Filed Pursuant to Rule 424(b)(3)
Registration No. 333-113158
PROSPECTUS
COMPUMED, INC.
This prospectus relates to the sale of up to 10,000,000 shares of our common
stock by a stockholder. We are not selling any securities in this offering and
therefore will not receive any proceeds from this offering. We will, however,
receive proceeds from the sale of securities under an Investment Agreement, also
referred to as an Equity Line of Credit, that we have entered into with Dutchess
Private Equities Fund, L.P., which permits us to "put" up to $5 million in
shares of Common Stock to Dutchess Private Equities Fund. All costs associated
with this registration will be borne by us.
The shares of Common Stock are being offered for sale by the selling stockholder
at prices established on the Over-the-Counter Bulletin Board or in negotiated
transactions during the term of this offering. Our Common Stock is quoted on
the Over-the-Counter Bulletin Board under the symbol CMPD.OB. On February 20,
2004, the last reported sale price of our Common Stock was $0.30 per share.
Dutchess Private Equities Fund, LP and Charleston Capital Corporation are
"underwriters" within the meaning of the Securities Act of 1933, as amended, in
connection with the resale of common stock under the Investment Agreement.
Dutchess will pay us 95% of the average of the three lowest closing bid price of
the common stock during the five consecutive trading day period immediately
following the date of our notice to them of our election to put shares pursuant
to the Equity Line of Credit.
____________________
This investment involves a high degree of risk. You should purchase securities
only if you can afford a complete loss. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
______________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is March 31, 2004
3
TABLE OF CONTENTS
PROSPECTUS SUMMARY 4
RISK FACTORS 6
USE OF PROCEEDS 10
DILUTION 11
CAPITALIZATION 12
DIVIDEND POLICY 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
DESCRIPTION OF BUSINESS 18
DESCRIPTION OF PROPERTY 27
MANAGEMENT 27
EXECUTIVE COMPENSATION 28
RELATED PARTY TRANSACTIONS 32
MARKET FOR OUR COMMON STOCK 32
REPORTS TO SECURITYHOLDERS 33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 33
SELLING STOCKHOLDERS 34
DESCRIPTION OF SECURITIES 35
PLAN OF DISTRIBUTION 35
LEGAL PROCEEDINGS 37
LEGAL MATTERS 37
EXPERTS 37
FINANCIAL STATEMENTS F-1
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL
OF THE INFORMATION YOU SHOULD CONSIDER BEFORE MAKING AN INVESTMENT DECISION.
COMPUMED, INC.
We are a healthcare informatics company that provides medical imaging software
solutions and the remote interpretation of electrocardiograms . Our two main
products are the OsteoGram (R) and CardioGram systems. The OsteoGram (R) is our
proprietary image processing software that utilizes standard or digital x-rays
of the hand to screen, diagnose and monitor osteoporosis, a disease that
affects over an estimated 200 million people worldwide. The CardioGram
consists of computer-aided telemedicine services that offer on-line
interpretation of electrocardiograms to physicians and government and corporate
healthcare providers. We incorporated in the State of Delaware on July
21, 1986.
Our principal executive offices are located at 5777 West Century Blvd., Suite
1285, Los Angeles, CA 90045. Our telephone number is (310) 258-5000.
THE OFFERING
This offering relates to the resale of 10,000,000 shares of our Common Stock by
Dutchess Private Equities Fund, L.P who will become our stockholder.
We have entered into an Investment Agreement with Dutchess Private Equities
Fund, also referred to as an Equity Line of Credit. That agreement provides
that, following notice to Dutchess, we may put to Dutchess up to $5 million in
shares of our Common Stock for a purchase price equal to 95% of the average of
the three lowest closing bid prices on the Over-the-Counter Bulletin Board of
our common stock during the five day period following that notice. The number
of shares that we will be permitted to put pursuant to the Investment Agreement
will be either: (A) two hundred percent of the average daily volume of our
common stock for the ten trading days prior to the applicable put notice,
multiplied by the average of the three daily closing best bid prices immediately
preceding the day we issue the put, or (B) $25,000; provided that in no event
will the put amount be more than $1,000,000 with respect to any single Put. In
turn, Dutchess has indicated that it will resell our shares in the open market,
resell our shares to other investors through negotiated transactions or hold our
shares in its portfolio. This prospectus covers the resale of our stock by
Dutchess either in the open market or to other investors through negotiated
transactions.
4
OUR CAPITAL STRUCTURE AND SHARES ELIGIBLE FOR FUTURE SALE
The following table outlines our capital stock as of January 31, 2004:
Common Stock outstanding
Before the offering 17,951,034 shares(1)
After the offering 27,951,034 shares(1)(2)
(1) Assuming:
- No exercise of stock options outstanding.
- No conversion of 300 shares of Class B Preferred Shares into 3,000 shares
of Common Stock.
- No conversion of 8,400 shares of Class A Preferred Shares into 4,200 shares of Common Stock.
(2) Assumes that we put 10,000,000 shares to Dutchess during the term of the
Investment Agreement.
USE OF PROCEEDS
We will not receive any proceeds from this offering. We will receive proceeds
from our Investment Agreement with Dutchess. See "Use of Proceeds."
SUMMARY FINANCIAL INFORMATION
The following summary financial information has been derived from our financial
statements and should be read in conjunction with the financial statements and
the related notes thereto appearing elsewhere in this prospectus.
5
For the For the For the For the
year ended year ended 3 months ended 3 months ended
30-Sep-03 30-Sep-02 31-Dec-03 31-Dec-02
(unaudited) (unaudited)
Statement of Operations Data
Revenue. . . . . . . . . . . . . . . . 1,811,000 1,955,000 460,000 452,000
Operating costs and expenses . . . . . 2,233,000 2,563,000 528,000 609,000
Net loss . . . . . . . . . . . . . . . (422,000) (608,000) (68,000) (157,000)
Loss per share . . . . . . . . . . . . (0.02) (0.03) (0.00) (0.01)
Weighted average # of shares outstanding 17,879,525 17,869,309 17,951,034 17,869,309
Balance Sheet Data
Current assets . . . . . . . . . . . . 512,000 609,000 492,000 564,000
Total assets . . . . . . . . . . . . . 780,000 1,067,000 710,000 972,000
Total liabilities. . . . . . . . . . . 271,000 243,000 223,000 297,000
Shareholders' equity . . . . . . . . . 509,000 817,000 487,000 670,000
RISK FACTORS
An investment in our Common Stock involves a high degree of risk. You should
carefully consider the following risk factors, other information included in
this prospectus and information in our periodic reports filed with the SEC. If
any of the following risks actually occur, our business, financial condition or
results of operations could be materially and adversely affected and you may
lose some or all of your investment.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We generally use words such as "believe," "may," "could," "will,"
"intend," "expect," "anticipate," "plan," and similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in the forward-looking statements for many reasons, including
the risks described below and elsewhere in this report. Although we believe the
expectations reflected in the forward-looking statements are reasonable, they
relate only to events as of the date on which the statements are made, and our
future results, levels of activity, performance or achievements may not meet
these expectations. We do not intend to update any of the forward-looking
statements after the date of this document to conform these statements to actual
results or to changes in our expectations, except as required by law.
RISKS RELATED TO OUR BUSINESS
WE HAVE HAD LOSSES SINCE OUR INCEPTION AND EXPECT LOSSES TO CONTINUE IN THE
FUTURE. WE MAY NEVER BECOME PROFITABLE.
We had a net loss of $375,000 for the year ended September 30, 2003 and a net
loss of $494,000 for the year ended September 30, 2002. Our future operations
may not be profitable if we are unable to develop our business. Revenues and
profits, if any, will depend upon various factors, including whether we will be
able to receive funding to develop and market new products or find additional
businesses to operate and/or acquire. We may not achieve our business
objectives and the failure to achieve such goals would have an adverse impact on
our business.
6
IF WE DO NOT CONTINUALLY ENHACE OUR PRODUCTS, OUR REVENUES WILL DECREASE
SIGNIFICANTLY.
The market for our products is characterized by rapid and significant
technological change, evolving industry standards and new product introductions.
Our products require significant planning, design, development and testing,
which may require significant capital commitments and investment. Our revenues
are primarily generated from sales of our CardioGram services and our OsteoGram
(R) system. These devices may be rendered obsolete or inferior as a result of
technological change, changing customer needs, new product introductions or
other developments, each of which could significantly reduce our revenues. Our
competitors could succeed in developing or marketing technologies and/or
products that are superior to and/or more commercially attractive than ours. Our
success will depend in part on our ability to improve and enhance our products
in a timely manner. If we fail to enhance our products in a timely manner our
revenues could decrease significantly.
IF WE LOSE ONE OF OUR MAJOR CUSTOMERS, WE MAY NOT BE ABLE TO REPLACE THEM AND
OUR REVENUES COULD DECREASE SIGNIFICANTLY.
For the year ended September 30, 2003 two customers accounted for approximately
33% of our total accounts receivable. These customers may be
difficult to replace if they were to discontinue using our services.
IF WE DO NOT COMPLY WITH REGULATORY AND LEGISLATIVE REQUIREMENTS, WE WILL NOT BE
ABLE TO SELL OUR PRODUCTS WHICH WILL CAUSE OUR REVNUES TO DECLINE.
We must obtain certain approvals by and marketing clearances from governmental
authorities, including the Food and Drug Administration, or the FDA, and similar
health authorities in foreign countries to market and sell its products in those
countries. The FDA regulates the marketing, manufacturing, labeling, packaging,
advertising, sale and distribution of 'medical devices,' as do various foreign
authorities in their respective jurisdictions. Such authorities currently
regulate our products.
The FDA review process typically requires extended proceedings pertaining to the
safety and efficacy of new products. Such proceedings, which must be completed
prior to marketing a new medical device, are potentially expensive and time
consuming. They may delay or hinder a product's timely entry into the
marketplace. Moreover, the review or approval process for these products by the
FDA or any other applicable governmental authorities may not occur in a timely
fashion, if at all, or that additional regulations will not be adopted or
current regulations amended in such a manner as will adversely affect us. The
FDA also regulates the content of advertising and marketing materials relating
to medical devices. Failure to comply with such regulations may result in a
delay in obtaining approval for the marketing of such products or the withdrawal
of such approval if previously obtained. International sales of our products
are subject to the regulatory agency product registration requirements of each
country in which our products are sold. The regulatory review process varies
from country to country and may in some cases require the submission of clinical
data. We typically rely on our distributors in foreign countries to obtain the
required regulatory approvals.
IF WE DO NOT OBTAIN APPROVALS OR COMPLY WITH REQUIREMENTS ON A TIMELY BASIS, WE
MAY NOT BE ABLE TO SELL OUR PRODUCTS.
Because a portion of our sales are outside the United States, we are subject to
additional risks, including the devaluation of foreign currencies, instability
in key geographic markets, tariffs and other trade barriers which are not within
our control and could substantially increase our costs or limit our ability to
sell our products.
Our international sales subject us to the risk of loss in the event of
devaluation of foreign currencies in which sales are made between the time of
contract and payment. We do not enter into currency hedging transactions. In
addition, our international sales would be adversely affected by political,
social or economic instability or the imposition of tariffs and other trade
barriers in the geographic markets in which we sell our products.
7
Risks Related to Our Industry
WE FACE INTENSE COMPETITION IN OUR INDUSTRY AND IF WE CANNOT SUCCESSFULLY
COMPETE, OUR REVENUES WILL DECLINE.
Competition relating to our current products is intense and includes various
companies, both within and outside of the United States. Our competitors and
potential competitors include large companies with substantially greater
financial, sales and marketing, and technical resources, larger and more
experienced research and development staffs, more extensive physical facilities
and substantially greater experience in obtaining regulatory approvals and in
marketing products than us. In addition, our competitors may be currently
developing, or may attempt to develop, technologies and products that are more
effective than those being developed by us or that would otherwise render our
existing and new technology and products obsolete or uncompetitive. We may not
be able to compete successfully. If we cannot compete successfully or the
development by our competitors of technology and products that are more
effective than those being developed by us would cause our revenues to decline.
IF THERE IS HEALTH CARE REFORM TO LIMIT COSTS, DEMAND FOR OUR PRODUCTS MAY
DECREASE WHICH WOULD CAUSE OUR REVENUES TO DECREASE.
In recent years the United States Congress and state legislatures have
considered various types of health care reform in order to control growing
health care costs. We are unable to predict what legislative proposals will be
adopted in the future, if any. Implementation of health care reform legislation
that contains costs could limit the profits that can be made from our products.
This could decrease demand for our products, which could in turn decrease the
business opportunities available to us both in the United States and abroad.
RISKS RELATED TO THIS OFFERING AND OUR STOCK
"PENNY STOCK" RULES MAY MAKE BUYING OR SELLING OUR SECURITIES DIFFICULT.
Trading in our securities is subject to the Securities and Exchange Commission's
"penny stock" rules and it is anticipated that trading in our securities will
continue to be subject to the penny stock rules for the foreseeable future. The
Securities and Exchange Commission has adopted regulations that generally define
a penny stock to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. These rules require that any
broker-dealer who recommends our securities to persons other than prior
customers and accredited investors must, prior to the sale, make a special
written suitability determination for the purchaser and receive the purchaser's
written agreement to execute the transaction. Unless an exception is available,
the regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with trading in the penny stock market. In addition, broker-dealers
must disclose commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities they offer. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from recommending transactions in our securities,
which could severely limit the liquidity of our securities and consequently
adversely affect the market price for our securities.
EXISTING STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION FROM THE SALE OF
SECURITIES PURSUANT TO OUR INVESTMENT AGREEMENT WITH DUTCHESS.
8
The sale of shares pursuant to our Investment Agreement with Dutchess will have
a dilutive impact on our stockholders. As a result, our net income per share,
if any, could decrease in future periods, and the market price of our common
stock could decline. In addition, the lower our stock price at the time we
exercise our put option, the more shares we will have to issue to Dutchess to
draw down on the full equity line with Dutchess. If our stock price decreases,
then our existing stockholders would experience greater dilution.
DUTCHESS WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF OUR COMMON
STOCK, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE.
The common stock to be issued under our agreement with Dutchess will be
purchased at a 5% discount to the lowest closing bid price for the five days
immediately following our notice to Dutchess of our election to exercise our put
right. These discounted sales could cause the price of our Common Stock to
decline and you may not be able to sell our stock for more than you paid for it.
OUR SECURITIES HAVE BEEN THINLY TRADED ON THE OVER-THE-COUNTER BULLETIN BOARD,
WHICH MAY NOT PROVIDE LIQUIDITY FOR OUR INVESTORS.
Our securities are quoted on the Over-the-Counter Bulletin Board. The
Over-the-Counter Bulletin Board is an inter-dealer, over-the-counter market that
provides significantly less liquidity than the NASDAQ Stock Market or national
or regional exchanges. Securities traded on the Over-the-Counter Bulletin Board
are usually thinly traded, highly volatile, have fewer market makers and are not
followed by analysts. The Securities and Exchange Commission's order handling
rules, which apply to NASDAQ-listed securities, do not apply to securities
quoted on the Over-the-Counter Bulletin Board. Quotes for stocks included on
the Over-the-Counter Bulletin Board are not listed in newspapers. Therefore,
prices for securities traded solely on the Over-the-Counter Bulletin Board may
be difficult to obtain and holders of our securities may be unable to resell
their securities at or near their original acquisition price, or at any price.
WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE OF CREDIT
WITH DUTCHESS WHEN NEEDED.
We will depend on external financing to fund our planned expansion. We expect
that these financing needs will be primarily met by our agreement with Dutchess.
However, due to the terms of the Investment Agreement, this financing may not be
available in sufficient amounts or at all when needed. As a result, we may not
be able to grow our business as planned.
INVESTORS MUST CONTACT A BROKER-DEALER TO TRADE OVER-THE-COUNTER BULLETIN BOARD
SECURITIES. AS A RESULT, YOU MAY NOT BE ABLE TO BUY OR SELL OUR SECURITIES AT
THE TIMES THAT YOU MAY WISH.
Even though our securities are quoted on the Over-the-Counter Bulletin Board,
the Over-the-Counter Bulletin Board may not permit our investors to sell
securities when and in the manner that they wish. Because there are no
automated systems for negotiating trades on the Over-the-Counter Bulletin Board,
they are conducted via telephone. In times of heavy market volume, the
limitations of this process may result in a significant increase in the time it
takes to execute investor orders. Therefore, when investors place market orders
an order to buy or sell a specific number of shares at the current market price
it is possible for the price of a stock to go up or down significantly during
the lapse of time between placing a market order and its execution.
9
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE, THEREFORE, YOU MAY
NEVER SEE A RETURN ON YOUR INVESTMENT.
We do not anticipate the payment of cash dividends on our Common Stock in the
foreseeable future. We anticipate that any profits from our operations will be
devoted to our future operations. Any decision to pay dividends will depend upon
our profitability at the time, cash available and other factors. Therefore, you
may never see a return on your investment. Investors who anticipate a need for
immediate income from their investment should not purchase the securities
offered in this prospectus.
USE OF PROCEEDS
---------------
This prospectus relates to shares of our Common Stock that may be offered and
sold from time to time by the selling stockholder. We will not receive proceeds
from the sale of shares of Common Stock in this offering. However, we will
receive the proceeds from the sale of shares of Common Stock to Dutchess under
the Investment Agreement. The purchase price of the shares purchased under the
Investment Agreement will be equal to 95% of the average of the three lowest
closing bid prices of our Common Stock on the Over-the-Counter Bulletin Board
for the five days immediately following the date of our notice of election to
exercise our put.
For illustrative purposes, we have set forth below our intended use of proceeds
for the range of net proceeds indicated below to be received under the
Investment Agreement. The table assumes estimated offering expenses of $25,000.
Proceeds Proceeds
If 100% Sold If 50% Sold
Gross proceeds $ 5,000,000 $ 2,500,000
Estimated remaining accounting, legal and associated expenses of Offering $ 25,000 $ 25,000
------------ ------------
Net Proceeds $ 4,975,000 $ 2,475,000
=========== ==========
Priority Proceeds Proceeds
Business development. . . . . . . . . . . . . . . . . . . . . . . . . . . 1st $ 600,000 $ 300,000
Research and development. . . . . . . . . . . . . . . . . . . . . . . . . 2nd $ 875,000 $ 437,500
Intellectual property . . . . . . . . . . . . . . . . . . . . . . . . . . 3rd $ 150,000 $ 75,000
Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4th $ 3,350,000 $ 1,662,500
------------ ------------
Total $ 4,975,000 $ 2,475,000
=========== ==========
Proceeds of the offering which are not immediately required for the purposes
described above will be invested in United States government securities,
short-term certificates of deposit, money market funds and other high-grade,
short-term interest-bearing investments.
10
DETERMINATION OF OFFERING PRICE
The shares of Common Stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board or in
negotiated transactions during the term of this offering. These prices will
fluctuate based on the demand for the shares.
DILUTION
--------
Our net tangible book value as of September 30, 2003 was $459,000, or $0.026 per
share. Our net tangible book value per share is equal to the amount of our total
assets less intangible assets and less total liabilities, divided by the number
of shares of Common Stock at September 30, 2003.
Assuming that we sell the 10,000,000 shares offered by us at a price of $0.30
per share, after deducting estimated underwriting fees and estimated offering
expenses payable by us, our net tangible book value as of September 30, 2003
would have been $3,434,000, or $0.123 per share. This represents an immediate
increase in net tangible book value of $0.097 per share to existing shareholders
and an immediate dilution on net tangible book value of $0.175 per share to
investors purchasing shares in this offering. The following table illustrates
this per share dilution:
Assumed public offering price per share $0.300
Net tangible book value per share at September 30, 2003 $0.026
Increase in net tangible book value per share attributable to new investors $0.097
Net tangible book value per share after this offering $0.123
Dilution per share to investors purchasing share in this offering $0.175
You should be aware that there is an inverse relationship between our stock
price and the number of shares to be issued under the Investment Agreement to
Dutchess. That is, as our stock price declines, we would be required to issue a
greater number of shares under the Investment Agreement for a given advance.
This inverse relationship is demonstrated by the table below, which shows the
number of shares to be issued under the Investment Agreement at a price of $0.30
per share and 75%, 50% and 25% discounts to that price.
11
Offering price: $0.30 75% 50% 25% -
PURCHASE PRICE:(1) $0.075 $0.150 $0.225 $0.300
NO. OF SHARES:(2) 10,000,000 5,000,000 3,333,333 2,500,000
TOTAL OUTSTANDING:(3) 27,951,034 22,951,034 21,284,367 20,451,034
PERCENT OUTSTANDING:(4) 35.8% 21.8% 15.7% 12.2%
(1) Represents 95% of market price.
(2) Represents the number of shares of Common Stock to be issued at the prices set
forth in the table to generate $750,000 in gross proceeds.
(3) Represents the total number of shares of Common Stock outstanding after the
issuance of the shares, assuming no issuance of any other shares of Common Stock.
(4) Represents the shares of Common Stock to be issued as a percentage of the total
number shares of Common Stock outstanding (assuming no exercise or conversion of any
options, warrants or other convertible securities).
CAPITALIZATION
--------------
The following sets forth our actual capitalization on September 30, 2003
Shareholders' equity
Preferred stock, $0.10 par value, authorized 1,000,000 shares
Class A $3.50 cumulative, convertible, voting
issued and outstanding - 8,400 shares. . . . . . . . . . . . . . . . $ 1,000
---------------
Class B $3.50 cumulative, convertible, voting
issued and outstanding - 300 shares. . . . . . . . . . . . . . . . . -
---------------
Common stock, $0.01 par value, authorized 50,000,000 shares
issued and outstanding - 17,951,034 shares . . . . . . . . . . . . . 180,000
---------------
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . 32,296,000
---------------
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (31,978,000)
---------------
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . 27,000
---------------
Deferred stock compensation. . . . . . . . . . . . . . . . . . . . . . . (17,000)
---------------
Total Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . $ 509,000
===============
12
DIVIDEND POLICY
---------------
We do not pay dividends on our Common Stock and we do not anticipate paying
dividends on our Common Stock in the foreseeable future. We intend to retain our
future earnings, if any, to finance the growth of our business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Introduction
The following discussion is intended to provide an analysis of our financial
condition and should be read in conjunction with our financial statements and
the accompanying notes.
Results of Operations
Fiscal Year Ended September 30, 2003 as compared to fiscal year ended September
30, 2002.
Total revenues for fiscal 2003 were $1,811,000 as compared to $1,955,000 in
fiscal 2002, a decrease of 7%. Our electrocardiogram services revenues
during fiscal 2003 decreased by 6% to $1,601,000 from $1,696,000 mainly due
to pricing pressures relating to ongoing state deficits. Electrocardiogram
product and supplies sales decreased in fiscal 2003 to $129,000 from
$138,000 due to fewer sales of electrocardiogram equipment. During fiscal 2003
the OsteoGram (R) revenue decreased to $81,000 from $121,000. The decrease was
due to our strategic shift away from selling the personal computer version
of our OsteoGram (R) system towards a software only sales, which does not
include computer hardware.
Cost of electrocardiogram services for fiscal 2003 decreased by 6% to
$477,000 from $508,000 due to us adopting new telecommunication carriers. Cost
of goods sold of electrocardiogram for fiscal 2003 decreased by 9% to $88,000
from $97,000 for fiscal 2002, due to lower sales of electrocardiogram equipment
and due to the continuing trend toward equipment leasing in lieu of outright
purchase. Cost of goods sold for OsteoGram (R) decreased by 38% during
fiscal 2003 to $8,000 from $13,000 for fiscal 2002, since OsteoGram (R) sales
to international distributors did not include computer hardware, which is
normally purchased locally.
Selling expenses decreased by 23% for fiscal 2003 to $282,000 from $364,000 for
fiscal 2002, due to reduction in domestic marketing activities and
marketing-related consulting services associated with the OsteoGram (R). Much of
our marketing emphasis has shifted to the international markets, where local
distributors bear the bulk of marketing costs.
General and administrative expenses in fiscal 2003 decreased by 14% to $945,000
from $1,097,000 for fiscal 2002 due to incremental cost cutting measures,
including deferring our 2003 annual shareholders' meeting, issuing stock options
to the directors and officers as compensation for their services in lieu of cash
payment and staff reductions.
13
Research and development costs decreased slightly for fiscal 2003 to $216,000
from $217,000 for fiscal 2002 primarily due to decrease of clinical trial
expenses and OsteoGram (R) related radiology projects.
Interest income decreased by 33% for fiscal 2003 to $26,000 from $39,000 for
fiscal 2002 due to decreased investments in marketable securities and reduced
interest income on such investments.
The net loss decreased by 24% to $375,000 for fiscal 2003 from $494,000 for
fiscal 2002. The decrease is primarily due to reduced expenditures related to
marketing activities for our OsteoGram (R) products, resulting from our decision
to withhold investment in marketing activities until we confirmed the validity
of our new strategy to enter the market for digital imaging applications by
seeking partners that will integrate our OsteoGram (R) software into their
digital (filmless) equipment.
Three Months Ended December 31, 2003 as compared to Three Months Ended December
31, 2002.
For the quarter ended December 31, 2003, revenues from electrocardiogram
operations decreased by 8% to $402,000 from $438,000 for the same period in
fiscal year 2002. The decrease is mostly due to lower sales of electrocardiogram
equipment, supplies, and maintenance agreements. electrocardiogram transmissions
declined by 1%. Revenues from OsteoGram(R) sales and services for the quarter
ended December 31, 2003 increased by 314% to $58,000 from $14,000 for the same
period in fiscal 2002 due to increased software sales in China and other Asian
countries.
Cost of services and goods sold consists of the costs of electrocardiogram
services provided, supplies, electrocardiograph equipment sold and OsteoGram(R)
systems sold. During the quarter ended December 31, 2003, costs of services of
electrocardiogram decreased by 4% to $119,000 from $124,000 for the same period
in fiscal 2002, mostly due to staff reductions and the adoption of new
telecommunication carriers. During the quarter ended December 31, 2003, cost of
goods sold of electrocardiogram decreased by 29% to $15,000 from $21,000 for the
same period in fiscal 2002, mainly due to the reduced purchase of
electrocardiogram equipment. Cost of goods sold for OsteoGram(R) increased 100%
during the quarter ended December 31, 2003 to $4,000 from $2,000 for the same
period in fiscal 2002, due to purchase of materials for the increased number of
OsteoGram(R) systems sold.
Selling expenses decreased by 45% during the quarter ended December 31, 2003 to
$45,000 from $82,000 for the same period in fiscal 2002, primarily due to
decreased OsteoGram(R) marketing expenses in the domestic market. As we focus
more on the international arena, our marketing outlays decline, since our
distribution partners assume the burden of local marketing expenses.
General and administrative expenses decreased by 12% during the quarter ended
December 31, 2003 to $241,000, as compared to $274,000 for the same period in
fiscal 2002, almost entirely due to decreased expenses for professional
services.
Research and development costs, generally for the OsteoGram(R) product,
increased by 4% during the quarter ended December 31, 2003 to $53,000 from
$51,000 for the same period in fiscal 2002, due to salary adjustments.
14
Interest income decreased by 38% during the quarter ended December 31, 2003 to
$5,000 from $8,000 for the same period in fiscal 2002, primarily due to
decreased investments in marketable securities and reduced interest income in
such investments.
Net loss for the quarter ended December 31, 2003 decreased by 59% to $61,000
from $147,000 for the same period in fiscal 2002 due to company-wide
cost-cutting measures implemented during the current year period.
Financial Condition, Liquidity and Capital Resources
At December 31, 2003, we had approximately $221,000 in cash and marketable
securities, as compared to a balance of $247,000 at September 30, 2003. The net
decrease of $26,000 in cash and marketable securities is primarily due to cash
used in operations. There were no purchases of property, plant and equipment in
the quarter ended December 31, 2003.
We intend to utilize the funds from our equity line with Dutchess to increase
our business development activities in seeking requisite partnerships with the
manufacturers of digital (filmless) imaging equipment that might integrate our
OsteoGram software into their platforms as a value-added product. In order to
develop new applications and to continue to integrate our OsteoGram software
into various digital platforms, we will be required to expand our development
team by adding programmers with digital imaging experience. We also plan to file
a number of patents to protect the intellectual property rights associated with
the development of a number of new OsteoGram (R) related imaging applications in
the fields of bone disease, dental disease and specific cancers. The remaining
funds will be used for strategic acquisitions that may or may not materialize.
We have historically used existing cash and readily marketable securities
balances to fund operating losses and capital expenditures. We had raised these
funds in 1997 through 2000 through the placement of Preferred Stock issuances
and proceeds from the exercise of certain stock options and warrants.
We have incurred recurring losses and had net losses aggregating $869,000 in
fiscal years ended September 30, 2003 and 2002. Our business strategy includes
an increase in OsteoGram (R) sales through domestic and international marketing
and distribution efforts, including partnerships with the manufacturers of
digital imaging equipment. We intend to finance this business strategy by using
our current working capital resources and cash flows from existing operations,
including the electrocardiogram and OsteoGram (R) businesses. Our sales of
OsteoGram (R) may not be sufficient to offset related expenses.
We anticipate that our cash flow from operations, available cash and marketable
securities will be sufficient to meet our anticipated financial needs for at
least the next 12 months. However, in certain circumstances we may need to raise
additional capital in the future, which might not be available on reasonable
terms or at all. Failure to raise capital when needed could adversely impact our
business, operating results and liquidity. If additional funds are raised
through the issuance of equity securities, the percentage of ownership of
existing stockholders would be reduced. Furthermore, these equity securities
might have rights, preferences or privileges senior to our Common Stock. Our
Common Stock is currently quoted on the Over-The-Counter Bulletin Board, which
will make it more difficult to raise funds through the issuance of equity
securities. Additional sources of financing may not be available on acceptable
terms, if at all.
15
Our primary capital resource commitments at December 31, 2003 consist of
capital and operating lease commitments, primarily for computer equipment and
for our corporate office facility.
We intend to pursue additional research and/or sub-contractor agreements
relating to our development projects. Additionally, we may seek partners and
acquisition candidates of businesses that are complementary to our own. Such
investments would be subject to our obtaining financing through issuance of debt
or other securities. Any acquisitions may be dilutive to stockholders.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations, including the discussion on liquidity and capital resources, are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
management re-evaluates its estimates and judgments, particularly those related
to the determination of the estimated recoverable amounts of trade accounts
receivable, impairment of long-lived assets, revenue recognition and deferred
tax assets. We believe the following critical accounting policies require its
more significant judgment and estimates used in the preparation of the financial
statements.
We maintain an allowance for doubtful accounts for estimated losses that
may arise if any of our customers are unable to make required payments.
Management specifically analyzes the age of customer balances, historical
bad debt experience, customer credit-worthiness, and changes in customer
payment terms when making estimates of the uncollectability of our trade
accounts receivable balances. If we determine that the financial conditions of
any of our customers deteriorated, whether due to customer specific or
general economic issues, increases in the allowance may be made. Accounts
receivable are written off when all collection attempts have failed.
We have a significant amount of property, equipment and intangible assets,
including patents. In accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long Lived
Assets, we review our long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset or asset group may not be recoverable.
Recoverability of long-lived and amortizable intangible assets to be held and
used is measured by a comparison of the carrying amount of an asset to the
undiscounted future operating cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying value of the assets exceeds their
fair value.
We follow the provisions of Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" for revenue recognition. Under Staff
Accounting Bulletin 101, four conditions must be met before revenue can be
recognized: (i) there is persuasive evidence that an arrangement exists, (ii)
delivery has occurred or service has been rendered, (iii) the price is fixed or
determinable and (iv) collection is reasonably assured.
16
Income taxes are accounted for under the asset and liability method. Under this
method, to the extent that we believe that the deferred tax asset is not
likely to be recovered, a valuation allowance is provided. In making this
determination, we consider estimated future taxable income and taxable timing
differences expected to reverse in the future. Actual results may differ from
those estimates.
New Accounting Pronouncements
In June 2002, Statement of Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit or Disposal Activities, which requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred, was issued. This statement nullifies Emerging
Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring), which required that a liability for an exit
cost be recognized upon the entity's commitment to an exit plan. Statement of
Financial Accounting Standards No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002.
In November 2002, Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, was issued. Statement of Financial Accounting Standards
No. 150 requires that certain financial instruments previously reported as
equity be reported as liabilities (such as mandatory redeemable equity
instruments and buy-sell arrangements). Depending on the type of financial
instrument, it will be accounted for at either fair value or present value of
future cash flows determined at each balance sheet date with the change in that
value reported as interest expense in the income statement. In the past, either
those financial instruments were not required to be recognized, or if recognized
were reported in the balance sheet as equity and changes in the value of those
instruments were normally not recognized in net income. The statement is
effective for instruments entered into or altered after May 31, 2003, and is
otherwise effective for interim periods ending after June 15, 2003.
In November 2002, Financial Interpretation Number (FIN) 45, Guarantor's
Accounting and Disclosure Requirement for Guarantees, including Indirect
Guarantees of Indebtedness of Others, was issued. Financial Interpretation
Number No. 45 requires that a guarantor recognize, at the inception of the
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provision of
Financial Interpretation Number No. 45 does not apply to certain guarantee
contracts, such as warranties, derivatives or guarantees between either parent
and subsidiaries or corporations under common control, although disclosures of
such guarantees is required. For contracts that are within the initial
recognition and measurement provisions of Financial Interpretation Number No.
45, the provisions are to be applied to guarantees issued or modified after
December 31, 2002.
17
In January 2003, Financial Interpretation Number No. 46, Consolidation of
Variable Interest Entities, was issued. Financial Interpretation Number 46
clarifies existing accounting principles that determine when a company should
include in its financial statements the assets, liabilities and activities of
another entity when the equity investors do not have the characteristics of a
controlling financial interest or when the equity at risk is not sufficient for
the entity to finance its activities without additional subordinated financial
support from other parties. The consolidation requirements of Financial
Interpretation Number No. 46 apply to variable interest entities (commonly
evidenced by a guarantee arrangement or other commitment to provide financial
support) created after January 31, 2003. It required us to perform this
assessment by September 30, 2003, and consolidate any variable interest entities
for which it absorbed a majority of the entities' expected losses or receive a
majority of the expected residual gains.
The adoption of the provisions of these pronouncements did not have a
material impact on our results of operations, financial position, cash flows and
related disclosures.
DESCRIPTION OF BUSINESS
-----------------------
GENERAL
We are a healthcare informatics company that provides medical imaging software
solutions and the remote interpretation of electrocardiograms. Our two main
products are the OsteoGram (R) and CardioGram systems. The OsteoGram (R) is our
proprietary image processing software that utilizes either standard or digital
x-rays of the hand to screen, diagnose and monitor osteoporosis, a disease that
affects over an estimated 200 million people worldwide. The CardioGram consists
of computer-aided telemedicine services that offer on-line interpretation of
electrocardiograms to physicians and government and corporate healthcare
providers. We incorporated in the State of Delaware on July 21, 1986.
RECENT EVENTS
During fiscal 2003 we changed the strategic direction for the OsteoGram (R)
product. We believe that the future of the underlying technology is in the
development of medical software applications for digital (filmless) imaging
equipment, which is a high growth segment of the medical imaging field. The
digital or DICOM (Digital Communications and Imaging in Medicine)
standards-based version of the OsteoGram (R) is the first CompuMed product in
this emerging arena. Our Research & Development team has a number of other
applications in development and on the drawing board in the areas of bone
disease, dental disease and specific cancers. This year we pursued distribution
and product development partnerships with imaging equipment manufacturers, and
we expect that these initiatives will bear fruit in the near future. We have
also expanded our international distribution through country-specific
distributors. These distributors are obtaining the necessary regulatory
approvals and gearing up their marketing efforts.
In fiscal 2003 we directed our electrocardiogram business towards strengthening
our relationships with key customers. In addition, we are exploring a number of
business development prospects to expand our service offering to the
international markets. Our CardioGram team is evaluating new electrocardiogram
platforms to exploit these opportunities.
THE OSTEOGRAM (R)
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GENERAL
The OsteoGram (R) is a software-based image processing system that enables
healthcare providers to screen, diagnose and monitor osteoporosis using
conventional, film-based hand x-rays or digital images from filmless x-ray
equipment. Osteoporosis is diagnosed by measuring bone mineral density . A low
bone mineral density is indicative of the disease. The OsteoGram (R) uses
Radiographic Absorptiometry to measure bone mineral density. The practical
implementation of the Radiographic Absorptiometry technique began in the early
1980's. We applied several enhancements to the technique in the early 1990's,
and in the middle of that decade, we made the OsteoGram (R) test available to
doctors as a central-lab-based service. This required that the hand x-ray films
be mailed by the healthcare provider to a special laboratory for analysis by
skilled technicians. The technology was validated in this era by a number of
peer-reviewed publications, and it was widely utilized by Merck and us
during clinical trials for their osteoporosis drug - Fosamax.
In May 1999, we received clearance from the United States Food and Drug
Administration, or FDA, to market an automated version of the OsteoGram (R)
software for use as a stand-alone product by physicians. We are currently
launching the DICOM, or digital version of the product. Using either standard or
digital x-ray equipment, two posterior-anterior views of the left-hand fingers
are taken with an aluminum alloy reference wedge in each exposure. The
calibration wedge is used to adjust for any differences among x-ray equipment,
exposures and other variables. In the case of the personal computer version of
the OsteoGram (R) , the developed film is scanned with a standard desktop
scanner, and the OsteoGram (R) software analysis program rapidly produces an
accurate and precise bone mineral density report. With a filmless x-ray system
the image is captured on a workstation for analysis. CompuMed recently developed
the DICOM-compliant version of the OsteoGram (R) for use on filmless systems,
which have become a high growth segment in the medical imaging market. As
digital radiography systems proliferate, the need grows for systems and networks
to communicate and efficiently move/archive images. DICOM is the
industry-consortium established information standard that allows the new
generation of digital medical imaging equipment to interconnect.
The foremost market opportunity that we have identified for our OsteoGram (R)
is the market for filmless x-ray systems. Our application can reside on a
workstation, just like Microsoft Word on a personal computer. There is
no need for an additional piece of equipment or a redundant computer. Clinicians
can launch the OsteoGram (R) application and diagnose osteoporosis at the same
time an x-ray is taken for a bone fracture, making it far easier to
implement and use than expensive dual energy x-ray absorptiometry equipment
that requires a dedicated room and specially trained technicians who are
usually not available around the clock.
STRATEGIC PARTNERSHIPS
Cost-effective distribution is a crucial component of our OsteoGram (R)
strategy. One of our goals is to establish distribution and product development
partnerships with the major manufactures of digital imaging platforms and
network servers, and a number of these companies are evaluating our software. We
expect this process to continue, and it is likely that smaller, nimbler firms
will initially commit. A second part of our strategy is to utilize experienced
imaging distributors both in the domestic and international market. We made a
presentation at the September 2003 national sales meeting of National Imaging
Resources, a prominent consortium of regional imaging distributors, and we hope
to establish relationships with many of their member firms. National Imaging
Resources' focus on selling capital equipment, combined with their commitment
to serve the market for digital radiography and network servers, compliments
our strategy to develop digital applications for the medical imaging
field.
19
Our efforts in the international arena continue. Rather than build our own
global sales force, we use existing distribution channels that include a mix of
manufacturers' direct sales representatives and local distributors. New
distributors are expected to become productive after they meet their
country-specific regulatory requirements. During this fiscal year we
strengthened our distribution in China, while adding new distributors in Korea,
Israel, Egypt, India and Brazil. The member countries to the European Union are
of particular interest, since their conversion to filmless x-ray systems is far
ahead of the U.S. market. In order to enter the European Union we will need to
have a CE Mark, indicating that we have conformed to all the regulatory
obligations required by European Union legislation. Our technical staff has been
working to meet the requirements soon after this year's Medica in November.
Located in Dusseldorf, Germany, Medica is the world's largest all-medical trade
show, attended by most of the major European Union distributors. We are also
seeking wider distribution in select areas of Latin America and the Middle East.
RESEARCH & DEVELOPMENT
We continue to invest in research and development efforts for the OsteoGram (R)
technology by developing new applications and filing key patents to protect our
intellectual property rights. Our DICOM version of the OsteoGram (R) was
essentially completed by the end of fiscal 2003; however, it must be modified to
function with each manufacturer's digital system. We agreed to a clinical trial
to validate the DICOM product on one leading manufacturer's system, and the
trial was successfully completed by the end of December 2003. In addition, we
have filed an application for an Small Business Innovative Research grant to
help fund our efforts to follow the progression of arthritic disease.
OSTEOPOROSIS
Osteoporosis is a disease characterized by low bone mass and structural
deterioration of tissue leading to bone fragility and an increased
susceptibility to fractures of the hip, spine and wrist. While there is
increased global awareness of osteoporosis, the disease is under-diagnosed and
under-treated.
According to the International Osteoporosis Foundation, osteoporosis affects
over 200 million people worldwide, 80% of which are women. Osteoporosis is a
major public health threat for 44 million Americans, and the disease costs the
U.S. healthcare system in excess of $17 billion annually, compared to breast
cancer at $6 billion. In fact, more people die as a result of
osteoporosis-related fractures each year than die from breast cancer.
In July 2002 the National Institutes of Health halted a large, in-progress study
examining the effects of hormone replacement therapy . The study, which was one
of the five major studies that comprise the large clinical trial called the
Women's Health Initiative , was discontinued because the hormones appeared to
increase a woman's risk of breast cancer as well as heart disease, blood clots
and stroke. This news caused the medical community to question one of the
long-accepted practices in the treatment of female menopausal symptoms. Hormone
replacement therapy is known to protect women against bone loss; however, the
negative implications of increased heart disease, stroke and cancer were largely
unknown. Subsequently millions of women discontinued hormone replacement therapy
therapy, which increased concern about bone loss. As a result, there was an
increased awareness of bone mineral density testing and testing methods.
20
Following the Women's Health Initiative announcement, the U.S. Preventative
Services Task Force published its own recommendations that women over the age of
65 be tested for osteoporosis. Soon afterwards the National Osteoporosis
Foundation reaffirmed their more comprehensive recommendations for osteoporosis
testing. In July 2003 the American Association for Orthopaedic Surgeons posted a
Policy Statement on their web site urging their members to test for underlying
bone disease when presented with a fragility fracture. In addition, Medicare is
expected to enact a new standard of care encouraging health care providers to
test for osteoporosis when a fracture is diagnosed.
We believe that the global awareness of osteoporosis is increasing, and that
there is a resurgence of interest in bone mineral density testing as a
result of the increased publicity. We also believe that osteoporosis testing is
a significant public health care issue that can best be dealt with in a
routine manner at a point-of-care care setting.
COMPETITION-OSTEOGRAM (R)
Bone mineral density measurements are the primary methods used to assist
physicians in detecting osteoporosis. Bone mineral density is measured by
passing x-ray beams or ultrasound through bone and determining how much
energy the bone absorbs.
Dual energy x-ray absorptiometry is currently the mostly widely used
osteoporosis detection technology, with a worldwide installed base of
approximately 16,000 units. The dual energy x-ray absorptiometry market is
divided into "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).
The leading manufacturers of whole-body dual energy x-ray absorptiometry
scanners include General Electric's Lunar Division (U.S.) and Hologic, Inc.
(U.S.), which together command most of the worldwide dual energy x-ray
absorptiometry market. The leading manufacturers of peripheral dual energy x-ray
absorptiometry machines are General Electric, Hologic, Norland, Osteometer (a
Danish subsidiary of OSI Systems, U.S.), and Schick Technologies, Inc. Whole
body dual energy x-ray absorptiometry products typically cost from
$70,000-$150,000 and require continued maintenance during their lifetime. They
also require specially trained technicians, who must be licensed in most states,
and who are not available around the clock.
We experience extensive competition for the OsteoGram (R) from companies that
offer dual energy x-ray absorptiometry machines, primarily because they
are considered the "gold standard" for measuring bone mineral density and
have a large installed base worldwide. We compete by offering cost effective
testing and a product with a unique digital format. The OsteoGram (R) was
developed to enhance the use of existing radiological equipment for
generating bone mineral density reports comparable to tests performed on the
expensive, dedicated dual energy x-ray absorptiometry equipment generally
found in hospitals and specialty practices.
21
Other competition for the OsteoGram (R) comes from less accurate ultrasound and
other peripheral devices. Our competition also uses single-energy x-ray
absorptiometry, quantitative computed tomography, peripheral quantitative
computed tomography, and radiographic absorptiometry. All radiographic
techniques in use today have been validated through extensive clinical studies
and are currently approved in the U.S. for Medicare reimbursement. Radiographic
Absorptiometry is the technology we employ because of its accuracy, ease of use
and relative low cost.
Quantitative Computed Tomography utilizes existing computed tomography, or CAT,
scanners that have been upgraded with specialized software, while peripheral
quantitative computed tomography utilizes specialized peripheral computed
tomography machines. Quantitative computed tomography and peripheral
quantitative computed tomography are expensive to perform and require a high
degree of expertise to operate properly. In addition, the radiation dose of
quantitative computed tomography is remarkably high compared to the OsteoGram
(R) process.
Quantitative Ultrasound bone densitometers were introduced in the early 1990s,
and they are widely available. General Electric Lunar and Hologic are leaders in
the ultrasound market segment; however, the market also includes numerous
regional manufacturers such as Myriad and Sunlight (Israel), IGEA (Italy) and
McCue (Great Britain). We believe that there are now approximately 10,000
Quantitative Ultrasound machines installed worldwide. Quantitative Ultrasound
has FDA clearance for screening in the U.S., but unlike the OsteoGram (R) ,
Quantitative Ultrasound is not recommended by the National Osteoporosis
Foundation for diagnosis and monitoring.
The only manufacturer using Radiographic Absorptiometry , other than CompuMed,
is Alara, Inc. (U.S.). In 2000 the FDA approved Alara's self-contained, tabletop
system that performs digital Radiographic Absorptiometry of the hand. Alara
appears to be currently focused on developing computed radiography, or filmless
x-ray, systems.
Biochemical Marker Tests that measure the level of bone metabolic substances
present in the blood or urine were introduced in the 1990s. There is no clear
consensus yet on the appropriate use of these technologies, since they only
measure the rate of bone loss, not bone density. Although their role in
monitoring the effect of drug therapy may grow, their use at the present time is
limited. Manufacturers of biochemical marker tests include Quidel, Inc. (U.S.)
and Ostex International, Inc., a division of Inverness Medical Innovations, Inc.
(U.S.).
Our existing and potential competitors consist principally of companies that
have substantially greater financial, technical, marketing, distribution and
other resources, greater current market penetration and longer-standing
relationships with customers than us. We believe that our ability to compete
successfully depends on a number of factors, both within and outside of our
control, including the price, quality and performance our products and those of
our competitors. Other factors include the timing and success of our new
product introductions and our competitors, the development of technical
innovations, the number and nature of our competitors in a given market, and
general market and economic conditions. We may never be able to compete
successfully in the future.
ELECTROCARDIOGRAM SERVICES
22
GENERAL
We have been a supplier of telemedicine services, establishing one of the
nation's largest telecommunications networks for processing electrocardiograms,
or ECGs, on a real time basis, for nearly twenty years.
Using a CompuMed electrocardiogram terminal, an electrocardiogram can be
acquired from a patient, telecommunicated to our central computers, analyzed and
received back on the electrocardiogram terminal where the electrocardiogram
trace and computer interpretation are printed- all within three minutes. If
necessary, we can provide an "overread" by a cardiologist and return the
results within an hour. We bill for this service on a per-use basis, and we
sell a full range of electrocardiogram supplies including electrodes, recording
paper, gel, and patient cables.
Electrocardiogram analysis services are available to end-users 24 hours a day,
seven days a week. Our computer laboratory is staffed or on-call at all times
and has been recently upgraded to provide additional features and faster turn
around time for "overreads" by replacing telephone requests with
electronic notification.
We currently provide electrocardiogram equipment and services to over 500
government and corporate healthcare facilities, clinics, and hospitals
nationwide. Our customers include physicians, correctional healthcare
facilities, ambulatory surgery centers, clinics, rural hospitals, occupational
health facilities, and behavioral health facilities.
Electrocardiogram terminals are available for purchase, rental or lease, and
transmission fees are charged on a per-use basis. Customers who choose to
purchase an electrocardiogram terminal are charged either hardware maintenance
fees or repair fees for maintaining and repairing the equipment.
We assess our customer's equipment needs on an ongoing basis, and we plan to
offer upgraded electrocardiogram instruments with value-added features that
should expand our market reach. We are also evaluating the need for an
XML- enabled, web-based version of our service that would allow us to enter the
international markets and those domestic markets where Internet access is
readily available. A web-based service would not only extend our scope,
but also significantly reduce costs by eliminating the need for long distance
phone transmissions. An XML-enabled system would also enable a number of
features including archiving and comparisons with previously stored
electrocardiograms.
MARKETING - ELECTROCARDIOGRAM SERVICES
During fiscal 2003 our goal was to strengthen relationships with key customers
and preserve a stable base of business. Although our electrocardiogram-related
revenue dipped during the year, we accomplished this goal, and September 2003
was the best month for electrocardiogram revenue in several years. We believe
that there are growth areas for the electrocardiogram business that can be
exploited with minimal cost. A proactive, outbound telemarketing approach will
be a key strategy for fiscal 2004, and we plan to identify and contact key
current and potential customers to expand our business in targeted segments.
23
Besides seeking cost reductions in our operations, we are seeking co-marketing
agreements with our equipment suppliers. Equipment upgrades are being explored,
which will enable us to enter higher margin segments, such as clinical trials. A
critical component of the upscale market segments is customer support and
increased regulatory compliance.
We target our sales efforts for electrocardiogram products and services
toward physicians, correctional healthcare facilities, ambulatory surgery
centers, rural hospitals and occupational health facilities located throughout
the U.S. We maintain a long-standing customer base with contracts for services
generally extending between one to three years. New customers are generated
mostly by our direct sales efforts. We advertise in trade journals and
attend national medical conventions to generate leads for selling our
services, equipment and supplies.
COMPETITION - ELECTROCARDIOGRAM SERVICES
Our primary competitors are the Laboratory Corporation of America, Biomedical
Systems, Inc. and Covance, Inc. These companies all offer electrocardiogram
terminals that provide electrocardiogram interpretation and data storage
services at a central location. We estimate that our centralized
electrocardiogram analyses constitute less than 1% of the total number of
electrocardiograms taken each year in the U.S.
The overall domestic electrocardiogram market is mature. However, we believe
that the demand for the centralized electrocardiogram services that we provide
may increase due to the trend toward decentralized diagnostic testing with
central interpretation and data storage. The principal methods under which we
compete are service, ease-of-use, and price.
Our existing and potential competitors consist principally of companies that
have substantially greater financial, technical, marketing, distribution and
other resources, greater current market penetration and longer-standing
relationships with customers than us. We believe that our ability to compete
successfully depends on a number of factors, both within and outside of our
control, including the price, quality and performance of our products and those
of our competitors. Other factors include the timing and success of our
new product introductions and our competitors, the development of
technical innovations, the number and nature of our competitors in a given
market, and general market and economic conditions. We may not be able to
compete successfully in the future.
ASSEMBLY, REPAIR AND CUSTOMER SERVICE
We repair and maintain most of the electrocardiographs rented, leased or sold
to our customers. All repair and assembly operations are conducted at our
headquarters. Our internal customer service staff handles customer equipment
and training problems, and our customer service department handles initial
installation and set-up, usually over the telephone.
24
GOVERNMENT REGULATION
The Centers for Medicare and Medicaid Services approve diagnostic tests for
reimbursement by Medicare. The OsteoGram (R) is approved for reimbursement by
Medicare as a centralized laboratory test and as a stand-alone system.
Government regulations may change at any time and Medicare reimbursement for the
OsteoGram (R) test, as well as for other bone mineral density tests, may be
withdrawn or reduced. Furthermore, other forms of testing for bone mineral
density as an indicator of osteoporosis have been or may be approved for
reimbursement, which may reduce our market share or profit margins for such
services.
Our OsteoGram (R) test and automated software have been cleared by the FDA for
use and sale. In addition, the OsteoGram (R) is approved for use in China,
Korea, and a number of other countries. The OsteoGram (R) software is subject to
regulation as a medical device. Our electrocardiogram computer interpretation
services are also regulated by the FDA and are compliant.
PATENTS AND PROPRIETARY RIGHTS
The U.S. Patent and Trademark Office awarded us our first OsteoGram (R)
patent in June 2001. The patent covers twenty aspects of Method and Apparatus
for determining Bone Mineral Density, and it expires on October 29, 2019.
In addition, we have a second patent pending, which includes twenty-four
claims covering image processing and bone segmentation technology. Final action
for the second patent was filed in August 2003. The second patent may not be
issued. Additionally, issued patents may not provide protection from
competitors, and any patents, if challenged, may not be upheld by the
courts. The OsteoGram (R) trademark is a registered trademark of CompuMed,
and it expires on July 2, 2012.
In July 2003 we filed a final action on a provisional U.S. patent
application for software to monitor the progression of both inflammatory and
degenerative joint disease, such as rheumatoid arthritis and osteoarthritis. The
application covers a system that uses many of the same imaging tools employed in
our OsteoGram (R) product for the screening, diagnosis and monitoring of
osteoporosis, but extends the system into the area of monitoring joint
degeneration. This new feature will be sold as separate product.
In July 2003 we filed a provisional U.S. patent application for our Digital
Communications and Imaging in Medicine, or DICOM version of the OsteoGram
(R) product, which we believe will be a key patent in our field. We are
unaware of any other patent to utilize x-ray equipment and a DICOM image to
evaluate bone mineral density and bone degenerative disease. We also filed
final action for a separate provisional patent that was originally filed in
1999 for bone segmentation and edge detection, along with final action on a
provisional patent to follow the progression of arthritic disease. In
September 2003 we filed an additional provisional U.S. patent application on a
method to determine the percentage cortical versus trabecular bone utilizing a
DICOM image. This is important, since many clinicians are turning their
attention to bone microstructure for a more precise diagnosis and prediction
of fracture risk. Dual energy x-ray absorptiometry technology, which is
considered the Gold Standard in bone mineral density testing, is unable to
distinguish between cortical and trabecular bone. We believe that our ability to
assess bone quality and other emerging parameters will help us to compete
effectively with dual energy x-ray absorptiometry.
In September 2003 our technical staff presented an abstract at the annual
meeting of the American Society of Bone Mineral Research, one of the most
prestigious organizations in the field. We submitted the abstract in conjunction
with Professor Liu Zonghou, President of the Osteoporosis Committee of China.
The work validated the unique ability of the OsteoGram (R) technology to
differentiate between cortical and trabecular bone.
25
EMPLOYEES
As of January 31, 2004, we had 13 full-time and 1 part-time employee, in
addition to our network of independent sales representatives and distributors.
None of our employees is represented by a labor union and we have experienced no
work stoppages. We consider our relations with our employees to be good. We also
retain consultants from time to time when necessary. Independent cardiologists
are retained for electrocardiogram "overreads" on a per-diem basis.
RESEARCH AND DEVELOPMENT
Our Research and Development efforts in fiscal 2003 focused primarily on
expanding the OsteoGram (R) platform with differentiating features and
additional applications that will open new market segments and expand our
business with existing customers. Our DICOM version of the OsteoGram (R)
platform will open up a new market for our product with many players in the
digital imaging arena. In addition, we plan to develop a new, lower-cost version
of the OsteoGram (R) that will open up a new market segment for customers that
would rather purchase bone mineral density testing on a "per test" basis. Our
arthritis module will allow clinicians to help patients with this debilitating
affliction by offering the first automated procedure to follow the progression
of the disease.
We are actively engaged in the development of potential diagnostic products
based on the technologies covered by our first patent awarded by the U.S. Patent
and Trademark Office in June 2001 and a second patent expected in the first half
of fiscal 2004. An additional patent filed in the fourth quarter of fiscal 2003
will protect our intellectual property as CompuMed develops a new application to
follow the progression of arthritic disease. We expect that a portion of this
development will be funded by research grants, contracts and Small
Business Innovation Research grants.
Our technical team is also working to select a new electrocardiogram supplier
that will enable us to compete effectively in the coming years. We intend to be
an active partner with our new supplier in the product planning process. Our
goal is to offer a number of systems with features that will appeal to both
cost-conscious customers and those desiring the additional benefits of
upgraded systems. An XML-enabled system will open up the international markets
for our services, plus cut transmission costs. Additionally, upgraded systems
will enable us to compete in the market for clinical drug trials and
electronic medical records.
In fiscal 2003, we spent $216,000 in research and development, as compared to
$217,000 in fiscal 2002. None of such costs were borne by our customers.
INSURANCE
We maintain liability insurance on our current products and are not aware of
any claims based on the use or failure of our products that are expected to
have material adverse effect on our operations or financial condition. There is
no assurance that claims made in the future with respect to our products will be
successfully defended or that our insurance will be sufficient. Furthermore,
liability insurance may not continue to be available to us on acceptable
terms.
26
DESCRIPTION OF PROPERTY
-----------------------
Our corporate office, computer center 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. We have the option to extend the lease
term for an additional five years. This is a full service lease that includes
utilities, maintenance and taxes on the property, janitorial and security
service.
MANAGEMENT
----------
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors and their ages as of the January 31, 2004 are as
follows:
Name Position Director since Age
--------------------------- --------------------- ----------------- ----------------
Robert Stuckelman Chairman of the Board 1973 71
John G. McLaughlin President, CEO 55
John Minnick Director 1985 55
John Romm, M.D Director 1997 73
Stuart L. Silverman, M.D. Director 1999 56
Phuong Dang Controller and Secretary 47
Biographies of executive officers and directors
Mr. Stuckelman founded our company in 1973 and served as our President
until 1982. From 1982 through 1989 Mr. Stuckelman was a business consultant for
small and medium size companies. In 1989 he rejoined us as President and
Chief Executive Officer, in which capacities he served until October 1994. Mr.
Stuckelman has been our director since our incorporation. He became Chairman
of the Board in April 2002. From 1994 to present, he has been President of
Technical Management Consultants, which provides business consulting
services to many companies. He holds an MSEE from the University of Southern
California and a BEE from Cornell University.
27
Mr. McLaughlin joined us in May 2002 as President and CEO. He has thirty years
of experience in the medical products arena, most recently as President of
the Great Circle Consulting Group, Inc. from May 1998 through May 2002. There
he provided strategic and operational guidance to domestic and international
firms in the medical device, diagnostic and biotech markets. Mr. McLaughlin's
prior experience includes five years as an officer and Vice President of
Marketing and Sales at Diagnostic Products Corporation, a global leader in
the design, manufacture and marketing of clinical laboratory instrumentation.
He served in that capacity from February 1993 to February 1998. Prior to
that, Mr. McLaughlin was the President of Biometric Imaging, which was
subsequently acquired by Becton Dickinson in 1999. He holds a Bachelor
of Science degree in Pharmacy from the State University of New York at Buffalo.
Mr. Minnick has been the President of Minnick Capital Management, an
investment management firm from 1972 to present. 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 . Mr. Minnick holds a B.A. from Washburn University and a J.D.
from Washburn University School of Law.
Dr. Romm has practiced internal medicine and gastroenterology in private
practice from 1962 to present. He earned his M.D. 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.
Dr. Silverman has been the Medical Director of the Osteoporosis Medical
Center in Beverly Hills, CA, from 1986 to present. The OMC is 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.
Ms. Dang has a degree in Accounting and been employed by us since 1990. She has
served as Controller, Secretary and Principal Financial Officer since 1997. Ms.
Dang has 26 years of corporate accounting and finance experience in the
healthcare field, mail order and retail stores . Prior to joining to CompuMed,
she served as Accounting Manager for the Maxicare Medical Center from 1984 to
1990. From 1978 to 1984, she served as Bookkeeper and Senior Staff Accountant
for Sunset House/ Gadget Tree a division of Carter Hawley Hale.
NUMBER AND ELECTION OF DIRECTORS
We have four directors. The terms of the Directors will expire at the next
annual meeting of stockholders.
28
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
The Audit Committee is primarily responsible for approving the services
performed by our independent auditors and reviewing reports of our internal and
external auditors regarding our accounting practices and systems of internal
accounting controls. This Committee currently consists of Mr. Stuckelman and
Dr. Romm. The Audit Committee met four times during the fiscal year ended
September 30, 2003. Mr. Stuckelman has been approved by our Board of Directors
as the Audit Committee Financial Expert.
COMPENSATION COMMITTEE
The Compensation Committee reviews and approves our compensation policy and has
assumed responsibility for administration of our 2003 Stock Option Plan. This
Committee currently consists of Mr. Minnick and Dr. Silverman.
LIMITATIONS ON OFFICER AND DIRECTOR LIABILITY
Our articles of incorporation provide, as permitted by governing Delaware law,
that our officers and directors shall not be personally liable to us or our
shareholders for monetary damages relating to an officer's or director's
position with the exception for liability (i) for breach of the director's duty
of loyalty to us or our stockholders, (ii) for acts or omissions not in good
faith which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit. In
addition, our by-laws provide for indemnification of directors to the full
extent of the law.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us under the
foregoing provisions, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act, and
is unenforceable for that reason.
EXECUTIVE COMPENSATION
----------------------
Set forth in the following table is certain information relating to the
approximate remuneration we paid during the past three fiscal years to our Chief
Executive Officer. No other executive officers had total compensation that
exceeded $100,000.
--------------------------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- -----------------
SECURITIES
FISCAL UNDERLYING STOCK
NAME AND PRINCIPAL POSITION YEAR ANNUAL SALARY BONUS OPTIONS
------------------------------------- ------------ ----------------- -------- ----------------
John G. McLaughlin, President and CEO 2003 $150,000 (1) 7,200(2) 434,225 (3)
Herbert S. Lightstone, President,
CEO and Director(4) $116,000 -0- 495,000 (5)
John G. McLaughlin, President and CEO 2002 $150,000 (6) -0- 100,000
Herbert S. Lightstone 2001 $146,570 $87,000 100,000
President, CEO & Director
------------------------------------- ------------ ----------------- -------- ----------------
(1) $139,000 was paid in fiscal 2003, and the remaining $11,000 was paid in the form of additional stock options.
(2) Earned in fiscal 2003, payable in fiscal 2004.
(3) 50,000 stock options were granted in November 2002 and the remaining 384,225 stock options were granted during
fiscal 2003 in lieu of salary (see (1) ).
(4) Mr. Lightstone's employment agreement expired May 31, 2002.
(5) Stock options terminated/unexercised as result of Mr. Lightstone's cessation of employment.
(6) Annualized compensation based on commencement date of May 15, 2002 which $53,000 of which was paid in fiscal year 2002.
29
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the stock options granted to our executive
officer named during the fiscal year ended September 30, 2003.
INDIVIDUAL GRANTS
------------------------
NUMBER OF SECURITIES % OF TOTAL OPTIONS
(SHARES OF COMMON STOCK) GRANTED TO EXERCISE
UNDERLYING OPTIONS EMPLOYEES/DIRECTORS PRICE EXPIRATION
NAME GRANTED(1) IN FISCAL ($/SHARE) DATE
------------------ ------------------------ -------------------- --------- ----------
John G. McLaughlin 434,225 14% $(2) (3)
------------------ ------------------------ -------------------- --------- ----------
(1) 50,000 options vested over a three-year period, 144,225 options vested immediately and
240,000 options vested over a six-month period.
(2) 50,000 options have an exercise price of $0.20 per share, 144,225 options have an exercise
price of $0.08 per share and 240,000 options have an exercise price of $0.10
per share.
(3) 50,000 options expire in 2012 and the remaining 384,225 options expire in 2013.
EXERCISE OF STOCK OPTIONS AND YEAR-END OPTION VALUES
There were no exercises of stock options by the named executive officer
during the fiscal year ended September 30, 2003. The following table sets forth
certain information regarding options of the named executive officer outstanding
as of September 30, 2003.
YEAR-END OPTION VALUES
---------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/WARRANTS AT OPTIONS/WARRANTS AT
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003 (1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------- ------------------ ------------------ ------------ -------------
John G. McLaughlin 394,218 140,007 75,831 32,869
---------------------- ------------------ ------------------ ----------- -------------
(1) Based on a fair market value of $ 0.43 per share, the closing price per share of
our Common Stock on September 30, 2003.
30
EMPLOYEE STOCK OPTION PLANS
We adopted the 2003 Stock Incentive Plan in June 2003, and did not submit this
plan to our stockholders for approval. We adopted the 1992 Stock Option Plan
in March 1992 and the 2002 Stock Option Plan in June 2002, both of which were
approved by our stockholders. Each of the plans was adopted to recruit and
retain selected officers and other employees and directors by providing equity
participation in the Company. The 1992 Plan was terminated in March 2002, while
the 2002 Plan was terminated on the effective date of the 2003 plan in June
2003. No further options can be granted under the 1992 Plan or the 2002 Plan.
Only nonqualified stock options may be granted under the 2003 Plan.
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 are generally nonassignable, except in the case of
death and may be exercised only while the optionee is employed by us or, in
certain cases, within three months after termination of employment or six months
after death or disability. 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.
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.
SAVINGS AND RETIREMENT PLANS
In July 1987, we instituted a Savings and Retirement Plan. Under the Savings
and Retirement Plan , every full-time salaried employee who is 18 years of age
or older may contribute up to 100 percent of his or her annual salary to the
Savings and Retirement Plan. We 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. Our contributions
are 100% vested after 36 months of contributions to the Savings and
Retirement Plan. Benefits are payable under the Savings and Retirement Plan
upon termination of a participant's employment with us or at retirement. The
Savings and Retirement 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.
EMPLOYMENT AGREEMENTS
We entered into a long-term agreement with Mr. McLaughlin effective November 2,
2002 through September 30, 2004. This agreement provides a base salary of
$150,000 per year and a performance bonus with a target of $150,000 for revenue,
profit and other criteria far exceeding fiscal 2002. In addition, Mr. McLaughlin
received standard employee options to purchase 50,000 shares of Common Stock at
an exercise price of $0.20 per share. In the event Mr. McLaughlin's employment
agreement is terminated by us without cause, or by Mr. McLaughlin for good
reason, he is entitled to receive all accrued compensation plus any bonus he
would otherwise receive for the remaining term of his contract. This agreement
was amended effective October 1, 2003 to provide that the Board of Directors
will award Mr. McLaughlin a bonus for fiscal 2004 of between $75,000 and
$150,000 based on performance factors, including revenue, profit and
accomplishment of milestones.
31
DIRECTOR COMPENSATION
Each of the Directors receives an annual Board of Directors fee of $10,000,
which is paid to each Director in equal monthly installments. The Chairman
receives an additional $4,500. In addition to the Board of Directors fee,
Directors receive an additional $750 per meeting when they serve as a member of
the Executive, Audit or Compensation Committee. Such amount is reduced to $250
if the committee meeting is held by teleconference or on the same day as a board
meeting.
In fiscal 2003, in our effort to conserve limited cash resources, the
Directors received no cash payment of their fees, but received a total of
2,380,817 stock options in lieu of their fees.
RELATED PARTY TRANSACTIONS
--------------------------
None.
MARKET FOR OUR COMMON STOCK
---------------------------
Our Common Stock is currently quoted on the over-the-counter bulletin board
under the symbol "CMPD.OB". Prior to December 1, 1999, our Common Stock was
listed on the Nasdaq National Market System. The following table sets forth the
range of high and low bid prices for our Common Stock during the periods
indicated. The prices set forth below represent inter-dealer prices, which do
not include retail mark-ups and markdowns, or any commission to the
broker-dealer, and may not necessarily represent actual transactions.
YEAR ENDED SEPTEMBER 30, 2002
QUARTER ENDED: COMMON STOCK
------------------------------ -------------------------
HIGH LOW
------------- ----------
December 31, 2001 $.15 $.06
March 31, 2002 .40 .09
June 30, 2002 .44 .15
September 30, 2002 .28 .09
YEAR ENDED SEPTEMBER 30, 2003
QUARTER ENDED: COMMON STOCK
------------------------------ -------------------------
HIGH LOW
------------- ----------
December 31, 2002 $.23 $.09
March 31, 2003 .15 .07
June 30, 2003 .18 .06
September 30, 2003 .45 .09
YEAR ENDED SEPTEMBER 30, 2004
QUARTER ENDED: COMMON STOCK
------------------------------ -------------------------
HIGH LOW
------------- ----------
December 31, 2003 $.71 $.26
March 31, 2004* .41 .26
* through February 2, 2004
32
NUMBER OF STOCKHOLDERS
As of January 31, 2004, there were approximately 597 record holders of our
Common Stock.
REPORTS TO SECURITY HOLDERS
---------------------------
We are subject to the information requirements of the Securities Exchange Act of
1934, as amended. In accordance with those regulations, we file periodic
reports, and other information with the Securities and Exchange Commission. Our
reports, and other information can be inspected and copied at the SEC's Public
Reference Room at 450 Fifth Street N.W., Washington D.C. 20549. You can obtain
information on the operations of the Public Reference Room by calling the SEC at
(800) SEC-0330. Information also is available electronically on the Internet at
http://www.sec.gov.
------------------
We will provide without charge to each person to whom a copy of this prospectus
is delivered, upon oral or written request of such person, a copy of any or all
documents which are incorporated by reference in this prospectus, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into such documents). Written requests for such documents should
be directed to CompuMed, Inc., 5777 West Century Blvd., Suite 1285, Los Angeles,
CA 90045. Telephone requests may be directed to us at (310) 258-5000.
We intend to furnish our shareholders with annual reports containing audited
financial statements and quarterly reports containing unaudited financial
information for the first three quarters of each year.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
-----------------------------------------------
AND MANAGEMENT
--------------
The following table sets forth, to our knowledge, certain information concerning
the beneficial ownership of our Common Stock as of January 31, 2004 by each
stockholder known by us to be (i) the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each current director, (iii) each of
the executive officers named in the Summary Compensation Table who were serving
as executive officers at the end of the 2003 fiscal year and (iv) all of our
directors and current executive officers as a group:
NAME AND ADDRESS OF
BENEFICIAL OWNER(1) AMOUNT AND NATURE
------------------------------------------------- ----------------------
BENEFICIAL OWNERSHIP(2) PERCENT OF CLASS
----------------------- -----------------
John G. McLaughlin 434,226 (3) 2.4%
John Minnick 802,937 (4) 4.3%
John Romm, M.D 730,302 (5) 3.9%
Stuart L. Silverman, M.D 970,221 (6) 5.1%
Robert Stuckelman 1,277,618 (7) 6.6%
Phuong Dang 68,616 (8) *
All officers and Directors as a group (6 persons) 4,283,920 22.7%
* less than 1%
(1) The address of all individual directors and executive officers is c/o
CompuMed, Inc, 5777 West Century Blvd, Suite 1285, Los Angeles, CA
90045.
(2) The number of shares of Common Stock issued and outstanding on January
31, 2004 was 17,951,034 shares. The calculation of percentage
ownership for each listed beneficial owner is based upon the number of
shares of Common Stock issued and outstanding on January 31, 2004,
plus shares of Common Stock subject to options held by such person on
January 31, 2004 and exercisable within 60 days thereafter. The
persons and entities named in the table have sole voting and
investment power with respect to all shares shown as beneficially
owned by them, except as noted below.
(3) Includes 434,226 shares subject to stock options.
(4) Includes 733,652 shares subject to stock options.
(5) Includes 714,902 shares subject to stock options.
(6) Includes 970,221 shares subject to stock options.
(7) Includes 1,123,103 shares subject to stock options.
(8) Includes 68,616 shares subject to stock options.
33
SELLING STOCKHOLDERS
--------------------
Based upon information available to us as of January 31, 2004, the following
table sets forth the names of the selling stockholder, the number of shares
owned, the number of shares registered by this prospectus and the number and
percent of outstanding shares that the selling stockholders will own after the
sale of the registered shares, assuming all of the shares are sold. The
information provided in the table and discussions below has been obtained from
the selling stockholders. The selling stockholders may have sold, transferred or
otherwise disposed of, or may sell, transfer or otherwise dispose of, at any
time or from time to time since the date on which it provided the information
regarding the shares beneficially owned, all or a portion of the shares of
common stock beneficially owned in transactions exempt from the registration
requirements of the Securities Act of 1933. As used in this prospectus, "selling
stockholder" includes donees, pledgees, transferees or other
successors-in-interest selling shares received from the named selling
stockholder as a gift, pledge, distribution or other non-sale related transfer.
Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated
by the Commission under the Securities Exchange Act of 1934. Unless otherwise
noted, each person or group identified possesses sole voting and investment
power with respect to the shares, subject to community property laws where
applicable.
Number of Shares
Name and address Owned After
of beneficial owner Number of Shares Number of Shares Offering(1)
Beneficially Owned Offered
----------------------------------- ----------------- ---------------- -----------------
Dutchess Private Equities Fund, L.P.(2) 0 10,000,000(3) -0-
(1) This number assumes the selling shareholder sells all of its shares prior to the completion of the
offering.
(2) Michael Novielli and Douglas Leighton, are the Managing Members of Dutchess Capital Management,
which is the General Partner of Dutchess Private Equities Fund, L.P..
(3) Consists of shares that may be issued pursuant to an Equity Line Agreement.
34
DESCRIPTION OF SECURITIES
-------------------------
We have authorized 50,000,000 shares of Common Stock, $.01 par value per share.
As of January 31, 2004 there were 17,951,034 issued and outstanding shares of
common stock. All shares are of the same class and have the same rights,
preferences and limitations.
There are no preemptive rights, subscription rights, or redemption provisions
relating to the shares and none of the shares carries any liability for further
calls. The absence of preemptive rights could result in a dilution of the
interest of existing shareholders if additional shares of Common Stock are
issued.
There are no provisions in our Articles of Incorporation or by-laws which would
delay, defer or prevent a change of control.
Dividends. Holders of shares are entitled to receive dividends in cash,
property or shares when and if the Board of Directors declares dividends out of
funds legally available therefore. The by-laws impose no limitations on the
payment of dividends. However, we do not anticipate declaring dividends in the
foreseeable future.
Voting. A quorum for any meeting of shareholders is a majority of shares then
issued and outstanding and entitled to be voted at the meeting. Holders of
shares are entitled to one vote per share.
Liquidation, dissolution, winding up. Upon our liquidation, dissolution or
winding up, any assets will be distributed to the holders of shares after
payment or provision for payment of all our debts, obligations or liabilities.
PLAN OF DISTRIBUTION
--------------------
The selling stockholder will act independently of us in making decisions with
respect to the timing, manner and size of each sale. The selling stockholder
may sell the shares from time to time:
- in transactions on the Over-the-Counter Bulletin Board or on any national
securities exchange or U.S. inter-dealer system of a registered national
securities association on which our Common Stock may be listed or quoted at
the time of sale; or
- in private transactions and transactions otherwise than on these exchanges
or systems or in the Over-The-Counter market;
- at prices related to such prevailing market prices, or
- in negotiated transactions, or
- in a combination of such methods of sale; or
- any other method permitted by law.
The selling stockholder may effect such transactions by offering and selling
the shares directly to or through securities broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling stockholder and/or the purchasers of the shares
for whom such broker-dealers may act as agent or to whom the selling
stockholder may sell as principal, or both, which compensation as to a
particular broker-dealer might be in excess of customary commissions.
Dutchess Private Equities Fund, LP and Charleston Capital Corporation and any
broker-dealers who act in connection with the sale of its shares will be
deemed to be "underwriters" within the meaning of the Securities Act, and
any discounts, concessions or commissions received by them and profit on any
resale of the shares as principal will be deemed to be underwriting discounts,
concessions and commissions under the Securities Act.
35
On or prior to the effectiveness of the registration statement to which this
prospectus is a part, we will advise the selling stockholder that they and any
securities broker-dealers or others who may be deemed to be statutory
underwriters will be governed by the prospectus delivery requirements under the
Securities Act. Under applicable rules and regulations under the Securities
Exchange Act, any person engaged in a distribution of any of the shares may not
simultaneously engage in market activities with respect to the Common Stock for
the applicable period under Regulation M prior to the commencement of such
distribution. In addition and without limiting the foregoing, the selling
security owners will be governed by the applicable provisions of the Securities
and Exchange Act, and the rules and regulations thereunder, including without
limitation Rules 10b-5 and Regulation M, which provisions may limit the timing
of purchases and sales of any of the shares by the selling stockholders. All of
the foregoing may affect the marketability of our securities.
On or prior to the effectiveness of the registration statement to which this
prospectus is a part, we will advise the selling stockholder that the
anti-manipulation rules under the Securities Exchange Act may apply to sales of
shares in the market and to the activities of the selling security owners and
any of their affiliates. We have informed the selling stockholder that they may
not:
- engage in any stabilization activity in connection with any of the shares;
- bid for or purchase any of the shares or any rights to acquire the shares,
- attempt to induce any person to purchase any of the shares or rights to
acquire the shares other than as permitted under the Securities Exchange
Act; or
- effect any sale or distribution of the shares until after the prospectus
shall have been appropriately amended or supplemented, if required, to
describe the terms of the sale or distribution.
We have informed the selling stockholder that it must effect all sales of
shares in broker's transactions, through broker-dealers acting as agents, in
transactions directly with market makers, or in privately negotiated
transactions where no broker or other third party, other than the purchaser, is
involved.
The selling stockholder may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act. Any commissions paid or
any discounts or concessions allowed to any broker-dealers, and any profits
received on the resale of shares, may be deemed to be underwriting discounts and
commissions under the Securities Act if the broker-dealers purchase shares as
principal.
In the absence of the registration statement to which this prospectus is a part,
certain of the selling stockholders would be able to sell their shares only
pursuant to the limitations of Rule 144 promulgated under the Securities Act.
We expect to incur approximately $25,000 in expenses related to this
registration statement. Our expenses consist mainly of accounting and legal
fees.
36
We engaged Charleston Capital Corporation as our placement agent with respect
to the securities to be issued under the Equity Line of Credit. To our
knowledge Charleston Capital Corporation has no affiliation or business
relationship with Dutchess. Charleston Capital Corporation will be our
exclusive placement agent in connection with the Investment Agreement. We
agreed to pay Charleston Capital Corporation 1% of the gross proceeds from each
put with an aggregate maximum of $10,000 over the term of our agreement. The
Placement Agent Agreement terminates when our Investment Agreement with
Dutchess terminates pursuant to the terms of that Investment Agreement.
LEGAL PROCEEDINGS
-----------------
We are not aware of any litigation or potential litigation affecting us or our
assets.
LEGAL MATTERS
-------------
The legality of our shares of Common Stock being offered hereby is being passed
upon by Amy Trombly, Esq. Ms. Trombly will not receive a direct or indirect
interest in the small business issuer and has never been a promoter,
underwriter, voting trustee, director, officer, or employee of our company. Nor
does Ms. Trombly have any contingent based agreement with us or any other
interest in or connection to us.
EXPERTS
-------
The financial statements included in this prospectus, have been audited by Rose
Snyder & Jacobs, independent auditors, and have been included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing. Rose, Snyder & Jacobs has no direct or indirect interest in us, nor
were they a promoter or underwriter.
ADDITIONAL INFORMATION
----------------------
We filed with the Securities and Exchange Commission a registration statement on
Form SB-2 under the Securities Act of 1933 for the shares of Common Stock in the
offering, of which this prospectus is a part. This prospectus does not contain
all of the information in the registration statement and the exhibits and
schedule that were filed with the registration statement. For further
information with respect to us and the Units, we refer you to the registration
statement and the exhibits and schedule that were filed with the registration
statement.
Statements contained in this prospectus about the contents of any contract or
any other document that is filed as an exhibit to the registration statement are
not necessarily complete, and we refer you to the full text of the contract or
other document filed as an exhibit to the registration statement. A copy of the
registration statement and the exhibits and schedules that were filed with the
registration statement may be inspected without charge at the Public Reference
Room maintained by the Securities and Exchange Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of all or any part of the registration
statement may be obtained from the Securities and Exchange Commission upon
payment of the prescribed fee. Information regarding the operation of the Public
Reference Room may be obtained by calling the Securities and Exchange Commission
at 1-800-SEC-0330.
37
The Securities and Exchange Commission maintains a web site that contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the SEC. The address of the site is
www.sec.gov.
COMPUMED, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors - Rose Snyder & Jacobs
Balance Sheet as of September 30, 2003
Statements of Operations for the years ended September 30, 2003 and 2002
Statements of Stockholders' Equity for the years ended September 30, 2003 and
2002
Statements of Cash Flows for the years ended September 30, 2003 and 2002
Notes to Financial Statements
REPORT OF ROSE, SNYDER & JACOBS, INDEPENDENT AUDITORS
Board of Directors and Stockholders
CompuMed, Inc.
We have audited the accompanying balance sheet of CompuMed, Inc. as of September
30, 2003, and the related statements of operations, stockholders' equity, and
cash flows for the year then ended. 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 audit. The financial
statements of CompuMed, Inc. as of September 30, 2002, were audited by other
auditors whose report dated November 15, 2002, expressed an unqualified opinion
on the statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 financial statements referred to above present fairly,
in all material respects, the financial position of CompuMed, Inc. as of
September 30, 2003, and the results of its operations and its cash flows for
year ended September 30, 2003, in conformity with accounting principles
generally accepted in the United States of America.
38
/s/ Rose, Snyder & Jacobs
---------------------------------------------
A Corporation of Certified Public Accountants
Encino, California
November 13, 2003
39
COMPUMED, INC.
BALANCE SHEET
ASSETS
SEPTEMBER 30,
2003
--------------
CURRENT ASSETS
Cash and cash equivalents $66,000
Marketable securities 181,000
Accounts receivable, less allowance of $22,000 219,000
Inventory 25,000
Prepaid expenses and other current assets 21,000
--------------
TOTAL CURRENT ASSETS 512,000
PROPERTY AND EQUIPMENT
Machinery and equipment 1,276,000
Furniture, fixtures and leasehold improvements 42,000
Equipment under capital leases 35,000
--------------
1,353,000
Accumulated depreciation and amortization (1,146,000)
--------------
207,000
OTHER ASSETS
Patents, net of accumulated amortization of $0 50,000
Other assets 11,000
--------------
TOTAL OTHER ASSETS 61,000
TOTAL ASSETS $780,000
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30,
2003
--------------
CURRENT LIABILITIES
Accounts payable $125,000
Accrued liabilities 139,000
Current portion of capital lease obligations 7,000
-------------
TOTAL CURRENT LIABILITIES 271,000
Capital lease obligations, less current portion -0-
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, $.10 par value - authorized 1,000,000 shares
Class A $3.50 cumulative convertible voting -
-issued and outstanding - 8,400 shares 1,000
Class B $3.50 cumulative convertible voting -
-issued and outstanding - 300 shares -0-
Common Stock, $.01 par value-authorized 50,000,000 shares
- issued and outstanding- 17,951,034 shares 180,000
Additional paid in capital 32,296,000
Accumulated deficit (31,978,000)
Accumulated other comprehensive income 27,000
Deferred stock compensation (17,000)
-----------
509,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $780,000
===========
See notes to financial statements
COMPUMED, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
--------------------------
2003 2002
------------ ------------
REVENUES
Electrocardiogram services $1,601,000 $1,696,000
Electrocardiogram product and supplies sales 129,000 138,000
OsteoGram (R) sales and services 81,000 121,000
------------ ------------
1,811,000 1,955,000
COST AND EXPENSES
Cost of electrocardiogram services 477,000 508,000
Cost of goods sold - electrocardiogram 88,000 97,000
Cost of goods sold - OsteoGram (R) 8,000 13,000
Selling expenses 282,000 364,000
Research and development 216,000 217,000
General and administrative expenses 945,000 1,097,000
Depreciation and amortization 217,000 267,000
------------ ------------
2,233,000 2,563,000
OPERATING LOSS (422,000) (608,000)
Interest income and dividends 26,000 41,000
Realized gain on marketable securities 22,000 74,000
Interest expense (1,000) (1,000)
------------ ------------
NET LOSS $(375,000) $(494,000)
============ ============
NET LOSS PER SHARE - Basic and Diluted $(.02) $(.03)
Weighted average number of common shares outstanding 17,879,525 17,869,309
See notes to financial statements
COMPUMED, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL OTHER ACCUMULATED
PREFERRED COMMON PAID IN ACCUMULATED COMPREHENSIVE DEFERRED STOCK
STOCK STOCK CAPITAL DEFICIT INCOME COMPENSATION TOTAL
Balances at
September 30, 2001: 1,000 179,000 32,241,000 (31,109,000) 55,000 (18,000) 1,349,000
Unrealized loss
on marketable securities - - - - (53,000) - (53,000)
Amortization of
deferred compensation - - - - - 15,000 15,000
Net Loss. .. . . - - - (494,000) - - (494,000)
--------- -------- ----------- ------------- ---------- ------------ ----------
Balances at
September 30, 2002: $ 1,000 $179,000 $32,241,000 $(31,603,000) $ 2,000 $ (3,000) $ 817,000
Unrealized gain
on marketable securities - - - - 25,000 - 25,000
Stock options
issued for services - - 49,000 - - (49,000) -
Amortization
of deferred compensation - - - - - 35,000 35,000
Exercise of options - 1,000 6,000 - - - 7,000
Net Loss. . . . . . - - - (375,000) - - (375,000)
--------- -------- ----------- ------------ ------------ ------------- ----------
Balances at
September 30, 2003: $ 1,000 $180,000 $32,296,000 $(31,978,000) $ 27,000 $ (17,000) $509,000
========= ======== =========== ============= =========== ============== ==========
Comprehensive losses for the years ended September 30, 2003 and 2002 were ($350,000) and ($547,000), respectively.
See notes to financial statements.
COMPUMED, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30
-------------------------
2003 2002
---------- ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (375,000) $(494,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Realized gain on marketable securities . . . . . . . . . . . . . . . . . . (22,000) (74,000)
Amortization of deferred stock compensation. . . . . . . . . . . . . . . . 35,000 15,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 217,000 267,000
Decrease (increase) in accounts receivable . . . . . . . . . . . . . . . . 8,000 (3,000)
Decrease in inventory and prepaid expenses. . . . . . . . . . . . . . . . 24,000 51,000
Decrease (increase) in accounts payable and other liabilities. . . . . . . 29,000 (33,000)
---------- ----------
NET CASH USED BY OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . (84,000) (271,000)
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from selling of marketable securities. . . . . . . . . . . . . . . 150,000 306,000
Investments in purchase of marketable securities . . . . . . . . . . . . . (35,000) (110,000)
Purchase of other assets . . . . . . . . . . . . . . . . . . . . . . . . . (33,000) -0-
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . (9,000) (39,000)
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES. . . . . . . . . . . . . . . . . . . 73,000 157,000
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock option. . . . . . . . . . . . . . . . . . . 7,000 -0-
Payments on capital lease obligations. . . . . . . . . . . . . . . . . . . (8,000) (47,000)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . . . . . . . . (1,000) (47,000)
NET DECREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,000) (161,000)
CASH BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . 78,000 239,000
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,000 $ 78,000
========== ==========
SUPPLEMENTARY DISCLOSURES:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000 $ 1,000
See notes to financial statements
COMPUMED, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: CompuMed, Inc. (CompuMed or the Company) 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 our osteoporosis testing technology (OsteoGram (R))
and the computer interpretation of electrocardiograms. CompuMed 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 has incurred recurring losses and had net losses aggregating
$869,000 in fiscal years ended September 30, 2003 and 2002. The Company's
business strategy includes an increase in OsteoGram (R) sales through domestic
and international marketing and distribution efforts. The Company intends to
finance this business strategy by using its current working capital resources
and cash flows from existing operations. There can be no assurance that the
OsteoGram (R) sales will be sufficient to offset related expenses.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. This basis of accounting contemplates the
recovery of the Company's assets and the satisfaction of its liabilities in the
normal course of conducting its business. The Company's ability to continue as
a going concern is dependent upon various factors including, among others, its
ability to generate profits and reduce its operating losses and negative cash
flows. No assurance can be given that the Company will be able to accomplish
these objectives. The Company uses existing cash and readily available
marketable securities balances to fund operating losses and capital
expenditures. The Company had raised these funds in 1997 through 2000 through
the placement of Preferred Stock issuances and proceeds from the exercise of
certain stock options and warrants.
Management believes the Company will be able to generate sufficient revenue,
reduce operating expenses or obtain sources of financing in order to fund
ongoing operations through at least September 30, 2004. Accordingly, the
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability or classifications of liabilities that may
result from the outcome of this uncertainty.
Cash Equivalents:
----------------
The Company considers investments in all highly liquid debt instruments with a
maturity of three months or less when purchased, and investments in money market
accounts to be cash equivalents. Cash and cash equivalents also consist of cash
on hand and demand deposit accounts.
Marketable Securities:
---------------------
Marketable securities consist of Common Stock of publicly traded domestic
companies and are stated at market value based on the most recently traded price
of these securities at September 30, 2003. All marketable securities are
classified as available for sale at September 30, 2003 and for the two years
then ended. Unrealized gains and losses, determined by the difference between
historical purchase price and the market value at each balance sheet date, are
recorded as a component of Accumulated Other Comprehensive Income in
Stockholders' Equity. Realized gains and losses are determined by the difference
between historical purchase price and gross proceeds received when the
marketable securities are sold. As of September 30, 2003, the Company's
investments in marketable securities were valued at $181,000. The Company
recorded a realized gain of $22,000 and $74,000 for the years ended September
30, 2003 and 2002, respectively, and $47,000 and $21,000 of unrealized gain (net
of reclassification adjustments of $22,000 and $74,000 of realized gains above)
as other comprehensive income, net of income taxes of $0 for the years ended
September 30, 2003 and 2002, respectively.
Accounts Receivable:
---------------------
The Company maintains an allowance for doubtful accounts for estimated losses
that may arise if any of its customers are unable to make required payments.
Management specifically analyzes the age of customer balances, historical bad
debt experience, customer credit-worthiness, and changes in customer payment
terms when making estimates of the uncollectability of the Company's trade
accounts receivable balances. If the Company determines that the financial
conditions of any of its customers deteriorated, whether due to customer
specific or general economic issues, increases in the allowance may be made.
Accounts receivable are written off when all collection attempts have failed.
Inventory:
----------
Inventory consists of electrocardiogram terminals, component parts and
electrocardiogram medical supplies and OsteoGram (R) hardware. Inventory,
primarily finished goods, is stated at the lower of cost (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. As of September 30, 2003,
the property and equipment being leased to customers had a historical cost of
$1,026,000. Amortization of assets leased under capital leases is included in
Depreciation and Amortization Expenses.
Revenue Recognition:
---------------------
Electrocardiogram and OsteoGram (R) services are recorded as revenue when billed
to the customer in conjunction with services performed. The Company leases
electrocardiogram equipment under operating leases. Accordingly, revenue from
operating leases is recognized over the life of the non-cancelable lease terms
under the straight-line method and is recorded as electrocardiogram service and
supply revenue in the statement of operations. electrocardiogram and OsteoGram
(R) product and supplies sales are recorded upon shipment of product and passage
of title to the customer.
Patents:
--------
Patents are amortized over their useful lives, starting from their approval
date.
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.
Per Share Data:
----------------
The Company reports its earnings (loss) per share in accordance with Statement
of Financial Accounting Standards No.128, "Accounting for Earnings Per Share"
("FAS 128"). Basic loss per share is calculated using the net loss divided by
the weighted average common shares outstanding. Shares from the assumed
conversion of outstanding warrants, options and the effect of the conversion of
the Class A Preferred Stock and Class B Preferred Stock are omitted from the
computations of diluted loss per share because the effect would be antidilutive.
Financial Instruments:
-----------------------
The carrying value of short-term financial instruments such as cash equivalents,
accounts receivable, accounts payable, accrued liabilities and capital leases
approximates their fair value based on the short-term maturities of these
instruments.
Long-lived Assets:
-------------------
Long-lived assets used in operations are reviewed periodically to determine
whether 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. The Company has not recorded impairment charges
during the years ended September 30, 2003 and 2002.
Use of Estimates:
-------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions affecting 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 accounts for employee and director's stock option grants using the
intrinsic method. Generally, the exercise price of the employee stock options
equal or exceeds the market price of the underlying stock on the date of grant
and no compensation expense is recognized. If the option price is less than
market value, the Company records compensation expense over the vesting period
of the option.
The Company accounts for equity instruments issued to non-employees in exchange
for goods or services using the fair value method and records expense based on
the values determined.
Concentration of Credit Risk:
--------------------------------
The Company sells its products throughout the United States and in the
international markets. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral. Credit
losses have been within management's expectations. For the year ended September
30, 2003 two customers accounted for approximately 33% of the Company total
revenue and approximately 37% of total accounts receivable at September 30,
2003.
NOTE B - INCOME TAXES
At September 30, 2003, the Company has available for federal income tax
purposes, net operating loss carry forwards of approximately $6.1 million,
which expire between 2004 and 2023. The utilization of the above net operating
loss carry forwards are subject to significant limitations under the tax codes
due to changes in ownership and portions may expire prior to utilization. The
difference between the Company's effective income tax rate and the statutory
federal rate for the years ended September 30, 2003 and 2002 relates primarily
to losses incurred for which no tax benefit was recognized, due to the
uncertainty of its realization. The valuation allowance was $2,248,000 and
$3,457,000 at September 30, 2003 and 2002, respectively, representing a decrease
of $1,400,000 for the year ended September 30, 2003. This decrease is mainly
explained by loss carry forwards that expire in the current year.
Significant components of the deferred tax liabilities and assets as of
September 30, 2003 are as follows:
2003
------------
Deferred tax liabilities:
Depreciation and amortization . . . . . . . $ (24,000)
Deferred tax assets:
Account receivable allowance. . . . . . . . 9,000
Net operating loss carry forwards . . . . . 2,215,000
------------
Total deferred tax assets . . . . . . . . . 2,224,000
Valuation allowance for Deferred tax assets (2,248,000)
------------
Net deferred tax assets . . . . . . . . . . 24,000
------------
Total . . . . . . . . . . . . . . . . . . . $ 0
============
NOTE C - STOCKHOLDERS' EQUITY
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, dividends at an annual rate of $.35 per
share, payable quarterly. Dividends are cumulative from the date of issuance.
Total cumulated dividends not declared at September 30, 2003 amounted to
$16,000. 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. Each
share of Class B Preferred Stock is convertible, subject to adjustment, into ten
shares of Common Stock. In the event of any liquidation, the holders of the
Class B Preferred Stock are entitled to receive $3.50 in cash per share plus
accumulated and unpaid dividends out of assets available for distribution to
stockholders, prior to any distribution to holders of Common Stock or any other
stock ranking junior to the Class B Preferred Stock. Each share of Class B
Preferred Stock may be redeemed by the Company, upon 30-days' written notice, at
a redemption price of $3.85 per share. Class B Preferred Stock stockholders have
the right to convert their shares into Common Stock during this 30-day period.
Shares of Class B Preferred Stock are entitled to one vote each. Shares of
Class B Preferred Stock vote as a single class on all matters presented to the
stockholders for action except as follows: Without the affirmative vote of the
holder of a majority of the Class B Preferred Stock then outstanding, voting as
a separate class, the Company may not (i) amend, alter or repeal any of the
preferences or rights of the Class B Preferred Stock, (ii) authorize any
reclassification of the Class B Preferred Stock, (iii) increase the authorized
number of shares of Class B Preferred Stock or (iv) create any class or series
of shares ranking prior to the Class B Preferred Stock as to dividends or upon
liquidation. A total of 3,000 shares of Common Stock are currently issuable
upon conversion of the remaining 300 shares of Class B Preferred Stock.
NOTE D - STOCK OPTIONS AND WARRANTS
Stock Options:
---------------
The Company has adopted one non-stockholder approved stock incentive plan, the
2003 Stock Incentive Plan (the "2003 Plan"), and two stockholder approved stock
options plans, the 1992 Stock Option Plan ("1992 Plan") and the 2002 Stock
Option Plan (the "2002 Plan") (collectively, the "Plans"). The 1992 Plan expired
in March 2002 and the 2002 Plan was suspended on the effective date of the 2003
Plan in June 2003. Awards are outstanding under the Plans, but awards may be
granted in the future only under the 2003 Plan. The 2003 Plan provides for the
granting of options, stock awards and other forms of equity compensation to key
employees, officers and certain individuals. Only nonqualified options may be
granted under the 2003 Plan.
Options granted under the Plans generally become exercisable at a rate of 33% of
the shares subject to an option one year after the date of grant and the
remaining shares generally become exercisable over an additional 24 months. The
duration of options may not exceed ten years beyond the date of grant.
In addition to options issued pursuant to these Plans, the Company has granted
non-qualified stock options to certain members of the Board of Directors,
management and consultants. Such options have been granted with exercise prices
equal to the market prices of the Common Stock at the date of grant and are for
a term of ten years. During 2000, the Company issued options to purchase
149,843 shares of Common Stock in exchange for services provided over a period
of one to two years. The Company valued these options using the fair value
method, at $59,000 of which $9,000 was expensed in 2000, $38,000 was expensed in
2001and $12,000 was expensed in fiscal 2002. During 2001, the Company issued
options to purchase 50,000 shares of Common Stock in exchange for services
provided over a period of three years. The Company valued these options using
the fair value method, at $7,000 of which $1,000 was expensed in 2001, $3,000
was expensed in 2002 and $2,000 was expensed in fiscal 2003.
During fiscal 2003, the Company granted options to purchase 50,000 shares of
common stock to an officer for compensation, vested upon the grant date. These
options were recorded at $0, using the intrinsic method. The Company also
issued options to purchase 2,971,768 shares of Common Stock to directors and
employees in 2003, under the 2003 Plan. These options were recorded at $42,000,
also using the intrinsic method. $30,000 of these options were expensed in
fiscal 2003. The Company granted options to issue 120,000 shares to a
consultant over a 6 month-period. These options were accounted using the fair
value method, in accordance with Financial Accounting Standards Board 123,
$7,000, of which $3,000 was expensed during fiscal 2003.
Statement of Financial Accounting Standards 123 "Accounting for Stock-Based
Compensation", amended by Statement of Financial Accounting Standards 148
requires pro forma information regarding net income (loss) using compensation
that would have been incurred if the Company had accounted for its employee
stock options under the fair value method. Options to purchase 3,141,768
shares of Common Stock were granted during the year ended September 30, 2003.
The fair value of these options has been estimated at $111,000 using the
Black-Scholes Option pricing model, with the following assumptions:
Risk free interest rate 3.33% to 4.05%
Stock volatility factor 18%
Weighted average expected option life 10 years
Expected dividend yield None
2002 Pro forma information regarding net loss and loss per share including the
effect of outstanding stock options has not been presented because the effect is
immaterial.
A summary of the stock option activity, and related information for the years
ended September 30 follows:
2003 2002
----------------- -----------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
----------- ------ --------- -------
Options outstanding, beginning of year 3,123,633 .51 3,244,763 .61
Options exercised. . . . . . . . . . . (81,725) .08 -0 -
Options granted. . . . . . . . . . . . 3,141,768 .09 550,000 .25
Options forfeited/canceled . . . . . . (1,156,651) .66 (671,130) .64
----------- ------ ---------- -------
Options outstanding, end of year . . . 5,027,025 .22 3,123,633 .51
=========== ====== ========== =======
Exercisable at end of year . . . . . . 4,273,673 .22 1,921,211 .65
=========== ====== ========== =======
The 2003 pro forma net loss and loss per share had the Company accounted
for its options using FAS 123 would have been as follows:
Net loss as reported $(375,000)
Basic and diluted loss per share as reported $(0.02)
Stock based employee compensation cost
Net of related tax effect included in the
Determination of net loss as reported $35,000
Total Stock based employee compensation
Net of related tax effect, that would have
Been included in the determination of net
Loss if the fair value based method would
Have been applied to all awards $111,000
Pro forma net loss as if the fair value based
Method had been applied to all awards $(451,000)
Pro forma basic and diluted loss per share
As if the fair value method had been applied
Applied to all awards $(0.03)
The following summarizes information concerning stock options outstanding at
September 30, 2003:
WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF . . . . . . . . . . . . . . . . . . . . NUMBER REMAINING AVERAGE SUBJECT TO AVERAGE
EXERCISE PRICES. . . . . . . . . . . . . . . . . OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISE EXERCISE PRICE
0.00 - $0.425 . . . . . . . . . . . . . . . . . 4,145,043 9.2 $ 0.1189 3,391,691 0.1035
0.4251 - $0.85. . . . . . . . . . . . . . . . . 847,519 5.6 $ 0.6734 847,519 0.6734
0.851 - $1.275. . . . . . . . . . . . . . . . . 34,463 3.8 $ 1.1396 34,463 1.1396
Total. . . . . . . . . . . . . . . . . . . . . . 5,027,025 8.6 $ 0.2194 4,273,673 0.22
NOTE E - COMMITMENTS AND CONTINGENCIES
The Company has capital leases for computer and office equipment that expire
through 2004 and has a non-cancelable operating lease for a facility expiring in
August 2004, with an option to extend the term of this lease for an additional
five years. The following is a summary as of September 30, 2003 of future
minimum lease payments together with the present value of the net minimum lease
payments on capital leases:
CAPITAL OPERATING
YEAR ENDING SEPTEMBER 30 LEASES LEASES
----------------------------------------------------------- -------- ----------
2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 114,000
2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . -0 11,000
2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . -0 11,000
2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . -0 11,000
2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . -0 11,000
---------- ----------
Total minimum lease payments. . . . . . . . . . . . . . . . $ 8,000 $ 158,000
========== ==========
Less amount representing interest . . . . . . . . . . . . . 1,000
----------
Net minimum lease payments. . . . . . . . . . . . . . . . . $ 7,000
Less current portion. . . . . . . . . . . . . . . . . . . . 7,000
----------
Present value of net minimum payments, less current portion $ -0-
==========
Rental expense under operating leases was $128,000 and 118,000 in fiscal years
2003 and 2002.
Litigation
----------
From time to time the Company is involved in litigation and threatened
litigation arising in the ordinary course of business. The Company is not aware
of any material unsettled litigation.
Employment Agreement
---------------------
We entered into a temporary employment agreement with John G. McLaughlin,
President and CEO, from May 20, 2002 through September 30, 2002. Under the terms
of the agreement, Mr. McLaughlin received an annualized compensation of $150,000
and standard employee options to purchase 100,000 shares of Common Stock at an
exercise price of $0.25 per share. Subsequently we entered into a long-term
agreement with Mr. McLaughlin effective November 2, 2002 through September 30,
2004. This agreement provides a base salary of $150,000 per year and a
performance bonus with a target of $150,000 for revenue, profit and other
criteria far exceeding fiscal 2002. In addition, Mr. McLaughlin received
standard employee options to purchase 50,000 shares of Common Stock at an
exercise price of $0.20 per share. In the event Mr. McLaughlin's employment
agreement is terminated by us without cause, or by Mr. McLaughlin for good
reason, he is entitled to receive all accrued compensation plus any bonus he
would otherwise receive for the remaining term of his contract. This agreement
was amended effective October 1, 2003 to provide that the Board of Directors
will award Mr. McLaughlin a bonus for fiscal 2004 of between $75,000 and
$150,000 based on performance factors, including revenue, profit and
accomplishment of milestones.
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
100 percent of his or her eligible annual salary to our Plan. For an employee
contribution of up to but not exceeding 6 percent of the employee's annual
salary the Company makes a matching contribution of $.25 for every $1.00 of the
employee's contribution. The Company's contributions are 100% vested after 36
months of contributions to the Plan. Benefits are payable under the Plan upon
termination of a participant's employment with us or at retirement. The Plan
meets the requirements of Section 401(k) of the Internal Revenue Code. The
Company's matching contribution, which was charged to expense, was $15,000 and
$13,000 in fiscal 2003 and 2002, respectively.
NOTE G - RELATED PARTY TRANSACTIONS
The Company has retained the services of an investment advisor, who is also a
member of the Board of Directors, to provide advice on the investment portfolio.
During fiscal years ended September 30, 2003 and 2002, the Company incurred, for
these services, $2,000 and $ 4,000 respectively.
FINANCIAL INFORMATION
BALANCE SHEETS
COMPUMED, INC.
DECEMBER 31, 2003 SEPTEMBER 30, 2003
------------------ -------------------
(UNAUDITED) (AUDITED)
------------------ -------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 31,000 $ 66,000
Marketable securities. . . . . . . . . . . . . . . . . . . . . . 190,000 181,000
Accounts receivable, less allowance of $21,000 (December 2003)
and $22,000 (September 2003). . . . . . . . . . . . . . . . . . 217,000 219,000
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,000 25,000
Prepaid expenses and other current assets. . . . . . . . . . . . 25,000 21,000
------------------ -------------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . 492,000 512,000
PROPERTY AND EQUIPMENT
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . 1,276,000 1,276,000
Furniture, fixtures and leasehold improvements . . . . . . . . . 42,000 42,000
Equipment under capital leases . . . . . . . . . . . . . . . . . 35,000 35,000
------------------ -------------------
1,353,000 1,353,000
Accumulated depreciation and amortization. . . . . . . . . . . . (1,197,000) (1,146,000)
------------------ -------------------
156,000 207,000
OTHER ASSETS
Patents, net of accumulated amortization of $0 . . . . . . . . . 51,000 50,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 11,000
------------------ -------------------
TOTAL ASSETS $710,000 $780,000
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 92,000 $125,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . 126,000 139,000
Current portion of capital lease obligations . . . . . . . . . . 5,000 7,000
------------------ -------------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . 223,000 271,000
STOCKHOLDERS' EQUITY
Preferred Stock, $.10 par value - authorized 1,000,000 shares
Preferred Stock- Class A $3.50 cumulative convertible voting -
issued and outstanding - 8,400 shares. . . . . . . . . . . . 1,000 1,000
Preferred Stock- Class B $3.50 cumulative convertible voting -
issued and outstanding -300 shares. . . . . . . . . . . . . . - -
Common Stock, $.01 par value-authorized 50,000,000 shares,
issued and outstanding-17,951,034 shares. . . . . . . . . . . 180,000 180,000
Additional paid in capital . . . . . . . . . . . . . . . . . . . 32,304,000 32,296,000
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (32,039,000) (31,978,000)
Accumulated other comprehensive income . . . . . . . . . . . . . 41,000 27,000
Deferred stock compensation. . . . . . . . . . . . . . . . . . . - (17,000)
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 487,000 509,000
------------------ -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $710,000 $780,000
================== ===================
See notes to condensed financial statements.
STATEMENTS OF OPERATIONS (UNAUDITED)
COMPUMED, INC.
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2003 2002
---------------- ------------
REVENUES FROM OPERATIONS
ECG services $384,000 $ 410,000
ECG product and supplies sales. . . . . . . . . . . . 18,000 28,000
OsteoGram(R) sales and services . . . . . . . . . . . 58,000 14,000
----------------- -----------
460,000 452,000
COSTS AND EXPENSES
Costs of ECG services . . . . . . . . . . . . . . . . 119,000 124,000
Cost of goods sold-ECG. . . . . . . . . . . . . . . . 15,000 21,000
Cost of goods sold- OsteoGram(R). . . . . . . . . . . 4,000 2,000
Selling expenses. . . . . . . . . . . . . . . . . . . 45,000 82,000
Research and development. . . . . . . . . . . . . . . 53,000 51,000
General and administrative expenses . . . . . . . . . 241,000 274,000
Depreciation. . . . . . . . . . . . . . . . . . . . . 51,000 55,000
----------------- -----------
528,000 609,000
OPERATING LOSS. . . . . . . . . . . . . . . . . . . . (68,000) (157,000)
Interest income and dividends . . . . . . . . . . . . 5,000 8,000
Realized gain on marketable securities. . . . . . . . 2,000 2,000
Interest expense. . . . . . . . . . . . . . . . . . . - -
NET LOSS $(61,000) $(147,000)
================ ============
NET LOSS PER SHARE (Basic and diluted) $ (0) $ (.01)
================ ============
Weighted average number of common shares outstanding. 17,951,034 17,869,309
================ ============
See notes to condensed financial statements.
STATEMENTS OF CASH FLOWS (UNAUDITED)
COMPUMED, INC.
THREE MONTHS ENDED
-------------------
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ------------------
OPERATING ACTIVITIES:
Net loss $(61,000) $(147,000)
Net adjustments to reconcile net loss to net cash used in
operating activities:
Realized gain on marketable securities . . . . . . . . . . . . . . (2,000) (2,000)
Amortization of deferred stock compensation. . . . . . . . . . . . 25,000 -
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 51,000 55,000
Decrease in accounts receivable . . . . . . . . . . . . . . . 2,000 33,000
Increase in inventory and prepaid expenses. . . . . . . . . . (8,000) (6,000)
Decrease (increase) in accounts payable and other liabilities (46,000) 44,000
------------------- ------------------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . . . . . . . . . (39,000) (23,000)
INVESTING ACTIVITIES:
Proceeds from selling of marketable securities. . . . . . . . . . . 7,000 27,000
Purchases of other asset. . . . . . . . . . . . . . . . . . . . . . (1,000)
Purchases of property, plant and equipment . . . . . . . . . . . . - (5,000)
------------------- ------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES. . . . . . . . . . . . . 6,000 22,000
FINANCING ACTIVITIES:
Principal payments on capital lease obligations. . . . . . . . . . (2,000) (2,000)
------------------- ------------------
NET CASH USED IN FINANCING ACTIVITIES. . . . . . . . . . . . . . . (2,000) (2,000)
------------------- ------------------
NET DECREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . (35,000) (3,000)
Cash and cash equivalents at beginning period. . . . . . . . . . . 66,000 78,000
------------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 31,000 $ 75,000
================== =================
Cash paid for interest $ - $ (1,000)
================== =================
See notes to condensed financial statements.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
COMPUMED, INC.
NOTE A-BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying interim unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended December 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending September 30,
2004. For further information, refer to the financial statements for the year
ended September 30, 2003 and the notes thereto included in the Company's Annual
Report on Form 10-KSB.
The balance sheet at September 30, 2003 has been derived from the Company's
year-end audited financial statements but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
The Company has historically used existing cash and readily available marketable
securities balances to fund operating losses and capital expenditures. The
Company raised these funds in 1997 through 2000 through the placement of
Preferred Stock issuances and proceeds from the exercise of certain stock
options and warrants.
The Company has incurred recurring losses and had net losses aggregating
$208,000 in quarters ended December 31, 2003 and 2002. The Company's business
strategy includes an increase in OsteoGram (R) sales through domestic and
international marketing and distribution efforts. The Company intends to finance
this business strategy by using its current working capital resources and cash
flows from existing operations. There can be no assurance that the sales will be
sufficient to offset related expenses.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. This basis of accounting contemplates the
recovery of the Company's assets and the satisfaction of its liabilities in the
normal course of conducting its business. The Company's ability to continue as a
going concern is dependent upon various factors including, among others, its
ability to generate profits and reduce its operating losses and negative cash
flows. No assurance can be given that the Company will be able to accomplish
these objectives. The Company uses existing cash and readily available
marketable securities balances to fund operating losses and capital
expenditures. The Company had raised these funds in 1997 through 2000 through
the placement of Preferred Stock issuances and proceeds from the exercise of
certain stock options and warrants.
Management believes the Company will be able to generate sufficient revenue,
reduce operating expenses or obtain sources of financing in order to fund
ongoing operations through at least December 31, 2004. Accordingly, the
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability or classifications of liabilities that may
result from the outcome of this uncertainty.
Stock-Based Compensation
-------------------------
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations (APB 25), and has adopted the "disclosure
only" alternative described in Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, amended by SFAS No. 148
Accounting for Stock-Based Compensation-Transition and Disclosure.
SFAS No. 123, Accounting for Stock-Based Compensation, requires pro forma
information regarding net income (loss) using compensation that would have been
incurred if the Company had accounted for its employee stock options under the
fair value method of that statement. Options to purchase 261,087 and 0 shares
of CompuMed, Inc. were granted during the three months ended December 31, 2003
and 2002, respectively. The fair value of options granted, which have been
estimated at $65,000 and $0, respectively, at the date of grant were determined
using the Black-Scholes Option pricing model with the following assumptions:
2003 2002
--------- --------
Risk free interest rate . . . . . . . 4.28% 4.05%
Stock volatility factor . . . . . . . 54% 43%
Weighted average expected option life 10 years 10 years
Expected dividend yield . . . . . . . None None
The pro forma net loss and loss per share had the Company accounted for the
options using FAS 123 would have been as follows:
2003 2002
--------- ----------
Net loss as reported . . . . . . . . . . . . $(61,000) $(147,000)
Basic and diluted loss per share as reported (0.00) (0.01)
Add: Stock-based employee compensation
cost included in determination of net loss
as reported. . . . . . . . . . . . . . . . . 8,000 -
Deduct: Stock-based employee
compensation cost that would have been
included in the determination of net loss if
the fair value based method had been
applied to all awards. . . . . . . . . . . . (8,000) (6,000)
--------- ----------
Pro forma net loss if the fair value based
method had been applied to all awards. . . . $(61,000) $(153,000)
========= ==========
Basic and diluted pro forma loss per share
if the fair value based method had been
applied to all awards. . . . . . . . . . . . $ (0.00) $ (0.01)
========= ==========
A summary of the stock options activity, and related information for the
quarters ended December 31 follows:
2003 2002
-------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------- --------- ---------- ---------
Options outstanding, beginning of period 5,027,025 0.22 3,124,466 0.51
Options exercised. . . . . . . . . . . . - - - -
Options granted. . . . . . . . . . . . . 261,087 0.34 50,000 0.20
Options forfeited/canceled . . . . . . . (1,104) 0.96 (258,076) 0.71
---------- --------- ---------- ---------
Options outstanding, end of period . . . 5,287,008 0.23 2,916,390 0.48
========== ========= ========== =========
Options exercisable, end of period . . . 4,495,347 0.22 1,698,968 0.64
========== ========= ========== =========
The following summarizes information concerning stock options outstanding at
December 31, 2003:
Weighted Weighted Number Weighted
Average Remaining Average Subject Average
Number Contractual Exercise to Exercise
Outstanding Life Price Exercise Price
----------- ----------- -------- --------- --------
Range of Exercise Prices
0.00 - $0.425. . . . . . 4,406,130 9.0 0.1319 3,614,469 0.1047
0.4251 - $0.85 . . . . . 847,375 5.4 0.6734 847,375 0.6734
0851 - $1.275. . . . . . 33,503 3.7 1.1436 33,503 1.1436
----------- ----------- -------- --------- --------
5,287,008 8.4 0.2251 4,495,347 0.2197
=========== =========== ======== ========= ========
Per share data
----------------
The Company reports its earnings (loss) per share in accordance with Statement
of Financial Accounting Standards No.128, "Accounting for Earnings Per Share"
("FAS 128"). Basic loss per share is calculated using the net loss divided by
the weighted average common shares outstanding. Shares from the assumed
conversion of outstanding warrants, options and the effect of the conversion of
the Class A Preferred Stock and Class B Preferred Stock are omitted from the
computations of diluted loss per share because the effect would be antidilutive.
NOTE B-OTHER AGREEMENTS
On December 23, 2004, we entered into an Investment Agreement and a Registration
Rights Agreement with Dutchess Private Equities Fund, L.P. (Dutchess), pursuant
to which Dutchess agreed to purchase up to $5,000,000 of our shares Common Stock
over a three year period. Purchases are made, if at all, subject to certain
conditions, upon our request. Dutchess cannot unilaterally purchase any shares
of our common stock.
Dutchess' obligation to purchase our Common Stock is contingent upon certain
closing conditions. Such conditions relate to the Investment Agreement and
include: (i) that our representations and warranties are true and correct as of
the funding date, (ii) that we have performed all of our covenants, agreements
and conditions required to be performed us, (iii) that trading of our common
stock has not been suspended, (iv) that no statute, rule, regulation, executive
order, decree, ruling or injunction is in force against the transactions
contemplated in the Note and Warrant Purchase Agreement, (v) that no pending or
threatened litigation exists, and (vi) that the SEC has declared effective a
registration statement covering the shares to be purchased by Dutchess. The
purchase price of our shares of Common Stock equal 95% the three lowest closing
best bid prices of our common stock during the pricing period.
_________________________________________
-----------------------------------------
COMPUMED, INC.
10,000,000 Shares of
Common Stock
_________________________________________
-----------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied on as having been authorized by CompuMed, Inc. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy, by any
person in any jurisdiction in which it is unlawful for such person to make such
offer or solicitation. Neither the delivery of this Prospectus nor any offer,
solicitation or sale made hereunder, shall under any circumstances create an
implication that the information herein is correct as of any time subsequent to
the date of the Prospectus.
_____________________ PROSPECTUS _____________
Until [90 days from the date of effectiveness], all dealers effecting
transactions in the registered securities, whether or not participating in the
distribution thereof, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotment or subscriptions.
March 31, 2004