AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1999
Registration No. 333-______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
AMERICAN ELECTROMEDICS CORP.
(Name of Small Business Issuer in Its Charter)
---------------------------
DELAWARE 3845 04-2608713
(State Or Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation Classification Code Number) Identification No.)
or Organization)
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13 COLUMBIA DRIVE, SUITE 5
AMHERST, NEW HAMPSHIRE 03031
(603) 880-6300
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
---------------------------
MICHAEL T. PIENIAZEK
PRESIDENT AND CHIEF FINANCIAL OFFICER
13 COLUMBIA DRIVE, SUITE 5
AMHERST, NEW HAMPSHIRE 03031
(603) 880-6300
(Name, Address and Telephone Number of Agent For Service)
---------------------------
COPIES TO:
BRUCE A. RICH, ESQ.
THELEN REID & PRIEST LLP
40 WEST 57TH STREET
NEW YORK, NEW YORK 10019
(212) 603-2000
---------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
from time to time after the effective date of this Registration Statement
as determined by market conditions and other factors.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-----------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OFFERING AGGREGATE AMOUNT OF
OF SECURITIES TO BE AMOUNT TO PRICE OFFERING REGISTRATION
REGISTERED BE REGISTERED PER UNIT(1) PRICE(1) FEE
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Common Stock, $.10 par 3,362,757 $1.28 $4,304,328.96 $1,196.60
value(2) shares
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Common Stock, $.10 par 25,000 $3.00 $75,000.00 $20.85
value(3)(4) shares
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Total 3,387,757 -- -- $1,217.45
shares
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(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) promulgated under the Securities Act of 1933, as
amended, based on the average of the bid and asked prices on the OTC Bulletin
Board on March 24, 1999.
(2) Includes a presently indeterminate number of shares issued or issuable upon
conversion of or otherwise in respect of Registrant's Series B Convertible
Preferred Stock. This is not intended to constitute a prediction as to the
number of shares of Common Stock into which the Preferred Stock will be
convertible.
(3) In accordance with Rule 457(g), the registration fee for these shares is
calculated upon a price which represents the highest of (i) the price at which
the warrants or options may be exercised; (ii) the offering price of securities
of the same class included in this registration statement; or (iii) the price of
securities of the same class, as determined pursuant to Rule 457(c).
(4) Represents shares of Common Stock underlying 25,000 warrants.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an
offer to sell or a solicitation of an offer to buy nor shall there be
any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
3,387,757 SHARES OF COMMON STOCK
AMERICAN ELECTROMEDICS CORP.
All of these shares are being offered for resale by existing stockholders.
These shares consist of 3,362,757 shares issuable on conversion of our
Series B preferred stock and 25,000 shares issuable on exercise of our warrants.
The number of shares issuable on conversion of the Series B preferred stock and
the warrants is subject to adjustment.
The selling stockholders may sell their shares at various times in usual
brokerage transactions at the market price at the time of sale, at prices
related to market price or at negotiated prices. The selling stockholders and
any agents, broker-dealers or underwriters who act with or for the selling
stockholders in the distribution of the shares may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, and any
commission received by them and any profit on the resale of the common stock may
be deemed underwriting discounts or commissions under the Securities Act of
1933.
We will not receive any proceeds from the sale of the shares but we will
receive $75,000 if all the warrants are exercised. We agreed to pay all expenses
of registration of these shares, but we will not pay the selling stockholders'
selling and brokerage expenses.
Our stock is traded in the over-the-counter market on the OTC Electronic
Bulletin Board under the symbol AMER. On March 24, 1999, the closing bid and
asked prices were $1.25 and $1.31.
------------------
We urge you to read and consider the information we provide to you in this
prospectus about our company and the common stock. In addition, we ask that you
consider the risk factors noted on pages 5 through 11 in light of your
investment objectives and the fact that an investment in shares of common stock
involves a high degree of risk.
---------------
These securities have not been approved by the SEC or any state securities
commission, nor have those organizations determined that this prospectus is
accurate or complete. Any representation otherwise is a criminal offense.
The date of this prospectus is 1999
--------,
<PAGE>
SUMMARY
This section is only a summary of this prospectus and does not contain all
the information about our business that may be important to you. You should read
the entire prospectus, especially the risk factors, the consolidated financial
statements and the notes section, before deciding to invest in shares of our
common stock. This summary describes our new business that emerged as a result
of acquiring two other companies and our plans to sell a significant portion of
our present business line in order to concentrate our business. As a result,
much of the business described in this prospectus is very different from the
business in which we may be engaged in the foreseeable future.
In November 1996, the Company effected a one-for-five reverse split of its
Common Stock. All share and per share information in this Prospectus is on a
post-split basis.
OUR BUSINESS
We operate a medical equipment business through our four operating units:
- our Equidyne Systems subsidiary which developed and recently
commenced marketing the INJEX(TM) needle-free drug injection
system,
- the U.S. intraoral dental camera unit is operated through our
Dynamic Dental Systems subsidiary,
- our Rosch GmbH Medizintechnik subsidiary, a marketing and
distribution company based in Berlin, Germany, through which we
conduct much of our foreign and export sales, and
- the audiometrics unit manufactures and sells Tympanometers(R) and
the Pilot(R) Audiometer.
On January 5, 1999, we announced a change of our business direction. We
decided to focus all our business resources on Equidyne Systems. Equidyne
developed the INJEX(TM) needle-free drug injection system. This system is intend
to eliminate risks of contaminated needle stick accidents and the resulting
diseases from hypodermic needles and syringes.
Equidyne holds two U.S. patents for features of the INJEX(TM) system. In
addition, it received U.S. FDA 510(k) clearance to market the system in the U.S.
Equidyne will begin marketing the system in the U.S. in late spring or early
summer 1999. At the start, Equidyne will market the system through exclusive
arrangements with medical products distributors. Equidyne is discussing
licensing and joint development agreements with pharmaceutical companies in
the U.S. to market the system. Equidyne also has plans to market its
products overseas. It now has distribution arrangements in Japan and Mexico
and will, when it receives regulatory approval in Europe, use the same
marketing plans there as it uses in the U.S. We anticipate receiving European
regulatory approval in late spring or early summer 1999 and when it is
granted, we will begin European sales.
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.
At this time, the largest segment of our business is intraoral dental
camera systems sales. Our intraoral camera systems display close-up high quality
color video or digital images of patients' teeth and gums. These images help
dental care providers to treat dental health and hygiene problems. Dental care
providers use our systems so that patients can better see, understand and accept
treatment recommendations. We also make the Tympanometer(R). It's a diagnostic
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<PAGE>
instrument which applies air pressure and sound to the ear drum, to identify
diseases and disorders of the middle ear not usually detected by standard
hearing tests.
In order for us to change our business direction, we are looking to sell
our U.S. dental and audiometrics business units. We retained an investment
banking firm to manage the sale of those units.
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.
THIS OFFERING
SECURITIES OFFERED........................ 3,387,757 shares of common
stock at various times by the
selling stockholders.
COMMON STOCK OUTSTANDING.................. 7,668,464 shares as of
March 25, 1999.
RISK FACTORS.............................. An investment in common stock
involves a high degree of risk,
including recent financial losses,
a highly competitive industry,
need for market acceptance of a
new product, ability to
manufacture the new product at
high quality control standards and
at projected costs, regulatory
compliance, changing healthcare
policies both domestically and
abroad, and technological changes.
USE OF PROCEEDS........................... We will receive none of the
proceeds of the sale of the common
stock. We will receive $75,000
upon the exercise of the warrants
of which 25,000 underlying
shares of common stock are being
registered for sale. We will use
any of those proceeds for general
corporate purposes.
OTC ELECTRONIC BULLETIN BOARD
SYMBOL........................... "AMER"
RISK FACTORS
Turn to the Risk Factors section of this prospectus for information on some
of the risk factors that should be considered before investing in the common
stock.
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<PAGE>
SUMMARY FINANCIAL AND OPERATING INFORMATION
This summary financial information below is from and should be read with
the financial statements, and the notes to the financial statements, elsewhere
in this Prospectus. All numbers are in thousands, except for share and per share
amounts.
--------------------------------------------------
YEAR ENDED
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SUMMARY OF OPERATIONS 7/31/98 7/31/97 7/27/96 7/29/95 7/30/94
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Net sales $7,025 $2,309 $3,337 $2,443 $1,965
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Income (loss) before (3,674) (926) 467 184 61
provision for income taxes
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Net income (loss) (3,674) (926) 442 172 57
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Net income (loss) per common
share:
Basic (1.01) (.37) .18 .08 .03
Diluted (1.01) (.37) .18 .08 .03
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Weighted average 4,687,707 2,510,296 2,493,854 2,238,483 1,833,666
common shares
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-------------------------------
SIX MONTHS ENDED
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SUMMARY OF OPERATIONS 1/31/99 1/31/98
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Net sales $4,396 $3,635
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Income (loss) before provision
for income taxes (2,642) 46
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Net income (loss) (2,642) 44
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Net income (loss) per common share:
Basic (.40) .01
Diluted (.40) .01
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Weighted average common shares 7,217,218 3,282,142
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As of AS OF AS OF AS OF AS OF
FINANCIAL POSITION 1/31/99 7/31/98 7/31/97 7/27/96 7/29/95
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Total assets $11,906 $11,458 $3,060 $2,771 $1,513
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Working capital (1,118) 793 1,060 906 915
(deficit)
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Long-term debt -0- -0- 1,100 94 0
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Stockholders' equity 6,450 8,512 1,168 1,948 1,196
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<PAGE>
RISK FACTORS
Investing in the shares of common stock of the company involves a high
degree of risk and should be considered extremely speculative. These shares
should not be purchased by persons who cannot afford to lose their entire
investment. Prospective investors should carefully consider the risk factors
before investing.
The information in this prospectus contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
For example, there are statements about our plans, beliefs, expectations and
intentions. Our actual results could differ greatly from the results mentioned
in the forward- looking statements. Factors that could cause or contribute to
these differences include the risk factors we mention in this section of the
prospectus in addition to information set out elsewhere in this prospectus. Our
cautionary statements should be read as being applicable to all related
forward-looking statements wherever they appear in this prospectus.
Financial Risks
WE RECENTLY EXPERIENCED ECONOMIC LOSSES. We had a net loss of $3,674,000
(or $1.01 per share) for the fiscal year that ended on July 31, 1998. Compare
this to our net loss of $926,000 (or $.37 per share) for the fiscal year that
ended on July 31, 1997.
We had a net loss for the six-month period that ended on January 31, 1999
of $2,642,000 (or $.40 per share). Compare this to our net profit of $44,000
(or $.01 per share) for the same six-month period in 1998.
At January 31, 1999, we had a working capital deficiency of $1,118,000,
that being the amount our current liabilities exceeded our current assets. Our
auditor's report for the July 31, 1998 financial statements contains an
explanatory paragraph describing conditions that raise substantial doubt about
our ability to continue as a going business.
Our losses in fiscal 1999 to date were because (1) we changed from
using a major distributor for sales of dental cameras in Europe to direct
sales, (2) of increased marketing and promotion activity, (3) of lower gross
profits on cameras compared to gross profits on sales of our other products,
and (4) of amortization of deferred compensation for consultants and options
granted in connection with acquisitions.
The increase in sales in fiscal 1999 was because (1) we accounted for sales
made by Rosch on a consolidated basis and (2) of sales of new intraoral dental
camera systems.
Business and Regulatory Risks
WE PLAN TO CONCENTRATE OUR BUSINESS ON ONE NEW PRODUCT. On January 5, 1999,
we announced our intention to focus all our resources on the development and
marketing of Equidyne's INJEX(TM) system and to sell our dental and audiometrics
business units. Equidyne is still developing the INJEX(TM) system and only
recently started marketing this system. The system has not been commercially
accepted, and will compete with other products. Some of these other products are
owned by large companies with far greater resources than our company and are
being used in the marketplace. In addition, the system may require substantial
amounts of money to develop, manufacture and sell. We cannot assure investors
that we will be successful in developing and marketing the INJEX(TM) system or
in obtaining the additional monies which are needed for this development and
marketing. Moreover, we cannot assure investors that we will find a buyer for
our U.S. dental and audiometrics units.
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<PAGE>
OUR BUSINESS AND OUR COMPANY ARE HEAVILY REGULATED BY THE GOVERNMENT.
Government regulation in the U.S. and foreign countries is a major factor that
can contribute to the success or failure of our business plans. In the U.S., all
medical devices including our existing products and products that we are
developing, are regulated by the federal government, chiefly by the FDA, and
also by state and local law. These regulations govern the development, testing,
manufacture, labeling, storage, premarket clearance and approval, advertising,
promotion, sale and distribution of medical products. Medical devices that are
marketed abroad are regulated by foreign governments.
The process for obtaining FDA premarket clearance for medical devices is
generally lengthy, expensive and uncertain. Securing FDA market clearance often
requires applicants to submit extensive information to the FDA. Even if granted,
the FDA can withdraw product clearances for failure to comply with regulatory
requirements or if unforeseen problems occur after marketing has already begun.
We cannot assure investors that we will be able to obtain necessary FDA
clearances on a timely basis, if at all, for products we are developing now or
in the future. Our business would suffer if:
- receipt of clearances is delayed,
- we fail to receive clearances, or
- we fail to comply with existing or future FDA requirements.
Even if granted, FDA clearances may include limitations on how our products
may be used. Also, if we change any of our products after obtaining the required
clearances, those products are again subject to FDA review and clearance. We
cannot assure investors that required clearances, once we obtain them, will not
be withdrawn or that they will remain in place. If we, or the outside
manufacturers of components of our products, fail to comply with applicable FDA
or other regulatory requirements, we (and they) are subject to sanctions.
FDA regulations also require that we follow "Good Manufacturing Practices."
Those regulations include validation testing, quality control and documentation
procedures. In order to determine if we are in compliance with those
regulations, we and any outside manufacturers we use are subject to inspections
by the FDA.
Even though we believe that our products and procedures are in compliance
with all relevant FDA requirements, if we fail to obtain clearances for new
products or fail to comply with the regulations, it would severely hurt our
business.
Medical devices made in the U.S. and sold outside the U.S. are subject to
U.S. export requirements. All medical devices sold outside the U.S. are
regulated by foreign governments. The laws regulating imported medical devices
vary from country to country and the process for obtaining approval in foreign
countries may be different from the required FDA approval process. We cannot
assure investors that we will be able to obtain regulatory approvals or
clearances for our products in foreign countries.
OUR BUSINESS IS HIGHLY COMPETITIVE; THERE IS ALSO A RISK THAT OUR PRODUCTS
MAY BE MADE OBSOLESCENT BY NEW TECHNOLOGY. Our business of manufacturing and
distributing medical and dental products is very competitive. We compete with
many other companies. Some of those companies are major manufacturers and
distributors. In the intraoral dental camera business, we compete with at least
five major companies in the video market. The digital equipment market has not
been in existence as long but we anticipate growing competition in this market
also. In the audiometrics business, some of our competition recently
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<PAGE>
consolidated and this resulted in reducing prices of audiometrics products. This
could affect the sale price of our audiometrics unit.
The competition for our injection system primarily is from traditional
hypodermic needles and syringes. They are used for the vast majority of
injections administered today. In order to make needles and syringes easier and
safer to use, other companies developed syringes with hidden needles,
spring-powered needle injectors and injectors with sheathed needles. These are
sometimes called safety syringes. In addition to competing with traditional
hypodermic needles and syringes and safety syringes, our needle-free injection
system also competes with other needle-free injection devices. Our competition
in the needle-free injection market is mostly limited to other small companies
with modest financial and other resources. However, the barriers to entry into
the needle-free injection market are now low. Additional competitors may enter
the needle-free injection system market, including companies with far greater
resources and experience than we have. Further, our major competitor in the
needle-free injection business is now working with the largest producer of
needles and syringes in order to manufacture a new design of disposable
needle-free system. We cannot assure investors that we will be able to compete
effectively with current or future competitors in the needle-free injection
market. Competition in this market could force us to reduce the price of our
system below the level currently planned. Downward pricing pressure in the
industry could hurt our operations.
Drugs are usually injected only when other delivery methods (such as pills
or liquids taken orally) are not possible. In particular, biopharmaceutical
proteins (drugs derived from living organisms, such as insulin and human growth
hormone) cannot currently be delivered orally, transdermally (through the skin)
or pulmonarily (through the lungs). Many large and small companies are engaged
in research and development to develop new techniques to deliver these drugs
without injection. For example, Pfizer, Inc. recently announced successful human
trials of a device to inhale insulin. They are competing with several other
large companies to develop such a device. If they are successful, it would
likely hurt our operations, business, financial condition and general financial
future.
Most of our competitors in all areas of our business have greater financial
and other resources than we have. As a result, those other companies may begin
to develop, manufacture, market and distribute medical devices which are similar
to or superior to the our products.
WE DEPEND ON PROPRIETARY TECHNOLOGY RIGHTS; MOST OF OUR PRODUCTS ARE NOT
PATENTED. Our success will depend in part on our ability to protect proprietary
(ownership) rights to our products and to operate our business without
infringing on the proprietary right of other parties. We do not hold any patents
on our products except for those obtained on our needle-free injection system.
We hold two U.S. patents and have applied for nine foreign patents on that
system.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions. Future patent applications may not be
issued, the scope of any patent protection may not exclude competitors and it
may not provide competitive advantages to us. Further, our patents may be found
to be invalid, and other companies may claim rights in (or ownership of) the
patents and other proprietary rights held or licensed by us. Also, our existing
patents might not cover products we want to bring out in the future. Moreover,
when key patents expire, the inventions will enter the public domain.
Since patent applications in the U.S. are maintained in secrecy until the
patent is issued, our products may infringe patents issued to others. If our
products are found to infringe competitors' patents, we may have to modify our
product to avoid infringement. It is possible that our modified products would
not be commercially successful.
IF MEDICAL INSURERS AND HEALTH MAINTENANCE ORGANIZATIONS DECIDE NOT TO
REIMBURSE PATIENTS FOR USE OF OUR PRODUCTS, IT COULD HURT OUR BUSINESS. Our
ability to commercialize our products successfully will depend in part on the
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<PAGE>
extent to which governmental authorities (such as the U.S. Health Care Financing
Administration), private health insurers and other organizations such as health
maintenance organizations (HMOs) agree to reimburse for our products and related
treatments. The levels of revenues and profitability of companies like ours may
be affected by the continuing efforts of governments and third party payors to
contain or reduce the costs of healthcare through various means including
limiting prices paid for medical products. In both the U.S. and in other
countries, diagnostics and the sale of medical products are dependent in part on
the availability of reimbursement to the consumer from third party payors, such
as government insurance programs (Medicare and Medicaid) and private corporate
health insurance plans. Third party payors are increasingly challenging the
prices charged for diagnostics and medical products and, in some cases, refusing
payment for diagnostics and medical equipment they deem inappropriate. The cost
containment measures that health care providers and third party payors are
instituting and any proposed future health care reform measures, including
reductions in government reimbursement programs such as Medicare and Medicaid,
could affect our ability to sell our products.
IN ORDER TO SUCCEED, WE MUST BE READY TO RESPOND TO TECHNOLOGICAL CHANGE
AND BRING NEW PRODUCTS TO MARKET. We are in the "high tech" end of the health
care industry. This industry experiences very rapid technological change and
frequent introductions of new products. As a result, our future growth and
profitability depend in part on our ability to respond to technological changes
in addition to successfully developing and marketing new products. We cannot
assure investors the we will be able to do so.
WE MAY BE SUED BECAUSE OF OUR PRODUCTS. If our products malfunction or are
misused, it could result in injury to patients and subject us to liability and
expenses in contesting claims against us. We maintain insurance coverage of
$4,000,000 per occurrence and $5,000,000 in the aggregate with a deductible of
$5,000. Insurance in these amounts is customary in the industry. However, we
cannot assure investors that our insurance will be enough to cover any potential
liability. Further, if we are not able to obtain insurance because of either a
successful claim against us or because of insurance industry trends, we may have
difficulty obtaining product liability insurance or we could be forced to pay
very high premiums. We cannot assure investors that insurance coverage will
continue to be available on commercially reasonable terms or at all. In
addition, we cannot assure investors that insurance will adequately cover any
product liability claim against our company. If a product liability or other
claim for which we are uninsured or a claim for more that we are insured is
successful, it could hurt our business, financial condition and operations.
SOME OF OUR KEY PERSONNEL WOULD BE DIFFICULT TO REPLACE AND THE LOSS OF ANY
ONE OF THEM COULD HURT OUR BUSINESS. Our success is highly dependent on our
ability to attract and retain highly qualified personnel, including Thomas A.
Slamecka, Chairman of the Board, and Michael T. Pieniazek, President, Chief
Financial Officer and Secretary, and the principal officers of our subsidiaries.
Competition for qualified personnel is intense, and we cannot assure investors
that we will be successful in attracting and retaining key personnel in the
future. If we fail to do so, it could hurt our company. We do not carry any
"key-man" insurance on the life of any of our officers.
Additional Business Risk Factors Relating
to Needle-Free Injection Business
THE MARKET MAY NOT ACCEPT OUR NEW PRODUCT. The success of our needle-free
injection system will depend on market acceptance of the system as an
alternative to needle injections. Our competitors' needle-free injection systems
have had only limited success in this area. We believe this is because of the
size, cost and complexity of their systems. The differences in our needle-free
system which make it easier and less costly to use may not be enough to overcome
reluctance of the marketplace to accept the system. We cannot assure investors
that we will be successful in these efforts or that our needle-free system will
ever gain enough market acceptance to become profitable.
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<PAGE>
THE SUCCESS OF OUR NEW PRODUCT WILL DEPEND ON OUR ABILITY TO ENTER INTO
SUPPORTING AGREEMENTS WITH OTHER COMPANIES. We believe that the introduction and
acceptance of our system depends in part on the success of our efforts in
obtaining licensing arrangements with pharmaceutical and medical device
companies. These arrangements would cover the development, manufacture or use of
the system with specific drug therapies. We anticipate that under these
arrangements these companies will assist in the development of systems for drug
therapies and participate in collecting data for regulatory approval of the
system with the licensed drug therapy. These companies also will be responsible
for distribution and marketing of the systems for these drug therapies
(either worldwide or in specific territories). We cannot control how these
companies will use their resources toward these goals. They may make decisions
about when a drug is introduced, how much of a drug will be sold, competition,
FDA approvals and patent and trademark lawsuits. These decisions could benefit
or hurt sales of the system.
WE HAVEN'T MANUFACTURED OUR INJECTION SYSTEM FOR VERY LONG OR IN GREAT
QUANTITIES. Our experience manufacturing our needle-free injection system
involves only small quantities for testing and demonstrations. Our plans for the
system require us to develop a manufacturing and assembly process able to
produce enough systems and components to satisfy demand. All components of the
system must be manufactured in compliance with government requirements, in a
timely manner and in sufficient quantities while maintaining quality and
acceptable manufacturing costs. Some manufacturing will be done by
sub-contractors over which we will not have any control. In developing these
manufacturing and production methods and relationships, we may encounter
difficulties, including problems with:
- yields,
- quality control and assurance,
- product reliability,
- manufacturing costs,
- new equipment,
- component supplies and
- shortages of personnel,
any of which could result in production delays. We cannot assure investors that
we will be successful at production and manufacture of our needle-free injection
system.
THE SUCCESS OF OUR NEW PRODUCT WILL DEPEND ON OUR ABILITY TO OBTAIN A
STEADY STREAM OF PARTS AND COMPONENTS FROM OTHER COMPANIES. We already chose the
companies to supply us component parts for the needle-free injection system.
However, government requirements that apply to medical device manufacturing can
make substituting any of these suppliers costly and time-consuming. We cannot
assure investors that we will enter into agreements with suppliers that are
capable of delivering enough components to meet our demands, on acceptable terms
or at all. All of the following could hurt our ability to manufacture and market
our products:
- an inadequate supply of component parts,
- an inability to obtain parts from sources other than our usual
supplier,
- a reduction or interruption in supply, and
- an increase in the price of components.
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Market Risks
THE VALUE OF STOCKS IS VOLATILE. Stock markets experience periods of
extreme volatility. Many times these periods are unrelated to the operating
performance of common stock or to public announcements concerning the issuers of
the stock. Our common stock is not actively traded. The bid and asked prices
have fluctuated significantly. In the past two fiscal years, the stock traded
from a high of $5.16 to a low of $0.66 (after giving effect to a one-for-five
reverse stock split in November 1996). The following factors could affect
the price of the stock:
- general market price declines,
- market volatility (especially for low priced securities), and
- factors related to the general economy or our company.
All of the shares registered for sale on behalf of the selling stockholders
are "restricted securities" as that term is defined in Rule 144 under the
Securities Act. We filed a Registration Statement of which this prospectus is a
part to register these restricted shares for sale into the public market by the
selling stockholders. In addition, in March 1999, the SEC declared effective our
registration statement by which we registered restricted shares for other
selling stockholders. The combined effect of both registration statements is to
increase the number of unrestricted shares. A sudden increase in the amount of
unrestricted shares may cause the price of the stock to go down and also could
affect our ability to raise equity capital. Any outstanding shares not sold by
the selling stockholders pursuant to this prospectus will remain "restricted
shares" in the hands of the holder, except for those held by non-affiliates, for
a period of two years, calculated pursuant to SEC Rule 144.
LACK OF DIVIDENDS. We have never declared any cash dividends on our common
stock. If we were to become profitable, we expect that all earnings would be
retained to support the business of our company. Accordingly, we do not
anticipate paying cash dividends on our common stock in the foreseeable future.
WE RESERVED SOME OF OUR UNISSUED SHARES FOR FUTURE SALE. On January 31,
1999, we had 1,859,633 shares of common stock reserved for exercise of options
and warrants. Our Series A preferred stock is convertible into shares of common
stock at a conversion rate of $1,000 per share 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 before the conversion date.
Our Series B Preferred Stock is convertible into shares of common stock at
a conversion rate of $1,000 per share 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 before the conversion date.
Since there is no minimum conversion price on either the Series A or Series
B Preferred Stock, a reduction of bid price could require us to issue a great
amount of common stock on conversion of either the Series A or Series B stock.
When large amounts of common stock are sold or become available for sale in the
public market, it could lower the market price of the common stock and hurt our
ability to raise additional capital by selling our equity securities.
OUR COMMON STOCK COULD BECOME A "PENNY STOCK" AND, IF IT DOES, IT COULD BE
HARDER TO SELL IN THE SECONDARY MARKET. If our stock price dropped and there
were certain adverse changes to our net tangible assets and revenues, our common
stock might be subject to certain rules, called penny stock rules. Those rules
impose additional sales practice requirements on broker-dealers who sell those
securities. For any transaction involving a penny stock, the rules require,
among other things, the delivery, prior to the transaction, of a disclosure
schedule required by the SEC relating to the market for penny stocks. The
broker-dealer also must disclose the commission payable to both the
broker-dealer and its registered representative, and current quotations for the
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securities. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in the customer's account.
Although we believe that our common stock is not penny stock, in the event
our common stock subsequently becomes characterized as a penny stock, our market
liquidity could be severely affected. If that happens, the regulations relating
to penny stocks could limit the ability of broker-dealers to sell our common
stock in the secondary market.
OUR ANTITAKEOVER PROTECTIONS COULD HURT OUR STOCK PRICE. There are
provisions in our Certificate of Incorporation and in Delaware law that could
discourage takeover proposals and could delay or even prevent a change in
control of our company by others. These provisions may work to lessen the chance
for stockholders to sell their shares in tender offers, including tender offers
at a price above the market price of the common stock. These provisions may also
inhibit fluctuations in the market price of our common stock that could result
from takeover attempts. Our Board of Directors, without stockholder approval,
has the power to issue preferred stock in order to delay or prevent a change in
control. If this kind of preferred stock is issued, it could either hurt the
voting power of common stockholders or cause them to lose voting control to
others.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling stockholders. We will receive $75,000 on the exercise of all of the
warrants and use it for general corporate purposes.
We will bear the expenses of the registration of these shares of common
stock and estimate that these expenses will be approximately $35,000.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and our Board
of Directors has no present intention of declaring any cash dividends in the
foreseeable future. If we were to become profitable in the future, we expect
that all earnings would be retained to support the business of our company.
THE MARKET FOR OUR STOCK AND OTHER STOCKHOLDER MATTERS
Principal market and market prices of our common stock
Our common stock is traded in the over-the-counter market on the OTC
Electronic Bulletin Board under the symbol AMER. The table below states the high
and low bid prices of our common stock for the fiscal years ended July 31, 1998
and 1997 and the seven months ended February 28, 1999. As with other share
information in this prospectus, the table gives effect to the one-for-five
reverse stock split which took place on November 8, 1996. The prices in the
table are based on quotations between dealers, and do not reflect retail
mark-up, mark-down or commissions, and may not necessarily represent actual
transactions.
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FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDING ENDED ENDED
FISCAL PERIOD 7/31/99 7/31/98 7/31/97
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High Low High Low High Low
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First Quarter $4.31 $2.38 $1.88 $1.00 $5.16 $3.13
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Second Quarter 2.31 .88 1.50 .66 4.38 1.88
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Third Quarter 1.94* 1.03* 4.94 .88 3.75 1.38
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Fourth Quarter 4.81 3.19 1.63 .84
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* Through March 25, 1999.
Approximate number of holders of our common stock
On February 28, 1999, there were approximately 203 stockholders of
record of our common stock. We believe that a great number of the shares are
held in nominee ("street") name for beneficial owners.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This prospectus includes forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include statements concerning
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements which are other than statements of
historical facts. Forward looking statements involve risks and uncertainties
which could cause actual results or outcomes to differ materially. The
Company's expectations and beliefs are expressed in good faith and are believed
by the Company to have a reasonable basis but there can be no assurance that
management's expectations, beliefs or projections will be achieved or
accomplished. In addition to other factors and matters discussed elsewhere
herein, the following are important factors that, in the view of the Company,
could cause actual results to differ materially from those discussed in the
forward-looking statements: the ability of the Company to concentrate its
business on one new product, the ability of the Company to divest itself of two
business units, the availability of debt or equity capital to fund the Company's
capital requirements, and government regulation of the Company's products and
manufacturing processes.
Comparison of Three and Six Month
Periods Ended January 31, 1999
Net sales for the three and six month periods ended January 31, 1999 were
$2,290,000 and $4,396,000, respectively, compared to $1,805,000 and $3,635,000
for the three and six month periods ended January 31, 1998. The increase in
sales in fiscal 1999 was attributable to the acquisitions of Dynamic Dental in
April 1998 and Equidyne in May 1998.
Cost of sales for the three and six month periods ended January 31, 1999
were 63.5% and 60.8%, compared to 45.5% and 51.7% of net sales during the same
periods in the prior year. The increase in cost as a percent of sales can be
attributed to the product mix which included sales of Dynamic Dental in fiscal
1999. The intraoral dental camera and related product lines in the U.S.
generally produce lower gross margins than the Company's other product lines.
Total operating expenses for the three and six month periods ended January
31, 1999 were $2,043,000 and $4,093,000, respectively, compared to $903,000 and
$1,590,000 for the comparable prior year periods. The 1999 amounts reflect
increased marketing, promotional, and development activity. The fiscal 1999
amounts also include the selling, general and administrative expenses of Dynamic
Dental and Equidyne, acquired in April and May 1998, respectively. The increase
also includes $399,000 and $832,000 for the three and six month periods ended
January 31, 1999, respectively, for amortization of deferred compensation for
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consultants and for options granted in connection with the acquisitions of
Dynamic Dental and Equidyne. This amortization relates primarily to the deferred
compensation recognized in connection with the Company's consulting agreement
with Liviakis Financial Communications, and was fully amortized as of March 15,
1999.
Net loss for the three and six month periods ended January 31, 1999 were
$1,356,000, or $.20 per common share, and $2,642,000, or $.40 per share compared
to a net profit of $64,000, or $.02 per share, and $44,000, or $.01 per share
for the same periods in the prior fiscal year. The decrease in net results is
primarily attributable to increased selling, general and administrative costs
and decreased gross margins.
Comparison of Fiscal Years Ended
July 31, 1998 and July 31, 1997
Consolidated net sales were $7,025,000 for the fiscal year ended July 31,
1998 ("Fiscal 1998") compared to $2,309,000 during the fiscal year ended July
31, 1997 ("Fiscal 1997"). The $4,716,000 increase in sales was attributable to
accounting for Rosch GmbH on a consolidated basis, as well as from the inception
of sales of the intraoral dental camera system.
Net loss for Fiscal 1998 was $3,674,000, or $1.01 per share, compared to a
net loss of $926,000, or $.37 per share, for Fiscal 1997. The overall decrease
in profits in Fiscal 1998 was primarily the result of operating losses resulting
from the United States introduction of dental cameras and Rosch GmbH
transitioning from utilizing a major distributor for the sale of its dental
cameras in Europe to direct sales. The net loss for Fiscal 1998 includes
approximately $1 million for deferred compensation for consultants and for
options granted in connection with acquisitions.
Cost of sales, as a percentage of net sales, for Fiscal 1998 was 66.8%
versus 56.8% for Fiscal 1997. The increase in cost as a percentage of sales can
be attributed to the product mix which included sales of Rosch GmbH on a
consolidated basis. As the Company's sales mix becomes more significantly
related to dental camera products, and as costs of sales for dental camera
products is greater than for other product lines, as expected, costs of sales as
a percentage increased.
Selling, general and administrative expense (SG&A) and research and
development (R&D) expense increased in Fiscal 1998 over Fiscal 1997. The Company
attributes the $3,924,000 increase in SG&A expenses to increased marketing and
promotional activity, increased corporate activity, accounting for Rosch GmbH on
a consolidated basis and the acquisition of Dynamic Dental and Equidyne. General
and administrative expenses increased by $2,357,000 as a result of aggressive
corporate development and the retention of senior level executives. These costs
are more fixed in nature. Selling expenses increased by $1,567,000 as a result
of the introduction of dental cameras in the United States. These selling
expenses were high as a result of heavy promotion at the front end of the
product introduction period and should become more variable over time.
Liquidity and Capital Resources
Working capital (deficit) of the Company at January 31, 1999 was
$(1,118,000), compared to $793,000 at fiscal year ended July 31, 1998. The
$1,911,000 decrease in working capital primarily reflects the effect of
operating losses. In February 1999, the Company received gross proceeds of
$1,600,000 upon a private placement of 1,600 shares of Series B Convertible
Preferred Stock. As mentioned in Note 4 to the unaudited consolidated
financial statements for the period ended January 31, 1999, the Company
used $650,000 of the proceeds to repay portions of its short-term
indebtedness, and the remaining proceeds of $850,000 (net of offering
costs of $100,000) is being used for general working capital purposes.
The Company has incurred net losses of $1,356,000 and $2,642,000
respectively, for the three and six month periods ended January 31, 1999, as
well as a net loss of $3,674,000 for the year ended July 31, 1998. This and
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other factors, such as working capital needed for the Company's operations,
requires additional funding beyond that which the Company currently has
available. The Company therefore will need to immediately raise additional
capital.
The Company announced on January 5, 1999, that it intends to change the
Company's business strategy and direction in order to focus all of its resources
on Equidyne, and the continued development of the INJEX(TM) system. The Company
plans to effect this change through the sale of its audiometrics and U.S. dental
(Dynamic Dental) business units. The proceeds from such sales would likely
provide additional working capital, and reduce the Company's expected short-term
working capital needs by eliminating the operating losses those business units
have been incurring. In addition, the Company continues to seek other sources of
additional working capital through equity and/or debt placements or secured
financing. No assurance can be given that the Company's plans to sell its
audiometrics and U.S. dental business units will be successfully achieved, or
that such other financing arrangements will be obtained. Further, no assurance
can be given that such sales or financing arrangements would be successfully
completed within the necessary time frame and, if so, on terms not dilutive to
existing stockholders.
In September 1998, the Company entered into a $505,000 line-of-credit with
Guardian Financial Services, Inc. (owned by an officer of the Company). This
line-of-credit is due on demand and bears an interest rate of 10% per annum. As
of January 31, 1999, $425,000 was outstanding under this line-of-credit, which
expired on February 28, 1999, and remains outstanding as a demand lona, which is
to be secured by substantially all assets of the Company.
On January 29, 1999, the Company entered into a $50,000 Promissory Note
bearing interest at 11.5%, and maturing on February 15, 1999. The Company's
$600,000 term loan, originally due to expire on November 25, 1998, has reverted
to a demand loan and was still outstanding at January 31, 1999. The $650,000
total balance was paid in full on February 3, 1999.
As a result of the foregoing, substantial doubt exists about the ability of
the Company to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
Year 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software embedded chips
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on recent assessments, the Company determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that with modifications or replacements of
existing software and certain hardware, the Year 2000 Issue can be mitigated.
However, if such modifications and replacements are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. To date, the
Company has substantially completed its assessment of all systems that could be
significantly affected by the Year 2000. The assessment indicated that most of
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the Company's significate information technology systems will be affected,
including its financial information system which includes its general ledger,
accounts payable, billing and inventory systems. The assessment was also
undertaken on the Company's products, which are also at risk, as they utilize
software and hardware (embedded chips) as well. However, based on its review of
its product line, the Company has determined that most of the products it has
sold and will continue to sell do not require remediation to be Year 2000
compliant. Accordingly, the Company does not believe that the Year 2000 presents
a material exposure as it relates to the Company's products. The Company's
manufacturing processes consist principally of unautomated assembly of
components manufactured by outside third-parties. The Company has begun to
gather information about the Year 2000 compliance status of its significant
suppliers, and will take appropriate steps to monitor their compliance on an
ongoing basis.
Regarding its information technology exposures, the Company utilizes an
unmodified of-the-shelf software package, which is not year 2000 compliant. The
Company has confirmed with it software vendor that a year 2000-complaint upgrade
is readily available, and anticipates purchasing this upgrade during it third
fiscal quarter, which ends on April 30, 1999. The upgrade would provide full
Year 2000 compliance with respect to its financial information systems, and as
the new software will also be an unmodified off-the-shelf package, testing to
ensure Year 2000 compliance will not be necessary. Implementation will take
place as early a possible following the purchase of the system, and is expected
to be completed no later than June 30, 1999.
The Company does not presently maintain direct interfaces with any
third-party vendors. The Company has made various queries of its significant
suppliers that do not share information systems with the Company (external
agents). To date, the Company is not aware of any external agent with a Year
2000 Issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of assuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
The total cost of the Company's Year 2000 project is estimated at $25,000,
which will be funded through operating cash flows. To date, the Company has not
incurred any direct costs related to its Year 2000 project. The project costs
will consist principally of the cost of new software, which will be capitalized.
Management of the Company believes it has an effective plan in place to
resolve the Year 2000 Issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of its Year 2000 project. In the event
that the Company does not complete any additional phases, the Company could be
unable to take customer orders, manufacturer and ship products, invoice
customers or collect payments. In addition, disruptions in the economy generally
resulting from Year 2000 Issues could also materially adversely affect the
Company.
The Company currently has no contingency plans in place in the event it
does not complete all phases of its Year 2000 project. The Company plans to
evaluate the status of completion in June 1999 and determine whether such a plan
is necessary.
BUSINESS
The Company is engaged in developing, manufacturing and selling the
following three categories of healthcare products: (i) needle-free drug delivery
systems, (ii) intraoral dental cameras and related products, and (iii)
diagnostic audiometric medical devices. The Company recently announced its
intention to focus upon the needle-free drug delivery system and to dispose of
its other product lines. The Company's wholly-owned German subsidiary, 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.
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Needle-Free Drug Delivery Systems
Through Equidyne, the Company is in the business of developing,
manufacturing and marketing its INJEX(TM) needle-free injection 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 Equidyne. The INJEX(TM) system eliminates the need
to pierce skin with a sharp needle and manipulate a plunger with the needle
inserted through the skin, thus eliminating the risk of potentially contaminated
needle stick incidents and the resulting blood-borne pathogen transmission. The
INJEX(TM) system is smaller, easier to use, less expensive and more comfortable
than previous needle-free injection systems marketed by Equidyne's competitors,
and the Company believes that the key to widespread market acceptance of the
INJEX(TM) system will depend on its ability to compete on the basis of such
criteria.
On May 12, 1998, the Company acquired Equidyne in exchange for 600,000
shares of the Company's Common Stock, valued at approximately $2.6 million.
A first generation INJEX(TM) system was tested and received 510(k) market
clearance from the FDA in August 1995. The first generation system was not
commercially marketed. Since then, certain improvements have been made to the
system and the Company will begin marketing the improved second generation
system in the United States by the late spring or early summer 1999. The
Company does not believe the modifications or enhancements made to the
system for the current version require a new FDA 510(k) submission.
The INJEX(TM) system consists of three components: (i) a pen sized reusable
jet injector, (ii) a reset box which acts as a carrying case and resets the
spring for the jet injector and (iii) a plastic, sterile, disposable ampule
which contains the medication fluid. In addition, Equidyne has designed and will
have produced disposable transfer adapters to be used as a channelling device
between drug bottles and sterilized ampules for ampules that are delivered
empty.
The Company has received initial orders for both testing and end-user
purposes. The Company currently has adequate manufacturing capacity in place for
the injector pens and reset boxes, and intends to expand its manufacturing
capacity throughout 1999 in order to meet current and expected future demand.
The Company does not possess the manufacturing capacity for the ampules required
for utilization of the INJEX(TM) system, it instead subcontracts the production
of ampules to third parties. The Company expects that by late spring or early
summer 1999, its subcontractors will have in place limited production
capabilities for the ampules.
The INJEX(TM) system is currently designed to deliver variable doses of
fluid medication from .02 ml to .5 ml. The ampules can be pre-filled by the
medication manufacturer for resale through pharmacies or delivered sterilized
and empty to be filled by patients or providers of care using Equidyne's
transfer adapter to transfer fluid from a standard medication vial.
Equidyne's core technology can be used for many different drug delivery
regimens and allows for needle-free injection into the subcutaneous tissue.
There are many uses for this product including the physician's office, hospital
and clinic environments, self administered injections by people with diabetes,
allergies or human growth disorders and vaccine inoculations such as for polio,
tetanus, rabies or flu. The INJEX(TM) system may also have applications in the
dental and veterinary markets.
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Intraoral Dental Cameras and
Related Products
The largest segment of the Company's business today is the sale of
intraoral dental camera systems and related dental products, which are sold
through the Company's wholly-owned subsidiaries, in the U.S. by Dynamic Dental
and in Europe by Rosch GmbH. 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). The Company has now replaced its marketing of the Viola(TM) in the
U.S. with the DynaCam(TM).
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 patients smile and
gives the dentist the ability to make changes to the smile. This allows the
patient to see what their smile would look like if they accept the treatment
proposed by the dentist. Cosmetic dentistry is the fastest growing part of a
dental practice, and is also the most profitable to the dentist. Cosmetic
imaging software allows the dentist to enhance this part of their practice and
attract new patients.
Digital x-ray is a new method of obtaining traditional dental x-rays.
Instead of x-ray film being placed in the patient's mouth, exposed to radiation,
then developed in a solution in a dark room, this system does it digitally. A
small computer sensor, the size of the film, is placed in the mouth and exposed,
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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 a change in the strategic direction of the Company announced
in January 1999, the Company is seeking to divest its interest in its
audiometrics business unit. The Company will continue to manufacture and sell
its audiometrics product line until such time as an acceptable sales agreement
is reached and completed.
The Company also manufactures and sells an audiometer, the Pilot(R)
Audiometer, which uses sound presented automatically at descending decibel
levels to screen for hearing loss.
The name Tympanometer(R) is a registered trademark of the Company. The
Tympanometer(R), an automatic impedance audiometer, is a medical diagnostic
instrument which, by applying a combination of air pressure and sound to the ear
drum, identifies diseases and disorders of the middle ear which are not revealed
by standard hearing tests. In September 1995, the Company introduced the Race
Car(TM) Tympanometer, which is directed for use in screening pre-school children
for hearing disorders. In December 1996, the Company began selling the
QuikTymp(R) Tympanometer, a version of the Race Car(TM) Tympanometer that can
test for middle ear disease in adults and children.
The test of the middle ear to detect disease is called "tympanometry."
Tympanometry detects middle ear diseases (regardless of whether such diseases
have resulted in a hearing loss) by using specialized instruments to test the
response of the middle ear muscle to sound stimulus, the functioning of the
nerve endings which transmit the hearing message to the brain, and the
functioning of the middle ear to determine the presence of any disease. Certain
types of middle ear diseases may not initially cause hearing loss and,
consequently, cannot be discovered or diagnosed in their early stages by
standard hearing tests. By the time those diseases cause discernible hearing
loss, the damage to the ear may be extensive and often irreparable. Early
detection through the use of tympanometry permits treatment which, in many
cases, can reverse or ameliorate the effects of the disease.
The Company recognized that tympanometry had applications beyond the use of
the ear specialists and could be used in the recognition and diagnosis of ear
disorders by other practitioners if an instrument were developed which was fully
automated and produced results which were easily interpreted. Consequently, in
1977, the Company introduced a Company-designed impedance audiometer called the
Tympanometer(R). The Tympanometer(R) has a rubber tipped probe which is placed
against the ear canal for a three second procedure that applies sound and air
pressure to the ear drum and produces a graphic (hard copy) representation of
the middle ear function. Family practitioners, pediatricians and allergists
confront, on a daily basis, problems affecting the middle ear. The graphic
result provided by the Tympanometer(R) eliminates the uncertainties which may
result from visual examination. The person administering the Tympanometer(R)
test, who may be a physician, school nurse or other health care professional,
can determine from the graph whether the ear condition is caused by an
infection, a perforation of the ear drum, a retraction of the ear drum or other
pathological condition, and can treat the condition or refer the patient to the
appropriate specialist.
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In fiscal 1996, the Company introduced the Race Car(TM) Tympanometer to the
marketplace. The Race Car(TM) Tympanometer is designed to test for middle ear
disease in young children using up-dated graphics for visual distraction of the
child during testing.
In fiscal 1997, the Company presented the new Quik Tymp(R) Tympanometer
line at the Health Industry Distributors Association (HIDA) Meeting. The Quik
Tymp(R) Tympanometer tests for middle ear disease in children and adults. This
easy to use unit features the Company's "Little Car" visual distraction for
testing children and the traditional graph display for adults. The Quik Tymp(R)
can include the option of a built-in pure tone audiometer. Marketing commenced
in December 1996.
In August 1994, the Company completed the design process and began
production of the Pilot(R) Audiometer, an audiometer which facilitates the
testing for hearing loss in very young children. The Pilot(R) Audiometer
performs "select picture" and puretone audiometry and is particularly useful in
screening young children for hearing loss because it is as simple as identifying
pictures. A test board with twelve easily identifiable pictures is displayed
within reach of the child, who is outfitted with a headset connected to an
audiometer. The child is then asked, through the headset, to identify ten
pictures presented at eight descending decibel levels. Select picture audiometry
is a technique developed by the Mayo Clinic in the 1960s and has been used by
audiologists for decades. Using new digital voice chip technology, the Company
has automated the procedure so that it can be used simply and efficiently in a
primary care or screening environment.
Rosch GmbH
Rosch GmbH is a wholly-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 developing, manufacturing capabilities
and marketing necessary to bring the INJEX(TM) needle-free injection system to
market in the United States by late spring or early summer 1999, and to continue
increasing manufacturing capacity based on demand. The Company anticipates that
approximately $1 million may be required for these purposes.
Government Regulation
Government regulation in the United States and certain foreign countries is
a significant factor in the Company's business. In the United States, the
Company's products and its manufacturing practices are subject to regulation by
the FDA pursuant to the Federal Food, Drug and Cosmetic Act ("FDC Act"), and by
other state regulatory agencies. Under the FDC Act, medical devices, including
those under development by the Company, such as its needle-free injection
system, must receive FDA clearance or approval before they may be sold, or be
exempted from the need to obtain such clearance or approval. The FDA regulatory
process may delay the marketing of new systems or devices for lengthy periods
and impose substantial additional costs. Moreover, FDA marketing clearance
regulations depend heavily on administrative interpretation, and there can be no
assurance that interpretations made by the FDA or other regulatory bodies, with
possible retroactive effect, will not adversely affect the Company. There can be
no assurance that the Company will be able to obtain clearance of any future
Company products or any expanded uses of current or future Company products in a
timely manner or at all. In addition, even if obtained, FDA clearances are
subject to continual review, and if the FDA believes that the Company is not in
compliance with applicable requirements, it can institute proceedings to detain
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or seize the Company's products, require a recall, suspend production,
distribution, marketing and sales, enjoin future violations and assess civil and
criminal penalties against the Company, its directors, officers or employees.
The FDA may also suspend or withdraw market approval for the Company's products
or require the Company to repair, replace or refund the cost of any product
manufactured or distributed by the Company. FDA regulations also require the
Company to adhere to certain "Good Manufacturing Practices" ("GMP") regulations,
which include validation testing, quality control and documentation procedures.
The Company's compliance with applicable regulatory requirements is subject to
periodic inspections by the FDA. The Company will need 510(k) approval for any
new medical products which are developed in the future. Compliance with these
requirements requires the Company to expend time, resources and effort in the
areas of production and quality control for itself and for its contract
manufacturers. Moreover, there can be no assurance that the required regulatory
clearances will be obtained, and those obtained may include significant
limitations on the uses of the product in question. In addition, changes in
existing regulations or the adoption of new regulations could make regulatory
compliance by the Company more difficult in the future.
Although the Company believes that its products and procedures are
currently in material compliance with all relevant FDA requirements, the failure
to obtain the required regulatory clearances or to comply with applicable
regulations would have a material adverse effect on the Company.
Sales of medical devices outside the United States that are manufactured
within the United States are subject to United States export requirements, and
all medical devices sold abroad are subject to applicable foreign regulatory
requirements. Legal restrictions on the sale of imported medical devices vary
from country to country. The time and requirements to obtain approval by a
foreign country may differ substantially from those required for FDA approval.
There can be no assurance that the Company will be able to obtain regulatory
approvals or clearances for its products in foreign countries.
Patents and Trademarks
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.
Properties
The Company's administrative offices and audiometric operations are located
in Amherst, New Hampshire in facilities containing 7,800 square feet leased to
the Company for three years at $3,800 per month under a lease expiring in May
2001. In connection with its announcement on January 5, 1999, upon divesting
of the audiometric business the Company will seek to sub-lease or enter in
another arrangement to minimize future lease costs for this facility.
Dynamic Dental maintains its administrative and sales operations in
Gainesville, Georgia, where it rents a facility containing 2,000 square feet on
a month-to-month basis at $1,800 per month.
Equidyne maintains its administrative and sales operations in San Diego,
California, where it leases a facility containing 1,200 square feet at $750 per
month under a renewable quarterly lease cancellable on three months notice.
Equidyne is also leasing a production facility in Aliso Viejo, California
containing approximately 1,700 square feet at $2,000 per month under a lease
expiring in September 2000.
Rosch GmbH maintains its administrative and sales offices in Berlin,
Germany, where it leases a facility containing 6,400 square feet at $8,800 per
month under a lease expiring in May 2002.
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The Company believes that these facilities are adequate for its current
business needs.
Marketing
The Company plans to market and distribute the INJEX(TM) System for home
care applications such as for people with diabetes, allergies, human growth
disorders, arthritis, osteoporosis or other diseases involving in home self
injections. It also plans to have licensing and joint development agreements
with drug companies and manufacturers of injectable pharmaceuticals in the
United States. The Company expects that product sales will be directed to
pharmaceutical companies, pediatric clinics, infectious disease wards, and
outpatient clinics where the threat of accidental needle pricks and patient
trauma are highest. The Company's marketing plans may change significantly
depending on its discussions with drug companies and manufacturers and its
success in securing licensing and/or joint development agreements with such
entities.
In August 1998, the Company entered into an agreement to supply La Sociedad
Mercantil Mexicana ("LSM") with the INJEX(TM) System for use in LSM's clinic in
Baja California, Mexico and for exclusive distribution within that geographic
territory, subject to LSM purchasing specified quantities.
In September 1998, the Company entered into an agreement to supply HNS
International, a California corporation, with the INJEX(TM) System for exclusive
distribution within Japan, subject to the distributor selling specified
quantities within the territory.
As of January 1999, the Company entered into an agreement for Precision
Medmark Inc. ("PMM") to establish and manage a network of medical device dealers
within the United States. Specifically excluded from such agreement are ampules
pre-filled by pharmaceutical companies or for use in conjunction with specific
proprietary drugs and individual stand-alone injectors to support initial sales
of the pharmaceutical companies' products. The agreement with PMM is for an
initial term of 18 months, with the renewal terms on a non-exclusive basis.
The Company's intraoral camera systems and other dental products are
marketed to dental practitioners throughout the United States by 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 1998, more than a majority of the Company's
sales were in Europe.
The market for the Company's audiometric products includes physicians,
particularly those in medical specialties such as pediatrics, allergy medicine,
family practice, otolaryngology and otology (the latter two specialties deal
with diseases of the ear). The audiometric products are marketed mainly through
independent regional dealers both domestically and internationally who sell
principally hearing related health care products. These dealers are retained
by the Company on a non-exclusive, best efforts basis. The Company also
distributes these products throughout Europe using Rosch GmbH.
The Company participates in exhibitions at major medical, educational and
public health conventions. It also advertises its products domestically and
internationally in journals for dentists, pediatricians, allergists,
otolaryngologists, otologists and family practitioners and also for schools,
public health clinics and HMOs.
Materials
The Company has not yet begun manufacturing the INJEX(TM) System for
commercial distribution. The INJEX(TM) System's reusable injector pen and reset
box are made of a combination of anodized aluminum and stainless steel metal
parts. The injector has three molded parts and the reset box has four molded
parts. The disposable plastic parts of the INJEX(TM) System include the ampule
which contains the drug and the transfer device. All parts are made from molds
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and tools. The Company is outsourcing the manufacturing of all components, and
is in the process of expanding manufacturing capacity to meet the current and
expected future demand.
The intraoral cameras and other dental equipment distributed by the Company
are purchased from suppliers and resold to the Company's customers.
The principal materials purchased by the Company in the manufacture of
Tympanometers are electronic components, pumps and metal stamped parts. All of
these materials are readily available from a number of sources in the quantities
required. The graph paper and accessories sold for use with the Company's
instruments are purchased by the Company from suppliers and resold to the
Company's customers. In fiscal 1997, the Company received ISO 9000 certification
in conformance with the international standard for the manufacture of medical
devices with respect to its audiometric products.
Product Warranty
The Company's intraoral camera systems are sold with the manufacturer's
warranty. Neither Dynamic Dental nor Rosch GmbH provide any additional
warranties for the products they distribute.
All audiometric products are sold with a one year warranty against defects
in parts and workmanship. The Company repairs, at no charge, defects covered by
the warranty if the instrument is returned to the Company's factory in Amherst,
New Hampshire or to an authorized factory service station. If the repair is
performed at the customer's office, there is no charge for warranty work. The
Company believes that it has no warranty problem with its audiometric products.
The Company plans to offer a one-year warranty on the injector component of
its INJEX(TM) System.
Employees
At March 30, 1999, the Company and its subsidiaries had 45 employees, 16
of whom were management or administrative personnel, 18 were engaged in
sales activities, and 11 were engaged in manufacturing and service related
activities. In addition, when necessary, the Company uses independent
engineering consultants for design support and new product development.
None of the Company's employees is covered by collective bargaining
agreements. The Company considers its employee relations to be satisfactory.
Competition
The distribution of medical and dental devices is intensely competitive.
The Company competes with numerous other companies, including several major
manufacturers and distributors. Most of the Company's competitors have greater
financial and other resources than the Company. Consequently, such entities may
begin to develop, manufacture, market and distribute systems which are
substantially similar or superior to the Company's products. Further, other
companies may enter this marketplace. No assurance can be given that the Company
will be able to compete against these other companies which may have
substantially greater marketing and financial resources than the Company.
The Company's INJEX(TM) needle-free injection system will compete with
standard needle syringes, safety syringes and other manufacturers of needle-free
injection systems. These competitors have been in business longer than the
Company and have substantially greater technical, marketing, financial, sales,
and customer service resources. Becton, Dickinson and Company ("BDC") has as
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much as 85% of the domestic needle syringe market. BDC has very low product cost
and high quality through superior manufacturing. BDC has also entered in
marketing and distribution arrangements with Medi-Ject, Inc., a manufacturer of
needle-free injection systems.
Medi-Ject, Inc., founded in 1979, has previously marketed a needle-free
injector system known as the "MediJector," which consists of an injector without
a removable or disposable component. Medi-Ject, Inc. has a collaborative
arrangement with BDC and has also entered into various licensing and development
agreements with multi-national pharmaceutical and medical device companies
covering the design and manufacture of customized injection systems for specific
drug therapies.
The other principal manufacturer of needle-free injection systems is
Bio-Ject Inc., formed in 1985. Bio- Ject, Inc. has sold a CO2 powered injector
since 1993. The injector is designed for and used almost exclusively for
vaccinations in doctors' offices or public clinics.
Two other companies, Health-Mor Personal Care Corp. and Vitajet
Corporation, currently sell coil spring injector systems. Vitajet has recently
introduced a product which incorporates a disposable needle-free syringe.
Vitajet was recently acquired by Bio-Ject.
Safety syringes are presently made by a small number of new firms, none of
which has a significant share of the total syringe market. BDC also manufactures
these devices, but the high cost of safety syringes and the continued problem of
controlled disposal has weakened the demand for them.
The Company expects Equidyne to compete with the smaller safety syringe
manufacturers and jet injector firms, based on health care worker safety, ease
of use, reduced overall costs of controlled disposal and patient comfort. The
Company expects that when all indirect costs are considered, the INJEX(TM)
System should be able to successfully compete on a cost basis.
With respect to the intraoral camera market, the Company has at least five
major competitors in the video market which the Company views as being largely
mature with little room for growth. Conversely, the digital camera market is
expanding with no one company or group of companies yet dominating the market.
Nevertheless, the Company anticipates that the digital market will become
increasingly competitive as demand among dental practitioners grows for digital
equipment.
There has been some recent consolidation among the Company's major
competitors in the audiometric business, which has resulted in some price
erosion for those products. The major competitive factors are price, utilization
of latest technology and ease of use. In fiscal year 1996, the Company completed
the redesign of its Tympanometer(R) line to take advantage of more cost
effective technology and to address customer needs.
Where you can obtain more information about us
We are subject to the informational requirements of the Securities Exchange
Act of 1934. Thus, we file reports and other information with the SEC. Our
reports and other information can be inspected and copied at the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549; or at its offices at Northwest Atrium Center, 500 West
Madison Street, 14th Floor, Chicago, IL 60661; or Seven World Trade Center, 13th
Floor, New York, NY 10048. Copies of this material can also be obtained at
prescribed rates by writing to the Public Reference Section of the SEC at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. The SEC maintains a web site (http://www.sec.gov) that contains reports,
proxy statements and other information regarding registrants that file
electronically with the SEC. The common stock quoted on the OTC Electronic
Bulletin Board.
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This prospectus is a part of a registration statement on Form SB-2 filed by
us with the SEC under the Securities Act. This Prospectus omits certain
information contained in the registration statement, and we refer you to the
registration statement and to the exhibits to the registration statement for
additional information about us and the common stock.
LEGAL PROCEEDINGS
On June 26, 1998, Christer O. Andreasson filed an action against Equidyne,
the Company, and four former directors of Equidyne, in Superior Court of
California, County of San Diego, seeking an indeterminate amount of damages
arising from his employment relationship with Equidyne over several months
spanning late 1995 and early 1996, which was prior to the Company's acquisition
of Equidyne. In February 1999, the parties settled this proceeding upon payment
of $30,000 by Equidyne.
On December 10, 1998, Charles S. Aviles, Jr. and Barry Hochstadt, former
shareholders, officers and employees of Dynamic Dental, filed an action in
Superior Court of California, County of Orange, against Henry Rhodes, the
President and a former shareholder of Dynamic Dental, Dynamic Dental and the law
firm that had represented Dynamic Dental 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 Dynamic Dental. On January 13, 1999, the action was
removed to the United States District Court for the Central District of
California. On March 8, 1999, it was announced that the judge to whom the case
was assigned died. It is likely that re-assignment may not occur for several
weeks thereafter and that additional delays may occur. Although this action is
at a preliminary stage and discovery has not yet commenced, based upon its
present knowledge, the Company believes that Dynamic Dental has meritorious
defenses to the allegations against it.
MANAGEMENT
Executive Officers, Directors and Other Significant Employees
The following table sets forth certain information concerning the
directors, executive officers and other significant employees of the Company as
of February 28, 1999.
Year Became
Name Age Position with the Company Director
---- --- ------------------------- --------
Thomas A. Slamecka 58 Chairman of the Board and Director 1996
Michael T. Pieniazek 40 President, Chief Financial Officer, N/A
Treasurer and Secretary
Blake C. Davenport 31 Director 1997
Andy Rosch 38 Director and General Manager of 1997
Rosch GmbH
Marcus R. Rowan 37 Director 1996
The terms of the Board of Directors will expire at the next annual meeting
of stockholders. The Company's officers are elected by the Board of Directors
and hold office at the will of the Board.
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Thomas A. Slamecka has been Chairman of the Board for the Company since
February 1997, and a director of the Company since October 1996. Mr. Slamecka
was President of the ConAgra Poultry Company, Inc., Duluth, Georgia, from 1995
to February 1997, and from 1990 to 1994, he was President and Chief Executive
Officer of CEEC Inc., Atlanta, Georgia.
Michael T. Pieniazek has been President of the Company since April 1997 and
Chief Financial Officer and Treasurer since July 1995, and Secretary since
January 1996. From 1987 to 1995, Mr. Pieniazek served in various executive
positions, the last having been Executive Vice President and Chief Financial
Officer, for Organogenesis Inc., a Massachusetts-based, biotechnology company.
From 1980 to 1987, Mr. Pieniazek was an auditor with Coopers & Lybrand LLP.
Blake C. Davenport has been a director of the Company since December 1997.
For more than the past five years, he has been the President and owner of
Davenport Interests, Inc., a private investment company.
Andy Rosch has been a Director of the Company since December 1997 and
General Manager of Rosch GmbH since July 1990.
Marcus R. Rowan has been a director of the Company since October 1996. For
more than the past five years he has been President of Berkshire Interests,
Inc., Dallas, Texas, which specializes in commercial real estate and
investments.
There is no family relationship among the directors or executive officers
of the Company.
Director Compensation
In October 1996, the Company granted each director an option under the 1996
Stock Option Plan for 10,000 shares of Common Stock exercisable at $4.38 per
share vesting after one year and terminating no later than five years from
grant.
Non-employee directors are each paid $1,000 per board meeting attended plus
travel expenses, and $500 per meeting for participating in telephonic board
meetings.
Committees
The only Board Committee is an Audit Committee consisting of Messrs.
Davenport and Rowan. The Audit Committee has general responsibility for
oversight of financial controls and for accounting and audit activities of the
Company.
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation for the fiscal year
ended July 31, 1998 of the executive officers whose compensation exceeded
$100,000 and of all executive officers as a group for services rendered to the
Company.
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CASH COMPENSATION TABLE
- -------------------------------------------------------------------------------
NAME AND PRINCIPAL FISCAL # OPTIONS LONG TERM
POSITION YEAR SALARY BONUS GRANTED AWARDS
- --------------------------------------------------------------------------------
Thomas A. Slamecka 1998 $100,000 -- 318,550 --
Chairman
- -------------------------------------------------------------------------------
Michael Pieniazek 1998 $125,000 -- 402,750 --
President and CFO
- -------------------------------------------------------------------------------
1997 $113,000 -- -- --
- -------------------------------------------------------------------------------
Aggregated Option Exercises for the Fiscal Year Ended July 31, 1998
and FY-End Option Values
- --------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at FY-End
FY-End (#) ($)
- --------------------------------------------------------------------------------
SHARES VALUE
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
Name EXEERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
- --------------------------------------------------------------------------------
Thomas A. Slamecka 100,000 12,500 528,550/0 1,080,750/0
- --------------------------------------------------------------------------------
Michael T. Pieniazek 50,000 6,250 382,750/0 799,061/0
- --------------------------------------------------------------------------------
Employment Agreements
As of January 1, 1998, the Company entered into an Employment Agreement
with Thomas A. Slamecka to serve as Chairman of the Board for an initial term
terminating on March 15, 2001, subject to annual renewals, and his February 1997
Employment Agreement was terminated. Mr. Slamecka receives an annual base salary
of $52,000 through July 31, 1998 and thereafter at $100,000, plus a profits
bonus equal to 10% of the amount that consolidated net after-tax operating
profits exceeds $500,000, provided for such year the Company earns a 12% return
on its Common Stock equity, and may also receive a supplemental bonus. The
Employment Agreement also provided for the grant of options to him for the
purchase of 400,000 shares of Common Stock at $1.00 per share, which was the
fair market value of the Company's Common Stock on the date of grant, vesting
immediately as to 212,500 shares and the balance vesting at 46,875 shares per
month through May 1998. The Company is to issue 100,000 shares of Common Stock
to Mr. Slamecka if during the term of his employment the closing price for the
Common Stock is at least $20 per share for a period of three consecutive trading
days. Further, the Employment Agreement provides that if the Company issues any
shares of Common Stock (other than pursuant to compensation or employee benefit
plans) it will grant to Mr. Slamecka additional options to purchase shares equal
to 9.3% of the outstanding Common Stock at a purchase price equal to the per
share price of the shares issued by the Company (but not less than $1.00 per
share). In calculating Mr. Slamecka's ownership for purposes of such 9.3% level,
unvested options held by him and shares sold by him during the initial term of
the Employment Agreement would be included in such calculation. In addition, the
Company agreed to make available certain loans to Mr. Slamecka, see "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
As of January 1, 1998, the Company entered into an Employment Agreement
with Michael T. Pieniazek to serve as President for an initial term of three
years terminating on December 31, 2001, subject to automatic renewal for
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consecutive one-year terms unless terminated not less than 60 days prior to end
of any term. Mr. Pieniazek receives an annual base salary of $125,000 and a
discretionary bonus. The Agreement also provided for the grant of options to Mr.
Pieniazek to purchase 250,000 shares of Common Stock at $1.00 per share, which
was the fair market value of the Company's Common Stock on the date of grant,
vesting immediately as to 150,000 shares, vesting ratably over the succeeding
seven months as to the balance, and for the Company to issue 50,000 shares of
Common Stock to Mr. Pieniazek if during the term of his employment the closing
price for the Common Stock is at least $20 per share for three consecutive
trading days. In addition, the Employment Agreement provides that if the Company
issues any shares of Common Stock (other than pursuant to compensation or
employee benefit plans) it will grant to Mr. Pieniazek additional options to
purchase shares in amount equal to 6.5% of such issuance. In calculating Mr.
Pieniazek's ownership for purposes of such 6.5% level, unvested options held by
him and shares sold by him during the term of the Employment Agreement would be
included in such calculation.
The Employment Agreements of Messrs. Slamecka and Pieniazek provide for
lump sum payments equal to 2.99 times the current base salary, plus continuation
of health benefits for 12 months, upon a change of control of the Company. A
change of control of the Company would include a person or group becoming the
beneficial owner of 20% of the voting power of the Company's securities or
individuals who are current directors of the Company, or successors chosen by
them, cease to constitute a majority of the whole Board of Directors. In the
event the amount payable upon a change of control would result in the
application of an excise tax under Section 4999 of Internal Revenue Code of
1986, as amended, the payment would be made over such period of time in order
not to cause the application of such excise tax.
On May 5, 1998, upon the closing of the Dynamic Dental Merger, Dynamic
Dental entered into an Employment Agreement with Mr. Rhodes pursuant to which he
serves as President of Dynamic Dental for an initial term of three years at an
annual base salary of $125,000. Mr. Rhodes was also granted stock options to
purchase up to 100,000 shares of the Company's Common Stock at an exercise price
of $1.00 per share, vested as of May 5, 1998, and stock options to purchase
100,000 shares of the Company's Common Stock at an exercise price of $3.00 per
share, vested as of November 1, 2000, all such stock options expire in May 2003.
On May 12, 1998, upon the closing of the Equidyne Merger, Equidyne entered
into Employment Agreements with Lawrence Petersen and Richard Battelle. Mr.
Petersen serves as President of Equidyne for an initial term of three and
one-half years at an annual salary of $125,000. Mr. Petersen was also granted
stock options to purchase an aggregate of 100,000 shares of the Company's Common
Stock, 50,000 of such options at an exercise price of $1.00 per share, with
5,000 of such options immediately vested and 45,000 of such options to vest
ratably over the term of the Employment Agreement, and the remaining 50,000 of
such options at an exercise price of $3.00 per share, with 5,000 of such options
immediately vested and 45,000 of such options to vest ratably over the term of
the Employment Agreement. Mr. Battelle serves as Director of Finance and
Administration of Equidyne for an initial term of one year at an annual salary
of $60,000, and was also granted stock options to purchase an aggregate of
40,000 shares of the Company's Common Stock, 20,000 of such options at an
exercise price of $1.00 per share to vest ratably over the term of the
Employment Agreement, and the remaining 20,000 of such options at an exercise
price of $3.00 per share to vest ratably over the term of the Employment
Agreement. All such stock options granted to Mr. Petersen and Mr. Battelle
expire in May 2003.
On December 18, 1997, upon the closing of the purchase by the Company of
the remaining 50% of the outstanding capital stock of Rosch GmbH, Rosch GmbH
entered into an amendment to the employment agreement for Andy Rosch pursuant to
which he serves as Managing Director of Rosch GmbH. Under the agreement, as
amended, Mr. Rosch is to serve as Managing Director of Rosch GmbH for an initial
term of three years, terminating on December 31, 2000, and automatically
renewable for one-year terms thereafter unless either party gives notice of an
intention not to renew not less than three months prior to the end of any term.
Mr. Rosch is to receive an annual base salary of 200,000 DM and an annual cash
bonus equal to 1% of net sales of Rosch GmbH, but not to exceed the amount of
his base salary.
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Stock Options
In 1995, the Company granted an option to Michael T. Pieniazek, an
executive officer, to purchase a total of 30,000 shares of the Company's Common
Stock, at an exercise price of $1.41, which was the fair market value on the
date of grant. There remains outstanding an option for 30,000 shares which is
exercisable and expires no later than four years from the date of grant.
In May 1996, the Company granted to a consultant an option to purchase a
total of 13,333 shares of the Company's Common Stock at $7.50 per share, which
was the fair market value on the date of grant. The option is exercisable and
expires no later than three years from the date of grant.
In October 1996, the Company's stockholders approved the 1996 Stock Option
Plan (the "Option Plan") providing for the issuance of up to 300,000 shares of
the Company's Common Stock. The Option Plan is administered by the Board of
Directors or an Option Committee. Options granted under this Plan would be
either incentive stock options or non-qualified stock options which would be
granted to employees, officers, directors and other persons who perform services
for or on behalf of the Company. Options are exercisable as determined at the
time of grant except options to officers or directors may not vest earlier than
six months from the date of grant, and the exercise price of all the option
cannot be less than the fair market value at the date of grant. At December 31,
1998, options for an aggregate of 280,000 shares were granted, of which options
for 88,000 shares were exercised, options for 12,000 shares were cancelled and
options for 180,000 shares remaining outstanding at an exercise price of $1.00
per share and expiring from January 2002 to February 2002.
Pursuant to Employment Agreements with Messrs. Slamecka, Pieniazek, Rhodes,
Petersen and Battelle, the Company has granted stock options to such persons and
in the cases of Messrs. Slamecka and Pieniazek is obligated to grant additional
options upon certain issuances of Common Stock. See "Employment Agreements"
herein.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of July 31, 1998, the Company had loaned Thomas A. Slamecka, Chairman of
the Board, an aggregate of $141,600 pursuant to his Employment Agreement. The
Employment Agreement provided that the Company make available to Mr. Slamecka a
loan in the amount of $8,333.33 each month during the initial term of such
Agreement, which is through March 15, 2001. The loans bear interest at 7% per
annum and mature on the earliest of (i) March 2002, (ii) two years after
termination of the Employment Agreement other than termination for cause by the
Company or (iii) upon the Company terminating the Agreement for cause; provided
that the loan would be forgiven (A) if Mr. Slamecka remains in the employ
throughout the initial term, (B) the Company terminates the Agreement other than
for cause, or (C) upon acquisition or change of control of the Company. Mr.
Slamecka has the election to repay the loans either in cash or in securities of
the Company.
In September 1998, the Company entered into a $505,000 line-of-credit
agreement with Guardian Financial Services, Inc. (owned by an officer of the
Company). This line-of-credit is due on demand and bears an interest rate of 10%
per annum. As of January 31, 1999, $425,000, was outstanding under this line-of
- -credit, which expired on February 28, 1999 and remains outstanding as a demand
loan, which is secured by substantially all assets of the Company.
-28-
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of March 12, 1999
concerning (i) persons known to the Company to be the beneficial owners of
more than 5% of the Company's Common Stock, (ii) the ownership interest of
each director and executive officer of the Company listed in the compensation
table and (iii) by all directors and executive officers as a group. Note:
stock options and warrants are considered presently exercisable if
exercisable within 60 days of March 12, 1999.
- --------------------------------------------------------------------------------
AMOUNT &
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER STATUS OWNERSHIP CLASS*
- --------------------------------------------------------------------------------
Liviakis Financial Stockholder 1,192,371 shs 15.5%
Communitcations, Inc.
2420 K Street
Sacramento, California 95816
- --------------------------------------------------------------------------------
Thomas A. Slamecka** Director and
Chairman 834,550 shs(1) 10.2%
- --------------------------------------------------------------------------------
Jubilee Investors LLC Stockholder 2,752,290 shs(2) 26.4%
c/o West End Capital LLC
One World Trade Center
Suite 4563
New York, New York 10048
- --------------------------------------------------------------------------------
Sovereign Partners LP Stockholder 746,443(3) 8.9%
c/o Southridge Capital
Management LLC
Executive Pavilion, Suite 01
90 Grove Street
Ridgefield, Connecticut 06877
- --------------------------------------------------------------------------------
Dominion Capital Fund Ltd. Stockholder 513,180(4) 6.3%
c/o Citco Fund Service
(Bahamas) Ltd.
Bahamas Financial Center
P.O.B. CB 13146
Nassau, Bahamas
- -------------------------------------------------------------------------------
Robert B. Prag Stockholder 397,457 shs 5.2%
2420 K Street
Sacramento, California 95816
- -------------------------------------------------------------------------------
Marcus R. Rowan** Director 357,000 shs(5) 4.5%
- -------------------------------------------------------------------------------
Michael T. Pieniazek** President and
CFO 434,750 shs(6) 5.4%
- -------------------------------------------------------------------------------
-29-
<PAGE>
- -------------------------------------------------------------------------------
Andy Rosch** Director 310,000 shs 4.0%
- -------------------------------------------------------------------------------
Blake C. Davenport** Director 70,000 shs(7) 0.9%
- -------------------------------------------------------------------------------
All Executive Officers and
Directors as a
Group (5 persons) 2,006,300 shs(8) 22.4%
- -------------------------------------------------------------------------------
- -----------------------------
1) Includes presently exercisable options for 528,550 shares.
2) Represents the number of shares which Jubilee Investors LLC would receive
upon conversion of its 3,000 shares of Series A Preferred Stock on March
12, 1999 subject to the restriction on conversion prohibiting conversion to
the event that the issuance of common stock on conversion would result in
the stockholder being deemed the beneficial holder of more than 9.9% of the
shares outstanding.
3) Represents the number of shares which Sovereign Partners LP would receive
upon conversion of its 800 shares of Period B Preferred Stock and the
exercise of warrants to purchase 12,500 shares of common stock on March 12,
1999, subject to the restriction on conversion prohibiting conversion to
the extent that the issuance of common stock on conversion would result in
the stockholder being deemed the beneficial holder of more than 9.9% of the
shares outstanding.
4) Represents the number of shares into which Dominion Capital Fund Ltd. would
receive upon conversion of its 550 shares of Series B Preferred Stock and
the exercise of warrants to purchase 8,594 shares of common stock, on March
12, 1999, subject to the restriction on conversion prohibiting conversion
to the extent that the issuance of common stock on conversion would result
in the stockholder being deemed the beneficial holder of more than 9.9% of
the shares outstanding.
5) Includes presently exercisable options 310,000 shares. Represents shares
owned directly by Mr. Rowan and his IRA and Keogh account.
6) Includes presently exercisable options for 382,750 shares.
7) Includes presently exercisable options to purchase 50,000 shares.
8) See Notes 1, 5, 6 and 7.
* Based upon 7,668,464 shares of Common Stock outstanding on March 12,
1999. Percentage ownership is calculated separate for each person on the
basis of the actual number of outstanding shares as of such date, and
assumes the exercise of certain stock options and warrants held by such
person (but not by anyone else) exercisable within sixty days of
March 12, 1999.
** The address of the persons listed above is c/o American Electromedics
Corp., 13 Columbia Drive, Suite 5, Amherst, New Hampshire 03031.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 20,000,000 shares of Common Stock,
$.10 par value, of which 7,668,464 shares were issued and outstanding as of
March 25, 1999.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted by stockholders. There is no cumulative voting
with respect to the election of directors with the result that the holders of
more than 50% of the shares of Common Stock voted for the election of directors
can elect all of the directors.
-30-
<PAGE>
The holders of shares of Common Stock are entitled to dividends when and as
declared by the Board of Directors from funds legally available therefore, and,
upon liquidation are entitled to share pro rata in any distribution to holders
of Common Stock. No dividends have ever been declared by the Board of Directors
on the Common Stock. See "DIVIDEND POLICY." All of the outstanding shares of
Common Stock are, and all shares sold hereunder will be, when issued upon
payment therefor, duly authorized, validly issued, fully paid and
non-assessable.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of Preferred Stock, par
value $.01 per share, issuable from time to time in one or more series, having
such designation, rights, preferences, powers, restrictions and limitations as
may be fixed by the Board of Directors. On May 5, 1998, the Company filed with
the Delaware Secretary of State a Certificate of Designations establishing the
Series A Preferred Stock consisting of 3,000 shares, and on February 3, 1999,
the Company filed a Certificate of Designation establishing the Series B
Preferred Stock consisting of 2,000 shares.
SERIES A PREFERRED STOCK. The Series A Preferred Stock is immediately
convertible into shares of Common Stock at a conversion rate equal to $1,000
divided by the lower of (i) $4.00 or (ii) 75% of the average closing bid price
for the Common Stock for the five trading days immediately preceding the
conversion date. The Company may force conversion of all (and not less than all)
of the outstanding shares of Series A Preferred Stock at any time after the
first anniversary of the effective date of the registration statement covering
the shares of common stock underlying the Series B Preferred Stock. There is no
minimum conversion price. No conversion of Series A Preferred Stock is permitted
which would result in the stockholder's ownership, after conversion, exceeding
9.9% of the Company's outstanding stock. Should the bid price of the Common
Stock fall substantially prior to conversion, the holders of the Series A
Preferred Stock could obtain a significant portion of the Common Stock upon
conversion, to the detriment of the then holders of the Common Stock.
The Series A Preferred Stock has a liquidation preference of $1,000 per
share, plus any accrued and unpaid dividends. The Company was to pay an annual
dividend equal to 5% of the liquidation preference, which may be paid at the
election of the Company in cash or shares of its Common Stock. Pursuant to a
Registration Agreement, the dividend rate was increased to 14% on September 3,
1998 due to the Company's failure to file and have declared effective a
registration statement covering the Common Stock underlying the Series A
Preferred Stock within a certain time after the initial closing of the Series
A Preferred Stock. The dividend rate was further increased to 18% effective
October 3, 1998, since the registration statement was not declared effective
within 150 days of the initial closing. For the period February 16, 1999
through March 2, 1999, dividends ceased to accrue and monetary penalties were
incurred. The dividend rate returned to 5% as of March 2, 1999 when the
registration statement was declared effective.
The Company may redeem up to $1 million face amount of Series A Preferred
Stock at a redemption price equal to 120% of the liquidation preference if the
closing bid price of the Company's Common Stock is below $2.75 per share for
five consecutive trading days.
The Company may redeem an additional $1 million face amount of Series A
Preferred Stock at a redemption price equal to 120% of the liquidation
preferences if the closing bid price of the Company's Common Stock is below
$2.50 per share for five consecutive dates.
SERIES B PREFERRED STOCK. At February 3, 1999, 1,600 shares of Series B
Preferred Stock were outstanding. The Series B Preferred Stock is convertible at
any time after April 30, 1999 into shares of Common Stock at a conversion rate
equal to $1,000 divided by the lower of (i) $2.00 or (ii) 75% of the average
closing bid price for the Common Stock for the five trading days immediately
preceding the conversion date. The Company may force conversion of all (and not
less than all) of the outstanding shares of Series B Preferred Stock at any time
after the first anniversary of the effective date of a registration statement
-31-
<PAGE>
covering the underlying shares of Common Stock. There is no minimum conversion
price. No conversion of Series B Preferred Stock is permitted which would result
in the stockholder's ownership, after conversion, exceeding 9.9% of the
Company's outstanding stock. Should the bid price of the Common Stock fall
substantially prior to conversion, the holders of the Series B Preferred Stock
could obtain a significant portion of the Common Stock upon conversion, to the
detriment of the then holders of the Common Stock.
The Series B Preferred Stock has a liquidation preference of $1,000 per
share, plus any accrued and unpaid dividends. The Company is to pay an annual
dividend equal to 5% of the liquidation preference, which may be paid at the
election of the Company in cash or shares of its Common Stock.
The Company may redeem shares of Series B Preferred Stock at a redemption
price equal to 105% of the liquidation preference plus accrued dividends during
the first 30 days after issuance and which redemption price increases to the
greater of (a) 120% of the Redemption Amount or (b) the market price on a
converted basis. Any redemption of the Series B Preferred Stock is subject to
the prior consent of the holders of two-thirds of the outstanding Series A
Preferred Stock.
Should the Registration Statement of which this Prospectus is a part be
declared effective on or after July 1, 1999, the Company would be subject to
monetary penalties.
-32-
<PAGE>
SELLING STOCKHOLDERS
The Shares offered by this Prospectus may be offered from time to time by
the Selling Stockholders. The Selling Stockholders are comprised of the
purchasers of the Series B Preferred Stock. None of the Selling Stockholders has
held any position or office or had any material relationship with the Company or
any of its predecessors or affiliates within three years of the date of this
Prospectus.
The following table sets forth, as of March 12, 1999 and upon completion of
this offering, information with regard to the beneficial ownership of the
Company's Common Stock by each of the Selling Stockholders.
The information included below is based upon information provided by the
Selling Stockholders. Because the Selling Stockholders may offer all, some or
none of their Common Stock, no definitive estimate as to the number of shares
thereof that will be held by the Selling Stockholders after such offering can be
provided and the following table has been prepared on the assumption that all
shares of Common Stock offered under this Prospectus will be sold.
SHARES AMOUNT
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO BE OWNED
NAME(1) TO OFFERING OFFERED AFTER OFFERING(2)
- ----------------------------- ------------ ------------ -----------------
Sovereign Partners LP (3) -0- 1,480,388 -0-
Dominion Capital Fund Ltd. (4) -0- 1,017,767 -0-
Canadian Advantage L.P. (5) -0- 462,621 -0-
- -----------------------------
(1) Unless otherwise indicated in the footnotes to this table, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property
laws where applicable.
(2) Assumes the sale of all shares offered hereby.
(3) Represents an estimate of (a) two times the number of shares into which 800
shares of Series B Preferred Stock may be converted and (b) 12,500 shares
under presently exercisable warrants.
(4) Represents an estimate of (a) two times the number of shares into which 550
shares of Series B Preferred Stock may be converted and (b) 8,594 shares
under presently exercisable warrants.
(5) Represents an estimate of (a) two times the number of shares into which 250
shares of Series B Preferred Stock may be converted and (b) 3,906 shares
under presently exercisable warrants.
Pursuant to the Registration Agreement, the Company agreed to use its best
efforts to cause this Registration Statement to become effective by June 30,
1999 (or if the SEC elects to conduct a review of the Registration Statement, by
July 30, 1999) but not later than five business days after the SEC indicates
that there are no additional comments to the Registration Statement. If the
Registration Statement is not declared effective by the applicable deadline
date, the Company must pay the Series B Preferred Stockholders for each full 30
day period following such date during which the Registration Statement is
pending, liquidated damages in the amount of 2% of the face amount of the Series
B Preferred Stock, however, in no event shall the total amount of such
liquidated damages exceed $100,000.
-33-
<PAGE>
PLAN OF DISTRIBUTION
The Selling Stockholders have advised the Company that, prior to the date
of this Prospectus, they have not made any agreement or arrangement with any
underwriters, brokers or dealers regarding the distribution and resale of the
Shares. If the Company is notified by a Selling Stockholder that any material
arrangement has been entered into with an underwriter for the sale of the
Shares, a supplemental prospectus will be filed to disclose such of the
following information as the Company believes appropriate: (i) the name of the
participating underwriter; (ii) the number of the Shares involved; (iii) the
price at which such Shares are sold, the commissions paid or discounts or
concessions allowed to such underwriter; and (iv) other facts material to the
transaction.
The Company expects that the Selling Stockholders will sell their Shares
covered by this Prospectus through customary brokerage channels, either through
broker-dealers acting as agents or brokers for the seller, or through
broker-dealers acting as principals, who may then resell the Shares in the
over-the-counter market, or at private sale or otherwise, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Stockholders may effect such
transactions by selling the Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of concessions or
commissions from the Selling Stockholders and/or the purchasers of the Shares
for whom they may act as agent (which compensation may be in excess of customary
commissions). The Selling Stockholders and any broker-dealers that participate
with the Selling Stockholders in the distribution of Shares may be deemed to be
underwriters and commissions received by them and any profit on the resale of
Shares positioned by them might be deemed to be underwriting discounts and
commissions under the Securities Act. There can be no assurance that any of the
Selling Stockholders will sell any or all of the Shares of 1933, as amended (the
"Securities Act") offered by them hereunder.
Sales of the Shares on the OTC Electronic Bulletin Board or other trading
system may be by means of one or more of the following: (i) a block trade in
which a broker or dealer will attempt to sell the Shares as agent, but may
position and resell a portion of the block as principal to facilitate the
transaction; (ii) purchases by a dealer as principal and resale by such dealer
for its account pursuant to this Prospectus; and (iii) ordinary brokerage
transactions and transactions in which the broker solicits purchasers. In
effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate.
The Selling Stockholders are not restricted as to the price or prices at
which they may sell their Shares. Sales of such Shares at less than market
prices may depress the market price of the Company's Common Stock. Moreover, the
Selling Stockholders are not restricted as to the number of Shares which may be
sold at any one time.
Pursuant to the Registration Agreement for the Preferred Stock Private
Placement and other agreements by the Company granting certain "piggy-back"
registration rights, the Company will pay all of the expenses incident to the
offer and sale of the Shares to the public by the Selling Stockholders other
than commissions and discounts of underwriters, dealers or agents. The Company
and the Selling Stockholders have agreed to indemnify each other and certain
persons, including broker-dealers or others, against certain liabilities in
connection with the offering of the Shares, including liabilities arising under
the Securities Act.
The Company has advised the Selling Stockholders that the anti-manipulative
rules under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), including Regulation M, may apply to sales in the market of the Shares
offered hereby and has furnished the Selling Stockholders with a copy of such
rules. The Company has also advised the Selling Stockholders of the requirement
for the delivery of this Prospectus in connection with resales of the Shares
offered hereby.
-34-
<PAGE>
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Thelen Reid & Priest LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company at July 31, 1998 and
1997, and for each of the three years in the period ended July 31, 1998,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
(which contains an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 13 to the consolidated financial statements) appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
-35-
<PAGE>
AMERICAN ELECTROMEDICS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of July 31, 1998 and July 31, 1997......... F-3
Consolidated Statements of Operations for the years ended
July 31, 1998, July 31, 1997 and July 27, 1996....................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
years ended July 31, 1998, July 31, 1997 and
July 27, 1996........................................................ F-5
Consolidated Statements of Cash Flows for the years ended
July 31, 1998, July 31, 1997 and July 27, 1996....................... F-6
Notes to Consolidated Financial Statements................................ F-7
Unaudited Consolidated Balance Sheet as of
January 31, 1999..................................................... F-18
Unaudited Consolidated Statements of Operations for the
three months ended January 31, 1999 and 1998 and
the six months ended January 31, 1999 and 1998...................... F-19
Unaudited Consolidated Statements of Cash Flows for the
six months ended January 31, 1999 and 1998.......................... F-20
Notes to Unaudited Consolidated Financial Statements..................... F-21
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
American Electromedics Corp. and Subsidiaries.
We have audited the accompanying consolidated balance sheets of American
Electromedics Corp. and subsidiaries as of July 31, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended July 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American
Electromedics Corp. and subsidiaries at July 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended July 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that American
Electromedics Corp. will continue as a going concern. As more fully described in
Note 13, the Company has incurred operating losses for the last two years. This
condition raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 13. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Manchester, New Hampshire
December 21, 1998
F-2
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1998 JULY 31, 1997
------------- -------------
(THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 396 $ 471
Accounts receivable, net of allowance of
$13,000 and $7,000 in 1998 and 1997,
respectively:
Trade........................................ 1,169 283
Affiliate.................................... -- 379
------- ------
1,169 662
Inventories.................................... 1,951 475
Prepaid and other current assets............... 223 244
------- ------
Total current assets.................. 3,739 1,852
Property and Equipment:
Machinery and equipment....................... 475 361
Furniture and fixtures........................ 306 79
Leasehold improvements........................ 13 9
------- ------
794 449
Accumulated depreciation....................... (436) (396)
------- ------
358 53
Deferred financing costs....................... -- 128
Investment in affiliate........................ -- 819
Goodwill....................................... 4,298 208
Patents........................................ 3,027 --
Other.......................................... 36 --
------- ------
$11,458 $3,060
======= ======
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Bank debt...................................... $ 1,033 $ 300
Accounts payable............................... 1,118 187
Accrued liabilities............................ 723 153
Dividends payable.............................. 72 --
Current portion of long-term debt.............. -- 152
------- ------
Total current liabilities................... 2,946 792
Convertible subordinated debentures............ -- 720
Long-term debt................................. -- 380
Stockholders' Equity:
Series A Convertible Preferred stock,
$.01 par value; Authorized- 1,000,000
shares; Outstanding - 3,000 shares
in 1998 and none in 1997..................... 2,387 --
Common stock, $.10 par value; Authorized-
20,000,000 shares; Outstanding -
7,058,136 and 2,553,136 shares in 1998
and 1997, respectively....................... 705 255
Additional paid-in capital..................... 12,643 2,919
Retained deficit............................... (5,680) (2,006)
Cumulative translation adjustment.............. (249) --
------- ------
9,806 1,168
Deferred compensation.......................... (1,294) --
------- ------
Total stockholder's equity............ 8,512 1,168
------- ------
$11,458 $3,060
======= ======
See accompanying notes.
F-3
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED
-------------------------------------------
JULY 31, 1998 JULY 31, 1997 JULY 27, 1996
------------- ------------- -------------
(Thousands, except per share amounts)
Net sales............................ $7,025 $2,309 $3,337
Cost of goods sold................... 4,692 1,311 1,652
------ ------ ------
Gross profit...................... 2,333 998 1,685
Selling, general and administrative
expenses.......................... 5,581 1,657 1,039
Research and development............. 122 85 215
------ ------ ------
Total operating expenses.......... 5,703 1,742 1,254
------ ------ ------
Operating income (loss).............. (3,370) (744) 431
Other income (expenses):
Interest, net..................... (186) (125) (16)
Undistributed earnings (loss) of
affiliate...................... 56 (57) 52
Minority interest in affiliate.... (85) -- --
Other............................. (89) -- --
------ ------ ------
(304) (182) 36
------ ------ ------
Income (loss) before provision for income
taxes............................. (3,674) (926) 467
Provision for income taxes........... -- -- 25
------ ------ ------
Net income (loss).................... (3,674) $ (926) $ 442
====== ====== ======
Net income (loss) attributable
to common stockholders*............. $(4,746) $ (926) $ 442
======= ====== ======
Net income (loss) per share,
basic and diluted................... $ (1.01) $ (.37) $ .18
======= ======= ======
*The year ended July 31, 1998 includes the impact of dividends on stock for
(a) a non-cash, non-recurring beneficial conversion feature of $1,000,000;
and (b) $72,000 of dividends on Preferred Stock.
See accompanying notes.
F-4
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1998, JULY 31, 1997 AND JULY 27, 1996
(Thousands)
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------- --------------
BOOK PAR
SHARES VALUE SHARES VALUE
------ ----- ------ -----
Balance at July 29, 1995.................... -- $-- 2,343 $234
Investment in affiliate..................... -- -- 100 10
Exercise of stock options................... -- -- 11 1
Net income.................................. -- -- -- --
---- ------ ------ ----
Balance at July 27, 1996.................... -- -- 2,454 245
Sale of capital stock....................... -- -- 48 5
Exercise of stock options, net.............. -- -- 51 5
Net loss.................................... -- -- -- --
---- ------ ------ ----
Balance at July 31, 1997.................... -- -- 2,553 255
Conversion of convertible debentures, net... -- -- 720 72
Private placement of common stock, net...... -- -- 1,050 105
Issuance of common stock for investment in
affiliates, net............................. -- -- 210 21
Issuance of common stock for acquisitions, net. -- -- 1,350 135
Stock and warrants issued for services...... -- -- 1,000 100
Exercise of stock options................... -- -- 175 17
Sale of convertible preferred stock and
warrants.................................. 3 2,387 -- --
Dividend on convertible preferred stock..... -- -- -- --
Conversion feature on convertible preferred
stock..................................... -- (1,000) -- --
Dividend on beneficial conversion feature... -- 1,000 -- --
Deferred compensation related to common
stock options............................. -- -- -- --
Amortization of deferred compensation....... -- -- -- --
Translation adjustment...................... -- -- -- --
Net loss.................................... -- -- -- --
---- ------ ------ ----
Balance at July 31, 1998 3 $2,387 7,058 $705
= ====== ===== ====
ADDITIONAL CUMULATIVE
PAID-IN RETAINED TRANSLATION
CAPITAL DEFICIT ADJUSTMENT
--------- -------- ----------
Balance at July 29, 1995.................... $2,484 $(1,522) --
Investment in affiliate..................... 290 -- --
Exercise of stock options................... 9 -- --
Net income.................................. -- 442 --
------- -------- ------
Balance at July 27, 1996.................... 2,783 (1,080) --
Sale of capital stock....................... 139 --
Exercise of stock options, net.............. (3) --
Net loss.................................... -- (926) --
------- -------- ------
Balance at July 31, 1997.................... 2,919 (2,006)
Conversion of convertible debentures, net... 625 -- --
Private placement of common stock, net...... 923 -- --
Issuance of common stock for investment in
affiliates, net............................. 159 -- --
Issuance of common stock for acquisitions, net. 5,490 -- --
Stock and warrants issued for services...... 1,480 -- --
Exercise of stock options................... 158 -- --
Sale of convertible preferred stock and
warrants.................................. 255 -- --
Dividend on convertible preferred stock..... (72) -- --
Conversion feature on convertible preferred
stock..................................... 1,000 -- --
Dividend on beneficial conversion feature... (1,000) -- --
Deferred compensation related to common
stock options............................. 706 -- --
Amortization of deferred compensation....... -- -- --
Translation adjustment...................... -- -- $(249)
Net loss.................................... -- (3,674) --
------- -------- ------
Balance at July 31, 1998 $12,643 $(5,680) $(249)
======= ======== ======
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- ------------
Balance at July 29, 1995....................... -- $1,196
Investment in affiliate........................ -- 300
Exercise of stock options...................... -- 10
Net income..................................... -- 442
-------- -------
Balance at July 27, 1996....................... -- 1,948
Sale of capital stock.......................... -- 144
Exercise of stock options, net................. -- 2
Net loss....................................... -- (926)
-------- -------
Balance at July 31, 1997....................... -- 1,168
Conversion of convertible debentures, net...... -- 697
Private placement of common stock, net......... -- 1,028
Issuance of common stock for investment in
affiliates, net................................ -- 180
Issuance of common stock for acquisitions, net. -- 5,625
Stock and warrants issued for services......... $(1,580) --
Exercise of stock options...................... -- 175
Sale of convertible preferred stock and
warrants..................................... -- 2,642
Dividend on convertible preferred stock........ -- (72)
Conversion feature on convertible preferred
stock........................................ -- --
Dividend on beneficial conversion feature...... -- --
Deferred compensation related to common
stock options................................ (706) --
Amortization of deferred compensation.......... 992 992
Translation adjustment......................... -- (249)
Net loss.......................................
-- (3,674)
-------- -------
Balance at July 31, 1998 $(1,294) $8,512
======== =======
See accompanying notes.
F-5
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED
----------------------------
JULY 31, 1998 JULY 31, 1997
------------- -------------
(THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss).................................. $(3,674) $ (926)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization...................... 269 42
Provision for doubtful accounts.................... -- (4)
Deferred compensation amortization................. 992 --
Loss on sale of affiliate.......................... 64 --
Undistributed earnings (loss) of affiliate......... (56) 57
Minority interest ................................. 85 --
Other.............................................. (67) 38
Changes in operating assets and liabilities:
Accounts receivable.............................. 598 43
Inventories, prepaid and other current assets.... (27) (106)
Accounts payable and accrued liabilities......... (856) (22)
-------- -------
Net cash used in operating activities.............. (2,672) (878)
INVESTING ACTIVITIES:
Investment in affiliates, net of cash acquired..... (138) --
Purchase of property and equipment, net............ (188) (39)
Acquisition of Dynamic Dental and Equidyne, net of
cash acquired.................................... (151) --
Proceeds from sale of affiliate.................... 247 --
-------- -------
Net cash used in investing activities.............. (230) (39)
FINANCING ACTIVITIES:
Principal payments on long-term debt .............. (532) (129)
Proceeds (payments) from debt and bank lines of
credit............................................ (97) 500
Issuance of common stock, net...................... 1,028 144
Proceeds from exercise of common stock options..... 175 2
Issuance of convertible preferred stock, net....... 2,642 --
Issuance of convertible subordinated debt.......... -- 720
Deferred financing costs........................... -- (166)
-------- -------
Net cash provided by financing activities.......... 3,216 1,071
-------- -------
Effect of exchange rate on cash.................... (389) --
-------- -------
Increase (decrease) in cash and cash equivalents... (75) 154
Cash and cash equivalents, beginning of year....... 471 317
-------- -------
Cash and cash equivalents, end of year............. $ 396 $ 471
======== =======
NONCASH TRANSACTIONS:
Common stock issued for investment in affiliates.. -- --
Common stock and warrants issued for services..... $ 1,580 --
Conversion of convertible subordinated debt into
common stock..................................... $ 697 --
Common stock issued in connection with acquisitions $ 5,805 --
YEAR ENDED
--------------
JULY 27, 1996
--------------
OPERATING ACTIVITIES:
Net income (loss)............................................. $ 442
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization................................. 38
Provision for doubtful accounts............................... --
Deferred compensation amortization............................ --
Loss on sale of affiliate..................................... --
Undistributed earnings (loss) of affiliate.................... (52)
Minority interest ............................................ --
Other......................................................... --
Changes in operating assets and liabilities:
Accounts receivable......................................... (274)
Inventories, prepaid and other current assets............... (317)
Accounts payable and accrued liabilities.................... 49
------
Net cash used in operating activities......................... (114)
INVESTING ACTIVITIES:
Investment in affiliates, net of cash acquired................ (519)
Purchase of property and equipment, net....................... (22)
Acquisition of Dynamic Dental and Equidyne, net of
cash acquired.............................................. --
Proceeds from sale of affiliate............................... --
------
Net cash used in investing activities......................... (541)
FINANCING ACTIVITIES:
Principal payments on long-term debt ......................... (43)
Proceeds (payments) from debt and bank lines of
credit....................................................... 500
Issuance of common stock, net................................. --
Proceeds from exercise of common stock options................ 10
Issuance of convertible preferred stock, net.................. --
Issuance of convertible subordinated debt..................... --
Deferred financing costs...................................... --
------
Net cash provided by financing activities..................... 467
------
Effect of exchange rate on cash............................... --
------
Increase (decrease) in cash and cash equivalents.............. (188)
Cash and cash equivalents, beginning of year.................. 505
------
Cash and cash equivalents, end of year........................ $ 317
=====
NONCASH TRANSACTIONS:
Common stock issued for investment in affiliates............. $300
Common stock and warrants issued for services................ --
Conversion of convertible subordinated debt into
common stock................................................ --
Common stock issued in connection with acquisitions.......... --
See accompanying notes.
F-6
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Business Description
- --------------------
American Electromedics Corp. (the "Company") is engaged in the manufacture
and sale of medical testing equipment principally to the United States and
European medical community. The Company currently produces two devices designed
for audiological testing purposes: Tympanometers(R), which apply a combination
of pressure and sound to the ear drum to detect diseases of the middle ear, and
Audiometers,which use sound at descending decibel levels to screen for hearing
loss.
The Company recognizes revenue upon receipt of a firm customer order and
shipment of the product, net of allowances for warranties, which have not been
material. The Company does not recognize revenue on product shipments that are
subject to rights of return, evaluation periods, customer acceptance, or any
other contingencies until such contingency has expired.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
transactions have been eliminated.
Cash and Cash Equivalents
- -------------------------
For the purpose of reporting cash flows, cash and cash equivalents include
all highly liquid debt instruments with original maturities of three months or
less. The carrying amount reported in the balance sheets for cash and cash
equivalents approximates its fair value.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Depreciation
- ------------
Property and equipment is stated at cost. The Company provides for
depreciation using the straight-line method over the various estimated useful
lives of the assets. Leasehold improvements are amortized over the life of the
lease agreement. Repairs and maintenance costs are expensed as incurred and
betterments are capitalized.
Goodwill and Patents
- --------------------
Goodwill is the purchase price in excess of the fair value of net assets
acquired at the Company's date of acquisition. Goodwill is being amortized on a
straight-line basis over periods ranging from 15 to 40 years. Amortization
expense for the year ended 1998 was $112,000 and for 1997 and 1996 was $11,000.
Accumulated amortization at July 31, 1998 and July 31, 1997 is $354,000 and
$242,000, respectively.
Patents are being amortized on a straight-line basis over 15 years, the
remaining life of the patent. Amortization expense and accumulated amortization
as of and for the year ended July 31, 1998 was $51,000.
F-7
<PAGE>
The Company continually assesses the recoverability of its goodwill and
patents based on estimated future results of operations and undiscounted cash
flows in accordance with Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". Based on the Company's assessment, there was no impairment in
the carrying value of goodwill or its other long-lived assets at July 31, 1998
or 1997.
Research and Development
- ------------------------
Research and development costs are charged to operations as incurred.
Advertising Costs
- -----------------
Costs associated with advertising products are expensed when incurred.
Advertising expense was $440,000 in 1998. Such amounts were immaterial for 1997
and 1996.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Stock Options
- -------------
The Company grants stock options for a fixed number of shares to employees
and others with an exercise price equal to or greater than the fair value of the
shares at the date of grant. The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and related interpretations in accounting for its stock-based compensation
plans because the alternative fair value accounting provided for under Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, when the
exercise price of options granted equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Income Taxes
- ------------
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Recent Accounting Pronouncement
- -------------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share". Previously reported earnings per share ("EPS") have been restated to
conform with SFAS No. 128. Basic EPS excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
for periods presented. Diluted EPS reflects the potential dilution that would
occur if securities such as stock options were exercised.
Change in Year End
- ------------------
The Company changed its year end to July 31 in 1997.
F-8
<PAGE>
2. ACQUISITIONS:
------------
On April 30, 1998, the Company acquired all of the issued and outstanding
capital stock of Dynamic Dental Systems, Inc. ("Dynamic Dental"), pursuant to an
Agreement and Plan of Merger, whereby Dynamic Dental became a wholly-owned
subsidiary of the Company. Dynamic Dental was founded in 1997 and is a
distributor of digital operator hardware, cosmetic-imaging software, intraoral
dental camera systems and digital x-ray equipment. The total cost of acquisition
was approximately $3.2 million consisting primarily of 750,000 shares of the
Company's Common Stock, valued at an aggregate price of $3,000,000 and $225,000
in cash. The purchase price exceeded the fair value of net assets acquired by
approximately $3.4 million, which is being amortized on a straight-line basis
over 15 years. The acquisition has been accounted for as a purchase and,
accordingly, the operating results of Dynamic Dental 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. ("Equidyne").
Equidyne was founded in 1990 and is engaged in the development of the INJEX(TM)
needle-free drug injection delivery system, which is designed to eliminate the
risks of contaminated needle stick accidents and the resulting cross
contamination of hepatitis, HIV, and other diseases. The total cost of
acquisition was approximately $2.6 million consisting of 600,000 shares of the
Company's Common Stock. The acquisition has been accounted for as a purchase
and, accordingly, the operating results of Equidyne have been included in the
company's consolidated financial statements since the date of acquisition. The
excess of the aggregate purchase price over the fair market value of net assets
acquired of approximately $3.0 million, which has been allocated to patents, is
being amortized over 15 years, the remaining life of the patent.
The following unaudited proforma consolidated financial results of
operations assume the acquisitions of Dynamic Dental, Equidyne and Rosch GmbH
(See Note 4) occurred as of August 1, 1996:
YEAR ENDED YEAR ENDED
JULY 31, 1998 JULY 31, 1997
-------------- --------------
Net sales.................................... $ 8,970,000 $ 6,176,000
Net loss..................................... $(3,813,000) $(1,214,000)
Loss per share:
Basic................................... $ (.66) $ (.30)
=========== ===========
Diluted................................. $ (.66) $ (.30)
=========== ===========
3. INVENTORIES:
-----------
Inventories consist of the following at:
JULY 31, 1998 JULY 31, 1997
---------------- --------------------
Raw materials................. $ 291,000 $264,000
Work-in-process............... 29,000 31,000
Finished goods................ $1,631,000 $180,000
---------- --------
$1,951,000 $475,000
========== ========
F-9
<PAGE>
4. INVESTMENT IN AFFILIATE:
-----------------------
In January 1996, the Company invested $819,000, which investment consisted
of $519,000 of cash and 100,000 shares of the Company's common stock, for a
fifty percent interest in Rosch GmbH Medizintechnik ("Rosch GmbH"). The 100,000
shares were valued at $3.00 per share, which represented the fair market value
of the stock at the time the agreement was reached. This investment was
previously being accounted for by the Company under the equity method of
accounting. Rosch GmbH is a marketing and distribution company based in Berlin,
Germany specializing in the distribution of healthcare products, including the
Company's products, to primary care physicians throughout Europe. Substantially
all of the Company's foreign and export sales are conducted through Rosch GmbH.
In January 1996, Rosch GmbH sold its exclusive distributorship rights for a
manufacturer's ear, nose, and throat ("ENT") line of products in order to
concentrate on the Company's products as well as other healthcare products.
The Company changed its method of accounting for Rosch GmbH from the equity
method to a consolidated basis on August 11, 1997 based upon the Company's
determination that it had reached the definition of control of Rosch GmbH as of
August 11, 1997 under generally accepted accounting principles. The Company's
determination of control of Rosch GmbH was based primarily upon the successful
completion of negotiations with the remaining owner to acquire effective voting
control. For the first quarterly period ended October 31, 1997, the Company
continued to recognize earnings of Rosch GmbH up to its 50% ownership share. On
December 18, 1997, the Company closed on the purchase of the remaining 50% of
the outstanding capital stock of Rosch GmbH, for $50,000 plus 105,000 shares of
Common Stock, pursuant to a Stock Purchase Option Agreement, dated as of
November 1, 1997. As a result of this transaction, the Company recognized 100%
of all activity of Rosch GmbH for the second quarterly period ended January 31,
1998, and thereafter.
Accounts receivable recorded in the Company's balance sheet as of July 31,
1997 represent receivables arising through the normal course of business. The
balance consists primarily of sales of the Company's audiometric products to
Rosch GmbH. Intercompany profits relating to sales of the Company's products to
Rosch GmbH were eliminated based on the Company's 50% equity ownership of Rosch
GmbH at that time.
The following is summarized unaudited financial information of Rosch GmbH.
YEAR ENDED YEAR ENDED
JULY 31, 1998 JULY 31, 1997
----------------- ----------------
Sales............................. $5,400,000 $3,920,000
Gross profit...................... 1,631,000 1,340,000
Net income (loss)................. (381,000) (58,000)
Current assets.................... 2,267,000 2,435,000
Non-current assets................ 258,000 211,000
Current liabilities............... 1,907,000 1,687,000
Non-current liabilities........... -- 737,000
In December 1997, the Company invested $255,000, consisting of $150,000 of
cash and 105,000 shares of its Common Stock for a 45% interest in Meditronic
Medizinelektronik GmbH ("Meditronic GmbH"), pursuant to a Stock Purchase Option
Agreement, dated November 1, 1997. The shares were valued at $1.00 per share,
which represented the fair market value of the Common Stock on the date of
acquisition. Meditronic GmbH is a development and manufacturing company,
specializing in the manufacture of medical camera systems. Substantially all of
Meditronic GmbH's sales are to Rosch GmbH. The Company accounted for its
investment in Meditronic GmbH under the equity method until July 1998 when the
F-10
<PAGE>
Company sold its interest in Meditronic GmbH for approximately $250,000 which
resulted in a loss of $64,000. The Company continues to act as the exclusive
distributor for Meditronic GmbH's products.
5. DEBT
----
In connection with the acquisition of Rosch GmbH, the Company has revolving
lines of credit from several German-based banks. These lines of credit bear
interest rates ranging from 8.125% to 9.0%. As of July 31, 1998, there was
$368,000 outstanding under these revolving lines of credit.
The Company also has Term Loans with German-based banks. The first loan is
payable in equal monthly installments through June 1999. Interest is 5.875% per
annum, and as of July 31, 1998, there was $202,000 outstanding under this loan.
The second loan is payable in its entirety on February 15, 1999. Interest is
5.7% per annum and as of July 31, 1998, there was $393,000 outstanding under
this loan.
As of July 31, 1997, there was $532,000 outstanding under two separate Term
Loans and $300,000 outstanding under a revolving line of credit from the
Company's prior bank. During 1998, these balances were repaid and the loan
agreements were terminated as of July 31, 1998.
Borrowings under these outstanding loans are collateralized by essentially
all of the assets of the Company.
6. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
-----------------------------------------------
Earnings per share, basic and diluted, were computed using weighted average
shares outstanding of, 4,687,707 for 1998, 2,510,296 for 1997 and 2,493,854 for
the year ended July 27, 1996. Dilutive securities were not included in the
calculation of diluted weighted average shares due to their anti-dilutive
effect.
7. INCOME TAXES:
------------
The Company's deferred tax assets (which result primarily from net
operating loss carryforwards and accrued expenses) as of July 31, 1998 and July
31, 1997 were $1,217,000 and $561,000, respectively. SFAS No. 109 requires a
valuation allowance against deferred tax assets if it is more likely than not
that some or all of the deferred tax assets will not be realized. The Company
believes that some uncertainty exists and therefore has maintained a valuation
allowance of $1,217,000 and $561,000 as of July 31, 1998 and July 31, 1997,
respectively. As of July 31, 1998, the Company has net operating loss
carryforwards for Federal income tax purposes of $3,175,000 that expire from
2004 to 2018.
The net provision for income taxes for the years ended July 31, 1998, July
31, 1997 and July 27, 1996 of $-0-, $-0-, and $25,000, respectively, are
comprised entirely of currently payable state income taxes. There was no current
Federal income tax provision due to the utilization of net operating loss
carryforwards. Approximately $-0-, $-0- and $511,000 of the Federal net
operating loss carryforward was utilized during the years ended July 31, 1998,
July 31, 1997 and July 27, 1996, respectively.
F-11
<PAGE>
Significant components of the Company's deferred tax assets are as follows:
1998 1997
-----------------------------
Deferred tax assets:
Net operating loss carryforwards $ 1,079,000 $ 437,000
Accrued expenses 90,000 67,000
Inventory 32,000 24,000
Other 3,000 16,000
Reserves 13,000 17,000
-----------------------------
Total deferred tax assets 1,217,000 561,000
Valuation allowance for deferred tax assets (1,217,000) (561,000)
-----------------------------
Net deferred tax assets $ -0- $ -0-
=============================
A reconciliation of income taxes computed at the federal statutory rates to
income tax expense is as follows:
1998 1997
------------------------------------------------------
Amount Percent Amount Percent
------------------------------------------------------
Tax (Benefit) at
Federal Statutory Rates $(1,249,000) (34%) $(315,000) (34%)
State Income Taxes,
Net of Federal Tax
Benefit -- -- -- --
Change in Valuation
Reserve 656,000 18 313,000 34
Goodwill Amortization 57,000 2 13,000 1
Deferred
Compensation 336,000 9 -- --
Other 200,000 5 (11,000) (1)
------------------------------------------------------
Total $-- 0% $ -- 0%
======================================================
1996
-------------------------------
Amount Percent
-------------------------------
Tax (Benefit) at
Federal Statutory Rates $159,000 34%
State Income Taxes,
Net of Federal Tax
Benefit 17,000 4
Change in Valuation
Reserve (122,000) (26)
Goodwill Amortization 4,000 1
Deferred
Compensation -- --
Other (33,000) (7)
-------------------------------
Total $25,000 6%
===============================
8. EQUITY:
------
Conversion of Debentures. As of November 3, 1997, the Company issued an
aggregate of 720,000 shares of its Common Stock upon the conversion of $720,000
principal amount of its 14% Convertible Subordinated Debentures due October 31,
1999 (the "Debentures"). This represented the entire issue of Debentures. The
Company had reduced the conversion price of the Debentures to $1.00 per share
from $3.75 per share, effective October 17, 1997 through October 27, 1997, in
connection with October 1997 amendments to arrangements with Citizens Bank New
Hampshire pursuant to a Forbearance and Workout Agreement and its efforts to
obtain additional equity capital.
Private Placement of Common Stock. As of November 26, 1997, the Company
closed a private placement of 1,050,000 shares of Common Stock, at a price of
$1.00 per share, or an aggregate purchase price of $1,050,000 to a group of
"accredited investors," as such term is defined in Regulation D under the
F-12
<PAGE>
Securities Act. The Company used $150,000 of the placement proceeds to repay
portions of its indebtedness to Citizens Bank, and used the balance of the
proceeds for working capital, including increasing its ownership interest in
Rosch GmbH.
Effective February 1998, the Company retained Liviakis Financial
Communications, Inc. ("LFC") as a financial consultant for a term of one year
for a fee of 1,000,000 shares of the Company's Common Stock, valued at $1.00 per
share, the fair market value, and warrants for an additional 1,000,000 shares of
Common Stock exercisable at $1.00 per share for four years. The fair value of
the 1,000,000 warrants was determined to be $580,000 through the application of
the Black-Scholes method. Consulting expense of $1,580,000 for the common stock
and warrants issued is being recognized ratably over the one year term of the
agreement. LFC would receive a finder's fee equal to 2.5% of the gross funding
of any debt or equity placement and 2% of the gross consideration on any
acquisition for which LFC acts as a finder for the Company.
Preferred Stock. During May 1998, the Company closed the placement of three
tranches of 1,000 shares each of Series A Convertible Preferred Stock, $.01 par
value (the "Series A Preferred Stock"), to one purchaser (the "Purchaser") at a
purchase price of $1,000 per share or an aggregate purchase price of $3 million,
pursuant to a Securities Purchase Agreement (the "Purchase Agreement"), among
the Company, West End Capital LLC ("West End") and the Purchaser. As part of its
entry into the Purchase Agreement, the Company entered into a Registration
Rights Agreement (the "Registration Agreement") and a Warrant Agreement.
Concurrently with the closing for the first tranche of Series A
Preferred Stock, the Company issued warrants under the Warrant Agreement (the
"Warrants") to West End for the purchase of 50,000 shares of the Company's
Common Stock at an exercise price of $4.80 per share, subject to customary
anti-dilution provisions, expiring on May 5, 2002. The Company also issued
warrants for the purchase of 30,000 shares of Common Stock to the placement
agent, exercisable at $4.40 per share for three years. On the date of issuance,
the Company determined these warrants had a value of $255,000.
The Series A Preferred Stock is immediately convertible into shares of the
Company's Common Stock at a conversion rate equal to $1,000 divided by the lower
of (i) $4.00 or (ii) 75% of the average closing bid price for the Common Stock
for the five trading days immediately preceding the conversion date. The Company
may force conversion of all (and not less than all) of the outstanding shares of
Series A Preferred Stock at any time after the first anniversary of the
effective date of the Registration Statement. There is no minimum conversion
price. Should the bid price of the Common Stock fall substantially prior to
conversion, the holders of the Series A Preferred Stock could obtain a
significant portion of the Common Stock upon conversion, to the detriment of the
then holders of the Common Stock.
The Series A Preferred Stock has a liquidation preference of $1,000 per
share, plus any accrued and unpaid dividends, and provides for an annual
dividend equal to 5% of the liquidation preference, which may be paid at the
election of the Company in cash or shares of its Common Stock. The annual
dividend rate was increased to 12% as of June 5, 1998 because the Company did
not file the Registration Statement covering the Common Stock underlying the
Series A Preferred Stock within 30 days of the initial closing. The Registration
Statement was filed on July 10, 1998, but has not yet been declared effective.
The rate has increased to 18% and will remain at such rate until the effective
date of the Registration Statement, when the dividend rate would return to 5%.
The conversion discount of the preferred stock is considered to be an
additional preferred stock dividend. The maximum discount available of
$1,000,000 was initially recorded as a reduction of preferred stock and an
increase to additional paid-in capital. As the preferred stock was immediately
convertible upon issuance, the Company then recognized additional dividends, by
recording a charge to income available to common stockholders.
F-13
<PAGE>
Stock Options. In 1997, the Company granted certain directors and officers
of the Company options to purchase 480,000 shares under separate option
agreements. The options were granted at the fair market value of the Company's
Common Stock on the date of grant. The options vest over four years and expire
ten years from the date of grant.
In October 1996, the Company's stockholders approved the 1996 Stock Option
Plan providing for the issuance of up to 300,000 shares of the Company's Common
Stock. The plan is administered by the Board of Directors or an Option
Committee. Options granted under this Plan would be either incentive stock
options or non-qualified stock options which would be granted to employees,
officers, directors and other persons who perform services for or on behalf of
the Company. Options are exercisable as determined at the time of grant except
options to officers or directors may not vest earlier than six months from the
date of grant, and the exercise price of all the options cannot be less than the
fair market value at the date of grant.
In 1996, the Company granted to a consultant an option to purchase a total
of 13,000 shares of the Company's Common Stock at fair market value on the date
of grant. The option is exercisable and expires no later than three years from
the date of grant. The Company expensed approximately $10,000 and $50,000 in
1996 and 1997, respectively, based on the fair market value of the consultant's
services over the twelve month term of the consulting agreement.
In 1995, the Company granted certain officers options to purchase a total
of 50,000 shares of the Company's Common Stock at fair market value on the date
of grant. There remains outstanding an option for 30,000 shares which is
exercisable and expires no later than four years from the date of grant.
FAS 123 DISCLOSURE
Pro forma information regarding net income (loss) is required by FAS 123
(Stock-Based Compensation), which requires that the information be determined as
if the Company had accounted for its employee stock options grants under the
fair value method of that Statement. The fair values for these options were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
1998 1997 1996
-----------------------------------------
Expected life (years) 4 4.7 4
Interest rate 6% 6% 6%
Volatility 1.15 1.15 1.13
Dividend yield 0.0% 0.0% 0.0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Because FAS 123 is
applicable only to options granted subsequent to July 29, 1995, its pro forma
effect will not be fully reflected until fiscal year 1999. The Company's pro
forma information is as follows:
F-14
<PAGE>
1998 1997 1996
------------------------------------------
Pro forma net income (loss) $(5,497,682) $(1,238,759) $429,134
Pro forma net income (loss per share) $ (1.17) $ (0.49) $ .17
Option activity for the years ended 1998, 1997 and 1996 is summarized below:
1998 1997
----------------------------------------------
Weighted
Average
Exercise
Shares Price Shares
----------------------------------------------
Outstanding at beginning of year 403,333 $3.23 133,333
Granted 1,866,300 1.55 480,000
Expired or canceled (320,000) 3.09 (136,000)
Exercised (175,000) 1.00 ( 74,000)
--------- ---------
Outstanding at end of year 1,774,633 1.71 (403,333)
========= =========
Exercisable at end of year 1,494,133 1.63 (111,000)
========= =========
Available for future grants 20,000 (240,000)
====== =========
Weighted-average fair value of
options granted during year $8.20
1997 1996
--------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Price Shares Price
--------------------------------------------
Outstanding at beginning of year $1.58 131,000 $0.93
Granted 3.36 13,000 7.50
Expired or canceled 3.45 -- --
Exercised 0.66 ( 11,000) 0.94
---------
Outstanding at end of year 3.23 (133,000) 1.58
=========
Exercisable at end of year 3.11 (107,000) 0.87
=========
Available for future grants ( 10,000)
=========
Weighted-average fair value of
options granted during year $2.54 $4.52
The following table presents weighted-average price and life information about
significant option grants outstanding at July 31, 1998:
OPTIONS OUTSTANDING
-------------------
Weighted
Average
Remaining
Range of Number Contractual
Exercise Prices Outstanding Life
- -------------------------------------------------------------------
$1.00 - $1.50 1,338,000 4 years
$3.00 - $4.38 423,300 5 years
$7.50 13,333 1 year
---------
1,774,633
=========
OPTIONS EXERCISABLE
-------------------
Weighted Weighted
Average Average
Range of Exercise Number Exercise
Exercise Prices Price Exercisable Price
- ----------------------------------------------------------------
$1.00 - $1.50 $1.01 1,214,500 $1.01
$3.00 - $4.38 $3.72 266,300 $4.14
$7.50 $7.50 13,333 $7.50
---------
1,494,133
=========
10. COMMITMENTS:
-----------
The Company leases its corporate offices and audiometric operations under a
36-month operating lease beginning in May 1998. Prior to that time, the Company
had leased facilities on a month-to month basis. Rent expenses for the year
ended July 31, 1998 was $33,000 and for the years ended July 31, 1997 and July
27, 1996 was $15,500 and $13,500 respectively.
F-15
<PAGE>
Rosch GmbH leases its administrative and sales offices under a 60-month
lease expiring in May 2002. Rent expense for the year ended July 31, 1998 was
$105,000.
11. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS:
------------------------------------------------
The Company's primary customers are in the medical field. At July 31, 1998
and July 31, 1997, substantially all accounts receivable balances are
concentrated in this industry. The Company sells products and extends credit
based on an evaluation of the customer's financial condition, generally without
regard to collateral. Exposure to losses on receivables is principally dependent
on each customer's financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
12. BUSINESS SEGMENT AND FOREIGN OPERATIONS:
---------------------------------------
The Company operates in one business segment - the sale of medical equipment.
The Company's foreign operations are subject to certain economic and regulatory
risks and uncertainties specific to Germany and the European geographic region.
Such risks and uncertainties could disrupt the Company's foreign operations and
have a material impact on the Company's financial results.
Transfers to affiliates are made at prices above the Company's cost and include
charges for freight and handling.
DOMESTIC GERMAN
OPERATIONS OPERATIONS ELIMINATION CONSOLIDATED
--------------------------------------------------
Year ended July 31, 1998: (Thousands)
Net sales $2,155 $4,870 $7,025
Transfers between
geographic areas 131 530 (661) --
--------------------------------------------------
Net sales 2,286 5,400 (661) 7,025
Loss from operations (2,989) (381) (3,370)
Assets $8,933 $2,525 $11,458
Prior to the acquisition and consolidation of Rosch GmbH in fiscal year 1998,
the Company did not conduct any significant business in foreign countries.
13. GOING CONCERN
-------------
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company has incurred net losses of $3,674,000 and $926,000 for
the years ended July 31, 1998 and 1997, respectively. This and other factors
indicate that the Company may be unable to continue as a going concern for a
reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing and ultimately to attain profitability. The Company
F-16
<PAGE>
continues to pursue strategies to improve the profitability of its current
product lines, and is actively pursuing additional debt and equity financing.
14. SUBSEQUENT EVENTS
-----------------
On October 26, 1998, the Company entered into a letter of intent to acquire
Score International, Inc. ("SCI") for $1.7 million, consisting of $1,450,000
payable in shares of the Company's Common Stock, to be valued as provided for in
a definitive acquisition agreement and $250,000 in cash. SCI is a developer and
distributor of dental office products, primarily a patented high-speed handpiece
repair system. The transaction is subject to negotiation and execution of a
definitive acquisition agreement and fulfillment of customary closing
conditions. This letter of intent may be terminated by either party, if by the
close of business on December 31, 1998, a definitive acquisition agreement shall
not have been executed.
F-17
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
JANUARY 31,
1999
--------------
(THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 107
Accounts receivable.............................. 1,443
Inventories...................................... 2,432
Prepaid and other current assets................. 356
-------
Total current assets.................... 4,338
Property and equipment:.......................... 900
Accumulated depreciation......................... (467)
-------
433
Goodwill......................................... 4,174
Patents.......................................... 2,932
Other............................................ 29
-------
$11,906
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Debt........................................ $ 1,223
Loans from related parties....................... 425
Other short-term debt............................ 650
Accounts payable................................. 2,263
Accrued liabilities.............................. 568
Dividends payable................................ 327
-------
Total current liabilities..................... 5,456
Stockholders' Equity:
Series A Convertible Preferred stock, $.01 par
value; Authorized-- 1,000,000 shares; Outstanding--
3,000 shares................................... 2,387
Common stock, $.10 par value; Authorized--
20,000,000 shares; Outstanding-- 7,668,464 shares
at January 31, 1999 ........................... 767
Additional paid-in capital....................... 12,270
Retained deficit................................. (8,322)
Accumulated other comprehensive loss............. (190)
-------
6,912
Deferred compensation............................ (462)
-------
Total stockholder's equity.............. 6,450
-------
$11,906
=======
See notes to unaudited consolidated financial statements.
F-18
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
----------------------------
JANUARY 31, JANUARY 31,
1999 1998
------------ --------------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales.................................. $ 2,290 $ 1,805
Cost of goods sold......................... 1,454 821
--------- ---------
Gross profit............................ 836 984
Selling, general and administrative........ 1,966 903
Research and development................... 77 --
--------- ---------
Total operating expenses................ 2,043 903
--------- ---------
Operating income (loss) ................... (1,207) 81
Other income (expenses):
Undistributed earnings of affiliate..... -- 77
Interest, net........................... (58) (40)
Minority interest in affiliate.......... -- --
Other................................... (91) (52)
--------- ---------
(149) (15)
Income (loss) before provision for
income taxes............................ (1,356) 66
Provision for income taxes................. -- (2)
--------- ---------
Net income (loss).......................... $ (1,356) $ 64
========= =========
Net income (loss) attributable to common
stockholders*........................... $ (1,494) $ 64
========= =========
Weighted average number of common and
common equivalent shares outstanding.... 7,369,800 4,096,830
========= =========
Earnings (loss) per common and common
equivalent share:
Basic................................... $ (.20) $ .02
========= =========
Diluted................................. $ (.20) $ .02
========= =========
SIX MONTHS ENDED
------------------------------
JANUARY 31, JANUARY 31,
1999 1998
-------------- --------------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales....................................... $ 4,396 $ 3,635
Cost of goods sold.............................. 2,673 1,879
--------- ---------
Gross profit................................. 1,723 1,756
Selling, general and administrative............. 3,888 1,590
Research and development........................ 205 --
--------- ---------
Total operating expenses..................... 4,093 1,590
--------- ---------
Operating income (loss) ........................ (2,370) 166
Other income (expenses):
Undistributed earnings of affiliate.......... -- 77
Interest, net................................ (75) (118)
Minority interest in affiliate............... -- (85)
Other........................................ (197) 6
--------- ---------
(272) (120)
Income (loss) before provision for
income taxes................................. (2,642) 46
Provision for income taxes...................... -- (2)
--------- ---------
Net income (loss)............................... $ (2,642) $ 44
========= =========
Net income (loss) attributable to common
stockholders*................................ $ (2,897) $ 44
========= =========
Weighted average number of common and
common equivalent shares outstanding......... 7,217,218 3,282,142
========= =========
Earnings (loss) per common and common
equivalent share:
Basic........................................ $ (.40) $ .01
========= =========
Diluted...................................... $ (.40) $ .01
========= =========
See accompanying notes.
* The three and six months ended January 31, 1999 includes the impact of
$138,000 and $255,000, respectively, of dividends on Preferred Stock.
F-19
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
-----------------------
JANUARY 31, JANUARY 31,
------------ ----------
1999 1998
---- -----
(Thousands)
OPERATING ACTIVITIES:
Net income (loss)................................... $(2,642) $ 44
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization....................... 284 132
Deferred compensation............................... 832 --
Undistributed earnings of affiliate................. -- (77)
Minority interest in affiliate...................... -- 85
Changes in operating assets and liabilities:
Accounts receivable.............................. (252) 341
Inventories, prepaid and other current
assets......................................... (528) (1,339)
Accounts payable and accrued liabilities......... 969 (264)
------- -------
Net cash used in operating activities............... (1,337) (1,078)
INVESTING ACTIVITIES:
Purchase of property and equipment, net............. (125) (94)
------- -------
Net cash used in investing activities............... (125) (94)
FINANCING ACTIVITIES:
Principal payments on long-term debt................ -- (72)
Proceeds from long-term debt and bank line of
credit............................................ -- (28)
Proceeds from issuance of common stock, net......... -- 994
Net proceeds from bank debt......................... 153 --
Net proceeds from related party debt................ 425 --
Net proceeds from other short-term debt............. 650 --
Issuance of common stock, net....................... (79) --
Proceeds from exercise of stock options............. 22 --
------- -------
Net cash provided by financing activities........ 1,171 894
------- -------
Effect of exchange rate changes on cash and cash
equivalents....................................... 2 1
Decrease in cash and cash equivalents............... (289) (277)
Cash and cash equivalents, beginning of period...... 396 533
------- -------
Cash and cash equivalents, end of period............ $ 107 $ 256
======= =======
NON-CASH ACTIVITIES:
Conversion of convertible subordinated debt into
common stock......................................
$ -- $ 720
======= =======
Common Stock issued in connection with
acquisitions...................................... S -- $ 210
======= =======
Common stock issued under conversion provision of
warrants......................................... $ 59 $ --
======= =======
See notes to unaudited consolidated financial statements.
F-20
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
Operating results for the three and six month periods ended January 31,
1999 are not necessarily indicative of the results that may be expected for the
year ending July 31, 1999. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-KSB for the year ended July 31, 1998.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with Statement of Financial
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 the changes in exchange
rates from the date of acquisition of Rosch GmbH to January 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 net income or shareholders' equity. For the three and six
months ended October 31, 1999, the Company's only item of other comprehensive
income was the foreign currency translation adjustment recognized in
consolidation of its wholly-owned German subsidiary, Rosch GmbH. SFAS 130
requires such adjustments, which prior to adoption were reported separately in
shareholder's equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS 130.
The foreign currency translation adjustment and comprehensive loss for
the three months ended January 31, 1999 was ($29,000) and ($1,385,000),
respectively. For the six months ended January 31, 1999, the foreign currency
translation adjustment and comprehensive loss was $59,000 and ($2,583,000). As
of January 31, 1999, the cumulative translation adjustment and accumulated other
comprehensive loss was ($190,000).
2. DEBT
----
In September 1998, the Company entered into a $505,000 line of credit
with Guardian Financial Services, Inc. (owned by an officer of the Company).
This line of credit is due on demand and bears an interest rate of 10% per
annum. As of January 31, 1999, $425,000 was outstanding under this line of
F-21
<PAGE>
credit, which expired on February 28, 1999 and remains outstanding as a demand
loan, which is secured by substantially by all assets of the Company.
On January 29, 1999, the Company entered into a $50,000 Promissory Note
bearing interest at 11.5%, and maturing on February 15, 1999. The Company's
$600,000 term loan, originally due to expire on November 25, 1998, has reverted
to a demand loan and was still outstanding at January 31, 1999. The $650,000
total balance was paid in full on February 3, 1999. See Subsequent Event, below.
3. ACQUISITIONS
------------
On April 30, 1998, the Company acquired all of the issued and
outstanding capital stock of Dynamic Dental Systems, Inc. ("Dynamic Dental"),
pursuant to an Agreement and Plan of Merger, whereby Dynamic Dental became a
wholly-owned subsidiary of the Company. Dynamic Dental was founded in 1997 and
is a distributor of digital operator hardware, cosmetic-imaging software,
intraoral dental camera systems and digital x-ray equipment. The total cost of
acquisition was approximately $3.2 million consisting primarily of 750,000
shares of the Company's Common Stock, valued at an aggregate price of $3,000,000
and $225,000 in cash. The purchase price exceeded the fair value of net assets
acquired by approximately $3.4 million, which is being amortized on a
straight-line basis over 15 years. The acquisition has been accounted for as a
purchase and, accordingly, the operating results of Dynamic Dental 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.
("Equidyne"). Equidyne was founded in 1990 and is engaged in the development of
the INJEX(TM) needle-free drug injection delivery system, which is designated to
eliminate the risks of contaminated needle stick accidents and the resulting
cross contamination of hepatitis, HIV, and other diseases. The total cost of
acquisition was approximately $2.6 million consisting of 600,000 shares of the
Company's Common Stock. The acquisition has been accounted for as a purchase
and, accordingly, the operating results of Equidyne have been included in the
Company's consolidated financial statements since the date of acquisition. The
excess of the aggregate purchase price over the fair market value of net assets
acquired of approximately $3.0 million, which has been allocated to patents, is
being amortized over 15 years, the remaining life of the patent.
The following unaudited proforma consolidated financial results of
operations for the three and six months ended January 31, 1998 assume the
acquisitions of Dynamic Dental and Equidyne occurred as of August 1, 1997.
Three months ended Six months ended
January 31, 1998 January 31, 1998
-----------------------------------------------
Net sales........................ $2,488,000 $4,716,000
Net loss......................... (55,000) (233,000)
Loss per share; basic and
diluted........................ (.01) (.05)
F-22
<PAGE>
4. SUBSEQUENT EVENT
----------------
On February 3, 1999, the Company sold 1,600 shares of Series B
Preferred Stock to one purchaser 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.
The Series B Preferred Stock is convertible at any time after April 30,
1999 into shares of Common Stock at a conversion rate equal to $1,000 divided by
the lower of (i) $2.00 or (ii) 75% of the average closing bid price for the
Common Stock for the five trading days immediately preceding the conversion
date. The Company may force conversion of all (and not less than all) of the
outstanding shares of Series B Preferred Stock at any time after the first
anniversary of the effective date of a registration statement covering the
underlying shares of Common Stock. There is no minimum conversion price. Should
the bid price of the Common Stock fall substantially prior to conversion, the
holders of the Series B Preferred Stock could obtain a significant portion of
the Common Stock upon conversion, to the detriment of the then holders of the
Common Stock.
The Series B Preferred Stock has a liquidation preference of $1,000 per
share, plus any accrued and unpaid dividends, and provided 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 terms of the Series B Preferred Stock could result in a
discount to the holders, depending on the market price of the Company's Common
Stock during the five trading days immediately preceding a future conversion
date. Any such discount would be considered an additional preferred stock
dividend resulting from the beneficial conversion feature of the securities, and
would be recorded as a charge to income available to common stockholders at the
time of conversion. As the Series B Preferred Stock is not convertible until
after April 30, 1999, the amount of the dividend which would be recognized, if
any, cannot be determined at this time.
The net proceeds of $1,500,000 (after offering expenses) from the sale
of the Series B Preferred Stock were used in part to repay the company's
$600,000 term loan and $50,000 Promissory Note described in Note 2, above.
5. YEAR 2000
---------
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that with modifications or replacements of
existing software and certain hardware, the Year 2000 Issue can be mitigated.
However, if such modifications and replacements are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the
following four phases: assessment, remediation, testing and implementation. To
date, the Company has substantially completed its assessment of all systems that
F-23
<PAGE>
could be significantly affected by the Year 2000. The assessment indicated that
most of the Company's significant information technology systems will be
affected, including its financial information system which includes its general
ledger, accounts payable, billing and inventory systems. The assessment was also
undertaken on the Company's products, which are also at risk, as they utilize
software and hardware (embedded chips) as well. However, based on its review of
its product line, the Company has determined that most of the products it has
sold and will continue to sell do not require remediation to be Year 2000
compliant. Accordingly, the Company does not believe that the Year 2000 presents
a material exposure as it relates to the Company's products. The Company's
manufacturing processes consist principally of unautomated assembly of
components manufactured by outside third-parties. The Company has begun to
gather information about the Year 2000 compliance status of its significant
suppliers, and will take appropriate steps to monitor their compliance on an
ongoing basis.
Regarding its information technology exposures, the Company utilizes an
unmodified off-the-shelf software package, which is not Year 2000 compliant. The
Company has confirmed with its software vendor that a Year 2000-compliant
upgrade is readily available, and anticipates purchasing this upgrade during its
third fiscal quarter, which ends on April 30, 1999. The upgrade would provide
full Year 2000 compliance with respect to its financial information systems, and
a the new software will also be an unmodified off-the-shelf package, testing to
ensure Year 2000 compliance will not be necessary. Implementation will take
place as early as possible following the purchase of the system, and is expected
to be completed no later than June 30, 1999.
The Company does not presently maintain direct interfaces with any
third-party vendors. The Company has made various queries of its significant
suppliers that do not share information systems with the Company (external
agents). To date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of assuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company.
The effect of non-compliance by external agents is not determinable.
The total cost of the Company's Year 2000 project is estimated at
$25,000, which will be funded through operating cash flows. To date, the Company
has not incurred any direct costs related to its Year 2000 project. The project
costs will consist principally of the cost of new software, which will be
capitalized.
Management of the Company believes it has an effective plan in place to
resolve the Year 2000 Issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of its Year 2000 project. In the event
that the Company does not complete any additional phases, the Company could be
unable to take customer orders, manufacture and ship products, invoice customers
or collect payments. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect the Company.
The Company currently has no contingency plans in place in the event it
does not complete all phases of its Year 2000 project. The Company plans to
evaluate the status of completion in June 1999 and determine whether such a plan
is necessary.
Item 2. 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 not limited to, technological innovations of competitors, delays in
product introductions, changes in health care regulations and reimbursements,
F-24
<PAGE>
changes in foreign economic conditions or currency translation, product
acceptance or changes in government regulation of the Company's products, as
well as other factors discussed in other Securities and Exchange Commission
filings for the Company.
RESULTS OF OPERATIONS
- ---------------------
Net sales for the three and six month periods ended January 31, 1999
were $2,290,000 and $4,396,000, respectively, compared to $1,805,000 and
$3,635,000 for the three and six month periods ended January 31, 1998. The
increase in sales in fiscal 1999 was attributable to the acquisitions of Dynamic
Dental and Equidyne in April and May 1998, respectively.
Cost of sales for the three and six month periods ended January 31,
1999 were 63.5% and 60.8%, compared to 45.5% and 51.7% of net sales during the
same periods in the prior year. The increase in cost as a percentage of sales
can be attributed to the product mix which included sales of Dynamic Dental in
fiscal 1999. The intraoral dental camera and related product lines in the U.S.
generally produce lower gross margins than the Company's other product lines.
Total operating expenses for the three and six month periods ended
January 31, 1999 were $2,043,000 and $4,093,000, respectively, compared to
$903,000 and $1,590,000 for the comparable prior year periods. The 1999 amounts
reflect increased marketing, promotional, and development activity. The fiscal
1999 amounts also include the selling, general and administrative expenses of
Dynamic Dental and Equidyne, acquired in April and May 1998, respectively. The
increase also includes $399,000 and $832,000 for the three and six month periods
ended January 31, 1999, respectively, for amortization of deferred compensation
for consultants and for options granted in connection with the acquisitions of
Dynamic Dental and Equidyne. This amortization relates primarily to the deferred
compensation recognized in connection with the Company's consulting agreement
with Liviakis Financial Communications, and will be fully amortized as of March
15, 1999.
Net loss for the three and six month periods ended January 31, 1999
were $1,356,000 or $.20 per share, and $2,642,000, or $.40 per share, compared
to net profit of $64,000, or $.02 per share, and $44,000, or $.01 per share for
the same periods in the prior fiscal year. The decrease in net results is
primarily attributable to increased selling, general and administrative costs
and decreased gross margins.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital (deficit) of the Company at January 31, 1999 was
$(1,118,000), compared to $793,000 at fiscal year ended July 31, 1998. The
$1,911,000 decrease in working capital primarily reflects the effect of
operating losses. In February 1999, the Company received gross proceeds of
$1,600,000 upon a private placement of 1,600 shares of Series B Convertible
Preferred Stock. As mentioned in Note 4, the Company used $650,000 of the
proceeds to repay portions of its short-term indebtedness, and the remaining
proceeds of $850,000 (net of offering costs of $100,000) is being used for
general working capital purposes.
The Company has incurred net losses of $1,356,000 and $2,642,000,
respectively, for the three and six month periods ended January 31, 1999, as
well as a net loss of $3,674,000 for the year ended July 31, 1998. This and
other factors, such as working capital needed for the Company's operations,
requires additional funding beyond that which the Company currently has
available. The Company therefore will need to immediately raise additional
capital.
The Company announced on January 5, 1999, that it intends to change the
Company's business strategy and direction in order to focus all of its resources
on Equidyne, and the continued development of the INJEX(TM) system. The Company
plans to affect this change through the sale of its audiometrics and U.S. dental
(Dynamic Dental) business units. The proceeds from such sales would likely
provide additional working capital, and reduce the Company's expected short-term
F-25
<PAGE>
working capital needs by eliminating the operating losses those business units
have been incurring. In addition, the Company continues to seek other sources of
additional working capital through equity and/or debt placements or secured
financing. No assurance can be given that the Company's plans to sell its
audiometrics and U.S. dental business units will be successfully achieved, or
that such other financing arrangements will be obtained. Further, no assurance
can be given that such sales or financing arrangements would be successfully
completed within the necessary time frame and, if so, on terms not dilutive to
existing stockholders.
As a result of the foregoing, substantial doubt exists about the
ability of the Company to continue as a going concern. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
F-26
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THESE SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. EXCEPT WHERE OTHERWISE INDICATED, THIS PROSPECTUS SPEAKS AS OF THE
EFFECTIVE DATE OF THE REGISTRATION STATEMENT. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
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TABLE OF CONTENTS
Page
----
Summary................................................................... 2
Our Business.............................................................. 2
This Offering............................................................. 3
Summary Financial and Operating
Information.......................................................... 4
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 11
The Market for Our Stock and Other
Stockholder Matters.................................................. 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................................... 12
Business.................................................................. 15
Legal Proceedings......................................................... 24
Management................................................................ 24
Executive Compensation.................................................... 25
Certain Relationships and Related
Transactions......................................................... 28
Principal Stockholders.................................................... 29
Description of Securities................................................. 30
Selling Stockholders...................................................... 33
Plan of Distribution...................................................... 34
Legal Matters............................................................. 35
Experts................................................................... 35
Index to Consolidated Financial Statements............................... F-1
===============================================================================
===============================================================================
3,387,757 SHARES
COMMOM STOCK
AMERICAN
ELECTROMEDICS
CORP.
----------
PROSPECTUS
----------
, 1999
-----
================================================================================
II-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII of the By-laws of the Company provides in part that the
Company shall indemnify its directors, officers, employees and agents to the
fullest extent permitted by the General Corporation Law of the State of Delaware
(the "DGCL").
Section 145 of the DGCL permits a corporation, among other things, to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation), by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
A corporation also may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation. However, in such an action by or on behalf of a corporation, no
indemnification may be made in respect of any claim, issue or matter as to which
the person is adjudged liable to the corporation unless and only to the extent
that the court determines that, despite the adjudication of liability but in
view or all the circumstances, the person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
In addition, the indemnification and advancement of expenses provided
by or granted pursuant to Section 145 shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
The Company has purchased and maintains insurance for its officers and
directors against certain liabilities, including liabilities under the
Securities Act. The effect of such insurance is to indemnify any officer or
director of the Company against expenses, judgements, fines, attorney's fees and
other amounts paid in settlements incurred by him, subject to certain
exclusions. Such insurance does not insure against any such amount incurred by
an officer or director as a result of his own dishonesty.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of this offering in connection with the issuance
and distribution of the securities being registered, all of which are to be paid
by the Registrant, are as follows:
II-2
<PAGE>
Registration Fee $ 1,217.45
Legal Fees and Expenses................................... 20,000.00
Accounting Fees and Expenses.............................. 10,000.00
Printing.................................................. 1,000.00
Miscellaneous Expenses.................................... 2,782.55
----------
Total............................................ $35,000.00
==========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of transactions by the Company during the
last three years preceding the date hereof involving sales of the Company's
securities that were not registered under the Securities Act.
In January 1996, the Company purchased a fifty percent interest in
Rosch GmbH Medizintechnik ("Rosch GmbH") from Andy Rosch ("Rosch") for a sum of
cash and 100,000 shares of the Company's Common Stock. The Company relied on the
exemption provided by Section 4(2) of the Securities Act.
In October 1996, the Company completed a private placement of 12 Units
at a price of $75,000 per Unit to a group of accredited investors. Each Unit
consisted of a $60,000 principal amount 14% Convertible Subordinated Debenture
due October 31, 1999 (a "Debenture") and 20,000 shares of the Company's Common
Stock, or an aggregate of $720,000 principal amount of Debentures and 48,000
shares of Common Stock. The Company relied on the exemption provided by Section
4(2) of the Securities Act.
In November 1997, the Company issued 720,000 shares of Common Stock
upon the conversion of the Debentures. The Company relied on the exemption
provided by Section 3(a)(9) of the Securities Act.
In November 1997, the Company completed a private placement of
1,050,000 shares of Common Stock at a purchase price of $1.00 per share to a
group of accredited investors. The Company relied on the exemption provided by
Section 4(2) of the Securities Act.
In December 1997, the Company purchased the remaining fifty percent
interest in Rosch GmbH from Rosch and a forty-five percent interest in
Meditronic Medizinelektronik for a sum of cash and 210,000 shares of the
Company's Common Stock. The Company relied on the exemption provided by Section
4(2) of the Securities Act.
In February 1998, the Company issued 1,000,000 shares of Common Stock
and warrants to purchase an additional 1,000,000 shares of Common Stock,
exercisable at $1.00 per share for four years, in payment of the fee under a
financial consulting agreement between the Company and Liviakis Financial
Communications, Inc. The Company relied on the exemption provided by Section
4(2) of the Securities Act.
In April 1998, pursuant to an Agreement and Plan of Merger, dated as of
April 30, 1998, by and among the Company, Dynamic Dental Acquisition
Corporation, a wholly-owned subsidiary of the Company, Dynamic Dental Systems,
Inc. ("Dynamic Dental"), Henry J. Rhodes, Charles S. Aviles, Jr., and Barry A.
Hochstadt, the Company acquired all of the outstanding shares of common stock of
Dynamic Dental for a sum of cash and 750,000 shares of the Company's Common
Stock. The Company relied on the exemption provided by Section 4(2) of the
Securities Act.
II-3
<PAGE>
In May 1998, pursuant to an Agreement and Plan of Merger, dated as of
March 27, 1998, by and among the Company, Equidyne Acquisition Corporation, a
wholly-owned subsidiary of the Company, and Equidyne Systems, Incorporated
("Equidyne"), the Company acquired all of the outstanding shares of common
stock of Equidyne for 600,000 shares of the Company's Common Stock. The Company
relied on the exemption provided by Section 4(2) of the Securities Act.
In May 1998, the Company closed the private 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 accredited investor (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, dated as of May 5, 1998
(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 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 for three
years. 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. The Company relied on the exemption provided by Section 4(2) of the
Securities Act.
In February 1999, the Company closed the private placement of 1,600
shares of Series B Convertible Preferred Stock, $.01 par value (the "Series B
Preferred Stock") to three accredited investors (the "Purchasers") at a purchase
price of $1,000 per share or an aggregate purchase price of $1,600,000, pursuant
to a Securities Purchase Agreement, dated as of February 2, 1999 (the "Purchase
Agreement"), among the Company and the Purchasers. As a part of their entry into
the Purchase Agreement, the Company entered into Warrant Agreements pursuant to
which the Company issued warrants ("Warrants") for the purchase of 25,000 shares
of the Company's common stock at an exercise price of $3.00 per share for three
years. The Company relied on the exemption provided by Section 4(2) of the
Securities Act.
ITEM 27. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -----------------------------
3.1.1 Certificate of Incorporation of the Company (filed as Exhibit
3(a)(1) to Registration No. 2-71775, and incorporated herein by
reference).
3.1.2 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State of the State of Delaware
on January 27, 1987 (filed as Exhibit 3(a)(2) to the Company's
Form 10-Q for the fiscal quarter ended January 31, 1987, and
incorporated herein by reference).
3.1.3 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State of the State of Delaware
on October 9, 1990 (filed as Exhibit 3(a)(3) to the Company's Form
10-K for the fiscal year ended July 28, 1990, and incorporated
herein by reference).
3.1.4 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State of Delaware on November
7, 1996 (filed as Exhibit 3.1.4 to the Company's Form 10-K for the
fiscal year ended July 31, 1997, and incorporated herein by
reference).
3.1.5 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State on May 4, 1998 (filed as
Exhibit 2.1 to the Company's Form 8-K for an event of May 5, 1998
(the "May 1998 Form 8-K"), and incorporated herein by reference).
II-4
<PAGE>
3.1.6 Certificate of Designations of Series A Convertible Preferred
Stock of the Company (filed with the Secretary of State of
Delaware on May 5, 1998, filed as Exhibit 2.2 to the May 1998 Form
8-K, and incorporated herein by reference).
3.1.7 Certificate of Designation for Series B 5% Convertible Preferred
Stock, filed with the Secretary of State of Delaware on February
3, 1999 (filed as Exhibit 3.1 to the Company's Form 8-K for an
event of February 3, 1999 (the "February 1999 Form 8-K"), and
incorporated herein by reference).
3.2 By-Laws of the Company (filed as Exhibit 3(b) to Registration No.
2-71775, and incorporated herein by reference).
3.3 Amendments to the By-Laws of the Company (filed as Exhibit 3(c) to
the Company's 1990 Form 10-K and incorporated herein by
reference).
4.1 Form of Common Stock Certificate (filed as Exhibit 4 to
Registration No. 2071775 and incorporated herein by reference).
5.* Opinion of Thelen, Reid & Priest LLP.
10.1 Commercial Lease, dated March 23, 1998, by and between Mareld
Company, Inc. and the Company (filed as Exhibit 10.1 to
Registration Statement 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 Form of Employment Agreement, dated as of July, 31, 1995, between
the Company and Noel A. Wren (filed as Exhibit 10.5 to the
Company's Form 10-KSB for the fiscal year ended July 29, 1995 (the
"1995 Form 10-KSB"), and incorporated herein by reference).
10.6 Consulting Agreement, dated as of March 24, 1995, between the
Company and Alan Gelband Company, Inc. (filed as Exhibit 10.6 to
the Company's 1995 Form 10-KSB, and incorporated herein by
reference).
10.7 Stock Purchase Agreement, dated January 11, 1996, between the
Company and Andy Rosch (filed as Exhibit 1 to the Company's Form
8-K for an event of January 11, 1996, and incorporated herein by
reference).
10.8.1 Loan Agreement, dated October 4, 1996, between the Company and
Citizens Bank New Hampshire (the "Bank") (filed as Exhibit 10.9.1
to the Company's Form 10-KSB for the fiscal year ended July 27,
1996 (the "1996 Form 10-KSB") and incorporated herein by
reference).
II-5
<PAGE>
10.8.2 Security Agreement, dated October 4, 1996, between the Company and
the Bank (filed as Exhibit 10.9.2 to the Company's 1996 form
10-KSB, and incorporated herein by reference).
10.8.3 Revolving Line of Credit Promissory Note, dated October 4, 1996,
from the Company to the Bank (filed as Exhibit 10.9.3 to the
Company's 1996 Form 10-KSB, and incorporated herein by reference).
10.8.4 Term Promissory Note, dated October 4, 1996, from the Company to
the Bank (filed as Exhibit 10.9.4 to the Company's 1996 Form
10-KSB, and incorporated herein by reference).
10.9 Form of 14% Convertible Subordinated Debenture, due October 31,
1999 (filed as Exhibit 4 to the Company's Form 8-K for an event of
October 25, 1996, and incorporated herein by reference).
10.10 Amended Employment Agreement, dated as of January 1, 1998, between
the Company and Thomas A. Slamecka (filed an Exhibit 10.10 to
Registration Statement No. 333-58937 and incorporated herein by
reference).
10.11 Employment Agreement, dated January 1, 1998, between the Company
and Michael T. Pieniazek (filed as Exhibit 10.11 to Registration
Statement No. 333-58937 and incorporated herein by reference).
10.12 Forbearance and Workout Agreement, dated October 28, 1997, between
Registrant and the Bank (filed as Exhibit 10.12 to Registrant's
Form 10-K for the fiscal year ended July 31, 1997 ("1997 Form
10-K") and incorporated herein by reference).
10.13 Standstill Agreement, dated October 1, 1997, between Registrant
and Alan Gelband (filed as Exhibit 10.13 to the Company's 1997
Form 10-K and incorporated herein by reference).
10.14 Contract of Employment between Rosch GmbH Medizintechnik and Andy
Rosch effective January 1, 1996 (filed as Exhibit 10.14 to
Registration Statement No. 333-58937 and incorporated herein by
reference).
10.15 Agreement and Plan of Merger, dated as of April 30, 1998, among
the Company, Dynamic Dental Acquisition Corporation, Dynamic
Dental Systems, Inc. ("Dynamic Dental") and others (without
Exhibits or Schedules thereto) (filed as Exhibit 2.3 to the May
1998 Form 8-K and incorporated herein by reference).
10.16 Certificate of Merger between Dynamic Dental Acquisition
Corporation and Dynamic Dental, filed with the Secretary of State
of Delaware on May 5, 1998 (filed as Exhibit 2.4 to the May 1998
Form 8-K and incorporated herein by reference).
10.17 Agreement and Plan of Merger, dated as of March 27, 1998, among
the Company, Equidyne Acquisition Corporation and Equidyne Systems
Inc. ("Equidyne") (incorporated by reference to Exhibit 2 to the
Company's Form 8-K for an event of March 27, 1998).
10.18 Employment Agreement, dated as of April 30, 1998, by and between
Dental Dynamic Systems, Inc. and Henry J. Rhodes (filed as Exhibit
2.8 to the May 1998 Form 8-K and incorporated herein by
reference).
10.19 Employment Agreement, dated as of May 11, 1998, by and between
Equidyne Systems, Inc. and Lawrence Petersen (filed as Exhibit 2.9
to the May 1998 Form 8-K and incorporated herein by reference).
II-6
<PAGE>
10.20 Securities Purchase Agreement, dated as of May 5, 1998, among the
Company, West End Capital LLC and the Purchaser listed therein
(filed as Exhibit 10.1 to the May 1998 Form 8-K and incorporated
herein by reference).
10.21 Form of Warrant issued to West End Capital LLC (filed as Exhibit
10.2 to the May 1998 Form 8- K and incorporated herein by
reference).
10.22 Registration Rights Agreement, dated as of May 5, 1998, among the
Company, West End Capital LLC and the Purchaser listed therein
(filed as Exhibit 10.3 to the May 1998 Form 8-K and incorporated
herein by reference).
10.23 Stock Purchase Option Agreement, dated November 1, 1997, between
the Company and Andy Rosch (without exhibits) (filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-QSB for the
period ended October 31, 1997 and incorporated herein by
reference).
10.24 Consulting Agreement, dated February 19, 1998, between the Company
and Liviakis Financial. Communications, Inc. (filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended January 31, 1998 and incorporated herein by
reference).
10.25 Form of Stock Purchase Agreement (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed to report an event of
November 26, 1997 and incorporated herein by reference).
10.26 Promissory Note, dated September 19, 1998, between the Company and
Guardian Financial Services, Inc. (filed as Exhibit 10.26 to
Amendment No. 3 to Registration Statement No. 333- 58937 and
incorporated herein by reference).
10.27 Promissory Note, dated September 23, 1998, between the Company and
Sovereign Partners L.P. (filed as Exhibit 10.27 to Amendment No. 3
to Registration Statement No. 333-58937 and incorporated herein by
reference).
10.28.1 Form of Securities Purchase Agreement for the sale of Series B
Preferred Stock (without exhibits) (filed as Exhibit 10.1 to the
February 1999 Form 8-K and incorporated herein by reference).
10.28.2 Form of Warrant Agreement (filed as Exhibit 10.2 to the February
1999 Form 8-K and incorporated herein by reference).
10.28.3 Form of Registration Rights Agreement (filed as Exhibit 10.3 to
the February 1999 Form 8-K and incorporated herein by reference).
10.29 Distribution Agreement, dated as of January 1, 1999, between
Equidyne and Precision Medmark, Inc. (filed as Exhibit 10.29 to
Amendment No. 3 to Registration Statement No. 333-58937 and
incorporated herein by reference).
21. List of subsidiaries (filed as Exhibit 21 to Registration
Statement No. 333-58937 and incorporated herein by reference).
23.1** Consent of Ernst & Young LLP
23.2* Consent of Thelen Reid & Priest LLP (to be included as part of
Exhibit 5).
24 Power of Attorney (included on p. II-8).
- -------------------------------------
* To be filed by amendment.
** Filed herewith.
II-7
<PAGE>
ITEM 28. UNDERTAKINGS.
UNDERTAKINGS REQUIRED BY REGULATION S-B, ITEM 512(A).
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act").
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of a prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
change in volume and price represents no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) to include any additional or changed material information with
respect to the plan of distribution.
(2) that, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at the time shall be deemed to be the initial bona fide offering
thereof.
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
UNDERTAKING REQUIRED BY REGULATION S-B, ITEM 512(E).
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions of its Certificate of Incorporation, By-Laws, the
DGCL or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer of
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-8
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND AUTHORIZED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN AMHERST, NEW HAMPSHIRE, ON THE 31ST DAY OF MARCH, 1999.
AMERICAN ELECTROMEDICS CORP.
BY:/s/ Thomas A. Slamecka
--------------------------------------------
Thomas A. Slamecka
Chairman of the Board
POWER OF ATTORNEY
EACH DIRECTOR AND/OR OFFICER OF THE REGISTRANT WHOSE SIGNATURE APPEARS
BELOW HEREBY APPOINTS MICHAEL T. PIENIAZEK AS HIS ATTORNEY-IN-FACT TO SIGN IN
HIS NAME AND BEHALF, IN ANY AND ALL CAPACITIES STATED BELOW AND TO FILE WITH THE
COMMISSION, ANY AND ALL AMENDMENTS INCLUDING POST-EFFECTIVE AMENDMENTS, TO THE
REGISTRATION STATEMENT.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Thomas A. Slamecka Chairman of the Board March 31, 1999
- -----------------------------
Thomas A. Slamecka
/s/ Michael T. Pieniazek
- ----------------------------- President and Chief March 31, 1999
Michael T. Pieniazek Financial Officer
- ----------------------------- Director March , 1999
Blake C. Davenport
/s/ Andy Rosch
- ----------------------------- Director March 31, 1999
Andy Rosch
/s/ Marcus R. Rowan
- ----------------------------- Director March 31, 1999
Marcus R. Rowan
II-9
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EXHIBIT INDEX
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Exhibit
- -------
23.1 Consent of Ernst & Young LLP
II-10
EXHIBIT 23.1
CONSENT INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated December 21, 1998 to the Registration Statement
(Form SB-2) and the related Prospectus of American Electromedics Corp. for the
registration of 3,387,757 shares of common stock.
/s/Ernst & Young LLP
Manchester, New Hampshire
March 29, 1999
