U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended July 31, 1997
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-9922
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AMERICAN ELECTROMEDICS CORP.
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(Name of Small Business Issuer in Its Charter)
Delaware 04-2608713
-------------------------- --------------------------
(State of Incorporation (I.R.S. Employer
or Organization) Identification No.)
13 Columbia Drive, Suite 18, Amherst, New Hampshire 03031
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(Address of principal executive offices) (Zip Code)
(603) 880-6300
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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, $.10 PAR VALUE
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Title of Class
Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. [X] YES [ ] NO
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this Form, and no
disclosure will be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
As of October 25, 1997, there were 2,553,136 shares of Common
Stock outstanding and the aggregate market value of such Common
Stock (based upon the closing bid price on such date) of the
Registrant held by non-affiliates was approximately $3,300,000.
Revenues for the fiscal year ended July 31, 1997 totaled $2,300,000.
Documents incorporated by reference: None.
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
THE COMPANY
-----------
American Electromedics Corp. (the "Company") is principally
engaged in the manufacture and sale of medical testing equipment.
A major part of the business is currently based on the
manufacture and sale of Tympanometers(registered trademark). The
name Tympanometer(registered trademark) is a registered trademark
of the Company. The Tympanometer(registered trademark), an
automatic impedance audiometer, is a medical diagnostic
instrument which, by applying a combination of air pressure and
sound to the ear drum, identifies diseases and disorders of the
middle ear which are not revealed by standard hearing tests. In
September 1995, the Company introduced the Race Car(Trademark)
Tympanometer, which is directed for use in screening pre-school
children for hearing disorders. In December 1996, the Company
began selling the QuikTymp(Trademark) Typanometer, a version of
the Race Car Tympanometer that can test for middle ear disease in
adults and children.
The Company also manufactures and sells audiometers which
use sound at descending decibel levels to screen for hearing
loss. Production and sales of the Pilot(Trademark) Audiometer
began in August 1994.
In the Fall of 1995, the Company decided to increase its
presence in the European market. Efforts were made to identify
opportunities which would result in greater market penetration
for its current product line as well as increased exposure to
potential manufacturing partners or joint ventures.
In January 1996, the Company purchased a fifty (50%) percent
interest in Rosch GmbH Medizintechnik, a German corporation
("Rosch GmbH"). Rosch GmbH is a marketing and distribution
company based in Berlin, Germany specializing in the distribution
of healthcare products, including the Company's products, to
primary care physicians in Europe. In 1997, Rosch GmbH began
selling and distributing in markets outside North America,
South America and Australia the Viola(TM) intraoral camera
system which is designed for use in the dental marketplace.
The Viola(TM) intraoral camera displays close-up high quality
color video images of dental patients' teeth and gums. These
images help dentists and other dentalcare workers in displaying
dental health and hygiene problems. Using this system, treatment
plans discussions and on-going patient information are enhanced
as patients can see, understand and accept treatment recommend-
ations.
The Company was granted the exclusive right to market and
sell the Viola(TM) system in North America, South America and
Australia. In September 1997, the Company received U.S. Food and
Drug Administration clearance to sell this system. In November
1997, the Company began the marketing program to introduce the
system in the United States.
In November 1996, the Company effected a one-for-five
reverse split of its Common Stock. All share and per share
information in this Report is on a post-split basis.
TYMPANOMETRY
------------
The impedance audiometer is used to perform a series of
diagnostic tests of the hearing process. The instrument tests
the response of the middle ear muscle to sound stimulus, the
functioning of the nerve endings which transmit the hearing
message to the brain, and the functioning of the middle ear to
determine the presence of any disease. The test of the middle
ear to detect disease is called "tympanometry." Tympanometry
detects middle ear diseases regardless of whether such diseases
result in a hearing loss. Certain types of middle ear diseases
may not initially cause hearing loss and, consequently, cannot be
discovered or diagnosed in their early stages by standard hearing
tests. By the time those diseases cause discernible hearing
loss, the damage to the ear may be extensive and often
irreparable. Early detection through the use of tympanometry
permits treatment which, in many cases, can reverse or ameliorate
the effects of the disease.
2
<PAGE>
TYMPANOMETER(REGISTERED TRADEMARK)
----------------------------------
The Company recognized that tympanometry had applications
beyond the use of the ear specialists and could be used in the
recognition and diagnosis of ear disorders by other practitioners
if an instrument was developed which was fully automated and
produced results which were easily interpreted. Consequently, in
1977, the Company introduced a Company-designed impedance
audiometer called the Tympanometer(registered trademark). The
Tympanometer(registered trademark) has a rubber tipped probe
which is placed against the ear canal for a three second
procedure that applies sound and air pressure to the ear drum and
produces a graphic (hard copy) representation of the middle ear
function. Family practitioners, pediatricians and allergists
confront, on a daily basis, problems affecting the middle ear.
The principal method of determining the nature of the middle ear
problem is through a visual impression obtained with the
assistance of a hand-held instrument that is placed in the
patient's ear. The graphic result provided by the
Tympanometer(registered trademark) eliminates the uncertainties
which may result from visual examination. The person
administering the Tympanometer(registered trademark) test, who
may be a physician, school nurse or other health care
professional, can determine from the graph whether the ear
condition is caused by an infection, a perforation of the ear
drum, a retraction of the ear drum or other pathological
condition, and can treat the condition or refer the patient to
the appropriate specialist.
The Company manufactures and sells four different models of
Tympanometers(registered trademark).
PILOT(REGISTERED TRADEMARK) AUDIOMETER
--------------------------------------
In August 1994, the Company completed the design process and
began production of an audiometer which facilitates the testing
for hearing loss in very young children. The Pilot(Trademark)
Audiometer performs "select picture" and puretone audiometry and
is particularly useful in screening young children for hearing
loss because it is as simple as identifying pictures. A test
board with twelve easily identifiable pictures is displayed
within reach of the child, who is outfitted with a headset
connected to an audiometer. The child is then asked, through the
headset, to identify ten pictures presented at eight descending
decibel levels. Select picture audiometry is a technique
developed by the Mayo Clinic in the 1960s and has been used by
audiologists for decades. Using new digital voice chip
technology, the Company has automated the procedure so that it
can be used simply and efficiently in a primary care or screening
environment. Since its introduction, the Pilot(Trademark)
Audiometer has continued to receive favorable response from the
market.
RACE CAR TYMPANOMETER(REGISTERED TRADEMARK)
-------------------------------------------
In fiscal 1996, the Company introduced the Race Car
Tympanometer(registered trademark) to the marketplace. The Race
Car Tympanometer(registered trademark) is designed to test for
middle ear disease in young children using up-dated graphics for
visual distraction of the child during testing.
QUIK TYMP(TRADEMARK) TYMPANOMETER
---------------------------------
In Fiscal 1997, the Company presented the new Quik
Tymp(Trademark) Tympanometer line at the Health Industry
Distributors Association (HIDA) Meeting. The Quik
Tymp(Trademark) Tympanometer tests for middle ear disease in
children and adults. This easy to use unit features the
Company's "Little Car" visual distraction for testing children
and the traditional graph display for adults. The Quik
Tymp(Trademark) can include the option of a built-in pure tone
audiometer. Marketing commenced in December 1996.
MARKETING
---------
The market for the Company's audiometric products includes
physicians, particularly those in medical specialties such as
pediatrics, allergy medicine, family practice, otolaryngology and
otology (the latter two specialties deal with diseases of the ear).
3
<PAGE>
The audiometric products are marketed mainly through
independent regional dealers both domestically and
internationally who sell principally hearing related health care
products. These dealers are retained on a non-exclusive, best
efforts basis. The Company also distributes its products
throughout Europe using its 50%-owned affiliate Rosch GmbH. For
fiscal 1997, Rosch GmbH accounted for 20% of the Company's total
sales, having accounted for 41% and 15% of the total sales for
the prior two fiscal years.
The Company participates in exhibitions at major medical,
educational and public health conventions. It also advertises
its products domestically and internationally in journals for
pediatricians, allergists, otolaryngologists, otologists and
family practitioners and also for schools, public health clinics
and HMOs.
The Company intends to market the Viola(TM) system on a
direct basis using sales leads generated from attendance at
trade shows and advertising in the major dental journals and
direct mail campaigns to the end user. The Company also intends
to distribute this product through selected distributors
throughout the United States.
PRODUCT WARRANTY
----------------
All audiometric products are sold with a one year warranty
against defects in parts and workmanship. The Company repairs,
at no charge, defects covered by the warranty if the instrument
is returned to the Company's factory in Amherst, New Hampshire or
to an authorized factory service station. If the repair is
performed at the customer's office, there is no charge for
warranty work. The Company believes that it has no warranty
problem with its audiometric products.
The Company's intraoral camera system will be sold with a
full three year warranty against defects in parts and workmanship.
MATERIALS
---------
The principal materials purchased by the Company in the
manufacture of Tympanometers are electronic components, pumps and
metal stamped parts. All of these materials are readily
available from a number of sources in the quantities required.
The graph paper and accessories sold for use with the Company's
instruments are purchased by the Company from suppliers and
resold to the Company's customers.
In Fiscal 1997, the Company received ISO 9000 certification
in conformance with the international standard for the manufacture
of medical devices.
The Viola(TM) system is manufactured by Meditronic
Medizinelektronik GmbH, a German manufacturer of medical camera
systems, and which is partially owned by the other 50% owner
of Rosch GmbH.
BACKLOG
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The Company's total backlog as of July 31, 1997 was $161,000
as compared to total backlog as of July 27, 1996 of $270,000
PRODUCT DEVELOPMENT
-------------------
The Company is continually engaged in product development.
As mentioned, the Quik Tymp(Trademark) Tympanometer was
introduced in fiscal 1997. The Company is currently exploring
new product opportunities both in audiometrics and also in other
lines. In fiscal 1997, the Company expended $85,000 for research
and development. It expects to continue to incur research and
development costs in fiscal 1998 dependent upon the success of
the development activities and available funds.
4
<PAGE>
GOVERNMENT REGULATION
---------------------
Amendments enacted in 1976 to the Federal Food, Drug, and
Cosmetic Act, and regulations issued or proposed thereunder,
provide for regulation by the Food and Drug Administration
("FDA") of the marketing, manufacture, labeling, packaging and
distribution of medical devices, including the Company's
products. Among those regulations are requirements that medical
device manufacturers register with the FDA, list devices
manufactured by them and file various reports. The Company
believes it is in substantial compliance with applicable
regulations. Certain requirements must be met prior to the
initial marketing of medical devices. These range from a minimum
obligation to wait 90 days after notification to the FDA before
introduction of medical devices substantially similar to devices
already on the market to a maximum obligation to comply with the
potentially expensive and time consuming process of testing
necessary to obtain FDA clearance prior to the commercial
marketing of new medical devices. The Company has not experienced
any significant difficulty or expense in complying with the
requirements imposed on it by the FDA or other government
agencies. In addition, the Company believes that the
manufacturing and quality control procedures it employs conform
to requirements of the FDA's "Good Manufacturing Practice for
Medical Devices" regulation and does not anticipate having to
make any material expenditures as a result of these requirements.
The Company believes that any future products it may
introduce will be substantially similar to medical devices
already in the marketplace. Therefore, these products would
require no more than 90 days prior notice to the FDA.
The various environmental laws are not material to the
Company's business.
COMPETITION
-----------
There has been some recent consolidation among the Company's
major competitors in the audiometric business, which has resulted
in some price erosion for those products. The major competitive
factors are price, utilization of latest technology and ease of
use. In fiscal year 1996, the Company completed the redesign of
its Tympanometer(registered trademark) line to take advantage of
more cost effective technology and to address customer needs.
The market for intraoral cameras is relatively new. Several
companies, including several large public companies are marketing
such cameras, and other companies may enter this marketplace. No
assurance can be given that the Company will be able to compete
against these other companies which may have substantially
greater marketing and financial resources than the Company.
PATENTS
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The Company does not hold any patents. It has registered
trademarks and copyrights for names which it believes are
important to its business.
EMPLOYEES
---------
At July 31, 1997, the Company had 9 employees, of which 3
were management or administrative personnel, 4 were engaged in
sales activities, and 2 were engaged in manufacturing and service
related activities. In addition, when necessary, the Company
uses independent engineering consultants for design support and
new product development.
None of the Company's employees are covered by collective
bargaining agreements. The Company considers its employee
relations to be satisfactory.
5
<PAGE>
ITEM 2. PROPERTIES
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All of the Company's operations are located in Amherst, New
Hampshire in facilities containing 4,000 square feet leased to
the Company on a month-to-month basis at $1,625 per month since
March 1997 when the prior lease had terminated. The Company
believes that these facilities are adequate for its current
business needs.
ITEM 3. LEGAL PROCEEDINGS
-----------------
On July 29, 1997, the Superior Court of New Hampshire,
Hillsborough County, granted partial summary judgment to Noel
Wren in the amount of $115,000 as the contractual termination
provision under his Employment Agreement in his action against
the Company for wrongful termination of his employment as
President and CEO. Payment of such judgment is subject to
resolution of the Company's pending counterclaims based
upon allegations of wrongful conduct by Mr. Wren. Mr. Wren is
also seeking liquidated damages and counsel fees. Preliminary
discovery has commenced. For additional information, see Item 1
to Part II of the Company's Form 10-QSB for the quarter ended
April 26, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
6
<PAGE>
PART II
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ITEM 5. MARKET FOR COMMON EQUITY
------------------------
AND RELATED STOCKHOLDER MATTERS
-------------------------------
PRINCIPAL MARKET AND SALES PRICES FOR COMPANY'S COMMON STOCK
------------------------------------------------------------
The Common Stock of the Company is traded in the over-the-
counter market on the OTC Electronic Bulletin Board under the
symbol AMER. The following table sets forth for the indicated
periods the high and low bid prices of the Common Stock for the
two fiscal years ended July 31, 1997, and gives effect to a one-
for-five reverse stock split effective as of November 8, 1996.
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FISCAL PERIOD FISCAL YEAR ENDED FISCAL YEAR ENDED
7/31/97 7/27/96
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HIGH LOW HIGH LOW
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First Quarter $5.16 $3.13 $3.75 $2.66
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Second Quarter 4.38 1.88 4.06 2.34
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Third Quarter 3.75 1.38 3.44 2.66
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Fourth Quarter 1.63 .84 9.06 4.22
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At the annual meeting of stockholders held on October 8,
1996, the stockholders authorized the Board of Directors to
effect a reverse stock split (any one falling within a range
between and including a one-for-one and one-half and a one-for-
five) of the outstanding Common Stock. The Board of Directors
subsequently authorized a one-for-five reverse stock split which
was effective as of November 8, 1996.
APPROXIMATE NUMBER OF HOLDERS OF COMPANY'S COMMON STOCK
-------------------------------------------------------
As of October 25, 1997, there were approximately 135
stockholders of record of the Company's Common Stock. The
Company believes that a substantial amount of the shares are held
in nominee name for beneficial owners.
DIVIDENDS
---------
The Company has never paid any cash dividends on its Common
Stock and its Board of Directors has no present intention of
declaring any cash dividends in the foreseeable future.
7
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
This report contains or refers to forward-looking information
including future revenues, products and income and is based upon
current expectations that involve a number of business risks and
uncertainties. Among the factors that could cause actual results
to differ materially from any forward-looking statement include,
but are not limited to, technological innovations of competitors,
market acceptance of its new products, changes in health care
regulations and reimbursements, ability to raise additional
capital and on favorable terms, litigation claims, changes in
foreign economic conditions or currency translation, government
approvals or changes in government regulation of the Company's
products, as well as other factors discussed in other Securities
and Exchange Commission filings for the Company.
RESULTS OF OPERATIONS
Net sales were $2,309,000 for the fiscal year ended July 31,
1997 ("Fiscal 1997") compared to $3,337,000 during fiscal year
ended July 27, 1996 ("Fiscal 1996"). The $1,028,000 decrease in
sales result primarily from a substantial decline in sales
in Germany, which had constituted the Company's major
international market, initially because of temporary regulatory
delays which became less of a factor in the third quarter of
Fiscal 1997 upon receipt of ISO 9000 certification for the
manufacture of medical devices. In addition, changes in the
medical reimbursement policy for the Company's products in Germany
will continue to negatively impact sales of the Company's current
audiometric products.
Net loss for Fiscal 1997 was $926,000, or $.37 per share,
compared to a net income of $442,000, or $.18 per share, for
Fiscal 1996. The overall decrease in profits in Fiscal 1997 was
primarily the result of the above-mentioned decline in sales in
addition to increased debt service costs. The conversion of the
Debentures mentioned below should reduce further annual debt
service costs by approximately $100,000.
Cost of sales, as a percentage of net sales, for Fiscal 1997
was 56.8% versus 49.5% for Fiscal 1996. The increase in cost as
a percentage of sales can be attributed to the product mix and
unfavorable overhead variances as a result of decreased manufact-
uring levels in response to the general domestic industry-wide
slowdown and the previoulsy mentioned decline in sales in
Germany.
Selling, general and administrative (SG&A) expenses
increased and research and development (R&D) expense decreased in
Fiscal 1997 over Fiscal 1996. The Company attributes the $355,000
increase in SG&A expenses to increased sales and promotional
activity and corporate development expense, including retention
of senior level executives, during Fiscal 1997. The Company
decreased R&D expenditures in Fiscal 1997 to $85,000 compared to
$215,000 in Fiscal 1996 when the Company redesigned its line
of tympanometers.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Working capital of the Company at July 31, 1997 was
$1,060,000, compared to $906,000 at July 27, 1996. The increase
of $154,000 during 1997 was primarily the result of raising $1.4
million through the placement of $720,000 principal amount of 14%
Convertible Subordinated Debentures due 1999 (the "Debentures")
and related sale of equity securities, together with receiving
a $500,000 term loan from its bank, which was offset by operating
losses.
At July 31, 1997, the Company had a revolving line of credit
in the amount of $400,000 with interest payable monthly at Wall
Street Journal Prime Rate plus 1/2% of which $300,000 was drawn
upon, and a term loan with an original principal amount of
$500,000 of which $437,000 was then outstanding. In October 1996,
the bank had increased the line of credit availability to $400,000
and provided for the term loan, upon the Company raising $900,000
through the issuance of the Debentures and shares of Common Stock.
In October 1997, the Company entered into a Forbearance and
Workout Agreement (the "Forbearance") with the bank as a result of
the Company not being in compliance with certain financial
covenants under its loan agreement as of July 31, 1997. Under the
Forbearance, the bank waived the non-compliance and the Company
8
<PAGE>
agreed to raise an additional $250,000 of equity capital, of which
$150,000 would be applied against outstanding term loans, and the
line of credit was reduced to $300,000.
In connection with the October 1997 amendments to the bank
arrangements and its efforts to obtain additional equity capital,
the conversion price of the Debentures had been reduced from $3.75
to $1.00 per share. As of November 3, 1997, all of the outstanding
Debentures were converted into Common Stock at a conversion price
of $1.00 per share, or an aggregate of 720,000 shares.
Currently, the Company is seeking additional capital required
under the Forbearance and to fund the Company's entry in the intra-
oral dental camera business. The Company is considering
future growth through acquisitions of companies or business
segments in related lines of business or other lines of business,
as well as through expansion of the existing line of business.
The Company is engaged in a private placement of its capital
stock. There is no assurance that management will find suitable
acquisition candidates or effect the necessary financial
arrangements, or that a private placement would not significantly
dilute its existing stockholders.
SELECTED FINANCIAL DATA
-----------------------
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SUMMARY OF
OPERATIONS 7/31/97 7/27/96 7/29/95 7/30/94 7/31/93
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Net sales $2,309 $3,337 $2,443 $1,965 $2,358
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Income (loss)
before provision
for income taxes
& extraordinary
items (926) 467 184 61 203
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Net income
(loss) (926) 442 172 57 399
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Net income
(loss) per
share (.37) .18 .08 .03 .25
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Weighted average
common &
equivalent
shares 2,510,296 2,493,854 2,238,483 1,833,666 1,594,651
-----------------------------------------------------------------------
----------------------------------------------------------------
FINANCIAL POSITION 7/31/97 7/27/96 7/29/95 7/30/94 7/31/93
----------------------------------------------------------------
Total assets $3,060 $2,771 $1,513 $899 $1,023
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Working capital 1,060 906 915 485 402
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Long-term debt 1,100 94 0 4 0
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Stockholders'
equity 1,168 1,948 1,196 771 704
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Note: In thousands, except for share and per share amounts.
9
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
--------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
Report of Ernst & Young LLP, Independent Auditors . . . . . . 11
Balance Sheets, July 31, 1997 and July 27, 1996 . . . . . . . 12
Statements of Operations for the Years Ended
July 31, 1997, July 27, 1996 and July 29, 1995 . . . . . . 13
Statements of Changes in Stockholders Equity
for the Years Ended July 31, 1997, July 27, 1996
and July 29, 1995 . . . . . . . . . . . . . . . . . . . . . 14
Statements of Cash Flows for the Years Ended
July 31, 1997, July 27, 1996 and July 29, 1995. . . . . . . 15
Notes to Financial Statements . . . . . . . . . . . . . . . . 16
10
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
American Electromedics Corp.
We have audited the accompanying balance sheets of American
Electromedics Corp. as of July 31, 1997 and July 27, 1996, and
the related statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended July
31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of American Electromedics Corp. at July 31, 1997 and July 27,
1996, and the results of its operations and its cash flows for
each of the three years in the period ended July 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Manchester, New Hampshire
September 29, 1997, except as to Note 10,
as to which the date is November 3, 1997.
11
<PAGE>
AMERICAN ELECTROMEDICS CORP.
BALANCE SHEETS
JULY 31, JULY 27,
1997 1996
-------- --------
(Thousands)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . $ 471 $ 317
Accounts receivable, net of allowance
of $7,000 and $11,000 in 1997 and
1996, respectively:
Trade . . . . . . . . . . . . . . . 283 303
Affiliate . . . . . . . . . . . . . 379 402
----- -----
662 705
Inventories . . . . . . . . . . . . . 475 480
Prepaid and other current assets . . 244 133
----- -----
Total current assets . . . . . . . 1,852 1,635
Property and Equipment:
Machinery and equipment . . . . . . . 361 318
Furniture and fixtures . . . . . . . 79 79
Leasehold improvements . . . . . . . 9 9
----- -----
449 406
Accumulated depreciation . . . . . . (396) (365)
----- -----
53 41
Deferred financing costs . . . . . . 128 --
Investment in affiliate . . . . . . . 819 876
Goodwill . . . . . . . . . . . . . . 208 219
----- -----
$3,060 $2,771
===== =====
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . $ 187 $ 324
Bank line of credit . . . . . . . . . 300 300
Accrued liabilities . . . . . . . . . 153 38
Current portion of long-term debt . . 152 67
----- -----
Total current liabilities . . . . 792 729
Convertible subordinated debentures . 720 --
Long-term debt . . . . . . . . . . . 380 94
Stockholders' Equity:
Preferred stock, $.01 par value;
Authorized-1,000,000 shares;
Outstanding-none . . . . . . . . . . -- --
Common stock, $.10 par value;
Authorized- 20,000,000 shares;
Outstanding- 2,553,136 and 2,454,666
shares in 1997 and 1996, respectively 255 245
Additional paid-in capital . . . . . 2,919 2,783
Retained deficit . . . . . . . . . . (2,006) (1,080)
----- -----
Total stockholders' equity . . . . 1,168 1,948
----- -----
$3,060 $2,771
===== =====
See accompanying notes.
12
<PAGE>
AMERICAN ELECTROMEDICS CORP.
STATEMENTS OF OPERATIONS
YEARS ENDED
-----------------------------------
JULY 31, JULY 27, JULY 29,
1997 1996 1995
-------- -------- --------
(Thousands, except per share
amounts)
Net sales . . . . . . . . $2,309 $3,337 $2,443
Cost of goods sold . . . 1,311 1,652 1,371
------ ------ ------
Gross profit . . . . . 998 1,685 1,072
Selling, general and 1,394 1,039 719
administrative . . . . .
Research and development 85 215 182
------ ------ ------
Total operating 1,479 1,254 901
expenses . . . . . . ------ ------ ------
Operating income (loss) . (481) 431 171
Other income (expenses):
Undistributed earnings (57) 52 --
(loss) of affiliate .
Interest, net . . . . (125) (16) 9
Other . . . . . . . . (263) -- 4
------ ------ ------
(445) 36 13
Income (loss) before (926) 467 184
provision for income
taxes . . . . . . . . .
Provision for income -- 25 12
taxes . . . . . . . . . ------ ------ ------
Net income (loss) . . . . $ (926) $ 442 $ 172
====== ====== ======
Earnings (loss) per
common and common
equivalent share . . . . $ (.37) $ .18 $ .08
====== ====== ======
See accompanying notes.
13
<PAGE>
AMERICAN ELECTROMEDICS CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
------------
SHARES AMOUNT
---------------------
(THOUSANDS)
Balance at July 30, 1994 . . . . . 1,838 $ 184
Exercise of stock options . . . . . 505 50
-- --
Net income . . . . . . . . . . . . ------ -----
Balance at July 29, 1995 . . . . . 2,343 234
Investment in affiliate . . . . . . 100 10
Exercise of stock options . . . . . 11 1
-- --
Net income . . . . . . . . . . . . ------ -----
Balance at July 27, 1996 . . . . . 2,454 245
Sale of capital stock . . . . . . . 48 5
Exercise of stock options, net . . 51 5
-- --
Net loss . . . . . . . . . . . . . ------ -----
2,553 $ 255
Balance at July 31, 1997 . . . . . ====== =====
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
------------------------------------
(THOUSANDS)
Balance at July 30, 1994 . . . . . $ 2,281 $(1,694) $ 771
Exercise of stock options . . . . . 203 -- 253
-- 172 172
Net income . . . . . . . . . . . . ------- ------- -----
Balance at July 29, 1995 . . . . . 2,484 (1,522) 1,196
Investment in affiliate . . . . . . 290 -- 300
Exercise of stock options . . . . . 9 -- 10
-- 442 442
Net income . . . . . . . . . . . . ------- ------- -----
Balance at July 27, 1996 . . . . . 2,783 (1,080) 1,948
Sale of capital stock . . . . . . . 139 -- 144
Exercise of stock options, net . . (3) -- 2
-- (926) (926)
Net loss . . . . . . . . . . . . . ------- ------- -----
$ 2,919 $(2,006) $1,168
Balance at July 31, 1997 . . . . . ======= ======= ======
See accompanying notes.
14
<PAGE>
AMERICAN ELECTROMEDICS CORP.
STATEMENTS OF CASH FLOWS
YEARS ENDED
----------------------------
JULY 31, 1997 JULY 27, 1996
------------- -------------
(Thousands)
OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . $(926) $442
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . 80 38
Provision for doubtful accounts . . . . . (4) --
Undistributed earnings (loss) of affiliate 57 (52)
Changes in operating assets and
liabilities:
Accounts receivable . . . . . . . . . . 43 (274)
Inventories, prepaid and other current
assets . . . . . . . . . . . . . . . (106) (317)
(22) 49
Accounts payable and accrued liabilities ----- -----
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . (878) (114)
INVESTING ACTIVITIES:
Investment in affiliate . . . . . . . . . -- (519)
(39) (22)
Purchase of property and equipment, net . ----- -----
Net cash used in investing activities . . (39) (541)
FINANCING ACTIVITIES:
Principal payments on long-term debt . . (129) (43)
Proceeds from long-term debt and bank line
of credit . . . . . . . . . . . . . . . 500 500
Issuance of common stock, net . . . . . . 144 --
Issuance of convertible subordinated debt 720 --
Deferred financing costs . . . . . . . . (166) --
2 10
Proceeds from exercise of stock options . ----- -----
1,071 467
Net cash provided by financing activities ----- -----
Increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . 154 (188)
Cash and cash equivalents, beginning of 317 505
year . . . . . . . . . . . . . . . . . ----- -----
$471 $317
Cash and cash equivalents, end of year . ===== =====
NONCASH TRANSACTION:
Stock issued for investment in affiliate -- $300
YEARS ENDED
-------------
JULY 29, 1995
-------------
(Thousands)
OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . $172
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . 35
Provision for doubtful accounts . . . . . . . . . . . . 8
Undistributed earnings (loss) of affiliate . . . . . . --
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . (277)
Inventories, prepaid and other current assets . . . . (114)
Accounts payable and accrued liabilities . . . . . . 195
----
Net cash provided by (used in) operating activities . . 19
INVESTING ACTIVITIES:
Investment in affiliate . . . . . . . . . . . . . . . . --
Purchase of property and equipment, net . . . . . . . . (26)
----
Net cash used in investing activities . . . . . . . . . (26)
FINANCING ACTIVITIES:
Principal payments on long-term debt . . . . . . . . . (6)
Proceeds from long-term debt and bank line of credit . --
Issuance of common stock, net . . . . . . . . . . . . . --
Issuance of convertible subordinated debt . . . . . . . --
Deferred financing costs . . . . . . . . . . . . . . . --
Proceeds from exercise of stock options . . . . . . . . 253
----
Net cash provided by financing activities . . . . . . . 247
----
Increase (decrease) in cash and cash equivalents . . . 240
Cash and cash equivalents, beginning of year . . . . . 265
----
Cash and cash equivalents, end of year . . . . . . . . $505
=====
NONCASH TRANSACTION:
Stock issued for investment in affiliate . . . . . . . -
See accompanying notes.
15
<PAGE>
AMERICAN ELECTROMEDICS CORP.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Business Description
--------------------
American Electromedics Corp. (the Company ) is engaged in the
manufacture and sale of medical testing equipment principally to the United
States and European medical community. The Company currently produces two
devices designed for audiological testing purposes: Tympanometers(R), which
apply a combination of pressure and sound to the ear drum to detect
diseases of the middle ear, and Audiometers,which use sound at descending
decibel levels to screen for hearing loss.
Cash and Cash Equivalents
-------------------------
For the purpose of reporting cash flows, cash and cash equivalents
include all highly liquid debt instruments with original maturities of
three months or less. The carrying amount reported in the balance sheets
for cash and cash equivalents approximates its fair value.
Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
Depreciation
------------
Property and equipment is stated at cost. The Company provides for
depreciation using the straight-line method over the various estimated
useful lives of the assets. Leasehold improvements are amortized over the
life of the lease agreement. Repairs and maintenance costs are expensed as
incurred and betterments are capitalized.
Goodwill
--------
Goodwill is the purchase price in excess of the fair value of net assets
acquired at the Company's date of acquisition. Goodwill is being amortized
on a straight-line basis over 40 years. Amortization expense for each of
the years ended 1997, 1996, and 1995 was $11,000. Accumulated amortization
at July 31, 1997 and July 27, 1996 is $242,000 and $231,000, respectively.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Stock Options
-------------
The Company grants stock options for a fixed number of shares to
employees and others with an exercise price equal to or greater than the
fair value of the shares at the date of grant. The Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25), and related interpretations in accounting
for its stock-based compensation plans because the alternative fair value
accounting provided for under Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123),
requires use of option valuation models that were not developed for use in
16
<PAGE>
valuing employee stock options. Under APB 25, when the exercise price of
options granted equals the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
Income Taxes
------------
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.
The Company deferred tax assets, net of deferred tax liabilities,
(which result primarily from net operating loss carryforwards, accrued
expenses and excess tax depreciation over book depreciation) as of
July 31, 1997 and July 27, 1996 are $561,000 and $248,000, respectively.
SFAS No. 109 requires a valuation allowance against deferred tax assets if
it is more likely than not that some or all of the deferred tax assets will
not be realized. The Company believes that some uncertainty exists and
therefore has maintained a valuation allowance of $561,000 and $248,000 as
of July 31, 1997 and July 27, 1996, respectively. As of July 31, 1997, the
Company has net operating loss carryforwards for Federal income tax
purposes of $1,286,000 that expire from 2004 to 2012.
The net provision for income taxes for the years ended July 31, 1997,
July 27, 1996 and July 29, 1995 of $-0-, $25,000, and $12,000,
respectively, are comprised entirely of currently payable state income
taxes. There was no current Federal income tax provision due to the
utilization of net operating loss carryforwards. Approximately $-0-,
$511,000 and $190,000 of the Federal net operating loss carryforward was
utilized during the years ended July 31, 1997, July 27, 1996 and July 29,
1995, respectively.
Recent Accounting Pronouncement
-------------------------------
In February 1997, the FASB issued Statement of Financial Accounting
Standard No. 128, "Earnings Per Share" (SFAS 128) which will simplify the
calculation of earnings per share (EPS) and achieve comparability with the
recently issued International Accounting Standard. SFAS 128 is effective
for both interim and annual financial statements for periods ending after
December 15, 1997. Earlier application is not permitted. Subsequent to
the effective date, all prior period EPS amounts are required to be
restated to conform to the provisions of SFAS 128. The Company's adoption
is not expected to have a material effect on EPS reported in its financial
statements.
Reverse Stock Split
-------------------
In November 1996, the Company effected a one-for-five reverse stock
split. The weighted average shares outstanding and all share, stock
option share and per share amounts included in the accompanying financial
statements and notes have been restated giving retroactive effect to the
reverse stock split. Certain amounts in fiscal 1996 and 1995 with
respect to par value of common stock and additional paid-in capital
have been reclassified to effect the reverse stock split.
2. INVENTORIES:
------------
Inventories consist of the following at:
July 31, July 27,
-------- --------
1997 1996
---- ----
Raw materials $264,000 $339,000
Work-in-process 31,000 51,000
Finished goods $180,000 $ 90,000
-------- --------
$475,000 $480,000
======== ========
17
<PAGE>
3. INVESTMENT IN AFFILIATE:
------------------------
In January 1996, the Company invested $519,000 of cash and issued
100,000 shares of its common stock for a fifty percent interest in Rosch
GmbH Medizintechnik ("Rosch GmbH"). This investment is being accounted for
by the Company under the equity method of accounting. Rosch GmbH is a
marketing and distribution company based in Berlin, Germany specializing in
the distribution of healthcare products, including the Company's products,
to primary care physicians throughout Europe. In January 1996, Rosch
GmbH sold its exclusive distributorship rights for a manufacturer's
ear, nose, and throat ("ENT") line of products in order to concentrate on
the Company's products as well as other healthcare products. At July 31,
1997, the investment in Rosch GmbH exceeded the Company's share of the
underlying net assets by approximately $646,000. This amount is being
amortized over twenty-five years. Amortization expense for the years ended
July 31, 1997 and July 27, 1996 was $28,000 and $16,000, respectively.
Summarized unaudited financial information of Rosch GmbH is as
follows:
Year Ended 7 Months Ended
July 31, 1997 July 27, 1996
------------- --------------
Sales . . . . . . . . . . $3,920,000 $1,893,000
Gross profit . . . . . . 1,340,000 853,000
Net (loss) income . . . . (58,000) 136,000
Current assets . . . . . 2,435,000 1,365,000
Non-current assets . . . 211,000 179,000
Current liabilities . . . 1,687,000 770,000
Non-current liabilities . 737,000 370,000
4. DEBT:
-----
In 1996, the Company entered into a term loan agreement with a bank.
The loan is payable in equal monthly installments through December 1998.
Interest is based on the Wall Street Journal Prime Rate plus 1/2% (9.0% as
of July 31, 1997). As of July 31, 1997, there was $95,000 outstanding
under this loan.
In October 1996, the Company completed a placement (the "Placement") of
12 units (the "Units") at a price of $75,000 per Unit, or an aggregate of
$900,000. Each Unit consisted of a $60,000 principal amount 14%
Convertible Subordinated Debenture due October 31, 1999 (the "Debenture")
and 4,000 shares of Common Stock, or an aggregate of $720,000 principal
amount of Debentures and 48,000 shares of Common Stock.
The Debentures are convertible into Common Stock at $3.75 per share upon
or after the Debentures are called for redemption or the effectiveness of a
registration statement under the Securities Act of 1933, as amended (the
"Act"), covering the underlying shares of Common Stock, subject to
customary anti-dilution provisions. The Company may call all or part of
the Debentures at par, plus accrued interest, at any time after October 31,
1997. The Debentures contain various covenants, including a restriction
on the payment of cash dividends on its Common Stock.
In October 1996, the Company received a $500,000 Term Loan from its bank
and the Company's revolving line of credit was increased to $400,000 from
$300,000. The bank had conditioned the closing of the Term Loan on the
Company receiving at least $700,000 from the issuance of subordinated
debentures and/or capital stock, which condition was fulfilled by the
Placement. The Term Loan is repayable over five years, bears annual
interest at prime plus 1/2%. As of July 31, 1997 there was $437,000
outstanding under the Term Loan and $300,000 outstanding under this
revolving line of credit.
18
<PAGE>
Borrowings under the bank loans are collateralized by essentially all of
the assets of the Company.
Principal payments due on long-term debt are as follows:
1998 $ 152,000
1999 173,000
2000 895,000
2001 32,000
----------
$1,252,000
==========
As of July 31, 1997, the Company was not in compliance with certain
financial covenants under its loan agreement. As a result, the Company
received waivers and entered into a Forbearance and Workout Agreement
with the bank as described in Note 10.
5. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
-----------------------------------------------
Earnings per common and common equivalent share is computed
using the weighted average number of common stock and common stock
equivalents outstanding. Common stock equivalents consist primarily of
dilutive outstanding stock options computed under the treasury stock
method. Earnings per common and common equivalent share for the years
ended July 31, 1997, July 27, 1996 and July 29, 1995 were computed using
weighted average shares outstanding of 2,510,296, 2,493,854 and 2,238,483,
respectively. Earnings per common share -- assuming full dilution is the
same amount as earnings per common and common equivalent share.
6. STOCK OPTIONS:
-------------
In 1988, the Company adopted the 1987 Nonqualified Stock Option Plan
providing for the issuance of up to 200,000 shares of the Company's common
stock. This Plan expired in July 1997 and no options remain outstanding
thereunder.
In 1995, the Company granted certain officers options to purchase a
total of 50,000 shares of the Company's common stock at fair market value
on the date of grant. During fiscal 1997, options to purchase 3,550 shares
of common stock were exercised and options for 16,450 shares were canceled.
There remains outstanding an option for 30,000 shares which is exercisable
and expires no later than four years from the date of grant.
In 1996, the Company granted to a consultant an option to purchase a
total of 13,000 shares of the Company's common stock at fair market value
on the date of grant. The option is exercisable and expires no later than
three years from the date of grant.
In October 1996, the Company's stockholders approved the 1996 Stock
Option Plan providing for the issuance of up to 300,000 shares of the
Company's common stock. The plan is administered by the Board of Directors
or an Option Committee. Options granted under this Plan would be either
incentive stock options or non-qualified stock options which would be
granted to employees, officers, directors and other persons who perform
services for or on behalf of the Company. Options are exercisable as
determined at the time of grant except options to officers or directors
may not vest earlier than six months from the date of grant, and the
exercise price of all the option cannot be less than the fair market
value at the date of grant.
19
<PAGE>
FAS 123 DISCLOSURE
Pro forma information regarding net income (loss) is required by FAS 123
(Stock-Based Compensation), which requires that the information be
determined as if the Company had accounted for its employee stock options
grants under the fair value method of that Statement. The fair values for
these options were estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
OPTIONS
1997 1996
---------------------------
Expected life (years) 4.7 4
Interest rate 6% 6%
Volatility 1.15 1.13
Dividend yield 0.0% 0.0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because
FAS 123 is applicable only to options granted subsequent to July 29,
1995, its pro forma effect will not be fully reflected until fiscal year
1999. The Company's pro forma information is as follows:
1997 1996
--------------------------
Pro forma net income (loss) $(1,238,759) $429,134
Pro forma net income (loss) per share $ (0.49) $ 0.17
Option activity for the years ended 1997, 1996 and 1995 is summarized
below:
1997 1996
---------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------------------------------------
Outstanding at
beginning of
year 133,000 $1.58 131,000 $0.93
Granted 480,000 3.36 13,000 7.50
Expired or
canceled (136,000) 3.45 -- --
Exercised ( 74,000) 0.66 ( 11,000) 0.94
-------- --------
Outstanding at (403,000) 3.23 (133,000) 1.58
end of year ======== ========
Exercisable at (111,000) 3.11 (107,000) 0.87
end of year ======== ========
Available for (240,000) (10,000)
future grants ======== =======
Weighted
average fair
value of
options
granted
during year $2.54 $4.52
20
<PAGE>
1995
-------------------
Weighted
Average
Exercise
Shares Price
-------------------
Outstanding at
beginning of
year 585,000 $0.53
Granted 120,000 0.93
Expired or
canceled ( 69,000) 0.68
(505,000) 0.50
Exercised --------
Outstanding at 131,000 0.93
end of year ========
Exercisable at 11,000 0.94
end of year ========
Available for 10,000
future grants ========
Weighted
average fair
value of
options
granted
during year
The following table presents weighted-average price and life information
about significant option grants outstanding at July 31, 1997:
Options Outstanding
---------------------
Weighted
Average
Remaining
Range of Exercise Number Contractual
Prices Outstanding Life
---------------------------------------------
$1.41 30,000 1 Year
$3.00 - $4.37 360,000 1 Year
$7.50 13,000 3 Years
-------
403,000
=======
Options Exercisable
-------------------------------
Weighted Weighted
Average Average
Exercise Number Exercise
Range of Exercise Prices Price Exercisable Price
----------------------------------------------------------
$1.41 $1.41 30,000 $1.41
$3.00 - $4.37 3.23 68,000 3.00
$7.50 7.50 13,000 7.50
-------
111,000
=======
7. OTHER EXPENSES
--------------
The Company incurred $225,000 in other charges during 1997 as a result
of a strategic change in direction of its business. The Company decided it
would not pursue the development and marketing of a new product technology
it licensed in November 1996 from BioFlo Systems, Inc. This amount
represents the write-off of the technology and estimates related to the
release of outgoing management and associated costs.
8. COMMITMENTS:
-----------
The Company leased its principal offices and manufacturing facility
under an operating lease which expired in March 1997. Since that time the
Company has leased the facilities on a month-to-month basis. Rent expense
for the year ended July 31, 1997 was $15,500 and for the years ended July
27, 1996 and July 29, 1995 was $13,500 and $12,000, respectively.
9. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS:
------------------------------------------------
The Company's primary customers are in the medical field. At July 31,
1997 and July 27, 1996, substantially all accounts receivable balances are
concentrated in this industry. The Company sells products and extends
credit based on an evaluation of the customer's financial condition,
generally without regard to collateral. Exposure to losses on receivables
is principally dependent on each customer's financial condition. The
Company monitors its exposure for credit losses and maintains allowances
for anticipated losses.
A major customer of the Company accounted for 20%, 41% and 15% of the
Company's net sales for the years ended July 31, 1997, July 27, 1996 and
July 29, 1995, respectively.
21
<PAGE>
10. SUBSEQUENT EVENTS
-----------------
The Company entered into a Forbearance and Workout Agreement with its
bank on October 28, 1997 as a result of it not being in compliance with
certain financial covenants under its loan agreement as of July 31, 1997.
The bank has waived the non-compliance and the Company agreed to, among
other things, raise an additional $250,000 of equity capital and to apply
$150,000 of such amount against outstanding term loans. Additionally, as
part of this Agreement, the Company's revolving line of credit was reduced
to $300,000. Certain of the loan agreement financial covenants were also
amended to more reasonably reflect the Company's current financial
position.
In connection with the October 1997 amendments to the bank
arrangements and its efforts to obtain additional equity capital,
the conversion price of the Debentures had been reduced from $3.75
to $1.00 per share. As of November 3, 1997, all $720,000 of the
Debenture holders have elected to convert. As a result of this
conversion, the Company reduced its long-term debt by $720,000 and
issued 720,000 shares of common stock. The Company also will record
a change of approximately $100,000 to write-off deferred financing
costs capitalized upon initial issuance of the Debentures.
22
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
---------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
PART III
--------
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
--------------------------------------------
CONTROL PERSONS; COMPLIANCE WITH SECTION
----------------------------------------
16(a) OF THE EXCHANGE ACT
-------------------------
The following table sets forth certain information concerning the
directors and executive officers of the Company as of October 25, 1997.
Year Became
Name Age Position with the Company Director
---- --- ------------------------- --------
Thomas A. Slamecka 57 Chairman of the Board and 1996
Director
Michael T. Pieniazek 39 President and Chief
Financial Officer N/A
Kenneth Levy 51 Director 1995
Marcus R. Rowan 36 Director 1996
Noel A. Wren 48 Director 1989
Joseph Wear 63 Director 1995
The terms of the Board of Directors will expire at the next annual
meeting of stockholders. The Company's officers are elected by the Board
of Directors and hold office at the will of the Board.
Thomas A. Slamecka has been Chairman of the Board for the Company since
February 1997, and a director of the Company since October 1996. Mr.
Slamecka was President of the ConAgra Poultry Company, Inc., Duluth,
Georgia, from 1995 to February 1997. From 1990 to 1994, he was President
and Chief Executive Officer of CEEC Inc., Atlanta, Georgia.
Michael T. Pieniazek has been President of the Company since April 1997
and Chief Financial Officer since July 1995. From 1987 to 1995, Mr.
Pieniazek served in various executive positions, the last having been
Executive Vice President and Chief Financial Officer, for Organogenesis
Inc., a Massachusetts-based, biotechnology company. From 1980 to 1987,
Mr. Pieniazek was an auditor with Coopers & Lybrand LLP.
Kenneth Levy has been a director of the Company since March 1995. Since
March 1997, he has been a Senior Managing Director of Janssen/Meyers
Associates, L.P., an investment banking firm in New York, New York. From
1993 to March 1997, he was an investment banker for Marshall, Alexander &
Marshall, Inc. In 1990, Mr.Levy founded MR International Enterprises,
which owned various Russian companies, and served as its President from
1990 to 1994.
Marcus R. Rowan has been a director of the Company since October 1996.
For more than the past five years he has been President of Berkshire
Interests, Inc., Dallas, Texas, which specializes in commercial real estate
and investments.
Joseph Wear has been a director of the Company since March 1995.
Since November 1995, he has been Executive Director of Wellness
Community-Delaware, a provider of psychosocial support to people with
cancer in their families. From 1987 to 1995, he was a partner in
Philadelphia Entrepreneurial Partners which was engaged in management
consulting to small and medium business. From 1970 to 1987, Mr. Wear
was President and Chief Executive Officer of Summit Airlines.
23
<PAGE>
Noel A. Wren has been a director of the Company since 1989, was
President and Chief Executive Officer of the Company from November 1988 and
October 1992, respectively, through March 1997, and served as Chief
Operating Officer and Chief Financial Officer of the Company from November
1988 to October 1992. Since March 1997, he has been self-employed.
In October 1996, the Company granted each director an option under the
1996 Stock Option Plan for 10,000 shares of Common Stock exercisable at
$4.38 per share vesting after one year and terminating no later than five
years from grant.
There is no family relationship among the directors or executive
officers of the Company.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
The following table sets forth all cash compensation for the fiscal
year ended July 31, 1997 of the executive officers whose compensation
exceeded $100,000 and of all executive officers as a group for services
rendered to the Company.
CASH COMPENSATION TABLE # LONG
OPTIONS TERM
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED AWARDS
-------------------------------------------------------------------------
Noel A. Wren, President & 1997 $ 76,000 -- 10,000 --
Chief Executive Officer 1./ 1996 105,000 $10,700 -- --
--- 1995 97,500 -- -- --
-------------------------------------------------------------------------
Michael T. Pieniazek, 1997 $113,000 -- -- --
President & CFO 2./
---
-------------------------------------------------------------------------
---------------------------------
1./ Mr. Wren's employment terminated in March 1997.
---
2./ Mr. Pieniazek became President in April 1997 and continues to
--- serve as Chief Financial Officer.
Mr. Wren was furnished with an automobile for business and personal use.
The compensation specified in the preceding table does not include the
value of non-business use as the amounts were not material.
As of July 31, 1995, the Company had entered into an Employment
Agreement with Noel Wren to serve as President and Chief Executive Officer
of the Company for a term of three years terminating on July 31, 1998. The
Company terminated the Agreement in March 1997, see Item 3 "Legal
Proceedings" in this Report. Under the Agreement, Mr. Wren was to receive
an annual base salary of $115,000 for fiscal 1997.
As of February 5, 1997, the Company entered into an Employment Agreement
with Thomas A. Slamecka to serve as Chairman of the Board for an initial
term terminating on January 31, 2000, subject to renewals. Mr. Slamecka
receives an annual base salary of $100,000, plus a bonus equal to 10% of
the amount that consolidated net after-tax operating profits exceeds
$500,000, provided for such year the Company earns a 15% return on its
Common Stock equity. In addition, the Company agreed to make available
loans to Mr. Slamecka in the amount of $8,333 per month due upon certain
events, see Item 12 "Certain Relationships and Related Transactions" in
this Report. The Employment Agreement also provides for the Company to
issue 100,000 shares of Common Stock to Mr. Slamecka in the event that
during the term of his employment the closing price for the Common Stock is
at least $60 per share for a period of 20 consecutive trading days and for
the grant of options to him for the purchase of 300,000 shares of Common
Stock at fair market value of the Company's Common Stock on the date of
grant, vesting immediately as to 30,000 shares and the balance vesting
monthly over the initial term.
24
<PAGE>
AGGREGATED OPTION EXERCISES FOR THE FISCAL YEAR ENDED JULY 31, 1997
AND FY-END OPTION VALUES
---------------------------------------------------------------------------
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS IN-THE-MONEY
AT FY- OPTIONS
END ($) AT FY-
END ($)
---------------------------------------------------------------------------
NAME SHARES VALUE
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
---------------------------------------------------------------------------
Noel A. Wren -- -- -0- -0-
---------------------------------------------------------------------------
Michael T. Pieniazek -- -- 30,000/0 --
---------------------------------------------------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
The following table sets forth information as of October 25, 1997
concerning (i) persons known to the Company to be the beneficial owners of
more than 5% of the Company's Common Stock, (ii) the ownership interest of
each director and executive officer of the Company listed in the
compensation table and (iii) by all directors and executive officers as a
group. Note: stock options are considered presently exercisable if
exercisable within 60 days of October 25, 1997.
AMOUNT &
NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OF
BENEFICIAL OWNER* STATUS OWNERSHIP CLASS
--------------------------------------------------------------
Kenneth Levy Director 114,839 shs1 4.5%
---------------------------------------------------------------
Marcus R. Rowan Director 91,550 shs2 3.5%
---------------------------------------------------------------
Director and
Thomas A. Slamecka Chairman 195,000 shs3 7.2%
---------------------------------------------------------------
Joseph Wear Director 66,825 shs4 2.6%
---------------------------------------------------------------
Noel A. Wren Director 208,000 shs4 8.1%
---------------------------------------------------------------
Michael T. Pieniazek President and CFO 32,000 shs5 1.2%
---------------------------------------------------------------
All Officers and
Directors as a
Group (6 persons) 708,214 shs6 25.1%
---------------------------------------------------------------
* The address of the persons listed above is c/o American
Electromedics Corp., 13 Columbia Drive, Suite 18, Amherst, New
Hampshire 03031.
---------------
1 Includes (i) 8,520 shares owned by Mr. Levy's wife and his minor
children as to which shares he disclaims beneficial ownership and (ii)
presently exercisable options for 10,000 shares.
2 Includes (i) 30,000 shares underlying Debentures and (ii) presently
exercisable options for 10,000 shares. Represents shares owned directly
by Mr. Rowan and by his IRA account.
3 Includes (i) presently exercisable options for 105,000 shares and (ii)
60,000 shares underlying Debentures.
4 Includes presently exercisable options for 10,000 shares.
5 Includes presently exercisable options for 30,000 shares.
6 Includes (i) presently exercisable options for 175,000 shares and
(ii) 90,000 shares underlying Debentures.
25
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
On March 24, 1995, Alan Gelband Company, Inc., which is owned by Alan
Gelband, who was a director and principal stockholder of the Company,
entered into an Agreement with the Company to provide general advice
regarding the Company's finances, including assistance in the raising of
capital and evaluation of potential acquisitions. Under the terms of the
Agreement, the Company paid to Mr. Gelband a base fee of $2,500 per month.
As of October 1, 1997, in connection with Mr. Gelband's agreement to sell
substantially all of his interest in the Company's Common Stock and
Debentures to third parties, he resigned as a director, terminated the
Agreement, entered into mutual releases with the Company, and agreed to
certain restrictions regarding his future interests in the Company's
securities.
As of July 31, 1997, the Company had loaned Thomas A. Slamecka, Chairman
of the Board, an aggregate of $41,666 pursuant to his Employment Agreement.
The Employment Agreement provides that the Company make available to Mr.
Slamecka a loan in the amount of $8,333.33 each month during the initial
term of such Agreement. The loans bear interest at 7% per annum and mature
on the earliest of (i) March 2002, (ii) two years after termination of the
Employment Agreement other than termination for cause by the Company or
(iii) upon the Company terminating the Agreement for cause; provided that
the loan would be forgiven (A) if Mr. Slamecka remains in the employ
throughout the initial term, (B) the Company terminates the Agreement other
than for cause, or (C) upon acquisition or change of control of the
Company. Mr. Slamecka has the election to repay the loans either in cash
or in securities of the Company.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) EXHIBITS:
3.1.1 Certificate of Incorporation of Registrant (filed as Exhibit
3(a)(1) to Registration No. 2-71775, and incorporated herein by
reference)
3.1.2 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of State of the State of
Delaware on January 27, 1987 (filed as Exhibit 3(a)(2) Registrant's
Form 10-Q for the fiscal quarter ended January 31, 1987, and
incorporated herein by reference)
3.1.3 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of State of the State of
Delaware on October 9, 1990 (filed as Exhibit 3(a)(3) to
Registrant's Form 10-K for the fiscal year ended July 28, 1990, and
incorporated herein by reference)
3.1.4* Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of State of Delaware on
November 7, 1996.
3.2 By-Laws of Registrant (filed as Exhibit 3(b) to Registration No.
2-71775, and incorporated herein by reference)
3.3 Amendments to the By-Laws of Registrant (filed as Exhibit 3(c) to
Registrant's 1990 Form 10-K and incorporated herein by reference)
10.1.1 Lease of Premises at Amherst, New Hampshire, dated December 10,
1991, between Registrant and Norwich Associates (filed as Exhibit
10.1.1 to Registrant's Form 10-KSB for the fiscal year ended July
25, 1995 (the "1995 Form 10-KSB") and incorporated herein by
reference)
10.1.2 Letters, dated February 14, 1995 and March 13, 1995, between
Registrant and H.J. Stabile & Son, Inc., for lease extension (filed
as Exhibit 10.1.2 to Registrant's 1995 Form 10-KSB and incorporated
herein by reference)
26
<PAGE>
10.2.1 1983 Incentive Stock Option Plan (filed as Exhibit A to
Registrant's 1983 Information Statement, and incorporated herein by
reference)
10.2.2 Form of 1983 Incentive Stock Option Certificate (filed as Exhibit
(10)-12 to Registrant's Form 10-K for the fiscal year ended July
28, 1984 ["1984 Form 10-K"] and incorporated herein by reference)
10.3.1 1983 Non-Qualified Stock Option Plan (filed as Exhibit B to
Registrant's 1983 Information Statement, and incorporated herein by
reference)
10.3.2 Form of 1983 Non-Qualified Stock Option Certificate (filed as
Exhibit (10)-13 to Registrant's 1984 Form 10-K, and incorporated
herein by reference)
10.4 1996 Stock Option Plan (filed as Exhibit A to Registrant's 1996
Proxy Statement, and incorporated herein by reference)
10.5 Form of Employment Agreement, dated as of July, 31, 1995, between
Registrant and Noel A. Wren (filed as Exhibit 10.5 to
Registrant's 1995 Form 10-KSB, and incorporated herein by
reference)
10.6 Consulting Agreement, dated as of March 24, 1995, between
Registrant and Alan Gelband Company, Inc. (filed as Exhibit 10.6
to Registrant's 1995 Form 10-KSB, and incorporated herein by
reference)
10.7 Consulting Agreement, dated as of March 24, 1995, between
Registrant and Kenneth Levy (filed as Exhibit 10.7 to
Registrant's 1995 Form 10-KSB, and incorporated herein by
reference)
10.8 Stock Purchase Agreement, dated January 11, 1996, between
Registrant and Andy Rosch (filed as Exhibit 1 to Registrant's
Form 8-K for an event of January 11, 1996, and incorporated
herein by reference)
10.9.1 Loan Agreement, dated October 4, 1996, between Registrant and
Citizens Bank New Hampshire (the "Bank") (filed as Exhibit 10.9.1
to Registrant's Form 10-KSB for the fiscal year ended July 27, 1996
(the "1996 Form 10-KSB") and incorporated herein by reference)
10.9.2 Security Agreement, dated October 4, 1996, between Registrant and
the Bank (filed as Exhibit 10.9.2 to Registrant's 1996 form 10-KSB,
and incorporated herein by reference)
10.9.3 Revolving Line of Credit Promissory Note, dated October 4, 1996,
from Registrant to the Bank (filed as Exhibit 10.9.3 to
Registrant's 1996 Form 10-KSB, and incorporated herein by
reference)
10.9.4 Term Promissory Note, dated October 4, 1996, from Registrant to the
Bank (filed as Exhibit 10.9.4 to Registrant's 1996 Form 10-KSB, and
incorporated herein by reference)
10.10 Form of 14% Convertible Subordinated Debenture, due October 31,
1999 (Filed as Exhibit 4 to Registrant's Form 8-K for an event of
October 25, 1996, and incorporated herein by reference).
10.11 * Form of Employment Agreement, dated as of February 5, 1997,
between Registrant and Thomas A. Slamecka
10.12 * Forbearance and Workout Agreement, dated October 28, 1997,
between Registrant and the Bank
10.13 * Standstill Agreement, dated October 1, 1997, between Registrant
and Alan Gelband
23 * Consent of Ernst & Young LLP, Independent Auditors
27
<PAGE>
27 * Financial data schedule.
* Filed herewith.
(B) REPORTS ON FORM 8-K: None
28
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN ELECTROMEDICS CORP.
----------------------------
(Registrant)
Dated: November 11, 1997 By: /s/ Thomas A. Slamecka
--------------------------------
Thomas A. Slamecka,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
TITLE DATE
----- ----
(1) Principal Executive Officer
/s/ Thomas A. Slamecka
-------------------------- Chairman of the Board November 11, 1997
Thomas A. Slamecka
(2) Principal Financial and
Accounting Officer
/s/ Michael T. Pieniazek
-------------------------- President and Chief November 11, 1997
Michael T. Pieniazek Financial Officer
(3) A majority of the Board
of Directors
-------------------------- Director
Kenneth Levy
/s/ Marcus R. Rowan
-------------------------- Director November 11, 1997
Marcus R. Rowan
/s/ Joseph Wear
-------------------------- Director November 11, 1997
Joseph Wear
-------------------------- Director
Noel A. Wren
29
<PAGE>
AMERICAN ELECTROMEDICS CORP.
FORM 10-KSB
EXHIBIT INDEX
Exhibits filed herewith:
-----------------------
3.1.4 Certificate of Amendment to Certificate of
Incorporation of Registrant, filed with the
Secretary of State of Delaware on November 7,
1996.
10.11 Form of Employment Agreement, dated as of February 5,
1997, between Registrant and Thomas A. Slamecka.
10.12 Forbearance and Workout Agreement, dated October
28, 1997, between Registrant and the Bank.
10.13 Standstill Agreement, dated October 1, 1997,
between Registrant and Alan Gelband.
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial data schedule.
Exhibit 3.1.4
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION OF
AMERICAN ELECTROMEDICS CORP.
(Pursuant to Sections 242, 211 and 212 of the
General Corporation Law of Delaware)
***
AMERICAN ELECTROMEDICS CORP., a corporation organized
and existing under and by virtue of the General Corporation Law
of the State of Delaware (the "Corporation"), DOES HEREBY
CERTIFY:
FIRST: That the Board of Directors of the Corporation
at a special meeting thereof held on August 12, 1996, duly
adopted resolutions setting forth a proposed amendment (the
"Amendment") to the Certificate of Incorporation of the
Corporation, declaring the Amendment to be advisable and
directing that the Amendment be considered for approval by the
stockholders of the Corporation at the next annual meeting of
stockholders held pursuant to Section 211 of the General
Corporation Law of the State of Delaware, and stating that the
Amendment will be effective only after the adoption thereof by a
majority of the issued and outstanding shares of Common Stock of
the Corporation entitled to vote and upon a determination by the
Board that it is in the best interests of the Corporation and the
stockholders and upon the filing thereof by the Corporation with
the Secretary of State of the State of Delaware.
SECOND: That, at the Annual Meeting of Stockholders
held on October 8, 1996, the Amendment was submitted for
consideration to the stockholders of the Corporation and
stockholders holding a majority of the issued and outstanding
stock of the Corporation entitled to vote voted for the adoption
of the Amendment.
THIRD: That, thereafter, the Board of Directors of
the Corporation at a special meeting thereof held on October 29,
1996 determined that the Amendment was in the best interests of
the Corporation and the stockholders and adopted a resolution to
amend the Certificate of Incorporation in accordance with Section
242 of the Delaware General Corporation Law as follows:
RESOLVED, that, prior to the Company's next Annual Meeting of
Stockholders, on the condition that no other amendment to the
Company's Certificate of Incorporation shall have been filed
subsequent to October 8, 1996 effecting a reverse stock split of
the Common Stock, Article 4 of the Company's Certificate of
Incorporation be amended by addition of the following provision:
Simultaneously with the effective date of this amendment
(the "Effective Date"), each share of the Company's Common
Stock, par value $.10 per share, issued and outstanding
immediately prior to the Effective Date (the "Old Common
Stock") shall automatically and without any action on the
part of the holder thereof be reclassified as and changed,
pursuant to a reverse stock split, into a fraction thereof
equal to one-fifth (1/5) of a share of the Company's
outstanding Common Stock, par value $.10 per share (the "New
Common Stock"), subject to the treatment of fractional share
interests as described below. Each holder of a certificate
or certificates which immediately prior to the Effective
Date represented outstanding shares of Old Common Stock (the
"Old Certificates"), whether one or more, shall be entitled
to receive upon surrender of such Old Certificates to the
Company's Transfer Agent for cancellation, a certificate or
certificates (the "New Certificates"), whether one or more,
representing the number of whole shares of the New Common
Stock into which and for which the shares of the Old Common
Stock formerly represented by such Old Certificates so
surrendered, are reclassified under the terms hereof. From
and after the Effective Date, Old Certificates shall
represent only the right to receive New Certificates
pursuant to the provisions hereof. No certificates or scrip
representing fractional share interests in New Common Stock
will be issued, and no such fractional share interest will
entitle the holder thereof to vote, or to any rights of a
stockholder of the Company. Any fraction of a share of New
Common Stock to which the holder would otherwise be entitled
will be adjusted upward or downward to the nearest whole
share. If more than one Old Certificate shall be
surrendered at one time for the account of the same
stockholder, the number of full shares of New Common Stock
for which New Certificates shall be issued shall be computed
on the basis of the aggregate number of shares represented
by the Old Certificates so surrendered. In the event that
the Company's Transfer Agent determines that a holder of Old
Certificates has not tendered all his certificates for
exchange, the Transfer Agent shall carry forward any
fractional share until all certificates of that holder have
been presented for exchange such that payment for fractional
shares to any one person shall not exceed the value of one
share. If any New Certificate is to be issued in a name
other than that in which the Old Certificates surrendered
for exchange are issued, the Old Certificates so surrendered
shall be properly endorsed and otherwise in proper form for
transfer, and the person or persons requesting such exchange
shall affix any requisite stock transfer tax stamps to the
Old Certificates surrendered, or provide funds for their
purchase, or establish to the satisfaction of the Transfer
Agent that such taxes are not payable. From and after the
Effective Date the amount of capital represented by the
shares of the New Common Stock into which and for which the
shares of the Old Common Stock are reclassified under the
terms hereof shall be the same as the amount of capital
represented by the shares of Old Common Stock so
reclassified, until thereafter reduced or increased in
accordance with applicable law.
FOURTH: That the Amendment was duly adopted the
affirmative vote of a majority of the issued and outstanding
stock entitled to vote, in accordance with the provisions of
Sections 211 and 212 of the General Corporation Law of the State
of Delaware.
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this
Certificate to be signed by Michael T. Pieniazek, Secretary, this
31st day of October, 1996.
AMERICAN ELECTROMEDICS CORP.
By: /s/ Michael T. Pieniazek
--------------------------
Michael T. Pieniazek
Chief Financial Officer
and Secretary
Exhibit 10.11
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of the 5th day of February, 1997, by
and between AMERICAN ELECTROMEDICS CORP., a Delaware corporation
(the "Company"), and THOMAS A. SLAMECKA (the "Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company desires the Executive to employ
the Executive to serve in the capacities of Chairman of the Board
of the Directors, and the Executive desires to render such
services, and the Company and the Executive desire to enter an
agreement providing for the commencement of their relationship,
subject to the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the foregoing and
the covenants and agreements hereinafter set forth, the parties
hereto, intending to be legally bound, agree as follows:
1. Retention of Employment. The Company hereby
-----------------------
retains the Executive as Chairman of the Board of the Directors
of the Company, and the Executive hereby accepts such employment,
all upon and subject to the terms and conditions hereinafter set
forth.
2. Term. The term (the "Term") of the employment
----
under this Agreement shall be for an initial period commencing on
February 7, 1997 and terminating on January 31, 2000, and
automatically renewed for additional one (1) year periods
thereafter unless either party gives the other written notice of
termination not less than sixty (60) days prior to the end of the
initial Term or any renewal Term.
3. Position, Duties and Representations.
------------------------------------
3.01 Service with the Company. The Executive
------------------------
shall serve as Chairman of the Board of the Directors of the
Company. The Executive agrees to perform such executive
employment duties for the Company consistent with the positions
specified above, and as the Board of Directors shall assign to
him from time to time consistent with his positions with the
Company.
3.02 Scope of Services. The Executive agrees to
-----------------
serve the Company faithfully and to the best of his ability and
to devote his full business time, attention and efforts necessary
to advance the business and affairs of the Company during the
Term of this Agreement. If requested, the Executive shall serve
as an officer and/or director of any subsidiary of the Company,
without any additional compensation hereunder.
3.03 Representations. The Executive hereby
---------------
represents to the Company that the Executive is not currently
bound by the terms of any non-competition, confidentiality or
similar agreement or understanding (written or oral) which would
prevent or restrict the Executive's employment with the Company
as contemplated hereunder, and that the Executive does not
possess confidential information arising out of his prior
employments which would be utilized in connection with his
employment by the Company.
4. Compensation.
------------
4.01 Annual Salary. The Executive will receive
-------------
an annual base salary ("Base Salary") of $100,000 per year,
payable in accordance with the Company's normal payroll
practices. In addition, on an annual basis the Board of
Directors or a compensation committee thereof (the "Compensation
Committee") shall review the Executive's compensation with a view
toward increases in the Base Salary, based upon the Executive's
performance during the preceding year or pursuant to guidelines
established by the Compensation Committee.
4.02 Bonus. (a) In further consideration of the
-----
Executive's agreement to perform services hereunder, the
Executive shall be entitled to a cash bonus (the "Profits Bonus")
in an amount equal to ten percent (10%) of the Company's
consolidated net after-tax operating profits (excluding any
extraordinary and/or non-recurring items) in excess of $500,000
(the "Threshold") for each fiscal year during the Term (the
"Profits"), provided the Company has earned in such Fiscal Year a
fifteen percent (15%) return on its equity on its Common Stock.
(b) The Profits Bonus amount shall be calculated
initially by the Chief Financial Officer of the Company based
upon the Company's audited financial statements for the relevant
Fiscal Year, provided that for the period from the commencement
of this Agreement through the end of the 1997 Fiscal Year, the
Threshold for the Profits shall be $250,000 and the calculation
shall be based upon the Company's unaudited financial information
for the last two quarters of such Fiscal Year. Promptly after
the completion of the Profits Bonus calculation for each Fiscal
Year, a report of the calculation shall be sent to the Board of
Directors. The Board of Directors will then present the proposed
Profits Bonus to the Executive. The Executive may object to the
calculation, within thirty (30) days after receipt thereof, by
requesting that the accounting firm then auditing the financial
statements of the Company review the calculation. The results of
such accountants' review shall be final and binding on the
Executive and the Company. Any Profits Bonus shall be paid to
the Executive within thirty (30) days after the Executive
receives the Profits Bonus calculation, except that if he objects
thereto, the payment shall be made as soon as practicable after
the resolution of the objection. The Executive shall bear the
cost of the accounting firm's review, except if upon such review
of the Profits Bonus calculation the accounting firm determines
that the amount of the Profits Bonus should be increased by ten
percent (10%) or more from the amount calculated by the Company,
in which case the Company shall bear the cost of the accounting
firm's review.
(c) In the event the period of the Term for which
a Profits Bonus is being determined is less than the entire
Fiscal Year being used for the calculation, the Profits Bonus, if
any, and the Threshold for such period shall be multiplied by a
fraction, the numerator of which shall be the number of whole
months during such Fiscal Year that the Executive was an employee
of the Company and the denominator of which shall be 12.
(d) Notwithstanding any Profits Bonus which may
be paid to the Executive pursuant to this Section 4.02, for each
Fiscal Year during the Term the Compensation Committee may award
the Executive a supplemental bonus based upon factors other than
the Company's Profits for such Fiscal Year, as determined by such
Committee.
4.03 Stock Options; Conditional Stock Grant. (a)
--------------------------------------
In consideration of the Executive entering into this Agreement,
the Company shall grant to the Executive stock options to
purchase up to 300,000 shares of the Company's common stock, par
value $.10 per share (the "Common Stock"), exercisable at a
purchase price of $3.00 per share, all upon the terms and
conditions set forth in the Stock Option Agreement between the
Company and the Executive, dated as of the date hereof (the
"Stock Option Agreement"), and attached hereto as Exhibit A.
(b) The Company hereby agrees to issue to the
Executive 100,000 shares (the "Bonus Shares") of the Company's
Common Stock, as presently constituted, in the event that the
closing price of the Company's Common Stock as reported on the
NASDAQ OTC Bulletin Board or other national market quotation
system or exchange where the Common Stock is then traded (the
"Trading Price") equals or exceeds $60.00 per share for a period
of twenty (20) consecutive trading days during the Term. In the
event of any stock split, stock dividend, reorganization or other
change in the Common Stock, the number of Bonus Shares and/or the
Trading Price shall be proportionately adjusted, as determined by
the Board of Directors of the Company. The Company shall use its
best efforts to register the Bonus Shares under the Securities
Act of 1933, as amended, after the issuance thereof, subject to
availability of audited financial information and regulatory
review.
4.04 Monthly Loans. (a) The Company shall make
-------------
available to the Executive a loan in the amount of $8,333.33
(each, a "Monthly Loan") on the first day of each month of each
Fiscal Year (each, a "Loan Date") for so long as the Executive
remains employed hereunder during the initial Term, commencing
with the month of March 1997. In order to obtain a Monthly Loan
on a Loan Date, the Executive shall notify the Company in writing
at least ten (10) days prior to each Loan Date, whereupon the
Company shall disburse the amount of such Monthly Loan on the
next succeeding Loan Date against delivery by the Executive of a
promissory note (the "Note"), as described below, to the Company.
(b) Each Monthly Loan shall be evidenced by a
Note executed by the Executive in favor of the Company and shall
bear interest commencing on the Loan Date at a rate of seven
percent (7%) per annum, compounded annually. The principal of
each Monthly Loan, plus all accrued and unpaid interest thereon,
shall mature and be payable to the Company in full on the
earliest of (i) the fifth anniversary of this Agreement, (ii) two
(2) years from the date on which the Executive ceases to be
employed by the Company hereunder, other than pursuant to
Section 6.03 hereof, or (iii) upon the date of termination of
this Agreement pursuant Section 6.03 hereof (the "Maturity
Date"), and (I) shall be repaid on the Maturity Date by payment,
in whole or part at the discretion of the Executive: (v) in cash,
(w) delivery of shares of the Company's Common Stock or fully
vested stock options exercisable therefor, which in the case of
the Common Stock shall be valued at the Trading Price as of the
Maturity Date, and in the case of the stock options shall be
valued at the difference between the Trading Price as of the
Maturity Date and the respective exercise prices of such Stock
Option or (x) by crediting against the amount due any amount then
outstanding and owed to the Executive as a Profits Bonus pursuant
to Section 4.02 hereof, or (II) shall be forgiven by the Company
(y) in the event the Executive continues in the employ of the
Company for the entire initial Term hereof or the Company
terminates this Agreement during the initial Term other than for
cause pursuant to Section 6.03 hereof, or (z) in the event of a
merger or consolidation of the Company whereby it is not the
surviving entity or the stockholders of the Company are not the
controlling stockholders of the surviving entity, the sale of all
or substantially all of the Company's assets, liquidation,
dissolution or entry by the Company (voluntarily or
involuntarily) into insolvency or bankruptcy proceedings, or any
person or group becomes the beneficial owner of more than twenty-
five (25%) percent of the Company's outstanding voting securities
other than in a transaction approved by the Board of Directors of
the Company as presently constituted or by their chosen
successors as directors. The Executive agrees that should there
be any income tax withholding obligation by reason of the Monthly
Loans or their repayment or forgiveness, he will bear his portion
of such withholding obligation.
4.05 Participation in Benefit Plans. The
------------------------------
Executive shall also be entitled, to the extent that his
position, title, tenure, salary, age, health and other
qualifications make him eligible, to participate in all employee
benefit plans or programs (including, but not limited to,
medical/dental insurance, disability, stock option, retirement
and pension plans and vacation time, sick leave and holidays) of
the Company currently in existence on the date hereof or as may
hereafter be instituted from time to time. The Executive's
participation in any such plan or program shall be subject to the
provisions, rules and regulations applicable thereto.
4.06 Automobile. The Company shall provide the
----------
Executive with (i) the use of an automobile or (ii) an allowance
or reimbursement for the use by the Executive of his personal
automobile for Company purposes, provided that the cost to the
Company does not exceed $500 a month.
4.07 Expenses. In accordance with the Company's
--------
policies established from time to time, the Company shall pay or
reimburse the Executive for all reasonable and necessary
out-of-pocket expenses incurred by him in the performance of his
duties under this Agreement, subject to the presentment of
appropriate vouchers and receipts.
4.08 Insurance. The Executive acknowledges and
---------
agrees that the Company may obtain a life insurance policy on the
life of the Executive in the amount of at least $2,000,000 with
the Company named as the beneficiary. The Executive shall
cooperate fully with the Company's efforts to obtain such
insurance policy, including making himself available for physical
examinations.
5. Non-Disclosure of Confidential Information;
-------------------------------------------
Non-Competition.
---------------
5.01 Confidentiality. Except as may be in
---------------
furtherance of the Executive's performance of his functions as a
senior executive officer of the Company, the Executive shall not,
throughout the Term of this Agreement and thereafter, disclose to
any third party or use or authorize any third party to use, any
information relating to the business, business plans, trade
secrets or other interests of the Company (including customers
and clients of the Company) which is confidential and valuable to
the Company or any of its subsidiaries or any third party
(including customers and clients of the Company) and which is not
known to the public (the "Confidential Information"). The
Confidential Information is and will remain the sole and
exclusive property of the Company, and during the Term of this
Agreement, the Confidential Information, when entrusted to the
Executive's custody, shall be deemed to remain at all times in
the Company's sole possession and control. Notwithstanding the
foregoing, the Executive may, after prior written notice to the
Company (to the extent such notice is possible under the
circumstances) disclose such Confidential Information pursuant to
subpoena or other legal process, and promptly thereafter shall
advise the Company in writing as to the Confidential Information
which was disclosed and the circumstances of such disclosure.
5.02 Return of Documents. The Executive agrees
-------------------
that, upon the expiration of his employment with the Company for
any reason, he shall forthwith deliver up to the Company any and
all documents and other material, and all copies thereof, in his
possession or under his control relating to any Confidential
Information which is otherwise the property of the Company.
5.03 Non-Competition. The Executive recognizes
---------------
that the services to be performed by him for the Company are
special and unique. The Executive further recognizes that the
nature of the Company's business is such that the Executive will
have full knowledge of the Company's business plans and
practices. The parties therefore confirm that, in order to
protect the Company's goodwill, it is necessary that the
Executive agree, and the Executive hereby does agree that he will
not in the United States, at any time during and for a period of
two (2) years after he ceases to be employed by the Company, hold
any equity interest or act as a sole proprietor, partner,
coventurer, principal, director or shareholder (to the extent of
5% or more of the equity interest thereof), directly or
indirectly, of any sole proprietorship, partnership, joint
venture, corporation, or other business entity engaged in the
business of the research, development, manufacture and sale of
audiometers and other devices designed to test hearing, or
engaged in any other business competitive to any business that
the Company is engaged (or has formulated plans to engage) in at
the time the Executive ceases to be employed by the Company.
5.04 Remedies. The Executive agrees that any
--------
breach or threatened breach by him of any provision of this
Section 5 shall entitle the Company, in addition to any other
legal remedies available to it, to apply to any court of
competent jurisdiction to enjoin such breach or threatened
breach. The parties understand and intend that each restriction
agreed to by the Executive hereinabove shall be construed as
separable and divisible from every other restriction, and that
the unenforceability, in whole or in part, of any restriction,
will not affect the enforceability of the remaining restrictions
and that one or more or all of such restrictions may be enforced
in whole or in part as the circumstances warrant. No waiver of
any one breach of the restrictions contained in this Section 5.04
shall be deemed a waiver of any future breach.
6. Termination.
-----------
6.01 Disability. (a) The Executive shall be
----------
considered disabled if, due to illness or injury, either physical
or mental, he is unable to perform his customary duties and
responsibilities as required by this Agreement for more than two
(2) months in the aggregate out of any period of six (6)
consecutive months. The determination that the Executive is
disabled shall be made by the Executive Committee or, if there is
no Executive Committee, by the Board of Directors of the Company
(with the Executive abstaining from the decision if he is then a
member of such Committee or the Board), based upon an examination
and certification by a physician selected by the Company subject
to the Executive's approval, which approval shall not be
unreasonably withheld. The Executive agrees to submit timely to
any required medical or other examination, provided that such
examination shall be conducted at a location convenient to the
Executive and that if the examining physician is other than the
Executive's personal physician, the Executive shall have the
right to have such personal physician present at such
examination.
(b) If the Executive is determined to be disabled
pursuant to this Section 6.01, the Company shall have the option
to terminate this Agreement by written notice to the Executive
stating the date of termination, which date may be any time
subsequent to the date of such determination, except that the
Company shall pay to the Executive the accrued amount of the
compensation (including any Profits Bonus), benefits,
reimbursements and other sums payable pursuant to this Agreement,
prorated through the date of termination (other than expense
reimbursements which shall be paid in full), if, as and when such
amounts would be paid but for the termination of this Agreement.
After the date of termination by reason of disability, the
Company shall pay to the Executive an amount equal to fifty
percent (50%) of his then Base Salary, payable in six (6) equal
monthly installments commencing on the first day of the month
immediately following the month in which the employment
terminated pursuant to this Section 6.01.
6.02 Death. If the Executive shall die during
-----
the Term of this Agreement, this Agreement and the Executive's
employment hereunder shall terminate immediately upon the
Executive's death. Upon such death, the Company shall pay to the
Executive's estate the accrued amount of the compensation
(including any Profits Bonus calculated pursuant to Section
4.02(b) hereof), benefits, reimbursements or other sums payable
pursuant to this Agreement, plus an amount equal to fifty percent
(50%) of his then Base Salary, payable in six (6) equal monthly
installments commencing with the month immediately following the
month in which the Executive died.
6.03 By the Company for Cause. The Company may
------------------------
terminate this Agreement for cause at any time. For purposes of
this Agreement, the term "cause" shall be limited to (i) the
engaging by the Executive in conduct which is materially
injurious to the Company, with written notice of the specific
misconduct given to the Executive and which conduct is not cured
within ten (10) days after the Executive receives such notice,
(ii) the conviction of the Executive of a crime involving any
financial impropriety or which would materially interfere with
the Executive's ability to perform his services required under
this Agreement or otherwise be materially injurious to the
Company, or (iii) the breach by the Executive of any of his
material obligations under this Agreement without proper
justification, which breach is not cured within ten (10) days
after written notice thereof from the Company. Upon termination
of employment by the Company "for cause," the Executive shall
receive any accrued Base Salary through the termination date,
less any amounts by reason of claims the Company may have against
the Executive.
7. Notices. All notices, requests, demands or other
-------
communications hereunder shall be deemed to have been given if
delivered in writing personally or by registered mail to each
party at the address set forth below, or at such other address as
each party may designate in writing to the other:
If to the Company:
American Electromedics Corp.
13 Columbia Drive
Amherst, New Hampshire 03031
Attn: Noel Wren, President
If to Executive:
Thomas A. Slamecka
3055 Mossy Pointe
Duluth, Georgia 30155
Fax: (770) 613-9963
8. Entire Agreement. This Agreement contains the
----------------
entire understanding of the parties with respect to the subject
matter hereof, supersedes any prior agreement between the
parties. No change, termination or attempted waiver of any of
the provisions hereof shall be binding unless in writing and
signed by the party against whom the same is sought to be
enforced.
9. Successors and Assigns; Binding Effect. This
--------------------------------------
Agreement will be binding upon and inure to the benefit of the
Company and its successors and assigns, and the Executive, and
his heirs and administrators. The Company may assign this
Agreement to any corporation which is in a consolidated group
with the Company.
10. Waiver and Severability. The waiver by either
-----------------------
party of a breach of any terms or conditions of this Agreement
shall not operate or be construed as a waiver of any subsequent
breach by such party. In the event that any one or more of the
provisions of this Agreement shall be declared to be illegal or
unenforceable under any law, rule or regulation of any government
having jurisdiction over the parties hereto, such illegality or
unenforceability shall not affect the validity and enforceability
of the other provisions of this Agreement.
<PAGE>
11. Heading; Interpretations. The headings and
------------------------
captions used in this Agreement are for convenience only and
shall not be construed in interpreting this Agreement.
12. Governing Law. All matters concerning the
-------------
validity and interpretation of and performance under this
Agreement shall be governed by the laws of the State of New
Hampshire without regard to the conflicts of law principles
thereof.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date first above written.
AMERICAN ELECTROMEDICS CORP.
By:
--------------------------------
Michael T. Pieniazek,
Chief Financial Officer
--------------------------------
Thomas A. Slamecka
Exhibit 10.12
CITIZENS BANK NEW HAMPSHIRE
AMERICAN ELECTROMEDICS CORP.
FORBEARANCE AND WORKOUT AGREEMENT
---------------------------------
This Agreement made this 28th of October, 1997 by and
between American Electromedics Corp., a Delaware corporation with
a principal place of business at 13 Columbia Drive, Amherst, New
Hampshire 03031 (referred to herein as the "Borrower"), and
Citizens Bank New Hampshire, successor in interest to First NH
Bank, with an address of 875 Elm Street, Manchester, New
Hampshire 03101 ("Lender").
1. RECITALS.
--------
1.01. Borrower and Lender are the parties directly
interested in certain loan documents and other instruments
evidencing a certain loan, financial accommodations and
agreements including, but not limited to, the following
(sometimes collectively referred to as the "Loan Documents"):
(A) Promissory Note dated December 22, 1995, executed
and delivered by Borrower to First NH Bank ("Bank") in the
original principal amount of $200,000.00 (the "Note I");
(B) Revolving Line of Credit Promissory Note dated
October 4, 1996, executed and delivered by Borrower to the Lender
in the original principal amount of $400,000.00 (the "Note II");
(C) Term Promissory Note dated October 4, 1996,
executed and delivered by Borrower to the Lender in the original
principal amount of $500,000.00 (the "Note III");
(D) Loan Agreement dated October 4, 1996, executed and
delivered by Borrower to the Lender (the "Loan Agreement");
(E) Security Agreement dated October 4, 1996, executed
and delivered by Borrower to the Lender (the "Security
Agreement") secured by certain UCC-1 Financing Statements
recorded at the New Hampshire Secretary of State and the Town of
Amherst (the "Financing Statements");
(F) Collateral Assignment of Leasehold Rights dated
October 4, 1996, executed and delivered by Borrower to the Lender
("Collateral Assignment") along with Landlord's Estoppel
Certificate and Consent to Collateral Assignment dated October 3,
1996 by Mareld Co., Inc. ("Consent").
1.02. Borrower is in default of certain financial
covenants under and in breach of the Loan Agreement, and the
outstanding balances due under the Notes are now due and payable
to Lender in full.
1.03. Lender is considering to enforce its rights to
payment, possession, attachment and collection under the Notes
and Loan Documents in full as available under the Notes and Loan
Documents, including without limitation, applicable New Hampshire
law.
1.04. Borrower has requested that Lender forbear with
respect to enforcing its rights to collecting full payment now
due under the Notes and in exercising its rights under the Loan
Documents and applicable state law.
1.05. In consideration of the foregoing and the
warranties, representations, covenants, agreements, and promises
contained herein, Borrower and Lender hereby covenant and agree
upon the express terms and conditions set forth herein.
2. LOAN DEFAULT.
------------
The Borrower hereby acknowledges that the Loan Agreement and
the Notes are in default by its failure to meet certain
non-payment covenants and that even though the Lender has not
made formal demand, the Notes are now due and payable in full and
further acknowledges, confirms, and agrees that the Notes are now
and continue to be due and payable in full, for the outstanding
principal amount, together with interest, and late charges
accrued and accruing thereon and costs incurred and to be
incurred, including attorneys' fees to the Lender, all in the
amounts as set forth in Section 4 below as of the date stated
therein, which amounts do not include interest accruing and costs
incurred thereafter, all without further notice or demand by the
Lender to the Borrower. The Borrower waives and releases any and
all claims arising out of or relating to any requirement of or
for notice of default, acceleration and demand under the Notes,
the other Loan Documents, or otherwise under applicable law and
hereby acknowledge, confirm and agree that the amounts claimed as
due by the Lender are now and continue to be due to the Lender as
claimed without deduction, defense, set-off or counterclaim.
3. RELEASE; WAIVER OF CLAIMS AND
-----------------------------
DEFENSES/INDEMNITY.
-------------------
3.01. WAIVER AND RELEASE. Subject to the terms and
-------------------
conditions of this Agreement, the Borrower, for itself, its
officers, directors, heirs, legal representatives, employees and
agents, as appropriate, and its respective successors and
assigns, hereby expressly waives and releases and discharges
Lender, its officers, directors, employees, agents, attorneys and
participants and its successors and assigns, of and from any and
all manner of action, cause or cause of action, suit, demand,
obligation, judgment, claim, right of offset, reduction and/or
defense of any and all types whatsoever, whether in law or
equity, whether known or unknown, contingent or otherwise, which
Borrower ever had, now has, or which hereafter can, shall or may
have against Lender for, upon, or by reason of, any matter, cause
or thing whatsoever, which would arise from any actions or
inactions taken to date by the Lender, its officers, directors,
employees, attorneys, participants and agents, all from the
beginning of time to the date first above written, including, but
not limited to, any and all lender liability claims arising out
of, relating to or concerning, whether directly or indirectly,
proximately or remotely, the subject loan, the Loan Documents,
the Notes, this Agreement, the documents executed in connection
with this Agreement and the subject workout, and any discussions,
negotiations or oral representations or agreements among any of
the parties. This Release is accepted by Lender pursuant to the
terms of this Agreement and shall not be construed as an
admission of liability on the part of the Lender or any other
released party.
3.02. REAFFIRMATION. The terms of the Loan Documents,
-------------
including without limitation, any provisions creating a security
interest in favor of Lender in property of Borrower are expressly
acknowledged, agreed, reaffirmed and consented to. Borrower
hereby acknowledges and confirms the Notes and related Loan
Documents, as they may apply to each party, and whether or not
listed in this Agreement, and each hereby expressly waives
presentment, demand of payment, protest, and notice of nonpayment
and any and all other notices and demands whatsoever.
3.03. INDEMNIFICATION. The Borrower agrees to indemnify
---------------
and hold harmless the Lender, its officers, directors, employees,
attorneys and agents, from and against any and all claims,
actions, and suits, whether groundless or otherwise, and from and
against any and all liabilities, losses, damages and expenses of
every nature and character arising out of this Agreement, the
documents executed in connection therewith, the Notes, the other
Loan Documents, or the transactions contemplated hereby and
thereby, in each case including, without limitation, the
reasonable fees and disbursements of counsel and allocated costs
of internal counsel incurred in connection with any such
investigation, litigation or other proceeding connected
therewith. If and to the extent that the obligations of the
Borrower under this indemnity are unlawful due to the amount
involved or for any other reason, the Borrower hereby agrees to
make the maximum contribution to the payment in satisfaction of
such obligations that is permissible under applicable law.
Notwithstanding the foregoing, this section shall impose no
liability upon the Borrower for any claims, actions, suits of
shareholders of the Lender or any affiliate, or claims, actions,
suits of any governmental agency charged with regulation of the
Lender. In the event this provision expands the obligation of one
or more of the Borrowers beyond his, her or its or their
liability, it is hereby expressly recognized and stated that the
foregoing undertaking of the Borrower is in consideration of the
accommodations and undertakings of the Lender set forth herein
which are granted at the request of the Borrower for the purposes
of assisting them in otherwise satisfying their contractual
obligations to Lender under the Loan Documents.
4. AMOUNT OF OBLIGATION.
--------------------
The Borrower and Lender hereby acknowledge, confirm and
agree that the amount due and owing under the Notes and related
Loan Documents as of October 21, 1997, is as follows:
Original Current
Principal Principal Accrued
Note Balance Balance Interest
---- ----------- ----------- ---------
I $200,000.00 $ 83,332.24 $ 604.16
II $400,000.00 $300,000.00 $2,175.00
III $500,000.00 $422,770.67 $2,219.55
Approximate Total Outstanding Indebtedness (as of October 21,
1997): $811,102.62. Interest and costs continue to accrue on the
Total Outstanding Indebtedness in accordance with the terms of
the Notes.
5. WORKOUT PROVISIONS.
------------------
5.01. NOTE II PAYMENT. Immediately, upon execution
---------------
hereof, the Borrower will pay to the Lender all of Borrower's
available cash, in the approximate amount of $250,000.00 as of
October 21, 1997, to be applied to the principal balance of Note
II.
5.02. ADDITIONAL EQUITY CAPITAL. Borrower agrees that on
-------------------------
or before thirty (30) days from the date of this Agreement, it
will raise or obtain additional equity capital of $250,000.00
(the "Additional Capital").
5.03. PAYMENT TO LENDER. On or before thirty (30) days
-----------------
from the date of this Agreement, the Borrower agrees to pay
$150,000.00 to the Lender from the Additional Capital. Said funds
shall be applied, first, to payoff in full Note I, and, second,
to paydown the principal balance of Note III.
5.04. CONSULTANT. The Borrower agrees that, at the
----------
convenience and discretion of the Lender, the Lender may hire a
consultant to review the Borrower's business operations. The
Borrower agrees to cooperate fully with the Lender in conducting
the review and the Borrower shall bear the reasonable expense of
the Lender's review of the Borrower's business operations. The
Borrower shall be provided with copies of any and all written
reports prepared by the consultants retained from time to time by
the Lender.
5.05. LOCKBOX AGREEMENT. The Borrower shall execute a
-----------------
Lockbox Agreement in form and substance satisfactory to the
Lender whereby all payments made to the Borrower by its customers
and clients shall be paid into a lock box controlled by the
Lender. The Borrower further agrees that all proceeds received
into the Lockbox will be applied to the outstanding principal
balance owing under Note II.
5.06. FINANCIAL REPORTING. The Borrower shall provide
-------------------
to the Lender daily reporting of advances, cash receipts and
sales. In addition, the Borrower will provide the Lender with
financial statements, including, but not limited to profit, loss
and income statements, on or before the 15th day of each month
covering the period of the Borrower's previous monthly business
operations. Further, the Borrower will provide to the Lender, on
or before the 15th day of each month, cash flow projections for
the Borrower's business.
5.07. LINE OF CREDIT REDUCTION. The Borrower's ability
------------------------
to borrow or draw funds under Note II is hereby permanently
reduced and limited to $300,000.00.
5.08. CONDITIONS PRECEDENT TO CLOSING. The Lender's
-------------------------------
agreement hereunder is expressly conditioned upon the Borrower's
provision of the following on or before the closing of the
transactions contemplated hereunder (the "Closing"):
(A) All FDA approvals necessary for the Borrower's
business; and
(B) ISO 9000 Certification.
5.09. AMENDMENT TO LOAN AGREEMENT. Schedule A of the
---------------------------
Loan Agreement is amended to reflect the following:
(A) Applicable Percentage of Eligible Accounts
Receivable: 75%.
(B) Applicable Percentage of Finished Goods Inventory:
50%.
The second full paragraph of Schedule A shall be amended and
restated in its entirety as follows:
"Definition of "Finished Goods Inventory": The
term "Finished Goods Inventory" shall mean Inventory of
the Borrower which is completed and salable. Inventory
shall be valued at the lower of costs on a "first
in/first out" basis or fair market value and shall be
inventory which is owned for sale in the ordinary
course of the Borrower's business as presently
conducted by it and held by the Borrower at its
principal place of business in Amherst, New Hampshire,
and, in all cases, which is subject to a valid and
prior, fully perfected security interest of the Lender,
free of all security interests or liens of any other
person."
The balance of the second full paragraph of Schedule A shall
remain unchanged.
The remaining portions of Schedule A shall remain unchanged.
5.10. ASSIGNMENT OF STOCK IN ROESCH GMBH MEDIZINTECH.
----------------------------------------------
Roesch GMBH Medizintech is a business entity with its principal
place of business in Berlin, Germany and organized under the laws
of Germany ("Roesch"). As security for the repayment of the Total
Outstanding Indebtedness, the Borrower shall assign and pledge
its fifty percent (50%) ownership in the stock of Roesch to the
Lender. The Borrower shall provide the original stock certificate
evidencing its ownership of the Roesch stock to the Lender at
Closing, and/or execute such documents as are required under
German law to create and perfect a security interest in said
ownership interest in favor of the Lender. Additionally, the
Borrower agrees to execute all documents necessary and take all
steps required by applicable law to accomplish the assignment of
the Borrower's Roesch stock to the Lender within ninety (90) days
of the date of the Closing.
5.11. ROESCH SECURITY INTEREST. The Borrower
------------------------
acknowledges that Roesch owes the Borrower $443,000.00 (as
reflected in the Borrower's accounts receivables) (the "Roesch
Account Receivable") and $250,000.00 (evidenced as a note
receivable in favor of the Borrower) (the "Roesch Note
Receivable"). In addition to the security interest of the Lender
in accounts and contract rights, the Borrower shall assign the
Roesch Account Receivable and the Roesch Note Receivable to the
Lender (collectively, the "Roesch Receivables") within thirty
(30) days of Closing. Consistent therewith, the Borrower will
direct Roesch to make any and all payments submitted under the
Roesch Receivables directly to the Lender. Any payments made to
the Lender on the Roesch Receivables shall be applied by the
Lender to the Total Outstanding Indebtedness as the Lender may
decide, in its sole discretion; provided, however, that assuming
no event of default has occurred, the Lender will consider any
reasonable request of the Borrower to retain some of the funds
repaid to it by Roesch, it being expressly acknowledged that any
response shall be made by the Lender in its sole and absolute
discretion. The Borrower shall cause Roesch to execute any and
all documents necessary to accomplish the assignment of the
Roesch Receivables to the Lender in accordance with this
Paragraph 5.10 under all applicable laws, including, but not
limited to, the laws of Germany.
5.12. SECURITY INTEREST IN ASSETS OF ROESCH. The amount
-------------------------------------
owing to the Lender pursuant to the assignment of the Roesch
Receivables shall be secured by a security interest in all of the
assets of Roesch. The Borrower shall obtain a security interest
in all of the assets of Roesch and assign said security interest
in favor of the Lender. The Borrower shall cause Roesch to
execute all documents necessary, and take all steps necessary to
accomplish the grant of a fully perfected security interest in
the assets of Roesch under all applicable laws including, but not
limited to the laws of Germany within ninety (90) days of the
date of the Closing.
5.13. BANKRUPTCY. In the event that Borrower files for
----------
bankruptcy protection under Title 11 of the United States Code,
Borrower agrees to continue making payments under the Notes. In
addition, and if requested by the Lender, Borrower will consent
to relief from the automatic stay pursuant to Section 362 of
Title 11 of the United States Code so that Lender can foreclose
upon its collateral.
5.14. REVIVAL. If the Borrower fails to fulfill any of
-------
the terms and conditions herein, Lender shall have the right to
take such other action permitted thereby and all costs of the
Lender incurred in connection with this Agreement and any other
costs of enforcement of the rights and remedies of the Lender
shall be deemed a part of the obligations and payable upon demand
by Borrower.
5.15. WAIVER OF FINANCIAL COVENANT DEFAULTS. The Lender
-------------------------------------
shall waive all financial covenant defaults existing under the
Loan Documents as of July 31, 1997 as part of this Agreement.
5.16. ROESCH FINANCIAL INFORMATION. Upon request, the
----------------------------
Borrower will obtain and provide all financial information on
Roesch to the Lender.
5.17. ADVANCES TO ROESCH. Advances by the Borrower to
------------------
Roesch shall be limited to $10,000.00 per calendar quarter.
5.18. AMENDMENT TO SCHEDULE B OF THE LOAN AGREEMENT.
---------------------------------------------
The parties hereto agree that Section IV, Paragraph A of Schedule
B to the Loan Agreement dated October 4, 1996, be and hereby is
amended to read as follows:
"The BORROWER shall have a Tangible Capital Base
(as hereinafter defined) (i) as of July 31, 1998,qual
to at least Nine Hundred Thirty-Four Thousand Dollars
($934,000.00); and (ii) as of July 31, 1999 and as at
each July 31st thereafter, the foregoing Tangible
Capital Base of the BORROWER shall be increased by an
additional Two Hundred Thousand Dollars ($200,000.00),
(i.e., $1,134,000.00 as of July 31, 1999, $1,334,000.00
as of July 31, 2000, etc.). "Tangible Capital Base"
means total shareholders' equity less intangible assets
----
less investment of the BORROWER in Roesch GMBH Medizintech,
----
all as determined in accordance with generally accepted
accounting principles from the BORROWER's financial
statements delivered to the BANK in accordance with the
covenants of the BORROWER hereinabove (the "Financial
Statements").
6. MISCELLANEOUS
-------------
6.01. BREACH. A breach of this Agreement shall
------
constitute a breach of each Loan Document, whether or not
referenced herein, without further notice, and shall entitle the
Lender to the remedies provided to the Lender in such Loan
Documents, and under applicable state law, including, but not
limited to, possession of the property securing the Loan
Documents.
6.02. NO WAIVER. Except as otherwise specifically
---------
provided in this Agreement, Borrower waives demand, notice of any
action taken in reliance on this Agreement and all other demands
and notices of any description. No delay or omission on the part
of the Lender in exercising any right or remedy or any subsequent
or continuing event of default under this Agreement or the Notes
or Loan Documents shall constitute a waiver of any other right or
remedy under this Agreement or under the Notes or Loan Documents.
A waiver on any one occasion shall not be construed as a bar to
or waiver of any such right and/or remedy on any future occasion.
No single or partial exercise of any power hereunder shall
preclude other or future exercises hereof or the exercises of any
other right. THE BORROWER FURTHER ACKNOWLEDGES THAT, WHILE THE
LENDER HAS AGREED NOT TO ACCELERATE OR DEMAND REPAYMENT OF THE
TOTAL INDEBTEDNESS BASED UPON THE BORROWER'S PRIOR DEFAULTS,
NOTHING CONTAINED HEREIN IS INTENDED TO MODIFY OR LIMIT THE
LENDER'S ABILITY TO DO SO IN THE FUTURE BASED UPON A FUTURE EVENT
OF DEFAULT ARISING PURSUANT TO THE TERMS SET FORTH IN THE LOAN
DOCUMENTS.
6.03. INFORMATION. All information furnished to the
-----------
Lender pursuant to this Agreement or the negotiation thereof is
true, accurate and complete.
6.04. COSTS AND FEES. The Borrower will pay all costs
--------------
associated with the negotiation and preparation of this
Agreement, including, but not limited to, appraisal fees, legal
fees, consultant fees and environmental reports.
6.05. BINDING AGREEMENT. This Agreement shall inure to
-----------------
the benefit of and shall be binding upon the parties hereto and
their respective heirs, legal representatives, successors and
assigns.
6.06. GOOD FAITH. This Agreement and all information
----------
furnished to the Lender is made and furnished in good faith, for
value and valuable consideration, and has not been made under or
induced by any fraud, duress or undue influence exercised by the
Lender or any other person.
6.07. MISREPRESENTATION. Borrower, jointly and
-----------------
severally, shall indemnify and hold the Lender harmless from and
against any losses, damages, costs or expenses (including
attorneys' fees) incurred by the Lender as a direct or indirect
result of: (a) breach of any representation or warranty of
Borrower contained in this Agreement; or (b) any breach or
default by Borrower under any of the covenants or agreements
contained in this Agreement to be performed by Borrower, all of
which shall survive the closing hereof
6.08. SURVIVAL. All representations, warranties,
--------
covenants and agreements of the parties made in this Agreement
shall survive the execution and delivery hereof and the closing
hereunder, until such time as all of the obligations of the
signatories hereto shall have lapsed in accordance with their
respective terms or shall have been discharged in full.
6.09. MERGER CLAUSE; AMENDMENT. The parties hereto
------------------------
agree that this Agreement represents their entire understanding
and undertakings as of the date first above written, and that all
prior discussions and negotiations have been incorporated herein.
Accordingly, to the extent that any term, condition or covenant
previously discussed does not appear herein, the parties hereto
agree that the same has been rendered null and void or otherwise
is covered by this Agreement. The parties hereto further agree
that this Agreement will not be extended, modified or amended,
and that no oral modification shall be binding or otherwise
admissible in any dispute.
6.10. GOVERNING LAW. The parties hereto agree that this
-------------
Agreement and all of the other agreements attached hereto or
referred to herein shall be governed and construed exclusively in
accordance with the internal substantive laws of the State of New
Hampshire. The parties further agree that the Hillsborough County
Superior Court, Northern District, shall have sole and exclusive
jurisdiction over any dispute arising hereunder and the parties
expressly consent to the jurisdiction and venue of said Court.
6.11. COUNTERPARTS. This Agreement may be executed in
------------
one or more counterparts, each of which shall together or singly
be and be deemed to constitute an original.
6.12. NOTICES. All notices, demands and requests given
-------
are required to be given by any party to this Agreement are to be
in writing and will be sent by U.S. Certified Mail, return
receipt requested, or if hand-delivered, to the addresses set
forth below:
If To Borrower: American Electromedics Corp.
13 Columbia Drive
Amherst, New Hampshire 03031
If To Lender: Fred Palazzolo, Vice President
Citizens Bank New Hampshire
875 Elm Street
Manchester, NH 03101
With A Copy To: Daniel W. Sklar, Esq.
Peabody & Brown
889 Elm Street
Manchester, NH 03101
6.13. INTERPRETATION. The parties hereto agree that
--------------
this Agreement has been carefully and diligently negotiated by
the parties, each of whom or which have been represented by
counsel, or have had the opportunity to be represented by
counsel, and consequently the parties agree that this Agreement
shall not be interpreted adversely against one party or the other
by reason of its having been drafted by that party.
The parties have executed and delivered this Agreement all
as of the day and date first above written.
LENDER:
CITIZENS BANK NEW
HAMPSHIRE
By: /s/ Fred Palazzolo
--------------------------------
Fred Palazzolo, Its Duly
Authorized Vice President
BORROWER:
AMERICAN ELECTROMEDICS
CORP.
By: /s/ Michael T. Pieniazek
--------------------------------
Name: Michael T. Pieniazek
------------------------------
Its: President
-------------------------------
STATE OF NEW HAMPSHIRE
COUNTY OF Hillsborough
------------
The foregoing instrument was acknowledged before me this
28th day of October, 1997, by Fred Palazzolo, duly authorized
President of Citizens Bank New Hampshire, on behalf of the Bank.
/s/ Gail M. Smith
---------------------------------------
Notary Public
My Commission Expires June 19, 2001
------------------
STATE OF NEW HAMPSHIRE
COUNTY OF Hillsborough
------------
The foregoing instrument was acknowledged before me this
28th day of October, 1997 by by Michael T. Pieniazek, duly
--------------------
authorized President of American Electromedics Corp., on behalf
---------
of the corporation.
/s/ Gail M. Smith
----------------------------------------
Notary Public
My Commission Expires June 19, 2001
-------------------
Exhibit 10.13
October 1, 1997
Mr. Alan Gelband
575 Madison Avenue
Suite 700
New York, New York 10022
Standstill Agreement
--------------------
Dear Mr. Gelband:
This letter agreement sets forth the terms of our
agreement with respect to any direct and/or indirect ownership or
acquisition by you, Alan Gelband ("Gelband"), of any Voting
Securities (as defined below) of American Electromedics Corp., a
Delaware corporation (the "Company"). The Company and you
acknowledge, respectively, that the consideration for entering
into and delivering this letter agreement is your sale of 500,000
shares of the Company's Common Stock to some investors and the
issuance and delivery by the Company to you of a General Release
simultaneous with such sale.
For the purposes of this letter agreement, the
following definitions shall apply: "Common Stock" means the
Common Stock, par value $.10 per share of the Company or any
securities of the Company issued in substitution thereof;
"affiliate" of a person means a person that directly or
-----------
indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with such person and,
to the extent not otherwise within this definition, a member of
such person's immediate family; "control" means the power to
direct or cause the direction of the management or policies of a
person whether through ownership of securities, by contract or
otherwise; "person" means and includes an individual, a
--------
partnership; a joint venture, a corporation, a group, a trust, an
estate, an unincorporated organization or association, and any
"person" within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); "immediate
----------
family" of a person means a son or daughter of such person or a
-------
descendent of either, a stepson or stepdaughter of such person,
the father or mother of such person or an ancestor of either, a
stepfather or stepmother of such person or a spouse of such
person; for the purpose of determining whether any of the
foregoing relations exists, a legally adopted child of a person
shall be considered a child of such person by blood; and "Voting
-------
Securities" includes the Common Stock, and any other securities
-----------
of the Company entitled to vote generally for the election of
directors or any securities having the right to convert into such
securities or any option or rights to acquire any of the
foregoing, now or hereafter outstanding.
1. Gelband covenants and agrees with the Company that
he will not in his name, nor will he permit any affiliate over
which he exercises control (including but not limited to The
Alden Foundation and Alan Gelband Co. Defined Contribution
Pension Plan), without the prior consent of the Company's Board
of Directors specifically expressed in a resolution adopted by a
majority of the directors of the Company, for a period of two (2)
years following the date of this letter agreement (the "Agreement
Term") to:
(a) Own or acquire or offer to acquire, directly
or indirectly, of record or beneficially, by
purchase or otherwise, any Voting Securities in
aggregate amount at any time exceeding the greater
of (I) 150,000 shares of Common Stock (as the
shares are presently constituted) or (II) two (2%)
percent of the issued and outstanding shares of
Common Stock (excluding treasury shares); or
(b) Seek representation on the Board of Directors of
the Company or solicit proxies with respect to Voting
Securities under any circumstances; submit proposals
for the vote of stockholders of the Company; or become
a "participant" in any "election contest" relating to
the election of directors of the Company (as such terms
are used on the date hereof in Rule 14a-11 of
Regulation 14A under the Exchange Act); or
(c) Enter into any joint venture, partnership, voting
arrangement or other understanding or otherwise act in
concert with any other person for the purpose of
acquiring, holding or voting of any Voting Securities;
(d) Take any action (or permit any investment banker,
attorney, accountant or any other representative
retained by him to take any action a part of such
retention), directly or indirectly, to acquire or
affect a change of control of the Company or initiate
contact with any person or entity in an effort to
solicit, encourage or assist such person or entity in a
takeover proposal. As used in this paragraph,
"takeover proposal" shall mean any proposal for a
merger or other business combination involving the
Company or for the acquisition of a substantial equity
interest in the Company or a substantial portion of the
Company's assets.
2. Gelband acknowledges and agrees that the Company
would be irreparably damaged in the event any of the provisions
of this letter agreement were not performed by him in accordance
with their specific terms or were otherwise breached. It is
accordingly agreed that the Company shall be entitled to an
injunction or injunctions to redress breaches of this letter
agreement and to specifically enforce the terms and provisions
hereof in any state thereof having subject matter jurisdiction,
in addition to any other remedy to which such party may be
entitled, at law or in equity.
3. This letter agreement sets forth the entire
agreement between us with respect to the subject matter herein,
and cannot be amended, modified or terminated except by an
agreement in writing executed by both of us.
4. This letter agreement shall be construed and
enforced in accordance with the laws of the State of Delaware.
If the foregoing correctly sets forth our agreement,
kindly sign and return to us the enclose copy of this letter
agreement.
American Electromedics Corp.
By: /s/ Michael T. Pieniazek
--------------------------
Agreed to:
/s/ Alan Gelband
--------------------------
Alan Gelband
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-23741 and 333-19323) pertaining to the 1987 Non-
Qualified Stock Option Plan and Stock Option Agreements and the 1996 Stock
Option Plan of American Electromedics Corp. of our report dated September
29, 1997, except for Note 10, as to which the date is November 3, 1997,
with respect to the financial statements of American Electromedics Corp.
included in the Annual Report (Form 10-KSB) for the year ended July 31,
1997.
/s/ Ernst & Young LLP
Manchester, New Hampshire
November 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN
ELECTROMEDICS CORP. FORM 10-KSB FOR THE PERIOD ENDED JULY 31, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 471
<SECURITIES> 0
<RECEIVABLES> 662
<ALLOWANCES> 0
<INVENTORY> 475
<CURRENT-ASSETS> 1,852
<PP&E> 449
<DEPRECIATION> (396)
<TOTAL-ASSETS> 3,060
<CURRENT-LIABILITIES> 792
<BONDS> 720
0
0
<COMMON> 255
<OTHER-SE> 913
<TOTAL-LIABILITY-AND-EQUITY> 3,060
<SALES> 2,309
<TOTAL-REVENUES> 2,309
<CGS> 1,311
<TOTAL-COSTS> 1,311
<OTHER-EXPENSES> 1,924
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125
<INCOME-PRETAX> (926)
<INCOME-TAX> 0
<INCOME-CONTINUING> (926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (926)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
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