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, 1998
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[ ] 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
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Commission file number 0-14210
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COMPUMED, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 95-2860434
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(State of Incorporation (I.R.S. Employer
or Organization) Identification No.)
1230 Rosecrans Avenue, Suite 1000,
Manhattan Beach, California 90266
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(Address of principal executive offices) (Zip Code)
(310) 643-5106
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(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
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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 11, 1998, 12,986,162 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 $13,000,000.
Revenues for the fiscal year ended September 30, 1998 totaled
$1,857,000.
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 1999 annual
meeting of stockholders to be filed with the Securities and
Exchange Commission on or before January 30,1999.
<PAGE>
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
CompuMed, Inc. (the "Company" or "CompuMed") is a medical
diagnostic product and services company focusing on the
diagnosis, monitoring and management of several costly, high
incidence diseases, particularly cardiovascular disease and
osteoporosis. The Company's primary business is the computer
interpretation of electrocardiograms ("ECG's") and the
development and marketing of its osteoporosis testing technology.
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 development of automated
processing functions for the Company's bone mineral density (BMD)
analysis software, the OsteoGram(R). The Company has applied for
U.S. Food and Drug Administration ("FDA") clearance to market
this software, on a stand-alone basis, to physicians and clinics
for individual use. The rights to the OsteoGram software
reverted back to the Company from Merck & Co., Inc. on March 31,
1998 (see "Merck License Agreement" below).
THE OSTEOGRAM(R)
The OsteoGram(R) is a bone density test developed by the
Company, which involves taking a standard hand x-ray of three
fingers, along with an aluminum alloy calibration wedge in the
field of view, utilizing existing and widely available standard
x-ray equipment. The OsteoGram analysis was originally delivered
as a lab service, where physicians obtain an x-ray of the
patient's hand and deliver it to the lab where the developed film
is analyzed by using proprietary software to accurately determine
bone density. The calibration wedge is used to adjust for any
differences among X-ray equipment, exposures, and types of film
and development processes. 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). The OsteoGram(R)
is approved for reimbursement by Medicare. The OsteoGram(R) can
be performed using 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 lab
facility for scanning and computer analysis. See "Merck License
Agreement".
On December 1, 1998, the Company filed a form 510(k)
application with the FDA for the proposed marketing of an
automated version of its OsteoGram software for use as a stand-
alone product by physicians. The automated OsteoGram software
utilizes a scanner and a personal computer to digitize a x-ray
film and process a bone density measurement analysis and report.
The Company is currently seeking distributors for this software
product, pending FDA clearance.
MERCK LICENSE AGREEMENT
Effective September 22, 1995, the Company entered into a
Technology License Agreement with Merck & Co., Inc. (the "Merck
License Agreement") pursuant to which Merck was granted a
perpetual, exclusive license of the OsteoGram(R). Merck offered
the OsteoGram(R) and related services to physicians on a per-test
basis and the Company received a royalty payment from Merck for
each OsteoGram(R) test sold. On January 7, 1998, the Company was
notified by Merck of a termination of the license agreement.
Royalty revenues earned under this license agreement terminated
after March 1998. During the fiscal year ended September 30,
1998 royalty revenues were $42,000, and total royalties earned
during the entire License Agreement were $197,000. The rights to
the OsteoGram(R) technology reverted back to the Company on March
31, 1998. The Company is currently incorporating this technology
into a stand-alone software product and is seeking distribution
and licensing agreements for this test.
THE OSTEOVIEW(R)
The Company has performed research and development efforts
leading to the initial design, engineering and feasibility
testing of a stand-alone bone densitometer, the OsteoView(R).
Such a device would utilize a low-dose x-ray source and a digital
detector to determine bone density from the measurement of the
fingers and the wrist. The OsteoView(R) would utilize amorphous
silicon as its detector, which produces a high-resolution digital
x-ray image. The Company is currently seeking a joint venture
partner to participate in the production engineering,
manufacturing and distribution of this device. Such a partner
has not yet been secured.
UNIVERSITY OF MASSACHUSETTS MEDICAL CENTER LICENSE AGREEMENT
On May 1, 1996, the Company entered into an Exclusive
License Agreement with the University of Massachusetts Medical
Center (UMMC) for the commercialization of certain BMD
technologies using digital detectors. 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. FDA clearance, which employ
the licensed technology of certain U.S. patents owned by UMMC.
UMMC licensed the technology to two other companies who were also
granted the rights to use the technology for bone densitometry.
The patents owned by UMMC cover the performance of bone
densitometry testing using charge-coupled diodes (CCD's) and
potentially several other types of pixilated detectors. While
the Company's early research utilized CCD detectors, the most
current research and development utilizes alternative digital
detector technologies (See "Varian Imaging Products Technology
Development Agreement" below). UMMC has applied for patent
continuations to explicitly include coverage of all pixilated
detector devices, however, there is no assurance that such a
patent continuation will be granted.
For the license agreement, the Company initially paid a $25,000
license fee during 1996, 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 would
also pay additional amounts totaling $175,000 upon the completion
of certain milestones and would 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 1998. The Company has not
paid the final installment due under a prior sponsored research
agreement with UMMC, in the amount of $25,000 and has not paid
the annual license maintenance fee due in the amount of $10,000.
Under the obligations relating to commercialization of the
licensed technology, the Company is required to file a 510(k)
application for a licensed product with the United States FDA by
December 31, 1998. The Company filed a 510(k) application on
December 1, 1998 for the automated OsteoGram software, which
would be the basis of the software contained in such a licensed
product. However, there is no assurance that UMMC will interpret
this as fulfilling the 510(k) requirement. Under the terms of
the agreement, UMMC may seek to cancel the License agreement
after December 31, 1998. The Company is currently in discussions
with UMMC about performing additional sponsored research, which
would also involve a continuation of the License Agreement.
There is no assurance that such discussions will lead to a
continuation of the License Agreement.
VARIAN IMAGING PRODUCTS TECHNOLOGY DEVELOPMENT AGREEMENT
In December 1996, the Company entered into a technology
development agreement with Varian Imaging Products (Varian)
covering Varian's amorphous silicon x-ray imaging system. 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 minimum purchases are
met. The Company made an initial payment to Varian of $65,000 for
the imaging system in December 1997, and may 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 Company is required to purchase a minimum of 25 panels
per quarter, with deliveries starting by the fourth quarter 1998,
200 panels per year with quarterly shipments starting during the
fourth quarter 1999, and 300 panels per year with quarterly
shipments starting during the fourth quarter 2000. The Company
has not placed orders for the purchase of panels and does not
anticipate purchasing panels during the next few fiscal quarters.
The Company believes that this is acceptable to Varian, and is
currently in discussions with Varian regarding the continuation
of this exclusive agreement. While management believes that
extensions under the agreement will be granted, there is no
assurance that such extensions will be granted.
OTHER OSTEOPOROSIS DETECTION AIDS
Bone mineral density measurements are the primary methods
used to assist physicians in detecting osteoporosis. Bone biopsy
is also used in isolated circumstances, however, it is rarely
used because of patient risk, pain and cost. 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, calcitonin, selective
estrogen-receptor modulators, fluoride (not yet approved in the
U.S., but widely used abroad), calcium supplements and
weight-bearing exercises.
Current FDA cleared medications for osteoporosis include the
bisphosphonate alendronate (Fosamax(R), Merck & Co, Inc.), the
female hormone estrogen in pill form (Wyeth-Ayerst and several
other manufacturers) and patch form (Novartis), the bone
metabolism hormone calcitonin, administered by injection
(Calcimar(R), Rhone-Poulenc Rorer) or nasal spray (Miacalcin(R),
Novartis), and the selective estrogen-receptor modulator
raloxifene (Evista(R), Lilly). Estrogen replacement therapy is
also approved for problems associated with menopause, such as hot
flashes and vaginal dryness.
COMPETITION
The primary competition for the Company's products include
bone densitometry devices that use x-rays or ultrasound to obtain
relative measures of bone mass and density. 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
peripheral quantitative computed tomography (pQCT), 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) has recently
received FDA clearance for sale in the U.S. and is now available
in the U.S. and abroad. QUS has recently been approved for
reimbursement by Medicare.
DEXA is currently the mostly widely used technology, with a
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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 measure bone mass and density at appendicular
sites (forearm, hand or heel). Whole-body DEXA machines cost an
average of $85,000 ($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 the Company's RA (OsteoGram/OsteoView)
technology, 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 (a Danish
subsidiary of OSI Systems, U.S.A.) are the leading manufacturers
of peripheral DEXA machines. During the fall of 1997, Schick
Technologies, Inc. introduced a peripheral device that measures a
site in the finger. Schick is believed to have sold
approximately 1,000 of these devices.
QCT utilizes existing computed tomography (CT) scanners that
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have been upgraded with specialized software, while pQCT utilized
specialized peripheral CT machines. QCT and pQCT are expensive
to perform and require a high degree of expertise to operate
properly.
QUS bone densitometers were introduced in the early 1990s,
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but their rate of market penetration has been slow. Lunar and
Hologic are leaders in the ultrasound market segment, but the
market also includes numerous regional manufacturers such as
Myriad and Sunlight (Israel), IGEA (Italy) and McCue (Great
Britain). Norland is also developing an ultrasound machine.
There are now approximately 2,500 QUS machines installed
worldwide.
Biochemical marker tests that measure the level of bone
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metabolic substances present in the blood or urine have been
introduced. There is no clear consensus yet on the appropriate
use of these technologies. Although their role in monitoring the
effect of 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. (a subsidiary of Beckman Coulter, U.S.A.).
ECG SERVICES
GENERAL
Through its ECG computer diagnostic services, the Company
currently serves approximately 1,000 health care providers
nationwide. The Company provides primary care physicians,
correctional facilities, surgery centers, clinics, institutions,
small hospitals and industrial health care facilities with
electrocardiograph (ECG) terminals, which access the Company's
centralized computers and custom software to produce on-line
ECG's and computer interpretations. When requested, the Company
also arranges for a cardiologist "overread" of the ECG, which is
a specialist's opinion regarding the computer interpretation
analysis. 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 offices, 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,
or a terminal is sold to the customer, and a per-ECG usage fee is
charged, usually over a minimum base quantity. The Company
maintains the ECG terminals as a part of the service contract,
when the units are rented, or charges either hardware maintenance
fees or repairs fees when services are performed. Approximately
50% of the new systems placed with customers involve ECG terminal
sales, including a base quantity of computer interpretations, and
approximately 50% involve rental of a terminal. When terminals
are sold, rather than rented, a higher margin amount is derived
from the initial sale than when a terminal is rented to a
customer.
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, 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 (or on-call) 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 claims based upon 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 directed primarily toward correctional facilities,
surgery centers, clinics, small hospitals, industrial health care
facilities and primary care physicians 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
selling its services, equipment and supplies. The Company's in-
house sales staff handles sales leads and the Company's customer
service representatives handle new customer installations,
primarily by telephone.
The Company currently offers several service and equipment
purchase options to new customers, including its System 507. The
System 507 is more compact and lightweight than previous
equipment models offered by the Company and it has the ability to
store multiple ECG recordings before transmitting ECG data for
processing.
COMPETITION - ECG SERVICES
The computer interpreted ECG business is made up of several
domestic companies. Most are offering ECG terminals and systems
that perform ECG analysis and interpretation on site from the
cardiograph itself, with data being stored at a central location.
The Company estimates that its form of business, centralized
computerized ECG analyses via a service bureau, constitutes less
than 1% of the total number of ECG's 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 Company believes that the
domestic ECG market is mature and expanding at a minimal rate.
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's internal customer service staff handles
customer equipment and training problems. Initial installation
and set-up is also handled by the Company's customer service
department, usually over the telephone.
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, two patent applications were filed on behalf of the Company
covering the technology underlying Detoxahol(TM). In June 1998,
one of the patents (U.S. Patent No. 5,759,539) was issued to
Georgia Research Foundation, Inc., which has been licensed to the
Company as described below. 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.
Since fiscal 1997, the Company has ceased 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 when provided as a lab
test and it is anticipated that reimbursement will be granted
when this test is performed on a stand-alone basis. Government
regulations may change at any time and Medicare reimbursement for
the OsteoGram(R) test, as well as other bone mineral density
tests, 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.
The Company's OsteoGram(R) test is subject to FDA clearance
and periodic inspection. The OsteoGram(R) currently is approved
by the FDA for use as a lab test and on December 1, 1998, the
Company filed a form 510(k) application with the FDA for the
proposed marketing of an automated version of its OsteoGram(R)
software, which will be subject to regulations as a medical
device.
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's technology involves
proprietary algorithms and software that have been developed and
refined over a 10-year period. The OsteoGram(R) trademark is a
registered trademark.
As a part of the research and license agreement with UMMC
(see University of Massachusetts Medical Center License
Agreement), 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, two patent applications were filed on behalf
of the Company covering the technology underlying Detoxahol(TM).
In June 1998, one of the patents (U.S. Patent No. 5,759,539) was
issued to Georgia Research Foundation, Inc. There can be no
assurance that the other patent application will be approved, or
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.
EMPLOYEES
At September 30, 1998, the Company had 23 full-time and 5
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. Cardiologists are retained for ECG
overreads on a per-diem basis, and management believes that such
relationships are good.
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 seek new facilities to occupy at the
expiration of its term and management believes that alternative
premises are available. This is a full service lease including
utilities, maintenance and taxes on the property, janitorial and
security service.
ITEM 3. LEGAL PROCEEDINGS
On August 5, 1996 the Company entered into a Memorandum of
Understanding to confirm the material terms of an agreement in
principle to settle the securities class action and derivative
litigation filed in the United States District Court for the
Central District of California (the "Court") on behalf of persons
who purchased Common Stock during various time periods spanning
from August 11, 1995 to October 17, 1995, inclusive and
derivatively on behalf of the Company. On January 26, 1998, the
United States District Court for the Central District of
California approved the settlement of the class action and
derivative lawsuits on the terms agreed to by the parties in the
Memorandum of Understanding. 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 the benefit of the
claimants. 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 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. 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, 1998.
<PAGE>
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") 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
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High Low
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Year ended September 30, 1997
Quarter Ended:
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December 31, 1996 $ 1.94 $ .53
March 31, 1997 1.38 .69
June 30, 1997 1.22 .50
September 30, 1997 3.09 .59
Year ended September 30, 1998:
Quarter Ended:
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December 31, 1997 $ 2.34 $ 1.34
March 31, 1998 1.50 .78
June 30, 1998 1.25 .69
September 30, 1998 .81 .34
As of December 12, 1998, there were approximately 887 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.
On November 16, 1998 the Company was notified of a potential
delisting of its securities from the Nasdaq quotation system.
The Company was provided a ninety (90) day period to regain
compliance with the minimum bid requirement of $1.00. In order
to regain compliance, shares of the Company's Common Stock must
report a closing bid price of $1.00 or greater for ten
consecutive trading days, prior to February 16, 1999.
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, 1998 AS COMPARED TO 1997
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Revenues for fiscal 1998 decreased overall by $82,000, or
4%, from fiscal 1997. This decrease is primarily due to the
elimination of the Company's cardiac event monitoring services
(TeleCor), causing a revenue decrease of $204,000 from the prior
year and the termination of OsteoGram royalty revenues, causing a
revenue decrease of $77,000 from the prior year. The TeleCor
operations were terminated in July 1997. The OsteoGram license
agreement was terminated in March 1998. Revenues from the
Company's ongoing ECG business increased overall by $199,000 in
fiscal 1998, as compared to the prior year, primarily as a result
of increased electrocardiograph sales from $146,000 in the prior
year to $395,000 in 1998.
Costs of ECG services increased by $70,000 during fiscal
1998 from those in fiscal 1997. Such increases were primarily a
result of increased purchases of parts and supplies for
refurbishment of electrocardiographs, so that the units could be
placed with new customers, and to increased salaries as a result
of the transfer of a staff member from research and development
to ECG operations (technical support). Cost of sales for fiscal
1998 were $226,000, or an average of 57% of product sales
revenues. Selling costs decreased by 41% ($131,000 decrease)
during fiscal 1998 as a result of the elimination of marketing
costs associated with the TeleCor monitoring services that were
terminated during the prior year. There were no operating costs
relating to the TeleCor monitoring services, as compared to
$219,000 during the prior year. Research and development costs
decreased by $204,000 during fiscal 1998 primarily as a result of
reduced consulting and contract research expenditures paid to
outside parties, and to reductions in purchases of supplies.
General and administrative expenses decreased during fiscal 1998
by $329,000 (21%) primarily as a result of reduced staffing,
consulting fees and insurance costs. During the prior fiscal
year 1997, the Company incurred $54,000 in expenses relating to
the securities litigation (see Item 3. Legal Proceedings). During
fiscal 1998 an additional $7,000 of legal costs were accrued.
Other income includes a revised estimate of an accrual for
certain contengencies amounting to $225,000. It was deemed in
the current year that the accrual was no longer necessary.
The net loss of $1,333,000 is primarily a result of research
and development costs associated with the development of the
OsteoGram software and to the general and administrative costs of
the Company including those corporate costs relating to the
requirements of a public company. Future research and development
costs and corporate costs are anticipated to result in continued
losses during the next fiscal year.
The sales of Class C Convertible Preferred Stock involved a
beneficial conversion feature whereby the securities may be
converted into Common Stock at a fixed discount to the market
price of the Common Stock at the date of conversion. The Series
1 Class C Preferred Stock provides for a discount of 25% and the
Series 2 Class C Preferred Stock provides for a discount of 20%
(or 22.5% if the Company receives full payment for such shares
prior to December 31, 1998). The total amount of the beneficial
conversion feature, in the amount of $794,000 has been accounted
for as a dividend to the preferred shareholders at issuance. The
amount of this deemed dividend has been added to the net loss in
determining loss per share during the year ended September 30,
1998. The value of the beneficial conversion feature is measured
by the difference between the conversion price and the market
value of the Common Stock on the date of issuance multiplied by
the number of shares into which the Preferred Stock may be
converted.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
At September 30, 1998, the Company had approximately
$2,833,000 in cash and marketable securities, as compared to a
balance of $931,000 at September 30, 1997. The net increase in
cash and marketable securities during fiscal 1998 of $1,902,000
is primarily due to the placement in December 1997 and March 1998
of Class C Preferred Stock, with net proceeds of approximately
$3,300,000, which was partially offset by losses from operations,
prior to depreciation and amortization expense.
The Company's primary capital resource commitments at
September 30, 1998 consist of capital and operating lease
commitments, primarily for computer equipment and for facilities.
Management estimates that present working capital amounts will be
sufficient for at least the next 12 months, based upon current
capital utilization rates.
Pending the FDA approval of the automated OsteoGram
software, the Company will commence the marketing and sale of
this software. The Company is seeking distributors to sell this
software and has not estimated the costs of marketing materials
and advertising that are associated with this product, a portion
of which may be borne by the distributor. There is no assurance
that such a distributor will be secured, or that there will be
wide market acceptance for this product.
The Company's ongoing research and development activities
associated with the OsteoGram bone densitometry software and the
current repair and refurbishment of its ECG terminals are all
subject to federal, state and local regulations. 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. Should the Company find a partner, the
regulatory approval process for the Company's Detoxahol(TM)
technology can take years and require expenditure of substantial
resources.
The Company is seeking potential business acquisitions or
joint venture opportunities with businesses that would be
complementary to its own. Should such opportunities arise, the
funding for such transactions would be derived from the working
capital of the Company along with issuances of equity and/or debt
instruments of the Company. There is no assurance that such
transactions will occur.
IMPACT OF THE YEAR 2000
-----------------------
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that
have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the Year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar
normal business activities.
Based on a recent assessment, the Company determined that its
computer systems will function properly with respect to dates in
the year 2000 and thereafter. The Company has determined it has
no exposure to contingencies related to the Year 2000 Issue for
the products it has sold.
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 that 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 that
could cause actual results or outcomes to differ materially from
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 and (iii) statements made in Item 1 under the
caption "GOVERNMENT REGULATION" that the OsteoGram 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.
<PAGE>
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 . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of
September 30, 1998 . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations
for the years ended September 30,
1998 and 1997 . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders'
Equity for the years ended September
30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows
for the years ended September 30,
1998 and 1997 . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . F-8
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
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 30,
1999 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]
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
-------- ----------------------
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)]
4.7 Certificate of Designation of Class C 7% Convertible
Preferred Stock [incorporated by reference to Exhibit 3.1 to
the Company's Form 8-K for an event of December 24, 1997].
4.8 Certificate of Correction for the Class C 7% Convertible
Preferred Stock [incorporated by reference to Exhibit 3.2 to
the Company's Form 8-K for an event of December 24, 1997}
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)]
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
-------- ----------------------
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 Form of Securities Purchase Agreement for sale of Class C 7%
Convertible Preferred Stock [incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K for an event of
December 24, 1997].
10.7 Registration Rights Agreement [incorporated by reference to
Exhibit 10.3 to the Company's Form 8-K for an event of
December 24, 1997].
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]
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
-------- ----------------------
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 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 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 [Incorporated by
reference to Exhibit 10.17 to the Company's Annual
Report on form 10-KSB for fiscal year 1996 (the "1996
Form 10-KSB")].
10.18 Exclusive License Agreement, effective as of May 1,
1996, between UMMC and the Company [Incorporated by
reference to Exhibit 10.18 to the Company's 1996 Form
10-KSB].
10.19 Evaluation and Development Agreement between Varian
Associates and the Company dated December 10, 1996
[Incorporated by reference to Exhibit 10.19 to the
Company's 1996 Form 10-KSB].
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 [Incorporated by reference to Exhibit 10.20
to the Company's 1996 Form 10-KSB].
10.21 Settlement Agreement and General Release, effective
September 15, 1996, between the Company and Howard L.
Mark, M.D. [Incorporated by reference to Exhibit 10.21
to the Company's 1996 Form 10-KSB].
10.22 Settlement Agreement and General Release, effective
August 1, 1996 between the Company and Mark C. Branigan
[Incorporated by reference to Exhibit 10.22 to the
Company's 1996 Form 10-KSB].
10.23 Commercial Office Lease, dated August 30, 1996, between
the Company and USAA Income Properties III Limited
Partnership [Incorporated by reference to Exhibit 10.23
to the Company's 1996 Form 10-KSB].
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
-------- ----------------------
21 Subsidiaries of the Company
23* Consent of Ernst & Young LLP
____________________________________
* Filed herewith.
B. REPORTS ON FORM 8-K
None.
<PAGE>
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 23, 1998
----------------------------
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 December 23, 1998
James Linesch Financial
Officer
/s/ Robert B. Goldberg
--------------------- Chairman of December 23, 1998
Robert B. Goldberg the Board
/s/ John D. Minnick
--------------------- Director December 23, 1998
John D. Minnick
/s/ Robert Stuckelman
--------------------- Director December 23, 1998
Robert Stuckelman
--------------------- Director December , 1998
Herbert Lightstone
<PAGE>
COMPUMED, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of
September 30, 1998 . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended
September 30, 1998 and 1997 . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for
the years ended September 30, 1998 and 1997 . . . . . . . . F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 1998 and 1997 . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . F-8
<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, 1998, and the
related consolidated statements of operations, stockholders'
equity, and cash flows for each of the two years in the period
ended September 30, 1998. 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, 1998, and the consolidated results of their
operations and their cash flows for each of the two years in the
period ended September 30, 1998, in conformity with generally
accepted accounting principles.
/s/Ernst & Young LLP
Los Angeles, California
November 20, 1998
<PAGE>
CONSOLIDATED BALANCE SHEET
COMPUMED, INC. AND SUBSIDIARIES
ASSETS
September 30,
1998
-----------
CURRENT ASSETS
Cash $ 51,000
Marketable securities 2,782,000
Accounts receivable, less allowance of $39,000
214,000
Inventory 36,000
Prepaid expenses and other current assets 27,000
-----------
TOTAL CURRENT ASSETS 3,110,000
PROPERTY AND EQUIPMENT - Note A
Machinery and equipment 1,758,000
Furniture, fixtures and leasehold
improvements 138,000
Equipment under capital leases 796,000
----------
2,692,000
Less allowance for depreciation and
amortization 2,374,000
----------
318,000
OTHER ASSETS
Other assets 22,000
----------
$3,450,000
==========
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED BALANCE SHEET
COMPUMED, INC. AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY September 30,
1998
-------------
CURRENT LIABILITIES
Accounts payable $ 101,000
Accrued liabilities 222,000
Current portion of capital lease
obligations-Note E 130,000
----------
TOTAL CURRENT LIABILITIES 453,000
CAPITAL LEASE OBLIGATIONS, less current
portion-Note E 112,000
COMMITMENTS AND CONTINGENCIES-Notes E and G
STOCKHOLDERS' EQUITY-Note C
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 - 300 shares -
Class C 7% convertible preferred stock,
issued and outstanding 11,650 shares 946,000
Common stock, $.01 par value--authorized
50,000,000 shares, issued and
outstanding- 12,540,102 125,000
Additional paid in capital 29,539,000
Retained deficit (27,726,000)
-------------
STOCKHOLDERS' EQUITY 2,885,000
-------------
$ 3,450,000
=============
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
COMPUMED, INC. AND SUBSIDIARIES
Year Ended September 30,
1998 1997
---- ----
REVENUES
ECG services $1,420,000 $1,470,000
ECG product and supplies sales 395,000 146,000
Cardiac event monitoring services -0- 204,000
OsteoGram royalty income 42,000 119,000
------------ ------------
1,857,000 1,939,000
COST AND EXPENSES
Cost of ECG services 990,000 920,000
Cost of goods sold 226,000 65,000
Cost of cardiac event monitoring
services -0- 219,000
Selling expenses 187,000 318,000
Research and development 537,000 741,000
General and administrative expenses 1,263,000 1,592,000
Depreciation and amortization 285,000 367,000
------------ ------------
3,488,000 4,222,000
Interest income 109,000 92,000
Other income Note I 225,000 -0-
Interest expense (36,000) (23,000)
NET LOSS $(1,333,000) $(2,214,000)
============ ============
NET LOSS PER SHARE $ (.19) $ (.25)
------------ ------------
Weighted average number of common
shares outstanding 10,912,240 8,965,045
============ ============
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMPUMED, INC. AND SUBSIDIARIES
Additional
Preferred Common Paid in
Stock Stock Capital
--------- ------ ----------
Balance at September 30, 1996: $ 2,000 $89,000 $27,036,000
Conversion of 1933 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 48,000
Securities issued and reserved
for issuance relating to MB
antidulition provision 85,000
Dividends paid on Class A
Preferred Stock
Net Loss ---------- -------- -----------
Balances at September 30,
1997: 2,000 90,000 27,169,000
Conversion of 100 shares of
Class B Preferred Stock to
1,000 shares of Common Stock (1,000) 1,000
Proceeds from issuance of
69,064 shares of Common Stock
Upon exercise of stock
options 1,000 69,000
Proceeds from issuance of
35,000 shares of Class C
Preferred Stock, net of
expenses 2,487,000 794,000
Deemed Dividend on beneifical
conversion feature of
Convertible Preferred Stock 794,000 (794,000)
Conversion of 23,350 shares of
Class C Preferred Stock to
3,294,182 shares of Common
Stock (2,335,000) 34,000 2,301,000
Dividends paid on Class A
Preferred Stock (1,000)
Net Loss ---------- -------- -----------
Balances at September 30,
1998: $947,000 $125,000 $29,539,000
========== ======== ===========
Retained
Deficit Total
--------- -----
Balance at September 30, 1996: $(24,169,000) $2,958,000
Conversion of 1933 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 49,000
Securities issued and reserved
for issuance relating to MB
antidulition provision 85,000
Dividends paid on Class A
Preferred Stock (10,000) (10,000)
Net Loss (2,214,000) (2,214,000)
------------ ----------
Balances at September 30,
1997: (26,393,000) 868,000
Conversion of 100 shares of
Class B Preferred Stock to
1,000 shares of Common Stock -0-
Proceeds from issuance of
69,064 shares of Common Stock
Upon exercise of stock
options 70,000
Proceeds from issuance of
35,000 shares of Class C
Preferred Stock, net of
expenses 3,281,000
Deemed Dividend on beneifical
conversion feature of
Convertible Preferred Stock -0-
Conversion of 23,350 shares of
Class C Preferred Stock to
3,294,182 shares of Common
Stock -0-
Dividends paid on Class A
Preferred Stock (1,000)
Net Loss (1,333,000) (1,333,000)
------------ ----------
Balances at September 30,
1998: $(27,726,000) $2,885,000
============ ==========
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMPUMED, INC. AND SUBSIDIARIES
Year Ended September 30,
1998 1997
---- ----
OPERATING ACTIVITIES:
Net loss $(1,333,000) $(2,214,000)
Net adjustments to reconcile net
loss to net cash used in operating
activities:
Depreciation and amortization 285,000 367,000
Expense recognized for securities
issued -0- 85,000
Changes in operating assets and
liabilities:
Accounts receivable 33,000 188,000
Inventory and prepaid expenses 19,000 93,000
Accounts payable and other
liabilities (352,000) (236,000)
Other assets -0- 7,000
------------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,348,000) (1,710,000)
------------- -----------
INVESTING ACTIVITIES:
Sale of marketable securities -0- 1,639,000
Purchase of marketable securities (1,932,000) -0-
Sales of property, plant and
equipment -0- 30,000
Purchases of property, plant and
equipment (3,000) (20,000)
------------- -----------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES (1,935,000) 1,649,000
FINANCING ACTIVITIES:
Proceeds from sale of Class C
Preferred Stock, net 3,281,000 -0-
Dividends on Class A Preferred Stock (1,000) (10,000)
Principal payments on capital lease
obligations (97,000) (52,000)
Exercise of stock options and
warrants 70,000 49,000
------------- ------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 3,253,000 (13,000)
------------- -----------
DECREASE IN CASH (30,000) (74,000)
Cash at beginning of year 81,000 155,000
------------- -----------
CASH AT END OF YEAR $ 51,000 $ 81,000
============= ===========
Cash paid for interest $ 36,000 $23,000
============= ===========
During 1998 and 1997 computer and office equipment were acquired
under capital lease obligations for
$106,000 and $176,000 respectively.
See notes to consolidated financial statements
<PAGE>
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 it's
wholly-owned subsidiary (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 diagnostic tests and in the rental and
sale of ECG equipment and supplies. 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, the Company is developing technologies for
the measurement of bone mineral density (BMD) for the diagnosis
and treatment of osteoporosis. The Company has developed
automated BMD tests using a digitized radiograph of three fingers
as compared to a radiograph of a calibrated aluminum wedge.
Inventory: Inventory consists of ECG terminals, component parts,
----------
ECG medical supplies and starter kits for the Company's OsteoGram
service. 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 3 to 5 years
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. 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.
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,
1998.
Per Share Data: 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE A-BASIS OF PRESENTATION SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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 has
adopted this new standard in the fiscal year 1998 financial
statements.
Basic loss per share is calculated using the net loss, less
preferred stock dividends and the value of beneficial conversion
features that have become exercisable, divided by the weighted
average common shares outstanding. Shares from the assumed
conversion of outstanding warrants, options and effect of the
conversion of the Class A Preferred Stock, Class B Preferred
Stock and Class C Preferred Stock are omitted from the
computations of diluted loss per share because the effect would
be antidilutive.
The sales of Class C Convertible Preferred Stock involved a
beneficial conversion feature whereby the securities may be
converted into Common Stock at a fixed discount to the market
price of the Common Stock at the date of conversion. The Series
1 Class C Preferred Stock provides for a discount of 25% and the
Series 2 Class C Preferred Stock provides for a discount of 20%
(or 22.5% if the Company receives full payment for such shares
prior to December 31, 1998). The total amount of the beneficial
conversion feature, in the amount of $794,000 has been accounted
for as a dividend to the preferred shareholders at issuance. The
amount of this deemed dividend has been added to the net loss in
determining loss per share during the year ended September 30,
1998. The value of the beneficial conversion feature is measured
by the difference between the conversion price and the market
value of the Common Stock on the date of issuance multiplied by
the number of shares into which the Preferred Stock may be
converted.
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 or 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.
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been
reclassified to conform with the 1998 classification.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE A-BASIS OF PRESENTATION SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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, 1998 and 1997, no single customer accounted for more than 10%
of the Company's net revenues.
NOTE B-INCOME TAXES
At September 30, 1998, the Company has available for federal
income tax purposes, net operating loss carryforwards of
approximately $16,880,000, which expire between 1998 and 2013.
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, 1998 and 1997 are as follows:
Deferred tax liabilities: 1998 1997
------------ ------------
Property and Equipment $(12,000) $(72,000)
Deferred tax assets:
Account receivable
allowance 26,000 29,000
Accrued expenses 18,000 20,000
Tax credits 9,000 9,000
Net operating loss
carryforwards 6,255,000 5,890,000
----------- -----------
Total deferred tax assets 6,308,000 5,948,000
Valuation allowance for
deferred tax assets (6,296,000) (5,876,000)
----------- -----------
Net deferred tax assets 12,000 72,000
Total $ 0 $ 0
========== ==========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE C-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.
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. During Fiscal
1998, 24,621 shares of Common Stock were issued to the other MB
shareholder in accordance with the Agreement. The value of these
shares had been accrued prior to Fiscal 1997, so the issuance of
the shares offset the accrued liability.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE C-STOCKHOLDERS' EQUITY (CONTINUED)
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 certain 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, 1998, 100 shares of
Class B stock were converted to 1,000 shares of Common Stock. A
total of 3,000 shares of Common Stock are currently issuable upon
conversion of the remaining 300 shares of Class B Preferred
Stock.
Class C Convertible Preferred Stock: On December 24, 1997, the
-----------------------------------
Company closed the placement of 17,500 shares of Series 1 Class C
7% Convertible Preferred Stock (the "Series C-1 Preferred Stock")
at a price of $100 per share, or an aggregate purchase price of
$1,750,000 pursuant to Securities Purchase Agreements. The
Series C-1 Preferred Stock is immediately convertible into shares
of the Company's Common Stock at a conversion ratio equal to $100
divided by the lesser of (i) $1.51 or (ii) 75% of the average
closing bid price for the ten consecutive trading days prior to
the notice of conversion. In the event that the closing bid
price of the Common Stock is less than $1.00 per share on the
trading day immediately preceding the receipt of a conversion
notice, the holder
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE C-STOCKHOLDERS' EQUITY (CONTINUED)
requesting conversion would be limited to converting not more
than 5% of the shares he initially purchased, which limitation
would continue for a period of 30 days. The Company has the
right to force conversion of any or all outstanding Series C-1
Preferred Stock on November 30, 1999 at the conversion ratio on
that date. There is no minimum conversion price. Should the
value of the Common Stock fall substantially prior to conversion,
the holders of the Preferred Stock could obtain a significant
share of the Common Stock upon their conversions. Upon
conversion of the Series C-1 Preferred Stock, the holder would
receive warrants (the "Warrants") to purchase the same number of
shares of Common Stock as being issued on the conversion, at an
exercise price equal to the conversion price and exercisable for
three years from issuance. The Securities Purchase Agreements
also provided for the issuance of 17,500 shares of Series 2 Class
C 7% Convertible Preferred Stock (the "Series C-2 Preferred
Stock" and together with the Series C-1 Preferred Stock, the
"Class C Preferred Stock"). The Series C-2 Preferred Stock is
identical to the Series C-1 Preferred Stock except that the
conversion ratio is equal to $100 divided by the lessor of (i)
$1.34 or (ii) 80% of the average closing bid price for the ten
consecutive trading days prior to the notice of conversion (or
77.5% if the Company received full payment for such shares prior
to December 31, 1998). In addition, the Company has the right to
force conversion on December 31, 1999. On January 22, 1998, the
Company sold an additional 8,750 shares of such Series C-2
Preferred Stock for $875,000 and, on March 31, 1998, the Company
sold an additional 8,750 shares of such Series C-2 for $875,000.
As a condition to the initial closing of the placement of the
Class C Preferred Stock, the Company entered into a Registration
Rights Agreement with each purchaser whereby the Company agreed
to file a registration statement under the Securities Act of 1933
with the Securities and Exchange Commission registering for offer
and sale the Common Stock underlying the Class C Preferred Stock
and Warrants. The registration statement was deemed effective on
February 6, 1998.
The net proceeds from the placement of the Series C Preferred
Stock were approximately $3,281,000 after payment of a 4% fee to
the distributor and other placement expenses.
During the fiscal year ended September 30, 1998, Class C
shareholders converted 23,350 shares of Class C preferred stock
into 3,294,182 shares of Common Stock. At September 30, 1998,
there were 11,650 shares of Class C Preferred Stock outstanding,
including 6,100 shares of Series 1 and 5,550 shares of Series 2.
See NOTE J SUBSEQUENT EVENT.
NOTE D STOCK OPTIONS AND WARRANTS
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE D- STOCK OPTIONS AND WARRANTS (CONTINUED)
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.
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
1998 and 1997.
A summary of the Company's stock option activity, and related
information for the years ended September 30 follows:
1998 1997
-----------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ --------- ------ ---------
Options
outstanding,
beginning of year 1,192,617 1.18 974,978 1.28
Options exercised (69,064) 1.00 (48,121) 1.00
Options granted 388,500 1.53 270,000 .76
Options
forfeited/canceled (222,628) 1.03 (4,240) .79
--------- ---------
Options
outstanding, end
of year 1,289,425 1.32 1,192,617 1.18
========= =========
Exercisable at end
of year 1,042,023 1.38 738,765 1.23
========= =========
The weighted average remaining contract life of the stock options
was 4.0 years as of September 30, 1998. The exercise prices for
options outstanding at September 30, 1998 ranged from $.75 to
$4.25.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE D- STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants: At September 30, 1998, the Company had the following
---------
warrants outstanding for the purchase of its common stock:
Number of
Expiration Shares Exercise
Description Date Issuable Price
----------- ---------- --------- --------
Secondary Offering August 1999 647,170 $3.75
SASCO September 2000 147,000 $2.50
First Geneva Holdings December 1999 200,000 $1.10
Other August 1999 22,000 $3.75
----------
Total warrants
outstanding 1,016,170
----------
Upon conversion of the Series C-1 Preferred Stock, the holder
will receive warrants to purchase the same number of shares of
Common Stock as being issued on the conversion, at an exercise
price equal to the conversion price and exercisable for three
years from issuance. Based on the conversion rates experienced
through September 30, 1998, warrants for the purchase of
approximately 5,000,000 shares of Common Stock could be issued at
average prices of approximately $0.71 per share.
On December 24, 1997, the Company issued warrants (the "1995
Warrants") exercisable for the purchase of 200,000 shares of its
Common Stock at an exercise price of $1.10 per share, until
December 1, 1999, related to certain placements effected by the
Company in 1995 and 1996. The shares of Common Stock underlying
the 1995 Warrants were also included in the registration
statement filed pursuant to the Registration Rights Agreement.
NOTE E - COMMITMENTS
The Company has capital leases for computer and office equipment
that expire through 2001 and has a noncancelable operating lease
for a facility expiring in August 1999 which is included in the
operating lease amounts below. The following is a summary as of
September 30, 1998 of future minimum lease payments together with
the present value of the net minimum lease payments on capital
leases:
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE E - COMMITMENTS (CONTINUED)
Capital Operating
Year ending September 30 Leases Leases
------- ---------
1999 $165,000 $210,000
2000 108,000 -0-
2001 15,000 -0-
2002 -0- -0-
---------- --------
Total minimum lease payments $288,000 $210,000
========
Less amount representing interest 46,000
----------
Net minimum lease payments $242,000
Less current portion 130,000
----------
Present value of net minimum
payments, less current portion $ 112,000
==========
Included in accumulated depreciation and amortization at
September 30, 1998 is $520,000 related to capital leases.
Amortization of capital leases is included in depreciation and
amortization expense. Rental expense under operating leases was
$234,000 (1998) and $233,000 (1997).
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 digital applications
of its bone mineral density analysis technology. 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 1998.
Under the terms of the research agreement with UMMC, the Company
has sponsored research during a two-year period that focused on
digital bone densitometry measurement techniques integrating the
Company's proprietary software. The Company agreed to 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, which
terminated in May 1998. During fiscal 1998, total payments of
$12,500 were made under this agreement. The Company has not
extended the research agreement at this time.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
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, were $8,000 and $8,000 in fiscal 1998 and
1997, respectively.
NOTE G - CONTINGENCIES
On August 5, 1996 the Company entered into a Memorandum of
Understanding to confirm the material terms of an agreement in
principle to settle the securities class action and derivative
litigation filed in the United States District Court for the
Central District of California (the "Court") on behalf of persons
who purchased Common Stock during various time periods spanning
from August 11, 1995 to October 17, 1995, inclusive and
derivatively on behalf of the Company. On January 26, 1998, the
United States District Court for the Central District of
California approved the settlement of the class action and
derivative lawsuits on the terms agreed to by the parties in the
Memorandum of Understanding. 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 Company
additionally will 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
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. On January 7, 1998, the Company was notified of a
termination of the license agreement. Revenues earned under this
license agreement terminated after March 1998. During the fiscal
year ended September 30, 1998 royalty revenues were $42,000. The
rights to the OsteoGram technology reverted back to the Company
on
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE H - MERCK LICENSE (CONTINUED)
March 31, 1998. The Company is currently incorporating this
technology into a software product and is seeking distribution
and licensing agreements for this test.
NOTE I OTHER INCOME
Other income includes a revised estimate of an accrual for
certain contengencies amounting to $225,000. It was deemed in
the current year that the accrual was no longer necessary.
NOTE J SUBSEQUENT EVENT
In October, and November, the Company received notices of
conversion of Class C Preferred Stock in the total amount of
1,812.5 shares and subsequently issued a total of 446,060 shares
of Common Stock.
<PAGE>
COMPUMED, INC.
FORM 10-KSB FOR THE PERIOD ENDED SEPTEMBER 30, 1998
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
-------- ----------------------
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
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. 333-44805) 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
6,394,690 shares of common stock of CompuMed, Inc., of our report
dated November 20, 1998, 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, 1998, filed with the Securities and Exchange Commission.
Ernst & Young LLP
Los Angeles, California
December 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 51,000
<SECURITIES> 2,782,000
<RECEIVABLES> 214,000
<ALLOWANCES> 39,000
<INVENTORY> 36,000
<CURRENT-ASSETS> 3,110,000
<PP&E> 2,692,000
<DEPRECIATION> 3,734,000
<TOTAL-ASSETS> 3,450,000
<CURRENT-LIABILITIES> 453,000
<BONDS> 0
0
947,000
<COMMON> 125,000
<OTHER-SE> 1,813,000
<TOTAL-LIABILITY-AND-EQUITY> 2,885,000
<SALES> 1,857,000
<TOTAL-REVENUES> 1,857,000
<CGS> 226,000
<TOTAL-COSTS> 3,262,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,000
<INCOME-PRETAX> (1,333,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,333,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,333,000)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
