U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended July 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from ________________ to ________________
Commission file number 0-9922
AMERICAN ELECTROMEDICS CORP.
(Name of Small Business Issuer in Its Charter)
Delaware 04-2608713
(State of Incorporation or Organization) (I.R.S. Employer Identification No.)
13 Columbia Drive, Suite 5, Amherst, New Hampshire 03031
(Address of principal executive offices) (Zip Code)
(603) 880-6300
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.10 par value
Title of Class
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days.
[ ] YES [X] NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
As of December 8, 1998, there were 7,071,136 shares of Common Stock outstanding
and the aggregate market value of such Common Stock (based upon the closing bid
price on such date) of the Registrant held by non-affiliates was approximately
$8,537,026.
Revenues for the fiscal year ended July 31, 1998 totaled $7,025,000.
Documents incorporated by reference: None.
<PAGE>
Item 1. DESCRIPTION OF BUSINESS
The Company
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. The focus of the Company's business has
shifted in the past year with the acquisitions of Dynamic Dental Systems, Inc.
and Equidyne Systems, Inc. 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 and audiometers used for
screening hearing problems in young children. In addition, the Company has
developed a needle-free drug injection system which has received FDA marketing
clearance, and it will begin to market the product in the United States by March
1999.
The Company was incorporated under the laws of the State of Delaware on
January 28, 1977.
Acquisitions and Recent Developments
Acquisition of Rosch GmbH Medizintechnik and interest in Meditronic
Medizinelektronik GmbH. On January 11, 1996, the Company acquired a 50% interest
in Rosch GmbH Medizintechnik, a German corporation ("Rosch GmbH"). Rosch GmbH is
a marketing and distribution company based in Berlin, Germany specializing in
the distribution of products in Europe. Substantially all of the Company's
foreign and export sales are conducted through Rosch GmbH.
On December 18, 1997, the Company closed on the purchase of the remaining
50% of the outstanding capital stock of Rosch GmbH paying $50,000 plus 105,000
shares of Common Stock, pursuant to a Stock Purchase Option Agreement, dated
November 1, 1997. On that day the Company simultaneously acquired 45% of the
outstanding shares of a second German company, Meditronic Medizinelektronik GmbH
("Meditronic GmbH"), for $150,000 plus 105,000 shares of the Company's Common
Stock, pursuant to a Stock Purchase Option Agreement, dated November 1, 1997.
Meditronic GmbH is a development and manufacturing company, specializing in the
manufacture of medical camera systems. Substantially all of Meditronic GmbH's
sales are to Rosch GmbH. In July 1998, the Company sold its interest in
Meditronic GmbH for approximately $250,000. The Company continues to act as the
exclusive distributor for Meditronic GmbH's products.
Acquisition of Dynamic Dental Systems, Inc. As of April 30, 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
-2-
<PAGE>
in San Diego, California. It is engaged in the development of the INJEX(TM)
needle-free drug injection system, which is designed to eliminate the risks of
contaminated needle stick accidents and the resulting cross contamination of
hepatitis, HIV and other diseases. ESI holds two U.S. patents for its features
of the injection system and has received U.S. Food and Drug Administration
("FDA") 510(k) clearance to market the system in the United States. ESI will
begin marketing of the system in the United States by March, 1999. The system
will initially be marketed to the public through exclusive arrangements with
certain medical products distributors. Also, ESI is currently in discussions
with drug companies in the United States and plans to market its products to
those companies through licensing and joint development agreements. ESI also
intends to market its products overseas, including through its distribution
arrangements in Japan and Mexico, and will, upon receipt of regulatory approval,
utilize the same marketing strategies as it envisions using domestically. The
Company anticipates receiving European regulatory approval during the first
calendar quarter of 1999 and upon receipt will commence foreign sales.
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.
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. The net
proceeds from the sale of the Series A Preferred Stock was $2,642,000 (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 its primary bank Citizens Bank New Hampshire
("Citizens Bank"), and the balance 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 a registration statement registering the shares of Common
Stock underlying the Series A Preferred Stock. 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 Series A Preferred Stock. The
dividend rate was increased to 12% on June 5, 1998 due to the Company's failure
to file a registration statement covering the Common Stock underlying the Series
A Preferred Stock within 30 days of the initial closing. The registration
statement was filed on July 10, 1998, but has not yet been declared effective.
The interest rate has increased to 18% and will remain at such rate until the
effective date of the registration statement.
As part of its entry into the Purchase Agreement, the Company entered into
a Registration Rights Agreement and a Warrant Agreement. Concurrently with the
closing for the first tranche of Series A Preferred Stock, the Company issued to
West End Warrants to purchase 50,000 shares of the Company's Common Stock at
-3-
<PAGE>
$4.80 per share exercisable for three years and 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.
Conversion of Debentures. On 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 Citizens Bank
pursuant to a Forbearance and Workout Agreement and its efforts to obtain
additional equity capital.
Private Placement of Common Stock. As of November 26, 1997, the Company
closed a private placement 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 $150,000 of the placement proceeds to repay
portions of its indebtedness to Citizens Bank, and used the balance of the
proceeds for working capital, including increasing its ownership interest in
Rosch GmbH.
Intraoral Dental Cameras and
Related Products
The largest segment of the Company's business 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 three kinds of camera systems, the DynaCam(TM), 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 DynaCam(TM) and ViperCam(TM). The Company has now
replaced its marketing of the Viola(TM) in the U.S. with the DynaCam(TM) and
ViperCam(TM) although the Company expects to transition away from the
ViperCam(TM) in fiscal 1999.
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 systems
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 patients 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.
-4-
<PAGE>
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, which agreement terminates on December 31, 1998. Through DDS, the
Company also possesses a distribution agreement 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
distributes various other products relating to digital operatory system without
formal distribution agreements. These include computers, computer accessories
and workstation cards.
Score International Inc. Letter of Intent. On October 26, 1998, the Company
entered into a letter of intent to acquire Score International, Inc. ("SCI") for
$1.7 million, consisting of $1,450,000 payable in shares of the Company's Common
Stock valued as to be provided for in a definitive acquisition agreement and
$250,000 in cash. SCI is a developer and distributor of dental office products,
primarily a patented high-speed handpiece repair system. The transaction is
subject to negotiation and execution of a definitive acquisition agreement and
fulfillment of customary closing conditions. This letter of intent may be
terminated by either party, if by the close of business on December 31, 1998 a
definitive acquisition agreement shall not have been executed.
Diagnostic Audiometric Medical Devices
Prior to the 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 Company also manufactures and sells an audiometer, the Pilot(R)
Audiometer, which uses sound presented automatically at descending decibel
levels to screen for hearing loss.
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(R) Tympanometer, a version of the Race Car(TM) Tympanometer that can
test for middle ear disease in adults and children.
The test of the middle ear to detect disease is called "tympanometry."
Tympanometry detects middle ear diseases (regardless of whether such diseases
have resulted in a hearing loss) by using specialized instruments to test 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.
-5-
<PAGE>
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 were 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 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.
In fiscal 1996, the Company introduced the Race Car(TM) Tympanometer to the
marketplace. The Race Car(TM) Tympanometer 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(R) Tympanometer
line at the Health Industry Distributors Association (HIDA) Meeting. The Quik
Tymp(R) 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(R)
can include the option of a built-in pure tone audiometer. Marketing commenced
in December 1996.
The Company presently manufactures and sells four different models of
Tympanometers(R).
In August 1994, the Company completed the design process and began
production of the Pilot(R) Audiometer, an audiometer which facilitates the
testing for hearing loss in very young children. The Pilot(R) 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.
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.
-6-
<PAGE>
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
marketed commercially. Since then certain improvements have been made to the
System and the Company will begin marketing the improved second generation
System in the United States by March 1999. Overseas marketing of the System will
begin upon receipt of foreign regulatory approval and is envisioned to begin
late in the first calendar quarter of 1999. The Company does not believe the
modifications or enhancements made to the System for the current version require
a new FDA 510(k) submission at this time.
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 have
produced disposable transfer adapters to be used as a channelling device between
drug bottles and ampules for sterilized ampules that are delivered empty.
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
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 manufacturing capabilities and
marketing necessary to bring the INJEX(TM) needle-free injection system to
market in the United States by March 1999. 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(R) Tympanometer was
introduced in fiscal 1997. All of the Company's Tympanometers(R) were redesigned
in 1998 to incorporate a built-in printer. The Company is currently exploring
new product opportunities both in audiometrics and also in other lines. In
fiscal 1997 and 1998, the Company expended $85,000 and $21,000, respectively,
for research and development with respect to its audiometric products. It
expects to continue to incur research and development costs in fiscal 1999
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 before they may be sold, or be exempted from
the need to obtain such clearance. 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
-7-
<PAGE>
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) clearance 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.
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 clearance.
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.
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. In fiscal 1998, more than a majority of the Company's sales were in
Europe.
The market for the Company's audiometric products includes physicians,
particularly those in medical specialties such as pediatrics, allergy medicine,
family practice, otolaryngology and otology (the latter two specialties deal
with diseases of the ear). The audiometric products are marketed mainly through
independent regional dealers both domestically and internationally who sell
principally hearing related health care products. These dealers are retained by
the Company on a non-exclusive, best efforts basis. The Company also distributes
these products throughout Europe using Rosch GmbH.
Initially the Company plans to market and distribute the INJEX(TM)
needle-free injection system through licensing and joint development agreements
with drug companies and manufacturers of injectable pharmaceuticals
-8-
<PAGE>
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 and manufacturers and its success in
securing licensing and/or joint development agreements with such entities.
In August 1998, the Company entered into an agreement to supply La Sociedad
Mercantil Mexicana ("LSM") with the INJEX(TM) System for use in LSM's clinic in
Baja California and for exclusive distribution within that geographic territory.
In September 1998, the Company entered into an agreement to supply HNS
International with the INJEX(TM) System for exclusive distribution within Japan.
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.
-9-
<PAGE>
Employees
At July 31, 1998, the Company and its subsidiaries had 45 employees, 11 of
whom were management or administrative personnel, 27 were engaged in sales
activities, and 7 were engaged in manufacturing and service related activities.
In addition, when necessary, the Company uses independent engineering
consultants for design support and new product development.
None of the Company's employees are covered by collective bargaining
agreements. The Company considers its employee relations to be satisfactory.
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. In response to feedback from
its dealers in fiscal 1998, the Company further redesigned its Tympanometers(R)
to incorporate built-in printers.
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.
-10-
<PAGE>
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 acquired by Bio-Ject.
Safety syringes are presently made by a small number of new firms, none of
which has a significant share of the total syringe market. BDC also manufactures
these devices, but the high cost of safety syringes and the continued problem of
controlled disposal has weakened the demand for them.
The Company expects ESI to compete with the smaller safety syringe
manufacturers and jet injector firms, based on health care worker safety, ease
of use, reduced overall costs of controlled disposal and patient comfort. The
Company expects that when all indirect costs are considered, the INJEX(TM)
System should be able to successfully compete on a cost basis.
Item 2. DESCRIPTION OF PROPERTY
The Company's corporate and audiometric operations are located in Amherst,
New Hampshire in facilities containing 7,800 square feet leased to the Company
at $3,800 per month under a lease expiring in May 2001.
DDS maintains its administrative and sales operations in Gainesville,
Georgia where it rents a facility containing 2,000 square feet on a
month-to-month basis. DDS rents these facilities for $1,800 per month.
ESI maintains its administrative and sales operations in San Diego,
California where it leases a facility containing 1,200 square feet under a
renewable quarterly lease currently expiring in March 1999 for $750 per month.
ESI is also leasing a production facility in Aliso Viejo, California containing
approximately 1,700 square feet at $2,000 per month.
Rosch GmbH maintains its administrative and sales offices in Berlin,
Germany where it leases a facility containing 6,400 square feet at $8,800 per
month. The five year lease expires in May 2002.
The Company believes that these facilities are adequate for its current
business needs.
Item 3. LEGAL PROCEEDINGS
On June 26, 1998, Christer O. Andreasson filed an action against ESI, the
Company, and four former directors of ESI, in Superior Court of California,
County of San Diego, seeking an indeterminate amount of damages arising from his
employment relationship with ESI over several months spanning late 1995 and
early 1996, which was prior to the Company's acquisition of ESI. Due to the
preliminary nature of the discovery process, the Company cannot estimate the
merits of the claim or the effect on the Company or ESI.
On December 10, 1998, Charles S. Aviles, Jr. and Barry Hochstadt, former
shareholders, officers and employees of DDS, filed an action in Superior Court
of California, County of Orange, against Henry Rhodes, the President and a
former shareholder of DDS, DDS and the law firm that had represented DDS and its
shareholders during its acquisition by the Company, seeking damages in excess of
$1,000,000 and an indeterminate amount of punitive damages and costs arising
from the plaintiffs' prior relationships with DDS. Although this action is at a
preliminary stage, discovery has not yet commenced and DDS has not yet answered
or otherwise moved in the action, based upon its present knowledge, the Company
believes that DDS has meritorious defenses to the allegations against it.
-11-
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Principal Market and Sales Prices for Company's Common Stock
The Common Stock of the Company is traded in the over-the-counter market on
the OTC Electronic Bulletin Board under the symbol AMER. The following table
sets forth for the indicated periods the high and low bid prices of the Common
Stock for the fiscal years ended July 31, 1998 and July 31, 1997, 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 commission, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Fiscal Period Fiscal Year Ended 7/31/98 Fiscal Year Ended 7/31/97
- -----------------------------------------------------------------------------------------------
High Low High Low
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $1.88 $1.00 $5.16 $3.13
- -----------------------------------------------------------------------------------------------
Second Quarter 1.50 .66 4.38 1.88
- -----------------------------------------------------------------------------------------------
Third Quarter 4.94 .88 3.75 1.38
- -----------------------------------------------------------------------------------------------
Fourth Quarter 4.81 3.19 1.63 .84
- -----------------------------------------------------------------------------------------------
</TABLE>
Approximate Number of Holders of Company's Common Stock
As of July 31, 1998, there were approximately 212 stockholders of record of
the Company's Common Stock. The Company believes that a substantial amount of
the shares are held in nominee name for beneficial owners.
Dividends
The Company has never paid any cash dividends on its Common Stock and its
Board of Directors has no present intention of declaring any cash dividends in
the foreseeable future. In addition, the Series A Preferred Stock imposes
certain restrictions on cash dividends on the Common Stock.
Recent Sales of Unregistered Securities
On May 5, 8 and 13, 1998, the Company closed, respectively, the first,
second and third tranches of a placement of an aggregate of 3,000 shares of
Series A Convertible Preferred Stock, $.01 par value per share and 1,000 shares
per tranche, to one purchaser at a purchase price of $1,000 per share or an
aggregate purchase price of $1 million, as more fully described in the Company's
Report on Form 8-K, dated May 5, 1998, and the Company's Quarterly Report on
Form 10-QSB/A, Amendment No. 1, for the quarterly period ended April 30, 1998.
-12-
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This report contains or refers to forward-looking information made pursuant
to the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995. That information covers future revenues, products, and income and is
based upon current expectations that involve a number of business risks and
uncertainties. Among the factors that could cause actual results to differ
materially from those expressed or implied in any forward-looking statement
include, but are not limited to, technological innovations of competitors,
delays in product introductions, changes in health care regulations and
reimbursements, changes in foreign economic conditions or currency translation,
product acceptance or changes in government regulation of the Company's
products, ability to finance future projects, as well as other factors discussed
in other Securities and Exchange Commission filings for the Company.
Results of Operations
Consolidated net sales were $7,025,000 for the fiscal year ended July 31,
1998 ("Fiscal 1998") compared to $2,309,000 during the fiscal year ended July
31, 1997 ("Fiscal 1997"). The $4,716,000 increase in sales was attributable to
accounting for Rosch GmbH on a consolidated basis, as well as from the inception
of sales of the intraoral dental camera system.
Net loss for Fiscal 1998 was $3,674,000, or $1.01 per share, compared to a
net loss of $926,000, or $.37 per share, for Fiscal 1997. The overall decrease
in profits in Fiscal 1998 was primarily the result of operating losses resulting
from the United States introduction of dental cameras and Rosch GmbH
transitioning from utilizing a major distributor for the sale of its dental
cameras in Europe to direct sales. The net loss for Fiscal 1998 includes
approximately $1 million for deferred compensation for consultants and for
options granted in connection with acquisitions.
Cost of sales, as a percentage of net sales, for Fiscal 1998 was 66.8%
versus 56.8% for Fiscal 1997. 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 & administrative expense (SG&A) and research and
development (R&D) expense increased in Fiscal 1998 over Fiscal 1997. The Company
attributes the $3,924,000 increase in SG&A expenses to increased marketing and
promotional activity, increased corporate activity, accounting for Rosch on a
consolidated basis and the acquisition of DDS and ESI. General and
administrative expenses increased by $2,357,000 as a result of aggressive
corporate development and the retention of senior level executives. These costs
are more fixed in nature. Selling expenses increased by $1,567,000 as a result
of the introduction of dental cameras in the United States. 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.
Liquidity and Capital Resources
Working capital of the Company at July 31, 1998 was $793,000, compared to
$1,060,000 at fiscal year ended July 31, 1997. The decrease of $267,000 during
1998 was primarily the result of net proceeds of $3,670,000 from the placement
of $2,642,000 of Series A Preferred Stock and $1,028,000 upon the private
placement of 1,050,000 shares of Common Stock, offset by the net operating loss
for the year and the use of approximately $275,000 for the cash portion of the
purchase price of the acquisitions of DDS and Rosch GmbH.
As shown in the financial statements, the Company has incurred net losses
of $3,674,000 and $926,000 for the years ended July 31, 1998 and 1997,
respectively. This and other factors, such as working capital needed for the
Company's operations, requires additional funding beyond that which the Company
currently has available.
-13-
<PAGE>
The Company therefore will need to raise additional capital in fiscal 1999. The
Company is seeking additional capital through equity and/or debt placements or
secured financing; however, no assurance can be given that such financing
arrangements would be successfully completed and, if so, on terms not dilutive
to existing stockholders.
As a result of the foregoing, substantial doubt exists about the ability of
the Company to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern (See Footnote 13 to Notes to Consolidated Financial Statements).
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 acquisition candidates or effect
the necessary financial arrangements for such acquisitions and obtain necessary
working capital for the acquired entities.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Summary of Operations 7/31/98(1) 7/31/97 7/27/96 7/29/95 7/30/94
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $7,025 $2,309 $3,337 $2,443 $1,965
- ---------------------------------------------------------------------------------------------------
Income (loss) before
provision for income taxes (3,674) (926) 467 184 61
- ---------------------------------------------------------------------------------------------------
Net income (loss) (3,674) (926) 442 172 57
- ---------------------------------------------------------------------------------------------------
Net income (loss) per share (1.01) (.37) .18 .08 .03
- ---------------------------------------------------------------------------------------------------
Weighted average
common & equivalent
shares 4,687,707 2,510,296 2,493,854 2,238,483 1,833,666
- ---------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Financial Position 7/31/98 7/31/97 7/27/96 7/29/95 7/30/94
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $11,458 $3,060 $2,771 $1,513 $899
- ---------------------------------------------------------------------------------------------------
Working capital 793 1,060 906 915 485
- ---------------------------------------------------------------------------------------------------
Long-term debt -- 1,100 94 -- 4
- ---------------------------------------------------------------------------------------------------
Stockholder's equity 8,512 1,168 1,948 1,196 771
- ---------------------------------------------------------------------------------------------------
</TABLE>
Note: In thousands, except for share and per share amounts.
1. The 7/31/98 amounts include amounts for Rosch GmbH (changed from equity
method of accounting to consolidated basis effective 8/11/97) and amounts
for Dynamic Dental Systems, Inc. and Equidine Systems, Inc., acquired on
April 30, 1998 and May 12, 1998, respectively, as follows (in thousands):
-14-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Dynamic Dental Equidine
Summary of Operations: Rosch GmbH Systems, Inc. Systems, Inc.
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $5,400 $571 $0
- ------------------------------------------------------------------------------------------------
Income (loss) before (381) (243) (200)
provision for income taxes
- ------------------------------------------------------------------------------------------------
Net income (loss) (381) (243) (200)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Financial Position:
- ------------------------------------------------------------------------------------------------
Total assets $2,525 $319 $155
- ------------------------------------------------------------------------------------------------
Working capital (deficit) 360 (94) (4)
- ------------------------------------------------------------------------------------------------
Long-term debt 0 0 0
- ------------------------------------------------------------------------------------------------
Stockholder's equity (deficit) (499) (477) (477)
- ------------------------------------------------------------------------------------------------
</TABLE>
Year 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software embedded chips
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on recent assessments, the Company determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that with modifications or replacements of
existing software and certain hardware, the Year 2000 Issue can be mitigated.
However, if such modifications and replacements are not made, or are not
completely timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. To date, the
Company has substantially completed its assessment of all systems that could be
significantly affected by the Year 2000. The assessment indicated that most of
the Company's significant information technology systems will be affected,
including its financial information system which includes its general ledger,
accounts payable, billing and inventory systems. The assessment was also
undertaken on the Company's products, which are also at risk, as they utilize
software and hardware (embedded chips) as well. However, based on its review of
its product line, the Company has determined that most of the products it has
sold and will continue to sell do not require remediation to be Year 2000
compliant. Accordingly, the Company does not believe that the Year 2000 presents
a material exposure as it relates to the Company's products. The Company's
manufacturing processes consist principally of unautomated assembly of
components manufactured by outside third-parties. The Company has begun to
gather information about the Year 2000 compliance status of its significant
suppliers, and will take appropriate steps to monitor their compliance on an
ongoing basis.
Regarding its information technology exposures, the Company utilizes an
unmodified off-the-shelf software package, which is not year 2000 compliant. The
Company has confirmed with its software vendor that a year 2000- compliant
upgrade is readily available and anticipates purchasing this upgrade during its
third fiscal quarter, which ends on April 30, 1999. The upgrade would provide
full year 2000 compliance with respect to its financial
-15-
<PAGE>
information systems, and as the new software will also be an unmodified
off-the-shelf package, testing to ensure Year 2000 compliance will not be
necessary. Implementation will take place as early as possible following the
purchase of the system, and is expected to be completed no later than June 30,
1999.
The Company does not presently maintain direct interfaces with any
third-party vendors. The Company has made various queries of its significant
suppliers that do not share information systems with the Company (external
agents). To date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of assuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
The total cost of the Company's Year 2000 project is estimated at $25,000,
which will be funded through operating cash flows. To date, the Company has not
incurred any direct costs related to its Year 2000 project. The project costs
will consist principally of the cost of new software, which will be capitalized.
Management of the Company believes it has an effective plan in place to
resolve the Year 2000 Issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of its Year 2000 project. In the event
that the Company does not complete any additional phases, the Company could be
unable to take customer orders, manufacture and ship products, invoice customers
or collect payments. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect the Company.
The Company currently has no contingency plans in place in the event it
does not complete all phases of its Year 2000 project. The Company plans to
evaluate the status of completion in June 1999 and determine whether such a plan
is necessary.
-16-
<PAGE>
Item 7. CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Page
Report of Ernst & Young LLP, Independent Auditors............................16
Consolidated Balance Sheets at July 31, 1998 and 1997........................17
Consolidated Statements of Operations for the Years Ended
July 31, 1998 and 1997, and July 27, 1996..................................18
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 1998 and 1997,
and July 27, 1996..........................................................19
Consolidated Statements of Cash Flows for the Years Ended
July 31, 1998 and 1997, and July 27, 1996..................................20
Notes to Consolidated Financial Statements...................................21
-17-
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
American Electromedics Corp. and Subsidiaries.
We have audited the accompanying consolidated balance sheets of American
Electromedics Corp. and subsidiaries as of July 31, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended July 31, 1998.
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 consolidated financial position of American
Electromedics Corp. and subsidiaries at July 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended July 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that American
Electromedics Corp. will continue as a going concern. As more fully described in
Note 13, the Company has incurred operating losses for the last two years. This
condition raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 13. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Manchester, New Hampshire
December 21, 1998
-18-
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, 1998 July 31, 1997
------------- -------------
(Thousands)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ........................................... $ 396 $ 0,471
Accounts receivable, net of allowance of $13,000 and
$7,000 in 1998 and 1997, respectively:
Trade ............................................................. 1,169 283
Affiliate ......................................................... -- 379
----------- -----------
1,169 662
Inventories ......................................................... 1,951 475
Prepaid and other current assets .................................... 223 244
----------- -----------
Total current assets ....................................... 3,739 1,852
Property and Equipment:
Machinery and equipment ............................................ 475 361
Furniture and fixtures ............................................. 306 79
Leasehold improvements ............................................. 13 9
----------- -----------
794 449
Accumulated depreciation ............................................ (436) (396)
----------- -----------
358 53
Deferred financing costs ............................................ -- 128
Investment in affiliate ............................................. -- 819
Goodwill ............................................................ 4,298 208
Patents ............................................................. 3,027 --
Other ............................................................... 36 --
----------- -----------
$ 11,458 $ 3,060
=========== ===========
Liabilities & Stockholders' Equity
Current Liabilities:
Bank debt ........................................................... $ 1,033 $ 300
Accounts payable .................................................... 1,118 187
Accrued liabilities ................................................. 723 153
Dividends payable ................................................... 72 --
Current portion of long-term debt ................................... -- 152
----------- -----------
Total current liabilities ........................................ 2,946 792
Convertible subordinated debentures ................................. -- 720
Long-term debt ...................................................... -- 380
Stockholders' Equity:
Series A Convertible Preferred stock, $.01 par value; Authorized-
1,000,000 shares; Outstanding - 3,000 shares
in 1998 and none in 1997 .......................................... 2,387 --
Common stock, $.10 par value; Authorized-
20,000,000 shares; Outstanding - 7,058,136
and 2,553,136 shares in 1998 and 1997, respectively ............... 705 255
Additional paid-in capital .......................................... 12,643 2,919
Retained deficit .................................................... (5,680) (2,006)
Cumulative translation adjustment ................................... (249) --
----------- -----------
9,806 1,168
Deferred compensation ............................................... (1,294) --
----------- -----------
Total stockholder's equity ................................. 8,512 1,168
----------- -----------
$ 11,458 $ 3,060
=========== ===========
</TABLE>
See accompanying notes.
-19-
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
July 31, 1998 July 31, 1997 July 27, 1996
------------- ------------- -------------
(Thousands, except per share amounts)
<S> <C> <C> <C>
Net sales ..................................... $ 7,025 $ 2,309 $ 3,337
Cost of goods sold ............................ 4,692 1,311 1,652
------- ------- -------
Gross profit ............................... 2,333 998 1,685
Selling, general and administrative expenses .. 5,581 1,657 1,039
Research and development ...................... 122 85 215
------- ------- -------
Total operating expenses ................... 5,703 1,742 1,254
------- ------- -------
Operating income (loss) ....................... (3,370) (744) 431
Other income (expenses):
Interest, net .............................. (186) (125) (16)
Undistributed earnings (loss) of affiliate . 56 (57) 52
Minority interest in affiliate ............. (85) -- --
Other ...................................... (89) -- --
------- ------- -------
(304) (182) 36
------- ------- -------
Income (loss) before provision for income taxes (3,674) (926) 467
Provision for income taxes .................... -- -- 25
------- ------- -------
Net income (loss) ............................. $(3,674) $ (926) $ 442
======= ======= =======
Net income (loss) attributable
to common stockholders* ...................... $(4,746) $ (926) $ 442
======= ======= =======
Net income (loss) per share,
basic and diluted ............................ $ (1.01) $ (.37) $ .18
======= ======= =======
</TABLE>
*The year ended July 31, 1998 includes the impact of dividends on stock for (a)
a non-cash, non-recurring beneficial conversion feature of $1,000,000; and (b)
$72,000 of dividends on Preferred Stock.
See accompanying notes.
-20-
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1998, JULY 31, 1997 AND JULY 27, 1996
(Thousands)
<TABLE>
<CAPTION>
Series A Convertible
Preferred Stock Common Stock
--------------------- ------------ -------- Additional
Book Paid-in
Shares Value Shares Par Value Capital
-------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance at July 29, 1995 ..................... -- $ -- 2,343 $ 234 $ 2,484
Investment in affiliate ...................... -- -- 100 10 290
Exercise of stock options .................... -- -- 11 1 9
Net income
-- -- -- -- --
-------- -------- -------- -------- --------
Balance at July 27, 1996 ..................... -- -- 2,454 245 2,783
Sale of capital stock ........................ -- -- 48 5 139
Exercise of stock options, net ............... -- -- 51 5 (3)
Net loss
-- -- -- -- --
-------- -------- -------- -------- --------
Balance at July 31, 1997 ..................... -- -- 2,553 255 2,919
Conversion of convertible debentures, net .... -- -- 720 72 625
Private placement of common stock, net ....... -- -- 1,050 105 923
Issuance of common stock for investment in
affiliates, net .............................. -- -- 210 21 159
Issuance of common stock for acquisitions, net -- -- 1,350 135 5,490
Stock and warrants issued for services ....... -- -- 1,000 100 1,480
Exercise of stock options .................... -- -- 175 17 158
Sale of convertible preferred stock and
warrants ................................... 3 2,387 -- -- 255
Dividend on convertible preferred stock ...... -- -- -- -- (72)
Conversion feature on convertible preferred
stock ...................................... -- (1,000) -- -- 1,000
Dividend on beneficial conversion feature .... -- 1,000 -- -- (1,000)
Deferred compensation related to common
stock options .............................. -- -- -- -- 706
Amortization of deferred compensation ........ -- -- -- -- --
Translation adjustment ....................... -- -- -- -- --
Net loss
-- -- -- -- --
-------- -------- -------- -------- --------
Balance at July 31, 1998 ................... 3 $ 2,387 7,058 $ 705 $ 12,643
======== ======== ======== ======== ========
<CAPTION>
Cumulative Total
Retained Translation Deferred Stockholders'
Deficit Adjustment Compensation Equity
-------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at July 29, 1995 ..................... $ (1,522) -- -- $ 1,196
Investment in affiliate ...................... -- -- -- 300
Exercise of stock options .................... -- -- -- 10
Net income
442 -- -- 442
-------- -------- -------- --------
Balance at July 27, 1996 ..................... (1,080) -- -- 1,948
Sale of capital stock ........................ -- -- 144
Exercise of stock options, net ............... -- -- 2
Net loss
(926) -- -- (926)
-------- -------- -------- --------
Balance at July 31, 1997 ..................... (2,006) -- 1,168
Conversion of convertible debentures, net .... -- -- -- 697
Private placement of common stock, net ....... -- -- -- 1,028
Issuance of common stock for investment in
affiliates, net .............................. -- -- -- 180
Issuance of common stock for acquisitions, net -- -- -- 5,625
Stock and warrants issued for services ....... -- -- (1,580) --
Exercise of stock options .................... -- -- -- 175
Sale of convertible preferred stock and
warrants ................................... -- -- -- 2,642
Dividend on convertible preferred stock ...... -- -- -- (72)
Conversion feature on convertible preferred
stock ...................................... -- -- -- --
Dividend on beneficial conversion feature .... -- -- -- --
Deferred compensation related to common
stock options .............................. -- -- (706) --
Amortization of deferred compensation ........ -- -- 992 992
Translation adjustment ....................... -- (249) -- (249)
Net loss
(3,674) -- -- (3,674)
-------- -------- -------- --------
Balance at July 31, 1998 ................... $ (5,680) $ (249) $ (1,294) $ 8,512
======== ======== ======== ========
</TABLE>
See accompanying notes.
-21-
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
----------------------------------
July 31, July 31, July 27,
1998 1997 1996
-------- -------- --------
(Thousands)
<S> <C> <C> <C>
Operating activities:
Net income (loss) ............................................ $(3,674) $ (926) $ 442
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization ................................ 269 42 38
Provision for doubtful accounts .............................. -- (4) --
Deferred compensation amortization ........................... 992 -- --
Loss on sale of affiliate .................................... 64 -- --
Undistributed earnings (loss) of affiliate ................... (56) 57 (52)
Minority interest ............................................ 85 -- --
Other ........................................................ (67) 38 --
Changes in operating assets and liabilities:
Accounts receivable ........................................ 598 43 (274)
Inventories, prepaid and other current assets .............. (27) (106) (317)
Accounts payable and accrued liabilities ................... (856) (22) 49
------- ------- -------
Net cash used in operating activities ........................ (2,672) (878) (114)
Investing activities:
Investment in affiliates, net of cash acquired ............... (138) -- (519)
Purchase of property and equipment, net ...................... (188) (39) (22)
Acquisition of DDS and ESI, net of cash acquired ............. (151) -- --
Proceeds from sale of affiliate .............................. 247 -- --
------- ------- -------
Net cash used in investing activities ........................ (230) (39) (541)
Financing activities:
Principal payments on long-term debt ......................... (532) (129) (43)
Proceeds (payments) from debt and bank lines of credit ....... (97) 500 500
Issuance of common stock, net ................................ 1,028 144 --
Proceeds from exercise of common stock options ............... 175 2 10
Issuance of convertible preferred stock, net ................. 2,642 -- --
Issuance of convertible subordinated debt .................... -- 720 --
Deferred financing costs ..................................... -- (166) --
------- ------- -------
Net cash provided by financing activities .................... 3,216 1,071 467
------- ------- -------
Effect of exchange rate on cash .............................. (389) -- --
------- ------- -------
Increase (decrease) in cash and cash equivalents ............. (75) 154 (188)
Cash and cash equivalents, beginning of year ................. 471 317 505
------- ------- -------
Cash and cash equivalents, end of year ....................... $ 396 $ 471 $ 317
======= ======= =======
Noncash transactions:
Common stock issued for investment in affiliates ............ -- -- $ 300
Common stock and warrants issued for services ............... $ 1,580 -- --
Conversion of convertible subordinated debt into common stock $ 697 -- --
Common stock issued in connection with acquisitions ......... $ 5,805 -- --
</TABLE>
See accompanying notes.
-22-
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1998
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.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
transactions have been eliminated.
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 and Patents
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 periods ranging from 15 to 40 years. Amortization
expense for the year ended 1998 was $112,000 and for 1997 and 1996 was $11,000.
Accumulated amortization at July 31, 1998 and July 31, 1997 is $354,000 and
$242,000, respectively.
Patents are being amortized on a straight-line basis over 15 years, the
remaining life of the patent. Amortization expense and accumulated amortization
as of and for the year ended July 31, 1998 was $51,000.
-23-
<PAGE>
The Company continually assesses the recoverability of its goodwill and
patents 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, 1998
or 1997.
Research and Development
Research and development costs are charged to operations as incurred.
Advertising Costs
Costs associated with advertising products are expensed when incurred.
Advertising expense was $440,000 in 1998. Such amounts were immaterial for 1997
and 1996.
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.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share". Previously reported earnings per share ("EPS") have been restated to
conform with SFAS No. 128. Basic EPS excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
for periods presented. Diluted EPS reflects the potential dilution that would
occur if securities such as stock options were exercised.
Change in Year End
The Company changed its year end to July 31 in 1997.
-24-
<PAGE>
2. ACQUISITIONS:
On April 30, 1998, the Company acquired all of the issued and outstanding
capital stock of Dynamic Dental Systems, Inc. ("DDS"), pursuant to an Agreement
and Plan of Merger, whereby DDS became a wholly-owned subsidiary of the Company.
DDS was founded in 1997 and is a distributor of digital operator hardware,
cosmetic-imaging software, intraoral dental camera systems and digital x-ray
equipment. The total cost of acquisition was approximately $3.2 million
consisting primarily of 750,000 shares of the Company's Common Stock, valued at
an aggregate price of $3,000,000 and $225,000 in cash. The purchase price
exceeded the fair value of net assets acquired by approximately $3.4 million,
which is being amortized on a straight-line basis over 15 years. The acquisition
has been accounted for as a purchase and, accordingly, the operating results of
DDS have been included in the Company's consolidated financial statements since
the date of acquisition.
On May 12, 1998, the Company acquired Equidyne Systems, Inc. ("ESI"). ESI
was founded in 1990 and is engaged in the development of the INJEX(TM)
needle-free drug injection delivery system, which is designed to eliminate the
risks of contaminated needle stick accidents and the resulting cross
contamination of hepatitis, HIV, and other diseases. The total cost of
acquisition was approximately $2.6 million consisting of 600,000 shares of the
Company's Common Stock. The acquisition has been accounted for as a purchase
and, accordingly, the operating results of ESI have been included in the
company's consolidated financial statements since the date of acquisition. The
excess of the aggregate purchase price over the fair market value of net assets
acquired of approximately $3.0 million, which has been allocated to patents, is
being amortized over 15 years, the remaining life of the patent.
The following unaudited proforma consolidated financial results of
operations assume the acquisitions of DDS, ESI and Rosch GmbH (See Note 4)
occurred as of August 1, 1996:
Year Ended Year Ended
July 31, 1998 July 31, 1997
------------- -------------
Net sales ........................ $ 8,970,000 $ 6,176,000
Net loss ......................... $ (3,813,000) $ (1,214,000)
Loss per share:
Basic ................... $ (.66) $ (.30)
============= =============
Diluted ................. $ (.66) $ (.30)
============= =============
3. INVENTORIES:
Inventories consist of the following at:
July 31, 1998 July 31, 1997
------------- -------------
Raw materials $ 291,000 $ 264,000
Work-in-process 29,000 31,000
Finished goods 1,631,000 $ 180,000
---------- ----------
$1,951,000 $ 475,000
========== ==========
4. INVESTMENT IN AFFILIATE:
In January 1996, the Company invested $819,000, which investment consisted
of $519,000 of cash and 100,000 shares of the Company's common stock, for a
fifty percent interest in Rosch GmbH Medizintechnik ("Rosch GmbH"). The 100,000
shares were valued at $3.00 per share, which represented the fair market value
of the stock at the time the agreement was reached. This investment was
previously 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
-25-
<PAGE>
primary care physicians throughout Europe. Substantially all of the Company's
foreign and export sales are conducted through Rosch GmbH. In January 1996,
Rosch GmbH sold its exclusive distributorship rights for a manufacturer's ear,
nose, and throat ("ENT") line of products in order to concentrate on the
Company's products as well as other healthcare products.
The Company changed its method of accounting for Rosch GmbH from the equity
method 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 with the remaining owner to acquire effective voting
control. For the first quarterly period ended October 31, 1997, the Company
continued to recognize earnings of Rosch GmbH up to its 50% ownership share. On
December 18, 1997, the Company closed on the purchase of the remaining 50% of
the outstanding capital stock of Rosch GmbH, for $50,000 plus 105,000 shares of
Common Stock, pursuant to a Stock Purchase Option Agreement, dated as of
November 1, 1997. As a result of this transaction, the Company recognized 100%
of all activity of Rosch GmbH for the second quarterly period ended January 31,
1998, and thereafter.
Accounts receivable recorded in the Company's balance sheet as of July 31,
1997 represent receivables arising through the normal course of business. The
balance consists primarily of sales of the Company's audiometric products to
Rosch GmbH. Intercompany profits relating to sales of the Company's products to
Rosch GmbH were eliminated based on the Company's 50% equity ownership of Rosch
GmbH at that time.
The following is summarized unaudited financial information of Rosch GmbH.
Year Ended Year Ended
July 31, 1998 July 31, 1997
------------- -------------
Sales $ 5,400,000 $ 3,920,000
Gross profit 1,631,000 1,340,000
Net income (loss) (381,000) (58,000)
Current assets 2,267,000 2,435,000
Non-current assets 258,000 211,000
Current liabilities 1,907,000 1,687,000
Non-current liabilities -- 737,000
In December 1997, the Company invested $255,000, consisting of $150,000 of
cash and 105,000 shares of its Common Stock for a 45% interest in Meditronic
Medizinelektronik GmbH ("Meditronic GmbH"), pursuant to a Stock Purchase Option
Agreement, dated November 1, 1997. The shares were valued at $1.00 per share,
which represented the fair market value of the Common Stock on the date of
acquisition. 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. The Company accounted for its
investment in Meditronic GmbH under the equity method until July 1998 when the
Company sold its interest in Meditronic GmbH for approximately $250,000 which
resulted in a loss of $64,000. The Company continues to act as the exclusive
distributor for Meditronic GmbH's products.
5. DEBT
In connection with the acquisition of Rosch GmbH, the Company has revolving
lines of credit from several German-based banks. These lines of credit bear
interest rates ranging from 8.125% to 9.0%. As of July 31, 1998, there was
$368,000 outstanding under these revolving lines of credit.
The Company also has Term Loans with German-based banks. The first loan is
payable in equal monthly installments through June 1999. Interest is 5.875% per
annum, and as of July 31, 1998, there was $202,000
-26-
<PAGE>
outstanding under this loan. The second loan is payable in its entirety on
February 15, 1999. Interest is 5.7% per annum and as of July 31, 1998, there was
$393,000 outstanding under this loan.
As of July 31, 1997, there was $532,000 outstanding under two separate Term
Loans and $300,000 outstanding under a revolving line of credit from the
Company's prior bank. During 1998, these balances were repaid and the loan
agreements were terminated as of July 31, 1998.
Borrowings under these outstanding loans are collateralized by essentially
all of the assets of the Company.
6. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Earnings per share, basic and diluted, were computed using weighted average
shares outstanding of, 4,687,707 for 1998, 2,510,296 for 1997 and 2,493,854 for
the year ended July 27, 1996. Dilutive securities were not included in the
calculation of diluted weighted average shares due to their anti-dilutive
effect.
7. INCOME TAXES:
The Company's deferred tax assets (which result primarily from net
operating loss carryforwards and accrued expenses) as of July 31, 1998 and July
31, 1997 were $1,217,000 and $561,000, 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 $1,217,000 and $561,000 as of July 31, 1998 and July 31, 1997,
respectively. As of July 31, 1998, the Company has net operating loss
carryforwards for Federal income tax purposes of $3,175,000 that expire from
2004 to 2018.
The net provision for income taxes for the years ended July 31, 1998, July
31, 1997 and July 27, 1996 of $-0-, $-0-, and $25,000, 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-, $-0- and $511,000 of the Federal net
operating loss carryforward was utilized during the years ended July 31, 1998,
July 31, 1997 and July 27, 1996, respectively.
Significant components of the Company's deferred tax assets are as follows:
1998 1997
-------------------------
Deferred tax assets:
Net operating loss carryforwards $ 1,079,000 $ 437,000
Accrued expenses 90,000 67,000
Inventory 32,000 24,000
Other 3,000 16,000
Reserves 13,000 17,000
-------------------------
Total deferred tax assets 1,217,000 561,000
Valuation allowance for deferred tax assets (1,217,000) (561,000)
-------------------------
Net deferred tax assets $-0- $-0-
=========================
-27-
<PAGE>
A reconciliation of income taxes computed at the federal statutory rates to
income tax expense is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax (Benefit) at
Federal Statutory Rates $(1,050,000) (34%) $ (315,000) (34%) $ 159,000 34%
State Income Taxes,
Net of Federal Tax
Benefit -- -- -- -- 17,000 4
Change in Valuation
Reserve 656,000 21 313,000 34 (122,000) (26)
Goodwill Amortization 57,000 2 13,000 1 4,000 1
Deferred
Compensation 336,000 11 -- -- -- --
Other 1,000 -- (11,000) (1) (33,000) (7)
----------------------------------------------------------------------------------------------
Total $ -- 0% $ -- 0% $ 25,000 6%
==============================================================================================
</TABLE>
8. EQUITY:
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 Citizens Bank New
Hampshire 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 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 $150,000 of the placement proceeds to repay
portions of its indebtedness to Citizens Bank, and used the balance of the
proceeds for working capital, including increasing its ownership interest in
Rosch GmbH.
Effective February 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. The fair value of
the 1,000,000 warrants was determined to be $580,000 through the application of
the Black-Scholes method. Consulting expense of $1,580,000 for the common stock
and warrants issued is being recognized ratably over the one year term of the
agreement. 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.
Preferred Stock. 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
-28-
<PAGE>
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. On the date of
issuance, the Company determined these warrants had a value of $255,000.
The Series A Preferred Stock is immediately convertible into shares of the
Company's Common Stock at a conversion rate equal to $1,000 divided by the lower
of (i) $4.00 or (ii) 75% of the average closing bid price for the Common Stock
for the five trading days immediately preceding the conversion date. The Company
may force conversion of all (and not less than all) of the outstanding shares of
Series A Preferred Stock at any time after the first anniversary of the
effective date of the Registration Statement. There is no minimum conversion
price. Should the bid price of the Common Stock fall substantially prior to
conversion, the holders of the Series A Preferred Stock could obtain a
significant portion of the Common Stock upon conversion, to the detriment of the
then holders of the Common Stock.
The Series A Preferred Stock has a liquidation preference of $1,000 per
share, plus any accrued and unpaid dividends, and provides for an annual
dividend equal to 5% of the liquidation preference, which may be paid at the
election of the Company in cash or shares of its Common Stock. The annual
dividend rate was increased to 12% as of June 5, 1998 because the Company did
not file the Registration Statement covering the Common Stock underlying the
Series A Preferred Stock within 30 days of the initial closing. The Registration
Statement was filed on July 10, 1998, but has not yet been declared effective.
The rate has increased to 18% and will remain at such rate until the effective
date of the Registration Statement, when the dividend rate would return to 5%.
The conversion discount of the preferred stock is considered to be an
additional preferred stock dividend. The maximum discount available of
$1,000,000 was initially recorded as a reduction of preferred stock and an
increase to additional paid-in capital. As the preferred stock was immediately
convertible upon issuance, the Company then recognized additional dividends, by
recording a charge to income available to common stockholders.
Stock Options. 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.
In October 1996, the Company's stockholders approved the 1996 Stock Option
Plan providing for the issuance of up to 300,000 shares of the Company's Common
Stock. The plan is administered by the Board of Directors or an Option
Committee. Options granted under this Plan would be either incentive stock
options or non-qualified stock options which would be granted to employees,
officers, directors and other persons who perform services for or on behalf of
the Company. Options are exercisable as determined at the time of grant except
options to officers or directors may not vest earlier than six months from the
date of grant, and the exercise price of all the options cannot be less than the
fair market value at 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 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. There remains outstanding an option for 30,000 shares which is
exercisable and expires no later than four years from the date of grant.
-29-
<PAGE>
FAS 123 Disclosure
Pro forma information regarding net income (loss) is required by FAS 123
(Stock-Based Compensation), which requires that the information be determined as
if the Company had accounted for its employee stock options grants under the
fair value method of that Statement. The fair values for these options were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
1998 1997 1996
--------------------------------
Expected life (years) 4 4.7 4
Interest rate 6% 6% 6%
Volatility 1.15 1.15 1.13
Dividend yield 0.0% 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:
1998 1997 1996
---------------------------------------
Pro forma net income (loss) $(5,497,682) $(1,238,759) $429,134
Pro forma net income (loss per share) $ (1.17) $ (0.49) $ .17
Option activity for the years ended 1998, 1997 and 1996 is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 403,333 $3.23 133,333 $1.58 131,000 $0.93
Granted 1,866,300 1.55 480,000 3.36 13,000 7.50
Expired or canceled (320,000) 3.09 (136,000) 3.45 -- --
Exercised (175,000) 1.00 ( 74,000) 0.66 ( 11,000) 0.94
--------- --------- ---------
Outstanding at end of year 1,774,633 1.71 403,333 3.23 133,000 1.58
========= ========= =========
Exercisable at end of year 1,494,133 1.63 111,000 3.11 107,000 0.87
========= ========= =========
Available for future grants 20,000 240,000 10,000
====== ========= =========
Weighted-average fair value of
options granted during year $8.20 $2.54 $4.52
</TABLE>
-30-
<PAGE>
The following table presents weighted-average price and life information about
significant option grants outstanding at July 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.50 1,338,000 4 years $1.01 1,214,500 $1.01
$3.00 - $4.38 423,300 5 years $3.72 266,300 $4.14
$7.50 13,333 1 year $7.50 13,333 $7.50
--------- ---------
1,774,633 1,494,133
========= =========
</TABLE>
10. COMMITMENTS:
The Company leases its corporate offices and audiometric operations under a
36-month operating lease beginning in May 1998. Prior to that time, the Company
had leased facilities on a month-to month basis. Rent expenses for the year
ended July 31, 1998 was $33,000 and for the years ended July 31, 1997 and July
27, 1996 was $15,500 and $13,500 respectively.
Rosch GmbH leases its administrative and sales offices under a 60-month
lease expiring in May 2002. Rent expense for the year ended July 31, 1998 was
$105,000.
11. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS:
The Company's primary customers are in the medical field. At July 31, 1998
and July 31, 1997, 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.
12. BUSINESS SEGMENT AND FOREIGN OPERATIONS:
The Company operates in one business segment - the sale of medical equipment.
The Company's foreign operations are subject to certain economic and regulatory
risks and uncertainties specific to Germany and the European geographic region.
Such risks and uncertainties could disrupt the Company's foreign operations and
have a material impact on the Company's financial results.
-31-
<PAGE>
Transfers to affiliates are made at prices above the Company's cost and include
charges for freight and handling.
Domestic German
Operations Operations Elimination Consolidated
-----------------------------------------------------
Year ended July 31, 1998: (Thousands)
Net sales $ 2,155 $ 4,870 $ 7,025
Transfers between
geographic areas 131 530 (661) --
-----------------------------------------------------
Net sales 2,286 5,400 (661) 7,025
Loss from operations (2,989) (381) (3,370)
Assets $ 8,933 $ 2,525 $ 11,458
Prior to the acquisition and consolidation of Rosch GmbH in fiscal year 1998,
the Company did not conduct any significant business in foreign countries.
13. GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company has incurred net losses of $3,674,000 and $926,000 for
the years ended July 31, 1998 and 1997, respectively. This and other factors
indicate that the Company may be unable to continue as a going concern for a
reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing and ultimately to attain profitability. The Company
continues to pursue strategies to improve the profitability of its current
product lines, and is actively pursuing additional debt and equity financing.
14. SUBSEQUENT EVENTS
On October 26, 1998, the Company entered into a letter of intent to acquire
Score International, Inc. ("SCI") for $1.7 million, consisting of $1,450,000
payable in shares of the Company's Common Stock, to be valued as provided for in
a definitive acquisition agreement and $250,000 in cash. SCI is a developer and
distributor of dental office products, primarily a patented high-speed handpiece
repair system. The transaction is subject to negotiation and execution of a
definitive acquisition agreement and fulfillment of customary closing
conditions. This letter of intent may be terminated by either party, if by the
close of business on December 31, 1998, a definitive acquisition agreement shall
not have been executed.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
-32-
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information concerning the directors
and executive officers of the Company and significant officers of its
subsidiaries as of November 30, 1998.
MANAGEMENT
<TABLE>
<CAPTION>
Year Became
Name Age Position with the Company Director
---- --- ------------------------- --------
<S> <C> <C> <C>
Thomas A. Slamecka 57 Chairman of the Board and Director 1996
Michael T. Pieniazek 40 President, Chief Financial Officer, N/A
Treasurer and Secretary
Blake C. Davenport 31 Director 1997
Ronald S. Newbower 54 Director 1998
Andy Rosch 38 Director and General Manager of Rosch 1997
GmbH
Marcus R. Rowan 37 Director 1996
</TABLE>
The terms of the Board of Directors will expire at the next annual meeting
of stockholders. The Company's officers are elected by the Board of Directors
and hold office at the will of the Board.
Thomas A. Slamecka has been Chairman of the Board for the Company since
February 1997, and a director of the Company since October 1996. Mr. Slamecka
was President of the ConAgra Poultry Company, Inc., Duluth, Georgia, from 1995
to February 1997, and from 1990 to 1994, he was President and Chief Executive
Officer of CEEC Inc., Atlanta, Georgia.
Michael T. Pieniazek has been President of the Company since April 1997 and
Chief Financial Officer and Treasurer since July 1995, and Secretary since
January 1996. From 1987 to 1995, Mr. Pieniazek served in various executive
positions, the last having been Executive Vice President and Chief Financial
Officer, for Organogenesis Inc., a Massachusetts-based, biotechnology company.
From 1980 to 1987, Mr. Pieniazek was an auditor with Coopers & Lybrand LLP.
Blake C. Davenport has been a director of the Company since December 1997.
For more than the past five years, he has been the President and owner of
Davenport Interests, Inc., a private investment company.
Dr. Ronald S. Newbower has been a director of the Company since August
1998. He has been Senior Vice President for Research and Technology of the
Massachusetts General Hospital since 1994 and Vice President for Research
Management of Partners HealthCare since 1997. He has been an Associate Professor
at Harvard-MIT Division of Health Sciences and Technology and at Harvard Medical
School for more than the past ten years. He received a Ph.D. from Harvard
University in 1971 in solid state physics. He serves as a director of Protocol
Systems, Inc.
-33-
<PAGE>
Andy Rosch has been a director of the Company since December 1997 and
General Manager of Rosch GmbH since July 1990.
Marcus R. Rowan has been a director of the Company since October 1996. For
more than the past five years he has been President of Berkshire Interests,
Inc., Dallas, Texas, which specializes in commercial real estate and
investments.
There is no family relationship among the directors or executive officers
of the Company.
Compliance with Certain Reporting Requirements
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
officers, directors and 10% shareholders of the Company report to the SEC the
ownership and purchase or sale of the equity securities of the Company. Based on
the Company's records, the Company believes that its officers, directors and 10%
shareholders were in compliance with Section 16(a) for fiscal 1998.
Director Compensation
In October 1996, the Company granted each director an option under the 1996
Stock Option Plan for 10,000 shares of Common Stock exercisable at $4.38 per
share vesting after one year and terminating no later than five years from
grant. Upon Dr. Newbower becoming a director, he received an option to purchase
10,000 shares and also received an option for 5,000 for agreeing to serve as
Chairman of the Company's Scientific Advisory Board, which options are
exercisable at a price of $3.00 per share, vesting on August 1, 1999 and
exercisable for five years.
Non-employee directors are each paid $1,000 per board meeting attended plus
travel expenses, and $500 per meeting for participating in telephonic board
meetings.
Committees
The only Board Committee is an Audit Committee consisting of Messrs.
Davenport and Rowan. The Audit Committee has general responsibility for
oversight of financial controls and for accounting and audit activities of the
Company.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation for the fiscal year
ended July 31, 1998 of the executive officers whose compensation exceeded
$100,000 and of all executive officers as a group for services rendered to the
Company.
-34-
<PAGE>
CASH COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Fiscal # Options Long Term
Name and Principal Position Year Salary Bonus Granted Awards
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Thomas A. Slamecka 1998 $100,000 -- 318,550 --
Chairman
- --------------------------------------------------------------------------------------------------
Michael Pieniazek 1998 $125,000 -- 402,750 --
President and CFO
- --------------------------------------------------------------------------------------------------
1997 $113,000 -- -- --
- --------------------------------------------------------------------------------------------------
</TABLE>
Aggregated Option Exercises for the Fiscal Year Ended July 31, 1998
and FY-End Option Values
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at FY- Options at FY-
End (#) End ($)
- -----------------------------------------------------------------------------------------------------------------
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas A. Slamecka 100,000 12,500 528,550/0 1,080,750/0
- -----------------------------------------------------------------------------------------------------------------
Michael T. Pieniazek 50,000 6,250 382,750/0 799,061/0
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Employment Agreements
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, 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 ITEM 12.
"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 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
-35-
<PAGE>
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, vesting 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 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 three 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 an option to an officer to purchase a
total of 30,000 shares of the Company's Common Stock at an exercise price of
$1.41, which was the fair market value on the date of grant. There remains
-36-
<PAGE>
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 July 31,
1998, options for an aggregate of 280,000 shares were granted, of which options
for 75,000 shares were exercised and options for 205,000 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.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of September 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 September 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Amount &
Nature of
Name and Address of Beneficial Percent
Beneficial Owner Status Ownership of Class
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liviakis Financial Stockholder 1,500,000 shs(1) 19.3%
Communications, Inc.
2420 K Street
Sacramento, California 95816
- --------------------------------------------------------------------------------------------------
Thomas A. Slamecka* Director and Chairman 834,550 shs(2) 11.0%
- --------------------------------------------------------------------------------------------------
Jubilee Investors LLC Stockholder 1,085,003 shs(3) 13.3%
c/o West End Capital LLC
One World Trade Center
Suite 4563
New York, New York 10048
- --------------------------------------------------------------------------------------------------
</TABLE>
-37-
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert B. Prag Stockholder 500,000 shs(4) 6.9%
2420 K Street
Sacramento, California 95816
- --------------------------------------------------------------------------------------------------
Marcus R. Rowan* Director 340,000 shs(5) 4.6%
- --------------------------------------------------------------------------------------------------
Michael T. Pieniazek* President and CFO 434,750 shs(6) 5.9%
- --------------------------------------------------------------------------------------------------
Andy Rosch* Director 310,000 shs 4.4%
- --------------------------------------------------------------------------------------------------
Blake C. Davenport* Director 70,000 shs(7) 1.0%
- --------------------------------------------------------------------------------------------------
Dr. Ronald S. Newbower* Director -0- --
- --------------------------------------------------------------------------------------------------
All Executive Officers and
Directors as a
Group (6 persons) 1,989,300 shs8 23.9%
- --------------------------------------------------------------------------------------------------
</TABLE>
- ------------------
(1) Includes presently exercisable warrants for 750,000 shares.
(2) Includes presently exercisable options for 528,550 shares.
(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 310,000 shares. Represents
shares owned directly by Mr. Rowan and his IRA and Keogh account.
(6) Includes presently exercisable options for 382,750 shares.
(7) Includes presently exercisable warrants to purchase 50,000 shares.
(8) See Notes 2, 5, 6 and 7.
* The address of the persons listed above is c/o American Electromedics Corp.,
13 Columbia Drive, Suite 5, Amherst, New Hampshire 03031.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of July 31, 1998, the Company had loaned Thomas A. Slamecka, Chairman of
the Board, an aggregate of $141,600 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, which is through March 15, 2001. 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.
-38-
<PAGE>
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 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-KSB for the
fiscal year ended July 31, 1997, and incorporated herein by
reference).
3.1.5 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State on May 4, 1998 (filed as
Exhibit 2.1 to the Company's Form 8-K for an event of May 5, 1998 (the
"May 1998 Form 8-K"), and incorporated herein by reference).
3.1.6 Certificate of Designations of Series A Convertible Preferred Stock of
the Company (filed with the Secretary of State of Delaware on May 5,
1998, filed as Exhibit 2.2 to the May 1998 Form 8-K, and incorporated
herein by reference).
3.2 By-Laws of the Company (filed as Exhibit 3(b) to Registration No.
2-71775, and incorporated herein by reference).
3.3 Amendments to the By-Laws of the Company (filed as Exhibit 3(c) to the
Company's 1990 Form 10-K and incorporated herein by reference).
4.1 Form of Common Stock Certificate (filed as Exhibit 4 to Registration
No. 2071775 and incorporated herein by reference).
10.1 Commercial Lease, dated March 23, 1998, by and between Mareld Company,
Inc. and the Company (filed as Exhibit 10.1 to Registration No.
333-58937 and incorporated herein by reference).
10.2.1 1983 Incentive Stock Option Plan (filed as Exhibit A to the Company's
Information Statement, and incorporated herein by reference).
10.2.2 Form of 1983 Incentive Stock Option Certificate (filed as Exhibit
(10)-12 to the Company's Form 10-K for the fiscal year ended July 28,
1984 ["1984 Form 10-K"] and incorporated herein by reference).
10.3.1 1983 Non-Qualified Stock Option Plan (filed as Exhibit B to the
Company's 1983 Information Statement, and incorporated herein by
reference).
-39-
<PAGE>
10.3.2 Form of 1983 Non-Qualified Stock Option Certificate (filed as Exhibit
(10)-13 to the Company's 1984 Form 10-K, and incorporated herein by
reference).
10.4 1996 Stock Option Plan (filed as Exhibit A to the Company's 1996 Proxy
Statement, and incorporated herein by reference).
10.5 Form of Employment Agreement, dated as of July, 31, 1995, between the
Company and Noel A. Wren (filed as Exhibit 10.5 to the Company's Form
10-KSB for the fiscal year ended July 29, 1995 (the "1995 Form
10-KSB"), and incorporated herein by reference).
10.6 Consulting Agreement, dated as of March 24, 1995, between the Company
and Alan Gelband Company, Inc. (filed as Exhibit 10.6 to the Company's
1995 Form 10-KSB, and incorporated herein by reference).
10.7 Stock Purchase Agreement, dated January 11, 1996, between the Company
and Andy Rosch (filed as Exhibit 1 to the Company's Form 8-K for an
event of January 11, 1996, and incorporated herein by reference).
10.8.1 Loan Agreement, dated October 4, 1996, between the Company and
Citizens Bank New Hampshire (the "Bank") (filed as Exhibit 10.9.1 to
the Company's Form 10-KSB for the fiscal year ended July 27, 1996 (the
"1996 Form 10-KSB") and incorporated herein by reference).
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 (filed as Exhibit 10.10 to Registration
No. 333-58937 and incorporated herein by reference).
10.11 Employment Agreement, dated January 1, 1998, between the Company and
Michael T. Pieniazek (filed as Exhibit 10.11 to Registration No.
333-58937 and incorporated herein by reference).
10.12 Forbearance and Workout Agreement, dated October 28, 1997, between
Registrant and the Bank (filed as Exhibit 10.12 to Registrant's Form
10-KSB for the fiscal year ended July 31, 1997 ["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-KSB
and incorporated herein by reference).
10.14 Contract of Employment between Rosch GmbH Medizintechnik and Andy
Rosch effective January 1, 1996 (filed as Exhibit 10.14 to
Registration No. 333-58937 and incorporated herein by reference).
-40-
<PAGE>
10.15 Agreement and Plan of Merger, dated as of April 30, 1998, among the
Company, DDS Acquisition Corporation, Dynamic Dental Systems, Inc.
("DDS") and others (without Exhibits or Schedules thereto) (filed as
Exhibit 2.3 to the May 1998 Form 8-K and incorporated herein by
reference).
10.16 Certificate of Merger between DDS Acquisition Corporation and DDS,
filed with the Secretary of State of Delaware on May 5, 1998 (filed as
Exhibit 2.4 to the May 1998 Form 8-K and incorporated herein by
reference).
10.17 Agreement and Plan of Merger, dated as of March 27, 1998, among the
Company, ESI Acquisition Corporation and Equidyne Systems Inc. ("ESI")
(incorporated by reference to Exhibit 2 to the Company's Form 8-K for
an event of March 27, 1998).
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 (filed as Exhibit 21 to Registration No.
333-58937 and incorporated herein by reference).
23* Consent of Ernst & Young LLP.
27** Financial data schedule.
- ----------
* Filed herewith.
** Previously filed.
(b) Reports on Form 8-K: None
-41-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN ELECTROMEDICS CORP.
By: /s/ Michael T. Pieniazek
------------------------
Dated: February 25, 1999 Michael T. Pieniazek,
President and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
(1) Principal Executive Officer
Chairman of the Board
- ---------------------------------
Thomas A. Slamecka
(2) Principal Financial Officer
/s/ Michael T. Pieniazek President and Chief Financial February 25, 1999
- ---------------------------------
Michael T. Pieniazek Officer
(3) Board of Directors
Director
- ---------------------------------
Blake C. Davenport
Director
- ---------------------------------
Andy Rosch
Director
- ---------------------------------
Marcus R. Rowan
</TABLE>
42
<PAGE>
Exhibit Index
Exhibit
- -------
23 Consent of Ernst & Young LLP
43
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-23741 and 333-19323) pertaining to the 1987 Non-Qualified
Stock Option Plan and Stock Option Agreements and the 1996 Stock Option Plan of
American Electromedics Corporation of our report dated December 21, 1998, with
respect to the financial statements of American Electromedics Corporation
included in the Annual Report (Form 10-KSB/A1) for the year ended July 31,
1998.
/s/ Ernst & Young LLP
Manchester, New Hampshire
February 24, 1999
