Filed pursuant to Rule 424(b)(3)
Registration No. 333-58937
PROSPECTUS
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 March 1, 1999, the closing bid and asked prices were
$1.50 and $1.75 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 FOR THE COMPANY'S
COMMON STOCK AND RELATED STOCKHOLDER MATTERS."
-------------------
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 6 THROUGH 12 HEREOF.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is March 2, 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.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by
reference to the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in
this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Investors should carefully consider
the information set forth in "Risk Factors." Certain of the
information contained in this summary and elsewhere in this
Prospectus, including information with regard to the Company's
strategy for expanding operations and market share and related
financing requirements are forward looking statements. For a
discussion of important factors that could affect such matters,
see "Risk Factors."
In November 1996, the Company effected a one-for-five
reverse split of its Common Stock. All share and per share
information in this Prospectus is on a post-split basis.
THE COMPANY
The Company is 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 in 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 in April 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 used 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 is
seeking 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.
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<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.
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<PAGE>
SUMMARY FINANCIAL AND OPERATING INFORMATION
The summary financial information set forth below is derived
from and should be read in conjunction with the financial
statements, including the notes thereto, appearing elsewhere in
this Prospectus. All numbers are in thousands, except for share
and per share amounts.
<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
provision for
income taxes . . (3,674) (926) 467 184 61
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
common shares . . 4,687,707 2,510,296 2,493,854 2,238,483 1,833,666
</TABLE>
THREE MONTHS ENDED
----------------------
SUMMARY OF OPERATIONS 10/31/98 10/31/97
--------------------------------------------------------------
Net sales . . . . . . . . . . . . . $2,150 $1,830
Loss before provision for income
taxes and extraordinary items . . (1,286) (20)
Net loss . . . . . . . . . . . . . (1,286) (20)
Net loss per common share:
Basic . . . . . . . . . . . . . . (.20) (.01)
Diluted . . . . . . . . . . . . . (.20) (.01)
Weighted average common shares . . 7,064,636 2,553,136
---------------------------------------------------------------
-----------------------------------------------------------------
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
-----------------------------------------------------------------
Total assets . . . $11,961 $11,458 $3,060 $2,771 $1,513
Working capital (72) 793 1,060 906 915
(deficit) . . . .
Long-term debt . . -0- -0- 1,100 94 0
Stockholders'
equity . . . . . 7,566 8,512 1,168 1,948 1,196
----------------------------------------------------------------
-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
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<PAGE>
the FDA believes the Company is not in compliance with applicable
requirements, it can institute proceedings to detain or seize the
Company's products, require a recall, suspend production,
distribution, marketing and sales, enjoin future violations and
assess civil and criminal penalties against the Company, its
directors, officers or employees. The FDA may also suspend or
withdraw market approval for the Company's products or require
the Company to repair, replace or refund the cost of any product
manufactured or distributed by the Company.
FDA regulations also require the Company to adhere to
certain "Good Manufacturing Practices" ("GMP") regulations, which
include validation testing, quality control and documentation
procedures. The Company's compliance with applicable regulatory
requirements is subject to periodic inspections by the FDA. The
Company will need 510(k) approval for any new medical products
which it develops. Compliance with these requirements requires
the Company to expend time, resources and effort in the areas of
production and quality control for itself and for its contract
manufacturers. Moreover, there can be no assurance that required
regulatory clearances will be obtained, and those obtained may
include significant limitations on the uses of the product in
question. In addition, changes in existing regulations or the
adoption of new regulations could make regulatory compliance by
the Company more difficult in the future.
Although the Company believes that its products and
procedures are in material compliance with all relevant FDA
requirements, the failure to obtain the required regulatory
clearances or to comply with applicable regulations would have a
material adverse effect on the Company.
Sales of medical devices outside the United States that are
manufactured within the United States are subject to United
States export requirements, and all medical devices sold abroad
are subject to applicable foreign regulatory requirements. Legal
restrictions on the sale of imported medical devices vary from
country to country. The requirements for obtaining approval by
foreign countries may differ substantially from those required
for FDA approval. There can be no assurance that the Company
will be able to obtain regulatory approvals or clearances for its
products in foreign countries.
Competition; Risk of Technological Obsolescence. The
manufacture and distribution of medical and dental devices is
intensely competitive. The Company competes with numerous other
companies, including several major manufacturers and
distributors. With respect to the intraoral camera market, the
Company has at least five major competitors in the video market.
The digital equipment market is less mature, but the Company
anticipates growing competition in this market as well. There
has been some recent consolidation among the Company's major
competitors in the audiometric business, which has resulted in
some price erosion for those products, 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
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<PAGE>
Company to achieve or maintain market acceptance of its products
or maintain price levels sufficient to realize profitable
operations. Furthermore, there is a possibility of increased
government control or influence over a broad range of healthcare
expenditures in the future. Any such trend could negatively
impact the market for the Company's products.
The Company is also subject to the reimbursement policies of
private and governmental healthcare payors in foreign countries
with respect to its international sales. In this regard, recent
changes in the reimbursement policy for the Company's audiometric
products in Germany have negatively impacted the Company's
earnings. See "RISK FACTORS -- Financial Risks."
New Products and Technological Change. The Company is in
the "high tech" end of the health care industry. This industry
has been historically marked by very rapid technological change
and frequent introductions of new products. Accordingly, the
Company's future growth and profitability depend in part on its
ability to continue to respond to technological changes and
successfully develop and market new products that achieve
significant market acceptance. There is no assurance that the
Company will be able to do so.
Products Liability Exposure. The malfunction or misuse of
the medical devices sold by the Company may result in potential
injury to physicians' patients, thereby subjecting the Company to
possible liability. Although the Company's insurance coverage is
$4,000,000 per occurrence and $5,000,000 in the aggregate with a
deductible of $5,000, which amounts and deductibles are customary
in the industry, there can be no assurance that such insurance
will be sufficient to cover any potential liability. Further, as
the result of either adverse claim experience or of medical
device or insurance industry trends, the Company may in the
future have difficulty in obtaining product liability insurance
or be forced to pay very high premiums, and there can be no
assurance that insurance coverage will continue to be available
on commercially reasonable terms or at all. In addition, there
can be no assurance that insurance will adequately cover any
product liability claim against the Company. A successful
product liability or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a
material adverse effect on the Company's business, financial
condition and operations.
Dependence on Key Personnel. The success of the Company is
highly dependent on its ability to attract and retain highly
qualified personnel, including Thomas A. Slamecka, Chairman of
the Board, and Michael T. Pieniazek, President, Chief Financial
Officer and Secretary, and the principal officers of the
operating subsidiaries. Competition for such personnel is
intense, and there can be no assurance that the Company will be
successful in attracting and retaining key personnel in the
future. Any failure to do so could adversely affect the Company.
The Company does not carry any "key-man" insurance on the life of
any officer of the Company.
ADDITIONAL BUSINESS RISK FACTORS RELATING
TO NEEDLE-FREE INJECTION BUSINESS
Uncertainty of Market Acceptance. The success of the
Company's needle-free injector system will depend upon increasing
market acceptance of the system as an alternative to needle
injections. Needle-free injection systems of other companies
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 FOR THE COMPANY'S
COMMON STOCK AND RELATED STOCKHOLDER MATTERS." 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
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<PAGE>
Prospectus will 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 FOR THE COMPANY'S COMMON
STOCK AND RELATED STOCKHOLDER MATTERS."
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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 seven months ended
February 28, 1999, 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.
----------------------------------------------------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDING ENDED ENDED
FISCAL PERIOD 7/31/99 7/31/98 7/31/97
----------------------------------------------------------------
HIGH LOW HIGH LOW HIGH LOW
----------------------------------------------------------------
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
-----------------------------------------------------------------
* Through March 1, 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
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<PAGE>
Fiscal 1998 includes approximately $1 million for deferred
compensation for consultants and for options granted in
connection with acquisitions.
Cost of sales, as a percentage of net sales, for Fiscal 1998
was 66.8% versus 56.8% for Fiscal 1997. The increase in cost as
a percentage of sales can be attributed to the product mix which
included sales of Rosch GmbH on a consolidated basis. As the
Company's sales mix becomes more significantly related to dental
camera products, and as costs of sales for dental camera products
is greater than for other product lines, as expected, costs of
sales as a percentage increased.
Selling, general and 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 GmbH 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
term loan was exchanged for $600,000 of Series B Preferred Stock.
The line-of-credit facility expired on February 28, 1999, and was
changed to a demand basis.
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 classification of asset
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<PAGE>
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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<PAGE>
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.
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, and intends to expand its manufacturing capacity
throughout 1999 in order to meet current and expected future
demand. The Company does not possess the manufacturing capacity
for the ampules required for utilization of the INJEX(TM) System,
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<PAGE>
it instead subcontracts the production of ampules to third
parties. The Company expects that by late March 1999, its
subcontractors will have in place limited production capabilities
for the ampules.
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 will continue to sell dental
products through Rosch GmbH. 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.
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 DynaCam(TM), the ViperCam(TM) and the
Viola(TM).
In 1997, the Company began selling and distributing the
Viola(TM) camera system, manufactured in Germany, in markets
outside North America, South America and Australia. In September
1997, the Company received FDA clearance to sell this system. In
November 1997, the Company began a marketing program to introduce
the system in the United States. Due to differences in the U.S.
and German markets, the Company has had only limited success in
marketing the Viola(TM) in the U.S. In particular, unlike the
German and other European markets, where the majority of dental
offices contain a single or small number of operatories (rooms
where patients receive dental care), the majority of U.S. dental
offices contain multiple operatories. The Viola(TM) intraoral
camera system, as currently designed, is generally not as cost
effective for offices containing multiple operatories as systems
designed for such uses such as the DynaCam(TM) and the
ViperCam(TM). The Company has now replaced its marketing of the
Viola(TM) in the U.S. with the DynaCam(TM) and ViperCam(TM),
although the Company expects to transition away from the
ViperCam(TM) in Fiscal 1999.
In the United States, the Company focuses its efforts on
selling intraoral cameras as part of a complete digital operatory
system, including cameras, dental and cosmetic imaging software,
and related hardware and equipment. The Company also offers
digital x-ray equipment that can be combined with its camera
system.
Digital operatory hardware and software allow the dentist
and his/her assistants to capture and store the pictures taken by
the intraoral camera on their computer system. Once digitized,
these images are stored in a database for that specific patient
and can be recalled for viewing and comparison. The basic system
allows dentists to store over 45,000 individual images on their
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
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<PAGE>
accept the recommended treatment plan. Images can also be
transferred to other dentists via the video conferencing module
or on the Internet. The system also integrates with most
practice management software packages, allowing the dentist to
save time by not having to reenter the patient's name in each
program.
Cosmetic imaging software takes a digitized image of a
patients smile and gives the dentist the ability to make changes
to the smile. This allows the patient to see what their smile
would look like if they accept the treatment proposed by the
dentist. Cosmetic dentistry is the fastest growing part of a
dental practice, and is also the most profitable to the dentist.
Cosmetic imaging software allows the dentist to enhance this part
of their practice and attract new patients.
Digital x-ray is a new method of obtaining traditional
dental x-rays. Instead of x-ray film being placed in the
patient's mouth, exposed to radiation, then developed in a
solution in a dark room, this system does it digitally. A small
computer sensor, the size of the film, is placed in the mouth and
exposed, using a 90% reduction in radiation. The image is
instantly displayed on a computer screen and sent via computer
into a data base containing the patient's file. The x-ray image
can be enhanced and enlarged and measurements taken giving both
the dentist and the patient more information. As with the other
software sold by the Company, the image can be viewed and sent
via video conferencing or on the Internet.
Through DDS, the Company 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
is seeking 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
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<PAGE>
loss, the damage to the ear may be extensive and often
irreparable. Early detection through the use of tympanometry
permits treatment which, in many cases, can reverse or ameliorate
the effects of the disease.
The Company recognized that tympanometry had applications
beyond the use of the ear specialists and could be used in the
recognition and diagnosis of ear disorders by other practitioners
if an instrument were developed which was fully automated and
produced results which were easily interpreted. Consequently, in
1977, the Company introduced a Company-designed impedance
audiometer called the Tympanometer(R). The Tympanometer(R) has a
rubber tipped probe which is placed against the ear canal for a
three second procedure that applies sound and air pressure to the
ear drum and produces a graphic (hard copy) representation of the
middle ear function. Family practitioners, pediatricians and
allergists confront, on a daily basis, problems affecting the
middle ear. The graphic result provided by the Tympanometer(R)
eliminates the uncertainties which may result from visual
examination. The person administering the Tympanometer(R) test,
who may be a physician, school nurse or other health care
professional, can determine from the graph whether the ear
condition is caused by an infection, a perforation of the ear
drum, a retraction of the ear drum or other pathological
condition, and can treat the condition or refer the patient to
the appropriate specialist.
In fiscal 1996, the Company introduced the Race Car(TM)
Tympanometer to the marketplace. The Race Car(TM) Tympanometer
is designed to test for middle ear disease in young children
using up-dated graphics for visual distraction of the child
during testing.
In fiscal 1997, the Company presented the new Quik Tymp(R)
Tympanometer line at the Health Industry Distributors Association
(HIDA) Meeting. The Quik Tymp(R) Tympanometer tests for middle
ear disease in children and adults. This easy to use unit
features the Company's "Little Car" visual distraction for
testing children and the traditional graph display for adults.
The Quik Tymp(R) can include the option of a built-in pure tone
audiometer. Marketing commenced in December 1996.
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.
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GOVERNMENT REGULATION
---------------------
Government regulation in the United States and certain
foreign countries is a significant factor in the Company's
business. In the United States, the Company's products and its
manufacturing practices are subject to regulation by the FDA
pursuant to the Federal Food, Drug and Cosmetic Act ("FDC Act"),
and by other state regulatory agencies. Under the FDC Act,
medical devices, including those under development by the
Company, such as its needle-free injection system, must receive
FDA clearance or approval before they may be sold, or be exempted
from the need to obtain such clearance or approval. The FDA
regulatory process may delay the marketing of new systems or
devices for lengthy periods and impose substantial additional
costs. Moreover, FDA marketing clearance regulations depend
heavily on administrative interpretation, and there can be no
assurance that interpretations made by the FDA or other
regulatory bodies, with possible retroactive effect, will not
adversely affect the Company. There can be no assurance that the
Company will be able to obtain clearance of any future Company
products or any expanded uses of current or future Company
products in a timely manner or at all. In addition, even if
obtained, FDA clearances are subject to continual review, and if
the FDA believes that the Company is not in compliance with
applicable requirements, it can institute proceedings to detain
or seize the Company's products, require a recall, suspend
production, distribution, marketing and sales, enjoin future
violations and assess civil and criminal penalties against the
Company, its directors, officers or employees. The FDA may also
suspend or withdraw market approval for the Company's products or
require the Company to repair, replace or refund the cost of any
product manufactured or distributed by the Company. FDA
regulations also require the Company to adhere to certain "Good
Manufacturing Practices" ("GMP") regulations, which include
validation testing, quality control and documentation procedures.
The Company's compliance with applicable regulatory requirements
is subject to periodic inspections by the FDA. The Company will
need 510(k) approval for any new medical products which are
developed in the future. Compliance with these requirements
requires the Company to expend time, resources and effort in the
areas of production and quality control for itself and for its
contract manufacturers. Moreover, there can be no assurance that
the required regulatory clearances will be obtained, and those
obtained may include significant limitations on the uses of the
product in question. In addition, changes in existing
regulations or the adoption of new regulations could make
regulatory compliance by the Company more difficult in the
future.
Although the Company believes that its products and
procedures are currently in material compliance with all relevant
FDA requirements, the failure to obtain the required regulatory
clearances or to comply with applicable regulations would have a
material adverse effect on the Company.
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.
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<PAGE>
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 at $750 per month under a renewable quarterly lease
cancellable on three months notice. ESI is also leasing a
production facility in Aliso Viejo, California containing
approximately 1,700 square feet at $2,000 per month under a lease
expiring in September 2000.
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, Mexico 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
Viola(TM) system is marketed throughout Europe through Rosch
GmbH. Rosch GmbH both distributes products directly and through
regional dealers. In fiscal 1998, more than a majority of the
Company's sales were in Europe.
The market for the Company's audiometric products includes
physicians, particularly those in medical specialties such as
pediatrics, allergy medicine, family practice, otolaryngology and
otology (the latter two specialties deal with diseases of the
ear). The audiometric products are marketed mainly through
independent regional dealers both domestically and
internationally who sell principally hearing related health care
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<PAGE>
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 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.
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<PAGE>
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 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.
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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.
In February 1999, the parties settled this proceeding upon
payment of $30,000 by ESI.
On December 10, 1998, Charles S. Aviles, Jr. and Barry
Hochstadt, former shareholders, officers and employees of DDS,
filed an action in Superior Court of California, County of
Orange, against Henry Rhodes, the President and a former
shareholder of DDS, DDS and the law firm that had represented DDS
and its shareholders during its acquisition by the Company,
seeking damages in excess of $1,000,000 and an indeterminate
amount of punitive damages and costs arising from the plaintiffs'
prior relationships with DDS. On January 13, 1999, the 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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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.
YEAR
POSITION WITH BECAME
NAME AGE THE COMPANY DIRECTOR
---- --- -------------- --------
Thomas A. Slamecka 58 Chairman of the Board and 1996
Director
Michael T. Pieniazek 40 President, Chief Financial N/A
Officer, Treasurer and
Secretary
Blake C. Davenport 31 Director 1997
Andy Rosch 38 Director and General 1997
Manager of Rosch GmbH
Marcus R. Rowan 37 Director 1996
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 five years from grant. Upon
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<PAGE>
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.
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
--------------------------------------------------------------
# LONG
NAME AND PRINCIPAL FISCAL OPTIONS TERM
POSITION YEAR SALARY BONUS GRANTED AWARDS
--------------------------------------------------------------
Thomas A. Slamecka 1998 $100,000 -- 318,550 --
Chairman
--------------------------------------------------------------
Michael Pieniazek 1998 $125,000 -- 402,750 --
--------------------------------------------------------------
President and CFO 1997 $113,000 -- -- --
--------------------------------------------------------------
AGGREGATED OPTION EXERCISES FOR THE FISCAL YEAR ENDED
JULY 31, 1998 AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)
-------------------------------------------------------------------------
Shares
Acquired Value
on Exercise Realized Exercisable/ Exercisable/
Name (#) ($) 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,
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<PAGE>
subject to annual renewals, and his February 1997 Employment
Agreement was terminated. Mr. Slamecka receives an annual base
salary of $52,000 through July 31, 1998 and thereafter at
$100,000, plus a profits bonus equal to 10% of the amount that
consolidated net after-tax operating profits exceeds $500,000,
provided for such year the Company earns a 12% return on its
Common Stock equity, and may also receive a supplemental bonus.
The Employment Agreement also provided for the grant of options
to him for the purchase of 400,000 shares of Common Stock at
$1.00 per share, which was the fair market value of the Company's
Common Stock on the date of grant, vesting immediately as to
212,500 shares and the balance vesting at 46,875 shares per month
through May 1998. The Company is to issue 100,000 shares of
Common Stock to Mr. Slamecka if during the term of his employment
the closing price for the Common Stock is at least $20 per share
for a period of three consecutive trading days. Further, the
Employment Agreement provides that if the Company issues any
shares of Common Stock (other than pursuant to compensation or
employee benefit plans) it will grant to Mr. Slamecka additional
options to purchase shares equal to 9.3% of the outstanding
Common Stock at a purchase price equal to the per share price of
the shares issued by the Company (but not less than $1.00 per
share). In calculating Mr. Slamecka's ownership for purposes of
such 9.3% level, unvested options held by him and shares sold by
him during the initial term of the Employment Agreement would be
included in such calculation. In addition, the Company agreed to
make available certain loans to Mr. Slamecka, see "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
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<PAGE>
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, 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
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<PAGE>
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 expired on February 28, 1999,
and is on a demand basis.
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<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.
-----------------------------------------------------------------
AMOUNT &
NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OF
BENEFICIAL OWNER STATUS OWNERSHIP CLASS*
-----------------------------------------------------------------
Liviakis Financial Stockholder 1,192,371 shs 15.5%
Communications, Inc.
2420 K Street
Sacramento, California
95816
-----------------------------------------------------------------
Thomas A. Slamecka** Director and 834,550 shs(1) 10.2%
Chairman
-----------------------------------------------------------------
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 434,750 shs(4) 5.4%
and CFO
-----------------------------------------------------------------
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%
-----------------------------------------------------------------
--------------------
(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.
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<PAGE>
SELLING STOCKHOLDERS
The Shares and Warrants offered by this Prospectus may be
offered from time to time by the Selling Stockholders. The
Selling Stockholders are comprised of: (i) persons who own an
aggregate of 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.
AMOUNT
SHARES WARRANTS BENEFICIALLY
BENEFICIALLY BENEFICIALLY SHARES WARRANTS OWNED
OWNED PRIOR OWNED PRIOR TO BE TO BE AFTER
NAME(1) TO OFFERING TO OFFERING OFFERED OFFERED OFFERING(2)
---------------- ------------ ------------- ------- --------- ------------
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
-33-
<PAGE>
AMOUNT
SHARES WARRANTS BENEFICIALLY
BENEFICIALLY BENEFICIALLY SHARES WARRANTS OWNED
OWNED PRIOR OWNED PRIOR TO BE TO BE AFTER
NAME(1) TO OFFERING TO OFFERING OFFERED OFFERED OFFERING(2)
---------------- ------------ ------------- ------- --------- ------------
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
Friedler JTWROS 50,000 N/A 50,000 N/A 0
Harold Geliebter 7,578 N/A 7,578 N/A 0
Paul Ghizzone
and Julia
Ghizzone 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.
Hood JTWROS 10,000 N/A 10,000 N/A 0
Sam W. Hunsaker 25,000 N/A 25,000 N/A 0
Dean Hyde and
Doris Hyde 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
Communications,
Inc. 1,192,371 N/A 1,192,371 N/A 0
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
Susan Mandelstam 31,315 N/A 31,315 N/A 0
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
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<PAGE>
AMOUNT
SHARES WARRANTS BENEFICIALLY
BENEFICIALLY BENEFICIALLY SHARES WARRANTS OWNED
OWNED PRIOR OWNED PRIOR TO BE TO BE AFTER
NAME(1) TO OFFERING TO OFFERING OFFERED OFFERED OFFERING(2)
---------------- ------------ ------------- ------- --------- ------------
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 Parsons
Family Trust 112,277 N/A 112,277 N/A 0
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
Richard A. Gray
Jr. Childrens
Trust 199,978 N/A 199,978 N/A 0
Tse Wo Wong and
Bianca T.T. Wu
TIC 99,491 N/A 99,491 N/A 0
-------------------------
(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 remained at such rate until the
effective date of the Registration Statement, when the dividend
rate would returned to 5%. The Company also paid $15,000 to the
holders of the Series A Preferred Stock for the period from
February 15, 1998 to the effective date. 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.
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
-37-
<PAGE>
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.
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.
-37-
<PAGE>
AMERICAN ELECTROMEDICS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
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-17
Unaudited Consolidated Statements of Operations
for the three months ended October 31, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . F-18
Unaudited Consolidated Statements of Cash Flows
for the three months ended October 31, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . F-19
Notes to Unaudited Consolidated Financial Statements . F-20
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
JULY 31, 1998 JULY 31, 1997
------------- -------------
(THOUSANDS)
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: 1,169 283
Trade . . . . . . . . . . . . . . . . . -- 379
Affiliate . . . . . . . . . . . . . . .
----- -----
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
====== =====
See accompanying notes.
F-3
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED
--------------------------
JULY 31, JULY 31, JULY 27,
1998 1997 1996
-------- -------- --------
(Thousands, except per share
amounts)
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
===== ===== =====
*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)
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------------- ------------
BOOK
SHARES VALUE SHARES
------ ----- ------
Balance at July 29, 1995 . -- $-- 2,343
Investment in affiliate . . -- -- 100
Exercise of stock options . -- -- 11
Net income . . . . . . . . -- -- --
------ ------ ------
Balance at July 27, 1996 . -- -- 2,454
Sale of capital stock . . . -- -- 48
Exercise of stock options, net -- -- 51
Net loss . . . . . . . . . -- -- --
------ ------ ------
Balance at July 31, 1997 . -- -- 2,553
Conversion of convertible
debentures, net . . . . . -- -- 720
Private placement of common
stock, net . . . . . . . -- -- 1,050
Issuance of common stock
for investment in
affiliates, net . . . . . -- -- 210
Issuance of common stock
for acquisitions, net . . -- -- 1,350
Stock and warrants issued
for services . . . . . . -- -- 1,000
Exercise of stock options -- -- 175
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
====== ===== =====
COMMON STOCK ADDITIONAL
------------ PAID-IN RETAINED
PAR VALUE CAPITAL DEFICIT
--------- ---------- ---------
Balance at July 29, 1995 . $234 $2,484 $(1,522)
Investment in affiliate . . 10 290 --
Exercise of stock options . 1 9 --
Net income . . . . . . . . -- -- 442
------ ------ ------
Balance at July 27, 1996 . 245 2,783 (1,080)
Sale of capital stock . . . 5 139 --
Exercise of stock options, net 5 (3) --
Net loss . . . . . . . . . -- -- (926)
------ ------ ------
Balance at July 31, 1997 . 255 2,919 (2,006)
Conversion of convertible
debentures, net . . . . . 72 625 --
Private placement of common
stock, net . . . . . . . 105 923 --
Issuance of common stock
for investment in
affiliates, net . . . . . 21 159 --
Issuance of common stock
for acquisitions, net . . 135 5,490 --
Stock and warrants issued
for services . . . . . . 100 1,480 --
Exercise of stock options 17 158 --
Sale of convertible
preferred stock and
warrants . . . . . . . . -- 255 --
Dividend on convertible
preferred stock . . . . . -- (72) --
Conversion feature on
convertible preferred
stock . . . . . . . . . . -- 1,000 --
Dividend on beneficial
conversion feature . . . -- (1,000) --
Deferred compensation
related to common
stock options . . . . . . -- 706 --
Amortization of deferred
compensation . . . . . . -- -- --
Translation adjustment . . -- -- --
Net loss . . . . . . . . . -- -- (3,674)
------ ------ ------
Balance at July 31, 1998 $705 $12,643 $(5,680)
====== ======= =======
CUMULATIVE TOTAL
TRANSLATION DEFERRED STOCKHOLDERS'
ADJUSTMENT COMPENSATION EQUITY
---------- ------------ ------------
Balance at July 29, 1995 . -- -- $1,196
Investment in affiliate . . -- -- 300
Exercise of stock options . -- -- 10
Net income . . . . . . . . -- -- 442
------ ------ ------
Balance at July 27, 1996 . -- -- 1,948
Sale of capital stock . . . -- 144
Exercise of stock options, net -- 2
Net loss . . . . . . . . . -- -- (926)
------ ------ ------
Balance at July 31, 1997 . -- 1,168
Conversion of convertible
debentures, net . . . . . -- -- 697
Private placement of common
stock, net . . . . . . . -- -- 1,028
Issuance of common stock
for investment in
affiliates, net . . . . . -- -- 180
Issuance of common stock
for acquisitions, net . . -- -- 5,625
Stock and warrants issued
for services . . . . . . -- $(1,580) --
Exercise of stock options -- -- 175
Sale of convertible
preferred stock and
warrants . . . . . . . . -- -- 2,642
Dividend on convertible
preferred stock . . . . . -- -- (72)
Conversion feature on
convertible preferred
stock . . . . . . . . . . -- -- --
Dividend on beneficial
conversion feature . . . -- -- --
Deferred compensation
related to common
stock options . . . . . . -- (706) --
Amortization of deferred
compensation . . . . . . -- 992 992
Translation adjustment . . $(249) -- (249)
Net loss . . . . . . . . . -- -- (3,674)
------ ------ ------
Balance at July 31, 1998 $(249) $(1,294) $8,512
======= ====== ======
See accompanying notes.
F-5
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
YEAR ENDED
------------------------------
JULY 31, JULY 31, JULY 27,
1998 1997 1996
-------- -------- --------
(Thousands)
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 -- --
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 "Company") is engaged in
the manufacture and sale of medical testing equipment principally
to the United States and European medical community. The Company
currently produces two devices designed for audiological testing
purposes: Tympanometers(R), which apply a combination of pressure
and sound to the ear drum to detect diseases of the middle ear,
and Audiometers,which use sound at descending decibel levels to
screen for hearing loss.
The Company recognizes revenue upon receipt of a firm
customer order and shipment of the product, net of allowances for
warranties, which have not been material. The Company does not
recognize revenue on product shipments that are subject to rights
of return, evaluation periods, customer acceptance, or any other
contingencies until such contingency has expired.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries.
All material intercompany transactions have been eliminated.
Cash and Cash Equivalents
-------------------------
For the purpose of reporting cash flows, cash and cash
equivalents include all highly liquid debt instruments with
original maturities of three months or less. The carrying amount
reported in the balance sheets for cash and cash equivalents
approximates its fair value.
Inventories
-----------
Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Depreciation
------------
Property and equipment is stated at cost. The Company
provides for depreciation using the straight-line method over the
various estimated useful lives of the assets. Leasehold
improvements are amortized over the life of the lease agreement.
Repairs and maintenance costs are expensed as incurred and
betterments are capitalized.
Goodwill and Patents
--------------------
Goodwill is the purchase price in excess of the fair value
of net assets acquired at the Company's date of acquisition.
Goodwill is being amortized on a straight-line basis over periods
ranging from 15 to 40 years. Amortization expense for the year
ended 1998 was $112,000 and for 1997 and 1996 was $11,000.
Accumulated amortization at July 31, 1998 and July 31, 1997 is
$354,000 and $242,000, respectively.
Patents are being amortized on a straight-line basis over 15
years, the remaining life of the patent. Amortization expense
and accumulated amortization as of and for the year ended July
31, 1998 was $51,000.
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
F-9
<PAGE>
products, to 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,
F-10
<PAGE>
1998, there was $202,000 outstanding under this loan. The second
loan is payable in its entirety on February 15, 1999. Interest
is 5.7% per annum and as of July 31, 1998, there was $393,000
outstanding under this loan.
As of July 31, 1997, there was $532,000 outstanding under
two separate Term Loans and $300,000 outstanding under a
revolving line of credit from the Company's prior bank. During
1998, these balances were repaid and the loan agreements were
terminated as of July 31, 1998.
Borrowings under these outstanding loans are collateralized
by essentially all of the assets of the Company.
6. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
-----------------------------------------------
Earnings per share, basic and diluted, were computed using
weighted average shares outstanding of, 4,687,707 for 1998,
2,510,296 for 1997 and 2,493,854 for the year ended July 27,
1996. Dilutive securities were not included in the calculation
of diluted weighted average shares due to their anti-dilutive
effect.
7. INCOME TAXES:
------------
The Company's deferred tax assets (which result primarily
from net operating loss carryforwards and accrued expenses) as of
July 31, 1998 and July 31, 1997 were $1,217,000 and $561,000,
respectively. SFAS No. 109 requires a valuation allowance
against deferred tax assets if it is more likely than not that
some or all of the deferred tax assets will not be realized. The
Company believes that some uncertainty exists and therefore has
maintained a valuation allowance of $1,217,000 and $561,000 as of
July 31, 1998 and July 31, 1997, respectively. As of July 31,
1998, the Company has net operating loss carryforwards for
Federal income tax purposes of $3,175,000 that expire from 2004
to 2018.
The net provision for income taxes for the years ended July
31, 1998, July 31, 1997 and July 27, 1996 of $-0-, $-0-, and
$25,000, respectively, are comprised entirely of currently
payable state income taxes. There was no current Federal income
tax provision due to the utilization of net operating loss
carryforwards. Approximately $-0-, $-0- and $511,000 of the
Federal net operating loss carryforward was utilized during the
years ended July 31, 1998, July 31, 1997 and July 27, 1996,
respectively.
Significant components of the Company's deferred tax assets
are as follows:
1998 1997
-------------------------
Deferred tax assets:
Net operating loss
carryforwards $ 1,079,000 $ 437,000
Accrued expenses 90,000 67,000
Inventory 32,000 24,000
Other 3,000 16,000
Reserves 13,000 17,000
-------------------------
Total deferred tax assets 1,217,000 561,000
Valuation allowance for
deferred tax assets (1,217,000) (561,000)
-------------------------
Net deferred tax assets $ -0- $ -0-
=========================
F-11
<PAGE>
A reconciliation of income taxes computed at the federal
statutory rates to income tax expense is as follows:
1998 1997 1996
-------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------------------------------------------------------
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%
=======================================================
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
F-12
<PAGE>
Rights Agreement (the "Registration Agreement") and a Warrant
Agreement. Concurrently with the closing for the first tranche
of Series A Preferred Stock, the Company issued warrants under
the Warrant Agreement (the "Warrants") to West End for the
purchase of 50,000 shares of the Company's Common Stock at an
exercise price of $4.80 per share, subject to customary anti-
dilution provisions, expiring on May 5, 2002. The Company also
issued warrants for the purchase of 30,000 shares of Common Stock
to the placement agent, exercisable at $4.40 per share for three
years. 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.
F-13
<PAGE>
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.
FAS 123 DISCLOSURE
Pro forma information regarding net income (loss) is
required by FAS 123 (Stock-Based Compensation), which requires
that the information be determined as if the Company had
accounted for its employee stock options grants under the fair
value method of that Statement. The fair values for these
options were estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average
assumptions:
1998 1997 1996
---- ---- ----
Expected life (years) 4 4.7 4
Interest rate 6% 6% 6%
Volatility 1.15 1.15 1.13
Dividend yield 0.0% 0.0% 0.0%
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. Because FAS 123 is applicable only to options granted
subsequent to July 29, 1995, its pro forma effect will not be
fully reflected until fiscal year 1999. The Company's pro forma
information is as follows:
1998 1997 1996
---- ---- ----
Pro forma net
income (loss) $(5,497,682) $(1,238,759) $429,134
Pro forma net
income (loss
per share) $ (1.17) $ (0.49) $ 0.17
Option activity for the years ended 1998, 1997 and 1996 is
summarized below:
1998 1997 1996
------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
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
========= ======== ========
F-14
<PAGE>
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
The following table presents weighted-average price and life
information about significant option grants outstanding at July
31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
---------- ----------- ---------- -------- ----------- --------
$1.00 - 1,338,000 4 years $1.01 1,214,500 $1.01
$1.50
$3.00 - 423,300 5 years $3.72 266,300 $4.14
$4.38
$7.50 13,333 1 year $7.50 13,333 $7.50
--------- ---------
1,774,633 1,494,133
========= =========
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.
F-15
<PAGE>
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.
Transfers to affiliates are made at prices above the Company's
cost and include charges for freight and handling.
DOMESTIC GERMAN
OPERATIONS OPERATIONS ELIMINATION CONSOLIDATED
----------- ---------- ----------- ------------
Year ended July (Thousands)
31, 1998:
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 (2,989) (381) (3,370)
operations
Assets $8,933 $2,525 $11,458
Prior to the acquisition and consolidation of Rosch GmbH in
fiscal year 1998, the Company did not conduct any significant
business in foreign countries.
13. GOING CONCERN
-------------
The accompanying financial statements have been prepared on
a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course
of business. As shown in the financial statements, the Company
has incurred net losses of $3,674,000 and $926,000 for the years
ended July 31, 1998 and 1997, respectively. This and other
factors indicate that the Company may be unable to continue as a
going concern for a reasonable period of time.
The financial statements do not include any adjustments
relating to the recoverability of assets and classification of
liabilities that might be necessary should the Company be unable
to continue as a going concern. The Company's continuation as a
going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis,
to obtain additional financing and ultimately to attain
profitability. The Company continues to pursue strategies to
improve the profitability of its current product lines, and is
actively pursuing additional debt and equity financing.
14. SUBSEQUENT EVENTS
-----------------
On October 26, 1998, the Company entered into a letter of
intent to acquire Score International, Inc. ("SCI") for $1.7
million, consisting of $1,450,000 payable in shares of the
Company's Common Stock, to be valued as provided for in a
definitive acquisition agreement and $250,000 in cash. SCI is a
developer and distributor of dental office products, primarily a
patented high-speed handpiece repair system. The transaction is
subject to negotiation and execution of a definitive acquisition
agreement and fulfillment of customary closing conditions. This
letter of intent may be terminated by either party, if by the
close of business on December 31, 1998, a definitive acquisition
agreement shall not have been executed.
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
Three Months Ended
--------------------------
October 31, October 31,
1998 1997
--------- ---------
(Thousands, except per share
amounts)
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)
========== ==========
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
THREE MONTHS ENDED
-----------------------
OCTOBER 31, OCTOBER 31,
1998 1997
----------------------
(THOUSANDS)
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
====== ======
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 8,912,294 SHARES
REPRESENTATIONS OTHER THAN COMMON STOCK
THOSE CONTAINED IN THIS AND
PROSPECTUS IN CONNECTION WITH 50,000 COMMON STOCK
THE OFFERING MADE BY THIS PURCHASE WARRANTS
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 AMERICAN
PROSPECTUS DOES NOT CONSTITUTE ELECTROMEDICS CORP.
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 PROSPECTUS
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 . . . . . 24
MANAGEMENT . . . . . . . . 25
EXECUTIVE COMPENSATION . . 26
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS . . 28
PRINCIPAL STOCKHOLDERS . . 30
DESCRIPTION OF SECURITIES . 31 MARCH 2, 1999
SELLING STOCKHOLDERS . . . 33
PLAN OF DISTRIBUTION . . . 36
LEGAL MATTERS . . . . . . . 37
EXPERTS . . . . . . . . . . 37
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS . . F1
-----------------
=============================== ==========================
