U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended July 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from__________________to______________________________
Commission file number 0-9922
AMERICAN ELECTROMEDICS CORP.
(Name of Small Business Issuer in Its Charter)
Delaware 04-2608713
(State of Incorporation or Organization) (I.R.S. Employer Identification No.)
13 Columbia Drive, Suite 5, Amherst, New Hampshire 03031
(Address of principal executive offices) (Zip Code)
(603) 880-6300
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.10 par value
Title of Class
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days. [X] YES
[ ] NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
As of October 21, 1999, there were 9,830,955 shares of Common Stock outstanding
and the aggregate market value of such Common Stock (based upon the closing bid
price on such date) of the Registrant held by non-affiliates was approximately
$8,118,708.
Revenues for the fiscal year ended July 31, 1999 totaled $6,789,000.
Documents incorporated by reference: Portions of the Registrant's Definitive
Proxy Statement for the annual meeting of stockholders to be held on December 9,
1999 are incorporated by reference into Part III of this report.
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Item 1. DESCRIPTION OF BUSINESS
The Company
The Company is engaged in developing, manufacturing and selling the
following two categories of healthcare products: (i) needle-free drug delivery
systems, and (ii) intraoral dental cameras and related products. In January
1999, the Company announced its intention to focus upon the needle-free drug
delivery system and to dispose of its other product lines. The Company's German
subsidiary, Rosch GmbH Medizintechnik ("Rosch GmbH"), will continue to market
and distribute intraoral dental cameras and related products, but will focus
primarily on the needle-free drug delivery system in Europe. As of July 31,
1999, the Company owned 75% of Rosch GmbH. In September 1999, a minority
shareholder of Rosch GmbH purchased an additional portion of the Company's 75%
ownership of Rosch GmbH through a combination of cash payments to the Company
and additional capital contributions into Rosch GmbH, thereby reducing the
Company's ownership of Rosch GmbH to 50.01%.
Our INJEX(TM) needle-free drug injection system is 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 INJEX(TM) system is
intended to eliminate risks of contaminated needle stick accidents and the
resulting diseases from hypodermic needles and syringes. The INJEX(TM) system
has received U.S. FDA 510(k) clearance to market the system in the U.S., and we
expect to begin marketing the product in early 2000. Our wholly-owned
subsidiary, Equidyne Systems, Inc. ("ESI") holds the U.S. patents to the
INJEX(TM) system and will market it world-wide, except for Europe, which will be
marketed through Rosch GmbH.
The intraoral dental 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. This product line has been the largest segment of our
business, but has also been the least profitable. As our focus has shifted
towards the INJEX(TM) system , we are trying to sell our U.S. intraoral dental
camera business.
We also had manufactured and marketed diagnostic audiometric medical
devices which identified diseases and disorders of the middle ear. As part of
our plan to shift the focus to the INJEX(TM) system , we sold the assets of this
product line in April 1999 and exited all related business activities .
Our company was incorporated under Delaware law on January 28, 1977. Our
executive offices are at 13 Columbia Drive, Suite 5, Amherst, New Hampshire
03031, and our telephone number is (603) 880-6300.
Recent Developments
On January 5, 1999, we announced a change of our business direction. We
decided to focus our business resources on the INJEX(TM) system of Equidyne
Systems, Inc. To affect this change in direction, we sold substantially all of
our assets connected with our audiometric equipment product line in April 1999,
and are actively seeking to sell our U.S. intraoral dental camera business.
Sale of Audiometric Business Assets. In April 1999, we completed a sale of
substantially all of our assets connected with our audiometrics business,
pursuant to an Assets Purchase Agreement for a total sale price of $625,000.
These assets consisted mainly of our domestic audiometric inventory, as well as
all patents, trademarks and other rights associated with the audiometrics
business, including the name "American Electromedics". As a result, we are no
longer in the business of selling audiometric medical devices, and we intend to
request a change in our name at the 1999 annual meeting of stockholders.
Rosch GmbH Medizintechnik. On July 8, 1999, a Germany-based investment
banking firm contributed capital amounting to $1.5 million into Rosch GmbH,
obtaining an approximate 25% share of this subsidiary. This investment was
followed by the sale of all European rights, patent applications and trademarks
associated with the INJEX(TM)
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system to Rosch GmbH for $750,000. As a result, Rosch GmbH will conduct all
development, manufacturing and marketing of the INJEX(TM) system in the European
market.
The investment banking firm made a second investment in Rosch GmbH in
September 1999. This investment consisted of two parts. The first was an
additional capital contribution in the amount of $1.6 million. The second part
was a direct purchase of ownership in Rosch GmbH from American Electromedics for
an additional $1.6 million. This investment further reduced our ownership
percentage to 50.01%. As we own over 50% of Rosch GmbH, and maintain control of
this subsidiary, we will continue to consolidate Rosch GmbH in our financial
statements.
Private Placement of Preferred Stock. On February 3, 1999, we sold 1,600
shares of Series B 5% convertible preferred stock at a purchase price of $1,000
per share for total price of $1,600,000, together with warrants to purchase of
25,000 shares of common stock at an exercise price of $3.00 per share
exercisable until January 31, 2002. We used the net proceeds of $1,500,000
(after offering expenses) to repay $650,000 of notes and for general working
capital purposes. The Series B Preferred Stock is convertible into 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. As of October 26, 1999, 1,170
shares of Series B Preferred Stock were outstanding.
Private Placements of Common Stock. In April 1999, the Company retained
American Financial Communications ("AFC") as a corporate communications and
financial consultant. The consulting agreement expires in November 1999 and
provides a total fee for AFC's services of 200,000 shares of the Company's
common stock. The Company has valued the shares at the fair market value on the
effective date of the agreement, which was $.94 per share, and has recorded
deferred compensation totaling $188,000 to be amortized over the term of the
agreement. In April 1999, the Company closed two private placements for a total
of 590,000 shares of Common Stock for aggregate net proceeds of $486,000, to two
"accredited investors", as such term is defined in Regulation D under the
Securities Act.
Needle-Free Injection Systems
In May 1998, we acquired Equidyne Systems, Inc., a California corporation
("ESI"), based in San Diego, California. 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 thus
eliminating the risk of potentially contaminated needle stick incidents and the
resulting blood-borne pathogen transmission. The INJEX(TM) System is
significantly smaller, easier to use, less expensive and more comfortable than
previous needle-free injection systems marketed by ESI's competitors. 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 the foregoing
criteria.
The INJEX(TM) System consists of three components: (i) a pen-sized reusable
jet injector, (ii) a reset box which also acts as a carrying case and (iii) a
plastic, sterile, disposable ampule which contains the medication fluid. The
Company also produes a full-range of accessories which allow the INJEX(TM)
System to be used with all standard medication containers.
We have received approximately $35 million in orders for both testing and
end-user purposes. These orders are primarily for Europe. Currently, we have
adequate manufacturing capacity in place for the injector pens and reset boxes,
and intend to expand our manufacturing capacity as necessary in order to meet
current and expected future demand. We do not possess the internal manufacturing
capacity for the ampules required for utilization of the INJEX(TM) system,
instead we subcontract the production of ampules to specialized contract
manufacturers. Our subcontractors currently have in place limited production
capabilities for the ampules, and are currently expanding production capacity.
Our ability to increase capacity is dependent upon our ability to raise the
necessary working capital.
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The INJEX(TM) System is currently designed to deliver variable doses of
fluid medication from .02 ml to .5 ml. The ampules can be pre-filled by the
medication manufacturer for resale through pharmacies or delivered sterilized
and empty to be filled by patients or care providers.
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 in the physician's office, hospitals and
clinic environments, for self-administered injections by people with diabetes,
allergies or human growth disorders and vaccine inoculations such as for polio,
tetanus, rabies, flu, etc. The INJEX(TM) System also has applications in the
dental and veterinary markets.
In recent years, increased awareness of the dangers of blood-borne pathogen
transmission has led to increased concern about needle safety in hospitals, and
for healthcare professionals and their patients. As a result, there is now
significant pressure on the healthcare industry to eliminate the risk of
contaminated needlestick injuries. The U.S. Occupational Safety and Health
Administration ("OSHA") has issued various regulations to improve safety, and
most recently, the State of California has enacted healthcare worker safety
legislation which requires healthcare providers to evaluate the various uses of
needle-syringes in their facilities and to begin using alternative injection
systems to protect healthcare worker safety where appropriate. Under the law,
healthcare providers can be held liable if a worker becomes infected from a
needlestick injury and suitable alternatives to needle-syringes were available
but not used.
ESI holds two U.S. patents for 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 the system in the U.S.
in the spring of 2000. At the start, ESI will market the system through
exclusive arrangements with medical products distributors. ESI is also
discussing licensing and joint development agreements with pharmaceutical
companies in the U.S. to market the system. ESI also has plans to market its
products overseas. Currently, it has distribution arrangements in Asia and
Mexico.
All aspects of developing, manufacturing and marketing the INJEX(TM) system
in European markets will be conducted by Rosch GmbH. Rosch GmbH received CE-mark
approval in September 1999, allowing it to sell the INJEX(TM) system directly
over-the-counter, and sales of the system are expected to commence by the end of
calendar 1999.
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 in
the U.S. and Europe through the Company's subsidiaries, Dynamic Dental and Rosch
GmbH, respectively. In January 1999, the Company announced its intention to
divest its ownership of Dynamic Dental, 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 Dynamic Dental
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 two kinds of camera systems, the
DynaCam(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). During 1999, the Company replaced its marketing of the Viola(TM) in
the U.S. with the DynaCam(TM).
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In the United States, the Company focuses its efforts on selling intraoral
cameras as part of a complete digital operatory system, including cameras,
dental and cosmetic imaging software, and related hardware and equipment. The
Company also offers digital x-ray equipment that can be combined with its camera
system.
Digital operatory hardware and software allow the dentist and his/her
assistants to capture and store the pictures taken by the intraoral camera on
their computer system. Once digitized, these images are stored in a database for
that specific patient and can be recalled for viewing and comparison. The basic
system allows dentists to store over 45,000 individual images on their system as
compared to four images on most intraoral camera systems. The dentist can
enhance the picture, giving the patients a better view of their teeth and helps
the patient accept the recommended treatment plan. Images can also be
transferred to other dentists via the video conferencing module or on the
Internet. The system also integrates with most practice management software
packages, allowing the dentist to save time by not having to reenter the
patient's name in each program.
Cosmetic imaging software takes a digitized image of a patient's smile and
gives the dentist the ability to make changes to the smile. This allows the
patient to see what his or her smile would look like if the patient accepts 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 dentists 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 patient's 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 Dynamic Dental, 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 the change in the strategic direction of the Company
announced in January 1999, the Company has sold the assets associated with its
audiometrics business, and is no longer involved in the manufacture and sale of
audiometrics products.
Rosch GmbH
As of September 30, 1999, Rosch GmbH is a 50.01%-owned subsidiary located
in Berlin, Germany. It is involved in the marketing and distribution of
healthcare products, primarily the Company's products, to primary care
physicians throughout Europe. Substantially all of the Company's foreign and
export sales are conducted through Rosch GmbH. In the near term, it is expected
that Rosch GmbH will concentrate its efforts on the introduction of the
INJEX(TM) system into European markets, while continuing to market and
distribute intraoral dental cameras and other related products.
Product Development
The Company is committed to fund the continued development, manufacturing
capabilities and marketing necessary to bring the INJEX(TM) needle-free
injection system to market by early 2000, and to continue increasing
manufacturing capacity based on demand. The Company anticipates that
approximately $2 to $4 million may be required for multiple fully-automated
production lines and marketing.
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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 before they may be sold, or be exempted from
the need to obtain such clearance. The FDA regulatory process may delay the
marketing of new systems or devices for lengthy periods and impose substantial
additional costs. Moreover, FDA marketing clearance regulations depend heavily
on administrative interpretation, and there can be no assurance that
interpretations made by the FDA or other regulatory bodies, with possible
retroactive effect, will not adversely affect the Company. There can be no
assurance that the Company will be able to obtain clearance of any future
Company products or any expanded uses of current or future Company products in a
timely manner or at all. In addition, even if obtained, FDA clearances are
subject to continual review, and if the FDA believes that the Company is not in
compliance with applicable requirements, it can institute proceedings to detain
or seize the Company's products, require a recall, suspend production,
distribution, marketing and sales, enjoin future violations and assess civil and
criminal penalties against the Company, its directors, officers or employees.
The FDA may also suspend or withdraw market approval for the Company's products
or require the Company to repair, replace or refund the cost of any product
manufactured or distributed by the Company. FDA regulations also require the
Company to adhere to certain "Good Manufacturing Practices" ("GMP") regulations,
which include validation testing, quality control and documentation procedures.
The Company's compliance with applicable regulatory requirements is subject to
periodic inspections by the FDA. The Company will need 510(k) clearance for any
new medical products which are developed in the future. Compliance with these
requirements requires the Company to expend time, resources and effort in the
areas of production and quality control for itself and for its contract
manufacturers. Moreover, there can be no assurance that the required regulatory
clearances will be obtained, and those obtained may include significant
limitations on the uses of the product in question. In addition, changes in
existing regulations or the adoption of new regulations could make regulatory
compliance by the Company more difficult in the future.
Although the Company believes that its products and procedures are
currently in material compliance with all relevant FDA requirements, the failure
to obtain the required regulatory clearances or to comply with applicable
regulations would have a material adverse effect on the Company.
Sales of medical devices outside the United States that are manufactured
within the United States are subject to United States export requirements, and
all medical devices sold abroad are subject to applicable foreign regulatory
requirements. Legal restrictions on the sale of imported medical devices vary
from country to country. The time and requirements to obtain approval by a
foreign country may differ substantially from those required for FDA clearance.
There can be no assurance that the Company will be able to obtain regulatory
approvals or clearances for its products in foreign countries.
The Company has obtained ISO 9001/EN 46001 certification of its quality
systems. This certification shows that the Company's procedures and
manufacturing facilities comply with standards for quality assurance and
manufacturing process control. Such certification, along with European Medical
Device Directive certification, evidence compliance with the requirements
enabling the Company to affix the CE Mark to its products. The CE Mark denotes
conformity with European standards for safety and allows certified devices to be
placed on the market in all European Union ("EU") countries.
Patents and Trademarks
The Company holds two United States patents and has applied for nine
foreign patents for its INJEX(TM) needle-free drug injection system. The Company
also possesses certain registered trademarks and copyrights for names which it
believes are important to its business.
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 and worldwide. The Company expects that product sales will be
directed to pharmaceutical companies, pediatric clinics, infectious disease
wards, and outpatient clinics where the threat of an accidental needle stick and
patient trauma are highest. The Company's marketing plans may change
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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 Asia and Australia, subject to the distributor selling
specified quantities within the territory.
In 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 Dynamic Dental
through 32 independent regional dealers who are retained by Dynamic Dental 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 1999, more than a majority of the Company's
sales were in Europe.
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 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 molded plastic and medical-grade stainless steel
products. The disposable plastic components of the INJEX(TM) System include the
ampule which contains the drug, and the accessories used with medication
containers. The Company has contracted with manufacturers of specialty medical
devices for the production of the component parts of the INJEX(TM) System. The
Company is in the process of expanding its contract manufacturing capacity to
meet the anticipated future demand.
The intraoral cameras and other dental equipment distributed by the Company
are purchased from suppliers and resold to the Company's customers.
Employees
At July 31, 1999, the Company and its subsidiaries had 47 employees, 14 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 are covered by collective bargaining
agreements. The Company considers its employee relations to be satisfactory.
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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.
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 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.
Another 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. Bio-Ject, Inc. has also acquired Vitajet
Corporation, which has introduced a coil spring injector system which
incorporates a disposable needle-free syringe.
Several other companies have needle-free medication delivery systems in
various stages of development, which may ultimately compete with the INJEX
System.
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 Equidyne to compete with the smaller safety syringe
manufacturers and jet injector firms, based on factors such as health care
worker safety, ease of use, costs of controlled disposal and patient comfort.
The Company expects that when all costs are considered, the INJEX(TM) System
will compete successfully.
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.
Item 2. DESCRIPTION OF PROPERTY
The Company's corporate offices are located in Amherst, New Hampshire in
facilities containing 800 square feet subleased to the Company rent-free through
its expiration in February 2000.
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DDS maintains its administrative and sales operations in Gainesville,
Georgia where it rents a facility containing 2,000 square feet under an
operating lease which expires in October 2001. DDS rents these facilities for
$1,800 per month.
ESI maintains its administrative and sales operations in San Diego,
California where it leases a facility containing 1,200 square feet under a
renewable quarterly lease currently expiring in December 1999 for $1,000 per
month. ESI is also leasing a production facility in Aliso Viejo, California
containing approximately 1,700 square feet at $2,000 per month, 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. The five year lease expires in May 2002.
The Company believes that these facilities are adequate for its current
business needs.
Item 3. LEGAL PROCEEDINGS
On June 26, 1998, Christer O. Andreasson filed an action against ESI, the
Company, and four former directors of ESI, in Superior Court of California,
County of San Diego, seeking an indeterminate amount of damages arising from his
employment relationship with ESI over several months spanning late 1995 and
early 1996, which was prior to the Company's acquisition of ESI. 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, preliminary
discovery has commenced and based upon its present knowledge, the Company
believes that DDS has meritorious defenses to the allegations against it.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Principal Market and Sales Prices for Company's Common Stock
The Common Stock of the Company is traded in the over-the-counter market on
the OTC Electronic Bulletin Board under the symbol AMER. The following table
sets forth for the indicated periods the high and low bid prices of the Common
Stock for the fiscal years ended July 31, 1999 and July 31, 1998. These prices
are based on quotations between dealers, and do not reflect retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
9
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------- ------------------------------------- ------------------------------------
Fiscal Period Fiscal Year Ended 7/31/99 Fiscal Year Ended 7/31/98
- -------------------------------------- ------------------------------------- ------------------------------------
High Low High Low
- -------------------------------------- ------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
First Quarter $4.31 $2.38 $1.88 $1.00
- -------------------------------------- ------------------ ------------------ ------------------ -----------------
Second Quarter 2.31 .88 1.50 .66
- -------------------------------------- ------------------ ------------------ ------------------ -----------------
Third Quarter 2.50 .84 4.94 .88
- -------------------------------------- ------------------ ------------------ ------------------ -----------------
Fourth Quarter 2.56 1.03 4.81 3.19
- -------------------------------------- ------------------ ------------------ ------------------ -----------------
</TABLE>
Approximate Number of Holders of Company's Common Stock
As of July 31, 1999, there were approximately 920 stockholders of record of
the Company's Common Stock. The Company believes that a substantial amount of
the shares are held in nominee name for beneficial owners.
Dividends
The Company has never paid any cash dividends on its Common Stock and its
Board of Directors has no present intention of declaring any cash dividends in
the foreseeable future. In addition, the Convertible Preferred Stock imposes
certain restrictions on cash dividends on the Common Stock. The Company's
outstanding Series A and Series B Convertible Preferred Stock provides for
annual dividends at the base rate of 5% of the liquidation preference, as
defined.
Recent Sales of Unregistered Securities
During the three month period ended July 31, 1999, the holders of the
Series B Convertible Preferred Stockholders exercised conversion rights and
converted a total of 430 shares of preferred stock into 431,530 shares of the
Company's common stock. In addition, the holder of the Series A Convertible
Preferred Stock converted a total of 430 shares of preferred stock into 513,237
shares of the Company's common stock. These conversions were exempt pursuant to
Section 3(a)(9) of the Securities Act of 1933.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This report contains or refers to forward-looking information made pursuant
to the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995. That information covers future revenues, products, and income and is
based upon current expectations that involve a number of business risks and
uncertainties. Among the factors that could cause actual results to differ
materially from those expressed or implied in any forward-looking statement
include, but are not limited to, technological innovations of competitors,
delays in product introductions, changes in health care regulations and
reimbursements, changes in foreign economic conditions or currency translation,
product acceptance or changes in government regulation of the Company's
products, ability to finance future projects, as well as other factors discussed
in other Securities and Exchange Commission filings for the Company.
Results of Operations
Consolidated net sales were $6,789,000 for the fiscal year ended July 31,
1999 ("Fiscal 1999") compared to $7,025,000 during the fiscal year ended July
31, 1998 ("Fiscal 1998"). During Fiscal 1999, the Company experienced decreased
sales of its audiometrics products, until April 1999, when the assets associated
with the audiometric product line were sold. As a result, revenue from
audiometrics product sales decreased from $1.6 million in Fiscal 1998 to
$600,000 in Fiscal 1999. This decrease was partially offset by the May 1998
acquisition of DDS, which resulted in inclusion of a full year of sales for DDS
(approximately $1.1 million) in Fiscal 1999, as compared to three months of
sales for DDS (approximately $600,000) in Fiscal 1998. In addition, the sales of
Rosch GmbH increased during Fiscal 1999 by approximately $200,000.
10
<PAGE>
Net loss for Fiscal 1999 was $9,861,000, or $1.39 per share, compared to a
net loss of $3,674,000, or $1.01 per share, for Fiscal 1998. The Fiscal 1999 net
loss includes a non-cash charge of approximately $3.2 million representing a
write-off of the unamortized goodwill associated with DDS. As discussed in Note
3 to the consolidated financial statements, this write-off was based primarily
upon revised estimates as to the expected sale price which could be obtained by
selling the outstanding DDS common stock, as well as the expected future
financial results of DDS. These revised estimates were based upon the Company's
efforts to sell DDS, as well as DDS' recent operating results. The overall
increase in net loss in Fiscal 1999 is also attributable to increased selling,
general and administrative expenses (see below), and was partially offset by
license fee revenue of $576,000 recognized by ESI during Fiscal 1999. License
fee revenue represents fees paid for exclusive distribution rights to the INJEX
System in specific geographic areas.
Cost of sales, as a percentage of net sales, for Fiscal 1999 was 75.2%
versus 66.8% for Fiscal 1998. The increase in cost as a percentage of sales can
be attributed to the product mix which included sales of DDS for twelve months
of Fiscal 1999 as compared to three months for fiscal 1998. As the Company's
sales mix became more significantly related to dental camera products, and as
costs of sales for dental camera products is greater than for other product
lines, as expected, costs of sales as a percentage increased.
Selling, general & administrative expense (SG&A) and research and
development expense increased in Fiscal 1999 over Fiscal 1998. The $2,722,000
increase in SG&A expenses is due to the acquisitions of DDS and ESI which took
place in the fourth quarter of Fiscal 1998, and thus only three months of
expenses for these subsidiaries were included in the consolidated financial
statements for Fiscal 1998, as compared to a full year for Fiscal 1999.
Throughout Fiscal 1999, the Company began to shift its focus towards ESI's INJEX
System, and by the fourth quarter, the INJEX System became the focus of the
Company. As a result, the expenses related to ESI increased significantly in all
areas. Headcount was increased, additional consulting services were purchased,
and a second operating facility was added as the Company began to build the
infrastructure necessary to achieve its goal of bringing the INJEX System to
market. Research and development expense also increased by approximately 220% as
a result of these efforts. These increases in SG&A were partially offset by
decreases resulting from the sale of the assets associated with the audiometrics
product line in April 1999. In anticipation of this sale, audiometrics headcount
reductions took place beginning in January, 1999, and the audiometrics operating
facility lease was terminated.
Liquidity and Capital Resources
At July 31, 1999, the Company had a working capital deficit of $1,262,000,
compared to positive working capital at July 31, 1998 of $793,000. The decrease
of approximately $2 million during 1999 was primarily the result of the
Company's net loss, which was partially offset by the net proceeds of
approximately $1.5 million from the placement of Series B Preferred Stock, a
capital contribution of approximately $1.5 million into Rosch GmbH by its
minority shareholders, and proceeds from the sale of the audiometrics assets of
$625,000. The Company also used $526,000 of working capital to invest in
property and equipment, primarily related to tooling necessary for manufacture
of the INJEX System.
In September 1999, the Company raised additional working capital through a
transaction with a minority shareholder of Rosch GmbH whereby an additional
capital contribution was made to Rosch GmbH of approximately $1.6 million. In
addition, one-third of the Company's ownership in Rosch GmbH at that time was
sold to the minority shareholder for an additional $1.6 million. As a result of
this transaction, the Company's ownership of Rosch GmbH was reduced to 50.01%.
As the Company continues to maintain a controlling interest, Rosch GmbH will
continue as a consolidated subsidiary until and unless the Company elects to
sell additional shares of its ownership, or Rosch GmbH sells its shares
directly. The proceeds from this transaction will be used for general working
capital and for the possible redemption of a portion of the outstanding
Convertible Preferred Stock. Though this transaction provided significant
additional working capital to the Company, it does not provide sufficient
working capital to sustain the Company through the expected time necessary to
achieve positive cash flows from operations. Additional working capital will be
needed in fiscal 2000, and therefore, the Company continues to seek additional
capital through equity and/or debt placements or secured financing; however, no
assurance can be given
11
<PAGE>
that such financing arrangements would be successfully completed and, if so, on
terms not dilutive to existing stockholders.
The Company's working capital requirements and, as shown in the financial
statements, the net losses incurred of $9,861,000 and $3,674,000 for the years
ended July 31, 1999 and 1998, respectively, as well as other factors, raise
substantial doubt about the ability of the Company to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern (See Footnote 13 to Notes to
Consolidated Financial Statements).
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.
The Company has completed its plan to resolve the Year 2000 Issue which
involved the following four phases: assessment, remediation, testing and
implementation. The assessment indicated that most of the Company's significant
information technology systems would 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, however, following the sale of the audiometrics assets in April 1999
(See Note 3), the Company no longer sells products which utilize software and
hardware (embedded chips) which could 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. The Company has purchased and
installed a year 2000-compliant upgrade, and is now fully year 2000 compliant
with respect to its financial information systems, and as the new software is
also an unmodified off-the-shelf package, testing to ensure Year 2000 compliance
is not necessary.
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 was approximately $5,000,
which was funded through operating cash flows. The project costs consisted
principally of the cost of new software, which has been capitalized.
12
<PAGE>
Management of the Company believes it has effectively resolved the Year
2000 Issue. However, exposure continues to exist relative to the Company's
outside suppliers, which could have a materially adverse effect on its
manufacturing and shipping operations. 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 of an unforeseen Year 2000 problem. The Company plans to continue to
monitor its suppliers, and will develop such a plan if necessary.
Euro Currency Conversion
The Company is aware of and has developed systems designed to handle the
introduction of the Euro as an effective currency in Europe. Although the
Company believes the systems that have been implemented are sufficient for the
Company to be able to process Euro denominated transactions, there can be no
assurances that such systems will actually function as designed. If they do not
function as designed, the Company's financial results could be adversely
affected. To date, the Company has not encountered any significant processing
issues related to the introduction of the Euro. The introduction of the Euro has
not materially affected the manner in which the Company conducts its operations,
nor has it required the Company to alter any significant contracts.
Factors Affecting Future Results
As originally announced in January 1999, the Company has shifted its focus
to concentrate its resources on the INJEX needle-free drug delivery system
(INJEX). This shift of focus has led to the sale of the Company's audiometrics
assets in April 1999, as well as a planned sale of its U.S. intraoral dental
camera operation.
As a result, the Company's future operating results are difficult to
predict and will be affected by a number of factors, including; the timely
ability to bring the INJEX System to market, the ability to obtain sufficient
working capital, continued development of the INJEX System and its components,
sufficiency of manufacturing capacity, demand for the INJEX System and ability
to capture sufficient market share, development and sales and marketing results
of competing products, competetive pricing pressures and fluctuating economic
conditions in the U.S., Europe, Asia and other international markets. In
addition, the Company's recent sale of its audiometrics assets, the planned sale
of its U.S. intraoral dental camera operation and reductions to the Company's
ownership share of Rosch GmbH make it impractical to use past performance as a
predictor of future results.
This past year has been a year of transition for the Company. We began the
year with a strategy of growth through acquisitions. However, the response to
the INJEX system, combined with market forces which contributed to operating
losses in the audiometrics and U.S. dental product lines, led to our decision to
focus our resources on ESI and its INJEX System.
As with most small developing companies, raising and maintaining sufficient
operating capital is a continuing issue. During the year, a shortage of capital
has, at times, slowed our development activities. However, we have made
significant strides towards fully automated production which will supply the
world-wide demand for the INJEX System. We currently have manual production
capabilities which recently began supplying product to German and U.S. markets.
The automated systems, which are being developed concurrently in Europe and the
U.S., will allow us to serve a larger market, reduce costs, and assuming
sufficient working capital, work towards improved financial condition and
profitability.
Other milestones reached during the year include: The signing of a
long-term distribution contract with La Sociedad Mercantil Mexicana ("LSM"), a
Mexican medical supplies distributor; an agreement with Precision MedMark
("PMM") to distribute the INJEX System throughout the U.S.; agreements with HNS
International, Inc. to distribute the INJEX System throughout Japan and Asia;
the sale of certain assets of the audiometric product line to Maico Diagnostic
GmbH, a German company; a contract with Diamed-depot-system to distribute the
INJEX System in Germany, along with an agreement with Medical Service Europe BV
to distribute the INJEX System in Belgium, Luxembourg and the Netherlands, which
are expected to generate significant revenues; receipt of ISO 9001 and EN-46001
quality certifications for the INJEX System; receipt of the European CE Mark,
allowing distribution of the INJEX System throughout Europe, both through normal
distribution channels, and directly to the consumer; and an agreement with
Concord Effekten AG ("Concord"), an investment banking firm based in Frankfurt,
Germany, to bring our Germany-based subsidiary, Rosch GmbH Medizintechnik
("Rosch GmbH") to the Frankfurt New Market Exchange through an initial public
offering of its shares. In July and September, Concord made substantial
investments in Rosch GmbH, which have provided the Company with substantial
working capital.
13
<PAGE>
Item 7. CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Page
Report of Ernst & Young LLP, Independent Auditors.............................15
Consolidated Balance Sheets at July 31, 1999 and 1998.........................16
Consolidated Statements of Operations for the Years Ended
July 31, 1999 and 1998......................................................17
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 1999 and 1998..................................18
Consolidated Statements of Cash Flows for the Years Ended
July 31, 1999 and 1998......................................................20
Notes to Consolidated Financial Statements....................................21
14
<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, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the years then ended. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the years then
ended, 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
October 26, 1999
15
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Assets (Thousands)
Current Assets:
Cash and cash equivalents.................................................. $ 210 $ 396
Accounts receivable, net of allowance of $44,000 and
$13,000 in 1999 and 1998, respectively 897 1,169
Inventories................................................................ 1,480 1,951
Prepaid and other current assets........................................... 196 223
------------------------------
Total current assets............................................... 2,783 3,739
Property and Equipment:
Machinery and equipment................................................... 36 475
309 --
Tooling
Furniture and fixtures.................................................... 371 306
Leasehold improvements.................................................... 29 13
------------------------------
745 794
Accumulated depreciation................................................... (115) (436)
------------------------------
630 358
Goodwill................................................................... 715 4,298
Patents.................................................................... 2,897 3,027
Other...................................................................... 216 36
==============================
$ 7,241 $11,458
==============================
Liabilities & Stockholders' Equity
Current Liabilities:
Bank debt.................................................................. $ 1,073 $ 1,033
Accounts payable........................................................... 1,784 1,118
Accrued liabilities........................................................ 815 723
Dividends payable.......................................................... 373 72
------------------------------
Total current liabilities............................................... 4,045 2,946
Minority interest in consolidated subsidiary............................... 440 --
Stockholders' Equity:
Preferred stock, $.01 par value;
Authorized-1,000,000 shares:
Series A Convertible; Outstanding - 2,400 shares
in 1999 and 3,000 in 1998.............................................. 1,909 2,387
Series B Convertible; Outstanding - 1,170 shares
in 1999 and none in 1998 .............................................. 982 --
Common stock, $.10 par value; Authorized-
20,000,000 shares; Outstanding - 9,637,621
and 7,058,136 shares in 1999 and 1998, respectively...................... 963 705
Additional paid-in capital................................................. 14,837 12,643
Retained deficit........................................................... (15,541) (5,680)
Accumulated other comprehensive loss....................................... (200) (249)
------------------------------
2,950 9,806
Deferred compensation...................................................... (194) (1,294)
------------------------------
Total stockholder's equity........................................ 2,756 8,512
==============================
$ 7,241 $11,458
==============================
</TABLE>
See accompanying notes.
16
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended July 31
------------------------------
1999 1998
------------------------------
(Thousands, except per share
amounts)
<S> <C> <C>
Net sales ................................................... $ 6,789 $ 7,025
Cost of goods sold .......................................... 5,107 4,692
------------------------------
Gross profit ............................................. 1,682 2,333
Selling, general and administrative expenses ................ 8,303 5,581
Research and development .................................... 392 122
Write-down of goodwill ...................................... 3,196 --
------------------------------
Total operating expenses ................................. 11,891 5,703
------------------------------
Operating loss .............................................. (10,209) (3,370)
Other income (expenses):
License fee revenue ...................................... 576 --
Loss on sale of audiometrics assets ...................... (98) --
Interest, net ............................................ (174) (186)
Undistributed earnings (loss) of affiliate ............... -- 56
Minority interest in affiliate ........................... 35 (85)
Other .................................................... 9 (89)
------------------------------
348 (304)
------------------------------
Net loss .................................................... $ (9,861) $ (3,674)
==============================
Net loss attributable
to common stockholders* .................................... $(10,695) $ (4,746)
==============================
Net loss per share,
basic and diluted .......................................... $ (1.39) $ (1.01)
==============================
</TABLE>
* The years ended July 31, 1999 and 1998 include the impact of dividends on
stock for (a) a non-cash, non-recurring beneficial conversion feature of
$533,000 and $1,000,000, respectively; and (b) $301,000 and $72,000,
respectively, of dividends on Preferred Stock.
See accompanying notes.
17
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
(Thousands)
<TABLE>
<CAPTION> Accumulated
Convertible Additional Other
Preferred Stock Common Stock Paid-in Retained Comprehensive
Capital Deficit Loss
---------------------------------------------------------------------------------
Shares Book Shares Par Value
Value
------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1997 ...................... -- -- 2,553 255 2,919 (2,006) --
Conversion of convertible debentures, net ...... -- -- 720 72 625 -- --
Private placement of common stock, net ......... -- -- 1,050 105 923 -- --
Issuance of common stock for investment in
affiliates, net ............................. -- -- 210 21 159 -- --
Issuance of common stock for acquisitions, net . -- -- 1,350 135 5,490 -- --
Stock and warrants issued for services ......... -- -- 1,000 100 1,480 -- --
Exercise of stock options ...................... -- -- 175 17 158 -- --
Sale of convertible preferred stock and
warrants ..................................... 3 $ 2,387 -- -- 255 -- --
Dividend on convertible preferred stock ........ -- -- -- -- (72) -- --
Conversion feature on convertible preferred
stock ........................................ -- (1,000) -- -- 1,000 -- --
Dividend on beneficial conversion feature ...... -- 1,000 -- -- (1,000) -- --
Deferred compensation related to common
stock options ................................ -- -- -- -- 706 -- --
Amortization of deferred compensation .......... -- -- -- -- -- -- --
Translation adjustment ......................... -- -- -- -- -- -- $ (249)
Net loss ....................................... -- -- -- -- -- (3,674) --
---------------------------------------------------------------------------------
Balance at July 31, 1998 ..................... 3 2,387 7,058 705 12,643 (5,680) (249)
Private placements of common stock, net ........ -- -- 590 59 427 -- --
Common stock issued for services ............... -- -- 200 20 168 -- --
Exercise of stock options and warrants ......... -- -- 610 61 (39) -- --
Dividends on convertible preferred stock ....... -- -- -- -- (391) -- --
Sale of convertible preferred stock and warrants 2 1,384 -- -- 114 -- --
Conversion feature on convertible
preferred stock............................... -- (533) -- -- 533 -- --
Dividend on beneficial conversion feature ...... -- 533 -- -- (533) -- --
Conversion of convertible preferred stock ...... (1) (880) 1,179 118 837 -- --
</TABLE>
Total
Deferred Stockholders'
Compensation Equity
----------------------------
Balance at August 1, 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)
Net loss ....................................... -- (3,674)
-----------------------
Balance at July 31, 1998 ..................... (1,294) 8,512
Private placements of common stock, net ........ -- 486
Common stock issued for services ............... (188) --
Exercise of stock options and warrants ......... -- 22
Dividends on convertible preferred stock ....... -- (391)
Sale of convertible preferred stock and warrants -- 1,498
Conversion feature on convertible
preferred stock............................... -- --
Dividend on beneficial conversion feature ...... -- --
Conversion of convertible preferred stock ...... -- 75
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Amortization of deferred compensation .......... -- -- -- -- -- -- --
Translation adjustment ......................... -- -- -- -- -- -- 49
Net loss ....................................... -- -- -- -- -- (9,861) --
Sale of subsidiary capital stock ............... -- -- -- -- 1,078 -- --
---------------------------------------------------------------------------------
Balance at July 31, 1999 ..................... 4 $ 2,891 9,637 $ 963 $ 14,837 $(15,541) $ (200)
=================================================================================
</TABLE>
Amortization of deferred compensation .......... 1,288 1,288
Translation adjustment ......................... -- 49
Net loss ....................................... -- (9,861)
Sale of subsidiary capital stock................ -- 1,078
--------------------
Balance at July 31, 1999 ..................... $ (194) $ 2,756
====================
See accompanying notes.
19
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended July 31
-----------------------------
1999 1998
-----------------------------
(Thousands)
<S> <C> <C>
Operating activities:
Net loss ............................................................ $(9,861) $(3,674)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ....................................... 530 269
Deferred compensation amortization .................................. 1,288 992
Loss on sale of audiometrics assets ................................. 98 --
Loss on sale of affiliate ........................................... -- 64
Write-down of goodwill .............................................. 3,196 --
Undistributed earnings (loss) of affiliate .......................... -- (56)
Minority interest ................................................... (35) 85
Other ............................................................... 25 (67)
Changes in operating assets and liabilities:
Accounts receivable ............................................... 319 598
Inventories, prepaid and other current assets ..................... (118) (27)
Accounts payable and accrued liabilities .......................... 1,686 (856)
-----------------------------
Net cash used in operating activities ............................... (2,872) (2,672)
Investing activities:
Proceeds from sale of audiometrics assets ........................... 625 --
Investment in affiliates, net of cash acquired ...................... -- (138)
Purchase of property and equipment, net ............................. (526) (188)
Acquisition of DDS and ESI, net of cash acquired .................... -- (151)
Proceeds from sale of affiliate ..................................... -- 247
-----------------------------
Net cash provided by (used in) investing activities ................. 99 (230)
Financing activities:
Principal payments on long-term debt ................................ -- (532)
Proceeds (payments) from debt and bank lines-of-credit .............. (512) (97)
Issuance of common stock, net ....................................... 486 1,028
Issuance of capital stock by consoldiated
subsidiary ........................................................ 1,553 --
Proceeds from exercise of common stock options ...................... 22 175
Issuance of convertible preferred stock, net ........................ 1,498 2,642
Other ............................................................... (16) --
-----------------------------
Net cash provided by financing activities ........................... 3,031 3,216
-----------------------------
Effect of exchange rate on cash ..................................... (444) (389)
-----------------------------
Decrease in cash and cash equivalents ............................... (186) (75)
Cash and cash equivalents, beginning of year ........................ 396 471
=============================
Cash and cash equivalents, end of year .............................. $ 210 $ 396
=============================
Noncash transactions:
Common stock and warrants issued for services ...................... $ 188 $ 1,580
Conversion of convertible preferred stock .......................... $ 880 --
Exercise of stock options and warrants ............................. $ 590 --
Conversion of convertible subordinated debt into
common stock .................................................... -- $ 697
Common stock issued in connection with acquisitions ................ -- $ 5,805
</TABLE>
See accompanying notes.
20
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business Description
American Electromedics Corp. (the "Company") is engaged in the development,
manufacture and sale of medical equipment principally to the United States and
European medical communities. The Company's current primary focus is on the
continued development of the INJEX needle-free drug injection system. The
Company also markets and sells intraoral dental camera equipment, and through
April 1999, produced Tympanometers(R) and Audiometers, two devices designed for
audiological testing purposes. In April 1999, the Company sold all of its assets
associated with its audiological testing products.
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. The Company receives
revenue on sales of distribution rights and license fees, which is recognized
over the terms of the related agreements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. During 1999, the Company's
formerly wholly-owned subsidiary, Rosch GmbH, received a capital investment from
an outside third party, reducing the Company's ownership interest to 75%. Rosch
GmbH continues to be consolidated, and the Company continues to maintain a
controlling interest. See Note 5 for further information. 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 (predominantly average cost
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.
21
<PAGE>
Goodwill and Patents
In April 1999, upon the sale of the Company's audiometrics assets, $189,000
of unamortized goodwill associated with the audiometrics business was
written-off against the sale proceeds. See Note 3.
Also in April 1999, the Company wrote-off approximately $3.2 million of
goodwill associated with its wholly-owned subsidiary, Dynamic Dental Systems.
See Note 3.
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 years ended July 31, 1999 and 1998 was $124,000 and $112,000,
respectively. Accumulated amortization at July 31, 1999 and 1998 is $116,000 and
$354,000, respectively.
Patents are being amortized on a straight-line basis over 15 years, the
remaining life of the patent. Amortization expense for the years ended July 31,
1999 and 1998 was $206,000 and $51,000, respectively. Accumulated amortization
as of July 31, 1999 and 1998 is $257,000 and $51,000, respectively.
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, other than as described in
Note 3, there was no impairment in the carrying value of goodwill or its other
long-lived assets at July 31, 1999 or 1998.
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 $417,000 and $440,000 in 1999 and 1998, respectively.
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.
22
<PAGE>
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.
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
Accounting 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 changes in exchange rates
from the date of acquisition of Rosch GmbH to July 31, 1999 have been reported
separately as a component of stockholders' equity. The aggregate transaction
gains and losses are insignificant.
Comprehensive Income (Loss)
Effective August 1, 1998, 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 results of operations or stockholders' equity. For the year
ended July 31, 1999, the Company's only item of other comprehensive income was
the foreign currency translation adjustment recognized in consolidation of its
German subsidiary, Rosch GmbH. SFAS 130 requires such adjustments, which prior
to adoption were reported separately in stockholders' 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
year ended July 31, 1999 was $49,000 and ($9,812,000), respectively. The foreign
currency translation adjustment and comprehensive loss for the year ended July
31, 1998 was ($249,000) and ($3,923,000), respectively. As of July 31, 1999 and
1998, the cumulative translation adjustment and accumulated other comprehensive
loss was ($200,000) and ($249,000), respectively.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding, and diluted earnings per
share reflects the potential dilution that would occur if securities such as
stock options and preferred stock conversion rights were exercised.
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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 was being amortized on a straight-line basis over 15 years, however, such
amount was written down to zero as of July 31, 1999. See Note 3. The acquisition
was 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 was 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 was 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 5)
occurred as of the beginning of Fiscal 1998:
Year Ended July 31, 1998
----------------------------
Net sales.................................. $ 8,970,000
Net loss................................... $(3,813,000)
Loss per share:
Basic............................. $ (.66)
===========
Diluted........................... $ (.66)
===========
3. DIVESTITURES
In January 1999, the Company announced its intention to focus its resources
on the needleless injection system ("INJEX(TM)") being developed by its
wholly-owned subsidiary, ESI, and hired an investment banking firm to assist in
the marketing and selling of the Company's audiometric and U.S. dental
businesses.
In April 1999, the Company sold certain assets of its audiometrics business
for $625,000. The sale was made pursuant to an Assets Purchase Agreement whereby
the purchaser obtained all of the Company's domestic audiometric inventory, as
well as all trademarks, patents and other rights associated with the
audiometrics business, including the name "American Electromedics". As a result,
the Company intends to effect a change in the name of the Corporation in the
near future. The sale resulted in the recognition of a net loss of $98,000.
To date, the Company's efforts to sell DDS have been unsuccessful, and
based upon these results, the Company has revised its estimates as to the
ultimate sale price which could be obtained for DDS. In addition, since
24
<PAGE>
its acquisition in April 1998, DDS has experienced a significant downturn in its
gross revenues, as well as gross profit margins, and has incurred net losses
totaling approximately $1.2 million for the year ended July 31, 1999. These
results are due to a variety of factors including changes within the dental
camera industry and DDS' competitors, the adverse affects of which became
evident during the quarter ended April 30, 1999.
Based upon the factors described above, management reviewed the continuing
value of the goodwill associated with DDS, taking into consideration the revised
estimates as to the expected sale price which could be obtained for the
outstanding DDS common stock, as well as the expectation that DDS' net operating
results and future cash flows will not likely be positive. Based upon this
review, the Company has written-off the goodwill, which had a book value, net of
accumulated amortization, of $3.2 million, as a charge against operations during
the year ended July 31, 1999.
4. INVENTORIES:
Inventories consist of the following at July 31:
1999 1998
---------- ----------
Raw materials $ 133,000 $ 291,000
Work-in-process -- 29,000
Finished goods 1,347,000 1,631,000
---------- ----------
$1,480,000 $1,951,000
========== ==========
5. INVESTMENT IN AFFILIATE:
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.
On July 8, 1999, the Company's German subsidiary, Rosch GmbH, received a
capital infusion of approximately $1.5 million from an outside investment
banking firm. This contribution of capital diluted the Company's ownership in
Rosch GmbH from 100% to 75%. As the Company continues to maintain a controlling
interest in Rosch GmbH, it continues to consolidate the operation of Rosch GmbH.
As a result, the Company has recognized a minority interest in the consolidated
subsidiary in an amount equivalent to 25% of the subsidiary's net assets as of
July 31, 1999, or $440,000. This balance includes the minority shareholder's 25%
share of Rosch GmbH's net losses attributed to the period July 8 through July
31, 1999, which was approximately $35,000.
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The following is summarized unaudited financial information of Rosch GmbH.
Year Ended July 31,
--------------------------
1999 1998
--------------------------
Sales....................................... $5,123,000 $5,400,000
Gross profit................................ 1,865,000 1,631,000
Net income (loss)........................... (542,000) (381,000)
Current assets.............................. 2,453,000 2,267,000
Non-current assets.......................... 1,206,000 258,000
Current liabilities......................... 1,899,000 1,907,000
Non-current liabilities..................... -0- -0-
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.
6. DEBT
Rosch GmbH has revolving lines of credit from two German-based banks. These
lines-of-credit bear interest rates ranging from 8.125% to 9.0% and permit total
borrowings of up to $876,000. As of July 31, 1999 and 1998, there was $483,000
and $368,000, respectively, outstanding under these revolving lines-of-credit.
Rosch GmbH also has Term Loans with German-based banks. The first loan is
payable in equal monthly installments of $22,000 through May 2000. Interest is
4.5% per annum, and as of July 31, 1999, there was $197,000 outstanding under
this loan. The second loan is payable in its entirety on February 2, 2000.
Interest is 5.7% per annum, and as of July 31, 1999, there was $393,000
outstanding under this loan.
As of July 31, 1998, there was $595,000 outstanding under two separate Term
Loans. During 1999, these balances were repaid and the loan agreements were
terminated.
Borrowings under outstanding loans are collateralized by the accounts
receivable and inventory of Rosch GmbH and are guaranteed by the Company.
7. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Earnings per share, basic and diluted, were computed using weighted average
shares outstanding of, 7,720,251 for 1999 and 4,687,707 for 1998. Dilutive
securities were not included in the calculation of diluted weighted average
shares due to their anti-dilutive effect.
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8. INCOME TAXES:
The Company's deferred tax assets (which result primarily from net
operating loss carryforwards and accrued expenses) as of July 31, 1999 and July
31, 1998 were $4,095,000 and $1,650,000, 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 $4,095,000 and $1,650,000 as of July 31, 1999 and July 31, 1998,
respectively. As of July 31, 1999, the Company has net operating loss
carryforwards for Federal income tax purposes of $8,727,000 that expire from
2004 to 2019. The Company's foreign subsidiary has net operating loss
carryforwards for German income tax purposes of approximately $615,000, which
under the German Tax Code, do not expire. The net provision for income taxes was
$-0- for the years ended July 31, 1999 and 1998.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,582,000 $ 1,079,000
Accrued expenses 83,000 90,000
Inventory 139,000 32,000
Other 10,000 16,000
Deferred compensation 281,000 433,000
----------- -----------
Total deferred tax assets 4,095,000 1,650,000
Valuation allowance for deferred tax assets (4,095,000) (1,650,000)
=========== ===========
Net deferred tax assets $ -0- $ -0-
=========== ===========
</TABLE>
A reconciliation of income taxes computed at the federal statutory rates to
income tax expense is as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------
Amount Percent Amount Percent
----------------------------------------------
<S> <C> <C> <C> <C>
Benefit at Federal Statutory Rates $(3,353,000) (34%) $(1,050,000) (34%)
Foreign Income Taxes
at Differing Statutory Rates (209,000) (2) -- --
Change in Valuation Reserve 2,445,000 25 992,000 32
Goodwill Amortization 1,291,000 13 57,000 2
Other (174,000) (2) 1,000 --
==============================================
Total $-- 0% $-- 0%
==============================================
</TABLE>
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9. 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 a bank pursuant to
a Forbearance and Workout Agreement, and its efforts to obtain additional equity
capital.
Private Placements of Common Stock:
In April 1999, the Company retained American Financial Communications
("AFC") as a corporate communications and financial consultant. The consulting
agreement expires in November 1999 and provides a total fee for AFC's services
of 200,000 shares of the Company's common stock. The Company has valued the
shares at the fair market value on the effective date of the agreement, which
was $.94 per share, and has recorded deferred compensation totaling $188,000 to
be amortized over the term of the agreement.
In April 1999, the Company closed two private placements for a total of
590,000 shares of Common Stock for aggregate net proceeds of $486,000, to two
"accredited investors", as such term is defined in Regulation D under the
Securities Act.
In November 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 a bank, and used
the balance of the proceeds for working capital, including increasing its
ownership interest in Rosch GmbH.
In 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 was recognized ratably over the one year term of the agreement.
Preferred Stock:
Series A:
During May 1998, the Company closed the placement of three tranches of
1,000 shares each of Series A Convertible Preferred Stock, $.01 par value (the
"Series A Preferred Stock"), to one purchaser (the "Purchaser") at a purchase
price of $1,000 per share or an aggregate purchase price of $3 million, pursuant
to a Securities Purchase Agreement (the "Purchase Agreement"), among the
Company, West End Capital LLC ("West End") and the Purchaser. As part of its
entry into the Purchase Agreement, the Company entered into a Registration
Rights Agreement (the "Registration Agreement") and a Warrant Agreement.
Concurrently with the closing for the first tranche of Series A Preferred Stock,
the Company issued warrants under the Warrant Agreement (the "Warrants") to West
End for the purchase of 50,000 shares of the Company's Common Stock at an
exercise price of $4.80 per share, subject to customary anti-dilution
provisions, expiring on May 5, 2002. The Company also issued warrants for the
purchase of 30,000 shares of Common Stock to the placement agent, exercisable at
$4.40 per share for three years. On the date of issuance, the Company determined
these warrants had a value of $255,000.
28
<PAGE>
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, and was declared effective in March 1999.
The rate had increased to 18% through the effective date of the Registration
Statement, at which time the dividend rate returned 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.
During the year ended July 31, 1999, the holder of Series A Convertible
Preferred Stock exercised its option and converted 600 shares of preferred stock
and accrued dividends of approximately $66,000 into 747,627 shares of the
Company's common stock.
Series B:
On February 3, 1999, the Company sold 1,600 shares of Series B Preferred
Stock to three purchasers for $1,000 per share or an aggregate purchase price of
$1.6 million, together with Warrants to purchase up to 25,000 shares of the
Company's Common Stock at an exercise price of $3.00 per share and exercisable
until January 31, 2002. In addition, the Company issued warrants to purchase up
to 60,000 shares of the Company's Common Stock to the placement agent,
exercisable at $3.00 per share until September 23, 2001. On the date of
issuance, the Company determined these warrants had a value of $114,000.
The Series B Preferred Stock is convertible 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, 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 conversion discount of the Series B Preferred Stock is considered to be
an additional preferred stock dividend. The maximum discount available of
$533,000 was initially recorded as a reduction of preferred stock and an
increase to additional paid-in capital. As the preferred stock became fully
convertible effective May 1, 1999, the Company recognized the additional
dividends at that date by recording a charge to income available to common
stockholders.
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<PAGE>
During the year ended July 31, 1999, the holders of the Series B
Convertible Preferred Stockholders exercised conversion rights and converted a
total of 430 shares of preferred stock and accrued dividends of approximately
$9,000 into 431,530 shares of the Company's common stock.
Stock Options and Warrants:
In April 1999, the Company issued warrants to purchase up to 500,000 shares
of the Company's Common Stock at $2.50 per share in connection with a private
placement of Common Stock. The warrants are exercisable through April 2002.
In December 1998, certain holders of oustanding warrants to purchase an
aggregate of 1 million shares of the Company's Common Stock at $1.00 per share,
exercised their rights under the related warrant agreements to execute a
cashless exercise. Upon exercise of these warrants, the Company issued 589,828
shares of its Common Stock, par value $.10.
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.
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:
1999 1998
--------------------------
Expected life (years) 4 4
Interest rate 6% 6%
Volatility 1.54 1.15
Dividend yield 0.0% 0.0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Because FAS 123 is
applicable only to options granted subsequent to July 29, 1995, its pro forma
effect will not be fully reflected until fiscal year 1999. The Company's pro
forma information is as follows:
30
<PAGE>
(Thousands)
-----------------------------
1999 1998
----------- -----------
Pro forma net loss $(11,540) $(5,498)
Pro forma net loss per share $ (1.50) $ (1.17)
Option activity for the years ended 1999 and 1998 is summarized below:
1999 1998
------------------------------------------------
Shares Weighted Shares Weighted
Average Average
Exercise Exercise
Price Price
------------------------------------------------
Outstanding at beginning of 1,774,633 $1.71 403,333 $3.23
year
Granted 554,319 1.46 1,866,300 1.55
Expired or canceled (112,833) 2.37 (320,000) 3.09
Exercised (20,500) 1.07 (175,000) 1.00
--------- ---------
Outstanding at end of year 2,195,619 1.62 1,774,633 1.71
========= =========
Exercisable at end of year 1,643,292 1.57 1,494,133 1.63
========= =========
Available for future grants 20,000 20,000
====== ======
Weighted-average fair value
of options granted during year $2.76 $8.20
===== =====
The following table presents weighted-average price and life information about
significant option grants outstanding at July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00 - $2.25 1,797,319 3.5 years $1.14 1,344,992 $1.02
$3.00 - $4.38 398,300 3.67 years $3.76 298,300 $4.02
--------- ---------
2,195,619 1,643,292
========= =========
</TABLE>
31
<PAGE>
10. COMMITMENTS:
The Company leased its corporate offices under an operating lease which was
terminated effective April 30, 1999, following the sale of certain of its
audiometrics business assets (See Note 3). Effective May 1, 1999, the Company
commenced a sublease of its corporate offices which expires in February 2000.
Rent expense for the years ended July 31, 1999 and 1998 was $34,000 and $33,000,
respectively.
Rosch GmbH leases its administrative and sales offices under a 60-month
lease expiring in May 2002. Rent expense for the years ended July 31, 1999 and
1998 was $98,000 and $105,000, respectively.
The Company's domestic subsidiaries lease operating facilities under
various operating leases expiring through October 2001. Total rent expense under
these leases for the year ended July 31, 1999 was $57,000.
11. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS:
The Company's primary customers are in the medical field. At July 31, 1999
and July 31, 1998, substantially all accounts receivable balances are
concentrated in this industry. The Company sells products and extends credit
based on an evaluation of the customer's financial condition, generally without
regard to collateral. Exposure to losses on receivables is principally dependent
on each customer's financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
12. BUSINESS SEGMENT AND FOREIGN OPERATIONS:
The Company operates in one business segment - the sale of medical equipment.
The Company's foreign operations are subject to certain economic and regulatory
risks and uncertainties specific to Germany and the European geographic region.
Such risks and uncertainties could disrupt the Company's foreign operations and
have a material impact on the Company's financial results.
Transfers to affiliates are made at prices above the Company's cost and include
charges for freight and handling.
<TABLE>
<CAPTION>
Domestic German
Operations Operations Eliminations Consolidated
--------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended July 31, 1999: (Thousands)
Net sales $ 1,787 $5,002 $ 6,789
Transfers between
geographic areas 79 121 (200) --
------- ------ --- -------
Net sales 1,866 5,123 (200) 6,789
Loss from operations (9,667) (542) (10,209)
Assets 3,582 3,659 7,241
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Domestic German
Operations Operations Eliminations Consolidated
--------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended July 31, 1998: (Thousands)
Net sales $ 2,155 $4,870 $ 7,025
Transfers between
geographic areas 131 530 (661) --
------- ------ --- -------
Net sales 2,286 5,400 (661) 7,025
Loss from operations (2,989) (381) (3,370)
Assets $ 8,933 $2,525 $11,458
</TABLE>
Prior to the acquisition and consolidation of Rosch GmbH in fiscal year 1998,
the Company did not conduct any significant business in foreign countries.
13. GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company has incurred net losses of $9,861,000 and $3,674,000 for
the years ended July 31, 1999, and 1998, respectively. In addition, the
Company's current liabilities exceed its current assets by $1,262,000 at July
31, 1999. These 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
In September 1999, a minority stockholder of Rosch GmbH purchased an
additional one third of the Company's 75% ownership share of Rosch GmbH,
bringing the minority stockholders' overall percentage ownership of Rosch GmbH
to 49.99%. The purchase price was approximately $1.6 million. In addition, the
minority stockholder made a second capital contribution into Rosch GmbH of $1.6
million.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
33
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed not later than November 29,
1999 pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934 ("Regulation 14A").
Item 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed not later than November 29,
1999 pursuant to Regulation 14A.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed not later than November 29,
1999 pursuant to Regulation 14A.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed not later than November 29,
1999 pursuant to Regulation 14A.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibit
- ----------------------------------------
3.1.1 Certificate of Incorporation of the Company (filed as Exhibit
3(a)(1) to Registration No. 2-71775, and incorporated herein by
reference).
3.1.2 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State of the State of
Delaware on January 27, 1987 (filed as Exhibit 3(a)(2) to the
Company's Form 10-Q for the fiscal quarter ended January 31,
1987, and incorporated herein by reference).
3.1.3 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State of the State of
Delaware on October 9, 1990 (filed as Exhibit 3(a)(3) to the
Company's Form 10-K for the fiscal year ended July 28, 1990, and
incorporated herein by reference).
3.1.4 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State of Delaware on November
7, 1996 (filed as Exhibit 3.1.4 to the Company's Form 10-KSB for
the fiscal year ended July 31, 1997, and incorporated herein by
reference).
34
<PAGE>
3.1.5 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State on May 4, 1998 (filed
as Exhibit 2.1 to the Company's Form 8-K for an event of May 5,
1998 (the "May 1998 Form 8-K"), and incorporated herein by
reference).
3.2 Certificate of Designations of Series A Convertible Preferred
Stock of the Company (filed with the Secretary of State of
Delaware on May 5, 1998, filed as Exhibit 2.2 to the May 1998
Form 8-K, and incorporated herein by reference).
3.3 Certificate of Designations of Series B 5% Convertible Preferred
Stock of the Company (filed with the Secretary of State of
Delaware on February 3, 1999, filed as exhibit 3.1 to February 3,
1999 Form 8-K (the " February 1999 Form 8-K"), and incorporated
herein by reference).
3.4.1 By-Laws of the Company (filed as Exhibit 3(b) to Registration No.
2-71775, and incorporated herein by reference).
3.4.2 Amendments to the By-Laws of the Company (filed as Exhibit 3(c)
to the Company's 1990 Form 10-K and incorporated herein by
reference).
4.1 Form of Common Stock Certificate (filed as Exhibit 4 to
Registration No. 2071775 and incorporated herein by reference).
10.1 Commercial Lease, dated March 23, 1998, by and between Mareld
Company, Inc. and the Company (filed as Exhibit 10.1 to
Registration No. 333-58937 and incorporated herein by reference).
10.2.1 1983 Incentive Stock Option Plan (filed as Exhibit A to the
Company's Information Statement, and incorporated herein by
reference).
10.2.2 Form of 1983 Incentive Stock Option Certificate (filed as Exhibit
(10)-12 to the Company's Form 10-K for the fiscal year ended July
28, 1984 ["1984 Form 10-K"] and incorporated herein by
reference).
10.3.1 1983 Non-Qualified Stock Option Plan (filed as Exhibit B to the
Company's 1983 Information Statement, and incorporated herein by
reference).
10.3.2 Form of 1983 Non-Qualified Stock Option Certificate (filed as
Exhibit (10)-13 to the Company's 1984 Form 10-K, and incorporated
herein by reference).
10.4 1996 Stock Option Plan (filed as Exhibit A to the Company's 1996
Proxy Statement, and incorporated herein by reference).
10.5.1 Consulting Agreement, dated as of March 24, 1995, between the
Company and Alan Gelband Company, Inc. (filed as Exhibit 10.6 to
the Company's 1995 Form 10-KSB, and incorporated herein by
reference).
10.5.2 Standstill Agreement dated October 1, 1997, between Registrant
and Alan Gelband (filed as Exhibit 10.13 to the Company's 1997
Form 10-KSB and incorporated herein by reference).
35
<PAGE>
10.6 Stock Purchase Agreement, dated January 11, 1996, between the
Company and Andy Rosch (filed as Exhibit 1 to the Company's Form
8-K for an event of January 11, 1996, and incorporated herein by
reference).
10.7.1 Loan Agreement, dated October 4, 1996, between the Company and
Citizens Bank New Hampshire (the "Bank") (filed as Exhibit 10.9.1
to the Company's Form 10-KSB for the fiscal year ended July 27,
1996 (the "1996 Form 10-KSB") and incorporated herein by
reference).
10.7.2 Security Agreement, dated October 4, 1996, between the Company
and the Bank (filed as Exhibit 10.9.2 to the Company's 1996 form
10-KSB, and incorporated herein by reference).
10.7.3 Revolving Line of Credit Promissory Note, dated October 4, 1996,
from the Company to the Bank (filed as Exhibit 10.9.3 to the
Company's 1996 Form 10-KSB, and incorporated herein by
reference).
10.7.4 Term Promissory Note, dated October 4, 1996, from the Company to
the Bank (filed as Exhibit 10.9.4 to the Company's 1996 Form
10-KSB, and incorporated herein by reference).
10.7.5 Forebearance and Workout Agreement, dated October 28, 1997,
between Registrant and the Bank (filed as Exhibit 10.12 to
Registrant's Form 10-KSB for the fiscal year ended July 31, 1997
("1997 Form 10-KSB") and incorporated herein by reference).
10.8 Form of 14% Convertible Subordinated Debenture, due October 31,
1999 (filed as Exhibit 4 to the Company's Form 8-K for an event
of October 25, 1996, and incorporated herein by reference).
10.9 Amended Employment Agreement, dated as of January 1, 1998,
between the Company and Thomas A. Slamecka (filed as Exhibit
10.10 to Registration No. 333-58937 and incorporated herein by
reference).
10.10 Employment Agreement, dated January 1, 1998, between the Company
and Michael T. Pieniazek (filed as Exhibit 10.11 to Registration
No. 333-58937 and incorporated herein by reference).
10.11 Contract of Employment between Rosch GmbH Medizintechnik and Andy
Rosch effective January 1, 1996 (filed as Exhibit 10.14 to
Registration No. 333-58937 and incorporated herein by reference).
10.12.1 Agreement and Plan of Merger, dated as of April 30, 1998, among
the Company, DDS Acquisition Corporation, Dynamic Dental Systems,
Inc. ("DDS") and others (without Exhibits or Schedules thereto)
(filed as Exhibit 2.3 to the May 1998 Form 8-K and incorporated
herein by reference).
10.12.2 Certificate of Merger between DDS Acquisition Corporation and
DDS, filed with the Secretary of State of Delaware on May 5, 1998
(filed as Exhibit 2.4 to the May 1998 Form 8-K and incorporated
herein by reference).
10.13 Agreement and Plan of Merger, dated as of March 27, 1998, among
the Company, ESI Acquisition Corporation and Equidyne Systems
Inc. ("ESI") (incorporated by reference to Exhibit 2 to the
Company's Form 8-K for an event of March 27, 1998).
36
<PAGE>
10.14 Employment Agreement, dated as of April 30, 1998, by and between
Dental Dynamic Systems, Inc. and Henry J. Rhodes (filed as
Exhibit 2.8 to the May 1998 Form 8-K and incorporated herein by
reference).
10.15 Employment Agreement, dated as of May 11, 1998, by and between
Equidyne Systems, Inc. and Lawrence Petersen (filed as Exhibit
2.9 to the May 1998 Form 8-K and incorporated herein by
reference).
10.16.1 Securities Purchase Agreement, dated as of May 5, 1998, among the
Company, West End Capital LLC and the Purchaser listed therein
(filed as Exhibit 10.1 to the May 1998 Form 8-K and incorporated
herein by reference).
10.16.2 Form of Warrant issued to West End Capital LLC (filed as Exhibit
10.2 to the May 1998 Form 8-K and incorporated herein by
reference).
10.16.3 Registration Rights Agreement, dated as of May 5, 1998, among the
Company, West End Capital LLC and the Purchaser listed therein
(filed as Exhibit 10.3 to the May 1998 Form 8-K and incorporated
herein by reference).
10.17 Stock Purchase Option Agreement, dated November 1, 1997, between
the Company and Andy Rosch (without exhibits) (filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-QSB for the
period ended October 31, 1997 and incorporated herein by
reference).
10.18 Consulting Agreement, dated February 19, 1998, between the
Company and Liviakis Financial. Communications, Inc. (filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB for
the quarterly period ended January 31, 1998 and incorporated
herein by reference).
10.19 Form of Stock Purchase Agreement (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed to report an event of
November 26, 1997 and incorporated herein by reference).
10.20* Consulting Agreement, dated as of April 23, 1999, between the
Company and American Financial Communications.
10.21* Sales Contract for Patents, dated July 8, 1999, by and between
the Company, Equidyne Systems, Inc. and Rosch GmbH
Medizintechnik.
10.22 Assets Purchase Agreement, dated April 8, 1999, by and between
the Company, Rosch GmbH Medizintechnik and Maico Diagnostic GmbH
(filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-QSB for the period ended April 30, 1999 and incorporated
herein by reference).
10.23* Investment Agreement, dated July 8, 1999, by and between the
Company, Rosch GmbH Medizintechnik and Concord Effekten AG, and
Andy Rosch.
10.24* Participation Agreement, dated September 30, 1999, by and between
the Company, Rosch GmbH Medizintechnik and Concord Effekten AG
and Andy Rosch.
10.25.1 Form of Securities Purchase Agreement for sale of Series B
Preferred Stock (filed as Exhibit 10.1 to the February 1999 Form
8-K and incorporated herein by reference).
10.25.2 Form of Warrant Agreement (filed as Exhibit 10.2 to the February
1999 Form 8-K and incorporated herein by reference).
10.25.3 Form of Registration Rights Agreement (filed as Exhibit 10.3 to
the February 1999 Form 8-K and incorporated herein by reference).
21.* List of subsidiaries.
23* Consent of Ernst & Young LLP.
37
<PAGE>
27* Financial data schedule.
- ---------
* Filed herewith.
(b) Reports on Form 8-K: None
38
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN ELECTROMEDICS CORP.
By: /s/ Thomas A. Slamecka
------------------------
Dated: October 29, 1999 Thomas A. Slamecka,
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
(1) Principal Executive Officer
/s/Thomas A. Slamecka
- -------------------------------- Chairman of the Board October 29, 1999
Thomas A. Slamecka
(2) Principal Financial Officer
/s/Michael T. Pieniazek President, Chief Financial October 29, 1999
- -------------------------------- Officer and Director
Michael T. Pieniazek
(3) Board of Directors
/s/Blake C. Davenport
- -------------------------------- Director October 29, 1999
Blake C. Davenport
/s/Andy Rosch
- -------------------------------- Director October 29, 1999
Andy Rosch
/s/Marcus R. Rowan
- -------------------------------- Director October 29, 1999
Marcus R. Rowan
/s/Jim Fukushima
- -------------------------------- Director October 29, 1999
Jim Fukushima
</TABLE>
39
<PAGE>
Exhibit Index
-------------
Exhibit
- -------
10.20 Consulting Agreement, dated as of April 23, 1999, between the Company
and American Financial Communications.
10.21 Sales Contract for Patents, dated July 8, 1999, by and between the
Company, Equidyne Systems, Inc. and Rosch GmbH Medizintechnik.
10.23 Investment Agreement, dated July 8, 1999, by and between the Company,
Rosch GmbH Medizintechnik and Concord Effekten AG, and Andy Rosch.
10.24 Participation Agreement, dated September 30, 1999, by and between the
Company, Rosch GmbH Medizintechnik and Concord Effekten AG and Andy
Rosch.
21 List of Subsidiaries
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
40
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement"), effective as of April 23, 1999 is
entered into by and between American Electromedics Corp., a Delaware corporation
(herein referred to as the "Company") and AMERICAN FINANCIAL COMMUNICATIONS, a
sole proprietorship (herein referred to as the "Consultant").
RECITALS
WHEREAS, Company is a publicly held corporation with its common stock
traded on the OTC Bulletin Board; and
WHEREAS, Consultant has experience in the area of investor communications
and financial and investor public relations; and
WHEREAS, Company desires to engage the services of Consultant to assist and
consult with the Company in matters concerning investor relations and to
represent the company in investors' communications and public relations with
existing shareholders, brokers, dealers and other investment professionals as to
the Company's current and proposed activities;
NOW THEREFORE, in consideration of the promises and the mutual covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. Term of Consultancy. Company hereby agrees to retain the Consultant to act in
a consulting capacity to the Company, and the Consultant hereby agrees to
provide services to the Company commencing on April 23, 1999 and ending on
November 14, 1999.
2. Duties of Consultant. The Consultant agrees that it will generally provide
the following specified consulting services through its officers and employees
during the term specified in Section 1.:
(a) Advise and assist the Company in developing and implementing
appropriate plans and materials for presenting the Company and its business
plans, strategy and personnel to the financial community, establishing an image
for the Company in the financial community, and creating the foundation for
subsequent financial public relations efforts;
(b) Introduce the Company to the financial community;
(c) With the cooperation of the Company, maintain an awareness during the
term of this Agreement of the Company's plans, strategy and personnel, as they
may evolve during such period, and advise and assist the Company in
communicating appropriate information regarding such plans, strategy and
personnel to the financial community;
(d) Assist and advise the Company with respect to its (i) stockholder and
investor relations, (ii) relations with brokers, dealers, analysts and other
investment professionals, and (iii) financial public relations generally;
(e) Perform the functions generally assigned to investor/stockholder
relations and public relations departments in major corporations, including
responding to telephone and written inquiries (which may be referred to the
Consultant by the Company); preparing press releases for the Company with the
Company's involvement and approval or reviewing press releases, reports
<PAGE>
and other communications with or to shareholders, the investment community and
the general public; advising with respect to the timing, form, distribution and
other matters related to such releases, reports and communications; and
consulting with respect to corporate symbols, logos, names, the presentation of
such symbols, logos and names, and other matters relating to corporate image;
(f) Upon the Company's approval, disseminate information regarding the
Company to shareholders, brokers, dealers, other investment community
professionals and the general investing public;
(g) Upon the Company's approval, conduct meetings, in person or by
telephone, with brokers, dealers, analysts and other investment professionals to
advise them of the Company's plans, goals and activities, and assist the Company
in preparing for press conferences and other forums involving the media,
investment professionals and the general investment public;
(h) At the Company's request, review business plans, strategies, mission
statements, budgets, proposed transactions and other plans for the purpose of
advising the Company of the investment community implications thereof; and,
(i) Otherwise perform as the Company's financial relations and public
relations consultant.
3. Allocation of Time and Energies. The Consultant hereby promises to
perform and discharge well and faithfully the responsibilities which may be
assigned to the Consultant from time to time by the officers and duly authorized
representatives of the Company in connection with the conduct of its financial
and investor public relations and communications activities, so long as such
activities are in compliance with applicable securities laws and regulations.
Consultant shall diligently and thoroughly provide the consulting services
required hereunder. Although no specific hours-per-day requirement will be
required, Consultant and the Company agree that Consultant will perform the
duties set forth hereinabove in a diligent and professional manner. The parties
acknowledge and agree that a disproportionately large amount of the effort to be
expended and the costs to be incurred by the Consultant and the benefits to be
received by the Company are expected to occur upon and shortly after, and in any
event, within two months of the effectiveness of this Agreement. It is
explicitly understood that the price of the Company's common stock, nor the
trading volume of the Company's common stock hereunder will in no way measure
Consultant's performance of its duties. It is also understood that the Company
is entering into this Agreement with American Financial Communications, Inc.
("AFC"), a corporation and not any individual member of AFC, and with such,
Consultant will not be deemed to have breached this Agreement if any member,
officer or director of AFC leaves the firm or dies or becomes physically unable
to perform any meaningful activities during the term of the Agreement, provided
the Consultant otherwise performs its obligations under this Agreement. The
Company shall have the right to request that any of Consultant's employees or
outside independent contractors, if any, not perform any services for the
Company contemplated hereunder on behalf of Consultant.
4. Remuneration. As full and complete compensation for services described in
this Agreement, the Company shall compensate AFC (herein referred to as
"Consultant") as follows:
4.1 For undertaking this engagement and for other good and valuable
consideration, the Company agrees to issue and deliver to the Consultant a
"Commencement Bonus" payable
<PAGE>
in the form of 200,000 of the Company's Common Stock ("Common Stock"). This
Commencement Bonus shall be issued to the Consultant immediately following
execution of this Agreement and shall, when issued and delivered to
Consultant, be fully paid and non-assessable. The Company understands and
agrees that Consultant has foregone significant opportunities to accept
this engagement and that the Company derives substantial benefit from the
execution of this Agreement and the ability to announce its relationship
with Consultant. The 200,000 shares of stock issued as a Commencement
Bonus, therefore, constitute payment for Consultant's agreement to
represent the Company and are a nonrefundable, non-apportionable, and
non-ratable retainer; such shares of Common Stock are not a prepayment for
future services. If the Company decides to terminate this Agreement prior
to November 14, 1999 for any reason whatsoever, it is agreed and understood
that Consultant will not be requested or demanded by the Company to return
any of the shares of Common Stock paid to it hereunder. 100,000 shares of
Common Stock issued pursuant to this Agreement shall be issued in the name
of Richard Carpenter and 100,000 shares of Common Stock issued pursuant to
this Agreement shall be issued in the name of Jeffery Lamberson(Richard
Carpenter and Jeffery Lamberson hereinafter referred to as "Consultants").
The Company agrees that all shares issuable to Consultants hereunder shall
carry "piggyback registration rights" whereby such shares will be included
in the next appropriate registration statement filed by the Company. The
Company further agrees that it will use its best efforts to file a
registration statement by September 30, 1999. Consultants agree that
neither will sell nor transfer during the term of this Agreement any of the
200,000 shares of the Company's stock issued to Consultants hereunder.
4.2 Consultants acknowledge that the shares of Common Stock to be issued
pursuant to this Agreement (collectively, the "Shares") have not been
registered under the Securities Act of 1933, and accordingly are
"restricted securities" within the meaning of Rule 144 of the Act. As such,
the Shares may not be resold or transferred unless the Company has received
an opinion of counsel reasonably satisfactory to the Company that such
resale or transfer is exempt from the registration requirements of that
Act. In addition, Consultant agrees that, during the term hereof neither
it, nor its officers or affiliates shall directly or indirectly, acquire or
dispose of any securities of Company without the Company's written consent.
4.3 In connection with the acquisition of Shares hereunder, the Consultants
represent and warrant to the Company as follows:
(a) Consultants acknowledge that the Consultants have been afforded the
opportunity to ask questions of and receive answers from duly authorized
officers or other representatives of the Company concerning an investment
in the Shares, and any additional information, which the Consultants have
requested.
(b) Consultants' investment in restricted securities is reasonable in
relation to the Consultants' net worth, which is in excess of ten (10)
times the Consultants' cost basis in the Shares. Consultants have had
experience in investments in restricted and publicly traded securities, and
Consultants have had experience in investments in speculative securities
and other investments, which involve the risk of loss of investment.
<PAGE>
Consultants acknowledge that an investment in the Shares is speculative and
involves the risk of loss. Consultants have the requisite knowledge to
assess the relative merits and risks of this investment without the
necessity of relying upon other advisors, and Consultants can afford the
risk of loss of his entire investment in the Shares. Consultants are (i)
accredited investors, as that term is defined in Regulation D promulgated
under the Securities Act of 1933, and (ii) a purchaser described in Section
25102 (f) (2) of the California Corporate Securities Law of 1968, as
amended.
(c) Consultants are acquiring the Shares for the Consultants' own account
for long-term investment and not with a view toward resale or distribution
thereof except in accordance with applicable securities laws.
5. Expenses. Consultant agrees to pay for all its expenses (phone, mailing,
labor, etc.) incurred pursuant to this Agreement, other than extraordinary items
(travel required by/or specifically requested by the Company, luncheons or
dinners to large groups of investment professionals, mass faxing to a sizable
percentage of the Company's constituents, investor conference calls, print
advertisements in publications, etc.) approved by the Company prior to its
incurring an obligation for reimbursement. All expenses in excess of $500 will
be pre-approved in writing by the Company.
6. Indemnification. The Company warrants and represents that all oral
communications, written documents or materials furnished to Consultant by the
Company with respect to financial affairs, operations, profitability and
strategic planning of the Company are accurate and Consultant may rely upon the
accuracy thereof without independent investigation. The Company will protect,
indemnify and hold harmless Consultant against any claims or litigation
including any damages, liability, cost and reasonable attorney's fees as
incurred with respect thereto resulting from Consultant's communication or
dissemination of any said information, documents or materials not designated by
the Company to the Consultant as "confidential" or "Company private", excluding
any such claims or litigation resulting from Consultant's communication or
dissemination of information not provided or authorized by the Company.
7. Representations. Consultant represents that it is not required to maintain
any licenses and registrations under federal or any state regulations necessary
to perform the services set forth herein. Consultant acknowledges that, to the
best of its knowledge, the performance of the services set forth under this
Agreement will not violate any rule or provision of any regulatory agency having
jurisdiction over Consultant. Consultant acknowledges that, to the best of its
knowledge, Consultant and its officers and directors are not the subject of any
investigation, claim, decree or judgment involving any violation of the SEC or
securities laws. Consultant further acknowledges that it is not a securities
Broker Dealer or a registered investment advisor. Company acknowledges that, to
the best of its knowledge, that it has not violated any rule or provision of any
regulatory agency having jurisdiction over the Company. Company acknowledges
that, to the best of its knowledge, Company is not the subject of any
investigation, claim, decree or judgment involving any violation of the SEC or
securities laws.
8. Legal Representation. The Company acknowledges that it has been represented
by independent legal counsel in the preparation of this Agreement. Consultant
represents that they
<PAGE>
have consulted with independent legal counsel and/or tax, financial and business
advisors, to the extent the Consultant deemed necessary.
9. Status as Independent Contractor. Consultant's engagement pursuant to this
Agreement shall be as independent contractor, and not as an employee, officer or
other agent of the Company. Neither party to this Agreement shall represent or
hold itself out to be the employer or employee of the other. Consultant further
acknowledges the consideration provided herein above is a gross amount of
consideration and that the Company will not withhold from such consideration any
amounts as to income taxes, social security payments or any other payroll taxes.
All such income taxes and other such payment shall be made or provided for by
Consultant and the Company shall have no responsibility or duties regarding such
matters. Neither the Company nor the Consultant possesses the authority to bind
each other in any agreements without the express written consent of the entity
to be bound.
10. Attorney's Fee. If any legal action or any arbitration or other proceeding
is brought for the enforcement or interpretation of this Agreement, or because
of an alleged dispute, breach, default or misrepresentation in connection with
or related to this Agreement, the successful or prevailing party shall be
entitled to recover reasonable attorneys' fees and other costs in connection
with that action or proceeding, in addition to any other relief to which it or
they may be entitled.
11. Waiver. The waiver by either party of a breach of any provision of this
Agreement by the other party shall not operate or be construed as a waiver of
any subsequent breach by such other party.
12. Notices. All notices, requests, and other communications hereunder shall be
deemed to be duly given if sent by U.S. mail, postage prepaid, addressed to the
other party at the address as set forth herein below:
To the Company: American Electromedics Corp.
Michael Pieniazek, President
13 Columbia Drive, Suite 5
Amherst, NH 03031
To the Consultant: American Financial Communications
Richard Carpenter & Jeffery Lamberson, Proprietors
2420 "K" Street, Suite 220
Sacramento, CA 95816
It is understood that either party may change the address to which notices
for it shall be addressed by providing notice of such change to the other party
in the manner set forth in this paragraph.
14. Choice of Law, Jurisdiction and Venue. This Agreement shall be governed by,
construed and enforced in accordance with the laws of the State of California.
The parties agree
<PAGE>
that Sacramento County, CA will be the venue of any dispute and will have
jurisdiction over all parties.
15. Arbitration. Any controversy or claim arising out of or relating to this
Agreement, or the alleged breach thereof, or relating to Consultant's activities
or remuneration under this Agreement, shall be settled by binding arbitration in
California, in accordance with the applicable rules of the American Arbitration
Association, and judgment on the award rendered by the arbitrator(s) shall be
binding on the parties and may be entered in any court having jurisdiction
thereof. The provisions of Title 9 of Part 3 of the California Code of Civil
Procedure, including section 1283.05, and successor statutes, permitting
expanded discovery proceedings shall be applicable to all disputes that are
arbitrated under this paragraph.
16. Complete Agreement. This Agreement contains the entire agreement of the
parties relating to the subject matter hereof. This Agreement and its terms may
not be changed orally but only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
AGREED TO:
"Company" American Electromedics Corp.
Date: ____________ By: ___________________________________
Michael Pieniazek,
President & Its Duly Authorized Officer
"Consultant" AMERICAN FINANCIAL COMMUNICATIONS
Date:_____________ By:__________________ ____________________
Richard Carpenter Jeffery Lamberson
Sales Contract for Patents
between the company
American Electromedics Corp.
Amherst, NH 03031, U.S.A.
duly represented by Mr. Michael T. Pieniazek, authorized by
Equidyne Systems Inc. with a letter dated July 06, 1999
and the company
Equidyne Systems Inc.
San Diego, CA 92121; USA
duly represented by Mr. Michael T. Pieniazek, authorized by
Equidyne Systems Inc. with a letter dated July 06, 1999
- - in the following called "seller" -
and the company
Rosch GmbH Medizintechnik
12349 Berlin, Germany
duly represented by Mr. Andy Rosch, having sole authority of representation
- - in the following called "buyer" -
Preface
Subject of this contract is the European part of the PCT-application
PCT/US96/16184 (Publication WO 98/15307). The application concerns a "hypodermic
jet injector". An identical application to the PCT-application in the USA (US
5,569,189) already led to a patent. The following countries are mentioned in the
application: Austria, Switzerland, Germany, Denmark, Spain, France, Great
Britain, Ireland, Liechtenstein, Netherlands and Sweden. For these countries the
application is in force. The device already is being used commercially by the
seller. The buyer wants to acquire the application and produce and distribute
the hypodermic jet injector. The seller alone is entitled to dispose of the
application in the mentioned countries.
With notarial deed of May 26, 1999 (No. 65/1999 of the Notary Wolfgang Bullmann,
Berlin) the shareholder's meeting of Rosch GmbH decided on a capital increase in
kind by the transferral of the Patents "Hypodermic Jet Injector" (Patent No.
5569180) and the "Hypodermic Jet Injector (Patent No. 55704911). With the
decision of the shareholder's meeting of June 28, 1999, this decision was
revoked. It is yet unclear whether with the notarial deed the patents
effectively have been transferred and, if it is so, whether with the private
decision of the shareholders of June 28, 1999 the transferal back has
effectively been done.
ss. 1 Condition
This contract comes into force with the effective participation of Concord
Effekten AG and Mr. Andy Rosch in Rosch GmbH.
English translation for information purposes only
<PAGE>
If the buyer effectively still is the owner of the patents Hypodermic Jet
Injector (No. 5569180) and Hypodermic Jet Injector (No. 55704911), these patents
are herewith transferred back to American Electromedics Corp. out of safety
reasons.
English translation for information purposes only
<PAGE>
ss. 2 Subject of Contract
1) The seller sells and transfers to the buyer the European part of the
PCT-application PCT/US96/16184 (Publication WO 98/15307) "hypodermic jet
injector" including all rights and obligations, especially the right on the
patent, the right to receive the patent and the rights out of the patent.
2) The seller agrees to the "renaming" of the application in the European
Patent Office or in the individual Patent Offices in the European countries
and he is obliged to hand over the necessary documents for this and to sign
all necessary documents.
ss. 3 Price
1) The price agreed upon is USDollars 750,000.
2) The price is payable within 7 days from the date of the signing of the
Investment agreement between the seller, Concord Effekten AG, the buyer,
Mr. Rosch and Mr. von zur Gathen.
3) The amount will be reimbursed, if the application or a derived right is
being lost caused by the seller through negligence or willful act.
4) The amount shall be reimbursed as well, if the application or a derived
right perishes because of a publication by the seller prior to October 9,
1996.
5) If the application does not lead to patents due to other reasons, the
seller herewith on an exclusivity basis transfers to the buyer the direct
and indirect marketing, production and selling rights of the products, for
which the application has been done, for Europe.
ss. 4 Guarantee Clauses
1) The buyer is aware of the technical details of the inventions mentioned in
this contract.
2) The seller confirms that he is not aware of any legal deficiency of the
PCT-application and of any factual deficiency of the invention. The seller
confirms, that the European part of the PCT-application is free from rights
of third parties and that no licenses have been granted for the countries
mentioned in the Preface.
3) The seller is aware of the international research report of the
PCT-application. The seller confirms that he is not aware of any additional
state of technology that may be in the way of the patent granting.
ss. 5 Secrecy
The seller herewith is obliged not to reveal a third party his knowledge
concerning the hypodermic jet injection.
ss. 6 Non-aggression obligation
English translation for information purposes only
<PAGE>
The seller herewith is obliged not to attack any right derived from the
PCT-application nor to assist third parties in such attacks on the rights.
English translation for information purposes only
<PAGE>
ss. 7 Charges
All charges and fees connected to this contract and all charges for the
transferal of the application are for the account of the buyer. The buyer also
pays all charges and fees that become due after effectiveness of this contract
for the maintaining of the application.
ss. 8 Place of jurisdiction and applicable law
For all disputes arising out of the contract the District Court (Landgericht)
Berlin will have jurisdiction. German law applies.
Berlin, July 8, 1999
Equidyne Systems Inc.
s/ Michael T. Pieniazek
Michael T. Pieniazek
s/ Michael T. Pieniazek
American Electromedics Corp.
represented by Mr. Michael T. Pieniazek,
President of American Electromedics Corp.
s/ Andy Rosch
Rosch GmbH Medizintechnik
Andy Rosch
General Manager
English translation for information purposes only
Investment Agreement
Between
American Electromedics Corp.
13 Columbia Drive, Suite 5, Amherst, NH 03031,
represented by
Michael T. Pieniazek (President)
in the following called "AMER"
and Rosch GmbH Medizintechnik, Alt-Buckow 6, D-12349 Berlin
represented by the Managing Director
Andy Rosch, having sole power of representation
in the following called "Rosch"
and Mr. Andy Rosch, in the following called Mr. Rosch, and Mr. von zur Gathen
and
Concord Effekten AG
Gro(beta)e Gallusstr. 1-7, 60311 Frankfurt/Main,
duly represented by
Dirk Schaper (Chairman of the Board) and Bernd Groebler (Board Member)
in the following called "Concord"
Preface
Concord Effekten AG (hereinafter referred to as "Concord") intends to acquire a
holding in Rosch GmbH (hereinafter referred to as "Rosch") by acquiring shares
from a cash capital increase prior to Rosch's going public. American
Electromedics Corp. (hereinafter referred to as "AMER") has hitherto been the
sole shareholder owning the fully paid-in share capital of Rosch amounting to DM
1,445 million. The new shares are to be taken over by Concord-
_________________. Furthermore, in the course of further capital
<PAGE>
increases before the IPO, additional shareholders are to be included, at
separately specified participation conditions. Rosch is then to be converted
into a corporation (AG), and introduced for trading on the Neuer Markt at the
Frankfurt stock exchange. The date of first listing is planned for October 1999.
Against this background, Concord, AMER, Rosch and Mr. Rosch agree on the
following:
I. Transfer of patents and other preconditions
1. AMER agrees to effectively transfer to Rosch against payment of
USD750,000, the patents appearing in Appendix 1 and furthermore to
evidence CE approval for Injex, or application for this approval.
2. Concord will arrange for a due diligence investigation to be run on
Rosch by Schitag Ernst & Young, covering tax, legal and marketing
matters. The involved costs will be divided at a ratio of 50:50
between Rosch and Concord.
3. Concord will request its supervisory board; Rosch will request its
supervisory board to give their consent to this investment agreement.
By signing this agreement, AMER and Concord acknowledge this consent.
4. AMER and Rosch have agreed on the pricing of intracorporate services
according to Appendix III of this agreement.
II. Capital increase
1. ____________________________________________. The paid-in-capital of
Rosch at the time of the investment is DM 1,445,000.
2. AMER hereby agrees to approve a cash capital increase (hereinafter
referred to as "Capital Increase I"), amounting to nominally DM
481,800, resulting in a paid-in-capital of DM 1,926,800. AMER hereby
waives its subscription right from this cash capital increase, and
further agrees to permit only Concord and Mr. Rosch for taking over
the new capital contribution. The parties agree that Concord and Mr.
Rosch are allowed to have Sub-Investors.
3. Concord agrees to take over part of the capital increase in the amount
of nominally DM 413,800 _____________________. Mr. Rosch agrees to
take over the remaining part of the capital increase in the amount of
nominally DM 68,000 ______________________. Thus Concord and Mr. Rosch
together will have 25.01% of the shares of Rosch.
4. Concord and Mr. Rosch hereby agree to pay the capital contribution
__________________ within five days from the date of the signing of
this investment agreement. Payment shall be made to a special account
opened by Rosch for this purpose called "Capital Increase 1999".
<PAGE>
5. After Capital increase I, and before the public offering, it is
planned to offer further shareholdings in Rosch through a "Capital
Increase II" or further capital increases in Rosch. These capital
increases in Rosch are subject to a simultaneous investment in AMER.
The subscribers of Capital Increase II in Rosch will be obliged to
participate in the Capital Increase of AMER equal to one half of the
amount of their participation in the Capital Increase II in Rosch.
III. Further procedure and action
1. Conversion
Immediately after the registration of Capital Increase I, AMER, Concord,
and Mr. Rosch hereby agree to approve the conversion of Rosch into a
corporation (AG), and to take all other necessary steps in connection with
this conversion. AMER, Concord, and Mr. Rosch further commit to make all
decisions by mutual agreement regarding further capital increases, the
stock exchange listing, and the public placement. The expenses incurred in
this context are to be borne by Rosch.
2. Contents of the articles of incorporation
a) In the course of Capital Increase I at Rosch as specified in Section
II, AMER undertakes to approve the change in Rosch's articles of
incorporation, to the effect that every disposition of shares in Rosch
shall require the consent of all shareholders, though Concord and Mr.
Rosch shall be entitled to allow a partner to participate in their
shareholding as a co-investor. After Rosch has been converted into a
corporation, the shares shall be deposited in a lock-up-account for
the purpose specified in III, 2. a), Sentence 1, with the instruction
that dispositions regarding the transfer of shares can be made only
with the consent of Concord, AMER, and Mr. Rosch.
b) The contracting parties agree that in the course of further capital
increases prior to the IPO, further shareholders can be included..
c) In the course of the change in Rosch's corporate form specified under
Section III No. 1 above, AMER, Concord, and Mr. Rosch agree to approve
the change in Rosch's articles of incorporation, to the effect that
firstly it conforms to the statutory requirements of a stock
corporation listed on the Frankfurt Stock Exchange, in particular the
requirements of the Neuer Markt, and secondly that the articles shall
include Concord's right entitling it to delegate a representative
appointed by Concord to Rosch's supervisory board (ss. 101 Para. 2
German Securities Act (AktG)).
d) AMER and Mr. Rosch also agree, for a period of six months after the
IPO, and Concord agrees until IPO, not to dispose of their shares
without the other party's consent, and before going public to impose
the same obligation on any new shareholders involved.
<PAGE>
Concord shall be bound by the above lock-up not longer than until
April 1, 2000.
AMER will have a "right of first refusal" regarding the acquisition of
shares of Concord and Mr. Rosch which are for sale prior to the IPO.
The lock-up shall not be considered contrary to the right of one or
more co-investors to dispose of their shares in the course of the IPO
of Rosch.
e) The parties agree, that the shares which are locked up according to
this agreement, shall be deposited on trust in a common
lock-up-account of a banking institution and shall be transferred only
according to this agreement.
This joint deposit shall not alter anything regarding the parties'
separate ownership of the shares each of them holds. In particular,
this shall not be construed as establishing any joint or shared
ownership.
The joint deposit will be under joint administration of AMER and
Concord as trustees for all shares locked-up according to this
agreement. AMER and Concord can only jointly transfer shares of the
joint deposit. Each pool member will agree with AMER, Concord and the
deposit-bank, that the transfer of the right of disposal of the shares
to third parties is only possible with the approval of AMER and
Concord.
On termination of this contract, both AMER and Concord may demand
delivery of their shares.
3. Management
a) Mr. Andy Rosch and Mr. Christoph von zur Gathen agree to remain active
in their present functions and positions at according to their
contracts. This undertaking shall apply for not less than three years
after Rosch goes public, and if the company does not go public, then
at least until December 31, 2004.
b) Rosch agrees, within 21 days from the end of each quarter, to forward
to Concord the actual figures for the quarter concerned in a
comparison with the planned figures.
If there is a negative deviation of more than 30% in the resulting net
income for a quarter, Concord shall have the following rights:
a) If Rosch at the date concerned is still operating as a limited
liability company, Concord shall have the right, not affecting
other existing rights, to appoint a person to assist Rosch's
management on a
<PAGE>
consultancy basis.
b) If Rosch at the date concerned has already been converted and is
operating as a corporation, Concord shall likewise have the right
to appoint a person to assist the managing board.
Rosch furthermore agrees to inform Concord immediately if it is
foreseeable, that the monthly planned sales and income figures will be
more than 10% below the expected results.
IV. Voting trust
The parties AMER, Concord and Mr. Rosch (aka poolmembers) hereby agree to
form a private company named "Sharepool Rosch" and agree on a voting trust
concerning their shares of Rosch in conformity with the following
arrangements:
1. All shares owned by Concord and AMER shall, in regard to the voting
rights arising from these shares, be committed until Rosch goes
public. This shall also apply for new shares which the contracting
parties obtain in the course of further capital increases. The
committed shares shall remain in the parties' separate ownership. This
agreement shall not be construed as establishing joint or shared
ownership. In the event of third parties acquiring a holding in Rosch,
AMER and Concord will, by means of capital increases prior to going
public, attempt to ensure that these new shareholders also accept the
voting trust agreed here. Mr. Rosch already hereby accepts this voting
trust agreement, insofar as he acquired shares in Rosch prior to its
going public.
2. The purpose of this voting trust agreement is primarily to assure the
official listing of Rosch on the Frankfurt stock exchange, segment
Neuer Markt,, as well as concerning capital increases and the public
placement.
To achieve this goal, the contracting parties in particular see the
intention behind their voting trust as:
- to join in handling the essential questions relating to Rosch
irrespective of the prerogatives under law and the articles of
incorporation of the shareholders' meeting, the supervisory board
(where applicable) and the managing board/management,
- to ensure joint exercise of voting rights of the locked-up shares
in the shareholders' meetings of Rosch.
3. The meeting shall be responsible for all issues regarding the
"Sharepool Rosch". This includes, if necessary, consulting and
decision-making, and for taking note of all matters incumbent upon it
under this contract, in particular:
- the decision on how the voting right is to be exercised for each
agenda item of a planned shareholders' meeting;
<PAGE>
- changes in this voting-rights agreement, the admission of new
shareholders, and transferring shares to third parties, as far as
this agreement does not stipulate the right to have co-investors;
- all other matters relating to the company and the "Sharepool
Rosch".
4. Poolmeetings are organised upon invitation of the pool-representative.
The invitation to a poolmeeting has to be done no later than three
weeks prior to a shareholder's meeting. The pool-representative has
the obligation to call for a poolmeeting upon written request of
poolmembers which own no less than 10% of the pooled shares of Rosch.
The invitation to a poolmeeting is done in written form, per telefax
or telegraph with an invitation period of eight days (beginning with
the day after which the letter was dispatched). The day of the
poolmeeting is not included in the calculation of the invitation
period. In urgent cases, the invitation period can be shortened to
five days.
5. The poolmeeting shall not have a quorum until 90% of the entire
committed capital is present or regularly represented. If this is not
the case, the pool-representative has to organize a new poolmeeting
which has no quorum with a shortened invitation period of five days.
Decisions of the poolmeeting can be made outside of poolmeetings
through written coordination, if all poolmembers agree on this
procedure.
6. Each poolmember has the right to appoint another poolmember as his
representative by written authorization. The representation through
third parties is not possible.
All decisions of the poolmeeting have to be recorded in written form
and signed by the pool-representative. The written report has to be
sent to all poolmembers.
The poolmembers vote, within the pool and with a simple majority, a
pool-representative for a period of four years. The first
pool-representative will be Mr. Andy Rosch.
Decisions of the poolmeeting shall be adopted by a simple majority of
all exercised votes, if not otherwise agreed on in this contract.
Abstentions are considered as not exercised votes. The voting rights
are exercised according to the nominal (face) value of the shares,
given that a nominal value of DM 100.- entitles to one vote. A voting
right shall not exist if one of the parties entitled to a voting right
cannot exercise a voting right in the shareholders' meeting on the
actual resolution topic involved.
The following resolutions of the poolmeeting relating to decisions
about the following issues in the shareholders' meeting require the
approval of Concord:
<PAGE>
- resolutions on all capital increases which take place prior to
the IPO, and resolutions on assuring the public placement;
- resolutions on dividend payments from net profits (ss. 119 Para.
1 No. 2 of the German Securities Act;
- resolutions on changes to the articles of incorporation,
including capital increases and decreases, and on dissolving the
company.
Moreover, Concord has a veto-right concerning decisions of the
poolmeeting, which could, from Concord's point of view, result in
considerable threats for the IPO of Rosch.
7. AMER and Concord agree that on request of not less than 10% of the
committed shares, a shareholders' meeting can be convened in
accordance with ss. 122 of the German Securities Act.
8. The voting right of the shareholder's meeting for the poolmembers
will, concerning their respective committed shares, be executed by the
pool-representative, as long as the poolmeeting does not decide
otherwise. The right of the poolmembers to participate at shareholder
meetings is not affected by this rule.
9. In the event of a shareholder dying, the voting trust agreement shall
be continued in regard to the committed shares with the heirs or
survivors benefiting. In the event of bequest through a legacy,
testator and heirs shall make the transfer of the shares involved
conditional on the heirs or survivors entering into this voting trust
agreement.
10. If, in a shareholders' meeting, a party or the representative of a
party votes against the decisions of the poolmeeting, this party
shall, irrespective of any further claims for damages, owe all other
poolmembers a contractual penalty amounting to DM 50,000 for each such
infringement.
11. Concord, AMER and Mr. Rosch herewith are obliged to use their rights
as shareholder of Rosch and as poolmember, and especially to vote in
the shareholders meeting and the poolmeeting, that all necessary and
effective measures are taken for the change the legal status of Rosch
into a corporation (AG) and for the IPO. ________________ Concord,
AMER, and Mr. Rosch shall exercise their votes in the shareholders
meeting and in the poolmeeting with respect to their legal and
commercial responsibilities against Rosch. Within the legal and
commercial responsibilities the parties will act according to the
suggestions of Concord in relation to the necessary and effective
measures for the IPO, especially the changing of the legal status to
an AG the last capital increase prior to the IPO, that has to be in
conformity with the minimum regulations for the acceptance in the
Neuer Markt of the Frankfurt Stock Exchange. The parties agree, that
AMER even immediately after the IPO will have at least shares in Rosch
of 50.1%. AMER and Mr. Rosch herewith confirm, to already herewith
agree to the
<PAGE>
transferals and splits of the shares of Concord, if Concord asked them
to do so, and to refrain from their right of First Refusal according
to ss. 8.2. of the Shareholders Agreement.
12. The provisions under this section IV. will also be valid for the
legal successors of the parties.
V. Guarantees
1. AMER guarantees to Concord as of the date this contract is entered
into that
- Rosch and its shares effectively exist,
- third party claims relating to shares of Rosch do not exist,
- Rosch is not overindebted or insolvent,
- to the best of its knowledge the last annual financial statements
of Rosch for the years 1996 (January 01 to December 31, 1996),
1997 (January 01 to July 31, 1997), and 1998 (August 1, 1997 to
July 31, 1998) are correct,
- Rosch has paid all taxes due, and all tax liabilities have been
accurately shown in the financial statements,
- to the best of its knowledge and belief no hidden dividend
payments have been made at Rosch,
- no lawsuits against Rosch are pending, and Rosch itself is not
conducting any lawsuits against third parties, except for the
lawsuit with Squared Circle GmbH with a maximum value of DM
500,000.
- the industrial property rights arising from the brand "INJEX",
registered at the German patent office under 399 14 659.8 /10
(Appendix II) and the patents (Appendix I) to be transferred to
Rosch, effectively exist or have been effectively applied for,
and are free from claims of third parties, and is obliged to make
all possibly necessary statements
- all approvals required for Rosch's business operations are
unrestrictedly in place,
- in the case of Rosch's real estate utilized by the company
itself: these properties are free of any claims of third parties,
and all approvals are unrestrictedly in place relating to
construction permission, trade and industry legislation,
environmental statutes and other requirements.
AMER further warrants that it knows of no circumstances which prior to
Rosch's going public might entail changes in the above situations and
guarantees.
<PAGE>
No further guarantees outside the stipulations of law exist.
2. Should the above listed guarantees and assurances be incorrect,
Concord, irrespective of further rights arising from this contract,
shall be put in the position in which it would be if the guarantee or
assurance concerned were to be correct. This above entitlement shall
be valid until three years after Rosch's going public.
VI. Right of withdrawal, consequences of a withdrawal
1. AMER and Concord shall be entitled to withdraw from this contract if
by April 1, 2000 the capital increase required for the IPO has not
been implemented for reasons within the responsibility of the other
party.
2. Concord can, not affecting other rights, withdraw from this contract
prior to Rosch's going public,
- if Rosch does not comply with its duty to provide information as
specified under Section III, No. 3,
- if a comparison between the planned and actual quarterly figures
reveals negative deviations of 30% or more, or in the case of any
negative deviation of figures which have been authorized by Rosch
for being published prior to the IPO,
- if the patents for the "INJEX" system (Appendix I) have not been
effectively transferred to Rosch by 30 July 1999,
- either the Commission of the Neuer Markt does not admit Rosch to
go public by April 1, 2000 or the market situation, due to
unforeseeable political or other events outside Concord's control
or an unforeseen change in the situation on the capital markets,
in Concord's view no longer permit a successful placement until
April 1, 2000,
- the guarantees and assurances given by AMER in Section V are
incorrect.
- if the monies paid by Concord and Mr. Rosch in the course of
Capital Increase I are used contrary to the stipulations of IV.,
11.
3. The withdrawal shall be declared by registered letter given 30 days
notice and specifying the reasons for the withdrawal.
4. Should AMER withdraw for the reasons specified in No. 1 above, Concord
undertakes to assign its shares in Rosch against repayment of its cash
contribution to AMER or a third party nominated by the latter.
If Concord should withdraw for the reasons specified in No. 1 and/or
No. 2 above, or for important reasons, AMER agrees to repay Concord
its cash contribution including the markup against assignment of the
shares to AMER.
<PAGE>
Following withdrawal from this contract by AMER or Concord, no rights
or duties whatsoever shall exist any longer under this contract, with
the exception of the above-mentioned obligations. Concord's rights
from Section V, No. 2 shall remain unaffected by a right of
withdrawal.
5. As security for the repayment of the cash contribution plus the
markup, Rosch shall deposit with Concord after implementation of
Capital Increase II, a bank guarantee payable upon first demand,
amounting to 50% of the Capital Increase II (nominal plus markup), but
in no way more than DM 1,000,000. Concord agrees to return this
guarantee to Rosch after Rosch has gone public within three days after
the official listing at the Frankfurt Stock Exchange.
VII. Term of the contract
This contract shall begin upon the signing by the parties and shall end
three years after Rosch's going public, but not later than December 31,
2004, unless AMER or Concord exercise their right of withdrawal under
Section VI of this agreement. The right to termination for an important
reason by AMER or Concord shall not be affected. An important reason shall
in particular apply when one of the parties repeatedly and after receipt of
a formal letter of caution violates the provisions of this contract. The
legal consequences of a termination for an important reason shall be in
line with the arrangements specified in Section VI, No. 4 and 5 of this
contract.
VIII. Other provisions
1. Changes and supplements to this contract must be made in writing. This
shall also apply for the above written form requirement.
2. In case one or more provisions of this Contract are rendered
ineffective or contestable, the validity of the other provisions will
not be affected. In this case, a valid regulation will replace the
ineffective and contestable provisions having a similar economic
purpose to the ineffective or contestable provision. The same applies
in case the Contract contains a gap.
3. This contract is subject to the laws of the Federal Republic of
Germany. The place of jurisdiction is Frankfurt am Main.
IX. Approval of the Supervisory Board
Concord hereby confirms, that the supervisory board of Concord approved the
transaction according to this investment agreement.
<PAGE>
Signatures
For AMER for Concord
Date: July 8, 1999 Date: 8.7.99
s./ Michael T. Pieniazek s./ i.V. M. Saller
- ------------------------ ----------------------------
Michael T. Pieniazek Dirk Schaper Bernd Groebler
for Rosch
Date: 08.07.99
s./Andy Rosch s./Christoph von zur Gathen s./Andy Rosch
- ------------------------ ---------------------------- --------------
Andy Rosch Christoph von zur Gathen Andy Rosch
Appendix I Patent Contract
Appendix II Name rights
Appendix III Intracorporate Pricing
Appendix IV Service Contracts
Urkundenrolle Nr./Doc. No. /1999
VERHANDELT / DONE
zu/in Berlin am ... ........ 1999/on ..., 1999
Vor dem unterzeichnenden Notar / Before the undersigned Notary
.................
..................
Berlin
<PAGE>
2
erschienen heute the following persons appeared today:
1. Prasident Michael Pieniazek, 1. The President, Mr. Michael
geboren am 1. August 1958, Pieniazek, date of birth
wohnhaft 38 Westview-Road, August 1, 1958, residential
Worcester, Massachusetts, USA, address: 38 Westview Road,
Worcester, Massachusetts, USA,
2. Herr Markus Saller, geboren am
6.12.1965, wohnhaft Stuibenweg 2. Mr. Markus Saller, date of
8, 82467 birth December 12, 1965,
Garmisch-Partenkirchen residential address:
Stuibenweg 8, 82467
3. Herr Prokurist Christoph von Garmisch-Partenkirchen
zur Gathen, geboren am 12.
Juli 1952, wohnhaft Ibisweg 3. Mr. Christoph von zur Gathen,
19, 12351 Berlin, Procuration Officer, date of
birth July 12, 1952,
residential address: Ibisweg
19, 12351 Berlin,
Die Erschienenen zu 1.und 3. sind The persons appearing as Nos. 1 and
dem amtierenden Notar personlich 3. are personally known to the
bekannt. Der Erschienene zu 2. wies certifying Notary. The person
sich gegenuber dem amtierenden appearing as No. 2 proved his
Notar durch Vorlage eines gultigen identity to the certifying Notary
Personaldokumentes aus. by presenting a valid personal
identification document.
Der Erschienene zu 1. erklarte, er
handele nachfolgend nicht im The person appearing as No. 1
eigenen Namen, sondern fur die declared that in the following he
is acting not in his own name, but
American Electromedics Corporation for
13 Columbia Drive, Suite No. 18,
American Electromedics Corporation
13 Columbia Drive, Suite No. 18,
<PAGE>
3
Amherst, NH 03031 USA Amherst, NH 03031 USA
- im folgenden:,,Verkaufer" genannt- - hereinafter referred to as: "Seller" -
und zwar einerseits im Namen des simultaneously acting in the name
Verkaufers selbst und andererseits of the seller himself and in the
in dessen Eigenschaft als seller's function as shareholder of
Gesellschafter der Rosch GmbH Rosch GmbH Medizintechnik, HRB
Medizintechnik, HRB 33099 des 33099 of the Amtsgericht
Amtsgerichts Charlottenburg, unter Charlottenburg and referring to the
Bezugnahme auf die Vollmacht des power of attorney given by the
Verkaufers vom 24. Juni 1998. seller with the date of June 24,
1998.
Eine Ausfertigung der Vollmacht vom
24. Juni 1998 lag bei der An official copy of the power of
Beurkundung vor, wovon eine attorney dated June 24, 1998 was
beglaubigte Fotokopie zu dieser presented at the notarisation, and
Verhandlung genommen wird. Auf eine a certified copy was added to the
Ubersetzung wird verzichtet, da die record. A translation is waived
Urkunde bereits einmal in dieser because the document has already
Ausfertigung mit Ubersetzung been presented as official copy
vorlag. before. The person appearing as No.
2 declared that in the following he
is acting not in his own name, but
for
Der Erschienene zu 2. erklarte, er Concord Effekten AG,
handele nachfolgend nicht im Gro(beta)e Gallusstra(beta)e 1 - 7
eigenen Namen, sondern fur die 60311 Frankfurt/M.,
Concord Effekten AG, recorded in the Commercial Register
Gro(beta)e Gallusstra(beta)e 1 - 7 (Handelsregister) of the local
60311 Frankfurt/M., court (Amtsgericht) of Frankfurt am
Main under No. HRB 47805
eingetragen im Handelsregister des
Amtsgerichts Frankfurt am Main - hereinafter referred to as
unter der Nummer HRB 47805, "Purchaser" -
- im folgenden: ,,Kaufer"
genannt -
Der Erschienene zu 2. legte eine
auf ihn lautende notariell
beglaubigte Vollmacht der Concord
und einen beglaubigten
Handelsregisterauszug der Concord
vor.
<PAGE>
4
Der Erschienene zu 3. erklarte, The person appearing as No. 2
zugleich fur fur folgende Personen presented a notarized power of
zu handeln: attorney granted to him by Concord
and a certified excerpt from the
- - fur sich selbst Commercial Register for Concord.
- im folgenden: ,,Herr von zur The person appearing as No. 3
Gathen" genannt; declared that he is acting
simultaneously for the following
- - fur Herrn Andy Rosch, geboren persons:
am 19. August 1960, wohnhaft
Kornblumenring 3, 12357 - for himself
Berlin,
- hereinafter referred to as:
und zwar fur diesen personlich "Mr. von zur Gathen";
und fur diesen in seiner
Eigenschaft als Gesellschafter - for Mr. Andy Rosch, date of
der Rosch GmbH Medizintechnik, birth August 19, 1960,
residential address:
- - im folgenden: ,,Herr Andy Kornblumenring 3, 12357
Rosch" genannt; Berlin,
- - und fur die both personally and in his
function as shareholder of
Rosch GmbH Medizintechnik, Rosch GmbH Medizintechnik,
eingetragen im Handelsregister des - hereinafter referred to as:
Amtsgerichts Berlin-Charlottenburg "Mr. Andy Rosch";
zu HRB 33099,
- and for
- - im folgenden: ,,Gesellschaft"
genannt -. Rosch GmbH Medizintechnik,
which is recorded in the Commercial
Register of the local court of
Berlin-Charlottenburg under HRB
33099,
- hereinafter referred to as
"Company" -.
<PAGE>
5
Der Erschienene zu 3. legte eine The person appearing as No. 3
auf ihn lautende beglaubigte presented a power of attorney
Vollmacht des Herrn Andy Rosch vor, granted to him by Mr. Andy Rosch,
in der dieser den Erschienenen zu authorizing him to act for Mr. Andy
3. bevollmachtigt, zugleich fur ihn Rosch both personally and in Mr.
personlich und fur ihn als Andy Rosch's function as
Gesellschafter der Rosch GmbH shareholder of Rosch GmbH
Medizintechnik und fur die Rosch Medizintechnik, as well as to act
GmbH Medizintechnik zu handeln. for Rosch GmbH Medizintechnik
itself.
Der Notar bescheinigt aufgrund am
28. September 1999 vorgenommener The notary confirms pursuant to his
Einsicht in das Handelsregister HRB inspection of the Commercial
33099 des Amtsgerichts Register under No. HRB 33099 of
Charlottenburg, da(beta) der September 28, 1999, that the
Kaufmann Andy Rosch als allein merchant Andy Rosch, in his
vertretungsberechtigter function as managing director
Geschaftsfuhrer berechtigt ist, die having sole representation power,
Gesellschaft allein zu vertreten, has the power to represent the
und die Gesellschaft in 12349 Company alone, and that the
Berlin, Alt-Buckow 6 domiziliert. headquarters of the Company are at
12349 Berlin, Alt-Buckow 6. The
Der Erschienene zu 1. erklarte, er person appearing as No. 1 declared
sei der deutschen Sprache nicht that his knowledge of the German
hinreichend kundig. Der Erschienene language is not sufficient. He
zu 1. verzichtete auf die waives the involvement of an
Hinzuziehung eines Dolmetschers. interpreter. The English text of
Der englische Text dieser Urkunde this document is for the
dient dem Erschienenen zur information of the person appearing
Information und wurde mit verlesen. as No. 1 and was also read aloud.
Ma(beta)geblich ist der deutsche The German language text of the
Text der Urkunde. Der amtierende document shall prevail. Due to his
Notar ist aufgrund seiner knowledge of both languages, the
Sprachkenntnisse in der Lage die certifying Notary is in a position
Ubereinstimmung des deutschen und to ascertain that the German and
englischen Textes festzustellen. English texts are identical in
content.
Der Notar fragte die Erschienenen,
ob er oder eine der mit ihm The Notary asked those appearing
beruflich verbundenen Personen whether he himself, or a person
au(beta)erhalb seiner Amtstatigkeit professionally associated with him,
in derselben Angelegenheit, die is or has been active in the same
Gegenstand dieser Beurkundung ist, matter as that comprising the
bereits tatig war oder ist. Die object of this notarization,
Erschienenen erklarten, da(beta) outside of his function as notary.
dies nicht The parties appearing responded in
der Fall sei. the negative.
<PAGE>
6
Die Erschienenen erklarten: The persons appearing made the
following declaration:
Vorbemerkung
Preamble
Verkaufer, Kaufer und Herr Andy
Rosch sind die alleinigen Seller, Purchaser and Mr. Andy
Gesellschafter der Gesellschaft. Rosch are the sole shareholders of
the Company
Das Stammkapital der Gesellschaft
betragt insgesamt DM 1.926.800.- The Company's total share capital
(in Worten: eine Million amounts to DM 1,926,800 (in words:
neunhundertsechsundzwanzigtausen- one million nine hundred twenty-six
dachthundert). Verkaufer, Kaufer thousand eight hundred Deutsche
und Herr Andy Rosch sind am Mark). Seller, Purchaser and Mr.
Stammkapital der Gesellschaft mit Andy Rosch participate in the
folgenden Geschaftsanteilen Company's share capital with the
beteiligt: following shares:
1. Geschaftsanteile des 1. Seller's shares:
Verkaufers:
a) Share with a nominal
a) Geschaftsanteil im value of
Nominalwert von DM 25,000
DM 25.000,-
b) Share with a nominal
b) Geschaftsanteil im value of
Nominalwert von DM 7,500
DM 7.500,-
c) Share with a nominal
c) Geschaftsanteil im value of
Nominalwert von DM 7,500
DM 7.500,-
<PAGE>
7
d) Share with a nominal
d) Geschaftsanteil im value of
Nominalwert von DM 10,000
DM 10.000,-
e) Share with a nominal
e) Geschaftsanteil im value of
Nominalwert von DM 150,000
DM 150.000,-
f) Share with a nominal
f) Geschaftsanteil im value of
Nominalwert von DM 1,245,000.00
DM 1.245.000,00
2. Purchaser's share:
2. Geschaftsanteil des
Kaufers: Sharewith a nominal value of
Geschaftsanteil im DM 413,800.00
Nominalwert von
3. Mr. Andy Rosch's share:
DM 413.800,00
Share with a nominal value of
3. Geschaftsanteil von Herrn Andy
Rosch: DM 68,000
The Purchaser intends to increase
Geschaftsanteil im its share in the Company by
Nominalwert von acquiring shares and a partial
share held by the Seller. The
DM 68.000,- Parties further intend to transform
the Company into a joint stock
Der Kaufer beabsichtigt, seinen company (Aktiengesellschaft) and to
Anteil an der Gesellschaft durch introduce it for trade on the new
Erwerb von Geschaftsanteilen und market of the Frankfurt Stock
eines Teilgeschaftsanteils des Exchange (Frankfurter
Verkaufers zu erhohen. Die Parteien Wertpapierborse). It is planned to
beabsichtigen ferner, die have it listed as of February/March
Gesellschaft in eine 2000. In preparation for going
Aktiengesellschaft umzuwandeln und public, further capital increases
zum Handel am Neuen Markt der should be effected and additional
Frankfurter Wertpapierborse shareholders should be accepted.
einzufuhren. Die Aufnahme der The plans include the increase of t
Notierung ist fur Februar/Marz 2000 Company's share capital by DM
geplant. Zur Vorbereitung des 3,000,000.00 to DM 4,926,800.00 by
Borsenganges sollen weitere way of a cash capital increase. To
Kapitalerhohungen vorgenommen und pursue these aims, the parties
zusatzliche Gesellschafter hereby conclude following
aufgenommen werden. Unter anderem
ist geplant, da(beta)das
Stammkapital he der Gesellschaft
durch Barkapitalerhohung um DM
3.000.000,00 auf DM 4.926.800,00
erhoht wird. Zur Verfolgung dieser
Zwecke schlie(beta)en die Parteien
<PAGE>
8
Beteiligungsvertrag Participation Agreement
ss.1 ss.1
Verkauf, Abtretungen Sale, Assignment
1.1 Der Verkaufer verkauft seinen 1.1 The Seller hereby sells its
in Ziffer 1. a) der the folgenden share as
Vorbemerkung bezeichneten designated in No.1. a) of the
Geschaftsanteil im Nominalwert Preamble, having a nominal
von DM 25.000,00 an den Kaufer value of DM 25,000.00 to the
und tritt den Geschaftsanteil Purchaser and assigns the
an den Kaufer ab. Der Kaufer share to the Purchaser The
nimmt Verkauf und Abtretung Purchaser hereby accepts the
an. sale and assignment.
1.2 Der Verkaufer verkauft seinen 1.2 The Seller hereby sells its
in Ziffer 1. b) der share as designated in No. 1.
Vorbemerkung bezeichneten b)of the Preamble, having a
Geschaftsanteil an der nominal value of DM 7,500.00
Gesellschaft in Hohe von DM to the Purchaser and assigns
7.500,00 an den Kaufer und the share to the Purchaser.
tritt den Geschaftsanteil an The Purchaser hereby accepts
den Kaufer ab. Der Kaufer the sale and assignment.
nimmt Verkauf und Abtretung
an. 1.3 The Seller hereby sells its
share as designated in No.1.
1.3 Der Verkaufer verkauft seinen c) of the Preamble, having a
in Ziffer 1. c) der nominal value of DM 7,500.00
Vorbemerkung bezeichneten to the Purchaser and assigns
Geschaftsanteil im Nominalwert the share to the Purchaser.
von DM 7.500,00 an den Kaufer The Purchaser hereby accepts
und tritt den Geschaftsanteil the sale and assignment.
an den Kaufer ab. Der Kaufer
nimmt Verkauf und Abtretung
an.
<PAGE>
9
1.4 Der Verkaufer verkauft seinen 1.4 The Seller hereby sells its
in Ziffer 1. d) der share as designated in No.
Vorbemerkung bezeichneten 1.d) of the Preamble, having a
Geschaftsanteil an der nominal value of DM 10,000.00
Gesellschaft in Hohe von DM to the Purchaser and assigns
10.000,00 an den Kaufer und the share to the Purchaser.
tritt den Geschaftsanteil an The Purchaser hereby accepts
den Kaufer ab. Der Kaufer the sale and assignment.
nimmt Verkauf und Abtretung
an. 1.5 The Seller hereby sells its
share as designated in No.1.
1.5 Der Verkaufer verkauft seinen e) of the Preamble, having a
in Ziffer1. e) der nominal value of DM 150,000.00
Vorbemerkung bezeichneten to the Purchaser and assigns
Geschaftsanteil an der the share to the Purchaser.
Gesellschaft in Hohe von DM The Purchaser hereby accepts
150.000,00 an den Kaufer und the sale and assignment.
tritt den Geschaftsanteil an
den Kaufer ab. Der Kaufer 1.6 The Seller's share in the
nimmt Verkauf und Abtretung Company, as designated in
an. No.1. f) of the Preamble,
having a nominal value of DM
1.6 Der in Ziffer 1. f) der 1,245,000.00, shall be divided
Vorbemerkung bezeichnete into one partial share having
Geschaftsanteil des Verkaufers a nominal value of DM
an der Gesellschaft im 963,600.00 and another partial
Nominalwert von DM share having a nominal value
1.245.000,00 wird in einen of DM 281,400.00. The Seller
Teilgeschaftsanteil im hereby sells its partial share
Nominalwert von DM 963.600,00 created in this way, with the
und einen Teilgeschaftsanteil nominal value of DM 281,400.00
im Nominalwert von DM to the Purchaser and assigns
281.400,00 geteilt. Der the partial share to the
Verkaufer verkauft seinen so Purchaser The Purchaser hereby
entstandenen accepts this sale and
Teilgeschaftsanteil im assignment.
Nominalwert von DM 281.400,00
an den Kaufer und tritt den
Teilgeschaftsanteil an den
Kaufer ab. Der Kaufer nimmt
Verkauf und Abtretung an.
<PAGE>
10
ss.1.A ss.1.A
Abtretungsangebot des Verkaufers Seller's Offer of Assignment to
an Herrn Andy Rosch Mr. Andy Rosch
1.A.1 The Seller makes Mr. Andy
1.A.1 Der Verkaufer bietet Herrn Rosch an irrevocable offer
Andy Rosch unwiderruflich of an assignment free of
die kostenlose Abtretung charge of a partial share in
eines Teilgeschaftsanteil an the Company with a nominal
der Gesellschaft im value of DM 1,400.00 from
Nominalwert von DM 1.400,00 the Seller to Mr. Andy
vom Verkaufer auf Herrn Andy Rosch. This partial share
Rosch an. Dieser shall be created by dividing
Teilgeschaftsanteil entsteht the partial share remaining
durch Teilung des beim to the Seller pursuant toss.
Verkaufer gema(beta) ss. 1.6 1.6 having a nominal value
verbliebenen of DM 963,600.00 into one
Teilgeschaftsanteils im partial share with a nominal
Nominalwert von DM value of DM 1,400.00 and
963.600,00 in einen another partial share with a
Teilgeschaftsanteil im nominal value of DM
Nominalwert von DM 1.400,00 962,200.00. The division and
und einen the Seller's assignment of
Teilgeschaftsanteil im the partial share with the
Nominalwert von DM nominal value of DM 1,400.00
962.200,00. Die Teilung und to Mr. Andy Rosch shall
die Abtretung des become effective once the
Teilgeschaftsanteils im shareholders' meeting has
Nominalwert von DM 1.400,00 consented to the division
vom Verkaufer auf Herrn Andy and assignment and Mr. Andy
Rosch werden wirksam, wenn Rosch has accepted the
die assignment offer set forth
Gesellschafterversammlung in thisss.1A.1 pursuant
der Teilung und Abtretung toss.1A.2.
zugestimmt hat und Herr Andy
Rosch das in diesemss. 1A.1
geregelte Abtretungsangebot 1.A.2 Mr. Andy Rosch may accept
gema(beta)ss.1A.2 annimmt. the offer of assignment of
the partial share designated
in ss. 1A.1 with the nominal
1.A.2 Herr Andy Rosch darf das value of DM 1.400,00 with
Abtretungsangebot des immediate effect by way of a
inss.1A.1 bezeichneten unilateral declaration once
Teilgeschaftsanteils im two months have elapsed
Nominalwert von DM 1.400,00 since the notarization of
nach Ablauf von 2 Monaten this Agreement, unless a
nach der Beurkundung dieses notarized agreement is
Vertrages durch einseitige concluded between the Seller
Erklarung mit sofortiger and Mr. Andy Rosch within
Wirkung annehmen, es sei these two months under which
denn, innerhalb dieser 2 Mr. Andy Rosch acquires from
Monate kommt zwischen dem the Seller a share in the
Verkaufer und Herrn Andy Company with a nominal value
Rosch ein notariell of at least DM 1,400.00 and
beurkundeter Vertrag pursuant to which Mr. Andy
zustande, nach dem Herr Andy Rosch becomes the owner of
Rosch von dem Verkaufer this share within the
einen Geschaftsanteil an der aforementioned two months.
Gesellschaft im Nominalwert To avoid misunderstandings,
von mindestens DM 1.400,00 the Parties clarify that Mr.
erwirbt und nach dem Herr Andy Rosch may not accept
Andy Rosch innerhalb der the assignment offer
bezeichneten 2 Monate pursuant to ss. 1.A.1 before
Eigentumer dieses two months have elapsed
Geschaftsanteils wird. Zur since the notarization of
Vermeidung von this Agreement.
Mi(beta)verstandnissen wird
klargestellt, da(beta)Herr
Andy Rosch das
Abtretungsangebot
gema(beta)ss.1.A.1 nicht vor
Ablauf von 2 Monaten nach
Beurkundung dieses Vertrages
annehmen darf.
<PAGE>
11
1.A.3 Herr Andy Rosch hat die 1.A.3 Mr. Andy Rosch shall have
Annahme gema(beta) ss. 1A.2 its acceptance pursuant to
von einem deutschen Notar ss. 1A.2 notarized by a
beurkunden zu lassen. Der German Notary. The Notary
Notar hat das Vorliegen der need not verify the
Voraussetzungen der Ausubung fulfillment of the
des Annahmerechts nach ss. prerequisites for exercising
1.A.2 nicht zu prufen. the acceptance right
pursuant to ss. 1.A.2.
1A.4 Der Kaufer hat das Recht,
Herrn Andy Rosch anzuweisen, 1A.4 The Purchaser shall have the
das in ss. 1A.1 erklarte right to instruct Mr. Andy
Abtretungsangebot gema(beta) Rosch to accept the
ss. 1A.2 und ss. 1.A.3 assignment offer declared in
anzunehmen. ss. 1A.1 pursuant to ss.
1A.2 and ss. 1.A.3.
<PAGE>
12
ss. 2 ss. 2
Kaufpreis Purchase Price
2.1 Der Kaufpreis fur die 2.1 The total purchase price for
gema(beta)ss.1 verkauften the shares sold pursuant toss.
Geschaftsanteile setzt sich 1shall be comprised of a fixed
insgesamt aus einem festen purchase price component and a
Kaufpreisteil und einem variable purchase price
beweglichen Kaufpreisteil component.
zusammen.
2.2 The fixed purchase price
2.2 Der feste Kaufpreisteil component shall be ______.
betragt 2 insgesamt. Der The Purchaser shall pay this
Kaufer hat diesen festen fixed purchase price component
Kaufpreisteil wie folgt zu as follows:
zahlen:
a) One installment of ______
within five days after
a) Eine Rate von innerhalb the assignment pursuant
von funf Tagen nach toss. 3. becomes effective
Wirksamwerden der
Abtretung gema(beta)ss.3. b) One installment of _____
by payment into a special
b) Eine Rate von durch capital increase account
Zahlung auf ein of the Company for the
besonderes purpose of fulfilling the
Kapitalerhohungskonto der Seller's duty to pay in
Gesellschaft mit dem the capital contribution
Zweck, die Pflicht des which the Seller assumes
Verkaufers zur Zahlung within the framework of
der Stammeinlage zu the planned cash capital
erfullen, die der increase of a DM
Verkaufer im Rahmen der 3.000,000.00 total, to be
geplanten effected on the basis of
Barkapitalerhohung von the capital increase
insgesamt DM 3.000.000,00 resolution that is to be
ubernimmt, und zwar nach adopted.
Ma(beta)gabe des zu
fassenden
Kapitalerhohungsbeschlusses.
<PAGE>
13
2.3 2.3
2.4 Nimmt Herr Andy Rosch die 2.4 Should Mr. Andy Rosch accept
Abtretung gema(beta)ss.1.A an, the assignment pursuant
so erhoht sich hierdurch der toss.1.A, the purchase price
Kaufpreis nicht. shall not be increased as a
result.
ss. 3 ss. 3
Wirksamwerden der Abtretungen Effectiveness of the Assignments
Die Abtretungen der The assignment of the shares
Geschaftsanteile gema(beta)ss.1.1 - pursuant to ss. 1.1 - 1.5 and the
1.5 und die Teilung und Abtretung division and assignment of the
des Teilgeschaftsanteils partial share pursuant to ss. 1.6
gema(beta)ss. 1.6 werden wirksam, shall become effective once the
wenn die Gesellschafterversammlung shareholders' meeting of the
der Gesellschaft diesen Abtretungen Company has consented to such
sowie der Teilung des assignment as well as the division
Geschaftsanteils gema(beta)ss.1.6 of the share pursuant to ss.1.6.The
zugestimmt hat. Die Teilung und division and assignment of the
Abtretung des Teilgeschaftsanteils partial share pursuant to ss. 1.A.
gema(beta)ss.1.A. werden wirksam, shall become effective once the
wenn die Gesellschafterversammlung shareholders' meeting of the
der Gesellschaft der Abtretung und Company has consented to such
der Teilung des Geschaftsanteils assignment as well as to the
gema(beta)ss. 1.A. zugestimmt hat division of the share pursuant
und der Kaufer die Abtretung to ss. 1.A and once the Purchaser
gema(beta) ss.1.A.3 angenommen hat. has accepted the assignment
pursuant to ss. 1.A.3.
ss. 4
Wirtschaftliche Wirkung ss. 4
Economic Effect
Die Abtretungen der
Geschaftsanteile gema(beta)ss. 1 The assignment of the shares
einschlie(beta)lich der Abtretung pursuant to ss. 1, including the
des Teilgeschaftsanteils assignment of the partial share
gema(beta)ss.1.6 gelten mit pursuant to ss. 1.6 shall be valid
wirtschaftlicher Wirkung zum with economic effect as of midnight
31.07.1999, 24.00 Uhr/01.08.1999, of 31 July 1999. From that time on,
0.00 Uhr. Anspruche des Verkaufers the Purchaser shall have sole
aus den Anteilen stehen ab diesem entitlement to the Seller's claims
Zeitpunkt allein dem Kaufer zu. arising from the shares. The same
Entsprechendes gilt fur die applies to the assignment of the
Abtretung des Teilgeschaftsanteils partial share pursuant to ss.1.A,
gema(beta)ss.1.A, sollte Herr Andy should Mr. Andy Rosch accept such
Rosch diese Abtretung annehmen. assignment.
<PAGE>
14
ss. 5 ss. 5
Verwendung des Kaufpreises Use of the Purchase Price
ss. 6 ss. 6
Gewahrleistung Warranty
Der Verkaufer garantiert The Seller makes an independent
selbstandig und sichert folgendes guarantee of and warrants the
zu: following:
6.1 Der Verkaufer darf uber die 6.1 The Seller may freely dispose
Geschaftsanteile frei of the shares. The sold shares
verfugen. Die verkauften are free of third party
Geschaftsanteile sind frei von rights. There are no option
Rechten Dritter. Es bestehen rights or other third party
keine Optionsrechte oder rights to acquire them. The
sonstige Rechte Dritter auf shares are not the object of
Erwerb. Die Geschaftsanteile trust relationships. There are
sind nicht Gegenstand von neither usufructuary rights
Treuhandverhaltnissen. Es nor subparticipations or
bestehen weder similar corporate
Nie(beta)brauchsrechte noch relationships with third
Unterbeteiligungen oder parties.
ahnliche
gesellschaftsrechtliche
Verhaltnisse mit Dritten. 6.2 The Seller requires no
approval from public agencies
6.2 Der Verkaufer benotigt zum or authorities in order to
Abschlu(beta)und zur conclude and execute this
Durchfuhrung dieses Vertrages Agreement.
keine Genehmigung von
offentlichen Stellen oder
Behorden.
<PAGE>
15
6.3 Die Stammeinlagen auf die 6.3 The capital contributions to
gema(beta)ss.1.1 - 1.5 the shares that were sold
verkauften Geschaftsanteile, pursuant toss.1.1 - 1.5, to
auf den gema(beta)ss.1.6 the share that was divided
geteilten Geschaftsanteil, auf pursuant toss.1.6, to the
den gema(beta)ss.1.6 partial share that was sold
verkauften Teilgeschaftsanteil pursuant toss. 1.6 and to the
und den gema(beta)ss. 1.A partial share that was offered
angebotenen pursuant toss.1.A have been
Teilgeschaftsanteil sind fully paid in and have been
vollstandig erbracht und weder neither completely nor
ganz noch teilweise partially refunded.
zuruckgezahlt.
6.4 Non-cash capital contributions
6.4 Sacheinlagen sind vollwertig have been fully paid in; no
erbracht; verdeckte hidden non-cash capital
Sacheinlagen haben nicht contributions have been made.
stattgefunden.
ss. 7
ss. 7 Further Duties of the Seller
Weitere Pflichten des Verkaufers
7.1 The Seller undertakes not to
7.1 Der Verkaufer verpflichtet issue more than 1,000,000
sich, nicht mehr als 1.000.000 shares of new stock in the
Stuck neuer Aktien an dem Seller with the par value of
Verkaufer mit einem Nennbetrag US-$ 0.10, or - respectively -
von je US-$ 0,10 bzw. nicht shares of new stock having a
mehr Aktien als im total par value of no more
Gesamtnennbetrag von US-$ than US-$ 100,000.00, before
100.000,00 vor dem Borsengang the Company goes on the stock
der Gesellschaft (geplant im market (which is planned for
Februar/Marz 2000) auszugeben. February/March 2000). Shares
Aktien an dem Verkaufer durfen in the Seller may only be
bis zu der bezeichneten issued up to the limit set
Obergrenze nur ausgegeben forth above if the Seller
werden, wenn der Verkaufer requires additional capital
zusatzliches Kapital fur sein for its day-to-day business.
laufendes Geschaft benotigt. The Seller undertakes to
Der Verkaufer ist inform the Purchaser of every
verpflichtet, den Kaufer uber capital increase of the Seller
jede Kapitalerhohung beim and to offer new shares in the
Verkaufer zu informieren und Seller to the Purchaser in
neue Aktien am Verkaufer writing first. If the
zuerst dem Kaufer schriftlich Purchaser does not accept the
anzubieten. Wenn der Kaufer offer within a period of one
das Angebot nicht innerhalb week after delivery of the
einer Frist von einer Woche offer to the Purchaser, the
nach Zugang des Angebots beim Seller shall be free to issue
Kaufer annimmt, ist der the shares to others.
Verkaufer frei, die Anteile
anderweitig auszugeben.
<PAGE>
16
7.2 Der Verkaufer ist 7.2 For a period of twelve months
verpflichtet, fur einen after the Company enters the
Zeitraum von zwolf Monaten stock market, the Seller
nach Borsengang der undertakes not to issue new
Gesellschaft keine Aktien am shares in the Seller without
Verkaufer ohne Zustimmung des the consent of the Purchaser.
Kaufers auszugeben. Diese This duty on the part of the
Pflicht des Verkaufers besteht Seller only exists if the
nur dann, wenn der Verkaufer Seller achieves gross proceeds
aus dem Borsengang im IPO from the sale of shares in the
Bruttoeinnahmen aus dem Company in the amount of a
Verkauf von Anteilen der total of US $ 10,000.000.00 or
Gesellschaft in Hohe von more from the entry into the
insgesamt US $ 10.000.000,00 stock market in the IPO. This
oder mehr erzielt. In diesem total amount of US $
Gesamtbetrag von US $ 10,000,000.00 shall take a
10.000.000,00 ist ein partial sum of DM 6,000,000.00
Teilbetrag in Hohe von DM into account, which already
6.000.000,00 zu now is deemed to have been
berucksichtigen, der bereits earned. Further to be
jetzt als erzielt gilt. In den calculated into the total
Gesamtbetrag von US amount of US $10,000,000.00
$10.000.000,00 sind ferner are the Seller's gross
Bruttoeinnahmen des Verkaufers proceeds on the basis of the
aufgrund des beweglichen variable purchase price
Kaufpreisteiles gema(beta)ss. component pursuant to ss. 2.3.
2.3 einzurechnen.
7.3 At the Purchaser's request,
the Seller undertakes to place
7.3 Der Verkaufer ist a portion of its shares in the
verpflichtet, auf Wunsch des Company during the entry into
Kaufers einen Teil seiner the stock market as well, to
Anteile an der Gesellschaft ensure the requisite free
beim Borsengang mit zu float of Company shares.
plazieren, damit der
notwendige free float von
Anteilen der Gesellschaft
gewahrleistet ist.
<PAGE>
17
ss. 8 ss. 8
Weitere Regelungen zum Borsengang Further Provisions on the Entry
into the Stock Market
8.1 Die Parteien sind sich einig,
da(beta)Concord weitere 8.1 The Parties agree that Concord
Investoren unterbeteiligen may be allow other investors
darf. to be sub-participants.
8.2 Die Parteien verpflichten 8.2 Once all the capital measures
sich, nach Durchfuhrung aller have been carried out, the
Kapitalma(beta)nahmen, die Parties undertake to adopt a
formwechselnde Umwandlung der resolution to transform the
Gesellschaft in eine Company into a joint stock
Aktiengesellschaft zu company, as well as to execute
beschlie(beta)en sowie alle all other necessary measures
weiteren notwendigen in connection with this
Ma(beta)nahmen im Zusammenhang transformation. The Parties
mit dieser Umwandlung undertake to unanimously adopt
vorzunehmen. Die Parteien all the necessary resolutions
verpflichten sich, alle fur for additional capital
weitere Kapitalerhohungen, fur increases, for the initial
die Borseneinfuhrung und die public offering and for the
offentliche Plazierung public placement of the
erforderlichen Beschlusse shares. The costs incurred in
ubereinstimmend zu fassen. Die this connection shall be borne
in diesem Zusammenhang by the Company.
entstehenden Kosten tragt die
Gesellschaft.
ss. 9
ss. 9 Further Guarantees
Weitere Garantien
9.1 The Seller, Mr. Andy Rosch and
9.1 Der Verkaufer, Herr Andy Rosch Mr. Herr von zur Gathen
und Herr von zur Gathen guarantee to the Purchaser at
garantieren dem Kaufer zum the time of the notarization
Zeitpunkt der Beurkundung of this Agreement that
dieses Vertrages, da(beta)
- the Company and its shares
validly exist;
- die Gesellschaft und deren
Geschaftsanteile wirksam
bestehen;
<PAGE>
18
- - die Geschaftsanteile frei von - the shares are free of third
Rechten Dritter sind; party rights;
- - die Gesellschaft nicht - the Company is not
uberschuldet oder overindebted or insolvent;
zahlungunfahig ist;
- to the Seller's, Mr. Ancy
- - nach bestem Wissen des Rosch's and Mr. von zur
Verkaufers, von Herrn Andy Gathen's best knowledge, the
Rosch und von Herrn von zur last annual financial
Gathen die letzten statements of the Company for
Jahresabschlusse der the years of 1 January 1998 -
Gesellschaft der Jahre 31 December 1998 and 1 January
01.01.1998 - 31.12.1998 und 1999 - 31 July 1999 are
01.01.1999 - 31.07.1999 accurate;
richtig sind;
- the Company has paid all taxes
- - die Gesellschaft samtliche due and all tax liabilities
fallige Steuern bezahlt hat have been accurately posted as
und alle debits on the balance sheet;
Steuerverbindlichkeiten
zutreffend passiviert worden - to the Seller's, Mr. Andy
sind; Rosch's and Mr. von zur
Gathen's best knowledge, no
- - nach bestem Wissen des hidden distribution of the
Verkaufers, von Herrn Andy Company's profits have been
Rosch und Herrn von zur Gathen carried out;
keine verdeckten
Gewinnausschuttungen bei der - no legal disputes against the
Gesellschaft vorgenommen Company are pending, nor is
worden sind; the Company itself waging any
legal disputes against third
- - gegen die Gesellschaft keine parties, with the exception of
Rechtsstreitigkeiten anhangig the legal dispute against
geworden sind und die Squared Circle Enterprises
Gesellschaft selbst auch keine with the amount in controversy
Rechtsstreitigkeiten gegen being a maximum of DM
Dritte fuhrt, mit Ausnahme der 500,000.00;
Rechtsstreitigkeit gegen die
Firma Squared Circle
Enterprises mit einem
Streitwert von maximal DM
500.000,00;
<PAGE>
19
- - die gewerblichen Schutzrechte, - the industrial property
insbesondere am Namen,,INJEX", rights, especially to the name
angemeldet bzw. eingetragen of "INJEX", have been applied
sind beim Markenregister des for or registered with the
deutschen Patent- und trademark registry of the
Markenamtes in Munchen, Az.: German Patent and Trademark
399 14 659.8/10 und die an die office in Munich, File No. 399
Gesellschaft ubertragenen 14 659.8/10 and the patents
Patente wirksam bestehen oder that have been transferred to
wirksam angemeldet sind und the Company exist validly or
fur den europaischen Raum frei have been validly applied for
von Rechten Dritter bzw. and are free of third party
Rechten des Verkaufers sind. rights or rights of the Seller
Falls dies nicht der Fall sein in the European territory.
sollte, erklart der Verkaufer Should this not be the case,
hiermit den Verzicht auf alle the Seller hereby declares its
damit verbundenen europaischen waiver of all European rights
Rechte und verpflichtet sich, involved and undertakes to
alle hierfur gegebenenfalls render any declarations that
notwendigen Erklarungen may be necessary for this
abzugeben; purpose;
- - alle fur den Geschaftsbetrieb - all approvals necessary for
der Gesellschaft the Company's commercial
erforderlichen Genehmigungen operation have been granted
unbeschrankt bestehen; without restriction;
- - bei selbstgenutzten - for properties owned by the
Grundstucken der Gesellschaft: Company which it uses itself:
diese Grundstucke frei von these properties are free of
Altlasten sind und alle old environmental damage
baurechtlichen, (Altlasten) and all approvals
gewerberechtlichen, under the building,
umweltrechtlichen und commercial, environmental and
sonstigen Genehmigungen other laws have been granted
unbeschrankt bestehen. without restriction.
<PAGE>
20
9.2 Der Verkaufer, Herr Andy Rosch 9.2 The Seller, Mr. Andy Rosch and
und Herr von zur Gathen Mr. von zur Gathen affirm that
versichern, da(beta)ihnen they are aware of no
keine Umstande bekannt sind, circumstances which could lead
woraus sich bis zum Borsengang to changes in the
der Gesellschaft Anderungen relationships and guarantees
der im vorigenss. 9.1 set forth in ss. 9.1 above up
stehenden Verhaltnisse und to the time the Company enters
Garantien ergeben konnten. the stock market.
Weitere Gewahrleistungen There are no further
au(beta)erhalb der warranties apart from those
gesetzlichen Vorschriften gibt mandated by statutory
es nicht. provisions.
9.3 Sollten die vorstehenden 9.3 Should the above guarantees
Garantien und Versicherungen and warranties not be
nicht zutreffen, so ist der accurate, the Purchaser shall,
Kaufer unbeschadet weiterer regardless of other rights
Rechte aus diesem Vertrag, so arising from this agreement,
zu stellen, wie er stehen be placed in the position it
wurde, wenn die Garantie oder would have been in if the
Versicherung zutrafe. Dieser guarantees or warranties had
Anspruch verjahrt drei Jahre been accurate. This claim
nach dem Borsengang (Tag der shall be statute barred three
ersten Notiz der Gesellschaft years after the Company has
an der Frankfurter entered the stock market.
Wertpapierborse). (date of the Company's first
notification to the Frankfurt
Stock Exchange - Frankfurter
Wertpapierborse).
<PAGE>
21
ss. 10 ss. 10
Rucktrittsrecht, Folgen eines Rucktritts Right of Withdrawal,
Consequences of a Withdrawal
10.1 Verkaufer und Kaufer sind 10.1 Seller and Purchaser shall be
berechtigt, von diesem Vertrag entitled to withdraw from this
zuruckzutreten, falls bis zum Agreement if the capital
01.04.2000 die fur den increases necessary for
Borsengang erforderlichen entering the stock market have
Kapitalerhohungen aus Grunden not been effected by 1 April
unterblieben sind, die der 2000 due to reasons for which
jeweils andere Vertragspartner the respective other party is
zu vertreten hat. responsible.
10.2 Der Kaufer kann, unbeschadet 10.2 The Purchaser may, regardless
sonstiger Rechte, von diesem of other rights, withdraw from
Vertrag bis zum Borsengang this Agreement
zurucktreten
- falls die Gesellschaft - if the Company repeatedly
gegen ihre and grossly breaches its
Informationspflicht nach duty to provide
Ziffer III. 3. des information pursuant to
Beteiligungsvertrages vom No. III. 3. of the
08.07.1999 wiederholt und Participation Agreement
grob versto(beta)t; of 8 July 1999;
- if a target-performance
- falls sich in einem comparison of the
Soll-Ist-Vergleich des business plan and the
Geschaftsplanes und der actual developments
tatsachlichen Entwicklung reveal negative
negative, die Emission deviations, which could
gefahrdende Abweichungen endanger the issuance of
im Quartal von 30 % bei shares, in the annual
der geplanten Umsatz- und quarter amounting to 30 %
Ergebnisentwicklung of the planned turnover
ergeben oder falls die and profit figures or, if
tatsachliche Entwicklung the actual development up
in irgendeiner Weise bis to the entry into the
zum Borsengang negativ stock market, in any way
von Zahlen abweicht, shows a negative
welche die Gesellschaft deviation from the
zur Veroffentlichung figures the Company has
autorisiert hat; authorized for
publication;
<PAGE>
22
- falls entweder Kommission - if either the Commission
des Neuen Marktes bis zum for the New Market does
01.04.2000 einen not permit the Company to
Borsengang der enter the stock market by
Gesellschaft nicht 1 April 2000 or, due to
zula(beta)t oder die unforeseen political or
Verhaltnisse am Markt other events beyond the
aufgrund unvorhersehbarer Purchaser's control or an
politischer oder unforeseen change in the
sonstiger vom Kaufer situation in the capital
nicht beherrschbarer markets, in the
Ereignisse oder einer Purchaser's assessment
unvorhergesehenen the situation in the
Anderung der Lage an den market makes it
Kapitalmarkten nach der impossible to
Ansicht des Kaufers eine successfully place shares
erfolgreiche Plazierung on the stock market by 1
bis zum 01.04.2000 nicht April 2000;
mehr ermoglichen;
- if one of the warranties,
- falls eine der inss.6 guarantees or
undss.9 abgegebenen representations set forth
Gewahrleistungen, in ss.6 and ss. 9 is
Garantien und untrue;
Versicherungen nicht
richtig ist; - if the purchase price
paid by the Purchaser is
- falls der vom Kaufer used in contravention of
gezahlte Kaufpreis the provisions on use set
entgegen den forth in ss. 5.
Verwendungsbestimmungen
des ss. 5 verwendet wird
10.3 The withdrawal shall be
10.3 Der Rucktritt ist durch declared by registered letter
eingeschriebenen Brief an die to the Company with a notice
Gesellschaft mit einer Frist period of thirty days, stating
von drei(beta)ig Tagen unter the grounds for the
Benennung des withdrawal. The Company is
Rucktrittsgrundes zu erklaren. empowered to receive service
Die Gesellschaft ist zum Zweck of the declaration of
der Entgegennahme der withdrawal and shall be
Rucktrittserklarung charged to inform the other
zustellungsbevollmachtigt und parties of the declaration of
wird beauftragt, die withdrawal without delay.
Rucktrittserklarung
unverzuglich den anderen
Parteien mitzuteilen.
<PAGE>
23
10.4 Fur den Fall, da(beta)der 10.4 In the event that the Seller
Verkaufer aus den inss. 10.1 withdraws on one of the
genannten Grunden zurucktritt, grounds set forth in ss. 10.1,
verpflichtet sich der Kaufer, the Purchaser shall undertake
seine Geschaftsanteile/Aktien to assign its shares/stocks in
an der Gesellschaft Zug um Zug the Company to the Seller or a
gegen Ruckzahlung des third person designated by the
Kaufpreises gema(beta)ss.2 und Seller, concurrently with the
aller Einlagen reimbursement of the
einschlie(beta)lich gezahlter Purchaser's capital
Aufgelder an den Verkaufer contributions, including
oder einen vom Verkaufer premiums paid.
benannten Dritten abzutreten.
10.5 In the event that the
10.5 Fur den Fall, da(beta)der Purchaser withdraws on one of
Kaufer aus den inss.10.1 the grounds set forth in ss.
und/oderss. 10.2 genannten 10.1 and/or ss. 10.2 or for
Grunden oder aus wichtigem good cause (aus wichtigem
Grund zurucktritt, Grund), the Seller shall
verpflichtet sich der undertake to reimburse the
Verkaufer, dem Kaufer den Purchaser for the purchase
Kaufpreis gema(beta) ss. 2 und price pursuant to ss. 2 and
alle Einlagen all capital contributions,
einschlie(beta)lich gezahlter including premiums paid,
Agios Zug um Zug gegen concurrently with the
Abtretung der assignment of the
Geschaftsanteile/Aktien shares/stocks.
zuruckzuzahlen.
10.6 Once the Seller or the
Purchaser has withdrawn from
10.6 Nach dem Rucktritt von diesem this Agreement, with the
Vertrag durch den Verkaufer exception of the obligations
oder den Kaufer bestehen mit set forth in this ss. 10, no
Ausnahme der in diesemss. 10 rights or duties whatsoever
geregelten Verpflichtungen shall exist under this
keinerlei Rechte und Pflichten Agreement anymore. The
mehr aus diesem Vertrag. Die Purchaser's rights under ss.6
Rechte des Kaufers ausss.6 and ss.9 shall not be affected
undss.9 bleiben von einem by a right of withdrawal.
Rucktrittsrecht unberuhrt.
10.7 If and to the extent that
10.7 Wenn und soweit zwingendes mandatory US-law provides that
Recht der USA vorschreibt, the Seller has to publish this
da(beta)der Verkaufer diesen Agreement, the Seller shall be
Vertrag veroffentlicht, ist allowed to do so. The
der Verkaufer hierzu publication shall be limited
berechtigt. Die to those parts of the
Veroffentlichung ist auf Agreement whose publication is
diejenigen Teile des Vertrages required. The other parties to
zu beschranken, deren this Agreement shall be
Veroffentlichung geboten ist. informed with due notice
In ausreichendem zeitlichen before the publication that
Abstand vor der the publication is intended,
Veroffentlichung sind die on the type and extent of the
anderen Vertragspartner uber publication and on the
die geplante Veroffentlichung, applicable law providing for
uber den Art und Umfang der the publication.
Veroffentlichung und uber die
einschlagigen Vorschriften, zu
unterrichten, welche die
Veroffentlichung anordnen.
<PAGE>
24
ss. 11 ss. 11
Laufzeit Term
Dieser Vertrag beginnt mit seiner This Agreement shall commence with
notariellen Beurkundung und endet its notarization and end three
drei Jahre nach dem Borsengang (Tag years after the entry into the
der ersten Notiz der Gesellschaft stock market (date of the Company's
an der Frankfurter first notification to the Frankfurt
Wertpapierborse), spatestens jedoch Stock Exchange), but no later than
zum 31.12.2004, sofern nicht zuvor by 31 December 2004, unless the
der Verkaufer oder der Kaufer von Seller or Purchaser avails itself
einem Rucktrittsrecht nachss.10 of a right of withdrawal pursuant
Gebrauch machen. Das Recht zur to ss. 10. The right of the Seller
Kundigung aus wichtigem Grund durch or the Purchaser to terminate for
den Verkaufer oder den Kaufer good cause remains unaffected. Good
bleibt unberuhrt. Ein wichtiger cause exists if one of the parties,
Grund liegt vor, wenn eine der despite receiving a warning, again
Vertragsparteien trotz Abmahnung violates the provisions of this
erneut gegen die Regelungen dieses Agreement. The legal consequences
Vertrages versto(beta)t. Die of a termination for good cause
Rechtsfolgen einer Kundigung aus shall be analogous to the
wichtigem Grund richten sich analog provisions set forth in ss.10 of
nach den Regelungen inss.10 dieses this Agreement.
Vertrages.
<PAGE>
25
ss. 12 ss. 12
Anwendbares Recht, Gerichtsstand Applicable Law, Legal Venue
12.1 Dieser Vertrag unterliegt dem 12.1 This Agreement is governed by
Recht der Bundesrepublik the laws of the Federal
Deutschland unter Republic of Germany, to the
Ausschlu(beta)des exclusion of the UN Sales
UN-Kaufrechts und des Convention and international
internationalen Privatrechts private law, as well as any
sowie sonstigen other international law.
internationalen Rechts.
12.2 The exclusive legal venue for
12.2 Ausschlie(beta)licher all disputes arising from and
Gerichtsstand fur alle in connection with this
Streitigkeiten aus und im Agreement shall be Frankfurt
Zusammenhang mit diesem am Main.
Vertrag ist Frankfurt am Main.
ss. 13 ss. 13
Anderungen, Erganzungen Changes, Additions
Anderungen und Erganzungen dieses Additions to and changes of this
Vertrages bedurfen der Schriftform, Agreement must be in written form,
soweit nicht gesetzlich ein unless a more stringent formal
strengeres Formerfordernis requirement is mandated by statute.
vorgeschrieben ist. Das gilt auch This also applies to changes in
fur Anderungen des this written form requirement
Schriftformerfordernisses selbst. itself.
ss. 14 ss. 14
Sprache Language
Ma(beta)geblich ist der deutsche The German text of this document
Text dieser Urkunde. shall prevail.
ss. 15 ss. 15
Sonstiges Miscellaneous
Die Parteien sind sich einig, The Parties agree that the
da(beta) der Beteiligungsvertrag Participation Agreement of 8 July
vom 08.07.1999, soweit nicht dieser 1999 shall continue to apply unless
Vertrag Abweichendes regelt, otherwise provided in this
fortgilt. Agreement.
<PAGE>
26
ss. 16 ss. 16
Salvatorische Klausel Partial Invalidity
Sollten einzelne Bestimmungen Should any individual provision of
dieses Vertrages ganz oder this Agreement be or become wholly
teilweise unwirksam sein oder or partially invalid, or should
werden oder sollte sich in diesem there prove to be an omission, this
Vertrag eine Lucke befinden, so shall not affect the validity of
soll hierdurch die Gultigkeit der the remaining provisions. In the
ubrigen Bestimmungen nicht beruhrt place of the invalid provision, a
werden. Anstelle der unwirksamen valid provision shall be deemed
Bestimmung gilt diejenige wirksame agreed which corresponds to the
Bestimmung als vereinbart, welche purpose and meaning of the invalid
dem Sinn und Zweck der unwirksamen one. In the event of an omission, a
Bestimmung entspricht. Im Falle provision shall be deemed agreed,
einer Lucke gilt diejenige which corresponds, on the basis of
Bestimmung als vereinbart, die dem the purpose and meaning of this
entspricht, was nach Sinn und Zweck Agreement, to what the Parties
des Vertrages vereinbart worden would have agreed, had the Parties
ware, hatte man die Angelegenheit considered the matter at the
von vornherein bedacht. Dies gilt outset. This shall also apply if
auch dann, wenn die Unwirksamkeit the invalidity of the provision
einer Bestimmung auf einem mit results from a measure of
diesem Vertrag normierten Ma(beta) performance or time set as a
der Leistung oder Zeit beruht. Es standard in this Agreement; in such
tritt in solchen Fallen ein dem cases, a legally valid measure of
Gewollten moglichst nahekommendes, performance or time which comes as
rechtlich zulassiges Ma(beta)der close as possible to that
Leistung oder Zeit anstelle des originally agreed shall be deemed
Vereinbarten. agreed instead.
ss. 17
ss. 17 Directions to the Notary
Anweisungen an den Notar
The Notary is hereby charged with
Der Notar wird beauftragt, die notifying the Commercial Register
Abtretungsanzeige an das Court (Handelsregistergericht) of
Handelsregistergericht gema(beta) the assignment pursuant to ss. 40
ss. 40 Abs.1 S. 2 GmbHG, soweit para.1 sent. 2 of the German
moglich, ohne Vorlage dieses Limited Liability Companies Act
Vertrages vorzunehmen. Sollte die (GmbHG), if possible without
Vorlage dieses Vertrages presenting this Agreement. Should
erforderlich sein, so ist der it be necessary to present this
Vertrag nur auszugsweise, d. h. Agreement, then it shall only be
soweit es ss. 1 und ss. 3 betrifft, presented in excerpts, i.e.
vorzulegen. where ss.1 and ss. 3 are concerned.
<PAGE>
27
ss. 18 ss. 18
Belehrungen des Notars Notary's Instructions
Der Notar hat daruber belehrt, The Notary has instructed those
da(beta) die mit den appearing that the statutory
Geschaftsanteilen verbundene liability associated with the
gesetzliche Haftung auf den shares passes to the transferee:
Erwerber ubergeht:
the transferee is unrestrictedly
fur etwaige nicht erbrachte liable for any capital
Geldeinlagen und fur etwaige contributions not paid in by the
Fehlbetrage nicht vollwertig transferors or other shareholders
geleisteter Sacheinlagen der and for any deficits in
Verau(beta)erer und anderer contributions in kind that were not
Gesellschafter der Erwerber rendered in their full value by the
unbeschrankt haftet, unbeschadet transferors or other shareholders,
der fortdauernden Haftung der regardless of the ongoing liability
Verau(beta)erer; of the transferors;
das GmbH-Gesetz den guten Glauben the Limited Liability Companies Act
des Erwerbers an das Bestehen und (GmbHG) does not protect the
die Lastenfreiheit des transferee's good faith that the
GmbH-Anteiles nicht schutzt; GmbH share exists and is free of
encumbrances;
gema(beta) ss. 16 GmbHG der
Gesellschaft gegenuber bei einer pursuant to ss. 16 GmbHG, where
Geschaftsanteilsverau(beta)erung shares are transferred, the
nur derjenige als Erwerber gilt, transferee is only legitimized
dessen Erwerb unter Nachweis des vis-a-vis the Company when his
Ubergangs bei der Gesellschaft acquisition is notified to the
angemeldet ist; Company by proving evidence of the
transfer;
eine Beratung und Prufung des
vorliegenden Ubertragungsvertrages that the certifying Notary did not
in steuerrechtlicher Hinsicht durch render advice or examine the tax
den amtierenden Notar nicht erfolgt aspects of this transfer agreement;
ist; die Beteiligten wurden auf die the Parties were informed of the
Moglichkeit hingewiesen, derartiges possibility of having such a
durch einen Steuerberater vornehmen service performed by a tax
zu lassen. consultant.
<PAGE>
28
ss. 19 ss. 20
Kosten Authorization to Execute
Die Kosten dieser Urkunde und ihrer We authorize the following notary'
Durchfuhrung tragt die staff
Gesellschaft.
Mrs. Karin Dittmar and
ss. 20 Mrs. Jacqueline Neuhoff
Vollzugsvollmacht business address:
Hohenzollerndamm 55, 14199 Berlin
Wir bevollmachtigen die
Notariatsangestellten to make changes to thes
negotiations and to apply for thei
Frau Karin Dittmar und entry in the Commercial Register
Frau Jacqueline Neuhoff, The designees each have sole power
geschaftsansassig of representation and ar
Hohenzollerndamm 55, 14199 Berlin, individually released from th
restrictions of ss. 181 of th
Anderungen dieser Verhandlung German Civil Code, and are release
vorzunehmen und zum Handelsregister of libilities of any kind.
anzumelden. Die Bevollmachtigten
sind alleinvertretungsberechtigt For the internal relationship, i
und jede fur sich von den is agreed that this power o
Beschrankungen des ss. 181 BGB attorney may only be exercise
befreit, und von jedweder Haftung before the officiating notary o
freigestellt. his officially designate
representative and only after prio
Fur das Innenverhaltnis wird approval by the parties involved
vereinbart, da(beta) von dieser This power of attorney expires whe
Vollmacht nur vor dem amtierenden this declaration is entered in th
Notar oder seinem amtlich Commercial Register.
bestellten Vertreter Gebrauch
gemacht werden darf und nur nach The above declarations were rea
vorheriger Zustimmung der aloud by the certifying Notary t
Beteiligten. Die Vollmacht erlischt the persons appearing, approved b
mit der Eintragung der Erklarung im the persons appearing and signed b
Handelsregister. the persons appearing and th
certifying Notary in their own han
Vorstehende Verhandlungen wurde den as follows:
Erschienenen von dem amtierenden
Notar vorgelesen, von den
Erschienenen genehmigt und von den
Erschienenen und dem amtierenden
Notar eigenhandig wie folgt
unterzeichnet:
<PAGE>
- -----------------------------------
Michael Pieniazek
- -----------------------------------
Markus Saller
- -----------------------------------
Christoph von zur Gathen
- -----------------------------------
Notar / Notary
<TABLE>
<CAPTION>
Exhibit 21
List of Subsidiaries
State/Country Percentage Ownership
Name of Incorporation as of July 31, 1999
- ---- ---------------- -------------------
<S> <C> <C>
1. Equidyne Systems, inc. California 100%
2. Dynamic Dental Systems, Inc. Georgia 100%
3. Rosch GmbH Medizintechnik Germany 75%
</TABLE>
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-23741 and 333-19323) pertaining to the 1987 Non-Qualified
Stock Option Plan and Stock Option Agreements and the 1996 Stock Option Plan of
American Electromedics Corporation of our report dated October 26, 1999 with
respect to the financial statements of American Electromedics Corporation
included in the Annual Report (Form 10-KSB) for the year ended July 31, 1999.
/s/ Ernst & Young LLP
Manchester, New Hampshire
October 26, 1999
42
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN
ELECTROMEDICS CORP. FORM 10-KSB FOR THE PERIOD ENDED JULY 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 210
<SECURITIES> 0
<RECEIVABLES> 897
<ALLOWANCES> 0
<INVENTORY> 1,480
<CURRENT-ASSETS> 2,783
<PP&E> 745
<DEPRECIATION> (115)
<TOTAL-ASSETS> 7,241
<CURRENT-LIABILITIES> 4,045
<BONDS> 0
0
2,891
<COMMON> 963
<OTHER-SE> (1,098)
<TOTAL-LIABILITY-AND-EQUITY> 7,241
<SALES> 6,789
<TOTAL-REVENUES> 6,789
<CGS> 5,107
<TOTAL-COSTS> 5,107
<OTHER-EXPENSES> 11,891
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 174
<INCOME-PRETAX> (9,861)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,861)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,861)
<EPS-BASIC> (1.39)
<EPS-DILUTED> (1.39)
</TABLE>
