AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON SEPTEMBER 11, 1998
Registration No. 333-58937
=================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
AMERICAN ELECTROMEDICS CORP.
(Name of Small Business Issuer in Its Charter)
--------------------
DELAWARE 3845 04-2608713
(State Or (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification
Organization) Code Number)
--------------------
13 COLUMBIA DRIVE, SUITE 5
AMHERST, NEW HAMPSHIRE 03031
(603) 880-6300
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
--------------------
MICHAEL T. PIENIAZEK
PRESIDENT AND CHIEF FINANCIAL OFFICER
13 COLUMBIA DRIVE, SUITE 5
AMHERST, NEW HAMPSHIRE 03031
(603) 880-6300
(Name, Address and Telephone Number of Agent For Service)
--------------------
Copies to:
BRUCE A. RICH, ESQ.
THELEN REID & PRIEST LLP
40 WEST 57TH STREET
NEW YORK, NEW YORK 10019
(212) 603-2000
--------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
from time to time after the effective date of
this Registration Statement as determined by
market conditions and other factors.
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
[ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
[ ]
----------
If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
=================================================================
Title Of Each Proposed Proposed
Class of Maximum Maximum
Securities Amount To Offering Aggregate Amount Of
to be Be Price Per Offering Registration
Registered Registered Unit(1) Price(1) Fee
------------ ---------- -------- -------- ------------
Common Stock,
$.10 par 4,570,798
value . . . shares $3.25 $14,855,093.50 $4,382.25
Common Stock,
$.10 par 1,085,003
value(2) . shares 3.25 3,526,259.75 1,040.25
Common Stock,
$.10 par 1,380,000
value(3) . shares 3.25 4,485,000.00 1,323.08
Common Stock,
$.10 par 50,000
value(3)(4) . shares 4.80 240,000.00 70.80
Common Stock,
$.10 par 13,333
value(3) . shares 7.50 99,997.50 29.50
Warrants . . 50,000 .10 5,000.00 --
Total . . . . -- -- $6,845.88(5)
=================================================================
(1) Estimated solely for the purpose of computing the amount of
the registration fee pursuant to Rule 457(c) promulgated
under the Securities Act of 1933, as amended, based on the
average of the bid and asked prices on the OTC Bulletin
Board on September 3, 1998.
(2) Includes a presently indeterminate number of shares issued
or issuable upon conversion of or otherwise in respect of
Registrant's Series A Convertible Preferred Stock. This is
not intended to constitute a prediction as to the number of
shares of Common Stock into which the Preferred Stock will
be convertible.
(3) In accordance with Rule 457(g), the registration fee for
these shares is calculated upon a price which represents the
highest of (i) the price at which the warrants or options
may be exercised; (ii) the offering price of securities of
the same class included in this registration statement; or
(iii) the price of securities of the same class, as
determined pursuant to Rule 457(c).
(4) Represents shares of Common Stock underlying the 50,000
warrants being registered hereby.
(5) The amount of $5,233.39 was previously paid as the
registration fee.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement
shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
=================================================================
<PAGE>
Information contained herein is subject to completion or
amendment. A registration statement relating to these securities
has been filed with the Securities and Exchange Commission.
These securities may not be sold nor may offers to buy be
accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell
or a solicitation of an offer to buy nor shall there be any sale
of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS (SUBJECT TO COMPLETION)
DATED SEPTEMBER 11, 1998
7,099,134 SHARES OF COMMON STOCK
($.10 PAR VALUE)
50,000 COMMON STOCK PURCHASE WARRANTS
AMERICAN ELECTROMEDICS CORP.
All of the shares (the "Shares") of Common Stock, par value
$.10 per share ("Common Stock") of American Electromedics Corp.,
a Delaware corporation (the "Company"), and all of the Company's
Common Stock Purchase Warrants (the "Warrants"), offered hereby
are being offered for resale by certain stockholders and warrant
holders of the Company (collectively the "Selling Stockholders")
as described more fully herein.
The shares of Common Stock offered hereby by the Selling
Stockholders consist of (A) 4,570,798 shares presently issued and
outstanding, (B) 1,443,333 shares issuable upon exercise of
presently exercisable warrants and options and (C) 1,085,003
shares issuable upon conversion of the Company's Convertible
Preferred Stock, Series A, par value $.01 per share ("Series A
Preferred Stock"). The number of shares issuable upon conversion
of the Series A Preferred Stock is subject to adjustment and
could be materially more than the amount presented herein
depending on the future market price of the Common Stock. See
"RISK FACTORS -- MARKET RISKS" and "SELLING STOCKHOLDERS."
Each Warrant entitles the holder thereof to purchase one
share of Common Stock at a price per share of $4.80, subject to
customary anti-dilution adjustments. Each Warrant may be
exercised until 5:00 p.m., New York time, on May 5, 2001.
The Selling Stockholders will sell the Shares and Warrants
from time to time through customary brokerage channels, either
through broker-dealers acting as agents or brokers for the
seller, or through broker-dealers acting as principals, who may
then resell the Shares and Warrants in the over-the-counter
market or at private sale or otherwise, at market prices
prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The Selling
Stockholders and any agents, broker-dealers or underwriters who
participate with the Selling Stockholders in the distribution of
the Shares may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933, as amended (the "Securities Act"),
and any commission received by them and any profit on the resale
of the Common Stock or Warrants purchased by them may be deemed
to be underwriting discounts or commissions under the Securities
Act. See "PLAN OF DISTRIBUTION."
The Company will not receive any proceeds from the sale of
the Shares or Warrants offered hereby. The Company will receive
proceeds of $1,822,000 upon the exercise of all the warrants and
options of which the underlying shares of Common Stock are
included herein. The Company has agreed to bear all expenses of
registration of the Shares and Warrants, excluding the selling
and brokerage expenses of the Selling Stockholders.
The Company's Common Stock is traded on the over-the-counter
market on the OTC Electronic Bulletin Board under the symbol
AMER. On September 3, 1998, the closing bid and asked prices
were $3.187 and $3.312 per share of Common Stock. There is no
market for the Warrants and it is not anticipated that any public
market will develop for the Warrants. See "MARKET PRICE
INFORMATION."
--------------------
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 9 THROUGH 15 HEREOF.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is September . , 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports and other
information with the Securities and Exchange Commission (the
"SEC"). Such reports and other information can be inspected and
copied at the Public Reference Section of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; or at its
offices at Northwest Atrium Center, 500 West Madison Street, 14th
Floor, Chicago, IL 60661; or Seven World Trade Center, 13th
Floor, New York, NY 10048. Copies of this material can also be
obtained at prescribed rates by writing to the Public Reference
Section of the SEC at its principal office at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. The SEC
maintains a Web site (http://www.sec.gov) that contains reports,
proxy statements and other information regarding registrants that
file electronically with the SEC, including the Company. The
Common Stock of the Company is quoted on the OTC Electronic
Bulletin Board.
This Prospectus constitutes a part of a Registration
Statement on Form SB-2 (together with all amendments and exhibits
thereto, the "Registration Statement") filed by the Company with
the SEC under the Securities Act. This Prospectus omits certain
information contained in the Registration Statement, and
reference is hereby made to the Registration Statement and to the
exhibits relating thereto for further information with respect to
the Company and the Shares and Warrants offered hereby.
-2-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by
reference to the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in
this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Investors should carefully consider
the information set forth in "Risk Factors." Certain of the
information contained in this summary and elsewhere in this
Prospectus, including information with regard to the Company's
strategy for expanding operations and market share and related
financing requirements are forward looking statements. For a
discussion of important factors that could affect such matters,
see "Risk Factors."
In November 1996, the Company effected a one-for-five
reverse split of its Common Stock. All share and per share
information in this Prospectus is on a post-split basis.
THE COMPANY
The Company is principally engaged in the manufacture and
sale of medical equipment. The focus of the Company's business
has shifted in the past year with the two acquisitions described
below. Today, the largest segment of the business is the
marketing of intraoral dental camera systems and related dental
equipment. The Company's intraoral camera systems display close-
up high quality color video or digital images of dental patients'
teeth and gums. These images help dentists and other dental care
workers in displaying dental health and hygiene problems. Using
these systems, treatment plans, discussions and on-going patient
information are enhanced so patients can better see, understand
and accept treatment recommendations. The Company also
manufactures and sells the Tympanometer(R), 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
addition, the Company is in the process of developing a needle-
free drug injection system which it expects to begin marketing by
the end of calendar 1998.
The Company was incorporated under the laws of the State of
Delaware on January 28, 1977. The Company's executive offices
are located at 13 Columbia Drive, Suite 5, Amherst, New Hampshire
03031, and its telephone number is (603) 880-6300.
RECENT DEVELOPMENTS
-------------------
ACQUISITIONS
Acquisition of Rosch GmbH Medizintechnik and interest in
--------------------------------------------------------
Meditronic Medizinelektronik GmbH. On January 11, 1996, the
---------------------------------
Company acquired a 50% 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 products in Europe. Substantially all of the
Company's foreign and export sales are conducted through Rosch
GmbH.
On December 18, 1997, the Company closed on the purchase of
the remaining 50% of the outstanding capital stock of Rosch GmbH
paying $50,000 plus 105,000 shares of Common Stock, pursuant to a
Stock Purchase Option Agreement, dated November 1, 1997. On that
day the Company simultaneously acquired 45% of the outstanding
shares of a second German company, Meditronic Medizinelektronik
GmbH ("Meditronic GmbH"), for $150,000 plus 105,000 shares of the
Company's Common Stock, pursuant to a Stock Purchase Option
Agreement, dated November 1, 1997. Meditronic GmbH is a
development and manufacturing company, specializing in the
manufacture of medical camera systems. Substantially all of
Meditronic GmbH's sales are to Rosch GmbH.
Acquisition of Dynamic Dental Systems, Inc. On May 5, 1998,
-------------------------------------------
the Company acquired Dynamic Dental Systems, Inc., a Delaware
corporation ("DDS"), in exchange for 750,000 shares of the
Company's Common Stock and $225,000, pursuant to an Agreement and
Plan of Merger, dated as of April 30, 1998, by and among the
Company, DDS Acquisition Corporation, a Delaware corporation and
wholly-owned subsidiary of the Company, DDS, and the sole
stockholders of DDS (the "DDS Merger"). DDS is based in
Gainesville, Georgia and is a distributor of digital operator
hardware, cosmetic imaging software, intraoral dental camera
systems and digital x-ray equipment.
Acquisition of Equidyne Systems, Inc. On May 12, 1998, the
-------------------------------------
Company acquired Equidyne Systems, Inc., a California corporation
("ESI"), in exchange for 600,000 shares of the Company's Common
Stock, pursuant to an Agreement and Plan of Merger, dated as of
March 27, 1998, among the Company, ESI Acquisition Corporation, a
-3-
<PAGE>
California corporation and a wholly-owned subsidiary of the
Company, and ESI (the "ESI Merger"). ESI is based in San Diego,
California. It is engaged in the development of the INJEX(TM)
needle-free drug injection system, which is designed to eliminate
the risks of contaminated needle stick accidents and the
resulting cross contamination of hepatitis, HIV and other
diseases. ESI holds two U.S. patents for its features of the
injection system and has received U.S. Food and Drug
Administration ("FDA") 510(k) clearance to market the system in
the United States. ESI anticipates commencing the marketing of
the system in late calendar 1998. Initially, ESI plans to market
and distribute its products through licensing and joint
development agreements with drug companies and manufacturers of
injectable pharmaceuticals in the United States.
These acquisitions are part of management's strategic plan
to expand the scope of the medical products to be offered by the
Company. 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. There is no
assurance that management will find suitable acquisitions
candidates or effect the necessary financial arrangements for
such acquisitions or that such acquisitions will be successful.
OTHER RECENT DEVELOPMENTS
The Viola(TM) Intraoral Camera System. In 1997, the Company
-------------------------------------
was granted the exclusive right to market and sell the Viola(TM)
intraoral camera system in North America, South America and
Australia. The Viola(TM) intraoral camera is manufactured by
Meditronic GmbH in Germany.
In 1997, Rosch GmbH began selling and distributing the
Viola(TM) intraoral camera in markets outside North America,
South America and Australia. In September 1997, the Company
received U.S. FDA clearance to sell this system, and in November
1997, the Company began a marketing program to introduce the
system in the United States. To date, United States marketing
efforts have proven unsuccessful and the Company has largely
discontinued its United States distribution of the Viola(TM)
system in favor of the camera systems that DDS had previously
been marketing in the United States.
Conversion of Debentures. As of November 3, 1997, the
------------------------
Company issued an aggregate of 720,000 shares of its Common Stock
upon the conversion of $720,000 principal amount of its 14%
Convertible Subordinated Debentures due October 31, 1999 (the
"Debentures"). This represented the entire issue of Debentures.
The Company had reduced the conversion price of the Debentures to
$1.00 per share from $3.75 per share, effective October 17, 1997
through October 27, 1997, in connection with October 1997
amendments to arrangements with its primary bank, Citizens Bank
New Hampshire ("Citizens Bank"), pursuant to a Forbearance and
Workout Agreement and its efforts to obtain additional equity
capital.
Private Placement of Common Stock. As of November 26, 1997,
---------------------------------
the Company closed a private placement (the "Common Stock Private
Placement") of 1,050,000 shares of Common Stock, at a price of
$1.00 per share, or an aggregate purchase price of $1,050,000 to
a group of "accredited investors," as such term is defined in
Regulation D under the Securities Act. The Company used $375,000
of the placement proceeds to repay portions of its indebtedness
to Citizens Bank, and used the balance of the proceeds for
working capital, including increasing its ownership interest in
Rosch GmbH.
Private Placement of Preferred Stock. On May 5, 1998, the
------------------------------------
Company closed the placement of 1,000 shares of the Series A
Preferred Stock to one purchaser (the "Purchaser") at a purchase
price of $1,000 per share or an aggregate purchase price of $1
million, pursuant to a Securities Purchase Agreement, dated as of
May 5, 1998 (the "Purchase Agreement"), among the Company, West
End Capital LLC ("West End") and the Purchaser. The Purchase
Agreement also provided that the Purchaser would purchase a
second tranche of 1,000 shares of Series A Preferred Stock for $1
million upon the Company acquiring DDS on or prior to May 15,
1998, and a third tranche of 1,000 shares of Series A Preferred
Stock for $1 million upon the Company acquiring ESI on or prior
to May 25, 1998. As part of its entry into the Purchase
Agreement, the Company entered into a Registration Rights
Agreement (the "Registration Agreement") and a Warrant Agreement.
Concurrently with the closing for the first tranche of Series A
Preferred Stock, the Company issued to West End the 50,000
Warrants being registered hereby. The Company also granted
options for the purchase of 30,000 shares of Common Stock to a
finder, exercisable at $4.40 per share for three years.
The Registration Agreement requires the Company to file a
registration statement (the "Registration Statement") under the
Securities Act for the Warrants and shares of Common Stock
underlying the Series A Preferred Stock and the Warrants.
-4-
<PAGE>
On May 8, 1998, following the DDS Merger, the Company closed
the second tranche of the Series A Preferred Stock. On May 13,
following the ESI Merger, the Company closed the third tranche of
the Series A Preferred Stock. The three placements of Series A
Preferred Stock with the Purchaser and the sale of the Warrants
to West End are collectively referred to herein as the "Preferred
Stock Private Placement." The net proceeds from the sale of the
3,000 shares of Series A Preferred Stock was $2,665,000 (after
placement fees and other related costs), of which $225,000 was
used as the cash portion of the purchase price for the DDS
Merger, $600,000 was used to repay the outstanding indebtedness
to Citizens Bank, and the balance will be used for possible
future acquisitions and working capital.
The Series A Preferred Stock is immediately convertible into
shares of Common Stock at a conversion rate equal to $1,000
divided by the lower of (i) $4.00 or (ii) 75% of the average
closing bid price for the Common Stock for the five trading days
immediately preceding the conversion date. The Company may force
conversion of all (and not less than all) of the outstanding
shares of Series A Preferred Stock at any time after the first
anniversary of the effective date of the Registration Statement
of which this Prospectus is a part. There is no minimum
conversion price. Should the bid price of the Common Stock fall
substantially prior to conversion, the holders of the Series A
Preferred Stock could obtain a significant portion of the Common
Stock upon conversion, to the detriment of the then holders of
the Common Stock.
The Series A Preferred Stock has a liquidation preference of
$1,000 per share, plus any accrued and unpaid dividends. The
Company was to pay an annual dividend equal to 5% of the
liquidation preference, which may be paid at the election of the
Company in cash or shares of its Common Stock. The dividend rate
was increased to 12% on June 5, 1998 due to the Company's failure
to file the Registration Statement covering the Common Stock
underlying the Series A Preferred Stock within 30 days of the
initial closing. If the Registration Statement is not declared
effective within 120 days of the initial closing such rate will
increase to 18% until the effective date of the Registration
Statement.
The Company may redeem up to $1 million face amount of
Series A Preferred Stock at a redemption price equal to 120% of
the liquidation preference if the closing bid price of the
Company's Common Stock is below $2.75 per share for five
consecutive trading days.
The Company may redeem an additional $1 million face amount
of Series A Preferred Stock at a redemption price equal to 120%
of the liquidation preferences if the closing bid price of the
Company's Common Stock is below $2.50 per share for five
consecutive dates.
Retention of Liviakis Financial Communications, Inc. as
-------------------------------------------------------
Financial Consultant. Effective as of March 15, 1998, the
--------------------
Company retained Liviakis Financial Communications, Inc. ("LFC")
as a financial consultant for a term of one year for a fee of
1,000,000 shares of the Company's Common Stock, valued at $1.00
per share, the fair market value, and warrants for an additional
1,000,000 shares of Common Stock exercisable at $1.00 per share
for four years. LFC would receive a finder's fee equal to 2.5%
of the gross funding of any debt or equity placement and 2% of
the gross consideration on any acquisition for which LFC acts as
a finder for the Company.
THE OFFERING
SECURITIES OFFERED . . . . An aggregate of 7,099,134 shares
of Common Stock and 50,000
Warrants may be offered from
time to time by the Selling
Stockholders. See "SELLING
STOCKHOLDERS."
COMMON STOCK OUTSTANDING . 7,038,136 shares as of July 31,
1998.
RISK FACTORS . . . . . . . An investment in the Common
Stock and Warrants involves a
high degree of risk, including
recent financial losses, a
highly competitive industry,
regulatory compliance, changing
healthcare policies both
domestically and abroad, and
technological changes. See
"RISK FACTORS"
USE OF PROCEEDS . . . . . . None of the proceeds of the sale
of the Common Stock or Warrants
registered hereunder will accrue
-5-
<PAGE>
to the Company. The Company
will receive gross proceeds of
$1,822,000 if all of the
warrants and options of which
the underlying shares of Common
Stock are included herein are
exercised which the Company
would use for general corporate
purposes. See "USE OF
PROCEEDS."
OTC ELECTRONIC BULLETIN BOARD
SYMBOL . . . . . . . . . "AMER"
RISK FACTORS
See "RISK FACTORS" for a discussion of certain factors that
should be considered in evaluating an investment in the Common
Stock.
-6-
<PAGE>
SUMMARY FINANCIAL AND OPERATING INFORMATION
The summary financial information set forth below is derived
from and should be read in conjunction with the financial
statements, including the notes thereto, appearing elsewhere in
this Prospectus. All numbers are in thousands, except for share
and per share amounts.
Year Ended
-----------------------------------------
Summary of Operations 7/31/97 7/27/96 7/29/95
------- ------- -------
Net sales . . . . . . $2,309 $3,337 $2,443
Income (loss) before
provision for
income taxes
and extraordinary
items . . . . . . . (926) 467 184
Net income (loss) . . (926) 442 172
Earnings (loss)
per common share:
Basic . . . . . (.37) .18 .08
Diluted . . . . (.37) .18 .08
Weighted average
common shares . . . 2,510,296 2,493,854 2,238,483
Year Ended
---------------------------
Summary of Operations 7/30/94 7/31/93
------- -------
Net sales . . . . . . $1,965 $2,358
Income (loss) before
provision for
income taxes
and extraordinary
items . . . . . . . 61 203
Net income (loss) . . 57 399
Earnings (loss)
per common share:
Basic . . . . . .03 .25
Diluted . . . . .03 .25
Weighted average 1,833,666 1,594,651
common shares . . .
Nine Months
Ended
--------------------------
4/30/98 4/26/97
Summary of Operations ------------- ------------
Net sales . . . . . . . . . . . . . . $5,095 $1,486
Loss before provision for income
taxes and extraordinary items . . (745) (926)
Loss . . . . . . . . . . . . . . . . (747) (926)
Loss per common share:
Basic . . . . . . . . . . . . . . . (.19) (.37)
Diluted . . . . . . . . . . . . . . (.19) (.37)
Weighted average common shares . . . 4,002,804 2,495,232
AS OF AS OF AS OF AS OF AS OF
FINANCIAL POSITION 4/30/98 7/31/97 7/27/96 7/29/95 7/30/94
------- ------- ------- ------- -------
Total assets . . . . $6,363 $3,060 $2,771 $1,513 $899
Working capital . . . 2,916 1,060 906 915 485
Long-term debt . . . 1,118 1,100 94 0 4
Stockholders' equity 3,401 1,168 1,948 1,196 771
-7-
<PAGE>
RISK FACTORS
An investment in the Common Stock and Warrants involves a
high degree of risk and, therefore, should be considered
extremely speculative. They should not be purchased by persons
who cannot afford the possibility of the loss of their entire
investment. Prospective investors should consider carefully
among other risk factors, the risk factors and other special
considerations relating to the Company and this offering set
forth below. The discussion in this Prospectus contains, in
addition to historical information, certain forward-looking
statements that involve risks and uncertainties, such as
statements of the Company's plans, beliefs, expectations and
intentions. The Company's actual results could differ materially
from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences
include the following risk factors, as well as factors discussed
elsewhere in this Prospectus. The cautionary statements made in
this Prospectus should be read as being applicable to all related
forward-looking statements wherever they appear in this
Prospectus.
FINANCIAL RISKS
Recent Losses. The Company had a net loss of $926,000, or
-------------
$.37 per share, for the fiscal year ended July 31, 1997 compared
to a net income of $442,000, or $.18 per share, for the
comparable period in fiscal 1996. The Company had a net loss for
the nine months period ended April 30, 1998 of $747,000, or $.19
per share, compared to a net loss of $926,000, or $.37 per share,
for the same period in the prior year. The loss in fiscal 1997
was attributable primarily to decreases in sales from Germany,
initially because of regulatory delays, which became less of a
factor in the second quarter of 1997, and subsequently because of
changes in the reimbursement policy for the Company's products in
Germany. The net loss in the first nine months of fiscal year
1998 was attributable to a transition in the third quarter from
utilizing a major distributor for the sales of its dental cameras
in Europe to direct sales, to lower gross margins on the sales of
the cameras compared to gross margins on the sale of other
products, and to higher interest costs. The increase in sales in
the first nine months of fiscal 1998 was attributable to
accounting for sales of Rosch GmbH on a consolidated basis as
well as sales of new intraoral dental camera systems. There can
be no assurance that the Company will realize increased sales of
the camera systems through selling on a direct basis or will be
able to increase the gross margins, or will be successful in
marketing ESI's INJEX(TM) needle-free drug injection system.
BUSINESS AND REGULATORY RISKS
Expansion Through Undetermined Acquisitions. The Company
-------------------------------------------
intends to expand its product lines and domestic and
international markets, in part, through acquisitions. The
Company's ability to expand successfully through acquisitions
will depend upon the availability of suitable acquisition
candidates at prices acceptable to the Company, the Company's
ability to consummate such transactions and the availability of
equity and/or debt financing on terms acceptable to the Company,
which could be dilutive to stockholders. There can be no
assurance that the Company will be successful in completing
acquisitions. Such transactions involve numerous risks, including
possible adverse short-term effects on the Company's operating
results or the market price of the Common Stock. These
acquisitions may not be subject to approval or review by the
Company's stockholders. Certain of the Company's future
acquisitions may also give rise to an obligation by the Company
to make contingent payments or to satisfy certain repurchase
obligations, which payments could have an adverse financial
effect on the Company. In addition, integrating acquired
businesses may result in a loss of customers or product lines of
the acquired businesses and also require significant management
attention and may place significant demands on the Company's
operations, information systems and financial resources. The
failure effectively to integrate acquired businesses with the
Company's operations could adversely affect the Company. In
addition, the Company competes for acquisition opportunities with
companies which have significantly greater financial and
management resources than those of the Company. There can be no
assurance that suitable acquisition opportunities will be
identified, that any such transactions can be consummated, or
that, if acquired, such new businesses can be integrated
successfully and profitably into the Company's operations.
Moreover, there can be no assurance that the Company will
continue to successfully expand, or that growth or expansion will
result in profitability.
-8-
<PAGE>
Government Regulations. Government regulation in the United
----------------------
States and certain foreign countries is a significant factor in
the Company's business. In the United States, the Company's
products and its manufacturing practices are subject to
regulation by the FDA pursuant to the Federal Food, Drug and
Cosmetic Act ("FDC Act"), and by other state regulatory agencies.
Under the FDC Act, medical devices, including those under
development by the Company, such as its needle-free injection
system, must receive FDA clearance before they may be sold, or be
exempted from the need to obtain such clearance or approval. The
FDA regulatory process may delay the marketing of new systems or
devices for significant periods of time and impose substantial
additional costs. Moreover, FDA marketing clearance regulations
depend heavily on administrative interpretation, and there can be
no assurance that interpretations made by the FDA or other
regulatory bodies, with possible retroactive effect, will not
adversely affect the Company. There can be no assurance that the
Company will be able to obtain clearance of any future Company
products or any expanded uses of current or future Company
products in a timely manner or at all. In addition, even if
obtained, FDA clearances are subject to ongoing review, and if
the FDA believes the Company is not in compliance with applicable
requirements, it can institute proceedings to detain or seize the
Company's products, require a recall, suspend production,
distribution, marketing and sales, enjoin future violations and
assess civil and criminal penalties against the Company, its
directors, officers or employees. The FDA may also suspend or
withdraw market approval for the Company's products or require
the Company to repair, replace or refund the cost of any product
manufactured or distributed by the Company.
FDA regulations also require the Company to adhere to
certain "Good Manufacturing Practices" ("GMP") regulations, which
include validation testing, quality control and documentation
procedures. The Company's compliance with applicable regulatory
requirements is subject to periodic inspections by the FDA. The
Company will need 510(k) approval for any new medical products
which it develops. Compliance with these requirements requires
the Company to expend time, resources and effort in the areas of
production and quality control for itself and for its contract
manufacturers. Moreover, there can be no assurance that required
regulatory clearances will be obtained, and those obtained may
include significant limitations on the uses of the product in
question. In addition, changes in existing regulations or the
adoption of new regulations could make regulatory compliance by
the Company more difficult in the future.
Although the Company believes that its products and
procedures are in material compliance with all relevant FDA
requirements, the failure to obtain the required regulatory
clearances or to comply with applicable regulations would have a
material adverse effect on the Company.
Sales of medical devices outside the United States that are
manufactured within the United States are subject to United
States export requirements, and all medical devices sold abroad
are subject to applicable foreign regulatory requirements. Legal
restrictions on the sale of imported medical devices vary from
country to country. The requirements for obtaining approval by
foreign countries may differ substantially from those required
for FDA approval. There can be no assurance that the Company
will be able to obtain regulatory approvals or clearances for its
products in foreign countries.
Competition; Risk of Technological Obsolescence. The
-----------------------------------------------
manufacture and distribution of medical and dental devices is
intensely competitive. The Company competes with numerous other
companies, including several major manufacturers and
distributors. With respect to the intraoral camera market, the
Company has at least five major competitors in the video market.
The digital equipment market is less mature, but the Company
anticipates growing competition in this market as well. 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 Company's current competition for injection systems is
primarily from traditional hypodermic needles and syringes which
are used for the vast majority of injections administered today.
In order to make needles and syringes easier and safer to use,
certain companies have developed syringes with hidden needles,
spring-powered needle injectors and injectors with sheathed
needles, sometimes referred to as safety syringes. In addition
to competing with these types of traditional hypodermic needles
and syringes, the Company's needle-free injection systems also
-9-
<PAGE>
compete with other needle-free injection devices. Currently,
competition in the needle-free injection market is generally
limited to other small companies with modest financial and other
resources, but the barriers to entry are currently low and
additional competitors may enter the needle-free injection
systems market, including companies with substantially greater
resources and experience than the Company. Further, as discussed
herein, the Company's major competitor in the needle-free
injection business formed a joint venture with the largest
producer of needles and syringes for purposes of manufacturing a
new design of disposable needle-free system. See "BUSINESS --
Needle-Free Drug Delivery System." There can be no assurance
that the Company will be able to compete effectively against
current or future competitors in the needle-free injection
market. Competition in this market could also force the Company
to reduce the prices of its systems below currently planned
levels, thereby adversely affecting the Company's revenues and
future profitability.
Injection is generally used only with drugs for which other
drug delivery methods are not possible, in particular with
biopharmaceutical proteins (drugs derived from living organisms,
such as insulin and human growth hormone) that cannot currently
be delivered orally, transdermally (through the skin) or
pulmonarily (through the lungs). Many companies, both large and
small are engaged in research and development efforts on novel
techniques aimed at delivering such drugs without injection. For
example, Pfizer, Inc. recently announced successful human trials
of a device to inhale insulin and is competing with several other
large companies to develop such a device. The successful
development and commercial introduction of such a non-injection
technique would likely have a material adverse effect on the
Company's business, financial condition, results of operations
and general prospects.
Most of the Company's competitors in all segments of its
business have greater financial and other resources than the
Company. Consequently, such entities may begin to develop,
manufacture, market and distribute medical devices which are
substantially similar or superior to the Company's products.
Dependence on Proprietary Technology Rights and Lack of
-------------------------------------------------------
Patent Protection. The Company's success will depend in part on
-----------------
its ability to protect proprietary rights and to operate without
infringing on the proprietary right of third parties. The
Company holds no patents, except for those held in connection
with its needle-free injection system for which it holds two
United States patents and has applied for nine foreign patents.
In appropriate circumstances, the Company may in the future apply
for patent protection for uses, processes, products and systems
that it develops. There can be no assurance that any of the
Company's current or future patent applications will result in
issued patents, that the scope of any current or future patents
will prevent competitors from introducing competitive products or
that any of the Company's current or future patents would be held
valid or enforceable if challenged. Patenting medical devices
involves complex legal and factual questions and there is no
consistent policy regarding the breadth of claims pertaining to
such technologies; the ultimate scope and validity of patents
issued to the Company or to its competitors are thus unknown.
Further, although the Company is unaware of any infringement by
its products, no infringement studies have been conducted. In
addition, there can be no assurance that measures taken by the
Company to protect its unpatented proprietary rights will be
sufficient to protect these rights against third parties.
Likewise, there can be no assurance that others will not
independently develop or otherwise acquire unpatented
technologies or products similar or superior to those of the
Company.
There has been substantial litigation regarding patent and
other intellectual property rights in the medical device
industry, and the Company may in the future be required to defend
its intellectual property rights against infringement,
duplication and discovery by third parties or to defend itself
against third-party claims of infringement. Likewise, disputes
may arise in the future with respect to ownership of technology
developed by consultants or under research or development
agreements with pharmaceutical companies, or with respect to the
ownership of technology developed by employees who were
previously employed by other companies. Any such disputes or
related litigation could result in substantial costs to, and a
diversion of effort by, the Company. An adverse determination
could subject the Company to significant liabilities to third
parties, require the Company to seek licenses from or pay
royalties to third parties or require the Company to develop
appropriate alternative technology. There can be no assurance
that any such licenses would be available on acceptable terms or
-10-
<PAGE>
at all, or that the Company could develop alternate technology at
an acceptable price or at all. Any of these events could have a
material adverse effect on the Company's business, financial
condition and results of operations.
Risks Associated with Third-Party Reimbursement of End
------------------------------------------------------
Users. Sales of the Company's current and proposed products in
-----
certain markets are dependent in part on the availability of
adequate reimbursement from third-party healthcare payors.
Currently, insurance companies and other third-party payors
reimburse the cost of dental x-ray equipment and [certain
audiometric testing], certain insurers reimburse the cost of some
dental camera work and the cost of needle-free injectors are
subject to reimbursement on a case-by-case basis. Such companies
may refuse reimbursement if they do not perceive benefits to the
use of the Company's equipment in a particular case. Third-party
payors are increasingly challenging the pricing of medical
products and services, and there can be no assurance that such
third-party payors will not in the future increasingly reject
claims for coverage. In addition, there can be no assurance that
adequate levels of reimbursement will be available to enable the
Company to achieve or maintain market acceptance of its products
or maintain price levels sufficient to realize profitable
operations. Furthermore, there is a possibility of increased
government control or influence over a broad range of healthcare
expenditures in the future. Any such trend could negatively
impact the market for the Company's products.
The Company is also subject to the reimbursement policies of
private and governmental healthcare payors in foreign countries
with respect to its international sales. In this regard, recent
changes in the reimbursement policy for the Company's audiometric
products in Germany have negatively impacted the Company's
earnings. See "RISK FACTORS -- Financial Risks."
New Products and Technological Change. The Company is in
-------------------------------------
the "high tech" end of the health care industry. This industry
has been historically marked by very rapid technological change
and frequent introductions of new products. Accordingly, the
Company's future growth and profitability depend in part on its
ability to continue to respond to technological changes and
successfully develop and market new products that achieve
significant market acceptance. There is no assurance that the
Company will be able to do so.
Products Liability Exposure. The malfunction or misuse of
---------------------------
the medical devices sold by the Company may result in potential
injury to physicians' patients, thereby subjecting the Company to
possible liability. Although the Company's insurance coverage is
$4,000,000 per occurrence and $5,000,000 in the aggregate with a
deductible of $5,000, which amounts and deductibles are customary
in the industry, there can be no assurance that such insurance
will be sufficient to cover any potential liability. Further, as
the result of either adverse claim experience or of medical
device or insurance industry trends, the Company may in the
future have difficulty in obtaining product liability insurance
or be forced to pay very high premiums, and there can be no
assurance that insurance coverage will continue to be available
on commercially reasonable terms or at all. In addition, there
can be no assurance that insurance will adequately cover any
product liability claim against the Company. A successful
product liability or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a
material adverse effect on the Company's business, financial
condition and operations.
Dependence on Key Personnel. The success of the Company is
---------------------------
highly dependent on its ability to attract and retain highly
qualified personnel, including Thomas A. Slamecka, Chairman of
the Board, and Michael T. Pieniazek, President, Chief Financial
Officer and Secretary, and the principal officers of the
operating subsidiaries. Competition for such personnel is
intense, and there can be no assurance that the Company will be
successful in attracting and retaining key personnel in the
future. Any failure to do so could adversely affect the Company.
The Company does not carry any "key-man" insurance on the life of
any officer of the Company.
ADDITIONAL BUSINESS RISK FACTORS RELATING
TO NEEDLE-FREE INJECTION BUSINESS
Uncertainty of Market Acceptance. The success of the
--------------------------------
Company's needle-free injector system will depend upon increasing
market acceptance of the system as an alternative to needle
injections. Needle-free injection systems of other companies
-11-
<PAGE>
have had only limited success competing with traditional needles
and syringes. The Company believes this largely because of the
size, cost and complexity of use of the systems that have been
previously marketed. The Company's improvements in the
functionality and design may not adequately address the actual or
perceived complexity of using needle-free injection systems or
adequately reduce the cost. There can be no assurance that the
Company will be successful in these efforts or that its needle-
free injection systems will ever gain sufficient market
acceptance to sustain profitable operations.
Dependence on Collaborative Relationships. The Company
-----------------------------------------
believes that the introduction and acceptance of its system
depends in part upon the success of its efforts at obtaining
licensing arrangements with pharmaceutical and medical device
companies covering the development, manufacture or use of the
system with specific parenteral drug therapies. The Company
anticipates that under these arrangements the pharmaceutical or
medical device company will assist in the development of systems
for such drug therapies and collect or sponsor the collection of
the appropriate data for submission for regulatory approval of
the use of the system with the licensed drug therapy. The
pharmaceutical or medical device company also will be responsible
for distribution and marketing of the systems for these drug
therapies either worldwide or in specific territories. There can
be no assurance that the Company will be successful in executing
agreements with pharmaceutical or medical device companies or
that such agreements if entered into will result in the sale of
the Company's needle-free injection systems. As a result of such
agreements, the Company would be dependent upon the development,
data collection and marketing efforts of such pharmaceutical and
medical device companies. The amount and timing of resources
such pharmaceutical and medical device companies would devote to
these efforts are not within the control of the Company, and such
pharmaceutical and medical device companies could make material
decisions regarding these efforts that could adversely impact the
introduction and level of sales of any drug covered by such
licensing arrangements, including competition within the
pharmaceutical and medical device industries, the timing of FDA
or other approvals and intellectual property litigation which
would negatively affect the Company's sales of its systems for
those uses.
Limited Manufacturing Experience. To date, the Company's
--------------------------------
manufacturing experience with its needle-free injection system
has involved only the assembly of products in limited quantities
for purposes of testing and demonstrations. The Company's
planned commercialization necessitates the development of a
manufacturing and assembly process capable of producing an
adequate number of systems and components to satisfy commercial
demand. These systems must be manufactured in compliance with
regulatory requirements, in a timely manner and in sufficient
quantities while maintaining quality and acceptable manufacturing
costs. In the course of developing its manufacturing and
production methods, the Company may encounter difficulties,
including problems involving yields, quality control and
assurance, product reliability, manufacturing costs, new
equipment, component supplies and shortages of personnel, any of
which could result in significant delays in production. There
can be no assurance that the Company will be able to produce and
manufacture successfully the Company's needle-free injection
systems.
Dependence on Third Party Suppliers for Production of
-----------------------------------------------------
Components. The Company has not yet chosen the companies that it
----------
will use as its suppliers for the component parts of its needle-
free injection system. Further, once it does, regulatory
requirements applicable to medical device manufacturing can make
substitution of suppliers costly and time-consuming. There can
be no assurance that the Company will come to agreement with
suppliers capable of delivering adequate quantities of components
within a reasonable period of time, on acceptable terms or at
all. The unavailability of adequate quantities, the inability to
develop alternative sources, a reduction or interruption in
supply or a significant increase in the price of components could
have a material adverse effect on the Company's ability to
manufacture and market its products.
MARKET RISKS
Securities Market Volatility. There have been periods of
----------------------------
extreme volatility in the stock markets, which in many cases were
unrelated to the operating performance of, or announcements
concerning, the issuers of the affected stock. The Company's
Common Stock is not actively traded, and the bid and asked prices
for its Common Stock have fluctuated significantly. In the past
two fiscal years, the Common Stock traded from a high of $5.16 to
-12-
<PAGE>
a low of $0.66, after giving effect to a one-for-five reverse
stock split in November 1996. See "MARKET PRICE INFORMATION."
General market price declines, market volatility, especially for
low priced securities, or factors related to the general economy
or the Company in the future could adversely affect the price of
the Common Stock.
All of the Shares and Warrants registered for sale on behalf
of the Selling Stockholders are "restricted securities" as that
term is defined in Rule 144 under the Securities Act. The
Company has filed the Registration Statement of which this
Prospectus is a part to register these restricted Shares and
Warrants for sale into the public market by the Selling
Stockholders, thereby creating a market overhang which could
depress the market price during the period the Registration
Statement remains effective and also could affect the Company's
ability to raise equity capital. Any outstanding Shares or
Warrants not sold by the Selling Stockholders pursuant to this
Prospectus will remain as "restricted shares" in the hands of the
holder.
Lack of Dividends. The Company has never declared any cash
-----------------
dividends on its Common Stock, and if the Company were to become
profitable, it would expect that all of such earnings would be
retained to support the business of the Company. Accordingly,
the Company does not anticipate paying cash dividends on its
Common Stock in the foreseeable future.
Shares Eligible for Future Sale. At July 31, 1998, the
-------------------------------
Company had an aggregate of 2,939,633 shares of Common Stock
reserved for the exercise of options and warrants. The Series A
Preferred Stock is convertible into shares of Common Stock at a
conversion rate equal to $1,000 per Series A share divided by the
lower of (i) $4.00 or (ii) 75% of the average closing bid price
for the Common Stock for the free trading days immediately
preceding the conversion date. Since there is no minimum
conversion price, a reduction on the bid price could require the
Company to issue a significant amount of Common Stock upon
conversion of the Series A Preferred Stock. The sale, or
availability for sale, of substantial amounts of Common Stock in
the public market could adversely affect the prevailing market
price of the Common Stock and could impair the Company's ability
to raise additional capital when needed through the sale of its
equity securities.
Risks Relating to Low-Priced Stock; Possible Effect of
------------------------------------------------------
"Penny Stock" Rules on Liquidity for the Company's Securities.
-------------------------------------------------------------
Depending upon the market price of the Company's Common Stock,
the Company's net tangible assets and revenues, the Common Stock
may become subject to Rule 15g-9 under the Exchange Act. This
Rule (the "Penny Stock Rule") imposes additional sales practice
requirements on broker-dealers that sell such securities to
persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of
$1,000,000 or annual incomes exceeding $200,000, or $300,000
together with their spouses). For transactions covered by
Rule 15g-9, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently,
such Rule may affect the ability of broker-dealers to sell the
Company's securities and may affect the ability of purchasers to
sell any of the Company's securities in the secondary market.
The SEC regulations define a "penny stock" to be any equity
security that has a market price (as therein defined) of less
than $5.00 per share or with an exercise price of less than $5.00
per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the SEC relating to the penny
stock market. Disclosure is also required to be made about sales
commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account
and information on the limited market in penny stock.
There can be no assurance that the Company's Common Stock
will qualify for exemption from the penny stock restrictions. In
any event, even if the Company's Common Stock were exempt from
such restrictions, the Company would remain subject to
Section 15(b)(6) of the Exchange Act, which gives the SEC the
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<PAGE>
authority to restrict any person from participating in a
distribution of penny stock, if the SEC finds that such a
restriction would be in the public interest.
If the Company's Common Stock were subject to the rules on
penny stocks, the market liquidity for the Company's Common Stock
could be materially adversely affected. Investors should check
the then current market prices before making an investment
decision with respect to the securities of the Company. The
current market price of the Common Stock reflects a one-for-five
reverse stock split of the Company's outstanding Common Stock,
effective November 8, 1996. See "MARKET PRICE INFORMATION."
Antitakeover Effect of Certain Charter Provisions. Certain
-------------------------------------------------
provisions of the Company's Certificate of Incorporation and of
Delaware law could discourage potential acquisition proposals and
could delay or prevent a change in control of the Company. Such
provisions could diminish the opportunities for a stockholder to
participate in tender offers, including tender offers at a price
above the then current market value of the Common Stock. Such
provisions may also inhibit fluctuations in the market price of
the Common Stock that could result from takeover attempts. The
Board of Directors, without further stockholder approval, may
issue preferred stock that could have the effect of delaying or
preventing a change in control of the Company. The issuance of
preferred stock could also adversely affect the voting power of
the holders of Common Stock, including the loss of voting control
to others.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the
sale of the Shares or Warrants by the Selling Stockholders. The
Company will receive gross proceeds of $1,822,000 if all the
warrants and options of which underlying shares of Common Stock
included herein are exercised. The Company will use such
proceeds for general working capital purposes, including possible
acquisitions.
The Company will bear the expenses of the registration of
the Shares and Warrants. The Company estimates that these
expenses will be approximately $70,000.
DIVIDEND POLICY
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. If the
Company were to become profitable in the future, it expects that
all earnings would be retained to support the business of the
Company.
MARKET FOR THE COMPANY'S
COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRINCIPAL MARKET AND MARKET PRICES
----------------------------------
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, 1998, and gives effect to a one-
for-five reverse stock split effective as of November 8, 1996.
These prices are based on quotations between dealers, and do not
reflect retail mark-up, mark-down or commissions, and may not
necessarily represent actual transactions.
<?R>
-14-
<PAGE>
Fiscal Year Ending Fiscal Year Ended
Fiscal Period 7/31/98 7/31/97
------------- ------------------ -----------------
High Low High Low
---- --- ---- ---
First Quarter . . $1.88 $1.00 $5.16 $3.13
Second Quarter . 1.50 .66 4.38 1.88
Third Quarter . . 4.94 .88 3.75 1.38
Fourth Quarter . 4.81 3.19 1.63 .84
APPROXIMATE NUMBER OF HOLDERS OF COMPANY'S COMMON STOCK
-------------------------------------------------------
As of July 31, 1998, there were approximately 212
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion in this Prospectus contains, in addition to
historical information, certain forward-looking statements that
involve risks and uncertainties, such as statements of the
Company's plans, beliefs, expectations and intentions. The
Company's actual results could differ materially from the results
discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include the those
discussed under Risk Factors, as well as factors discussed
elsewhere in this Prospectus. The cautionary statements made in
this Prospectus should be read as being applicable to all related
forward-looking statements wherever they appear in this
Prospectus.
COMPARISON OF NINE MONTH PERIODS ENDED
APRIL 30, 1998 AND APRIL 26, 1997
Net sales for the nine month period ended April 30, 1998
were $5,095,000 compared to $1,486,000 for the nine month period
ended April 26, 1997. The increase in sales in fiscal 1998 was
attributable to accounting for sales of Rosch GmbH on a
consolidated basis as well as sales of the new intraoral dental
camera system. Sales of the dental camera system commenced in
the second quarter of fiscal 1997. During the third quarter of
fiscal 1998, Rosch GmbH began a transition from utilizing a major
distributor for the sale of its dental cameras in Europe to
direct sales. Management believes that selling the cameras on a
direct basis should result in increased sales and profits
commencing in early fiscal 1999. This transitioning though
resulted in decreased sales in the third quarter of fiscal 1998
when compared with sales for the second quarter of fiscal 1998.
Cost of sales for the nine month period ended April 30, 1998
was 58.5% compared to 56.6% of net sales during the same period
in the prior year. The increase in cost as a percentage of sales
can be attributed to the product mix which included sales of
Rosch GmbH on a consolidated basis. As the Company's sales mix
becomes more significantly related to dental camera products, and
as costs of sales for dental camera products is greater than for
other product lines, as expected, costs of sales as a percentage
increased.
Selling, general and administrative ("SGA") expenses for the
nine month period ended April 30, 1998 were $2,637,000 compared
to $1,100,000 for the comparable prior year period. The increase
reflects increased corporate activity, as well as accounting for
the selling, general and administrative expenses of Rosch GmbH on
a consolidated basis. The Company expects that the higher level
of marketing and selling expenses will continue for the balance
-15-
<PAGE>
of fiscal 1998, when compared to the prior year, as the Company
seeks to promote its new dental camera product line. The
increased corporate activity relates to management time and
related expenses in connection with preliminary acquisition
discussions conducted during the third quarter of fiscal 1998.
These discussions resulted in the two acquisitions closed early
in the fourth quarter of fiscal 1998. The Company expects to
continue incurring expenses related to acquisition discussions as
its current strategy is to grow through acquisitions.
Additionally, as a result of the Company's entering into a
consulting agreement with LFC, the Company will incur additional
SGA expense related to the ratable amortization of the fair value
of the services performed at a rate of $250,000 per quarter over
a one-year period ending March 15, 1999.
Net loss for the nine month period ended April 30, 1998 was
$747,000, or $.19 per share, compared to a net loss of $926,000,
or $.37 per share, for the same period in the prior fiscal year.
The increase in net loss is the result of decreased sales, as
described above, and the per share amounts were also affected by
increases during fiscal 1998 in the number of outstanding shares
upon which such calculation was based.
COMPARISON OF FISCAL YEARS ENDED
JULY 31, 1997 AND JULY 27, 1996
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.
SG&A expenses increased and research and development (R&D)
expense decreased in Fiscal 1997 over Fiscal 1996. The Company
attributes the $580,000 increase in SG&A expenses to increased
marketing and promotional activity, together with other costs
associated with the write-off of $100,000 of purchased technology
from BioFlo Systems and $125,000 associated with the legal
proceeding involving the former president of the Company.
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(TM) 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
-16-
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introduction period and should become more variable over time.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital of the Company at April 30, 1998 was
$2,916,000, compared to $1,060,000 at fiscal year ended July 31,
1997. The $1,856,000 increase in working capital primarily
reflects the accounting for Rosch GmbH on a consolidated basis.
As mentioned in Note 3 of the Notes to the Unaudited Condensed
Financial Statements in this Prospectus, the Company applied
$150,000 to repay portions of its bank indebtedness and $200,000
as the cash portion of the purchase price of its acquisition of
Rosch GmbH and investment in Meditronic GmbH. Further, the
November 1997 conversion of the Debentures should reduce the
annual interest expense going forward by approximately $100,000 a
year. The principal components of the increase in working
capital were inventory and accounts receivable as the result of
accounting for Rosch GmbH on a consolidated basis.
Subsequent to April 30, 1998, the Company received
$2,665,000 in net proceeds from the placement of the Series A
Preferred Stock. It used $225,000 of such proceeds for the cash
portion of the DDS Merger and $600,000 to repay the outstanding
indebtedness to Citizens Bank.
The Company expects that available cash should be sufficient
to meet its normal operating requirements, including research and
development expenditures, for the next 12 months, subject to
needs of further cash for possible future acquisitions. The
Company would seek additional capital through equity and/or debt
placements or secured financings; however, no assurance can be
given that such financing arrangements would be successfully
completed and, if so, on terms not dilutive to existing
stockholders.
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 existing lines of business. There is no assurance
that management will find suitable acquisition candidates or
effect the necessary financial arrangements for such
acquisitions. In May 1998, the Company acquired DDS and ESI.
The Company, through DDS, is marketing intraoral dental cameras
in the United States and expects to commence marketing the ESI
INJEX(TM) needle-free injection system at the end of calendar
1998. It anticipates spending approximately $1 million for
developing, manufacturing capabilities and marketing of this
injection system.
YEAR 2000
The Company has completed an assessment of Year 2000 issues
with respect to its computer systems. The Company believes that
the Year 2000 issue will not pose significant operational
problems for its computer systems in that all required
modifications and conversions to comply with Year 2000
requirements should be fully completed by the third quarter of
1999. In the opinion of management, the total cost of addressing
the Year 2000 issue will not have a material impact on the
Company's financial position or results of operations.
BUSINESS
The Company is engaged in developing, manufacturing and
selling the following three categories of healthcare products:
(i) intraoral dental cameras and related products, (ii)
diagnostic audiometric medical devices and (iii) needle-free drug
delivery systems.
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INTRAORAL DENTAL CAMERAS AND
----------------------------
RELATED PRODUCTS
----------------
The largest segment of the Company's business today is the
sale of intraoral dental camera systems and related dental
products. Intraoral cameras display close-up high quality color
video or digital images of dental patients' teeth and gums.
These images help dentists and other dental care workers in
displaying dental health and hygiene problems. Using these
systems, treatment plans, discussions and on-going patient
information are enhanced so patients can better see, understand
and accept treatment recommendations. Through DDS and Rosch GmbH,
the Company markets two kinds of camera systems, the ViperCam(TM)
and the Viola(TM).
In 1997, the Company began selling and distributing the
Viola(TM) camera system, manufactured in Germany by Meditronic
GmbH, in markets outside North America, South America and
Australia. In September 1997, the Company received FDA clearance
to sell this system. In November 1997, the Company began a
marketing program to introduce the system in the United States.
Due to differences in the U.S. and German markets, the Company
has had only limited success in marketing the Viola(TM) in the
U.S. In particular, unlike the German and other European
markets, where the majority of dental offices contain a single or
small number of operatories (rooms where patients receive dental
care), the majority of U.S. dental offices contain multiple
operatories. The Viola(TM) intraoral camera system, as currently
designed, is generally not as cost effective for offices
containing multiple operatories as systems designed for such uses
such as the ViperCam(TM). The Company has now significantly
reduced its marketing of the Viola(TM) in the U.S. in favor of
the ViperCam(TM).
In the United States, the Company focuses its efforts on
selling intraoral cameras as part of a complete digital operatory
system, including cameras, dental and cosmetic imaging software,
and related hardware and equipment. The Company also offers
digital x-ray equipment that can be combined with its camera
system.
Digital operatory hardware and software allow the dentist
and his/her assistants to capture and store the pictures taken by
the intraoral camera on their computer system. Once digitized,
these images are stored in a database for that specific patient
and can be recalled for viewing and comparison. The basic system
allows dentists to store over 45,000 individual images on their
system as compared to four images on most intraoral camera
systems. The dentist can enhance the picture, giving the
patients a better view of their teeth and helps the patient
accept the recommended treatment plan. Images can also be
transferred to other dentists via the video conferencing module
or on the Internet. The system also integrates with most
practice management software packages, allowing the dentist to
save time by not having to reenter the patient's name in each
program.
Cosmetic imaging software takes a digitized image of a
patients smile and gives the dentist the ability to make changes
to the smile. This allows the patient to see what their smile
would look like if they accept the treatment proposed by the
dentist. Cosmetic dentistry is the fastest growing part of a
dental practice, and is also the most profitable to the dentist.
Cosmetic imaging software allows the dentist to enhance this part
of their practice and attract new patients.
Digital x-ray is a new method of obtaining traditional
dental x-rays. Instead of x-ray film being placed in the
patient's mouth, exposed to radiation, then developed in a
solution in a dark room, this system does it digitally. A small
computer sensor, the size of the film, is placed in the mouth and
exposed, using a 90% reduction in radiation. The image is
instantly displayed on a computer screen and sent via computer
into a data base containing the patient's file. The x-ray image
can be enhanced and enlarged and measurements taken giving both
the dentist and the patient more information. As with the other
software sold by the Company, the image can be viewed and sent
via video conferencing or on the Internet.
Through DDS, the Company acquired a non-exclusive
distribution agreement with Integra Medical to distribute Integra
Medical's intraoral camera model # IMI-AC4 and certain related
ViperSoft software packages throughout the United States.
Through DDS, the Company also possesses a distribution agreement
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<PAGE>
with the Sony Business and Professional Group, a division of Sony
Electronic, Inc., for the distribution of printers, monitors and
digital cameras. The Company also purchases and distribute
various other products relating to digital operatory system
without formal distribution agreements. These include computers,
computer accessories and workstation cards.
DIAGNOSTIC AUDIOMETRIC MEDICAL DEVICES
--------------------------------------
Prior to the recent acquisitions of DDS and ESI, the
Company's business was based primarily on the development,
manufacture and sale of Tympanometers(R). The Company expects
Tympanometers(R) to continue to be a significant portion of its
business.
The name Tympanometer(R) is a registered trademark of the
Company. The Tympanometer(R), 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(TM) Tympanometer, which is directed for
use in screening pre-school children for hearing disorders. In
December 1996, the Company began selling the QuikTymp(TM)
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(TM) 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 product line as well as increased exposure to potential
manufacturing partners or joint ventures. This was accomplished
in part by the Company's purchase of Rosch GmbH and its equity
investment in Meditronic GmbH.
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.
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(R). The Tympanometer(R) 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(R) eliminates the uncertainties which may result
from visual examination. The person administering the
Tympanometer(R) 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.
-19-
<PAGE>
The Company manufactures and sells four different models of
Tympanometers(R).
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(TM)
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(TM) Audiometer
has continued to receive favorable response from the market.
In fiscal 1996, the Company introduced the Race Car
Tympanometer(R) to the marketplace. The Race Car Tympanometer(R)
is designed to test for middle ear disease in young children
using up-dated graphics for visual distraction of the child
during testing.
In fiscal 1997, the Company presented the new Quik Tymp(TM)
Tympanometer line at the Health Industry Distributors Association
(HIDA) Meeting. The Quik Tymp(TM) 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(TM) can include the option of a built-in pure tone
audiometer. Marketing had commenced in December 1996.
NEEDLE-FREE DRUG DELIVERY SYSTEMS
---------------------------------
Through ESI, the Company is in the business of developing,
manufacturing and marketing its INJEX(TM) needle-free injector
system (the "INJEX(TM) System"), a hand-held, spring-powered
device that injects drugs from a needle-free syringe through the
skin as a narrow, high pressure stream of liquid. The name
INJEX(TM) is a registered trademark of ESI. The INJEX(TM) System
eliminates the need to pierce skin with a sharp needle and
manipulate a plunger with the needle inserted through the skin,
thus eliminating the risk of potentially contaminated needle
stick incidents and the resulting blood-borne pathogen
transmission. The INJEX(TM) System is smaller, easier to use,
less expensive and more comfortable than previous needle-free
injection systems marketed by ESI's competitors, and the Company
believes that the key to widespread market acceptance of the
INJEX(TM) System will depend on its ability to compete on the
basis of such criteria.
A first generation INJEX(TM) System was tested and received
510(k) market clearance from the FDA in August 1995. The first
generation system was not commercially marketed. Since then,
certain improvements have been made to the System and the Company
expects to begin marketing a second generation system by the end
of this calendar year. The Company does not believe the
modifications or enhancements made to the system for the current
version require a new FDA 510(k) submission.
The INJEX(TM) System consists of three components: (i) a pen
sized reusable jet injector, (ii) a reset box which acts as a
carrying case and resets the spring for the jet injector and
(iii) a plastic, sterile, disposable ampule which contains the
medication fluid. In addition, ESI has designed and will produce
disposable transfer adapters to be used as a channelling device
between drug bottles and ampules for ampules that are delivered
empty but sterile.
The INJEX(TM) System is currently designed to deliver
variable doses of fluid medication from .02 ml to .5 ml. The
ampules can be pre-filled by the medication manufacturer for
resale through pharmacies or delivered sterilized and empty to be
filled by patients or providers of care using ESI's transfer
adapter to transfer fluid from a standard medication vial.
-20-
<PAGE>
ESI's core technology can be used for many different drug
delivery regimens and allows for needle-free injection into the
subcutaneous tissue. There are many uses for this product
including the physician's office, hospital and clinic
environments, self administered injections by people with
diabetes, allergies or human growth disorders and vaccine
inoculations such as for polio, tetanus, rabies or flu. The
INJEX(TM) System may also have applications in the dental and
veterinary markets.
PRODUCT DEVELOPMENT
-------------------
The Company is committed to fund the developing,
manufacturing capabilities and marketing necessary to bring the
INJEX needle-free injection system to market by the end of
calendar year 1998. The Company anticipates that approximately
$1 million may be required for this purpose.
In the fields of audiometrics, the Company is continually
engaged in product development. As mentioned above, the Quik
Tymp(TM) 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 with
respect to its audiometric products. It expects to continue to
incur research and development costs in fiscal 1998 depending
upon the success of the development activities and available
funds.
The Company has not presently committed any significant
funds for research and development with respect to the intraoral
camera equipment it markets.
GOVERNMENT REGULATION
---------------------
Government regulation in the United States and certain
foreign countries is a significant factor in the Company's
business. In the United States, the Company's products and its
manufacturing practices are subject to regulation by the FDA
pursuant to the Federal Food, Drug and Cosmetic Act ("FDC Act"),
and by other state regulatory agencies. Under the FDC Act,
medical devices, including those under development by the
Company, such as its needle-free injection system, must receive
FDA clearance or approval before they may be sold, or be exempted
from the need to obtain such clearance or approval. The FDA
regulatory process may delay the marketing of new systems or
devices for lengthy periods and impose substantial additional
costs. Moreover, FDA marketing clearance regulations depend
heavily on administrative interpretation, and there can be no
assurance that interpretations made by the FDA or other
regulatory bodies, with possible retroactive effect, will not
adversely affect the Company. There can be no assurance that the
Company will be able to obtain clearance of any future Company
products or any expanded uses of current or future Company
products in a timely manner or at all. In addition, even if
obtained, FDA clearances are subject to continual review, and if
the FDA believes that the Company is not in compliance with
applicable requirements, it can institute proceedings to detain
or seize the Company's products, require a recall, suspend
production, distribution, marketing and sales, enjoin future
violations and assess civil and criminal penalties against the
Company, its directors, officers or employees. The FDA may also
suspend or withdraw market approval for the Company's products or
require the Company to repair, replace or refund the cost of any
product manufactured or distributed by the Company. FDA
regulations also require the Company to adhere to certain "Good
Manufacturing Practices" ("GMP") regulations, which include
validation testing, quality control and documentation procedures.
The Company's compliance with applicable regulatory requirements
is subject to periodic inspections by the FDA. The Company will
need 510(k) approval for any new medical products which are
developed in the future. Compliance with these requirements
requires the Company to expend time, resources and effort in the
areas of production and quality control for itself and for its
contract manufacturers. Moreover, there can be no assurance that
the required regulatory clearances will be obtained, and those
obtained may include significant limitations on the uses of the
product in question. In addition, changes in existing regulations
or the adoption of new regulations could make regulatory
compliance by the Company more difficult in the future.
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<PAGE>
Although the Company believes that its products and
procedures are currently in material compliance with all relevant
FDA requirements, the failure to obtain the required regulatory
clearances or to comply with applicable regulations would have a
material adverse effect on the Company.
Sales of medical devices outside the United States that are
manufactured within the United States are subject to United
States export requirements, and all medical devices sold abroad
are subject to applicable foreign regulatory requirements. Legal
restrictions on the sale of imported medical devices vary from
country to country. The time and requirements to obtain approval
by a foreign country may differ substantially from those required
for FDA approval. There can be no assurance that the Company
will be able to obtain regulatory approvals or clearances for its
products in foreign countries.
PATENTS AND TRADEMARKS
----------------------
With respect to the Company's INJEX(TM) needle-free drug
injection system, the Company holds two United States patents and
has applied for nine foreign patents. The Company also possesses
certain registered trademarks and copyrights for names which it
believes are important to its business.
PROPERTIES
----------
The Company's administrative offices and audiometric
operations are located in Amherst, New Hampshire in facilities
containing 7,800 square feet leased to the Company for three
years at $3,800 per month under a lease expiring in May 2001.
DDS maintains offices in two locations, in Gainesville,
Georgia, where it rents 2,400 square feet of office space, and in
Newport Beach, California, where it rents 1,500 square feet of
office space.
ESI maintains an office in San Diego, California, where it
rents 1,200 square feet of office space under a lease expiring in
November 1998. ESI may rent additional space in connection with
the commercialization of the INJEX(TM) system. It believes that
such additional space would be available.
Rosch GmbH maintains an office in Berlin, Germany, where it
rents approximately 2,150 square feet of office space under a
lease expiring in January 2001.
The Company believes that these facilities are adequate for
its current business needs.
MARKETING
---------
The Company's intraoral camera systems and other dental
products are marketed to dental practitioners throughout the
United States by DDS through 32 independent regional dealers who
are retained by DDS on a non-exclusive, best efforts basis. The
Viola(TM) system is marketed throughout Europe through Rosch
GmbH. Rosch GmbH both distributes products directly and through
regional dealers.
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). 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 by the Company on a non-
exclusive, best efforts basis. The Company also distributes
these products throughout Europe using Rosch GmbH.
Initially the Company plans to market and distribute the
INJEX(TM) needle-free injection system through licensing and
joint development agreements with drug companies and
manufacturers of injectable pharmaceuticals in the United States.
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<PAGE>
The Company expects that product sales will be directed to
pharmaceutical companies, pediatric clinics, infectious disease
wards, and outpatient clinics where the threat of accidental
needle pricks and patient trauma are highest. Thereafter, the
Company expects to broaden its market to home care applications
such as for people with diabetes, allergies, human growth
disorders, arthritis, osteoporosis or other diseases involving in
home self injections. The Company's marketing plans may change
significantly depending on its discussions with drug companies
and manufacturers and its success in securing licensing and/or
joint development agreements with such entities.
In August 1998, the Company entered into an agreement to
supply La Sociedad Mercantil Mexicana ("LSM") with the INJEX(TM)
System for use in LSM's clinic in Baja California and for
exclusive distribution within that geographic territory.
The Company participates in exhibitions at major medical,
educational and public health conventions. It also advertises
its products domestically and internationally in journals for
dentists, pediatricians, allergists, otolaryngologists,
otologists and family practitioners and also for schools, public
health clinics and HMOs.
MATERIALS
---------
The intraoral cameras and other dental equipment distributed
by the Company are purchased from suppliers and resold to the
Company's customers. The Viola(TM) system is manufactured by
Meditronic GmbH.
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
with respect to its audiometric products.
The Company has not yet begun manufacturing the INJEX(TM)
System for commercial distribution. Pre-production aluminum
injectors and reset boxes were built for FDA testing and limited
clinical trials, internal testing and inspection and for
marketing demonstrations and evaluations. The Company expects
the finished product to be made of a combination of anodized
aluminum and stainless steel metal parts. Prototypes will be
built from automated drawings prior to making a commitment to
molds. The injector has three molded parts and the reset box has
four molded parts.
The disposable plastic parts of the INJEX(TM) System include
the ampule which contains the drug and the transfer device, which
to date have been produced using single cavity molds that are not
capable of producing high volumes of ampules or adapters in a
cost effective manner. The Company has determined that the
current designs for the ampule and transfer device are functional
but can be improved for reliability. Once the design for these
components is finalized, the Company will progress to multi-
cavity molds and tools.
Initially, the Company plans to rely on established FDA
licensed medical products manufacturing facilities for the
manufacturing of the disposable components of the INJEX(TM)
System. The Company will also outsource component manufacturing
for the injector and reset device and has developed a list of
vendors for this purpose. Assembly of the injector and reset
device will eventually be performed in house. The Company will
oversee the quality assurance of all products manufactured by
assembling a team of quality assurance professionals with
expertise in disposable and medical devices. As demand develops
for the INJEX(TM) System, the Company will evaluate the
feasibility of assuming a larger role in the manufacturing of its
products.
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<PAGE>
PRODUCT WARRANTY
----------------
The Company's intraoral camera systems are sold with the
manufacturer's warranty. Neither DDS nor Rosch GmbH provide any
additional warranties for the products they distribute.
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 plans to offer a one-year warranty on the
injector component of its INJEX(TM) system.
EMPLOYEES
---------
At July 31, 1998, the Company and its subsidiaries had 45
employees, 11 of whom were management or administrative
personnel, 27 were engaged in sales activities, and 7 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.
SCIENTIFIC ADVISORY BOARD
-------------------------
The Company intends to establish a Scientific Advisory Board
to evaluate technologies which are being developed by the Company
and those which management is considering to develop or to
acquire, and to consult with management regarding such
technologies and possible acquisitions. In August 1998, the
Company appointed Dr. Ronald S. Newbower to serve as the Chairman
of the Scientific Advisory Board and to help select the members
of such Board. Dr. Newbower also became a director of the Company,
see "MANAGEMENT." The Scientific Advisory Board is expected to meet
at least twice each year, and its members would receive cash
compensation and grants of stock options in amounts to be
determined.
COMPETITION
-----------
The distribution of medical and dental devices is intensely
competitive. The Company competes with numerous other companies,
including several major manufacturers and distributors. Most of
the Company's competitors have greater financial and other
resources than the Company. Consequently, such entities may begin
to develop, manufacture, market and distribute systems which are
substantially similar or superior to the Company's products.
Further, 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.
With respect to the intraoral camera market, the Company has
at least five major competitors in the video market which the
Company views as being largely mature with little room for
growth. Conversely, the digital camera market is expanding with
no one company or group of companies yet dominating the market.
Nevertheless, the Company anticipates that the digital market
will become increasingly competitive as demand among dental
practitioners grows for digital equipment.
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
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<PAGE>
use. In fiscal year 1996, the Company completed the redesign of
its Tympanometer(R) line to take advantage of more cost effective
technology and to address customer needs.
The Company's INJEX(TM) needle-free injection system will
compete with standard needle syringes, safety syringes and other
manufacturers of needle-free injection systems. These
competitors have been in business longer than the Company and
have substantially greater technical, marketing, financial,
sales, and customer service resources. Becton, Dickinson and
Company ("BDC") has as much as 85% of the domestic needle syringe
market. BDC has very low product cost and high quality through
superior manufacturing. BDC has also entered in marketing and
distribution arrangements with Medi-Ject, Inc., a manufacturer of
needle-free injection systems.
Medi-Ject, Inc., founded in 1979, has previously marketed a
needle-free injector system known as the "MediJector," which
consists of an injector without a removable or disposable
component. Medi-Ject, Inc. has a collaborative arrangement with
BDC and has also entered into various licensing and development
agreements with multi-national pharmaceutical and medical device
companies covering the design and manufacture of customized
injection systems for specific drug therapies.
The other principal manufacturer of needle-free injection
systems is Bio-Ject Inc., formed in 1985. Bio-Ject, Inc. has sold
a CO2 powered injector since 1993. The injector is designed for
and used almost exclusively for vaccinations in doctors' offices
or public clinics, and is both expensive and complicated to use.
Two other companies, Health-Mor Personal Care Corp. and
Vitajet Corporation, currently sell coil spring injector systems.
Vitajet has recently introduced a product which incorporates a
disposable needle-free syringe. Vitajet was recently acquired by
Bio-Ject.
Safety syringes are presently made by a small number of new
firms, none of which has a significant share of the total syringe
market. BDC also manufactures these devices, but the high cost
of safety syringes and the continued problem of controlled
disposal has weakened the demand for them.
The Company expects ESI to compete with the smaller safety
syringe manufacturers and jet injector firms, based on health
care worker safety, ease of use, reduced overall costs of
controlled disposal and patient comfort. The Company expects that
when all indirect costs are considered, the INJEX(TM) System
should be able to successfully compete on a cost basis.
LEGAL PROCEEDINGS
On June 26, 1998, Christer O. Andreasson filed an action
against ESI, the Company, and four former directors of ESI, in
Superior Court of California, County of San Diego, seeking an
indeterminate amount of damages arising from his employment
relationship with ESI over several months spanning late 1995 and
early 1996, which was prior to the Company's acquisition of ESI.
Due to the preliminary nature of the discovery process, the
Company cannot estimate the merits of the claim or the effect on
the Company or ESI.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER SIGNIFICANT EMPLOYEES
-------------------------------------------------------------
The following table sets forth certain information
concerning the directors, executive officers and other
significant employees of the Company as of August 31, 1998.
Year
Position with Became
Name Age the Company Director
---- --- ------------- --------
Thomas A. Slamecka 57 Chairman of the Board and 1996
Director
Michael T. Pieniazek 40 President, Chief Financial N/A
Officer, Treasurer and
Secretary
Blake C. Davenport 31 Director 1997
Ronald S. Newbower 54 Director 1998
Andy Rosch 38 Director and General Manager 1997
of Rosch GmbH
Marcus R. Rowan 37 Director 1996
Lawrence A. Petersen 53 President of ESI N/A
Henry J. Rhodes 43 President of DDS N/A
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, and
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 and Treasurer since July
1995, and Secretary since January 1996. 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.
Blake C. Davenport has been a director of the Company since
December 1997. For more than the past five years, he has been
the President and owner of Davenport Interests, Inc., a private
investment company.
Dr. Ronald S. Newbower has been a director of the Company
since August 1998. He has been Senior Vice President for
Research and Technology of the Massachusetts General Hospital
since 1994 and Vice President for Research Management of Partners
HealthCare since 1997. He has been an Associate Professor at
Harvard-MIT Division of Health Sciences and Technology and at
Harvard Medical School for more than the past ten years. He
received a Ph.D. from Harvard University in 1971 in solid state
physics. He serves as a director of Protocol Systems, Inc.
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<PAGE>
Andy Rosch has been a Director of the Company since December
1997 and General Manager of Rosch GmbH since July 1990.
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.
Lawrence A. Petersen has been Chief Executive Officer of ESI
since September 1, 1997. Prior to the acquisition of ESI by the
Company in May 1998, Mr. Petersen had been both President and
Chief Executive Officer ESI. From October 1, 1995 to August 15,
1997, Mr. Petersen was Chief Executive Officer of Solid State
Farms, Inc., a medical device company involved in the blood
glucose monitoring business. From 1993 to 1996, Mr. Petersen was
President of Capital Solutions, Ltd., a financial services
company.
Henry J. Rhodes has been President of DDS since August 1996.
From July 1992 to August 1996, Mr. Rhodes was a sales manager for
New Image Industries Inc., a provider of intraoral camera
systems, digital x-ray and associated products, and Dental
Medical Diagnostics, Inc., a provider of intraoral camera systems
and video network components.
There is no family relationship among the directors or
executive officers of the Company.
DIRECTOR COMPENSATION
---------------------
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. Upon Dr.
Newbower becoming a director, he received an option to purchase
10,000 shares and also received an option for 5,000 for agreeing
to serve as Chairman of the Company's Scientific Advisory Board,
which options are exercisable at a price of $3.00 per share,
vesting on August 1, 1999 and exercisable for five years.
Non-employee directors are each paid $1,000 per board
meeting attended plus travel expenses, and $500 per meeting for
participating in telephonic board meetings.
COMMITTEES
----------
The only Board Committee is an Audit Committee consisting
of Messrs. Davenport and Rowan. The Audit Committee has general
responsibility for oversight of financial controls and for
accounting and audit activities of the Company.
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<PAGE>
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 Fiscal Options Term
Position Year Salary Bonus Granted Awards
------------------ ------ ------ ----- ------- ------
Noel A. Wren, 1997 $ 76,000 -- 10,000 --
President & Chief 1996 105,000 $10,700 -- --
Executive 1995 97,500 -- -- --
Officer(1)
Michael T. Pieniazek, 1997 $113,000 -- -- --
President & CFO(2)
-----------------------
(1) Mr. Wren's employment terminated in March 1997.
(2) Mr. Pieniazek became President in April 1997 and continues
to serve as Chief Financial Officer.
Mr. Wren was furnished with an automobile for business and
personal use. The compensation specified in the preceding table
does not include the value of non-business use as the amounts
were not material.
AGGREGATED OPTION EXERCISES FOR THE FISCAL YEAR ENDED JULY 31,
1997
AND FY-END OPTION VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)
---------- ----------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
---- --------- -------- ------------- -------------
Noel A. Wren -- -- -0- -0-
Michael T.
Pieniazek -- -- 30,000/0 --
EMPLOYMENT AGREEMENTS
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, at a base salary of $115,000 for
fiscal 1997. The Company terminated the Agreement in March 1997,
and paid Mr. Wren $62,500 in connection with the termination of
his Employment Agreement.
As of January 1, 1998, the Company entered into an
Employment Agreement with Thomas A. Slamecka to serve as Chairman
of the Board for an initial term terminating on March 15, 2001,
subject to annual renewals, and his February 1997 Employment
Agreement was terminated. Mr. Slamecka receives an annual base
salary of $52,000 through July 31, 1998 and thereafter at
$100,000, plus a profits 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 12% return on its
Common Stock equity, and may also receive a supplemental bonus.
The Employment Agreement also provided for the grant of options
to him for the purchase of 400,000 shares of Common Stock at
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$1.00 per share, which was the fair market value of the Company's
Common Stock on the date of grant, vesting immediately as to
212,500 shares and the balance vesting at 46,875 shares per month
through May 1998. The Company is to issue 100,000 shares of
Common Stock to Mr. Slamecka if during the term of his employment
the closing price for the Common Stock is at least $20 per share
for a period of three consecutive trading days. Further, the
Employment Agreement provides that if the Company issues any
shares of Common Stock (other than pursuant to compensation or
employee benefit plans) it will grant to Mr. Slamecka additional
options to purchase shares equal to 9.3% of the outstanding
Common Stock at a purchase price equal to the per share price of
the shares issued by the Company (but not less than $1.00 per
share). In calculating Mr. Slamecka's ownership for purposes of
such 9.3% level, unvested options held by him and shares sold by
him during the initial term of the Employment Agreement would be
included in such calculation. In addition, the Company agreed to
make available certain loans to Mr. Slamecka, see "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
As of January 1, 1998, the Company entered into an
Employment Agreement with Michael T. Pieniazek to serve as
President for an initial term of three years terminating on
December 31, 2001, subject to automatic renewal for consecutive
one-year terms unless terminated not less than 60 days prior to
end of any term. Mr. Pieniazek receives an annual base salary of
$125,000 and a discretionary bonus. The Agreement also provided
for the grant of options to Mr. Pieniazek to purchase 250,000
shares of Common Stock at $1.00 per share, which was the fair
market value of the Company's Common Stock on the date of grant,
vesting immediately as to 150,000 shares, vesting ratably over
the succeeding seven months as to the balance, and for the
Company to issue 50,000 shares of Common Stock to Mr. Pieniazek
if during the term of his employment the closing price for the
Common Stock is at least $20 per share for three consecutive
trading days. In addition, the Employment Agreement provides
that if the Company issues any shares of Common Stock (other than
pursuant to compensation or employee benefit plans) it will grant
to Mr. Pieniazek additional options to purchase shares in amount
equal to 6.5% of such issuance. In calculating Mr. Pieniazek's
ownership for purposes of such 6.5% level, unvested options held
by him and shares sold by him during the term of the Employment
Agreement would be included in such calculation.
The Employment Agreements of Messrs. Slamecka and Pieniazek
provide for lump sum payments equal to 2.99 times the current
base salary, plus continuation of health benefits for 12 months,
upon a change of control of the Company. A change of control of
the Company would include a person or group becoming the
beneficial owner of 20% of the voting power of the Company's
securities or individuals who are current directors of the
Company, or successors chosen by them, cease to constitute a
majority of the whole Board of Directors. In the event the
amount payable upon a change of control would result in the
application of an excise tax under Section 4999 of Internal
Revenue Code of 1986, as amended, the payment would be made over
such period of time in order not to cause the application of such
excise tax.
On May 5, 1998, upon the closing of the DDS Merger, DDS
entered into an Employment Agreement with Mr. Rhodes pursuant to
which he will serve as President of DDS for an initial term of
three years at an annual base salary of $125,000. Mr. Rhodes
was also granted stock options to purchase up to 100,000 shares
of the Company's Common Stock at an exercise price of $1.00 per
share, vested as of May 5, 1998, and stock options to purchase
100,000 shares of the Company's Common Stock at an exercise price
of $3.00 per share, vested as of November 1, 2000, all such stock
options expire in May 2003.
On May 12, 1998, upon the closing of the ESI Merger, ESI
entered into Employment Agreements with Lawrence Petersen and
Richard Battelle. Mr. Petersen is to serve as President of ESI
for an initial term of three and one-half years at an annual
salary of $125,000. Mr. Petersen was also granted stock options
to purchase an aggregate of 100,000 shares of the Company's
Common Stock, 50,000 of such options at an exercise price of
$1.00 per share, with 5,000 of such options immediately vested
and 45,000 of such options to vest ratably over the term of the
Employment Agreement, and the remaining 50,000 of such options at
an exercise price of $3.00 per share, with 5,000 of such options
immediately vested and 45,000 of such options to vest ratably
over the term of the Employment Agreement. Mr. Battelle is to
serve as Director of Finance and Administration of ESI for an
initial term of one year at an annual salary of $60,000, and was
also granted stock options to purchase an aggregate of 40,000
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<PAGE>
shares of the Company's Common Stock, 20,000 of such options at
an exercise price of $1.00 per share to vest ratably over the
term of the Employment Agreement, and the remaining 20,000 of
such options at an exercise price of $3.00 per share to vest
ratably over the term of the Employment Agreement. All such
stock options granted to Mr. Petersen and Mr. Battelle expire in
May 2003.
On December 18, 1997, upon the closing of the purchase by
the Company of the remaining 50% of the outstanding capital stock
of Rosch GmbH, Rosch GmbH entered into an amendment to the
employment agreement for Andy Rosch pursuant to which he serves
as Managing Director of Rosch GmbH. Under the agreement, as
amended, Mr. Rosch is to serve as Managing Director of Rosch GmbH
for an initial term of 3 years, terminating on December 31, 2000,
and automatically renewable for one-year terms thereafter unless
either party gives notice of an intention not to renew not less
than three months prior to the end of any term. Mr. Rosch is to
receive an annual base salary of 200,000 DM and an annual cash
bonus equal to 1% of net sales of Rosch GmbH, but not to exceed
the amount of his base salary.
STOCK OPTIONS
In 1995, the Company granted options to two officers to
purchase a total of 50,000 shares of the Company's Common Stock,
of which options for 30,000 shares at an exercise price of $1.41,
which was the fair market value on the date of grant, remain
outstanding. 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 May 1996, the Company granted to a consultant an option
to purchase a total of 13,333 shares of the Company's Common
Stock at $7.50 per share, which was the 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 (the "Option Plan") providing for the
issuance of up to 300,000 shares of the Company's Common Stock.
The Option 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. At June 30, 1998, options for an aggregate
of 300,000 shares were granted, of which options for 75,000
shares were exercised and options for 225,000 remaining
outstanding at an exercise price of $1.00 per share and expiring
from January 2002 to February 2002.
Pursuant to Employment Agreements with Messrs. Slamecka,
Pieniazek, Rhodes, Petersen and Battelle, the Company has granted
stock options to such persons and in the cases of
Messrs. Slamecka and Pieniazek is obligated to grant additional
options upon certain issuances of Common Stock. See "Employment
Agreements" herein.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 provided
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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of August 31,
1998 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 and warrants are considered presently exercisable if
exercisable within 60 days of August 31, 1998.
AMOUNT &
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT
BENEFICIAL OWNER STATUS OWNERSHIP OF CLASS
Liviakis Financial Stockholder 1,500,000 19.3%
Communications, Inc. shs(1)
2420 K Street
Sacramento, California 95816
Thomas A. Slamecka* Director 834,550 11.0%
and shs(2)
Chairman
Jubilee Investors LLC Stockholder 1,085,003 14.9%
c/o West End Capital LLC shs(3)
One World Trade Center
Suite 4563
New York, New York 10048
Robert B. Prag Stockholder 500,000 6.9%
2420 K Street shs(4)
Sacramento, California 95816
Marcus R. Rowan* Director 340,000 4.6%
shs(5)
Michael T. Pieniazek* President 334,750 4.6%
and CFO shs(6)
Andy Rosch* Director 310,000 shs 4.4%
Blake C. Davenport* Director 70,000 1.0%
shs(7)
Dr. Ronald S. Newbower* Director -0- --
All Executive Officers and
Directors as a
Group (6 persons) 1,889,300 25.6%
shs(8)
-----------------------------
(1) Includes presently exercisable warrants for 750,000 shares.
(2) Includes presently exercisable options for 528,550 shares.
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<PAGE>
(3) Represents an estimate of the total number of shares which
Jubilee Investors LLC would receive upon conversion of its
3,000 shares of Series A Preferred Stock.
(4) Includes presently exercisable warrants for 250,000 shares.
(5) Includes presently exercisable options for 10,000 shares and
warrants for 300,000 shares. Represents shares owned
directly by Mr. Rowan and his IRA and Keogh account.
(6) Includes presently exercisable options for 282,750 shares.
(7) Includes presently exercisable warrants to purchase 50,000
shares.
(8) See Notes 2, 5, 6, 7 and 8.
* The address of the persons listed above is c/o American
Electromedics Corp., 13 Columbia Drive, Suite 5, Amherst, New
Hampshire 03031.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common
Stock, $.10 par value, of which 7,038,136 shares were issued and
outstanding as of June 30, 1998.
The holders of Common Stock are entitled to one vote for each
share held of record on all matters to be voted by stockholders.
There is no cumulative voting with respect to the election of
directors with the result that the holders of more than 50% of
the shares of Common Stock voted for the election of directors
can elect all of the directors.
The holders of shares of Common Stock are entitled to
dividends when and as declared by the Board of Directors from
funds legally available therefore, and, upon liquidation are
entitled to share pro rata in any distribution to holders of
Common Stock. No dividends have ever been declared by the Board
of Directors on the Common Stock. See "DIVIDEND POLICY." All of
the outstanding shares of Common Stock are, and all shares sold
hereunder will be, when issued upon payment therefor, duly
authorized, validly issued, fully paid and non-assessable.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of
Preferred Stock, par value $.01 per share, issuable from time to
time in one or more series, having such designation, rights,
preferences, powers, restrictions and limitations as may be fixed
by the Board of Directors. On May 5, 1998, the Company filed
with the Delaware Secretary of State a Certificate of
Designations establishing the Series A Preferred Stock consisting
of 3,000 shares.
The Series A Preferred Stock is immediately convertible into
shares of Common Stock at a conversion rate equal to $1,000
divided by the lower of (i) $4.00 or (ii) 75% of the average
closing bid price for the Common Stock for the five trading days
immediately preceding the conversion date. The Company may force
conversion of all (and not less than all) of the outstanding
shares of Series A Preferred Stock at any time after the first
anniversary of the effective date of the Registration Statement.
There is no minimum conversion price. Should the bid price of
the Common Stock fall substantially prior to conversion, the
holders of the Series A Preferred Stock could obtain a
significant portion of the Common Stock upon conversion, to the
detriment of the then holders of the Common Stock.
The Series A Preferred Stock has a liquidation preference of
$1,000 per share, plus any accrued and unpaid dividends. The
Company was to pay an annual dividend equal to 5% of the
liquidation preference, which may be paid at the election of the
Company in cash or shares of its Common Stock. Pursuant to a
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<PAGE>
Registration Agreement, the dividend rate was increased to 12% on
June 5, 1998 due to the Company's failure to file the
Registration Statement covering the Common Stock underlying the
Series A Preferred Stock within 30 days of the initial closing of
the Series A Preferred Stock. If the Registration Statement is
not declared effective within 120 days of the initial closing,
such rate will increase to 18% until the effective date the
Registration Statement.
The Company may redeem up to $1 million face amount of Series
A Preferred Stock at a redemption price equal to 120% of the
liquidation preference if the closing bid price of the Company's
Common Stock is below $2.75 per share for five consecutive
trading days.
The Company may redeem an additional $1 million face amount of
Series A Preferred Stock at a redemption price equal to 120% of
the liquidation preferences if the closing bid price of the
Company's Common Stock is below $2.50 per share for five
consecutive dates.
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<PAGE>
SELLING STOCKHOLDERS
The Shares and Warrants offered by this Prospectus may be
offered from time to time by the Selling Stockholders. The
Selling Stockholders are comprised of: (i) persons who own an
aggregate of 4,570,798 shares of Common Stock which were
purchased since October 1996 in private placements, (ii) holders
of warrants and options to purchase an aggregate of 1,443,333
shares of Common Stock at exercise prices ranging from $1.00 to
$7.50 per share and (iii) the Purchaser of the Series A Preferred
Stock and the purchaser of the Warrants in the Preferred Stock
Private Placement. See "THE COMPANY -- Recent Developments."
None of the Selling Stockholders has held any position or office
or had any material relationship with the Company or any of its
predecessors or affiliates within three years of the date of this
Prospectus, except for Thomas A. Slamecka, Marcus Rowan, Blake C.
Davenport, Richard Battelle, Lawrence Petersen and Henry J.
Rhodes. Mr. Slamecka has been the Chairman of the Board of the
Company since February 1997, and a director of the Company since
October 1996, Mr. Rowan has been a director of the Company since
October 1996, Mr. Davenport has been a director of the Company
since December 1997, Messrs. Battelle and Petersen were
principals of ESI at the time of its acquisition by the Company
in May 1998 and have continued as executive officers of ESI, and
Mr. Rhodes was a principal of DDS at the time of its acquisition
by the Company in May 1998 and has continued as an executive
officer of DDS.
The following table sets forth, as of June 30, 1998 and upon
completion of this offering, information with regard to the
beneficial ownership of the Company's Common Stock and Warrants
by each of the Selling Stockholders.
The information included below is based upon information
provided by the Selling Stockholders. Because the Selling
Stockholders may offer all, some or none of their Common Stock
and Warrants, no definitive estimate as to the number of shares
thereof that will be held by the Selling Stockholders after such
offering can be provided and the following table has been
prepared on the assumption that all shares of Common Stock and
Warrants offered under this Prospectus will be sold.
AMOUNT
SHARES WARRANTS BENEFICIALLY
BENEFICIALLY BENEFICIALLY SHARES WARRANTS OWNED
OWNED PRIOR OWNED PRIOR TO BE TO BE AFTER
NAME(1) TO OFFERING TO OFFERINGOFFERED OFFERED OFFERING(2)
---------------- ------------ ------------ ------ -------- -----------
Stanley I. Aber 12,800 N/A 12,800 N/A 0
Arthur Adams(3) 14,546 N/A 14,546 N/A 0
Alexander
Enterprise
Holdings Corp. 6,700 N/A 6,700 N/A 0
Saul Amber(3) 38,221 N/A 38,221 N/A 0
Jose Arozamena 6,700 N/A 6,700 N/A 0
Charles S. Aviles,
Jr. (4) 250,000 N/A 250,000 N/A 0
David Ballinger(3) 3,637 N/A 3,637 N/A 0
Richard
Battelle(3) 11,151 N/A 11,151 N/A 0
John and Debra
Blum(3) 10,909 N/A 10,909 N/A 0
Edward A. Borrelli 10,000 N/A 10,000 N/A 0
Jonathan F.
Boucher 32,000 N/A 32,000 N/A 0
Charles Brown(3) 3,637 N/A 3,637 N/A 0
Martin Brown and
Eleanor Brown(3) 2,546 N/A 2,546 N/A 0
Arthur Buls(3) 9,091 N/A 9,091 N/A 0
Randie Burrell(3) 3,637 N/A 3,637 N/A 0
Thomas Cabe 100,000 N/A 100,000 N/A 0
Cedar Capital 15,000 N/A 15,000 N/A 0
David Chazin(3) 2,728 N/A 2,728 N/A 0
Neal Chazin(3) 1,818 N/A 1,818 N/A 0
John Cho 8,421 N/A 8,421 N/A 0
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<PAGE>
AMOUNT
SHARES WARRANTS BENEFICIALLY
BENEFICIALLY BENEFICIALLY SHARES WARRANTS OWNED
OWNED PRIOR OWNED PRIOR TO BE TO BE AFTER
NAME(1) TO OFFERING TO OFFERINGOFFERED OFFERED OFFERING(2)
---------------- ------------ ------------ ------ -------- -----------
Violet Clark(3) 1,818 N/A 1,818 N/A 0
Cohig & Associates
Inc.(5) 30,000 N/A 30,000 N/A 0
Simon Coley 7,500 N/A 7,500 N/A 0
Harvey H. Conger
Trust No. 2 128,000 N/A 128,000 N/A 0
Steven Crouch(3) 4,000 N/A 4,000 N/A 0
Amy Davenport 25,000 N/A 25,000 N/A 0
Blake C.
Davenport(6) 70,000 N/A 50,000 N/A 20,000
Robert M.
Davenport 178,000 N/A 178,000 N/A 0
Robert M.
Davenport Jr. 25,000 N/A 25,000 N/A 0
Helen Derosis(3) 3,637 N/A 3,637 N/A 0
Henry Eisenson(3) 1,212 N/A 1,212 N/A 0
David Epstein(3) 1,818 N/A 1,818 N/A 0
Michael Erro(3) 1,818 N/A 1,818 N/A 0
Bruce Exton 3,500 N/A 3,500 N/A 0
Andrew Fackrell 5,000 N/A 5,000 N/A 0
Daniel Faucetta 9,891 N/A 9,891 N/A 0
Louise Jane
Felitti(3) 3,637 N/A 3,637 N/A 0
Joseph Ferrano(3) 728 N/A 728 N/A 0
Harry Fields(3) 2,728 N/A 2,728 N/A 0
James Flynn and
Julie Flynn(3) 3,637 N/A 3,637 N/A 0
Erwin Fried and
Jenny Fried 25,000 N/A 25,000 N/A 0
Jack Friedler and
Stefanie
Friedler JTWROS 50,000 N/A 50,000 N/A 0
Harold Geliebter 7,578 N/A 7,578 N/A 0
Paul Ghizzone and
Julia Ghizzone(3) 7,273 N/A 7,273 N/A 0
J. Gilliland(3) 3,637 N/A 3,637 N/A 0
Malcolm Goekler(3) 7,273 N/A 7,273 N/A 0
Bar-Giora
Goldberg(3) 1,212 N/A 1,212 N/A 0
Jay Grunfeld 4,210 N/A 4,210 N/A 0
Arnold Hagler(3) 27,273 N/A 27,273 N/A 0
Andrew M. Hall 10,000 N/A 10,000 N/A 0
Barry A.
Hochstadt(4) 250,000 N/A 250,000 N/A 0
David W. Hood and
Ellen P.
Hood JTWROS 10,000 N/A 10,000 N/A 0
Sam W. Hunsaker 25,000 N/A 25,000 N/A 0
Dean Hyde and
Doris Hyde(3) 2,546 N/A 2,546 N/A 0
Jubilee Investors
LLC(7) 1,085,003 N/A 1,085,003 N/A 0
Frederic Kakis(3) 10,909 N/A 10,909 N/A 0
Henry Kim 4,210 N/A 4,210 N/A 0
Edith Kornberg(3) 2,909 N/A 2,909 N/A 0
H. Ward Lay 100,000 N/A 100,000 N/A 0
Lay Trust 100,000 N/A 100,000 N/A 0
William Lenartz(3) 1,212 N/A 1,212 N/A 0
John Lindeman 25,000 N/A 25,000 N/A 0
Liviakis Financial
Communications,
Inc.(8) 1,500,000 N/A 1,500,000 N/A 0
Robert Luedke(3) 27,273 N/A 27,273 N/A 0
Lee Machado(3) 1,818 N/A 1,818 N/A 0
Donald MacKay(3) 33,664 N/A 33,664 N/A 0
Maloney & Fox, LLC 10,000 N/A 10,000 N/A 0
Arnold Mandelstam
and Susan
Mandelstam 31,315 N/A 31,315 N/A 0
Madsen Family
Partners, Ltd. 10,000 N/A 10,000 N/A 0
Mary McNichols(3) 9,454 N/A 9,454 N/A 0
-35-
<PAGE>
AMOUNT
SHARES WARRANTS BENEFICIALLY
BENEFICIALLY BENEFICIALLY SHARES WARRANTS OWNED
OWNED PRIOR OWNED PRIOR TO BE TO BE AFTER
NAME(1) TO OFFERING TO OFFERINGOFFERED OFFERED OFFERING(2)
---------------- ------------ ------------ ------ -------- ------------
Metropolis Equity
Fund LP 100,000 N/A 100,000 N/A 0
James B. Metzger 86,805 N/A 86,805 N/A 0
Thomas
Meyerhoeffer 4,500 N/A 4,500 N/A 0
David Miller 10,000 N/A 10,000 N/A 0
Richard O'Connell 6,700 N/A 6,700 N/A 0
Tamar Neuman 15,000 N/A 15,000 N/A 0
Alan S.J. Pahng 21,052 N/A 21,052 N/A 0
Mary Parish(3) 1,818 N/A 1,818 N/A 0
J. Stuart
Parsons(3) 124,752 N/A 124,752 N/A 0
Lawrence
Petersen(3) 15,031 N/A 15,031 N/A 0
Matthew D.
Pieniazek 25,000 N/A 25,000 N/A 0
Michael Pizitz 11,488 N/A 11,488 N/A 0
Richard Pizitz 11,489 N/A 11,489 N/A 0
J. Bucky Polk 10,000 N/A 10,000 N/A 0
Potter Wear Polk 5,000 N/A 5,000 N/A 0
Robert B. Prag(9) 500,000 N/A 500,000 N/A 0
George Reynolds(3) 7,273 N/A 7,273 N/A 0
Henry J. Rhodes(4) 250,000 N/A 250,000 N/A 0
Daniel Roses(3) 3,637 N/A 3,637 N/A 0
Round Hill
Holdings 100,000 N/A 100,000 N/A 0
Marcus Rowan(10) 327,200 N/A 327,200 N/A 0
Marcus Rowan Keogh
Acct. 12,800 N/A 12,800 N/A 0
Charles Salik(3) 32,147 N/A 32,147 N/A 0
M. Morad Sarnii(3) 20,222 N/A 20,222 N/A 0
Gurmit Sandhu(3) 39,128 N/A 39,128 N/A 0
Samuel Schick and
Freida Schick(3) 909 N/A 909 N/A 0
H. Alan Schnall 26,315 N/A 26,315 N/A 0
Manuel Selvin(3) 6,182 N/A 6,182 N/A 0
Benjamin Siegal(3) 16,000 N/A 16,000 N/A 0
Herrick Siegel(3) 1,818 N/A 1,818 N/A 0
Merideth Siegel(3) 1,818 N/A 1,818 N/A 0
Michael Siegel and
Marsha Siegel(3) 5,454 N/A 5,454 N/A 0
Richard
Silvergleid 138,157 N/A 138,157 N/A 0
Thomas A. Slamecka 834,550 N/A 260,000 N/A 574,550
Mark Smith 10,000 N/A 10,000 N/A 0
Glenn Solomon 50,000 N/A 50,000 N/A 0
Virgil Swanner(3) 1,818 N/A 1,818 N/A 0
Eleanor Tweed(3) 13,130 N/A 13,130 N/A 0
Eva Waisburd(3) 1,818 N/A 1,818 N/A 0
Wall Street
Consultants(11) 13,333 N/A 13,333 N/A 0
Stephen Weiss and
Wendy Weiss(3) 363 N/A 363 N/A 0
Audrey Weiss(3) 1,454 N/A 1,454 N/A 0
West End Capital
LLC(12) 50,000 50,000 50,000 50,000 0
Jules Whitehill(3) 40,001 N/A 40,001 N/A 0
Joan Wilbanks and
Calvin
Wilbanks(3) 1,818 N/A 1,818 N/A 0
Roy Willetts 4,000 N/A 4,000 N/A 0
Addison Wilson
III, Trustee for
Richard A. Gray
Jr. Childrens
Trust 199,978 N/A 199,978 N/A 0
Tse Wo Wong and
Bianca T.T. Wu
TIC 99,491 N/A 99,491 N/A 0
----------------------
-36-
<PAGE>
(1) Unless otherwise indicated in the footnotes to this table, the
persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
(2) Assumes the sale of all shares offered hereby.
(3) Ten percent of which are held in escrow until October 12, 1998.
(4) Ten percent of which are held in escrow until October 31, 1998.
(5) Includes 30,000 shares under presently exercisable warrants.
(6) Includes 50,000 shares under presently exercisable warrants.
(7) Represents an estimate of the number of shares into which the 3,000
shares of Series A Preferred Stock held by Jubilee Investors LLC
may be converted.
(8) Includes 750,000 shares under presently exercisable warrants.
(9) Includes 250,000 shares under presently exercisable warrants.
(10) Includes 300,000 shares under presently exercisable warrants.
(11) Includes 13,333 shares under presently exercisable options.
(12) Includes the 50,000 shares underlying the Warrants.
Under the terms of the Registration Agreement for the Preferred Stock
Private Placement, the Company is obligated to file the Registration
Statement and to use its best efforts to cause the Registration Statement
to become effective. Pursuant to the Registration Agreement, the failure
to have filed this Registration Statement by June 5, 1998 caused the
dividend rate for the Series A Preferred Stock to be increased from 5% of
the liquidation preference for such Stock to 12% of the liquidation
preference. If the Registration Statement is not declared effective by
September 2, 1998, the dividend rate will increase to 18%. Most of the
other Selling Stockholders were granted "piggyback" registration rights at
the time of their purchase of shares of Common Stock or the issuance of
warrants.
-37-
<PAGE>
PLAN OF DISTRIBUTION
The Selling Stockholders have advised the Company that, prior to the
date of this Prospectus, they have not made any agreement or arrangement
with any underwriters, brokers or dealers regarding the distribution and
resale of the Shares or Warrants. If the Company is notified by a Selling
Stockholder that any material arrangement has been entered into with an
underwriter for the sale of the Shares or Warrants, a supplemental
prospectus will be filed to disclose such of the following information as
the Company believes appropriate: (i) the name of the participating
underwriter; (ii) the number of the Shares or Warrants involved; (iii) the
price at which such Shares or Warrants are sold, the commissions paid or
discounts or concessions allowed to such underwriter; and (iv) other facts
material to the transaction.
The Company expects that the Selling Stockholders will sell their
Shares and Warrants covered by this Prospectus through customary brokerage
channels, either through broker-dealers acting as agents or brokers for the
seller, or through broker-dealers acting as principals, who may then resell
the Shares or Warrants in the over-the-counter market, or at private sale
or otherwise, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. The
Selling Stockholders may effect such transactions by selling the Shares or
Warrants to or through broker-dealers, and such broker-dealers may receive
compensation in the form of concessions or commissions from the Selling
Stockholders and/or the purchasers of the Shares or Warrants for whom they
may act as agent (which compensation may be in excess of customary
commissions). The Selling Stockholders and any broker-dealers that
participate with the Selling Stockholders in the distribution of Shares or
Warrants may be deemed to be underwriters and commissions received by them
and any profit on the resale of Shares or Warrants positioned by them might
be deemed to be underwriting discounts and commissions under the Securities
Act. There can be no assurance that any of the Selling Stockholders will
sell any or all of the Shares or Warrants offered by them hereunder.
Sales of the Shares on the OTC Electronic Bulletin Board or other
trading system may be by means of one or more of the following: (i) a block
trade in which a broker or dealer will attempt to sell the Shares and
Warrants as agent, but may position and resell a portion of the block as
principal to facilitate the transaction; (ii) purchases by a dealer as
principal and resale by such dealer for its account pursuant to this
Prospectus; and (iii) ordinary brokerage transactions and transactions in
which the broker solicits purchasers. In effecting sales, brokers or
dealers engaged by the Selling Stockholders may arrange for other brokers
or dealers to participate.
The Selling Stockholders are not restricted as to the price or prices
at which they may sell their Shares. Sales of such Shares at less than
market prices may depress the market price of the Company's Common Stock.
Moreover, the Selling Stockholders are not restricted as to the number of
Shares or Warrants which may be sold at any one time.
Pursuant to the Registration Agreement for the Preferred Stock Private
Placement and other agreements by the Company granting certain "piggy-back"
registration rights, the Company will pay all of the expenses incident to
the offer and sale of the Shares and Warrants to the public by the Selling
Stockholders other than commissions and discounts of underwriters, dealers
or agents. The Company and the Selling Stockholders have agreed to
indemnify each other and certain persons, including broker-dealers or
others, against certain liabilities in connection with the offering of the
Shares or Warrants, including liabilities arising under the Securities Act.
The Company has advised the Selling Stockholders that the anti-
manipulative rules under the Exchange Act, including Regulation M, may
apply to sales in the market of the Shares and Warrants offered hereby and
has furnished the Selling Stockholders with a copy of such rules. The
Company has also advised the Selling Stockholders of the requirement for
the delivery of this Prospectus in connection with resales of the Shares
and Warrants offered hereby.
-38-
<PAGE>
LEGAL MATTERS
The validity of the Common Stock and Warrants being offered hereby
will be passed upon for the Company by Thelen Reid & Priest LLP, New York,
New York.
EXPERTS
The financial statements of the Company at July 31, 1997 and July 27,
1996, and for each of the three years in the period ended July 31, 1997,
appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
-39-
<PAGE>
AMERICAN ELECTROMEDICS CORP.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors . . . . . . . . . . . . F-2
Balance Sheets as of July 31, 1997 and July 26, 1996 . F-3
Statements of Operations for the years ended
July 31, 1997, July 27, 1996 and July 29, 1995 . F-4
Statements of Changes in Stockholders' Equity for
the years ended July 31, 1997, July 27, 1996
and July 29, 1995 . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows for the years ended
July 31, 1997, July 27, 1996 and July 29, 1995 . F-6
Notes to Financial Statements . . . . . . . . . . . . F-7
Unaudited Condensed Balance Sheet as of
April 30, 1998 . . . . . . . . . . . . . . . . . F-15
Unaudited Condensed Statements of Operations
for the nine months ended April 30, 1998
and April 26, 1997 . . . . . . . . . . . . . . . F-16
Unaudited Condensed Statements of Cash Flows
for the nine months ended April 30, 1998
and April 26, 1997 . . . . . . . . . . . . . . . F-17
Notes to Unaudited Condensed Financial Statements . . F-18
Unaudited Pro Forma Combined Condensed Financial
Information . . . . . . . . . . . . . . . . . . . F-21
Unaudited Pro Forma Combined Condensed Balance
Sheet as of April 30, 1998 . . . . . . . . . . . F-22
Unaudited Pro Forma Combined Condensed Statement
of Operations for the nine months ended
April 30, 1998 . . . . . . . . . . . . . . . . . F-23
Unaudited Pro Forma Combined Condensed
Statement of Operations for the year
ended July 31, 1997 . . . . . . . . . . . . . . . F-24
F-1
<PAGE>
REPORT OF 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.
F-2
<PAGE>
AMERICAN ELECTROMEDICS CORP.
BALANCE SHEETS
JULY 31, JULY 27,
1997 1996
------- -------
ASSETS (Thousands)
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.
F-3
<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 . . . . . 1,619 1,039 719
Research and development 85 215 182
------ ------ ------
Total operating 1,704 1,254 901
expenses . . . . . . ------ ------ ------
Operating income (loss) . (706) 431 171
Other income (expenses):
Undistributed earnings
(loss) of affiliate . . . (57) 52 __
Interest, net . . . . (125) (16) 9
Other . . . . . . . . (38) -- 4
------ ------ ------
(220) 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 share:
Basic . . . . . . . $ (.37) $ .18 $ .08
======== ======= ======
Diluted . . . . . . $ (.37) $ .18 $ .08
======== ======= ======
See accompanying notes.
F-4
<PAGE>
AMERICAN ELECTROMEDICS CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
------------ PAID-IN
SHARES AMOUNT CAPITAL
------ ------ ----------
(THOUSANDS)
Balance at July 30, 1994 $1,838 $ 184 $2,281
Exercise of stock options. 505 50 203
Net income . . . . . . . -- -- --
------ ------ ------
Balance at July 29, 1995. 2,343 234 2,484
Investment in affiliate . 100 10 290
Exercise of stock options 11 1 9
Net income . . . . . . . -- -- --
------- ------ -------
Balance at July 27, 1996 2,454 245 2,783
Sale of capital stock . . 48 5 139
Exercise of stock options,
net . . . . . . . . . . 51 5 (3)
Net loss . . . . . . . . -- -- --
------- ------ -------
Balance at July 31, 1997 $2,553 $ 255 $2,919
====== ====== ======
TOTAL
RETAINED STOCKHOLDERS'
DEFICIT EQUITY
-------- -----------
Balance at July 30, 1994 . . . $(1,694) $ 771
Exercise of stock options . . . -- 253
Net income . . . . . . . . . . 172 172
------- -------
Balance at July 29, 1995 . . . (1,522) 1,196
Investment in affiliate . . . . -- 300
Exercise of stock options . . . -- 10
Net income . . . . . . . . . . 442 442
------- -------
Balance at July 27, 1996 . . . (1,080) 1,948
Sale of capital stock . . . . . -- 144
Exercise of stock options, net -- 2
Net loss . . . . . . . . . . . (926) (926)
------- -------
Balance at July 31, 1997 . . . $(2,006) $1,168
======= ======
See accompanying notes.
F-5
<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
other current assets . . (106) (317) (114)
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.
F-6
<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.
F-7
<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 (561,000) (248,000)
deferred tax assets ------- -------
Net deferred tax assets $ -0- $ -0-
======= =======
F-8
<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%
====== ====== ====== ===== ======= =====
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
======== ========
3. INVESTMENT IN AFFILIATE:
-----------------------
In January 1996, the Company invested $819,000, which
investment consisted of $519,000 of cash and 100,000 shares of
the Company's 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 represented the fair market
value of the stock at the time the agreement was reached. 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. Substantially all of
the Company's foreign and export sales are conducted through
F-9
<PAGE>
Rosch GmbH. 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.
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.
F-10
<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 SHARE:
-------------------------
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share. Statement 128 replaced the previously reported primary
and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings
per share. All earnings per share amounts for all periods have
been presented, and where necessary, restated to conform to the
Statement 128 requirements. Earnings per common 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.
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
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.
F-11
<PAGE>
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 $(1,238,759) $429,134
income (loss)
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
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
======== ======== ========
F-12
<PAGE>
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
Options Outstanding Exercisable
--------------------- -------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable 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. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
The selling, general and administrative expenses 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.
F-13
<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 through the close of the 1998 fiscal 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.
F-14
<PAGE>
AMERICAN ELECTROMEDICS CORP.
UNAUDITED CONDENSED BALANCE SHEET
AS OF APRIL 30, 1998
APRIL 30, 1998
----------------
(THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . $ 110
Accounts receivable, Trade . . . . . . . . 1,242
Inventories . . . . . . . . . . . . . . . . 1,829
Prepaid and other current assets . . . . . 1,579
-----
Total current assets . . . . . . . . . 4,760
Property and equipment . . . . . . . . . . 840
Accumulated depreciation . . . . . . . . . (418)
-----
422
Deferred financing costs . . . . . . . . . 21
Investment in affiliate . . . . . . . . . . 311
Goodwill . . . . . . . . . . . . . . . . . 849
-----
$6,363
=====
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . $ 923
Bank line of credit . . . . . . . . . . . . 285
Accrued liabilities . . . . . . . . . . . . 469
Current portion of long-term debt . . . . . 167
-----
Total current liabilities . . . . . . . 1,844
Convertible subordinated debentures . . . . --
Long-term debt . . . . . . . . . . . . . . 1,118
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- 5,663,136
shares at April 30, 1998 . . . . . . . . 566
Additional paid-in capital . . . . . . . . 5,682
Retained deficit . . . . . . . . . . . . . (2,752)
Foreign currency translation adjustment . . (95)
-----
Total stockholders' equity . . . . . . . 3,401
-----
$6,363
=====
See notes to Unaudited Condensed Financial Statements.
F-15
<PAGE>
AMERICAN ELECTROMEDICS CORP.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED APRIL 30, 1998 AND APRIL 26, 1997
Nine Months Ended
-----------------
April 30, 1998 April 26, 1997
-------------- --------------
(Thousands, except per share amounts)
Net sales . . . . . . . . . $ 5,095 $ 1,486
Cost of goods sold . . . . 2,979 841
--------- ---------
Gross profit . . . . . . 2,116 645
Selling, general and
administrative . . . . . . 2,637 1,325
Research and development . -- 85
--------- ---------
Total operating expenses 2,637 1,410
--------- ---------
Operating loss . . . . . . (521) (765)
Other income (expenses):
Undistributed earnings of
affiliate . . . . . . . 56 (55)
Interest, net . . . . . . (137) (81)
Minority interest in
affiliate . . . . . . . (85) --
Other . . . . . . . . . . (58) (25)
--------- ---------
(224) (161)
Loss before income taxes . (745) (926)
Income tax benefit . . . . (2) --
--------- ---------
Net loss . . . . . . . . . $ (747) $ (926)
========= =========
Weighted average common
shares outstanding . . . . 4,002,804 2,495,232
========= =========
Loss per common share:
Basic . . . . . . . . . . $ (.19) $ (.37)
========= =========
Diluted . . . . . . . . . $ (.19) $ (.37)
========= =========
See notes to Unaudited Condensed Financial Statements.
F-16
<PAGE>
AMERICAN ELECTROMEDICS CORP.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, 1998 AND APRIL 26, 1997
NINE MONTHS ENDED
-----------------
APRIL 30, 1998 APRIL 26, 1997
-------------- --------------
(THOUSANDS)
Operating activities:
Net loss . . . . . . . . . . $ (747) $ (926)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization . . . . . 265 56
Undistributed earnings
of affiliate . . . . . (56) 55
Minority interest in
affiliate . . . . . . . 85 --
Changes in operating
assets and liabilities:
Accounts receivable 189 135
Inventories,
prepaid and other
current assets . . (775) (361)
Accounts payable
and accrued
liabilities . . . (233) 16
------ ------
Net cash used in
operating
activities . . . . (1,272) (1,025)
Investing activities:
Purchase of property and
equipment, net . . . . . . . (267) (36)
------ ------
Net cash used in investing
activities . . . . . . . . . (267) (36)
Financing activities:
Principal payments on long
-term debt . . . . . . . . . (265) (84)
Proceeds from long-term debt
and bank line of credit . . 236 500
Proceeds from issuance of
common stock, net . . . . . 994 144
Proceeds from issuance of
convertible subordinated
debt . . . . . . . . . . . . -- 720
Deferred financing costs . . -- (166)
Proceeds from exercise of
stock options . . . . . . . 150 2
------ ------
Net cash provided by
financing activities . 1,115 1,116
Effect of exchange rate
changes on cash and cash
equivalents . . . . . . . . 1 --
Increase (decrease) in cash
and cash equivalents . . . . (423) 55
Cash and cash equivalents,
beginning of period . . . . 533 317
------ ------
Cash and cash equivalents,
end of period . . . . . . . $ 110 $ 372
====== ======
Supplemental disclosure of
cash flow information:
Non-cash activities:
Common Stock issued in
connection with
consulting agreement . $ 1,000 $ --
====== ======
Conversion of
convertible
subordinated debt . . . $ 720 $ --
====== ======
Common Stock issued in
connection with
acquisitions . . . . . $ 210 $ --
====== ======
See notes to Unaudited Condensed Financial Statements.
F-17
<PAGE>
AMERICAN ELECTROMEDICS CORP.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
APRIL 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included.
The Company changed its method from the equity method of
accounting for Rosch GmbH Medizintechnik ("Rosch GmbH") to a
consolidated basis on August 11, 1997 based upon the Company's
determination that it had reached the definition of control of
Rosch GmbH as of August 11, 1997 under generally accepted
accounting principles. The Company's determination of control of
Rosch GmbH was based primarily upon the successful completion of
negotiations to acquire effective voting control. For the
quarterly period ended October 31, 1997, the Company consolidated
the Company and Rosch GmbH, however, the Company continued only
to recognize earnings of Rosch GmbH up to its 50% ownership share
until the remaining 50% was purchased. On December 18, 1997, the
Company closed on the purchase of the remaining 50% of the
outstanding capital stock of Rosch GmbH paying $50,000 plus
105,000 shares of the Company's Common Stock, pursuant to a Stock
Purchase Option Agreement, dated as of November 1, 1997. As a
result of this transaction, the Company has recognized 100% of
earnings by Rosch GmbH since the quarter ended January 31, 1998.
The following proforma information is presented for comparative
purposes to disclose information on the financial position and
results of operations of the Company and Rosch GmbH had they been
consolidated for the nine months ended April 30, 1998:
(IN 000'S)
Nine Months Ended Nine Months Ended
April 30, 1998 April 26, 1997
-------------- --------------
Sales $ 5,095 $ 3,302
Gross profit 2,116 1,086
Net loss (747) (967)
Current assets 4,760 3,722
Non-current assets 1,603 1,294
Current liabilities 1,844 2,052
Non-current liabilities 1,118 1,744
Foreign Currency Translation
----------------------------
The financial statements of the Company's foreign subsidiary have
been translated into U.S. dollars in accordance with Statement of
Financial Standards No. 52, Foreign Currency Translation. All
balance sheet amounts have been translated using the exchange
rates in effect at the balance sheet date. Statement of
operations amounts have been translated using average exchange
rates. The gains and losses resulting from the changes in
exchange rates from the date of acquisition of Rosch GmbH to
April 30, 1998 have been reported separately as a component of
stockholders equity.
The aggregate transaction gains and losses are insignificant.
F-18
<PAGE>
2. INVESTMENT IN AFFILIATE
-----------------------
On December 18, 1997, the Company invested $150,000 and issued
105,000 shares of its Common Stock for a 45% interest in
Meditronic Medizinelektronik GmbH ("Meditronic"), pursuant to a
Stock Purchase Option Agreement, dated as of November 1, 1997.
The shares were valued at $1.00 per share, which represented the
fair market value of the Common Stock as of the entry into such
Agreement. Meditronic is a development and manufacturing company
based in Germany, specializing in the manufacture of medical
camera systems. Substantially all of Meditronic's sales are to
Rosch GmbH. At April 30, 1998, the investment in Meditronic
exceeded the Company's share of the underlying equity in net
assets by approximately $190,000 and is being amortized over
twenty-five years.
3. DEBT
----
On October 28, 1997, the Company entered into a Forbearance and
Workout Agreement with its bank as a result of the Company not
being in compliance with certain financial covenants under its
loan agreement as of July 31, 1997. The bank 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. See
Note 6, Subsequent Events.
As of November 26, 1997, the Company closed a private placement
of 1,030,000 shares of Common Stock at a price of $1.00 per
share, and used $150,000 of the placement proceeds to repay
portions of its bank indebtedness.
In connection with the October 1997 amendments to its bank
arrangements and efforts to obtain additional equity capital, the
Company reduced the conversion price of its outstanding 14%
Convertible Subordinated Debentures (the "Debentures") from $3.75
to $1.00 per share of Common Stock. As of November 3, 1997, the
holders of all outstanding $720,000 principal amount of
Debentures elected to convert. As a result of these conversions,
the Company also reduced its long-term debt by $720,000 and
issued 720,000 shares of Common Stock.
4. CAPITAL STOCK
-------------
Effective as of March 15, 1998, the Company retained Liviakis
Financial Communications, Inc. ("LFC") as a financial consultant
for a term of one year for a fee of 1,000,000 shares of the
Company's Common Stock, valued at $1.00 per share, the fair
market value, and warrants for an additional 1,000,000 shares of
Common Stock exercisable at $1.00 per share for four years. LFC
would receive a finder's fee equal to 2.5% of the gross funding
of any debt or equity placement and 2% of the gross consideration
on any acquisition for which LFC acts as a finder for the
Company.
5. YEAR 2000
---------
The Company has completed an assessment of Year 2000 issues with
respect to its computer systems. The Company believes that the
Year 2000 issue will not pose significant operational problems
for its computer systems in that all required modifications and
conversions to comply with Year 2000 requirements should be fully
completed by the third quarter of 1999. In the opinion of
management, the total cost of addressing the Year 2000 issue will
not have a material impact on the Company's financial position or
results of operations.
6. SUBSEQUENT EVENTS
-----------------
On May 5, 1998, the Company acquired Dynamic Dental Systems,
Inc., a Delaware corporation ("DDS"), in exchange for
$2,475,000 consisting of 750,000 shares of the Company's Common
Stock and $225,000 in cash, pursuant to an Agreement and Plan
F-19
<PAGE>
of merger, whereby DDS became a wholly-owned
subsidiary of the Company. The shares were valued at $3.00 per
share, which represented the fair market value at the time of
entry into the Agreement. The acquisition will be accounted for
as a purchase. DDS is based in Gainesville, Georgia
and is a distributor of digital operator hardware, cosmetic
imaging software, and intraoral dental cameras.
On May 12, 1998, the Company acquired Equidyne Systems, Inc., a
California corporation ("ESI"), in exchange for $1,800,000
consisting of 600,000 shares of the Company's Common Stock,
pursuant to an Agreement and Plan of Merger, whereby ESI became
a wholly-owned subsidiary of the Company. The shares were valued
at $3.00 per share, which represented the fair market value at
the time of entry into the Agreement. The acquisition will be
accounted for as a purchase. ESI is based in San Diego, California
and is engaged in the development of the INJEX needle-free drug
injection system.
During May 1998, the Company closed the placement of three
tranches of 1,000 shares each of Series A Convertible Preferred
Stock, $.01 par value (the "Series A Preferred Stock"), to one
purchaser (the "Purchaser") at a purchase price of $1,000 per
share or an aggregate purchase price of $3 million, pursuant to a
Securities Purchase Agreement (the "Purchase Agreement"), among
the Company, West End Capital LLC ("West End") and the Purchaser.
As part of its entry into the Purchase Agreement, the Company
entered into a Registration Rights Agreement (the "Registration
Agreement") and a Warrant Agreement. Concurrently with the
closing for the first tranche of Series A Preferred Stock, the
Company issued warrants under the Warrant Agreement (the
"Warrants") to West End for the purchase of 50,000 shares of the
Company's Common Stock at an exercise price of $4.80 per share,
subject to customary anti-dilution provisions, expiring on May 5,
2002. The Company also issued warrants for the purchase of
30,000 shares of Common Stock to the placement agent, exercisable
at $4.40 per share for three years.
The Registration Agreement requires the Company to file a
registration statement (the "Registration Statement") under the
Securities Act of 1933, as amended, for the Warrants and shares
of the Company's Common Stock underlying the Series A Preferred
Stock and the Warrants.
The Series A Preferred Stock is immediately convertible into
shares of the Company's Common Stock at a conversion rate equal
to $1,000 divided by the lower of (i) $4.00 or (ii) 75% of the
average closing bid price for the Common Stock for the five
trading days immediately preceding the conversion date. The
Company may force conversion of all (and not less than all) of
the outstanding shares of Series A Preferred Stock at any time
after the first anniversary of the effective date of the
Registration Statement. There is no minimum conversion price.
Should the bid price of the Common Stock fall substantially prior
to conversion, the holders of the Series A Preferred Stock could
obtain a significant portion of the Common Stock upon conversion,
to the detriment of the then holders of the Common Stock.
The Series A Preferred Stock has a liquidation preference of
$1,000 per share, plus any accrued and unpaid dividends, and
provides for an annual dividend equal to 5% of the liquidation
preference, which may be paid at the election of the Company in
cash or shares of its Common Stock. The annual dividend rate was
increased to 12% as of June 5, 1998 because the Company did not
file the Registration Statement covering the Common Stock
underlying the Series A Preferred Stock within 30 days of the
initial closing. Such rate may increase up to 18% by reason of
further delays in the effective date of the Registration
Statement, and remain in effect until the effective date thereof
when the dividend rate would return to 5%.
F-20
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following are unaudited pro forma combined condensed balance
sheet as of April 31, 1998 and the unaudited combined condensed
statements of earnings for the nine months ended April 30, 1998
and year ended July 31, 1997 for the following companies:
American Electromedics Corp., Equidyne Systems, Inc., Dynamic
Dental Systems, Inc. and Rosch GmbH Medizintechnik. The pro
forma combined condensed statements are presented under the
purchase method of accounting for business combinations. The
purchase method of accounting requires that all assets and
liabilities be adjusted to their estimated fair market value as
of the date of acquisition.
The pro forma statements are provided for informational purposes
only. The pro forma combined condensed statements of earnings
are not necessarily indicative of actual results that would have
been achieved had the acquisition been consummated at the
beginning of the periods presented, and is not indicative of
future results. The pro forma financial statements should be
read in conjunction with the audited financial statements and the
notes thereto of Equidyne Systems, Inc., Dynamic Dental Systems,
Inc. and Rosch GmbH and the Company.
F-21
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
APRIL 30, 1998
(THOUSANDS)
PRO FORMA
AMERICAN PRO
ELECTROMEDICS PRO FORMA FORMA
(1) ADJUSTMENTS COMBINED
ASSETS
Current Assets:
Cash and cash equivalents . $147 $ (3) (139) $ 8
Accounts receivable . . . . 1,328 -- 1,328
Inventories . . . . . . . . 1,944 -- 1,944
Other current assets . . . 705 -- 705
------ ------ -------
Total current assets . $4,124 $ (139) $ 3,985
Depreciable assets, net . . 438 -- 438
Intangible assets, net . . 5,154 (2) (134) 5,020
Investment in affiliate . . 311 -- 311
Other . . . . . . . . . . . 901 -- 901
------ ------ -------
Total assets $10,928 $ (273) $10,655
====== ====== =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . $1,187 -- $ 1,187
Bank line of credit . . . . 300 -- 300
Accrued liabilities . . . . 412 -- 412
Current portion of long- 167 -- 167
term debt . . . . . . . . . ------ ------ -------
Total current
liabilities . . . . . 2,066 __ 2,066
Long-term debt . . . . . . 1,785 (2) (145) 1,640
Other liabilities . . . . . 12 -- 12
Stockholders' Equity:
Common stock . . . . . . . 712 -- 712
Additional paid-in capital 9,691 -- 9,691
Retained deficit . . . . . (3,242) (2,3) (128) (3,370)
Foreign currency (96) -- (96)
translation adjustment . . ------ -------
Total stockholders' 7,065 (128) 6,937
equity . . . . . . . . ------ -------
Total liabilities and $10,928 $(273) $10,655
stockholders' equity . ====== ====== =======
See accompanying notes.
F-22
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED APRIL 30, 1998
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
AMERICAN
ELECTROMEDICS PRO FORMA PRO FORMA
(1) ADJUSTMENT COMBINED
---------- ---------- ---------
Net sales . . . . . . $7,040 $-- $7,040
Cost of goods sold . 4,210 -- 4,210
------ ------
2,830 2,830
Operating expense . . 3,493 -- 3,493
Amortization of
tangibles . . . . . 229 (2)(73) 302
Operating loss . . . (892) (73) (965)
Other income
(expenses) . . . . . (33) (3)6 (27)
------ ------ ------
Loss before
provisions for
income taxes . . . . (925) (67) (992)
Provision for income
taxes . . . . . . . (24) -- (24)
------ ------ ------
Net loss . . . . . . $(949) $(67) $(1,016)
========= ====== =========
Loss per share:
Basic . . . . . . . . $(.14) -- $(.15)
========= =========
Diluted . . . . . . . $(.14) -- $(.15)
========= =========
Shares used to
compute per share
amounts:
Basic . . . . . . . . 7,118,136 -- 7,118,136
========= =========
Diluted . . . . . . . 7,118,136 -- 7,118,136
========= =========
See accompanying notes.
F-23
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(1) YEAR ENDED JULY 31, 1997
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
AMERICAN
ELECTROMEDICS PRO FORMA PRO FORMA
(1) ADJUSTMENT COMBINED
------------------------ -----------
Net sales . . . . . . $6,176 $-- $6,176
Cost of goods sold . 3,758 -- 3,758
--------- ---------
2,418 2,418
Operating expense . . 3,141 -- 3,141
Amortization of
tangibles . . . . . 50 (5) 206 256
------------------ ---------
Operating loss . . . (773) -- (979)
Other income (417) (3) 3 (414)
(expenses) . . . . . ------------------ ---------
Loss before provision
for income taxes . . (1,190) (203) (1,393)
Provision for income
taxes . . . . . . . (27) __ (27)
--------- ---------
Net loss . . . . . . $(1,217) (203) $(1,420)
========== ====== =========
Loss per share:
Basic . . . . . . . . $(.31) -- $(.36)
========= =========
Diluted . . . . . . . $(.31) -- $(.36)
========= =========
Shares used to compute
per share amounts:
Basic . . . . . . . . 4,008,136 -- 4,008,136
========= =========
Diluted . . . . . . . 4,008,136 -- 4,008,136
========= =========
Notes to Pro Forma Condensed Financial Statements
(1) Pro forma numbers for American Electromedics column include
the following companies: American Electromedics Corp.,
Rosch GmbH Medizintechnik, Equidyne Systems, Inc. and
Dynamic Dental Systems, Inc. These combined numbers are
represented as though Equidyne, Dynamic and Rosch were
acquired as of August 1, 1996.
(2) Amortized nine months of goodwill for investment in
affiliates with the assumption that subsidiaries were owned
at August 1, 1996.
(3) Write off notes payable on Equidyne Systems, Inc., assuming
debt was fully paid when acquired on August 1, 1996.
(4) Dynamic Dental Systems date of inception was January 1,
1997. Seven months activity reflected.
(5) Amortized twelve months of goodwill for investments in
affiliates with assumption that subsidiaries were owned at
August 1, 1996.
F-24
<PAGE>
===========================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING
STOCKHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE
SPECIFICALLY OFFERED HEREBY OR AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THESE SECURITIES IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. EXCEPT WHERE
OTHERWISE INDICATED, THIS PROSPECTUS SPEAKS AS OF THE EFFECTIVE DATE OF THE
REGISTRATION STATEMENT. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
Page
----
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Summary Financial and Operating Information . . . . . . . . . . . . . . 7
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Market for the Company's Common Stock and Related Stockholder Matters . 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . 28
Certain Relationships and Related Transactions . . . . . . . . . . . . 30
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . 31
Description of Securities . . . . . . . . . . . . . . . . . . . . . . . 32
Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . 34
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . 38
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . F-1
===========================================================================
===========================================================================
7,099,134 SHARES
COMMON STOCK
AND
50,000 COMMON STOCK
PURCHASE WARRANTS
AMERICAN
ELECTROMEDICS
CORP.
----------
PROSPECTUS
----------
SEPTEMBER ., 1998
===========================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of this offering in connection with the
issuance and distribution of the securities being registered, all of which
are to be paid by the Registrant, are as follows:
Registration Fee . . . . . . . . . . . . . $ 6,845.88
Legal Fees and Expenses . . . . . . . . . . 35,000.00
Accounting Fees and Expenses . . . . . . . 20,000.00
Printing . . . . . . . . . . . . . . . . . 2,000.00
Miscellaneous Expenses . . . . . . . . . . 6,154.12
---------
Total . . . . . . . . . . . . . . . . $70,000.00
=========
ITEM 27. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------------------------------------------
3.1.1 Certificate of Incorporation of the Company (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 the Company filed with the
Secretary of State of the State of Delaware on
January 27, 1987 (filed as Exhibit 3(a)(2) to the
Company'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 the Company filed with the
Secretary of State of the State of Delaware on
October 9, 1990 (filed as Exhibit 3(a)(3) to the
Company'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 the Company filed with the
Secretary of State of Delaware on November 7, 1996
(filed as Exhibit 3.1.4 to the Company's Form 10-K
for the fiscal year ended July 31, 1997, and
incorporated herein by reference).
3.1.5 Certificate of Amendment to Certificate of
Incorporation of the Company filed with the
Secretary of State on May 4, 1998 (filed as
Exhibit 2.1 to the Company's Form 8-K for an event
of May 5, 1998 (the "May 1998 Form 8-K"), and
incorporated herein by reference).
II-1
<PAGE>
3.1.6 Certificate of Designations of Series A
Convertible Preferred Stock of the Company (filed
with the Secretary of State of Delaware on May 5,
1998, filed as Exhibit 2.2 to the May 1998 Form 8-
K, and incorporated herein by reference).
3.2 By-Laws of the Company (filed as Exhibit 3(b) to
Registration No. 2-71775, and incorporated herein
by reference).
3.3 Amendments to the By-Laws of the Company (filed as
Exhibit 3(c) to the Company's 1990 Form 10-K and
incorporated herein by reference).
4.1 Form of Common Stock Certificate (filed as
Exhibit 4 to Registration No. 2071775 and
incorporated herein by reference).
5.* Opinion of Thelen, Reid & Priest LLP.
10.1** Commercial Lease, dated March 23, 1998, by and
between Mareld Company, Inc. and the Company.
10.2.1 1983 Incentive Stock Option Plan (filed as Exhibit
A to the Company's Information Statement, and
incorporated herein by reference).
10.2.2 Form of 1983 Incentive Stock Option Certificate
(filed as Exhibit (10)-12 to the Company'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 the Company'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 the
Company's 1984 Form 10-K, and incorporated herein
by reference).
10.4 1996 Stock Option Plan (filed as Exhibit A
to the Company's 1996 Proxy Statement, and
incorporated herein by reference).
10.5 Form of Employment Agreement, dated as of
July, 31, 1995, between the Company and
Noel A. Wren (filed as Exhibit 10.5 to the
Company's Form 10-KSB for the fiscal year
ended July 29, 1995 (the "1995 Form 10-
KSB"), and incorporated herein by
reference).
10.6 Consulting Agreement, dated as of March 24,
1995, between the Company and Alan Gelband
Company, Inc. (filed as Exhibit 10.6 to the
Company's 1995 Form 10-KSB, and
incorporated herein by reference).
10.7 Stock Purchase Agreement, dated January 11,
1996, between the Company and Andy Rosch
(filed as Exhibit 1 to the Company's Form
8-K for an event of January 11, 1996, and
incorporated herein by reference).
10.8.1 Loan Agreement, dated October 4,
1996, between the Company and
Citizens Bank New Hampshire (the
"Bank") (filed as Exhibit 10.9.1 to
the Company's Form 10-KSB for the
fiscal year ended July 27, 1996
(the "1996 Form 10-KSB") and
incorporated herein by reference).
II-2
<PAGE>
10.8.2 Security Agreement, dated October
4, 1996, between the Company and
the Bank (filed as Exhibit 10.9.2
to the Company's 1996 form 10-KSB,
and incorporated herein by
reference).
10.8.3 Revolving Line of Credit Promissory
Note, dated October 4, 1996, from
the Company to the Bank (filed as
Exhibit 10.9.3 to the Company's
1996 Form 10-KSB, and incorporated
herein by reference).
10.8.4 Term Promissory Note, dated October
4, 1996, from the Company to the
Bank (filed as Exhibit 10.9.4 to
the Company's 1996 Form 10-KSB, and
incorporated herein by reference).
10.9 Form of 14% Convertible Subordinated
Debenture, due October 31, 1999 (filed as
Exhibit 4 to the Company's Form 8-K for an
event of October 25, 1996, and incorporated
herein by reference).
10.10** Amended Employment Agreement, dated
as of January 1, 1998, between the
Company and Thomas A. Slamecka.
10.11** Employment Agreement, dated January
1, 1998, between the Company and
Michael T. Pieniazek.
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-K for the fiscal year
ended July 31, 1997 ["1997 Form 10-K"] and
incorporated herein by reference).
10.13 Standstill Agreement, dated October 1,
1997, between Registrant and Alan Gelband
(filed as Exhibit 10.13 to the Company's
1997 Form 10-K and incorporated herein by
reference).
10.14** Contract of Employment between
Rosch GmbH Medizintechnik and Andy
Rosch effective January 1, 1996.
10.15 Agreement and Plan of Merger, dated as of
April 30, 1998, among the Company, DDS
Acquisition Corporation, Dynamic Dental
Systems, Inc. ("DDS") and others (without
Exhibits or Schedules thereto) (filed as
Exhibit 2.3 to the May 1998 Form 8-K and
incorporated herein by reference).
10.16 Certificate of Merger between DDS
Acquisition Corporation and DDS, filed with
the Secretary of State of Delaware on May
5, 1998 (filed as Exhibit 2.4 to the May
1998 Form 8-K and incorporated herein by
reference).
10.17 Agreement and Plan of Merger, dated as of
March 27, 1998, among the Company, ESI
Acquisition Corporation and Equidyne
Systems Inc. ("ESI") (incorporated by
reference to Exhibit 2 to the Company's
Form 8-K for an event of March 27, 1998).
II-3
<PAGE>
10.18 Employment Agreement, dated as of April 30, 1998,
by and between Dental Dynamic Systems, Inc. and
Henry J. Rhodes (filed as Exhibit 2.8 to the May
1998 Form 8-K and incorporated herein by
reference).
10.19 Employment Agreement, dated as of May 11, 1998, by
and between Equidyne Systems, Inc. and Lawrence
Petersen (filed as Exhibit 2.9 to the May 1998
Form 8-K and incorporated herein by reference).
10.20 Securities Purchase Agreement, dated as of May 5,
1998, among the Company, West End Capital LLC and
the Purchaser listed therein (filed as Exhibit
10.1 to the May 1998 Form 8-K and incorporated
herein by reference).
10.21 Form of Warrant issued to West End Capital LLC
(filed as Exhibit 10.2 to the May 1998 Form 8-K
and incorporated herein by reference).
10.22 Registration Rights Agreement, dated as of May 5,
1998, among the Company, West End Capital LLC and
the Purchaser listed therein (filed as Exhibit
10.3 to the May 1998 Form 8-K and incorporated
herein by reference).
10.23 Stock Purchase Option Agreement, dated November 1,
1997, between the Company and Andy Rosch (without
exhibits) (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB for the period
ended October 31, 1997 and incorporated herein by
reference).
10.24 Consulting Agreement, dated February 19, 1998,
between the Company and Liviakis Financial.
Communications, Inc. (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the
quarterly period ended January 31, 1998 and
incorporated herein by reference).
10.25 Form of Stock Purchase Agreement (filed as Exhibit
10.1 to the Company's Current Report on Form 8-K
filed to report an event of November 26, 1997 and
incorporated herein by reference).
21.** List of subsidiaries.
23.1* Consent of Ernst & Young LLP.
23.2* Consent of Thelen Reid & Priest LLP (included as
part of Exhibit 5).
24.** Power of Attorney.
-------------------------------------
* Filed herewith.
** Filed with the initial filing of this Registration Statement.
II-4
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF
1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO
BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM
SB-2 AND AUTHORIZED THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
AMHERST, NEW HAMPSHIRE, ON THE 9TH DAY OF SEPTEMBER, 1998.
AMERICAN ELECTROMEDICS CORP.
BY: /s/ Michael T. Pieniazek
-------------------------
Michael T. Pieniazek
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOW-
ING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of
-------------------------- the Board
Thomas A. Slamecka
/s/ Michael T. Pieniazek President September 9, 1998
-------------------------- and Chief
Michael T. Pieniazek Financial Officer
* Director
--------------------------
Blake C. Davenport
* Director
--------------------------
Ronald S. Newbower
* Director
--------------------------
Andy Rosch
* Director
--------------------------
Marcus R. Rowan
*By: /s/ Michael T. Pieniazek Attorney-in-fact September 9, 1998
--------------------------- for each of the
Michael T. Pieniazek persons indicated
by an asterisk
II-5
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
-------
5 Opinion of Thelen Reid & Priest LLP.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Thelen Reid & Priest LLP (included as part of
Exhibit 5).
II-6
Exhibit 5
THELEN REID & PRIEST LLP
40 West 57th Street
New York, NY 10019
(212) 603-6780
New York, New York
September 10, 1998
American Electromedics Corp.
13 Columbia Drive, Suite 5
Amherst, New Hampshire 03031
Gentlemen:
We have acted as special counsel to American
Electromedics Corp., a Delaware corporation (the "Company"), in
connection with the preparation of a Registration Statement on
Form SB-2 (the "Registration Statement") relating to the
registration of (A) 4,570,798 shares of the Company's Common
Stock, $.10 par value per share ("Common Stock"), which have been
issued in various private placements since October of 1996 (the
"Private Placements"), (B) 1,433,333 shares of Common Stock
issuable upon exercise of presently exercisable warrants and
options (the "Options and Warrants") including those issuable
under the West End Warrants (as defined below), (C) 1,085,003
shares of Common Stock issuable upon conversion of the Company's
Convertible Preferred Stock, Series A, par value $.01 per share
(the "Series A Preferred Stock"), and (D) 50,000 Common Stock
Purchase Warrants issued to West End Capital LLC in connection
with the issuance of the Series A Preferred Stock (the "West End
Warrants").
The Private Placements consisted principally of (i)
1,000,000 shares issued as of March 15, 1998 to Liviakis
Financial Communications, Inc., a financial consultant, as part
of a consulting fee (the "LFC Consulting Fee"); (ii) 1,050,000
shares issued as of November 26, 1997 in a private placement of
Common Stock (the "1997 Private Placement"); (iii) 750,000 shares
issued as of May 5, 1998 in connection with the acquisition by
the Company of Dynamic Dental Systems, Inc. (the "DDS Merger");
(iv) 720,000 shares issued as of November 3, 1997 in connection
with the conversion of the Company's 14% Convertible Subordinated
Debentures (the "Debenture Conversion"); (v) 600,000 shares
issued as of May 12, 1998 in connection with the acquisition by
the Company of Equidyne Systems, Inc. (the "ESI Merger"); and
(vi) 210,000 shares issued as of December 18, 1997 in connection
with the purchase of all the remaining interests in Rosch Gmbh
Medizintechnic which had not previously been acquired by the
Company and the purchase of an interest in Meditronic
Medizinelektronic Gmbh (the "Rosch Acquisitions").
The Options and Warrants consist of (i) warrants to
purchase 1,000,000 shares of Common Stock issued as part of the
LFC Consulting Fee; (ii) warrants to purchase 300,000 shares of
Common Stock issued to Marcus Rowan, a Director of the Company;
(iii) warrants to purchase 50,000 shares of Common Stock issued
to Blake C. Davenport, a Director of the Company; (iv) warrants
to purchase 30,000 shares of Common Stock issued to Cohig &
Associates, the placement agent for the Series A Preferred Stock;
(v) options to purchase 13,333 shares of Common Stock issued to
Wall Street Consultants; and (vi) the West End Warrants.
This opinion is being rendered in connection with the
filing by the Company of the Registration Statement.
For purposes of this opinion, we have examined
originals or copies, certified or otherwise identified to our
satisfaction, of (i) the Registration Statement; (ii) the
Certificate of Incorporation and By-Laws of the Company, as in
effect on the date hereof; (iii) the Certificate of Designation
of the Class A Preferred Stock; (iv) agreements and documents
relating to the placement of the Class A Preferred Stock; (v) the
option and warrant agreements relating to the Options and
Warrants; (vi) agreements and documents relating to the 1997
Private Placement; (vii) agreements and documents relating to the
DDS Merger; (viii) agreements and documents relating to the ESI
Merger; (ix) agreements and documents relating to the Rosch
Acquisitions; (x) the agreement under which the LFC Consulting
Fee was paid; (xi) agreements and documents relating to the
Debenture Conversion; (xii) the resolutions adopted by the Board
of Directors of the Company relating to each of the foregoing and
(xiii) such other documents, certificates or other records as we
have deemed necessary or appropriate.
Based upon the foregoing, and subject to the
qualifications hereinafter expressed, we are of the opinion that:
(1) The Company is a corporation duly organized,
validly existing and in good standing under the
laws of the State of Delaware.
(2) The shares of Common Stock included in the
Registration Statement which are presently issued
and outstanding were duly authorized, validly
issued, and are fully paid and non-assessable.
(3) The shares of Common Stock included in the
Registration Statement to be issued upon the
conversion of the Class A Preferred Stock will be
duly authorized and validly issued, and fully paid
and non-assessable when the Class A Preferred
Stock is duly converted in accordance with the
Certificate of Designation of the Class A
Preferred Stock.
(4) The shares of Common Stock included in the
Registration Statement to be issued upon the
exercise of the Options and Warrants will be duly
authorized and validly issued, and fully paid and
non-assessable when the Options and Warrants are
duly exercised and the exercise price is paid for
the shares of Common Stock underlying such options
and warrants in accordance with the terms of the
respective option and warrant agreements.
(5) The West End Warrants were duly authorized and
validly issued, and are fully paid and non-
assessable.
We are members of the Bar of the State of New York and
do not hold ourselves out as experts concerning, or qualified to
render opinions with respect to, any laws other than the laws of
the State of New York, the Federal laws of the United States and
the General Corporation Law of the State of Delaware.
We hereby consent to the reference to this firm under
the caption "Legal Matters" in the Prospectus included in the
Registration Statement and to the filing of this opinion with the
Securities and Exchange Commission as Exhibit 5 to the
Registration Statement. In giving the foregoing consent, we do
not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act, or the
rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ Thelen Reid & Priest LLP
Thelen Reid & Priest LLP
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption
"Experts" and to the use of our report dated September 29, 1997
(except Note 10, as to which the date is November 3, 1997) in
Amendment No. 1 to the Registration Statement (Form SB-2) and the
related Prospectus of American Electromedics Corp. for the
registration of 7,099,134 shares of its common stock and 50,000
of its common stock purchase warrants.
/s/ Ernst & Young LLP
Manchester, New Hampshire
September 9, 1998
