AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 5, 1996
REGISTRATION NO. 33-
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==========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
COMPUMED, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 5047 95-2860434
------------------ ------------------------- ---------------
(State or (Primary Standard (I.R.S.
Jurisdiction of Industrial Classification Employer
Incorporation or Code No.) Identification
Organization) No.)
1230 Rosecrans Avenue, Suite 1000
Manhattan Beach, California 90266
(310) 643-5106
(Address and Telephone Number of Principal Executive Offices and Principal
Place of Business)
--------------------
Rod N. Raynovich
President and Chief Executive Officer
CompuMed, Inc.
1230 Rosecrans Avenue, Suite 1000
Manhattan Beach, California 90266
(310) 643-5106
(Name, Address and Telephone Number of Agent for Service)
--------------------
Copies to:
Bruce A. Rich, Esq.
Reid & Priest LLP
40 West 57th St.
New York, New York 10019
(212) 603-6780
Approximate date of proposed sale to the public: from time to time
after the effective date of this Registration Statement as determined by
market conditions and other factors.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act of 1933, as
amended (the "Securities Act"), please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
----------------------
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
-----------------------
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
==========================================================================
Title Proposed
of Each Maximum Proposed
Class of Offering Maximum Amount
Securities Amount Price Aggregate of
to Be to Be Per Offering Registration
Registered Registered Unit(1) Price(1) Fee
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Common
Stock,
par value
$.01 per
share 1,412,200 $3.40 $4,801,480 $1,655.68
=========================================================================
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
COMPUMED, INC.
Registration Statement
on Form SB-2
Cross Reference Sheet
Furnished Pursuant to Item 501(a)(4) of Regulation S-B
Form SB-2 Item Number and Caption Location in Prospectus
--------------------------------- ----------------------
1. Front of Registration Statement and
Outside Front Cover of Prospectus.... Facing Page of Registration
Statement; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.................. Inside Front and Outside Back
Pages of Prospectus
3. Summary Information and Risk
Factors.............................. PROSPECTUS SUMMARY; RISK
FACTORS
4. Use of Proceeds...................... USE OF PROCEEDS
5. Determination of Offering Price...... *
6. Dilution............................. *
7. Selling Security-Holders............. SELLING STOCKHOLDERS
8. Plan of Distribution................. PLAN OF DISTRIBUTION
9. Legal Proceedings.................... LEGAL PROCEEDINGS
10. Directors, Executive Officers,
Promoters and Control Persons........ MANAGEMENT
11. Security Ownership of Beneficial
Owners and Management................ PRINCIPAL STOCKHOLDERS
12. Description of Securities............ DESCRIPTION OF SECURITIES
13. Interest of Named Experts and
Counsel.............................. EXPERTS; LEGAL MATTERS
14. Disclosure of Commission Position on
Indemnification for Securities Act STATEMENT AS TO
Liabilities.......................... INDEMNIFICATION
15. Organization Within Last Five
Years................................ *
16. Description of Business.............. BUSINESS
17. Management's Discussion and Analysis
or Plan of Operation................. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATION
18. Description of Property.............. BUSINESS
19. Certain Relationships and Related
Transactions......................... *
20. Market for Common Equity and Related
Stockholder Matters.................. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
21. Executive Compensation............... COMPENSATION OF EXECUTIVE
OFFICERS
22. Financial Statements................. FINANCIAL STATEMENTS
23. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure................. *
---------------------------
* Not applicable or answered in the negative
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH __, 1996
PROSPECTUS
1,412,200 SHARES OF COMMON STOCK
($.01 PAR VALUE)
COMPUMED, INC.
COMMON STOCK
This Prospectus relates to the offering of 1,412,200 shares (the
"Shares") of Common Stock, $.01 par value per share ("Common Stock"), of
CompuMed, Inc., a Delaware corporation (the "Company") on behalf of certain
persons (the "Selling Stockholders"). 4,200 of the Shares are issuable
upon the conversion of the Company's Class A $3.50 Cumulative Convertible
Preferred Stock (the "Class A Preferred Stock"), 147,000 of the Shares are
issuable upon the exercise of Common Stock Purchase Warrants (the "SASCO
Warrants") held by Skeletal Assessment Services Co. ("SASCO"), 1,236,000 of
the Shares are owned by certain investors who purchased such Shares in an
August 1995 private placement (the "Reg D Placement") effected pursuant to
Regulation D of the Securities Act of 1933, as amended (the "Securities
Act") and the remaining 25,000 Shares are issuable upon the exercise of
Common Stock Purchase Warrants (the "Toppen Warrants") held by Maurene
Toppen ("Toppen"). The Company will receive aggregate gross proceeds of
$464,500 upon the exercise of all of the SASCO Warrants and all of the
Toppen Warrants. The Company will not receive any proceeds from the sale
of the Shares by the Selling Stockholders. See "SELLING STOCKHOLDERS."
The Selling Stockholders will sell the Shares from time to time after
the effective date of the SB-2 Registration Statement (No. 33- )
-----------
(the "Registration Statement") which this Prospectus constitutes a part as
determined by market conditions and other factors. The Company expects
that the Selling Stockholders will sell their Shares covered by this
Prospectus through customary brokerage channels, either through broker-
dealers acting as agents or brokers for the seller, or through broker-
dealers acting as principals, who may then resell the Shares in the over-
the-counter market or at private sale or otherwise, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. See "PLAN OF DISTRIBUTION."
The Company's Common Stock is quoted on the NASDAQ Small Cap Market
under the symbol CMPD. On March , 1996, the closing bid and asked prices
--
were $ and $ per share of Common Stock. See "MARKET FOR
------ --------
THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS."
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 5 THROUGH 10 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 March __, 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY STATE.
<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 regional 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 the Registration Statement
filed by the Company with the SEC under 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.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and the consolidated financial statements, including
the notes thereto, appearing elsewhere in this Prospectus.
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 DetoxaholTM, a
substance and delivery technology intended to facilitate the rapid lowering
of blood alcohol levels from people who have consumed alcohol. An
industrial park complex, which was owned and managed by Irsco Development
Company, Inc., a California corporation and the Company's wholly owned
subsidiary ("Irsco"), is presently being sold in connection with certain
foreclosure proceedings arising from defaults by Irsco 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.
The Company was incorporated in the State of Delaware on July 21,
1986. The address and telephone number of the Company's principal
executive offices are 1230 Rosecrans Avenue, Suite 1000, Manhattan Beach,
California 90266, (310) 643-5106.
THE OFFERING
Common Stock Outstanding.................. 8,408,517 shares as of
February 20, 1996.
The Offering.............................. 1,412,200 shares of Common
Stock by certain
stockholders, including an
aggregate of 172,000 Shares
of Common Stock underlying
warrants.
Risk Factors............................. An investment in the Common
Stock involves a high degree
of risk, including, a history
of financial losses, need for
future sources of capital,
regulatory compliance,
changing healthcare policies,
technological changes and
pending litigations. See
"RISK FACTORS."
NASDAQ Symbol........................... Common Stock CMPD.
SUMMARY OF FINANCIAL DATA
Year Ended September 30,
--------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data
Revenues............... $4,236 $3,528 $2,967 $2,363 $3,010
Net loss............... (548) (2,015) (2,202) (3,864) (3,390)
Loss per share......... (.31) (.98) (.72) (.90) (.55)
Weighted average common
shares outstanding..... 1,749 2,056 3,062 4,315 6,151
Three Months Ended
December 31,
------------------
(In thousands, except
per share data)
1994 1995
---- ----
Statement of Operations Data
Revenues............... $763 $652
Net loss............... (329) (649)
Loss per share......... (.07) (.08)
Weighted average common
shares outstanding..... 4,809 8,344
September 30,
-------------------
1994 1995 December 31, 1995
---- ---- -----------------
(In thousands) (In thousands)
Balance Sheet Data
Working capital.......... $(441) $ 3,857 $ 549
Total assets............. 6,866 10,498 10,159
Debt obligations(1)...... 3,782 3,727 3,765
Stockholders' equity(2).. 1,913 5,201 4,839
--------------------
(1) Long-term and short-term indebtedness, including capital leases.
(2) Cash dividends are paid only on Class A Preferred Stock. See
"DESCRIPTION OF SECURITIES - PREFERRED STOCK - Class A Preferred
Stock."
RISK FACTORS
An investment in the Common Stock involves a high degree of risk and,
therefore, should be considered extremely speculative. It 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
approximately $2,202,000 in 1993, $3,864,000 in 1994, $3,390,000 in 1995
and $649,000 for the first quarter of 1996. The Company's retained deficit
at December 31, 1995 was $20,170,000. 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 fiscal 1996 than in the first quarter of fiscal 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 DetoxaholTM.
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 DetoxaholTM 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 a result of the Reg D
Placement in August 1995 which raised $5.1 million in gross proceeds,
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 FosamaxTM 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 DetoxaholTM. Significant
further research and development, including clinical testing, as well as
obtaining necessary regulatory clearances, are required before the Company
can produce a marketable DetoxaholTM product. To date, only one series of
animal studies relating to the conceptual feasibility of DetoxaholTM has
been completed. There can be no assurance that the Company's research and
development efforts will be successful or that any potential DetoxaholTM
product ultimately produced will prove to be safe and effective in further
pre-clinical or clinical trials. Moreover, even if a potential DetoxaholTM
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 DetoxaholTM 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 "FDA Regulation" and
"Competition."
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 its
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) is not exempt from the 510-K filing
requirements, a Form 510-K would be filed with the FDA. The Company
estimates that the 510-K filing process would take approximately one year
comprising of 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
DetoxaholTM 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 DetoxaholTM technology or that if any DetoxaholTM 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 can be shorter. Since
pre-clinical testing of DetoxaholTM has not yet commenced, the Company is
unable to estimate when it would file an IND with respect to DetoxaholTM,
assuming the Company decides to continue to develop DetoxaholTM.
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
remain 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 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 DetoxaholTM. There can be no assurance
that such patent application will be approved, that the Company can develop
or acquire DetoxaholTM products or methods of use that are patentable, or
even if patents are issued that they will result in any competitive
advantage to any DetoxaholTM 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 DetoxaholTM products. In addition, to the extent that
the Company develops uses of DetoxaholTM in combination with other
products, if such products are covered by third-party patents, the Company
could be required to obtain licenses from the owners of such patents in
order to market such combination products.
Competition. The primary businesses in which the Company engages,
testing for bone density and sales and processing of ECGs, are 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
DetoxaholTM 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
DetoxaholTM products. In addition, the Company does not have the capacity
to conduct the preclinical and clinical testing of DetoxaholTM and other
research required in connection with the development of DetoxaholTM 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 DetoxaholTM. 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 DetoxaholTM 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 overreads of
ECG or TeleCor printouts by physicians retained by the Company to provide
such services. Medical professional liability claims which may be brought
against the Company for misinterpreted overreads, which are not covered by
or exceed the coverage amount of a medical professional liability insurance
policy held by the physician performing the overread, could have a material
adverse effect on the Company's business, financial condition or operating
results. Since commencing 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 with respect to
misinterpreted overreads.
Irsco Default. Notices of default were received by the Company's
wholly-owned subsidiary, Irsco, in connection with defaults by Irsco on
certain deeds of trust secured by Irsco's sole asset, a 6.3 acre industrial
park (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 Irsco Property.
Securities Litigation. In October through November 1995, several
class action and one derivative complaint (collectively, the "Complaints")
were filed against the Company and certain of its executive officers and
directors on behalf of persons who purchased Common Stock during various
time periods spanning from August 11, 1995 through October 17, 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 "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
fluctuated 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 market price of the Common Stock is presently in excess
of net tangible book value, which was $.55 per share on December 31, 1995.
Investors who purchase Common Stock would absorb immediate dilution in the
net tangible book value per share of Common Stock.
Shares Eligible for Future Sale. An aggregate of 10,397,411 shares of
the Company's Common Stock will be outstanding immediately, assuming
conversion of outstanding shares of Class A Preferred Stock and $3.50
Series B Convertible Preferred Stock (the "Class B Preferred Stock") and
the exercise of all outstanding warrants to purchase Common Stock, but
excluding shares underlying options. 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.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Shares by the Selling Stockholders. However, the Company will receive an
amount equal to $2.50 per share, or aggregate gross proceeds of $367,500,
assuming the exercise of all of the SASCO Warrants and an amount equal to
$3.88 per share, or aggregate gross proceeds of $97,000, assuming the
exercise of all of the Toppen Warrants. The Company is obligated to bear
the expenses of the registration of the Shares. The Company estimates that
such expenses will amount to approximately $50,000.
DIVIDEND POLICY
No dividend or other distribution with respect to the Company's Common
Stock or Class B Preferred Stock has ever been paid by the Company. Any
payment of future dividends on the Common Stock or Class B Preferred Stock
and the amounts thereof will be dependent upon the Company's earnings,
financial requirements and other factors deemed relevant by the Company's
Board of Directors. The Company currently does not intend to pay any cash
dividends on the Common Stock or Class B Preferred Stock in the foreseeable
future; rather, the Company intends to retain any earnings to provide for
the operation and expansion of its business.
The holders of the 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 has declared
and the Company has paid quarterly dividends on the Class A Preferred Stock
at an annual rate of $.35. No such dividends which were declared remain
due and unpaid. The Company intends to continue to pay dividends in such
amount on the Class A Preferred Stock, assuming it is able to do so under
applicable law.
CAPITALIZATION
The following table sets forth the actual capitalization of the
Company at December 31, 1995, and as adjusted to reflect the application of
the estimated net proceeds of $414,375 from the exercise of the SASCO and
Toppen Warrants. The table should be read in conjunction with the
Company's consolidated financial statements and the related notes thereto,
included elsewhere in this Prospectus. See "USE OF PROCEEDS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS."
December 31, 1995
-----------------------
Actual As Adjusted(1)
------ --------------
Long-term
indebtedness
(capital leases).................... $ 101,000 $101,000
Stockholders' equity
Preferred Stock $.10 par value -
1,000,000 shares authorized
Class A $3.50 Cumulative
Convertible Voting - 8,400 shares
issued and outstanding(2)......... 1,000 0
Class B $3.50 Convertible Voting -
52,333 shares issued and
outstanding(3).................... 5,000 0
Common Stock, $.01 par value -
50,000,000 shares authorized,
8,346,568 shares issued and
outstanding(4), 9,046,101
shares issued and outstanding,
as adjusted(5).................... 83,000 91,000
Additional paid in capital........... 24,920,000 25,332,000
Retained deficit..................... (20,170,000) (20,170,000)
------------ ------------
Total stockholders' equity.... 4,839,000 5,253,000
------------ ------------
Total capitalization................. $ 4,940,000 $ 5,354,000
============ ============
--------------------------
(1) Reflects the issuance of 172,000 shares of Common Stock issuable upon
the exercise of all of the SASCO and Toppen Warrants and the
anticipated application of the net proceeds therefrom.
(2) Every two shares of Class A Preferred Stock are convertible into one
share of Common Stock. See "DESCRIPTION OF SECURITIES - PREFERRED
STOCK" for a description of the conversion provisions relating to the
Class A Preferred Stock. The "As Adjusted" figure assumes the
conversion of all outstanding shares of Class A Preferred Stock.
(3) Each share of Class B Preferred Stock is convertible into ten shares
of Common Stock. See "DESCRIPTION OF SECURITIES - PREFERRED STOCK"
for an explanation of the conversion provisions relating to the
Class B Preferred Stock. The "As Adjusted" figure assumes the
conversion of all outstanding shares of Class B Preferred Stock.
(4) Does not include up to (i) an aggregate of 807,190 shares of Common
Stock issuable upon the exercise of certain publicly-traded warrants
and certain other warrants issued to the representative of the
underwriters who participated in the Company's 1992 public offering;
(ii) an aggregate of 1,543,246 shares of Common Stock issuable upon
the exercise of options granted to officers, directors, employees and
consultants, and certain non-public warrants; (iii) 4,200 shares of
Common Stock reserved for the conversion of 8,400 shares of Class A
Preferred Stock, or (iv) 523,330 shares of Common Stock reserved for
the conversion of 52,333 shares of Class B Preferred Stock. See
"MANAGEMENT - EMPLOYEE STOCK OPTION PLANS," "NON-QUALIFIED STOCK
OPTIONS" and "DESCRIPTION OF SECURITIES."
(5) Includes an aggregate of 527,533 shares of Common Stock issuable upon
conversion of the Class A and Class B Preferred Stock. Does not
include (i) an aggregate of 807,190 shares of Common Stock issuable
upon the exercise of certain publicly-traded warrants and (ii)
1,593,246 shares of Common Stock issued upon the exercise of certain
non-public warrants and options subsequent to December 31, 1995.
SELECTED FINANCIAL DATA
The following selected financial data for the five years ended
September 30, 1995 are derived from consolidated financial statements of
the Company. The financial data for the three month periods ended December
31, 1994 and 1995 are derived from unaudited financial statements. The
unaudited financial statements include all adjustments, consisting of
normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for
these periods. Operating results for the three months ended December 31,
1995 are not necessarily indicative of the results for the entire year
ending September 30, 1996. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information included herein.
Year Ended September 30,
--------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data
Revenues............... $4,236 $3,528 $2,967 $2,363 $3,010
Costs and expenses..... 4,784 5,543 5,169 6,227 6,400
------- ------- ------- ------- -------
Net loss............... $ (548) $(2,015) $(2,202) $(3,864) $(3,390)
======= ======== ======== ======== ========
Loss per share......... $ (.31) $ (.98) $ (.72) $ (.90) $ (.55)
======= ======== ======== ======== ========
Weighted average common
shares outstanding..... 1,749 2,056 3,062 4,315 6,151
Three Months Ended
December 31,
------------------
(In thousands, except
per share data)
1994 1995
---- ----
Statement of Operations Data
Revenues............... $763 $652
Costs and expenses..... 1,092 1,301
------ ------
Net loss............... $(329) $(649)
====== ======
Loss per share......... $(.07) $(.08)
====== ======
Weighted average common
shares outstanding..... 4,809 8,344
September 30,
----------------------
1994 1995 December 31, 1995
---- ---- -----------------
(In thousands) (In thousands)
Balance Sheet Data
Current assets........... $ 761 $ 6,095 $ 5,709
Working capital.......... (441) 3,857 549
Total assets............. 6,866 10,498 10,159
Debt obligations(1)...... 3,782 3,727 3,765
Total liabilities........ 4,953 5,297 5,320
Stockholders' equity(2).. 1,913 5,201 4,839
-------------------
(1) Long-term and short-term indebtedness, including capital leases.
(2) Cash dividends are paid only on Class A Preferred Stock. See
"DESCRIPTION OF SECURITIES - PREFERRED STOCK - Class A Preferred
Stock."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This analysis should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere herein.
RESULTS OF OPERATIONS
FISCAL QUARTER ENDED DECEMBER 31, 1995 AS COMPARED TO 1994
----------------------------------------------------------
Revenues from operations for the three months ended December 31, 1995
decreased by 15% as compared to the same period in 1994. This decrease is
primarily attributed to the loss of revenues from the Company's Osteo
services operation which was licensed to Merck pursuant to the Merck
License Agreement. Pursuant to the terms of the Merck License Agreement,
the Company will begin to receive royalties in the amounts specified in the
Merck License Agreement on OsteoGram(R) tests sold by Merck on or after
January 1, 1996, the beginning of the Company's second fiscal quarter.
ECG services and product sale revenues increased by $23,000 or 5% for
the quarter ended December 31, 1995 over revenues for the same period in
the prior fiscal year and the Company earned interest income of $74,000 on
the Company's average $5 million balance in marketable securities. Rental
income from Irsco declined modestly as compared to prior periods. The
Board of Directors of Irsco had determined that it is in Irsco's and the
Company's best interests to allow the Irsco Property to be sold in
foreclosure proceedings. The foreclosure proceedings were instituted upon
the default by Irsco on the payment of indebtedness evidenced by certain
deeds of trust (the "Deeds of Trust"). The Deeds of Trust are secured by
the Irsco Property. The Company does not believe that the sale of the
Irsco Property in foreclosure proceedings will have a material strategic
impact on the development of the Company's core business because Irsco was
not related to the Company's core medical systems business.
Net loss from operations for the first quarter was $649,000 or $0.08
per share compared to a loss of $329,000 or $0.07 per share for the same
period in 1994. The loss for first quarter of 1996 increased by $320,000
or 66% compared to the prior quarter primarily as the result of a $117,000
increase in research and development and $100,000 increase in legal
expenses as a result of certain securities class action lawsuits and a
derivative lawsuit filed against the Company.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 AS COMPARED TO 1994
--------------------------------------------------------
Operating results were affected by continuing marketing efforts and
developmental costs associated with the Company's OsteoSystem business and
the entry by the Company into cardiac transtelephonic event monitoring
services. In the fourth quarter of 1995, certain non-recurring charges of
$1,500,000 relating to the impairment of the Irsco Property, and $228,000
of certain rights related to the TeleCor division were taken. The loss of
$3,390,000 for fiscal year 1995 as compared to the loss of $3,864,000 for
fiscal year 1994 was down 12%.
Revenue for fiscal year 1995 increased by 27% or $647,000 primarily as
a result of increased product sales of OsteoSystem processing units in the
international market and a full year's rental income from Irsco. Rental
revenue related to Irsco was $431,000 in 1995 as compared to $66,000 for
the period commencing on August 12, 1994, the date of the acquisition of
Irsco, through year end 1994. ECG services revenue increased to $1,643,000
in fiscal year 1995 from $1,446,000 in fiscal year 1994 due to a slight
increase in the customer base. A decrease in Osteo Services revenue
resulted from a lower test volume and certain adjustments relating to the
licensing of the OsteoSystem to Merck.
The total expenses for fiscal year 1995 were similar to those incurred
in fiscal year 1994, after taking into account the 1995 non-recurring
charges previously noted and the 1994 charge of $1,696,000 related to
DetoxaholTM research and development. An increase in interest and
depreciation occurred in fiscal year 1995 of $369,000 for Irsco for a full
fiscal year and in the cost of sales of $128,000 related to the three
international sales of the OsteoSystem processing units. The decreases in
1995 resulted primarily from $300,000 less in expenses for DetoxaholTM
research and development.
Further losses are anticipated from research and development in
connection with second generation OsteoSystem, ECG Systems and DetoxaholTM.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
FISCAL QUARTER ENDED DECEMBER 31, 1995 AS COMPARED TO 1994
----------------------------------------------------------
At December 31, 1995, the ratio of current assets to current
liabilities was 1.1 to 1.0 as compared to 2.7 to 1.0 at September 30, 1995.
This decrease in the ratio resulted from the classification as a current
liability of the Secured Promissory Note in the amount of $2,963,765, dated
December 31, 1986 (the "Note"), in favor of Principal Mutual Life Insurance
Company, due December 1, 1996. The Note was reclassified as a result of a
default by Irsco on the payment of the indebtedness evidenced by the Note.
The Note, like the Deeds of Trust, is secured by the Irsco Property. The
Company has incurred $669,000 in current liabilities related to the payment
of the Deeds of Trust. Irsco's revenues in fiscal year 1995 were $431,000
and costs were $419,000, excluding $197,000 of depreciation. After the
sale of the Irsco Property in foreclosure, the Company expects the ratio of
current assets to current liabilities to be consistent with the ratio that
existed at September 30, 1995 (2.7 to 1.0) because long term assets and
current liabilities relating to the Irsco Property will be removed from the
consolidated balance sheet of the Company and subsidiaries as a result of
such sale. Included in current assets at December 31, 1995 was
approximately $5 million in marketable securities primarily as the result
of the Company's August 1995 Reg D Placement of $5.1 million worth of its
Common Stock.
The Company's primary capital resource commitments at December 31,
1995 consisted of the remaining lease commitments, primarily for computer
equipment and certain commitments resulting from liabilities assumed
pursuant to the Irsco acquisition. The Company has $641,000 in current
liabilities related to the payment of the Deeds of Trust. See Note B to
the Consolidated Financial Statements. Revenues for Irsco in fiscal year
1995 were $431,000, and costs were $419,000, excluding $197,000 of
depreciation. The Company currently does not have, and does not anticipate
significant commitments for capital expenditures.
For the last few years, the Company has financed its operations
primarily through private and public sales of securities, and revenues from
sales of its services. Since August 1991 the Company received net proceeds
of approximately $10,400,000 from the private and public sale of equity
securities. The Company believes that as a result of the Reg D Placement,
it has enough capital for at least the next 24 months. The Company may,
however, raise additional capital through the sale of its securities.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 AS COMPARED TO 1994
--------------------------------------------------------
At September 30, 1995, the ratio of current assets to current
liabilities was 2.7 to 1.0 as compared to 0.6 to 1.0 at September 30, 1994.
This increase was primarily the result of the Reg D Placement and other
smaller private placements throughout 1995. These funds have and will be
used primarily for research and development on the second generation
OsteoSystem technology and to move the Company forward in the area of
telemedicine. Additional funds will be used to support the further
development of DetoxaholTM.
The Company's ongoing research and development activities associated
with DetoxaholTM and the second generation OsteoSystem technology and the
current manufacture of its ECG terminals are all subject to federal, state,
local and in some instances, foreign authorities. In June, the Company
filed patent applications on DetoxaholTM. Subject to obtaining such
patents, the Company would seek strategic partners to help fund the
research and development of DetoxaholTM at the University of Georgia. The
regulatory approval process for DetoxaholTM can take years and require
expenditure of substantial resources.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the NASDAQ Small Cap Market under the
symbol "CMPD." The following table sets forth the range of high and low
bid prices for the Common Stock during the periods indicated, and
represents inter-dealer prices, which do not include retail mark-ups and
mark-downs, or any commission to the broker-dealer, and may not necessarily
represent actual transactions.
Common Stock Warrants
------------ --------
High Low High Low
---- --- ----- ---
Fiscal Year ended September 30, 1994:
Quarter Ended:
-------------
December 31, 1993 10 15/16 1 1/4 17/32 1/32
March 31, 1994 11 7/8 3 1/8 9/16 1/8
June 30, 1994 5 5/16 2 3/16 3/16 1/16
September 30, 1994 2 13/16 1 9/16 1/16 1/32
Fiscal Year ended September 30, 1995:
Quarter Ended:
-------------
December 31, 1994 2 1/4 1 1/16 1/32
March 31, 1995 1 3/4 7/8 3/64 3/64
June 30, 1995 6 9/16 15/16 N/A N/A
September 30, 1995 13 1/8 3 15/16 15/16 1/8
Fiscal Year ending September 30, 1996:
Quarter Ended:
-------------
December 31, 1995 19 3/8 3 1 1/2 1/8
(Second Quarter through
February 20, 1996) 5 2 1/2 9/32 1/8
The above-listed prices of the Common Stock are adjusted to reflect
the one-for-ten reverse stock split of October 17, 1994.
As of February 20, 1996 there were approximately 876 record holders of
Common Stock. Such amounts do not include Common Stock held in "nominee"
or "street" name.
The Company has not paid cash dividends on its Common Stock since its
inception. At the present time, the Company's anticipated working capital
requirements are such that it intends to follow a policy of retaining any
earnings in order to finance the development of its business.
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
DetoxaholTM, 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 ("RA"). RA was developed by
SASCO, who sold the RA technology to the Company in 1991. The Company made
enhancements in image digitalization and processing speed and named the
bone density test the Osteogram(R). The Osteogram(R) 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 "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 10% of Merck's
total collected revenues for that year or $3 million and a cap in year 2000
equal to the lesser of 10% 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 60 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 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, 8% of all royalties paid by Merck to the Company
under the Merck License Agreement and extended by five years the term of
warrants to purchase 64,000 shares of the Company's Common Stock at an
exercise price of $2.50 issued to SASCO under the Company's original
agreement with SASCO.
INTERNATIONAL OSTEOSYSTEM SALES
Product sales increased in 1995 as the result of the sale of
OsteoSystem processing units to companies in Mexico, Switzerland and The
Netherlands 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 FosamaxTM are being offered as alternative treatments for
osteoporosis.
Pharmaceutical companies have estimated that only about 5% of patients
requiring medical treatment for osteoporosis receive prescriptions today.
They ascribe this low treatment level to a lack of knowledge about
osteoporosis by the primary care physician and the patient, limited
availability of convenient affordable tests for osteoporosis, limited
amount of FDA approved medications and poor patient compliance when
medication is prescribed. The 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). 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 equipment, 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 equipment 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 equipment 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 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 performed by physicians retained by the
Company. Medical professional liability claims which may be brought
against the Company for misinterpreted overreads, which are not covered by
or exceed the coverage amount of a medical professional liability insurance
policy held by the physician performing the overread, could have a material
adverse effect on the Company's business, financial condition or operating
results. Since commencing ECG services, no medical professional liability
claims have been made against either physicians who perform overreads for
the Company or the Company with respect to misinterpreted overreads.
The Company offers physicians a full range of disposable
cardiopulmonary supplies including electrodes, ECG recording paper, gel and
patient cables.
MARKETING
The Company's sales efforts for its ECG products and services are
aimed principally at primary care physicians, clinics, institutions, small
hospitals and industrial health care facilities.
The Company's revenues are generated mostly by the Company's direct
sales efforts. Approximately 5% of the Company's revenues result from non-
exclusive commissioned dealers who are independent contractors and receive
commissions ranging from 20 35% 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 they are sold or leased. The Company has developed
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
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 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 device
continuously over an extended period of time and call in for a reading in
the event of a specified cardiac event or wear the cardiac event recorder
for a shorter period of time after a cardiac event has occurred so that
multiple cardiac readings can be taken and compared. The Company's
technicians transtelephonically monitor signals received from the cardiac
event recorder.
The telemetry technicians who monitor the results of the event
recorders have all attended two-year training programs in ECG monitoring.
In the event of a cardiac abnormality, the patient's attending physician
will consult with the Company's TeleCor Services Division physician, who
may perform an overread.
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 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.
The Company's current liability insurance policy does not cover losses
due to misinterpreted overreads performed by physicians retained by the
Company. Medical professional liability claims which may be brought
against the Company for misinterpreted overreads, which are not covered by
or exceed the coverage amount of a malpractice insurance policy held by the
physician performing the overread, could have a material adverse effect on
the Company's business, financial condition or operating results. Since
the commencement of the TeleCor Division, no medical professional liability
claims have been made against physicians who perform overreads for the
Company or the Company with respect to misinterpreted overreads.
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.
DETOXAHOLTM
In March 1994, the Company acquired the rights to a potential new
pharmaceutical product called DetoxaholTM through the acquisition of MB
Nutraceuticals, Inc. ("MB"). In June 1995, a patent application was filed
on behalf of the Company covering the technology underlying DetoxaholTM.
DetoxaholTM is a substance intended to facilitate the rapid lowering of
blood alcohol of people who have been drinking alcohol. DetoxaholTM is
currently under development at the University of Georgia, with the Company
funding the research and development. DetoxaholTM is intended to augment
the liver's natural function of removing alcohol from the blood by creating
an "auxiliary liver function" in the small intestine. Its efficacy would
depend on the amount of DetoxaholTM taken compared to the amount of alcohol
consumed; since large doses of DetoxaholTM can be taken, alcohol
detoxification would occur quickly.
There is no assurance that the Company will continue to develop
DetoxaholTM technology or that if any DetoxaholTM product is ultimately
developed by the Company such product will be cleared by the appropriate
regulatory agencies.
Management expects that the initial market for DetoxaholTM would be
for emergency rooms and ambulances. In addition, DetoxaholTM 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 DetoxaholTM might be marketed as additives to these 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 DetoxaholTM compound is currently in the development phase.
The Company is in the process of establishing certain achievement
milestones for DetoxaholTM research for 1996. Depending upon whether such
milestones are achieved, pre-clinical testing may begin in 1996.
Before commencing marketing and sales efforts for DetoxaholTM or any
DetoxaholTM product that is eventually developed by the Company, the
Company must obtain FDA clearance of DetoxaholTM. The FDA and
corresponding regulatory bodies in other countries require that the drug
for which clearance is sought be shown to be safe and effective in
adequately controlled clinical trials. Prior to initiation of clinical
trials, extensive basic research and development information must be
submitted to the FDA in an 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 DetoxaholTM has not yet commenced, it is
premature to estimate when the Company will file an IND with respect to
DetoxaholTM, assuming the Company decides to continue to develop
DetoxaholTM.
Pursuant to a Research Agreement with the University of Georgia,
through December 31, 1995, the Company has funded $260,000 for the research
and development of DetoxaholTM, which includes expenses associated with the
filing of a patent application for DetoxaholTM. The Company has agreed to
fund up to an additional $740,000 over the next year of which $250,000 will
be released only for FDA preclinical testing if the results of the research
of the project are satisfactory to the Company and the University. Upon
material breach or default of the Research Agreement by the Company, the
University of Georgia has the right upon notice to terminate the Research
Agreement and all of the rights and privileges of the Company thereunder,
including the Company's licensing rights, unless the Company cures the
breach within a specified period. Pursuant to the terms of the Research
Agreement, the University of Georgia retains all right and title to any
DetoxaholTM product developed by it, subject to the terms and conditions of
an Exclusive License Agreement, dated as of January 3, 1994 (the "Detoxahol
License Agreement"), between the parties. Pursuant to the Detoxahol
License Agreement, the Company has received an exclusive, perpetual,
worldwide license to use, make and sell any DetoxaholTM products developed
by the University of Georgia and the University of Georgia is entitled to
royalty payments based on the annual net sales resulting from each sale of
a licensed DetoxaholTM product of 5% of the first $1 million, 4% of the
second $1 million, 3% of the third $1 million and 2% of all additional net
sales up to an aggregate royalty amount of $1 million. Thereafter, the
Company must pay the University of Georgia 2% of all net sales. In
addition to the royalties payable under the Detoxahol License Agreement,
the Company must also bear all expenses incidental to the filing and upkeep
of a DetoxaholTM patent.
INDUSTRIAL PROPERTY - IRSCO DEVELOPMENT COMPANY, INC.
In August 1994, the Company acquired Irsco, whose principal asset is
the Irsco Property, in exchange for 52,333 shares of the Company's Class B
Preferred Stock. As a result of the Company's October 1994 one-for-ten
reverse stock split, each share of Class B Preferred Stock is convertible
into 10 shares of the Company's Common Stock.
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.
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 remain 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
DetoxaholTM products. The core technology behind DetoxaholTM must be
further developed, however, before the specifics of any DetoxaholTM product
can be more concretely defined. Prior to marketing, any DetoxaholTM
products that are eventually developed, the Company must undergo an
extensive regulatory clearance process conducted by the FDA and comparable
agencies in other countries. This process, which generally includes a
review of preclinical and clinical testing and confirmation by the FDA that
Good Laboratory Practices established by the FDA and Good Clinical
Practices were maintained during testing, can take many years and require
the expenditure of substantial resources. The Company is dependent on the
laboratory and medical institutions that will conduct its preclinical and
clinical testing to maintain both Good Laboratory Practices and Good
Clinical Practices. Data obtained from preclinical and clinical testing
are subject to varying interpretations that can result in delays in the
regulatory clearance process or limitations on, or even prevention of,
regulatory clearance. In addition, delays or rejections may be encountered
as a result of changes in regulatory review policies during the period of
development and regulatory review of an IND. Each potential DetoxaholTM
product that is produced by the Company must go through separate clinical
trials. The clearance of any particular potential DetoxaholTM product by
the FDA will not necessarily facilitate the clearance of other potential
DetoxaholTM products.
There can be no assurance that regulatory clearance will be obtained
for any potential DetoxaholTM 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 60 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 DetoxaholTM. There can be no assurance
that such patent application will be approved, that the Company can develop
or acquire DetoxaholTM products or methods of use that are patentable, or
even if patents are issued that they will afford the Company's potential
DetoxaholTM products any competitive advantage or will not be challenged by
third parties, or that patents issued to others will not adversely affect
the development or commercialization of the Company's products. In the
event that a patent for DetoxaholTM is not granted, the proprietary
information relating to DetoxaholTM could be protected to a certain extent
by putting procedures into effect which are designed to maintain the key
enzymes, delivery systems and manufacturing process of DetoxaholTM as a
trade secret. In addition, to the extent that the Company develops uses of
DetoxaholTM in combination with other products, if such products are
covered by third-party patents, the Company could be required to obtain
licenses from the owners of such patents in order to market such
combination products. In the event that the Company does have to obtain
such licenses, the overall profitability of any DetoxaholTM product that is
eventually developed by the Company would be diminished by the cost of
obtaining such licenses and any royalties payable by the Company in
connection therewith.
RESEARCH AND DEVELOPMENT
The Company funded research and development of DetoxaholTM, the
OsteoSystem and ECG Services in the aggregate amount of $250,000 in 1995
and $551,000 in 1994 with approximately 65%, 20% and 15% of such amounts,
respectively, attributable to research and development in connection with
each of the aforementioned services. None of such amount is attributable
to research and development of TeleCor. Amounts to be funded on research
and development in 1996 will vary depending upon the amount of working
capital available to the Company in 1996.
EMPLOYEES
At February 20, 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.
FACILITIES
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 ceased operations at its
1,200 square foot facility in Yellow Springs, Ohio. 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
and certain of its executive officers and directors. The Complaints were
filed by the named plaintiffs on behalf of persons who purchased the
Common Stock during various time periods spanning from August 11, 1995
through October 17, 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 the Merck License Agreement.
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 judgment 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. The Company denies the allegations and contends
that the case has no merit.
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.
MANAGEMENT
Directors and Significant Officers
----------------------------------
The directors and significant officers of the Company are as follows:
Director or
Executive Officer
Name Position with Company Age Since
---- --------------------- --- -----------------
Robert Funari Chairman of the Board 48 1992
Rod Raynovich President, CEO and Director 52 1995
Robert Goldberg Director 62 1994
Winston Millet Director 64 1994
John Minnick Director 47 1986
Robert Stuckelman Director 63 1973
Howard Mark, M.D. Director 56 1992
Russell Walker Director 36 1987
DeVere Pollom Vice President Finance, 58 1990
Secretary and CFO
Mr. Funari was elected to the Board in February 1992. Since August 1993
----------
he has served as Executive Vice President of the Syncor Corporation and
recently was appointed as its President and Chief Operating Officer.
From 1989 to 1993 he was a Corporate Vice President of Baxter International
and President of its Pharmaseal Division. Mr. Funari was with Baxter for
over fifteen years, and has held a number of executive positions, including
President of Paramax Systems Division from 1986 to 1989. Mr. Funari
received his BS degree in Mechanical Engineering from Cornell University
and his MBA degree from Harvard University, Graduate School of Business
Administration.
Mr. Raynovich was appointed President and Chief Executive Officer of the
-------------
Company in October 1994. Mr. Raynovich has 25 years of experience in
the medical diagnostics and biotechnology industry. Mr. Raynovich served
as president of Raygent Associates, a healthcare consulting firm providing
investment banking and business development services from April 1993 to
October 1994. Prior to becoming president of Raygent Associates, he was
President and CEO of Leeco Diagnostics, Inc., which have merged into
Endogen, Inc. from August 1990 to April 1993. Mr. Raynovich was Vice
President of Business Development of Cambridge Bioscience Corp. He has
also held management positions with Abbott Laboratories and Johnson &
Johnson. Mr. Raynovich received his M.B.A. from Rutgers University and
his B.S. from Penn State
University.
Mr. Goldberg is a senior partner in the firm of Francis, Goldberg &
------------
Powers, a certified Public Accounting Firm and has been associated with
such firm since January 1995. Prior to becoming associated with such firm
he was a senior partner in the Los Angeles office of Bernstein, Fox,
Goldberg & Licker Certified Public Accountants for fifteen years. He is
certified in both California and New York and is also a member of the New
York State Bar. Mr. Goldberg attended Lehigh University, Brooklyn Law
School and New York University School of Law and has lectured for the
Practicing Law Institute and The American College of Life Underwriters.
He is a member of the Estate Planning Council, Professional Planners
Forum and various accounting societies.
Mr. Millet is publisher of the weekly community newspaper "Beverly
----------
Hills News." Until 1990, he was Deputy Treasurer of the City of Beverly
Hills, and past Treasurer and Director of the Wilshire Chamber of
Commerce. Mr. Millet graduated UCLA in 1952 with a degree in Finance.
He owns and manages hotels, commercial properties and professional
buildings. Mr. Millet personally founded both the Beverly Hills Historical
Society and the Beverly Hills Annual Car Show for Charity (now in its
sixteenth year) and serves on a number of community boards.
Mr. Minnick is currently President of Minnick Capital Management and for
-----------
the past nineteen years has been President of J.D. Minnick & Company,
investment counselors, Topeka, Kansas. Mr. Minnick, an attorney, has had
a long standing relationship with the Company in his capacity as investment
counsel for a large number of investors in certain franchise programs to
which the Company is a party. Mr. Minnick has also served as a Director to
certain private corporations.
Howard Mark, M.D. has been a member of the Company's Medical Advisory
-----------------
Board since 1978. Dr. Mark has been an internist in Sherman Oaks for more
than 25 years. He developed the Cardiac Function Analyzer and was co-
founder of Instranetics, Inc., a company which manufactured magnetic mats
and other surgical disposables. Instranetics, Inc. was acquired by
American Hospital Supply Corporation in 1985. Dr. Mark was a founder,
principal shareholder and officer and director of MB. Dr. Mark received
his M.D. from Baylor University and his A.B. in Biology from Occidental
College.
Mr. Stuckelman founded the Company in 1973 and served as its President up
--------------
to 1982. From 1982 through 1989, Mr. Stuckelman was a business consultant
for small and medium size companies. In 1989, he rejoined the Company as
President and Chief Executive Officer in which capacities he served until
October 1994. Mr. Stuckelman has been a director of the Company since
its incorporation and is one of its principal stockholders. From 1958
to 1973, he was employed by Litton Industries in various capacities, the
last of which was Director of Advanced Business Development. He holds
an MSEE from the University of Southern California and a BEE from Cornell
University.
Mr. Walker joined the Company in April 1985 as a Senior Software
----------
Specialist. He was promoted to Engineering Manager in August 1986,
assumed additional duties as Director of Engineering and Manufacturing in
November 1987, was appointed Vice President of Operations in October 1988
and assumed the role of Senior Scientist on a consulting basis in October
1993. Since October 1993 Mr. Walker has maintained a private consulting
practice, Walker Associates, specializing in applications of physics and
computer science to health care. In September 1995 he contracted to
provide consulting services to the Bone Measurement Institute, a wholly
owned subsidiary of Merck & Co. Inc., in support of the OsteoGram(R)
technology licensed by Merck from the Company. Mr. Walker also currently
serves as an adjunct instructor in Computer Science at Orange Coast
College. He was named Director of the Company in June 1993. He holds
an M.S. degree in Applied Physics from the California Institute of
Technology and an MBA from California State University-Long Beach.
Devere B. Pollom joined the company in September 1990 as Vice President
----------------
and Chief Financial Officer. From 1988 through 1990, he was a consultant
to hospitals and nursing registries. From 1984 to 1988, he was a Director
of Finance for Jupiter Hospital Corporation. Mr. Pollom graduated from
the University of Washington with a degree in Business Administration.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation
of the Company's Chief Executive Officer for the period from October 1994,
the date Mr. Raynovich became Chief Executive Officer, through September
30, 1995, the fiscal year end of the Company. No other executive officers
had an annual salary and bonus, if any, which exceeded $100,000 for
services in all capacities to the Company during the last fiscal year.
Name and Long-Term
Principal Fiscal Annual Compensation Compensation All Other
Position Year Salary Bonus Stock Options Compensation
------------ ------ ------ ------------ ------------- ------------
R. Raynovich
President 1995 $114,000* $25,000 158,150 $36,000
* Reflects actual salary from October 1994 to fiscal year end 1995.
EMPLOYMENT AGREEMENTS
No formal employment agreement exists between the Company and Mr.
Raynovich. Mr. Raynovich has, however, accepted an offer of employment
pursuant to which he currently receives an annual salary of $120,000 and
$3,000 per month in personal expenses. The Company is presently
negotiating the remaining terms of a formal employment agreement with Mr.
Raynovich.
EMPLOYEE STOCK OPTION PLANS
On March 27, 1992, the Company's stockholders approved a 1992 Stock
Option Plan (the "1992 Plan"). The purpose of the 1992 Plan is to enable
the Company to recruit and retain selected officers and other employees by
providing equity participation in the Company to such individuals. Under
the 1992 Plan, regular salaried employees, including directors who are full
time employees, may be granted options exercisable at not less than 100% of
the fair market value of the Common Stock on the date of grant. The
exercise price of any option granted to an optionee who owns stock
possessing more than 10% of the voting power of all classes of stock of the
Company must be 110% of the fair market value of the Common Stock on the
date of grant and the duration of the options granted may not exceed five
years. Prior to the existence of any public market for the Company's
shares, the fair market value had been determined from time to time by the
Board of Directors. Options generally become exercisable at a rate of 33%
of the shares subject to an option one year after its grant. The remaining
shares generally become exercisable over an additional 24 months. The
duration of options may not exceed 10 years. Options under the Plan are
nonassignable, except in the case of death and may be exercised only while
the optionee is employed by the Company, or in certain cases, within a
specified period after termination of employment (within three months) or
death (within twelve months). The purchase price and number of shares of
Common Stock that may be purchased upon exercise of options are subject to
adjustment in certain cases, including stock splits, recapitalizations and
reorganizations.
Under the 1992 Plan, there are 51,308 shares available for grant and
109,674 options were exercised during the fiscal year ending September 30,
1995. At the Annual Meeting of Stockholders scheduled for March 28, 1996,
the stockholders will vote upon a proposal to increase the number of shares
subject to the 1992 Plan to 880,000 from 480,000.
The amount of options granted and to whom they are granted, are
determined by the Board of Directors with the recommendation of the
Compensation Committee, at their discretion. There are no specific
criteria, performance formulas or measures applicable to the determination
of the amount of options to be granted and to whom such options are to be
granted.
The Company's 1982 Stock Option Plan (the "1982 Plan") terminated on
January 29, 1992. The terms and conditions of such plan were in all
material respects identical with the 1992 Plan. Options totaling 16,222
were exercised during the 1995 fiscal year and 4,750 remain outstanding
under the 1982 Plan. No further options will be granted under such Plan.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
---------------------------------------
Number of Securities
(shares of Common Stock) % of Total Options
Underlying Options Granted to Employees
Name Granted(1) in Fiscal Year
---- ----------------------- -------------------
R. Raynovich 158,150 41%
Exercise Price Expiration
Name ($/share) Date
---- ----------------------- -------------------
R. Raynovich $1.00 (2)
-------------------
(1) Options vested at various dates during the 1995 fiscal year, except
for 9,000 options that vested on December 16, 1995.
(2) The expiration dates for the options granted span the period from
October 2000 to March 2001.
NON-QUALIFIED STOCK OPTIONS
Between February 1992 and January 1996, a total of 591,397 non-
qualified stock options were granted to directors and officers. The
exercise prices of such non-qualified stock options were between $1.00 and
$4.00 per share which were equal to the fair market value of the Common
Stock on the dates of grant. The non-qualified stock options expire
between 1996 and 2000. These options were not issued from either the 1982
or 1992 Employee Stock Option Plans. As of February 9, 1996, 19,542 of
these non-qualified stock options were exercised.
SAVINGS AND RETIREMENT PLANS
In July 1987 the Company instituted a Savings and Retirement Plan (the
"S&R Plan"). Under the S&R Plan, every full-time salaried employee who is
18 years of age or older may contribute up to 15 percent of his or her
annual salary to the Company's S&R Plan. The Company will make a matching
contribution of $.25 for every $1.00 of the employee's contribution for an
employee contribution of up to but not exceeding 6% of the employee's
annual salary. Company contributions are 100% vested after 60 months of
contributions to the S&R Plan. Benefits are payable under the S&R Plan
upon termination of a participant's employment with the Company or at
retirement. The S&R Plan meets the requirements of Section 401(k) of the
Internal Revenue Code. Internal Revenue Service regulations limit the
percentage of tax-deferred contributions that can be made by higher-
compensated participants. There are restrictions upon withdrawal of tax
deferred contributions, but participants are permitted to borrow against
the value of their tax deferred accounts.
In March 1993, the Company established a Supplemental Employee
Retirement Plan (deferred compensation plan) for executives to defer part
of their compensation up to 15% of their annual salary, less any monies
withheld under the Company's 401(k) Plan. In addition to executive's
compensation, the Company contributes $.25 to the plan for each $1.00 of
executive compensation contribution. The Company has elected to invest the
amount in the executive's account in a life insurance policy in the name of
the executive with assignment to the Company. The Company is obligated to
pay to the executive or any beneficiary any credit balance in the
executive's account.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information regarding the
exercise of stock options during the fiscal year ended September 30, 1995
and the fiscal year-end value of unexercised options for the Company's
named executive officers.
Number of Securities
(shares of Common Stock)
Shares Underlying Unexercized
Acquired Value Options at Fiscal Year End
Name on Exercise Realized Exercisable/Unexercisable
---- ----------- -------- --------------------------
R. Raynovich - - 149,150 / 9,000
Value of Unexercised
In-the-money Options at
Fiscal Year End (1)
Name Exercisable/Unexercisable
---- --------------------------
R. Raynovich $1,528,787 / $92,250
(1) Based upon the closing market price of the Company's Common Stock as
reported on the NASDAQ Stock market on September 30, 1995 minus the
respective option exercise prices.
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning ownership of the
Company's Common Stock as of February 20, 1996 by: (a) each director of
the Company; (b) each person known to the Company to be the beneficial
owner of more than five percent of its Common Stock; and (c) all officers
and directors of the Company as a group.
Amount and Nature of Beneficial Ownership
-----------------------------------------
Name and Address of
Beneficial Owner Number of Shares(1) Percent of Class
------------------- ------------------- --------------------
Spinnaker Technology Fund L.P. 550,000 5.9%
c/o Sound View Asset Management
22 Gatehouse Road
P.O. Box 110236
Stamford, CT 06911-0238
Winston Millet 524,776 (2) 5.6%
c/o CompuMed, Inc.
1230 Rosecrans Avenue
Manhattan Beach, CA 90266
Howard Mark, M.D. 432,661 (3) 4.6%
c/o CompuMed, Inc.
1230 Rosecrans Avenue
Manhattan Beach, CA 90266
Robert Stuckelman 248,658 (4) 2.6%
c/o CompuMed, Inc.
1230 Rosecrans Avenue
Manhattan Beach, CA 90266
Rod Raynovich 141,483 (5) 1.5%
c/o CompuMed, Inc.
1230 Rosecrans Avenue
Manhattan Beach, CA 90266
John Minnick 122,982 (6) 1.3%
c/o CompuMed, Inc.
1230 Rosecrans Avenue
Manhattan Beach, CA 90266
Russell Walker 42,652 (7) .5%
c/o CompuMed, Inc.
1230 Rosecrans Avenue
Manhattan Beach, CA 90266
Robert Funari 36,917 (8) .4%
c/o CompuMed, Inc.
1230 Rosecrans Avenue
Manhattan Beach, CA 90266
Robert Goldberg 32,496 (9) .4%
c/o CompuMed, Inc.
1230 Rosecrans Avenue
Manhattan Beach, CA 90266
All Officers and Directors 1,622,070 (10) 17.3%
as a group (9 in number) ============== =====
-------------------
(1) A person is deemed to be the beneficial owner of securities that can
be acquired by such person within 60 days from the date of this
Prospectus upon the exercise of options, warrants and convertible
securities. Each beneficial owner's percentage ownership is
determined by assuming that options, warrants and convertible
securities held by such person (but not those held by any other
person) and which are exercisable within 60 days of this Prospectus
have been exercised. Except as otherwise indicated, all shares are
beneficially owned, and sole investment and voting power is held, by
the persons named.
(2) Includes 44,776 shares subject to non-qualified stock options and
warrants and 48,000 shares of Class B Preferred Stock which are
convertible into 480,000 shares of Common Stock.
(3) Includes 70,755 shares subject to non-qualified and qualified stock
options.
(4) Includes 94,143 shares subject to non-qualified and qualified stock
options.
(5) Includes 141,483 shares subject to non-qualified stock options.
(6) Includes 53,697 shares subject to non-qualified stock options.
(7) Includes 42,652 shares subject to non-qualified and qualified stock
options.
(8) Includes 36,917 shares subject to non-qualified stock options.
(9) Includes 22,496 shares subject to non-qualified stock options.
(10) Includes 32,214 shares in addition to shares listed in above footnotes
subject to non-qualified and qualified stock options.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock,
$.01 par value, of which 8,408,517 shares were issued and outstanding as of
February 20, 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 20,
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 the Class A Preferred Stock are Selling Stockholders
with respect to the 2,400 shares of Common Stock issuable upon the
conversion of all outstanding 8,400 shares of Class A Preferred Stock. See
"SELLING STOCKHOLDERS."
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 Class B Preferred Stock ranks pari passu with the Class 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 Class 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 Company issued 8,000,000 Warrants (the "Warrants") in its public
offering of 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 20, 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.
REPRESENTATIVE'S WARRANTS
In connection with its August 1992 public offering, the Company
granted 800,000 Representative's Warrants to Paulson Investment Company or
its designees, as representative of several underwriters in such offering
(the "Representative"). As a result of the Reverse Stock Split, the
Representative must exercise 10 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.
SELLING STOCKHOLDERS
The Selling Stockholders are comprised of the following four groups:
(i) holders of the Class A Preferred Stock, (ii) SASCO, (iii) purchasers in
the August 1995 Reg D Placement and finders in such placement, and (iv)
Toppen.
As of February 9, 1996 there were 8,400 shares of Class A Preferred
Stock outstanding. The holders of the Class A Preferred Stock acquired
such stock in a private placement in August 1991. As a result of the
Reverse Stock Split, every two shares of Class A Preferred Stock are
convertible, subject to adjustment, into one share of Common Stock. This
Prospectus includes the 4,200 shares of Common Stock underlying the
outstanding shares of Class A Preferred Stock.
SASCO acquired warrants to purchase 64,000 shares of Common Stock in
1991 (the "Initial Warrants") in connection with the sale of certain
Osteosystem-related assets (the "SASCO Assets"). It acquired additional
warrants for the purchase of 83,000 shares of Common Stock and an extension
by five years of the expiration date of the Initial Warrants in September
1995 in connection with the modification of payments due to SASCO for the
SASCO Assets. The SASCO Warrants terminate in September 2000 and have an
exercise price of $2.50. This Prospectus includes the 147,000 shares of
Common Stock underlying the SASCO Warrants. See "BUSINESS - THE
OSTEOGRAM(R) - Merck License Agreement".
The Company's Reg D Private Placement of 1,236,000 shares of Common
Stock for an aggregate of $5.1 million was effected in August 1995. The
shares of Common Stock issued in the placement are being offered hereby by
the purchasers and finders in that placement. Pursuant to registration
rights provision contained in the stock purchase agreement among the
parties to the Reg D Placement, the Company was required to file a
registration statement covering such shares. This Prospectus includes the
1,236,000 shares of Common Stock issued in the Reg D Placement.
Toppen acquired Warrants to purchase 25,000 shares of Common Stock in
February 1996 as partial consideration in connection with a settlement
agreement with the Company. In exchange for the Toppen Warrants and the
extension of the term of certain options held by her, Toppen, a former
employee of the Company, has agreed to sign a General Release and Covenant
Not to Sue (the "Release"). The Release, among other things, discharges
the Company from any claims that Toppen ever had against the Company. The
Toppen Warrants terminate in January 1998 and have an exercise price of
$3.88, the average of the bid and asked prices on the date the offer to
settle was made by the Company. This Prospectus includes the 25,000 Shares
of Common Stock underlying the Toppen Warrants.
Toppen was employed by the Company as a technician from April 1993 to
September 1995. In addition, Richard Bachtell, the President of SASCO, was
employed by the Company as Technical Manager at the Company's now defunct
Radiology Testing Facility in Yellow Springs, Ohio from June 1991 through
January 1996 and during most of such period, he was also the President of
SASCO. Other than Toppen, SASCO and Mr. Bachtell, none of the Selling
Stockholders has had any position, held any office or had any other
material relationship with the Company or any of its affiliates within the
past three years.
The following table sets forth, as of February 9, 1996 and upon
completion of this offering, information with regard to the beneficial
ownership of the Company's Common Stock by each of the Selling
Stockholders. The table assumes the exercise of all of the SASCO Warrants
and the Toppen Warrants and the conversion of all of the shares of the
Class A Preferred Stock. Beneficial ownership by the Selling Stockholders
after the offering will depend upon the number of Shares sold by each
Selling Stockholder.
Beneficial Ownership | Beneficial Ownership
Prior to Offering | After Offering
-------------------- | --------------------
Maximum |
Number Amount |
of to be | Number of
Name Shares Percent Sold | Shares Percent
____ ________ _______ _____ | _________ _______
|
Claudio and Jonette |
Chiuchiarelli 3,500 * 3,500 | -0- -0-
|
John Butler, M.D. 700 * 700 | -0- -0-
|
Skeletal Assessment |
Services Co. 147,000 1.3% 147,000 | -0- -0-
|
Spinnaker Technology |
Fund, L.P. 550,000 5.0% 550,000 | -0- -0-
|
Sextant Group, |
Inc. 250,000 2.3% 250,000 | -0- -0-
|
Pequot Scout |
Fund, L.P. 125,000 1.1% 125,000 | -0- -0-
|
David M. Gong 25,000 * 25,000 | -0- -0-
|
Sanford B. Prater 10,000 * 10,000 | -0- -0-
|
Douglas C. Floren 40,000 * 40,000 | -0- -0-
|
Jeffrey Edwards 10,000 * 10,000 | -0- -0-
|
Timothy R. McCollum 10,000 * 10,000 | -0- -0-
|
Philip and Colleen |
Hempleman (Joint |
Trust with Right |
of Survivorship) 90,000 * 90,000 | -0- -0-
|
Carter G. Hempleman |
Trust (U/A/D |
December 29, 1992) 7,500 * 7,500 | -0- -0-
|
Spencer J. Hempleman |
Trust 7,500 * 7,500 | -0- -0-
|
Lawrence A. Bowman(1)45,000 * 45,000 | -0- -0-
|
SoundView Financial |
Group, Inc. 30,000 * 30,000 | -0- -0-
|
Douglas D. Lind, |
M.D. 18,000 * 18,000 | -0- -0-
|
Lance Willsey, |
M.D. 18,000 * 18,000 | -0- -0-
|
Maurene Toppen 25,000 * 25,000 | -0- -0-
-------------------
* Less than one percent.
(1) Mr. Bowman is the President of SoundView Asset Management, Inc.
which is the General Partner of Spinnaker Technology Fund, L.P.
PLAN OF DISTRIBUTION
The Shares offered hereby are being sold by the Selling Stockholders
acting as principals for his or its own account. The Company will not
receive any of the proceeds from the sale of the Shares by the Selling
Stockholders. However, the Company will receive an amount equal to $2.50
per share or aggregate gross proceeds of $367,500, assuming the exercise of
all of the SASCO Warrants and an amount equal to $3.88 per share, or
aggregate gross proceeds of $97,000, assuming the exercise of all of the
Toppen Warrants. See "Use of Proceeds."
The distribution of the Shares by the Selling Stockholders is not
subject to any underwriting agreement. The Company expects that the
Selling Stockholders will sell their Shares covered by this Prospectus
through customary brokerage channels, either through broker-dealers acting
as agents or brokers for the seller, or through broker-dealers acting as
principals, who may then resell the Shares in the over-the-counter market,
or at private sale or otherwise, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. The Selling Stockholders may effect such transactions by selling
Shares to or through broker-dealers, and such broker-dealers may receive
compensation in the form of concessions or commissions from the Selling
Stockholders and/or the purchasers of the Shares for whom they may act as
agent (which compensation may be in excess of customary commissions). The
Selling Stockholders and any broker-dealers that participate with the
Selling Stockholders in the distribution of Shares may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act,
and commissions received by them and any profit on the resale of Shares
positioned by them might be deemed to be underwriting discounts and
commissions under the Securities Act.
The Selling Stockholders are not restricted as to the price or prices
at which they may sell their Shares. Sales of such Shares at less than
market prices may depress the market price of the Company's Common Stock.
Moreover, the Selling Stockholders are not restricted as to the number of
Shares which may be sold at any one time.
STATEMENT AS TO INDEMNIFICATION
The Certificate of Incorporation of the Company and its By-laws
contain provisions that permit the Company to indemnify its directors,
officers, employees and agents to the fullest extent permitted by the
General Corporation Law of the State of Delaware and purchase and maintain
insurance for the benefit of any director or officer against any liability
incurred in their capacity as directors and officers of the Company.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise,
the Company has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed
upon for the Company by Reid & Priest LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company at September 30,
1995, and for each of the two years in the period ended September 30, 1995,
appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
<PAGE>
COMPUMED, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of
September 30, 1995 and December 31, 1995 (unaudited) . . . . . . . F-3
Consolidated Statements of Operations for the years ended
September 30, 1994 and 1995 and for the three months
ended December 31, 1994 and 1995 (unaudited) . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for
the years ended September 30, 1994 and 1995 and for the three
months ended December 31, 1995 (unaudited) . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 1994 and 1995 and for the three months
ended December 31, 1994 and 1995 (unaudited) . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . F-8 to F-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CompuMed, Inc.
We have audited the accompanying consolidated balance sheet of CompuMed,
Inc. and subsidiaries as of September 30, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the two years in the period ended September 30, 1995. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CompuMed,
Inc. and subsidiaries at September 30, 1995, and the consolidated results
of their operations and their cash flows for each of the two years in the
period ended September 30, 1995, in conformity with generally accepted
accounting principles.
Los Angeles, California /s/ Ernst & Young LLP
November 29, 1995
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1995 December 31, 1995
------------------ -----------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . $ 299,000 $ 24,000
Marketable securities . . . . . . . 4,723,000 5,017,000
Accounts receivable, less allowance
of $218,000 (September 30, 1995)
and $211,000 (December 31, 1995) . 469,000 415,000
Other receivables . . . . . . . . . 433,000 102,000
Inventory . . . . . . . . . . . . . 123,000 112,000
Prepaid expenses and other current
assets . . . . . . . . . . . . . . 48,000 39,000
---------- -----------
TOTAL CURRENT ASSETS . . . . . . 6,095,000 5,709,000
PROPERTY AND EQUIPMENT - Notes A and C
Machinery and equipment . . . . . . 2,944,000 3,015,000
Furniture, fixtures and leasehold
improvements . . . . . . . . . . . 199,000 199,000
Equipment under capital leases . . . 562,000 611,000
Rental Property - Note F
Land . . . . . . . . . . . . . . . 1,022,000 1,022,000
Building . . . . . . . . . . . . . 2,828,000 2,828,000
--------- ---------
7,555,000 7,675,000
Less allowance for depreciation and
amortization . . . . . . . . . . . . 3,516,000 3,601,000
--------- ---------
4,039,000 4,074,000
OTHER ASSETS
Reacquired franchises, net of
accumulated amortization of
$117,000 (September 30, 1995) and
$127,000 (December 31, 1995) . . . 210,000 200,000
Other assets . . . . . . . . . . . . 154,000 176,000
----------- -----------
$10,498,000 $10,159,000
=========== ===========
See notes to consolidated financial statements
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1995 December 31, 1995
------------------ -----------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $465,000 $464,000
Deferred revenue 95,000 100,000
Other accrued liabilities 952,000 932,000
Current portion of long term debt-Note B 704,000 3,633,000
Current portion of capital lease
obligations-Note C 22,000 31,000
--------- ---------
TOTAL CURRENT LIABILITIES 2,238,000 5,160,000
TRUST DEED NOTES PAYABLE, less current
portion-Note B 2,932,000
CAPITAL LEASE OBLIGATIONS, less current
portion-Note C 69,000 101,000
OTHER LIABILITIES 58,000 59,000
COMMITMENTS AND CONTINGENCIES-Note C and
Note H
STOCKHOLDERS' EQUITY-Note E
Preferred stock, $.10 par value--authorized
1,000,000 shares
Class A $3.50 cumulative convertible
voting preferred stock, issued and
outstanding -- 8,400 shares 1,000 1,000
Class B $3.50 convertible voting
preferred stock, issued and outstanding
- 52,333 5,000 5,000
Common Stock, $.01 par value--authorized
50,000,000 shares, issued and
outstanding--8,235,937 (September 1995)
and 8,346,566 (December 1995) 82,000 83,000
Additional paid in capital 24,633,000 24,920,000
Retained deficit (19,520,000) (20,170,000)
------------ ------------
STOCKHOLDERS' EQUITY 5,201,000 4,839,000
------------ ------------
$10,498,000 $10,159,000
============ ============
See notes to consolidated financial statements
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Year Ended September 30 December 31, 1995
----------------------- -------------------
1994 1995 1994 1995
---- ---- ---- ----
(unaudited) (unaudited)
REVENUES
ECG services $1,446,000 $1,643,000 $ 401,000 $ 426,000
Osteo services, net 580,000 327,000 174,000
Product sales 266,000 573,000 55,000 53,000
Rental property - Note F 66,000 431,000 132,000 99,000
Other income 5,000 36,000 1,000 74,000
---------- ---------- ---------- ----------
2,363,000 3,010,000 763,000 652,000
COST AND EXPENSES
Cost of services 1,499,000 1,416,000 315,000 300,000
Cost of sales 156,000 284,000 29,000 24,000
Selling expenses 394,000 418,000 77,000 73,000
Research and development 551,000 250,000 47,000 164,000
Cost of rights - Note E 1,696,000 228,000
General and
administrative
expenses 1,388,000 1,392,000 393,000 553,000
Depreciation and amorti-
zation 359,000 538,000 125,000 102,000
Interest expense 184,000 374,000 106,000 85,000
Loss on impairment of
asset - Note F 1,500,000
---------- ---------- ---------- ----------
6,227,000 6,400,000 1,092,000 1,301,000
NET LOSS $(3,864,000) $(3,390,000) $(329,000) $(649,000)
========== ========== ======== ========
NET LOSS PER SHARE $ (.90) $ (.55) $ (.07) $ (.08)
=========== =========== =========== ==========
Weighted average
number of
common shares
outstanding 4,315,200 6,150,500 4,809,200 8,344,300
========= ========= ========= =========
See notes to consolidated financial statements
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED COMMON ADDITIONAL PAID
STOCK STOCK IN CAPITAL
-------- ------ ----------------
Balance at September 30, 1993: $1,000 $33,000 $13,175,000
Proceeds from issuance of 571,289
shares of Common Stock in a
Regulation "S" offering . . . 6,000 1,426,000
Issuance of 737,913 shares of
common stock for acquisition
of MB Nutraceuticals, Inc. . 7,000 1,689,000
Proceeds from issuance of 20,000
shares of Common Stock for
exercise of warrants . . . . 75,000
Proceeds from issuance of 31,328
shares of Common Stock upon
exercise of stock options . . 44,000
Issuance of 3,087 shares of
Common Stock for services . . 14,000
Issuance of 52,333 shares of
Class B preferred stock for
the acquisition of IRSCO
Development Company, Inc. . . 5,000 1,565,000
Dividends paid on Class A
preferred stock . . . . . . .
Net loss . . . . . . . . . . . . ------ ------- -----------
Balance at September 30, 1994: $6,000 $46,000 $17,988,000
Proceeds from issuance of
1,735,029 shares of Common
Stock in a Regulation "S"
offering . . . . . . . . . . 17,000 962,000
Issuance of 400,000 shares of
Common Stock for acquisition
of TeleCor marketing rights . 4,000 224,000
Proceeds from issuance of
1,236,000 shares of Common
Stock in a Regulation "D"
offering . . . . . . . . . . 12,000 5,066,000
Proceeds from issuance of 66,010
shares of Common Stock upon
exercise of warrants . . . . 1,000 166,000
Proceeds from issuance of 156,405
of common stock upon exercise
of stock options . . . . . . 2,000 227,000
Dividends paid on Class A
preferred stock . . . . . . .
Net loss . . . . . . . . . . . . ------ ------- -----------
Balance at September 30, 1995: $6,000 $82,000 $24,633,000
Proceeds from issuance of 66,800
Shares of Common Stock upon
exercise of warrants . . . . 1,000 249,000
Proceeds from issuance of 43,829
Shares of Common Stock upon
exercise of stock options . . 38,000
Dividends paid on Class A Preferred
Stock . . . . . . . . . . . .
Net loss . . . . . . . . . . . . ------ ------- -----------
Balance at December 31, 1995
(unaudited) . . . . . . . . . $6,000 $83,000 $24,920,000
RETAINED
(DEFICIT) TOTAL
-------- ------
Balance at September 30, 1993: $(12,258,000) $ 951,000
Proceeds from issuance of 571,289
shares of Common Stock in a
Regulation "S" offering . . . 1,432,000
Issuance of 737,913 shares of
common stock for acquisition
of MB Nutraceuticals, Inc. . 1,696,000
Proceeds from issuance of 20,000
shares of Common Stock for
exercise of warrants . . . . 75,000
Proceeds from issuance of 31,328
shares of Common Stock upon
exercise of stock options . . 44,000
Issuance of 3,087 shares of
Common Stock for services . . 14,000
Issuance of 52,333 shares of
Class B preferred stock for
the acquisition of IRSCO
Development Company, Inc. . . 1,570,000
Dividends paid on Class A
preferred stock . . . . . . . (5,000) (5,000)
Net loss . . . . . . . . . . . . (3,864,000) (3,864,000)
---------- ----------
Balance at September 30, 1994: $(16,127,000) $1,913,000
Proceeds from issuance of
1,735,029 shares of Common
Stock in a Regulation "S"
offering . . . . . . . . . . 979,000
Issuance of 400,000 shares of
Common Stock for acquisition
of TeleCor marketing rights . 228,000
Proceeds from issuance of
1,236,000 shares of Common
Stock in a Regulation "D"
offering . . . . . . . . . . 5,078,000
Proceeds from issuance of 66,010
shares of Common Stock upon
exercise of warrants . . . . 167,000
Proceeds from issuance of 156,405
of common stock upon exercise
of stock options . . . . . . 229,000
Dividends paid on Class A
preferred stock . . . . . . . (3,000) (3,000)
Net loss . . . . . . . . . . . . (3,390,000) (3,390,000)
---------- ----------
Balance at September 30, 1995: $(19,520,000) $5,201,000
Proceeds from issuance of 66,800
Shares of Common Stock upon
exercise of warrants . . . . 250,000
Proceeds from issuance of 43,829
Shares of Common Stock upon
exercise of stock options . . 38,000
Dividends paid on Class A Preferred
Stock . . . . . . . . . . . . (1,000) (1,000)
Net loss (649,000) (649,000)
---------- ----------
Balance at December 31, 1995
(unaudited) . . . . . . . . . $(20,170,000) $4,839,000
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
Year Ended September 30 December 31, 1995
----------------------- -------------------
1994 1995 1994 1995
---- ---- ---- ----
(unaudited) (unaudited)
OPERATING ACTIVITIES:
Net Loss $(3,864,000) $(3,390,000) $(329,000) $(649,000)
Net adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization 359,000 538,000 125,000 102,000
Cost of rights 1,696,000 228,000
Loss on impairment
of asset 1,500,000
Issuance of Common
Stock for services 14,000
Changes in operating
assets and liabilities:
Interest receivable 25,000 7,000 7,000
Notes receivable 460,000
Accounts receivable (7,000) (45,000) (27,000) 54,000
Other receivables 65,000 (378,000) 35,000 331,000
Inventories and
prepaid expenses 86,000 88,000 9,000 20,000
Accounts payable and
other liabilities 242,000 270,000 19,000 (15,000)
Other assets (59,000) 116,000 (2,000) (29,000)
-------- --------- --------- ---------
NET CASH USED IN
OPERATING ACTIVITIES (983,000) (1,066,000) (163,000) (186,000)
INVESTING ACTIVITIES:
Purchase of marketable
securities (4,823,000) (500,000)
Sale of marketable
securities 100,000 206,000
Purchases of property,
plant and equipment (122,000) (270,000) (36,000) (71,000)
-------- --------- --------- ---------
NET CASH USED IN
INVESTING ACTIVITIES (122,000) (4,993,000) (36,000) (365,000)
FINANCING ACTIVITIES:
Net Proceeds from sale
of stock 1,432,000 6,057,000 345,000
Dividends on Class A
preferred stock (5,000) (3,000) (1,000) (1,000)
Proceeds from short
term borrowings 45,000 100,000 176,000
Payments on short term
borrowings (446,000) (100,000)
Principal payments on
capital lease
obligations (26,000) (25,000) (5,000) (8,000)
Principal payments on
trust deeds payable (2,000) (62,000) (26,000) (3,000)
Principal payments on
notes payable (16,000) (21,000) (6,000)
Exercise of stock
options and warrants 119,000 396,000 288,000
--------- --------- --------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,101,000 6,342,000 483,000 276,000
--------- --------- --------- ---------
(DECREASE) INCREASE IN
CASH (4,000) 283,000 284,000 (275,000)
Cash at beginning of year 20,000 16,000 20,000 299,000
--------- --------- --------- ---------
CASH AT END OF YEAR $ 16,000 $ 299,000 $ 304,000 $ 24,000
========= ========= ========= =========
Cash paid for interest $ 168,000 $ 374,000 $ 80,000 $ 85,000
========= ========= ========= =========
During 1994 and 1995 computer and office equipment were acquired under
capital lease obligation for $76,000 and $32,000, respectively.
During 1994 Irsco Development Company, Inc. was acquired with the issuance
of 50,000 shares of Class B $3.50 preferred stock for a value of
$1,500,000. This included $5,200,000 in property received and the
assumption of $3,700,000 in Trust Deed Notes.
See notes to consolidated financial statements
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The interim financial information for the three months ended December 31,
1994 and 1995 is unaudited)
NOTE A-BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
---------------------------
the accounts of the Company and its wholly-owned subsidiaries. All
material intercompany transactions and accounts have been eliminated.
Business Segment and Credit Risk: The Company operates primarily in one
--------------------------------
business segment. The Company is engaged in the assembly, sale,
distribution and service of ECG computer analysis equipment, and in the
distribution and processing of bone density tests. These OsteoSystems
customers are the physicians who take the OsteoGram(R) and send it to
Merck (commencing January 1996) for diagnostic laboratory processing;
however, payment is made in nearly all cases by the medical insurance
carrier of the patient. Accounts receivable related to OsteoSystem
consist of approximately sixty percent (60%) from two Medicare
intermediaries and approximately forty percent (40%) from about 250
nation-wide private insurance companies. The Company's ECG customer
base is comprised of a large group of single site users, none of which is
individually significant. Receivables are generally not collateralized.
In August of 1994 the Company acquired a business that owns a commercial
rental property. Rental revenue is received on approximately 25 separate
units pursuant to primarily month-to-month leases. (See Note F.)
Inventories: Inventories consist of ECG terminals, component parts and
-----------
ECG medical supplies. Inventories are stated at cost (weighted average
or first-in first-out method) which is not in excess of market.
Property and Equipment: Property and Equipment are stated at cost.
----------------------
Depreciation and amortization are computed based on the following useful
lives:
Buildings 20 years
Improvements 10 years
Equipment 5 to 7 years
Reacquired Franchises: The reacquired franchises are being amortized
---------------------
over a seven year period.
Revenue Recognition: ECG and healthcare services are recorded when
-------------------
billed to the customer in conjunction with services performed. Product
sales are recorded upon shipment of product and passage of title to the
customer. OsteoSystem services are recorded when processing is completed
and claims are submitted to the third party payors. Other income is
recorded when accrued or received. Rental revenue is recognized on a
straight-line basis pursuant to the terms of the underlying leases.
Income Taxes: In February 1992, the Financial Accounting Standards Board
------------
issued Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The Company adopted the provisions of the standard in
fiscal year 1994. The adoption of FAS 109 did not have a material impact
on the financial position or results of operations of the Company for any
period.
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A-BASIS OF PRESENTATION SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FAS 109 provides that the liability method is used in accounting for income
taxes whereby deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
Securities Available-for-Sale: Management determines the appropriate
-----------------------------
classification of equity securities at the time of purchase and reevaluates
such designation as of each balance sheet date. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses,
net of tax, reported in a separate component of stockholders' equity.
There were no unrealized gains or losses on the Company's equity securities
at September 30, 1995 and the Company had no equity securities at September
30, 1994. The marketable securities held for sale at September 30, 1995
are invested in a Merrill Lynch Institutional Fund which invests in short-
term government and other debt securities. Interest and dividends on
securities classified as available-for-sale are included in other income.
Per Share Data: Per share data is based on the weighted average of the
--------------
number of common shares outstanding during each year. Options and
warrants are excluded as they are antidilutive.
Interim Financial Information (Unaudited): The interim financial
-----------------------------------------
information for the three months ended December 31, 1994 and 1995 is
unaudited. The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with Form
10-QSB and Item 310 of Regulation SB. Accordingly, the interim financial
statements do not include all of the information and footnotes required
by generally accepted accounting principles for a complete presentation
of such interim financial information. In the opinion of the Company's
management, all unaudited interim financial statements have been prepared
on the same basis as the audited information and include all adjustments
(consisting only of normal, recurring adjustments) necessary for a fair
presentation of the results of operations of the interim periods. The
results of operations and cash flows for the three months ended December
31, 1995 are not necessarily indicative of the results that can be
expected for the year ended September 30, 1996.
Reclassifications: Certain reclassifications have been made in the 1994
-----------------
financial statements to conform with the 1995 presentations.
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B-DEBT (CONTINUED)
In connection with the acquisition of Irsco (see Note F), the Company
assumed several notes payable, consisting of the following at September 30,
1995:
Secured promissory note payable at 9.25% interest
rate with payments of $26,737 a month, including
interest $2,995,000
Second Deed of Trust note payable (former owner of
Irsco) at 6% interest rate with variable
payments of $2,000 to $10,000 a month, including
interest 139,000
Third Deed of Trust note payable (former owner of
Irsco) Including accrued interest with 9%
interest rate with principal maturing in
August 1997 502,000
----------
3,636,000
Less current portion 704,000
----------
$2,932,000
==========
On November 29, 1995, holders of the Deeds of Trust filed a Notice of
Default and Election to Sell under Deed of Trust. The Company has been
evaluating its options in relation to the property and has not yet
determined whether to oppose the foreclosure. (See Note F.)
Maturities over the next five years on these notes, including the
acceleration of the Second and Third Deeds of Trust to current pursuant to
the notice of default, are as follows:
1996 $ 704,000
1997 2,932,000
------------
$ 3,636,000
Defaults under the Deeds of Trust constitute a default under the Note.
Consequently, the holder of the Note has the option of accelerating amounts
owed. The Note is classified as long term given the probability of cure
through payment of the Second and Third Deeds of Trust or foreclosure which
would satisfy the obligation with a noncurrent asset. The notes payable
are secured by all of the assets of Irsco, a wholly owned subsidiary of the
Company.
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C-COMMITMENTS
Capital leases cover computer and office equipment and expire through 2000.
The Company has a noncancelable facility lease accounted for as an
operating lease expiring in August 1996 which is included in the operating
lease amounts below.
The following is a summary as of September 30, 1995 of future minimum lease
payments together with the present value of the net minimum lease payments
on capital leases:
YEAR ENDING SEPTEMBER 30 CAPITAL OPERATING
LEASES LEASES
------ ---------
1996 . . . . . . . . . $31,000 $286,000
1997 . . . . . . . . . 27,000
1998 . . . . . . . . . 27,000
1999 . . . . . . . . . 21,000
2000 . . . . . . . . . 8,000
-------- --------
Total minimum lease
payments . . . . . . . 114,000 $286,000
========
Less amount representing
interest . . . . . . . 23,000
--------
Net minimum lease
payments . . . . . . . 91,000
Less current portion . . 22,000
--------
Present value of net
minimum payments, less
current portion . . . . $ 69,000
========
Included in accumulated depreciation and amortization is $470,000 (1995)
related to capital leases. Amortization of capital leases is included in
depreciation and amortization expense. Rental expense under operating
leases was $245,000 (1994) and $245,000 (1995).
Through September 30, 1995 the Company has expensed approximately $330,000
for research and development related to DetoxaholTM rights. The Company
has agreed to fund an additional $740,000 over the next year of which
$250,000 will be released only for FDA preclinical testing upon meeting
certain conditions to the satisfaction of the Company.
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D-INCOME TAXES
At September 30, 1995, the Company has available for federal income tax
purposes, net operating loss carryforwards of approximately $13,459,000
which expire between 1998 and 2011 and tax credit carryforwards of
approximately $165,000, which expire between 1997 and 2001. The
utilization of the above net operating loss and tax credit carryforwards
are subject to significant limitations under the tax codes due to changes
in ownership.
Significant components of the Company's deferred tax liabilities and assets
as of September 30, 1994 and 1995 are as follows:
1994 1995
---- ----
Deferred tax liabilities:
Property and Equipment . . . . . . . . $(1,509,000) $ (913,000)
Deferred tax assets:
Account receivable allowance . . . . . 66,000 94,000
Accrued expenses . . . . . . . . . . . 127,000 59,000
Other . . . . . . . . . . . . . . . . 31,000 41,000
Net operating loss carry forwards . . 4,506,000 5,380,000
----------- -----------
Total deferred tax assets . . . . . 4,730,000 5,574,000
Valuation allowance for deferred
tax assets . . . . . . . . . . . . . (3,221,000) (4,661,000)
Net deferred tax assets . . . . . . 1,509,000 913,000
Total . . . . . . . . . . . . . . $ 0 $ 0
=========== ===========
NOTE E-STOCKHOLDERS' EQUITY
Common Stock: On August 13, 1992, the Company issued 8,000,000 units,
------------
each unit consisting of one share of Common Stock and one warrant to
purchase one share of Common Stock. This offering was sold at $.25 per
unit for net proceeds of $1,505,000. On September 17, 1992, the 8,000,000
shares of Common Stock became separately tradeable.
After the one for ten reverse stock split of October 17, 1994, the
8,000,000 warrants were exercisable to purchase 800,000 shares of Common
Stock until August 3, 1997. This entitles a holder of 10 warrants to
purchase one share of the Company's Common Stock at $3.75 per share. The
outstanding warrants were callable by the Company at any time after August
3, 1994, at a price of $.05 per warrant. A total of 67,910 of the warrants
were exercised as of September 30, 1995.
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E-STOCKHOLDERS' EQUITY (CONTINUED)
The Company issued to the underwriter 800,000 units, each unit consisting
of the right to purchase one share of Common Stock at a price of $.30 per
share and one warrant to purchase one share of Common Stock for $.375 per
share. The units and underlying warrants are exercisable until August 2,
1997. After the one for ten reverse stock split of October 17, 1994, the
800,000 units were exercisable into 80,000 shares of Common Stock at $3.00
per share and warrants to purchase 80,000 shares of Common Stock at $3.75
per share.
Pursuant to an Agreement and Plan of Reorganization entered into on March
18, 1994, the Company acquired all of the issued and outstanding common
stock of MB in exchange for 635,380 shares of the Company's Common Stock.
MB had only two shareholders of which its President and principal
shareholder was Dr. Howard Mark, a Director and Medical Director of the
Company. The MB shareholders also received 102,532 shares of Common Stock
for their assistance in raising, prior to June 15, 1994, $200,000 for the
Company through a Regulation S offering. Independent appraisers valued the
acquisition of MB and its rights to DetoxaholTM at $1,696,000; however, in
accordance with industry practices regarding research and development
expenses, the Company immediately expensed this amount. An additional
265,000 shares were reserved for issue on the basis of .16 shares of Common
Stock for every currently outstanding warrant or option that is exercised
prior to June 15, 1995. As of September 30, 1995, none of these shares
have been issued.
In 1994, the Company sold 571,289 shares of Common Stock pursuant to
Regulation S under the Securities Act. Net proceeds of $1,452,000 were
used for the funding of research and development, prepayment of debt and
payment of operating expenses
From December 1994 through June 1995 the Company sold 1,735,029 shares of
Common Stock at $.60 per share pursuant to Regulation S under the
Securities Act. In addition, warrants to purchase 142,000 shares of Common
Stock at an exercise price of $1.10 were issued as a finders fee in the
transaction. Net proceeds of $979,000 were used for the funding of
research and development and payment of operating expensed.
In February 1995 the Company issued 400,000 shares of Common Stock for the
acquisition of certain exclusive rights for the marketing of certain new
products of Aerotel Ltd., a medical device and telecommunications company
based in Israel. The original term of the license has expired as a result
of the Company's failure to meet certain minimum sales amounts in 1995.
Costs associated with obtaining the license ($228,000) were expensed in
fiscal year 1995.
In August 1995 the Company sold 1,236,000 shares of Common Stock pursuant
to Regulation D under the Securities Act. Net proceeds of $5,078,000 will
be used for research and development and operating expenses.
Class A $3.50 Cumulative Convertible Voting Preferred Stock: The holders
-----------------------------------------------------------
of Class A Preferred Stock are entitled to receive, when and as declared
by the Board of Directors of the Company, dividends at an annual rate of
$.35 per share, payable quarterly. Dividends are cumulative from the
date of issuance. Every two shares of the Class A Preferred Stock are
presently convertible, subject to adjustment, into one share of Common
Stock. In the event of any liquidation, the holders of the Class A
Preferred Stock are entitled to receive $2.00 in cash per share plus
accumulated and unpaid dividends out of assets available for distribution
to stockholders, prior to any distribution to holders of Common Stock or
any other stock ranking junior to the Class A Preferred Stock. The Class A
Preferred Stock may be redeemed by the Company, upon 30 days written
notice, at a redemption
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E-STOCKHOLDERS' EQUITY (CONTINUED)
price of $3.85 per share. Class A Preferred Stock stockholders have the
right to convert their shares into Common Stock during such 30 day period.
Shares of Class A Preferred Stock have one vote each. Shares of Class A
Preferred Stock vote along with shares of Common Stock and shares of Class
B Preferred Stock as a single class on all matters presented to the
stockholders for action except as follows: Without the affirmative vote of
the holder of a majority of the Class A Preferred Stock then outstanding,
voting as a separate class, the Company may not (i) amend, alter or repeal
any of the preferences or rights of the Class A Preferred Stock, (ii)
authorize any reclassification of the Class A Preferred Stock, (iii)
increase the authorized number of shares of Class A Preferred Stock or (iv)
create any class or series of shares ranking prior to the Class A Preferred
Stock as to dividends or upon liquidation.
Of the 437,500 shares of Class A Preferred Stock issued on September 30,
1991, a total of 429,100 were converted into 429,100 shares of Common
Stock. A total of 4,200 shares of Common Stock are currently issuable upon
conversion of the remaining 8,400 shares of the Class A Preferred Stock.
Class B $3.50 Convertible Voting Preferred Stock: In August 1994, the
------------------------------------------------
Company issued 52,333 shares of Class B $3.50 Convertible Preferred Stock
("Class B Preferred Stock") in connection with the acquisition of Irsco
(See Note F). The holders of Class B Preferred Stock are entitled to
receive dividends only, when and as declared by the Board of Directors of
the Company. Each share of Class B Preferred Stock is convertible,
subject to adjustment, into 10 shares of Common Stock. In the event of
any liquidation, the holders of the Class B Preferred Stock are entitled
to receive $3.50 in cash per share plus accumulated and unpaid dividends
out of assets available for distribution to stockholders, prior to any
distribution to holders of Common Stock or any other stock ranking junior
to the Class B Preferred Stock. Each share of Class B Preferred Stock
may be redeemed by the Company, upon 30 days written notice, at a
redemption price of $3.85 per share. Class B Preferred Stock stockholders
have the right to convert their shares into Common Stock during this 30
day period.
Shares of Class B Preferred Stock are entitled to one vote each. Shares of
Class B Preferred Stock vote as a single class on all matters presented to
the stockholders for action except as follows: Without the affirmative
vote of the holder of a majority of the Class B Preferred Stock then
outstanding, voting as a separate class, the Company may not (i) amend,
alter or repeal any of the preferences or rights of the Class B Preferred
Stock, (ii) authorize any reclassification of the Class B Preferred Stock,
(iii) increase the authorized number of shares of Class B Preferred Stock
or (iv) create any class or series of shares ranking prior to the Class B
Preferred Stock as to dividends or upon liquidation.
Stock Options and Warrants: Pursuant to the 1992 Stock Option Plan, the
--------------------------
Company may grant qualified or non-qualified options for the purchase of
480,000 shares of Common Stock. The number of shares available upon the
exercise of options granted under the Plan were increased from 360,000
to 480,000 shares. Such increase was approved by the Company's
stockholders at its Annual Meeting in March 1995. Options are granted
at prices equal to the fair market value of the stock on the date the
options are granted. The options generally are exercisable in three
equal annual installments commencing one year from date of grant and
expire 10 years after the date of grant. At the year ended September
30, 1995, there were 301,801 shares reserved for exercise of options
granted, of which 96,021 were exercisable, and 50,630 were available for
grant under such plan.
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E-STOCKHOLDERS' EQUITY (CONTINUED)
In addition to options issued pursuant to the Plan, in March 1995, the
board approved the grant of 175,000 non-qualified stock options that vest
over three years to members of the Board. In addition, officers and
certain employees and consultants were granted 467,599 non-qualified
options, 50,000 of which vest from one to six months and the remainder vest
from one to three years. All of the options were granted at an exercise
price equal to the current market value. A total of 50,000 options were
exercisable at September 30, 1995.
The following table summarizes the activity related to the Company's
qualified and nonqualified stock options and warrants issued. The Company
has reserved shares of Common Stock for all options and warrants
outstanding.
Year Ended September 30,
---------------------------
1993 1994 1995
---- ---- ----
Options and warrants outstanding
at beginning of year ($1.00 to
$11.90 per share) . . . . . . . 1,369,200 1,662,800 1,695,400
Options granted
($1.00 to $11.90 per share) . . 243,600 95,500 694,200
Warrants issued
($.50 to $3.75 per share) . . . 167,300 22,000 375,900
Options and warrants exercised . . (43,200) (51,300) (222,400)
Options canceled . . . . . . . . . (74,100) (33,600)
--------- --------- ---------
1,662,800 1,695,400 2,543,100
========= ========= =========
NOTE F-RENTAL PROPERTY (IRSCO)
On August 12, 1994 the Company acquired Irsco in exchange for 52,333 shares
of the Company's $3.50 Class B Convertible Preferred Stock. Each share of
Preferred Stock is convertible into 10 shares of the Common Stock. The
Company can redeem the Preferred Stock after one year, upon 30 days notice,
at a price of $3.85 per share. In addition to the Preferred Stock, the
Company issued warrants to purchase 22,000 shares of Common Stock at an
exercise price of $3.75 per share. These warrants terminate five years
from date of issue. Irsco's principal asset is a 6.3 acre industrial park,
consisting of nine buildings comprising a total of 118,270 sq. ft. plus
parking. The buildings have been divided into 25 separate units, ranging
from 1,900 sq. ft. to 10,000 sq. ft. The property is located in Irwindale,
California, approximately 18 miles from downtown Los Angeles. The
acquisition has been accounted for under the purchase method and,
accordingly, the operating results of Irsco have been included in the
consolidated operating results since the date of acquisition. The cost of
the acquisition has been allocated on the basis of the estimated fair
market value of the asset acquired and liabilities assumed.
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F-RENTAL PROPERTY (IRSCO) (CONTINUED)
The following table summarizes the unaudited consolidated proforma results
of operations assuming the acquisition of Irsco had occurred at the
beginning of fiscal year 1993 (in thousands):
Fiscal Year Ended
September 30, 1994
------------------
Revenues $2,804
Net loss (3,988)
Net loss per share (.92)
On November 29, 1995 holders of the Second and Third Deeds of Trust filed a
notice of default and election to sell under Deed of Trust against Irsco.
The Company is evaluating its options in relation to the property and
whether to oppose the foreclosure. Given the recent licensing arrangement
with Merck (See Note I) the property no longer fits with the strategic
priorities of the Company. Based on these factors and other impairment
indicators the Company reduced the value of the rental property to net
realizable value and recorded a loss on impairment of $1.5 million.
Total rental income from the property was $66,000 (1994) and $431,000
(1995) with rental expenses related to the property including interest and
depreciation of $74,000 (1994) and $616,000 (1995).
NOTE G-OTHER INFORMATION
Savings and Retirement Plans
----------------------------
The Company has a Savings and Retirement Plan (the "Plan") under which
every full-time salaried employee who is 18 years of age or older may
contribute up to 15 percent of his or her annual salary to the Company's
Plan. For an employee contribution of up to but not exceeding 6 percent of
the employee's annual salary the Company will make a matching contribution
of $.25 for every $1.00 of the employee's contribution. The Company's
contributions are 100% vested after 60 months of contributions to the Plan.
Benefits are payable under the Plan upon termination of a participant's
employment with the Company or at retirement. The Plan meets the
requirements of Section 401(k) of the Internal Revenue Code.
In March 1993, the Company established a defined compensation plan for
executives to defer part of their compensation up to 15% of their annual
salary, less any monies withheld under the Company's 401(k) Plan. In
addition to executive's compensation, the Company contributes $.25 to the
plan for each $1.00 of executive compensation contribution. The Company
has elected to invest the amount in the executive's account in a life
insurance policy in the name of the executive with assignment to the
Company. The Company is obligated to pay to the executive or any
beneficiary any credit balance in the executive's account.
The Company's matching contribution which was charged to expense was
$13,000 and $7,000 in fiscal 1994 and 1995, respectively.
<PAGE>
COMPUMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H-CONTINGENCIES
In July 1994, an alleged former associate of the principals of MB, a
company acquired by the Company in March 1994, filed an action against the
Company, its officers and directors and the former principals of MB. The
action was filed in the Los Angeles County Superior Court, seeking
unspecified damages and injunctive relief based on numerous alleged causes
of action, including intentional interference with contract, intentional
interference with prospective economic advantages, and aiding and abetting
breach of fiduciary duties.
The Company denies the allegations and contends that the lawsuit has no
merit. In accordance with its acquisition agreement with MB, the Company
has demanded indemnification for any costs, expenses or awards relating to
this matter. The Company has also notified its insurance carrier in regard
to indemnification. The Company's right to indemnification and the scope
of such indemnification have not been resolved. The Company is unable to
determine the ultimate outcome of this litigation or the effect on its
financial condition, as discovery is in an early stage.
In October and November 1995, several securities class actions have been
brought against the Company and certain executive officers and directors
concerning certain alleged misrepresentation and omission of material facts
concerning the terms of the Company's right to receive royalties pursuant
to the Merck License Agreement. The case is in the early stages of
discovery although the Company denies the allegations and contends that the
lawsuit has no merit. The Company is unable to determine the ultimate
outcome of this litigation or the effect on its financial condition.
NOTE I-MERCK LICENSE
On September 22, 1995, the Company entered into an agreement with Merck
whereby Merck was granted a perpetual, exclusive license of the Company's
OsteoGram(R) technology and was assigned the Company's software copyright
and OsteoGram(R) trade name. The Company retains the right to make major
enhancements to the technology and to use or license such enhancements,
subject to Merck approval.
Under the license agreement for the first-generation OsteoGram(R), Merck
will pay the Company royalties for each revenue-producing test using the
OsteoGram(R) technology during the years 1996 through 2000. The royalties
will escalate from $2 to $4 per test over that period. These royalty
payments have no maximum amount during 1996 through 1998, but they are
subject to a maximum in the year 1999 equal to the lesser of 10% of Merck's
total collected revenues in that year or $3 million and a maximum in the
year 2000 equal to the lesser of 10% of Merck's total collected revenues in
that year or $4 million. There are no minimum royalties under the
agreement.
In connection with entering into the Merck License Agreement, the
Company paid $100,000 and issued five year warrants for the purchase of
83,000 shares of the Company's Common Stock at an exercise price of $2.50
per share to 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, 8% of all royalties paid by Merck to the Company
under the Merck License Agreement and extended by five years the term of
warrants to purchase 64,000 shares of the Company's Common Stock at an
exercise price of $2.50 issued to SASCO under the Company's original
agreement with SASCO. Amounts paid were expensed in 1995.
<PAGE>
=================================== ===================================
No person is authorized in
connection with any offering made
hereby to give any information or 1,412,200 Shares of Common Stock
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 not constitute COMPUMED, INC.
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 P R O S P E C T U S
that there has been no change in the -------------------
affairs of the Company since the
date hereof.
TABLE OF CONTENTS
-----------------
Page
----
Available Information . . . . . 2
Prospectus Summary . . . . . . 3
The Company . . . . . . . . . . 3
The Offering . . . . . . . . . 3
Summary of Financial Data . . . 4 March __, 1996
Risk Factors . . . . . . . . . 5
Use of Proceeds . . . . . . . . 10
Dividend Policy . . . . . . . . 10
Capitalization . . . . . . . . 11
Selected Financial Data . . . . 12
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations . . . . . . . . . . 13
Market for the Company's Common
Stock and Related Stockholder
Matters . . . . . . . . . . . 15
Business . . . . . . . . . . . 16
Legal Proceedings . . . . . . . 26
Management . . . . . . . . . . 27
Compensation of Executive
Officers . . . . . . . . . . . 29
Principal Stockholders . . . . 32
Description of Securities . . . 33
Selling Stockholders . . . . . 35
Plan of Distribution . . . . . 37
Statement as to
Indemnification . . . . . . . 38
Legal Matters . . . . . . . . . 38
Experts . . . . . . . . . . . . 38
=================================== ==================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article TENTH of the Certificate of Incorporation of the Company and
Article VI of the By-laws of the Company provide in part that the Company
shall indemnify its directors, officers, employees and agents to the
fullest extent permitted by the General Corporation Law of the State of
Delaware (the "DGCL").
Section 145 of the DGCL permits a corporation, among other things, to
indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an
action by or in the right of the corporation), by reason of the fact that
he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding if he acted in
good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
A corporation also may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. However, in such an
action by or on behalf of a corporation, no indemnification may be made in
respect of any claim, issue or matter as to which the person is adjudged
liable to the corporation unless and only to the extent that the court
determines that, despite the adjudication of liability but in view or all
the circumstances, the person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
In addition, the indemnification and advancement of expenses provided
by or granted pursuant to Section 145 shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this offering in connection with the
issuance and distribution of the securities being registered, all of which
are to be paid by the Company, are as follows:
Securities and Exchange Commission Registration Fee $ 1,656
Legal Fees and Expenses . . . . . . . . . . . . . . . 32,000
Accounting Fees and Expenses . . . . . . . . . . . . . 13,000
Miscellaneous Expenses . . . . . . . . . . . . . . . . 3,344
--------
Total . . . . . . . . . . . . . . . . . . . . . . $ 50,000
========
ITEM 26. UNREGISTERED SECURITIES ISSUED OR SOLD WITHIN THREE YEARS
The following is a description of all unregistered sales of securities
by the Company within the past three years, including the name of the
purchaser, the date of purchase and the consideration paid.
1. In April 1993, the Company issued an aggregate of 151,706 shares
of Common Stock and three year warrants to purchase an additional 167,316
shares of Common Stock at an exercise price of $3.075 to Robert Meyer,
Joseph Stave and Steven Tempero pursuant to Section 4(2) of the Securities
Act in connection with the early termination of certain ECG franchise
agreements with such persons. Of the 151,706 shares issued, 131,707 shares
were issued to Mr. Meyer, 4,390 shares were issued to Mr. Stave and the
remaining 15,609 shares were issued to Mr. Tempero. Of the 167,316
warrants issued, 131,707 warrants were issued to Mr. Meyer, 4,390 warrants
were issued to Mr. Stave and the remaining 31,219 warrants were issued to
Mr. Tempero.
2. An aggregate of 13,532 shares of Common Stock were issued to the
following persons in the amounts listed below pursuant to Section 4(2) of
the Securities Act in consideration for various services rendered by such
persons, including services involving research, marketing and finding
investors for the Company:
Name Number of Shares Date of Purchase
---- ---------------- -----------------
Richard Johnson 5,000 6/14/93
Jack Feinberg 1,032 3/10/93
Agathe Amzallaq 200 7/26/93
Maya Grosz 1985 Trust 375 7/26/93
Peter Grosz 1985 Trust 375 7/26/93
Hyman Fox 450 7/26/93
Robert Josephberg 1,300 7/26/93
Craig Josephberg 1,600 7/26/93
Arline Josephberg as
Custodian for Jessica
Josephberg 1,600 7/26/93
Kara Josephberg 1,600 7/26/93
3. Over the period from January 1994 through April 1994 an aggregate
of 487,077 shares of Common Stock were issued to Importaciones y
Exportaciones, Sociedad Anonima at offering prices ranging from $2.38 to
$3.438 and in April 1994, 84,210 shares of Common Stock were issued to
Broadway International Limited at an offering price of $2.38 per share.
Both of such placements were made pursuant to Regulation S of the
Securities Act.
4. In April 1994, the Company issued 3,087 shares of Common Stock
pursuant to Section 4(2) of the Securities Act to Steven Drucker for
research and development services rendered by Mr. Drucker.
5. In August 1994, the Company issued five year warrants to purchase
11,000 shares of Common Stock at an exercise price of $3.75 pursuant to
Section 4(2) of the Securities Act to each of Winston Millet and Max Guefen
in connection with the acquisition of Irsco.
6. An aggregate of 1,014,256 shares of Common Stock were issued to
the following persons in the following amounts and at the following
offering prices pursuant to Regulation S of the Securities Act on the dates
listed below:
Number of Shares
Name of Purchaser Purchased Offering Price Date of Purchase
----------------- ------------------ -------------- ----------------
Ilya Margulies 649,350 $.54 12/28/94
Ilya Margulies 246,417 $.61 03/10/95
Michal Meller 410,697 $.61 03/10/95
Ori Meller 178,571 $.70 06/13/95
Shulamit Pritzker 178,571 $.70 06/19/95
Mark C. Branigan 59,867 * --
Aaron Lehmann 11,571 * --
-------------------
* Mr. Branigan became entitled to an aggregate of 71,438 shares of
Common Stock under an agreement with the Company pursuant to which he acted
as finder and assisted the Company in raising $1,000,000 in private
placements made pursuant to Regulation S of the Securities Act. Mr.
Branigan instructed the Company to issue 11,571 of such shares to Mr.
Lehmann to compensate Mr. Lehmann for the assistance that Mr. Lehmann gave
to Mr. Branigan in his capacity as finder for the Company.
7. In February 1995, the Company issued, pursuant to Regulation
S of the Securities Act, 400,000 shares of Common Stock and five year
warrants to purchase an additional 150,000 shares of Common Stock to
Jacob Meller in connection with the assignment by Mr. Meller to the
Company of certain exclusive marketing rights for Aerotel cardiac event
recorders and software. Aerotel cardiac event recorders and software
are used and sold by the Company's TeleCor Services Division. 200,000 of
the 400,000 shares issued to Mr. Meller were subject to an escrow
agreement, which contained certain milestones for TeleCor sales. Since
such milestones were not achieved, Mr. Meller is no longer entitled to
such 200,000 shares of Common Stock.
8. In May 1991, the Company entered into an agreement with SASCO
pursuant to which SASCO sold the SASCO Assets to the Company and the
Company issued SASCO the Initial Warrants to purchase 64,000 shares of
Common Stock. In August 1995, SASCO acquired additional warrants for the
purchase of 83,000 shares of Common Stock and an extension by five years
of the expiration date of the Initial Warrants in connection with a
modification of payments due to SASCO for the SASCO Assets. The SASCO
Warrants were issued to SASCO pursuant to Section 4(2) of the Securities
Act.
9. In August 1995, the Company sold 1,200,000 shares of Common Stock
at $4.25 per share or an aggregate purchase price of $5.1 million to
certain investors pursuant to Regulation D of the Securities Act. The
Company issued an additional 18,000 shares of Common Stock to each of
Douglas D. Lind, M.D. and Lance Willsey, M.D. who acted as finders in the
Reg D Placement. The investors who participated in the Reg D Placement and
the number of shares purchased by each investor are as follows:
Name of Purchaser Number of Shares Purchased
----------------- --------------------------
Spinnaker Technology Fund, L.P. 550,000
Sextant Group, Inc. 250,000
Pequot Scout Fund, L.P. 125,000
David M. Gong 25,000
Sanford B. Prater 10,000
Douglas C. Floren 40,000
Jeffrey Edwards 10,000
Timothy R. McCollum 10,000
Philip and Colleen Hempleman 90,000
(Joint Trust with Right
of Survivorship)
Carter G. Hempleman Trust 7,500
(UAD December 29, 1992)
Spencer J. Hempleman Trust 7,500
Lawrence A. Bowman 45,000
SoundView Financial Group, Inc. 30,000
10. In February 1996, the Company issued two year warrants to
purchase 25,000 shares of Common Stock to Toppen as partial consideration
in settlement of a dispute that Toppen had with the Company regarding
certain options that Toppen had held. The Toppen Warrants were issued
pursuant to Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 Certificate of Incorporation of the Company [Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
of Form S-1 (File No. 33-46061), effective May 7, 1992]
3.2 Certificate of Amendment of Certificate of Incorporation
[Incorporated by reference to Exhibit 3.1a to Amendment No. 1 to
Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-2 (File No. 33-48437), filed June 28, 1994]
3.3 Certificate of Amendment of Certificate of Incorporation
[Incorporated by reference to Exhibit 3.1b to Amendment No. 2 to
Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-2 (File No. 33-48437), filed November 7,
1994]
3.4 Certificate of Correction of Certificate of Amendment
[Incorporated by reference to Exhibit 3.1c to Amendment No. 2 to
Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-2 (File No. 33-48437), filed November 7,
1995]
3.5 By-Laws of the Company, as currently in effect [Incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-1 (File No. 33-46061), effective May 7, 1992]
4.1 Form of Underwriter's Warrant Agreement [Incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-2 (File No. 33-48437), effective August 3, 1992]
4.2 Form of Warrant Agreement and Warrant [Incorporated by reference
to Exhibit 4.5 to the Company's Registration Statement on Form S-
2 (File No. 33-48437), effective August 3, 1992]
4.3 Specimen Common Stock Certificate [Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1
(File No. 33-46061), effective May 7, 1992]
4.4 Form of Preferred Stock Certificate [Incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-1
(File No. 33-46061), effective May 7, 1992]
4.5 Certificate of Designation of Class A Preferred Stock
[Incorporated by reference to Exhibit 4.5 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended September 30,
1995 (File No. 0-14210)]
4.6 Certificate of Designation of Class B Preferred Stock
[Incorporated by reference to Exhibit 4.6 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended September 30,
1995 (File No. 0-14210)]
5.* Opinion of Reid & Priest LLP
10.1 Lease Agreement, dated December 31, 1990, by and between the
Company and Hughes Aircraft Company for the premises located at
1230 Rosecrans Avenue, Suite 1000, Manhattan Beach, California
90266 [Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (File No. 33-46061), effective
May 7, 1992]
10.2 Agreement, dated May 23, 1991 (the "SASCO Agreement"), for the
purchase by the Company of substantially all of the assets of
SASCO [Incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (File No. 33-46061), effective
May 7, 1992]
10.3 Amendment to the SASCO Agreement, dated August 11, 1995, between
the Company and SASCO [Incorporated by reference to Exhibit 10.3
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended September 30, 1995 (File No. 0-14210)]
10.4 First Amendment to Warrant to Purchase Common Stock, dated as of
June 1, 1995, between the Company and SASCO [Incorporated by
reference to Exhibit 10.4 to the Company's Annual Report on Form
10-KSB for the fiscal year ended September 30, 1995 (File No. 0-
14210)]
10.5 1992 Stock Option Plan [Incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-1 (File
No. 33-46061), effective May 7, 1992]
10.6 Form of Non-Qualified Stock Option Agreement [Incorporated by
reference to Exhibit 10 to the Company's Registration Statement
on Form S-8 (File No. 33-63435), filed October 14, 1995]
10.7 Agreement and Amendment, dated October 26, 1992 and June 10,
1993, respectively, between the Company and Rhone-Poulenc Rorer
Pharmaceuticals, Inc. ("RPR") [Incorporated by reference to
Exhibit 10.16 to Amendment No. 1 to Post-Effective Amendment No.
1 to the Company's Registration Statement on Form S-2 (File No.
33-48437), filed June 28, 1994]
10.8 Termination Agreement, dated August 16, 1995, between the Company
and RPR [Incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1995 (File No. 0-14210)]
10.9 Agreement, dated April 27, 1993 between the Company and OCG
Technology, Inc. [Incorporated by reference to Exhibit 10.18 to
Amendment No. 1 to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-2 (File No. 33-48437),
filed June 28, 1994]
10.10 Agreement and Plan of Reorganization and Amendment Number One and
Specific Release Agreement, dated March 18, 1994 and June 15,
1994, respectively, between the Company, MB Nutraceuticals, Inc.,
Howard Mark and Mark Branigan [Incorporated by reference to
Exhibit 10.19 to Amendment No. 1 to Post-Effective Amendment No.
1 to the Company's Registration Statement on Form S-2 (File No.
33-48437), filed June 28, 1994]
10.11 Research Agreement, dated January 3, 1994, between the Company
and the University of Georgia Research Foundation, Inc.
[Incorporated by reference to Exhibit 10.20 to the Company's
Annual Report on Form 10-KSB for fiscal year 1994]
10.12 Exclusive License Agreement, dated January 3, 1994, between the
Company and the University of Georgia Research Foundation, Inc.
[Incorporated by reference to Exhibit 10.21 to the Company's
Annual Report on Form 10-KSB for fiscal year 1994]
10.13 Employment Agreement, dated October 14, 1994, between the Company
and Rod N. Raynovich [Incorporated by reference to Exhibit 10.22
to Amendment No. 2 to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-2 (File No. 33-48437),
filed November 7, 1994]
10.14 Agreement, dated August 12, 1994, for the acquisition of Irsco
[Incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 33-46061), effective
May 7, 1992]
10.15 Technology License Agreement, dated September 22, 1995, between
the Company and Merck & Co., Inc. [Incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K for an
event of September 27, 1995]
10.16 Assignment of Exclusive Marketing Rights, dated February 9, 1995,
between the Company and Jacob Meller [Incorporated by reference
to Exhibit 10.17 to the Company's Registration Statement on Form
S-1 (File No. 33-46061), effective May 7, 1992]
10.17 Stock Purchase Agreement, dated as of August 9, 1995, relating to
the Company's private placement of $5.1 million worth of Common
Stock [Incorporated by reference to Exhibit 10 to the Company's
Current Report on Form 8-K for an event of August 9, 1995]
21.* Subsidiaries of the Company
23.1* Consent of Ernst & Young LLP
23.2* Consent of Reid & Priest LLP (included as part of Exhibit 5)
24. Power of Attorney (included on p. II-8)
-------------------------------
* Filed herewith.
ITEM 28. UNDERTAKINGS
Undertakings Required by Regulation S-B Item 512(a).
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act.
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement.
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
Undertaking Required by Regulation S-B, Item 512(e).
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the provisions of its Certificate of
Incorporation, of the DGCL or otherwise, the Company has been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director,
officer of controlling person of the Company in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Undertakings Required by Regulation S-B, Item 512(f).
The undersigned Company hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule
430A and contained in the form of prospectus filed by the Company
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
(2) That for purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the Company
certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and authorized this Amendment to
the Post-Effective Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Manhattan Beach, and State of California on the 4th day of March, 1996.
COMPUMED, INC.
By: /s/ Rod N. Raynovich
--------------------------------
Rod N. Raynovich, President
POWER OF ATTORNEY
Each director and/or officer of the registrant whose signature appears
below hereby appoints Rod N. Raynovich and DeVere Pollom, and each of them
severally, as his attorney-in-fact to sign in his name and behalf, in any
and all capacities stated below and to file with the SEC, any and all
amendments, including post-effective amendments, to this Registration
Statement.
Pursuant to the requirements of the Securities Act, this Amendment to
the Post-Effective Amendment to the Registration Statement has been signed
below by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Rod N. Raynovich
------------------------- President, Chief March 4, 1996
Rod N. Raynovich Executive Officer and
Director
/s/ DeVere Pollom
------------------------- Vice President Finance, March 4, 1996
DeVere Pollom Chief Financial Officer,
and Secretary
/s/ Robert Funari
------------------------- Chairman March 4, 1996
Robert Funari
/s/ Robert Goldbert
------------------------- Director March 4, 1996
Robert Goldbert
/s/Howard Mark
------------------------- Director March 4, 1996
Howard Mark, M.D.
------------------------- Director , 1996
Winston Millet
------------------------- Director , 1996
John Minnick
/s/ Robert Stuckelman
------------------------- Director March 4, 1996
Robert Stuckelman
/s/ Russell Walker
------------------------- Director March 4, 1996
Russell Walker
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
5. Opinion of Reid & Priest LLP
21. Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Consent of Reid & Priest LLP
(included as part of Exhibit 5)
24. Power of Attorney (included on
p. II-8)
Exhibit 5
REID & PRIEST LLP
A New York Registered Limited Liability Partnership
40 West 57th Street
New York, NY 10019-4097
Telephone 212 603-2000
Fax 212 603-2001
(212) 603-6780
New York, New York
March 1, 1996
CompuMed, Inc.
1230 Rosecrans Avenue, Suite 1000
Manhattan Beach, California 90266
Gentlemen:
We have acted as special counsel to CompuMed, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form SB-2 (the "Registration Statement"),
relating to the registration of 1,412,200 shares (the "Shares") of the
Company's Common Stock, $.01 par value per share ("Common Stock"), on
behalf of certain holders of Common Stock or rights to acquire Common
Stock. 4,200 of the Shares are issuable upon the conversion of the
Company's Class A $3.50 Cumulative Convertible Preferred Stock (the "Class
A Preferred Stock"), 147,000 of the Shares are issuable upon the exercise
of Common Stock Purchase Warrants (the "SASCO Warrants") held by Skeletal
Assessment Services Co. ("SASCO"), 1,236,000 of the Shares are owned by
certain investors who purchased such shares in an August 1995 private
placement (the "Reg D Placement") effected pursuant to Regulation D of the
Securities Act of 1933, as amended (the "Securities Act") and the remaining
25,000 Shares are issuable upon the exercise of Common Stock Purchase
Warrants (the "Toppen Warrants") held by Maurene Toppen.
This opinion is being rendered in connection with the filing by
the Company of the Registration Statement.
For purposes of this opinion, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of the (i)
Registration Statement; (ii) Certificate of Incorporation and By-Laws of
the Company, as in effect on the date hereof; (iii) Certificate of
Designation of the Class A Preferred Stock; (iv) Stock Purchase Agreement,
dated August 9, 1995, among the Company and the investors in the Reg D
Placement; (v) warrant agreement, as amended relating to the SASCO
Warrants; (vi) form of warrant agreement relating to the Toppen Warrants;
<PAGE>
CompuMed, Inc. -2- March 1, 1996
(vii) resolutions adopted by the Board of Directors of the Company relating
to the Registration Statement, Class A Preferred Stock, the SASCO Warrants,
the Reg D Placement and the Toppen Warrants and (viii) such other
documents, certificates or other records as we have deemed necessary or
appropriate.
Based upon the foregoing, and subject to the qualifications
hereinafter expressed, we are of the opinion that:
(1) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Delaware.
(2) The shares of Common Stock included in the Registration
Statement to be issued upon the conversion of the Class A
Preferred Stock will be duly authorized and validly issued,
and fully paid and non-assessable when the Class A Preferred
Stock is duly converted in accordance with the Certificate
of Designation of the Class A Preferred Stock.
(3) The shares of Common Stock included in the Registration
Statement to be issued upon the exercise of the SASCO
Warrants and the Toppen Warrants will be duly authorized and
validly issued, and fully paid and non-assessable when the
SASCO Warrants and the Toppen Warrants are duly exercised
and the exercise price is paid for the shares of Common
Stock underlying such warrants in accordance with the terms
of the respective warrant agreements.
(4) The shares of Common Stock included in the Registration
Statement that were issued to the investors in the Reg D
Placement were duly authorized, validly issued, full paid
and are non-assessable.
We are members of the Bar of the State of New York and do not
hold ourselves out as experts concerning, or qualified to render opinions
with respect to any laws other than the laws of the State of New York, the
Federal laws of the United States and the General Corporation Law of the
State of Delaware.
<PAGE>
CompuMed, Inc. -3- March 1, 1996
We hereby consent to the reference to this firm under the caption
"Legal Matters" in the Prospectus included in the Registration Statement
and to the filing of this opinion with the Securities and Exchange
Commission as Exhibit 5 to the Registration Statement. In giving the
foregoing consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act, or
the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ Reid & Priest LLP
REID & PRIEST LLP
Exhibit 21
SUBSIDIARIES OF COMPUMED, INC.
------------------------------
Percentage
Name State of Incorporation Owned
---- ---------------------- ----------
Irsco Development Company, Inc. California 100%
CompuMed Systems California 100%
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption
"Experts" and to the use of our report dated November 29, 1995,
in the Registration Statement (Form SB-2) and related Prospectus
of CompuMed, Inc. for the registration of 1,412,200 shares of its
common stock.
February 29, 1996
/s/ Ernst & Young LLP
