U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. (FEE REQUIRED).
For the fiscal year ended September 30, 1997
_______________________________________
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. (NO FEE REQUIRED).
For the transition period from to
_________________________________
Commission file number 0-14210
_________________________________________
COMPUMED, INC.
________________________________________________
(Name of Small Business Issuer in Its Charter)
Delaware 95-2860434
_____________________________________________ ________________
(State of Incorporation or Organization) (I.R.S. Employer
Identification
No.)
1230 Rosecrans Avenue, Suite 1000, Manhattan Beach, California 90266
______________________________________________________________________
(Address of principal executive offices) (Zip Code)
(310) 643-5106
______________
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Common Stock Purchase Warrants
_______________________________
Title of Class
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Check if there is no disclosure of delinquent filers in response to
item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
As of December 12, 1997, 9,041,857 common shares were outstanding and
the aggregate market value of the common shares (based upon the
average bid and asked prices on such date) of the Registrant held by
non-affiliates was approximately $12,700,000.
Revenues for the fiscal year ended September 30, 1997 totaled
$1,939,000.
Documents incorporated by reference: Certain responses to Part III
are incorporated herein by reference to information contained in the
Company's definitive proxy statement for its 1998 annual meeting of
stockholders to be filed with the Securities and Exchange Commission
on or before January 28, 1998.
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
CompuMed, Inc. (the "Company" or "CompuMed") is a medical
information technology and service company focused on the diagnosis,
monitoring and management of costly, high incidence diseases,
particularly cardiovascular disease and osteoporosis. The primary
focus of the Company's business is the ongoing development of its
osteoporosis testing technology and the computer interpretation of
electrocardiograms ("ECGs"). The Company applies advanced computing,
medical imaging, telecommunications and networking technologies to
provide medical professionals and patients with affordable, point-of-
care solutions for disease risk assessment and decision support. The
Company was incorporated in the State of Delaware on July 21, 1986.
Significant business developments that have occurred during the
past twelve months include the proof of technological feasibility of
its digital bone densitometer, the development of a prototype model of
the OsteoView device and the discontinuance of the TeleCor cardiac
event monitoring services.
THE OSTEOVIEW(R)
The Company's research and development efforts are focused
primarily on producing a stand-alone bone densitometer, the
OsteoView . This device will utilize a low-dose x-ray source and a
digital detector to determine bone density from a measurement of the
fingers and the wrist. The OsteoView will utilize amorphous silicon
as its detector which will produce a high resolution digital x-ray
image. The Company believes that the OsteoView device will be
competitive with other peripheral-site bone scanning devices on the
market. A development team has been assembled which includes the
University of Massachusetts Medical Center ("UMMC") and specialized
high technology vendors for certain aspects of this project. The
Company coordinates and funds the development performed by project
members and will retain primary rights to the completed product.
On May 1, 1996, the Company entered into an Exclusive License
Agreement and a Sponsored Research Agreement with UMMC in connection
with the development of its OsteoView device. Under the terms of the
License Agreement, the Company received from UMMC worldwide rights, in
the field of bone densitometry, to develop and market devices and
services, subject to U.S. Food and Drug Administration ("FDA")
clearance, which employ the licensed technology of certain US patents
owned by UMMC. UMMC licensed the technology to two other companies
who may also use the technology for bone densitometry. For the
license agreement, the Company paid a $25,000 license initiation fee,
and is obligated to pay UMMC an annual license maintenance fee in the
amount of $10,000 for the first five years that the agreement is in
effect. The Company will also pay additional amounts totaling
$175,000 upon the completion of certain milestones and will remit
royalty payments of 5% of the net revenues generated from product
sales, with a minimum annual royalty of $15,000. No amounts were paid
under the License Agreement during fiscal year 1997.
Under the terms of the Sponsored Research Agreement with UMMC,
the Company is sponsoring research during a two-year period which
focuses on digital bone densitometry measurement techniques
integrating the Company's proprietary software. The Company
reimburses UMMC for its costs in the amount of $100,000 during the
first year of the Agreement, commencing May 1, 1996, and $50,000
during the second year of the agreement.
In December 1996, the Company entered into a technology
development agreement with Varian Imaging Products (Varian). The
Company will receive Varian's amorphous silicon sensor x-ray imaging
system for integration into its OsteoView device. Varian granted
exclusive marketing rights to the Company for the use of its amorphous
silicon technology in the assessment of appendicular bone mineral
density and arthritis detection for a period of three years, providing
certain sales targets are met. The Company agreed to make an initial
payment to Varian of $65,000 for the imaging system, which was
received in December 1997, and will purchase silicon panel assemblies
at prices determined in the agreement. Varian will supply technical
and engineering assistance for incorporating its silicon detectors
into CompuMed's products.
THE OSTEOGRAM(R)
The OsteoGram(R) is a bone density test developed by the Company,
presently licensed to Merck & Co., Inc. ("Merck"), 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 Skeletal Assessment Services Co. ("SASCO"), which 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). 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 being
commercially marketed 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
Effective September 22, 1995, the Company entered into a
Technology License Agreement with Merck (the "Merck License
Agreement") pursuant to which Merck has been granted a perpetual,
exclusive license of the OsteoGram(R). Merck offers the OsteoGram(R)
and related services to physicians on a per-test basis. The Company
receives 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 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. Through September 1997,
the Company has earned royalties on approximately 70,000 OsteoGram(R)
tests amounting to gross proceeds of $155,000. Since the Merck
License Agreement provides Merck with full control over the operation
of, marketing and sales for, the OsteoGram, 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.
Other Osteoporosis Detection Aids
The only present methods used to assist physicians in detecting
osteoporosis other than the OsteoGram 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 ultrasound 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, bisphosphonates, such as Merck's Fosamax(R), calcitonin,
calcium supplements and weight-bearing exercises.
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 cleared medications and poor
patient compliance when medication is prescribed. The OsteoGram(R)
and OsteoView(R) overcome at least one of these obstacles by providing
convenient, affordable bone density tests which aid physicians in
detecting osteoporosis.
Current FDA cleared medications for osteoporosis include
Fosamax(R), manufactured by Merck, 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 (Novartis). Estrogen medication
is also approved for problems associated with menopause, such as hot
flashes.
Competition - Bone Density Measurement
The OsteoGram's primary competition includes bone densitometry
devices that use x-rays or ultrasound to obtain relative measures of
bone mass and density. At the present time, specialized bone
densitometry software and biochemical assay tests represent only minor
and indirect competition for the OsteoGram(R).
The most common x-ray-based techniques for performing bone
densitometry include dual-energy x-ray absorptiometry (DEXA), single-
energy x-ray absorptiometry (SXA), quantitative computed tomography
(QCT), and radiographic absorptiometry (RA). All radiographic
techniques in use today have been validated through extensive clinical
studies, and are currently approved in the U.S. for Medicare
reimbursement. Quantitative ultrasound (QUS) is nearing FDA clearance
for sale in the U.S. and is available overseas.
DEXA
____
is currently the mostly widely used technology, with a worldwide
installed base of approximately 10,000 machines. The DEXA market may
be divided into so-called "whole-body" machines, which are designed to
measure bone mass and density at a variety of skeletal sites
(primarily the hip and spine), and "peripheral" machines, which only
measure bone mass and density at the appendages (primarily the forearm
or heal). Whole-body DEXA machines cost an average of $85,000 (range
$55,000 to over $130,000) and require both dedicated facilities and
specialized training to operate. Peripheral DEXA machines, with an
average price of $30,000, are less costly, but are also believed to be
less effective than whole-body DEXA, or than RA , in predicting
fracture risk. Approximately 7,500 peripheral DEXA machines have been
installed worldwide.
The leading manufacturers of whole-body DEXA scanners include
Lunar Corp. (U.S.A.) and Hologic, Inc. (U.S.A.), which each command
approximately 40% of the worldwide DEXA market. Other manufacturers
of whole-body machines include Norland Medical Systems, Inc. (U.S.A.).
Norland and Osteometer (Denmark) are the leading manufacturers of
peripheral DEXA machines.
QCT
___
utilizes existing computed tomography (CT) scanners that have been
upgraded with specialized software. QCT is expensive to perform,
requires a high degree of expertise and shows limited potential for
widespread use outside of research settings.
QUS
___
bone densitometers were introduced in the early 1990s, but their rate
of market penetration has been slowed by controversy surrounding
validation data and long-term clinical efficacy studies. Lunar and
Hologic are leaders in the ultrasound market segment, but the market
also includes numerous regional manufacturers such as Myriad (Israel)
and IGEA. Norland is also developing an ultrasound machine. The
current worldwide installed base of QUS machines approximates 2,000
machines.
Biochemical marker tests
________________________
that measure the level of bone metabolic substances present in the
blood or urine have been introduced. These biochemical marker tests
are still costly and difficult to control. Although their role as a
tool to monitor the impact of or compliance with drug therapy may
grow, their use at the present time is limited. Makers of biochemical
marker tests include Metra Biosystems, Inc. (U.S.A.), Ostex, Inc.
(U.S.A.) and Hybritech, Inc. (U.S.A.).
ECG SERVICES
General
Through its ECG computer diagnostic services, the Company
currently serves approximately 1,200 health care providers nationwide.
The Company provides primary care physicians, correctional facilities,
surgery centers, clinics, institutions, small hospitals and industrial
health care facilities with fully-automated, solid-state
microprocessor terminals, which access the Company's centralized
computers and custom software to produce on-line ECG's and computer
interpretations in less than three minutes. The Company also offers a
full range of ECG supplies including electrodes, recording paper, gel,
patient cables and related supplies. The Company's ECG terminals are
connected by direct telephone lines to its ECG analysis computer
center in Manhattan Beach, CA. Physicians, nurses or technicians can
apply ECG electrodes on a patient at their office, transmit the ECG by
telephone to the Company, and receive a printed computer
interpretation within three minutes.
ECG terminals are provided to customers on a rental basis and a
per-ECG usage fee is charged. The Company maintains the ECG terminals
as a part of the service contract.
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 on a per-ECG basis.
The Company retains cardiologists on a consulting basis to perform
overreads of certain ECG readings and for advice regarding its ECG
interpretation software programs.
ECG analysis services are available to users by telephone 24
hours a day, seven days a week. The computer center located on site
at the Company, which is staffed at all times, currently includes five
on-line computers, with a sixth used for backup and off-line research
and development.
The Company'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.
Marketing - ECG Services
The Company's sales efforts for its ECG products and services are
aimed principally at primary care physicians, correctional facilities,
surgery centers, clinics, institutions, small hospitals and industrial
health care facilities located throughout the U.S.. The Company
maintains a long-standing customer base with contracts for services
extending between one to three years. New customers are generated
mostly by the Company's direct sales efforts. The Company advertises
in trade journals and attends national and regional medical
conventions to generate leads for its services, equipment and
supplies. Sales leads are handled by the Company's in-house sales
staff and new customer installations are handled by the Company's
customer service representatives, primarily by telephone.
The Company currently offers several service and equipment
options to new customers, including its new System 507. The System
507 is more compact and lightweight than previous equipment models and
it has the ability to store multiple ECG recordings before
transferring ECG data to the Company for processing. With a broader
line of equipment and multiple service options, the Company can offer
its on-line ECG services to certain customer groups requiring this
type of service.
Competition - ECG Services
The computer interpreted ECG business is made up of a number of
domestic and foreign companies. Most are offering ECG terminals and
systems that perform ECG analysis and interpretation on site from the
cardiograph itself. The Company estimates that its form of business,
centralized computerized ECG analyses via a service bureau,
constitutes only 1.5% of the total number of ECGs taken each year in
the United States. The Company estimates that it has approximately
30% of this service bureau market. Its major competitor, Global Data
Exchange, Inc. has about 50% and several smaller companies share the
balance of the market. The principal methods under which the Company
competes are service, ease of use and price.
Assembly, Repair and Customer Service
The Company repairs and maintains most of the electrocardiographs
leased to its customers. All repair and assembly operations are
conducted at the Company's headquarters. Quality control procedures
used in testing the products have been cleared by the FDA and are
subject to yearly inspections by the FDA.
The Company uses a "hot line" and a customer service staff to
handle customer equipment and training problems. Initial installation
and set up is handled by the Company's customer service department.
DETOXAHOL(TM)
In March 1994, the Company acquired the rights to a potential new
pharmaceutical product called Detoxahol(TM) through the acquisition of
MB Neutraceuticals, Inc. ("MB"). In June 1995, a patent application
was filed on behalf of the Company covering the technology underlying
Detoxahol(TM). Detoxahol(TM) is a substance intended to facilitate
the rapid lowering of blood alcohol of people who have been drinking
alcohol. Detoxahol(TM) is intended to augment the liver's natural
function of removing alcohol from the blood by creating an "auxiliary
liver function" in the small intestine. Its efficacy would depend on
the amount of Detoxahol(TM) taken compared to the amount of alcohol
consumed; since large doses of Detoxahol(TM) can be taken, alcohol
detoxification would occur quickly.
Detoxahol(TM) has been developed under a Research Agreement with
the University of Georgia. Pursuant to the terms of the Research
Agreement, the University of Georgia retains all right and title to
any Detoxahol(TM) product developed by them, subject to the terms and
conditions of an Exclusive License Agreement, dated as of January 3,
1994 (the "Detoxahol License Agreement"), between the parties.
Pursuant to the Detoxahol License Agreement, the Company has received
an exclusive, perpetual, worldwide license to use, make and sell any
Detoxahol(TM) products developed by the University of Georgia and the
University of Georgia is entitled to royalty payments based on the
annual net sales resulting from each sale of a licensed Detoxahol(TM)
product. In addition to the royalties payable under the Detoxahol
License Agreement, the Company must also bear all expenses incidental
to the filing and upkeep of a Detoxahol(TM) patent.
The Company is not currently developing the Detoxahol(TM)
technology and there is no assurance that the Company will commence
development in the future or that if any Detoxahol(TM) product is
ultimately developed by the Company such product will be cleared by
the appropriate regulatory agencies. The Company is currently seeking
a development partner for this product, however, there is no assurance
that such a partner will be secured. Necessary patent costs are being
paid by the Company in order to maintain its Exclusive License
Agreement.
GOVERNMENT REGULATION
The Health Care Finance Administration approves diagnostic tests
for reimbursement by Medicare. The OsteoGram(R) has been approved for
reimbursement by Medicare and the Company anticipates that future
tests using its OsteoView(R) device under development will be approved
for reimbursement. Government regulations may change at any time and
Medicare reimbursement for the OsteoGram(R) test or the OsteoView test
may be withdrawn or reduced. Furthermore, other forms of testing for
bone mineral density as an indicator of osteoporosis may be approved
for reimbursement which may reduce the market share or profit margins
for such services.
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.
As a part of the research and license agreement with UMMC (see
THE OSTEOVIEW), the Company, along with two others, received worldwide
rights to two patents that utilize charge-coupled device (CCD) camera
technology in bone densitometry. The two patents deal specifically
with the use of CCD cameras in radiography systems. A continuation
has been filed in connection with these patients to include all
pixilated detectors (for the digital x-ray recording) along with the
CCD technology described in the patent.
In June 1995, a patent application was filed on behalf of
the Company covering the technology underlying Detoxahol(TM). There
can be no assurance that such patent application will be approved,
that the Company can develop or acquire Detoxahol(TM) products or
methods of use that are patentable, or even if patents are issued that
they will afford the Company's potential Detoxahol(TM) products any
competitive advantage or will not be challenged by third parties, or
that patents issued to others will not adversely affect the
development or commercialization of the Company's products. In the
event that a patent for Detoxahol(TM) is not granted, the proprietary
information relating to Detoxahol(TM) could be protected to a certain
extent by putting procedures into effect which are designed to
maintain the key enzymes, delivery systems and manufacturing process
of Detoxahol(TM) as a trade secret.
EMPLOYEES
At September 30, 1997, the Company had 24 full-time and 2 part-
time employees. None of the Company's employees is represented by a
labor union and the Company has experienced no work stoppages. The
Company considers its relations with its employees to be good. The
Company also retains consultants from time to time when necessary.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's only facilities are located in 16,440 square feet
in a modern office building located at 1230 Rosecrans Avenue,
Manhattan Beach, California 90266. This facility is leased through
August 1999 at a monthly rental of $18,906, plus certain future
increases in common area expenses. The Company presently 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.
ITEM 3. LEGAL PROCEEDINGS
On October 24, 1997, the Order Preliminarily Approving Settlement
and Providing for Notice was approved by the United States District
Court for the Central District of California to settle the securities
class action and derivative litigation filed on behalf of persons who
purchased Common Stock during various time periods spanning from
August 11, 1995 through October 17, 1995, inclusive and derivatively
on behalf of the Company (the "Securities Litigation"). The
Securities Litigation alleged violations of federal and state
securities laws by the Company and certain of its officers and
directors. The terms of the Stipulation of Settlement include cash
payments in the total amount of $1,300,000. Of this amount,
$1,000,000 was paid by proceeds from the Company's insurance coverage.
The cash payment has been made into an escrow account for their
benefit. Additionally, the Company will issue 1,870,000 warrants to
purchase shares of Common Stock of the Company at $3.00 per share for
five years, and 770,000 shares of Common Stock. The consummation of
the Settlement is subject to obtaining court approval which is
scheduled for January 26, 1998. Notice has already been given to the
class members. The Company will additionally issue warrants to the
insurance company to purchase 50,000 shares of common stock of the
Company at an exercise price of $3.00 per share for a period of five
years. The Company recorded a $2,786,000 expense in 1996 related to
the Settlement. Shares of Common Stock and Warrants have been
reserved for the Settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to stockholders during the fourth
quarter of the fiscal year ended September 30, 1997.
PART II
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ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Common Stock is listed on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") SmallCap
Market under the symbol "CMPD". The Common Stock Purchase Warrants
(the "Warrants") had been listed on the Nasdaq SmallCap Market (symbol:
CPMDW) until December 1996. As of August 1, 1997, the expiration date
of the Warrants was extended to August 2, 1999. The following table
sets forth the range of high and low bid prices for the Common
Stock and the Warrants during the periods indicated, and represents
inter-dealer prices, which do not include retail mark-ups and
mark-downs, or any commission to the broker-dealer, and may not
necessarily represent actual transactions.
Common Stock Warrants
____________ ________
High Low High Low
____ ___ ---- ---
Year ended September 30, 1996
Quarter Ended:
_____________
December 31, 1995 $ 19.13 $ 3.00 $ 1.50 $ .16
March 31, 1996 5.06 2.31 .34 .13
June 30, 1996 3.75 2.25 .25 .13
September 30, 1996 2.63 .94 .09 .03
Year ended September 30, 1997:
Quarter Ended:
_____________
December 31, 1996 $ 1.94 $ .53 $ .05 .02
March 31, 1997 1.38 .69 -- --
June 30, 1997 1.22 .50 -- --
September 30, 1997 3.09 .59 -- --
* The Warrants closed trading on the Nasdaq SmallCap System on
December 11, 1996.
As of December 12, 1997, there were approximately 875 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This analysis should be read in conjunction with the consolidated
financial statements and notes thereto. See "ITEMS 7 and 13 Financial
Statements, and Exhibits and Reports on Form 8-K".
RESULTS OF OPERATIONS
Fiscal Year Ended September 30, 1997 as Compared to 1996
________________________________________________________
Revenues for fiscal 1997 decreased overall by $405,000, or 17%,
from fiscal 1996. This decrease is primarily due to reduced volume of
service revenues ($334,000 reduction) which resulted from the
elimination of the Company's cardiac event monitoring services
(TeleCor) and from customer attrition. The TeleCor revenues declined
considerably during the second fiscal quarter following the
termination of several key distributors of this service and the
Company elected to terminate the offering of this service rather than
invest in the necessary marketing costs to rebuild the customer base.
TeleCor revenues decreased from $305,000 in FY1996 to $203,000 in
FY1997. Revenues from the Company's ongoing ECG business decreased by
$232,000 in fiscal 1997, as compared to the prior year, primarily as a
result of the loss of a significant customer representing
approximately $120,000 in annual revenues and to normal customer
attrition. Sales of the Company's new System 507 electrocardiograph
commenced during the second half of the fiscal year and revenues from
new placements are anticipated to offset reductions from customer
attrition in the future. Another factor in the overall decrease in
revenues is also due to the elimination of certain rental property
disposed of in 1996 and the associated rental income in Fiscal 1997,
which was $99,000 in Fiscal 1996. The revenue decreases were offset
by increases in OsteoGram(R) royalty revenues of $82,000 to $119,000
during Fiscal 1997 due to increased tests being performed and to an
increase in the royalty rate during the second year of this Agreement.
Selling costs decreased by 25% ($108,000 decrease) during fiscal
1997 as a result of the termination of the TeleCor services as
described above. Costs of services decreased during fiscal 1997 from
those in fiscal 1996 by $53,000. Fixed costs of the TeleCor services
were not eliminated until late in fiscal 1997, so further cost
reductions are anticipated to be reflected in future reporting periods
at a rate of approximately $30,000 per month. Research and
development costs increased by $128,000 during fiscal 1997 primarily
as a result of increased costs relating to the OsteoView(R) bone
densitometer under development. General and administrative expenses
decreased during fiscal 1997 by $153,000 primarily due to a non-
recurring decrease in unearned income of $80,000, for which services
will not be required, and to reductions in general consulting fees,
recruitment fees and legal costs.
During the prior fiscal year 1996, the Company incurred
$2,786,000 in expenses relating to the securities litigation (see Item
3. Legal Proceedings). These expenses resulted primarily from the
value of the securities which are to be issued in relation to the
settlement of this litigation, consisting of Common Stock with a value
of $575,000 and Warrants with a value of $1,524,000. Additionally,
the Company paid $300,000 and incurred approximately $441,000 in legal
costs associated with the defense of this matter. During fiscal 1997
an additional $54,000 of legal costs were accrued.
The net loss of $2,214,000 is primarily a result of research and
development costs associated with the development of the OsteoView
bone densitometer and to the general and administrative costs of the
company including those corporate costs relating to the requirements
of a public company. In addition, the operations in providing TeleCor
services also contributed to the overall losses prior to the
termination of those services. Future research and development costs
and corporate costs are anticipated to result in continued losses
during the next fiscal year.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
____________________________________________________
At September 30, 1997, the Company had approximately $931,000 in
cash and marketable securities, as compared to a balance of $2,644,000
at September 30, 1996. The decrease in cash and marketable securities
during fiscal 1997 of $1,713,000 is primarily due to losses from
operations, prior to depreciation and amortization expense, which was
slightly offset by reductions in accounts receivable.
The Company's primary capital resource commitments at September
30, 1997 consist of capital and operating lease commitments, primarily
for computer equipment and for facilities, and the balance of a
sponsored research and development contract with the University of
Massachusetts Medical Center of approximately $37,500. The Company
has also committed to the purchase of a digital imaging system in the
amount of $65,000.
Subsequent to the end of the 1997 fiscal year, the Company has
completed the sale of Series I Class C 7% Preferred Stock for gross
proceeds of $1,750,000. This Preferred Stock may be converted to
Common Stock for a period of two years at a conversion price which
is the lesser of 75% of the average bid price of the Common Stock
for the ten tradinbg days prior to the closing or the notice of
conversion. Should the value of the Company Common Stock fall
substantially prior to conversion, the Preferred Stock holders
could gain a significant share of the Common Stock of the Company
upon conversion. Upon conversion, the Preferred shareholders
will also receive warrants for the purchase of Common Stock equal
to the number of shares issued upon conversion at an exercise
price equal to the conversion price exercisable for three years.
The securities subscription agreement also provides for an
additional sale (second tranche) of Preferred Stock of $1,750,000
if certain conditions are met. The terms of the second tranche are
similar to the first, except that the conversion price will be 77.5%
of the market price at conversion for the securities purchased by
December 31, 1997 and at 80% for the securities purchased after
December 3, 1997. The proceeds from this sale of securities
(after payment of a 4% fee to the distribution and other placement
expenses), along with current working capital, is considered
adequate to support the Company's costs of operations during the
next fiscal year.
The Company's ongoing research and development activities
associated with the OsteoView bone densitometry device and the current
repair and refurbishment of its ECG terminals are all subject to
federal, state, local and in some instances, foreign regulations. In
June 1995, the Company filed patent applications on Detoxahol(TM).
Subject to obtaining such patents, the Company would seek strategic
partners to help fund the research and development of Detoxahol(TM) at
the University of Georgia. The regulatory approval process for
Detoxahol(TM) can take years and require expenditure of substantial
resources. The Company is seeking a partner to continue the
development of Detoxahol and is not continuing expenditures for
research and development of this product at this time.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
__________________________________________
The Company is including the following cautionary statement in
this Annual Report on Form 10-KSB to make applicable and take
advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statements made
by, or on behalf of, the Company. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements
which are other than statements of historical facts. From time to
time, the Company may publish or otherwise make available forward-
looking statements of this nature. All such subsequent forward-
looking statements, whether written or oral, and whether made by or on
behalf of the Company, are also expressly qualified by these
cautionary statements. Certain statements contained herein are
forward-looking statements and accordingly involve risks and
uncertainties which could cause actual results or outcomes to differ
materially form those expressed in the forward-looking statements.
The forward-looking statements contained herein include (i) statements
made in Item 1 under the caption "THE OSTEOVIEW(R)" relating to the
expectation that the bone densitometer under development will
determine bone density utilizing a low-dose x-ray source from a
measurement of the fingers and the wrist (ii) statements made in Item
6 under the caption "FINANCIAL CONDITION, LIQUIDITY AND CAPITAL
RESOURCES" relating to management's projection that present working
capital amounts will be sufficient for at least the next 12 months,
(iii)statements made in Item 6 that System 507 revenues from new
placements are anticipated to offset reductions from customer
attrition in the future and (iv) statements made in Item 1 under
the caption "GOVERNMENT REGULATION" that the OsteoView bone density
test is anticipated to become covered for reimbursement under
Medicare guidelines. The forward-looking statements contained herein
are based on various assumptions, many of which are based, in turn,
upon further assumptions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the
Company to have a reasonable basis, including without
limitation, management's examination of historical operating
trends, data contained in the Company's records and other data
available from third parties, but there can be no assurance that
management's expectations, beliefs or projections will result or
be achieved or accomplished. In addition to other factors and
matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results
to differ materially from those discussed in the forward-looking
statements: technological advances by the Company's competitors,
changes in health care reform, including reimbursement programs,
capital needs to fund any delays or extensions of research programs
and the availability of capital on terms satisfactory to the Company.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date
hereof.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included as a separate
section following the signature page to this Form 10-KSB:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors for the years ended
September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of
September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended
September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . F-8 to F-18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
________
The information called for by Part III (Items 9, 10, 11 and 12)
of Form 10-KSB is hereby incorporated by reference from the Company's
definitive Proxy Statement to be filed with the Securities and
Exchange Commission by not later than January 38, 1998 in connection
with the election of directors at the 1998 Annual Meeting of
Stockholders of the Company.
PART IV
_______
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit
Number Description of Exhibit
_______ ______________________
3.1 Certificate of Incorporation of the Company [Incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement of Form S-1 (File No. 33-46061), effective May 7,
1992]
3.2 Certificate of Amendment of Certificate of Incorporation
[Incorporated by reference to Exhibit 3.1a to Amendment No.
1 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-2 (File No. 33-48437),
filed June 28, 1994]
3.3 Certificate of Amendment of Certificate of Incorporation
[Incorporated by reference to Exhibit 3.1b to Amendment No.
2 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-2 (File No. 33-48437),
filed November 7, 1994]
3.4 Certificate of Correction of Certificate of Amendment
[Incorporated by reference to Exhibit 3.1c to Amendment No.
2 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-2 (File No. 33-48437),
filed November 7, 1995]
3.5 By-Laws of the Company, as currently in effect [Incorporated
by reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (File No. 33-46061), effective May 7,
1992]
4.1 Form of Underwriter's Warrant Agreement [Incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-2 (File No. 33-48437), effective August
3, 1992]
4.2 Form of Warrant Agreement and Warrant [Incorporated by
reference to Exhibit 4.5 to the Company's Registration
Statement on Form S-2 (File No. 33-48437), effective August
3, 1992]
4.2.1 Amendment to Warrant Agreement, dated as of July 29, 1997
[Incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K for an event of August 1, 1997]
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)]
10.1 Agreement, dated May 23, 1991 (the "SASCO Agreement"), for
the purchase by the Company of substantially all of the
assets of Skeletal Assessment Services Company ("SASCO")
[Incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (File No. 33-46061),
effective May 7, 1992]
10.2 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)]
10.3 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)]
10.4 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]
10.5 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]
10.6 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]
10.7 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)]
10.8 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]
10.9 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
Neutraceuticals, 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]
10.10 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]
10.11 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]
10.12 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]
10.13 Agreement, dated August 12, 1994, for the acquisition of
Irsco. [Incorporated by reference to Exhibit 10.15 to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended September 30, 1995 (File No. 0-14210)]
10.14 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]
10.15 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 Annual Report on
Form 10-KSB for the fiscal year ended September 30, 1995
(File No. 0-14210)]
10.16 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]
10.17 Sponsored Research Agreement, effective as of May 1, 1996,
between UMMC and the Company.
10.18 Exclusive License Agreement, effective as of May 1, 1996,
between UMMC and the Company.
10.19 Evaluation and Development Agreement between Varian
Associates and the Company dated December 10, 1996.
10.20 Agreement of Settlement and Mutual General Release, dated
April 23, 1996 among the Company, Robert Stuckelman, William
Barnett, Allan Gelbard and Barry Silverton.
10.21 Settlement Agreement and General Release, effective
September 15, 1996, between the Company and Howard L. Mark,
M.D.
10.22 Settlement Agreement and General Release, effective August
1, 1996, between the Company and Mark C. Branigan.
10.23 Commercial Office Lease, dated August 30, 1996, between the
Company and USAA Income Properties III Limited Partnership.
21* Subsidiaries of the Company
23* Consent of Ernst & Young LLP
27* Financial Data Schedule
____________________________________
* Filed herewith.
B. REPORTS ON FORM 8-K
(i) Report for an event of August 1, 1997 to report on Item 5
the extension of the expiration date of the Company's public
warrants.
(ii) Report for an event of August 19, 1997 to report on Item 5 a
change in officers of the Company.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPUMED, INC.
____________________________
Registrant
By: /s/ James Linesch
__________________________
James Linesch, President
Date: December 29, 1997
____________________________
In accordance with Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ James Linesch
__________________ President, Chief Financial December 29, 1997
James Linesch Officer
/s/ Robert B. Goldberg
__________________ Chairman of the Board December 29, 1997
Robert B. Goldberg
/s/ John D. Minnick
__________________ Director December 29, 1997
John D. Minnick
/s/ Robert Struckelman
__________________ Director December 29, 1997
Robert Stuckelman
__________________ Director
Herbert Lightstone
_________________ Director
John Romm
/s/ Rod Raynovich
_________________ Director December 29, 1997
Rod Raynovich
COMPUMED, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors for the years ended
September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of
September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended
September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for
the years ended September 30, 1997 and 1996 . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . F-8 to F-18
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, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the two years in the period ended September 30, 1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of CompuMed, Inc. and subsidiaries at September 30, 1997, and the
consolidated results of their operations and their cash flows for each of
the two years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles.
Los Angeles, California
November 7, 1997, except for Note I, as to which the date is December 24,
1997
/s/Ernst & Young LLP
CONSOLIDATED BALANCE SHEET
COMPUMED, INC. AND SUBSIDIARIES
ASSETS
September 30,
1997
------------
CURRENT ASSETS
Cash $ 81,000
Marketable securities 850,000
Accounts receivable, less allowance of $66,000 247,000
Inventory 55,000
Prepaid expenses and other current assets 27,000
----------
TOTAL CURRENT ASSETS 1,260,000
PROPERTY AND EQUIPMENT - Notes A and B
Machinery and equipment 2,994,000
Furniture, fixtures and leasehold
improvements 208,000
Equipment under capital leases 787,000
---------
3,989,000
Less allowance for depreciation and
amortization 3,591,000
---------
398,000
OTHER ASSETS
Reacquired franchises, net of accumulated
amortization of $263,000 63,000
Other assets 55,000
----------
$1,776,000
==========
See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEET
COMPUMED, INC. AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY September 30,
1997
------------
CURRENT LIABILITIES
Accounts payable $ 174,000
Accrued liabilities 501,000
Current portion of capital lease
obligations-Note B 81,000
-------------
TOTAL CURRENT LIABILITIES
756,000
CAPITAL LEASE OBLIGATIONS, less current
portion-Note B 152,000
COMMITMENTS AND CONTINGENCIES-Notes B and G
STOCKHOLDERS' EQUITY-Notes D and I
Preferred stock, $.10 par value--authorized
1,000,000 shares
Class A $3.50 cumulative convertible voting
preferred stock, issued and outstanding --
8,400 shares 1,000
Class B $3.50 convertible voting preferred
stock, issued and outstanding - 400 shares 1,000
Common stock, $.01 par value--authorized
50,000,000 shares, issued and outstanding--
9,041,857 90,000
Additional paid in capital 27,169,000
Retained deficit (26,393,000)
------------
STOCKHOLDERS' EQUITY 868,000
------------
$ 1,776,000
=============
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
COMPUMED, INC. AND SUBSIDIARIES
Year Ended September 30,
1997 1996
---- ----
REVENUES
ECG services $1,674,000 $2,008,000
Osteo royalty revenues 119,000 37,000
Product sales 146,000 200,000
-0- 99,000
Rental income - Note E ---------- ----------
1,939,000 2,344,000
COST AND EXPENSES
Cost of services 1,139,000 1,192,000
Cost of sales 65,000 92,000
Selling expenses 318,000 426,000
Research and development 741,000 613,000
General and administrative
expenses 1,538,000 1,691,000
Depreciation and amortization 367,000 323,000
Provision for securities 54,000 2,786,000
litigation ---------- ----------
4,222,000 7,123,000
Interest income 92,000 229,000
(23,000) (97,000)
Interest expense ---------- ----------
$(2,214,000) $(4,647,000)
NET LOSS ========== ==========
$ (.25) $ (.54)
NET LOSS PER SHARE ---------- ----------
Weighted average number of common 8,965,045 8,534,276
shares outstanding ========== ==========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMPUMED, INC. AND SUBSIDIARIES
Preferred Common
Stock Stock Total
---------------- ---------------- -----------------
Balance at
September 30,
1995: $6,000 $82,000 $5,201,000
Costs
associated with
Regulation "D"
offering (88,000)
Convert 50,000
shares of Class B
Preferred Stock
to 500,000 shares
of Common Stock (4,000) 4,000
Proceeds from
issuance of
66,820 shares of
Common Stock upon
exercise of
warrants 1,000 251,000
Proceeds from
issuance of
141,091 shares of
Common Stock upon
exercise of stock
options 2,000 144,000
Securities
reserved for
issuance relating
to securities
litigation 2,099,000
Dividends paid
on Class A
Preferred Stock (2,000)
000 000 (4,647,000)
Net Loss ------ ------- ----------
Balance at
September 30,
1996: 2,000 89,000 2,958,000
Convert 1,933
shares of Class B
Preferred Stock
to 19,330 shares
of Common Stock
Proceeds from
issuance of
48,120 shares of
Common Stock upon
exercise of stock
options 1,000 49,000
Securities
issued and
reserved for
issuance relating
to MD
antidilution
provision 85,000
Dividends paid
on Class A
Preferred Stock (10,000)
00 00 (2,214,000)
Net Loss ------ ------- ----------
Balances at
September 30, $2,000 $90,000 $ 868,000
1997: ====== ======= ==========
Additional Paid Retained
in Capital (Deficit) Total
---------------- ---------------- -----------------
Balance at
September 30,
1995: $24,633,000 $(19,520,000) $5,201,000
Costs
associated with
Regulation "D"
offering (88,000) (88,000)
Convert 50,000
shares of Class B
Preferred Stock
to 500,000 shares
of Common Stock
Proceeds from
issuance of
66,820 shares of
Common Stock upon
exercise of
warrants 250,000 251,000
Proceeds from
issuance of
141,091 shares of
Common Stock upon
exercise of stock
options 142,000 144,000
Securities
reserved for
issuance relating
to securities
litigation 2,099,000 2,099,000
Dividends paid
on Class A
Preferred Stock (2,000) (2,000)
000 (4,647,000) (4,647,000)
Net Loss ----------- ------------ ----------
Balance at
September 30,
1996: 27,036,000 (24,169,000) 2,958,000
Convert 1,933
shares of Class B
Preferred Stock
to 19,330 shares
of Common Stock
Proceeds from
issuance of
48,120 shares of
Common Stock upon
exercise of stock
options 48,000 49,000
Securities
issued and
reserved for
issuance relating
to MD
antidilution
provision 85,000 85,000
Dividends paid
on Class A
Preferred Stock (10,000) (10,000)
(2,214,000) (2,214,000)
Net Loss ----------- ------------ ----------
Balances at
September 30, $27,169,000 $(26,393,000) $ 868,000
1997: =========== ============ ==========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMPUMED, INC. AND SUBSIDIARIES
Year Ended September 30,
1997 1996
---- ----
OPERATING ACTIVITIES:
Net loss $(2,214,000)$(4,647,000)
Net adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 367,000 323,000
Stock reserved for securities
litigation settlement 2,099,000
Changes in operating assets and
liabilities:
Accounts receivable 188,000 14,000
Inventories and prepaid expenses 93,000 424,000
Accounts payable and other
liabilities ( 236,000) (675,000)
Other assets 7,000 38,000
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,795,000) (2,424,000)
----------- -----------
INVESTING ACTIVITIES:
Sale of marketable securities 1,639,000 2,234,000
Sales of property, plant and equipment 30,000
Purchases of property, plant and equipment (20,000) (229,000)
-------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,649,000 2,005,000
FINANCING ACTIVITIES:
Net costs from sale of stock (88,000)
Dividends on Class A preferred stock (10,000) (2,000)
Principal payments on capital lease
obligations (52,000) (30,000)
Proceeds related to MB securities issued 85,000
Exercise of stock options and warrants 49,000 395,000
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 72,000 275,000
-------- ---------
DECREASE IN CASH (74,000) (144,000)
Cash at beginning of year 155,000 299,000
-------- ---------
CASH AT END OF YEAR $ 81,000 $ 155,000
======== =========
Cash paid for interest $ 23,000 $ 97,000
======== =========
During 1997 and 1996 computer and office equipment were acquired under
capital lease obligations for $176,000 and $48,000 respectively
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPUMED, INC. AND SUBSIDIARIES
NOTE A-BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
---------------------------
the accounts of CompuMed, Inc. and its wholly-owned subsidiaries (the
Company). All material intercompany transactions and accounts have been
eliminated.
Description of Business: The Company is engaged in the processing and
------------------------
interpretation of ECG tests and in the rental and sale of equipment and
supplies relating to these tests. The Company maintains a central
processing center where services are provided on a 24-hour basis, located
in Manhattan Beach, California. Customers of the Company are located
throughout the country. In addition to the ECG operations, active
development is being conducted by the Company of a stand-alone bone density
testing device for the diagnosis and treatment of osteoporosis. The
Company earns royalties from a division of Merck & Co. for the processing
of OsteoGram(R) tests, a bone density test processed in a central lab.
Inventory: Inventory consists of ECG terminals, component parts and ECG
----------
medical supplies. Inventory is 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 on the straight-line basis over
the following useful lives:
Furniture, fixtures and leasehold improvements 3 to 5 years
Equipment 5 to 7 years
Reacquired Franchises: The reacquired franchises are being amortized over
----------------------
a seven year period.
Revenue Recognition: Standard ECG services and supplies 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. ECG event monitoring services are recorded when processing is
completed and claims are submitted to the third party payors. Other income
is recorded when accrued or received.
Income Taxes: The Company utilizes the liability method to determine the
-------------
provision 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE A-BASIS OF PRESENTATION SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Marketable Securities: Marketable securities consist of short-term money
----------------------
market investments and investments in U.S. Treasury securities (t-bills).
The marketable securities are carried at cost, which approximates the
market value as of September 30, 1997.
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.
Long-lived Assets: Long-lived assets used in operations are reviewed
------------------
periodically to determine that the carrying values are not impaired and if
indications of impairment are present of if long-lived assets are expected
to be disposed of, impairment losses are recorded.
Use of Estimates: The preparation of financial statements in conformity
-----------------
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Stock Based Compensation: In October 1995, the Financial Accounting
-------------------------
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("FAS 123"). FAS 123 established
a fair value-based method of accounting for compensation cost related to
stock options and other stock-based compensation awards. However, FAS 123
allows an entity to continue to measure compensation costs using the
principles of APB 25 if certain pro forma disclosures are made. The
Company has elected to account for its stock compensation arrangements
under the provision of APB 25, "Accounting for Stock Issued to Employees,"
with pro forma disclosures required by FAS 123.
Concentration of Credit Risk: The Company sells its products throughout
-----------------------------
the United States. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
Credit losses have been within management's expectations. For the years
ended September 30, 1997 and 1996, no single customer accounted for more
than 10% of the Company's net revenues.
Earnings per Share: In February 1997, the Financial Accounting Standards
-------------------
Board issued Statement of Financial Accounting Standards No.128,
"Accounting for Earnings Per Share" ("FAS 128"). This statement
establishes standards for computing and presenting earnings per share (EPS)
and applies to entities with publicly held common stock or potential common
stock. This Statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings per Share, and makes
them comparable to international EPS standards. It is effective for
financial statements issued for periods ending after December 5, 1997. The
Company will adopt this new standard in fiscal year 1998, and has not yet
determined the potential impact on the financial statements.
Comprehensive Income: In June 1997, the Financial Accounting Standards
---------------------
Board issued Statement of Financial Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) in financial statements. FAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
It is effective for fiscal years beginning after December 15, 1997. The
Company intends to disclose the information required by FAS 130 beginning
with its 1998 fiscal year.
Segment Reporting: In June 1997, the Financial Accounting Standards Board
------------------
issued Statement of Financial Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131")./ This
statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments.
Generally, financial information is required to be reported on the basis
that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments. It is effective for fiscal years
beginning after December 15, 1997. The Company intends to adopt this new
standard in fiscal year 1998 and does not believe that this statement will
have a significant impact on its financial statements.
NOTE B - COMMITMENTS
The Company has capital leases for computer and office equipment that
expire through 2000 and has a noncancelable operating lease for a facility
expiring in August 1999 which is included in the operating lease amounts
below.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE B-COMMITMENTS (CONTINUED)
The following is a summary as of September 30, 1997 of future minimum lease
payments together with the present value of the net minimum lease payments
on capital leases:
Capital Operating
Year ending September 30 Leases Leases
------------------
1998 $111,000 $233,000
1999 101,000 212,000
2000 56,000 -0-
2001 4,000
-0-
-------- --------
Total minimum lease payments 272,000 $445,000
========
Less amount representing interest 39,000
--------
Net minimum lease payments 233,000
Less current portion 81,000
--------
Present value of net minimum
payments, less current portion $ 152,000
========
Included in accumulated depreciation and amortization at September 30, 1997
is $437,000 related to capital leases. Amortization of capital leases is
included in depreciation and amortization expense. Rental expense under
operating leases was $233,000 (1997) and $245,000 (1996).
On May 1, 1996, the Company entered into a research and license agreement
with the University of Massachusetts Medical Center (UMMC) in connection
with the development of its bone densitometer device. Under the terms of
the license agreement, the Company will receive from UMMC worldwide rights,
in the field of bone densitometry, to develop and market devices and
services, subject to FDA regulation, which employ the licensed technology
of certain US patents owned by UMMC. UMMC has reserved the right to
license the technology to two other companies. For the license agreement,
the Company paid a $25,000 license initiation fee. The Company will also
pay additional amounts totaling $175,000 upon the completion of certain
milestones and will remit royalty payments of 3% of the revenues generated
from product sales when such sales should commence in the future. No
amounts were paid under the license agreement during fiscal 1997.
Under the terms of the research agreement with UMMC, the Company is
sponsoring research during a two-year period which focuses on digital bone
densitometry measurement techniques integrating the Company's proprietary
software. The Company will reimburse UMMC for their costs in the amount of
$100,000 during the first year and $50,000 during the second year of the
agreement. During fiscal 1997, payments of $87,500 were made under this
agreement with $37,500 remaining to be paid at September 30, 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE C-INCOME TAXES
At September 30, 1997, the Company has available for federal income tax
purposes, net operating loss carryforwards of approximately $15,943,000
which expire between 1998 and 2012. The utilization of the above net
operating loss carryforwards are subject to significant limitations under
the tax codes due to changes in ownership and portions may expire prior to
utilization.
Significant components of the Company's deferred tax liabilities and assets
as of September 30, 1997 and 1996 are as follows:
Deferred tax liabilities: 1997 1996
------------ ------------
Property and Equipment $( 72,000) $ (41,000)
Deferred tax assets:
Account receivable allowance 29,000 113,000
Accrued expenses 20,000 20,000
Tax credits 9,000
Net operating loss carryforwards
5,890,000 4,955,000
--------- ---------
Total deferred tax assets 5,948,000 5,088,000
Valuation allowance for
deferred tax assets (5,876,000) (5,047,000)
---------- ----------
Net deferred tax assets 72,000 41,000
---------- ----------
Total $ 0 $ 0
========== ==========
NOTE D-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 tradable.
After a 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 2, 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 1,528,300 of the warrants were
exercised as of September 30, 1997. On August 1, 1997, the expiration date
of the warrants was extended until August 2, 1999.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE D-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 expired on August 2, 1997.
During Fiscal 1997, the Company issued 24,621 shares of Common Stock to one
of the shareholders of MB Neutraceuticals (MB) in accordance with
antidilution provisions of an Agreement and Plan of Reorganization entered
into on March 18, 1994. An additional 24,621 shares of Common Stock will
be issued to the other MB shareholder in accordance with the Agreement.
Class A $3.50 Cumulative Convertible Voting Preferred Stock: The holders of
------------------------------------------------------------
Class A Preferred Stock are entitled to receive, when and as declared by
the Board of Directors of the Company, dividends at an annual rate of $.35
per share, payable quarterly. Dividends are cumulative from the date of
issuance. Every two shares of the Class A Preferred Stock are presently
convertible, subject to adjustment, into one share of Common Stock. In the
event of any liquidation, the holders of the Class A Preferred Stock are
entitled to receive $2.00 in cash per share plus accumulated and unpaid
dividends out of assets available for distribution to stockholders, prior
to any distribution to holders of Common Stock or any other stock ranking
junior to the Class A Preferred Stock. The Class A Preferred Stock may be
redeemed by the Company, upon 30-days' written notice, at a redemption
price of $3.85 per share. Class A Preferred Stock stockholders have the
right to convert their shares into Common Stock during such 30-day period.
Shares of Class A Preferred Stock have one vote each. Shares of Class A
Preferred Stock vote along with shares of Common Stock and shares of Class
B Preferred Stock as a single class on all matters presented to the
stockholders for action except as follows: Without the affirmative vote of
the holder of a majority of the Class A Preferred Stock then outstanding,
voting as a separate class, the Company may not (i) amend, alter or repeal
any of the preferences or rights of the Class A Preferred Stock, (ii)
authorize any reclassification of the Class A Preferred Stock, (iii)
increase the authorized number of shares of Class A Preferred Stock or (iv)
create any class or series of shares ranking prior to the Class A Preferred
Stock as to dividends or upon liquidation.
Of the 437,500 shares of Class A Preferred Stock issued on September 30,
1991, a total of 429,100 were converted into 429,100 shares of Common
Stock. A total of 4,200 shares of Common Stock are currently issuable upon
conversion of the remaining 8,400 shares of the Class A Preferred Stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE D-STOCKHOLDERS' EQUITY (CONTINUED)
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
commercial property. The holders of Class B Preferred Stock are entitled
to receive dividends only, when and as declared by the Board of Directors
of the Company. Each share of Class B Preferred Stock is convertible,
subject to adjustment, into ten shares of Common Stock. In the event of
any liquidation, the holders of the Class B Preferred Stock are entitled to
receive $3.50 in cash per share plus accumulated and unpaid dividends out
of assets available for distribution to stockholders, prior to any
distribution to holders of Common Stock or any other stock ranking junior
to the Class B Preferred Stock. Each share of Class B Preferred Stock may
be redeemed by the Company, upon 30-days' written notice, at a redemption
price of $3.85 per share. Class B Preferred Stock stockholders have the
right to convert their shares into Common Stock during this 30-day period.
Shares of Class B Preferred Stock are entitled to one vote each. Shares of
Class B Preferred Stock vote as a single class on all matters presented to
the stockholders for action except as follows: Without the affirmative
vote of the holder of a majority of the Class B Preferred Stock then
outstanding, voting as a separate class, the Company may not (i) amend,
alter or repeal any of the preferences or rights of the Class B Preferred
Stock, (ii) authorize any reclassification of the Class B Preferred Stock,
(iii) increase the authorized number of shares of Class B Preferred Stock
or (iv) create any class or series of shares ranking prior to the Class B
Preferred Stock as to dividends or upon liquidation.
During the fiscal year ended September 30, 1997, 1,933 shares of Class B
stock were converted to 19,330 shares of Common Stock. A total of 4,000
shares of Common Stock are currently issuable upon conversion of the
remaining 400 shares of Class B Preferred Stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE D-STOCKHOLDERS' EQUITY (CONTINUED)
Stock Options: The Company's Stock Option Plan provides for the granting
--------------
of options to key employees, officers and certain individuals to purchase
shares of the Company's Common Stock. Options intended to be incentive
stock options within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended, and nonqualified options may be granted under the
Stock Option Plan. Incentive stock options granted under the Stock Option
Plan shall be exercisable for a period of not more than ten years from the
date of grant. The purchase price per share of Common Stock issuable under
the Stock Option Plan will not be less than the fair market value of such
shares on the date the option is granted.
In addition to options issued pursuant to the Plan, the Company has granted
non-qualified stock options to certain members of the Board of Directors,
management and consultants of the Company. Such options have been granted
at the market prices at the date of grant and are for a term of five or ten
years. As of September 30, 1997, there were 994,918 shares reserved for
exercise of options granted, of which 778,881 were exercisable subject to
vesting.
In accordance with Statement 123, pro forma information regarding net
income and earnings per share has not been presented because the effect of
the employee stock option grants is immaterial in 1997 and 1996.
A summary of the Company's stock option activity, and related information
for the years ended September 30 follows:
1997 1996
----------------- ---------------
Weighted- Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Options outstanding,
beginning of year 1,002,983 1.21 936,944 1.22
Options exercised 48,120 1.00 141,461 1.00
Options granted 270,000 0.82 207,500 1.00
Options forfited/canceled 4,240 1.00 0
Options outstanding, end of
year 1,220,623 1.13 1,002,983 1.21
1.32
Exercisable at end of year 798,534 1.26 653,225
The exercise prices for options outstanding at September 30, 1997 ranged
from $.75 to $1.92.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
Warrants: At September 30, 1997, the Company had the following
warrants outstanding for the purchase of its common stock:
Description Expiration Number of Exercise
----------- Date Shares Price
---- Issuable -----
--------
Secondary Offering August 1999 669,170 $3.75
SASCO September 2000 147,000 $2.50
Israel Trading December 1999 142,857 $1.10
Other January 1998 25,000 $ .39
-------
Total warrants 984,027
outstanding -------
NOTE E-RENTAL PROPERTY
In 1996 the Company disposed of certain property that had been
acquired in 1994. The total costs associated with owning and
operating the rental property, including debt service, were $0 in
1997 and $128,000 in 1996 with rental proceeds of $0 in 1997 and
$99,000 in 1996. The depreciation taken by IRSCO on the IRSCO
Property was $0 in 1997 and $49,000 in 1996.
NOTE F-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. The Company's matching contribution which was
charged to expense was $8,000 and $8,000 in fiscal 1997 and 1996,
respectively.
NOTE G-CONTINGENCIES
On October 24, 1997, the Order Preliminarily Approving Settlement
and Providing for Notice was approved by the United States
District Court for the Central District of California to settle
the securities class action and derivative litigation filed on
behalf of persons who purchased Common Stock during various time
periods spanning from August 11, 1995 through October 17, 1995,
inclusive and derivatively on behalf of the Company (the
"Securities Litigation"). The Securities Litigation alleged
violations of federal and state securities laws by the Company
and certain of its officers and directors. The terms of the
Stipulation of Settlement include cash payments in the total
amount of $1,300,000. Of this
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
amount, $1,000,000 was paid by proceeds from the Company's
insurance coverage. The cash payment has been made into an
escrow account for their benefit. Additionally, the Company will
issue 1,870,000 warrants to purchase shares of Common Stock of
the Company at $3.00 per share for five years, and 770,000 shares
of Common Stock. The consummation of the Settlement is subject to
obtaining court approval after notice to the class members has
been given. The Company will additionally issue warrants to the
insurance company to purchase 50,000 shares of common stock of
the Company at an exercise price of $3.00 per share for a period
of five years. The Company recorded a $2,786,000 expense in 1996
related to the Settlement. Shares of Common Stock and Warrants
have been reserved for the Settlement.
NOTE H-MERCK LICENSE ("Merck")
On September 22, 1995, the Company entered into an agreement with
Merck & Co. (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 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 percent of Merck's total collected revenues in
that year or $3 million and a maximum in the year 2000 equal to
the lesser of 10 percent of Merck's total collected revenues in
that year or $4 million. There are no minimum royalties under
the agreement. During the fiscal year ended September 30, 1997,
Merck paid $119,000 for the tests performed.
In connection with entering into the Merck License Agreement, the
Company paid $100,000 and issued five year warrants for the
purchase of 83,000 shares of the Company's Common Stock at an
exercise price of $2.50 per share to Skeletal Assessment Services
Co. ("SASCO") and forgave $30,000 of indebtedness owed to it by
SASCO as a modification of payments due to SASCO for assets the
Company purchased from SASCO in 1991 in connection with the
development of the OsteoSystem. In addition, the Company agreed
to pay SASCO, as additional consideration for such modification,
eight percent (8%) of all royalties paid by Merck to the Company
under the Merck License Agreement and extended by five years the
term of warrants to purchase 64,000 shares of the Company's
Common Stock at an exercise price of $2.50 issued to SASCO under
the Company's original agreement with SASCO. Amounts paid were
expensed in 1995.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE I - SUBSEQUENT EVENT
In November 1997, the Company entered into an agreement to sell
35,000 shares of Class C 7% Preferred Stock for $3,500,000. In
accordance with the agreement, 17,500 of the shares were sold on
December 24, 1997. The Preferred Stock may be converted to
Common Stock for a period of two years at a conversion price
which is 75% of the market price of the Common Stock at the date
of conversion. Should the value of the Company Common Stock fall
substantially prior to conversion, the Preferred Stock holders
could gain a significant share of the equity of the Company upon
conversion. Upon conversion, the Preferred shareholders will
also receive warrants for the purchase of Common Stock equal to
the number of shares issued upon conversion at an exercise price
at the conversion price for three years. The securities sale
agreement also provides for an additional sale (second tranche)
of Preferred Stock of $1,750,000 if certain conditions are met.
The terms of the second tranche are similar to the first, except
that the conversion price will be 77.5% of the market price at
conversion.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
Exhibit 21
SUBSIDIARIES
------------
IRSCO Development Company, Inc. California 100%
Compumed Services, Inc. (inactive)
COMPUMED, INC.
FORM 10-KSB FOR THE PERIOD ENDED SEPTEMBER 30, 1997
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-57896 and Form S-3 No. 33-4837) and
each related Prospectus pertaining to the 1982 Stock Option Plan,
1992 Stock Option Plan, Non-Qualified Stock Option Plan
Agreements and Consultant Agreement and the registration of
960,000 shares of common stock of CompuMed, Inc., of our report
dated November 7, 1997, except for Note 1 as to which the date is
December 24, 1997 with respect to the consolidated financial
statements of CompuMed, Inc. and subsidiaries included in its
Annual Report (Form 10-KSB) for the year ended September 30,
1997, filed with the Securities and Exchange Commission.
Ernst & Young LLP
Los Angeles, California
December 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
COMPUMED, INC. FORM 10-KSB FOR THE PERIOD ENDED SEPTEMBER 30, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 81,000
<SECURITIES> 850,000
<RECEIVABLES> 247,000
<ALLOWANCES> 66,000
<INVENTORY> 55,000
<CURRENT-ASSETS> 1,260,000
<PP&E> 3,989,000
<DEPRECIATION> 3,591,000
<TOTAL-ASSETS> 1,776,000
<CURRENT-LIABILITIES> 756,000
<BONDS> 0
0
2,000
<COMMON> 90,000
<OTHER-SE> 776,000
<TOTAL-LIABILITY-AND-EQUITY> 868,000
<SALES> 1,939,000
<TOTAL-REVENUES> 1,939,000
<CGS> 65,000
<TOTAL-COSTS> 4,222,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,000
<INCOME-PRETAX> (2,214,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,214,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,214,000)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
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