UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-14210
COMPUMED, INC.
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(Name of Small Business Issuer in Its Charter)
DELAWARE 95-2860434
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5777 WEST CENTURY BLVD., SUITE 1285, LOS ANGELES, CA 90045
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(Address of principal executive offices) (Zip Code)
(310) 258-5000
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(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK,
$.01 PAR VALUE
Check whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
[X] YES [ ]NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
State the issuer's revenues for its most recent fiscal year: $2,284,000.
As of November 30, 2005, the issuer had 22,920,609 common shares were
outstanding. The aggregate market value of the common shares held by
non-affiliates of the issuer (21,366,028 shares) was approximately $15,704,031
based upon the average bid and asked prices ($0.735) on such date.
Transitional Small business issuer Format: [ ] YES [X] NO
TABLE OF CONTENTS
PART I PAGE
Item 1 Description of Business 2
Item 2 Description of Property 9
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
PART II
Item 5 Market For Common Equity and Related Stockholder Matters 9
Item 6 Management's Discussion and Analysis or Plan of Operation 10
Item 7 Financial Statements 14
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
Item 8A Controls and Procedures 14
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act 14
Item 10 Executive Compensation 16
Item 11 Security Ownership of Certain Beneficial Owners and
Management And Related Stockholder Matters 17
Item 12 Certain Relationships and Related Transactions 18
Item 13 Exhibits 18
Item 14 Principal Accountant Fees and Services. 20
Signatures. 20
Financial Statements F-1
2
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
We are a developer of Computer Aided Diagnostic (CAD) solutions for the
healthcare industry that provides medical imaging software and remote,
computer-aided 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 digital or film-based x-rays of
the hand to screen, diagnose and monitor osteoporosis, a disease that affects
more than 200 million people worldwide. The CardioGram consists of
computer-aided telemedicine services that offer on-line interpretation of
electrocardiograms to physicians, government and corporate healthcare providers.
We incorporated in the State of Delaware on July 21, 1986.
RECENT EVENTS
Our core business is the remote interpretation of electrocardiograms (ECGs)
coupled with a feature that allows customers to have a cardiologist overread
abnormal results. We are pleased that the core business grew 27% this fiscal
year. Much of this growth came from a one-time purchase of nearly 100 ECG
terminals from the New York State Department of Corrections.
Prior to the shipment of the New York order, we made a decision to partner with
Schiller AG, Schiller is the global market leader in electrocardiogram equipment
and the Schiller system is state-of-the-art in remote interpretation servers. We
acquired the latest Schiller server system to accept, interpret and handle the
billing and data storage of our ECG business, and we now market Schiller ECG
terminals to our customers. The Internet-ready capability of the Schiller system
will enable us to accept transmission over the Internet. We believe the ability
to immediately transmit an electrocardiogram to an American cardiologist is a
desirable feature that may expand our market reach outside of the United States.
In addition, we expect to collaborate with Schiller in the development of new
product offerings and the expansion into new global markets.
We believe that the future of our OsteoGram(R) 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. As a result, in 2005, we
developed the Digital Communications and Imaging in Medicine (DICOM)
standards-based version of the OsteoGram(R) which is our first product in this
emerging arena.
3
Late in fiscal 2005 we decided to accelerate our efforts with the OsteoGram(R)
product by strengthening our management team in the areas of sales and
engineering. We recruited an experienced Vice President of Sales and a seasoned
Vice President of Engineering. We expect that these two additions to our
management team will rapidly ramp up OsteoGram(R) revenue and hasten product
development.
Our research and development team devoted the majority of their time this fiscal
year to integrating our software application into several digital imaging
platforms, including the market-leading direct digital x-ray platform from
Swissray. In addition, we released the Version 1.03 of the DICOM OsteoGram
product with increased functionality and a more robust underlying structure.
THE OSTEOGRAM(R)
GENERAL
The OsteoGram(R) is a medical 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 (BMD). A low BMD is
indicative of the disease. The OsteoGram(R) is based on a bone mass measurement
technique called radiographic absorptiometry, which was cited in the 2004
Surgeon General's report on bone disease. Radiographic absorptiometry uses a
conventional x-ray of the hand, scanned at high resolution, to measure bone
density. The radiographic absorptiometry technique not only measures bone mass,
but also the cortical thickness of bones. Recent studies affirm the importance
of cortical thickness as an additional measure of bone strength and overall
fracture risk. Several prominent pharmaceutical manufacturers are developing
products that will strengthen cortical bone. Cortical bone is the outer shell
that gives bone strength, much like the hollow tubes from which bicycles are
constructed. Our technology has the capability to measure BMD in both cortical
and trabecular bone, and we believe this is an important feature to add to the
OsteoGram(R) system in the future. Dual x-ray absorptiometry (DXA), is
considered the "Gold Standard" of BMD measurement, but it cannot differentiate
between cortical and trabecular bone. We believe that the OsteoGram(R) could
become a key tool for some pharmaceutical manufacturers not only in the clinical
trial phase, but also in monitoring therapy once a drug is approved. Our
development team is working diligently to add cortical thickness measurement to
the existing OsteoGram(R) report, and we plan to launch the preliminary product
in China during the first quarter of 2006.
In May 1999, we received clearance from the United States Food and Drug
Administration to market an automated version of the OsteoGram(R) software for
use as a stand-alone product by physicians. We recently launched the Digital
Imaging and Communications in Medicine (DICOM) or digital version of the
product. Using digital or film-based 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
film-based version of the OsteoGram(R), the developed film is scanned with a
high-resolution 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 digital image is captured on a workstation for
analysis. We originally developed the DICOM-compliant version of the
OsteoGram(R) in fiscal 2004 for use on filmless systems, which have become a
high growth segment in the medical imaging market. 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(R) Word on a personal computer. There is no
need for expensive, dedicated equipment or redundant computers. 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 x-ray absorptiometry equipment that requires a dedicated
room and specially trained technicians who are usually not available around the
clock.
The business model for the OsteoGram(R) is compelling, since the test is
reimbursable by Medicare, adding value to the bundled solution manufacturers of
digital radiography equipment can offer to their customers. The OsteoGram(R) not
only helps to solve the public health problem of lack of convenient osteoporosis
testing, but it also increases revenue for the customer. The projected revenue
can be positioned as a means to offset the monthly lease costs of the
manufacturer's equipment, allowing these manufacturers and their dealers an
attractive sales paradigm.
STRATEGIC PARTNERSHIPS
As a small company, it is difficult to create global demand for our products;
therefore we rely on strategic partners to market the OsteoGram(R) to end-users.
Our strategy is to establish distribution and product development partnerships
with the major manufactures of digital imaging platforms and to launch the
integrated solution in a timely manner. Although we are much more adept at
integrating the OsteoGram(R) into various digital modalities, the process is
gated by our partners' schedules, the timing of product launches and market
conditions. Orex Computed Radiography was one of our earliest licensees. The
company was acquired by the Health Group of Eastman Kodak Company in early 2005,
and the subsequent integration of Orex into the Kodak system slowed our progress
in the field. We expect Orex to devote more attention to the OsteoGram(R)
bundled solution in the near future, and revenue from the Orex agreement should
begin to flow in the first quarter of our new fiscal year. The Orex licensing
agreement was transferable upon the sale of the company, and Kodak is a key
player in the digital radiography field with platforms in computed radiography
(CR), digital radiography (DR) and CAD mammography. The terms of our licensing
agreement with Orex allow Kodak to effortlessly license the OsteoGram(R) for
their existing digital products.
4
Last year we signed an OsteoGram(R) licensing agreement with market-leading
direct digital radiography (DR) manufacturer, Swissray International. After
integrating our software with the Swissray platform, sales efforts began and the
Swissray sales organization is actively promoting our product. We have achieved
early success, and we are looking forward to a steady revenue stream from
Swissray.
A second leg of our strategy is to utilize experienced imaging distributors both
in the domestic and international market. To reach out to these regional
distributors, we hired an experienced imaging executive in July as our new Vice
President of Sales. Our new VP concluded fiscal year 2005 by signing a number of
new distributors, including Merry X-Ray, a market leader in the digital imaging
arena. Merry recently announced the acquisition of SourceOne, the largest
clinical imaging distributor in the U.S. We expect that there will be a lag
phase in which these new distributors must undergo as they become familiar with
the OsteoGram(R) and develop a sustainable sales pipeline. Our new sales VP will
continue to work with our new distribution partners to help them identify market
opportunities that can be replicated nationwide.
Our efforts in the international arena continue. We have been shut out of the
European market by the lack of a CE Mark, which is a requirement in the European
Union (EU). Gaining a CE Mark is an arduous task, and in August 2005 our efforts
were rewarded by a simultaneous approval for a CE Mark and ISO 13485, the
internationally recognized standard developed to ensure that companies provide
medical devices that consistently meet customer and regulatory requirements. ISO
certification verifies that we meet strict requirements for quality management
systems applicable to medical devices and related services. ISO 13485 is a key
accomplishment, since our imaging manufacturing partners require quality
standards that are in alignment with their own internal protocols. Our
Scientific Director worked diligently with TUV Rhineland to obtain these
important approvals. TUV Rhineland is one of the most prestigious notifying
bodies in the quality field, and their audit process is highly demanding. With
the CE Mark on the OsteoGram(R), we look forward to a full launch of the product
in the EU in the coming fiscal year at Medica, the world's largest all medical
trade show held annually in Dusseldorf, Germany during November.
RESEARCH & DEVELOPMENT
Fiscal 2005 was a demanding year for our development team, as they focused on
releasing Version 1.03 of the OsteoGram DICOM software with added functionality
and a more robust underlying structure. We were able to accomplish a number of
R&D goals during fiscal 2005 by adding a new Vice President of engineering that
had an excellent track record in the DICOM development field. In addition, the
OsteoGram(R) software was modified to function on the Swissray International dDR
platform, and the Swissray sales team began to market the product both in the
United States and in Europe. Preliminary orders for trial systems were installed
in several Swissray accounts, and a full-scale effort from Swissray will be
forthcoming beginning at this year's Annual Meeting of the Radiological Society
of North America (RSNA). The OsteoGram software was exhibited at the 2004 RSNA
by Fuji Medical Systems USA on both their market leading computed radiography
(CR) and CR mammography units (currently awaiting FDA clearance). We believe
that there is a strong market for our product on digital and film-based
mammography platforms, and we filed a preliminary patent application in November
2004 to protect our intellectual property rights in that regard.
As fiscal 2005 progressed, we undertook a small clinical trial to assess the
results of utilizing the OsteoGram(R) software with images taken on a full field
digital mammography (FFDM) unit. The trial was conducted at a major teaching
hospital, and we were encouraged by the strong correlation between the
OsteoGram(R) results on digital mammography equipment and the original
OsteoGram(R) film-based product. We are actively planning an OsteoGram(R)
product around the concept. One of the major issues preventing routine
osteoporosis testing is the lack of convenient testing sites. We believe that,
by integrating the OsteoGram(R) into FFDM platforms, women can be conveniently
tested for osteoporosis at the same time and on the same equipment as their
routine mammogram.
Recent studies affirm the importance of cortical thickness as an additional
measure of bone strength and overall fracture risk. Several well-known
pharmaceutical manufacturers are developing products that will selectively
strengthen cortical bone. Cortical bone is the outer shell that gives bone
strength, much like the hollow tubes that make up a bicycle. Our technology has
the capability to measure BMD in either cortical or trabecular bone. DXA,
considered the "Gold Standard" of BMD measurement, cannot differentiate between
cortical and trabecular bone, and we believe that the OsteoGram(R) could become
a key tool for pharmaceutical manufacturers not only in the clinical trial
phase, but also in monitoring therapy once a drug is approved. Our development
team is working diligently to add cortical thickness measurement to the existing
OsteoGram(R) report, and we plan to launch the preliminary product in China
during the first quarter of the fiscal year.
We continue to invest in research and development efforts for the OsteoGram(R)
technology by planning new applications and filing key patents to protect our
intellectual property rights. We are actively engaged in the development of
potential diagnostic products based on the technologies covered by our first and
second patents awarded by the U.S. Patent and Trademark Office in June 2001 and
April 2004.
Our technical team invested considerable time and effort in selecting Schiller
AG as our new electrocardiogram equipment supplier. We intend to be an active
partner with our new supplier in the product planning process, and our goal is
to offer a number of electrocardiogram terminals with features that will appeal
to both cost-conscious customers and those desiring the additional benefits of
upgraded systems. The Schiller 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.
5
In fiscal 2005, we spent $293,000 in research and development, as compared to
$217,000 in fiscal 2004. None of these costs were borne by our customers.
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
more than 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, and one of
every two women will suffer an osteoporosis-related fracture in her lifetime.
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, which increased concern about bone loss. As a result, there was an
increased awareness of bone mineral density testing and testing methods.
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
now enacting a new measure requiring health care providers to test for
osteoporosis when a fracture is diagnosed. Failure to test or treat osteoporosis
may have negative implications for a hospital's accreditation.
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 x-ray absorptiometry (DXA) is currently the mostly widely used osteoporosis
detection technology, with a worldwide installed base of approximately 16,000
units according to Lunar News, Summer 2000. The DXA 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 DXA scanners include General Electric's
Lunar Division (U.S.) and Hologic, Inc. (U.S.), which together command most of
the worldwide DXA market. The leading manufacturers of peripheral DXA machines
are General Electric, Hologic, Norland and Osteometer (a subsidiary of OSI
Systems, U.S.). Whole body DXA 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 on a 24-hour, 7 days a week basis.
We experience extensive competition for the OsteoGram(R) from companies that
offer DXA 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 DXA equipment generally found in
hospitals and specialty practices.
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(RA). All radiographic
techniques in use today have been validated through extensive clinical studies
and are currently approved in the U.S. for Medicare reimbursement. We employ
radiographic absorptiometry technology because of its accuracy, ease of use and
relative low cost.
6
Quantitative Computed Tomography. Quantitative computed tomography (QCT)
utilizes existing computed tomography (CT or CAT) scanners that have been
upgraded with specialized software, while peripheral quantitative computed
tomography (pQCT) utilizes specialized peripheral computed tomography equipment.
QCT and pQCT are expensive to perform and require a high degree of expertise to
operate properly. In addition, the radiation dose of QCT is remarkably high
compared to the OsteoGram(R) process.
Quantitative Ultrasound. Quantitative ultrasound (QUS) 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 QUS machines installed worldwide. QUS has Food and Drug
Administration clearance for screening in the U.S., but unlike the OsteoGram(R),
is not recommended for diagnosis by the National Osteoporosis Foundation.
To our knowledge, the only manufacturer using radiographic absorptiometry, other
than us, is Alara, Inc. (U.S.). In 2000, the Food and Drug Administration
approved Alara's self-contained, tabletop system that performs digital
radiographic absorptiometry of the hand. We believe Alara is currently focused
on developing computed radiography systems.
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 not be able to compete successfully in the future.
ELECTROCARDIOGRAM SERVICES
GENERAL
We have been a supplier of telemedicine services, establishing one of the
nation's largest telecommunications networks for processing electrocardiograms
on a real time basis, for nearly twenty years.
Using our customized electrocardiogram terminal, an electrocardiogram is
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 more than 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.
MARKETING - ELECTROCARDIOGRAM SERVICES
As in fiscal 2004, our goal in fiscal 2005 was to capture 100% of the state
correctional contracts up for bid. We are pleased that we accomplished that goal
by renewing our contract with the Idaho Department of Corrections and by
capturing the state correctional contracts for both Maryland and Wyoming. The
successful bids for Wyoming and Maryland were noteworthy, since we participated
with Correctional Medical Systems (CMS) and Prison Health Services (PHS) in
winning the overall healthcare award for the two state systems. We have not
partnered with CMS or PHS in many years, and we look forward to further
opportunities in conjunction with the two market leaders in the correctional
healthcare services market.
During fiscal 2005 we installed more than 150 new Schiller terminals in the New
York and Florida State Departments of Corrections. The New York contract called
for the outright purchase of nearly 100 new Schiller terminals, which resulted
in a short-term revenue increase that helped boost fiscal 2005 ECG revenue by
27%. Older 507 units will be returned to us from New York and Florida
correctional facilities for refurbishing and subsequent marketing to customers
that are price sensitive in nature. We believe that the Internet compatibility
of the Schiller system will enable us to enter the international markets, where
the cost of a phone connection previously was a barrier to entry. We look
forward to exploring several potential business models for expansion of our
business outside of the United States, and we have held preliminary discussions
with a major university medical school in China that expresses interest in
partnering with us to provide remote interpretation and overreading services in
their country. China has recently initiated a countrywide program to stem the
increasing number of deaths from heart disease; therefore, there exists growing
awareness of preventative measures.
7
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 five years. New customers are generated mostly by our
direct sales efforts. We advertise in trade journals and attend national medical
conventions as needed 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, especially in clinical drug trials,
where the federal government is likely to approve more automated procedures. 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 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 in Los Angeles. 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.
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 these
services.
Our OsteoGram(R) test and automated software have been cleared by the Food and
Drug Administration 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 Food and Drug
Administration and are compliant.
PATENTS AND PROPRIETARY RIGHTS
The U.S. Patent and Trademark Office awarded us our first OsteoGram(R) patent in
June 2001 with a duration of 20 years. The patent covers twenty aspects of
method and apparatus for determining bone mineral density. In April 2004 we were
awarded a second patent with a duration of 20 years, which includes twenty-four
claims covering image processing and bone segmentation technology.
In July 2004, we filed final action on a provisional U.S. patent application for
our Digital Communications and Imaging in Medicine 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 standard or digital x-ray equipment and a
DICOM image to evaluate bone mineral density and bone degenerative disease. In
September 2004, we filed final action on 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 x-ray absorptiometry (DXA) 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 DXA, as clinicians become more aware of fracture risk
assessment using parameters beyond bone mineral density.
In November 2005 we filed an additional preliminary patent application to
protect our intellectual property rights relating to the integration of the
OsteoGram(R) with mammography equipment.
8
In June 2005 our technical staff presented an abstract on the DICOM OsteoGram at
the annual meeting of the Society for Computer Applications in Radiology (SCAR),
one of the most prestigious organizations in our field. The abstract validated
the strong correlation between the film-based OsteoGram(R) and the DICOM version
on the Orex computed radiography platform.
The OsteoGram(R) trademark has been our registered trademark since July 2, 2002.
We filed and were awarded trademark protection for the OsteoClick, our remote,
pay-per-use system utilizing the OsteoGram(R) software positioned on a central
server.
EMPLOYEES
As of September 30, 2005, we had 15 full-time and 2 part-time employees, 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.
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. Claims made in
the future with respect to our products may not be successfully defended or our
insurance may not be sufficient. Furthermore, liability insurance may not
continue to be available to us on acceptable terms.
ITEM 2. 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 2006 at a monthly
rental of $11,800. This is a full service lease that includes utilities,
maintenance and taxes on the property, janitorial and security service.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to stockholders during the quarter ended
September 30, 2005.
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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, 2004
QUARTER ENDED: COMMON STOCK
------------------------------ -------------------------
HIGH LOW
------------- ----------
December 31, 2003. . . . . . . $ .32 $ .26
March 31, 2004 . . . . . . . . .23 .20
June 30, 2004. . . . . . . . . .16 .15
September 30, 2004 . . . . . . .22 .18
YEAR ENDED SEPTEMBER 30, 2005
QUARTER ENDED: COMMON STOCK
------------------------------ -------------------------
HIGH LOW
------------- ----------
December 31, 2004. . . . . . . $ .43 $ .34
March 31, 2005 . . . . . . . . .27 .26
June 30, 2005. . . . . . . . . .33 .25
September 30, 2005 . . . . . . .40 .38
9
As of September 30, 2005, there were approximately 548 record holders of our
common stock, which does not include common stock held in "nominee" or "street"
name.
We have not paid cash dividends on our common stock since our inception. At the
present time, we intend to follow a policy of retaining any earnings in order to
finance the development of our business and do not anticipate paying cash
dividends in the foreseeable future.
On November 30, 2005 the closing price of our common stock was $0.74. In fiscal
2005, during the first quarter, we issued 121,000 shares to raise of $33,000,
during the second quarter, we issued 139,000 shares to raise $42,000, during the
third quarter, we issued 437,000 shares to raise $96,000, and during the fourth
quarter, we issued 1,597,000 shares to raise $390,000. At September 30, 2005 we
issued an aggregate amount of 2,294,000 shares of common stock to Dutchess
Private Equities Fund, L.P. and had a net proceeds of $561,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis compares our results of operations for the
year ended September 30, 2005 to the same period in 2004. This discussion and
analysis should be read in conjunction with the consolidated financial
statements and notes thereto.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Report on Form 10-KSB contains forward-looking statements, including,
without limitation, statements concerning our possible or assumed future results
of operations. These statements are preceded by, followed by or include the
words "believes," "could," "expects," "intends" "anticipates," or similar
expressions. Our actual results could differ materially from those anticipated
in the forward-looking statements for many reasons including, but not limited
to, product and service demand and acceptance, changes in technology, ability to
raise capital, the availability of appropriate acquisition candidates and/or
business partnerships, economic conditions, the impact of competition and
pricing, capacity and supply constraints or difficulties, government regulation
and other risks described 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.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 2005 AS COMPARED TO 2004
Total revenues for fiscal 2005 were $2,284,000 as compared to $1,856,000 in
fiscal 2004, an increase of 23%. Our ECG transmission services revenues during
fiscal 2005 increased by 7% to $1,726,000 from $1,619,000, mostly due to
increase of ECG Processing and Overread services. ECG product and supplies sales
increased by 418% in fiscal 2005 to $440,000 from $85,000 mostly due to a
one-time sales of ECG terminals to the New York State Department of Corrections.
During fiscal 2005, OsteoGram (R) revenues decreased by 22% to $118,000 from
$152,000. The decrease was due to slower than expected implementation by our OEM
partners.
10
Cost of ECG services for fiscal 2005 increased by 18% to $602,000 from $512,000
mostly due to higher demand in overrread services. Cost of goods sold of ECG for
fiscal 2005 increased by 454% to $327,000 from $59,000 for fiscal 2004, due to
higher sales of ECG equipment. Cost of goods sold for OsteoGram (R) increased by
14% during fiscal 2005 to $8,000 from $7,000 for fiscal 2004 due to cost related
hardware of the full system sold.
Selling expenses increased by 31% for fiscal 2005 to $313,000 from $239,000 for
fiscal 2004 mostly due to costs related to the CE mark applications and the
hiring of the Vice President of Sales.
General and administrative expenses in fiscal 2005 slightly increased to
$1,024,000 from $1,022,000 from fiscal 2004, due to increase in Board of
Director meetings and investor relations related expenses.
Research and development costs increased for fiscal 2005 increased by 35% to
$293,000 from $217,000 for fiscal 2004 due to the hiring of the Vice President
of Engineering.
Other miscellaneous income for fiscal 2005 decreased by 87% to $7,000 from
$55,000 in fiscal 2004. The miscellaneous income was higher in fiscal 2004 due
to one-time property tax dispute that was settled in our favor.
Interest income for fiscal 2005 remained the same as 2004 at $16,000.
The net loss for fiscal year 2005 increased by 22% to $336,000 from $275,000 in
fiscal 2004 mostly due to increased staffing in the OsteoGram(R) business in the
third and fourth quarters of fiscal 2005.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2005, we had approximately $571,000 in cash and marketable
securities, as compared to a balance of $227,000 at September 30, 2004. The net
increase of $344,000 in cash and marketable securities is primarily due to fund
raised through Dutchess Private Equities Fund, LP.
During fiscal year 2005, purchases of property and equipment increased to
$176,000 from $82,000 for fiscal 2004, mostly due to the acquisition of the
Schiller terminals to provide to our new acquired and renewed contracts with
several Departments of Corrections.
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. During
2005 we raised $561,000 through the sale of 2,294,000 shares of common stock
through a financial contract with Dutchess Private Equities Fund, LP.
We have incurred recurring losses and had net losses aggregating $611,000 in
fiscal years ended September 30, 2005 and 2004. However, 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. 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 were 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. These additional sources of financing may not be
available on acceptable terms, if at all.
Our primary capital resource commitments at September 30, 2005 consist of
capital and operating lease commitments, primarily for computer equipment,
electrocardiogram terminals 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. These
investments would be subject to our obtaining financing through issuance of debt
or other securities. An acquisition may be dilutive to stockholders.
CAPITAL COMMITMENTS
On May 1, 2005, we entered into a six-month agreement with Porter, Levay & Rose,
Inc. an investor relations company. During the term of this Agreement, we will
pay Porter, LeVay & Rose $6,500 per month. On December 1, 2005, the Agreement
was extended for another six months with a 5% increase in fees at $6,825 per
month.
We lease our corporate offices at a monthly rental of $11,822 per month.
FINANCING ACTIVITIES
On February 25, 2004, we entered into an Investment Agreement and a Registration
Rights Agreement with Dutchess Private Equities Fund, L.P., pursuant to which
Dutchess agreed to purchase up to $5,000,000 of shares of our common stock over
a three-year period. The purchase price of the shares of our common stock equals
95% the three lowest closing best bid prices of our common stock during the 5
days after we deliver a put notice to them.
MATERIAL TRENDS AND UNCERTAINITIES
We are disappointed by the rate of progress in commercializing the Digital
Communications and Imaging in Medicine (DICOM) OsteoGram (R), and we expect that
our distribution partners will accelerate their efforts to incorporate our
product into their sales training schedules during the first two quarters of
fiscal year 2006.
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, we
re-evaluate our estimates and judgments, particularly those related to the
determination of the estimated recoverable amounts of trade accounts receivable,
impairment of long-lived assets and deferred tax valuation allowance. We believe
the following critical accounting policies require our more significant judgment
and estimates used in the preparation of the financial statements.
11
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 (SFAS) 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
future operating cash flows expected to be generated by the asset. If these
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" (SAB 101), for revenue recognition. Under SAB 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. In December 2003, the SEC issued Staff Accounting Bulletin
(SAB) No. 104, "Revenue Recognition" (SAB No. 104), which revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition", in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on our results of operations, financial
position or cash flows.
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 December 2004, the FASB issued Statement of Accounting Standard No. 123R,
"Share-Based Payment", a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS 123R supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and amends Statement of Accounting Standards No. 9,
"Statement of Cash Flows." SFAS 123R requires all companies to measure
compensation expense for all share-based payments (including employee stock
options and options issued pursuant to employee stock purchase plans) based upon
the fair value of the stock-based awards at the date of grant. SFAS 123R is
effective for the Company for fiscal year beginning after December 15, 2005.
Retroactive application of the requirements of FASB Statement No. 123 to the
beginning of the fiscal year that includes the effective date is permitted, but
not required. Early adoption of Statement 123R is encouraged. A component of
SFAS 123R includes one of the following options: 1) modified-prospective method,
2) the modified-retrospective method, restating all prior periods, or 3) the
modified-retrospective method, restating only the prior interim periods of 2005.
A determination as to which of the three options we will adopt will be made at a
later date. As permitted by SFAS 123, we currently account for share-based
payments to employees using APB25's intrinsic value method and, as such, we
generally recognize no compensation cost for employee stock options.
Accordingly, the adoption of SFAS 123R's fair value method will have a
significant impact on our results of operations, although it will have no impact
on our overall financial position. The impact of adoption of Statement 123R
cannot be predicted at this time because it will depend on levels of share-based
payments granted in the future.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement applies to all voluntary changes in accounting
principles and requires retrospective application to prior periods' financial
statements of changes in accounting principles, unless this would be
impracticable. This statement also makes a distinction between "retrospective
application" of an accounting principle and the "restatement" of financial
statements to reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company is evaluating the effect the adoption of
this interpretation will have on its financial position, cash flows and results
of operations.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are included as a separate section following the
signature page to this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
12
We carried out an evaluation required by the 1934 Act, under the supervision and
with the participation of our principal executive officer and principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in our periodic SEC reports. It should be noted that the design of any
system of controls is based in part upon certain assumptions, and a design may
not succeed in achieving its stated goals.
During the most recent fiscal quarter, there has not occurred any change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. Our chief executive officer and principal financial officer do not
expect that our disclosure controls or our internal control over financial
reporting will prevent all error and all fraud. A control system, no matter how
well conceived and operated, may only reasonably, not absolutely, meet the
objectives of the system. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, absolutely all control issues and instances of fraud, if
any, within the Company may not be detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based partly on certain assumptions about the
likelihood of future events, and a design may not succeed in achieving its
stated goals under all potential future conditions.
OTHER INFORMATION
On October 28, 2005, we declared a dividend of one Common Stock Purchase Right
for each outstanding share of common stock. The dividend is payable to holders
of record at the close of business on August 1, 2005. Each Right entitles the
registered holder to purchase shares of common stock at a purchase price of
$0.40, subject to adjustment.
Initially, the Rights will not be exercisable, certificates for the Rights will
not be issued and the Rights will automatically trade with our common stock.
Until the close of business on the earlier of (i) the tenth day following the
public announcement that a person or group of affiliated or associated persons
("Acquiring Person") other than us, our subsidiary or any employee benefit plan
or employee stock plan ("Exempt Person") has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of our outstanding common stock or
(ii) the tenth business day following the commencement by any person (other
than an Exempt Person) of, or the announcement of the intention to commence, a
tender or exchange offer that would result in the ownership of 15% or more of
our outstanding common stock (the earlier of such dates in clauses (i) and
(ii) being called the "Distribution Date"), the Rights will be evidenced, with
respect to any of the common stock certificates outstanding as of August 1,
2005, by such common stock certificate, together with a copy of the Summary of
Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire at the close of business on October 28, 2009, unless redeemed or
exchanged.
The terms and conditions of the Rights are contained in a Rights Agreement
between U.S. Stock Transfer Corporation and us. A copy of the Rights Agreement
was filed with the Securities and Exchange Commission as an Exhibit to a
Registration Statement on Form 8-A on November 2, 2005. This summary
description of the Rights does not purport to be complete and is qualified in
its entirety by reference to the Rights Agreement, as amended from time to time,
which is incorporated in this summary description by reference.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning our directors and
executive officers as of September 30, 2005:
YEAR
BECAME
NAME POSITION WITH COMPANY DIRECTOR AGE
------------------------- ------------------------ -------- ---
Robert Stuckelman . . . . Chairman of the Board 1973 73
John G. McLaughlin. . . . President, CEO 57
Phillip Berman, MD. . . . Director 2004 52
John Minnick. . . . . . . Director 1985 57
John Romm, M.D. . . . . . Director 1997 75
Stuart L. Silverman, M.D. Director 1999 58
Phuong Dang . . . . . . . Controller and Secretary 49
13
The terms of the Board of Directors will expire at the next annual meeting of
stockholders. Our officers are elected by the Board of Directors and hold office
at the will of the Board.
BACKGROUND EXPERIENCE OF DIRECTORS AND OFFICERS
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 M.S.E.E. from the University of Southern California
and a B.E.E. from Cornell University.
Dr. Berman was appointed to CompuMed's Board in July 2004. As a radiologist and
entrepreneur, he is well respected throughout the industry as an innovator and
successful businessman. He founded and sold several successful companies, and he
was formerly a Vice President of Kodak Medical Imaging. Dr. Berman is a cum
laude graduate of both Harvard University and the Medical College of
Pennsylvania. He completed his residency in radiology at UC San Diego.
Mr. McLaughlin joined us in May 2002 as President and Chief Executive Officer.
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 (NYSE:DP), 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 B.S. 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 Bars. He is a member of the Association for Investment Management and
Research. Mr. Minnick is a graduate of Washburn University (B.A.) and the
Washburn University School of Law (J.D.).
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 B.S. 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 Osteoporosis Medical Center 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 us, 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.
BOARD MEETINGS AND COMMITTEES
Our Board of Directors held a total of nine meetings during the fiscal year
ended September 30, 2005. All of our Directors attended each meeting.
AUDIT COMMITTEE
The Audit Committee is primarily responsible for approving the services
performed by our independent auditors and reviewing reports of our 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, 2005.
Mr. Stuckelman has been approved by our Board of Directors as the independent
Audit Committee Financial Expert.
14
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. The Compensation
Committee met four times during the fiscal year ended September 30, 2005.
EXECUTIVE COMMITTEE
The Executive Committee is comprised of Dr. Silverman and Mr. Stuckelman and
meets monthly with the Chief Executive Officer to review company strategy and
our financial condition.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely on our review of our records, we believe that, during the fiscal
year ended September 30, 2005, our officers, directors, and greater than
ten-percent beneficial owners complied with all applicable filing requirements
under Section 16(a) of the Security Exchange Act of 1934, as amended.
CODE OF ETHICS
We have adopted a Code of Ethics that applies to our principal executive officer
and controller. A copy of the Code of Ethics is available on our website at
http://www.compumed.net/info/index.html. We intend to disclose any amendment or
waiver to the Code of Ethics on our website at
http://www.compumed.net/info/index.html. We will provide to any person without
charge, upon written request to our above address, a copy of such code of
ethics.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation for the fiscal years ended
September 30, 2005, 2004 and 2003 for our chief executive officer and all
executive officers whose compensation exceeded $100,000.00 for such fiscal year.
Long Term
Compensation
Annual Awards Payouts
Compensation
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Principle . Year Salary Bonus Other Annual Restricted Securities LTIP All Other
Position ($) ($) Compensation ($) Stock Underlying Payouts Compensation ($)
Award(s)($) Options/SARs(#) ($)
John G. McLaughlin, 2005 $ 150,000 - - - 45,000 - -
President and CEO
2004 $ 150,000 - - - 245,000 - -
2003 $ 150,000 7,200 - - 434,225 - -
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, 2005.
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 45,000 4% $ 0.32 2014
------------------ ------------------------ -------------------- --------- ----------
(1) The options are vested over a three-year period.
EXERCISE OF STOCK OPTIONS AND YEAR-END OPTION VALUES
During fiscal year ended September 30, 2005, the Board of Directors exercised
1,006,000 shares of options. The proceeds were $46,000.
The following table sets forth certain information regarding options of the
named executive officer outstanding as of September 30, 2005.
15
YEAR-END OPTION VALUES
---------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/WARRANTS AT OPTIONS/WARRANTS AT
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005 (1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------- ------------------ ------------------ ------------ -------------
John G. McLaughlin 599,225 225,000 156,569 40,433
---------------------- ------------------ ------------------ ------------ -------------
(1) Based on a fair market value of $ 0.40 per share, the closing price per share
of our common stock on September 30, 2005.
COMPENSATION OF DIRECTORS
Each of the Directors receives an annual Board of Directors fee of $12,000,
which is paid to each Director in equal monthly installments. The Chairman
receives an additional $4,800. In addition to the Board of Directors fee,
Directors receive an additional $1,000 per meeting when they serve as a member
of the Executive, Audit or Compensation Committee. This amount is reduced to
$350 if the committee meeting is held by teleconference or on the same day as a
board meeting.
EMPLOYMENT AGREEMENT
We entered into a long-term agreement with John McLaughlin effective November 2,
2002 through September 30, 2004. This agreement provides a base salary of
$150,000 per year and a bonus up to $150,000 based on performance factors
including revenue, profit and accomplishment of certain key milestones. 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 upon acceptance
of the agreement . On September 24, 2004, the Board passed a resolution to
extend this contract for an additional year to 2005. On September 9, 2005 the
Board passed a resolution to continue Mr. McLaughlin at a monthly salary of
$14,500 starting October 1, 2005.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information as of September 30, 2005 regarding
shares of our common stock subject to outstanding options or authorized for
issuance under our currently existing equity compensation plan.
NUMBER OF
SECURITIES
REMAINING AND
AVAILABLE FOR
NUMBER OF FUTURE ISSUANCE
SECURITIES TO BE UNDER EQUITY
ISSUED UPON WEIGHTED AVERAGE COMPENSATION
EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING
OUTSTANDING OUTSTANDING SECURITIES
OPTIONS, WARRANTS OPTIONS, WARRANTS REFLECTED IN
AND RIGHTS AND RIGHTS COLUMN (A))
(A) (B) (C)
------------------ ------------------ -----------------
Equity compensation plans approved by security holders . . 1,929,518 .42 -0-
Equity compensation plans not approved by security holders 4,642,416 .18 422,145
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,571,934 .25 422,145
16
NARRATIVE DESCRIPTION OF THE 2003 STOCK INCENTIVE 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 non-assignable, 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 these options are to be granted.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, to our knowledge, certain information concerning
the beneficial ownership of the our common stock as of November 30, 2005 by: (a)
each director of the Company; (b) the executive officer named in the Executive
Compensation Table; (c) our directors and executive officer as a group; and (d)
each person known to us who beneficially owns 5% or more of our common stock.
NAME AND ADDRESS* OF
BENEFICIAL OWNER AMOUNT AND NATURE
BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS (2)
----------------------- -----------------
Phillip Berman... . . . . . . . . . . . . . . . . 233,334 (3) 1%
John G. McLaughlin. . . . . . . . . . . . . . . . 645,892 (4) 3%
John Minnick. . . . . . . . . . . . . . . . . . . 1,019,603 (5) 4%
John Romm, M.D. . . . . . . . . . . . . . . . . . 896,968 (6) 4%
Stuart L. Silverman, M.D. . . . . . . . . . . . . 1,093,554 (7) 5%
Robert Stuckelman . . . . . . . . . . . . . . . . 1,388,228 (8) 6%
All officers and Directors as a group (6 persons) 5,277,579 (9) 22%
Except as otherwise indicated, each person named in the table has sole voting and investment
power (or such power together with any spouse of such person, if they are joint tenants), with
respect to securities beneficially owned by such person as set forth opposite such person's name.
(1) Includes options exercisable as of or within 60 days following November 30, 2005.
(2) The number of shares of common stock issued and outstanding on November 30, 2005 was 22,920,609 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 November 30, 2005.
(3) Includes 166,887 shares subject to stock options.
(4) Includes 645,892 shares subject to stock options.
(5) Includes 643,080 shares subject to stock options.
(6) Includes 635,800 shares subject to stock options.
(7) Includes 764,439 shares subject to stock options.
(8) Includes 866,900 shares subject to stock options.
(9) See notes (3) through (8)
(*) c/o CompuMed, Inc, 5777 West Century Blvd, Suite 1285, Los Angeles, CA 90045
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We 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 each
of the fiscal year ended September 30, 2005 and 2004, we incurred $2,000 each,
for these services.
17
ITEM 13. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.1 Certificate of Incorporation (filed as Exhibit 3.1 to the Registrant's
Registration Statement of Form S-1 effective May 7, 1992 and incorporated herein
by reference).
3.2 Certificate of Amendment of Certificate of Incorporation (filed as Exhibit
3.1a to the Registrant's Registration Statement on Form S-2/A filed on June 28,
1994 and incorporated herein by reference).
3.3 Certificate of Amendment of Certificate of Incorporation (filed as Exhibit
3.1b to the Registrant's Registration Statement on Form S-2/A filed on November
7, 1994 and incorporated herein by reference).
3.4 Certificate of Correction of Certificate of Amendment (filed as Exhibit 3.1c
the Registrant's Registration Statement on Form S-2/A filed on November 7, 1995
and incorporated herein by reference).
3.5 By-Laws (filed as Exhibit 3.5 to the Registrant's Quarterly Report on Form
10-QSB filed on February 13, 2004 and incorporated herein by reference).
3.6 Amendment to By-laws (filed as Exhibit 3.6 to the Registrant's Quarterly
Report on Form 10-QSB filed on February 13, 2004 and incorporated herein by
reference).
4.1 Certificate of Designation of Class A Preferred Stock (filed as Exhibit 4.5
to the Registrant's Annual Report on Form 10-KSB filed on December 29, 1995 and
incorporated herein by reference).
4.2 Certificate of Designation of Class B Preferred Stock (filed as Exhibit 4.6
to the Registrant's Annual Report on Form 10-KSB filed on December 29, 1995 and
incorporated herein by reference).
4.3 Certificate of Designation of Class C Preferred Stock (filed as Exhibit 3.1
to the Registrant's Current Report on Form 8-K filed on January 9, 1998 and
incorporated herein by reference).
4.4 Certificate of Correction for Class C Preferred Stock (filed as Exhibit 3.2
to the Registrant's Current Report on Form 8-K filed on January 9, 1998 and
incorporated herein by reference).
4.5 Rights Agreement between the Company and U.S. Stock Transfer Corporation
dated October 28, 2005 (filed as Exhibit 4.1 to the Company's Form 8-A filed on
November 2, 2005 and incorporated herein by reference).
10.1 Form of Non-Qualified Stock Option Agreement (filed as Exhibit 10 to the
Registrant's Registration Statement on Form S-8 filed on October 14, 1995 and
incorporated herein by reference).
10.2 Commercial Office Lease between the Registrant and L.A.T. Investment
Corporation, dated August 16, 1999 (filed as Exhibit 10.24 to the Registrant's
Annual Report on Form 10-KSB filed on December 29, 1999 and incorporated herein
by reference).
10.3 Form of Stock Option Agreement (filed as Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-QSB filed on August 14, 2002 and incorporated herein
by reference).
10.4 Employment Agreement between the Registrant and John McLaughlin dated
November 2, 2002 (filed as Exhibit 10.6 to the Registrant's Quarterly Report on
Form 10-QSB filed on February 14, 2003 and incorporated herein by reference).
10.5 2003 Stock Incentive Plan (filed as Exhibit 99.2 to the Registrant's
Registration Statement on Form S-8 filed on June 2, 2003 and incorporated herein
by reference).
10.6 Amendment to Commercial Office Lease between the Registrant and L.A.T.
Investment Corporation
10.7 Investment Agreement between the Registrant and Dutchess Private Equities
Fund, LP, dated February 25, 2004 (filed as Exhibit 10.9 to the Registrant's
Registration Statement on Form SB-2 filed on February 27, 2004 and incorporated
herein by reference).
10.8 Registration Rights Agreement between the Registrant and Dutchess Private
Equities Fund, LP, dated February 25, 2004 (filed as Exhibit 10.10 to the
Registrant's Registration Statement on Form SB-2 filed on February 27, 2004 and
incorporated herein by reference).
18
10.9 Placement Agent Agreement between the Registrant, Charleston Securities and
Dutchess Private Equities Fund, LP, dated February 25, 2004 (filed as Exhibit
10.11 to the Registrant's Registration Statement on Form SB-2 filed on February
27, 2004 and incorporated herein by reference).
21.1 Subsidiaries
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certification Pursuant to 18 U.S.C. Section 7241, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 7241, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees. The aggregate fees billed for professional services rendered by our
principal accountants for the audit of our annual financial statements and
review of our quarterly financial statements were $49,000 and $43,000 for fiscal
years 2005 and 2004, respectively.
Audit-Related Fees. None.
Tax Fees. The aggregate fees billed to us for professional services rendered by
our principal accountants for tax related services were $5,375 and $5,340 for
fiscal years 2005 and 2004, respectively.
All Other Fees. None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
19
COMPUMED, INC.
By: /s/ John G. McLaughlin
----------------------------
John G. McLaughlin, President and Chief Executive Officer
Date: December 27, 2005
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
---------------------- -------------------------- -------------
President, Chief Executive
Officer (principal
/s/ John G. McLaughlin executive officer) December 27, 2005
---------------------- -----------------
John G. McLaughlin
Secretary and Controller
(principal financial
/s/ Phuong Dang officer) December 27, 2005
---------------------- -----------------
Phuong Dang
/s/ Robert Stuckelman Chairman of the Board December 27, 2005
---------------------- -----------------
Robert Stuckelman
/s/ Phillip Berman Director December 27, 2005
---------------------- -----------------
Phillip Berman
/s/ John D. Minnick Director December 27, 2005
---------------------- -----------------
John D. Minnick
/s/ John Romm Director December 27, 2005
---------------------- -----------------
John Romm
/s/ Stuart Silverman Director December 27, 2005
---------------------- -----------------
Stuart Silverman
20
COMPUMED, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Balance Sheet as of September 30, 2005
Statements of Operations for the years ended September 30, 2005 and 2004
Statements of Stockholders' Equity for the years ended September 30, 2005 and
2004
Statements of Cash Flows for the years ended September 30, 2005 and 2004
Notes to Financial Statements
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
CompuMed, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of CompuMed, Inc. as of September
30, 2005, and the related statements of operations, stockholders' equity, and
cash flows for the years ended September 30, 2005 and 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards established by the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CompuMed, Inc. as of September
30, 2005, and the results of its operations and its cash flows for the years
ended September 30, 2005 and 2004, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Rose, Snyder & Jacobs
---------------------------------------------------
A Corporation of Certified Public Accountants
Encino, California
November 16, 2005
F-2
COMPUMED, INC.
BALANCE SHEET
ASSETS
SEPTEMBER 30,
2005
--------------
CURRENT ASSETS
Cash and cash equivalents $281,000
Marketable securities, at fair market value. . . . . 290,000
Accounts receivable, less allowance of $26,000. . . 323,000
Inventory . . . . . . . . . . . . . . . . . . . . . 31,000
Prepaid expenses and other current assets . . . . . 18,000
--------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . 943,000
PROPERTY AND EQUIPMENT
Machinery and equipment . . . . . . . . . . . . . . 1,252,000
Furniture, fixtures and leasehold improvements. . . 78,000
Equipment under capital leases. . . . . . . . . . . 183,000
--------------
1,513,000
Accumulated depreciation and amortization . . . . . (1,273,000)
--------------
240,000
OTHER ASSETS
Patents, net of accumulated amortization of $5,000. 77,000
Other assets. . . . . . . . . . . . . . . . . . . . 13,000
--------------
TOTAL OTHER ASSETS. . . . . . . . . . . . . . . . . 90,000
TOTAL ASSETS $1,273,000
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . $159,000
Accrued liabilities . . . . . . . . . . . . . . . . 148,000
Current portion of capital lease obligations. . . . 33,000
-------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . 340,000
Capital lease obligations, less current portion . . 126,000
Commitments and Contingencies, note E
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- 22,920,609 shares . . . . 230,000
Additional paid in capital. . . . . . . . . . . . . 33,154,000
Accumulated deficit . . . . . . . . . . . . . . . (32,589,000)
Accumulated other comprehensive income. . . . . . . 17,000
Deferred stock compensation . . . . . . . . . . . (6,000)
-----------
807,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . $1,273,000
===========
F-3
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
--------------------------
2005 2004
------------ ------------
REVENUES
ECG services . . . . . . . . . . . . . . . . . . . . 1,726,000 $ 1,619,000
ECG product and supplies sales . . . . . . . . . . . 440,000 85,000
OsteoGram(R) sales and services . . . . . . . . . . 118,000 152,000
------------ ------------
2,284,000 1,856,000
COST AND EXPENSES
Cost of ECG services . . . . . . . . . . . . . . . . 602,000 512,000
Cost of goods sold - ECG . . . . . . . . . . . . . . 327,000 59,000
Cost of goods sold - OsteoGram(R) . . . . . . . . . 8,000 7,000
Selling expenses . . . . . . . . . . . . . . . . . . 313,000 239,000
Research and development . . . . . . . . . . . . . . 293,000 217,000
General and administrative expenses. . . . . . . . . 1,024,000 1,022,000
Depreciation and amortization. . . . . . . . . . . . 81,000 152,000
------------ ------------
2,648,000 2,208,000
OPERATING LOSS . . . . . . . . . . . . . . . . . . . (364,000) (352,000)
Interest income and dividends. . . . . . . . . . . . 16,000 16,000
Other miscellaneous income . . . . . . . . . . . . . 7,000 55,000
Realized gains on marketable securities . . . . . . . 19,000 9,000
Interest expense . . . . . . . . . . . . . . . . . . (14,000) (3,000)
------------ ------------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . $ (336,000) $ (275,000)
============ ============
NET LOSS PER SHARE - Basic and Diluted . . . . . . . $ (.02) $ (.02)
Weighted average number of common shares outstanding 20,963,081 18,289,279
F-4
COMPUMED, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
PREFERRED COMMON PAID IN ACCUMULATED COMPREHENSIVE DEFERRED STOCK
STOCK STOCK CAPITAL DEFICIT INCOME COMPENSATION TOTAL
Balances at
September 30, . . .
2003:. . . . . . . $ 1,000 $180,000 $32,296,000 $(31,978,000) $ 27,000 $ (17,000) $ 509,000
Unrealized gain
on marketable
securities. . . . . - - - - 26,000 - 26,000
Stock options and
restricted shares
issued for services - 4,000 43,000 - - (8,000) 39,000
Amortization
of deferred
compensation. . . . - - - - - 25,000 25,000
Issuance of
common stock
to Dutchess . . . . - 10,000 150,000 - - - 160,000
Exercise of options - 3,000 31,000 - - - 34,000
Net Loss. . . . . . - - - (275,000) - - (275,000)
----------- -------- ----------- ------------ --------------- --------------- ----------
Balances at
September 30, . . .
2004:. . . . . . . $ 1,000 $197,000 $32,520,000 $(32,253,000) $ 53,000 $ - $ 518,000
Unrealized loss
on marketable
securities. . . . . - - - - (36,000) - (36,000)
Stock option
issued for
services . . . . . - - 8,000 - - (8,000) -
Amortization
of deferred
compensation. . . . - - - - - 2,000 2,000
Issuance of
common stock
to Dutchess . . . . - 23,000 538,000 - - - 561,000
Exercise of options - 10,000 88,000 - - - 98,000
Net Loss. . . . . . - - - (336,000) - - (336,000)
----------- -------- ----------- ------------ --------------- --------------- ----------
Balances at
September 30, . . .
2005:. . . . . . . $ 1,000 $230,000 $33,154,000 $(32,589,000) $ 17,000 $ (6,000) $ 807,000
============ ======== =========== ============ =============== =============== ==========
Comprehensive losses for the years ended September 30, 2005 and 2004 were ($372,000) and ($249,000), respectively.
F-5
Twelve Months Ended September 30,
2005 2004
------------- -------------
OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (336,000) (275,000)
Net adjustments to reconcile net loss to net cash used in operating activities:
Realized gain on marketable securities. . . . . . . . . . . . . . . . . . . . . (19,000) (8,000)
Amortization of deferred stock compensation . . . . . . . . . . . . . . . . . . 2,000 25,000
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 81,000 150,000
Increase in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . (26,000) (78,000)
Decrease in inventory and prepaid expenses. . . . . . . . . . . . . . . . . . . 20,000 15,000
Decrease (Increase) in accounts payable and other liabilities . . . . . . . . . 59,000 (16,000)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . (219,000) (187,000)
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from selling of marketable securities. . . . . . . . . . . . . . . . . 55,000 54,000
Investments in purchase of marketable securities. . . . . . . . . . . . . . . . (197,000) (4,000)
Purchase of other asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,000) (20,000)
Purchase of property, plant and equipment . . . . . . . . . . . . . . . . . . . (44,000) (32,000)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . (200,000) (2,000)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock option. . . . . . . . . . . . . . . . . . . . . 98,000 35,000
Net offering of the investment agreement with Dutchess Private Equities Fund. . 561,000 160,000
Payments on capital lease obligations . . . . . . . . . . . . . . . . . . . . . (21,000) (10,000)
------------ -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . 638,000 185,000
NET DECREASE [INCREASE] IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . 219,000 (4,000)
CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . 62,000 66,000
------------ -------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281,000 62,000
SUPPLEMENTAL DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000 3,000
Equipment acquired under capital lease. . . . . . . . . . . . . . . . . . . . . 133,000 50,000
Disposal of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,000 0
See notes to financial statements and report of Independent Registered Public Accounting Firm
F-6
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 ("ECGs"). 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 generated negative cash flows from operations and had net losses
aggregating $611,000 in fiscal years ended September 30, 2005 and 2004. 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. Currently, the Company raises fund through
the Investment Agreement with Dutchess Private Equities Fund.
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, 2006. 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
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, 2005. All marketable securities are
classified as available for sale at September 30, 2005 and 2004. 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, 2005, the Company's investments in marketable securities were
valued at $290,000. The Company recorded a realized gain of $19,000 and $8,000
for the years ended September 30, 2005 and 2004, respectively, and $17,000 and
$53,000 of unrealized gains as other comprehensive income (net of
reclassifications adjustments of $19,000 and $8,000 of realized gains above),
net of income taxes of $0 for the years ended September 30, 2005 and 2004,
respectively.
F-7
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 ECG terminals, component parts and ECG 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, 2005,
the property and equipment being leased to customers had a historical cost of
$1,089,000. Amortization of assets leased under capital leases is included in
Depreciation and Amortization Expenses.
REVENUE RECOGNITION:
---------------------
ECG and OsteoGram (R) services are recorded as revenue when billed to the
customer in conjunction with services performed. The Company leases ECG
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 ECG service and supply revenue in the
statement of operations. ECG 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 15 years, 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, 2005 and 2004.
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.
F-8
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, 2005 two customers accounted for approximately 22% of the Company total
revenue and 45% of total accounts receivable at September 30, 2005. The Company
maintains cash balance at a financial institution which accounts are insured by
the Federal Deposit Insurance Corporation of $100,000. The portion in excess of
the federally insured limit amounted to approximately $106,000 at September 30,
2005
NOTE B - INCOME TAXES
At September 30, 2005, the Company has available for federal income tax
purposes, net operating loss carry forwards of approximately $6.3 millions,
which expire between 2006 and 2025. 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, 2005 and 2004 relates primarily
to losses incurred for which no tax benefit was recognized, due to the
uncertainty of its realization. The valuation allowance was $2,451,000 and
$2,343,000 at September 30, 2005 and 2004, respectively, representing an
increase of $108,000 for the year ended September 30, 2005. This increase is
mainly explained by loss carry forwards for which no tax effect was recognized
due to the uncertainty of its realization, offset by loss carry forwards that
expired at September 30, 2005.
Significant components of the deferred tax liabilities and assets as of
September 30, 2005 are as follows:
2005 2004
----------- ------------
Deferred tax liabilities: : . . . . . . . . 0 0
Deferred tax assets:
Net operating loss carry forwards . . . . . 2,400,000 2,318,000
Other asset and liabilities . . . . . . . . 51,000 25,000
----------- -----------
Total deferred tax assets 2,451,000 2,343,000
Valuation allowance for Deferred tax assets (2,451,000) (2,343,000)
----------- -----------
Net deferred tax assets . . . . . . . . . . 0 0
Total . . . . . . . . . . . . . . . . . . . $ 0 $ 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, 2005 amounted to
$19,000. 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.
F-9
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.
ISSUANCE OF COMMON STOCK - EQUITY LINE OF CREDIT
--------------------------------------------------------
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.
During fiscal year 2005, we issued 2,294,000 shares of common stock to Dutchess
and had a net proceeds of $561,000.
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.
F-10
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, $2,000 was expensed in
fiscal 2003 and $1,000 was expensed in fiscal 2004.
During 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 and $12,000 of these options were expensed in fiscal
2003 and fiscal 2004, respectively. The Company also issued options to purchase
120,000 shares of common stock to a consultant over a 6 month-period. These
options were accounted using the fair value method, in accordance with SFAS 123,
$7,000, of which $3,000 was expensed during fiscal 2003 and $4,000 in fiscal
2004.
During 2004, the Company issued options to purchase 26,087 shares of common
stock to a consultant in exchange for services over three-month period. These
options were valued according to SFAS 123 at $8,000 of which $8,000 was expensed
in fiscal 2004. The Company also granted options to purchase 1,785,000 shares of
common stock to directors and employees. These options were recorded at $0 using
the intrinsic method and they were valued at $188,000 in accordance with SFAS
123.
During 2005, the Company issued options to purchase 35,000 shares of common
stock to a consultant. These options were valued according to SFAS 123 at $8,000
of which $2,000 was expensed in 2005. The Company also granted options to
purchase 1,160,000 shares of common stock to directors and employees. These
options were recorded at $0 using the intrinsic method and they were valued at
$124,000 in accordance with SFAS 123.
SFAS 123 "Accounting for Stock-Based Compensation", amended by SFAS 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 1,195,000 and 1,811,087 shares
of common stock were granted during the year ended September 30, 2005 and 2004,
respectively. The fair value of these options has been estimated at $132,000 and
$196,000 using the Black-Scholes Option pricing model, with the following
assumptions:
2005 2004
--------------- ---------------
Risk free interest rate. . . . . . . . 4.00% to 4.50% 4.27% to 4.73%
Stock volatility factor . . . . . . . . 18% to 33% 21% to 65%
Weighted average expected option life 10 years 10 years
Expected dividend yield . . . . . . . . None None
A summary of the stock option activity, and related information for the years
ended September 30 follows:
2005 2004
------------------- ------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
----------- ------ --------- -------
Options outstanding, beginning of year 6,437,217 .22 5,027,025 .21
Options exercised. . . . . . . . . . . (1,026,354) .10 (394,227) .09
Options granted. . . . . . . . . . . . 1,195,000 .25 1,811,087 .21
Options forfeited/canceled . . . . . . (33,929) .46 (6,868) .75
----------- ------ ---------- -------
Options outstanding, end of year . . . 6,571,934 .25 6,437,217 .22
=========== ====== ========== =======
Exercisable at end of year . . . . . . 4,353,609 .26 4,535,551 .23
=========== ====== ========== =======
F-11
The pro forma net loss and loss per share had the Company accounted for its
options using FAS 123 would have been as follows:
Twelve Months Ended September 30,
2005 2004
---------- ----------
Net loss as reported $(336,000) $(275,000)
Basic and diluted loss per share as reported $(0.02) $(0.02)
Stock based employee compensation cost
net of related tax effect included in the
determination of net loss as reported 2,000 $25,000
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 $(79,000) $(80,000)
Pro forma net loss as if the fair value based
method had been applied to all awards $(413,000) $(330,000)
Pro forma basic and diluted loss per share
as if the fair value method had been applied
applied to all awards $(0.02) $(0.02)
The following summarizes information concerning stock options outstanding at
September 30, 2005:
<>C
WEIGHTED AVERAGE WEIGHTED WEIGHTED WEIGHTED
RANGE OF . . . . . . . . . . . . . . . . . . . . NUMBER REMAINING AVERAGE SUBJECT TO AVERAGE
EXERCISE PRICES. . . . . . . . . . . . . . . . . OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISE EXERCISE PRICE
$0.0000 - $0.425 . . . . . . . . . . . . . . . . 5,709,249 8.1092 $ 0.1818 3,490,924 0.1520
$0.4251 - $0.850. . . . . . . . . . . . . . . . . 831,435 3.7117 $ 0.6735 831,435 0.6735
$0.8501 - $1.275. . . . . . . . . . . . . . . . . 31,250 2.1368 $ 1.1540 31,250 1.1540
Total. . . . . . . . . . . . . . . . . . . . . . 6,571,934 7.5245 $ 0.2486 4,353,609 0.2588
NOTE E - COMMITMENTS AND CONTINGENCIES
The Company has capital leases for machinery and equipment that expire in 2009
and has operating lease for a facility that expired in August 2004, with an
option to extend the term of this lease for an additional five years. The
Company exercised the option to extend the lease to August 2006The following is
a summary as of September 30, 2005 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
----------------------------------------------------------- -------- ----------
2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000 129,000
2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,000 4,000
2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,000 4,000
2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,000 2,000
2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 -
---------- ----------
Total minimum lease payments. . . . . . . . . . . . . . . . $ 202,000 $ 139,000
========== ==========
Less amount representing interest . . . . . . . . . . . . . 43,000
----------
Net minimum lease payments. . . . . . . . . . . . . . . . . $159,000
Less current portion. . . . . . . . . . . . . . . . . . . . 33,000
----------
Present value of net minimum payments, less current portion $126,000
==========
F-12
During the year ended September 30, 2005, the Company entered a capital lease
obligation for equipment at the cost of $133,000. This obligation bears an
average interest of 12.16 % and a monthly payment of $3,000 and mature in
October 2009.
Rental expense under operating leases was $144,000 and 129,000 in fiscal years
2005 and 2004.
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 long-term agreement with John McLaughlin effective November 2,
2002 through September 30, 2004. This agreement provided a base salary of
$150,000 per year and a bonus up to $150,000 based on performance factors
including revenue, profit and accomplishment of certain key milestones. 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 upon acceptance
of the agreement. On September 24, 2004, the Board passed a resolution to extend
this contract for an additional year to 2005. On September 9, 2005 the Board
passed a resolution to continue Mr. McLaughlin at a monthly salary of $14,500
starting October 1, 2005.
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 $16,000 and
$15,000 for fiscal 2005 and 2004, 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 each of the fiscal year ended September 30, 2005 and 2004, the Company
incurred $2,000 each, for these services.