AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AMERICAN ELECTROMEDICS CORP.
(Name of Small Business Issuer in Its Charter)
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DELAWARE 3845 04-2608713
(State Or Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation Industrial Identification No.)
or Organization) Classification
Code Number)
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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)
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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)
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Copies to:
BRUCE A. RICH, ESQ.
THELEN REID & PRIEST LLP
40 WEST 57TH STREET
NEW YORK, NEW YORK 10019
(212) 603-2000
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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. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH AMOUNT OFFERING AGGREGATE AMOUNT OF
CLASS OF SECURITIES TO BE PRICE PER OFFERING REGISTRATION
TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) FEE(4)
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Common Stock, 3,153,556 $3.31 $10,438,270.36 $3,079.29
$.10 par value shares
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Common Stock, 723,335 3.31 2,394,238 706.30
$.10 par value(2) shares
--------------------------------------------------------------------------
Common Stock, 1,380,000 3.31 4,567,800 1,347.50
$.10 par value(3) shares
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Common Stock, 50,000 4.80 240,000 70.80
$.10 par shares
value(3)(4)
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Common Stock, 13,333 7.50 99,997.50 29.50
$.10 par value(3) shares
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Warrants 50,000 .10 5,000 --
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Total -- -- $5,233.39
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(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 July 8, 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.
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.
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<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 JULY 10, 1998
5,320,224 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) 3,153,556 shares presently issued and
outstanding, (B) 1,443,333 shares issuable upon exercise of
presently exercisable warrants and options and (C) 723, 335
shares issuable upon conversion of 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 July 8, 1998, the closing bid and asked prices were
$3.25 and $3.38 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."
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AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 9 THROUGH 15 HEREOF.
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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 July . , 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.
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<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
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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.
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
California corporation and a wholly-owned subsidiary of the
Company, and ESI (the "ESI Merger"). ESI is based in San Diego,
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<PAGE>
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
injectible 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 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 bank
indebtedness, 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.
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<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 New Hampshire, 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.
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 5,320,224
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
June 30, 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
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<PAGE>
will accrue 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.
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<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.
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YEAR ENDED
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SUMMARY OF 7/31/97 7/27/96 7/29/95 7/30/94 7/31/93
OPERATIONS
---------------------------------------------------------------------
Net sales $2,309 $3,337 $2,443 $1,965 $2,358
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Income (loss)
before
provision for
income taxes
and
extraordinary
items (926) 467 184 61 203
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Net income (loss) (926) 442 172 57 399
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Earnings (loss)
per common
share:
Basic (.37) .18 .08 .03 .25
Diluted (.37) .18 .08 .03 .25
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Weighted average
common shares 2,510,296 2,493,854 2,238,483 1,833,666 1,594,651
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-------------------
NINE MONTHS
ENDED
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4/30/98 4/26/97
SUMMARY OF OPERATIONS
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Net sales $5,095 $1,486
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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 7/31/97 7/27/96 7/29/95 7/30/94 7/31/93
---------------------------------------------------------------------
Total assets $3,060 $2,771 $1,513 $899 $1,023
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Working capital 1,060 906 915 485 402
---------------------------------------------------------------------
Long-term debt 1,100 94 0 4 0
---------------------------------------------------------------------
Stockholders' equity 1,168 1,948 1,196 771 704
---------------------------------------------------------------------
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<PAGE>
--------------------------------------
AS OF
FINANCIAL POSITION 4/30/98
--------------------------------------
Total assets $6,363
--------------------------------------
Working capital 2,916
--------------------------------------
Long-term debt 1,118
--------------------------------------
Stockholders' equity 3,401
--------------------------------------
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<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.
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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
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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 9 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
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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
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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 and the eleven-month period ended June 30, 1998,
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the Common Stock traded from a high of $9.06 to 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 June 30, 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 authority
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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, 1997 and the eleven months ended
June 30, 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.
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<PAGE>
-----------------------------------------------------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDING ENDED ENDED
FISCAL PERIOD 7/31/98 7/31/97 7/27/96
-----------------------------------------------------------------
High Low High Low High Low
-----------------------------------------------------------------
First Quarter $1.88 $1.00 $5.16 $3.13 $3.75 $2.66
-----------------------------------------------------------------
Second Quarter 1.50 .66 4.38 1.88 4.06 2.34
-----------------------------------------------------------------
Third Quarter 4.94 .88 3.75 1.38 3.44 2.66
-----------------------------------------------------------------
Fourth Quarter 4.81* 3.19* 1.63 .84 9.06 4.22
-----------------------------------------------------------------
* Through June 30, 1998.
APPROXIMATE NUMBER OF HOLDERS OF COMPANY'S COMMON STOCK
-------------------------------------------------------
As of June 30, 1998, there were approximately 205
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
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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
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 $355,000 increase in SG&A expenses to increased
marketing and promotional activity. General and administrative
expenses increased by $145,000 as a result of corporate
development expense and the retention of senior level executives.
These costs are more fixed in nature. Selling expenses increased
by $210,000 as a result of the market introduction of the new
QuikTymp(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 introduction period and should
become more variable over time. The increase in other
income/expense in 1997 when compared to 1996 primarily related to
$100,000 of additional interest expense as a result of new
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convertible debentures and other bank debt as well as write-off
of purchased technology from BioFlo Systems together with
$125,000 associated with the legal proceeding involving the
former president of the Company. The Company decreased R&D
expenditures in Fiscal 1997 to $85,000 compared to $215,000 in
Fiscal 1996 when the Company redesigned its line of
tympanometers.
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. 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
bank indebtedness.
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.
-18-
<PAGE>
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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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.
The Company manufactures and sells four different models of
Tympanometers(R).
-20-
<PAGE>
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.
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
-21-
<PAGE>
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.
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.
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<PAGE>
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 injectible pharmaceuticals in the United States.
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
-23-
<PAGE>
and manufacturers and its success in securing licensing and/or
joint development agreements with such entities.
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.
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.
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<PAGE>
EMPLOYEES
---------
At June 30, 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.
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
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.
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<PAGE>
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 as Chief Executive Officer of ESI over several
months spanning late 1995 and early 1996. At this stage, and
absent any investigation or discovery, the Company cannot
estimate the merits of the claim or the effect on the Company.
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<PAGE>
MANAGEMENT
The following table sets forth certain information
concerning the directors, executive officers and other
significant employees of the Company as of June 30, 1998.
Position with the Year Became
Name Age Company Director
---- --- ------- --------
Thomas A. Slamecka 57 Chairman of the Board 1996
and Director
Michael T. Pieniazek 39 President, Chief N/A
Financial Officer,
Treasurer and
Secretary
Blake C. Davenport 31 Director 1997
Andy Rosch 37 Director and General 1997
Manager of Rosch GmbH
Marcus R. Rowan 37 Director 1996
Joseph Wear 63 Director 1995
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.
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.
Joseph Wear has been a director of the Company since March
1995. Since November 1995, he has been Executive Director of
Wellness Community-Delaware, a provider of psychosocial support
to people with cancer and their families. From 1987 to 1995, he
was a partner in Philadelphia Entrepreneurial Partners which was
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<PAGE>
engaged in management consulting to small and medium businesses.
From 1970 to 1987, Mr. Wear was President and Chief Executive
Officer of Summit Airlines.
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, 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.
In October 1996, the Company granted each director an option
under the 1996 Stock Option Plan for 10,000 shares of Common
Stock exercisable at $4.38 per share vesting after one year and
terminating no later than five years from grant.
There is no family relationship among the directors or
executive officers of the Company.
Directors are each paid $500 per board meeting attended plus
travel expenses.
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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 Officer 1./ 1995 97,500 -- -- --
--
-------------------------------------------------------------------
Michael T. Pieniazek, 1997 $113,000 -- -- --
President & CFO 2./
--
-------------------------------------------------------------------
---------------------------------
1/ Mr. Wren's employment terminated in March 1997.
--
2/ Mr. Pieniazek became President in April 1997 and continues to
--
serve as Chief Financial Officer.
Mr. Wren was furnished with an automobile for business and personal
use. The compensation specified in the preceding table does not
include the value of non-business use as the amounts were not
material.
AGGREGATED OPTION EXERCISES FOR THE FISCAL YEAR ENDED JULY 31, 1997
AND FY-END OPTION VALUES
----------------------------------------------------------------------
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FY- OPTIONS AT FY-
END (#) END ($)
----------------------------------------------------------------------
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 $1.00 per share,
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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
shares of the Company's Common Stock, 20,000 of such options at
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<PAGE>
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.
-31-
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of June 30, 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 June 30, 1998.
----------------------------------------------------------------------
AMOUNT &
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT
BENEFICIAL OWNER STATUS OWNERSHIP OF CLASS
----------------------------------------------------------------------
Liviakis Financial Stockholder 1,500,000 shs(1) 19.3%
Communications, Inc.
2420 K Street
Sacramento, California
95816
----------------------------------------------------------------------
Thomas A. Slamecka* Director 834,550 shs(2) 11.0%
and
Chairman
----------------------------------------------------------------------
Jubilee Investors LLC Stockholder 723,335 shs(3) 9.3%
c/o West End Capital LLC
One World Trade Center
Suite 4563
New York, New York 10048
----------------------------------------------------------------------
Robert B. Prag Stockholder 500,000 shs(4) 6.9%
2420 K Street
Sacramento, California
95816
----------------------------------------------------------------------
Marcus R. Rowan* Director 391,550 shs(5) 5.3%
----------------------------------------------------------------------
Michael T. Pieniazek* President 334,750 shs(6) 4.6%
and CFO
----------------------------------------------------------------------
Andy Rosch* Director 310,000 shs 4.4%
----------------------------------------------------------------------
Blake C. Davenport* Director 70,000 shs(7) 1.0%
----------------------------------------------------------------------
Joseph Wear* Director 66,825 shs(8) 0.9%
----------------------------------------------------------------------
All Executive Officers
and Directors as a
Group (6 persons) 2,007,675 shs(9) 27.2%
----------------------------------------------------------------------
-----------------------------
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) Includes presently exercisable options for 10,000 shares.
9) See Notes 3, 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
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<PAGE>
Company in cash or shares of its Common Stock. Pursuant to a
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 3,153,556 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."
Except for Thomas A. Slamecka, Marcus Rowan and Blake C.
Davenport, none of the Selling Stockholders has held any
position, office or material relationship with the Company or any
of its predecessors or affiliates within three years of the date
of this Prospectus. Mr. Slamecka has been the Chairman of the
Board of the Company since February 1997, and a director of the
Company since October 1996, and Mr. Rowan has been a director of
the Company since October 1996, and Mr. Davenport has been a
director of the Company since December 1997.
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.
SHARES WARRANTS AMOUNT
BENEFICIALLY BENEFICIALLY SHARES WARRANTS BENEFICIALLY
OWNED PRIOR OWNED PRIOR TO BE TO BE OWNED AFTER
NAME(1) TO OFFERING TO OFFERING OFFERED OFFERED OFFERING(2)
----------------- ------------ ------------ --------------- ----------
Stanley I. Aber 12,000 N/A 12,000 N/A 0
Alexander
Enterprise
Holdings Corp. 10,256 N/A 10,256 N/A 0
Jose Arozamena 6,700 N/A 6,700 N/A 0
Jonathan F.
Boucher 30,000 N/A 30,000 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
Cohig & Associates
Inc.(3) 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. 2 120,000 N/A 120,000 N/A 0
Amy Davenport 25,000 N/A 25,000 N/A 0
Blake C.
Davenport(4) 70,000 N/A 50,000 N/A 20,000
Robert M.
Davenport 170,000 N/A 170,000 N/A 0
Robert M.
Davenport Jr. 25,000 N/A 25,000 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
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
Andrew M. Hall 10,000 N/A 10,000 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
Jubilee Investors
LLC(5) 723,335 N/A 723,335 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
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<PAGE>
SHARES WARRANTS AMOUNT
BENEFICIALLY BENEFICIALLY SHARES WARRANTS BENEFICIALLY
OWNED PRIOR OWNED PRIOR TO BE TO BE OWNED AFTER
NAME(1) TO OFFERING TO OFFERING OFFERED OFFERED OFFERING(2)
----------------- ------------ ------------ --------------- ----------
John Lindeman 25,000 N/A 25,000 N/A 0
Liviakis Financial
Communications,
Inc.(6) 1,500,000 N/A 1,500,000 N/A 0
Harris R. L. Lydon
Jr. 25,000 N/A 25,000 N/A 0
Maloney & Fox, LLC 10,000 N/A 10,000 N/A 0
Arnold Mandelstam 25,000 N/A 25,000 N/A 0
Madsen Family
Partners, Ltd. 10,000 N/A 10,000 N/A 0
Metropolis Equity
Fund LP 100,000 N/A 100,000 N/A 0
James B. Metzger 129,491 N/A 129,491 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
Matthew D.
Pieniazek 25,000 N/A 25,000 N/A 0
Frank Lyon Polk
Jr. and Nancy
Wear Polk 24,728 N/A 24,728 N/A 0
Frank Lyon Polk
III 74,871 N/A 74,871 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(7) 500,000 N/A 500,000 N/A 0
Round Hill
Holdings 100,000 N/A 100,000 N/A 0
Marcus Rowan(8) 364,810 N/A 320,400 N/A 44,410
Marcus Rowan Keogh
Acct. 26,740 N/A 9,600 N/A 17,140
Alan Schnall 20,000 N/A 20,000 N/A 0
Richard
Silvergleid 75,000 N/A 75,000 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
Wall Street
Consultants(9) 13,333 N/A 13,333 N/A 0
West End Capital
LLC(10) 50,000 50,000 50,000 50,000 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 54,491 N/A 54,491 N/A 0
------------------------------
(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) Includes 30,000 shares under presently exercisable
warrants.
(4) Includes 50,000 shares under presently exercisable
warrants.
(5) 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.
(6) Includes 750,000 shares under presently exercisable
warrants.
(7) Includes 250,000 shares under presently exercisable
warrants.
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<PAGE>
(8) Includes 300,000 shares under presently exercisable
warrants.
(9) Includes 13,333 shares under presently exercisable
options.
(10) 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.
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<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>
The Company has been advised by the Selling Stockholders that
none of them has, as of , 1998, entered into any
------------- --
arrangement with a broker-dealer for the sale of the Shares or
Warrants through block trade, special offering, exchange
distribution or secondary distribution of a purchase by a broker-
dealer.
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
----
AMERICAN ELECTROMEDICS CORP.:
----------------------------
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
AMERICAN ELECTROMEDICS CORP. (UNAUDITED):
----------------------------------------
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
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: 283 303
Trade . . . . . . . . . . . . . . 379 402
Affiliate . . . . . . . . . . . . ------ ------
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 . . . . . . . . 1,394 1,039 719
Research and development . . . 85 215 182
------ ------ ------
Total operating expenses . . 1,479 1,254 901
------ ------ ------
Operating income (loss) . . . . (481) 431 171
Other income (expenses):
Undistributed earnings (loss)
of affiliate . . . . . . . (57) 52 --
Interest, net . . . . . . . (125) (16) 9
Other . . . . . . . . . . . (263) -- 4
------ ------ ------
(445) 36 13
Income (loss) before provision
for income taxes . . . . . . . (926) 467 184
Provision for income taxes . . -- 25 12
------ ------ ------
Net income (loss) . . . . . . . $ (926) $ 442 $ 172
====== ====== ======
Earnings (loss) per common 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 TOTAL
PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- -------- ------------
(THOUSANDS)
Balance at
July 30,
1994 . . . . . $1,838 $ 184 $2,281 $(1,694) $ 771
Exercise of
stock
options . . . 505 50 203 -- 253
Net income . . -- -- -- 172 172
------ ------ ------ ------ ------
Balance at July
29, 1995 . . . 2,343 234 2,484 (1,522) 1,196
Investment in
affiliate . . 100 10 290 -- 300
Exercise of
stock
options . . . 11 1 9 -- 10
Net income . . -- -- -- 442 442
------ ------ ------ ------ ------
Balance
at July 27,
1996 . . . . . 2,454 245 2,783 (1,080) 1,948
Sale of
capital
stock . . . . 48 5 139 -- 144
Exercise of
stock options,
net . . . . . 51 5 (3) -- 2
Net loss . . . -- -- -- (926) (926)
------ ------ ------ ------ ------
Balance at
July 31,
1997 . . . . . $2,553 $ 255 $2,919 $(2,006) $1,168
====== ====== ====== ====== ======
See accompanying notes.
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(R), which apply a combination of pressure
and sound to the ear drum to detect diseases of the middle ear,
and Audiometers,which use sound at descending decibel levels to
screen for hearing loss.
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
deferred tax assets (561,000) (248,000)
---------- --------
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
======== ========
F-9
<PAGE>
3. INVESTMENT IN AFFILIATE:
-----------------------
In January 1996, the Company invested $519,000 of cash and
issued 100,000 shares of its common stock for a fifty percent
interest in Rosch GmbH Medizintechnik ("Rosch GmbH"). The
100,000 shares were valued at $3.00 per share, which represents
the fair market value of the stock. This investment is being
accounted for by the Company under the equity method of
accounting. Rosch GmbH is a marketing and distribution company
based in Berlin, Germany specializing in the distribution of
healthcare products, including the Company's products, to primary
care physicians throughout Europe. In January 1996, Rosch GmbH
sold its exclusive distributorship rights for a manufacturer's
ear, nose, and throat ("ENT") line of products in order to
concentrate on the Company's products as well as other healthcare
products. At July 31, 1997, the investment in Rosch GmbH
exceeded the Company's share of the underlying net assets by
approximately $646,000. This amount is being amortized over
twenty-five years. Amortization expense for the years ended July
31, 1997 and July 27, 1996 was $28,000 and $16,000, respectively.
Accounts receivable from affiliates recorded in the Company's
balance sheets represent trade receivables arising through the
normal course of business. The balances consist primarily of
sales of the Company's audiometric products to Rosch GmbH. As
discussed in Note 9, Rosch GmbH represents a significant customer
of the Company. Intercompany profits relating to sales of the
Company's products to Rosch GmbH are eliminated based on the
Company's 50% equity ownership of Rosch GmbH.
Summarized unaudited financial information of Rosch GmbH is as
follows:
Year Ended 7 Months Ended
July 31, 1997 July 27, 1996
------------- -------------
Sales . . . . . . . . . $3,920,000 $1,893,000
Gross profit . . . . . 1,340,000 853,000
Net (loss) income . . . (58,000) 136,000
Current assets . . . . 2,435,000 1,365,000
Non-current assets . . 211,000 179,000
Current liabilities . . 1,687,000 770,000
Non-current
liabilities . . . . . 737,000 370,000
4. DEBT:
-----
In 1996, the Company entered into a term loan agreement with a
bank. The loan is payable in equal monthly installments through
December 1998. Interest is based on the Wall Street Journal
Prime Rate plus 1/2% (9.0% as of July 31, 1997). As of July 31,
1997, there was $95,000 outstanding under this loan.
In October 1996, the Company completed a placement (the
"Placement") of 12 units (the "Units") at a price of $75,000 per
Unit, or an aggregate of $900,000. Each Unit consisted of a
$60,000 principal amount 14% Convertible Subordinated Debenture
due October 31, 1999 (the "Debenture") and 4,000 shares of Common
Stock valued at $3.75 per share, the fair market value, or an
aggregate of $720,000 principal amount of Debentures and 48,000
shares of Common Stock. The aggregate financing costs of the
Placement was $202,000, of which $36,000 was for the Common Stock
and $166,000 was for the Debentures.
The Debentures are convertible into Common Stock at $3.75 per
share upon or after the Debentures are called for redemption or
the effectiveness of a registration statement under the
Securities Act of 1933, as amended (the "Act"), covering the
underlying shares of Common Stock, subject to customary anti-
dilution provisions. The Company may call all or part of the
Debentures at par, plus accrued interest, at any time after
October 31, 1997. The Debentures contain various covenants,
including a restriction on the payment of cash dividends on its
Common Stock.
F-10
<PAGE>
In October 1996, the Company received a $500,000 Term Loan
from its bank and the Company's revolving line of credit was
increased to $400,000 from $300,000. The bank had conditioned
the closing of the Term Loan on the Company receiving at least
$700,000 from the issuance of subordinated debentures and/or
capital stock, which condition was fulfilled by the Placement.
The Term Loan is repayable over five years, bears annual interest
at prime plus 1/2%. As of July 31, 1997 there was $437,000
outstanding under the Term Loan and $300,000 outstanding under
this revolving line of credit.
Borrowings under the bank loans are collateralized by
essentially all of the assets of the Company.
Principal payments due on long-term debt are as follows:
1998 $ 152,000
1999 173,000
2000 895,000
2001 32,000
--------
$1,252,000
=========
As of July 31, 1997, the Company was not in compliance with
certain financial covenants under its loan agreement. As a
result, the Company received waivers and entered into a
Forbearance and Workout Agreement with the bank, as described in
Note 10.
5. EARNINGS PER COMMON 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 Statementt 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
F-11
<PAGE>
services for or on behalf of the Company. Options are
exercisable as determined at the time of grant except options to
officers or directors may not vest earlier than six months from
the date of grant, and the exercise price of all the option
cannot be less than the fair market value at the date of grant.
In 1997, the Company granted certain directors and officers of
the Company options to purchase 480,000 shares under separate
option agreements. The options were granted at the fair market
value of the Company's Common Stock on the date of grant. The
options vest over four years and expire ten years from the date
of grant.
FAS 123 DISCLOSURE
Pro forma information regarding net income (loss) is required
by FAS 123 (Stock-Based Compensation), which requires that the
information be determined as if the Company had accounted for its
employee stock options grants under the fair value method of that
Statement. The fair values for these options were estimated at
the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
OPTIONS
1997 1996
---- ----
Expected life (years) 4.7 4
Interest rate 6% 6%
Volatility 1.15 1.13
Dividend yield 0.0% 0.0%
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. Because FAS 123 is applicable only to options granted
subsequent to July 29, 1995, its pro forma effect will not be
fully reflected until fiscal year 1999. The Company's pro forma
information is as follows:
1997 1996
---- ----
Pro forma net income (loss) $(1,238,759) $429,134
Pro forma net income (loss)
per share $ (0.49) $ 0.17
Option activity for the years ended 1997, 1996 and 1995 is
summarized below:
1997 1996 1995
-------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ ------
Outstanding at
beginning
of year 133,000 $1.58 131,000 $0.93 585,000 $0.53
F-12
<PAGE>
Granted 480,000 3.36 13,000 7.50 120,000 0.93
Expired or
canceled (136,000) 3.45 -- -- ( 69,000) 0.68
Exercised ( 74,000) 0.66 ( 11,000) 0.94 (505,000) 0.50
-------- -------- --------
Outstanding at
end of year 403,000 3.23 133,000 1.58 131,000 0.93
======== ======== ========
Exercisable at
end of year 111,000 3.11 107,000 0.87 11,000 0.94
======== ======== ========
Available for
future grants 240,000 10,000 10,000
========= ======== ========
Weighted
-average fair
value of
options
granted during
year $2.54 $4.52
The following table presents weighted-average price and life information
about significant option grants outstanding at July 31, 1997:
Options
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. OTHER EXPENSES
--------------
The Company incurred $263,000 in other charges during 1997.
This amount included $125,000 associated with the legal
proceeding involving the former president of the Company and
$100,000 for the write-off of purchased technology from BioFlo
Systems. This technology was intended to measure the viscosity
of human blood plasma. However, it was subsequently determined
not to be commercially feasible.
8. COMMITMENTS:
-----------
The Company leased its principal offices and manufacturing
facility under an operating lease which expired in March 1997.
Since that time the Company has leased the facilities on a month-
to-month basis. Rent expense for the year ended July 31, 1997
was $15,500 and for the years ended July 27, 1996 and July 29,
1995 was $13,500 and $12,000, respectively.
9. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS:
------------------------------------------------
The Company's primary customers are in the medical field.
At July 31, 1997 and July 27, 1996, substantially all accounts
receivable balances are concentrated in this industry. The
Company sells products and extends credit based on an evaluation
of the customer's financial condition, generally without regard
to collateral. Exposure to losses on receivables is principally
dependent on each customer's financial condition. The Company
monitors its exposure for credit losses and maintains allowances
for anticipated losses.
A major customer of the Company accounted for 20%, 41% and
15% of the Company's net sales for the years ended July 31, 1997,
July 27, 1996 and July 29, 1995, respectively.
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 for a period of one year on the condition that the
Company agreed to, among other things, raise within 30 days an
additional $250,000 of equity capital and to apply $150,000 of
such amount against outstanding term loans. Additionally, as
part of the Workout Agreement, the Company's revolving line of
credit was reduced to $300,000. Certain of the loan agreement
financial covenants were also amended to more reasonably reflect
the Company's current financial position.
In connection with the October 1997 amendments to the bank
arrangements and its efforts to obtain additional equity capital,
the conversion price of the Debentures had been reduced from
$3.75 to $1.00 per share. As of November 3, 1997, the holders of
all $720,000 principal amount of Debentures have elected to
convert. As a result of this conversion, the Company has reduced
its long-term debt by $720,000 and issued 720,000 shares of
common stock. The Company also will record a charge of
approximately $100,000 to write-off deferred financing costs
capitalized upon initial issuance of the Debentures.
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 1,100
Research and development . . . . . . . -- 85
---------- ----------
Total operating expenses . . . . . . 2,637 1,185
---------- ----------
Operating loss . . . . . . . . . . . . (521) (540)
Other income (expenses):
Undistributed earnings of affiliate . 56 (55)
Interest, net . . . . . . . . . . . . (137) (81)
Minority interest in affiliate . . . (85) --
Other . . . . . . . . . . . . . . . . (58) (250)
---------- ----------
(224) (386)
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 . . . . . (985) (361)
Accounts payable
and accrued
liabilities . . . (233) 16
------ ------
Net cash used in
operating
activities . . . (1,482) (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 . . 1,924 144
Proceeds from issuance
of convertible
subordinated debt . . . -- 720
Redemption of
convertible
subordinated debt . . . (720) --
Deferred financing costs -- (166)
Proceeds from exercise
of stock options . . . . 150 2
------ ------
Net cash provided by
financing activities 1,325 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 $ --
======= ======
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 Nine Months
Ended 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.
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 750,000
shares of the Company's Common Stock and $225,000, pursuant to an
Agreement and Plan of Merger, whereby DDS became a wholly-owned
subsidiary of the Company. DDS is based in Gainesville, Georgia
and is a distributor of digital operator hardware, cosmetic
imaging software, and intraoral dental cameras.
F-19
<PAGE>
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, whereby ESI became a wholly-owned subsidiary of the
Company. ESI is based in San Diego, California and is engaged in
the development of the INJEX(TM) 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 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>
=================================================================
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 . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . .
Dividend Policy . . . . . . . . . . . . . . . . . . . . . .
Capitalization . . . . . . . . . . . . . . . . . . . . . .
Dilution . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Information . . . . . . . . . . . . . .
Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . .
Business . . . . . . . . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Management and
Certain Securityholders . . . . . . . . . . . . . . . .
Certain Transactions . . . . . . . . . . . . . . . . . . .
Description of Securities . . . . . . . . . . . . . . . . .
Plan of Distribution . . . . . . . . . . . . . . . . . . .
Shares Eligible for Future Sale . . . . . . . . . . . . . .
Legal Matters . . . . . . . . . . . . . . . . . . . . . . .
Experts . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information . . . . . . . . . . . . . . . . . .
Index to Financial Statements . . . . . . . . . . . . . . .
----------------
=================================================================
=================================================================
5,320,224 SHARES
COMMON STOCK
AND
50,000 COMMON STOCK
PURCHASE WARRANTS
AMERICAN
ELECTROMEDICS
CORP.
----------------
PROSPECTUS
----------------
( ) , 1998
=================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII of the By-laws of the Company provides in part
that the Company shall indemnify its directors, officers,
employees and agents to the fullest extent permitted by the
General Corporation Law of the State of Delaware (the "DGCL").
Section 145 of the DGCL permits a corporation, among other
things, to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in
the right of the corporation), by reason of the fact that he is
or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in
connection with such action, suit or proceeding if he acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful.
A corporation also may indemnify any person who was or is a
party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection with the defense or
settlement of such action or suit if acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best
interests of the corporation. However, in such an action by or
on behalf of a corporation, no indemnification may be made in
respect of any claim, issue or matter as to which the person is
adjudged liable to the corporation unless and only to the extent
that the court determines that, despite the adjudication of
liability but in view or all the circumstances, the person is
fairly and reasonably entitled to indemnity for such expenses
which the court shall deem proper.
In addition, the indemnification and advancement of expenses
provided by or granted pursuant to Section 145 shall not be
deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under
any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such
office.
The Company has purchased and maintains insurance for its
officers and directors against certain liabilities, including
liabilities under the Securities Act. The effect of such insur-
ance is to indemnify any officer or director of the Company
against expenses, judgements, fines, attorney's fees and other
amounts paid in settlements incurred by him, subject to certain
exclusions. Such insurance does not insure against any such
amount incurred by an officer or director as a result of his own
dishonesty.
II-1
<PAGE>
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 . . . . . . . . . . . . . . . $ 5,233.39
Legal Fees and Expenses . . . . . . . . . . . . [ ]
Accounting Fees and Expenses . . . . . . . . . [ ]
Printing . . . . . . . . . . . . . . . . . . . [ ]
Miscellaneous Expenses . . . . . . . . . . . . [ ]
-------------
Total . . . . . . . . . . . . . . . . . . . $ [ ]
=============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of transactions by the Company
during the last three years preceding the date hereof involving
sales of the Company's securities that were not registered under
the Securities Act.
In January 1996, the Company purchased a fifty percent
interest in Rosch GmbH Medizintechnik ("Rosch GmbH") from Andy
Rosch ("Rosch") for a sum of cash and 100,000 shares of the
Company's Common Stock. The Company relied on the exemption
provided by Section 4(2) of the Securities Act.
In October 1996, the Company completed a private placement
of 12 Units at a price of $75,000 per Unit to a group of
accredited investors. Each Unit consisted of a $60,000 principal
amount 14% Convertible Subordinated Debenture due October 31,
1999 (a "Debenture") and 20,000 shares of the Company's Common
Stock, or an aggregate of $720,000 principal amount of Debentures
and 48,000 shares of Common Stock. The Company relied on the
exemption provided by Section 4(2) of the Securities Act.
In November 1997, the Company issued 720,000 shares of
Common Stock upon the conversion of the Debentures. The Company
relied on the exemption provided by Section 3(a)(9) of the
Securities Act.
In November 1997, the Company completed a private placement
of 1,050,000 shares of Common Stock at a purchase price of $1.00
per share to a group of accredited investors. The Company relied
on the exemption provided by Section 4(2) of the Securities Act.
In December 1997, the Company purchased the remaining fifty
percent interest in Rosch GmbH from Rosch and a forty-five
percent interest in Meditronic Medizinelektronik for a sum of
cash and 210,000 shares of the Company's Common Stock. The
Company relied on the exemption provided by Section 4(2) of the
Securities Act.
In February 1998, the Company issued 1,000,000 shares of
Common Stock and warrants to purchase an additional 1,000,000
shares of Common Stock, exercisable at $1.00 per share for four
years, in payment of the fee under a financial consulting
agreement between the Company and Liviakis Financial
II-2
<PAGE>
Communications, Inc. The Company relied on the exemption
provided by Section 4(2) of the Securities Act.
In April 1998, pursuant to an Agreement and Plan of Merger,
dated as of April 30, 1998, by and among the Company, DDS
Acquisition Corporation, a wholly-owned subsidiary of the
Company, Dynamic Dental Systems, Inc. ("DDS"), Henry J. Rhodes,
Charles S. Aviles, Jr., and Barry A. Hochstadt, the Company
acquired all of the outstanding shares of common stock of DDS for
a sum of cash and 750,000 shares of the Company's Common Stock.
The Company relied on the exemption provided by Section 4(2) of
the Securities Act.
In May 1998, pursuant to an Agreement and Plan of Merger,
dated as of March 27, 1998, by and among the Company, ESI
Acquisition Corporation, a wholly-owned subsidiary of the
Company, and Equidyne Systems, Incorporated ("ESI"), the Company
acquired all of the outstanding shares of common stock of ESI for
600,000 shares of the Company's Common Stock. The Company relied
on the exemption provided by Section 4(2) of the Securities Act.
In May 1998, the Company closed the private 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 accredited investor (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, dated as of May 5,
1998 (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 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 for three years. 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 Company relied on the exemption provided by
Section 4(2) of the Securities Act.
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).
II-3
<PAGE>
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).
3.1.6 Certificate of Description 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 the Registration No. 2-71775 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 Registrant's 1983 Information Statement, and
incorporated herein by reference).
10.2.2 Form of 1983 Incentive Stock Option Certificate
(filed as Exhibit (10)-12 to the Compoany'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 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 ["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).
II-4
<PAGE>
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).
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, filed to report an event of May
5, 1998 [the "May 5, 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).
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 (to be included
as part of Exhibit 5)
24. Power of Attorney (including on p.II-8)
-------------------------------------
* Filed herewith.
** To be filed by amendment.
II-6
<PAGE>
ITEM 28. UNDERTAKINGS.
UNDERTAKINGS REQUIRED BY REGULATION S-B, ITEM 512(A).
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registra-
tion Statement:
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended (the "Securities
Act").
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration State-
ment. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of a
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the change in volume and price
represents no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement.
(iii) to include any additional or changed material
information with respect to the plan of distribution.
(2) that, for the purpose of determining any liability
under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3) to remove from registration by means of a post-effecti-
ve amendment any of the securities being registered which
remain unsold at the termination of the offering.
UNDERTAKING REQUIRED BY REGULATION S-B, ITEM 512(E).
Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers and con-
trolling persons of the Registrant pursuant to the provi-
sions of its Certificate of Incorporation, By-Laws, the
DGCL or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In
event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer of
controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection
with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final
adjudication of such issue.
II-7
<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 THE
TOWN OF AMHERST, AND STATE OF NEW HAMPSHIRE, ON THE 9TH DAY OF
JULY, 1998.
AMERICAN ELECTROMEDICS CORP.
BY: /s/Thomas A. Slamecka
------------------------
Thomas A. Slamecka
Chairman of the Board
POWER OF ATTORNEY
EACH DIRECTOR AND/OR OFFICER OF THE REGISTRANT WHOSE SIGNATURE
APPEARS BELOW HEREBY APPOINTS MICHAEL T. PIENIAZEK AS HIS
ATTORNEY-IN-FACT TO SIGN IN HIS NAME AND BEHALF, IN ANY AND ALL
CAPACITIES STATED BELOW AND TO FILE WITH THE SEC, ANY AND ALL
AMENDMENTS, INCLUDING POST-EFFECTIVE AMENDMENTS, TO THIS
REGISTRATION STATEMENT.
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
--------- ----- ----
/s/Thomas A. Slamecka Chairman of the July 9, 1998
--------------------- Board
Thomas A. Slamecka
/s/Michael T. Pieniazek President and Chief July 9, 1998
----------------------- Financial Officer
Michael T. Pieniazek
/s/Blake C. Davenport Director July 9, 1998
----------------------
Blake C. Davenport
/s/Andy Rosch Director July 9, 1998
----------------------
Andy Rosch
/s/Marcus R. Rowan Director July 9, 1998
----------------------
Marcus R. Rowan
Director , 1998
---------------------- ------
Joseph Wear
II-8
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
-------
10.1 Commercial Lease, dated March 23, 1998,
by and between Mareld Company, Inc.
and the Company
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
10.14 Contract of Employment between
Rosch GmbH Medizintechnik and Andy
Rosch effective January 1, 1996
21. List of Subsidiaries
23.1 Consent of Ernst & Young LLP
24. Power of Attorney (included on p.II-8)
COMMERCIAL LEASE
THIS INDENTURE OF LEASE made this 23 day of March 1998 by
and between MARELD COMPANY, INC., a New Hampshire Corporation,
having a usual place of business at 400 Amherst St., Suite 202,
Nashua, NH 03063 (hereinafter designated as the LESSOR ) and
AMERICAN ELECTROMEDICS CORPORATION, a New Hampshire Corporation,
having a usual place of business at 13 Columbia Drive, Suite 18,
Amherst, NH 03031 (hereinafter designated as the LESSEE ).
WITNESSETH:
1. PREMISES. In consideration of the rent and covenants
herein reserved and contained on the part of the Lessee to be
paid, performed or observed, and subject to the conditions
hereinafter set forth, the Lessor does hereby demise and lease
unto the Lessee certain premises (hereinafter Premises )
consisting of approximately 7,800 square feet in the building
(hereinafter Building ) known as 13 Columbia Drive, Amherst, New
Hampshire. The Premises are commonly known as Building #2, Units
#5, #6, #201, and #202 and are more particularly described in
Exhibit A attached hereto and incorporated herein.
2. APPURTENANT RIGHTS AND RESERVATIONS. Lessee shall
have, as appurtenant to the Premises, the nonexclusive right to
use, and permit its invitees to use in common with others, common
parking facilities and other interior and exterior common areas.
Such appurtenant rights shall always be subject to rules and
regulations from time to time established by Lessor and to the
right of Lessor to designate and change from time to time such
common areas and facilities, provided same shall not unreasonably
impair or restrict ingress or egress to the Premises.
3. TERM. Subject to the conditions herein stated, the
Lessee shall hold the said Premises for a term of three (3) years
and one half month commencing on May 15, 1998 (hereinafter the
"Commencement Date") and terminating on May 31, 2001 (hereinafter
the "Expiration Date"). If the space is not delivered by May 15,
1998, the rent will be abated until it is delivered.
4. RENT PAYABLE BY LESSEE. Lessee covenants and agrees to
pay Lessor yearly and every year during the term of this Lease,
without demand, set-off, or any deduction whatsoever except as
otherwise provided herein;
(a) a BASE RENT of $45,935.70 per year payable on the first
day of each month in advance in equal monthly
installments of $3,827.98.
(b) such other amounts as shall become due and payable
under the provisions of this Lease as ADDITIONAL RENT
as hereinafter provided in Section 5.
Rent for any fraction of a month at the commencement or
expiration of the Term of this Lease shall be prorated.
5. ADDITIONAL RENT PAYABLE BY LESSEE. In addition to the
Base Rent set forth in Section 4 above, the Lessee shall
beginning with the Lease Year (as hereinafter defined) commencing
on the first anniversary of the Commencement Date and every year
thereafter pay as additional rent ("Additional Rent") its pro-
rata share of any increase in Common Costs and Real Estate Taxes
(as hereinafter defined) over such costs incurred by Lessor
during the Base Year (as hereinafter defined). The Lessor shall,
from time to time, furnish the Lessee with a statement, certified
as correct by the Lessor, setting forth the Common Costs and Real
Estate Taxes for the current year, and the Additional Rent to be
paid. Within fifteen (15) days of receipt of such statement, the
Lessee shall pay the Additional Rent shown to be due for the
period prior to the date of such statement, and thereafter shall
pay the monthly Additional Rent shown on such statement at the
times specified for the payment of Base Rent. Lessor shall act
in good faith to furnish Lessee with such statement within thirty
(30) days of the expiration of the year that the Common Costs
were incurred, and, with respect to Real Estate Taxes, within 30
days of the end of the fiscal year. Notwithstanding that the
Base Year may not be a calendar year (January 1 December 31),
Lessor may at any time during the Term elect to bill such
Additional Rent on a calendar year basis so long as there is
proper pro-ration between Lease Year and the calendar year. For
purposes of this Lease the following definitions shall apply:
Pro-rata Share: "Pro-Rata Share" means a fraction of the
numerator of which is 7,800 (Lessee's Gross Rentable Area) and
the denominator of which is 89,600 (Gross Rentable are of the
Building).
Lease Year: "Lease Year" means the twelve month period
beginning on the Commencement Date and each twelve month period
thereafter.
Base Year: "Base Year" means the first lease year of the
Term commencing on the Commencement Date and ending one year
thereafter, except that with respect to real estate taxes it
means the fiscal year April 1, 1998 to March 31, 1999.
Common Costs: "Common Costs" means the sum of all costs and
expenses of every nature and description paid or incurred by
Lessor for the repair and maintenance of the Building common
areas, (excluding capital improvements and replacements)
including but not limited to:
(a) cleaning, operation, maintenance and repair of the
interior and exterior of all common areas, and all systems and
facilities servicing the Common Areas, including but not limited
to electrical systems, water and sewer systems, HVAC systems,
sprinkler systems, fire alarm systems, security alarm systems,
elevator, snow removal, trash and refuse collection and removal,
landscaping and lawn mowing, paving repairs and restriping of the
parking areas, plus
(b) service of all utilities servicing the Common Areas;
including but not limited to electricity, gas, water and sewer,
plus
(c) the maintenance of all insurance (including, but not
limited to fire, broad form extended coverage, rent, water risk,
liability, products liability, flood, etc.) covering the Office
Building, the improvements, the Common Areas and every other
facility or property used or required or deemed necessary in
connection with any of them, plus
(d) fifteen percent (15%) of all costs set forth in the
foregoing subparagraphs (a), (b), and (c) to cover Lessor's
administrative and overhead costs.
Real Estate Taxes: Real Estate Taxes means the sum of all
real property taxes and assessments assessed against the land and
the Building of which the Premises are a part, including, but not
limited to, betterments, water and sewer assessments and other
taxes or levies levied or assessed in lieu of or as a substitute
for real property taxes less the Lessee's share of any abatements
after costs that the Lessor may receive. The Lessor is not
obligated to file for an abatement.
6. BUSINESS TAXES AND TAXES UPON IMPROVEMENTS. Lessee
shall pay all business taxes or other similar rates and taxes
which may be levied or imposed upon the business carried on in
the demised premises only, all other rates and taxes which are or
may be payable by Lessee as tenant and occupant in the demised
premises only and any and all taxes that may be levied upon the
improvements. If by law, regulation or otherwise, such business
taxes or other similar rates and taxes or taxes upon improvements
are made payable by landlords or proprietors, or if the mode of
collecting such taxes be so altered as to make Lessor liable
therefor instead of Lessee, Lessee shall repay to Lessor within
seven (7) days after demand upon Lessee that amount of the charge
imposed on Lessor as a result of such change, and shall save
Lessor harmless from any costs or expense in respect thereof, all
subject, however, to the provisions of this Lease with respect to
each party's obligation for said charges.
7. USE. It is understood and the Lessee so agrees that
the Premises shall be utilized only for the purpose of the
manufacture, repair and storage of electronic medical equipment
and related office uses.
8. RULES AND REGULATIONS. Lessee shall at all times
comply with, and cause its invitees, agents, guests, employees
and licensees to comply with, any Rules and Regulations which may
be promulgated by Lessor.
9. LESSOR'S RIGHT TO PLACE, ETC. UTILITY FACILITIES, ETC.
The Lessor reserves the right to place, maintain, repair and
replace such utility facilities or lines, pipes, wires and the
like, over, upon and through the Premises as may be necessary or
advisable for the servicing of the Premises or the Building;
provided, however, the Lessee's use of the Premises shall be
interfered with only temporarily during such servicing. Such
interference shall not materially interfere with the Lessee's
normal business operations.
10. LESSEE'S INSTALLATION OF SEPARATE METERS. The Lessee
shall maintain its own public utility meters and facilities which
are to be used to provide and measure utilities for appliance
operations of the business. All charges under the separate
meters will be billed directly to the Lessee by the public
utilities servicing the meters.
11. MAINTENANCE OF PARKING AREA/SNOW REMOVAL. The Lessor
shall maintain and keep clean the parking area and shall remove
snow therefrom with reasonable dispatch when required.
Reasonable piling of snow shall be permitted. Lessee shall be
responsible to clean and remove snow from the walkways, entrances
and rear exits of the Premises. The Lessor shall provide
adequate lighting for the parking area from 6:00 A.M. through
6:00 P.M.
12. LESSEE'S COVENANTS. In addition to all other covenants
and agreements of the Lessee contained in this lease, the Lessee
covenants and agrees at all times during the term hereof, and for
any further time as it shall hold the Premises or any part
thereof to:
(a) pay when due all rent provided for herein;
(b) procure any authorizations or licenses required for
Lessee's use of the Premises;
(c) make all necessary non-capital repairs to or
replacements for the interior of the Premises and to keep the
same in as good order, repair and condition as the same are in at
the commencement of the term or may be put in thereafter
(reasonable wear and tear and damage by fire excepted);
(d) install and operate machines and mechanical equipment
in such a manner as to prevent vibrations and noise outside the
Premises;
(e) keep the Premises equipped with all safety appliances
required by law or ordinance or any regulation of any public
authority for the particular use of the Premises by the Lessee
and make all repairs, alterations, replacements, or additions so
required;
(f) use the septic, sewage or other waste disposal system
only for disposal of human waste and not dump, flush, or in any
way, introduce any hazardous, toxic or chemical substances into
said waste disposal system or use it in such a manner which would
damage, impair or cause accelerated deterioration;
(g) permit the Lessor or its agents to enter at reasonable
times upon reasonable prior notice to view the Premises and, if
the Lessee has failed to, make repairs, within three days after
notice to make repairs, or alterations necessary for the
preservation and safety thereof;
(h) permit the Lessor to show the Premises to others at any
time within one hundred twenty days (120) before the expiration
of the term so long as the Lessor does not materially interfere
with the Lessee's operation;
(i) remove its goods and effects and those of all persons
claiming under it at the termination or expiration of this Lease
and peaceably yield up said Premises and all additions thereto to
the Lessor, leaving the same clean and in such repair, order and
condition as in at the commencement of the term or as may be put
in during the continuancy thereof, (excepting only such
alterations as are made or authorized by the Lessor, or from
reasonable wear and tear and damage by fire);
(j) not generate, store or dispose of hazardous, toxic or
chemical substances in or on the Premises;
(k) not permit the emission from the Premises of any
objectionable noise or odor;
(l) not carry on any business or occupation which shall be
unlawful, or contrary to any law or ordinance in force for the
term of the Lease;
(m) not do any act or thing upon the Premises (other than
in its normal conduct of business) which will make it uninsurable
against fire or which is liable to increase the premium for fire
insurance on the Building;
(n) Tenant will be responsible to remove snow and ice on
front walkways and immediately in front of overhead door
entrances.
13. LESSOR'S RESPONSIBILITY FOR MAINTENANCE. The Lessor
covenants and agrees to keep in good order and repair, the roof,
exterior wall (but not including plate or other glass unless the
same be damaged by fire), foundations and structure of the
Premises and all utility entrances exterior to the premises,
excepting for damage caused by any act or negligence of the
Lessee or other person or persons for which it is legally
responsible.
14. LESSEE'S RESPONSIBILITIES FOR MAINTENANCE.
(a) The Lessee covenants and agrees to keep in good order,
condition and repair (excepting for reasonable wear and tear and
damage by fire) the exterior and interior portions of all doors,
windows and plate glass, all plumbing and heating fixtures,
interior walls, floors, ceilings and the wiring and electrical
fixtures and equipment within the Premises. The Lessee agrees to
replace immediately all glass and glass windows in the Premises
with glass of the same quality as that which may become injured
or broken, unless damaged or broken by fire. If the Lessee shall
not within three (3) days after written notice by Lessor of
repairs to be made by the Lessee, commence to make such repairs
and complete same within a reasonable time, the Lessor may make
such repairs and the expense thereof shall constitute a debt by
the Lessee payable as Additional Rent, with interest Payable to
Lessor at the maximum legal rate.
(b) HVAC: Lessee shall maintain and perform non-capital
repairs to the HVAC system and keep the same in good working
order and condition during the Term and, in furtherance thereof,
Lessee shall, on or before the commencement of the Term, enter
into and maintain a service agreement with a reputable and
experienced service company to perform regular maintenance
(including, but not limited to, changing filters, oiling,
lubricating and replacement of all belts and pulleys) and to make
repairs to the HVAC system, with the obligation of said company
to examine such equipment no less frequently than quarterly.
Lessor shall be responsible for all major capital repairs and
replacements.
15. TENANT'S PROPERTY. All furnishings, fixtures,
equipment, effects and property of every kind, nature and
description of Lessee, and of all persons claiming, by, through
or under Lessee, shall be kept on the Premises or Building at the
sole risk of the Lessee; and if the whole or any part thereof
shall be destroyed or damaged by fire, water or other casualty
(including the bursting or leakage of water pipes, steam pipes or
other pipes, or by theft or from any other cause), such damage or
destruction shall be Lessee's responsibility.
16. HAZARDOUS MATERIALS. Lessee shall not (either with or
without negligence) by its actions or those of its contractors,
employees, servants, agents, licensees or invitees (i) cause or
permit the escape, disposal or release of any biologically or
chemically active or other hazardous substances or materials (ii)
store or use such substances or materials in any manner not
sanctioned by law or by the highest standards prevailing in the
industry for the storage and use of such substances or materials,
nor allow to be brought into the Premises or the Building or onto
the land on which the Building is situated any such materials or
substances except to use in the ordinary course of Lessee's
business, and then only after written notice is given to Lessor
of the identity of such substances or materials. Without
limitations, hazardous substances and materials shall include
those described in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ( CERCLA ), 42
U.S.C. Section 9601 et seq., the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., and any
applicable state or local laws and the regulations adopted under
these acts. If any lender or governmental agency shall ever
require testing to ascertain whether or not there has been any
release of hazardous materials, then Lessee shall upon demand
reimburse Lessor for the reasonable costs thereof if, and only to
the extent, such requirement applies to the Premises and it is
determined that Lessee or any of its agents, employees, servants
or contractors caused the release of hazardous substances or
materials. In addition, Lessee shall execute affidavits,
representations, certifications and the like from time to time at
Lessor's request concerning Lessee's best knowledge and belief
regarding the presence of hazardous substances or materials on
the Premises. Lessee shall indemnify Lessor to the extent and
manner set forth in Section 22 of this Lease on account of any
release of hazardous materials if caused by Lessee or persons
acting under Lessee. The within covenants shall survive the
expiration or earlier termination of the Lease term.
17. SIGNS. Lessor shall at its expense place Lessee's name
(or its d/b/a as Lessor may approve) on the Pylon Sign
Directory in front of the Building. Lessee may at its expense
paint or place a directory sign on its entry door, subject to the
reasonable approval of Lessor as to design, material, color and
other aesthetic qualities. Except as stated above, Lessee shall
not without Lessor s prior written consent (a) paint or place any
signs on the Premises or anywhere on or in the Building which is
or are visible from outside the Premises, or (b) place any
curtains, blinds, shades, awnings, aerials or flagpoles or the
like, in the Premises or anywhere on or in the Building which is
or are visible from outside the Premises. Any sign placed or
painted by Lessee with Lessor s approval shall comply with any
applicable ordinances of the Town of Amherst.
18. FLOOR LOAD, HEAVY MACHINERY. Lessee shall not place a
load upon any floor in the Premises exceeding the load per square
foot of floor of area which such floor was designed to carry and
which is allowed by law. Lessor reserves the right to prescribe
the weight and position of all business machines and mechanical
equipment (including safes or vaults) or as to distribute the
weight in a safe and reasonable manner. Lessee shall not move
any safe, vault, heavy machinery or heavy equipment in such a
manner as to jeopardize or threaten the safety or well-being of
the Building, other tenants or the public. Any moving of such
heavy machinery or equipment shall be done by licensed
professionals in compliance with applicable law and at such times
as Lessor shall require for the safety and convenience of the
Building's occupants.
19. ALTERATIONS AND/OR ADDITIONS. The Lessee shall not
make structural alterations or additions to the Premises, but may
make non-structural alterations provided the Lessor consents
thereto in writing, such consent not to be unreasonably withheld.
All such allowed alterations shall be at Lessee's expense and
shall be in quality at least equal to the present construction.
Lessee shall not permit any mechanic's lien or similar liens to
remain upon the Premises for labor and materials furnished to
Lessee in connection with work of any character performed or
claimed to have been performed at the direction of the Lessee and
shall cause any such lien to be released of record forthwith
without cost to the Lessor. Any alterations or improvements made
by the Lessee shall become the property of the Lessor at the
termination of the occupancy as provided therein, except for
ordinary removable trade fixtures. At the conclusion of the
lease term, the Lessor reserves the right to require the Lessee
to remove any alterations that it made during the lease term.
20. LESSEE'S LIABILITY INSURANCE. The Lessee shall
maintain with respect to the leased premises and the property of
which the leased premises are a part comprehensive public
liability insurance in the amount of $1,000,000 with property
damage insurance in limits of $500,000 in responsible companies
qualified to do business in New Hampshire and in good standing
therein, insuring the Lessor as well as Lessee against injury to
persons or damage to property as provided. The Lessee shall
deposit with the Lessor certificates for such insurance at or
prior to the commencement of the term, and thereafter within
thirty (30) days prior to the expiration of any such policies.
All such insurance certificates shall provide that such policies
shall not be canceled without at least ten (10) days prior
written notice to each insured named therein.
21. DESTRUCTION BY FIRE.
21.01 DUTY TO REPAIR. If the Premises should be
damaged during the Term by fire or other casualty covered by the
usual extended coverage carried by Lessor, Lessor shall (except
as hereinafter provided) repair the Premises.
21.02 RIGHT TO TERMINATE. If, however, the Premises or
the Building of which the Premises are a part should be damaged
or destroyed:
(a) by fire or other casualty covered by the usual extended
coverage carried by Lessor (i) to the extent of thirty (30%)
percent or more of the cost of replacement of either the Premises
or the Building, or (ii) so that thirty percent (30%) or more of
the Gross Leasable Area contained in either thereof shall be
rendered untenantable; or
(b) by any casualty other than those covered by standard
fire and extended coverage insurance policies; or
(c) the Premises shall be damaged in whole or in part
during the last year of the term; or
(d) if Lessor s insurer shall refuse, for any reason, to
settle a covered claim; or
(e) if any Mortgagee shall require that the insurance
recovery arising from the damage or destruction be applied
against the principal balance due on such Mortgage; then, in any
such event, Lessor may, at its option, either terminate this
lease or elect to repair the Premises. Lessor shall notify
Lessee as to its election within ninety (90) days after the
occurrence of the damage in the event of an uninsured casualty.
If Lessor elects to terminate this Lease, the term hereof shall
end at the end of the calendar month in which such election is
made. If Lessor does not elect to terminate this Lease, then
Lessor shall perform such repairs and rebuilding as is necessary
to provide Lessee with the same or nearly the same demised
premises as was delivered at the commencement of the Lease (or as
altered during the term by mutual consent); and the term shall
continue without interruption and this Lease shall remain in full
force and effect. If the Premises are not repaired within one
hundred eighty days after casualty, Lessee will have the option
to terminate this lease.
21.03 RENT ABATEMENT. If this Lease is not terminated as
above provided, then from and after such damage and until the
Premises are restored as above provided, the rent reserved herein
shall abate, either wholly or proportionately, according to the
extent that the Premises have been rendered untenantable by such
damage or destruction.
22. INDEMNIFICATION AND LIABILITY. Lessee shall save
harmless and indemnify Lessor from any liability for injury,
loss, accident, or damage to any person or property, and from any
claims, actions, proceedings and expenses and costs in connection
therewith, including without limitation reasonable counsel fees
(i) arising from the omission, fault, willful act, negligence, or
other misconduct of Lessee or its employees, servants, agents,
licensees or invitees or from any use made or occurrence on or
about the Premises. Lessee shall also indemnify and hold Lessor
harmless from and against any losses, costs, damages or claims of
whatever nature, arising out of or in connection with the
compliance requirements set forth in the Americans with
Disabilities Act of 1990, Title III, relating to Lessee's design,
renovations, alteration and/or construction of the Premises.
23. LESSOR'S ACCESS. The Lessor or agents of the Lessor
may, at reasonable times, enter to view the Premises and may
remove placards and signs not approved and affixed as herein
provided, and make repairs and alterations as Lessor should elect
to do subject to paragraph 14 excepting those repairs necessary
to protect the building or people from damage and may show the
Premises to others at any time within one hundred twenty (120)
days before the expiration of the term.
24. SUBORDINATION. This Lease shall be subject and
subordinate to any and all mortgages, deeds of trust and other
instruments in the nature of a mortgage, now or at any time
hereafter, a lien or liens on the property of which the Premises
are a part. Lessee shall upon request promptly execute and
deliver such written instruments as shall be necessary to show
the subordination of this Lease to said mortgages, deeds of trust
or other such instruments in the nature of a mortgage, provided
that in the instruments of subordination, the mortgagee or
trustee or assignee shall agree that so long as the Lessee shall
not be in default of the Lease, the Lessee shall not be disturbed
in the quiet enjoyment of the Premises.
25. DEFAULT AND BANKRUPTCY. In the event that:
(a) the Lessee shall default in the payment of any
installment of rent or other sum herein specified and such
default shall continue for five (5) days after written notice
thereof; or
(b) the Lessee shall default in the observance or
performance of any other of the Lessee's covenants, agreements,
or obligations hereunder and such default shall not be corrected
within twenty (20) days after written notice theretofor.
(c) the Lessee shall be declared bankrupt or insolvent
according to law, or, if any assignment shall be made of Lessee's
property for the benefit of creditors, then the Lessor shall have
the right thereafter, while such default continues, to re-enter
and take complete possession of the Premises, to declare the Term
of this Lease ended, and remove the Lessee's effects without
prejudice to any remedies which might be otherwise used for
arrears of rent or other default. The Lessee shall indemnify the
Lessor against all loss of rent and other payments which the
Lessor may incur by reason of such termination during the residue
of the term. If the Lessee shall default, after reasonable
notice thereof, in the observance or performance of any
conditions or covenants or Lessee's part to be observed or
performed under or by virtue of any of the provisions in any
article of this lease, the Lessor, without being under any
obligation to do so and without thereby waiving such default, may
remedy such default for the account and at the expense of the
Lessee. If the Lessor makes any expenditures or incurs any
obligations for the payment of money in connection therewith,
including but not limited to reasonable attorney's fees, in
instituting, prosecuting or defending any action or legal
proceeding, such sums paid or obligations incurred, with interest
at the rate of eighteen percent (18%) per annum and costs, shall
be paid to the Lessor by the Lessee as damages for Lessee's
breach.
26. NOTICE TO PARTIES. Any notice from the Lessor to the
Lessee relating to the Premises or to the occupancy thereof
(including but not limited to any notice of default or
termination pursuant to Section 24, or any legal process relating
thereto for possession or for rent due), shall be deemed duly
served, if mailed to the Premises, to the attention of the
President, registered or certified mail, return receipt
requested, postage prepaid, addressed to the Lessee.
Any notice from the Lessee to the Lessor relating to the
Premises or to the occupancy thereof, shall be deemed duly
served, if mailed to the Lessor by registered or certified mail,
return receipt requested, postage prepaid, at 400 Amherst St.,
Suite 202, Nashua, NH 03063.
27. LIMITATION OF LIABILITY. In the event Lessor shall
default in the performance of its obligations hereunder, Lessee
shall look only to Lessor's then equity interest in the Building
for the satisfaction of any judgement; and in no event shall
Lessor be liable for any consequential damages. In the event of
any sale of the Premises or Lessor s assignment of this Lease,
the Lessor shall be and hereby is entirely released and
discharged from any and all further liability and obligations of
the Lessor hereunder, except for such thereof as may have
theretofore accrued.
28. SURRENDER. The Lessee shall at the expiration or other
termination of this Lease remove all Lessee's goods and effects
from the Premises, including, without hereby limiting the
generality of the foregoing, all signs and lettering affixed or
painted by the Lessee, either inside or outside the Premises.
Lessee shall deliver to the Lessor the Premises and all keys,
locks thereto, and other fixtures connected therewith and all
alterations and additions made to or upon the leased premises, in
good condition, damage by fire or other casualty only excepted.
In the event of the Lessee's failure to remove any of Lessee's
property from the Premises, Lessor is hereby authorized, without
liability to Lessee for loss or damage thereto, and at the sole
risk of Lessee, to remove and store any of the property at
Lessee's expense, or to retain same under Lessor s control or to
sell at public or private sale without notice any or all of the
property not so removed and to apply the net proceeds of such
sale to the payment of any sum due hereunder, or to destroy such
property.
29. LESSOR'S FAILURE TO ACT UPON LESSEE'S BREACH. The
failure of the Lessor to insist in any one or more instances upon
a strict performance or observance of any of the terms,
provisions or covenants of the Lease or to exercise any right
therein contained shall not be construed or deemed to be a waiver
or relinquishment for the future of such terms, provisions,
covenant or right; but the same shall continue and remain in full
force and effect. Receipt by the Lessor of rent with knowledge
of the breach of any provision of the foregoing Lease shall not
be deemed a waiver of such breach.
30. SERVICES PROVIDED BY LESSOR. With respect to any
services to be furnished to Lessee, the Lessor shall in no event
be liable for failure or delay to furnish the same when prevented
from so doing by war, strikes, labor difficulties, lockouts,
breakdown, accident, order or regulation of governmental
authority, failure of supply, or inability by exercise of
reasonable diligence, to obtain supplies, parts or employees
necessary to perform such services, or for any cause beyond
Lessor s reasonable control, or of any cause due to any act or
neglect on the part of the Lessee or its servants, agents,
employees, licensees or any person claiming by, through or under
the Lessee.
31. ASSIGNMENT, SUBLETTING. Lessee shall not assign,
mortgage, pledge, or otherwise encumber this Lease or sublet the
Premises (or any portion thereof) without first obtaining the
written consent of the Lessor. Notwithstanding any assignment or
subletting hereunder, Lessee shall continue to be liable for the
performance and/or observance of the covenants, agreements,
terms, and provisions of this Lease. If the Lessee is a
corporation or a trust, the sale or transfer at any time during
the term of this Lease of more than fifty percent (50%) of the
corporate stock or of the beneficial interest of the trust shall
be deemed an assignment of the Lease requiring Lessor s prior
written consent.
32. CERTIFICATE OF ESTOPPEL. The Lessee shall, at the
request of the Lessor, provide to whomsoever the Lessor shall
name, a Certificate of Estoppel regarding the terms, covenants,
and conditions of the Lease.
33. MARGINAL HEADINGS. The marginal headings appearing in
this Lease are for purposes of easy reference and shall not be
considered a part of this Lease or in any way to modify, to
amend, or to affect the provisions thereof.
34. ENTIRE AGREEMENT. This Lease and any exhibit attached
hereto and forming a part hereof sets forth all of the covenants,
promises, agreements, conditions and understandings between
Lessor and Lessee concerning the Premises and there are no
covenants, promises, agreements, conditions or understandings,
either oral or written, between them other than herein set forth.
No subsequent alteration, amendment, change or addition to the
Lease shall be binding upon Lessor or Lessee unless reduced to
writing and signed by them.
35. HEIRS, EXECUTORS, ETC. The covenants, conditions and
agreements contained in this Lease shall bind and enure to the
benefit of Lessor and Lessee and their respective heirs,
distributees, executors, administrators, successors and assigns,
except as otherwise provided in this Lease.
36. REPRESENTATION AS TO BROKERS. Lessee materially
warrants and represents to Lessor that it has dealt with no
broker or agent in connection with this transaction other than
Hirsch & Company, Inc. and Lessee agrees to indemnify and hold
Lessor harmless from and against any cost, liability or damage
including reasonable attorney's fees and expenses) incurred by
Lessor arising from a claim by any person or firm other than
Hirsch & Company, Inc. alleging entitlement to a broker's
commission or finder s fee for the rental of the Premises.
37. JOINT AND SEVERAL LIABILITY. If Lessee shall at any
time comprise or include more than one person, firm, corporation
or entity, the liability of each thereof shall be joint and
several.
38. GOVERNING LAW. This Lease shall be construed and
interpreted in accordance with the laws of the State of New
Hampshire.
39. PREPARATORY WORK
(a) Lessor shall perform in a diligent, workmanlike manner
at its sole cost and expense the renovation of the Premises in
accordance with the specifications set forth in Exhibit B
attached hereto.
(b) Lessee shall perform in a diligent, workmanlike manner
at its sole cost and expense the renovation of the Premises in
accordance with the specifications set forth in Exhibit C
attached hereto.
(c) In connection with the plans and construction
referenced in Exhibits B and C, Lessor and Lessee hereby
authorize the other to rely upon the approval and other actions
on such party's behalf by the construction representative
designated hereafter. The following persons are designated
construction representatives for the purposes of this Section 39:
For Lessor: Tim Paige
Telephone: 603-886-7300
Fax: 603-880-7176
For Lessee: Debra Doyon
Telephone: 880-6300
Fax: 880-8977
40. RECORDING. Lessee shall not record this Lease in any
Registry of Deeds or public registration office. Any recording
of this Lease shall constitute a material breach by Lessee,
entitling Lessor, at its election, to immediately terminate this
Lease.
41. COMPLIANCE WITH ADA. If the Premises are now, or at
any time during the Lease Term become a Public Accommodation
under the Americans with Disabilities Act of 1990 (hereinafter
"ADA"), Lessee shall at its sole expense be responsible for (a)
compliance with Title III of the ADA to the extent that the ADA
imposes obligations on the procedure and design of any
alterations to the Premises made by Lessee, including but not
limited to partitions, furnishings, doors, door frames and all
accessories thereof, and (b) drawing and implementing
modifications in its policies, practices and procedures in
connection with the operation of Lessee's business and occupancy
of the Premises. If Lessee fails to comply with its obligations
hereunder and such noncompliance constitutes a violation of the
ADA, Lessee shall indemnify and hold harmless Lessor from and
against all claims, expenses or liability suffered or incurred by
Lessor resulting therefrom.
42. SECURITY DEPOSIT. Coincidental with the execution of
this Lease, Lessee shall deliver to Lessor a security deposit in
the amount of $3,827.98 which shall be held in security for
Lessee's full, faithful and diligent performance under this
Lease. Said deposit shall be non-interest bearing and shall be
refunded to Lessee at the expiration of the Lease, subject to
Lessee's satisfactory compliance with the terms and conditions
hereof.
43. OPTION TO EXTEND LEASE Lessee shall have the option to
extend the term of the Lease for one additional term of three (3)
years provided that: (a) Lessee is not in default (beyond the
expiration of any grace period granted herein for the curing of
same) under any of the terms and conditions of the Lease at the
time it elects to extend the term and at the commencement of the
Extension Term, and (b) Lessee has given Lessor written notice of
its election to extend the term no later than six months prior to
the Expiration Date of the Lease. In the event that Lessee shall
extend the term as aforesaid, such extension shall be upon the
same terms and conditions as set forth herein, except that no
further right to extend shall be deemed to be included, and
except for the Base Rent, which shall be determined as
hereinafter set forth.
The Base Rent during the Extension Term shall be the Base
Rent in effect during the last year of the Term or the "Market
Rent" (as hereinafter defined), whichever is greater. The term
"Market Rent" shall mean the rent being charged for comparable
existing space at the time the extension option is exercised, as
reasonably determined by the Lessor. Lessor shall send a written
notice to Lessee specifying the rent for the extension term
within thirty (30) days of its receipt of Lessee's exercise of
option to extend. Lessee shall be deemed to have rejected the
new rent level if it has not sent Lessor a notice approving the
same within ten (10) days of receipt of Lessor s notice. In the
event Lessee disapproves the new rent level, then Market Rent
shall be determined as follows:
Each party shall within ten (10) days of Lessee's
disapproval appoint an arbitrator to act on its behalf, which
person shall be a real estate broker or other person experienced
in the appraisal or management of real estate within the Nashua
metropolitan area. If the two arbitrators are unable to reach
agreement within ten (10) days after their appointment, then the
two arbitrators shall appoint a third arbitrator and the decision
by a majority of the arbitrators shall be binding upon the
parties. Each party shall each bear the cost of the arbitrators
selected by it and shall jointly bear the cost of any third
arbitrator. In the event the arbitrators have failed to
establish "Market Rent" by the commencement of the Extension
Term, Lessee shall pay at the rental rate proposed by Lessor in
its notice to Lessee, with a prompt adjustment between the
parties retroactive to the commencement date of the Extension
Term in the event such arbitration results in a reduction of the
rental rate. Under no circumstances shall the Base Rent during
the Extension Term be less than the Base Rent in effect during
the last year of the Term.
IN WITNESS WHEREOF, the parties have caused this Lease to be
executed by their respective authorized representatives the day
and year first written above.
LESSOR:
MARELD COMPANY, INC.
By: /s/ Eliot W. Denalut
/s/ Patricia Stark Rice -------------------------
--------------------------- Eliot W. Denalut, III
Witness Its duly authorized:
President
LESSEE:
AMERICAN ELECTROMEDICS CORP.
By: /s/ Michael T. Pieniazek
/s/ Debra A. Illegible -------------------------
-------------------------- Michael T. Pieniazek
Witness Its duly authorized:
President
<PAGE>
EXHIBIT A
Diagram of Floor Plan of 13 Columbia Dr., Unit #5 & 6
First Floor, Unit #201 & 202 Second Floor
Date 2-17-98 Final
<PAGE>
EXHIBIT B
LESSOR'S CONSTRUCTION
American Electromedics
13 Columbia Drive
Amherst, NH
A. PARTITIONS
----------
1. INTERIOR WALLS New partitions will be constructed using
3-5/8" metal studs with 5/8" gypsum board applied to each
side. Walls will be finished with dry wall tape and joint
compound. Partitions will be constructed and finished to
the underside of the ceiling.
Partitions which are not finished on both sides (shop area)
will receive gypsum board on the unfinished side.
2. PARTITION LAYOUT The partitions will be laid out in
accordance with the attached plan.
B. CEILING
-------
1. TYPE The ceiling in the office area (except where there is
presently a sheetrocked ceiling) will consist of a 2' x 4'
suspended system utilizing acoustical tiles (Armstrong
Cortega or equal) installed in a metal grid. As necessary,
the existing ceiling grid will be repaired, cleaned or
painted. All ceiling tiles will be replaced.
C. HEATING, VENTILATING, AIR CONDITIONING
--------------------------------------
1. SYSTEM The existing HVAC systems will be utilized. The air
conditioning units in the first floor offices will be
replaced. The Lessor will install a two ton roof top air
conditioning unit to cool the first floor kitchen area and
new office. The Lessor will add electric baseboard heat for
the kitchen area and new first floor office. On the second
floor, the Lessor will make any necessary repairs to the
existing systems prior to lease commencement so that it is
in good working order.
2. BALANCING The Lessor will make all required modifications to
the HVAC system to provide the lessee space with reasonably
acceptable air quality and comfort levels. Additionally,
the HVAC system will be adjusted so that proper balancing of
the lessee space may be achieved.
D. TELEPHONE/COMPUTERS
-------------------
1. It will be the lessee's responsibility to install its own
telephone system and computer cable. Lessor will make
reasonable efforts to coordinate with lessee's contractor.
E. LIGHTING
--------
1. TYPE Lighting will consist of 2' x 4' four tube fluorescent
lamp fixtures with acrylic prismatic type lens. The
existing fixtures will be cleaned and, if necessary,
repaired.
2. QUANTITY The number of fixtures is anticipated to be one (1)
fixture for every 125 square feet.
3. SWITCHING All enclosed spaces will have a single wall
mounted switch to control the fixtures within the space.
F. FLOOR COVERINGS
---------------
1. TYPE The office areas will receive new carpet -Encounter #26
"Waterfall". At the option of the Lessor, carpet
installation will be either direct glue-down over existing
floor slab or tackless installation over pad.
The floors in the kitchen area and restrooms will be tiled
with vct tile. The tile will be Awesome #10", color #580.
Vinyl cove base will be installed throughout suite. The
base will be Mercer #204.
G. DOORS
-----
1. TYPE Office Doors: The existing doors will be utilized
throughout the suite. The new doors in the office area will
be replaced with doors similar to the ones currently in the
space.
Fire Doors: The three doors between the office/kitchen areas
and the production area will be fire-rated steel doors.
Appropriate hardware will be provided.
2. QUANTITY As shown on attached floor plan.
3. HARDWARE All door hardware will be passage type of a lever
style.
4. EXIT DOOR (Unit 202) -Once the Lessor is able to install a
new exit door in for the tenant in Units 7 and 8, it will
remove the existing door at the top of the staircase and
will either remove or secure the door at the foot of the
staircase leading in to Units 7 and 8.
H. PAINTING
--------
1. PARTITION All partitions within the demised space will
receive two finish coats of latex paint, eggshell finish.
The paint used with be Muralo Superfinish ; the color will
be "Coral White" #16. Prior to painting, all partitions
will be patched as required.
2. DOORS The three metal fire doors will be painted with Muralo
oil based, semi-gloss paint; the color will be Coral White
#16.
I. FIRE PROTECTION
---------------
1. EMERGENCY LIGHTS, EXIT SIGNAGE, etc. -Will be provided as
required by building codes.
J. KITCHEN
-------
1. A five foot base cabinet with laminated countertop and
stainless steel sink and faucet will be installed when shown
on floor plan.
K. REST ROOMS
----------
1. Existing restrooms on the second floor will be thoroughly
cleaned. If the fixtures cannot be cleaned, they will be
replaced.
2. The existing mens room on the first floor will be removed.
The ladies room on the first floor will be modified as shown
on the attached floorplan.
L. STAIRCASE INTO SHOP AREA
------------------------
-The Lessor will construct the staircase shown on the attached
plan from the rear of unit 201 to the shop floor.
<PAGE>
EXHIBIT C
LESSEE'S CONSTRUCTION
The Lessee will be responsible for the wiring of its
telephones and computers.
AMENDED EMPLOYMENT AGREEMENT
----------------------------
AMENDED AGREEMENT, dated as of the lst day of January,
1998, by and between AMERICAN ELECTROMEDICS CORP., a Delaware
corporation (the "Company"), and THOMAS A. SLAMECKA (the
"Executive").
W I T N E S S E T H:
--------------------
WHEREAS, the Company has employed the Executive in the
capacity of Chairman of the Board of Directors, and the Executive
has rendered such services, pursuant to an Employment Agreement,
dated as of February 5, 1997 (the"Original Agreement"); and
WHEREAS, the Company and the Executive desire to amend
their Original Agreement to assure the continuity of their
relationship, all subject to the terms and conditions contained
herein.
NOW, THEREFORE, in consideration of the foregoing and
the covenants and agreements hereinafter set forth, the parties
hereto, intending to be legally bound, agree as follows:
1. Retention of Employment.
-----------------------
The Company hereby continues the employment of the Executive as
Chairman of the Board of Directors of the Company, and the
Executive hereby accepts the continuation of such employment, all
upon and subject to the terms and conditions hereinafter set
forth.
2. Term.
----
The term of the employment under this Agreement shall be for an
initial period which had commenced on February 5, 1997 and shall
terminate on March 15, 2001 (the "Initial Term"), and be
automatically renewed for additional one (1) year periods
thereafter (the "Renewal Term"), unless either party gives the
other written notice of termination not less than sixty (60) days
prior to the end of the Initial Term or any Renewal Term
(collectively, the "Term").
3. Position, Duties and Representations.
------------------------------------
3.01. Service with the Company.
------------------------
The Executive shall serve as Chairman of the Board of Directors
of the Company. The Executive agrees to perform such executive
employment duties for the Company consistent with the position
specified above, and as the Board of Directors shall assign to
him from time to time consistent with his position with the
Company.
3.02. Scope of Services.
-----------------
The Executive agrees to serve the Company faithfully and to the
best of his ability and to devote his full business time,
attention and efforts necessary to advance the business and
affairs of the Company during the Term of this Agreement. If
requested, the Executive shall serve as an officer and/or
director of any subsidiary of the Company, without any additional
compensation hereunder.
3.03 Representations.
---------------
The Executive hereby represents to the Company that upon the
commencement of the Initial Term the Executive was not bound by
the terms of any non-competition, confidentiality or similar
agreement or understanding (written or oral) which would have
prevented or restricted the Executive's employment with the
Company as contemplated hereunder, and that the Executive does
not possess confidential information arising out of his prior
employments which would be utilized in connection with his
employment by the Company.
4. Compensation.
------------
4.01 Annual Salary.
-------------
The Executive will receive an annual base salary
("Base Salary") at an annual rate of $100,000 for the Initial
Term, except for the period beginning March 15, 1998 and ending
July 31, 1998 when the Base Salary will be $52,000 annually, paid
in accordance with the Company's normal payroll practices. In
addition on an annual basis the Board of Directors or a
compensation thereof (the "Compensation Committee") shall review
the Executive's compensation with a view towards increasing the
Base Salary and granting additional options, based on the
Executives performance during the preceding year or pursuant to
guidelines established by the Compensation Committee.
4.02 Bonus.
-----
(a) In further consideration of the Executive's agreement to
perform services hereunder, the Executive shall be entitled to a
cash bonus (the "Profits Bonus") in an amount equal to ten
percent (10%) of the Company's consolidated before-tax operating
profits (excluding any extraordinary and/or non-recurring items
of profit or expense) (the "Company Profits") in excess of
$500,000 (the "Threshold") for each fiscal year during the Term
(the Profits ), provided the Company has earned in such fiscal
year a twelve percent (12%) return on its equity on its common
stock.
(b) The Profits Bonus amount shall be calculated
initially by the Chief Financial Officer of the Company based
upon the Company's audited financial statements for the relevant
fiscal year. Promptly after completion of the Profits Bonus
calculation for each fiscal year, a report of the calculation
shall be sent to the Board of Directors. The Board of Directors
will then present the proposed Profits Bonus to the Executive.
The Executive may object to the calculation, within thirty (30)
days after receipt thereof, by requesting that the accounting
firm then auditing the financial statements of the Company review
the calculation. The results of such accountants' review shall
be final and binding on the Executive and the Company. Any
Profits Bonus shall be paid to the Executive within (30) days
after the Executive receives the Profits Bonus calculation,
except that if he objects thereto, the payment shall be made as
soon as practicable after the resolution of the objection. The
Executive shall bear the cost of the accounting firm s review,
except if upon such review of the Profits Bonus calculation the
accounting firm determines that the amount of the Profits Bonus
should be increased by ten percent (10%) or more from the amount
calculated by the Company, in which case the Company shall bear
the cost of the accounting firm's review.
(c) In the event the period of the Term for which
a Profits Bonus is being determined is less than the entire
fiscal year being used for the calculation, the Profits Bonus, if
any, and the Threshold for such period shall be multiplied by a
fraction, the numerator of which shall be the number of whole
months during such fiscal year that the Executive was an employee
of the Company and the denominator of which shall be 12.
(d) Notwithstanding any Profits Bonus which may
be paid to the Executive pursuant to this Section 4.02, for each
fiscal year during the Term the Compensation Committee may award
the Executive a supplemental bonus based upon factors other than
the Company's Profits for such fiscal year, as determined by such
Committee.
4.03 Stock Options: Conditional Grant.
--------------------------------
(a) In consideration of the Executive entering into this
Agreement, the Company shall grant to the executive stock options
(the "Options") to purchase up to 400,000 shares of the Company s
common stock, par value $.10 per share (the "Common Stock"),
exercisable at a purchase price of $1.00 per share, vesting as to
212,500 shares upon grant and as to 46,875 shares a month
commencing upon January 1, 1998 and continuing through May 1,
1998, all upon the terms and conditions set forth in the Stock
Option Agreement between the Company and the Executive, dated as
of the date hereof (the "Stock Option Agreement"), and attached
hereto as Exhibit A. The options shall be in substitution for
the remaining stock options granted to the Executive under the
Original Agreement.
(b) If at any time during the Initial Term hereof
the Company issues any shares of Common Stock, the Options
Committee shall immediately grant stock options to the Executive
in order that the Executive would beneficially own (as determined
in accordance with Rule 13d-2 under the Securities Exchange Act
of 1934, as amended (the Exchange Act ) nine and three-tenths
(9.3%) of the outstanding common stock of the company. For
purposes of the immediately preceding sentence, all Options
granted to the Executive, including Options not yet vested, and
also all shares of Common Stock sold by the Executive during the
Initial Term shall be included in the calculations of beneficial
ownership. Said new options being exercisable at a purchase
price to the Executive equal to the per share price of the shares
issued by the Company which caused the Executive to receive these
additional new stock options. Under no circumstance shall the
per share cost to the Executive be less than one dollar.
(c) The Company hereby agrees to issue to the
Executive 100,000 shares (the "Bonus Shares") of the Company's
Common Stock, as presently constituted, in the event that the
closing price of the Company's Common Stock as reported on the
OTC Bulletin Board or other national market quote system or
exchange where the Common Stock is then traded (the Trading
Price ) equals or exceeds $20.00 per share for a period of three
(3) trading days during the Term. In the event of any increase
in shares outstanding, stock split, stock dividend,
reorganization or other change in the Common Stock, the number of
Bonus Shares and or the Trading Price shall be proportionately
adjusted. The Company shall immediately register the Bonus
Shares under the Securities Act of 1933, as amended, after the
issuance thereof, subject to the availability of audited
financial information and regulatory review.
4.04 Monthly Loans.
-------------
(a) The Company shall make available to the Executive a loan in
the amount of $8333.33 (each, a "Monthly Loan") on the first day
of each month (each, a "Loan Date") for so long as the Executive
remains employed hereunder commencing with the month of March
1997 and terminating on February 2, 2001, subject to earlier
termination of fifty per-cent (50%) of the value of the Monthly
Loan upon the Trading Price of the Company's Common Stock
equaling or exceeding $10.00 per share for a period of twenty
(20) consecutive trading days during the Term. In order to
obtain a Monthly Loan on a Loan Date, the Executive shall notify
the Company in writing at least ten (10) days prior to each Loan
Date, whereupon the Company shall disburse the amount of such
Monthly Loan on the next succeeding Loan Date against delivery by
the Executive of a promissory note (the Note ) as described
below, to the Company.
(b) Each Monthly Loan shall be evidenced by a
Note executed by the Executive in favor of the Company and shall
bear interest commencing on the Loan Date at a rate of seven
percent (7%) per annum, compounded annually. The principal of
each Monthly Loan, plus all accrued and unpaid interest thereon,
shall mature and be payable to the Company in full on the
earliest of February 4, 2002, (ii) two (2) years from the date on
which the Executive ceases to be employed by the Company
hereunder, other than pursuant to Section 6.03 hereof, or (iii)
upon the date of termination of this Agreement pursuant to
Section 6.03 hereof (the "Maturity Date"), and (I) shall be
repaid on the Maturity Date by payment, in whole or part at the
discretion of the Executive: (v) in cash, (w) delivery of shares
of the Company's Common Stock or fully vested stock options
exercisable therefor, which in the case of the Common Stock shall
be valued at the Trading Price as of the Maturity Date, and in
the case of the stock options shall be valued at the difference
between the Trading Price as of the Maturity Date and the
respective exercise prices of such Stock Option or (x) by
crediting against the amount due any amount then outstanding and
owed to the Executive as a Profits Bonus pursuant to Section 4.02
hereof, or (II) shall be forgiven by the Company (y) in the event
the Executive continues in the employ of the Company for the
entire Initial Term hereof or the Company terminates this
Agreement during the Initial Term other than for cause pursuant
to Section 6.03 hereof, or (z) in the event of a merger or
consolidation of the Company whereby it is not the surviving
entity or the stockholders of the Company are not the controlling
stockholders of the surviving entity, the sale of all or
substantially all of the Company's assets, liquidation,
dissolution or entry by the Company (voluntarily or
involuntarily) into insolvency or bankruptcy proceedings, or any
person or group becomes the beneficial owner (as defined in Rule
13d-2 under the Exchange Act) of more than twenty-five percent
(25%) of the Company's outstanding voting securities other than
in a transaction approved by the Board of Directors of the
Company as presently constituted or by their chosen successors as
directors. The Executive agrees that should there be any income
tax withholding obligation by reason of the Monthly Loans or
their repayment or forgiveness, he will bear his portion of such
withholding obligation.
4.05 Participation in Benefit Plans.
------------------------------
The Executive shall also be entitled, to the extent that his
position, title, tenure, salary, age, health and other
qualifications make him eligible, to participate in all employee
benefit plans or programs (including, but not limited to,
medical/dental insurance, disability, stock option, retirement
and pension plans and vacation time, sick leave and holidays) of
the Company currently in existence on the date hereof or as may
hereafter be instituted from time to time. The Executive's
participation in any such plan or program shall be subject to the
provisions, rules and regulations applicable thereto.
4.06 Automobile.
----------
The Company shall provide the Executive with (i) the use of an
automobile or (ii) an allowance or reimbursement for the use by
the Executive of his personal automobile for Company purposes,
provided that the cost to the Company does not exceed $700 a
month.
4.07 Expenses.
--------
In accordance with the Company's policies established from time
to time, the Company shall pay or reimburse the Executive for all
reasonable and necessary out-of-pocket expenses incurred by him
in the performance of his duties under this Agreement, subject to
the presentment of appropriate vouchers and receipts.
4.08 Insurance.
---------
The Executive acknowledges and agrees that the Company may obtain
a life insurance policy on the life of the Executive in the
amount of at least $2,000,000 with the Company named as the
beneficiary. The Executive shall cooperate fully with the
Company's efforts to obtain such insurance policy, including
making himself available for physical examinations.
5. Non-Disclosure of Confidential Information;
-------------------------------------------
Non-Competition.
---------------
5.01 Confidentiality.
---------------
Except as may be in furtherance of the Executive's performance of
his functions as a senior executive officer of the Company, the
Executive shall not, throughout the Term of this Agreement and
thereafter, disclose to any third party or use or authorize any
third party to use, any information relating to the business,
business plans, trade secrets or other interests of the Company
(including customers and clients of the Company) which is
confidential and valuable to the Company or any of its
subsidiaries or any third party (including customers and clients
of the Company) and which is not known to the public (the
"Confidential Information"). The Confidential Information is and
will remain the sole and exclusive property of the Company, and
during the Term of this Agreement, the Confidential Information,
when entrusted to the Executive s custody, shall be deemed to
remain at all times in the Company s sole possession and control.
Notwithstanding the foregoing, the Executive may, after prior
written notice to the Company (to the extent such notice is
possible under the circumstances) disclose such Confidential
Information pursuant to subpoena or other legal process, and
promptly thereafter shall advise the Company in writing as to the
Confidential Information which was disclosed and the
circumstances of such disclosure.
5.02 Return of Documents.
-------------------
The Executive agrees that, upon the expiration of his employment
with the Company for any reason, he shall forthwith deliver up to
the Company any and all documents and other material, and all
copies thereof, in his possession or under his control relating
to any Confidential Information which is otherwise the property
of the Company.
5.03 Non-Competition.
---------------
The Executive recognizes that the services to be performed by him
for the Company are special and unique. The Executive further
recognizes that the nature of the Company's business is such that
the Executive will have full knowledge of the Company's business
plans and practices. The parties therefore confirm that, in
order to protect the Company's goodwill, it is necessary that the
Executive agree, and the Executive hereby does agree that he will
not in the United States, at any tune during and for a period of
two (2) years after he ceases to be employed by the Company, hold
any equity interest or act as a sole proprietor, partner,
coventurer, principal, director or shareholder (to the extent of
5% or more of the equity interest thereof), directly or
indirectly, of any sole proprietorship, partnership, joint
venture, corporation, or other business entity engaged in the
business of the research, development, manufacture and sale of
audiometers and other devices designed to test hearing, or
engaged in any other business competitive to any business that
the Company is engaged (or has formulated plans to engage) or at
the time the Executive ceases to be employed by the Company.
5.04 Remedies.
--------
The Executive agrees that any breach or threatened breach by him
of any provision of this Section 5 shall entitle the Company, in
addition to any other legal remedies available to it, to apply to
any court of competent jurisdiction to enjoin such breach or
threatened breach. The parties understand and intend that each
restriction agreed to by the Executive hereinabove shall be
construed as separable and divisible from every other
restriction, and that the unenforceability, in whole or in part
of any restriction, will not affect the enforceability of the
remaining restrictions and that one or more or all of such
restrictions may be enforced in whole or in part as the
circumstances warrant. No waiver of any one breach of the
restrictions contained in this Section 5 shall be deemed a waiver
of any future breach.
6. Termination.
-----------
6.01 Disability.
----------
(a) The Executive shall be considered disabled if, due to
illness or injury, either physical or mental, he is unable to
perform his customary duties and responsibilities as required by
this Agreement for more than two (2) months in the aggregate out
of any period of six (6) consecutive months. The determination
that the Executive is disabled shall be made by the Executive
Committee or, if there is no Executive Committee, by the Board of
Directors of the Company (with the Executive abstaining from the
decision if he is then a member of such Committee or the Board),
based upon an examination and certification by a physician
selected by the Company subject to the Executive's approval,
which approval shall not be unreasonably withheld. The Executive
agrees to submit timely to any required medical or other
examination, provided that such examination shall be conducted at
a location convenient to the Executive and that if the examining
physician is other than the Executive's personal physician, the
Executive shall have the right to have such personal physician
present at such examination.
(b) If the Executive is determined to be disabled
pursuant to this Section 6.01, the Company shall have the option
to terminate this Agreement by written notice to the Executive
stating the date of termination, which date may be any time
subsequent to the date of such determination.
6.02 Death.
-----
If the Executive shall die during the Term of this Agreement,
this Agreement and the Executive's employment hereunder shall
terminate immediately upon the Executive's death.
6.03 By the Company for Cause.
------------------------
The Company may terminate this Agreement for cause at any time.
For purposes of this Agreement, the term "cause" shall be limited
to (i) conviction of a felony or equivalent crime under the laws
of the United States or any state, (ii) conviction of a felony or
equivalent crime under the laws of any other country or political
subdivision thereof involving moral turpitude, (iii) action
involving willful gross misconduct having a material adverse
effect on the Company including willfully aiding the competition,
or (iv) the breach by the Executive of any of his material
obligations under this Agreement without proper justification,
which breach is not cured within thirty (30) days after written
notice thereof from the Company. Upon termination of employment
by the Company for cause, the Executive shall receive any
accrued Base Salary through the termination date, less any
amounts by reason of claims the Company may have against the
Executive.
6.04 By the Executive for Cause.
--------------------------
The Executive may terminate this Agreement for "cause" at any
time. For purposes of this Section 6.04, the term "cause" shall
be the failure of the Company to perform in a material respect of
its material obligation under this Agreement without proper
justification after notice thereof from the Executive and, if
curable, the opportunity to cure, within thirty (30) days after
the giving of written notice thereof to the Company.
6.05 Termination Benefit.
-------------------
Upon termination of employment (i) by the Company other than for
cause pursuant to Section 6.03 hereof, (ii) upon the disability
of the Executive pursuant to Section 6.01 hereof, (iii) by the
Executive's death pursuant to Section 6.02 hereof, or (iv) by the
Executive for "cause" pursuant to Section 6.04 hereof, the
Executive (or his estate or representative) shall receive a
severance payment equal to the greater of (i) the amount of the
then current annual Base Salary or (ii) the continuation of the
then Base Salary for the balance of the Term.
6.06 Change in Control of the Company.
--------------------------------
(a) If, at anytime during the Term hereof, a change in control
of the Company (as defined in Subsection (b) below) occurs, then
within sixty (60) days after receipt of written notice of such
change in control of the Company, the Executive may, by written
notice to the Company (or its successor), terminate this
Agreement. In the event of said termination, (i) the Executive
shall receive a lump sum payment equal to 2.99 times his then
current Base Salary, payable within thirty (30) days after
termination of this Agreement, (ii) the Company (or its
successor) shall maintain, at its expense, the health plan
coverage of the Executive for a period of twelve (12) months
after such termination, subject to termination of such health
plan benefits upon the Executive becoming covered by a comparable
plan offered by a subsequent employer and also subject to any
changes in such plan as applicable to other executive officers
and (iii) all stock options and other equity based awards granted
to the Executive by the Company shall become fully vested and
exercisable subject to their respective terms; provided, however,
-------- -------
if the amount to be paid or distributed to the Executive pursuant
to this Section 6.06 (taken together with any amounts otherwise
to be paid or distributed to the Executive by the Company) (such
amounts collectively the "Section 6.06 Payment") would result in
the application of an excise tax under Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any
successor or similar provision thereto, the Section 6.06 Payment
shall not be paid or distributed in the amounts or at the times
otherwise required by this Agreement, but shall instead be paid
or distributed annually, beginning within thirty (30) days after
the termination date and thereafter on each anniversary thereof,
in the maximum substantially equal amounts and over the minimum
number of years that are determined to be required to reduce the
aggregate present value of Section 6.06 Payment to an amount that
will not cause any Section 6.06 Payment to be non-deductible
under Section 280G of the Code. For purposes of this Section
6.06, present value shall be determined in accordance with
Section 280G(d)(4) of the Code.
(b) "Change of control of the Company" shall be
deemed to have occurred if:
(i) any "person" or "group" (as "person" and "group"
are defined in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), other than
(A) the Executive or a person controlled by him, (B) a trustee or
other fiduciary holding securities under an employee benefit plan
of the Company, (C) a person or group by reason of a transaction
with the Company approved by the Company Board of Directors as
constituted in accordance with Paragraph (ii) below, or (D) a
corporation owned, directly or indirectly, by the stockholders of
the Company in substantially the same proportions, is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the
Company representing 20% or more of the combined voting power of
the Company's then outstanding securities; or
(ii) individuals who on the commencement date of this
Agreement constitute members of the Board of Directors, or
successors chosen by such individuals, shall cease for any reason
to constitute a majority of the whole Board of Directors.
7. Notices.
-------
All notices, requests, demands or other communications hereunder
shall be deemed to have been given if delivered in writing
personally or by registered mail to each party at the address set
forth below, or at such other address as each party may designate
in writing to the other:
If to the Company:
American Electromedics Corp.
13 Columbia Drive
Amherst, New Hampshire 03031
Attn: Michael T. Pieniazek, President
If to Executive:
Thomas A. Slamecka
3055 Mossy Pointe
Duluth, Georgia 30155
Fax: (770) 613-9963
8. Entire Agreement.
----------------
This Agreement contains the entire understanding of the parties
with respect to the subject matter hereof, supersedes any prior
agreement between the parties. No change, termination or
attempted waiver of any of the provisions hereof shall be binding
unless in writing and signed by the party against whom the same
is sought to be enforced.
9. Successors and Assigns; Binding Effect.
--------------------------------------
This Agreement will be binding upon and inure to the benefit of
the Company and its successors and assigns, and the Executive,
and his heirs and administrators. The Company may assign this
Agreement to any corporation which is in a consolidated group
with the Company.
10. Waiver and Severability.
-----------------------
The waiver by either party of a breach of any terms or conditions
of this Agreement shall not operate or be construed as a waiver
of any subsequent breach by such party. In the event that any
one or more of the provisions of this Agreement shall be declared
to be illegal or unenforceable under any law, rule or regulation
of any government having jurisdiction over the parties hereto,
such illegality or unenforceability shall not affect the validity
and enforceability of the other provisions of this Agreement.
11. Heading; Interpretations.
------------------------
The headings and captions used in this Agreement are for
convenience only and shall not be construed in interpreting this
Agreement.
12. Governing Law.
-------------
All matters concerning the validity and interpretation of and
performance under this Agreement shall be governed by the laws of
the State of New Hampshire without regard to the conflicts of law
principles thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date first above written.
AMERICAN ELECTROMEDICS CORP.
By: /s/ Michael T. Pieniazek
--------------------------
Michael T. Pieniazek
Chief Financial Officer
/s/ Thomas A. Slamecka
-----------------------------
Thomas A. Slamecka
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of January 1, 1998, by and between
AMERICAN ELECTROMEDICS CORP., a Delaware corporation (the
"Company"), and MICHAEL T. PIENIAZEK (the "Executive").
W I T N E S S E T H:
--------------------
WHEREAS, the Executive has been employed by the Company, and
the Company and the Executive desire to assure continuity of the
Executive's services upon the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the foregoing and the
covenants and agreements hereinafter set forth, the parties
hereto, intending to be legally bound, agree as follows:
1. Retention of Employment.
-----------------------
The Company hereby employs the Executive as President of the
Company, and the Executive hereby accepts such employment, all
upon and subject to the terms and conditions hereinafter set
forth.
2. Term.
----
The Term (the "Term") of the employment under this Agreement
shall be for an initial period commencing on January 1, 1998 and
terminating on December 31, 2001 and automatically renewed for
additional one (1) year periods thereafter unless either party
gives the other written notice of termination not less than sixty
(60) days prior to the end of the Initial Term.
3. Position, Duties and Representations.
------------------------------------
3.01 Service with the Company.
------------------------
The Executive shall serve as President of the Company. Subject
to the Board appointing other persons the Executive will act as
Chief Financial Officer and Secretary. The Executive agrees to
perform such executive employment duties for the Company
consistent with the positions specified above, and as the Board,
the Executive Committee, or the Chairman of the Board shall
assign to him from time to time consistent with his position with
the Company.
3.02 Scope of Services.
-----------------
The Executive agrees to serve the Company faithfully and to the
best of his ability and to devote his full business time,
attention, and efforts to advance the business of the Company
during the Term of this Agreement. If requested, the Executive
shall serve as a director of the Company and officer and/or
director of any subsidiary of the Company without any additional
compensation hereunder.
4. Compensation.
------------
4.01 Annual Salary.
-------------
The Executive shall receive an annual base salary ("Base Salary")
of $125,000 per year payable in accordance with the Company's
normal payroll practices. In addition, on an annual basis the
Board or the Compensation Committee shall review the Executive's
compensation with a view towards increases in the Base Salary,
and/or payment of a bonus, based on the Executive's performance
during the preceding year or pursuant to guidelines established
by the Compensation Committee. Payment of a bonus shall be
entirely at the discretion of the Board of Directors.
4.02 Participation in Benefit Plans.
------------------------------
The Executive shall also be entitled, to the extent his position,
tenure, salary, age, health and other qualifications make him
eligible, to participate in all employee benefit plans or
programs (including, but not limited to, medical/dental
insurance, disability, stock option, retirement and pension plans
and vacation time, sick leave and holidays) of the Company
currently in existence on the date hereof or as may hereafter be
instituted from time to time. The Executive's participation in
any such plan or program shall be subject to the provisions,
rules and regulations applicable thereto.
4.03 Stock Options.
-------------
The Company shall grant to the executive stock options (the
"Options") under its 1996 Stock Options Plan for the purchase of
250,000 shares of Common Stock as an exercise price of one dollar
($1.00) per share. The Options to the maximum extent possible
shall be "incentive" stock options, as defined in Section 422 of
the Internal Revenue Service Code of 1986, as amended, and vest
as follows: 150,000 shares initially upon grant, and the balance
of the 250,000 shares by July 31, 1998 or sooner, subject to
acceleration as provided herein. If during any fiscal year
during the Term hereof the Company issues any shares of Common
Stock (other than pursuant to compensation or employee benefit
plans), the Options Committee shall immediately grant stock
options to the Executive in order that the Executive would
beneficially own (as determined in accordance with Rule 13d-2
under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") six and one-half percent (6.5%) of the
outstanding common stock of the Company. For purposes of the
immediately preceding sentence, all Options granted to the
Executive, including Options not yet vested, and also all shares
of Common Stock sold by the Executive during the term shall be
included in the calculation of beneficial ownership.
4.04 Bonus Shares.
------------
The Company hereby agrees to issue to the Executive 50,000 shares
(the "Bonus Shares") of the company's Common Stock as reported on
the OTC Bulletin Board or other national market quote system or
exchange where the Common Stock is then traded (the "Trading
Price") equals or exceeds $20.00 per share for a period of three
(3) trading days during the Term. In the event of any increase
in shares outstanding, stock split, stock dividend,
reorganization or other change in the Common Stock, the number of
Bonus Shares and or the Trading price shall be proportionately
adjusted. The Company shall immediately register the Bonus
Shares under the Securities Act of 1933, as amended, after the
issuance thereof, subject to the availability of audited
financial information and regulatory review.
4.05 Automobile.
----------
The Company shall provide the Executive with (i) the use of an
automobile or (ii) an allowance or reimbursement for the use by
the Executive of his personal automobile for Company purposes,
provided the cost to the Company does not exceed $700 per month.
4.06 Expenses.
--------
In accordance with the Company's policies established from time
to time, the Company shall pay or reimburse the Executive for all
reasonable and necessary out-of-pocket expenses incurred by him
in the performance of his duties under this Agreement, subject to
the presentment of appropriate vouchers and receipts.
5. Non-disclosure of Confidential Information: Non-
-------------------------------------------------
Competition.
-----------
5.01 Confidentiality.
---------------
Except as may be in the furtherance of the Executive's
performance of his functions as a senior executive officer of the
Company, the Executive shall not, throughout the Term of this
Agreement and thereafter, disclose to any third party or use or
authorize any third party to use any information relating to the
business, business plans, work-in-progress, trade secrets or
other interests of the Company (including customers and clients
of the Company) which is confidential and valuable to the Company
or any of its subsidiaries or any third party (including
customers and clients of the Company) and which is not known to
the public (the "Confidential Information"). The Confidential
Information is and will remain the sole and exclusive property of
the Company, and during the Term of this Agreement, the
Confidential Information, when entrusted to the Executive's
custody, shall be deemed to remain at all times in the Company's
sole possession and control. Notwithstanding the foregoing, the
Executive may, after prior written notice to the Company (to the
extent such notice is possible under the circumstances) disclose
such Confidential Information pursuant to subpoena or other legal
process, and promptly thereafter shall advise the Company in
writing as to the Confidential Information which was disclosed
and the circumstances of such disclosure.
5.02 Return of Documents.
-------------------
The Executive agrees that, upon the expiration of his employment
with the Company for any reason, he shall forthwith deliver up to
the Company any and all documents and other material, and all
copies thereof, in his possession or under his control relating
to any Confidential Information which is otherwise the property
of the Company.
5.03 Non-Competition.
---------------
The Executive recognizes that the services to be performed by him
for the Company are special and unique. The Executive further
recognizes that the nature of the Company's business is such that
the Executive will have full knowledge of the Company's business
plans and practices. The parties therefore confirm that, in
order to protect the Company's goodwill, and in consideration of
the Company entering into this Agreement providing for a fixed
term of employment of the Executive, it is necessary that the
Executive agree, and the Executive hereby does agree that he will
not in the United States, for a period of two (2) years after the
termination of this Agreement, become employed by, a consultant
to or a director of, or hold any equity interest as a partner,
member or shareholder (to the extent of 5% or more of the equity
interest thereof), of any sole proprietorship, partnership, joint
venture, corporation or other business entity which engages in a
business directly competitive to any business that the Company is
engaged (or has formulated plans to engage) in at the time of
termination of this Agreement, and the Executive's primary duties
with such entity relate directly to the competitive entity. This
Section shall not be applicable if the Executive terminates this
Agreement pursuant to Section 6.03 hereof or if the Company
terminates this Agreement other than for "cause" as defined in
Section 6.04 hereof.
5.04 Remedies.
--------
The Executive agrees that any breach or threatened breach by him
of any provision of this Section 5 shall entitle the Company, in
addition to any other legal remedies available to it, to apply to
any court of competent jurisdiction to enjoin such breach or
threatened breach. The parties understand and intend that each
restriction agreed to by the Executive hereinabove shall be
construed as separable and divisible from every other
restriction, and that the unenforceability, in whole or in part,
of any restriction, will not affect the enforceability of the
remaining restrictions and that one or more or all of such
restrictions may be enforced in whole or in part as the
circumstances warrant. No waiver of any breach of the
restrictions contained in this Section 5 shall be deemed a waiver
of any future breach.
6. Termination.
-----------
6.01 Disability.
----------
If the Executive is determined to be disabled (as defined below),
the Company shall have the option to terminate this Agreement by
written notice to the Executive stating the date of termination,
which date may be any time subsequent to the date of such
determination. The Executive shall be considered disabled if,
due to illness or injury, either physical or mental, he is unable
to perform his customary duties and responsibilities as required
by this Agreement for more than two (2) months in the aggregate
out of any period of six (6) consecutive months. The
determination that the Executive is disabled shall be made by the
Board of Directors of the Company (with the Executive abstaining
from the decision if he is then a member of the Board), based
upon an examination and certification by a physician selected by
the Company subject to the Executive's approval, which approval
shall not be unreasonably withheld. The Executive agrees to
submit timely to any required medical or other examination,
provided that such examination shall be conducted at a location
convenient to the Executive and that if the examining physician
is other than the Executive's personal physician, the Executive
shall have the right to have such personal physician present at
such examination.
6.02 Death.
-----
If the Executive shall die during the Term of this Agreement,
this Agreement and the Executive's employment hereunder shall
terminate immediately upon the Executive's death.
6.03 By the Executive for Cause.
--------------------------
The Executive may terminate this Agreement for "cause" at any
time. For purposes of this Section 6.03, the term "cause" shall
be the failure of the Company to perform in a material respect of
its material obligations under this Agreement without proper
justification after notice thereof from the Executive and, if
curable, the opportunity to cure, within ten (10) days after the
giving of written notice thereof to the Company.
6.04 By the Company for Cause.
------------------------
The Company may terminate this Agreement for cause at any time.
For purposes of this Section 6.04, the term "cause" shall be
limited to (i) conviction of a felony or equivalent crime under
the laws of the United States or any state, (ii) conviction of a
felony or equivalent crime under the laws of any other country or
political subdivision thereof involving moral turpitude, (iii)
action involving willful gross misconduct having a material
adverse effect on the Company including wilfully aiding the
competition, or (iv) the breach by the Executive of any of his
material obligations under this Agreement without proper
justification, which breach is not cured within thirty (30) days
after written notice thereof from the Company. Upon termination
of employment by the Company pursuant to this Section, the
Executive shall receive any accrued Base Salary through the
termination date, less any amounts by reason of claims the
Company may have against the Executive.
6.05 Termination Benefit.
-------------------
Upon termination of employment (i) by the Company other than for
"cause" pursuant to Section 6.04 hereof, (ii) upon the disability
of the Executive pursuant to Section 6.01 hereof, (iii) by the
Executive's death, or (iv) by the Executive for "cause," pursuant
to Section 6.03 hereof, the Executive (or his estate or
representative) shall receive (A) a severance payment equal to
the greater of (i) the amount of the then current annual Base
Salary or (ii) the continuation of the Base Salary for the
balance of the Term, (B) other than termination upon the death of
the Executive, the continuation of his health benefits for a
period of one (1) year from the date of such termination, at the
Company's expense, subject to discontinuance of health benefits
upon the Executive becoming covered by a comparable plan offered
by a subsequent employer, and (C) all outstanding unvested stock
options granted to the Executive by the Company for the purchase
of shares of its Common Stock shall automatically vest and become
exercisable, subject to their respective terms.
6.06 Change in Control of the Company.
--------------------------------
(a) If, at anytime during the Term hereof, a change in control of
the Company (as defined in Subsection (b) below) occurs, then
within sixty (60) days after receipt of written notice of such
change in control of the Company, the Executive may, by written
notice to the Company (or its successor), terminate this
Agreement. In the event of said termination, (i) the Executive
shall receive a lump sum payment equal to 2.99 times his then
current Base Salary, payable within thirty (30) days after
termination of this Agreement, (ii) the Company (or its
successor) shall maintain, at its expense, the health plan
coverage of the Executive for a period of twelve (12) months
after such termination, subject to termination of such health
plan benefits upon the Executive becoming covered by a comparable
plan offered by a subsequent employer and also subject to any
changes in such plan as applicable to other executive officers
and (iii) all outstanding unvested stock options granted to the
Executive under a plan of the Company for the purchase of shares
of its Common Stock shall automatically vest and become
exercisable subject to their respective terms; provided, however,
-------- -------
if the amount to be paid or distributed to the Executive pursuant
to this Section 6.06 (taken together with any amounts otherwise
to be paid or distributed to the Executive by the Company) (such
amounts collectively the "Section 6.06 Payment") would result in
the application of an excise tax under Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any
successor or similar provision thereto, the Section 6.06 Payment
shall not be paid or distributed in the amounts or at the times
otherwise required by this Agreement, but shall instead be paid
or distributed annually, beginning within thirty (30) days after
the termination date and thereafter on each anniversary thereof,
in the maximum substantially equal amounts and over the minimum
number of years that are determined to be required to reduce the
aggregate present value of Section 6.06 Payment to an amount that
will not cause any Section 6.06 Payment to be nondeductible under
Section 28OG of the Code. For purposes of this Section 6.06,
present value shall be determined in accordance with Section
28OG(d)(4) of the Code.
(b) "Change of control of the Company" shall be deemed
to have occurred if:
(i) any "person" or "group" (as "person" and "group" are
defined in Sections 13(d) and 14(d) of the Exchange Act, other
than (A) the Executive or a person controlled by him, (B) a
trustee or other fiduciary holding securities under an employee
benefit plan of the Company, (C) a person or group by reason of a
transaction with the Company approved by the Company Board of
Directors as constituted in accordance with Paragraph (ii) below,
or (D) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same
proportions, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding
securities; or
(ii) individuals who on the commencement date of this
Agreement constitute members of the Board of Directors, or
successors chosen by such individuals, shall cease for any reason
to constitute a majority of the whole Board of Directors.
7. Notices.
-------
All notices, requests, demands or other communications hereunder
shall be deemed to have been given if delivered in writing
personally or by registered mail to each party at the address set
forth below, or at such other address as each party may designate
in writing to the other:
If to the Company:
American Electromedics Corp.
13 Columbia Drive
Amherst, New Hampshire 03031
Attn: Thomas A. Slamecka, Chairman
If to Executive:
Michael T. Pieniazek
38 Westview Road
Worcester, MA 01602
8. Entire Agreement.
----------------
This Agreement contains the entire understanding of the parties
with respect to the subject matter hereof, supersedes any prior
agreement (oral or written) between the parties. No change,
termination or attempted waiver of any of the provisions hereof
shall be binding unless in writing and signed by the party
against whom the same is sought to be enforced.
9. Successors and Assigns; Binding Effect.
--------------------------------------
This Agreement will be binding upon and inure to the benefit of
the Company and its successors and assigns, and the Executive,
and his heirs and administrators. The Company may assign this
Agreement to any corporation which is in a consolidated group
with the Company, provided that the Company shall remain liable
hereunder.
10. Waiver and Severability.
-----------------------
The waiver by either party of a breach of any terms or conditions
of this Agreement shall not operate or be construed as a waiver
of any subsequent breach by such party. In the event that any
one or more of the provisions of this Agreement shall be declared
to be illegal or unenforceable under any law, rule or regulation
of any government having jurisdiction over the parties hereto,
such illegality or unenforceability shall not affect the validity
and enforceability of the other provisions of this Agreement.
11. Headings; Interpretations.
-------------------------
The headings and captions used in this Agreement are for
convenience only and shall not be construed in interpreting this
Agreement.
12. Governing Law.
-------------
All matters concerning the validity and interpretation of and
performance under this Agreement shall be governed by the laws of
the State of New Hampshire without regard to the conflicts of law
principles thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
AMERICAN ELECTROMEDICS CORP.
By: /s/ Thomas A. Slamecka
------------------------------------
Thomas A. Slamecka, Chairman
/s/ Michael T. Pieniazek
--------------------------------------
Michael T. Pieniazek
Contract of Employment
----------------------
between
ROSCH GmbH, Medizintechnik,
Alt Buckow 6, 12349 Berlin
hereinafter called the company -
- on the one hand -
and
Mr. Andy Rosch,
resident at Kornblumenring 3, 12357 Berlin
- hereinafter called the Managing Director -
on the other.
This contract replaces the original Managing Director's contract
dated the first of July 1990 and all the amendments to it by
shareholders' decision.
This Contract comes into force retroactively from the first of
January 1996 as per the shareholders' decision of the eleventh of
January 1996.
<PAGE>
SECTION I SCOPE OF FUNCTIONS/MANAGERIAL AND REPRESENTATIVE
RIGHTS/ADDITIONAL OCCUPATIONS
1.1 The Managing Director is responsible together with the other
managing directors for the management of the company and its
outward representation. He manages the company and is
responsible for all its commercial activities.
1.2 The Managing Director must comply with all applicable laws
and the company's shareholders' agreement in managing the
company, whereby the decisions of the shareholders' meeting
are to be respected and carried out.
He is entitled to perform all normal business on his own
initiative and is sole authorized signatory for such
activities. He must first obtain the shareholders'
agreement in those special cases stipulated in the
shareholders' agreement and for legal actions outside the
scope of normal business activities which are not
inconsequential.
1.3 The Managing Director may only take on an additional
occupation or participate in another commercial undertaking
in the same line of business as the company with the
agreement of a shareholders' meeting. The same applies to
the acceptance of seats on supervisory boards, advisory
boards or similar bodies, including honorary offices of any
kind.
SECTION 2 EMOLUMENTS/EXPENSES AND ALLOWANCES/SICKNESS
2.1 The Managing Director will receive the following emoluments
for his activities.
A. A monthly gross salary of fifteen thousand German
Marks.
B. A share in the annual profits as calculated for tax
purposes before adding the trade tax reduction due to
payment of this share and after deduction of those
company expenses not tax-deductible insofar as the
employment relationship has subsisted throughout the
entire year amounting to 15% (fifteen percent), payable
after approval of the relevant annual accounts by the
shareholders' meeting.
In the event of payment on a loan basis, interest is
payable to the company at the rate of seven percent per
annum, beginning with the first day of the financial
year following the date of transfer or of crediting of
the money. Any such loan is subject to quarterly
notice of termination.
C. Special payment can be made for overtime, Sunday and
holiday work, but only when the Managing Director was
demonstrably not at his usual place of work, i.e.
overtime was incurred during traveling on business,
congresses, etc.
D. In addition to the emoluments mentioned above, the
Managing Director will also receive the employer's
portion of all social security payments due, or a
comparable sum in the event that no obligation to make
such payments exists.
The company has taken out direct accident insurance
with guaranteed refund of contributions as company
pension. This insurance began on the first of
February, 1995.
An endowment assurance policy numbered 211309134 with
capital payment in the event of death and an annuity
option was taken out on the eleventh of February, 1994
on the Managing Director's life.
E. The Managing Director also has a right to all the
company's usual social security benefits and services.
F. The Managing Director will receive a thirteenth month's
salary as Christmas bonus.
2.2 Travelling and other expenses necessarily incurred on the
company's behalf will be appropriately recompensed. All
such expenses exceeding the permissible limits in taxation
law must be documented.
The Managing Director has a right to a company car, which he
may also use privately. The payment of tax on the financial
benefit involved is due in accordance with the tax
authorities' guidelines.
2.3 The company is entitled to reduce the Managing Director's
emoluments as appropriate should he be absent from work due
to illness, accident or other causes for more than 12 weeks.
2.4 Any adjustment in the Managing Director's emoluments can
only be made by shareholders' decision.
SECTION 3 HOLIDAY
The Managing Director is entitled to thirty working days holiday
per annum. This is to be taken with due regard to the company's
affairs and at such a time as not to damage the company in any
way.
The Managing Director is entitled to compensation for any unused
annual holiday entitlement.
SECTION 4 OBLIGATION TO CONFIDENTIALITY
4.1 The Managing Director is obliged to maintain confidentiality
regarding all the company's affairs toward all outsiders
unless passing on such information is essential in the
normal course of his duties. This obligation remains in
force when this Contract expires.
SECTION 5 DURATION OF EMPLOYMENT, PERIOD OF NOTICE
5.1 The employment relationship has existed since the first of
July, 1990 and is valid for an indefinite period.
5.2 The employment relationship can be terminated by either
party to it, the period of notice being six months to the
end of a company financial year.
5.3 An important reason in the person of the Managing Director
making continuation of the employment relationship
intolerable to the company must exist, as well as an
appropriate shareholders' decision, before the company may
terminate this Contract.
5.4 The company is entitled to send the Managing Director on
leave of absence with full pay in the event that lawful
notice of termination of this Contract has been served.
Such leave is to be deducted from any annual holiday
entitlement the Managing Director may have remaining at the
time.
5.5 Notice of termination must be in writing.
SECTION 6 RETURN OF DOCUMENTS
6.1 The Managing Director has a duty to treat all documents and
records pertaining to his professional activities as company
property entrusted to him on loan, to keep same under lock
and key and to return them to the company in full on expiry
of this Contract without being asked to do so. The company
will then decide whether to retain all or any such documents
and records.
SECTION 7 CHANGES TO THIS CONTRACT
7.1 All changes and/or amendments to this Contract must be in
writing.
Should any stipulation in this contract be or become null and
void for any reason whatsoever, this will not affect the validity
of the rest of the contract.
Any such null and void stipulations are to be replaced by mutual
consent with effective equivalents fulfilling the same economic
purpose.
Place of jurisdiction and of performance of this Contract is the
company's head office site for both parties.
Place: Berlin
------------------------------------------------------
Date: 11.1.96
---------------------------------------------------------
Signature (Employee) /s/ Andy Rosch
-------------------------------------------
Place: Berlin
-----------------------------------------------------
Date: 11.1.96
---------------------------------------------------------
Signature (Shareholder) /s/ Andy Rosch
----------------------------------------
Andy Rosch
/s/ Michael T. Pieniazek
------------------------------------------------
American Electromedics - Michael Pieniazek
Chief Financial Officer
EXHIBIT 21
LIST OF SUBSIDIARIES
Dynamic Dental Systems, Inc., a Delaware corporation (100%)
Equidyne Systems, Inc., a California corporation (100%)
Rosch GmbH Medizintechnik, a German corporation (100%)
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 the
Registration Statement (Form SB-2) and the related Prospectus of
American Electromedics Corp. for the registration of 5,320,224
shares of its common stock and 50,000 of its common stock purchase
warrants.
/s/ Ernst & Young LLP
Manchester, New Hampshire
July 7, 1998
