order to obtain a unit
consisting of one share of Common Stock and one warrant to purchase one
share of Common Stock at an exercise price of $3.75. The Representative's
Warrants are currently exercisable and expire on August 2, 1997.
The Company's Common Stock and the Warrants are quoted on the Nasdaq
Small Cap Market under the symbols CMPD and CMPDW, respectively. On
February 12, 1996, the closing bid and asked prices were $2.94 and $3.06
per share of Common Stock and $.16 and $.19 per Warrant. The Company will
receive proceeds from the exercise of the Warrants and the Representative's
Warrants, but not from the sale of the underlying Common Stock.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 4 THROUGH 8 HEREOF.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is February 13, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the
Securities and Exchange Commission (the "SEC"). Such reports and other
information can be inspected and copied at the Public Reference Section of
the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
or at its offices at 500 West Madison Street, 14th Floor, Chicago, IL
60661; or Seven World Trade Center, 13th Floor, New York, NY 10048. Copies
of this material can also be obtained at prescribed rates by writing to the
Public Reference Section of the SEC at its principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
This Prospectus constitutes a part of a Registration Statement filed
by the Company with the SEC under the Securities Act of 1933, as amended
(the "Securities Act"). This Prospectus omits certain information
contained in the Registration Statement, and reference is hereby made to
the Registration Statement and to the exhibits relating thereto for further
information with respect to the Company and the offering. Any statements
contained herein concerning the provisions of any document are not
necessarily complete, and, in each instance, reference is made to the copy
of such document filed as an exhibit to the Registration Statement or
otherwise filed with the SEC. Each such statement is qualified in its
entirety by such reference. The Company's Common Stock is quoted on the
Nasdaq Small Cap Market, and such reports and other information can also be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the SEC are incorporated
by reference in this Prospectus:
1. Annual Report on Form 10-KSB for the fiscal year ended September
30, 1995;
2. Current Reports on Form 8-K for events of September 27, 1995,
October 18, 1995, October 24, 1995, November 29, 1995 and January 2, 1996;
and
3. Proxy Statement for Annual Meeting of Stockholders, dated January
29, 1996.
All documents filed by the Company with the SEC pursuant to Section 13
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the securities covered by this
Prospectus shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or
superseded for the purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document
which is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
The Company undertakes to provide without charge to each person to
whom this Prospectus is delivered, upon written or oral request of any such
person, a copy of any and all of the documents referred to above which have
been or may be incorporated by reference in this Prospectus other than the
exhibits thereto. Requests for such copies should be directed to CompuMed,
Inc. at 1230 Rosecrans Avenue, Suite 1000, Manhattan Beach, California
90266, Attn: DeVere B. Pollom, Chief Financial Officer, telephone (310)
643-5106.
THE COMPANY
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 OsteoGram(R), 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) the
TeleCor Services Division ("TeleCor"), which is engaged in transtelephonic
cardiac event monitoring, and (iv) the development of Detoxahol[TM], a
substance and delivery technology intended to facilitate the rapid lowering
of blood alcohol levels from people who have been drinking alcohol. The
industrial park complex, which was owned and managed by the Company's
wholly owned subsidiary is presently being sold in connection with certain
foreclosure proceedings arising from defaults by such subsidiary under
certain deeds of trust secured by such property. See "BUSINESS INDUSTRIAL
PROPERTY IRSCO DEVELOPMENT COMPANY, INC." In September 1995, the Company
entered into a Technology License Agreement (the "Merck License
Agreement"), with Merck & Co., Inc. ("Merck"), pursuant to which the
Company has licensed its proprietary technology in the OsteoGram(R) to
Merck and has sold to Merck certain assets used in conducting and analyzing
OsteoGrams(R) (such assets together with the proprietary technology are
hereinafter referred to as the "OsteoSystem"). Management expects its
near-term growth to come from the royalties obtained pursuant to the Merck
License Agreement.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and consolidated financial statements incorporated by
reference herein.
THE OFFERING
Common Stock Outstanding . . . . 8,408,166 shares as of February 1,
1996; 9,215,356 shares upon
completion of the offering (1)
Use of Proceeds . . . . . . . . . Marketing, sales and distribution,
research and development expenses
and for working capital. See "Use
of Proceeds."
Terms of Warrants . . . . . . . . As a result of the Reverse Stock
Split, a warrantholder must
exercise ten Warrants at an
aggregate exercise price of $3.75
to purchase one share of Common
Stock. The Warrants expire on
August 2, 1997.
Rights of Redemption . . . . . . The Warrants are presently
redeemable by the Company upon 30
days prior written notice at a
redemption price of $.05 per
Warrant.
Terms of Representative's Warrants
As a result of the Reverse Stock
Split, the Representative must
exercise ten Representative's
Warrants at an aggregate exercise
price of $3.00 in order to obtain a
unit consisting of one share of
common stock and one warrant to
purchase one share of common stock
at an exercise price of $3.75.
Risk Factors . . . . . . . . . . Exercise of the Warrants involves a
high degree of risk and substantial
dilution. See "Risk Factors."
Nasdaq Symbols . . . . . . . . . Common Stock CMPD
Warrants CMPDW
(1) Includes 647,190 shares issuable upon exercise of Warrants
(152,810 shares were previously issued) and 160,000 shares issuable upon
exercise of the Representative's Warrants. Does not include an aggregate
of 1,625,032 shares reserved for issuance upon exercise of other
outstanding warrants and options to purchase shares of the Company's Common
Stock, and 527,530 shares underlying convertible preferred stock.
RISK FACTORS
The shares of Common Stock issuable upon exercise of the Warrants and
the Representative's Warrants involve a high degree of risk and, therefore,
should be considered extremely speculative. They should not be purchased
by persons who cannot afford the possibility of the loss of their entire
investment. Prospective investors should consider carefully among other
risk factors, the risk factors and other special considerations relating to
the Company and this offering set forth below.
FINANCIAL RISKS
History of Losses. The Company's operations incurred net losses of
$3,390,000 in 1995, $3,864,000 in 1994 and $2,202,000 in 1993. The
Company's retained deficit at September 30, 1995 was $19,520,000. The
Company anticipates further losses until a significant market for the
OsteoGram(R) is developed and the Company begins to receive royalties from
the licensing of the OsteoSystem pursuant to the Merck License Agreement.
Although revenues for the quarter ended December 31, 1995 were comparable
to revenues for the quarter ended December 31, 1994, the Company incurred a
larger loss in the first quarter of 1996 than in the first quarter of 1995
due in part to increased research and development costs and expenses
related to certain securities class action complaints and a derivative
complaint filed against the Company. Future operating results could be
further impaired by such costs and expenses and by development efforts and
associated expenses in connection with the creation of a second generation
OsteoSystem and the Company's rights to Detoxahol[TM].
No Assurance of Future Sources of Capital to Support and Grow
Business. The Company will require capital to finance its continued
investment in research and development of Detoxahol[TM] and a second
generation OsteoSystem and to support and grow its existing ECG systems and
TeleCor businesses. Although the Company has sufficient capital to fund
these activities for at least the next 24 months as the result of the
private placement in August 1995 of 1,236,000 shares of its Common Stock
for $5.1 million (See "MARKET RISKS Shares Eligible for Future Sale"),
inasmuch as it expects to incur additional operating losses, there can be
no assurance that the Company will have adequate working capital to fund
all of these activities thereafter. Presently, no additional capital is
actively being sought.
BUSINESS AND REGULATORY RISKS
Lack of Acceptance of the OsteoGram(R). Management expects a
significant portion of the Company's future revenues to come from royalties
under the Merck License Agreement. The Merck License Agreement grants
Merck the exclusive right to market and sell the OsteoGram(R), including
complete control over the operation of, marketing and sales for, the
OsteoGram(R). Royalties receivable by the Company pursuant to the Merck
License Agreement are dependent on OsteoGram(R) sales volume. Merck is not
obligated to pay the Company any minimum amount of royalties. The
existence of the OsteoGram(R) for testing bone mass is currently at an
early stage in market development and is not widely recognized by the
medical profession and the public. Although management believes that the
introduction of drugs like Merck's Fosamax[TM] into the market will
increase the public's awareness of the OsteoGram(R), education of the
medical profession and public of the OsteoGram(R)'s effectiveness, low
cost, ease of use, and lack of any need for specialized capital equipment
to administer the test remains vital to the success of the OsteoGram(R).
In addition, other obstacles such as competition with other companies that
are better known and financed than the Company, could impede the
OsteoGram(R)'s success. In fact, Merck has entered into licensing or
collaborative arrangements with certain of the Company's competitors and
has acquired an equity interest in at least one of the Company's
competitors, although the systems of such competitors differ materially in
cost or performance from the OsteoGram(R). Such arrangements could affect
sales by Merck of the Osteogram(R) as the Merck License Agreement does not
provide for minimum royalties to the Company. There is no assurance that
any of these approaches will be successful to develop a profitable market
for the OsteoGram(R) or that Merck will be able to successfully market the
OsteoGram(R) or that the Company will derive substantial royalties from the
Merck License Agreement.
Technological and Market Uncertainty for Detoxahol[TM]. Significant
further research and development, including clinical testing, as well as
obtaining necessary regulatory clearances, are required before the Company
can produce a marketable Detoxahol[TM] product. To date, only one series
of animal studies relating to the conceptual feasibility of Detoxahol[TM]
has been completed. There can be no assurance that the Company's research
and development efforts will be successful or that any potential
Detoxahol[TM] product ultimately produced will prove to be safe and
effective in further pre-clinical or clinical trials. Moreover, even if a
potential Detoxahol[TM] product is eventually approved for marketing, there
can be no assurance that it can be marketed successfully. The Company may
encounter unanticipated problems relating to requisite Food and Drug
Administration (the "FDA") clearance, development, manufacturing,
distribution or marketing, some of which may be beyond the financial and
technical abilities of the Company to resolve. The failure to adequately
address such problems could have a material adverse effect on the Company.
Finally, there can be no assurance that any potential Detoxahol[TM] product
will not be rendered obsolete by competitors' products or that competitors'
products will not significantly limit the potential market for any products
the Company produces in the future. See "RISK FACTORS BUSINESS AND
REGULATORY RISKS Competition" and "Government Regulation."
FDA Regulation. The Company's medical devices, medical services and
potential pharmaceutical products are subject to varying degrees of FDA
regulation. The FDA Office of Medical Devices regulates the safety and
efficacy of "medical devices." All medical devices and their components
are subject to certain general controls, including compliance with
specified manufacturing practices. Manufacturers are required to provide
the FDA with advance notice of their intention to introduce and market new
medical devices and demonstrate such devices' safety and efficacy to the
FDA's satisfaction prior to commencement of their commercial use.
In December 1993, the FDA issued a "Warning Letter" to the Company
relating to the OsteoGram(R) (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 OsteoGram(R) was in use prior to
1976 when the 510-K regulations were established and thus the Company
believes that the OsteoGram(R) is "grand-fathered" in without having to
file under 510-K. In addition, the Company considers the OsteoGram(R) to
be a medical service, which in the opinion of management and the Company's
consultants is not subject to the requirements of 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 FDA concerns. In the event that the FDA ultimately
determines that the OsteoGram(R) requires a 510-K filing, such filing would
be made. The Company estimates that the 510-K filing process would take
approximately one year comprising the following stages: (i) approximately
four months to draft documents to be submitted to the FDA and to prepare
exhibits, (ii) approximately another four months before obtaining a
preliminary response from the FDA and (iii) about four months from the
receipt of the preliminary response until the filing is completed. There
is, however, no assurance that the Company and Merck will be able to
resolve FDA concerns or that there will not be future FDA concerns having
an adverse effect on revenues the Company receives from Merck on
OsteoGram(R) sales.
Prior to marketing any prescription or over-the-counter potential
Detoxahol[TM] product that is eventually developed by the Company, such
prescription or potential product 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 Investigational New Drug Application ("IND").
There can be no assurance that the Company will continue to develop
its Detoxahol[TM] technology or that if any Detoxahol[TM] product is
ultimately developed by the Company, such product will be cleared by the
appropriate regulatory agencies. 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 clearances may result in 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 potential
products might otherwise enjoy.
If clearance is obtained to proceed to clinical trials pursuant to 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 may be shorter. Since
pre-clinical testing of Detoxahol[TM] has not yet commenced, the Company is
unable to estimate when it would file an IND with respect to Detoxahol[TM],
assuming the Company decides to continue to develop Detoxahol[TM].
Even if regulatory marketing clearances are 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 product from the market. Any manufacturing or labeling
change made by the Company to any product approved for marketing would also
be subject to regulatory review. See "BUSINESS Government Regulation".
Medical Reimbursement Program. Currently, the OsteoGram(R), ECG
services and TeleCor are approved for reimbursement by Medicare and most
other third party payors. Most payments for these services are made by the
medical insurance carrier of the patients. Congress and President Clinton
are presently at an impasse over Congress' long-term budget bill. The bill
contains provisions which seek to limit Medicare. If such provisions
remain in the bill when and if it becomes law, then such legislation would
likely limit the total number of Medicare recipients and thereby limit the
ability of physicians to recover costs of Osteogram(R) tests and ECG or
TeleCor services. Should Medicare reimbursement programs be significantly
reduced or should other regulatory changes affect the ability of physicians
or the Company (or Merck in the case of the OsteoGram(R)) to recover the
cost of OsteoGram(R) tests, ECG services or TeleCor services, the Company's
ability to market and sell its products would be adversely affected.
Lack of Patent Protection. The Company has licensed its proprietary
technology in the OsteoGram(R) to Merck in reliance on trade secret
protection for the OsteoGram(R) and considers the software to process the
OsteoGram(R) to be proprietary. However, such protection may not
necessarily preclude competitors from developing products which can be
marketed in competition with the OsteoGram(R). The Company intends to file
for patents as improvements are made to the OsteoSystem or as the second
generation OsteoSystem is developed. See "BUSINESS THE OSTEOGRAM(R) Merck
License Agreement" for a description of certain rights of first refusal
held by Merck in connection with the development and ultimate licensing of
a second generation OsteoSystem. There can be no assurance that patent
applications, if filed, will result in issued patents or that patents, if
issued will not be circumvented or invalidated. Moreover, there is no
assurance that the Company is not infringing the patents of third parties.
In June 1995, a patent application was filed on behalf of the Company
covering the technology underlying Detoxahol[TM]. There can be no
assurance that such patent application will be approved, that the Company
can develop or acquire Detoxahol[TM] products or methods of use that are
patentable, or even if patents are issued that they will result in any
competitive advantage to any Detoxahol[TM] products ultimately created by
the Company 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 potential Detoxahol[TM] products. In
addition, to the extent that the Company develops uses of Detoxahol[TM] 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.
Competition. The primary businesses in which the Company engages,
testing for bone density and sales and processing of ECGs, is highly
competitive. There are other companies with substantially greater market
recognition and financial and development resources than those of the
Company which are engaged in the marketing of products similar to and which
compete with the OsteoGram(R) and the Company's ECG terminals. Many
radiology centers (in hospitals and free standing) also consider themselves
competitors of the Company, because of their capital investments in
expensive bone scanning equipment. In addition, and particularly in regard
to the OsteoGram(R), physicians and other prominent members of the medical
community frequently are reluctant to accept new products until their
contribution to health care has been established over an extended period of
time. To the extent the medical community is slow to accept the use of the
OsteoGram(R), any revenues receivable by the Company pursuant to the Merck
License Agreement may be impeded. In addition, there is no assurance that
other companies with competing technologies will not be approved for
reimbursement by Medicare and/or private insurance carriers.
New Products and Technological Change. The Company is in the "high
tech" end of the health care industry. This industry has been historically
marked by very rapid technological change and frequent introductions of new
products. Accordingly, the Company's future growth and profitability
depend in part on its ability to continue to respond to technological
changes and successfully develop and market new products that achieve
significant market acceptance. There is no assurance that the Company will
be able to do so.
Dependence on Third Parties for Manufacturing, Marketing and Research.
The Company currently has no capability to manufacture or market potential
Detoxahol[TM] products that may be developed or certain apparatus used in
connection with the OsteoSystem, ECG services or TeleCor services. The
Company has entered into arrangements for the manufacture of certain
apparatus used in connection with the OsteoSystem, ECG services and TeleCor
services. The Company intends to seek license agreements with
pharmaceutical companies for the manufacture and marketing of any potential
Detoxahol[TM] products. In addition, the Company does not have the
capacity to conduct the preclinical and clinical testing of Detoxahol[TM]
and other research required in connection with the development of
Detoxahol[TM] and accordingly has entered into an arrangement with the
University of Georgia for the preclinical and clinical testing and the
continued research and development of Detoxahol[TM]. The Company will be
dependent on these and other third parties for the manufacture of its
products for clinical testing and commercial purposes, for the marketing of
these products and for research capacity, as the case may be.
The Company has not yet entered into any discussions with third
parties for manufacturing and marketing of potential Detoxahol[TM]
products. In addition, there can be no assurance that the Company will be
able to enter into commercial manufacturing or marketing agreements for any
of these products or that the terms of any such agreements will be
attractive to the Company.
In the event that the Company is unable to obtain or retain third
party manufacturers, it may not be able to commercialize its products as
planned. Clearance of the Company's products for marketing outside the
United States and Canada may be dependent on the consummation of
manufacturing and marketing agreements with licensees or partners. The
Company's dependence upon third parties for the manufacture and marketing
of its products also may adversely affect the amount of any future profit
to the Company from the marketing of its products.
Products Liability Exposure. The malfunction or misuse of the medical
devices assembled and sold and services rendered by the Company may result
in potential injury to physicians' patients, thereby subjecting the Company
to possible liability. Although the Company's insurance coverage is
$3,000,000 per occurrence and $3,000,000 in the aggregate with a deductible
of $1,000, which amounts and deductibles are customary in the industry,
there can be no assurance that such insurance will be sufficient to cover
any potential liability. Furthermore, there can be no assurance that this
coverage will continue to be available or, if available, that it can be
maintained at reasonable cost. To date, the Company has never been
involved in any litigation as a result of alleged product liability.
Professional Liability Exposure. The Company's current liability
insurance policy does not cover losses due to misinterpreted physician
overreads of ECG or TeleCor printouts. Medical professional liability
claims which may be brought against the Company for physician overreads
could have a material adverse effect on the Company's business, financial
condition or operating results. Since commencing its ECG and TeleCor
services, no medical professional liability claims have been made against
either physicians who perform overreads for the Company or the Company.
Irsco Default. The Board of Directors of the Company's wholly-owned
subsidiary, Irsco Development Company, Inc., a California corporation
("Irsco"), has determined that it is in Irsco's best interests to allow
Irsco's industrial park (the "Irsco Property") to be sold in foreclosure
proceedings instituted by the holders of certain deeds of trust in November
1995. The holders of the deeds of trust do not have any recourse beyond
the Irsco Property. 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. The Company may have to record additional write-downs in connection
with the foreclosure and sale of the Irsco Property.
Securities Litigation. In October through November 1995, several
class action and one derivative complaint (collectively, the "Complaints")
were filed against the Company 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 derivative complaint which is
brought derivatively on behalf of the Company. The Complaints allege
violations of federal securities laws and relate to the nature and extent
of the disclosure of certain caps on the royalties receivable by the
Company under the terms of the Merck License Agreement. The litigation is
in the early stages of discovery. The Complaints allege damages in an
unspecified amount together with costs and fees. The Company denies the
allegations and contends that the lawsuit has no merit. The Company cannot
predict what effect a certified judgment in favor of the plaintiffs would
have on the Company's financial condition. See "BUSINESS - LEGAL
PROCEEDINGS".
MARKET RISKS
Securities Market Volatility. There have been periods of extreme
volatility in the stock markets, which in many cases were unrelated to the
operating performance of, or announcements concerning, the issuers of the
affected stock. The Company's Common Stock has recently been traded at a
high volume and the bid and asked prices for its Common Stock have
increased significantly as a result of such volume. General market price
declines or market volatility or factors related to the general economy or
the Company in the future could adversely affect the price of the Common
Stock. Investors should check market prices before making an investment
decision with respect to securities of the Company.
Dilution. The exercise price of $3.75 per share is in excess of net
tangible book value, which was $.55 per share on December 31, 1995.
Warrantholders who exercise the Warrants would absorb immediate dilution in
the net tangible book value per share underlying the Warrants.
Shares Eligible for Future Sale. An aggregate of 9,742,886 shares of
the Company's Common Stock will be outstanding immediately, assuming
conversion of outstanding shares of Class A and Class B Preferred Stock,
the exercise of the Warrants and the full exercise of the Representative's
Warrants, but excluding shares underlying options and other warrants. The
sale, or availability for sale, of substantial amounts of Common Stock in
the public market subsequent to this offering could adversely affect the
prevailing market price of the Common Stock and could impair the Company's
ability to raise additional capital when needed through the sale of its
equity securities. In addition, an aggregate of 1,236,000 shares were
issued in August 1995 to certain accredited investors and finders for an
aggregate of $5.1 million pursuant to exemptions from registration under
the Securities Act (the "Placement"). Pursuant to the Stock Purchase
agreement among the parties to the Placement, the Company must prepare and
file an appropriate registration statement covering the shares issued in
the Placement in February 1996 and use its best efforts to cause such
registration statement to become effective. Alternatively, if the Company
at any time prior to such date proposes to register any other shares of its
Common Stock under the Securities Act (other than registrations (i) solely
for the registration of shares in connection with an employee benefit plan
or a merger or consolidation or (ii) for the registration of Common Stock
underlying warrants or other rights issued and outstanding), whether or not
for sale of its own account, the holders of the shares issued in the
Placement have the right, upon written request of any such holder made
within thirty days after the receipt of notice from the Company of its
intention to file such a registration statement, to cause the Company to
use its best efforts to effect the registration under the Securities Act of
all shares which the Company has been so requested to register. The
Company must bear the entire cost of the registration of the shares issued
in the Placement and upon request, must qualify such shares for sale in
such jurisdictions as requested by the holders thereof.
Effect of Exercise of the Warrants. Holders of the Warrants might be
expected to exercise at a time when the market price of the Company's
Common Stock is in excess of the exercise price under the terms of the
Warrants, with a resulting dilution of the interest of stockholders. In
the event the Warrants are exercised, any sales of the shares so acquired
might depress the then current market price of the Common Stock. In
addition, the Warrants could serve as an impediment to the Company's
ability to raise capital based on a sale of equity on terms more favorable
than those of the Warrants.
Warrants Redeemable. The Warrants may be redeemed by the Company in
whole or in part at any time at the Company's option upon 30 days prior
written notice at the price of $.05 per Warrant, so long as there is a
current prospectus in effect. Although a Warrantholder may have the right
to exercise his Warrants through the date of redemption, he may not be able
to exercise because of lack of funds at the time of redemption. Further,
the Warrants will have no value other than the redemption price upon the
close of business on the date of redemption. See "DESCRIPTION OF SECURITIES
WARRANTS" for a summary of the material terms of the Warrants and
Representative's Warrants.
BUSINESS
GENERAL
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 OsteoGram(R), 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 ECGs, (iii) TeleCor, which is engaged
in transtelephonic cardiac event monitoring, and (iv) the development of
Detoxahol[TM], a substance and delivery technology intended to facilitate
the rapid lowering of blood alcohol levels of people who have consumed
alcohol. The Company was incorporated in the State of Delaware on July 21,
1986.
THE OSTEOGRAM(R)
The OsteoGram(R) 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 OsteoGram(R) 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 equipment, exposures, types of
film and development. An OsteoGram(R) report is then delivered to the
patient's physician.
The scientific name for the testing technique utilized by the
OsteoGram(R) is radiographic absorptiometry. It is capable of detecting
changes in bone mineral density as small as approximately 1.5%. Since
1985, the OsteoGram(R) has been cleared for reimbursement by Medicare. To
the best of the Company's knowledge, the OsteoGram(R) is the only bone
density test that can be performed without any specialized medical
equipment. The OsteoGram(R) can be taken using an OsteoGram(R) 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 OsteoGram(R) 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. See "BUSINESS THE
OSTEOGRAM(R) Merck License Agreement".
MERCK LICENSE AGREEMENT
On September 22, 1995, the Company entered into the Merck License
Agreement with Merck, effective September 27, 1995, pursuant to which Merck
has been granted a perpetual, exclusive license of the OsteoSystem. The
Company understands that Merck will offer the OsteoGram(R) and related
services to physicians on a per-test basis. The Company will receive a
royalty payment from Merck for each OsteoGram(R) 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 is not
required by the Merck License Agreement to invest in excess of its $250,000
commitment during the first year of the Merck License Agreement.
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 by the
Company of OsteoSystem processing units to companies in Mexico, Switzerland
and The Netherlands for an aggregate gross sales price of $284,000. 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. Any future international sales of OsteoSystem processing units
would be made by Merck.
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 Fosamax[TM] 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 OsteoGram(R) introduces a convenient
affordable bone density test which may aid physicians in detecting
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 OsteoGram(R) 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 OsteoGram(R)
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 OsteoGram(R) has several competitive
advantages over other existing bone density tests, including that the
OsteoGram(R) is the only test for the measurement of bone density that can
be administered using standard X-ray equipment. This factor alone makes
the OsteoGram(R) 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 OsteoGram(R) also provides
an easy "low cost" way for primary care physicians, who have many patients
at risk for osteoporosis, to initiate the first steps for testing and
treating the disease. The per test cost of the OsteoGram(R) 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 unlike X-ray devices, 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 OsteoGram(R) because of their
capital investment in expensive bone scanning equipment. However,
management believes that because the OsteoGram(R) 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 OsteoGram(R) 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
OsteoGram(R) which also use X-ray devices or some other widely-available
devices or equipment to test bone density. In fact, Merck has entered into
licensing or collaborative arrangements with certain of the Company's
competitors and has acquired an equity interest in at least one of the
Company's competitors, although the systems of such competitors differ
materially in cost or performance from the OsteoGram(R). Such arrangements
could affect sales by Merck of the OsteoGram(R) as the Merck License
Agreement does not provide for minimum royalties to the Company.
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 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. Arrangements have also been made with Sisters of Providence
Medical Center of Seattle, Washington, to provide processing and to
interpret ECG's for certain ECG accounts. Pursuant to its understanding
with Sisters of Providence Medical Center, the medical center provides
computerized ECG analysis to subscribers on a continuous 24 hours a day
basis at a specified rate and emergency overread and routine overread
services to subscribers at rates published by the Company. No formal
agreement presently exists between the Company and Sisters of Providence
Medical Center. 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), Federal Aviation Administration ("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 attending physician. The Company periodically
retains cardiologists for advice regarding its ECG interpretation software
programs and to perform overreads of certain ECG readings. Presently, two
cardiologists perform ECG overreads for the Company. No formal consulting
agreements exist between the Company and such cardiologists.
The Company's current liability insurance policy does not cover losses
due to misinterpreted overreads. Medical professional liability claims
which may be brought against the Company for physician overreads 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.
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
domestic and foreign companies. 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 testing by personnel skilled in the electronics
industry before the systems 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 a 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 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 was be terminated as of
January 1996 because the Company failed to meet certain minimum sales
amounts in 1995. However, pursuant to an oral understanding between
Aerotel and the Company, the Company has a non-exclusive right to use
Aerotel software and to distribute Aerotel event recorders. No formal
agreement exists between the Company and Aerotel. Furthermore, the
Company's arrangement with Aerotel is terminable at any time by Aerotel,
however, other event recorder devices may be purchased and other software
may be licensed in lieu of Aerotel event recorders and software.
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
would consult with the Company's TeleCor Services Division physician, who
may perform an overread. The attending physician would ultimately inform
the patient of any abnormality.
The Company's current liability insurance policy does not cover losses
due to misinterpreted overreads. Medical professional liability claims
which may be brought against the Company for physician overreads 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.
The Company has retained a cardiologist to provide TeleCor overreads.
No formal consulting agreement exists between the Company and such
cardiologist.
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.
DETOXAHOL[TM]
In March 1994, the Company acquired the rights to a potential new
pharmaceutical product called Detoxahol[TM] 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 Detoxahol[TM].
Detoxahol[TM] is a substance intended to facilitate the rapid lowering of
blood alcohol of people who have been drinking alcohol. Detoxahol[TM] is
currently under development at the University of Georgia, with the Company
funding the research and development. Detoxahol[TM] 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 Detoxahol[TM] taken compared to the amount of
alcohol consumed; since large doses of Detoxahol[TM] may be taken, alcohol
detoxification would occur quickly.
There is no assurance that the Company will continue to develop
Detoxahol[TM] technology or that if any Detoxahol[TM] product is ultimately
developed by the Company such product will be cleared by the appropriate
regulatory agencies.
Management expects that the initial market for Detoxahol[TM] would be
for emergency rooms and ambulances. In addition, Detoxahol[TM] might be
initially marketed to certain niche markets in the Far East, where there is
presently a demand for over the counter beverages and tonics or herbal
treatments which people consume to alleviate the symptoms such as
"hangover" of the overindulgence of alcohol. The active enzyme ingredients
of Detoxahol[TM] might be marketed as additives to those existing far east
products. 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
Detoxahol[TM] compound is currently in the development phase. The Company
is in the process of establishing certain achievement milestones for
Detoxahol[TM] research for 1996. Depending upon whether such milestones
are achieved, pre-clinical testing may begin in 1996.
Before commencing marketing and sales efforts for Detoxahol[TM] or any
Detoxahol[TM] product that is eventually developed by the Company, the
Company must obtain FDA clearance of Detoxahol[TM]. 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 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 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 shorter.
Since pre-clinical testing of Detoxahol[TM] has not yet commenced, it is
premature to estimate when the Company will file an IND with respect to
Detoxahol[TM], assuming the Company decides to continue to develop
Detoxahol[TM].
Pursuant to a Research Agreement with the University of Georgia,
through December 31, 1995, the Company has funded $260,000 for the research
and development of Detoxahol[TM], which includes expenses associated with
the filing of a patent application for Detoxahol[TM]. 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 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
Detoxahol[TM] 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 Detoxahol[TM]
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 Detoxahol[TM] 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 Detoxahol[TM] patent.
INDUSTRIAL PROPERTY IRSCO DEVELOPMENT COMPANY, INC.
In August 1994, the Company acquired Irsco, whose principal asset is
the Irsco Property, in exchange for 52,333 shares of the Company's $3.50
Series B Convertible Preferred Stock (the "Series B Preferred Stock"). As
a result of the Reverse Stock Split, each share of Series B Preferred Stock
is convertible into ten shares of the Company's Common Stock.
In November 1995 notices of default were received by Irsco in
connection with defaults by Irsco on certain deeds of trust secured by the
Irsco Property. In addition, Irsco has received notice that the holders of
the aforementioned deeds of trust have begun to collect rents pursuant to
provisions contained in the deeds of trust which are triggered in the event
of a default. The Board of Directors of Irsco has determined that it is in
the best interests of Irsco to allow the Irsco Property to be sold in any
foreclosure proceedings instituted by the holders of the deeds of trust.
The holders of the deeds of trust do not have any recourse beyond the Irsco
Property. 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. The
Company may have to record additional write-downs in connection with the
foreclosure and sale of the Irsco Property.
GOVERNMENT REGULATION
The Health Care Finance Administration approves diagnostic tests for
reimbursement by Medicare. The OsteoGram(R) 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 OsteoGram(R) 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. If the provisions in the bill which seek to
limit Medicare remain in the bill when and if it becomes law, then such
legislation would likely limit the total number of Medicare recipients and
thereby the ability of physicians to recover costs of Osteogram(R) tests or
ECG and TeleCor services. The Company cannot predict the outcome of this
debate or the ultimate effect that it may have, if any, on the
reimbursement by Medicare of the OsteoGram(R) tests or the Company's ECG or
TeleCor services.
The FDA registers medical devices used for diagnostic testing and
pharmaceutical products for safety and efficacy. Although the Company and
Merck have recently provided additional information in support of their
position to the FDA with respect to the Warning Letter and management
expects that the Company and Merck will be able to resolve the FDA's
concerns, there is no assurance that there will not be future FDA concerns
having an adverse effect on license revenues that the Company would receive
from Merck on Osteogram(R) sales.
The Company has no present plans for the development of specific
Detoxahol[TM] products. The core technology behind Detoxahol[TM] must be
further developed, however, before the specifics of any Detoxahol[TM]
product can be more concretely defined. Prior to marketing, any
Detoxahol[TM] 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 potential Detoxahol[TM]
product that is produced by the Company must go through separate clinical
trials. The clearance of any particular potential Detoxahol[TM] product by
the FDA will not necessarily facilitate the clearance of other potential
Detoxahol[TM] products.
There can be no assurance that regulatory clearance will be obtained
for any potential Detoxahol[TM] products ultimately 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 made
by the Company to 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 OsteoGram(R) as it was
determined that it would be to the Company's competitive advantage to
maintain such information proprietary 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
OsteoGram(R) 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 OsteoGram(R). 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 shall 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 Detoxahol[TM]. There can be no
assurance that such patent application will be approved, that the Company
can develop or acquire Detoxahol[TM] products or methods of use that are
patentable, or even if patents are issued that they will afford the
Company's potential Detoxahol[TM] 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 Detoxahol[TM] is not
granted, the proprietary information relating to Detoxahol[TM] 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 Detoxahol[TM] as a trade secret. In addition, to the extent
that the Company develops uses of Detoxahol[TM] 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
Detoxahol[TM] 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 Detoxahol[TM], the
OsteoSystem and ECG Services in the aggregate amount of $250,000 in fiscal
1995 and $551,000 in fiscal 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 February 1, 1996, the Company had 21 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.
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 OsteoGram(R) processing, because Merck
became responsible for OsteoGram(R) 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.
LEGAL PROCEEDINGS
From October 18 through November 3, 1995, several class action
complaints and one derivative complaint were filed in the United States
District Court for the Central District of California against the Company.
The Complaints were filed by the named plaintiffs on behalf of persons who
purchased the Common Stock during various time periods spanning from June
27, 1995 through October 20, 1995 with the exception of the derivative
complaint which is brought derivatively on behalf of the Company.
The Complaints allege violations of federal securities laws by the
Company 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
Exchange Act. The Complaints generally relate to the nature and the extent
of the disclosure of certain caps on the royalties receivable by the
Company under the terms of its License Agreement with Merck.
The Complaints seek unspecified class compensatory damages together
with prejudgment interest at the maximum rate allowable by law, costs and
expenses including reasonable attorneys' fees and other disbursements. The
Company cannot predict what effect a certified judgement in favor of the
class would have on its financial condition.
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 "BUSINESS - INDUSTRIAL PROPERTY - IRSCO DEVELOPMENT COMPANY, INC."
for a discussion of certain notices of default received by Irsco and
foreclosure proceedings relating to the Irsco Property.
USE OF PROCEEDS
Assuming all outstanding Warrants and Representative's Warrants are
exercised, the Company will receive net proceeds of approximately
$3,260,000 after expenses of the offering less proceeds of $573,000, which
have already been received as a result of the exercise of Warrants to
purchase 152,810 shares of Common Stock. The proceeds, if any, to be
received by the Company from the exercise of the Warrants will be used for
research and development activities, marketing and sales and general
working capital purposes.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock,
$.01 par value, of which 8,408,166 shares were issued and outstanding as of
February 1, 1996.
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted by stockholders. There is no
cumulative voting with respect to the election of directors with the result
that the holders of more than 50% of the shares of Common Stock voted for
the election of directors can elect all of the directors.
The holders of shares of Common Stock are entitled to dividends when
and as declared by the Board of Directors from funds legally available
therefore, and, upon liquidation are entitled to share pro rata in any
distribution to holders of Common Stock. No dividends have ever been
declared by the Board of Directors on the Common Stock. All of the
outstanding shares of Common Stock are, and all shares sold hereunder will
be, when issued upon payment therefor, duly authorized, validly issued,
fully paid and non-assessable.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock, $.10 par value, of which 8,400 shares of $3.50 Class A Cumulative
Convertible Preferred Stock and 52,333 shares of $3.50 Class B Cumulative
Convertible Preferred Stock were issued and outstanding as of February 1,
1996.
The Board of Directors has authority to issue the authorized Preferred
Stock in one or more series, each series to have such designation and
number of shares as the Board of Directors may fix prior to the issuance of
any shares of such series. Each series may have such preferences and
relative, participating, optional or other special rights, with such
qualifications, limitations or restrictions, as are stated in the
resolution or resolutions providing for the issue of such series as may be
adopted from time to time by the Board of Directors prior to the issuance
of any shares of such series.
CLASS A 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. The Board of Directors of the Company has
declared and the Company has paid quarterly dividends at an annual rate of
$.35. No such dividends which were declared remain due and unpaid. As a
result of the Reverse Stock Split, every two shares of the Class A
Preferred Stock are 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.
CLASS B PREFERRED STOCK
The Series B Preferred Stock ranks pari passu with the Series A
Preferred Stock. 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. No dividends have ever been declared by the Board of
Directors on the Series B Preferred Stock. Each share of Class B Preferred
Stock is convertible, subject to adjustment, into ten shares of Common
Stock, giving effect to the Reverse Stock Split. 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 such 30-day period.
Shares of Class B Preferred Stock have one vote each. Shares of Class
B Preferred Stock vote along with shares of Common Stock and shares of
Class A 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 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.
WARRANTS
The 8,000,000 Warrants were issued in August 1992 subject to the terms
and conditions of a Warrant Agreement between the Company and U.S. Stock
Transfer Corporation, Glendale, California, as Warrant Agent. 1,528,100 of
the Warrants have been exercised. As of February 1, 1996 there were
6,471,900 Warrants issued and outstanding. The following description of
the Warrants is not complete and is qualified in all respects by the
Warrant Agreement which was previously filed with the SEC. As a result of
the Reverse Stock Split, a Warrantholder must exercise ten Warrants in
order to purchase one share of Common Stock of the Company at an aggregate
exercise price of $3.75, subject to adjustment for stock splits, reverse
stock splits and similar events. The Warrants are exercisable through
August 2, 1997. The Company is not required to issue fractional shares
upon the exercise of the Warrants. If any fraction (calculated to the
nearest one-hundredth) of a share of Common Stock would be issuable on the
exercise of any Warrant, the Company, at its option, may either purchase
such fraction for an amount in cash equal to the fair market value of such
fraction on the trading day immediately preceding the day upon which such
Warrant was surrendered for exercise or issue the required fractional
share. The Warrants are presently redeemable by the Company upon 30 days
prior written notice at a redemption price of $.05 per Warrant.
The Warrants contain anti-dilution provisions upon the occurrence of
certain events such as stock dividends or splits, mergers or acquisitions.
In the event of liquidation, dissolution or winding up of the Company,
Warrantholders will not be entitled to receive any assets of the Company
available for distribution to the holders of Common Stock. Holders of the
Warrants do not have any of the rights of a stockholder, and no dividends
will be declared on the Warrants.
The Warrants may be exercised on surrender of the applicable Warrant
certificate on or prior to the expiration of the Warrant exercise period,
accompanied by payment in full of the exercise price for the number of
Warrants being exercised.
The Company has agreed to use its best efforts to maintain the
effectiveness of a registration statement under the Securities Act for the
Common Stock underlying the Warrants and to take such other actions under
the laws of various states as may be required to cause the lawful sale of
securities upon the exercise of Warrants. However, the Company will not be
required to honor the exercise of Warrants if, in the opinion of the Board
of Directors, upon advice of counsel, the sale of securities upon such
exercise would be unlawful.
REPRESENTATIVE'S WARRANTS
In connection with the August 1992 offering, the Company granted
800,000 Representative's Warrants to the Representative or its designees.
As a result of the Reverse Stock Split, the Representative must exercise
ten Representative's Warrants at an aggregate exercise price of $3.00 in
order to obtain a unit consisting of one share of Common Stock and one
warrant to purchase one share of Common Stock at an exercise price of
$3.75. The Representative's Warrants are currently exercisable and expire
on August 2, 1997. The exercise price of the Representative's Warrants is
subject to adjustment pursuant to customary anti-dilution provisions. The
warrants issuable upon exercise of the Representative's Warrants are
identical to the Warrants.
PLAN OF DISTRIBUTION
No underwriter is being utilized in connection with this offering or
with the exercise of the Warrants. The shares of Common Stock issuable
upon exercise of the Warrants are being offered directly by the Company
pursuant to the terms of the Warrants.
The Company is registering the shares of Common Stock issuable upon
exercise of the Warrants and the Representative's Warrants and not the
resale thereof by the holders of the shares of Common Stock after such
exercise. It is anticipated that the sale of the Common Stock issuable
upon the exercise of the Warrants or the Representative's Warrants, when
made, may be effected through customary brokerage channels or in privately
negotiated transactions.
The Company has agreed to pay broker-dealers who are members of the
NASD a solicitation fee of 5% of the aggregate exercise price of each
Warrant in those states where commissions are allowed. In order to
facilitate the exercise of the Warrants the Company will furnish, at its
expense, such number of copies of this Prospectus to each recordholder of
the Warrants as the holder may request together with instructions that such
copies be delivered to the beneficial owners thereof.
LEGAL MATTERS
Certain legal matters in connection with the validity of the shares of
Common Stock offered hereby will be passed upon for the Company by Reid &
Priest LLP, 40 West 57th Street, New York, New York 10019.
EXPERTS
The consolidated financial statements of the Company and its
subsidiaries appearing in the Company's Annual Report on Form 10-KSB for
the year ended September 30, 1995 have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein
and incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
<PAGE>
=================================== ===================================
960,000 Shares of Common Stock
No person is authorized in
connection with any offering made
hereby to give any information or
to make any representation not
contained in this Prospectus, and,
if given or made, such information
or representation must not be
relied upon as having been
authorized by the Company or any
underwriter. This Prospectus does COMPUMED, INC.
not constitute an offer to sell or
a solicitation of an offer to buy
any security other than the shares
of Common Stock offered hereby, nor
does it constitute an offer to sell
or a solicitation of any offer to
buy any of the securities offered
hereby to any person in any
jurisdiction in which it is
unlawful to make such an offer or
solicitation. Neither the delivery
of this Prospectus nor any sale
made hereunder shall under any
circumstances create an implication
that there has been no change in -------------------
the affairs of the Company since P R O S P E C T U S
the date hereof. -------------------
TABLE OF CONTENTS
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Page
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Available Information . . . . . 2
Incorporation of Certain February 13, 1996
Documents by Reference . . . 2
The Company . . . . . . . . . . 3
Prospectus Summary . . . . . . 3
Risk Factors . . . . . . . . . 4
Business . . . . . . . . . . . 9
Use of Proceeds . . . . . . . . 19
Description of Securities . . . 20
Plan of Distribution . . . . . 22
Legal Matters . . . . . . . . . 22
Experts . . . . . . . . . . . . 22
=================================== ===================================
