U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(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
----------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
---------------- ----------------
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 or (I.R.S. Employer
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: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.10 PAR VALUE
-----------------------------------------------------------------
Title of Class
Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act
during the 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> Tympanometer, 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 Mediz-intechnik, 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<trademark> intraoral camera
system which is designed for use in the dental marketplace. The
Viola<trademark> 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
recommendations.
The Company was granted the exclusive right to market and
sell the Viola<trademark> 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.
QUIKTYMP<TRADEMARK> TYMPANOMETER
--------------------------------
In fiscal 1997, the Company presented the new
QuikTymp<trademark> Tympanometer line at the Health Industry
Distributors Association (HIDA) Meeting. The QuikTymp<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 QuikTymp<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<trademark> 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<trademark> 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
-------
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 QuikTymp<trademark> Tympanometer was
introduced in fiscal 1997. The Company is currently exploring
new product opportunities both in audiometrics and also in other
lines. In 1996, the Company licensed a new technology for the
measurement of the viscosity of human blood plasma. This new
technology, however, was subsequently determined not to be
commercially feasible. 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
-------
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
----------
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.
---------------------------------------------------------------
FISCAL PERIOD FISCAL YEAR ENDED FISCAL YEAR ENDED
7/31/97 7/27/96
---------------------------------------------------------------
HIGH LOW HIGH LOW
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First Quarter $5.16 $3.13 $3.75 $2.66
---------------------------------------------------------------
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
---------------------------------------------------------------
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 made pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. That
information covers 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 those expressed or
implied in any forward-looking statement include, but are not
limited to, technological innovations of competitors, delays in
product introductions, changes in health care regulations and
reimbursements, changes in foreign economic conditions or
currency translation, product acceptance 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. The
Company's products intended to be sold in Germany are required to
be manufactured under an approved quality system, i.e., ISO 9000.
The Company received ISO 9000 certification at the end of the
second fiscal quarter of 1997 and resumed shipments into Germany
and, therefore, as of July 31, 1997 any temporary regulatory
delays relating to ISO 9000 issues were no longer a factor.
Sales continued to be affected, however, by a change in medical
reimbursement in Germany whereby separate reimbursement was
terminated for audiometric tests performed with the Company's
products.
The temporary regulatory delays related to ISO 9000
certification and the change in medical reimbursement in Germany
both came into effect at approximately the same time, late in the
fourth quarter of fiscal 1996. Sales to Germany decreased by
$900,000 in fiscal 1997 as a result of these factors. Inasmuch
as both factors impacted upon sales at the same time, it is not
possible to quantify their impact separately.
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 future 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
manufacturing levels in response to the general domestic
industry-wide slowdown and the previously 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 marketing and
promotional activity. General and administrative expenses
increased by $145,000 as a result of corporate development
expense and the retention of senior level executives. These
costs are more fixed in nature. Selling expenses increased by
$210,000 as a result of the market introduction of the new
QuikTymp<trademark> Tympanometer line of products in December
1996. These selling expenses were high as a result of heavy
promotion at the front end of the product introduction period and
should become more variable over time. The increase in other
income/expense in 1997 when compared to 1996 primarily related to
$100,000 of additional interest expense as a result of new
convertible debentures and other bank debt as well as write-off
of purchased technology from BioFlo Systems together with
$125,000 associated with the legal proceeding involving the
former president of the Company. 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.
8
<PAGE>
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 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 intraoral 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
-----------------------
-------------------------------------------------------------------------
SUMMARY OF 7/31/97 7/27/96 7/29/95 7/30/94 7/31/93
OPERATIONS
-------------------------------------------------------------------------
Net sales $2,309 $3,337 $2,443 $1,965 $2,358
-------------------------------------------------------------------------
Income (loss) (926) 467 184 61 203
before
provision for
income taxes
& extraordinary
items
-------------------------------------------------------------------------
Net income (loss) (926) 442 172 57 399
-------------------------------------------------------------------------
Net income (loss) (.37) .18 .08 .03 .25
per share
-------------------------------------------------------------------------
Weighted 2,510,296 2,493,854 2,238,483 1,833,666 1,594,651
average
common &
equivalent
shares
-------------------------------------------------------------------------
9
<PAGE>
-------------------------------------------------------------------------
FINANCIAL 7/31/97 7/27/96 7/29/95 7/30/94 7/31/93
POSITION
-------------------------------------------------------------------------
Total assets $3,060 $2,771 $1,513 $899 $1,023
-------------------------------------------------------------------------
Working capital 1,060 906 915 485 402
-------------------------------------------------------------------------
Long-term debt 1,100 94 0 4 0
-------------------------------------------------------------------------
Stockholders' 1,168 1,948 1,196 771 704
equity
-------------------------------------------------------------------------
Note: In thousands, except for share and per share amounts.
10
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
--------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
Report of Ernst & Young LLP, Independent Auditors . . . . . . 12
Balance Sheets, July 31, 1997 and July 27, 1996 . . . . . . . 13
Statements of Operations for the Years Ended
July 31, 1997, July 27, 1996 and July 29, 1995 . . . . . . 14
Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 1997, July 27, 1996
and July 29, 1995 . . . . . . . . . . . . . . . . . . . . . 15
Statements of Cash Flows for the Years Ended
July 31, 1997, July 27, 1996 and July 29, 1995. . . . . . . 16
Notes to Financial Statements . . . . . . . . . . . . . . . . 17
11
<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.
12
<PAGE>
AMERICAN ELECTROMEDICS CORP.
BALANCE SHEETS
JULY 31, 1997 JULY 27, 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.
13
<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
administrative . . . . . 1,394 1,039 719
Research and development . 85 215 182
------- ------- -------
Total operating expenses 1,479 1,254 901
------- ------- -------
Operating income (loss) . . (481) 431 171
Other income (expenses):
Undistributed earnings
(loss) of affiliate . (57) 52 --
Interest, net . . . . . (125) (16) 9
Other . . . . . . . . . (263) -- 4
------- ------- -------
(445) 36 13
Income (loss) before
provision for
income taxes . . . . . . (926) 467 184
Provision for income taxes -- 25 12
------- ------- -------
Net income (loss) . . . . . $ (926) $ 442 $ 172
======= ======= =======
Earnings (loss) per common
and common equivalent
share . . . . . . . . . . $ (.37) $ .18 $ .08
======= ======= =======
See accompanying notes.
14
<PAGE>
AMERICAN ELECTROMEDICS CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------- PAID-IN DEFICIT STOCKHOLDERS'
SHARES AMOUNT CAPITAL EQUITY
------ ------ ---------- -------- ------------
(THOUSANDS)
Balance at
July 30,
1994 . . . 1,838 $ 184 $ 2,281 $(1,694) $ 771
Exercise of
stock
options . 505 50 203 -- 253
Net income -- -- -- 172 172
----- ----- ----- ----- -----
Balance at
July 29,
1995 . . . 2,343 234 2,484 (1,522) 1,196
Investment
in
affiliate 100 10 290 -- 300
Exercise of
stock
options . 11 1 9 -- 10
Net income -- -- -- 442 442
----- ----- ----- ----- -----
Balance at
July 27,
1996 . . . 2,454 245 2,783 (1,080) 1,948
Sale of
capital
stock . . 48 5 139 -- 144
Exercise of
stock options,
net . . . 51 5 (3) -- 2
Net loss . -- -- -- (926) (926)
----- ----- ----- ----- -----
Balance at
July 31,
1997 . . . 2,553 $ 255 $2,919 $(2,006) $1,168
====== ===== ===== ===== =====
See accompanying notes.
15
<PAGE>
AMERICAN ELECTROMEDICS CORP.
STATEMENTS OF CASH FLOWS
YEARS ENDED
--------------------------------------
JULY 31, JULY 27, JULY 29,
1997 1996 1995
---------- ---------- -----------
(Thousands)
OPERATING ACTIVITIES:
Net income (loss) . . . . . . . $(926) $442 $172
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization . 80 38 35
Provision for doubtful accounts (4) -- 8
Undistributed earnings (loss)
of affiliate . . . . . . . . 57 (52) --
Changes in operating assets and
liabilities:
Accounts receivable . . . . . 43 (274) (277)
Inventories, prepaid and (106) (317) (114)
other current assets . . .
Accounts payable and accrued
liabilities . . . . . . . . (22) 49 195
----- ----- -----
Net cash provided by (used in)
operating activities . . . . (878) (114) 19
INVESTING ACTIVITIES:
Investment in affiliate . . . . -- (519) --
Purchase of property and
equipment, net . . . . . . . (39) (22) (26)
----- ------ -----
Net cash used in investing
activities . . . . . . . . . (39) (541) (26)
FINANCING ACTIVITIES:
Principal payments on long-term
debt . . . . . . . . . . . . (129) (43) (6)
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) -- --
Proceeds from exercise of stock
options . . . . . . . . . . . 2 10 253
----- ----- -----
Net cash provided by financing
activities . . . . . . . . . 1,071 467 247
----- ----- -----
Increase (decrease) in cash and
cash equivalents . . . . . . 154 (188) 240
Cash and cash equivalents,
beginning of year . . . . . . 317 505 265
----- ------- -------
Cash and cash equivalents, end
of year . . . . . . . . . . . $471 $317 $505
===== ======= =======
NONCASH TRANSACTION:
Stock issued for investment in
affiliate . . . . . . . . . -- $300 --
See accompanying notes.
16
<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<registered trademark>, 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.
The Company recognizes revenue upon receipt of a firm
customer order and shipment of the product, net of allowances for
warranties, which have not been material. The Company does not
recognize revenue on product shipments that are subject to rights
of return, evaluation periods, customer acceptance, or any other
contingencies until such contingency has expired.
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.
The Company continually assesses the recoverability of its
goodwill based on estimated future results of operations and
undiscounted cash flows in accordance with Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Based on the Company's assessment, there was no impairment in the
carrying value of goodwill or its other long-lived assets at July
31, 1997 or July 27, 1996.
17
<PAGE>
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 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's deferred tax assets (which result primarily
from net operating loss carryforwards and accrued expenses) 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.
Significant components of the Company's deferred tax assets
are as follows:
1997 1996
---- ----
Deferred tax assets:
Net operating loss
carryforwards $ 437,000 $183,000
Accrued expenses 67,000 3,000
Inventory 24,000 43,000
Other 16,000 --
Reserves 17,000 19,000
------- -------
Total deferred tax assets 561,000 248,000
Valuation allowance for
deferred tax assets (561,000) (248,000)
------- -------
Net deferred tax assets $ -0- $ -0-
======= =======
18
<PAGE>
A reconciliation of income taxes computed at the federal
statutory rates to income tax expense is as follows:
1997 1996 1995
------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
Tax (Benefit)
at Federal
Statutory
Rates $(315,000) (34%) $159,000 34% $63,000 34%
State Income
Taxes, Net of
Federal Tax
Benefit -- -- 17,000 4 8,000 4
Change in
Valuation
Reserve 313,000 34 (122,000) (26) (63,000) (34)
Goodwill
Amortization 13,000 1 4,000 1 4,000 2
Other (11,000) (1) (33,000) (7) -- --
------ ---- ------- ---- ------ ---
Total $ -- 0% $25,000 6% $12,000 6%
====== ==== ====== ==== ====== ===
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.
Change in Year End
------------------
Effective July 31, 1997, the Company is reporting its month
end on the last day of each month for accounting purposes.
2. INVENTORIES:
------------
Inventories consist of the following at:
July 31, 1997 July 27, 1996
------------- -------------
Raw materials $264,000 $339,000
Work-in-process 31,000 51,000
Finished goods 180,000 90,000
-------- --------
$475,000 $480,000
======== ========
19
<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"). The
100,000 shares were valued at $3.00 per share, which represents
the fair market value of the stock. 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.
Accounts receivable from affiliates recorded in the
Company's balance sheets represent trade receivables arising
through the normal course of business. The balances consist
primarily of sales of the Company's audiometric products to Rosch
GmbH. As discussed in Note 9, Rosch GmbH represents a
significant customer of the Company. Intercompany profits
relating to sales of the Company's products to Rosch GmbH are
eliminated based on the Company's 50% equity ownership of Rosch
GmbH.
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 valued at $3.75 per share, the fair market value, or an
aggregate of $720,000 principal amount of Debentures and 48,000
shares of Common Stock. The aggregate financing costs of the
Placement was $202,000, of which $36,000 was for the Common Stock
and $166,000 was for the Debentures.
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.
20
<PAGE>
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.
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. The Company expensed approximately $10,000 and $50,000
in 1996 and 1997, respectively, based on the fair market value of
the consultant's services over the twelve month term of the
consulting agreement.
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
21
<PAGE>
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.
In 1997, the Company granted certain directors and officers
of the Company options to purchase 480,000 shares under separate
option agreements. The options were granted at the fair market
value of the Company's common stock on the date of grant. The
options vest over four years and expire ten years from the date
of grant.
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 1995
------------------ ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- ---------- -------- --------- --------
Outstanding at
beginning of
year . . . . 133,000 $1.58 131,000 $0.93 585,000 $0.53
22
<PAGE>
Granted . . . 480,000 3.36 13,000 7.50 120,000 0.93
Expired or
canceled . (136,000) 3.45 -- -- ( 69,000) 0.68
Exercised . . ( 74,000) 0.66 ( 11,000) 0.94 (505,000) 0.50
------- ------- -------
Outstanding at
end of year . 403,000 3.23 133,000 1.58 131,000 0.93
======= ======= =======
Exercisable at
end of year . 111,000 3.11 107,000 0.87 11,000 0.94
======= ======= =======
Available for
future grants 240,000 10,000 10,000
======= ======= =======
Weighted-
average fair
value of
options
granted
during year . $2.54 $4.52
The following table presents weighted-average price and life
information about significant option grants outstanding at
July 31, 1997:
Options Outstanding Options Exercisable
-------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Out- Contractual Exercise Exer- Exercise
Prices standing Life Price cisable Price
------------- -------- ---------- -------- -------- ---------
$1.41 30,000 1 Year $1.41 30,000 $1.41
$3.00 - $4.37 360,000 1 Year 3.23 68,000 3.00
$7.50 13,000 3 Years 7.50 13,000 7.50
------- -------
403,000 111,000
======= =======
7. OTHER EXPENSES
--------------
The Company incurred $263,000 in other charges during 1997.
This amount included $125,000 associated with the legal
proceeding involving the former president of the Company and
$100,000 for the write off of purchased technology from BioFlo
Systems. This technology was intended to measure the viscosity
of human blood plasma. However, it was subsequently determined
not to be commercially feasible.
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.
23
<PAGE>
10. SUBSEQUENT EVENTS
-----------------
The Company entered into a Forbearance and Workout Agreement
(the "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. Under
the Workout Agreement, the bank has waived the non-compliance of
the covenants for a period of one year on the condition that the
Company agreed to, among other things, raise within 30 days an
additional $250,000 of equity capital and to apply $150,000 of
such amount against outstanding term loans. Additionally, as
part of the Workout 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, the holders of
all $720,000 principal amount of Debentures have elected to
convert. As a result of this conversion, the Company has reduced
its long-term debt by $720,000 and issued 720,000 shares of
common stock. The Company also will record a charge of
approximately $100,000 to write-off deferred financing costs
capitalized upon initial issuance of the Debentures.
24
<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 N/A
Chief Financial Officer
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 and 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.
25
<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
NAME AND PRINCIPAL OPTIONS TERM
POSITION YEAR SALARY BONUS GRANTED AWARDS
-----------------------------------------------------------------
Noel A. Wren, 1997 $ 76,000 -- 10,000 --
President & Chief 1996 105,000 $10,700 -- --
Executive Officer 1./ 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 $60
per share for a period of 20 consecutive trading days and for the
grant of options to him for the purchase of 300,000 shares of
Common Stock at fair market value of the Company's Common Stock
on the date of grant, vesting immediately as to 30,000 shares and
the balance vesting monthly over the initial term.
26
<PAGE>
AGGREGATED OPTION EXERCISES FOR THE FISCAL YEAR
ENDED JULY 31, 1997 AND FY-END OPTION VALUES
----------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)
----------------------------------------------------------------
Shares
Acquired
on Value
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) 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 shs(1) 4.5%
-----------------------------------------------------------------
Marcus R. Rowan Director 91,550 shs(2) 3.5%
-----------------------------------------------------------------
Thomas A. Slamecka Director and 195,000 shs(3) 7.2%
Chairman
-----------------------------------------------------------------
Joseph Wear Director 66,825 shs(4) 2.6%
-----------------------------------------------------------------
Noel A. Wren Director 208,000 shs(4) 8.1%
-----------------------------------------------------------------
Michael T. Pieniazek President and CFO 32,000 shs(5) 1.2%
-----------------------------------------------------------------
All Officers and
Directors as a
Group (6 persons) 708,214 shs(6) 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.
27
<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 (filed as Exhibit
3.1.4 to Registrant's Form 10-KSB for the fiscal year
ended July 31, 1997, and incorporated herein by
reference).
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)
28
<PAGE>
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)
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 (filed
as Exhibit 10.11 to Registrant's Form 10-KSB for the
fiscal year ended July 31, 1997, and incorporated
herein by reference).
29
<PAGE>
10.12 Forbearance and Workout Agreement, dated October 28,
1997, between Registrant and the Bank (filed as Exhibit
10.12 to Registrant's Form 10-KSB for the fiscal year
ended July 31, 1997, and incorporated herein by
reference).
10.13 Standstill Agreement, dated October 1, 1997, between
Registrant and Alan Gelband (filed as Exhibit 10.13 to
Registrant's Form 10-KSB for the fiscal year ended
July 31, 1997, and incorporated herein by reference).
23 * Consent of Independent Auditors
27 Financial data schedule (filed as Exhibit 27 to
Registrant's Form 10-KSB for the fiscal year ended
July, 1997, and incorporated herein by reference).
* Filed herewith.
(b) REPORTS ON FORM 8-K: None
30
<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: July 10, 1998 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 July 10, 1998
---------------------------
Thomas A. Slamecka
(2) Principal Financial
and Accounting Officer
/s/ Michael T. Pieniazek President and Chief
--------------------------- Financial Officer July 10, 1998
Michael T. Pieniazek
(3) A majority of the
Board of Directors
/s/ Blake Davenport Director July 10, 1998
---------------------------
Blake Davenport
/s/ Marcus R. Rowan Director July 10, 1998
---------------------------
Marcus R. Rowan
/s/ Joseph Wear Director July 10, 1998
---------------------------
Joseph Wear
/s/ Andy Rosch Director July 10, 1998
---------------------------
Andy Rosch
31
<PAGE>
AMERICAN ELECTROMEDICS CORP.
FORM 10-KSB/A
EXHIBIT INDEX
Exhibits filed herewith:
-----------------------
23 Consent of Independent Auditors.
EXHIBIT 23
Consent of 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 Note 10, as to which the date is November 3, 1997) with
respect to the financial statements, as amended, of American
Electromedics Corp., included in this Form 10-KSB/A for the year
ended July 31, 1997.
/s/ ERNST & YOUNG LLP
Manchester, New Hampshire
July 7, 1998
