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, 1999
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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 or Organization) (I.R.S. Employer Identification No.)
5777 WEST CENTURY BLVD., SUITE 1285, LOS ANGELES, CA 90045
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(Address of principal executive offices) (Zip Code)
(310) 258-5000
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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 September 30, 1999, 16,613,486 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 $13,955,000. . Revenues for the fiscal year ended September 30,
1999 totaled $2,325,000.
Documents incorporated by reference: None
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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
development and marketing of its osteoporosis testing technology and the
computer interpretation of electrocardiograms ("ECG's"). 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). In May
1999, the Company received 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 Company is currently performing pre-marketing testing and is
improving the user functions before the market introduction, which is planned
during fiscal 2000.
THE OSTEOGRAM(R)
The Osteogram(R) is a bone density test developed by the Company that
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 the
Company's 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 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
<PAGE>
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.
In May 1999, the Company gained clearance from the FDA to market 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 completing refinements to the functionality
of this product and plans to commence marketing activities during the fiscal
year 2000.
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 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
that employ the licensed technology of certain U.S. patents owned by UMMC. The
patents owned by UMMC cover the performance of bone densitometry testing using
charge-coupled diodes (CCD's). The Company determined that the licensed
technology was not directly related to its current technology and marketing
emphasis, so the License Agreement was mutually terminated in October 1999.
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 were met. The Company has not placed
orders for the purchase of panels and the agreement expired under its own terms
during the fiscal year 1999.
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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, Rhone-Poulenc Rorer) or nasal spray (Miacalcin,
NovartisAG), and the selective estrogen-receptor modulator raloxifene (Evista,
Eli 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. Digital X-ray radiogrammetry (DXR) was
introduced in 1998, a technique using a combination of radiogrammetry and
texture analysis. 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.
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DEXA is currently the mostly widely used technology, with a worldwide
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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 8,000 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, and Norland Medical Systems, Inc. (U.S.A.), with
under 10% of the market. The leading manufacturers of peripheral DEXA machines
are Norland, Osteometer (a Danish subsidiary of OSI Systems, U.S.A.), and Schick
Technologies, Inc. Schick has introduced a peripheral device that measures a
site in the finger.
QCT utilizes existing computed tomography (CT) scanners that have been
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upgraded with specialized software, while pQCT utilizes 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, but their
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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.
DXR was introduced to European markets in 1998 and gained approval for
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marketing in the US in 1999. Pronosco A/S (Denmark) manufactures the X-posure
system, consisting of a PC, an X-ray digitizer (scanner), a printer and
software. Pronosco has recently announced an alliance with GE Medical Systems
for the distribution of its product.
Biochemical marker tests that measure the level of bone metabolic
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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.).
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ECG SERVICES
GENERAL
Through its ECG computer diagnostic services, the Company currently
serves approximately 1,000 point-of-care sites 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. The rental
contracts usually include a minimum base quantity of ECG's. The Company
maintains the ECG terminals as a part of the service contract when the units are
rented. If the customer owns an ECG terminal, the Company charges either
hardware maintenance fees or repair fees for maintaining and repairing the
equipment. Approximately 50% of the new systems placed with customers involve
ECG terminal sales, and approximately 50% involve rental of a terminal.
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 prior liability insurance policy has 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
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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. During the fiscal year 1999, the Company
commenced insurance coverage for such claims.
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 50% of this service bureau market.
Its major competitor, Global Data Exchange, Inc. has about 30% and several
smaller companies share the balance of the market. The overall domestic ECG
market is mature and expanding at a minimal rate, however, the Company believes
that the demand for the centralized ECG services that it provides is increasing
at a strong rate due to the trend toward decentralized diagnostic testing with
central interpretation and data storage. The principal methods under which the
Company competes are service, ease of use and price.
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ASSEMBLY, REPAIR AND CUSTOMER SERVICE
The Company repairs and maintains most of the electrocardiographs
rented or sold 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 periodic
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.
DETOXAHOLO(TM)
In March 1994, the Company acquired the rights to a potential new
pharmaceutical product called DetoxaholO 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 DetoxaholO. 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. DetoxaholO is
a substance intended to facilitate the rapid lowering of blood alcohol of people
who have been drinking alcohol. Pursuant to the Detoxahol License Agreement, the
Company has received an exclusive, perpetual, worldwide license to use, make and
sell any DetoxaholO 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 DetoxaholO 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 DetoxaholO
patent. During fiscal 1999, $2,500 was paid for such costs.
Since fiscal 1997, the Company has ceased developing the DetoxaholO
technology and there is no assurance that the Company will commence development
in the future or that if any DetoxaholO 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
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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 the automated version of its Osteogram(R) software will be
subject to regulations as a medical device.
PATENTS AND PROPRIETARY RIGHTS
The Company currently does not have any patents for the Osteogram(R) as
it maintains 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. In November 1999, the Company filed
for patent protection covering certain aspects of its software design. The
Osteogram(R) trademark is a registered trademark.
EMPLOYEES
At September 30, 1999, the Company had 25 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 corporate office and warehouse facilities are located in
9,496 square feet in an office building located at 5777 West Century Blvd., Los
Angeles, CA 90045. This facility is leased through August 2004 at a monthly
rental of $9,577 per month during the first year with 3% annual increases in the
ensuing lease years. The lease gives the Company the option to extend the term
for an additional five years. This is a full service lease including utilities,
maintenance and taxes on the property, janitorial and security service. The
Company also occupies 1,582 square feet for its central computer center located
at 1230 Rosecrans Avenue, Manhattan Beach, California 90266. The space is
rented, on a month-to-month basis, for $3,559 per month. The Company intends to
move its computer center to the corporate office location during the fiscal year
2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation proceeding.
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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, 1999.
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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") over-the-counter bulletin board
under the symbol "CMPD.OB". 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
Year ended September 30, 1998: ------------
Quarter Ended: High Low
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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
Common Stock
Year ended September 30, 1999: ------------
Quarter Ended: High Low
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December 31, 1998 $ 1.25 $ .34
March 31, 1999 .75 .38
June 30, 1999 4.03 .38
September 30, 1999 2.06 .75
As of September 30, 1999, there were approximately 883 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 April 22, 1999 an oral hearing was held before a Nasdaq Listing
Qualifications Panel (the "Panel") to make a determination regarding the
Company's request for continued inclusion on the Nasdaq SmallCap Market. The
Company had been notified of potential delisting actions due to its inability to
meet the $1.00 per share minimum bid price requirement for continued listing on
the Nasdaq SmallCap Market. The Panel also expressed concerns with respect to
the Company's marginal compliance with the net tangible assets requirement and
its ability to meet this requirement in the future.
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On July 19, 1999, the Company was granted a temporary exception from
its prior inability to meet the minimum bid price standard, subject to its
meeting certain conditions. On October 13, 1999, the exception conditions were
amended to apply increased requirements regarding the minimum bid price
requirement. On December 1, 1999, the Company was notified by Nasdaq that it had
not met the minimum bid price requirement for a sufficient duration and the
Company's common stock was delisted from the SmallCap exchange on that date. The
securities of the Company were immediately eligible to trade on the OTC Bulletin
Board. The Company intends to appeal this delisting with Nasdaq.
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, 1999 AS COMPARED TO 1998
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Revenues for fiscal 1999 increased overall by $468,000, or 25%, from
fiscal 1998. This increase is primarily due to increased electrocardiograph
sales from $395,000 in the prior year to $923,000 in 1999, which resulted from
the successful marketing and promotion of the Company's products.
Cost of sales for fiscal 1999 were $471,000, or 51% of product sales
revenues, as compared to $226,000, or 57% of product sales revenues during the
prior year. The decrease in cost of goods sold, as a percentage of sales, is due
to lower costs of products, resulting from purchasing in higher volumes of
units. Selling costs increased by 71% to $320,000 due to sales commissions paid
on product sales and customer rental agreement placements and to increased
advertising and promotion, including tradeshow attendance.
General and administrative expenses decreased during fiscal 1999 by
$179,000, representing a 14% decrease, primarily as a result of reduced
compensation costs, consulting fees, legal costs and public relations and
reporting costs. Research and development costs decreased by $173,000 to
$364,000 during fiscal 1999 primarily as a result of reduced consulting and
contract research expenditures paid to outside parties.
Other income in fiscal 1998 included a one-time revised estimate of an
accrual for certain contingencies amounting to $225,000.
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The net loss of $1,041,000 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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
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At September 30, 1999, the Company had approximately $2,643,000 in cash
and marketable securities, as compared to a balance of $2,833,000 at September
30, 1998. The net decrease in cash and marketable securities during fiscal 1999
of $190,000 is primarily due to losses from operations, prior to depreciation
and amortization expense, which have been offset by the exercise of Class C
Preferred Stock warrants and stock options with net proceeds of approximately
$1,165,000.
The Company's primary capital resource commitments at September 30,
1999 consist of capital and operating lease commitments, primarily for computer
equipment and for facilities. The Company has ordered a new computer system,
which will replace its central ECG-management system, for a cost of
approximately $125,000. Management estimates that present working capital
amounts will be sufficient for at least the next 12 months, based upon current
capital utilization rates.
The Company is planning to commence marketing of its automated
OsteoGram software during fiscal 2000. To the degree that initial marketing and
distribution costs exceed the revenues derived from sales of its software, the
Company may sustain initial losses from sales.
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 DetoxaholO 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, or that any issuance of equity securities would not be dilutive to
current stockholders.
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IMPACT OF THE YEAR 2000
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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.
As part of the Company's compliance program, formal communications with
customers, suppliers and other support service providers have been initiated. To
date, the Company is not aware of any supplier or subcontractor with a Year 2000
issue that would materially affect the Company's results of operations,
liquidity or capital resources. The Company will continue to monitor the Year
2000 compliance of third parties with which it does business.
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 believes that it does not have material exposure to
contingencies related to the Year 2000 Issue for the products it has sold.
While the Company currently expects that the Year 2000 Issue will not
pose significant operational problems, a failure to identify all Year 2000
dependencies in the Company's systems and the systems of its suppliers and
customers could have material adverse consequences, including inability to take
customer orders, ship products, invoice customers or collect payments. In
addition, disruptions in the economy generally resulting from Year 2000 issues
could adversely affect the Company. The amount of potential lost revenue or
additional costs cannot be reasonably estimated at this time.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
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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
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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.
-14-
<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, 1999 ............................................F-3
Consolidated Statements of Operations for the years ended
September 30, 1999 and 1998....................................F-5
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1999 and 1998..............................F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 1999 and 1998..............................F-7
Notes to Consolidated Financial Statements......................F-8
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
-15-
<PAGE>
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
- ------
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Executive Officers and Directors
The following table sets forth certain information concerning the
directors and executive officers of the Company as of September 30, 1999:
Year Became
Name Position with Company Director Age
- ---- --------------------- -------- ---
Robert Goldberg Chairman of the Board & CEO 1994 66
Herbert S. Lightstone Director 1997 66
John Minnick Director 1985 51
John Romm, M.D Director 1997 69
Robert Stuckelman Director 1973 68
Stuart L. Silverman M.D Director 1999 52
Phoung Dang Secretary and Principal Financial
Officer
The terms of the Board of Directors will expire at the next annual
meeting of stockholders. The Company's officers are elected by the Board of
Directors and hold office at the will of the Board.
BACKGROUND EXPERIENCE OF DIRECTORS
Mr. Goldberg is a senior partner in the firm of Francis, Goldberg & Powers, a
- ------------
Certified Public Accounting Firm, and has been associated with such firm since
January 1995. Prior thereto, he was a senior partner in the Los Angeles office
of Bernstein, Fox, Goldberg & Licker, Certified Public Accountants. He is
certified in both California and New York and has been a member of the New York
State Bar. Mr. Goldberg attended Lehigh University, Brooklyn Law School and New
York University School of Law and has lectured for the Practicing Law Institute
and The American College of Life Underwriters. He is a member of the Estate
Planning Council, Professional Planners Forum and various accounting societies.
Mr. Lightstone is Vice President, Corporate Development, with ICN
- --------------
Pharmaceuticals. (NYSE:ICN) where he also had been responsible for ICN's global
public and investor relations activities. He rejoined ICN in 1994 and also
served with ICN from 1968 until 1981. Prior to ICN, Mr. Lightstone served as a
Director, and subsequently as Chairman & CEO of Immunetech Pharmaceuticals from
1983 through 1986. In 1981 and 1982 he served as President of Revlon Ophthalmic
International. He has been a consultant to numerous emerging companies.
-16-
<PAGE>
Mr. Minnick is President of Minnick Capital Management, an investment
- -----------
management firm that he founded in 1972. Mr. Minnick is a member of the Kansas
and Federal Bar. He has served as a director on other corporate and non-profit
boards and is a member of the Association for Investment Management and
Research (AIMR). Mr. Minnick is a graduate of Washburn University (BA) and th
Washburn University School of Law (JD).
Dr. Romm has practiced internal medicine and gastroenterology in private
- --------
practice since 1962. He earned his MD at Wayne State College of Medicine and
also holds a BS in biology. He is an associate professor of medicine at the
University of California, Los Angeles and is an attending physician at
Cedars-Sinai Medical Center.
Mr. Stuckelman founded the Company in 1973 and served as its President to 1982.
- --------------
From 1982 through 1989, Mr. Stuckelman was a business consultant for small and
medium size companies. In 1989, he rejoined the Company as President and Chief
Executive Officer in which capacities he served until October 1994. Mr.
Stuckelman has been a director of the Company since its incorporation. Since
1994, he has been President of Technical Management Consultants, which provides
business consulting services to many companies. He is also on the Board of
Directors of Medical Resources Management, Inc., a public company that rents
laser surgery equipment to doctors and hospitals. He holds an MSEE from the
University of Southern California and a BEE from Cornell University.
Dr. Silverman is the Medical Director of the Osteoporosis Medical Center in
- -------------
Beverly Hills, CA, a nationally recognized clinical research center for
osteoporosis, and is also a Clinical Professor of Medicine at the UCLA School of
Medicine. Dr. Silverman is a graduate of the Johns Hopkins University Medical
School (1973) and earned his undergraduate degree from Princeton University
(1969) Cum Laude in biology. He is an internationally recognized authority on
osteoporosis and related fields and has been principal investigator for six
research grants in the field of osteoporosis and has authored numerous published
articles in the field.
There is no family relationship among the directors or executive
officers of the Company.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of four meetings during
the fiscal year ended September 30, 1999. No director attended fewer than 75% of
the aggregate of all meetings of the Board of Directors.
The Audit Committee is primarily responsible for approving the services
performed by the Company's independent auditors and reviewing reports of the
-17-
<PAGE>
Company's internal and external auditors regarding the Company's accounting
practices and systems of internal accounting controls. This Committee currently
consists of Mr. Stuckelman and Mr. Goldberg. The Audit Committee met once during
the fiscal year ended September 30, 1999.
The Compensation Committee reviews and approves the Company's compensation
policy and has assumed responsibility for administration of the Company's 1992
Stock Option Plan. This Committee currently consists of Mr. Minnick and
Dr. Romm. The Compensation Committee met once during the fiscal year ended
September 30, 1999.
The Executive Committee is comprised of Mr. Goldberg, Mr. Minnick and
Mr. Lightstone. The Executive Committee normally meets monthly.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of its Common
Stock, to file reports of ownership and changes of ownership with the Securities
and Exchange Commission ("SEC") and each exchange [or market quotation system]
on which the Company's securities are registered. Officers, directors and
greater than ten-percent stockholders are required by SEC regulation to furnish
the Company with copies of all ownership forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations that no Form 5 was required, the Company believes that,
during the year ended September 30, 1999, its officers, directors, and greater
than ten-percent beneficial owners complied with all applicable filing
requirements.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation for the fiscal year ended
September 30, 1999 for the Company's chief executive officer and all executive
officers whose compensation exceeded $100,000 for such fiscal year.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
Name and Principal Position Fiscal Year Annual Salary Compensation Long-Term
Bonus Compensation
Stock Options
- --------------------------------------------------------------------------------------------
James Linesch 1999 $129,160 $5,000 50,000
President & CEO* 1998 $117,000 0 0
1997 $98,077 $5,000 25,000
- --------------------------------------------------------------------------------------------
* Mr. Linesch terminated employment on September 8, 1999.
</TABLE>
-18-
<PAGE>
EMPLOYMENT AGREEMENTS
NONE
EMPLOYEE STOCK OPTION PLANS
The Company established its 1992 Stock Option Plan (the "1992 Plan") to enable
the Company to recruit and retain selected officers and other employees by
providing equity participation in the Company to such individuals. Under the
1992 Plan, regular salaried employees, including directors who are full time
employees, may be granted options exercisable at not less than 100% of the fair
market value of the Common Stock on the date of grant. The exercise price of any
option granted to an optionee who owns stock possessing more than 10% of the
voting power of all classes of stock of the Company must be 110% of the fair
market value of the Common Stock on the date of grant and the duration of the
options granted may not exceed five years. Options generally become exercisable
at a rate of 33% of the shares subject to an option one year after its grant.
The remaining shares generally become exercisable over an additional 24 months.
The duration of options may not exceed ten years. Options under the Plan are
nonassignable, except in the case of death and may be exercised only while the
optionee is employed by the Company, or in certain cases, within a specified
period after termination of employment (within three months) or death or
disability (within twelve months). The purchase price and number of shares of
Common Stock that may be purchased upon exercise of options are subject to
adjustment in certain cases, including stock splits, recapitalizations and
reorganizations.
Under the 1992 Plan, the Company may grant qualified or non-qualified options
for the purchase of up to 1,200,000 shares of Common Stock. On January 8, 1999,
the Board of Directors granted 435,000 options to employees, officer and
directors under the plan. At September 30, 1999, there were 825,549 shares
reserved for exercise of options granted, of which 295,135 were exercisable and
374,451 were available for grant under such Plan. The average price of options
issued under the Plan is $.79 per share.
Both the amount of options granted and to whom they are granted are determined
by the Board of Directors with the recommendation of the Compensation Committee,
at their discretion. There are no specific criteria, performance formulas or
measures applicable to the determination of the amount of options to be granted
and to whom such options are to be granted.
-19-
<PAGE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
---------------------------------------------------------
Number of Securities
(shares of Common Stock) % of Total Options Exercise
Underlying Options Granted to Employee Price Expiration
Name Granted (1) in Fiscal Year ($/share) Date
---- ----------- -------------- --------- ----
J. Linesch 50,000 12% $.67 2004
(1) Options vested over a three-year period.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information regarding the exercise of
stock options during the fiscal year ended September 30, 1999 and the fiscal
year-end value of unexercised options for the Company's named executive
officers.
<TABLE>
<CAPTION>
<S> <C> <C>
Number of Securities
(shares of Common Stock) Value of Unexercised
Shares Underlying Unexercised In-the-money Options at
Acquired Value Options at Fiscal Year End Fiscal Year End (1)
Name On Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- -------- ------------------------- -------------------------
J. Linesch - - 74,042 / 58,333 $13,845 / $11,292
</TABLE>
(1) Based upon the closing market price of the Company's Common Stock as
reported on the Nasdaq Small Cap market on September 30, 1999 minus the
respective option exercise prices.
NON PLAN STOCK OPTIONS
Between February 1992 and July 1999, a total of 1,581,513 stock options were
granted to directors, officers and consultants outside either the 1992 Plan. As
of September 30, 1999, 400,740 of these non-qualified stock options were
exercised, 566,007 were canceled and 614,766 were still outstanding. The
exercise prices of these non-plan stock options outstanding are at an average
price of $.92 per share which were equal to the fair market value of the Common
Stock on the respective dates of grant (or re-pricing), and they expire between
1999 and 2001.
SAVINGS AND RETIREMENT PLANS
In July 1987, the Company instituted a Savings and Retirement Plan (the "S&R
Plan"). Under the S&R Plan, every full-time salaried employee who is 18 years of
-20-
<PAGE>
age or older may contribute up to 15% of his or her annual salary to the S&R
Plan. The Company will make a matching contribution of $.25 for every $1.00 of
the employee's contribution for an employee contribution of up to but not
exceeding 6 percent of the employee's annual salary. Company contributions are
100% vested after 60 months of contributions to the S&R Plan. Benefits are
payable under the S&R Plan upon termination of a participant's employment with
the Company or at retirement. The S&R Plan meets the requirements of Section
401(k) of the Internal Revenue Code. Internal Revenue Service regulations limit
the percentage of tax-deferred contributions that can be made by
higher-compensated participants. There are restrictions upon withdrawal of tax
deferred contributions, but participants are permitted to borrow against the
value of their tax deferred accounts.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------
(a) MANAGEMENT
--------------
The following table sets forth information concerning beneficial ownership
of the Company's Common Stock as of September 30, 1999 by: (a) each
director of the Company; and (b) all executive officers and directors of
the Company as a group.
Name and Address* of
Beneficial Owner Amount and Nature of Beneficial Ownership (1)
----------------- ---------------------------------------------
Robert Stuckelman 284,414 (2) 2%
John Minnick 249,228 (3) 1%
Robert Goldberg 181,476 (4) 1%
Herbert S. Lightstone 71,667 (5) **
John Romm, M.D. 16,667 (6) **
All officers and
Directors as a group (6
persons) 803,452 (7) 5%
============ ==
(1) Includes options exercisable as of September 30, 1999.
(2) Includes 129,899 shares subject to non-qualified and qualified stock
-21-
<PAGE>
options.
(3) Includes 179,943 shares subject to non-qualified stock
options.
(4) Includes 171,476 shares subject to non-qualified stock
options.
(5) Includes 71,667 shares subject to non-qualified stock options.
(6) Includes 16,667 shares subject to non-qualified stock options.
(7) See notes (2) through (6)
(*) c/o CompuMed, Inc, 5777 West Century Blvd, Suite 1285, Los Angeles,
CA 90045
(**) Less than 1%.
(b) FIVE PERCENT STOCKHOLDERS
- -----------------------------
None
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has retained the services of an investment advisor, Minnick Capital
Management, controlled by John Minnick a member of its Board of Directors, to
provide advice on its investment portfolio. The cost of such services will be at
comparable market rates for the services involved. No fees were paid for
services during the fiscal year ended September 30, 1999.
-22-
<PAGE>
PART IV
-------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 Certificate of Incorporation of the Company [Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement of Form S-1
(File No. 33-46061), effective May 7, 1992]
3.2 Certificate of Amendment of Certificate of Incorporation [Incorporated
by reference to Exhibit 3.1a to Amendment No. 1 to Post-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-2
(File No. 33-48437), filed June 28,
1994]
3.3 Certificate of Amendment of Certificate of Incorporation [Incorporated
by reference to Exhibit 3.1b to Amendment No. 2 to Post-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-2
(File No. 33-48437), filed November 7, 1994]
3.4 Certificate of Correction of Certificate of Amendment [Incorporated by
reference to Exhibit 3.1c to Amendment No. 2 to Post-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-2
(File No. 33-48437), filed November 7, 1995]
3.5 By-Laws of the Company, as currently in effect [Incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (File No. 33-46061), effective May 7, 1992]
4.1 Form of Underwriter's Warrant Agreement [Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-2 (File
No. 33-48437), effective August 3, 1992]
4.2 Form of Warrant Agreement and Warrant [Incorporated by reference to
Exhibit 4.5 to the Company's Registration Statement on Form S-2 (File
No. 33-48437), effective August 3, 1992]
4.3 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
-23-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
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]
4.9 Form of Class C Warrant Agreement [incorporated by reference to
Exhibit 10.2 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)]
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].
-24-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
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].
10.10 Research Agreement, dated January 3, 1994, between the Company and the
University of Georgia Research Foundation, Inc. [Incorporated by
reference to Exhibit 10.20 to the Company's Annual Report on Form
10-KSB for fiscal year 1994]
10.11 Exclusive License Agreement, dated January 3, 1994, between the Company
and the University of Georgia Research Foundation, Inc. [Incorporated
by reference to Exhibit 10.21 to the Company's Annual Report on Form
10-KSB for fiscal year 1994]
10.12 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]
10.17 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 of 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 of the Company's 1996 Form 10KSB].
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
of the Company's 1996 Form 10KSB].
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 of the Company's 1996 Form 10KSB].
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 of the Company's Form 10KSB at September 30, 1997].
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]
10.24* Commercial Office Lease dated August 16, 1999 between the Company and
L.A.T. Investment Corporation, a California corporation.
-25-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.25* Final Judgment and Order of Dismissal, CompuMed, Inc. Securities
Litigation dated October 20, 1997.
21* Subsidiaries of the Company [Incorporated by reference to Exhibit 21
of the Company's Form 10KSB at September 30, 1997].
23* Consent of Ernst & Young LLP
27* Financial data schedule
- ------------------------------------
* Filed herewith.
B. REPORTS ON FORM 8-K
None.
-26-
<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/ Phuong Dang
----------------------
Phuong Dang, Secretary and Principal
Financial Officer
Date: December 27, 1999
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/ Robert B. Goldberg Chairman of the Board December 27, 1999
- ------------------------
Robert B. Goldberg and CEO
/s/ John D. Minnick Director December 27, 1999
- ------------------------
John D. Minnick
/s/ Robert Stuckelman Director December 27, 1999
- ------------------------
Robert Stuckelman
Director
- ------------------------
Herbert S. Lightstone
/s/ John Romm Director December 27, 1999
- ------------------------
John Romm
/s/ Stuart Silverman Director December 27, 1999
- ------------------------
Stuart Silverman
-27-
<PAGE>
COMPUMED, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors................................... F-2
Consolidated Balance Sheet as of
September 30, 1999...............................................F-3
Consolidated Statements of Operations for the years ended
September 30, 1999 and 1998......................................F-5
Consolidated Statements of Stockholders' Equity for
the years ended September 30, 1999 and 1998......................F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 1999 and 1998................................F-7
Notes to Consolidated Financial Statements........................F-8
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CompuMed, Inc.
We have audited the accompanying consolidated balance sheet of CompuMed, Inc. as
of September 30, 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended September 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CompuMed, Inc. at
September 30, 1999, and the consolidated results of their operations and their
cash flows for each of the two years in the period ended September 30, 1999, in
conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
Los Angeles, California
December 3, 1999
F-2
<PAGE>
COMPUMED, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
September 30,
1999
-------------
CURRENT ASSETS
Cash and cash equivalents $2,598,000
Marketable securities 45,000
Accounts receivable, less allowance of $32,000 497,000
Inventory 50,000
Prepaid expenses and other current assets 24,000
-----------
TOTAL CURRENT ASSETS 3,214,000
PROPERTY AND EQUIPMENT
Machinery and equipment 1,781,000
Furniture, fixtures and leasehold
improvements 173,000
Equipment under capital leases 1,079,000
------------
3,033,000
Less allowance for depreciation and
amortization 2,508,000
------------
525,000
OTHER ASSETS
Other assets 33,000
------------
$3,772,000
============
See notes to consolidated financial statements
F-3
<PAGE>
COMPUMED, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY September 30,
1999
------------
CURRENT LIABILITIES
Accounts payable $ 272,000
Accrued liabilities 215,000
Current portion of capital lease
obligations 193,000
------------
TOTAL CURRENT LIABILITIES 680,000
Capital lease obligations, less current
Portion 188,000
Commitments and contingencies
STOCKHOLDERS' EQUITY
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 -
Common stock, $.01 par value--authorized
50,000,000 shares, issued and
outstanding- 16,613,486 166,000
Additional paid in capital 31,504,000
Retained deficit (28,767,000)
------------
STOCKHOLDERS' EQUITY 2,904,000
------------
$ 3,772,000
==============
See notes to consolidated financial statements
F-4
<PAGE>
COMPUMED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30,
1999 1998
---- ----
REVENUES
ECG services $1,385,000 $1,420,000
ECG product and supplies sales 923,000 395,000
OsteoGram services and royalty income 17,000 42,000
------------ ------------
2,325,000 1,857,000
COST AND EXPENSES
Cost of ECG services 958,000 990,000
Cost of goods sold 471,000 226,000
Selling expenses 320,000 187,000
Research and development 364,000 537,000
General and administrative expenses 1,084,000 1,263,000
Depreciation and amortization 199,000 285,000
------------ ----------
3,396,000 3,488,000
----------- ---------
OPERATING LOSS (1,071,000) (1,631,000)
Interest income 90,000 109,000
Other income - Note I -0- 225,000
Interest expense (60,000) (36,000)
-------------- ------------
NET LOSS - BASIC AND DILUTED $(1,041,000) $(1,333,000)
============= ============
NET LOSS PER SHARE $ (.07) $ (.19)
--------------- ------------
Weighted average number of common
shares outstanding 14,328,343 10,912,240
============= ============
See notes to consolidated financial statements
F-5
<PAGE>
COMPUMED, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Preferred Common Additional Paid Retained
Stock Stock in Capital (Deficit) Total
--------- ------ --------------- -------- -----
Balances at September 30, 1997: $ 2,000 $ 90,000 $ 27,169,000 $(26,393,000) $ 868,000
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 -- 70,000
Proceeds from issuance of 35,000 shares of
Class C Preferred Stock, net of expenses 2,487,000 -- 794,000 -- 3,281,000
Deemed Dividend on beneficial 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) -- (1,000)
Net Loss -- -- -- (1,333,000) (1,333,000)
------------ --------- ------------ ------------ ------------
Balances at September 30, 1998: 947,000 125,000 29,539,000 (27,726,000) 2,885,000
Conversion of 11,650 shares of Class C Preferred
Stock to 2,325,344 shares of Common Stock (946,000) 23,000 923,000 -- --
Registration costs -- -- (2,000) -- (2,000)
Proceeds from issuance of 1,330,110 shares of
Common Stock upon exercise of
Class C Preferred Stock warrants -- 14,000 644,000 -- 658,000
Proceeds from issuance of 200,000 shares of
Common Stock upon conversion of
Underwriter warrants -- 2,000 218,000 -- 220,000
Proceeds from issuance of 217,930 shares of Common
Stock upon exercise of stock options -- 2,000 184,000 -- 186,000
Dividends paid on Class A Preferred Stock -- -- (2,000) -- (2,000)
Net Loss -- -- -- (1,041,000) (1,041,000)
------------ -------- ------------ ------------ ------------
Balances at September 30, 1999: $ 1,000 $166,000 $ 31,504,000 $(28,767,000) $ 2,904,000
========== ========== ============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
COMPUMED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
1999 1998
---- ----
OPERATING ACTIVITIES:
Net loss $(1,041,000) $(1,333,000)
Net adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 199,000 285,000
Changes in operating assets and liabilities:
Accounts receivable (283,000) 33,000
Inventory and prepaid expenses (11,000) 19,000
Accounts payable and accrued liabilities 164,000 (352,000)
Other assets (11,000) -0-
---------------- -----------
NET CASH USED IN OPERATING ACTIVITIES (983,000) (1,348,000)
--------- -----------
INVESTING ACTIVITIES:
Investment in marketable securities (45,000) -0-
Purchases of property, plant and equipment (82,000) (3,000)
---------------- -----------
NET CASH USED IN INVESTING ACTIVITIES (127,000) (3,000)
Proceeds from sale of Class C Preferred Stock, net -0- 3,281,000
Dividends on Class A Preferred Stock (2,000) (1,000)
Principal payments on capital lease obligations (186,000) (97,000)
Proceeds from the exercise of stock options and
warrants 1,063,000 70,000
---------------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 875,000 3,253,000
---------------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (235,000) 1,902,000
Cash and cash equivalents at beginning of year 2,833,000 931,000
---------------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $2,598,000 $2,833,000
================ ===========
Cash paid for interest $ 60,000 $ 36,000
================ ===========
During 1999 and 1998 computer and office equipment were acquired under capital
lease obligations for $326,000 and $106,000 respectively.
See notes to consolidated financial statements
F-7
<PAGE>
COMPUMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A-BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of Consolidation: The consolidated financial statements include the
- ---------------------------
accounts of CompuMed, Inc. and its wholly-owned subsidiary (together referred
as the Company). All material intercompany transactions and accounts have been
eliminated.
Description of Business: The Company is engaged primarily 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 and a calibrated aluminum wedge for reference.
Cash Equivalents: The Company considers all highly liquid investments with a
- ----------------
maturity of three months or less when purchased to be cash equivalents. Cash and
cash equivalents consist of cash on hand, cash in money market funds and demand
deposit accounts. The carrying amount reported in the consolidated balance sheet
for cash and cash equivalents approximates its fair value.
Marketable Securities: Marketable securities consist of investments in common
- ---------------------
stock in publicly traded domestic companies and are stated at market value based
on the most recently traded price of these securities at September 30, 1999.
Unrealized gains and losses were insignificant in the years ended September 30,
1999 and 1998.
Inventory: Inventory consists of ECG terminals, component parts, ECG medical
- ---------
supplies and starter kits for the Company's OsteoGram service. Inventory is
stated at the lower of cost (weighted average or first-in first-out method) or
market.
Property and Equipment: Property and equipment are stated at cost. Depreciation
- ----------------------
and amortization are computed on the straight-line basis over 3 to 5 years.
Revenue Recognition: Standard ECG services and supplies are recorded as revenue
- -------------------
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.
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.
F-8
<PAGE>
COMPUMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A-BASIS OF PRESENTATION SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Per Share Data: During the year ended September 30, 1998, the Company adopted
- --------------
the Statement of Financial Accounting Standards No.128, "Accounting for Earnings
Per Share" ("FAS 128").
Basic loss per share is calculated using the net loss, less preferred stock
dividends ($2,000 in 1999 and $1,000 in 1998) and the deemed dividend related to
the 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 were 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 provided for a discount of 25%
and the Series 2 Class C Preferred Stock provided for a discount of 20% (or
22.5% for shares that the Company received 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 deemed 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. Any impairment is charged to
expense in the period in which the impairment is determined.
Use of Estimates: The preparation of financial statements in conformity with
- ----------------
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock Based Compensation: 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
F-9
<PAGE>
COMPUMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A-BASIS OF PRESENTATION SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
generally does not require collateral. Credit losses have been within
management's expectations. For the years ended September 30, 1999 and 1998, no
single customer accounted for more than 10% of the Company's net revenues.
Financial Statement Presentation: Certain balances from the September 30, 1998
- --------------------------------
financial statements have been reclassified to conform to the September 30, 1999
presentation.
NOTE B-INCOME TAXES
At September 30, 1999, the Company has available for federal income tax
purposes, net operating loss carryforwards of approximately $17,898,000, which
expire between 1999 and 2014. 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, 1999 and 1998 are as follows:
Deferred tax liabilities: 1999 1998
------------ ------------
Property and Equipment $(2,000) $(12,000)
Deferred tax assets:
Account receivable allowance 14,000 26,000
Accrued expenses 17,000 18,000
Tax credits 9,000 9,000
Net operating loss carryforwards 6,648,000 6,255,000
------------ ------------
Total deferred tax assets 6,688,000 6,308,000
Valuation allowance for
deferred tax assets (6.686,000) (6,296,000)
----------- -----------
Net deferred tax assets 2,000 12,000
------------ -------------
Total $ 0 $ 0
============= ==============
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. The 8,000,000 warrants were exercisable to purchase
800,000 shares of Common Stock
F-10
<PAGE>
COMPUMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C-STOCKHOLDERS' EQUITY (CONTINUED)
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. The expiration date of the warrants was extended until
August 2, 2000 and the exercise price was reduced to $2.50 per share. There were
6,471,700 warrants remaining at September 30, 1999.
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. 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.
F-11
<PAGE>
COMPUMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C-STOCKHOLDERS' EQUITY (CONTINUED)
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. 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 was immediately convertible into
shares of the Company's Common Stock at a conversion ratio equal to $100 divided
by the lesser of (i) $1.51or (ii) 75% of the average closing bid price for the
ten consecutive trading days prior to the notice of conversion. 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 was identical to the Series C-1 Preferred Stock
except that the conversion ratio was 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). 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. 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. During the fiscal year
ended September 30, 1999, Class C shareholders converted the remaining 11,650
shares of Class C preferred stock into 2,325,344 shares of Common Stock. Upon
conversion of the Series C Preferred Stock, the holder received warrants (the
"Warrants") to purchase the same number of shares of Common Stock as was issued
on the conversion, at an exercise price equal to the conversion price and
exercisable for three years from issuance.
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
F-12
<PAGE>
COMPUMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - STOCK OPTIONS AND WARRANTS (CONTINUED)
Stock. Options intended to be incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, and nonqualified
options may be granted under the Stock Option Plan. Incentive stock options
granted under the Stock Option Plan shall be exercisable for a period of not
more than ten years from the date of grant. The purchase price per share of
Common Stock issuable under the Stock Option Plan will not be less than the fair
market value of such shares on the date the option is granted. In addition to
options issued pursuant to the Plan, the Company has granted non-qualified stock
options to certain members of the Board of Directors, management and consultants
of the Company. Such options have been granted at the market prices at the date
of grant and are for a term of five or ten years.
In accordance with FAS 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 1999 and 1998.
A summary of the Company's stock option activity, and related information for
the years ended September 30 follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 1998
-----------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Options outstanding, beginning of year 1,289,425 1.32 1,192,617 1.18
Options exercised (217,930) 0.86 (69,064) 1.00
Options granted 1,090,325 0.67 388,500 1.53
Options forfeited/Canceled (721,505) 1.44 (222,628) 1.03
---------- ----------
Options outstanding, end of year 1,440,315 0.84 1,289,425 1.32
=========== ===========
Exercisable at end of year 896,568 0.94 1,042,023 1.38
========= ===========
</TABLE>
The weighted average remaining contract life of the stock options was 5.4 years
as of September 30, 1999. The exercise prices for options outstanding at
September 30, 1999 ranged from $.67 to $4.25.
F-13
<PAGE>
COMPUMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D- STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants: At September 30, 1999, the Company had the following warrants
- --------
outstanding for the purchase of its common stock:
Expiration Number of Exercise
Description Date Shares Issuable Price
----------- ---- --------------- -----
Secondary Offering August 2000 647,170 $2.50
SASCO September 2000 147,000 $2.50
Class action settlement January 2003 1,870,000 $3.00
Class action insurance carrier January 2003 50,000 $3.00
----- ------
Total warrants outstanding 2,714,170
---------
In connection with the conversion of the Class C preferred stock, warrants were
issued for the purchase of 5,619,525 shares of Common Stock at an average price
of $0.62 per share. During the fiscal year ended September 30, 1999, 1,330,110
shares of Common Stock were issued from the exercise of such warrants.
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. During fiscal 1999, all of
such warrants were converted into Common Stock.
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 2004 (with an option to extend the term of this lease for an additional
five years) which is included in the operating lease amounts below. The
following is a summary as of September 30, 1999 of future minimum lease payments
together with the present value of the net minimum lease payments on capital
leases:
F-14
<PAGE>
COMPUMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - COMMITMENTS (CONTINUED)
Capital Operating
Year ending September 30 Leases Leases
------ ------
2000 $467,000 $106,000
2001 276,000 114,000
2002 89,000 117,000
2003 -0- 121,000
2004 -0- 102,000
-------------- -------
Total minimum lease payments $832,000 $560,000
======== ========
Less amount representing interest 451,000
---------
Net minimum lease payments $381,000
Less current portion 193,000
---------
Present value of net minimum
payments, less current portion $188,000
==========
Included in accumulated depreciation and amortization at September 30, 1999 is
$617,000 related to assets leased under capital leases. Rental expense under
operating leases was $238,000 (1999) and $234,000 (1998).
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 that employ the
licensed technology of certain U.S. patents owned by UMMC. The patents owned by
UMMC cover the performance of bone densitometry testing using charge-coupled
diodes (CCD's). The Company determined that the licensed technology was not
directly related to its current technology and marketing emphasis, so a mutual
termination License Agreement was performed in October, 1999.
On October 1, 1999, the Company entered into a firm purchase agreement with a
vendor to purchase a central processing system for its electrocardiogram
business. The total purchase price is $112,500. Additionally, the Company placed
an order for 300 electrocardiograph units to be delivered over the next year. In
connection with the purchase of the electrocardiograph units, the Company has
issued a standby letter of credit in the amount of $75,000 to secure payments.
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 eligible 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
F-15
<PAGE>
COMPUMED, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
NOTE F - SAVINGS AND RETIREMENT PLANS (CONTINUED)
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 $6,000 and $8,000 in
fiscal 1999 and 1998, respectively.
NOTE H - RELATED PARTY TRANSACTIONS
The Company has retained the services of an investment advisor, who is also a
member of its Board of Directors, to provide advice on its investment portfolio.
No fees were paid for services during the fiscal year ended September 30, 1999.
F-16
CompuMed, Inc.
Exhibit 21 - Subsidiaries of the Company
Irsco Development Corporation
COMPUMED, INC.
FORM 10-KSB FOR THE PERIOD ENDED SEPTEMBER 30, 1999
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 333-68039, 333-07791 and 333-63433 and Forms S-3 No. 333-44805
and 333-82753) 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 7,633,628 shares of common stock
of CompuMed, Inc., of our report dated December 3, 1999, 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, 1999,
filed with the Securities and Exchange Commission.
Ernst & Young LLP
Los Angeles, California
December 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,598,000
<SECURITIES> 45,000
<RECEIVABLES> 497,000
<ALLOWANCES> 32,000
<INVENTORY> 50,000
<CURRENT-ASSETS> 3,214,000
<PP&E> 3,033,000
<DEPRECIATION> 2,508,000
<TOTAL-ASSETS> 3,772,000
<CURRENT-LIABILITIES> 680,000
<BONDS> 0
0
1,000
<COMMON> 166,000
<OTHER-SE> 2,738,000
<TOTAL-LIABILITY-AND-EQUITY> 3,772,000
<SALES> 2,325,000
<TOTAL-REVENUES> 2,325,000
<CGS> 471,000
<TOTAL-COSTS> 3,396,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,000
<INCOME-PRETAX> (1,041,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,041,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,041,000)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
