As Filed With the Securities and Exchange Commission on February 26, 1999
Registration No. 333-58937
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AMERICAN ELECTROMEDICS CORP.
(Name of Small Business Issuer in Its Charter)
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Delaware 3845 04-2608713
(State Or Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
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13 Columbia Drive, Suite 5
Amherst, New Hampshire 03031
(603) 880-6300
(Address and Telephone Number of Principal Executive
Offices and Principal Place of Business)
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Michael T. Pieniazek
President and Chief Financial Officer
13 Columbia Drive, Suite 5
Amherst, New Hampshire 03031
(603) 880-6300
(Name, Address and Telephone Number of Agent For Service)
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Copies to:
Bruce A. Rich, Esq.
Thelen Reid & Priest LLP
40 West 57th Street
New York, New York 10019
(212) 603-2000
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Approximate Date of Proposed Sale to the Public:
from time to time after the effective date of this Registration Statement as
determined by market conditions and other factors.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title Of Each Class of Securities Amount To Offering Price Per Proposed Maximum Amount Of
to be Registered Be Registered Unit(1) Aggregate Offering Price(1) Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, $.10 par value 5,059,851 $1.75 $8,854,739.25 $2,612.15
shares
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Common Stock, $.10 par value(2) 3,409,110 $1.75 $5,965,942.50 1,759.95
shares
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Common Stock, $.10 par value(3) 380,000 $1.75 $ 665,000.00 196.18
shares
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Common Stock, $.10 par value(3)(4) 50,000 $4.80 $ 240,000.00 70.80
shares
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Common Stock, $.10 par value(3) 13,333 $7.50 $ 99,997.50 29.50
shares
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Warrants 50,000 $ .10 $ 5,000.00 --
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Total -- -- $4,668.58(5)
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) promulgated under the Securities Act of 1933, as
amended, based on the average of the bid and asked prices on the OTC Bulletin
Board on February 22, 1999.
(2) Includes a presently indeterminate number of shares issued or issuable upon
conversion of or otherwise in respect of Registrant's Series A Convertible
Preferred Stock. This is not intended to constitute a prediction as to the
number of shares of Common Stock into which the Preferred Stock will be
convertible.
(3) In accordance with Rule 457(g), the registration fee for these shares is
calculated upon a price which represents the highest of (i) the price at which
the warrants or options may be exercised; (ii) the offering price of securities
of the same class included in this registration statement; or (iii) the price of
securities of the same class, as determined pursuant to Rule 457(c).
(4) Represents shares of Common Stock underlying the 50,000 warrants being
registered hereby.
(5) The amount of $6,845.88 was previously paid as the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
================================================================================
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or a
solicitation of an offer to buy nor shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
================================================================================
PRELIMINARY PROSPECTUS (SUBJECT TO COMPLETION)
Dated February __, 1999
8,912,294 Shares of Common Stock
($.10 par value)
50,000 Common Stock Purchase Warrants
AMERICAN ELECTROMEDICS CORP.
All of the shares (the "Shares") of Common Stock, par value $.10 per share
("Common Stock"), of American Electromedics Corp., a Delaware corporation (the
"Company"), and all of the Company's Common Stock Purchase Warrants (the
"Warrants"), offered hereby are being offered for resale by certain stockholders
and warrant holders of the Company (collectively the "Selling Stockholders") as
described more fully herein.
The shares of Common Stock offered hereby by the Selling Stockholders
consist of (A) 5,059,851 shares presently issued and outstanding, (B) 443,333
shares issuable upon exercise of presently exercisable warrants and options and
(C) 3,409,110 shares issuable upon conversion of the Company's Convertible
Preferred Stock, Series A, par value $.01 per share ("Series A Preferred
Stock"). The number of shares issuable upon conversion of the Series A Preferred
Stock is subject to adjustment and could be materially more than the amount
presented herein depending on the future market price of the Common Stock. See
"RISK FACTORS - MARKET RISKS" and "SELLING STOCKHOLDERS."
Each Warrant entitles the holder thereof to purchase one share of Common
Stock at a price per share of $4.80, subject to customary anti-dilution
adjustments. Each Warrant may be exercised until 5:00 p.m., New York time, on
May 5, 2001.
The Selling Stockholders will sell the Shares and Warrants from time to
time through customary brokerage channels, either through broker-dealers acting
as agents or brokers for the seller, or through broker-dealers acting as
principals, who may then resell the Shares and Warrants in the over-the-counter
market or at private sale or otherwise, at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or at negotiated
prices. The Selling Stockholders and any agents, broker-dealers or underwriters
who participate with the Selling Stockholders in the distribution of the Shares
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and any commission received by them and
any profit on the resale of the Common Stock or Warrants purchased by them may
be deemed to be underwriting discounts or commissions under the Securities Act.
See "PLAN OF DISTRIBUTION."
The Company will not receive any proceeds from the sale of the Shares or
Warrants offered hereby. The Company will receive proceeds of $821,998 upon the
exercise of all the warrants and options of which the underlying shares of
Common Stock are included herein. The Company has agreed to bear all expenses of
registration of the Shares and Warrants, excluding the selling and brokerage
expenses of the Selling Stockholders.
The Company's Common Stock is traded on the over-the-counter market on the
OTC Electronic Bulletin Board under the symbol AMER. On February 23, 1999 the
closing bid and asked prices were $2.00 and $2.00 per share of Common Stock.
There is no market for the Warrants and it is not anticipated that any public
market will develop for the Warrants. See "MARKET PRICE INFORMATION."
----------
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 6 THROUGH 12 HEREOF.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is February __, 1999
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "SEC"). Such reports and other information can be inspected and
copied at the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549; or at its offices at Northwest Atrium
Center, 500 West Madison Street, 14th Floor, Chicago, IL 60661; or Seven World
Trade Center, 13th Floor, New York, NY 10048. Copies of this material can also
be obtained at prescribed rates by writing to the Public Reference Section of
the SEC at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC maintains a Web site (http://www.sec.gov) that
contains reports, proxy statements and other information regarding registrants
that file electronically with the SEC, including the Company. The Common Stock
of the Company is quoted on the OTC Electronic Bulletin Board.
This Prospectus constitutes a part of a Registration Statement on Form SB-2
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the SEC under the Securities Act. This
Prospectus omits certain information contained in the Registration Statement,
and reference is hereby made to the Registration Statement and to the exhibits
relating thereto for further information with respect to the Company and the
Shares and Warrants offered hereby.
-2-
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. Investors should carefully consider the
information set forth in "Risk Factors." Certain of the information contained in
this summary and elsewhere in this Prospectus, including information with regard
to the Company's strategy for expanding operations and market share and related
financing requirements are forward looking statements. For a discussion of
important factors that could affect such matters, see "Risk Factors."
In November 1996, the Company effected a one-for-five reverse split of its
Common Stock. All share and per share information in this Prospectus is on a
post-split basis.
THE COMPANY
The Company is engaged in the development, manufacture and sale of medical
equipment through its four operating units; (1) the audiometrics unit
manufactures and sells Tympanometers and the Pilot(R) Audiometer, (2) the U.S.
intraoral dental camera unit, operated through the Company's wholly-owned
subsidiary, Dynamic Dental Systems, Inc. ("DDS"), (3) Rosch GmbH Medizintechnik
("Rosch GmbH"), a wholly-owned marketing and distribution company based in
Berlin, Germany, through which substantially all the Company's foreign and
export sales are conducted, and (4) Equidyne Systems, Inc., a wholly-owned
subsidiary described below.
The Company announced on January 5, 1999, that it intends to change the
Company's business strategy and direction in order to focus all of its resources
on Equidyne Systems, Inc. ("ESI"). ESI is engaged in the development of the
INJEX(TM) needle-free drug injection system (the "INJEX(TM) 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 INJEX(TM) 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 INJEX(TM) System will initially be marketed to the public
through exclusive arrangements with certain medical products distributors. ESI
is currently in discussions with pharmaceutical companies in the United States
with respect to marketing 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 in Europe, 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.
On February 3, 1999, the Company sold 1,600 shares of Series B 5%
Convertible Preferred Stock (the "Series B Preferred Stock") at a purchase price
of $1,000 per share for an aggregate purchase price of $1,600,000, together with
Warrants for the purchase of 25,000 shares of Common Stock at an exercise price
of $3.00 per share and exercisable until January 31, 2002. The Company shall use
the net proceeds of $1,500,000 (after offering expenses) for repayment of
$650,000 principal amount of notes and general working corporate purposes,
primarily relating to the INJEX(TM) system.
Currently, the largest segment of the Company's business is the marketing
of intraoral dental camera systems and related dental equipment. The Company's
intraoral camera systems display close-up high quality color video or digital
images of dental patients' teeth and gums. These images help dentists and other
dental care workers in displaying dental health and hygiene problems. Using
these systems, treatment plans, discussions and on-going patient information are
enhanced so patients can better see, understand and accept treatment
recommendations. The Company also manufactures and sells the Tympanometer(R), a
medical diagnostic instrument which, by applying a combination of air pressure
and sound to the ear drum, identifies diseases and disorders of the middle ear
which are not revealed by standard hearing tests. In order to affect the
aforementioned change in the Company's business strategy and direction, the
Company intends to divest its U.S. dental and audiometrics business units. The
Company has retained an investment banking firm to manage the sale of those
units.
The Company was incorporated under the laws of the State of Delaware on
January 28, 1977. The Company's executive offices are located at 13 Columbia
Drive, Suite 5, Amherst, New Hampshire 03031, and its telephone number is (603)
880-6300.
- --------------------------------------------------------------------------------
-3-
<PAGE>
- --------------------------------------------------------------------------------
THE OFFERING
Securities Offered..................... An aggregate of 8,912,294 shares of
Common Stock and 50,000 Warrants may
be offered from time to time by the
Selling Stockholders. See "SELLING
STOCKHOLDERS."
Common Stock Outstanding............... 7,668,464 shares as of January 31,
1999.
Risk Factors........................... An investment in the Common Stock
and Warrants involves a high degree
of risk, including recent financial
losses, a highly competitive
industry, regulatory compliance,
changing healthcare policies both
domestically and abroad, and
technological changes. See "RISK
FACTORS"
Use of Proceeds........................ None of the proceeds of the sale of
the Common Stock or Warrants
registered hereunder will accrue to
the Company. The Company will
receive gross proceeds of $821,998
if all of the warrants and options
of which the underlying shares of
Common Stock are included herein are
exercised which the Company would
use for general corporate purposes.
See "USE OF PROCEEDS."
OTC Electronic Bulletin Board
Symbol........................ "AMER"
RISK FACTORS
See "RISK FACTORS" for a discussion of certain factors that should be
considered in evaluating an investment in the Common Stock.
- --------------------------------------------------------------------------------
-4-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY FINANCIAL AND OPERATING INFORMATION
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. All numbers are in thousands,
except for share and per share amounts.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Year Ended
- -------------------------------------------------------------------------------------------------------------
Summary of Operations 7/31/98 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 (3,674) (926) 467 184 61
provision for income taxes
- -------------------------------------------------------------------------------------------------------------
Net income (loss) (3,674) (926) 442 172 57
- -------------------------------------------------------------------------------------------------------------
Net income (loss) per common share:
Basic (1.01) (.37) .18 .08 .03
Diluted (1.01) (.37) .18 .08 .03
- -------------------------------------------------------------------------------------------------------------
Weighted average 4,687,707 2,510,296 2,493,854 2,238,483 1,833,666
common shares
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Three Months
Ended
- ------------------------------------------------------------------------------------------------------
Summary of Operations 10/31/98 10/31/97
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $2,150 $1,830
- ------------------------------------------------------------------------------------------------------
Loss before provision for income taxes and extraordinary (1,286) (20)
items
- ------------------------------------------------------------------------------------------------------
Net loss (1,286) (20)
- ------------------------------------------------------------------------------------------------------
Net loss per common share: (.20) (.01)
Basic (.20) (.01)
Diluted
- ------------------------------------------------------------------------------------------------------
Weighted average common shares 7,064,636 2,553,136
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</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
As of As of As of As of As of
Financial Position 10/31/98 7/31/98 7/31/97 7/27/96 7/29/95
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $11,961 $11,458 $3,060 $2,771 $1,513
- -------------------------------------------------------------------------------------------------------------
Working capital (deficit) (72) 793 1,060 906 915
- -------------------------------------------------------------------------------------------------------------
Long-term debt -0- -0- 1,100 94 0
- -------------------------------------------------------------------------------------------------------------
Stockholders' equity 7,566 8,512 1,168 1,948 1,196
- -------------------------------------------------------------------------------------------------------------
</TABLE>
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-5-
<PAGE>
RISK FACTORS
An investment in the Common Stock and Warrants involves a high degree of
risk and, therefore, should be considered extremely speculative. They should not
be purchased by persons who cannot afford the possibility of the loss of their
entire investment. Prospective investors should consider carefully among other
risk factors, the risk factors and other special considerations relating to the
Company and this offering set forth below. The discussion in this Prospectus
contains, in addition to historical information, certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, beliefs, expectations and intentions. The Company's actual
results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include the following risk factors, as well as factors discussed
elsewhere in this Prospectus. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus.
FINANCIAL RISKS
Recent Losses. The Company had a net loss of $3,674,000, or $1.01 per
share, for the fiscal year ended July 31, 1998 compared to a net loss of
$926,000, or $.37 per share, for the comparable period in fiscal 1997, and a net
loss for the three month period ended October 31, 1998 of $1,286,000, or $.20
per share, compared to a net loss of $20,000, or $.01 per share, for the same
period in the prior year. At October 31, 1998, the Company had a working capital
deficit. The accountants' report for the July 31, 1998 financial statements
contains an explanatory paragraph describing conditions that raise substantial
doubt about the Company's ability to continue as a going concern. The loss in
fiscal 1998 was attributable to a transition in the third quarter from utilizing
a major distributor for the sales of its dental cameras in Europe to direct
sales, to lower gross margins on the sales of the cameras compared to gross
margins on the sale of other products, and to higher interest costs. The
increase in sales in fiscal 1998 was attributable to accounting for sales of
Rosch GmbH on a consolidated basis as well as sales of new intraoral dental
camera systems.
BUSINESS AND REGULATORY RISKS
Concentration of Business on New Product. On January 5, 1999, the Company
announced its intention to focus all of its resources on the development and
marketing of ESI's INJEX System and to divest its dental and audiometrics
business units, and that it had retained an investment banking firm to manage
the sales of these businesses. The INJEX System is still in the development
stage, has not yet been commercially accepted, is subject to competitive
products some of which are owned by entities with substantial resources, and may
require significant amounts of capital for development, manufacturing and
marketing. There can be no assurance that the Company will be successful in
developing and marketing ESI's INJEX(TM) System. Moreover, there can be no
assurance that the Company will successfully locate and reach agreement with
potential buyers, nor can there be any assurance as to the sales prices to be
ultimately received, and related gains or losses to be recognized.
Government Regulations. Government regulation in the United States and
certain foreign countries is a significant factor in the Company's business. In
the United States, the Company's products and its manufacturing practices are
subject to regulation by the FDA pursuant to the Federal Food, Drug and Cosmetic
Act ("FDC Act"), and by other state regulatory agencies. Under the FDC Act,
medical devices, including those under development by the Company, such as its
needle-free injection system, must receive FDA clearance before they may be
sold, or be exempted from the need to obtain such clearance or approval. The FDA
regulatory process may delay the marketing of new systems or devices for
significant periods of time and impose substantial additional costs. Moreover,
FDA marketing clearance regulations depend heavily on administrative
interpretation, and there can be no assurance that interpretations made by the
FDA or other regulatory bodies, with possible retroactive effect, will not
adversely affect the Company. There can be no assurance that the Company will be
able to obtain clearance of any future Company products or any expanded uses of
current or future Company products in a timely manner or at all. In addition,
even if obtained, FDA clearances are subject to ongoing review, and if the FDA
believes the
-6-
<PAGE>
Company is not in compliance with applicable requirements, it can institute
proceedings to detain or seize the Company's products, require a recall, suspend
production, distribution, marketing and sales, enjoin future violations and
assess civil and criminal penalties against the Company, its directors, officers
or employees. The FDA may also suspend or withdraw market approval for the
Company's products or require the Company to repair, replace or refund the cost
of any product manufactured or distributed by the Company.
FDA regulations also require the Company to adhere to certain "Good
Manufacturing Practices" ("GMP") regulations, which include validation testing,
quality control and documentation procedures. The Company's compliance with
applicable regulatory requirements is subject to periodic inspections by the
FDA. The Company will need 510(k) approval for any new medical products which it
develops. Compliance with these requirements requires the Company to expend
time, resources and effort in the areas of production and quality control for
itself and for its contract manufacturers. Moreover, there can be no assurance
that required regulatory clearances will be obtained, and those obtained may
include significant limitations on the uses of the product in question. In
addition, changes in existing regulations or the adoption of new regulations
could make regulatory compliance by the Company more difficult in the future.
Although the Company believes that its products and procedures are in
material compliance with all relevant FDA requirements, the failure to obtain
the required regulatory clearances or to comply with applicable regulations
would have a material adverse effect on the Company.
Sales of medical devices outside the United States that are manufactured
within the United States are subject to United States export requirements, and
all medical devices sold abroad are subject to applicable foreign regulatory
requirements. Legal restrictions on the sale of imported medical devices vary
from country to country. The requirements for obtaining approval by foreign
countries may differ substantially from those required for FDA approval. There
can be no assurance that the Company will be able to obtain regulatory approvals
or clearances for its products in foreign countries.
Competition; Risk of Technological Obsolescence. The manufacture and
distribution of medical and dental devices is intensely competitive. The Company
competes with numerous other companies, including several major manufacturers
and distributors. With respect to the intraoral camera market, the Company has
at least five major competitors in the video market. The digital equipment
market is less mature, but the Company anticipates growing competition in this
market as well. There has been some recent consolidation among the Company's
major competitors in the audiometric business, which has resulted in some price
erosion for those products, and which could adversely affect the sales values of
the intraoral camera and audiometrics businesses.
The Company's current competition for injection systems is primarily from
traditional hypodermic needles and syringes which are used for the vast majority
of injections administered today. In order to make needles and syringes easier
and safer to use, certain companies have developed syringes with hidden needles,
spring-powered needle injectors and injectors with sheathed needles, sometimes
referred to as safety syringes. In addition to competing with these types of
traditional hypodermic needles and syringes, the Company's needle-free injection
systems also compete with other needle-free injection devices. Currently,
competition in the needle-free injection market is generally limited to other
small companies with modest financial and other resources, but the barriers to
entry are currently low and additional competitors may enter the needle-free
injection systems market, including companies with substantially greater
resources and experience than the Company. Further, as discussed herein, the
Company's major competitor in the needle-free injection business formed a joint
venture with the largest producer of needles and syringes for purposes of
manufacturing a new design of disposable needle-free system. See "BUSINESS -
Needle-Free Drug Delivery System." There can be no assurance that the Company
will be able to compete effectively against current or future competitors in the
needle-free injection market. Competition in this market could also force the
Company to reduce the prices of its systems below currently planned levels,
thereby adversely affecting the Company's revenues and future profitability.
-7-
<PAGE>
Injection is generally used only with drugs for which other drug delivery
methods are not possible, in particular with biopharmaceutical proteins (drugs
derived from living organisms, such as insulin and human growth hormone) that
cannot currently be delivered orally, transdermally (through the skin) or
pulmonarily (through the lungs). Many companies, both large and small are
engaged in research and development efforts on novel techniques aimed at
delivering such drugs without injection. For example, Pfizer, Inc. recently
announced successful human trials of a device to inhale insulin and is competing
with several other large companies to develop such a device. The successful
development and commercial introduction of such a non-injection technique would
likely have a material adverse effect on the Company's business, financial
condition, results of operations and general prospects.
Most of the Company's competitors in all segments of its business have
greater financial and other resources than the Company. Consequently, such
entities may begin to develop, manufacture, market and distribute medical
devices which are substantially similar or superior to the Company's products.
Dependence on Proprietary Technology Rights and Lack of Patent Protection.
The Company's success will depend in part on its ability to protect proprietary
rights and to operate without infringing on the proprietary right of third
parties. The Company holds no patents, except for those held in connection with
its needle-free injection system for which it holds two United States patents
and has applied for nine foreign patents. In appropriate circumstances, the
Company may in the future apply for patent protection for uses, processes,
products and systems that it develops. There can be no assurance that any of the
Company's current or future patent applications will result in issued patents,
that the scope of any current or future patents will prevent competitors from
introducing competitive products or that any of the Company's current or future
patents would be held valid or enforceable if challenged. Patenting medical
devices involves complex legal and factual questions and there is no consistent
policy regarding the breadth of claims pertaining to such technologies; the
ultimate scope and validity of patents issued to the Company or to its
competitors are thus unknown. Further, although the Company is unaware of any
infringement by its products, no infringement studies have been conducted. In
addition, there can be no assurance that measures taken by the Company to
protect its unpatented proprietary rights will be sufficient to protect these
rights against third parties. Likewise, there can be no assurance that others
will not independently develop or otherwise acquire unpatented technologies or
products similar or superior to those of the Company.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry, and the Company may
in the future be required to defend its intellectual property rights against
infringement, duplication and discovery by third parties or to defend itself
against third-party claims of infringement. Likewise, disputes may arise in the
future with respect to ownership of technology developed by consultants or under
research or development agreements with pharmaceutical companies, or with
respect to the ownership of technology developed by employees who were
previously employed by other companies. Any such disputes or related litigation
could result in substantial costs to, and a diversion of effort by, the Company.
An adverse determination could subject the Company to significant liabilities to
third parties, require the Company to seek licenses from or pay royalties to
third parties or require the Company to develop appropriate alternative
technology. There can be no assurance that any such licenses would be available
on acceptable terms or at all, or that the Company could develop alternate
technology at an acceptable price or at all. Any of these events could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risks Associated with Third-Party Reimbursement of End Users. Sales of the
Company's current and proposed products in certain markets are dependent in part
on the availability of adequate reimbursement from third-party healthcare
payors. Currently, insurance companies and other third-party payors reimburse
the cost of dental x-ray equipment and certain audiometric testing, certain
insurers reimburse the cost of some dental camera work and the cost of
needle-free injectors are subject to reimbursement on a case-by-case basis. Such
companies may refuse reimbursement if they do not perceive benefits to the use
of the Company's equipment in a particular case. Third-party payors are
increasingly challenging the pricing of medical products and services, and there
can be no assurance that such third-party payors will not in the future
increasingly reject claims for coverage. In addition, there can be no assurance
that adequate levels of reimbursement will be available to enable the Company to
achieve
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<PAGE>
or maintain market acceptance of its products or maintain price levels
sufficient to realize profitable operations. Furthermore, there is a possibility
of increased government control or influence over a broad range of healthcare
expenditures in the future. Any such trend could negatively impact the market
for the Company's products.
The Company is also subject to the reimbursement policies of private and
governmental healthcare payors in foreign countries with respect to its
international sales. In this regard, recent changes in the reimbursement policy
for the Company's audiometric products in Germany have negatively impacted the
Company's earnings. See "RISK FACTORS - Financial Risks."
New Products and Technological Change. The Company is in the "high tech"
end of the health care industry. This industry has been historically marked by
very rapid technological change and frequent introductions of new products.
Accordingly, the Company's future growth and profitability depend in part on its
ability to continue to respond to technological changes and successfully develop
and market new products that achieve significant market acceptance. There is no
assurance that the Company will be able to do so.
Products Liability Exposure. The malfunction or misuse of the medical
devices sold by the Company may result in potential injury to physicians'
patients, thereby subjecting the Company to possible liability. Although the
Company's insurance coverage is $4,000,000 per occurrence and $5,000,000 in the
aggregate with a deductible of $5,000, which amounts and deductibles are
customary in the industry, there can be no assurance that such insurance will be
sufficient to cover any potential liability. Further, as the result of either
adverse claim experience or of medical device or insurance industry trends, the
Company may in the future have difficulty in obtaining product liability
insurance or be forced to pay very high premiums, and there can be no assurance
that insurance coverage will continue to be available on commercially reasonable
terms or at all. In addition, there can be no assurance that insurance will
adequately cover any product liability claim against the Company. A successful
product liability or other claim with respect to uninsured liabilities or in
excess of insured liabilities could have a material adverse effect on the
Company's business, financial condition and operations.
Dependence on Key Personnel. The success of the Company is highly dependent
on its ability to attract and retain highly qualified personnel, including
Thomas A. Slamecka, Chairman of the Board, and Michael T. Pieniazek, President,
Chief Financial Officer and Secretary, and the principal officers of the
operating subsidiaries. Competition for such personnel is intense, and there can
be no assurance that the Company will be successful in attracting and retaining
key personnel in the future. Any failure to do so could adversely affect the
Company. The Company does not carry any "key-man" insurance on the life of any
officer of the Company.
ADDITIONAL BUSINESS RISK FACTORS RELATING
TO NEEDLE-FREE INJECTION BUSINESS
Uncertainty of Market Acceptance. The success of the Company's needle-free
injector system will depend upon increasing market acceptance of the system as
an alternative to needle injections. Needle-free injection systems of other
companies have had only limited success competing with traditional needles and
syringes. The Company believes this largely because of the size, cost and
complexity of use of the systems that have been previously marketed. The
Company's improvements in the functionality and design may not adequately
address the actual or perceived complexity of using needle-free injection
systems or adequately reduce the cost. There can be no assurance that the
Company will be successful in these efforts or that its needle-free injection
systems will ever gain sufficient market acceptance to sustain profitable
operations.
Dependence on Collaborative Relationships. The Company believes that the
introduction and acceptance of its system depends in part upon the success of
its efforts at obtaining licensing arrangements with pharmaceutical and medical
device companies covering the development, manufacture or use of the system with
specific parenteral drug therapies. The Company anticipates that under these
arrangements the pharmaceutical or medical device company will assist in the
development of systems for such drug therapies and collect or sponsor the
collection of
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<PAGE>
the appropriate data for submission for regulatory approval of the use of the
system with the licensed drug therapy. The pharmaceutical or medical device
company also will be responsible for distribution and marketing of the systems
for these drug therapies either worldwide or in specific territories. There can
be no assurance that the Company will be successful in executing agreements with
pharmaceutical or medical device companies or that such agreements if entered
into will result in the sale of the Company's needle-free injection systems. As
a result of such agreements, the Company would be dependent upon the
development, data collection and marketing efforts of such pharmaceutical and
medical device companies. The amount and timing of resources such pharmaceutical
and medical device companies would devote to these efforts are not within the
control of the Company, and such pharmaceutical and medical device companies
could make material decisions regarding these efforts that could adversely
impact the introduction and level of sales of any drug covered by such licensing
arrangements, including competition within the pharmaceutical and medical device
industries, the timing of FDA or other approvals and intellectual property
litigation which would negatively affect the Company's sales of its systems for
those uses.
Limited Manufacturing Experience. To date, the Company's manufacturing
experience with its needle-free injection system has involved only the assembly
of products in limited quantities for purposes of testing and demonstrations.
The Company's planned commercialization necessitates the development of a
manufacturing and assembly process capable of producing an adequate number of
systems and components to satisfy commercial demand. These systems must be
manufactured in compliance with regulatory requirements, in a timely manner and
in sufficient quantities while maintaining quality and acceptable manufacturing
costs. In the course of developing its manufacturing and production methods, the
Company may encounter difficulties, including problems involving yields, quality
control and assurance, product reliability, manufacturing costs, new equipment,
component supplies and shortages of personnel, any of which could result in
significant delays in production. There can be no assurance that the Company
will be able to produce and manufacture successfully the Company's needle-free
injection systems.
Dependence on Third Party Suppliers for Production of Components. Although
the Company has determined the companies that it will use as its suppliers for
the component parts of its needle-free injection system, regulatory requirements
applicable to medical device manufacturing can make substitution of suppliers
costly and time-consuming. There can be no assurance that the Company will come
to agreement with suppliers capable of delivering adequate quantities of
components within a reasonable period of time, on acceptable terms or at all.
The unavailability of adequate quantities, the inability to develop alternative
sources, a reduction or interruption in supply or a significant increase in the
price of components could have a material adverse effect on the Company's
ability to manufacture and market its products.
MARKET RISKS
Securities Market Volatility. There have been periods of extreme volatility
in the stock markets, which in many cases were unrelated to the operating
performance of, or announcements concerning, the issuers of the affected stock.
The Company's Common Stock is not actively traded, and the bid and asked prices
for its Common Stock have fluctuated significantly. In the past two fiscal
years, the Common Stock traded from a high of $5.16 to a low of $0.66, after
giving effect to a one-for-five reverse stock split in November 1996. See
"MARKET PRICE INFORMATION." General market price declines, market volatility,
especially for low priced securities, or factors related to the general economy
or the Company in the future could adversely affect the price of the Common
Stock.
All of the Shares and Warrants registered for sale on behalf of the Selling
Stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. The Company has filed the Registration Statement of
which this Prospectus is a part to register these restricted Shares and Warrants
for sale into the public market by the Selling Stockholders, thereby creating a
market overhang which could depress the market price during the period the
Registration Statement remains effective and also could affect the Company's
ability to raise equity capital. Any outstanding Shares or Warrants not sold by
the Selling Stockholders pursuant to this Prospectus will
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<PAGE>
remain as "restricted shares" in the hands of the holder, except for those held
by non-affiliates for a period of two years, calculated pursuant to Rule 144.
Lack of Dividends. The Company has never declared any cash dividends on its
Common Stock, and if the Company were to become profitable, it would expect that
all of such earnings would be retained to support the business of the Company.
Accordingly, the Company does not anticipate paying cash dividends on its Common
Stock in the foreseeable future.
Shares Eligible for Future Sale. At January 31, 1999, the Company had an
aggregate of 1,859,633 shares of Common Stock reserved for the exercise of
options and warrants. The Series A Preferred Stock is convertible into shares of
Common Stock at a conversion rate equal to $1,000 per Series A share divided by
the lower of (i) $4.00 or (ii) 75% of the average closing bid price for the
Common Stock for the free trading days immediately preceding the conversion
date. Since there is no minimum conversion price, a reduction on the bid price
could require the Company to issue a significant amount of Common Stock upon
conversion of the Series A Preferred Stock. The foregoing amount excludes shares
of Common Stock reserved for conversion of the Series B Preferred Stock, which
becomes convertible after April 30, 1999. The sale, or availability for sale, of
substantial amounts of Common Stock in the public market could adversely affect
the prevailing market price of the Common Stock and could impair the Company's
ability to raise additional capital when needed through the sale of its equity
securities.
Risks Relating to Low-Priced Stock; Possible Effect of "Penny Stock" Rules
on Liquidity for the Company's Securities. Depending upon the market price of
the Company's Common Stock, the Company's net tangible assets and revenues, the
Common Stock may become subject to Rule 15g-9 under the Exchange Act. This Rule
(the "Penny Stock Rule") imposes additional sales practice requirements on
broker-dealers that sell such securities to persons other than established
customers and "accredited investors" (generally, individuals with a net worth in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by Rule 15g-9, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale.
Consequently, such Rule may affect the ability of broker-dealers to sell the
Company's securities and may affect the ability of purchasers to sell any of the
Company's securities in the secondary market.
The SEC regulations define a "penny stock" to be any equity security that
has a market price (as therein defined) of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the SEC relating to the penny stock market. Disclosure is also
required to be made about sales commissions payable to both the broker-dealer
and the registered representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stock.
There can be no assurance that the Company's Common Stock will qualify for
exemption from the penny stock restrictions. In any event, even if the Company's
Common Stock were exempt from such restrictions, the Company would remain
subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the
authority to restrict any person from participating in a distribution of penny
stock, if the SEC finds that such a restriction would be in the public interest.
If the Company's Common Stock were subject to the rules on penny stocks,
the market liquidity for the Company's Common Stock could be materially
adversely affected. Investors should check the then current market prices before
making an investment decision with respect to the securities of the Company. The
current market price of the Common Stock reflects a one-for-five reverse stock
split of the Company's outstanding Common Stock, effective November 8, 1996. See
"MARKET PRICE INFORMATION."
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<PAGE>
Antitakeover Effect of Certain Charter Provisions. Certain provisions of
the Company's Certificate of Incorporation and of Delaware law could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions could diminish the opportunities for a
stockholder to participate in tender offers, including tender offers at a price
above the then current market value of the Common Stock. Such provisions may
also inhibit fluctuations in the market price of the Common Stock that could
result from takeover attempts. The Board of Directors, without further
stockholder approval, may issue preferred stock that could have the effect of
delaying or preventing a change in control of the Company. The issuance of
preferred stock could also adversely affect the voting power of the holders of
Common Stock, including the loss of voting control to others.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Shares or Warrants by the Selling Stockholders. The Company will receive gross
proceeds of $821,998 if all the warrants and options of which underlying shares
of Common Stock included herein are exercised. The Company will use such
proceeds for general working capital purposes.
The Company will bear the expenses of the registration of the Shares and
Warrants. The Company estimates that these expenses will be approximately
$70,000.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and its
Board of Directors has no present intention of declaring any cash dividends in
the foreseeable future. If the Company were to become profitable in the future,
it expects that all earnings would be retained to support the business of the
Company.
MARKET FOR THE COMPANY'S
COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Principal Market and Market Prices
- ----------------------------------
The Common Stock of the Company is traded in the over-the-counter market on
the OTC Electronic Bulletin Board under the symbol AMER. The following table
sets forth for the indicated periods the high and low bid prices of the Common
Stock for the two fiscal years ended July 31, 1998 and the five months ended
December 31, 1998, and gives effect to a one-for-five reverse stock split
effective as of November 8, 1996. These prices are based on quotations between
dealers, and do not reflect retail mark-up, mark-down or commissions, and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Fiscal Year Ending Fiscal Year Ended Fiscal Year Ended
Fiscal Period 7/31/99 7/31/98 7/31/97
- --------------------------------------------------------------------------------------------------------------------
High Low High Low High Low
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $4.31 $2.38 $1.88 $1.00 $5.16 $3.13
- --------------------------------------------------------------------------------------------------------------------
Second Quarter 2.31 .88 1.50 .66 4.38 1.88
- --------------------------------------------------------------------------------------------------------------------
Third Quarter 1.94* 1.47* 4.94 .88 3.75 1.38
- --------------------------------------------------------------------------------------------------------------------
Fourth Quarter 4.81 3.19 1.63 .84
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Through February 23, 1999.
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<PAGE>
Approximate Number of Holders of Company's Common Stock
- -------------------------------------------------------
As of January 31, 1999, there were approximately 212 stockholders of record
of the Company's Common Stock. The Company believes that a substantial amount of
the shares are held in nominee name for beneficial owners.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion in this Prospectus contains, in addition to historical
information, certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, beliefs, expectations
and intentions. The Company's actual results could differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include the those discussed under Risk Factors,
as well as factors discussed elsewhere in this Prospectus. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus.
Comparison of three Month Periods Ended
October 31, 1998 and 1997
Net sales for the three month period ended October 31, 1998 were
$2,150,000, compared to $1,830,000 for the three month period ended October 31,
1997. The increase in sales in fiscal 1999 was attributable to incremental sales
of the intraoral dental camera system by the Company's acquisition of DDS in May
1998.
Cost of sales for the three month periods ended October 31, 1998 and
October 31, 1997 were 58.7% and 57.8% of net sales, respectively.
Selling, general and administrative expenses for the three month period
ended October 31, 1998 were $1,922,000, compared to $687,000 for the comparable
prior year period. The increase reflects increased marketing and promotional
activity and increased corporate activity as a result of aggressive corporate
development activity and retention of senior level executives in the acquired
companies. The increase also includes $432,000 of amortization of deferred
compensation recognized in connection with the acquisition of DDS and ESI.
Net loss for the three month period ended October 31, 1998 was $1,286,000,
compared to a net loss of $20,000, for the same period in the prior fiscal year.
The increase in net loss is the result of increased sales offset by higher
selling general and administrative costs.
Comparison of Fiscal Years Ended
July 31, 1998 and July 31, 1997
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
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<PAGE>
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 October 31, 1998 was $(72,000), compared
to $793,000 at fiscal year ended July 31, 1998. The decrease of $865,000
reflects primarily the net effect of operating losses.
The Company has incurred net losses of $3,674,000 for the year ended July
31, 1998 and $1,286,000 for the three month period ended October 31, 1998. This
and other factors, such as working capital needed for the Company's operations,
has required additional funding beyond that which the Company currently has
available.
The Company has satisfied its immediate working capital needs by obtaining
two short-term debt facilities, consisting of a $505,000 line-of-credit facility
from Guardian Financial Services, Inc. (owned by an officer and director of the
Company), and a $600,000 term loan from an outside third party. Borrowings under
these facilities are due on demand, bear interest at 10% per annum, and are to
be secured by substantially all assets of the Company. Outstanding borrowings
under these facilities as of December 31, 1998 were $300,000 and $600,000,
respectively. The line-of-credit facility expires on February 28, 1999.
The Company needs to raise additional capital to satisfy its longer term
working capital requirements. One source of working capital would be the
proceeds from the sales of its audiometrics and U.S. dental business units. The
proceeds from the sales of the business units and the placement of the Series B
Preferred Stock should provide the necessary working capital to fund the
operations of the Company through such time as the INJEX(TM) System is brought
to market and begins to generate sufficient positive cash flow. However, no
assurance can be made that the sales of both business units will be completed
within the near future, thereby necessitating obtaining additional capital
through debt or equity placements.
No assurance can be given that the Company's plans to sell its audiometrics
and U.S. dental business units will be successfully achieved, or that such sales
will result in providing the Company with sufficient working capital to sustain
the Company's operations until such time as the sales of the INJEX(TM) System
begins to generate sufficient positive cash flows. Furthermore, there can be no
assurance that sales of the INJEX(TM) System will ultimately result in future
positive cash flows.
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
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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.
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
completed 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 significate 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 of-the-shelf software package, which is not year 2000 compliant. The
Company has confirmed with it software vendor that a year 2000-complaint upgrade
is readily available, and anticipates purchasing this upgrade during it third
fiscal quarter, which ends on April 30, 1999. The upgrade would provide full
Year 2000 compliance with respect to its financial 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 a 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.
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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, manufacturer 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.
BUSINESS
The Company is engaged in developing, manufacturing and selling the
following three categories of healthcare products: (i) needle-free drug delivery
systems, (ii) intraoral dental cameras and related products, and (iii)
diagnostic audiometric medical devices. The Company recently announced its
intention to focus upon the needle-free drug delivery systems and to dispose of
the other product lines.
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.
On May 12, 1998, the Company acquired ESI in exchange for 600,000 shares of
the Company's Common Stock, valued at approximately $2.6 million.
A first generation INJEX(TM) System was tested and received 510(k) market
clearance from the FDA in August 1995. The first generation system was not
commercially marketed. Since then, certain improvements have been made to the
System and the Company will begin marketing the improved second generation
System in the United States by March 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.
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 sterilized ampules for ampules that are delivered empty.
To date, the Company has received initial orders for both testing and
end-user purposes. The Company currently has adequate manufacturing capacity in
place for the injector pens and reset boxes, but does not currently possess the
manufacturing capacity for the ampules required for utilization of the Systems.
The Company expects that by early March 1999, it will have limited production
capabilities for the ampules in place, and intends to expand its manufacturing
capacity throughout 1999 in order to meet current and expected future demand.
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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.
Intraoral Dental Cameras and
- ----------------------------
Related Products
- ----------------
The largest segment of the Company's business today is the sale of
intraoral dental camera systems and related dental products, which are sold
through the Company's wholly-owned subsidiaries, DDS and Rosch GmbH. In January
1999, the Company announced its intention to divest its ownership of DDS, in
order to focus on the continued development and marketing of the INJEX(TM)
System. The Company had acquired DDS in May 1998 in exchange for 750,000 shares
of the Company's Common Stock, valued at approximately $3 million, and $225,000
in cash. The Company will continue to sell dental products through Rosch GmbH.
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. The Company markets three kinds of camera systems, the
DynaCamJ, the ViperCamJ and the ViolaJ.
In 1997, the Company began selling and distributing the ViolaJ camera
system, manufactured in Germany, 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 ViolaJ
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 ViolaJ 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 DynaCamJ and the
ViperCamJ. The Company has now replaced its marketing of the ViolaJ in the U.S.
with the DynaCamJ and ViperCamJ, although the Company expects to transition away
from the ViperCamJ 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 system as
compared to four images on most intraoral camera systems. The dentist can
enhance the picture, giving the patients a better view of their teeth and helps
the patient accept the recommended treatment plan. Images can also be
transferred to other dentists via the video conferencing module or on the
Internet. The system also integrates with most practice management software
packages, allowing the dentist to save time by not having to reenter the
patient's name in each program.
-17-
<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 distributes Integra Medical's intraoral camera
model # IMI-AC4 and certain related ViperSoft software packages throughout the
United States. Through DDS, the Company also possesses a distribution agreement
with the Sony Business and Professional Group, a division of Sony Electronic,
Inc., for the distribution of printers, monitors and digital cameras. The
Company also purchases and distribute various other products relating to digital
operatory system without formal distribution agreements. These include
computers, computer accessories and workstation cards.
Diagnostic Audiometric Medical Devices
- --------------------------------------
Historically, the Company's business was based primarily on the
development, manufacture and sale of four different models of Tympanometers(R).
However, based upon a change in the strategic direction of the Company announced
in January 1999, the Company intends to divest its interest in its audiometrics
business unit. The Company will continue to manufacture and sell its
audiometrics product line until such time as an acceptable sales agreement is
reached and completed.
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. 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
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<PAGE>
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.
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.
Product Development
- -------------------
The Company is committed to fund the developing, manufacturing capabilities
and marketing necessary to bring the INJEX needle-free injection system to
market in the United States by March 1999, and to continue increasing
manufacturing capacity based on demand. The Company anticipates that
approximately $1 million may be required for these purposes.
The Company has not presently committed any significant funds for research
and development with respect to the intraoral camera equipment it markets.
Government Regulation
- ---------------------
Government regulation in the United States and certain foreign countries is
a significant factor in the Company's business. In the United States, the
Company's products and its manufacturing practices are subject to regulation by
the FDA pursuant to the Federal Food, Drug and Cosmetic Act ("FDC Act"), and by
other state regulatory agencies. Under the FDC Act, medical devices, including
those under development by the Company, such as its needle-free injection
system, must receive FDA clearance or approval before they may be sold, or be
exempted from the need to obtain such clearance or approval. The FDA regulatory
process may delay the marketing of new systems or devices for lengthy periods
and impose substantial additional costs. Moreover, FDA marketing clearance
regulations depend heavily on administrative interpretation, and there can be no
assurance that
-19-
<PAGE>
interpretations made by the FDA or other regulatory bodies, with possible
retroactive effect, will not adversely affect the Company. There can be no
assurance that the Company will be able to obtain clearance of any future
Company products or any expanded uses of current or future Company products in a
timely manner or at all. In addition, even if obtained, FDA clearances are
subject to continual review, and if the FDA believes that the Company is not in
compliance with applicable requirements, it can institute proceedings to detain
or seize the Company's products, require a recall, suspend production,
distribution, marketing and sales, enjoin future violations and assess civil and
criminal penalties against the Company, its directors, officers or employees.
The FDA may also suspend or withdraw market approval for the Company's products
or require the Company to repair, replace or refund the cost of any product
manufactured or distributed by the Company. FDA regulations also require the
Company to adhere to certain "Good Manufacturing Practices" ("GMP") regulations,
which include validation testing, quality control and documentation procedures.
The Company's compliance with applicable regulatory requirements is subject to
periodic inspections by the FDA. The Company will need 510(k) approval for any
new medical products which are developed in the future. Compliance with these
requirements requires the Company to expend time, resources and effort in the
areas of production and quality control for itself and for its contract
manufacturers. Moreover, there can be no assurance that the required regulatory
clearances will be obtained, and those obtained may include significant
limitations on the uses of the product in question. In addition, changes in
existing regulations or the adoption of new regulations could make regulatory
compliance by the Company more difficult in the future.
Although the Company believes that its products and procedures are
currently in material compliance with all relevant FDA requirements, the failure
to obtain the required regulatory clearances or to comply with applicable
regulations would have a material adverse effect on the Company.
Sales of medical devices outside the United States that are manufactured
within the United States are subject to United States export requirements, and
all medical devices sold abroad are subject to applicable foreign regulatory
requirements. Legal restrictions on the sale of imported medical devices vary
from country to country. The time and requirements to obtain approval by a
foreign country may differ substantially from those required for FDA approval.
There can be no assurance that the Company will be able to obtain regulatory
approvals or clearances for its products in foreign countries.
Patents and Trademarks
- ----------------------
With respect to the Company's INJEX(TM) needle-free drug injection system,
the Company holds two United States patents and has applied for nine foreign
patents. The Company also possesses certain registered trademarks and copyrights
for names which it believes are important to its business.
Properties
- ----------
The Company's administrative offices and audiometric operations are
located in Amherst, New Hampshire in facilities containing 7,800 square feet
leased to the Company for three years at $3,800 per month under a lease expiring
in May 2001. In connection with its announcement on January 5, 1999, upon
divesting of the audiometric business the Company will seek to sub-lease or
enter in another arrangement to minimize future lease costs for this facility.
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 at $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 expiring in March 1999 at $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.
-20-
<PAGE>
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 under a lease expiring in May 2002.
The Company believes that these facilities are adequate for its current
business needs.
Marketing
- ---------
The Company plans to market and distribute the INJEX(TM) System for home
care applications such as for people with diabetes, allergies, human growth
disorders, arthritis, osteoporosis or other diseases involving in home self
injections. It also plans to have licensing and joint development agreements
with drug companies and manufacturers of injectable pharmaceuticals in the
United States. The Company expects that product sales will be directed to
pharmaceutical companies, pediatric clinics, infectious disease wards, and
outpatient clinics where the threat of accidental needle pricks and patient
trauma are highest. 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,
subject to LSM purchasing specified quantities.
In September 1998, the Company entered into an agreement to supply HNS
International, a California corporation, with the INJEX(TM) System for exclusive
distribution within Japan, subject to the distributor selling specified
quantities within the territory.
As of January 1999, the Company entered into an agreement for Precision
Medmark Inc. ("PMM") to establish and manage a network of medical device dealers
within the United States. Specifically excluded from such agreement are ampules
pre-filled by pharmaceutical companies or for use in conjunction with specific
proprietary drugs and individual stand-alone injectors to support initial sales
of the pharmaceutical companies' products. The agreement with PMM is for an
initial term of 18 months, with the renewal terms on a non-exclusive basis.
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 ViolaJ 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.
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 Company has not yet begun manufacturing the INJEX(TM) System for
commercial distribution. The INJEX(TM) System's reusable injector pen and reset
box are made of a combination of anodized aluminum and stainless
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<PAGE>
steel metal parts. 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. All parts are made
from molds and tools. The Company is outsourcing the manufacturing of all
components, and is in the process of expanding manufacturing capacity to meet
the current and expected future demand.
The intraoral cameras and other dental equipment distributed by the Company
are purchased from suppliers and resold to the Company's customers.
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.
Product Warranty
- ----------------
The Company's intraoral camera systems are sold with the manufacturer's
warranty. Neither DDS nor Rosch GmbH provide any additional warranties for the
products they distribute.
All audiometric products are sold with a one year warranty against defects
in parts and workmanship. The Company repairs, at no charge, defects covered by
the warranty if the instrument is returned to the Company's factory in Amherst,
New Hampshire or to an authorized factory service station. If the repair is
performed at the customer's office, there is no charge for warranty work. The
Company believes that it has no warranty problem with its audiometric products.
The Company plans to offer a one-year warranty on the injector component of
its INJEX(TM) System.
Employees
- ---------
At December 31, 1998, the Company and its subsidiaries had 49 employees, 16
of whom were management or administrative personnel, 21 were engaged in sales
activities, and 12 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 is 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.
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
-22-
<PAGE>
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.
Two other companies, Health-Mor Personal Care Corp. and Vitajet
Corporation, currently sell coil spring injector systems. Vitajet has recently
introduced a product which incorporates a disposable needle-free syringe.
Vitajet was recently acquired by Bio-Ject.
Safety syringes are presently made by a small number of new firms, none of
which has a significant share of the total syringe market. BDC also manufactures
these devices, but the high cost of safety syringes and the continued problem of
controlled disposal has weakened the demand for them.
The Company expects ESI to compete with the smaller safety syringe
manufacturers and jet injector firms, based on health care worker safety, ease
of use, reduced overall costs of controlled disposal and patient comfort. The
Company expects that when all indirect costs are considered, the INJEX(TM)
System should be able to successfully compete on a cost basis.
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.
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. The
parties are presently in settlement negotiations.
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. On January 13, 1999, the
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<PAGE>
action was removed to the United States District Court for the Central District
of California. Although this action is at a preliminary stage, discovery has not
yet commenced and DDS has not yet answered or otherwise moved before the federal
court, based upon its present knowledge, the Company believes that DDS has
meritorious defenses to the allegations against it.
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<PAGE>
MANAGEMENT
Executive Officers, Directors and Other Significant Employees
- -------------------------------------------------------------
The following table sets forth certain information concerning the
directors, executive officers and other significant employees of the Company as
of January 31, 1999.
<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
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.
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.
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
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<PAGE>
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.
-26-
<PAGE>
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.
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 C 318,550 C
Chairman
- ------------------------------------------------------------------------------------------------------------------
Michael Pieniazek 1998 $125,000 C 402,750 C
President and CFO
- ------------------------------------------------------------------------------------------------------------------
1997 $113,000 C C C
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Aggregated Option Exercises for the Fiscal Year Ended July 31, 1998
and FY-End Option Values
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Number of
Unexercised Value of Unexercised
Options at FY-End In-the-Money Options
(#) at FY-End ($)
- ------------------------------------------------------------------------------------------------------------------
Shares Acquired on Exercisable/ Exercisable/
Name Exercise (#) Value Realized ($) 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
-27-
<PAGE>
be included in such calculation. In addition, the Company agreed to make
available certain loans to Mr. Slamecka, see "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
As of January 1, 1998, the Company entered into an Employment Agreement
with Michael T. Pieniazek to serve as President for an initial term of three
years terminating on December 31, 2001, subject to automatic renewal for
consecutive one-year terms unless terminated not less than 60 days prior to end
of any term. Mr. Pieniazek receives an annual base salary of $125,000 and a
discretionary bonus. The Agreement also provided for the grant of options to Mr.
Pieniazek to purchase 250,000 shares of Common Stock at $1.00 per share, which
was the fair market value of the Company's Common Stock on the date of grant,
vesting immediately as to 150,000 shares, vesting ratably over the succeeding
seven months as to the balance, and for the Company to issue 50,000 shares of
Common Stock to Mr. Pieniazek if during the term of his employment the closing
price for the Common Stock is at least $20 per share for three consecutive
trading days. In addition, the Employment Agreement provides that if the Company
issues any shares of Common Stock (other than pursuant to compensation or
employee benefit plans) it will grant to Mr. Pieniazek additional options to
purchase shares in amount equal to 6.5% of such issuance. In calculating Mr.
Pieniazek's ownership for purposes of such 6.5% level, unvested options held by
him and shares sold by him during the term of the Employment Agreement would be
included in such calculation.
The Employment Agreements of Messrs. Slamecka and Pieniazek provide for
lump sum payments equal to 2.99 times the current base salary, plus continuation
of health benefits for 12 months, upon a change of control of the Company. A
change of control of the Company would include a person or group becoming the
beneficial owner of 20% of the voting power of the Company's securities or
individuals who are current directors of the Company, or successors chosen by
them, cease to constitute a majority of the whole Board of Directors. In the
event the amount payable upon a change of control would result in the
application of an excise tax under Section 4999 of Internal Revenue Code of
1986, as amended, the payment would be made over such period of time in order
not to cause the application of such excise tax.
On May 5, 1998, upon the closing of the DDS Merger, DDS entered into an
Employment Agreement with Mr. Rhodes pursuant to which he serves as President of
DDS for an initial term of three years at an annual base salary of $125,000. Mr.
Rhodes was also granted stock options to purchase up to 100,000 shares of the
Company's Common Stock at an exercise price of $1.00 per share, vested as of May
5, 1998, and stock options to purchase 100,000 shares of the Company's Common
Stock at an exercise price of $3.00 per share, vested as of November 1, 2000,
all such stock options expire in May 2003.
On May 12, 1998, upon the closing of the ESI Merger, ESI entered into
Employment Agreements with Lawrence Petersen and Richard Battelle. Mr. Petersen
serves 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 serves 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,
-28-
<PAGE>
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 Michael T. Pieniazek, an
executive 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 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 December 31,
1998, options for an aggregate of 280,000 shares were granted, of which options
for 88,000 shares were exercised, options for 12,000 shares were cancelled and
options for 180,000 shares remaining outstanding at an exercise price of $1.00
per share and expiring from January 2002 to February 2002.
Pursuant to Employment Agreements with Messrs. Slamecka, Pieniazek, Rhodes,
Petersen and Battelle, the Company has granted stock options to such persons and
in the cases of Messrs. Slamecka and Pieniazek is obligated to grant additional
options upon certain issuances of Common Stock. See "Employment Agreements"
herein.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of July 31, 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.
In September 1998, the Company entered into a $505,000 line of credit
agreement with Guardian Financial Services, Inc., which is owned by Mr.
Slamecka. As of December 31, 1998, the Company had outstanding $300,000 under
the line of credit. The line of credit bears interest at the rate of 10% per
annum, is to be secured by the Company's assets and expires on February 28,
1999.
-29-
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of January 31, 1999
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 January 31, 1999.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Amount &
Nature of
Name and Address of Beneficial Percent of
Beneficial Owner Status Ownership Class*
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liviakis Financial Communications, Inc. Stockholder 1,192,371 shs 15.5%
2420 K Street
Sacramento, California 95816
- ----------------------------------------------------------------------------------------------------------
Thomas A. Slamecka** Director and Chairman 834,550 shs(1) 10.2%
- ----------------------------------------------------------------------------------------------------------
Jubilee Investors LLC Stockholder 3,409,110 shs(2) 30.8%
c/o West End Capital LLC
One World Trade Center
Suite 4563
New York, New York 10048
- ----------------------------------------------------------------------------------------------------------
Robert B. Prag Stockholder 397,457 shs 5.2%
2420 K Street
Sacramento, California 95816
- ----------------------------------------------------------------------------------------------------------
Marcus R. Rowan** Director 357,000 shs(3) 4.5%
- ----------------------------------------------------------------------------------------------------------
Michael T. Pieniazek** President and CFO 434,750 shs(4) 5.4%
- ----------------------------------------------------------------------------------------------------------
Andy Rosch** Director 310,000 shs 4.0%
- ----------------------------------------------------------------------------------------------------------
Blake C. Davenport** Director 70,000 shs(5) 0.9%
- ----------------------------------------------------------------------------------------------------------
All Executive Officers and
Directors as a
Group (5 persons) 2,006,300 shs(6) 22.4%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
1) Includes presently exercisable options for 528,550 shares.
2) Represents an estimate of one and one-half times the total number of shares
which Jubilee Investors LLC would receive upon conversion of its 3,000
shares of Series A Preferred Stock.
-30-
<PAGE>
3) Includes presently exercisable options 310,000 shares. Represents shares
owned directly by Mr. Rowan and his IRA and Keogh account.
4) Includes presently exercisable options for 382,750 shares.
5) Includes presently exercisable options to purchase 50,000 shares.
6) See Notes 1, 3, 4 and 5.
* Based upon 7,660,964 shares of Common Stock outstanding on January 31,
1999. Percentage ownership is calculated separate for each person on the
basis of the actual number of outstanding shares as of such date, and
assumes the exercise of certain stock options and warrants held by such
person (but not by anyone else) exercisable within sixty days of January
31, 1999.
** The address of the persons listed above is c/o American Electromedics
Corp., 13 Columbia Drive, Suite 5, Amherst, New Hampshire 03031.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 20,000,000 shares of Common Stock, $.10
par value, of which 7,660,964 shares were issued and outstanding as of January
31, 1999.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted by stockholders. There is no cumulative voting
with respect to the election of directors with the result that the holders of
more than 50% of the shares of Common Stock voted for the election of directors
can elect all of the directors.
The holders of shares of Common Stock are entitled to dividends when and as
declared by the Board of Directors from funds legally available therefore, and,
upon liquidation are entitled to share pro rata in any distribution to holders
of Common Stock. No dividends have ever been declared by the Board of Directors
on the Common Stock. See "DIVIDEND POLICY." All of the outstanding shares of
Common Stock are, and all shares sold hereunder will be, when issued upon
payment therefor, duly authorized, validly issued, fully paid and
non-assessable.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of Preferred Stock, par
value $.01 per share, issuable from time to time in one or more series, having
such designation, rights, preferences, powers, restrictions and limitations as
may be fixed by the Board of Directors. On May 5, 1998, the Company filed with
the Delaware Secretary of State a Certificate of Designations establishing the
Series A Preferred Stock consisting of 3,000 shares, and on February 3, 1999,
the Company filed a Certificate of Designation establishing the Series B
Preferred Stock consisting of 2,000 shares.
Series A Preferred Stock. The Series A Preferred Stock is immediately
---------------------------
convertible into shares of Common Stock at a conversion rate equal to $1,000
divided by the lower of (i) $4.00 or (ii) 75% of the average closing bid price
for the Common Stock for the five trading days immediately preceding the
conversion date. The Company may force conversion of all (and not less than all)
of the outstanding shares of Series A Preferred Stock at any time after the
first anniversary of the effective date of the Registration Statement. There is
no minimum conversion price. Should the bid price of the Common Stock fall
substantially prior to conversion, the holders of the Series A Preferred Stock
could obtain a significant portion of the Common Stock upon conversion, to the
detriment of the then holders of the Common Stock.
-31-
<PAGE>
The Series A Preferred Stock has a liquidation preference of $1,000 per
share, plus any accrued and unpaid dividends. The Company was to pay an annual
dividend equal to 5% of the liquidation preference, which may be paid at the
election of the Company in cash or shares of its Common Stock. Pursuant to a
Registration Agreement, the dividend rate was increased to 12% on June 5, 1998
due to the Company's failure to file the Registration Statement covering the
Common Stock underlying the Series A Preferred Stock within 30 days of the
initial closing of the Series A Preferred Stock. The dividend rate was further
increased to 18% effective October 3, 1998, since the Registration Statement was
not declared effective within 120 days of the initial closing. The dividend rate
will return to 5% once the Registration Statement is declared effective.
The Company may redeem up to $1 million face amount of Series A Preferred
Stock at a redemption price equal to 120% of the liquidation preference if the
closing bid price of the Company's Common Stock is below $2.75 per share for
five consecutive trading days.
The Company may redeem an additional $1 million face amount of Series A
Preferred Stock at a redemption price equal to 120% of the liquidation
preferences if the closing bid price of the Company's Common Stock is below
$2.50 per share for five consecutive dates.
Series B Preferred Stock. At February 3, 1999, 1,600 shares of Series B
-------------------------
Preferred Stock were outstanding. The Series B Preferred Stock is convertible at
any time after April 30, 1999 into shares of Common Stock at a conversion rate
equal to $1,000 divided by the lower of (i) $2.00 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 B Preferred Stock at any time
after the first anniversary of the effective date of a registration statement
covering the underlying shares of Common 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 B 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 B Preferred Stock has a liquidation preference of $1,000 per
share, plus any accrued and unpaid dividends. The Company is to pay an annual
dividend equal to 5% of the liquidation preference, which may be paid at the
election of the Company in cash or shares of its Common Stock.
The Company may redeem shares of Series B Preferred Stock at a redemption
price equal to 105% of the liquidation preference plus accrued dividends during
the first 30 days after issuance and which redemption price increases to the
greater of (a) 120% of the Redemption Amount or (b) the market price on a
converted basis. Any redemption of the Series B Preferred Stock is subject to
the prior consent of the holders of two-thirds of the outstanding Series A
Preferred Stock.
The Company is obligated to file a registration statement under the
Securities Act for the shares of Common Stock underlying conversion of the
Series B Preferred Stock. The registration statement must be filed no later than
the later of (i) March 5, 1999 or (ii) 30 days after the day this Registration
Statement first becomes effective, and must be declared effective within 90 days
after filing, otherwise the Company would be subject to certain monetary
penalties.
-32-
<PAGE>
SELLING STOCKHOLDERS
The Shares and Warrants offered by this Prospectus may be offered from time
to time by the Selling Stockholders. The Selling Stockholders are comprised of:
(i) persons who own an aggregate of 5,059,851 shares of Common Stock which were
purchased since October 1996 in private placements, (ii) holders of warrants and
options to purchase an aggregate of 443,333 shares of Common Stock at exercise
prices ranging from $1.00 to $7.50 per share and (iii) the Purchaser of the
Series A Preferred Stock and the purchaser of the Warrants in the Preferred
Stock Private Placement. None of the Selling Stockholders has held any position
or office or had any material relationship with the Company or any of its
predecessors or affiliates within three years of the date of this Prospectus,
except for Thomas A. Slamecka, Marcus Rowan, Blake C. Davenport, Richard
Battelle, Lawrence Petersen and Henry J. Rhodes. Mr. Slamecka has been the
Chairman of the Board of the Company since February 1997, and a director of the
Company since October 1996, Mr. Rowan has been a director of the Company since
October 1996, Mr. Davenport has been a director of the Company since December
1997, Messrs. Battelle and Petersen were principals of ESI at the time of its
acquisition by the Company in May 1998 and have continued as officers of ESI,
and Mr. Rhodes was a principal of DDS at the time of its acquisition by the
Company in May 1998 and has continued as an officer of DDS.
The following table sets forth, as of February 23, 1998 and upon completion
of this offering, information with regard to the beneficial ownership of the
Company's Common Stock and Warrants by each of the Selling Stockholders.
The information included below is based upon information provided by the
Selling Stockholders. Because the Selling Stockholders may offer all, some or
none of their Common Stock and Warrants, no definitive estimate as to the number
of shares thereof that will be held by the Selling Stockholders after such
offering can be provided and the following table has been prepared on the
assumption that all shares of Common Stock and Warrants offered under this
Prospectus will be sold.
<TABLE>
<CAPTION>
Amount
Shares Warrants Beneficially
Beneficially Beneficially Owned
Owned Prior Owned Prior Shares to be Warrants to be After
Name(1) to Offering to Offering Offered Offered Offering(2)
------- ----------- ----------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
Stanley I. Aber 12,800 N/A 12,800 N/A 0
Arthur Adams 14,546 N/A 14,546 N/A 0
Alexander Enterprise Holdings Corp. 6,700 N/A 6,700 N/A 0
Saul Amber 38,221 N/A 38,221 N/A 0
Jose Arozamena 6,700 N/A 6,700 N/A 0
Charles S. Aviles, Jr. 250,000 N/A 250,000 N/A 0
David Ballinger 3,637 N/A 3,637 N/A 0
Richard Battelle 11,151 N/A 11,151 N/A 0
John and Debra Blum 10,909 N/A 10,909 N/A 0
Edward A. Borrelli 10,000 N/A 10,000 N/A 0
Jonathan F. Boucher 32,000 N/A 32,000 N/A 0
Charles Brown 3,637 N/A 3,637 N/A 0
Martin Brown and Eleanor Brown 2,546 N/A 2,546 N/A 0
Arthur Buls 9,091 N/A 9,091 N/A 0
Randie Burrell 3,637 N/A 3,637 N/A 0
Thomas Cabe 100,000 N/A 100,000 N/A 0
Cedar Capital 15,000 N/A 15,000 N/A 0
David Chazin 2,728 N/A 2,728 N/A 0
Neal Chazin 1,818 N/A 1,818 N/A 0
John Cho 8,421 N/A 8,421 N/A 0
Violet Clark 1,818 N/A 1,818 N/A 0
Cohig & Associates Inc.(3) 30,000 N/A 30,000 N/A 0
Simon Coley 7,500 N/A 7,500 N/A 0
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
Amount
Shares Warrants Beneficially
Beneficially Beneficially Owned
Owned Prior Owned Prior Shares to be Warrants to be After
Name(1) to Offering to Offering Offered Offered Offering(2)
------- ----------- ----------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
Harvey H. Conger Trust No. 2 128,000 N/A 128,000 N/A 0
Steven Crouch 4,000 N/A 4,000 N/A 0
Amy Davenport 25,000 N/A 25,000 N/A 0
Blake C. Davenport(4) 70,000 N/A 50,000 N/A 20,000
Robert M. Davenport 178,000 N/A 58,000 N/A 120,000
Robert M. Davenport Jr. 25,000 N/A 25,000 N/A 0
Helen Derosis 3,637 N/A 3,637 N/A 0
Henry Eisenson 1,212 N/A 1,212 N/A 0
David Epstein 1,818 N/A 1,818 N/A 0
Michael Erro 1,818 N/A 1,818 N/A 0
Andrew Fackrell 5,000 N/A 5,000 N/A 0
Daniel Faucetta 9,891 N/A 9,891 N/A 0
Louise Jane Felitti 3,637 N/A 3,637 N/A 0
Joseph Ferrano 728 N/A 728 N/A 0
Harry Fields 2,728 N/A 2,728 N/A 0
James Flynn and Julie Flynn 3,637 N/A 3,637 N/A 0
Erwin Fried and Jenny Fried 25,000 N/A 25,000 N/A 0
Jack Friedler and Stefanie 50,000 N/A 50,000 N/A 0
Friedler JTWROS
Harold Geliebter 7,578 N/A 7,578 N/A 0
Paul Ghizzone and Julia Ghizzone 7,273 N/A 7,273 N/A 0
J. Gilliland 3,637 N/A 3,637 N/A 0
Malcolm Goekler 7,273 N/A 7,273 N/A 0
Bar-Giora Goldberg 1,212 N/A 1,212 N/A 0
Jay Grunfeld 4,210 N/A 4,210 N/A 0
Arnold Hagler 27,273 N/A 27,273 N/A 0
Andrew M. Hall 10,000 N/A 10,000 N/A 0
Barry A. Hochstadt 250,000 N/A 250,000 N/A 0
David W. Hood and Ellen P. 10,000 N/A 10,000 N/A 0
Hood JTWROS
Sam W. Hunsaker 25,000 N/A 25,000 N/A 0
Dean Hyde and Doris Hyde 2,546 N/A 2,546 N/A 0
Jubilee Investors LLC(5) 3,409,110 N/A 3,409,110 N/A 0
Frederic Kakis 10,909 N/A 10,909 N/A 0
Eugene Preston Keogh 5,000 N/A 5,000 N/A 0
Henry Kim 4,210 N/A 4,210 N/A 0
Edith Kornberg 2,909 N/A 2,909 N/A 0
H. Ward Lay 100,000 N/A 100,000 N/A 0
Lay Trust 100,000 N/A 100,000 N/A 0
William Lenartz 1,212 N/A 1,212 N/A 0
John Lindeman 25,000 N/A 25,000 N/A 0
Liviakis Financial 1,192,371 N/A 1,192,371 N/A 0
Communications, Inc.
Robert Luedke 27,273 N/A 27,273 N/A 0
Lee Machado 1,818 N/A 1,818 N/A 0
Donald MacKay 33,664 N/A 33,664 N/A 0
Maloney & Fox, LLC 10,000 N/A 10,000 N/A 0
Arnold Mandelstam and 31,315 N/A 31,315 N/A 0
Susan Mandelstam
Mary McNichols 9,454 N/A 9,454 N/A 0
Metropolis Equity Fund LP 100,000 N/A 100,000 N/A 0
James B. Metzger 86,805 N/A 86,805 N/A 0
Thomas Meyerhoeffer 4,500 N/A 4,500 N/A 0
David Miller 10,000 N/A 10,000 N/A 0
</TABLE>
-34-
<PAGE>
<TABLE>
<CAPTION>
Amount
Shares Warrants Beneficially
Beneficially Beneficially Owned
Owned Prior Owned Prior Shares to be Warrants to be After
Name(1) to Offering to Offering Offered Offered Offering(2)
------- ----------- ----------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
Richard O'Connell 11,700 N/A 11,700 N/A 0
Tamar Neuman 15,000 N/A 15,000 N/A 0
Alan S.J. Pahng 21,052 N/A 21,052 N/A 0
Mary Parish 1,818 N/A 1,818 N/A 0
J. Stuart Parsons 12,475 N/A 12,475 N/A 0
J. Stuart Parsons, Trustee for 112,277 N/A 112,277 N/A 0
Parsons Family Trust
Lawrence Petersen 15,031 N/A 15,031 N/A 0
Matthew D. Pieniazek 25,000 N/A 25,000 N/A 0
J. Bucky Polk 10,000 N/A 10,000 N/A 0
Potter Wear Polk 5,000 N/A 5,000 N/A 0
Robert B. Prag 397,457 N/A 397,457 N/A 0
George Reynolds 7,273 N/A 7,273 N/A 0
Henry J. Rhodes 250,000 N/A 250,000 N/A 0
Daniel Roses 3,637 N/A 3,637 N/A 0
Round Hill Holdings 100,000 N/A 100,000 N/A 0
Marcus Rowan(6) 346,760 N/A 346,760 N/A 0
Marcus Rowan Keogh Acct. 10,240 N/A 10,240 N/A 0
Charles Salik 32,147 N/A 32,147 N/A 0
M. Morad Sarnii 20,222 N/A 20,222 N/A 0
Gurmit Sandhu 39,128 N/A 39,128 N/A 0
Samuel Schick and Freida Schick 909 N/A 909 N/A 0
H. Alan Schnall 26,315 N/A 26,315 N/A 0
Manuel Selvin 6,182 N/A 6,182 N/A 0
Benjamin Siegal 16,000 N/A 16,000 N/A 0
Herrick Siegel 1,818 N/A 1,818 N/A 0
Merideth Siegel 1,818 N/A 1,818 N/A 0
Michael Siegel and Marsha Siegel 5,454 N/A 5,454 N/A 0
Richard Silvergleid 138,157 N/A 138,157 N/A 0
Thomas A. Slamecka 834,550 N/A 260,000 N/A 574,550
Mark Smith 10,000 N/A 10,000 N/A 0
Glenn Solomon 50,000 N/A 50,000 N/A 0
Virgil Swanner 1,818 N/A 1,818 N/A 0
Eleanor Tweed 13,130 N/A 13,130 N/A 0
Eva Waisburd 1,818 N/A 1,818 N/A 0
Wall Street Consultants(7) 42,035 N/A 42,035 N/A 0
Stephen Weiss and Wendy Weiss 363 N/A 363 N/A 0
Audrey Weiss 1,454 N/A 1,454 N/A 0
West End Capital LLC(8) 50,000 50,000 50,000 50,000 0
Jules Whitehill 40,001 N/A 40,001 N/A 0
Joan Wilbanks and Calvin Wilbanks 1,818 N/A 1,818 N/A 0
Roy Willetts 4,000 N/A 4,000 N/A 0
Addison Wilson III, Trustee for 199,978 N/A 199,978 N/A 0
Richard A. Gray Jr. Childrens
Trust
Tse Wo Wong and Bianca T.T. Wu TIC 99,491 N/A 99,491 N/A 0
</TABLE>
- ----------
(1) Unless otherwise indicated in the footnotes to this table, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property
laws where applicable.
(2) Assumes the sale of all shares offered hereby.
-35-
<PAGE>
(3) Includes 30,000 shares under presently exercisable warrants.
(4) Includes 50,000 shares under presently exercisable options.
(5) Represents an estimate of one and one-half times the number of shares into
which the 3,000 shares of Series A Preferred Stock held by Jubilee
Investors LLC may be converted.
(6) Includes 300,000 shares under presently exercisable options.
(7) Includes 13,333 shares under presently exercisable options.
(8) Includes the 50,000 shares underlying the warrants.
Under the terms of the Registration Agreement for the Preferred Stock
Private Placement, the Company is obligated to file the Registration Statement
and to use its best efforts to cause the Registration Statement to become
effective. Pursuant to the Registration Agreement, the failure to have filed
this Registration Statement by June 5, 1998 caused the dividend rate for the
Series A Preferred Stock to be increased from 5% of the liquidation preference
for such Stock to 12% of the liquidation preference. The dividend rate was
increased to 12% on June 5, 1998 due to the Company's failure to file the
Registration Statement covering the Common Stock underlying the Series A
Preferred Stock within 30 days of the initial closing. The dividend rate was
further increased to 18% as a result of the Registration Statement not being
declared effective within 120 days of the initial closing, and will remain at
such rate until the effective date of the Registration Statement, when the
dividend rate would return to 5%. Most of the other Selling Stockholders were
granted "piggyback" registration rights at the time of their purchase of shares
of Common Stock or the issuance of warrants.
-36-
<PAGE>
PLAN OF DISTRIBUTION
The Selling Stockholders have advised the Company that, prior to the date
of this Prospectus, they have not made any agreement or arrangement with any
underwriters, brokers or dealers regarding the distribution and resale of the
Shares or Warrants. If the Company is notified by a Selling Stockholder that any
material arrangement has been entered into with an underwriter for the sale of
the Shares or Warrants, a supplemental prospectus will be filed to disclose such
of the following information as the Company believes appropriate: (i) the name
of the participating underwriter; (ii) the number of the Shares or Warrants
involved; (iii) the price at which such Shares or Warrants are sold, the
commissions paid or discounts or concessions allowed to such underwriter; and
(iv) other facts material to the transaction.
The Company expects that the Selling Stockholders will sell their Shares
and Warrants covered by this Prospectus through customary brokerage channels,
either through broker-dealers acting as agents or brokers for the seller, or
through broker-dealers acting as principals, who may then resell the Shares or
Warrants in the over-the-counter market, or at private sale or otherwise, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The Selling Stockholders may
effect such transactions by selling the Shares or Warrants to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
concessions or commissions from the Selling Stockholders and/or the purchasers
of the Shares or Warrants for whom they may act as agent (which compensation may
be in excess of customary commissions). The Selling Stockholders and any
broker-dealers that participate with the Selling Stockholders in the
distribution of Shares or Warrants may be deemed to be underwriters and
commissions received by them and any profit on the resale of Shares or Warrants
positioned by them might be deemed to be underwriting discounts and commissions
under the Securities Act. There can be no assurance that any of the Selling
Stockholders will sell any or all of the Shares or Warrants offered by them
hereunder.
Sales of the Shares on the OTC Electronic Bulletin Board or other trading
system may be by means of one or more of the following: (i) a block trade in
which a broker or dealer will attempt to sell the Shares and Warrants as agent,
but may position and resell a portion of the block as principal to facilitate
the transaction; (ii) purchases by a dealer as principal and resale by such
dealer for its account pursuant to this Prospectus; and (iii) ordinary brokerage
transactions and transactions in which the broker solicits purchasers. In
effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate.
The Selling Stockholders are not restricted as to the price or prices at
which they may sell their Shares. Sales of such Shares at less than market
prices may depress the market price of the Company's Common Stock. Moreover, the
Selling Stockholders are not restricted as to the number of Shares or Warrants
which may be sold at any one time.
Pursuant to the Registration Agreement for the Preferred Stock Private
Placement and other agreements by the Company granting certain "piggy-back"
registration rights, the Company will pay all of the expenses incident to the
offer and sale of the Shares and Warrants to the public by the Selling
Stockholders other than commissions and discounts of underwriters, dealers or
agents. The Company and the Selling Stockholders have agreed to indemnify each
other and certain persons, including broker-dealers or others, against certain
liabilities in connection with the offering of the Shares or Warrants, including
liabilities arising under the Securities Act.
The Company has advised the Selling Stockholders that the anti-manipulative
rules under the Exchange Act, including Regulation M, may apply to sales in the
market of the Shares and Warrants offered hereby and has furnished the Selling
Stockholders with a copy of such rules. The Company has also advised the Selling
Stockholders of the requirement for the delivery of this Prospectus in
connection with resales of the Shares and Warrants offered hereby.
-37-
<PAGE>
LEGAL MATTERS
The validity of the Common Stock and Warrants being offered hereby will be
passed upon for the Company by Thelen Reid & Priest LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company at July 31, 1998 and
1997, and for each of the three years in the period ended July 31, 1998,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
(which contains an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 13 to the consolidated financial statements) appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
-38-
<PAGE>
AMERICAN ELECTROMEDICS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors....................................................................... F-2
Consolidated Balance Sheets as of July 31, 1998 and July 31, 1997.................................... F-3
Consolidated Statements of Operations for the years ended
July 31, 1998, July 31, 1997 and July 27, 1996.................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the
years ended July 31, 1998, July 31, 1997 and
July 27, 1996................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended
July 31, 1998, July 31, 1997 and July 27, 1996.................................................. F-6
Notes to Consolidated Financial Statements........................................................... F-7
Unaudited Consolidated Balance Sheet as of
October 31, 1998................................................................................ F-18
Unaudited Consolidated Statements of Operations for the
three months ended October 31, 1998 and 1997.................................................... F-19
Unaudited Consolidated Statements of Cash Flows for the
three months ended October 31, 1998 and 1997.................................................... F-20
Notes to Unaudited Consolidated Financial Statements................................................. F-21
</TABLE>
F-1
<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
F-2
<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 $ 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.
F-3
<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.
F-4
<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
-------------------- -----------------------
Book Par
Shares Value Shares Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Balance at July 29, 1995 ....................... -- $ -- 2,343 $ 234
Investment in affiliate ........................ -- -- 100 10
Exercise of stock options ...................... -- -- 11 1
Net income ..................................... -- -- -- --
-------- -------- -------- --------
Balance at July 27, 1996 ....................... -- -- 2,454 245
Sale of capital stock .......................... -- -- 48 5
Exercise of stock options, net ................. -- -- 51 5
Net loss ....................................... -- -- -- --
-------- -------- -------- --------
Balance at July 31, 1997 ....................... -- -- 2,553 255
Conversion of convertible debentures, net ...... -- -- 720 72
Private placement of common stock, net ......... -- -- 1,050 105
Issuance of common stock for investment in
affiliates, net ................................ -- -- 210 21
Issuance of common stock for acquisitions, net . -- -- 1,350 135
Stock and warrants issued for services ......... -- -- 1,000 100
Exercise of stock options ...................... -- -- 175 17
Sale of convertible preferred stock and
warrants ..................................... 3 2,387 -- --
Dividend on convertible preferred stock ........ -- -- -- --
Conversion feature on convertible preferred
stock ........................................ -- (1,000) -- --
Dividend on beneficial conversion feature ...... -- 1,000 -- --
Deferred compensation related to common
stock options ................................ -- -- -- --
Amortization of deferred compensation .......... -- -- -- --
Translation adjustment ......................... -- -- -- --
Net loss ....................................... -- -- -- --
-------- -------- -------- --------
Balance at July 31, 1998 ..................... 3 $ 2,387 7,058 $ 705
======== ======== ======== ========
<CAPTION>
Additional Cumulative Total
Paid-in Retained Translation Deferred Stockholders'
Capital Deficit Adjustment Compensation Equity
------- ------- ---------- ------------ ------
<S> <C> <C> <C> <C> <C>
Balance at July 29, 1995 ....................... $ 2,484 $ (1,522) -- -- $ 1,196
Investment in affiliate ........................ 290 -- -- -- 300
Exercise of stock options ...................... 9 -- -- -- 10
Net income ..................................... -- 442 -- -- 442
-------- -------- -------- -------- --------
Balance at July 27, 1996 ....................... 2,783 (1,080) -- -- 1,948
Sale of capital stock .......................... 139 -- -- 144
Exercise of stock options, net ................. (3) -- -- -- 2
Net loss ....................................... -- (926) -- -- (926)
-------- -------- -------- -------- --------
Balance at July 31, 1997 ....................... 2,919 (2,006) -- -- 1,168
Conversion of convertible debentures, net ...... 625 -- -- -- 697
Private placement of common stock, net ......... 923 -- -- -- 1,028
Issuance of common stock for investment in
affiliates, net ................................ 159 -- -- -- 180
Issuance of common stock for acquisitions, net . 5,490 -- -- -- 5,625
Stock and warrants issued for services ......... 1,480 -- -- $ (1,580) --
Exercise of stock options ...................... 158 -- -- -- 175
Sale of convertible preferred stock and
warrants ..................................... 255 -- -- -- 2,642
Dividend on convertible preferred stock ........ (72) -- -- -- (72)
Conversion feature on convertible preferred
stock ........................................ 1,000 -- -- -- --
Dividend on beneficial conversion feature ...... (1,000) -- -- -- --
Deferred compensation related to common
stock options ................................ 706 -- -- (706) --
Amortization of deferred compensation .......... -- -- -- 992 992
Translation adjustment ......................... -- -- $ (249) -- (249)
Net loss ....................................... -- (3,674) -- -- (3,674)
-------- -------- -------- -------- --------
Balance at July 31, 1998 ..................... $ 12,643 $ (5,680) $ (249) $ (1,294) $ 8,512
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------
July 31, 1998 July 31, 1997 July 27, 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.
F-6
<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 ACompany@) 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.
F-7
<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.
F-8
<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
F-9
<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
F-10
<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:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
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-
=========== ===========
</TABLE>
F-11
<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 $(1,249,000) (34%) $(315,000) (34%) $159,000 34%
State Income Taxes,
Net of Federal Tax
Benefit -- -- -- -- 17,000 4
Change in Valuation
Reserve 656,000 18 313,000 34 (122,000) (26)
Goodwill Amortization 57,000 2 13,000 1 4,000 1
Deferred
Compensation 336,000 9 -- -- -- --
Other 200,000 5 (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
F-12
<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.
F-13
<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:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Pro forma net income (loss) $(5,497,682) $(1,238,759) $429,134
Pro forma net income (loss per share) $ (1.17) $ (0.49) $ 0.17
</TABLE>
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>
F-14
<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.
F-15
<PAGE>
Transfers to affiliates are made at prices above the Company's cost and include
charges for freight and handling.
<TABLE>
<CAPTION>
Domestic German
Operations Operations Elimination Consolidated
----------------------------------------------------------------------
Year ended July 31, 1998: (Thousands)
<S> <C> <C> <C> <C>
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
</TABLE>
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.
F-16
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
October 31,
1998
-----------
(Thousands)
Assets
Current Assets:
Cash and cash equivalents ....................................... $ 181
Accounts receivable ............................................. 1,454
Inventories ..................................................... 2,346
Prepaid and other current assets ................................ 342
--------
Total current assets ................................... 4,323
Property and equipment: ......................................... 838
Accumulated depreciation ........................................ (451)
--------
387
Goodwill ........................................................ 4,240
Patents ......................................................... 2,984
Other ........................................................... 27
--------
$ 11,961
========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable ................................................ $ 1,877
Debt ............................................................ 1,791
Accrued liabilities ............................................. 538
Dividends payable ............................................... 189
--------
Total current liabilities .................................... 4,395
Stockholders' Equity:
Series A Convertible Preferred stock, $.01 par value;
Authorized - 1,000,000 shares; Outstanding
- 3,000 shares ................................................ 2,387
Common stock, $.10 par value; Authorized - 20,000,000
shares; Outstanding - 7,071,136 shares ........................ 707
Additional paid-in capital ...................................... 12,460
Retained deficit ................................................ (6,966)
Accumulated other comprehensive loss ............................ (161)
--------
8,427
Deferred compensation ........................................... (861)
--------
Total stockholder's equity ............................. 7,566
--------
$ 11,961
========
See notes to unaudited consolidated financial statements.
F-17
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
October 31, October 31,
1998 1997
----------- -----------
(Thousands, except per share amounts)
<S> <C> <C>
Net sales ........................................ $ 2,150 $ 1,830
Cost of goods sold ............................... 1,263 1,058
----------- -----------
Gross profit ................................... 887 772
Selling, general and administrative .............. 1,922 687
Research and development ......................... 128 --
----------- -----------
Total operating expenses ....................... 2,050 687
----------- -----------
Operating income (loss) .......................... (1,163) 85
Other income (expenses):
Interest, net .................................. (17) (78)
Minority interest in affiliate ................. -- (85)
Other .......................................... (106) 58
----------- -----------
(123) (105)
----------- -----------
Net loss ......................................... $ (1,286) $ (20)
=========== ===========
Net loss attributable to common stockholders* .... $ (1,403) $ (20)
=========== ===========
Weighted average number of common and
common equivalent shares outstanding ........... 7,064,636 2,553,136
=========== ===========
Net loss per share, basic and diluted .......... $ (.20) $ (.01)
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
* The quarter ended October 31, 1998 includes the impact of $117,000 of
dividends on Preferred Stock.
F-18
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
October 31, 1998 October 31, 1997
---------------- ----------------
(Thousands)
<S> <C> <C>
Operating activities:
Net loss ...................................................... $(1,286) $ (20)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................................. 132 49
Undistributed earnings of affiliate ........................... 432 --
Minority interest in affiliate ................................ -- 85
Other ......................................................... -- 62
Changes in operating assets and liabilities:
Accounts receivable .................................... (206) 187
Inventories, prepaid and other current assets .......... (402) (88)
Accounts payable and accrued liabilities ............... 532 (385)
------- -------
Net cash used in operating activities ......................... (798) (110)
Investing activities:
Purchase of property and equipment, net ....................... (36) (13)
------- -------
Net cash used in investing activities ......................... (36) (13)
Financing activities:
Principal payments on long-term debt .......................... -- (62)
Net proceeds from bank debt ................................... 682 --
Issuance of common stock, net ................................. (79) --
Proceeds from exercise of stock options ....................... 15 --
------- -------
Net cash provided by (used in) financing activities ........... 618 (62)
------- -------
Effect of exchange rate changes on cash and cash equivalents .. 1 3
------- -------
Decrease in cash and cash equivalents ......................... (215) (182)
Cash and cash equivalents, beginning of period ................ 396 471
------- -------
Cash and cash equivalents, end of period ...................... $ 181 $ 289
======= =======
</TABLE>
See notes to unaudited consolidated financial statements.
F-19
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
Operating results for the three month period ended October 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
July 31, 1999. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB for the
year ended July 31, 1998.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with Statement of Financial Standards
No. 52, Foreign Currency Translation. All balance sheet amounts have been
translated using the exchange rates in effect at the balance sheet date.
Statement of Operations amounts have been translated using average exchange
rates. The gains and losses resulting from the changes in exchange rates from
the date of acquisition of Rosch GmbH to October 31, 1998 have been reported
separately as a component of stockholders equity.
The aggregate transaction gains and losses are insignificant.
New Accounting Pronouncements
Effective August 1, the Company adopted Statement of Financial Accounting
Standard No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130
establishes new rules for the reporting and display of comprehensive income or
loss and its components, however, the adoption of this statement had no impact
on the Company's net income or shareholders' equity. For the three months ended
October 31, 1998, the Company's only item of other comprehensive income was the
foreign currency translation adjustment recognized in consolidation of its
wholly-owned German subsidiary, Rosch GmbH. SFAS 130 requires such adjustments,
which prior to adoption were reported separately in shareholder's equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of SFAS 130.
The foreign currency translation adjustment and comprehensive loss for the
three months ended October 31, 1998 was $88,000 and ($1,198,000), respectively.
As of October 31, 1998, the cumulative translation adjustment and accumulated
other comprehensive loss was ($161,000).
2. DEBT
In September 1998, the Company entered into a $505,000 line of credit with
Guardian Financial Services, Inc. (owned by an officer of the Company). This
line of credit bears an interest rate of 10% per annum and expires on February
28, 1999. As of October 31, 1998, $75,000 was outstanding under this line of
credit, which is collateralized essentially by all of the assets of the Company
including an assignment of patents and trademarks. Subsequent to October 31,
1998, the Company borrowed an additional $225,000 under this line of credit.
F-20
<PAGE>
In September 1998, the Company also entered into a Term Loan with an
unrelated third party in an amount of $600,000 due on demand. Interest is 10%
per annum, and as of October 31, 1998, there was $600,000 outstanding under this
loan, which is collateralized by essentially all of the assets of the Company.
3. 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 designated 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 for the quarter ended October 31, 1997 assume the acquisitions of DDS
and ESI occurred as of August 1, 1997.
Net sales........................................... $2,228,000
Net loss............................................ (185,000)
Loss per share; basic and diluted................... (.05)
F-21
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS. THIS
PROSPECTS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THESE SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. EXCEPT WHERE OTHERWISE INDICATED, THIS PROSPECTUS SPEAKS AS OF THE
EFFECTIVE DATE OF THE REGISTRATION STATEMENT. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
----------
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY ........................................................ 3
THE COMPANY ............................................................... 3
THE OFFERING .............................................................. 4
SUMMARY FINANCIAL AND OPERATING INFORMATION ............................... 5
RISK FACTORS .............................................................. 6
USE OF PROCEEDS ........................................................... 12
DIVIDEND POLICY ........................................................... 12
MARKET FOR THE COMPANY'S
COMMON STOCK AND RELATED STOCKHOLDER MATTERS.......................... 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS ........................................................... 13
BUSINESS .................................................................. 16
LEGAL PROCEEDINGS ......................................................... 23
MANAGEMENT ................................................................ 25
EXECUTIVE COMPENSATION .................................................... 27
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................ 29
PRINCIPAL STOCKHOLDERS .................................................... 30
DESCRIPTION OF SECURITIES ................................................. 31
SELLING STOCKHOLDERS ...................................................... 33
PLAN OF DISTRIBUTION ...................................................... 37
LEGAL MATTERS ............................................................. 38
EXPERTS ................................................................... 38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ................................ F1
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8,912,294 SHARES
COMMON STOCK
AND
50,000 COMMON STOCK
PURCHASE WARRANTS
AMERICAN
ELECTROMEDICS CORP.
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PROSPECTUS
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February __, 1999
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses of this offering in connection with the issuance and
distribution of the securities being registered, all of which are to be paid by
the Registrant, are as follows:
Registration Fee ...................................... $ 6,845.88
-------------
Legal Fees and Expenses ............................... 35,000.00
Accounting Fees and Expenses .......................... 20,000.00
Printing .............................................. 2,000.00
Miscellaneous Expenses ................................ 6,154.12
-------------
Total ........................................ $ 70,000.00
=============
Item 27. Exhibits.
Exhibit
Number Description of Exhibit
- -------------------------------------
3.1.1 Certificate of Incorporation of the Company (filed as
Exhibit 3(a)(1) to Registration No. 2-71775, and incorporated
herein by reference).
3.1.2 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State of the State of
Delaware on January 27, 1987 (filed as Exhibit 3(a)(2) to the
Company's Form 10-Q for the fiscal quarter ended January 31,
1987, and incorporated herein by reference).
3.1.3 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State of the State of
Delaware on October 9, 1990 (filed as Exhibit 3(a)(3) to the
Company's Form 10-K for the fiscal year ended July 28, 1990, and
incorporated herein by reference).
3.1.4 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State of Delaware on November
7, 1996 (filed as Exhibit 3.1.4 to the Company's Form 10-K for
the fiscal year ended July 31, 1997, and incorporated herein by
reference).
3.1.5 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State on May 4, 1998 (filed
as Exhibit 2.1 to the Company's Form 8-K for an event of May 5,
1998 (the "May 1998 Form 8-K"), and incorporated herein by
reference).
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).
II-1
<PAGE>
3.1.7 Certificate of Designation for Series B 5% Convertible Preferred
Stock, filed with the Secretary of State of Delaware on February
3, 1999 (filed as Exhibit 3.1 to the Company's Form 8-K for an
event of February 3, 1999 (the "February 1999 Form 8-K"), and
incorporated herein by reference).
3.2 By-Laws of the Company (filed as Exhibit 3(b) to Registration
No. 2-71775, and incorporated herein by reference).
3.3 Amendments to the By-Laws of the Company (filed as Exhibit 3(c)
to the Company's 1990 Form 10-K and incorporated herein by
reference).
4.1 Form of Common Stock Certificate (filed as Exhibit 4 to
Registration No. 2071775 and incorporated herein by reference).
5.* Opinion of Thelen, Reid & Priest LLP.
10.1** Commercial Lease, dated March 23, 1998, by and between Mareld
Company, Inc. and the Company.
10.2.1 1983 Incentive Stock Option Plan (filed as Exhibit A to the
Company's Information Statement, and incorporated herein by
reference).
10.2.2 Form of 1983 Incentive Stock Option Certificate (filed as Exhibit
(10)-12 to the Company's Form 10-K for the fiscal year ended July
28, 1984 ["1984 Form 10-K"] and incorporated herein by
reference).
10.3.1 1983 Non-Qualified Stock Option Plan (filed as Exhibit B to the
Company's 1983 Information Statement, and incorporated herein by
reference).
10.3.2 Form of 1983 Non-Qualified Stock Option Certificate (filed as
Exhibit (10)-13 to the Company's 1984 Form 10-K, and incorporated
herein by reference).
10.4 1996 Stock Option Plan (filed as Exhibit A to the Company's 1996
Proxy Statement, and incorporated herein by reference).
10.5 Form of Employment Agreement, dated as of July, 31, 1995, between
the Company and Noel A. Wren (filed as Exhibit 10.5 to the
Company's Form 10-KSB for the fiscal year ended July 29, 1995
(the "1995 Form 10-KSB"), and incorporated herein by reference).
10.6 Consulting Agreement, dated as of March 24, 1995, between the
Company and Alan Gelband Company, Inc. (filed as Exhibit 10.6 to
the Company's 1995 Form 10-KSB, and incorporated herein by
reference).
10.7 Stock Purchase Agreement, dated January 11, 1996, between the
Company and Andy Rosch (filed as Exhibit 1 to the Company's Form
8-K for an event of January 11, 1996, and incorporated herein by
reference).
10.8.1 Loan Agreement, dated October 4, 1996, between the Company and
Citizens Bank New Hampshire (the "Bank") (filed as Exhibit 10.9.1
to the Company's Form 10-KSB for the fiscal year ended July 27,
1996 (the "1996 Form 10-KSB") and incorporated herein by
reference).
II-2
<PAGE>
10.8.2 Security Agreement, dated October 4, 1996, between the Company
and the Bank (filed as Exhibit 10.9.2 to the Company's 1996 form
10-KSB, and incorporated herein by reference).
10.8.3 Revolving Line of Credit Promissory Note, dated October 4, 1996,
from the Company to the Bank (filed as Exhibit 10.9.3 to the
Company's 1996 Form 10-KSB, and incorporated herein by
reference).
10.8.4 Term Promissory Note, dated October 4, 1996, from the Company to
the Bank (filed as Exhibit 10.9.4 to the Company's 1996 Form
10-KSB, and incorporated herein by reference).
10.9 Form of 14% Convertible Subordinated Debenture, due October 31,
1999 (filed as Exhibit 4 to the Company's Form 8-K for an event
of October 25, 1996, and incorporated herein by reference).
10.10** Amended Employment Agreement, dated as of January 1, 1998,
between the Company and Thomas A. Slamecka.
10.11** Employment Agreement, dated January 1, 1998, between the Company
and Michael T. Pieniazek.
10.12 Forbearance and Workout Agreement, dated October 28, 1997,
between Registrant and the Bank (filed as Exhibit 10.12 to
Registrant's Form 10-K for the fiscal year ended July 31, 1997
("1997 Form 10-K") and incorporated herein by reference).
10.13 Standstill Agreement, dated October 1, 1997, between Registrant
and Alan Gelband (filed as Exhibit 10.13 to the Company's 1997
Form 10-K and incorporated herein by reference).
10.14** Contract of Employment between Rosch GmbH Medizintechnik and Andy
Rosch effective January 1, 1996.
10.15 Agreement and Plan of Merger, dated as of April 30, 1998, among
the Company, DDS Acquisition Corporation, Dynamic Dental Systems,
Inc. ("DDS") and others (without Exhibits or Schedules thereto)
(filed as Exhibit 2.3 to the May 1998 Form 8-K and incorporated
herein by reference).
10.16 Certificate of Merger between DDS Acquisition Corporation and
DDS, filed with the Secretary of State of Delaware on May 5, 1998
(filed as Exhibit 2.4 to the May 1998 Form 8-K and incorporated
herein by reference).
10.17 Agreement and Plan of Merger, dated as of March 27, 1998, among
the Company, ESI Acquisition Corporation and Equidyne Systems
Inc. ("ESI") (incorporated by reference to Exhibit 2 to the
Company's Form 8-K for an event of March 27, 1998).
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).
II-3
<PAGE>
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).
10.26** Promissory Note, dated September 19, 1998, between the Company
and Guardian Financial Services, Inc.
10.27** Promissory Note, dated September 23, 1998, between the Company
and Sovereign Partners L.P.
10.28.1 Form of Securities Purchase Agreement for the sale of Series B
Preferred Stock (without exhibits) (filed as Exhibit 10.1 to the
February 1999 Form 8-K and incorporated herein by reference).
10.28.2 Form of Warrant Agreement (filed as Exhibit 10.2 to the February
1999 Form 8-K and incorporated herein by reference).
10.28.3 Form of Registration Rights Agreement (filed as Exhibit 10.3 to
the February 1999 Form 8-K and incorporated herein by reference).
10.29** Distribution Agreement, dated as of January 1, 1999, between ESI
and Precision Medmark, Inc.
21.** List of subsidiaries.
23.1* Consent of Ernst & Young LLP
23.2* Consent of Thelen Reid & Priest LLP (included as part of Exhibit
5).
24.** Power of Attorney.
- ----------
* Filed herewith.
** Previously filed.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Amherst, New Hampshire, on the 25th day of February, 1999.
AMERICAN ELECTROMEDICS CORP.
By: /s/ Michael T. Pieniazek
----------------------------------
Michael T. Pieniazek
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board
- -----------------------------------
Thomas A. Slamecka
/s/Michael T. Pieniazek President and Chief February 25, 1999
- ------------------------------------ Financial Officer
Michael T. Pieniazek
* Director
- -----------------------------------
Blake C. Davenport
* Director
- -----------------------------------
Andy Rosch
* Director
- -----------------------------------
Marcus R. Rowan
*By: /s/Michael T. Pieniazek Attorney-in-fact for February 25, 1999
------------------------------- each of the persons
Michael T. Pieniazek indicated by an asterisk
</TABLE>
II-5
<PAGE>
Exhibit Index
Exhibit
5 Opinion of Thelen Reid & Priest LLP
23.1 Consent of Ernst & Young LLP
Exhibit 5
Thelen Reid & Priest LLP
40 West 57th Street
New York, New York 10019
New York, New York
February 25, 1999
American Electromedics Corp.
13 Columbia Drive, Suite 5
Amherst, New Hampshire 03031
Gentlemen:
We have acted as counsel to American Electromedics Corp., a Delaware
corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form SB-2 (the "Registration Statement") relating to
the registration of (A) 5,059,851 shares of the Company's Common Stock, $.10 par
value per share (the "Common Stock"), which have been issued in various private
placements since October 1996 (the "Private Placements"), (B) 443,333 shares of
Common Stock issuable upon exercise of presently exercisable warrants and
options (the "Options and Warrants") including those issuable under the West End
Warrants (as defined below), (C) 3,409,110 shares of Common Stock issuable upon
conversion of the Company's Convertible Preferred Stock, Series A, par value
$.01 per share (the "Series A Preferred Stock"), and (D) 50,000 Common Stock
Purchase Warrants issued to West End Capital LLC in connection with the issuance
of the Series A Preferred Stock (the "West End Warrants").
This opinion is being rendered in connection with the filing by the Company
of the Registration Statement.
For purposes of this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement, including the amendments thereto; (ii) the Certificate of
Incorporation and By-Laws of the Company, as in effect on the date hereof; (iii)
the Certificate of Designation of the Series A Preferred Stock; (iv) agreements
and documents relating to the placement of the Series A Preferred Stock; (v) the
option and warrant agreements relating to the Options and Warrants; (vi)
agreements and documents relating to the Private Placements; (vii) the
resolutions adopted by the Board of Directors of the Company relating to each of
the foregoing and (viii) such other documents, certificates or other records as
we have deemed necessary or appropriate.
Based upon the foregoing, and subject to the qualifications hereinafter
expressed, we are of the opinion that:
(1) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
<PAGE>
(2) The shares of Common Stock included in the Registration Statement
which are presently issued and outstanding were duly authorized,
validly issued, and are fully paid and non-assessable.
(3) The shares of Common Stock included in the Registration Statement to
be issued upon the conversion of the Series A Preferred Stock will be
duly authorized and validly issued, and fully paid and non-assessable
when the Series A Preferred Stock is duly converted in accordance with
the Certificate of Designation of the Series A Preferred Stock.
(4) The shares of Common Stock included in the Registration Statement to
be issued upon the exercise of the Options and Warrants will be duly
authorized and validly issued, and fully paid and non-assessable when
the Options and Warrants are duly exercised and the exercise price is
paid for the shares of Common Stock underlying such options and
warrants in accordance with the terms of the respective option and
warrant agreements.
(5) The West End Warrants were duly authorized and validly issued.
We are members of the Bar of the State of New York and do not hold
ourselves out as experts concerning, or qualified to render opinions with
respect to, any laws other than the laws of the State of New York, the federal
laws of the United States and the General Corporation Law of the State of
Delaware.
We hereby consent to the reference to this firm under the caption "Legal
Matters" in the Prospectus included in the Registration Statement and to the
filing of this opinion with the Securities and Exchange Commission as Exhibit 5
to the Registration Statement.
Very truly yours,
/s/Thelen Reid & Priest LLP
THELEN REID & PRIEST LLP
CONSENT INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated December 21, 1998 in Amendment No. 4 to the Registration
Statement (Form SB-2) and the related Prospectus of American Electromedics Corp.
for the registration of 8,912,294 shares of common stock and 50,000 of its
common stock purchase warrants.
/s/Ernst & Young LLP
Manchester, New Hampshire
February 24, 1999
