SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission File Number
OCTOBER 31, 1998 0-9922
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AMERICAN ELECTROMEDICS CORP.
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(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 04-2608713
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(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
13 COLUMBIA DRIVE, SUITE 5, AMHERST, NEW HAMPSHIRE 03031
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(Address and Zip Code of Principal Executive Offices)
Issuer's telephone number, including area code: 603-880-6300
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Securities registered pursuant to Section 12(b) of the Exchange
Act: NONE
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Securities registered pursuant to Section 12(g) of the Exchange
Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
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(Title of Class)
Indicate by check mark whether the Issuer (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months, and (2) has been subject
to such filing requirements for the past 90 days. YES X NO
-- --
As of December 13, 1998, there were outstanding 7,071,136 shares
of the Issuer's Common Stock, $.10 par value.
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AMERICAN ELECTROMEDICS CORP.
Index
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets, October 31, 1998 and
July 31, 1997 . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three
Months Ended October 31, 1998 and October 31, 1997 . . 4
Consolidated Statements of Cash Flows for the Three
Months Ended October 31, 1998 and October 31, 1997 . . 5
Notes to Consolidated Financial Statements . . . . . . . 6
Item 2. Management's Discussion and Analysis or Plan of
Operation . . . . . . . . . . . . . . . . . . . . . . 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 11
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PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, JULY 31,
1998 1998
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(Unaudited)
(Thousands)
ASSETS
Current Assets:
Cash and cash equivalents ................. 181 $ 396
Accounts receivable ....................... 1,454 1,169
Inventories ............................... 2,346 1,951
Prepaid and other current assets .......... 342 223
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Total current assets .................... 4,323 3,739
Property and equipment .................... 838 794
Accumulated depreciation .................. (451) (436)
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387 358
Goodwill .................................. 4,240 4,298
Patents ................................... 2,984 3,027
Other ..................................... 27 36
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$11,961 $11,458
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................... $ 1,877 $ 1,118
Bank debt ................................. 1,791 1,033
Accrued liabilities ....................... 538 723
Dividends payable ......................... 189 72
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Total current liabilities ............... 4,395 2,946
Stockholders' equity:
Series A Convertible Preferred stock, $.01
par value; Authorized - 1,000,000 shares;
Outstanding - 3,000 shares ................ 2,387 2,387
Common stock, $.10 par value; Authorized
- 20,000,000 shares; Outstanding - 7,071,136
shares at October 31, 1998 and 7,058,136
shares at July 31, 1998 .................... 707 705
Additional paid-in capital ................ 12,460 12,643
Retained deficit .......................... (6,966) (5,680)
Accumulated other comprehensive loss (161) (249)
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8,427 9,806
Deferred compensation ..................... (861) (1,294)
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Total stockholders' equity .............. 7,566 8,512
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$11,961 $11,458
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SEE ACCOMPANYING NOTES.
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AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
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OCTOBER 31, OCTOBER 31,
1998 1997
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(Thousands, except per share amounts)
Net sales ............................... $ 2,150 $ 1,830
Cost of goods sold ...................... 1,263 1,058
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Gross profit ............................ 887 772
Selling, general and administrative ..... 1,922 687
Research and development ................ 128 --
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Total operating expenses .............. 2,050 687
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Operating income (loss) ................. (1,163) 85
Other income (expenses):
Interest, net ......................... (17) (78)
Minority interest in affiliate ........ -- (85)
Other ................................. (106) 58
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(123) (105)
Loss before provision for income taxes .. (1,286) (20)
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Net loss ................................ $ (1,286) $ (20)
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Net loss attributable to common
stockholders* ......................... $ (1,403) $ (20)
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Weighted average number of common and
common equivalent shares outstanding .. 7,064,636 2,553,136
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Net loss per share, basic and diluted $ (.20) $ (.01)
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See accompanying notes.
* The quarter ended October 31, 1998 includes the impact of $117,000
of dividends on Preferred Stock.
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AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
1998 1997
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(THOUSANDS)
OPERATING ACTIVITIES:
Net loss ........................................$ (1,286) $ (20)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................. 132 49
Deferred compensation amortization ............ 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)
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Net cash used in operating activities .......... (798) (110)
INVESTING ACTIVITIES:
Purchase of property and equipment, net .......... (36) (13)
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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 --
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Net cash provided by (used in) financing activities. 618 (62)
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Effect of exchange rate changes on cash and cash
equivalents ...................................... 1 3
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Decrease in cash and cash equivalents ............ (215) (182)
Cash and cash equivalents, beginning of period ... 396 471
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Cash and cash equivalents, end of period .........$ 181 $ 289
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See accompanying notes.
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AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998
(Unaudited)
1. BASIS OF PRESENTATION
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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 shareholders'
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
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In September 1998, the Company entered into a $500,000 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. As of October 31, 1998, $75,000 was
outstanding under this line of credit, which is collateralized
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essentially by all of the assets of the Company including an
assignment of patents and trademarks.
In September 1998, the Company also entered into a Term Loan
in an amount of $600,000 due on November 25, 1998. 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
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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)
4. YEAR 2000
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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
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believes that with modifications or replacements of existing
software and certain hardware, the Year 2000 Issue can be
mitigated. However, if such modifications and replacements are
not made, or are not completely timely, the Year 2000 Issue could
have a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves
the following four phases: assessment, remediation, testing and
implementation. To date, the Company has substantially completed
its assessment of all systems that could be significantly
affected by the Year 2000. The assessment indicated that most of
the Company's significant information technology systems will be
affected, including its financial information system which
includes its general ledger, accounts payable, billing and
inventory systems. The assessment was also undertaken on the
Company's products, which are also at risk, as they utilize
software and hardware (embedded chips) as well. However, based
on its review of its product line, the Company has determined
that most of the products it has sold and will continue to sell
do not require remediation to be Year 2000 compliant.
Accordingly, the Company does not believe that the Year 2000
presents a material exposure as it relates to the Company's
products. The Company's manufacturing processes consist
principally of unautomated assembly of components manufactured by
outside third-parties. The Company has begun to gather
information about the Year 2000 compliance status of its
significant suppliers, and will take appropriate steps to monitor
their compliance on an ongoing basis.
Regarding its information technology exposures, the Company
utilizes an unmodified off-the-shelf software package, which is
not year 2000 compliant. The Company has confirmed with its
software vendor that a year 2000-compliant upgrade is readily
available and anticipates purchasing this upgrade during its
third fiscal quarter, which ends on April 30, 1999. The upgrade
would provide full year 2000 compliance with respect to its
financial information systems, and as the new software will also
be an unmodified off-the-shelf package, testing to ensure Year
2000 compliance will not be necessary. Implementation will take
place as early as possible following the purchase of the system,
and is expected to be completed no later than June 30, 1999.
The Company does not presently maintain direct interfaces
with any third-party vendors. The Company has made various
queries of its significant suppliers that do not share
information systems with the Company (external agents). To date,
the Company is not aware of any external agent with a Year 2000
issue that would materially impact the Company's results of
operations, liquidity, or capital resources. However, the
Company has no means of assuring that external agents will be
Year 2000 ready. The inability of external agents to complete
their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by
external agents is not determinable.
The total cost of the Company's Year 2000 project is
estimated at $25,000, which will be funded through operating cash
flows. To date, the Company has not incurred any direct costs
related to its Year 2000 project. The project costs will consist
principally of the cost of new software, which will be
capitalized.
Management of the Company believes it has an effective plan
in place to resolve the Year 2000 Issue in a timely manner. As
noted above, the Company has not yet completed all necessary
phases of its Year 2000 project. In the event that the Company
does not complete any additional phases, the Company could be
unable to take customer orders, manufacture and ship products,
invoice customers or collect payments. In addition, disruptions
in the economy generally resulting from Year 2000 issues could
also materially adversely affect the Company.
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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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
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OPERATION RESULTS OF OPERATIONS
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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 new acquisition, Dynamic
Dental Systems, Inc.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
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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, requires
additional funding beyond that which the Company currently has
available.
The Company therefore will need to immediately raise
additional capital. The Company is seeking additional capital
through equity and/or debt placements or secured financing;
however, no assurance can be given that such financing
arrangements would be successfully completed immediately and, if
so, on terms not dilutive to existing stockholders.
As a result of the foregoing, substantial doubt exists about
the ability of the Company to continue as a going concern. The
accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities
that might result should the Company be unable to continue as a
going concern.
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PART II. - OTHER INFORMATION
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarterly
period ended October 31, 1998.
Exhibits -
None.
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SIGNATURES
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In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN ELECTROMEDICS CORP.
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/s/Michael T. Pieniazek Dated: February 25, 1999
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Michael T. Pieniazek
President and
Chief Financial Officer
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