U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
X ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-14210
COMPUMED, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 95-2860434
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(State or Other Jurisdiction of (I.R.S.
Incorporation or Organization) Employer Identification No.)
5777 WEST CENTURY BLVD., SUITE 1285, LOS ANGELES, CA 90045
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(Address of principal executive offices) (Zip Code)
(310) 258-5000
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
Title of Class
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months), and (2)
has been subject to such filing requirements for the past 90 days. X YES NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
State the issuer's revenues for its most recent fiscal year: $1,811,000.
As of December 12, 2003, 17,951,034 common shares were outstanding and the
aggregate market value of the common shares (based upon the average bid and
asked prices on such date) of the Registrant held by non-affiliates was
approximately $6,911,148.
Documents incorporated by reference: None
Transitional Small business issuer Formal: YES X NO
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PART I
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SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
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We are including the following cautionary statement in this Annual Report
on Form 10-KSB to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 with respect
to forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements that are other than statements of historical facts. From time
to time, we may make written or oral statements that are forward-looking
including statements contained in this report and other filings with the
Securities and Exchange Commission. These forward-looking statements are
principally contained in the sections captioned "Business" and "Management's
Discussion and Analysis of Operations". In those and other portions of this
Form 10-KSB, the words "anticipates", "believes," "estimates," "seeks,"
"expects," "plans," "intends" and similar expressions as they relate to us or
our management are intended to identify forward-looking statements. All such
forward-looking statements are expressly qualified by these cautionary
statements.
Forward-looking statements involve risks and uncertainties that could cause
actual results or outcomes to differ materially from those expressed in the
forward-looking statements. The forward-looking statements contained herein are
based on various assumptions, many of which are based, in turn, upon further
assumptions. Our expectations, beliefs and forward-looking statements are
expressed in good faith on the basis of management's views and assumptions as of
the time the statements are made, but there can be no assurance that
management's expectations, beliefs or projections will result or be achieved or
accomplished.
In addition to other factors and matters discussed elsewhere herein, the
following are important factors that, in our view, could cause actual results to
differ materially from those discussed in the forward-looking statements:
technological advances by our competitors, the impact of competition, dependence
on key employees and the need to attract new management, effectiveness and costs
of sales and marketing efforts, acceptance of product offerings, ability to
expand into new markets, the risks of patent claims or other third party
liability, and the risks of launching a new product or service, such as our
Osteogram (R) test, changes in health care regulation, including reimbursement
programs, capital needs to fund any delays or extensions of research programs
and the availability of capital on terms satisfactory us. We do not intend to
update any forward-looking statements to reflect events or circumstances after
the date hereof.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
CompuMed, Inc. ("we", "our", the "Company" or "CompuMed") is a healthcare
informatics company that provides medical imaging software solutions and the
remote interpretation of electrocardiograms (ECGs). Our two main products are
the Osteogram (R) and CardioGram systems. The Osteogram (R) is our proprietary
image processing software that utilizes standard or digital x-rays of the hand
to screen, diagnose and monitor osteoporosis, a disease that affects over an
estimated 200 million people worldwide. The CardioGram consists of
computer-aided telemedicine services that offer on-line interpretation of ECGs
to physicians and government and corporate healthcare providers. We incorporated
in the State of Delaware on July 21, 1986.
RECENT EVENTS
During fiscal 2003 we changed the strategic direction for the Osteogram (R)
product. We believe that the future of the underlying technology is in the
development of medical software applications for digital (filmless) imaging
equipment, which is a high growth segment of the medical imaging field. The
digital or DICOM (Digital Communications and Imaging in Medicine)
standards-based version of the Osteogram (R) is the first CompuMed product in
this emerging arena. Our R&D team has a number of other applications in
development and on the drawing board in the areas of bone disease, dental
disease and specific cancers. This year we pursued distribution and product
development partnerships with imaging equipment manufacturers, and we expect
that these initiatives will bear fruit in the near future. We have also expanded
our international distribution through country-specific distributors. These
distributors are obtaining the necessary regulatory approvals and gearing up
their marketing efforts.
In fiscal 2003 we directed our ECG business towards strengthening our
relationships with key customers. In addition, we are exploring a number of
business development prospects to expand our service offering to the
international markets. Our CardioGram team is evaluating new ECG platforms to
exploit these opportunities.
THE OSTEOGRAM (R)
GENERAL
The Osteogram (R) is a software-based image processing system that enables
healthcare providers to screen, diagnose and monitor osteoporosis using
conventional, film-based hand x-rays or digital images from filmless x-ray
equipment. Osteoporosis is diagnosed by measuring bone mineral density (BMD). A
low BMD is indicative of the disease. The Osteogram (R) uses Radiographic
Absorptiometry (RA) to measure bone mineral density. The practical
implementation of the Radiographic Absorptiometry technique began in the early
1980's. We applied several enhancements to the technique in the early 1990's,
and in the middle of that decade, we made the Osteogram (R) test available to
doctors as a central-lab-based service. This required that the hand x-ray films
be mailed by the healthcare provider to a special laboratory for analysis by
skilled technicians. The technology was validated in this era by a number of
peer-reviewed publications, and it was widely utilized by Merck and Company
during clinical trials for their osteoporosis drug- Fosamax.
In May 1999, we received clearance from the United States Food and Drug
Administration (FDA) to market an automated version of the Osteogram (R)
software for use as a stand-alone product by physicians. We are currently
launching the DICOM (Digital Imaging and Communications in Medicine) or digital
version of the product. Using standard or digital x-ray equipment, two
posterior-anterior views of the left-hand fingers are taken with an aluminum
alloy reference wedge in each exposure. The calibration wedge is used to adjust
for any differences among x-ray equipment, exposures and other variables. In the
case of the PC version of the Osteogram (R) , the developed film is scanned with
a standard desktop scanner, and the Osteogram (R) software analysis program
rapidly produces an accurate and precise BMD report. With a filmless x-ray
system the image is captured on a workstation for analysis. CompuMed recently
developed the DICOM-compliant version of the Osteogram (R) for use on filmless
systems, which have become a high growth segment in the medical imaging market.
As digital radiography systems proliferate, the need grows for systems and
networks to communicate and efficiently move/archive images. DICOM is the
industry-consortium established information standard that allows the new
generation of digital medical imaging equipment to interconnect.
The foremost market opportunity that we have identified for our Osteogram
(R) is the market for filmless x-ray systems. Our application can reside on a
workstation, just like Microsoft Word on a PC. There is no need for an
additional piece of equipment or a redundant computer. Clinicians can launch the
Osteogram (R) application and diagnose osteoporosis at the same time an x-ray is
taken for a bone fracture, making it far easier to implement and use than
expensive dual x-ray absorptiometry (DXA) equipment that requires a dedicated
room and specially trained technicians who are usually not available around the
clock.
STRATEGIC PARTNERSHIPS
Cost-effective distribution is a crucial component of our Osteogram (R)
strategy. One of our goals is to establish distribution and product development
partnerships with the major manufactures of digital imaging platforms and
network servers, and a number of these companies are evaluating our software. We
expect this process to continue, and it is likely that smaller, nimbler firms
will initially commit. A second part of our strategy is to utilize experienced
imaging distributors both in the domestic and international market. We made a
presentation at the September 2003 national sales meeting of National Imaging
Resources (NIR), a prominent consortium of regional imaging distributors, and we
hope to establish relationships with many of their member firms. NIR's focus on
selling capital equipment, combined with their commitment to serve the market
for digital radiography and PACS network servers, compliments our strategy to
develop digital applications for the medical imaging field.
Our efforts in the international arena continue. Rather than build our own
global sales force, we use existing distribution channels that include a mix of
manufacturers' direct sales representatives and local distributors. New
distributors are expected to become productive after they meet their
country-specific regulatory requirements. During this fiscal year we
strengthened our distribution in China, while adding new distributors in Korea,
Israel, Egypt, India and Brazil. The member countries to the European Union (EU)
are of particular interest, since their conversion to filmless x-ray systems is
far ahead of the U.S. market. In order to enter the EU we will need to have a CE
Mark, indicating that we have conformed to all the regulatory obligations
required by EU legislation. Our technical staff has been working to meet the
requirements soon after this year's Medica in November. Located in Dusseldorf,
Germany, Medica is the world's largest all-medical trade show, attended by most
of the major EU distributors. We are also seeking wider distribution in select
areas of Latin America and the Middle East.
RESEARCH & DEVELOPMENT
We continue to invest in research and development efforts for the Osteogram
(R) technology by developing new applications and filing key patents to protect
our intellectual property rights. Our DICOM version of the Osteogram (R) was
essentially completed by the end of fiscal 2003; however, it must be modified to
function with each manufacturer's digital system. We have agreed to a clinical
trial to validate the DICOM product on one leading manufacturer's system that
will likely be completed by the end of December 2003. In addition, we have filed
an application for an SBIR (Small Business Innovative Research) grant to help
fund our efforts to follow the progression of arthritic disease.
OSTEOPOROSIS
Osteoporosis is a disease characterized by low bone mass and structural
deterioration of tissue leading to bone fragility and an increased
susceptibility to fractures of the hip, spine and wrist. While there is
increased global awareness of osteoporosis, the disease is under-diagnosed and
under-treated.
According to the International Osteoporosis Foundation (IOF), osteoporosis
affects over 200 million people worldwide, 80% of which are women. Osteoporosis
is a major public health threat for 44 million Americans, and the disease costs
the U.S. healthcare system in excess of $17 billion annually, compared to breast
cancer at $6 billion. In fact, more people die as a result of
osteoporosis-related fractures each year than die from breast cancer.
In July 2002 the National Institutes of Health (NIH) halted a large,
in-progress study examining the effects of hormone replacement therapy (HRT).
The study, which was one of the five major studies that comprise the large
clinical trial called the Women's Health Initiative (WHI), 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. HRT 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 HRT therapy,
which increased concern about bone loss. As a result, there was an increased
awareness of BMD testing and testing methods.
Following the WHI announcement, the U.S. Preventative Services Task
Force (USPSTF) published its own recommendations that women over the age of 65
be tested for osteoporosis. Soon afterwards the National Osteoporosis
Foundation reaffirmed their more comprehensive recommendations for osteoporosis
testing. In July 2003 the American Association for Orthopaedic Surgeons posted
a Policy Statement on their web site urging their members to test for underlying
bone disease when presented with a fragility fracture. In addition, Medicare is
expected to enact a new standard of care encouraging health care providers to
test for osteoporosis when a fracture is diagnosed.
We believe that the global awareness of osteoporosis is increasing, and
that there is a resurgence of interest in BMD 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 (BMD) measurements are the primary methods used to
assist physicians in detecting osteoporosis. BMD 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. 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, Osteometer (a
Danish subsidiary of OSI Systems, U.S.), and Schick Technologies, Inc. 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
24/7 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 BMD 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 BMD 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 (SXA), quantitative computed tomography (QCT), peripheral
quantitative computed tomography (pQCT), and radiographic absorptiometry (RA).
All radiographic techniques in use today have been validated through extensive
clinical studies and are currently approved in the U.S. for Medicare
reimbursement. RA is the technology we employ because of its accuracy, ease of
use and relative low cost.
Quantitative Computed Tomography (QCT) utilizes existing computed
tomography (CT or CAT) scanners that have been upgraded with specialized
software, while pQCT utilizes specialized peripheral CT machines. QCT and pQCT
are expensive to perform and require a high degree of expertise to operate
properly. In addition, the radiation dose of QCT is remarkably high compared to
the Osteogram (R) process.
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). The Company believes that there are now
approximately 10,000 QUS machines installed worldwide. QUS has FDA clearance for
screening in the U.S., but unlike the Osteogram (R) , is not recommended by the
National Osteoporosis Foundation for diagnosis and monitoring.
The only manufacturer using RA, other than CompuMed, is Alara, Inc. (U.S.).
In 2000 the FDA approved Alara's self-contained, tabletop system that performs
digital RA of the hand. Alara appears to be currently focused on developing
computed radiography (CR) systems.
Biochemical Marker Tests that measure the level of bone metabolic
substances present in the blood or urine were introduced in the 1990s. There is
no clear consensus yet on the appropriate use of these technologies, since they
only measure the rate of bone loss, not bone density. Although their role in
monitoring the effect of drug therapy may grow, their use at the present time is
limited. Manufacturers of biochemical marker tests include Quidel, Inc. (U.S.)
and Ostex International, Inc., a division of Inverness Medical Innovations, Inc.
(U.S.).
Our existing and potential competitors consist principally of companies
that have substantially greater financial, technical, marketing, distribution
and other resources, greater current market penetration and longer-standing
relationships with customers than us. We believe that our ability to compete
successfully depends on a number of factors, both within and outside of our
control, including the price, quality and performance our products and those of
our competitors. Other factors include the timing and success of our new
product introductions and our competitors, the development of technical
innovations, the number and nature of our competitors in a given market, and
general market and economic conditions. There can be no assurance that we will
be able to compete successfully in the future.
ECG SERVICES
GENERAL
We have been a supplier of telemedicine services, establishing one of the
nation's largest telecommunications networks for processing electrocardiograms
(ECGs) on a real time basis, for nearly twenty years.
Using a CompuMed ECG terminal, an ECG can be acquired from a patient,
telecommunicated to our central computers, analyzed and received back on the ECG
terminal where the ECG 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 ECG supplies including electrodes, recording paper,
gel, and patient cables.
ECG 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 ECG equipment and services to over 500 government and
corporate healthcare facilities, clinics, and hospitals nationwide. Our
customers include physicians, correctional healthcare facilities, ambulatory
surgery centers, clinics, rural hospitals, occupational health facilities, and
behavioral health facilities.
ECG terminals are available for purchase, rental or lease, and transmission
fees are charged on a per-use basis. Customers who choose to purchase an ECG
terminal are charged either hardware maintenance fees or repair fees for
maintaining and repairing the equipment.
We assess our customer's equipment needs on an ongoing basis, and we plan
to offer upgraded ECG instruments with value-added features that should expand
our market reach. We are also evaluating the need for an XML- enabled,
web-based version of our service that would allow us to enter the international
markets and those domestic markets where Internet access is readily available.
A web-based service would not only extend our scope, but also significantly
reduce costs by eliminating the need for long distance phone transmissions. An
XML-enabled system would also enable a number of features including archiving
and comparisons with previously stored ECGs.
MARKETING - ECG SERVICES
During fiscal 2003 our goal was to strengthen relationships with key
customers and preserve a stable base of business. Although our ECG-related
revenue dipped slightly during the year, we accomplished this goal, and
September 2003 was the best month for ECG revenue in several years. We believe
that there are growth areas for the ECG business that can be exploited with
minimal cost. A proactive, outbound telemarketing approach will be a key
strategy for fiscal 2004, and we plan to identify and contact key current and
potential customers to expand our business in targeted segments.
Besides seeking cost reductions in our operations, we are seeking
co-marketing agreements with our equipment suppliers. Equipment upgrades are
being explored, which will enable us to enter higher margin segments, such as
clinical trials. A critical component of the upscale market segments is
customer support and increased regulatory compliance.
We target our sales efforts for ECG products and services toward
physicians, correctional healthcare facilities, ambulatory surgery centers,
rural hospitals and occupational health facilities located throughout the U.S.
We maintain a long-standing customer base with contracts for services generally
extending between one to three years. New customers are generated mostly by our
direct sales efforts. We advertise in trade journals and attend national
medical conventions to generate leads for selling our services, equipment and
supplies.
COMPETITION - ECG SERVICES
Our primary competitors are the Laboratory Corporation of America,
Biomedical Systems, Inc. and Covance, Inc. These companies all offer ECG
terminals that provide ECG interpretation and data storage services at a central
location. We estimate that our centralized ECG analyses constitute less than 1%
of the total number of ECGs taken each year in the U.S.
The overall domestic ECG market is mature. However, we believe that the
demand for the centralized ECG services that we provide may increase due to the
trend toward decentralized diagnostic testing with central interpretation and
data storage. The principal methods under which we compete are service,
ease-of-use, and price.
Our existing and potential competitors consist principally of companies
that have substantially greater financial, technical, marketing, distribution
and other resources, greater current market penetration and longer-standing
relationships with customers than us. We believe that our ability to compete
successfully depends on a number of factors, both within and outside of our
control, including the price, quality and performance 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. There can be no assurance that we will
be able to compete successfully in the future.
ASSEMBLY, REPAIR AND CUSTOMER SERVICE
We repair and maintain most of the electrocardiographs rented, leased or
sold to our customers. All repair and assembly operations are conducted at our
headquarters. Our internal customer service staff handles customer equipment
and training problems, and our customer service department handles initial
installation and set-up, usually over the telephone.
GOVERNMENT REGULATION
The Centers for Medicare and Medicaid Services approve diagnostic tests for
reimbursement by Medicare. The Osteogram (R) is approved for reimbursement by
Medicare as a centralized laboratory test and as a stand-alone system.
Government regulations may change at any time and Medicare reimbursement for the
Osteogram (R) test, as well as for other bone mineral density tests, may be
withdrawn or reduced. Furthermore, other forms of testing for bone mineral
density as an indicator of osteoporosis have been or may be approved for
reimbursement, which may reduce our market share or profit margins for such
services.
Our Osteogram (R) test and automated software have been cleared by the FDA
for use and sale. In addition, the Osteogram (R) is approved for use in China,
Korea, and a number of other countries. The Osteogram (R) software is subject to
regulation as a medical device. Our ECG computer interpretation services are
also regulated by the FDA and are compliant.
PATENTS AND PROPRIETARY RIGHTS
The U.S. Patent and Trademark Office awarded us our first Osteogram (R)
patent in June 2001. The patent covers twenty aspects of Method and Apparatus
for determining Bone Mineral Density. In addition, we have a second patent
pending, which includes twenty-four claims covering image processing and bone
segmentation technology. Final action for the second patent was filed in August
2003. There is no assurance that the second patent will be issued, or that any
issued patents will provide protection from competitors, or that any patents, if
challenged, will be upheld by the courts. The Osteogram (R) trademark is a
registered trademark of CompuMed.
In July 2003 we filed a final action on a provisional U.S. patent
application for software to monitor the progression of both inflammatory and
degenerative joint disease, such as rheumatoid arthritis and osteoarthritis. The
application covers a system that uses many of the same imaging tools employed in
our Osteogram (R) product for the screening, diagnosis and monitoring of
osteoporosis, but extends the system into the area of monitoring joint
degeneration. This new feature will be sold as separate product.
In July 2003 we filed a provisional U.S. patent application for our DICOM
version of the Osteogram (R) product, which we believe will be a key patent in
our field. We are unaware of any other patent to utilize x-ray equipment and a
DICOM image to evaluate BMD and bone degenerative disease. We also filed final
action for a separate provisional patent that was originally filed in 1999 for
bone segmentation and edge detection, along with final action on a provisional
patent to follow the progression of arthritic disease. In September 2003 we
filed an additional provisional U.S. patent application on a method to determine
the percentage cortical versus trabecular bone utilizing a DICOM image. This is
important, since many clinicians are turning their attention to bone
microstructure for a more precise diagnosis and prediction of fracture risk. DXA
technology, which is considered the Gold Standard in BMD 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.
In September 2003 our technical staff presented an abstract at the annual
meeting of the American Society of Bone Mineral Research, one of the most
prestigious organizations in the field. We submitted the abstract in conjunction
with Professor Liu Zonghou, President of the Osteoporosis Committee of China.
The work validated the unique ability of the Osteogram (R) technology to
differentiate between cortical and trabecular bone.
EMPLOYEES
As of September 30, 2003, we had 13 full-time and 1 part-time employee, in
addition to our network of independent sales representatives and distributors.
None of our employees is represented by a labor union and we have experienced no
work stoppages. We consider our relations with our employees to be good. We
also retain consultants from time to time when necessary. Independent
cardiologists are retained for ECG "overreads" on a per-diem basis.
RESEARCH AND DEVELOPMENT
Our R&D efforts in fiscal 2003 focused primarily on expanding the Osteogram
(R) platform with differentiating features and additional applications that will
open new market segments and expand our business with existing customers. Our
DICOM-compliant version of the Osteogram (R) platform will open up a new market
for our product with many players in the digital imaging arena. In addition, we
plan to develop a new, lower-cost version of the Osteogram (R) that will open up
a new market segment for customers that would rather purchase BMD testing on a
"per test" basis. Our arthritis module will allow clinicians to help patients
with this debilitating affliction by offering the first automated procedure to
follow the progression of the disease.
We are actively engaged in the development of potential diagnostic products
based on the technologies covered by our first patent awarded by the U.S. Patent
and Trademark Office in June 2001 and a second patent expected in the first half
of fiscal 2004. An additional patent filed in the fourth quarter of fiscal 2003
will protect our intellectual property as CompuMed develops a new application to
follow the progression of arthritic disease. We expect that a portion of this
development will be funded by research grants, contracts and SBIR (Small
Business Innovation Research) grants.
Our technical team is also working to select a new ECG supplier that will
enable us to compete effectively in the coming years. We intend to be an active
partner with our new supplier in the product planning process. Our goal is to
offer a number of systems with features that will appeal to both cost-conscious
customers and those desiring the additional benefits of upgraded systems. An
XML-enabled system will open up the international markets for our services, plus
cut transmission costs. Additionally, upgraded systems will enable us to compete
in the market for clinical drug trials and electronic medical records.
In fiscal 2003, the Company spent $216,000 in research and development, as
compared to $217,000 in fiscal 2002. None of such costs were borne by our
customers.
INSURANCE
We maintain liability insurance on our current products and are not aware
of any claims based on the use or failure of our products that are expected to
have material adverse effect on our operations or financial condition. There is
no assurance that claims made in the future with respect to our products will be
successfully defended or that our insurance will be sufficient. Furthermore,
there is no assurance that liability insurance will 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 2004 at a
monthly rental of $9,577 per month during the first year with 3% annual
increases in the ensuing lease years. We have the option to extend the lease
term for an additional five years. This is a full service lease that includes
utilities, maintenance and taxes on the property, janitorial and security
service.
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 of the
fiscal year ended September 30, 2003.
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is currently quoted on the over-the-counter (OTC) bulletin
board under the symbol "CMPD.OB". Prior to December 1, 1999, our Common Stock
was listed on the Nasdaq National Market System. The following table sets forth
the range of high and low bid prices for our Common Stock during the periods
indicated. The prices set forth below represent inter-dealer prices, which do
not include retail mark-ups and markdowns, or any commission to the
broker-dealer, and may not necessarily represent actual transactions.
YEAR ENDED SEPTEMBER 30, 2002
QUARTER ENDED: COMMON STOCK
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HIGH LOW
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December 31, 2001. . . . . . . $ .15 $ .06
March 31, 2002 . . . . . . . . .40 .09
June 30, 2002. . . . . . . . . .44 .15
September 30, 2002 . . . . . . .28 .09
YEAR ENDED SEPTEMBER 30, 2003
QUARTER ENDED: COMMON STOCK
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HIGH LOW
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December 31, 2002. . . . . . . $ .23 $ .09
March 31, 2003 . . . . . . . . .15 .07
June 30, 2003. . . . . . . . . .18 .06
September 30, 2003 . . . . . . .45 .09
As of September 30, 2003, there were approximately 600 record holders of
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 December 12, 2003 the closing price of our Common Stock was $0.42.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This analysis should be read in conjunction with the consolidated financial
statements and notes thereto. See ITEM 7 "Financial Statements" and ITEM 13
"Exhibits and Reports on Form 8-K".
RESULTS OF OPERATIONS
-----------------------
FISCAL YEAR ENDED SEPTEMBER 30, 2003 AS COMPARED TO 2002
-----------------------------------------------------------------
Total revenues for fiscal 2003 were $1,811,000 as compared to $1,955,000 in
fiscal 2002, a decrease of 7%. Our ECG services revenues during fiscal 2003
decreased by 6% to $1,601,000 from $1,696,000. ECG product and supplies sales
decreased in fiscal 2003 to $129,000 from $138,000. During fiscal 2003 the
Osteogram (R) revenue decreased to $81,000 from $121,000. The decrease was due
to our strategic shift away from selling the PC version of our Osteogram (R)
system.
Cost of ECG Services for fiscal 2003 decreased by 6% to $477,000 from
$508,000 due to us adopting new telecommunication carriers. Cost of goods sold
of ECG for fiscal 2003 decreased by 9% to $88,000 from $97,000 for fiscal 2002,
due to lower sales of ECG equipment due to the continuing trend toward equipment
leasing in lieu of outright purchase. Cost of goods sold for Osteogram (R)
decreased by 38% during fiscal 2003 to $8,000 from $13,000 for fiscal 2002,
since Osteogram (R) sales to international distributors did not include computer
hardware, which is normally purchased locally.
Selling expenses decreased by 23% for fiscal 2003 to $282,000 from $364,000
for fiscal 2002, due to reduction in domestic marketing activities and
marketing-related consulting services associated with the Osteogram (R).
General and administrative expenses in fiscal 2003 decreased by 14% to
$945,000 from $1,097,000 for fiscal 2002 due to incremental cost cutting
measures, including deferring our 2003 annual shareholders' meeting.
Research and development costs decreased slightly for fiscal 2003 to
$216,000 from $217,000 for fiscal 2002 primarily due to decrease of clinical
trial expenses.
Interest income decreased by 33% for fiscal 2003 to $26,000 from $39,000
for fiscal 2002 due to decreased investments in marketable securities and
reduced interest income on such investments.
The net loss decreased by 24% to $375,000 for fiscal 2003 from $494,000 for
fiscal 2002. The decrease is primarily due to reduced expenditures related to
marketing activities for our Osteogram (R) products, resulting from our decision
to withhold investment in marketing activities until we confirmed the validity
of our new strategies.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
---------------------------------------------------------
At September 30, 2003, we had approximately $247,000 in cash and marketable
securities, as compared to a balance of $327,000 at September 30, 2002. The net
decrease of $80,000 in cash and marketable securities is primarily due to losses
from operations. Purchases of property, plant and equipment decreased by 77%
for fiscal 2003 to $9,000 from $39,000 for fiscal 2002, mostly due to decrease
in acquiring computers for the Osteogram (R) systems sales.
We have historically used existing cash and readily marketable securities
balances to fund operating losses and capital expenditures. We had raised these
funds in 1997 through 2000 through the placement of Preferred Stock issuances
and proceeds from the exercise of certain stock options and warrants.
We have incurred recurring losses and had net losses aggregating $869,000
in fiscal years ended September 30, 2003 and 2002. Our business strategy
includes an increase in Osteogram (R) sales through domestic and international
marketing and distribution efforts, including partnerships with the
manufacturers of digital imaging equipment. We intend to finance this business
strategy by using our current working capital resources and cash flows from
existing operations, including the ECG and Osteogram (R) businesses. There can
be no assurance that the Osteogram (R) sales will be sufficient to offset
related expenses.
We anticipate that our cash flow from operations, available cash and
marketable securities will be sufficient to meet our anticipated financial needs
for at least the next 12 months. However, in certain circumstances we may need
to raise additional capital in the future, which might not be available on
reasonable terms or at all. Failure to raise capital when needed could
adversely impact our business, operating results and liquidity. If additional
funds are raised through the issuance of equity securities, the percentage of
ownership of existing stockholders would be reduced. Furthermore, these equity
securities might have rights, preferences or privileges senior to our Common
Stock. Our Common Stock is currently quoted on the over-the-counter (OTC)
bulletin board, which will make it more difficult to raise funds through the
issuance of equity securities. We cannot assure you that such additional
sources of financing will be available on acceptable terms, if at all.
Our primary capital resource commitments at September 30, 2003 consist of
capital and operating lease commitments, primarily for computer equipment and
for our corporate office facility.
We intend to pursue additional research and/or sub-contractor agreements
relating to our development projects. Additionally, we may seek partners and
acquisition candidates of businesses that are complementary to our own. Such
investments would be subject to our obtaining financing through issuance of debt
or other securities. No assurance can be given that any acquisition would not
be dilutive to stockholders.
CRITICAL ACCOUNTING POLICIES
------------------------------
The Company's discussion and analysis of its financial condition and
results of operations, including the discussion on liquidity and capital
resources, are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, management re-evaluates its
estimates and judgments, particularly those related to the determination of the
estimated recoverable amounts of trade accounts receivable, impairment of
long-lived assets, revenue recognition and deferred tax assets. The Company
believes the following critical accounting policies require its more significant
judgment and estimates used in the preparation of the financial statements.
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.
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
undiscounted future operating cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying value of the assets exceeds their
fair value.
The Company follows 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.
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, the Company considers estimated future taxable income and taxable
timing differences expected to reverse in the future. Actual results may differ
from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
-------------------------------
In June 2002, SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, which requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred, was
issued. This statement nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring), which
required that a liability for an exit cost be recognized upon the entity's
commitment to an exit plan. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002.
In November 2002, SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, was issued.
SFAS No. 150 requires that certain financial instruments previously reported as
equity be reported as liabilities (such as mandatory redeemable equity
instruments and buy-sell arrangements). Depending on the type of financial
instrument, it will be accounted for at either fair value or present value of
future cash flows determined at each balance sheet date with the change in that
value reported as interest expense in the income statement. In the past, either
those financial instruments were not required to be recognized, or if recognized
were reported in the balance sheet as equity and changes in the value of those
instruments were normally not recognized in net income. The statement is
effective for instruments entered into or altered after May 31, 2003, and is
otherwise effective for interim periods ending after June 15, 2003.
In November 2002, Financial Interpretation Number (FIN) 45, Guarantor's
Accounting and Disclosure Requirement for Guarantees, including Indirect
Guarantees of Indebtedness of Others, was issued. FIN No. 45 requires that a
guarantor recognize, at the inception of the guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provision of FIN No. 45 does not apply to certain
guarantee contracts, such as warranties, derivatives or guarantees between
either parent and subsidiaries or corporations under common control, although
disclosures of such guarantees is required. For contracts that are within the
initial recognition and measurement provisions of FIN No. 45, the provisions are
to be applied to guarantees issued or modified after December 31, 2002.
In January 2003, FIN No. 46, Consolidation of Variable Interest Entities,
was issued. FIN 46 clarifies existing accounting principles that determine when
a company should include in its financial statements the assets, liabilities and
activities of another entity when the equity investors do not have the
characteristics of a controlling financial interest or when the equity at risk
is not sufficient for the entity to finance its activities without additional
subordinated financial support from other parties. The consolidation
requirements of FIN No. 46 apply to variable interest entities (commonly
evidenced by a guarantee arrangement or other commitment to provide financial
support) created after January 31, 2003. It required us to perform this
assessment by September 30, 2003, and consolidate any variable interest entities
for which it absorbed a majority of the entities' expected losses or receive a
majority of the expected residual gains.
The adoption of the provisions of these pronouncements did not have a
material impact on our results of operations, financial position, cash flows and
related disclosures.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included as a separate section
following the signature page to this Form 10-KSB:
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors - Rose Snyder & Jacobs
Report of Independent Auditors - Ernst & Young LLP
Balance Sheet as of September 30, 2003
Statements of Operations for the years ended September 30, 2003 and 2002
Statements of Stockholders' Equity for the years ended September 30, 2003 and
2002
Statements of Cash Flows for the years ended September 30, 2003 and 2002
Notes to Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 16, 2003, the Company retained Rose Snyder & Jacobs (RS&J) as
its independent public accountants. The Company's audit committee and board of
directors separately adopted resolutions on September 12, 2003 approving
RS&J's selection.
During the Company's two most recent fiscal years, the Company did not
consulted with RS&J regarding either the application of accounting principles to
a specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements, or any
matter that was the subject of a disagreement, within the meaning of Item
304(a)(1)(iv) of Regulation S-K, or a reportable event, as described in the Item
304(a)(1)(v) of Regulation S-K.
ITEM 8A. CONTROLS AND PROCEDURES
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
there can be no assurance that any design will 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, can provide only reasonable, not absolute,
assurance that the objectives of the system are met. 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, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been 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 there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
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, 2003:
YEAR BECAME
NAME POSITION WITH COMPANY DIRECTOR AGE
------------------------- ------------------------ -------- ---
Robert Stuckelman . . . . Chairman of the Board 1973 71
John G. McLaughlin. . . . President, CEO 55
John Minnick. . . . . . . Director 1985 55
John Romm, M.D. . . . . . Director 1997 73
Stuart L. Silverman, M.D. Director 1999 56
Phuong Dang . . . . . . . Controller and Secretary 47
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 the Company in 1973 and served as its President
until 1982. From 1982 through 1989 Mr. Stuckelman was a business consultant for
small and medium size companies. In 1989 he rejoined the Company as President
and Chief Executive Officer, in which capacities he served until October 1994.
Mr. Stuckelman has been a director of the Company since its incorporation. He
became Chairman of the Board in April 2002. From 1994 to present, he has been
President of Technical Management Consultants, which provides business
consulting services to many companies. He holds an MSEE from the University of
Southern California and a BEE from Cornell University.
Mr. McLaughlin joined the Company in May 2002 as President and CEO. He has
thirty years of experience in the medical products arena, most recently as
President of the Great Circle Consulting Group, Inc. from May 1998 through May
2002. There he provided strategic and operational guidance to domestic and
international firms in the medical device, diagnostic and biotech markets. Mr.
McLaughlin's prior experience includes five years as an officer and Vice
President of Marketing and Sales at Diagnostic Products Corporation (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
Bachelor of Science degree in Pharmacy from the State University of New York at
Buffalo.
Mr. Minnick has been the President of Minnick Capital Management, an
investment management firm from 1972 to present. Mr. Minnick is a member of the
Kansas and Federal Bar. He has served as a director on other corporate and
non-profit boards and is a member of the Association for Investment Management
and Research (AIMR). Mr. Minnick is a graduate of Washburn University (BA) and
the Washburn University School of Law (JD).
Dr. Romm has practiced internal medicine and gastroenterology in private
practice from 1962 to present. He earned his M.D. at Wayne State College of
Medicine and also holds a BS in biology. He is an associate professor of
medicine at the University of California, Los Angeles and is an attending
physician at Cedars-Sinai Medical Center.
Dr. Silverman has been the Medical Director of the Osteoporosis Medical
Center in Beverly Hills, CA, from 1986 to present. The OMC is a nationally
recognized clinical research center for osteoporosis and is also a Clinical
Professor of Medicine at the UCLA School of Medicine. Dr. Silverman is a
graduate of the Johns Hopkins University Medical School (1973) and earned his
undergraduate degree from Princeton University (1969) Cum Laude in biology. He
is an internationally recognized authority on osteoporosis and related fields
and has been principal investigator for six research grants in the field of
osteoporosis and has authored numerous published articles in the field.
Phuong Dang has been employed by the Company since 1990 and has served as
the Controller and Corporate Secretary since 1997.
There is no family relationship among the directors or executive officers
of the Company.
BOARD MEETINGS AND COMMITTEES
Our Board of Directors held a total of four meetings during the fiscal year
ended September 30, 2003. 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 internal and
external auditors regarding our accounting practices and systems of internal
accounting controls. This Committee currently consists of Mr. Stuckelman and
Dr. Romm. The Audit Committee met four times during the fiscal year ended
September 30, 2003. Mr. Stuckelman has been approved by our Board of Directors
as the Audit Committee Financial Expert.
COMPENSATION COMMITTEE
-----------------------
The Compensation Committee reviews and approves our compensation policy and
has assumed responsibility for administration of our 2003 Stock Option Plan.
This Committee currently consists of Mr. Minnick and Dr. Silverman. The
Compensation Committee met twice during the fiscal year ended September 30,
2003.
EXECUTIVE COMMITTEE
--------------------
The Executive Committee is comprised of Dr. Silverman and Mr. Stuckelman
and meets monthly with the Chief Executive Officer.
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, 2003, 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
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation for the fiscal year ended
September 30, 2003 for our chief executive officer and all executive officers
whose compensation exceeded $100,000.00 for such fiscal year.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- -----------------
SECURITIES
FISCAL UNDERLYING STOCK
NAME AND PRINCIPAL POSITION YEAR ANNUAL SALARY BONUS OPTIONS
------------------------------------- ------------ ----------------- -------- ----------------
John G. McLaughlin, President and CEO 2003 $ 150,000 (1) 7,200(2) 434,225 (3)
------------------------------------- ------------ ----------------- -------- ----------------
(1) $139,000 was paid in fiscal 2003, and the remaining $11,000 was paid in the form of additional stock
options.
(2) Earned in fiscal 2003, payable in fiscal 2004.
(3) 50,000 stock options were granted in November 2002 and the remaining 384,225 stock options were granted
during fiscal 2003 in lieu of salary.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the stock options granted to our
executive officer named during the fiscal year ended September 30, 2003.
INDIVIDUAL GRANTS
------------------------
NUMBER OF SECURITIES % OF TOTAL OPTIONS
(SHARES OF COMMON STOCK) GRANTED TO EXERCISE
UNDERLYING OPTIONS EMPLOYEES/DIRECTORS PRICE EXPIRATION
NAME GRANTED(1) IN FISCAL ($/SHARE) DATE
------------------ ------------------------ -------------------- --------- ----------
John G. McLaughlin 434,225 14% $ (2) (3)
------------------ ------------------------ -------------------- --------- ----------
(1) 50,000 options vested over a three-year period, 144,225 options vested immediately and 240,000
options vested over a six-month period.
(2) 50,000 options have an exercise price of $0.20 per share, 144,225 options have an exercise price
of $0.08 per share and 240,000 options have an exercise price of $0.10 per share.
(3) 50,000 options expire in 2012 and the remaining 384,225 options expire in 2013.
EXERCISE OF STOCK OPTIONS AND YEAR-END OPTION VALUES
There were no exercises of stock options by the named executive officer
during the fiscal year ended September 30, 2003. The following table sets forth
certain information regarding options of the named executive officer outstanding
as of September 30, 2003.
YEAR-END OPTION VALUES
---------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/WARRANTS AT OPTIONS/WARRANTS AT
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003 (1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------- ------------------ ------------------ ------------ -------------
John G. McLaughlin 394,218 140,007 75,831 32,869
---------------------- ------------------ ------------------ ----------- -------------
(1) Based on a fair market value of $ 0.43 per share, the closing price per share of the
Company's common stock on September 30, 2003.
EMPLOYEE STOCK OPTION PLANS
We adopted the 2003 Stock Incentive Plan in June 2003, and did not submit
this plan to our stockholders for approval. We adopted the 1992 Stock Option
Plan in March 1992 and the 2002 Stock Option Plan in June 2002, both of which
were approved by our stockholders. Each of the plans was adopted to recruit and
retain selected officers and other employees and directors by providing equity
participation in the Company. The 1992 Plan was terminated in March 2002, while
the 2002 Plan was terminated on the effective date of the 2003 plan in June
2003. No further options can be granted under the 1992 Plan or the 2002 Plan.
Only nonqualified stock options may be granted under the 2003 Plan.
Options generally become exercisable at a rate of 33% of the shares subject to
an option one year after its grant. The remaining shares generally become
exercisable over an additional 24 months. The duration of options may not
exceed ten years. Options are generally nonassignable, except in the case of
death and may be exercised only while the optionee is employed by us or, in
certain cases, within three months after termination of employment or six months
after death or disability. The purchase price and number of shares of Common
Stock that may be purchased upon exercise of options are subject to adjustment
in certain cases, including stock splits, recapitalizations and reorganizations.
Both the amount of options granted and to whom they are granted are
determined by the Board of Directors with the recommendation of the Compensation
Committee, at their discretion. There are no specific criteria, performance
formulas or measures applicable to the determination of the amount of options to
be granted and to whom such options are to be granted.
COMPENSATION OF DIRECTORS
Each of the Directors receives an annual Board of Directors fee of $10,000,
which is paid to each Director in equal monthly installments. The Chairman
receives an additional $4,500. In addition to the Board of Directors fee,
Directors receive an additional $750 per meeting when they serve as a member of
the Executive, Audit or Compensation Committee. Such amount is reduced to $250
if the committee meeting is held by teleconference or on the same day as a board
meeting.
In fiscal 2003, in our effort to conserve limited cash resources, the
Directors received no cash payment of their fees, but received a total of
2,380,817 stock options in lieu of their fees.
EMPLOYMENT AGREEMENT
We entered into a temporary employment agreement with John G. McLaughlin,
President and CEO, from May 20, 2002 through September 30, 2002. Under the
terms of the agreement, Mr. McLaughlin received an annualized compensation of
$150,000 and standard employee options to purchase 100,000 shares of Common
stock at an exercise price of $0.25 per share. Subsequently we entered into a
long-term agreement with Mr. McLaughlin effective November 2, 2002 through
September 30, 2004. This agreement provides a base salary of $150,000 per year
and a performance bonus with a target of $150,000 for revenue, profit and other
criteria far exceeding fiscal 2002. In addition, Mr. McLaughlin received
standard employee options to purchase 50,000 shares of Common stock at an
exercise price of $0.20 per share. In the event Mr. McLaughlin's employment
agreement is terminated by us without cause, or by Mr. McLaughlin for good
reason, he is entitled to receive all accrued compensation plus any bonus he
would otherwise receive for the remaining term of his contract. This agreement
was amended effective October 1, 2003 to provide that the Board of Directors
will award Mr. McLaughlin a bonus for fiscal 2004 of between $75,000 and
$150,000 based on performance factors, including revenue, profit and
accomplishment of milestones.
SAVINGS AND RETIREMENT PLANS
In July 1987, we instituted a Savings and Retirement Plan (the "S&R Plan").
Under the S&R Plan, every full-time salaried employee who is 18 years of age or
older may contribute up to 100 percent of his or her annual salary to the S&R
Plan. We make a matching contribution of $.25 for every $1.00 of the employee's
contribution for an employee contribution of up to but not exceeding 6 percent
of the employee's annual salary. Our contributions are 100% vested after 36
months of contributions to the S&R Plan. Benefits are payable under the S&R
Plan upon termination of a participant's employment with us or at retirement.
The S&R Plan meets the requirements of Section 401(k) of the Internal Revenue
Code. Internal Revenue Service regulations limit the percentage of tax-deferred
contributions that can be made by higher-compensated participants. There are
restrictions upon withdrawal of tax-deferred contributions, but participants are
permitted to borrow against the value of their tax deferred accounts.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information as of September 30, 2003
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 . . 2,016,982 .41 -0-
Equity compensation plans not approved by security holders 3,010,043 .09 408,232(1)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,027,025 .22 408,232
(1) Consists of shares reserved for issuance under the Company's 2003 Stock Incentive Plan. Excludes shares that
will become issuable under the 2003 Stock Incentive Plan if and when they cease to be subject to outstanding awards
(other than by reason of exercise or settlement of the awards) under our 2002 Stock Option Plan (which was suspended
on the effective date of our 2003 Stock Incentive Plan).
NARRATIVE DESCRIPTION OF THE 2003 STOCK INCENTIVE PLAN
A copy of our 2003 Stock Incentive Plan is has been filed as an exhibit to
this annual report. The following description of the 2003 Plan is a summary and
does not purport to be a complete description.
Purposes. The purposes of the 2003 Plan are to attract and retain the best
available personnel, to provide additional incentives to our employees,
consultants and outside directors and to promote the success of our business.
Stock Subject to the Plan. Subject to adjustment for stock splits, a
maximum of 1,600,000 shares of common stock will be available for issuance under
the 2003 Plan, plus the shares that remained available for issuance under 2002
Stock Option Plan on the date the 2002 Plan was suspended and any shares made
subject to an award under the 2002 Plan that cease to be subject to that award
(generally because such award expires or terminates), up to an aggregate maximum
of 4,100,0000 shares.
As of February 11, 2003, the effective date for the 2003 Plan and the date
the 2002 Plan was suspended, 1,900,000 shares remained available for issuance
under the 2002 Plan, and there were outstanding options for 600,000 shares. Any
shares that had been made subject to an option under the 2002 Plan that cease to
be subject to that option (generally because that option expires or terminates)
will become available for future grants under the 2003 Plan. The shares issued
under the 2003 Plan will be from authorized but unissued shares of our common
stock or from shares subsequently acquired as treasury shares.
Administration. The 2003 Plan may be administered by our Board of Directors
or any Board appointed committee (the "plan administrator"). The plan
administrator, subject to the terms of the 2003 Plan, selects the individuals to
receive options, determines the terms and conditions of all options and
interprets the provisions of the 2003 Plan. The plan administrator is also
authorized to make such rules and regulations as it deems necessary to
administer the 2003 Plan. The plan administrator's decisions, determinations and
interpretations are binding on all holders of options granted under the 2003
Plan. Awards. The plan administrator is authorized to grant nonstatutory stock
options and stock awards under the 2003 Plan. Awards may consist of one or more
of these grant types.
Eligibility. Options may be granted to our employees, consultants and
outside directors and to the employees, consultants and outside directors of any
parent or subsidiary of us. Approximately five employees are eligible to
participate in the 2003 Plan
Stock Option Grants. Options granted under the 2003 Plan will be
nonstatutory stock options. The exercise price for each option is determined by
the plan administrator. The exercise price for shares purchased under an option
must be paid in a form acceptable to the plan administrator, which forms may
include cash, a check, shares of already owned common stock, a broker-assisted
cashless exercise or such other consideration as the plan administrator may
permit. Unless the plan administrator determines otherwise, the term of each
option will be ten years from the date of grant. Each option will vest and
become exercisable by the holder based on a vesting schedule set forth in the
individual optionees grant notice. Grants made to employees typically vest [25%
after the first year and 1/48th of the total option each month thereafter]. We
intend to continue using this schedule for most of our grants under the 2003
Plan. Unless the plan administrator determines otherwise, options vested as of
the date of termination of the optionees employment or service relationship with
the Company by reason of death or disability generally will be exercisable for
one year after the date of termination unless the option term expires as of an
earlier date. In the event of termination for a reason other than death or
disability, the option will be exercisable for a period of time determined by
the plan administrator, generally 90 days from the date of termination, and in
no event may the option be exercisable after the expiration of its term. A
transfer of employment or service relationship between us, our subsidiaries and
any parent of the Company is not deemed a termination for purposes of the 2003
Plan.
Transferability. Unless otherwise determined by the plan administrator, no
option granted under the 2003 Plan may be transferred or assigned except by will
or the laws of descent and distribution, and no option may be exercised by
anyone other than the holder during the holder's lifetime.
Stock Awards. The plan administrator can also grant awards of shares of
common stock, or awards denominated in units of common stock, and can subject
these awards to repurchase or forfeiture restrictions based on continuous
service with the company or the achievement of performance goals.
Adjustment of Shares. In the event of stock splits, stock dividends,
reclassification or similar changes in our capital structure, the Board of
Directors, in its sole discretion, will make equitable adjustments in (a) the
number of shares covered by each outstanding option, (b) the number of shares
authorized for issuance under the 2003 Plan but as to which no options have yet
been granted and (c) the purchase price of the common stock underlying each
option.
Company Transaction. In the event of merger or consolidation of the Company
with or into any other company or a sale, lease, exchange or other transfer of
all or substantially all the Company's then outstanding securities or all or
substantially all the Company's assets, all outstanding options will be assumed
or substituted for successor company. If the successor company refuses to
assume or substitute for the options, all outstanding options will become
immediately vested and exercisable immediately prior to the effective date of
the transaction and will then be terminated. Restrictions applicable to any
stock awards will lapse if and to the same extent that option vesting is
accelerated.
Termination and Amendment. The Board of Directors may at any time amend,
suspend, alter or terminate the 2003 Plan. The 2003 Plan will terminate on
February 11, 2013, unless earlier terminated by the Board. No suspension,
alteration, termination or amendment of the 2003 Plan may impair the rights of
holders of outstanding options without the holder's written consent.
Federal Income Tax Consequences.
The following is a summary of the material United States federal income
tax consequences to us and to participants in the 2003 Plan. The summary is
based on the Code and the United States Treasury regulations promulgated
thereunder in effect as of the date of this report, all of which may change with
retroactive effect. The summary is not intended to be a complete analysis or
discussion of all potential tax consequences that may be important to
participants in the 2003 Plan. Therefore, we strongly encourage participants to
consult their own tax advisors as to the specific federal income tax or other
tax consequences of their participation in the 2003 Plan.
Nonqualified Stock Options. Generally, the grant of a nonqualified
stock option will not result in any federal income tax consequences to the
participant or to us. Upon exercise of a nonqualified stock option, the
participant generally will recognize ordinary income equal to the excess of the
fair market value of the stock on the date of exercise over the amount paid for
the stock upon exercise of the option. Subject to certain limitations, we
generally will be entitled to a corresponding business expense deduction equal
to the ordinary income recognized by the participant. Upon disposition of the
stock, the participant will recognize capital gain or loss equal to the
difference between the amount realized on the disposition of such stock over the
sum of the amount paid for such stock plus any amount recognized as ordinary
income upon exercise of the option. Such capital gain or loss will be
characterized as short-term or long-term, depending on how long the stock was
held. Slightly different rules may apply to optionees who are subject to Section
16(b) of the Exchange Act.
Stock Awards. Upon the receipt of shares of our common stock pursuant
to a stock award that is subject to repurchase rights, the holder will generally
recognize ordinary compensation income (subject to FICA and income tax
withholding) when the shares vest in an amount equal to the fair market value of
the shares that vest on each vesting date. If the stock award is not subject to
restrictions other than restrictions on transfer, or the holder files an
election pursuant to Section 83(b) of the Code, the holder will generally
recognize ordinary compensation income (subject to FICA and income tax
withholding) in an amount equal to the fair market value of the shares on the
date of receipt.
Potential Limitation on Our Deductions. Code Section 162(m) precludes a
deduction for compensation paid to our chief executive officer and our four
other highest compensated officers to the extent that such compensation exceeds
$1,000,000 for a taxable year per officer. If certain requirements are met,
qualified performance-based compensation is disregarded for purposes of the
$1,000,000 limitation. The 2003 Plan has been structured in a manner that is
intended to comply with Code Section 162(m). Therefore, assuming certain
requirements are met, payments made to our executive officer during the term of
the 2003 Plan generally will be deductible.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information concerning beneficial ownership
of the our Common Stock as of December 12, 2003 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 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
----------------------- -----------------
John G. McLaughlin. . . . . . . . . . . . . . . . 434,226 (2) 2%
John Minnick. . . . . . . . . . . . . . . . . . . 802,937 (3) 4%
John Romm, M.D. . . . . . . . . . . . . . . . . . 730,302 (4) 4%
Stuart L. Silverman, M.D. . . . . . . . . . . . . 970,221 (5) 5%
Robert Stuckelman . . . . . . . . . . . . . . . . 1,277,618 (6) 7%
All officers and Directors as a group (5 persons) 4,215,304 (7) 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 December 12, 2003.
(2) Includes 434,226 shares subject to stock options.
(3) Includes 733,652 shares subject to stock options.
(4) Includes 714,902 shares subject to stock options.
(5) Includes 970,221 shares subject to stock options.
(6) Includes 1,123,103 shares subject to stock options.
(7) See notes (2) through (6)
(*) c/o CompuMed, Inc, 5777 West Century Blvd, Suite 1285, Los Angeles, CA 90045
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.1 Certificate of Incorporation of the Company [Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement of Form S-1 (File No.
33-46061), effective May 7, 1992]
3.2 Certificate of Amendment of Certificate of Incorporation [Incorporated by
reference to Exhibit 3.1a to Amendment No. 1 to Post-Effective Amendment
No. 1 to the Company's Registration Statement on Form S-2 (File No.
33-48437), filed June 28, 1994]
3.3 Certificate of Amendment of Certificate of Incorporation [Incorporated by
reference to Exhibit 3.1b to Amendment No. 2 to Post-Effective Amendment
No. 1 to the Company's Registration Statement on Form S-2 (File No.
33-48437), filed November 7, 1994]
3.4 Certificate of Correction of Certificate of Amendment [Incorporated by
reference to Exhibit 3.1c to Amendment No. 2 to Post-Effective Amendment
No. 1 to the Company's Registration Statement on Form S-2 (File No.
33-48437), filed November 7, 1995]
3.5 By-Laws of the Company, as currently in effect [Incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File
No. 33-46061), effective May 7, 1992]
4.1 Form of Preferred Stock Certificate [Incorporated by reference to Exhibit
4.2 to the Company's Registration Statement on Form S-1 (File No.
33-46061), effective May 7, 1992]
4.2 Certificate of Designation of Class A Preferred Stock [Incorporated by
reference to Exhibit 4.5 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended September 30, 1995 (File No. 0-14210)]
4.3 Certificate of Designation of Class B Preferred Stock [Incorporated by
reference to Exhibit 4.6 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended September 30, 1995 (File No. 0-14210)]
10.1 1992 Stock Option Plan [Incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (File No. 33-46061), effective
May 7, 1992]
10.2 Form of Non-Qualified Stock Option Agreement [Incorporated by reference to
Exhibit 10 to the Company's Registration Statement on Form S-8 (File No.
33-63435), filed October 14, 1995]
10.3 Commercial Office Lease dated August 16, 1999 between the Company and
L.A.T. Investment Corporation, a California corporation [Incorporated by
reference to Exhibit 10.24 to the Company's 1999 Form 10-KSB]
10.4 2002 Stock Option Plan [Incorporated by reference to Appendix B to our
Definitive Proxy Statement on Schedule 14A (File No. 0-14210), filed on May
3, 2002]
10.5 Form of Stock Option Agreement [Incorporated by reference to Exhibit 10.5
to the Company's Form 10-QSB for the quarter ended June 30, 2002 (File No.
0-14210), filed August 14, 2002]
10.6 Employment Agreement dated November 2, 2002 between the Company and Mr.
McLaughlin [Incorporated by reference to Exhibit 10.6 to the Company's
quarterly report on Form 10-QSB for the quarter ended December 31, 2002
(File No. 0-14210), filed February 14, 2003]
10.7 Amendment to Employment Agreement dated November 2, 2002 between the
Company and Mr. McLaughlin*
10.8 2003 Stock Incentive Plan [Incorporated by reference to Exhibit 99.2 to the
Company's Registration Statement on Form S-8 (file No. 33-105770), filed
June 2, 2003]
23.1 Consent of Rose, Snyder & Jacobs*
23.2 Consent of Ernst & Young, LLP*
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***
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002***
* Filed herewith.
** Filed herewith pursuant to Item 601(b)(31) of Regulation SB.
*** Filed herewith pursuant to Item 601(b)(32) of Regulation SB.
Management compensatory plan or arrangement.
B. REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K on each of August 20,
2003 and September 23, 2003 to report a change in the Company's certified
accountant.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees. The aggregate fees billed for professional services rendered by our
current and former principal accountants for the audit of our annual financial
statements and review of our quarterly financial statements is $69,750 and
$63,400, for fiscal years 2003 and 2002, respectively.
Audit-Related Fees. None.
Tax Fees. The aggregate fees billed to us for professional services rendered by
our current and former principal accountants for tax related services is $10,800
and $4,815, for fiscal years 2003 and 2002, respectively.
All Other fees. None
The audit committee approved the engagement of Rose Snyder & Jacobs in the
preparation of the Company's tax returns.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMPUMED, INC.
By: /s/ John G. McLaughlin
----------------------------
John G. McLaughlin, President and Chief Executive Officer
Date: December 19, 2003
SIGNATURE TITLE DATE
---------------------- -------------------------- -------------
President, Chief Executive
Officer (principal
/s/ John G. McLaughlin executive officer) December 19, 2003
---------------------- -----------------
John G. McLaughlin
Controller and Secretary
(principal financial
/s/ Phuong Dang accounting officer) December 19, 2003
---------------------- -----------------
Phuong Dang
/s/ Robert Stuckelman Chairman of the Board December 19, 2003
---------------------- -----------------
Robert Stuckelman
/s/ John D. Minnick Director December 19, 2003
---------------------- -----------------
John D. Minnick
/s/ John Romm Director December 19, 2003
---------------------- -----------------
John Romm
/s/ Stuart Silverman Director December 19, 2003
---------------------- -----------------
Stuart Silverman
COMPUMED, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors - Rose Snyder & Jacobs
Report of Independent Auditors - Ernst & Young LLP
Balance Sheet as of September 30, 2003
Statements of Operations for the years ended September 30, 2003 and 2002
Statements of Stockholders' Equity for the years ended September 30, 2003 and
2002
Statements of Cash Flows for the years ended September 30, 2003 and 2002
Notes to Financial Statements
F-1
REPORT OF ROSE, SNYDER & JACOBS, INDEPENDENT AUDITORS
Board of Directors and Stockholders
CompuMed, Inc.
We have audited the accompanying balance sheet of CompuMed, Inc. as of September
30, 2003, and the related statements of operations, stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of CompuMed, Inc. as of September 30, 2002, were audited by other
auditors whose report dated November 15, 2002, expressed an unqualified opinion
on the statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 financial statements referred to above present fairly,
in all material respects, the financial position of CompuMed, Inc. as of
September 30, 2003, and the results of its operations and its cash flows for
year ended September 30, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Rose, Snyder & Jacobs
---------------------------------------------------
A Corporation of Certified Public Accountants
Encino, California
November 13, 2003
F-2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
CompuMed, Inc.
We have audited the accompanying statement of operations, stockholder's equity,
and cash flows of CompuMed, Inc. for the year ended September 30, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of CompuMed,
Inc. for the year ended September 30, 2002, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
---------------------
Los Angles, California
November 15, 2002
F-3
COMPUMED, INC.
BALANCE SHEET
ASSETS
SEPTEMBER 30,
2003
--------------
CURRENT ASSETS
Cash and cash equivalents $ 66,000
Marketable securities . . . . . . . . . . . . . . . 181,000
Accounts receivable, less allowance of $22,000. . . 219,000
Inventory . . . . . . . . . . . . . . . . . . . . . 25,000
Prepaid expenses and other current assets . . . . . 21,000
--------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . 512,000
PROPERTY AND EQUIPMENT
Machinery and equipment . . . . . . . . . . . . . . 1,276,000
Furniture, fixtures and leasehold improvements. . . 42,000
Equipment under capital leases. . . . . . . . . . . 35,000
--------------
1,353,000
Accumulated depreciation and amortization . . . . . (1,146,000)
--------------
207,000
OTHER ASSETS
Patents, net of accumulated amortization of $0. . . 50,000
Other assets. . . . . . . . . . . . . . . . . . . . 11,000
--------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . 61,000
TOTAL ASSETS $780,000
==============
See notes to financial statements
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30,
2003
--------------
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . . . $125,000
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . 139,000
Current portion of capital lease obligations. . . . . . . . . 7,000
-------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . 271,000
Capital lease obligations, less current portion . . . . . . . -0-
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, $.10 par value - authorized 1,000,000 shares
Class A $3.50 cumulative convertible voting -
-issued and outstanding - 8,400 shares. . . . . . . . . . . . 1,000
Class B $3.50 cumulative convertible voting -
-issued and outstanding - 300 shares. . . . . . . . . . . . . -0-
Common stock, $.01 par value-authorized 50,000,000 shares
- issued and outstanding- 17,951,034 shares . . . . . . . . . 180,000
Additional paid in capital. . . . . . . . . . . . . . . . . . 32,296,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (31,978,000)
Accumulated other comprehensive income. . . . . . . . . . . . 27,000
Deferred stock compensation . . . . . . . . . . . . . . . . . (17,000)
-----------
509,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . $780,000
===========
See notes to financial statements
COMPUMED, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
--------------------------
2003 2002
------------ ------------
REVENUES
ECG services . . . . . . . . . . . . . . . . . . . . 1,601,000 $ 1,696,000
ECG product and supplies sales . . . . . . . . . . . 129,000 138,000
Osteogram (R) sales and services . . . . . . . . . . 81,000 121,000
------------ ------------
1,811,000 1,955,000
COST AND EXPENSES
Cost of ECG services . . . . . . . . . . . . . . . . 477,000 508,000
Cost of goods sold - ECG . . . . . . . . . . . . . . 88,000 97,000
Cost of goods sold - Osteogram (R) . . . . . . . . . 8,000 13,000
Selling expenses . . . . . . . . . . . . . . . . . . 282,000 364,000
Research and development . . . . . . . . . . . . . . 216,000 217,000
General and administrative expenses. . . . . . . . . 945,000 1,097,000
Depreciation and amortization. . . . . . . . . . . . 217,000 267,000
------------ ------------
2,233,000 2,563,000
OPERATING LOSS . . . . . . . . . . . . . . . . . . . (422,000) (608,000)
Interest income and dividends. . . . . . . . . . . . 26,000 41,000
Realized gain on marketable securities . . . . . . . 22,000 74,000
Interest expense . . . . . . . . . . . . . . . . . . (1,000) (1,000)
------------ ------------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . $ (375,000) $ (494,000)
============ ============
NET LOSS PER SHARE - Basic and Diluted . . . . . . . $ (.02) $ (.03)
Weighted average number of common shares outstanding 17,879,525 17,869,309
See notes to financial statements
COMPUMED, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
PREFERRED COMMON PAID IN ACCUMULATED COMPREHENSIVE DEFERRED STOCK
STOCK STOCK CAPITAL DEFICIT INCOME COMPENSATION TOTAL
Balances at
September 30,
2001:. . . . . . . 1,000 179,000 32,241,000 (31,109,000) 55,000 (18,000) 1,349,000
Unrealized loss
on marketable
securities. . . . . - - - - (53,000) - (53,000)
Amortization of
deferred
compensation . . . - - - - - 15,000 15,000
Net Loss. . . . . . - - - (494,000) - - (494,000)
----------- -------- ----------- ----------- ---------- -------- --------
Balances at
September 30, . . .
2002:. . . . . . . $ 1,000 $179,000 $32,241,000 $(31,603,000) $ 2,000 $ (3,000) $ 817,000
Unrealized gain
on marketable
securities. . . . . - - - - 25,000 - 25,000
Stock options
issued for
services . . . . . - - 49,000 - - (49,000) -
Amortization
of deferred
compensation. . . . - - - - - 35,000 35,000
Exercise of options - 1,000 6,000 - - - 7,000
Net Loss. . . . . . - - - (375,000) - - (375,000)
----------- -------- ----------- ------------ --------------- --------------- ---------
Balances at
September 30, . . .
2003:. . . . . . . $ 1,000 $180,000 $32,296,000 $(31,978,000) $ 27,000 $ (17,000) $ 509,000
============ ======== =========== ============ =============== =============== ==========
Comprehensive losses for the years ended September 30, 2003 and 2002 were ($350,000) and ($547,000), respectively.
See notes to financial statements.
COMPUMED, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30
-------------------------
2003 2002
---------- ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (375,000) $(494,000)
Adjustment to reconcile net loss to net cash used in operating activities:
Realized gain on marketable securities . . . . . . . . . . . . . . . . . . (22,000) (74,000)
Amortization of deferred stock compensation. . . . . . . . . . . . . . . . 35,000 15,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 217,000 267,000
Decrease (increase) in accounts receivable . . . . . . . . . . . . . . . . 8,000 (3,000)
Decrease in inventory and prepaid expenses. . . . . . . . . . . . . . . . 24,000 51,000
Decrease (increase) in accounts payable and other liabilities. . . . . . . 29,000 (33,000)
---------- ----------
NET CASH USED BY OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . (84,000) (271,000)
CASH FLOW FROM INVESTING ACTIVITIES:
Proceed from selling of marketable securities. . . . . . . . . . . . . . . 150,000 306,000
Investments in purchase of marketable securities . . . . . . . . . . . . . (35,000) (110,000)
Purchase of other assets . . . . . . . . . . . . . . . . . . . . . . . . . (33,000) -0-
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . (9,000) (39,000)
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES. . . . . . . . . . . . . . . . . . . 73,000 157,000
CASH FLOW FROM FINANCING ACTIVITIES:
Proceed from exercise of stock option. . . . . . . . . . . . . . . . . . . 7,000 -0-
Payments on capital lease obligations. . . . . . . . . . . . . . . . . . . (8,000) (47,000)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . . . . . . . . (1,000) (47,000)
NET DECREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,000) (161,000)
CASH BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . 78,000 239,000
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,000 $ 78,000
========== ==========
SUPPLEMENTARY DISCLOSURES:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000 $ 1,000
See notes to financial statements
COMPUMED, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: CompuMed, Inc. (CompuMed or the Company) is a medical
diagnostic product and services company focusing on the diagnosis, monitoring
and management of several costly, high incidence diseases, particularly
cardiovascular disease and osteoporosis. The Company's primary business is the
development and marketing of our osteoporosis testing technology (Osteogram (R))
and the computer interpretation of electrocardiograms ("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 has incurred recurring losses and had net losses aggregating
$869,000 in fiscal years ended September 30, 2003 and 2002. The Company's
business strategy includes an increase in Osteogram (R) sales through domestic
and international marketing and distribution efforts. The Company intends to
finance this business strategy by using its current working capital resources
and cash flows from existing operations. There can be no assurance that the
Osteogram (R) sales will be sufficient to offset related expenses.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. This basis of accounting contemplates the
recovery of the Company's assets and the satisfaction of its liabilities in the
normal course of conducting its business. The Company's ability to continue as
a going concern is dependent upon various factors including, among others, its
ability to generate profits and reduce its operating losses and negative cash
flows. No assurance can be given that the Company will be able to accomplish
these objectives. The Company uses existing cash and readily available
marketable securities balances to fund operating losses and capital
expenditures. The Company had raised these funds in 1997 through 2000 through
the placement of Preferred Stock issuances and proceeds from the exercise of
certain stock options and warrants.
Management believes the Company will be able to generate sufficient revenue,
reduce operating expenses or obtain sources of financing in order to fund
ongoing operations through at least September 30, 2004. Accordingly, the
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability or classifications of liabilities that may
result from the outcome of this uncertainty.
Cash Equivalents:
----------------
The Company considers investments in all highly liquid debt instruments with a
maturity of three months or less when purchased, and investments in money market
accounts to be cash equivalents. Cash and cash equivalents also consist of cash
on hand and demand deposit accounts.
Marketable Securities:
---------------------
Marketable securities consist of common stock of publicly traded domestic
companies and are stated at market value based on the most recently traded price
of these securities at September 30, 2003. All marketable securities are
classified as available for sale at September 30, 2003 and for the two years
then ended. Unrealized gains and losses, determined by the difference between
historical purchase price and the market value at each balance sheet date, are
recorded as a component of Accumulated Other Comprehensive Income in
Stockholders' Equity. Realized gains and losses are determined by the difference
between historical purchase price and gross proceeds received when the
marketable securities are sold. As of September 30, 2003, the Company's
investments in marketable securities were valued at $181,000. The Company
recorded a realized gain of $22,000 and $74,000 for the years ended September
30, 2003 and 2002, respectively, and $47,000 and $21,000 of unrealized gain (net
of reclassification adjustments of $22,000 and $74,000 of realized gains above)
as other comprehensive income, net of income taxes of $0 for the years ended
September 30, 2003 and 2002, respectively.
Accounts Receivable:
---------------------
The Company maintains an allowance for doubtful accounts for estimated losses
that may arise if any of its customers are unable to make required payments.
Management specifically analyzes the age of customer balances, historical bad
debt experience, customer credit-worthiness, and changes in customer payment
terms when making estimates of the uncollectability of the Company's trade
accounts receivable balances. If the Company determines that the financial
conditions of any of its customers deteriorated, whether due to customer
specific or general economic issues, increases in the allowance may be made.
Accounts receivable are written off when all collection attempts have failed.
Inventory:
----------
Inventory consists of 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, 2003,
the property and equipment being leased to customers had a historical cost of
$1,026,000. Amortization of assets leased under capital leases is included in
Depreciation and Amortization Expenses
Revenue Recognition:
---------------------
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 their useful lives, starting from their approval
date.
Income Taxes:
--------------
The Company utilizes the liability method to determine the provision for income
taxes, whereby deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Per Share Data:
----------------
The Company reports its earnings (loss) per share in accordance with Statement
of Financial Accounting Standards No.128, "Accounting for Earnings Per Share"
("FAS 128"). Basic loss per share is calculated using the net loss divided by
the weighted average common shares outstanding. Shares from the assumed
conversion of outstanding warrants, options and the effect of the conversion of
the Class A Preferred Stock and Class B Preferred Stock are omitted from the
computations of diluted loss per share because the effect would be antidilutive.
Financial Instruments:
-----------------------
The carrying value of short-term financial instruments such as cash equivalents,
accounts receivable, accounts payable, accrued liabilities and capital leases
approximates their fair value based on the short-term maturities of these
instrument
s.
Long-lived Assets:
-------------------
Long-lived assets used in operations are reviewed periodically to determine
whether the carrying values are not impaired and, if indications of impairment
are present or if long-lived assets are expected to be disposed of, impairment
losses are recorded. Any impairment is charged to expense in the period in which
the impairment is determined. The Company has not recorded impairment charges
during the years ended September 30, 2003 and 2002.
Use of Estimates:
-------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions affecting the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock Based Compensation:
-------------------------
The Company accounts for employee and director's stock option grants using the
intrinsic method. Generally, the exercise price of the employee stock options
equal or exceeds the market price of the underlying stock on the date of grant
and no compensation expense is recognized. If the option price is less than
market value, the Company records compensation expense over the vesting period
of the option.
The Company accounts for equity instruments issued to non-employees in exchange
for goods or services using the fair value method and records expense based on
the values determined.
Concentration of Credit Risk:
--------------------------------
The Company sells its products throughout the United States and in the
international markets. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral. Credit
losses have been within management's expectations. For the year ended September
30, 2003 two customers accounted for approximately 33% of the Company total
revenue and approximately 37% of total accounts receivable at September 30,
2003.
NOTE B - INCOME TAXES
At September 30, 2003, the Company has available for federal income tax
purposes, net operating loss carry forwards of approximately $6.1 millions,
which expire between 2004 and 2023. The utilization of the above net operating
loss carry forwards are subject to significant limitations under the tax codes
due to changes in ownership and portions may expire prior to utilization. The
difference between the Company's effective income tax rate and the statutory
federal rate for the years ended September 30, 2003 and 2002 relates primarily
to losses incurred for which no tax benefit was recognized, due to the
uncertainty of its realization. The valuation allowance was $2,248,000 and
$3,457,000 at September 30, 2003 and 2002, respectively, representing a decrease
of $1,400,000 for the year ended September 30, 2003. This decrease is mainly
explained by loss carry forwards that expire in the current year.
Significant components of the deferred tax liabilities and assets as of
September 30, 2003 are as follows:
2003
------------
Deferred tax liabilities:
Depreciation and amortization . . . . . . . $ (24,000)
Deferred tax assets:
Account receivable allowance. . . . . . . . 9,000
Net operating loss carry forwards . . . . . 2,215,000
------------
Total deferred tax assets . . . . . . . . . 2,224,000
Valuation allowance for Deferred tax assets (2,248,000)
------------
Net deferred tax assets . . . . . . . . . . 24,000
------------
Total . . . . . . . . . . . . . . . . . . . $ 0
============
NOTE C - STOCKHOLDERS' EQUITY
Class A $3.50 Cumulative Convertible Voting Preferred Stock:
-----------------------------------------------------------------
The holders of Class A Preferred Stock are entitled to receive, when and as
declared by the Board of Directors, dividends at an annual rate of $.35 per
share, payable quarterly. Dividends are cumulative from the date of issuance.
Total cumulated dividends not declared at September 30, 2003 amounted to
$16,000. Every two shares of the Class A Preferred Stock are presently
convertible, subject to adjustment, into one share of Common Stock. In the event
of any liquidation, the holders of the Class A Preferred Stock are entitled to
receive $2.00 in cash per share plus accumulated and unpaid dividends out of
assets available for distribution to stockholders, prior to any distribution to
holders of Common Stock or any other stock ranking junior to the Class A
Preferred Stock. The Class A Preferred Stock may be redeemed by the Company,
upon 30-days' written notice, at a redemption price of $3.85 per share. Class A
Preferred Stock stockholders have the right to convert their shares into Common
Stock during such 30-day period.
Shares of Class A Preferred Stock have one vote each. Shares of Class A
Preferred Stock vote along with shares of Common Stock and shares of Class B
Preferred Stock as a single class on all matters presented to the stockholders
for action except as follows: Without the affirmative vote of the holder of a
majority of the Class A Preferred Stock then outstanding, voting as a separate
class, the Company may not (i) amend, alter or repeal any of the preferences or
rights of the Class A Preferred Stock, (ii) authorize any reclassification of
the Class A Preferred Stock, (iii) increase the authorized number of shares of
Class A Preferred Stock or (iv) create any class or series of shares ranking
prior to the Class A Preferred Stock as to dividends or upon liquidation. A
total of 4,200 shares of Common Stock are currently issuable upon conversion of
the remaining 8,400 shares of the Class A Preferred Stock.
Class B $3.50 Convertible Voting Preferred Stock:
----------------------------------------------------
In August 1994, the Company issued 52,333 shares of Class B $3.50 Convertible
Preferred Stock ("Class B Preferred Stock") in connection with the acquisition
of certain property. The holders of Class B Preferred Stock are entitled to
receive dividends only, when and as declared by the Board of Directors. Each
share of Class B Preferred Stock is convertible, subject to adjustment, into ten
shares of Common Stock. In the event of any liquidation, the holders of the
Class B Preferred Stock are entitled to receive $3.50 in cash per share plus
accumulated and unpaid dividends out of assets available for distribution to
stockholders, prior to any distribution to holders of Common Stock or any other
stock ranking junior to the Class B Preferred Stock. Each share of Class B
Preferred Stock may be redeemed by the Company, upon 30-days' written notice, at
a redemption price of $3.85 per share. Class B Preferred Stock stockholders have
the right to convert their shares into Common Stock during this 30-day period.
Shares of Class B Preferred Stock are entitled to one vote each. Shares of
Class B Preferred Stock vote as a single class on all matters presented to the
stockholders for action except as follows: Without the affirmative vote of the
holder of a majority of the Class B Preferred Stock then outstanding, voting as
a separate class, the Company may not (i) amend, alter or repeal any of the
preferences or rights of the Class B Preferred Stock, (ii) authorize any
reclassification of the Class B Preferred Stock, (iii) increase the authorized
number of shares of Class B Preferred Stock or (iv) create any class or series
of shares ranking prior to the Class B Preferred Stock as to dividends or upon
liquidation. A total of 3,000 shares of Common Stock are currently issuable
upon conversion of the remaining 300 shares of Class B Preferred Stock.
NOTE D - STOCK OPTIONS AND WARRANTS
Stock Options:
---------------
The Company has adopted one non-stockholder approved stock incentive plan, the
2003 Stock Incentive Plan (the "2003 Plan"), and two stockholder approved stock
options plans, the 1992 Stock Option Plan ("1992 Plan") and the 2002 Stock
Option Plan (the "2002 Plan") (collectively, the "Plans"). The 1992 Plan expired
in March 2002 and the 2002 Plan was suspended on the effective date of the 2003
Plan in June 2003. Awards are outstanding under the Plans, but awards may be
granted in the future only under the 2003 Plan. The 2003 Plan provides for the
granting of options, stock awards and other forms of equity compensation to key
employees, officers and certain individuals. Only nonqualified options may be
granted under the 2003 Plan.
Options granted under the Plans generally become exercisable at a rate of 33% of
the shares subject to an option one year after the date of grant and the
remaining shares generally become exercisable over an additional 24 months. The
duration of options may not exceed ten years beyond the date of grant.
In addition to options issued pursuant to these Plans, the Company has granted
non-qualified stock options to certain members of the Board of Directors,
management and consultants. Such options have been granted with exercise prices
equal to the market prices of the Common Stock at the date of grant and are for
a term of ten years. During 2000, the Company issued options to purchase
149,843 shares of Common Stock in exchange for services provided over a period
of one to two years. The Company valued these options using the fair value
method, at $59,000 of which $9,000 was expensed in 2000, $38,000 was expensed in
2001and $12,000 was expensed in fiscal 2002. During 2001, the Company issued
options to purchase 50,000 shares of common stock in exchange for services
provided over a period of three years. The Company valued these options using
the fair value method, at $7,000 of which $1,000 was expensed in 2001, $3,000
was expensed in 2002 and $2,000 was expensed in fiscal 2003.
During fiscal 2003, the Company granted options to purchase 50,000 shares of
common stock to an officer for compensation, vested upon the grant date. These
options were recorded at $0, using the intrinsic method. The Company also
issued options to purchase 2,971,768 shares of common stock to directors and
employees in 2003, under the 2003 Plan. These options were recorded at $42,000,
also using the intrinsic method. $30,000 of these options were expensed in
fiscal 2003. The Company granted options to issue 120,000 shares to a
consultant over a 6 month-period. These options were accounted using the fair
value method, in accordance with FASB 123, $7,000, of which $3,000 was expensed
during fiscal 2003.
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 3,141,768 shares of common
stock were granted during the year ended September 30, 2003. The fair value of
these options has been estimated at $111,000 using the Black-Scholes Option
pricing model, with the following assumptions:
Risk free interest rate 3.33% to 4.05%
Stock volatility factor 18%
Weighted average expected option life 10 years
Expected dividend yield None
2002 Pro forma information regarding net loss and loss per share including the
effect of outstanding stock options has not been presented because the effect is
immaterial.
A summary of the stock option activity, and related information for the years
ended September 30 follows:
2003 2002
----------------- -----------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
----------- ------ --------- -------
Options outstanding, beginning of year 3,123,633 .51 3,244,763 .61
Options exercised. . . . . . . . . . . (81,725) .08 -0 -
Options granted. . . . . . . . . . . . 3,141,768 .09 550,000 .25
Options forfeited/canceled . . . . . . (1,156,651) .66 (671,130) .64
----------- ------ ---------- -------
Options outstanding, end of year . . . 5,027,025 .22 3,123,633 .51
=========== ====== ========== =======
Exercisable at end of year . . . . . . 4,273,673 .22 1,921,211 .65
=========== ====== ========== =======
The pro forma net loss and loss per share had the Company accounted for its
options using FAS 123 would have been as follows:
Net loss as reported $(375,000)
Basic and diluted loss per share as reported $(0.02)
Stock based employee compensation cost
Net of related tax effect included in the
Determination of net loss as reported $35,000
Total Stock based employee compensation
Net of related tax effect, that would have
Been included in the determination of net
Loss if the fair value based method would
Have been applied to all awards $111,000
Pro forma net loss as if the fair value based
Method had been applied to all awards $(451,000)
Pro forma basic and diluted loss per share
As if the fair value method had been applied
Applied to all awards $(0.03)
The following summarizes information concerning stock options outstanding at
September 30, 2003:
WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF . . . . . . . . . . . . . . . . . . . . NUMBER REMAINING AVERAGE SUBJECT TO AVERAGE
EXERCISE PRICES. . . . . . . . . . . . . . . . . OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISE EXERCISE PRICE
0.00 - $0.425 . . . . . . . . . . . . . . . . . 4,145,043 9.2 $ 0.1189 3,391,691 0.1035
0.4251 - $0.85. . . . . . . . . . . . . . . . . 847,519 5.6 $ .06734 847,519 .6734
0.851 - $1.275. . . . . . . . . . . . . . . . . 34,463 3.8 $ 1.1396 34,463 1.1396
Total. . . . . . . . . . . . . . . . . . . . . . 5,027,025 8.6 $ 0.2194 4,273,673 0.2249
NOTE E - COMMITMENTS AND CONTINGENCIES
The Company has capital leases for computer and office equipment that expire
through 2004 and has a non-cancelable operating lease for a facility expiring in
August 2004, with an option to extend the term of this lease for an additional
five years. The following is a summary as of September 30, 2003 of future
minimum lease payments together with the present value of the net minimum lease
payments on capital leases:
CAPITAL OPERATING
YEAR ENDING SEPTEMBER 30 LEASES LEASES
----------------------------------------------------------- -------- ----------
2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 114,000
2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . -0 11,000
2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . -0 11,000
2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . -0 11,000
2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . -0 11,000
---------- ----------
Total minimum lease payments. . . . . . . . . . . . . . . . $ 8,000 $ 158,000
========== ==========
Less amount representing interest . . . . . . . . . . . . . 1,000
----------
Net minimum lease payments. . . . . . . . . . . . . . . . . $ 7,000
Less current portion. . . . . . . . . . . . . . . . . . . . 7,000
----------
Present value of net minimum payments, less current portion $ -0-
==========
Rental expense under operating leases was $128,000 and 118,000 in fiscal years
2003 and 2002.
Litigation
----------
From time to time the Company is involved in litigation and threatened
litigation arising in the ordinary course of business. The Company is not aware
of any material unsettled litigation.
Employment Agreement
---------------------
We entered into a temporary employment agreement with John G. McLaughlin,
President and CEO, from May 20, 2002 through September 30, 2002. Under the
terms of the agreement, Mr. McLaughlin received an annualized compensation of
$150,000 and standard employee options to purchase 100,000 shares of Common
stock at an exercise price of $0.25 per share. Subsequently we entered into a
long-term agreement with Mr. McLaughlin effective November 2, 2002 through
September 30, 2004. This agreement provides a base salary of $150,000 per year
and a performance bonus with a target of $150,000 for revenue, profit and other
criteria far exceeding fiscal 2002. In addition, Mr. McLaughlin received
standard employee options to purchase 50,000 shares of Common stock at an
exercise price of $0.20 per share. In the event Mr. McLaughlin's employment
agreement is terminated by us without cause, or by Mr. McLaughlin for good
reason, he is entitled to receive all accrued compensation plus any bonus he
would otherwise receive for the remaining term of his contract. This agreement
was amended effective October 1, 2003 to provide that the Board of Directors
will award Mr. McLaughlin a bonus for fiscal 2004 of between $75,000 and
$150,000 based on performance factors, including revenue, profit and
accomplishment of milestones.
NOTE F - SAVINGS AND RETIREMENT PLANS
The Company has a Savings and Retirement Plan (the "Plan") under which every
full-time salaried employee who is 18 years of age or older may contribute up to
100 percent of his or her eligible annual salary to our Plan. For an employee
contribution of up to but not exceeding 6 percent of the employee's annual
salary the Company makes a matching contribution of $.25 for every $1.00 of the
employee's contribution. The Company's contributions are 100% vested after 36
months of contributions to the Plan. Benefits are payable under the Plan upon
termination of a participant's employment with us or at retirement. The Plan
meets the requirements of Section 401(k) of the Internal Revenue Code. The
Company's matching contribution, which was charged to expense, was $15,000 and
$13,000 in fiscal 2003 and 2002, respectively.
NOTE G - RELATED PARTY TRANSACTIONS
The Company has retained the services of an investment advisor, who is also a
member of the Board of Directors, to provide advice on the investment portfolio.
During fiscal years ended September 30, 2003 and 2002, the Company incurred, for
these services, $2,000 and $ 4,000 respectively.