AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 6, 2000
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
EQUIDYNE CORPORATION
(Name of Small Business Issuer in Its Charter)
----------------
DELAWARE 3845 04-2608713
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
----------------
238 LITTLETON ROAD
WESTFORD, MA 01886
(978) 692-6680
(Address and Telephone Number of Principal Executive Offices and
Principal Place of Business)
----------------
MICHAEL T. PIENIAZEK
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
238 LITTLETON ROAD
WESTFORD, MA 01886
(978) 692-6680
(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
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================== ============== ================ ==================== ================
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT PRICE (1) REGISTRATION FEE
---------------------------------------- -------------- ---------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Common Stock, par value $.10 per share 30,000 $1.00(1) $30,000.00 $7.92
---------------------------------------- -------------- ---------------- -------------------- ----------------
Common Stock, par value $.10 per share 150,000 $4.00(1) $600,000.00 $158.40
---------------------------------------- -------------- ---------------- -------------------- ----------------
Common Stock, par value $.10 per share 62,500 $3.19(2) $199,375.00 $52.64
---------------------------------------- -------------- ---------------- -------------------- ----------------
Totals 242,500 $218.96
---------------------------------------- -------------- ---------------- -------------------- ----------------
</TABLE>
(1) In accordance with Rule 457(g), the registration fee for these shares is
calculated upon the basis of the price at which the options may be
exercised.
(2) 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, the price per share and the aggregate offering
price are calculated based upon the average of the high and low prices of
the Company's Common Stock on September 5, 2000.
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>
Subject to Completion, Dated September 6, 2000
---------------------------------------
EQUIDYNE CORPORATION
242,500 SHARES OF COMMON STOCK
---------------------------------------
The stockholders of Equidyne Corporation listed elsewhere in this
prospectus are offering up to 242,500 shares of our common stock. The selling
stockholders may sell the shares from time to time at the prevailing market
price or in negotiated transactions. No period of time has been fixed within
which the shares may be offered or sold. Of the shares offered:
- 62,500 shares are presently outstanding, and
- 180,000 shares are issuable upon exercise of options.
We will not receive any proceeds from the sale of the common stock.
However, we will receive proceeds in the amount of $630,000 from the sale of
shares issuable upon the exercise of options by the selling stockholders.
Our common stock is quoted in the OTC Electronic Bulletin Board under the
symbol "INJX." On September 5, 2000, the closing price of our common stock was
$3.1875.
The selling stockholders and any participating broker-dealers may be deemed
to be "underwriters" within the meaning of the Securities Act of 1933, and any
commissions or discounts given to any such broker-dealer may be regarded as
underwriting commissions or discounts under the Securities Acts of 1933.
Brokers or dealers effecting transactions in the shares should confirm the
registration of these securities under the securities laws of the states in
which transactions occur or the existence of an exemption from registration.
INVESTING IN THE COMMON STOCK INVOLVES SUBSTANTIAL RISKS. WE URGE YOU TO READ
THE SECTION "RISK FACTORS" BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
YOUR RELIANCE ON INFORMATION CONTAINED IN THIS PROSPECTUS
In deciding whether to invest in our common stock, you should rely on the
information contained in this prospectus. We have not authorized anyone to
provide you with information different from that contained in this prospectus.
The selling stockholders are offering to sell, and seeking offers to buy, shares
of common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of the common stock. You must not consider that the delivery of this prospectus
or any sale of the common stock covered by this prospectus implies that there
has been no change in our affairs since the date of this prospectus or that the
information contained in this prospectus is current or complete as of any time
after the date of this prospectus.
We effected a one-for-five reverse split of our common stock in November
1996. All share and per share information in this Prospectus is on a post-split
basis.
PROSPECTUS SUMMARY
------------------
The following summary information is qualified in its entirety by the
information contained elsewhere in this prospectus and the documents
incorporated by reference herein.
THE COMPANY
Equidyne Corporation, through Equidyne Systems, Inc.(ESI), our wholly owned
subsidiary based in San Diego, California, and Rosch AG Medizintechnik (Rosch
AG), our partially-owned investment based in Berlin, Germany, is focused on
becoming the worldwide leader in needle-free drug delivery systems for
subcutaneous and intramuscular injections. We are responsible for developing,
manufacturing and selling the needle-free drug delivery systems in the U.S.,
Canada, South America and the Asian markets while Rosch AG is responsible for
the European market. The INJEX(TM) needle-free injector is a compact,
uncomplicated device that delivers a virtually painless injection through the
skin in a fraction of a second, and eliminates needle stick and disposal
problems.
Our INJEX(TM) needle-free drug injection system is a hand-held,
spring-powered device that injects medications from a needle-free syringe
through the skin as a narrow, high-pressure stream of liquid. The INJEX(TM)
System is intended to eliminate risks of contaminated needle stick accidents and
possible diseases resulting from the use of hypodermic needles and syringes. The
INJEX(TM) System has received U.S. FDA 510(k) clearance to market the system in
the U.S. ESI holds the U.S. patents to the INJEX(TM) System while Rosch AG holds
all European patents to the INJEX(TM) System.
The marketing launch of the INJEX(TM) System began on July 17, 2000 in the
United States. In anticipation of the launch of the INJEX(TM) System, we
expanded our direct sales force to more than 50 individuals, and are planning an
increase in our sales force throughout the next year. We retained a national
search firm to assist us in identifying and hiring new sales personnel. Our
sales force will initially call on the diabetes market and other markets where
medications are self-injected by the consumer. Our marketing plan includes
making the INJEX(TM) System products available through selected retail pharmacy
outlets, based on nation-wide and regional agreements. In addition, we will
market the INJEX(TM) Systems to various clinical markets through the formation
of strategic alliances with key specialty medical device dealers throughout the
U.S.
The components of the INJEX(TM) System are currently being manufactured and
assembled by outside manufacturers that we believe are well known for their
expertise in the type of specialty manufacturing required to produce our
products. Utilizing the tools and molds we currently have in place, and by an
agreement to share production capacity of Rosch AG, we believe that we have the
manufacturing capacity to satisfy the anticipated market demand for the
INJEX(TM) System. The INJEX(TM) System is currently assembled using a
semi-automated process. We recently entered into a $3.2 million dollar
memorandum of understanding with a view towards a final agreement with Nypro
Inc., a leading worldwide manufacturer in precision injection molding for the
healthcare industry to build and operate automated, low-cost production systems
2
<PAGE>
to supply the component parts of the INJEX(TM) System product necessary to meet
market demand. This will provide the low-cost, state-of-the-art manufacturing
capabilities that will be necessary to fill the anticipated demand for the
INJEX(TM) System.
Our partially-owned investment in Germany, Rosch AG, is focused primarily
on the needle-free drug delivery system in Europe. Effective January 14, 2000,
Rosch GmbH Medizintechnik became Rosch AG, a stock company. On February 24,
2000, Rosch AG completed an Initial Public Offering (IPO) of its shares on the
Neuer Market, a segment of the Frankfurt (Germany) Stock Exchange. Rosch AG sold
1,263,950 newly issued shares in the IPO, which, along with our sale of certain
of our shares of Rosch AG in the IPO, reduced our ownership of Rosch AG from
41.43% to 26.43%. We received proceeds of approximately $11 million from the
sale of our shares of Rosch AG common stock, and have recognized a pre-tax gain
of approximately $10.8 million. On August 25, 2000, we formed Equidyne Holdings,
as a Massachusetts business trust for the purpose of acting as a holding company
for 1,268,750 of the shares we owned of Rosch AG. We own 100% of the capital
stock of Equidyne Holdings, which was issued to us in exchange for our transfer
of our Rosch AG shares to Equidyne Holdings in a tax-free transaction. On August
29, 2000, we announced that we had sold 332,000 additional shares of Rosch AG
stock, reducing our ownership of Rosch AG stock to 19.52%. We received proceeds
in excess of $10 million from this sale.
We used to manufacture and market diagnostic audiometric medical devices
which identify diseases and disorders of the middle ear. As part of our plan to
shift our focus to the INJEX(TM) System, we sold the assets connected with this
business in April 1999. We also marketed and sold intraoral dental cameras and
related equipment in the U.S. through our wholly-owned subsidiary, Dynamic
Dental Systems (DDS), and in Europe through Rosch AG. While Rosch AG continues
to operate in this market, we have ceased the operations of DDS, completing our
plan to shift all of our energies and resources towards the INJEX(TM) System.
With this shift in our corporate strategy, our stockholders approved a change in
our corporate name to Equidyne Corporation from American Electromedics Corp on
December 29, 1999.
We were incorporated under Delaware law on January 28, 1977. Our executive
offices are at 238 Littleton Road, Westford, Massachusetts 01886, and our
telephone number is (978) 692-6680.
THIS OFFERING
SECURITIES OFFERED.................... 242,500 Shares of Common Stock.
COMMON STOCK OUTSTANDING.............. 16,128,933 shares as of July 31, 2000.
USE OF PROCEEDS....................... We will receive none of the proceeds of
the sale of the common stock. We will
receive $630,000 upon the exercise of
the options of which 180,000 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........................... "INJX"
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the common stock.
3
<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
--------------------------------------------------------------------------------
SUMMARY OF OPERATIONS 7/31/99 7/31/98 7/31/97 7/27/96 7/29/95
--------------------------- --------- ---------- ---------- ---------- ---------
NET SALES $6,789 $7,025 $2,309 $3,337 $2,443
--------------------------- --------- ---------- ---------- ---------- ---------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME TAXES (9,861) (3,674) (926) 467 184
--------------------------- --------- ---------- ---------- ---------- ---------
NET INCOME (LOSS) (9,861) (3,674) (926) 442 172
--------------------------- --------- ---------- ---------- ---------- ---------
NET INCOME (LOSS) PER COMMON
SHARE:
BASIC (1.39) (1.01) (.37) .18 .08
DILUTED (1.39) (1.01) (.37) .18 .08
--------------------------- --------- ---------- ---------- ---------- ---------
WEIGHTED AVERAGE
COMMON SHARES 7,720,251 4,687,707 2,510,296 2,493,854 2,238,483
--------------------------- --------- ---------- ---------- ---------- ---------
NINE MONTHS
ENDED
--------------------------------------------------------------------------------
SUMMARY OF OPERATIONS 4/30/00 4/30/99
-------------------------------------------- ---------------- ------------------
NET SALES $802 $6,132
-------------------------------------------- ---------------- ------------------
NET INCOME (LOSS) 7,280 (7,575)
-------------------------------------------- ---------------- ------------------
INCOME (LOSS) PER COMMON SHARE:
BASIC .55 (1.07)
DILUTED .47 (1.07)
-------------------------------------------- ---------------- ------------------
WEIGHTED AVERAGE COMMON SHARES 13,142,154 7,369,800
-------------------------------------------- ---------------- ------------------
AS OF AS OF AS OF AS OF AS OF
FINANCIAL POSITION 4/30/00 7/31/99 7/31/98 7/27/97 7/29/96
--------------------------- ---------- --------- --------- --------- ----------
Total assets $23,154 $7,241 $11,458 $3,060 $2,771
--------------------------- ---------- --------- --------- --------- ----------
Working capital (deficit) $7,727 (1,262) 793 1,060 906
--------------------------- ---------- --------- --------- --------- ----------
Long-term debt -0- -0- -0- 1,100 94
--------------------------- ---------- --------- --------- --------- ----------
Stockholders' equity 21,626 2,756 8,512 1,168 1,948
--------------------------- ---------- --------- --------- --------- ----------
4
<PAGE>
RISK FACTORS
------------
The shares of our common stock being offered for resale by the selling
stockholders are highly speculative in nature, involve a high degree of risk and
should be purchased only by persons who can afford to lose the entire sum
invested in the common stock. Before purchasing any of the shares of common
stock, you should carefully consider the following factors relating to our
business and prospects. If any of the following risks actually occurs, our
business, financial condition or operating results could be materially adversely
affected. In such case, the trading price of our stock could decline, and you
may lose all or part of your investment.
WE HAVE A HISTORY OF LOSSES
To date we have been unable to generate revenue sufficient to be profitable
on a consistent basis. As a result, we have sustained substantial losses. We had
a net loss of $9,861,000, or $1.39 per share, for the fiscal year ended July 31,
1999 compared to a net loss of $3,674,000, or $1.01 per share, for the fiscal
year ended July 31, 1998. Although we had net income of $7,280,000 for the nine
months ended April 30, 2000, this was largely a result of the gains recognized
on the sale of a portion of the shares we owned of Rosch AG in Rosch AG's
initial public offering in February 2000. We cannot assure you that we will be
able to achieve the level of revenues from operations that will be needed to be
profitable in the future or, if profitability from operations is achieved, that
it will be sustained.
OUR AUDITOR'S REPORT RAISES DOUBT AS TO OUR ABILITY TO CONTINUE AS A
GOING CONCERN
The report of our independent auditors on our July 31, 1999 Consolidated
Financial Statements contains an explanatory paragraph describing conditions
that raise substantial doubt about our ability to continue as a going concern.
Our independent accountants cited our history of operating losses over the last
two years, which raised substantial doubt as to our ability to continue as a
going concern. Although we had net income in the three and nine month period
ended April 30, 2000 of $7,987,000 and $7,280,000, respectively, this was
largely a result of the gains on the sale of a portion of the shares we owned of
Rosch AG in Rosch AG's initial public offering in February 2000. We had
operating losses in the three and nine month period ended April 30, 2000 of
$3,563,000 and $6,000,000, respectively, and we still have a retained deficit of
$8,261,000 as of April 30, 2000. Although we have improved our liquidity since
our independent auditors issued the explanatory paragraph that raised doubts as
to our ability to continue as a going concern on July 31, 1999, if we are unable
to continue as a going concern, your entire investment in us could be lost.
OUR PRODUCT IS NOT YET COMMERCIALLY ACCEPTED
Broad acceptance of our products is critical to our success and ability to
generate revenues. We have decided to focus our business solely on the INJEX(TM)
needle free drug injection system. We sold our assets connected with our
audiometric equipment product line in April 1999, and we have ceased our U.S.
intraoral dental camera business.
The INJEX(TM) System has not yet been commercially accepted in the U.S. and
faces competition from products, some of which are owned by entities with
substantial resources. Further, the INJEX(TM) System may require significant
amounts of capital for continued development, manufacturing and marketing. It is
too early to ascertain the results of the marketing launch of the INJEX(TM)
System on July 17, 2000. There can be no assurance that we will be successful in
manufacturing and marketing the INJEX(TM) System on a global basis.
5
<PAGE>
FDA REGULATIONS MAY IMPAIR OUR PROFITABILITY AND RESTRICT OUR GROWTH
In the United States, our products and manufacturing practices are subject
to regulation by the FDA and by state regulatory agencies. All of the medical
devices we develop, including the INJEX(TM) System, must receive FDA clearance
before they may be sold, or be exempted from the need to obtain FDA clearance.
We have already received 510(k) clearance for the INJEX(TM) System. On June 22,
2000, we announced that we were seeking FDA approval to market the INJEX(TM)
System for "over the counter" use.
The FDA regulatory process may delay the marketing of new systems or
devices or substantial changes to the INJEX(TM) System for significant periods
of time and impose substantial additional costs. There can be no assurance that
we will be able to obtain clearance of any future products in a timely manner or
at all. FDA clearance, once granted, is subject to ongoing review, and if the
FDA believes that we are not in compliance with applicable requirements, it can
institute proceedings to detain or seize our products, require a recall, suspend
production, distribution, marketing and sales, enjoin future violations and
assess civil and criminal penalties against us and our directors, officers or
employees. The FDA may also suspend or withdraw market approval for our products
or require us to repair, replace or refund the cost of any of our products.
FDA regulations also require us to adhere to certain "Good Manufacturing
Practices" regulations, which include validation testing, quality control and
documentation procedures. The FDA will periodically monitor our compliance with
applicable regulatory requirements. FDA regulations will also require us to
expend time, resources and effort in the areas of production and quality control
for ourselves and our contract manufacturers. Moreover, we cannot assure you
that all required regulatory clearances will be obtained or that those obtained
will not include significant limitations on the uses of our products. In
addition, changes in existing regulations or the adoption of new regulations
could make regulatory compliance more difficult in the future. The failure to
obtain all required regulatory clearances or to comply with applicable
regulations would have a material adverse effect on our business and financial
condition.
FOREIGN GOVERNMENT REGULATIONS COULD RESTRICT OUR GROWTH AND PROFITABILITY.
Sales of medical devices outside the United States that are manufactured
within the United States are subject to United States export requirements, and
all medical devices sold abroad are subject to applicable foreign regulatory
requirements. Legal restrictions on the sale of imported medical devices vary
from country to country. The requirements for obtaining approval by foreign
countries may differ substantially from those required for FDA approval. There
can be no assurance that we will be able to obtain regulatory approvals or
clearances for our products in foreign countries.
We have obtained ISO 9001/EN 46001 certification of our quality systems.
This certification is evidence that our procedures and manufacturing facilities
comply with standards for quality assurance and manufacturing process control.
This certification, along with the European Medical Device Directive
certification obtained by Rosch AG, confirm our compliance with the requirements
that enable use to affix the CE Mark to our products. The CE Mark denotes
conformity with European standards for safety and allows certified devices to be
placed on the market in all European Union (EU) countries.
THE DISTRIBUTION OF MEDICAL DEVICES IS HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE
TO COMPETE SUCCESSFULLY
We compete with numerous other companies, including several major
manufacturers and distributors, in the distribution and development of medical
devices. Most of our competitors have greater financial and other resources than
6
<PAGE>
we do. As a result, these entities may begin to develop, manufacture, market and
distribute systems which are substantially similar or superior to our products.
Further, other companies may enter this marketplace. No assurance can be given
that we will be able to successfully compete against these other companies which
may have substantially greater marketing and financial resources.
Our current competition for injection systems is primarily from traditional
hypodermic needles and syringes which are used for the vast majority of
injections administered today. Certain companies have tried to make needles and
syringes easier and safer to use by developing syringes with hidden needles,
spring-powered needle injectors and injectors with sheathed needles, sometimes
referred to as safety syringes. Our needle-free injection systems also compete
with other needle-free injection devices. Currently, competition in the
needle-free injection market is limited to other small companies with modest
financial and other resources because the barriers to entry are currently low.
However, additional competitors could enter the needle-free injection systems
market, including companies with substantially greater resources and experience
than we do. We cannot assure you that we will be able to compete effectively
against current or future competitors in the needle-free injection market.
Competition in this market could also force us to reduce our prices below
currently planned levels which would affect our revenues and profitability.
THE DEVELOPMENT OF NON-INJECTION DRUG DELIVERY SYSTEMS COULD DECREASE OUR
PROFITABILITY
Injection is generally used only with drugs for which other drug delivery
methods are not possible, in particular with biopharmaceutical proteins (drugs
derived from living organisms, such as insulin and human growth hormone) that
cannot currently be delivered orally, transdermally (through the skin) or
pulmonarily (through the lungs). Many companies, both large and small are
engaged in research and development efforts on novel techniques aimed at
delivering such drugs without injection. For example, in 1998, Pfizer, Inc.
announced that its device to inhale insulin was successful in human trials and
is competing with several other large companies to develop this device. The
successful development and commercial introduction of a non-injection technique
would likely have a material adverse effect on our business, results of
operations and profitability.
WE MAY NOT BE ABLE TO PROTECT OUR PATENTS AND PROPRIETARY TECHNOLOGY, WHICH
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
Our ability to compete successfully will depend in part on our ability to
protect our proprietary rights and to operate without infringing the proprietary
right of others, both in the United States and abroad. The patent positions of
medical technology companies generally involve complex legal and factual
questions. We hold two U.S. patents related to our needle-free injection system
and we have applied for nine foreign patents. On April 12, 2000, we announced
that ESI had filed a patent application for a new single use, disposable,
needle-free injector. We may also apply in the future for patent protection for
other uses, processes, products and systems that we develop. There can be no
assurance that any patent that we apply for will be issued, or that any patents
issued will not be challenged, invalidated, or circumvented, or that the rights
granted thereunder will provide any competitive advantage. We may incur
substantial costs in defending any patent or license infringement suits or in
asserting any patent or license rights, including those granted by third
parties, the expenditure of which we might not be able to afford. An adverse
determination could subject us to significant liabilities to third parties,
require us to seek licenses from or pay royalties to third parties or require us
to develop appropriate alternative technology. There can be no assurance that
any such licenses would be available on acceptable terms or at all, or that we
could develop alternate technology at an acceptable price or at all. Any of
these events could have a material adverse effect on our business and
profitability.
7
<PAGE>
WE WILL DEPEND ON REIMBURSEMENT FROM THIRD PARTIES FOR A SUBSTANTIAL PORTION OF
OUR REVENUES
A substantial portion of our current and proposed products are to be
purchased by patients, managed care organizations and medical facilities which
provide healthcare services to their patients. Currently, some insurance
companies and other third-party payers reimburse the cost of needle-free
injectors. These companies may refuse reimbursement if they do not perceive
benefits from the use of our products or equipment in a particular case.
Third-party payers are increasingly challenging the pricing of medical products
and services, and there can be no assurance that such third-party payers will
not in the future increasingly reject claims for coverage. In addition, there
can be no assurance that adequate levels of reimbursement will be available to
enable us to achieve or maintain market acceptance of our products or maintain
price levels sufficient to realize profitable operations. Furthermore, there is
a possibility of increased government control or influence over a broad range of
healthcare expenditures in the future. We believe that our market success will
depend upon obtaining favorable contracts and receiving timely reimbursement for
our products and services from such programs and carriers. We are also subject
to the reimbursement policies of private and governmental healthcare payers in
foreign countries with respect to our international sales.
WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE
Our future growth and profitability depend in part on our ability to
respond to technological changes and successfully develop and market new
products that achieve significant market acceptance. We are in the "high tech"
end of the health care industry. This industry has been historically marked by
very rapid technological change and the frequent introductions of new products.
There is no assurance that we will be able to develop new products that will
realize broad market acceptance.
THE NATURE OF OUR BUSINESS EXPOSES US TO PROFESSIONAL AND PRODUCT LIABILITY
CLAIMS, WHICH COULD MATERIALLY ADVERSELY IMPACT OUR BUSINESS AND PROFITABILITY
The malfunction or misuse of our medical devices could result in potential
injury to physicians' patients, and expose us to potential professional and
product liability risks. While we maintain insurance coverage that is customary
in our industry in the amounts of $4,000,000 per occurrence and $5,000,000 in
the aggregate with a deductible of $5,000, we cannot assure you that claims
against us arising with respect to our products or services will be successfully
defended or that the insurance carried by us will be sufficient to cover
liabilities arising from such claims. Further, as the result of either adverse
claim experience or of medical device or insurance industry trends, we may have
difficulty in the future obtaining product liability insurance or be forced to
pay very high premiums, and we cannot assure you that insurance coverage will
continue to be available to us on commercially reasonable terms or at all. A
successful product liability or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on our business, results of operations and profitability.
THE LOSS OF CERTAIN MEMBERS OF OUR MANAGEMENT TEAM COULD ADVERSELY AFFECT OUR
BUSINESS
Our success will be highly dependent on the continued efforts of our new
President, Chairman of the Board and Chief Executive Officer, Joseph R. Nelson.
Competition for highly skilled individuals such as Mr. Nelson is intense, and
there can be no assurance that we will be successful in attracting and retaining
key personnel in the future. Our failure to do so could adversely affect our
business and financial condition. We presently do not carry "key-man" insurance
on the life of any of our officers or employees.
8
<PAGE>
OUR SUCCESS WILL DEPEND ON BROAD MARKET ACCEPTANCE OF OUR NEEDLE FREE DRUG
INJECTOR SYSTEM
We believe that we will achieve and sustain profitable operations only
after our needle-free injector system gains market acceptance as an alternative
to needle injections and the commencement of an automated production process.
Needle-free injection systems of other companies have had only limited success
competing with traditional needles and syringes. We believe this is due
primarily to the size, cost and complexity of use of the systems that have been
previously marketed. Our improvements in the functionality and design of the
INJEX(TM) System may not adequately address the actual or perceived complexity
of using needle-free injection systems or adequately reduce the cost. We cannot
assure you that we be successful in our efforts to market our needle-free
injection systems or that it will ever gain sufficient market acceptance to
sustain profitable operations.
THE GROWTH OF OUR BUSINESS DEPENDS UPON OUR ABILITY TO OBTAIN LICENSING
ARRANGEMENTS WITH PHARMACEUTICAL AND MEDICAL DEVICE COMPANIES TO COVER THE
DEVELOPMENT, MANUFACTURE AND USE OF OUR NEEDLE-FREE INJECTION SYSTEM
We believe that the introduction and acceptance of our INJEX(TM) System
depends in part upon our success at obtaining licensing arrangements with
pharmaceutical and medical device companies covering the development,
manufacture or use of the system with specific parenteral drug therapies. We
anticipate that under these arrangements the pharmaceutical or medical device
company will assist in the development of systems for such drug therapies and
collect or sponsor the collection of the appropriate data for submission for
regulatory approval of the use of the system with the licensed drug therapy. The
pharmaceutical or medical device company also will be responsible for
distribution and marketing of the systems for these drug therapies either
worldwide or in specific territories. We cannot assure you that we will be
successful in executing agreements with pharmaceutical or medical device
companies or that such agreements if entered into will result in the sale of our
needle-free injection systems. As a result of these agreements, our success
would be dependent also upon the development, data collection and marketing
efforts of such pharmaceutical and medical device companies. The amount and
timing of resources that the participating pharmaceutical and medical device
companies would devote to these efforts are not within our control, and these
pharmaceutical and medical device companies could make material decisions
regarding these efforts that could adversely impact the introduction and level
of sales of any drug covered by such licensing arrangements, including
competition within the pharmaceutical and medical device industries, the timing
of FDA or other approvals and intellectual property litigation which would
negatively affect the marketing and sales of our needle-free injection product
for those uses.
OUR LIMITED MANUFACTURING RESOURCES COULD PREVENT US FROM SATISFYING OUR
ANTICIPATED COMMERCIAL DEMAND FOR OUR PRODUCTS
To date, our manufacturing experience with our needle-free injection system
has involved only the assembly of products in limited quantities. We recently
entered into a $3.2 million dollar memorandum of understanding with a view
towards a final agreement with Nypro Inc., a leading worldwide manufacturer of
precision injection molding for the healthcare industry to build and operate
automated, low-cost production systems to supply the component parts of the
INJEX(TM) System. In the course of developing the manufacturing and production
methods, difficulties may be encountered, including problems involving yields,
quality control and assurance, product reliability, manufacturing costs, new
equipment, component supplies and shortages of personnel, any of which could
result in significant delays in production. We cannot assure you that our
needle-free injection systems will be produced and manufactured successfully.
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WE WILL BE DEPENDENT ON OUR THIRD PARTY SUPPLIERS FOR THE PRODUCTION OF
COMPONENT PARTS
We cannot assure you that we will come to agreement with suppliers capable
of delivering adequate quantities of components within a reasonable period of
time, on acceptable terms or at all. Although we have determined the companies
that we will use as our suppliers for the component parts of our needle-free
injection system, regulatory requirements applicable to medical device
manufacturing can make substitution of suppliers costly and time-consuming. The
unavailability of adequate quantities, the inability to develop alternative
sources, a reduction or interruption in supply or a significant increase in the
price of components could have a material adverse effect on our ability to
manufacture and market our products.
THERE IS ONLY A VOLATILE LIMITED MARKET FOR OUR COMMON STOCK
Recent history relating to the market prices of public companies indicates
that, from time to time, there may be periods of extreme volatility in the
market price of our securities because of factors unrelated to the operating
performance of, or announcements concerning, the issuers of the affected stock.
Our common stock is listed on the over-the-counter bulletin board and is not
actively traded, and the bid and asked prices for our common stock have
fluctuated significantly. Since August 1, 1998, the common stock traded from a
high of $9.00 to a low of $0.72. See "MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS." General market price declines, market volatility,
especially for low priced securities, or factors related to the general economy
or to us in the future could adversely affect the price of the common stock.
WE HAVE A SUBSTANTIAL AMOUNT OF STOCK THAT WILL BECOME AVAILABLE FOR RESALE
UNDER RULE 144 AND OTHER REGISTRATION STATEMENTS.
All of the shares being 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 have filed a registration statement to register
these restricted shares for sale into the public market by the selling
stockholders. On March 24, 2000 our Registration Statement on Form SB-2 (File
No. 333-75399) (the "March Registration") to register the resale by selling
stockholders of 5,047,919 shares of common stock was declared effective. On
January 4, 2000, our Registration Statement on Form SB-2 (File No. 333-58937)
(the "January Registration") to register the resale by other selling
stockholders of 5,817,140 shares of common stock and 50,000 warrants to purchase
shares of common stock was declared effective. All of the shares and warrants
registered in the March Registration and January Registration were also
"restricted securities" as that term is defined in Rule 144 of the Securities
Act. These securities, if sold in the market all at once or at about the same
time could depress the market price during the period this registration
statement remains effective 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 as "restricted shares" in the hands of the holder,
except for those held by non-affiliates for a period of two years, calculated
pursuant to rule 144.
WE HAVE NEVER PAID DIVIDENDS AND WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE
FUTURE
We do not believe that we will pay any dividends on our common stock in the
future. We have never declared any cash dividends on our common stock, and if we
were to become profitable, it would expect that all of such earnings would be
retained to support our business.
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SHARES ELIGIBLE FOR FUTURE SALE COULD NEGATIVELY AFFECT YOUR INVESTMENT IN US
At July 31, 2000, we had an aggregate of 3,548,360 shares of common stock
reserved for the exercise of options and warrants, including the options for
180,000 shares covered by this Registration Statement.
WE ARE SUBJECT TO PENNY STOCK REGULATIONS AND RESTRICTIONS
The SEC has adopted regulations, which generally define Penny Stocks to be
an equity security that has a market price less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exemptions. As
of September 5, 2000, the closing price of our common stock was $3.1875 per
share and therefore, our common stock would be designated a "Penny Stock." If
our common stock is designated a Penny Stock, our common stock may become
subject to Rule 15g-9 under the Exchange Act or the Penny Stock Rule. This rule
imposes additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by Rule 15g-9, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. As a result, this rule may
affect the ability of broker-dealers to sell our securities and may affect the
ability of purchasers to sell any of our securities in the secondary market.
For any transaction involving a penny stock, unless exempt, the rules
require delivery, prior to any transaction in a penny stock, of a disclosure
schedule prepared by the SEC relating to the penny stock market. Disclosure is
also required to be made about sales commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stock.
There can be no assurance that our common stock will qualify for exemption
from the penny stock restrictions. In any event, even if our common stock were
exempt from the Penny Stock restrictions, we would remain subject to Section
15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any
person from participating in a distribution of penny stock, if the SEC finds
that such a restriction would be in the public interest.
POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR CHARTER
Certain provisions of our Certificate of Incorporation and of Delaware law
could discourage potential acquisition proposals and could make it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire control of us. These provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the common
stock. These provisions could also inhibit fluctuations in the market price of
the common stock that could result from takeover attempts. The Board of
Directors, without further stockholder approval, may issue preferred stock that
could have the effect of delaying or preventing a change in control. The
issuance of preferred stock could also adversely affect the voting power of the
holders of common stock, including the loss of voting control to others.
THE ACCURACY OF FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS IS
UNCERTAIN.
This prospectus contains certain forward-looking statements that are based
on the beliefs of our management, as well as assumptions made by, and
information currently available to, our management. The words "anticipates,"
"believes," "estimates," "expects," "plans," "intends" and similar expressions
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are intended to identify these forward-looking statements, but are not the
exclusive means of identifying them. These forward-looking statements reflect
the current views of our management and are subject to certain risks,
uncertainties and contingencies which could cause our actual results,
performance or achievements to differ materially from those expressed in, or
implied by, these statements. These risks, uncertainties and contingencies
include, but are not limited to, the following:
* our ability to raise additional capital when needed or on acceptable
terms;
* the acceptance of our products and services by the medical profession;
* our ability to obtain regulatory approvals for the devices that we
develop;
* our ability to mass produce ampule components for the INJEX(TM)System;
* our ability to retain the proprietary nature of the technologies that
we develop; and
* other factors discussed above under the heading "Risk Factors" and
elsewhere in this prospectus.
We assume no obligation to update any forward-looking statements, whether
as a result of new information, future events or otherwise.
USE OF PROCEEDS
---------------
The stockholders listed elsewhere in this prospectus will sell the common
stock being offered hereby, and we will not receive any of the proceeds from the
sales, except for the proceeds of $630,000 from the exercise of 180,000 common
stock options underlying shares of common stock included in this registration
statement. We will bear the cost of the registration statement, which we expect
will be approximately $50,000.
DIVIDEND POLICY
We have never declared dividends or paid cash dividends. We intend to
retain and use any future earnings for the development and expansion of our
business and do not anticipate paying any cash dividends in the foreseeable
future.
MARKET PRICE INFORMATION
------------------------
MARKET FOR THE COMPANY'S
COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRINCIPAL MARKET AND MARKET PRICES
----------------------------------
Our common stock is traded in the over-the-counter market on the OTC
Electronic Bulletin Board under the symbol INJX. The following table sets forth
for the indicated periods the high and low bid prices of the common stock for
the two fiscal years ended July 31, 2000 and for the period from August 1, 2000
through September 5, 2000. These prices are based on quotations between dealers,
and do not reflect retail mark-up, mark-down or commissions, and may not
necessarily represent actual transactions.
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FISCAL PERIOD FISCAL YEAR ENDING FISCAL YEAR ENDING FISCAL YEAR ENDED
7/31/01 7/31/00 7/31/99
--------------------------------------------------------------------------------
High Low High Low High Low
--------------- ---------- ---------- --------- --------- ---------- -----------
First Quarter $3.875* $2.875* $1.34 $.72 $4.31 $2.38
--------------- ---------- ---------- --------- --------- ---------- -----------
Second Quarter $3.94 .75 2.31 .88
--------------- ---------- ---------- --------- --------- ---------- -----------
Third Quarter $9.00 3.25 2.50 .84
--------------- ---------- ---------- --------- --------- ---------- -----------
Fourth Quarter $6.44 2.88 2.56 1.03
--------------- ---------- ---------- --------- --------- ---------- -----------
* Through August 21, 2000
See the cover page of this prospectus for the last sales price of the
common stock reported on the OTC Electronic Bulletin Board as of a recent date.
APPROXIMATE NUMBER OF HOLDERS OF OUR COMMON STOCK
On July 31, 2000, there were approximately 186 stockholders of record of
our common stock. We believe that a substantial amount of the shares are held in
nominee name for beneficial owners.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and the notes thereto and the other financial
information appearing elsewhere in this Prospectus. This Prospectus contains
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 underlying assumptions
and other statements which are other that 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. Our actual results
could differ materially from those discussed in the forward-looking statements
due to factors discussed under "Risk Factors", as well as factors discussed
elsewhere in this Prospectus. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus.
OVERVIEW
--------
In the past, our ability to achieve our financial goals has been negatively
impacted by our working capital deficiency. This has changed as a result of the
net proceeds we realized of approximately $11 million from the sale of the
shares we sold in Rosch AG's initial public offering (IPO) of its common stock
in February 2000. We realized total net proceeds of approximately $14 million as
a result of the various sales of our ownership in our German affiliate, Rosch AG
throughout the past year. On August 29, 2000, we announced that we had sold
332,000 additional shares of Rosch AG stock, realizing proceeds in excess of $10
million from this sale. We retain an ownership stake of 19.52% in Rosch AG.
Although our ownership of Rosch AG has declined from the 50.01% we owned in
September 1999, we believe that our present ownership stake continues to provide
us with a significant stake in the European market for the INJEXTM System.
The recent infusion of working capital from the sale of a portion of our
ownership in Rosch AG has allowed us to aggressively pursue our goal of a full
scale market introduction of the INJEXTM System. We received clearance from the
U.S. Food and Drug Administration (FDA) 510(k) clearance to market the system in
the United States. On June 22, 2000, we announced that we were going to apply to
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the FDA to market the INJEX(TM) System for "over the counter" use. On July 17,
2000, we commenced the launch of the INJEX(TM) System in the United States.
During the three months ended April 30, 2000, we entered into a $3.2
million dollar memorandum of understanding with a view towards a final agreement
with Nypro Inc., a leading worldwide manufacturer in precision injection molding
for the healthcare industry to build and operate automated, low-cost production
systems to supply the component parts of the INJEX(TM) System product necessary
to meet market demand. We have also added operating and sales executives, hired
nearly all of a 50-person dedicated sales force and forged alliances with
outside firms for assistance in the areas of public relations and diabetes
education. In addition, we made significant investments in marketing materials,
including product literature and a new logo. In addition, we appointed Randy
Nelson, former head of U.S. marketing for Eli Lilly's $1 billion diabetes care
business, as our new President, Chief Executive Officer and as a director. In
March 2000, we announced that Dr. James r. Gavin, a past president of the
American Diabetes Association, joined the Company's Board of Directors. These
achievements put us in a position to launch the INJEXTM System on July 17, 2000.
COMPARISON OF THE THREE AND NINE MONTHS ENDED
APRIL 30, 2000 AND APRIL 30, 1999
RESULTS OF OPERATIONS
---------------------
Net sales for the three and nine month periods ended April 30, 2000 were
$-0- and $802,000, respectively, compared to $1,756,000 and $6,132,000 for the
three and nine month periods ended April 30, 1999, respectively. Cost of sales
for the three and nine month periods ended April 30, 2000, were $-0- and
$502,000, respectively, compared to $1,343,000 and $4,024,000 for the three and
nine month periods ended April 30, 1999, respectively. The decrease in net sales
and cost of sales is attributable to three major factors: (1) the sale of our
audiometrics business assets in April 1999 resulted in a decrease in sales of
approximately $31,000 and $618,000 for the three and nine month periods,
respectively, as compared to the same period in the prior fiscal year; (2) our
shift in focus towards the INJEXTM System, and away from the intraoral dental
camera equipment market served by our wholly-owned subsidiary, Dynamic Dental
Systems (DDS), coupled with DDS' poor financial performance, and the inability
to secure a buyer for DDS, led to our decision to cease DDS' operations during
the three months ended January 31, 2000, resulting in net sales of DDS for the
three and nine months ended April 30, 2000 decreasing by $254,000 and
$1,078,000, respectively; and (3) our change from the consolidation basis to the
equity method of accounting for Rosch AG, resulted in a change in the method of
reporting the operations of Rosch AG in the Company's Consolidated Statements of
Operations. Under the consolidation basis, the Rosch AG Statement of Operations
is consolidated with the Statement of Operations of the Company. Under the
equity method of accounting, our Statement of Operations only reflects our share
of the net income or loss of Rosch AG as a separate component of our Statement
of Operations. As a result, the Statements of Operations for the three and nine
months ended April 30, 2000 do not include the net sales and cost of sales of
Rosch AG, whereas the Statements of Operations for the three and nine months
ended April 30, 1999 include Rosch AG net sales of $1,306,000 and $3,959,000,
respectively.
Selling, general and administrative expenses for the three and nine month
periods ended April 30, 2000 were $3,248,000 and $5,624,000, respectively,
compared to $1,765,000 and $5,616,000, respectively, for the comparable prior
year periods. The increase for the three months ended April 30, 2000 is due
primarily to the recognition of approximately $1 million for compensation
associated with common stock issued to two executives of the Company in
accordance with the terms of their respective employment agreements. Other
increases resulted from an increased number of employees at the Company's
wholly-owned subsidiary, Equidyne Systems, Inc. (ESI), recruiting fees
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associated with the hiring of 50 new ESI sales representatives, and increased
market research activity. This increase reflects the impact of the sale of our
audiometrics business assets in April 1999, and cost savings associated with
ceasing the operations of DDS. The change in accounting method described above
resulted in a reduction in the selling, general and administrative expense
reported in the consolidated Statement of Operations for the three and nine
month periods of $560,000 and $1,616,000, respectively. Also contributing to the
net change was a reduction for the three and nine month periods ended April 30,
2000 of approximately $295,000 and $964,000, respectively of amortization
expense due primarily to deferred compensation recognized in connection with the
acquisitions of DDS and ESI. These expenses became fully amortized during the
fiscal year ended July 31, 1999.
Research and development expenses for the three and nine months ended April
30, 2000 were $315,000 and $676,000, respectively, compared to $78,000 and
$283,000, respectively, for the comparable prior year periods. The increase
reflects the availability of working capital to the Company and management's
decision to allocate a greater portion of our resources towards the development
of high-volume, automated production tools and improved product features.
Net income for the three and nine month periods ended April 30, 2000 was
$7,987,000 and $7,280,000, respectively, compared to a net loss of $4,933,000
and $7,575,000, respectively, for the same periods in the prior fiscal year. The
change is primarily the result of the gains recognized on the partial sales of
our ownership in Rosch AG, which were $10,819,000 and $12,684,000 for the three
and nine months ended April 30, 2000, respectively. The sale of the audiometrics
business assets in April 1999 and ceasing the operations of DDS also caused
reductions to our net losses for the periods, as both operations incurred
significant losses during the three and nine months ended April 30, 1999. The
net income for the three and nine month periods ended April 30, 2000 were
further increased by the recognition of a net income tax benefit of $781,000
relating primarily to a reduction in our valuation allowance against a portion
of our deferred tax assets. The increase in net income for the three and nine
months ended April 30, 2000 was also offset by increased costs (described above)
incurred in connection with ESI and its preparation for full-scale U.S. market
introduction of the INJEXTM System.
COMPARISON OF FISCAL YEARS ENDED
JULY 31, 1999 AND JULY 31, 1998
RESULTS OF OPERATIONS
---------------------
Consolidated net sales were $6,789,000 for the fiscal year ended July 31,
1999 ("Fiscal 1999") compared to $7,025,000 during the fiscal year ended July
31, 1998 ("Fiscal 1998"). During Fiscal 1999, we experienced decreased sales of
our audiometrics products, until April 1999, when the assets associated with the
audiometric product line were sold. As a result, revenue from audiometrics
product sales decreased from $1.6 million in Fiscal 1998 to $600,000 in Fiscal
1999. This decrease was partially offset by the May 1998 acquisition of DDS,
which resulted in inclusion of a full year of sales for DDS (approximately $1.1
million) in Fiscal 1999, as compared to three months of sales for DDS
(approximately $600,000) in Fiscal 1998. In addition, the sales of Rosch GmbH
increased during Fiscal 1999 by approximately $200,000.
Net loss for Fiscal 1999 was $9,861,000, or $1.39 per share, compared to a
net loss of $3,674,000, or $1.01 per share, for Fiscal 1998. The Fiscal 1999 net
loss includes a non-cash charge of approximately $3.2 million representing a
write-off of the unamortized goodwill associated with DDS. As discussed in Note
3 to the consolidated financial statements, this write-off was based primarily
upon revised estimates as to the expected sale price which could be obtained by
selling the outstanding DDS common stock, as well as the expected future
financial results of DDS. These revised estimates were based upon our efforts to
sell DDS, as well as DDS' recent operating results. The overall increase in net
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loss in Fiscal 1999 is also attributable to increased selling, general and
administrative expenses (see below), and was partially offset by license fee
revenue of $576,000 recognized by ESI during Fiscal 1999. License fee revenue
represents fees paid for exclusive distribution rights to the INJEX(TM) System
in specific geographic areas.
Cost of sales, as a percentage of net sales, for Fiscal 1999 were 75.2%
versus 66.8% for Fiscal 1998. The increase in cost as a percentage of sales can
be attributed to the product mix, which included sales of DDS for twelve months
of Fiscal 1999 as compared to three months for fiscal 1998. As our sales mix
became more significantly related to dental camera products, and as costs of
sales for dental camera products is greater than for other product lines, as
expected, costs of sales as a percentage increased.
Selling, general & administrative expense (SG&A) and research and
development expense increased in Fiscal 1999 over Fiscal 1998. The $2,722,000
increase in SG&A expenses is due to the acquisitions of DDS and ESI which took
place in the fourth quarter of fiscal 1998, and thus only three months of
expenses for these subsidiaries were included in the consolidated financial
statements for Fiscal 1998, as compared to a full year for fiscal 1999.
Throughout fiscal 1999, we began to shift our focus towards ESI's INJEX(TM)
System, and by the fourth quarter, the INJEX(TM) System became our focus. As a
result, the expenses related to ESI increased significantly in all areas.
Headcount was increased, additional consulting services were purchased, and a
second operating facility was added as we began to build the infrastructure
necessary to achieve our goal of bringing the INJEX(TM) System to market.
Research and development expense also increased by approximately 220% as a
result of these efforts. These increases in SG&A were partially offset by
decreases resulting from the sale of the assets associated with the audiometrics
product line in April 1999. In anticipation of this sale, audiometrics headcount
reductions took place beginning January 1999, and the audiometrics operating
facility lease was terminated.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Our working capital (deficit) at April 30, 2000 was $7,727,000, compared to
$(1,262,000) at July 31, 1999. The increase of approximately $9 million
primarily resulted from the proceeds from the sales of a portion of our
ownership in Rosch AG of approximately $11.1 million, partially offset by the
net effect of our operating losses. In addition, the change in the accounting
treatment for our investment in Rosch AG from consolidation basis to equity
method had the impact of removing the working capital of Rosch AG from our
consolidated balance sheet. Rosch AG's working capital at July 31, 1999 was
approximately $400,000.
We significantly improved our working capital position, and currently have
sufficient working capital to sustain ourselves through at least the next twelve
months. Of the proceeds from the IPO described above, $700,000 was used to
pay-off our $700,000 note payable outstanding at January 31, 2000. The balance
of the proceeds are being used to fund the acquisition of the high-volume,
fully-automated production tools that are necessary to fill the anticipated
demand for the INJEXTM System. In addition, the funds are being used to build
the infrastructure necessary to support the business, including the hiring of a
full-time dedicated sales force, a customer support team, and various other
personnel requirements. The proceeds are also being used to implement strategic
marketing initiatives, continued research and development initiatives, and
general corporate purposes.
EURO CURRENCY CONVERSION
------------------------
We are aware of and have developed systems designed to handle the
introduction of the Euro as an effective currency in Europe. Although our
management believes the systems that have been implemented are sufficient for us
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to be able to process Euro denominated transactions, there can be no assurances
that such systems will actually function as designed. If they do not function as
designed, our financial results could be adversely affected. To date, we have
not encountered any significant processing issues related to the introduction of
the Euro. The introduction of the Euro has not materially affected the manner in
which we conduct our operations, nor has it required us to alter any of our
significant contracts. The introduction of the Euro has affected the value of
our holdings and investment in Rosch AG. Rosch AG's value is maintained on a
Euro basis on the Neuer Market, a segment of the Frankfurt Stock Exchange.
BUSINESS
We are engaged in developing, manufacturing and selling needle-free drug
delivery systems. In January 1999, we announced our intention to focus upon the
needle-free drug delivery system and to dispose of our other product lines.
Rosch AG, will continue to market and distribute intraoral dental cameras and
related products, but will focus primarily on the needle-free drug delivery
system in Europe. Through a series of transactions commencing in July, 1999, our
ownership of Rosch AG has declined from the 50.01% we owned in September 1999
and is currently 19.52%. Effective January 14, 2000, Rosch GmbH became Rosch AG,
a stock company.
At the Company's Annual Meeting of Stockholders on December 29, 1999, our
stockholders approved a change in our corporate name to Equidyne Corporation
from American Electromedics Corp. In January 1999, the Company announced its
intention to focus on the needle-free injection system developed by its
subsidiary, Equidyne Systems, Inc. In April, 1999, the Company sold certain
assets of its audiometric business, including all trademarks, patents and other
rights associated with the audiometric business and also the name "American
Electromedics." Pursuant to the sale of the audiometric sale agreement, the
Company agreed to change its name from American Electromedics Corp. Our
Management believes that the name change is in the best interests of the Company
and its shareholders because the new name reflects the Company's primary
subsidiary and principal line of business. Our Management also believes that, in
addition to the requirements of the audiometric sale agreement and
notwithstanding the goodwill associated with the Company's prior name, the
corporate name change will broaden the appeal of the Company among potential
customers, suppliers and the investment community. There can be no assurance
that the new corporate name will attract a broader range of customers, or that
the name change will not create confusion that will cause the Company to lose
market support.
RECENT DEVELOPMENTS
-------------------
On January 5, 1999, we announced a change of our business direction. We
decided to focus our business resources on the INJEX(TM) System of Equidyne
Systems, Inc. To affect this change in direction, we sold substantially all of
our assets connected with our audiometric equipment product line in April 1999.
Sale of Audiometric Business Assets. In April 1999, we completed a sale of
substantially all of our assets connected with our audiometrics business,
pursuant to an Assets Purchase Agreement for a total sale price of $625,000.
These assets consisted mainly of our domestic audiometric inventory, as well as
all patents, trademarks and other rights associated with the audiometrics
business, including the name "American Electromedics". As a result, we are no
longer in the business of selling audiometric medical devices.
Rosch AG Medizintechnik. Effective January 14, 2000, Rosch GmbH became
Rosch AG, a stock company. On July 8, 1999, a Germany-based investment-banking
firm contributed capital amounting to $1.5 million into Rosch AG, obtaining an
approximate 25% share of this subsidiary. This investment was followed by the
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sale of all of our European rights, patent applications and trademarks
associated with the INJEX(TM) System to Rosch AG for $750,000. As a result,
Rosch AG will conduct all development, manufacturing and marketing of the
INJEX(TM) System in the European market. Effective January 14, 2000, Rosch GmbH
became Rosch AG, a stock company.
The investment banking firm made a second investment in Rosch GmbH in
September 1999. This investment consisted of two parts. The first was an
additional capital contribution in the amount of $1.6 million. The second part
was a direct purchase of ownership in Rosch GmbH from us for an additional $1.6
million. This investment further reduced our ownership percentage to 50.01%.
In November 1999, we completed an additional sale of 5% of Rosch GmbH to
Jim Fukushima (see below). This sale resulted in our reducing our ownership
percentage to 45.01%.
On December 16, 1999, we announced that Synergy 1 Life Science, a medical
technology investment fund based in Heidelburg, Germany had made a capital
contribution to Rosch GmbH. Synergy invested 5 million Deutsche Marks ($2.6
million) directly into Rosch GmbH and, as a result, received a 5.55% ownership
interest. In addition, we sold an additional 1.11% of Rosch GmbH to Synergy for
1 million Deutsche Marks ($520,000) in December 1999.
On January 14, 2000, Rosch GmbH Medizintechnik became Rosch AG, a stock
company. On February 24, 2000, Rosch AG completed an Initial Public Offering
(IPO) of its shares on the Neuer Market, a segment of the Frankfurt (Germany)
Stock Exchange. Rosch AG sold 1,263,950 newly issued shares in the IPO, which,
along with the Company's sale of certain of its shares of Rosch AG in the IPO,
reduced the Company's ownership of Rosch AG from 41.43% to 26.43%. We received
proceeds of approximately $11 million from the sale of our shares of Rosch AG
common stock, and will recognize a pre-tax gain of approximately $10.8 million.
On August 29, 2000, we announced that we had sold 332,000 additional shares of
Rosch AG stock, reducing our ownership of Rosch AG stock to 19.52%. We received
proceeds in excess of $10 million from this sale.
Equidyne Holdings. On August 25, 2000, we formed Equidyne Holdings, as a
Massachusetts business trust for the purpose of acting as a holding company for
the shares we own of Rosch AG. We own 100% of the capital stock of Equidyne
Holdings, which was issued to us in exchange for our transfer of our Rosch AG
shares to Equidyne Holdings in a tax-free transaction.
On July 17, 2000, the marketing launch of the INJEX(TM) System began in the
United States. In anticipation of this event, we expanded our direct sales force
to more than 50 individuals, and are planning an increase in our sales force
throughout the next year. We retained a national search firm to assist us in
identifying and hiring new sales personnel.
On August 1, 2000, we announced that our Board of Directors approved a plan
that would allow the Company to purchase, over the next six months, up to
1,000,000 shares of its common stock on the open market from time to time at
management's discretion, based upon market conditions.
Redemptions of Preferred Stock. In November 1999, we executed an agreement
with the holders of the Series B Convertible Preferred Stock whereby all such
outstanding shares were redeemed, and all accrued and unpaid dividends,
penalties and redemption premiums were deemed paid in exchange for a total
payment of $1,170,000 plus 369,000 shares of our common stock.
Also, in November 1999, we entered into an agreement with the holder of the
Series A Convertible Preferred Stock under which we made a cash payment of
$840,000, issued 2,228,312 shares of our common stock and entered into an
interest-free secured promissory note for $1,050,000 due in full on April 30,
18
<PAGE>
1999, in exchange for all outstanding shares of Series A Convertible Preferred
Stock and all outstanding accrued dividends.
Private Placements of Common Stock. During the three months ended April 30,
2000, we closed a private placement of 62,500 shares of common stock with six
"accredited investors", as such term is defined in Regulation D under the
Securities Act, for a total of $250,000. In addition, we issued 2,051,405 shares
of common stock pursuant to the exercise of outstanding stock options and
warrants, and issued 150,000 shares of common stock to two executives pursuant
to the terms of their respective employment agreements.
On November 15, 1999, we entered into an agreement with Jim Fukushima, who
is one of our directors, in which Mr. Fukushima received 800,000 shares of our
common stock, a three-year warrant to purchase up to 300,000 additional shares
of common stock at an exercise price of $2.00 per share, and a 5% ownership
interest in Rosch GmbH, in exchange for a payment of $2,000,000. In addition, on
November 17, 1999, we sold 1,333,333 shares of our common stock to Concord for a
total price of $1,000,000.
During the three month period ended October 31, 1999, we closed one private
placement for 133,334 shares of our common stock for $100,000, and issued 60,000
shares of our common stock, plus a five-year warrant to purchase up to 20,000
shares of our common stock at an exercise price of $1.25 per share, as
consideration for $75,000 of prior services. These transactions were with
"accredited investors", as such term is defined in Regulation D under the
Securities Act.
NEEDLE-FREE INJECTION SYSTEMS
-----------------------------
In May 1998, we acquired Equidyne Systems, Inc., a California corporation
(ESI), based in San Diego, California. Through ESI, we are in the business of
developing, manufacturing and marketing its INJEX(TM) needle-free injector
system, a hand-held, spring-powered device that injects drugs from a needle-free
syringe through the skin as a narrow, high-pressure stream of liquid. The name
INJEX(TM) is a registered trademark of ESI. The INJEX(TM) System eliminates the
need to pierce skin with a sharp needle thus eliminating the risk of potentially
contaminated needle stick incidents and the resulting blood-borne pathogen
transmission. The INJEX(TM) System is significantly smaller, easier to use, less
expensive and more comfortable than previous needle-free injection systems
marketed by ESI's competitors. We believe that the key to widespread market
acceptance of the INJEX(TM) System will depend on our ability to compete on the
basis of the foregoing criteria.
The INJEX(TM) System consists of three components: (i) a pen-sized reusable
jet injector, (ii) a reset box which also acts as a carrying case and (iii) a
plastic, sterile, disposable ampule which contains the medication fluid. We also
produce a full-range of accessories, which allow the INJEX(TM) System to be used
with all standard medication containers.
Currently, we have adequate manufacturing capacity in place for the
injector pens and reset boxes, and intend to expand our manufacturing capacity
as necessary in order to meet current and expected future demand. We do not
possess the internal manufacturing capacity for the ampules required for
utilization of the INJEX(TM) System, instead we subcontract the production of
ampules to specialized contract manufacturers. Our subcontractors currently have
in place limited production capabilities for the ampules, and are currently
expanding production capacity. Our ability to increase capacity is dependent
upon our ability to raise the necessary working capital.
19
<PAGE>
The INJEX(TM) System is currently designed to deliver variable doses of
fluid medication from .02 ml to .5 ml. The ampules can be pre-filled by the
medication manufacturer for resale through pharmacies or delivered sterilized
and empty to be filled by patients or care providers.
ESI's core technology can be used for many different drug delivery regimens
and allows for needle-free injection into the subcutaneous tissue. There are
many uses for this product including in the physician's office, hospitals and
clinic environments, for self-administered injections by people with diabetes,
allergies or human growth disorders and vaccine inoculations such as for polio,
tetanus, rabies, flu, etc. The INJEX(TM) System also has applications in the
dental and veterinary markets.
In recent years, increased awareness of the dangers of blood-borne pathogen
transmission has led to increased concern about needle safety in hospitals, and
for healthcare professionals and their patients. As a result, there is now
significant pressure on the healthcare industry to eliminate the risk of
contaminated needlestick injuries. The U.S. Occupational Safety and Health
Administration has issued various regulations to improve safety, and in 1998,
the State of California has enacted healthcare worker safety legislation which
requires healthcare providers to evaluate the various uses of needle-syringes in
their facilities and to begin using alternative injection systems to protect
healthcare worker safety where appropriate. Under the law, healthcare providers
can be held liable if a worker becomes infected from a needlestick injury and
suitable alternatives to needle-syringes were available but not used.
ESI holds two U.S. patents for features of the INJEX(TM) System and has
received FDA 510(k) clearance to market the system in the United States. ESI
began marketing the system in the U.S. on July 17, 2000. ESI will initially
market the system through its 50 person direct sales force. ESI is also
discussing licensing and joint development agreements with pharmaceutical
companies in the U.S. to market the system. On June 22, 2000, we announced that
we were seeking FDA approval to market the INJEX(TM) System for "over the
counter" use. ESI also has plans to market its products overseas. Currently, it
has distribution arrangements for Asia and Mexico.
Rosch AG will conduct all aspects of developing, manufacturing and
marketing the INJEX(TM) System in European markets. Rosch AG received CE-mark
approval in September 1999, allowing it to sell the INJEX(TM) System directly
over-the-counter, and sales of the system commenced in January 2000.
INTRAORAL DENTAL CAMERAS AND
----------------------------
RELATED PRODUCTS
----------------
Our partially-owned investment in Germany, Rosch AG, markets and
distributes intraoral dental camera systems and related dental products in
Europe. We used to sell these products in the U.S. through our wholly-owned
subsidiary, Dynamic Dental Systems (DDS). As noted above, in January 1999, we
announced our intention to divest our ownership of DDS, in order to focus on the
continued development and marketing of the INJEX(TM) System and DDS has ceased
its business operation. Rosch AG continues to sell dental products in Europe.
DIAGNOSTIC AUDIOMETRIC MEDICAL DEVICES
--------------------------------------
Historically, our business was based primarily on the development,
manufacture and sale of four different models of Tympanometers(R). However,
based upon the change in our strategic direction announced in January 1999, we
have sold the assets associated with our audiometrics business in April 1999,
and we are no longer involved in the manufacture and sale of audiometrics
products.
20
<PAGE>
ROSCH AG MEDIZINTECHNIK
-----------------------
Our partially-owned investment in Germany, Rosch AG Medizintechnik (Rosch
AG) (formerly Rosch GmbH Medizintechnik) is located in Berlin, Germany. Rosch AG
is involved in the marketing and distribution of healthcare products. Rosch AG
is concentrating its efforts on the introduction of the INJEX(TM) System into
European markets.
On December 16, 1999, we announced that Synergy 1 Life Science, a medical
technology investment fund based in Heidelburg, Germany had made a capital
contribution to Rosch AG. Synergy invested 5 million Deutsche Marks ($2.6
million) directly into Rosch AG and , as a result, received a 5.55% ownership
interest. In addition, we sold an additional 1.11% of Rosch AG to Synergy for 1
million Deutsche Marks ($520,000) in December 1999.
Effective January 14, 2000, Rosch GmbH Medizintechnik became Rosch AG, a
stock company. On February 24, 2000, Rosch AG completed an IPO of its shares on
the Neuer Market, a segment of the Frankfurt (Germany) Stock Exchange. Rosch AG
sold 1,263,950 newly issued shares in the IPO, which, along with the Company's
sale of a portion of its shares of Rosch AG in the IPO, reduced our ownership of
Rosch AG from 41.43% prior to the IPO to 26.43%. The Company received proceeds
of approximately $11 million from the sale of our shares, and we will recognize
a pre-tax gain of approximately $10.8 million as a result of the sale of our
shares in Rosch AG's IPO. On August 29, 2000, we announced that we had sold
332,000 additional shares of Rosch AG stock, reducing our ownership of Rosch AG
stock to 19.52%. We received proceeds in excess of $10 million from this sale.
We are currently evaluating our investment in Rosch AG and may dispose a portion
or all of our remaining investment in Rosch AG in the future.
PRODUCT DEVELOPMENT
-------------------
We are committed to fund the continued development, manufacturing
capabilities and marketing necessary to market the INJEX(TM) System and
development of our new single use, disposable, needle-free injector. ESI filed
for patent protection of the new injector on April 7, 2000. We are committed to
increasing manufacturing capacity based on demand and our working capital.
GOVERNMENT REGULATION
---------------------
Government regulation in the United States and certain foreign countries is
a significant factor in our business. In the United States, our products and our
manufacturing practices are subject to regulation by the FDA pursuant to the
Federal Food, Drug and Cosmetic Act, and by other state regulatory agencies.
Under the Act, medical devices, including those we are developing, such as our
needle-free injection system, must receive FDA clearance before they may be
sold, or be exempted from the need to obtain such clearance. We have already
received 510(k) clearance for the INJEX(TM) System. On June 22, 2000, we
announced that we were seeking FDA approval to market the INJEX(TM) System for
"over the counter" use. The FDA regulatory process may delay the marketing of
new systems or devices or substantial changes to the INJEX(TM) System 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 us. There
can be no assurance that we will be able to obtain clearance of any of our
future products or any expanded uses of current or future products in a timely
manner or at all. Once obtained, FDA clearances are subject to continual review,
and if the FDA believes that we are not in compliance with applicable
requirements, it can institute proceedings to detain or seize our products,
require a recall, suspend production, distribution, marketing and sales, enjoin
future violations and assess civil and criminal penalties against us and our
directors, officers or employees. The FDA may also suspend or withdraw market
21
<PAGE>
approval for our products or require us to repair, replace or refund the cost of
any product that we manufacture or distribute.
FDA regulations also require us to adhere to certain "Good Manufacturing
Practices" regulations, which include validation testing, quality control and
documentation procedures. Our compliance with applicable regulatory requirements
is subject to periodic inspections by the FDA. We will need to attain 510(k)
clearance for any new medical products which we develop in the future.
Compliance with these requirements requires that we expend our time, resources
and effort in the areas of production and quality control for itself and for our
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
our ability to be in regulatory compliance more difficult in the future.
Although we believe that our 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 our business, results of operations or
profitability.
Sales of medical devices outside the United States that are manufactured
within the United States are subject to United States export requirements, and
all medical devices sold abroad are subject to applicable foreign regulatory
requirements. Legal restrictions on the sale of imported medical devices vary
from country to country. The time and requirements to obtain approval by a
foreign country may differ substantially from those required for FDA clearance.
There can be no assurance that we will be able to obtain regulatory approvals or
clearances for our products in foreign countries.
We have obtained ISO 9001/EN 46001 certification of our quality systems.
This certification shows that our procedures and manufacturing facilities comply
with standards for quality assurance and manufacturing process control. This
certification, along with European Medical Device Directive certification,
evidence compliance with the requirements that allow us to affix the CE Mark to
our products. The CE Mark denotes conformity with European standards for safety
and allows certified devices to be placed on the market in all European Union
countries.
PATENTS AND TRADEMARKS
----------------------
We hold two United States patents and we have applied for nine foreign
patents for our INJEX(TM) needle-free drug injection system. On April 12, 2000,
we annouced that we had filed a patent application with the U.S. Patent and
Trademark Office for a new single-use, disposable, needle-free injector. We also
possess certain registered trademarks and copyrights for names we believe are
important to our business.
PROPERTIES
----------
Effective February 15, 2000, our wholly owned subsidiary Equidyne Systems,
Inc. relocated its principal offices within San Diego, California, terminating
its month-to-month lease, and entering into a new 36-month lease. The new lease
provides for monthly rent beginning at $6,282 and increasing annually to $8,077
and $8,301 per month in years two and three, respectively.
In December 1999, the Company entered into a lease amendment for its Aliso
Viejo, California facility, adding new space within the same office complex. The
amended lease has a 39 month term, expiring February 2003, and provides for
monthly rent of $6,528 through February 2001. Monthly rent for the subsequent
two twelve-month periods is fixed at $6,854 and $7,197, respectively.
22
<PAGE>
In January 2000, the Company relocated from its Amherst, New Hampshire
offices to Westford, Massachusetts, entering into a three year lease at the rate
of $2,606 per month.
We believe that these facilities are adequate for our current business
needs.
MARKETING
---------
We plan to market and distribute the INJEX(TM) System for home care
applications such as for people with diabetes, allergies, human growth
disorders, arthritis, osteoporosis or other diseases involving in home self
injections. It also plans to have licensing and joint development agreements
with drug companies and manufacturers of injectable pharmaceuticals in the
United States and worldwide. We expect that product sales will be directed to
pharmaceutical companies, pediatric clinics, infectious disease wards, and
outpatient clinics where the threat of an accidental needle stick and patient
trauma is highest. Our marketing plan includes making the INJEX(TM) System
products available through selected retail pharmacy outlets, based on
nation-wide and regional agreements. In addition, we will market the INJEX(TM)
Systems to various clinical markets through the formation of strategic alliances
with key specialty medical device dealers throughout the U.S. Our sales force
will initially call on the diabetes market and other markets where medications
are self-injected by the consumer. Our marketing plans may change significantly
depending on our discussions with drug companies and manufacturers and our
success in securing licensing and/or joint development agreements with such
entities. We participate in exhibitions at major medical, educational and public
health conventions.
The marketing launch of the INJEX(TM) System began on July 17, 2000 in the
United States. In anticipation of this event, we expanded our direct sales force
to more than 50 individuals, and are planning an increase in our sales force
throughout the next year. We retained a national search firm to assist us in
identifying and hiring new sales personnel.
In September 1998, we entered into an agreement to supply HNS
International, Inc., a California corporation, with the INJEX(TM) System for
exclusive distribution within Asia and Australia, subject to the distributor
selling specified quantities within the territory.
In August 1998, we 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.
MATERIALS
---------
We have begun manufacturing the INJEX(TM) System for commercial
distribution. The INJEX(TM) System's reusable injector pen and reset box are
made of a combination of molded plastic and medical-grade stainless steel
products. The disposable plastic components of the INJEX(TM) System include the
ampule which contains the drug, and the accessories used with medication
containers. We have entered into a $3.2 million dollar memorandum of
understanding with a view towards a final agreement with Nypro Inc., a leading
worldwide manufacturer in precision injection molding for the healthcare
industry to build and operate automated, low-cost production systems to supply
the component parts of the INJEX(TM) System product necessary to meet market
demand.
23
<PAGE>
PRODUCT WARRANTY
----------------
We plan to offer a one-year warranty on the injector component of our
INJEX(TM) System. Rosch AG does not provide any additional warranties for the
products it distributes.
EMPLOYEES
---------
At July 31, 2000, we had 76 employees, 12 of whom were management or
administrative personnel, 55 were engaged in sales activities, and 9 were
engaged in manufacturing and service related activities. In addition, when
necessary, we use independent engineering consultants for design support and new
product development.
None of our employees are covered by collective bargaining agreements. We
consider our employee relations to be satisfactory.
COMPETITION
-----------
The distribution of medical and dental devices is intensely competitive. We
compete with numerous other companies, including several major manufacturers and
distributors. Most of our competitors have greater financial and other resources
than we do. Consequently, such entities may begin to develop, manufacture,
market and distribute systems which are substantially similar or superior to our
products. Further, other companies may enter this marketplace. No assurance can
be given that we will be able to compete against these other companies which may
have substantially greater marketing and financial resources.
Our 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 we have
and have substantially greater technical, marketing, financial, sales, and
customer service resources. Becton, Dickinson and Company (BDC) has as much as
85% of the domestic needle syringe market.
Medi-Ject Corporation, 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 Corporation has
entered into various licensing and development agreements with multi-national
pharmaceutical and medical device companies covering the design and manufacture
of customized injection systems for specific drug therapies.
Another principal manufacturer of needle-free injection systems is Bioject
Medical Technologies, Inc., formed in 1985. Bioject Medical Technologies, 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.
Bioject Medical Technologies, Inc also has acquired Vitajet Corporation, which
has introduced a coil spring injector system that incorporates a disposable
needle-free syringe.
Several other companies have needle-free medication delivery systems in
various stages of development, which may ultimately compete with the INJEX(TM)
System.
Safety syringes are presently made by a small number of new firms, none of
which has a significant share of the total syringe market. BDC also manufactures
these devices, but the high cost of safety syringes and the continued problem of
controlled disposal has weakened the demand for them.
24
<PAGE>
We expect to compete with the smaller safety syringe manufacturers and jet
injector firms, based on factors such as health care worker safety, ease of use,
costs of controlled disposal and patient comfort. We expect that when all costs
are considered, the INJEX(TM) System will compete successfully.
LEGAL PROCEEDINGS
On December 10, 1998, Charles S. Aviles, Jr. and Barry Hochstadt, former
stockholders, officers and employees of DDS, filed an action in Superior Court
of California, County of Orange, against Henry Rhodes, the President and a
former shareholder of DDS, DDS and the law firm that had represented DDS and its
stockholders during its acquisition by the Company, seeking damages in excess of
$1,000,000 and an indeterminate amount of punitive damages and costs arising
from the plaintiffs' prior relationships with DDS. On January 13, 1999, the
action was removed to the United States District Court for the Central District
of California. Following the removal of the action, defendants Henry Rhodes and
DDS sought to change the venue of the action to the United States District Court
for the Southern District of Georgia, and the defendant law firm filed a motion
to dismiss for lack of personal jurisdiction. On July 29, 1999, while these
motions were pending, the plaintiffs served the Company with a copy of the
complaint. On June 15, 1999, the court denied the defendants' motion to change
the venue. In their amended complaint, the plaintiffs are seeking general,
special and punitive damages against Mr. Rhodes, DDS and the Company for breach
of duty of care, breach of fiduciary duty, self dealing, fraud and deceit,
negligent misrepresentation, breach of employment agreement and wrongful
termination. On September 21, 1999, Mr. Rhodes, DDS and the Company answered the
amended complaint by denying all allegations set forth in the amended complaint
and setting forth several affirmative defenses. On November 1, 1999, the court
granted the law firm's motion to dismiss that firm as a defendant in this
action. However, this action is continuing against the remaining defendants. The
Plaintiffs subsequently filed a Second Amended Complaint against the remaining
defendants. The parties have completed the depositions in this case and the
final written discovery is pending. We expect to file a motion for summary
judgment within the next few weeks. Based upon our present knowledge, we believe
that the Company and DDS have meritorious defenses to the allegations against
them.
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER SIGNIFICANT EMPLOYEES
-------------------------------------------------------------
The following table sets forth certain information concerning our
directors, executive officers and other significant employees as of July 31,
2000.
Name Age Position Year Became
---- --- -------- Director
----------
Joseph R. Nelson 47 Director, Chairman of the Board of 1999
Directors, President and Chief
Executive Officer
Jim Fukushima 55 Vice Chairman and Director 1999
Michael T. Pieniazek 42 Director, Executive Vice President, 1999
Chief Financial Officer and Treasurer
Blake C. Davenport 33 Director 1997
Marcus R. Rowan 39 Director 1996
Dr. James R. Gavin 55 Director 2000
Thomas A. Slamecka 59 Director 1996
25
<PAGE>
The terms of the Board of Directors will expire at the next annual meeting
of stockholders. Our officers are elected by the Board of Directors and hold
office at the will of the Board.
Joseph R. Nelson became our Chairman of the Board in August 2000, and has
served as our President and Chief Executive Officer since December 1999. Mr.
Nelson was President and Chief Executive Officer of LXN Corp., a developer and
manufacturer of diabetes testing systems located in San Diego, California, from
February 1998 through December 1999. From January 1994 through January 1998, Mr.
Nelson was Director of Marketing for Eli Lilly & Co.'s U.S. Diabetes Care
Business Unit.
Michael T. Pieniazek has served as our Executive Vice President since
December 1999 and has served as our Chief Financial Officer and Treasurer since
July 1995. Mr. Pieniazek had served as our President from April 1997 through
December 1999 and Secretary from January 1996 to December 1999. 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 Price Waterhouse Coopers LLP.
Jim Fukushima became our Vice Chairman in October 1999. Since 1995, he has
been President of HNS International, Inc. which is engaged in the distribution
of medical and automotive products.
Blake C. Davenport has been the President and owner of Davenport Interests,
Inc., a private investment company for more than the past five years.
Marcus R. Rowan has been President of Berkshire Interests, Inc., Dallas,
Texas, which specializes in commercial real estate and investments, for more
than the past five years.
Dr. James R. Gavin joined our Board of Directors on March 17, 2000. Dr.
Gavin has been a Senior Scientific Officer of the Howard Hughes Medical
Institute located in Chevy Chase, Maryland, since 1991. Dr. Gavin is a member of
the National Board of Directors of the American Diabetics Association and has
served as a past president of this organization.
Thomas A. Slamecka is a consultant to Mr. Nelson since August 2000 and has
served as a director since October 1996. Mr. Slamecka had served as our Chairman
of the Board from February 1997 to July 2000. 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.
There is no family relationship among our directors or executive officers.
DIRECTOR COMPENSATION
---------------------
In August 1999, we granted each non-employee director an option for 50,000
shares of common stock exercisable at $1.25 per share vesting after six months
and terminating no later than five years from grant. Non-employee Directors are
reimbursed for travel expenses but are not otherwise compensated.
In March 2000, our three non-employee directors were granted options to
purchase a total of 145,000 shares of common stock, exercisable at $7.00 per
share vesting after six months and terminating five years from the date of
grant. In addition, two or our non-employee directors received a total of
$300,000 as compensation for services rendered.
26
<PAGE>
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 AND EMPLOYMENT AGREEMENTS
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning all cash and
non-cash compensation awarded to, earned by or paid to our Company's Chief
Executive Officer and all other executive officers who had total compensation in
excess of $100,000 during the fiscal years ended July 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
--------------------------- ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Thomas A. Slamecka 1999 $100,000 -- -- 237,985
Director (1) 1998 100,000 -- -- 618,550
1997 133,374 -- -- --
Michael T. Pieniazek 1999 125,000 -- -- 166,334
President, Chief Financial 1998 125,000 -- -- 402,750
Officer, Secretary, Treasurer 1997 113,000 -- -- --
and Director (2)
Andy Rosch (3) 1999 110,565 $49,904 -- --
1998 73,053 34,342 -- --
</TABLE>
------------------------
(1) Mr. Slamecka is a consultant to Mr. Nelson since June 2000. Prior to that
time, Mr. Slamecka served as our Chairman of the Board since February 1997.
(2) Mr. Pieniazek became President in April 1997 and currently serves as
Executive Vice President and Chief Financial Officer and Treasurer.
(3) Mr. Rosch was a Director from December 1997 through March 2000 and serves
as Chief Executive Officer of Rosch AG Medizintechnik.
EMPLOYMENT AGREEMENTS
In December 1999, we entered into an employment agreement with Joseph R.
Nelson to serve as President and Chief Executive Officer for an initial term
terminating in December 2002, subject to annual renewals. Mr. Nelson receives
27
<PAGE>
annual base salary of $250,000, plus an annual profits bonus equal to 5% of the
amount that consolidated net after-tax operating profits exceeds $1 million,
provided for such year the Company's earns a 12% return on its common stock
equity, and may also receive a supplemental bonus. In addition, the Company
agreed to make available interest-free loans to Mr. Nelson of up to $150,000, to
be forgiven over a three-year period, provided Mr. Nelson remains an employee of
the Company. The employment agreement also provided for the grant of options to
purchase up to 600,000 shares of common stock at an exercise price of $1.125 per
share, which was the fair market value on the date of the grant. Such options
vested immediately, subject to continuation of employment for a minimum of six
months.
Mr. Nelson's employment agreement further provides for a lump sum
termination payment of the greater of (A) the amount of his then current annual
base salary or (B) the continuation of his base salary for the balance of the
current term of his employment agreement, plus continuation of health benefits
for 12 months. Should the termination result from a change in control of the
Company, as defined, the termination payment would be two times Mr. Nelson's
then current base salary, plus continuation of health benefits for 12 months.
As of August 31, 1999, we amended Mr. Slamecka's prior employment agreement
so that no further salary or loans would be provided to him. Under this
amendment, Mr. Slamecka was granted an option to purchase 250,000 shares of
common stock at an exercise price of $1.25 per share, exerciseable six months
after grant and terminating after five years. As of January 1, 2000, we entered
into an amended and restated employment agreement with Mr. Slamecka to serve as
Chairman of the Board for an initial term under the amended and restated
employment agreement terminating on December 31, 2003, subject to annual
renewals, and his prior employment agreement was terminated. Mr. Slamecka
received an annual base salary of $75,000, plus a profits bonus equal to 5% of
the amount that consolidated pre-tax profits in excess of $500,000 for the first
two years under the amended and restated employment agreement commencing with
the fiscal year ending July 31, 2000. This profits bonus is not to exceed
$275,000 in the first fiscal year and $785,000 in the second fiscal year. On
February 17, 2000, we awarded 100,000 shares of common stock to Mr. Slamecka
pursuant to the terms of his amended and restated employment agreement which
provided that Mr. Slamecka was entitled to these bonus shares after the price of
our common stock exceeded $6.20 per share. Effective August 1, 2000, we
announced that Mr. Nelson would replace Mr. Slamecka as Chairman of the Board.
Mr. Slamecka has agreed to remain a director of the Company and to serve as a
consultant to Mr. Nelson.
On June 15, 2000, we entered into a termination agreement with Mr.
Slamecka, under which Mr. Slamecka's employment with the Company terminated as
of the date of the agreement. As noted above, Mr. Slamecka agreed to remain as
the chairman of the board through July 31, 2000 and as a director of the Company
through December 31, 2000. Mr. Slamecka also agreed to serve as a consultant to
the Company without any compensation, other than the reimbursement of his
direct, out-of-pocket expenses. As of the effective date of the agreement, Mr.
Slamecka was to be paid $46,100 in cash, representing pre-payment of $17,500 for
his current annual salary of $75,000 through July 31, 2000, and $28,800 for his
annual expenses. Mr. Slamecka was also to be paid $225,000 in cash, representing
a lump sum payment in lieu of salary and expenses otherwise payable to him under
his prior employment agreement and $220,000 in cash, representing partial
payment of the profits bonus for the fiscal year 2000. Mr. Slamecka also remains
entitled to any additional amount of the profits bonus for the fiscal year 2000,
provided that this bonus will not exceed $275,000. Mr. Slamecka is also entitled
to a profits bonus for fiscal year 2001, provided, however, that this bonus not
exceed $500,000. In addition, if the Company disposes of additional shares of
Rosch AG and receives net proceeds in excess of $5,000,000, the Company shall
pay Mr. Slamecka $250,000 in cash, representing partial payment of the profits
bonus for fiscal year 2001. Upon a change of control of the Company, then the
maximum amount of the profits bonus for fiscal years 2000 and 2001, shall be
paid by the Company to Mr. Slamecka. The termination agreement also provides
28
<PAGE>
that the Company maintain health insurance for Mr. Slamecka and his spouse
through December 31, 2003.
As of January 1, 2000, we entered into an amended and restated employment
agreement with Mr. Pieniazek to serve as Executive Vice President and Chief
Financial Officer for an initial term under the amended and restated employment
agreement terminating on December 31, 2003, subject to annual renewals, and his
prior employment agreement was terminated. Mr. Pieniazek received an annual base
salary of $150,000, plus a profits bonus equal to 5% of the amount that
consolidated pre-tax profits in excess of $500,000 for the first two years under
the amended and restated employment agreement commencing with the fiscal year
ended July 31, 2000. This profits bonus is not to exceed $275,000 in the first
fiscal year and $785,000 in the second fiscal year. On February 17, 2000, we
awarded 50,000 shares of common stock to Mr. Pieniazek pursuant to the terms of
his amended and restated employment agreement which provided that Mr. Pieniazek
was entitled to these bonus shares after the price of our common stock exceeded
$6.20 per share.
On June 15, 2000, we entered into a termination agreement with Mr.
Pieniazek, which provides that Mr. Pieniazek's employment at the Company will
terminate on a date chosen by Mr. Pieniazek, but the date was not to be later
than October 31, 2000. Mr. Pieniazek will continue to receive his annual base
salary of $165,000 determined under his prior employment agreement until the
date that his employment with the Company is terminated. In addition, if Mr.
Pieniazek's employment is terminated after July 31, 2000, he shall not be
entitled to receive a pro rata portion of the profits bonus for Fiscal Year
2001. Upon execution of the termination agreement, Mr. Pieniazek was paid
$200,000 in cash, in lieu of any Profits Bonus that may have become payable for
any and all fiscal years pursuant to Mr. Pieniazek's prior employment agreements
with the Company. On the date that Mr. Pieniazek's employment terminates with
the Company, the termination agreement provides that he is entitled to an amount
of $400,000 in cash, if the date of employment termination is prior to September
1, 2000, however, the Company may, in its sole discretion, pay Mr. Pieniazek
$475,000 in cash, if a new Chief Financial Officer has been chosen to replace
Mr. Pieniazek and, in the Company's business judgement, a new successful
transition has been made to the new Chief Financial Officer, or $475,000 in
cash, if the date of Mr. Pieniazek's employment termination is after September
1, 2000. The termination agreement also provides that the Company will maintain
health insurance and dental insurance for Mr. Pieniazek for one year from the
date of the termination agreement, except that such coverage will terminate if
Mr. Pieniazek becomes eligible to be covered by a similar plan through another
employment agreement or consulting arrangement during this period.
On September 1, 2000, we entered into an addendum to Mr. Pieniazek's
termination agreement, which provides that Mr. Pieniazek's employment at the
Company will terminate on a date chosen by Mr. Pieniazek, but the date is not to
be later than February 28, 2001. In addition, the addendum provides that Mr.
Pieniazek is entitled to a profits bonus for fiscal year 2001, provided,
however, that this bonus not exceed $500,000. Since Mr. Pieniazek's employment
at the Company will in all events terminate prior to the end of Fiscal Year
2001, the amount of Mr. Pieniazek's profits bonus for Fiscal Year 2001, after he
is paid the partial payment discussed herein, will equal the amount of the
profits bonus that Mr. Pieniazek would have been entitled to receive for the
Fiscal Year 2001, multiplied by a fraction, the numerator of which will be the
number of days during the Fiscal Year 2001 that Mr. Pieniazek was employed by
the Company and the denominator of which shall be three hundred sixty-five
(365). In addition, if the Company disposes of additional shares of Rosch AG and
receives net proceeds in excess of $5,000,000, the Company shall pay Mr.
Pieniazek $250,000 in cash, representing partial payment of the profits bonus
for fiscal year 2001. Upon a change of control of the Company, then the maximum
amount of the profits bonus for fiscal year 2001 shall be paid by the Company to
Mr. Pieniazek.
29
<PAGE>
OPTION GRANTS
The following table sets forth certain information regarding grants of
stock options made during the fiscal year ended July 31, 1999 to the named
executive officers.
<TABLE>
<CAPTION>
OPTIONS GRANTED IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
INDIVIDUAL GRANTS STOCK APPRECIATION FOR
OPTION TERM (2)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR (1) ($/SHARE) DATE 5% ($) 10% ($)
---- ------- --------------- ------------ ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. Dec. 2003/
Slamecka 237,986 42.9% $0.94-2.25 Apr. 2004 $103,424 $228,334
Michael T. Dec. 2003/
Pieniazek 166,334 30.0% $0.94-2.25 Apr. 2004 72,286 159,588
</TABLE>
------------------------
(1) Based on an aggregate of 554,320 options granted by the Company to
employees in the fiscal year ended July 31, 1999.
(2) Amounts represent hypothetical gains that could achieved for the respective
options if exercised at the end of the option term. These gains are based
on assumed rates of stock appreciation of 5% and 10% compounded annually
from the date the respective options were granted to their expiration date
and are not intended to forecast possible future appreciation, if any, in
the price of the common stock. The gains show are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise of the options or the sale of the underlying
shares.
STOCK OPTION PLAN
In December 1999, our stockholders approved an amendment to the 1996 Stock
Option Plan (the "Stock Option Plan") that increased the number of shares
reserved for issuance from 300,000 shares to 700,000 shares pursuant to the
exercise of options granted under the Stock Option Plan. The Stock Option Plan
is administered by the Board of Directors or an Option Committee. Options
granted under the Stock Option Plan are 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
and its subsidiaries. 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. As of October 31, 1999, stock
options to purchase 260,500 shares of Common Stock shares were granted, of which
options for 95,500 shares were exercised and options for 165,000 remaining
outstanding. Of the 165,000 outstanding options, 125,000 have an exercise price
of $1.00 per share and expire from January through February 2003. The remaining
40,000 outstanding options have an exercise price of $4.38 per share and expire
30
<PAGE>
in October 2001. Pursuant to employment agreements with Messrs. Slamecka and
Pieniazek, the Company has granted stock options to such persons. See
"Employment Agreements" herein.
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES
The following table provides information on the value of unexercised stock
options owned by the executive officers named in the Summary Compensation Table
as of July 31, 1999. No options were exercised in the fiscal year ended July 31,
1999.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT JULY 31, 1999 IN-THE-MONEY OPTIONS AT
JULY 31, 1999(1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Thomas A. Slamecka 766,535 -- $68,938 --
Michael T. Pieniazek 519,084 -- $46,634 --
------------------------
(1) Fair market value of the common stock on the last trading date of the
fiscal year ended July 31, 1999, less the applicable exercise prices,
multiplied by the number of shares underlying the options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of July 31, 1999, the Company had loaned Thomas A. Slamecka, at the time
the Chairman of the Board, an aggregate of $258,334 pursuant to his employment
agreement. The initial 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. Effective July 31, 1999, Mr. Slamecka's employment
agreement was amended and the provisions thereof providing for future
availability of loans to Mr. Slamecka were eliminated.
During the fiscal year ended July 31, 1999, the Company entered into a
distribution agreement with HNS International, Inc. ("HNS") providing HNS with
exclusive distribution rights for the Injex(TM) System throughout Japan and
Asia. In April 1999, HNS purchased 500,000 shares of the Company's common stock
and was issued warrants to purchase up to 500,000 shares of common stock at an
exercise price of $2.50 per share, expiring in April 2002. In September 1999,
Jim Fukushima, the President and a principal stockholder of HNS, was elected to
the Company's Board of Directors, and he became Vice Chairman in October 1999.
Effective November 15, 1999, the Company sold to Mr. Fukushima 800,000
shares of common stock at a price of $.50 per share and warrants to purchase up
to 300,000 shares of common stock at an exercise price of $2.00 per share
exercisable for three years, and also a 5% interest in Rosch AG, through a
31
<PAGE>
sub-participation contract with Mr. Rosch, the General Manager of such
subsidiary, for an aggregate of $2,000,000.
As of July 31, 1999, Rosch AG had a loan of approximately $91,000 payable
to Andy Rosch. Mr. Rosch served as a Director of the Company from December 1997
until March 17, 2000 and General Manager of Rosch AG. Such loan bears interest
at 12% per annum and, for the fiscal year ended July 31, 1999, the Company
recognized interest expense of approximately $15,000 thereon.
In September 1998, the Company entered into a $505,000 line of credit
agreement (the "Loan Agreement") with Guardian Financial Services, Inc., a
company owned by Mr. Slamecka. The borrowings under the Loan Agreement (the
"Loan") were due on demand, bearing interest at a rate of 10% per annum. The
Loan was secured by substantially all of the Company's tangible and intangible
assets. The Loan Agreement's original expiration date was February 28, 1999,
which date was extended to July 31, 1999 for an additional fee of $55,000, or
13% of the outstanding principal balance at February 28, 1999. In addition to
such extension fee, interest expense totaling approximately $22,000 was
recognized during the fiscal year ended July 31, 1999. All borrowings under the
Loan Agreement were paid in full on July 28, 1999, at which time the Loan
Agreement was terminated.
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of July 31, 2000 concerning
(i) persons known to us to be the beneficial owners of more than 5% of the
Company's common stock, (ii) the ownership interest of each of our directors and
executive officers 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 July 31, 2000.
BENEFICIAL OWNERSHIP (*)
NAME STATUS SHARES PERCENTAGE
---- ------ ------ ----------
Jim Fukushima Director and Vice Chairman 2,205,300 (1) 12.51%
Concord Effekten AG(2) Stockholder 1,423,333 8.82%
Thomas A. Slamecka Director and adviser 1,118,258 (3) 6.61%
Joseph R. Nelson Director, Chairman of the 600,000 (4) 3.59%
Board, President and Chief
Executive Officer
Michael T. Pieniazek Director, Executive Vice 481,381 (5) 2.95%
President, Chief Financial
Officer and Treasurer
Marcus R. Rowan Director 362,000 (6) 2.23%
Blake C. Davenport Director 120,000 (7) 0.74%
Dr. James R. Gavin Director 20,000 (8) 0.12%
================================================================================
All executive officers 4,906,939 (9) 25.18%
and directors as a group
(7 persons)
32
<PAGE>
------------------------
* Includes voting and investment power, except where otherwise noted. The
number of shares beneficially owned includes shares each beneficial owner
and the group has the right to acquire within 60 days of July 31, 2000
pursuant to stock options, warrants and convertible securities.
(1) Includes indirect beneficial ownership of (i) 705,300 shares and (ii)
presently exercisable options for 1,500,000 shares of common stock.
(2) Concord Effekten AG is an investment banking firm based in Frankfurt,
Germany, and is publicly traded on the Frankfurt stock exchange under the
ticker symbol "CEFF."
(3) Includes indirect beneficial ownership of (i) 321,000 shares and (ii)
presently exercisable options for 797,258 shares of common stock.
(4) Includes presently exercisable options for 600,000 shares of common stock.
(5) Includes indirect beneficial ownership of (i) 276,750 shares and (ii)
presently exercisable options for 204,631 shares of common stock.
(6) Includes presently exercisable options for 135,000 shares of common stock.
(7) Includes indirect beneficial ownership of (i) 20,000 shares and (ii)
presently exercisable options for 100,000 shares of common stock.
(8) Includes presently exercisable options for 20,000 shares of common stock.
(9) Includes presently exercisable options for Common Stock listed in notes 1,
3, 4, 5, 6, 7 and 8 above.
DESCRIPTION OF SECURITIES
COMMON STOCK
At the Company's Annual Meeting of Stockholders on December 29, 1999, our
shareholders approved an amendment to our certificate of incorporation to
increase the amount of shares that we are authorized to issue from 20,000,000
shares to 35,000,000 shares of common stock, $.10 par value, of which 14,561,600
shares were issued and outstanding as of July 31, 2000.
The holders of common stock are entitled to one vote for each share held of
record on all matters to be voted by stockholders. There is no cumulative voting
with respect to the election of directors with the result that the holders of
more than 50% of the shares of common stock voted for the election of directors
can elect all of the directors.
The holders of shares of common stock are entitled to dividends when and as
declared by the Board of Directors from funds legally available therefore, and,
upon liquidation are entitled to share pro rata in any distribution to holders
of common stock. No dividends have ever been declared by the Board of Directors
on the common stock. See "DIVIDEND POLICY." All of the outstanding shares of
common stock are, and all shares sold hereunder will be, when issued upon
payment therefor, duly authorized, validly issued, fully paid and
non-assessable.
33
<PAGE>
PREFERRED STOCK
The certificate of incorporation authorizes us 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. As of November 30,
1999, no shares of preferred stock were outstanding.
SELLING STOCKHOLDERS
We have agreed with the selling stockholders to register the shares of
common stock issued in private placements and shares underlying certain stock
option agreements that we had granted. We also agreed to use our best efforts to
keep the registration statement effective until all of the shares have been
sold. Our registration of the shares does not necessarily mean that the selling
stockholder will sell all or any of the shares.
The following table sets forth, as of July 31, 2000 and upon completion of
this offering, information with regard to the beneficial ownership of our common
stock and options by each of the selling stockholders. None of the Selling
Shareholders are officers or directors of the Company.
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.
<TABLE>
<CAPTION>
AMOUNT OF STOCK AMOUNT
AMOUNT OF SHARES OPTIONS BENEFICIALLY
BENEFICIALLY BENEFICIALLY OWNED
OWNED OWNED PRIOR TO SHARES TO BE AFTER
NAME(1) PRIOR TO OFFERING OFFERING OFFERED OFFERING(2)
-------------------------- ------------------ ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Michael A. Chatelier (3) 12,500 12,500 0
Paul R. Chatelier (3) 6,250 6,250 0
Jason Chautin (4) 6,250 25,000 31,250 0
John Dexter Fletcher (3) 12,500 12,500 0
Eric M. Poh (3) 12,500 12,500 0
Howard Tripp (3) 12,500 12,500 0
Wall Street Group, Inc. (5) 30,000 30,000 0
Jeffrey Lamberson (6) 62,500 62,500 0
Richard Carpenter (6) 62,500 62,500 0
</TABLE>
(1) Unless otherwise indicated, the persons and entities named in the table
have sole voting and sole investment power with respect to all shares
beneficially owned.
(2) Assumes the sale of all shares offered hereby.
(3) Messrs. Michael A. Chatelier, Paul R. Chatelier, John Dexter Fletcher, Eric
M. Poh and Howard Tripp received their shares registered hereunder in
various private placement transactions.
34
<PAGE>
(4) Mr. Chautin received 6,250 shares registered hereunder pursuant to a
private placement and 25,000 shares issuable upon the exercise of options
granted under a Stock Option Agreement, dated June 8, 2000 between the
Company and Mr. Chautin.
(5) The Wall Street Group, Inc. is an entity controlled by Donald Kirsch.
(6) Mr. Lamberson and Mr. Carpenter received their options pursuant to a
Consulting Agreement, dated June 8, 2000 between the Company and American
Financial Communications.
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 these 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 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
35
<PAGE>
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 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.
LEGAL MATTERS
Legal matters in connection with the validity of the shares of common stock
offered hereby will be passed upon for us by Thelen Reid & Priest LLP, New York,
New York. This firm owns 25,000 shares of common stock and warrants to purchase
20,000 shares at $1.25 per share exercisable through August 2004.
EXPERTS
The consolidated financial statements of American Electromedics Corp. (now
Equidyne Corporation) and Subsidiaries at July 31, 1999 and 1998, and for each
of the two years in the period ended July 31, 1999, 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.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form SB-2 under the Securities Act of 1933 with respect to the
common stock offered hereby. This Prospectus, which constitutes part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedule thereto, certain parts of
which are omitted in accordance with the rules and regulations of the SEC. For
further information regarding our common stock and us, please review the
Registration Statement, including exhibits, schedule and reports filed as a part
thereof. Statements in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the Registration Statement, set forth the
material terms of such contract or other document but are not necessarily
complete, and in each instance reference is made to the copy of such document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedule thereto, may be inspected without charge at
the principal office of the public reference facilities maintained by the SEC at
Room 1024 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,
36
<PAGE>
including the Company. The common stock of the Company is quoted on the OTC
Electronic Bulletin Board.
37
<PAGE>
AMERICAN ELECTROMEDICS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors..........................................F-2
Consolidated Balance Sheets as of July 31, 1999 and July 31, 1998.......F-3
Consolidated Statements of Operations for the years ended
July 31, 1999 and July 31, 1998.......................................F-4
Consolidated Statements of Changes in Stockholders' Equity for
the years ended July 31, 1999 and July 31, 1998.......................F-5
Consolidated Statements of Cash Flows for the years ended
July 31, 1999 and July 31, 1998.......................................F-7
Notes to Consolidated Financial Statements..............................F-8
Unaudited Consolidated Balance Sheet as of
April 30, 2000.......................................................F-21
Unaudited Consolidated Statements of Operations for the three and
nine months ended April 30, 2000 and 1999............................F-22
Unaudited Consolidated Statements of Cash Flows for the
nine months ended April 30, 2000 and 1999............................F-23
Notes to Unaudited Consolidated Financial Statements...................F-24
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, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American
Electromedics Corp. and subsidiaries at July 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that American
Electromedics Corp. will continue as a going concern. As more fully described in
Note 13, the Company has incurred operating losses for the last two years. This
condition raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 13. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Manchester, New Hampshire
October 26, 1999
F-2
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31
----------- ------------
1999 1998
----------- ------------
ASSETS (THOUSANDS)
Current Assets:
Cash and cash equivalents............................. $ 210 $ 00,396
Accounts receivable, net of allowance of $44,000 and
$13,000 in 1999 and 1998, respectively................ 897 1,169
Inventories........................................... 1,480 1,951
Prepaid and other current assets...................... 196 223
----------- ------------
Total current assets............................. 2,783 3,739
Property and Equipment:
Machinery and equipment............................... 36 475
Tooling............................................... 309 --
Furniture and fixtures................................ 371 306
Leasehold improvements................................ 29 13
----------- ------------
745 794
Accumulated depreciation.............................. (115) (436)
----------- ------------
630 358
Goodwill.............................................. 715 4,298
Patents............................................... 2,897 3,027
Other................................................. 216 36
----------- ------------
$ 7,241 $ 11,458
=========== ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Bank debt............................................. $ 1,073 $ 1,033
Accounts payable...................................... 1,784 1,118
Accrued liabilities................................... 815 723
Dividends payable..................................... 373 72
----------- ------------
Total current liabilities........................ 4,045 2,946
Minority interest in consolidated subsidiary.......... 440 --
Stockholders' Equity:
Preferred stock, $.01 par value;
Authorized-1,000,000 shares:
Series A Convertible; Outstanding - 2,400 shares
In 1999 and 3,000 in 1998........................... 1,909 2,387
Series B Convertible; Outstanding - 1,170 shares
In 1999 and none in 1998............................ 982 --
Common stock, $.10 par value; Authorized-
20,000,000 shares; Outstanding - 9,637,621
and 7,058,136 shares in 1999 and 1998, respectively.. 963 705
Additional paid-in capital............................ 14,837 12,643
Retained deficit...................................... (15,541) (5,680)
Accumulated other comprehensive loss.................. (200) (249)
----------- ------------
2,950 9,806
Deferred compensation................................. (194) (1,294)
----------- ------------
Total stockholder's equity....................... 2,756 8,512
----------- ------------
$ 7,241 $ 11,458
=========== ============
See accompanying notes.
F-3
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31
----------------------------
1999 1998
----------------------------
(Thousands, except per share
amounts)
Net sales......................................... $ 6,789 $ 7,025
Cost of goods sold................................ 5,107 4,692
----------------------------
Gross profit................................... 1,682 2,333
Selling, general and administrative expenses...... 8,303 5,581
Research and development.......................... 392 122
Write-down of goodwill............................ 3,196 --
----------------------------
Total operating expenses....................... 11,891 5,703
----------------------------
Operating loss.................................... (10,209) (3,370)
Other income (expenses):
License fees................................... 576 --
Loss on sale of audiometrics assets............ (98) --
Interest, net.................................. (174) (186)
Undistributed earnings (loss) of affiliate..... -- 56
Minority interest in affiliate................. 35 (85)
Other.......................................... 9 (89)
----------------------------
348 (304)
----------------------------
Net loss.......................................... $ (9,861) $ (3,674)
============================
Net loss attributable
to common stockholders*.......................... $ (10,695) $ (4,746)
============================
Net loss per share,
basic and diluted................................ $ (1.39) $ (1.01)
============================
*The years ended July 31, 1999 and 1998 include the impact of dividends on stock
for (a) a non-cash, non-recurring beneficial conversion feature of $533,000 and
$1,000,000, respectively; and (b) $301,000 and $72,000, respectively, of
dividends on Preferred Stock.
See accompanying notes.
F-4
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
(Thousands)
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN RETAINED OTHER DEFERRED STOCKHOLDERS'
CAPITAL DEFICIT COMPREHENSIVE COMPEN EQUITY
LOSS SATION
--------------------------------------------------------------------------------------
SHARES BOOK SHARES PAR
VALUE VALUE
----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1997................... -- -- 2,553 $ 255 $2,919 $(2,006) -- -- $1,168
Conversion of convertible debentures, net... -- -- 720 72 625 -- -- -- 697
Private placement of common stock, net...... -- -- 1,050 105 923 -- -- -- 1,028
Issuance of common stock for investment in
affiliates, net............................ -- -- 210 21 159 -- -- -- 180
Issuance of common stock for acquisitions,
net........................................ -- -- 1,350 135 5,490 -- -- -- 5,625
Stock and warrants issued for services...... -- -- 1,000 100 1,480 -- -- $(1,580) --
Exercise of stock options................... -- -- 175 17 158 -- -- -- 175
Sale of convertible preferred stock and
Warrants................................... 3 $2,387 -- -- 255 -- -- -- 2,642
Dividend on convertible preferred stock..... -- -- -- -- (72) -- -- -- (72)
Conversion feature on convertible preferred
Stock..................................... -- (1,000) -- -- 1,000 -- -- -- --
Dividend on beneficial conversion feature... -- 1,000 -- -- (1,000) -- -- -- --
Deferred compensation related to common
stock options.............................. -- -- -- -- 706 -- -- (706) --
Amortization of deferred compensation....... -- -- -- -- -- -- -- 992 992
Translation adjustment...................... -- -- -- -- -- -- $(249) -- (249)
Net loss.................................... -- -- -- -- -- (3,674) -- -- (3,674)
--------------------------------------------------------------------------------------
Balance at July 31, 1998.................... 3 2,387 7,058 705 12,643 5,680) (249) (1,294) 8,512
Private placements of common stock, net..... -- -- 590 59 427 -- -- -- 486
Common stock issued for services............ -- -- 200 20 168 -- -- (188) --
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN RETAINED OTHER DEFERRED STOCKHOLDERS'
CAPITAL DEFICIT COMPREHENSIVE COMPEN EQUITY
LOSS SATION
--------------------------------------------------------------------------------------
SHARES BOOK SHARES PAR
VALUE VALUE
----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of stock options and warrants...... -- -- 610 61 (39) -- -- -- 22
Dividends on convertible preferred stock.... -- -- -- -- (391) -- -- -- (391)
Sale of convertible preferred stock and
warrants................................... 2 1,384 -- -- 114 -- -- -- 1,498
Conversion feature on convertible preferred
stock..................................... -- (533) -- -- 533 -- -- -- --
Dividend on beneficial conversion feature... -- 533 -- -- (533) -- -- -- --
Conversion of convertible preferred stock... (1) (880) 1,179 118 837 -- -- -- 75
Amortization of deferred compensation....... -- -- -- -- -- -- -- 1,288 1,288
Translation adjustment...................... -- -- -- -- -- -- 49 -- 49
Net loss.................................... -- -- -- -- -- (9,861) -- -- (9,861)
Sale of subsidiary capital stock............ -- -- -- -- 1,078 -- -- -- 1,078
--------------------------------------------------------------------------------------
Balance at July 31, 1999.................... 4 $2,891 9,637 $963 $14,837 $(15,541) $(200) $(194) $2,756
======================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31
-----------------------
1999 1998
-----------------------
OPERATING ACTIVITIES: (Thousands)
Net loss................................................. $(9,861) $(3,674)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............................ 530 269
Deferred compensation amortization....................... 1,288 992
Loss on sale of audiometrics assets...................... 98 --
Loss on sale of affiliate................................ -- 64
Write-down of goodwill................................... 3,196 --
Undistributed earnings (loss) of affiliate............... -- (56)
Minority interest ....................................... (35) 85
Other.................................................... 25 (67)
Changes in operating assets and liabilities:
Accounts receivable.................................... 319 598
Inventories, prepaid and other current assets.......... (118) (27)
Accounts payable and accrued liabilities............... 1,686 (856)
-----------------------
Net cash used in operating activities.................... (2,872) (2,672)
INVESTING ACTIVITIES:
Proceeds from sale of audiometrics assets................ 625 --
Investment in affiliates, net of cash acquired........... -- (138)
Purchase of property and equipment, net.................. (526) (188)
Acquisition of DDS and ESI, net of cash acquired......... -- (151)
Proceeds from sale of affiliate.......................... -- 247
-----------------------
Net cash provided by (used in) investing activities...... 99 (230)
FINANCING ACTIVITIES:
Principal payments on long-term debt .................... -- (532)
Payments on debt and bank lines-of-credit................ (512) (97)
Issuance of common stock, net............................ 486 1,028
Issuance of capital stock by consolidated subsidiary..... 1,553 --
Proceeds from exercise of common stock options........... 22 175
Issuance of convertible preferred stock, net............. 1,498 2,642
Other.................................................... (16) --
-----------------------
Net cash provided by financing activities................ 3,031 3,216
-----------------------
Effect of exchange rate on cash.......................... (444) (389)
-----------------------
Decrease in cash and cash equivalents.................... (186) (75)
Cash and cash equivalents, beginning of year............. 396 471
-----------------------
Cash and cash equivalents, end of year................... $ 210 $ 396
=======================
NONCASH TRANSACTIONS:
Common stock and warrants issued for services............ $ 188 $ 1,580
Conversion of convertible preferred stock............... $ 880 --
Exercise of stock options and $ 590 --
warrants.................................................
Conversion of convertible subordinated debt into common -- $ 697
stock....................................................
Common stock issued in connection with acquisitions..... -- $ 5,805
See accompanying notes.
F-7
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Business Description
--------------------
American Electomedics Corp. is engaged in the development, manufacture and
sale of medical equipment principally to the United States and European medical
communities. Our current primary focus is on the continued development of the
INJEX needle-free drug injection system. We also market and sell intraoral
dental camera equipment, and through April 1999, produced Tympanometers(R) and
Audiometers, two devices designed for audiological testing purposes. In April
1999, we sold all of our assets associated with its audiological testing
products.
The Company recognizes revenue upon receipt of a firm customer order and
shipment of the product, net of allowances for warranties, which have not been
material. The Company does not recognize revenue on product shipments that are
subject to rights of return, evaluation periods, customer acceptance, or any
other contingencies until such contingency has expired. The Company receives
revenue on sales of distribution rights and license fees, which is recognized
over the terms of the related agreements.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. During 1999, the Company's former
wholly-owned subsidiary, Rosch GmbH, received a capital investment from an
outside third party, reducing the Company's ownership interest to 75%. Rosch
GmbH continues to be consolidated, and the Company continues to maintain a
controlling interest. See Note 5 for further information. All material
intercompany transactions have been eliminated.
Cash and Cash Equivalents
-------------------------
For the purpose of reporting cash flows, cash and cash equivalents include
all highly liquid debt instruments with original maturities of three months or
less. The carrying amount reported in the balance sheets for cash and cash
equivalents approximates its fair value.
Inventories
-----------
Inventories are stated at the lower of cost (predominantly average cost
method) or market.
Depreciation
------------
Property and equipment is stated at cost. The Company provides for
depreciation using the straight-line method over the various estimated useful
lives of the assets. Leasehold improvements are amortized over the life of the
lease agreement. Repairs and maintenance costs are expensed as incurred and
betterments are capitalized.
F-8
<PAGE>
Goodwill and Patents
--------------------
In April 1999, upon the sale of the Company's audiometrics assets, $189,000
of unamortized goodwill associated with the audiometrics business was
written-off against the sale proceeds. See Note 3.
Also in April 1999, the Company wrote-off approximately $3.2 million of
goodwill associated with its wholly-owned subsidiary, DDS. See Note 3.
Goodwill is the purchase price in excess of the fair value of net assets
acquired at the Company's date of acquisition. Goodwill is being amortized on a
straight-line basis over periods ranging from 15 to 40 years. Amortization
expense for the years ended July 31, 1999 and 1998 was $124,000 and $112,000,
respectively. Accumulated amortization at July 31, 1999 and 1998 is $116,000 and
$354,000, respectively.
Patents are being amortized on a straight-line basis over 15 years, the
remaining life of the patent. Amortization expense for the years ended July 31,
1999 and 1998 was $206,000 and $51,000, respectively. Accumulated amortization
as of July 31, 1999 and 1998 is $257,000 and $51,000, respectively.
The Company continually assesses the recoverability of its goodwill and
patents based on estimated future results of operations and undiscounted cash
flows in accordance with Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". Based on the Company's assessment, other than as described in
Note 3, there was no impairment in the carrying value of goodwill or its other
long-lived assets at July 31, 1999 or 1998.
Research and Development
------------------------
Research and development costs are charged to operations as incurred.
Advertising Costs
-----------------
Costs associated with advertising products are expensed when incurred.
Advertising expense was $417,000 and $440,000 in 1999 and 1998, respectively.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Stock Options
-------------
The Company grants stock options for a fixed number of shares to employees
and others with an exercise price equal to or greater than the fair value of the
shares at the date of grant. The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and related interpretations in accounting for its stock-based compensation
F-9
<PAGE>
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.
Foreign Currency Translation
----------------------------
The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation. All balance sheet
amounts have been translated using the exchange rates in effect at the balance
sheet date. Statement of Operations amounts have been translated using average
exchange rates. The gains and losses resulting from changes in exchange rates
from the date of acquisition of Rosch GmbH to July 31, 1999 have been reported
separately as a component of stockholders' equity. The aggregate transaction
gains and losses are insignificant.
Comprehensive Income (Loss)
---------------------------
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130
establishes new rules for the reporting and display of comprehensive income or
loss and its components; however, the adoption of this statement had no impact
on the Company's results of operations or stockholders' equity. For the year
ended July 31, 1999, the Company's only item of other comprehensive income was
the foreign currency translation adjustment recognized in consolidation of its
German subsidiary, Rosch GmbH. SFAS 130 requires such adjustments, which prior
to adoption were reported separately in stockholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
The foreign currency translation adjustment and comprehensive loss for the
year ended July 31, 1999 was $49,000 and ($9,812,000), respectively. The foreign
currency translation adjustment and comprehensive loss for the year ended July
31, 1998 was ($249,000) and ($3,923,000), respectively. As of July 31, 1999 and
1998, the cumulative translation adjustment and accumulated other comprehensive
loss was ($200,000) and ($249,000), respectively.
Earnings Per Share
------------------
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding, and diluted earnings per
share reflects the potential dilution that would occur if securities such as
stock options and preferred stock conversion rights were exercised.
F-10
<PAGE>
2. ACQUISITIONS:
------------
On April 30, 1998, the Company acquired all of the issued and outstanding
capital stock of Dynamic Dental Systems, Inc. (DDS), pursuant to an Agreement
and Plan of Merger, whereby DDS became a wholly-owned subsidiary of the Company.
DDS was founded in 1997 and is a distributor of digital operator hardware,
cosmetic-imaging software, intraoral dental camera systems and digital x-ray
equipment. The total cost of acquisition was approximately $3.2 million
consisting primarily of 750,000 shares of the Company's common stock, valued at
an aggregate price of $3,000,000, and $225,000 in cash. The purchase price
exceeded the fair value of net assets acquired by approximately $3.4 million,
which was being amortized on a straight-line basis over 15 years, however, such
amount was written down to zero as of July 31, 1999. (See Note 3.) The
acquisition was accounted for as a purchase and, accordingly, the operating
results of DDS have been included in the Company's consolidated financial
statements since the date of acquisition.
On May 12, 1998, the Company acquired Equidyne Systems, Inc. ("ESI). ESI
was founded in 1990 and is engaged in the development of the INJEX(TM)
needle-free drug injection delivery system, which is designed to eliminate the
risks of contaminated needle stick accidents and the resulting cross
contamination of hepatitis, HIV, and other diseases. The total cost of
acquisition was approximately $2.6 million consisting of 600,000 shares of the
Company's common stock. The acquisition was accounted for as a purchase and,
accordingly, the operating results of ESI have been included in the company's
consolidated financial statements since the date of acquisition. The excess of
the aggregate purchase price over the fair market value of net assets acquired
of approximately $3.0 million, which was allocated to patents, is being
amortized over 15 years, the remaining life of the patent.
The following unaudited proforma consolidated financial results of
operations assume the acquisitions of DDS, ESI and Rosch GmbH (See Note 5)
occurred as of the beginning of Fiscal 1998:
YEAR ENDED JULY 31,
1998
-----------------------
Net sales.............................. $ 8,970,000
Net loss............................... $(3,813,000)
Loss per share:
Basic............................. $(.66)
======
Diluted........................... $(.66)
======
3. DIVESTITURES
------------
In January 1999, the Company announced its intention to focus its resources
on the needleless injection system ("INJEX(TM)") being developed by its
wholly-owned subsidiary, ESI, and hired an investment banking firm to assist in
the marketing and selling of the Company's audiometric and U.S. dental
businesses.
In April 1999, the Company sold certain assets of its audiometrics business
for $625,000. The sale was made pursuant to an Assets Purchase Agreement whereby
the purchaser obtained all of the Company's domestic audiometric inventory, as
F-11
<PAGE>
well as all trademarks, patents and other rights associated with the
audiometrics business, including the name "American Electromedics". As a result,
the Company intends to effect a change in the name of the Corporation in the
near future. The sale resulted in the recognition of a net loss of $98,000.
To date, the Company's efforts to sell DDS have been unsuccessful, and
based upon these results, the Company has revised its estimates as to the
ultimate sale price which could be obtained for DDS. In addition, since its
acquisition in April 1998, DDS has experienced a significant downturn in its
gross revenues, as well as gross profit margins, and has incurred net losses
totaling approximately $1.2 million for the year ended July 31, 1999. These
results are due to a variety of factors including changes within the dental
camera industry and DDS' competitors, the adverse affects of which became
evident during the quarter ended April 30, 1999.
Based upon the factors described above, management reviewed the continuing
value of the goodwill associated with DDS, taking into consideration the revised
estimates as to the expected sale price which could be obtained for the
outstanding DDS common stock, as well as the expectation that DDS' net operating
results and future cash flows will not likely be positive. Based upon this
review, the Company has written-off the goodwill, which had a book value, net of
accumulated amortization, of $3.2 million, as a charge against operations during
the year ended July 31, 1999.
4. INVENTORIES:
-----------
Inventories consist of the following at July 31:
1999 1998
--------------- --------------
Raw materials $ 133,000 $ 291,000
Work-in-process - 29,000
Finished goods 1,347,000 1,631,000
---------- ----------
$1,480,000 $1,951,000
5. INVESTMENT IN AFFILIATE:
-----------------------
The Company changed its method of accounting for Rosch GmbH from the equity
method to a consolidated basis on August 11, 1997 based upon the Company's
determination that it had reached the definition of control of Rosch GmbH as of
August 11, 1997 under generally accepted accounting principles. The Company's
determination of control of Rosch GmbH was based primarily upon the successful
completion of negotiations with the remaining owner to acquire effective voting
control. For the first quarterly period ended October 31, 1997, the Company
continued to recognize earnings of Rosch GmbH up to its 50% ownership share. On
December 18, 1997, the Company closed on the purchase of the remaining 50% of
the outstanding capital stock of Rosch GmbH, for $50,000 plus 105,000 shares of
common stock, pursuant to a Stock Purchase Option Agreement, dated as of
November 1, 1997. As a result of this transaction, the Company recognized 100%
of all activity of Rosch GmbH for the second quarterly period ended January 31,
1998, and thereafter.
On July 8, 1999, the Company's German subsidiary, Rosch GmbH, received a
capital infusion of approximately $1.5 million from an outside investment
banking firm. This contribution of capital diluted the Company's ownership in
F-12
<PAGE>
Rosch GmbH from 100% to 75%. As the Company continues to maintain a controlling
interest in Rosch GmbH, it continues to consolidate the operation of Rosch GmbH.
As a result, the Company has recognized a minority interest in the consolidated
subsidiary in an amount equivalent to 25% of the subsidiary's net assets as of
July 31, 1999, or $440,000. This balance includes the minority shareholder's 25%
share of Rosch GmbH's net losses attributed to the period July 8 through July
31, 1999, which was approximately $35,000.
The following is summarized unaudited financial information of Rosch
GmbH:
YEAR ENDED JULY 31,
---------------------------
1999 1998
---------------------------
Sales.............................. $5,123,000 $5,400,000
Gross profit....................... 1,865,000 1,631,000
Net loss........................... (542,000) (381,000)
Current assets..................... 2,453,000 2,267,000
Non-current assets................. 1,206,000 258,000
Current liabilities................ 1,899,000 1,907,000
Non-current liabilities............ -0- -0-
In December 1997, the Company invested $255,000, consisting of $150,000 of
cash and 105,000 shares of its common stock for a 45% interest in Meditronic
Medizinelektronik GmbH ("Meditronic GmbH), pursuant to a Stock Purchase Option
Agreement, dated November 1, 1997. The shares were valued at $1.00 per share,
which represented the fair market value of the common stock on the date of
acquisition. Meditronic GmbH is a development and manufacturing company,
specializing in the manufacture of medical camera systems. Substantially all of
Meditronic GmbH's sales are to Rosch GmbH. The Company accounted for its
investment in Meditronic GmbH under the equity method until July 1998 when the
Company sold its interest in Meditronic GmbH for approximately $250,000 which
resulted in a loss of $64,000.
6. DEBT
----
Rosch GmbH has revolving lines of credit from two German-based banks. These
lines-of-credit bear interest rates ranging from 8.125% to 9.0% and permit total
borrowings of up to $876,000. As of July 31, 1999 and 1998, there was $483,000
and $368,000, respectively, outstanding under these revolving lines-of-credit.
Rosch GmbH also has Term Loans with German-based banks. The first loan is
payable in equal monthly installments of $22,000 through May 2000. Interest is
4.5% per annum, and as of July 31, 1999, there was $197,000 outstanding under
this loan. The second loan is payable in its entirety on February 2, 2000.
Interest is 5.7% per annum, and as of July 31, 1999, there was $393,000
outstanding under this loan.
As of July 31, 1998, there was $595,000 outstanding under two separate Term
Loans. During 1999, these balances were repaid and the loan agreements were
terminated.
Borrowings under outstanding loans are collateralized by the accounts
receivable and inventory of Rosch GmbH and are guaranteed by the Company.
F-13
<PAGE>
7. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
-----------------------------------------------
Earnings per share, basic and diluted, were computed using weighted average
shares outstanding of, 7,720,251 for 1999 and 4,687,707 for 1998. Dilutive
securities were not included in the calculation of diluted weighted average
shares due to their anti-dilutive effect.
8. INCOME TAXES:
------------
The Company's deferred tax assets (which result primarily from net
operating loss carryforwards and accrued expenses) as of July 31, 1999 and July
31, 1998 were $4,095,000 and $1,650,000, respectively. SFAS No. 109 requires a
valuation allowance against deferred tax assets if it is more likely than not
that some or all of the deferred tax assets will not be realized. The Company
believes that some uncertainty exists and therefore has maintained a valuation
allowance of $4,095,000 and $1,650,000 as of July 31, 1999 and July 31, 1998,
respectively. As of July 31, 1999, the Company has net operating loss
carryforwards for Federal income tax purposes of $8,727,000 that expire from
2004 to 2019. The Company's foreign subsidiary has net operating loss
carryforwards for German income tax purposes of approximately $615,000, which
under the German Tax Code, do not expire. The net provision for income taxes was
$-0- for the years ended July 31, 1999 and 1998.
Significant components of the Company's deferred tax assets are as follows:
1999 1998
------------- ---------------
Deferred tax assets:
Net operating loss carryforwards $ 3,582,000 $ 1,079,000
Accrued expenses 83,000 90,000
Inventory 139,000 32,000
Other 10,000 16,000
Deferred compensation 281,000 433,000
------------ ----------------
Total deferred tax assets 4,095,000 1,650,000
Valuation allowance for deferred tax (4,095,000) (1,650,000)
assets
------------ ----------------
Net deferred tax assets $ -0- $ -0-
============ ================
A reconciliation of income taxes computed at the federal statutory rates to
income tax expense is as follows:
1999 1998
-------------------------------------------
Amount Percent Amount Percent
Benefit at Federal Statutory Rates $(3,353,000) (34%) $(1,050,000) (34%)
Foreign Income Taxes
at Differing Statutory Rates (209,000) (2) -- --
Change in Valuation Reserve 2,445,000 25 992,000 32
Goodwill Amortization 1,291,000 13 57,000 2
Other (174,000) (2) 1,000 --
-------------------------------------------
Total $-- 0% $-- 0%
===========================================
F-14
<PAGE>
9. EQUITY:
------
Conversion of Debentures. As of November 3, 1997, the Company issued an
aggregate of 720,000 shares of its common stock upon the conversion of $720,000
principal amount of its 14% Convertible Subordinated Debentures due October 31,
1999 (the "Debentures). This represented the entire issue of Debentures. The
Company had reduced the conversion price of the Debentures to $1.00 per share
from $3.75 per share, effective October 17, 1997 through October 27, 1997, in
connection with October 1997 amendments to arrangements with a bank pursuant to
a Forbearance and Workout Agreement, and its efforts to obtain additional equity
capital.
Private Placements of Common Stock:
In April 1999, the Company retained American Financial Communications
("AFC") as a corporate communications and financial consultant. The consulting
agreement expires in November 1999 and provides a total fee for AFC's services
of 200,000 shares of the Company's common stock. The Company has valued the
shares at the fair market value on the effective date of the agreement, which
was $.94 per share, and has recorded deferred compensation totaling $188,000 to
be amortized over the term of the agreement.
In April 1999, the Company closed two private placements for a total of
590,000 shares of common stock for aggregate net proceeds of $486,000, to two
"accredited investors", as such term is defined in Regulation D under the
Securities Act.
In February 1998, the Company retained Liviakis Financial Communications,
Inc. ("LFC) as a financial consultant for a term of one year for a fee of
1,000,000 shares of the Company's common stock, valued at $1.00 per share, the
fair market value, and warrants for an additional 1,000,000 shares of common
stock exercisable at $1.00 per share for four years. The fair value of the
1,000,000 warrants was determined to be $580,000 through the application of the
Black-Scholes method. Consulting expense of $1,580,000 for the common stock and
warrants issued was recognized ratably over the one year term of the agreement.
In November 1997, the Company closed a private placement of 1,050,000
shares of common stock, at a price of $1.00 per share, or an aggregate purchase
price of $1,050,000 to a group of "accredited investors," as such term is
defined in Regulation D under the Securities Act. The Company used $150,000 of
the placement proceeds to repay portions of its indebtedness to a bank, and used
the balance of the proceeds for working capital, including increasing its
ownership interest in Rosch GmbH.
F-15
<PAGE>
Preferred Stock:
Series A:
During May 1998, the Company closed the placement of three tranches of
1,000 shares each of Series A Convertible Preferred Stock, $.01 par value (the
"Series A Preferred Stock), to one purchaser (the "Purchaser) at a purchase
price of $1,000 per share or an aggregate purchase price of $3 million, pursuant
to a Securities Purchase Agreement (the "Purchase Agreement), among the Company,
West End Capital LLC ("West End) and the Purchaser. As part of its entry into
the Purchase Agreement, the Company entered into a Registration Rights Agreement
(the "Registration Agreement) and a Warrant Agreement. Concurrently with the
closing for the first tranche of Series A Preferred Stock, the Company issued
warrants under the Warrant Agreement (the "Warrants) to West End for the
purchase of 50,000 shares of the Company's common stock at an exercise price of
$4.80 per share, subject to customary anti-dilution provisions, expiring on May
5, 2002. The Company also issued warrants for the purchase of 30,000 shares of
common stock to the placement agent, exercisable at $4.40 per share for three
years. On the date of issuance, the Company determined these warrants had a
value of $255,000.
The Series A Preferred Stock is immediately convertible into shares of the
Company's common stock at a conversion rate equal to $1,000 divided by the lower
of (i) $4.00 or (ii) 75% of the average closing bid price for the common stock
for the five trading days immediately preceding the conversion date. The Company
may force conversion of all (and not less than all) of the outstanding shares of
Series A Preferred Stock at any time after the first anniversary of the
effective date of the Registration Statement. There is no minimum conversion
price. Should the bid price of the common stock fall substantially prior to
conversion, the holders of the Series A Preferred Stock could obtain a
significant portion of the common stock upon conversion, to the detriment of the
then holders of the common stock.
The Series A Preferred Stock has a liquidation preference of $1,000 per
share, plus any accrued and unpaid dividends, and provides for an annual
dividend equal to 5% of the liquidation preference, which may be paid at the
election of the Company in cash or shares of its common stock. The annual
dividend rate was increased to 12% as of June 5, 1998 because the Company did
not file the Registration Statement covering the common stock underlying the
Series A Preferred Stock within 30 days of the initial closing. The Registration
Statement was filed on July 10, 1998, and was declared effective in March 1999.
The rate had increased to 18% through the effective date of the Registration
Statement, at which time the dividend rate returned to 5%.
The conversion discount of the preferred stock is considered to be an
additional preferred stock dividend. The maximum discount available of
$1,000,000 was initially recorded as a reduction of preferred stock and an
increase to additional paid-in capital. As the preferred stock was immediately
convertible upon issuance, the Company then recognized additional dividends, by
recording a charge to income available to common stockholders.
During the year ended July 31, 1999, the holder of Series A Convertible
Preferred Stock exercised its option and converted 600 shares of preferred stock
and accrued dividends of approximately $66,000 into 747,627 shares of the
Company's common stock.
Series B:
On February 3, 1999, the Company sold 1,600 shares of Series B Preferred
Stock to three purchasers for $1,000 per share or an aggregate purchase price of
$1.6 million, together with Warrants to purchase up to 25,000 shares of the
Company's Common Stock at an exercise price of $3.00 per share and exercisable
until January 31, 2002. In addition, the Company issued warrants to purchase up
to 60,000 shares of the Company's common stock to the placement agent,
F-16
<PAGE>
exercisable at $3.00 per share until September 23, 2001. On the date of
issuance, the Company determined these warrants had a value of $114,000.
The Series B Preferred Stock is convertible into shares of common stock at
a conversion rate equal to $1,000 divided by the lower of (i) $2.00 or (ii) 75%
of the average closing bid price for the common stock for the five trading days
immediately preceding the conversion date. The Company may force conversion of
all ( and not less than all) of the outstanding shares of Series B Preferred
Stock at any time after the first anniversary of the effective date of a
registration statement covering the underlying shares of common stock. There is
no minimum conversion price. Should the bid price of the Common Stock fall
substantially prior to conversion, the holders of the Series B Preferred Stock
could obtain a significant portion of the Common Stock upon conversion, to the
detriment of the then holders of the common stock.
The Series B Preferred Stock has a liquidation preference of $1,000 per
share, plus any accrued and unpaid dividends, and provides for an annual
dividend equal to 5% of the liquidation preference, which may be paid at the
election of the Company in cash or shares of its common stock.
The conversion discount of the Series B Preferred Stock is considered to be
an additional preferred stock dividend. The maximum discount available of
$533,000 was initially recorded as a reduction of preferred stock and an
increase to additional paid-in capital. As the preferred stock became fully
convertible effective May 1, 1999, the Company recognized the additional
dividends at that date by recording a charge to income available to common
stockholders.
During the year ended July 31, 1999, the holders of the Series B
Convertible Preferred Stockholders exercised conversion rights and converted a
total of 430 shares of preferred stock and accrued dividends of approximately
$9,000 into 431,530 shares of the Company's common stock.
Stock Options and Warrants:
In April 1999, the Company issued warrants to purchase up to 500,000 shares
of the Company's common stock at $2.50 per share in connection with a private
placement of Common Stock. The warrants are exercisable through April 2002.
In December 1998, certain holders of outstanding warrants to purchase an
aggregate of 1 million shares of the Company's common stock at $1.00 per share,
exercised their rights under the related warrant agreements to execute a
cashless exercise. Upon exercise of these warrants, the Company issued 589,828
shares of its common stock, par value $.10.
In October 1996, the Company's stockholders approved the 1996 Stock Option
Plan providing for the issuance of up to 300,000 shares of the Company's common
stock. The plan is administered by the Board of Directors or an Option
Committee. Options granted under this Plan would be either incentive stock
options or non-qualified stock options which would be granted to employees,
officers, directors and other persons who perform services for or on behalf of
the Company. Options are exercisable as determined at the time of grant except
options to officers or directors may not vest earlier than six months from the
date of grant, and the exercise price of all the options cannot be less than the
fair market value at the date of grant.
F-17
<PAGE>
FAS 123 DISCLOSURE
Pro forma information regarding net income (loss) is required by FAS 123
(Stock-Based Compensation), which requires that the information be determined as
if the Company had accounted for its employee stock options grants under the
fair value method of that Statement. The fair values for these options were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
1999 1998
---------------------- ----------------
Expected life (years) 4 4
Interest rate 6% 6%
Volatility 1.54 1.15
Dividend yield 0.0% 0.0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because FAS
123 is applicable only to options granted subsequent to July 29, 1995, its pro
forma effect will not be fully reflected until fiscal year 1999. The Company's
pro forma information is as follows:
(THOUSANDS)
-----------------------------
1999 1998
--------------- -------------
Pro forma net loss $(11,540) $(5,498)
Pro forma net loss per share $00(1.50) $0(1.17)
Option activity for the years ended 1999 and 1998 is summarized below:
1999 1998
--------------------- ----------------------
Shares Weighted Shares Weighted
Average Average
Exercise Exercise
Price Price
---------- ---------- ----------- -----------
Outstanding at beginning 1,774,633 $1.71 403,333 $3.23
of year
Granted 554,319 1.46 1,866,300 1.55
Expired or canceled (112,833) 2.37 (320,000) 3.09
Exercised (20,500) 1.07 (175,000) 1.00
-------- ---------
Outstanding at end of
year 2,195,619 1.62 1,774,633 1.71
========= =========
Exercisable at end of
year 1,643,292 1.57 1,494,133 1.63
========= =========
Available for future
grants 20,000 20,000
====== ======
Weighted-average fair
value of options granted
during year $2.76 $8.20
========== =========
F-18
<PAGE>
The following table presents weighted-average price and life information about
significant option grants outstanding at July 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
----------------- ------------- -------------- ----------- ---------- ----------
$1.00 - $2.25 1,797,319 3.5 years $1.14 1,344,992 $1.02
$3.00 - $4.38 398,300 3.67 years $3.76 298,300 $4.02
------------- ----------
2,195,619 1,643,292
============= ==========
10. COMMITMENTS:
-----------
The Company leased its corporate offices under an operating lease which was
terminated effective April 30, 1999, following the sale of certain of its
audiometrics business assets (See Note 3). Effective May 1, 1999, the Company
commenced a sublease of its corporate offices which expires in February 2000.
Rent expense for the years ended July 31, 1999 and 1998 was $34,000 and $33,000,
respectively.
Rosch GmbH leases its administrative and sales offices under a 60-month
lease expiring in May 2002. Rent expense for the years ended July 31, 1999 and
1998 was $98,000 and $105,000, respectively.
The Company's domestic subsidiaries lease operating facilities under
various operating leases expiring through October 2001. Total rent expense under
these leases for the year ended July 31, 1999 was $57,000.
11. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS:
------------------------------------------------
The Company's primary customers are in the medical field. At July 31, 1999
and July 31, 1998, substantially all accounts receivable balances are
concentrated in this industry. The Company sells products and extends credit
based on an evaluation of the customer's financial condition, generally without
regard to collateral. Exposure to losses on receivables is principally dependent
on each customer's financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
F-19
<PAGE>
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 ELIMINATIONS CONSOLIDATED
------------ ------------ --------------- -------------
Year ended July 31, 1999: (Thousands)
Net sales $1,787 $5,002 $6,789
Transfers between
Geographic areas 79 121 $(200) --
------------ ------------ --------------- -------------
Net sales 1,866 5,123 (200) 6,789
Loss from operations (9,667) (542) (10,209)
Assets 3,582 3,659 7,241
DOMESTIC GERMAN
OPERATIONS OPERATIONS ELIMINATIONS 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 $9,861,000 and $3,674,000 for
the years ended July 31, 1999, and 1998, respectively. In addition, the
Company's current liabilities exceed its current assets by $1,262,000 at July
31, 1999. These and other factors indicate that the Company may be unable to
continue as a going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing and ultimately to attain profitability. The Company
continues to pursue strategies to improve the profitability of its current
product lines, and is actively pursuing additional debt and equity financing.
14. SUBSEQUENT EVENTS
-----------------
In September 1999, a minority stockholder of Rosch GmbH purchased an
additional one third of the Company's 75% ownership share of Rosch GmbH,
bringing the minority stockholders' overall percentage ownership of Rosch GmbH
to 49.99%. The purchase price was approximately $1.6 million. In addition, the
minority stockholder made a second capital contribution into Rosch GmbH of $1.6
million.
F-20
<PAGE>
EQUIDYNE CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
-----------------------
2000 1999
---------- ----------
(UNAUDITED)
ASSETS (THOUSANDS)
<S> <C> <C>
Current Assets:
Cash and cash equivalents....................................... $ 8,868 $ 210
Accounts receivable............................................. 23 897
Inventories..................................................... 90 1,480
Deferred Income Taxes........................................... 162 --
Prepaid and other current assets................................ 112 196
---------- ----------
Total current assets....................................... 9,255 2,783
Property and Equipment.......................................... 1,001 745
Accumulated depreciation........................................ (218) (115)
---------- ----------
783 630
Deposits on tooling and machinery 899 --
Goodwill........................................................ 694 715
Patents......................................................... 1,962 2,897
Investment in affiliate......................................... 8,487 --
Deferred income taxes, net of current........................... 940 --
Other........................................................... 134 216
---------- ----------
$ 23,154 $ 7,241
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Bank debt....................................................... $ -- $ 1,073
Accounts payable................................................ 784 1,784
Accrued liabilities............................................. 744 815
Dividends payable............................................... -- 373
---------- ----------
Total current liabilities.................................. 1,528 4,045
Minority interest in consolidated subsidiary.................... -- 440
Stockholders' Equity:
Preferred stock, $.01 par value; Authorized-1,000,000 shares:
Series A Convertible; Outstanding - None at April 30, 2000 and
2,400 shares at July 31, 1999................................... -- 1,909
Series B Convertible; Outstanding - None at April 30, 2000
and 1,170 shares at July 31, 1999............................... -- 982
Common stock, $.10 par value; Authorized - 35,000,000 shares;
Outstanding - 16,128,933 shares at April 30, 2000 and 9,637,621
shares at July 31, 1999......................................... 1,613 963
Additional paid-in capital...................................... 28,426 14,837
Retained deficit................................................ (8,261) (15,541)
Accumulated other comprehensive loss............................ -- (200)
---------- ----------
21,778 2,950
Deferred compensation........................................... (152) (194)
---------- ----------
Total stockholder's equity................................. 21,626 2,756
---------- ----------
$ 23,154 $ 7,241
========== ==========
</TABLE>
See accompanying notes.
F-21
<PAGE>
EQUIDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------------
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
2000 1999 2000 1999
---------------------------------------------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales.................................... $-- $ 1,756 $802 $ 6,132
Cost of goods sold........................... -- 1,343 502 4,024
---------------------------------------------
Gross profit............................... -- 413 300 2,108
Selling, general and administrative expenses. 3,248 1,765 5,624 5,616
Research and development..................... 315 78 676 283
Write down of goodwill....................... -- 3,196 -- 3,196
---------------------------------------------
Total operating expenses................... 3,563 5,039 6,300 9,095
---------------------------------------------
Operating loss............................... (3,563) (4,626) (6,000) (6,987)
Other income (expenses):
Loss on sale of audiometrics assets........ -- (98) -- (98)
Gain on sale of affiliate capital stock.... 10,819 -- 12,684 --
Equity in losses of affiliate.............. (150) -- (409) --
Minority interest in affiliate............. -- -- 113 --
Interest, net.............................. 69 (114) 90 (197)
Other...................................... 31 (95) 21 (293)
---------------------------------------------
10,769 (307) 12,499 (588)
---------------------------------------------
Income (loss) before income tax benefit...... 7,206 (4,933) 6,499 (7,575)
Income tax benefit........................... (781) -- (781) --
---------------------------------------------
Net income (loss)............................ $7,987 $ (4,933) $7,280 $ (7,575)
=============================================
Net income (loss) attributable
to common stockholders*..................... $7,987 $ (5,001) $7,262 $ (7,898)
=============================================
Income (loss) per common and common
equivalent share:
Basic...................................... $.51 $(.64) $.55 $(1.07)
===== ====== ===== =======
Diluted.................................... $.47 $(.64) $.47 $(1.07)
===== ====== ===== =======
</TABLE>
*The three and nine months ended April 30, 2000 includes the impact of $-0-
and $141,000, respectively, of dividends on Preferred Stock. The three and nine
months ended April 30, 2000 also includes the impact of $-0- and $123,000,
respectively, of preferred stock redemption discounts. The three and nine months
ended April 30,1999 includes the impact of $68,000 and $323,000, respectively,
of dividends on Preferred Stock. All of the remaining outstanding Preferred
Stock was redeemed/converted during the second quarter of the fiscal year ending
July 31, 2000.
See accompanying notes.
F-22
<PAGE>
EQUIDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
APRIL 30
---------------------
2000 1999
---------------------
OPERATING ACTIVITIES: (Thousands)
Net income (loss).......................................... $7,280 $(7,575)
Adjustments to reconcile net income (loss) to net cash
Used in operating activities:
Depreciation and amortization.............................. 375 435
Loss on disposal of fixed assets 47 --
Deferred compensation amortization......................... 517 964
Deferred income taxes...................................... (1,102) --
Stock compensation......................................... 1,003 --
Equity in loss of unconsolidated affiliate................. 409 --
Minority interest in affiliate ............................ (113) --
Gain on sale of affiliate capital stock.................... (12,684) --
Loss on sale of audiometrics assets........................ -- 98
Write-down of goodwill..................................... -- 3,196
Changes in operating assets and liabilities:
Accounts receivable....................................... 105 (381)
Inventories, prepaid and other current assets............. (126) (209)
Accounts payable and accrued liabilities.................. (601) 694
---------------------
Net cash used in operating activities...................... (4,890) (2,778)
INVESTING ACTIVITIES:
Purchase of property and equipment, net.................... (962) (246)
Deposits on tooling and machinery.......................... (899) --
Proceeds from sale of affiliate stock...................... 14,305 --
Proceeds from sale of audiometrics assets.................. -- 625
---------------------
Net cash provided by investing activities.................. 12,444 379
FINANCING ACTIVITIES:
Payments on redemption of preferred stock.................. (2,010) --
Net proceeds (payments) on debt and bank lines-of-credit... (1,249) 157
Issuance of capital stock by unconsolidated
affiliate.................................................. 1,635 --
Net proceeds from related party debt....................... -- 231
Dividends paid............................................. -- (15)
Issuance of common stock, net.............................. 2,422 485
Issuance of preferred stock, net........................... -- 1,498
Proceeds from exercise of stock options and warrants....... 505 22
---------------------
Net cash provided by financing activities.................. 1,303 2,378
---------------------
Effect of exchange rate changes on cash and cash
equivalents................................................ (12) 16
Decrease in cash due to change in method of accounting
from consolidation to equity method........................ (187) --
---------------------
Increase (decrease) in cash and cash equivalents........... 8,658 (5)
Cash and cash equivalents, beginning of period............. 210 396
---------------------
Cash and cash equivalents, end of period...................$ 8,868 $ 391
=====================
NONCASH TRANSACTION:
Common Stock issued for
services................................................... $300 188
=====================
Common Stock issued in connection with employment
agreements................................................. $1,003 --
=====================
Common Stock issued under cashless conversion provision
of options/warrants........................................ $74 $59
=====================
Common Stock issued upon conversions and redemptions of
convertible preferred stock................................ $808 $135
=====================
Short-term debt issued in connection with Preferred stock
redemptions................................................ $700 $--
=====================
See accompanying notes.
F-23
<PAGE>
EQUIDYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000
(Unaudited)
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 nine month periods ended April 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending July 31, 2000. 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, 1999.
Foreign Currency Translation
Effective November 1, 1999, the Company changed its method of accounting
for its foreign affiliate, Rosch AG Medizintechnik ("Rosch AG"), from the
consolidated basis to the equity method, due to the decrease in the Company's
ownership percentage (see Note 3). Through October 31, 1999, the foreign
affiliate was accounted for on the consolidated basis, and accordingly, its
financial statements were translated into U.S. dollars in accordance with
Statement of Financial Standards No. 52, Foreign Currency Translation. All
balance sheet amounts were translated using the exchange rates in effect at the
balance sheet date. Statement of Operations amounts were translated using
average exchange rates. The gains and losses resulting from the changes in
exchange rates from the date of acquisition of Rosch AG to October 31, 1999 were
reported separately as a component of stockholders equity. For periods
subsequent to October 31, 1999, in accordance with the equity method of
accounting, the Company reports its percentage share of the foreign affiliate's
results of operations as a separate component in its statement of operations.
This amount is determined by translating the results of operations of the
foreign affiliate to U.S. dollars using average exchange rates for the period.
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 months ended
April 30, 2000, there were no items of other comprehensive income. For the nine
months ended April 30, 2000, the Company's only item of other comprehensive
income was the foreign currency translation adjustment recognized in
consolidation of its partially-owned German affiliate, Rosch AG. This affiliate
ceased to be consolidated effective November 1, 1999 (see Note 3). SFAS 130
requires such adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS 130.
F-24
<PAGE>
The foreign currency translation adjustment and comprehensive income for
the three months ended April 30, 2000 was $0 and $7,987,000, respectively. The
foreign currency translation adjustment and comprehensive income for the nine
months ended April 30, 2000 was $(40,000) and $7,280,000, respectively.
2. DEBT
----
The Company's method of accounting for its German affiliate, Rosch AG was
changed from consolidation to the equity method effective November 1, 1999 (see
Note 3). As a result, the debt of Rosch AG is no longer included in the
consolidated balance sheet of Equidyne Corporation and Subsidiaries.
In November 1999, in connection with the redemption of the Company's Series
A Preferred Stock, the Company issued a Promissory Note and Security Agreement
(the "Secured Note") in the principal amount of $1,050,000. The Secured Note was
non-interest bearing and secured by certain intellectual property rights of the
Company. The Secured Note was due in full on the earlier to occur of (i) five
business days of the closing date of the initial public offering in Germany of
Rosch AG or (ii) April 30, 2000. The initial public offering took place on
February 24, 2000 (see Note 3), thus the Secured Note matured on February 29,
2000. The terms of the Secured Note provided that the principal amount would be
reduced to $700,000 if the average closing bid price of the Company's Common
Stock for the five trading days prior to maturity exceeded $3.00 per share. As
this provision was met, the balance of the Secured Note was adjusted to
$700,000. The Secured Note was paid in full on March 7, 2000.
3. INVESTMENT IN AFFILIATE
-----------------------
On February 24, 2000, Rosch AG completed an Initial Public Offering ("IPO")
of its shares on the Neuer Market, a segment of the Frankfurt (Germany) Stock
Exchange. Rosch AG sold 1,263,950 newly issued shares in the IPO, which, along
with the Company's sale of certain of its shares of Rosch AG in the IPO, reduced
the Company's ownership of Rosch AG to 26.43%. The Company received proceeds of
approximately $11.1 million from the sale of its shares, and has recognized a
pre-tax gain of approximately $10.8 million.
Effective November 1, 1999, the Company accounts for its investment in
Rosch AG under the equity method of accounting. Under the equity method of
accounting, the Company's percentage share of Rosch AG's operating results are
reported as a single line item in its Statement of Operations. For the three and
nine months ended April 30, 2000, the Company's share of the net loss of Rosch
AG was approximately $150,000 and $409,000, respectively.
For the three months ended October 31, 1999, the Company consolidated the
operating results of Rosch AG and recognized the minority stockholders' share of
Rosch AG's net losses of approximately $113,000.
F-25
<PAGE>
The following is summarized unaudited financial information of Rosch AG as
of and for the three months ended April 30, 2000:
(THOUSANDS)
Gross Sales $ 1,022
Cost of goods sold 523
Net income (loss) (567)
Total assets 33,750
Total liabilities 1,638
At April 30, 2000, the quoted market value of the Company's investment in
Rosch AG was approximately $79 million. The valuation represents a mathematical
calculation based on a closing quotation published by the Neuer Market and Euro
to U.S. Dollar conversion rates at that date. The valuation is not necessarily
indicative of the amount that could be realized upon sale. Furthermore, the
Company is prohibited from selling any its shares of Rosch AG until August 24,
2000, under the terms of an agreement between the Frankfurt Stock Exchange and
the Company.
4. INCOME TAXES
------------
The Company's deferred tax assets (which result primarily from net
operating loss carryforwards) as of April 30, 2000 and July 31, 1999 were
$1,102,000 and $4,095,000, 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. As of July 31, 1999,
uncertainty existed about the realization of the Company's deferred tax assets,
and a valuation allowance of $4,095,000 was recognized.
SFAS No. 109 sets forth several possible sources of future taxable income
to be used to evaluate the likelihood of realization of deferred tax assets. One
such source is the availability of tax planning strategies that could be used to
accelerate future taxable income in order to utilize expiring carryforwards.
Management believes that sufficient tax planning strategies, as defined by SFAS
No. 109, are available such that it is more likely than not that the deferred
tax assets will be realized, and therefore, the valuation allowance against
deferred tax assets has been adjusted to $-0-, thereby recognizing approximately
$1.1 million of net deferred tax assets at April 30, 2000.
As of April 30, 2000, the Company has net operating loss carryforwards
available totaling approximately $2.5 million, after utilization of
approximately $6.2 million for the three months ended April 30, 2000. These
carryforwards expire from 2004 through 2020, and are subject to annual
limitations under Internal Revenue Code Section 382. Based upon an evaluation of
these limitations, the Company expects to offset all of its Federal taxable
income for the fiscal year ending July 31, 2000 by utilizing its net operating
loss carryforwards. However, the Company will be subject to alternative minimum
tax, and has recognized a current provision for Federal income taxes based upon
estimated alternative minimum taxable income for its fiscal year ending July 31,
2000. In addition, due to limitations on net operating loss carryforward usage
imposed by certain states, a current provision for State income taxes has also
been recognized based upon estimated taxable income for State income tax
purposes.
F-26
<PAGE>
Significant components of the Company's deferred tax assets are as follows:
APRIL 30, 2000 JULY 31, 1999
Deferred tax assets:
Net operating carryforwards $842,000 $3,582,000
Accrued expenses 30,000 83,000
Inventory 115,000 139,000
Other 15,000 10,000
Deferred compensation -- 281,000
Alternative minimum tax credit carryforward 100,000 --
--------------- ------------------
Total deferred tax assets 1,102,000 4,095,000
Valuation allowance for deferred tax assets -- (4,095,000)
--------------- ------------------
Net deferred tax assets 1,102,000 --
=============== ==================
Following is a summary of the tax provision (benefit) recognized for the three
and nine months ended April 30, 2000:
CURRENT DEFERRED
Federal $100,000 $(1,066,000)
State 221,000 (36,000)
-------------- -----------------
Total $321,000 $(1,102,000)
============== =================
For the three and nine months ended April 30, 1999, the net provision for
Federal and State income taxes was $-0-, due to the Company's net losses for the
periods, and the valuation allowance recognized against the deferred tax assets,
as described above.
A reconciliation of income taxes computed at the federal statutory rates to
income tax expense for the nine months ended April 30, 2000 is as follows:
AMOUNT PERCENT
Benefit at Federal Statutory Rates $ 2,210,000 34%
State Income Taxes, net of Federal Benefit 122,000 1.9
Change in Valuation Reserve (3,146,000) (48.4)
Other 33,000 .5
---------------- ---------------
Total $ (781,000) (12.0)%
================ ===============
5. EQUITY
------
During the three months ended April 30, 2000, the Company closed on a
private placement of 62,500 shares of Common Stock with six investors for a
total of $250,000.
Effective February 17, 2000, the Company issued 150,000 shares of Common
Stock to two executives pursuant to the terms of their respective employment
agreements. The common stock was valued at its quoted fair market value at the
close of business on February 17, 2000, or $6.69 per share, resulting in the
recognition of compensation expense of $1,003,000.
F-27
<PAGE>
In addition, during the three months ended April 30, 2000, the Company
issued 1,073,153 shares of Common Stock pursuant to the exercise of outstanding
stock options and warrants.
6. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
-----------------------------------------------
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 2000 APRIL 30, 1999 APRIL 30, 2000 APRIL 30, 2000
---------------------------------------------------------------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Numerator:
<S> <C> <C> <C> <C>
Net income (loss) $ 7,987 $ (4,933) $ 7,280 $(7,575)
Preferred stock redemption
premium -- -- 123 --
Preferred stock dividends -- (68) (141) (323)
------------- ------------ ------------- ----------
Numerator for basic earnings
per share-income available to
common stockholders $7,987 $(5,001) $7,262 $(7,898)
Effect of dilutive securities:
Preferred stock redemption
premium -- -- (123) --
Preferred stock dividends -- -- 141 --
------------- ------------ ------------- ----------
18
------------- ------------ ------------- ----------
Numerator for diluted earnings
per share-income available to
common shareholders after
assumed conversions $7,987 $(5,001) $7,262 $(7,898)
============ ============ ============= ==========
Denominator:
Denominator for basic earnings
per share-weighted average share 15,653,170 7,806,813 13,142,154 7,413,750
Effect of dilutive securities:
Stock Options 895,814 -- 565,900 --
Warrants 499,857 -- 178,328 --
Convertible preferred stock -- -- 1,513,942 --
------------- ------------ ------------- ----------
Dilutive potential common
shares 1,395,671 -- 2,258,170 --
------------- ------------ ------------- ----------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
conversions 17,048,841 7,806,813 15,400,324 7,412,750
============ ============ ============= ==========
Basic earnings (loss) per share $0.51 $(0.64) $0.55 $ (1.07)
============ ============ ============= ==========
Diluted earnings (loss) per share $0.47 $(0.64) $0.47 $ (1.07)
============ ============ ============= ==========
</TABLE>
F-28
<PAGE>
Dilutive securities were not included in the calculation of diluted weighted
average shares for the three and nine months ended April 30, 1999, due to their
anti-dilutive effect.
For additional disclosure regarding the stock options and the warrants, see Note
5.
Options to purchase 235,000 shares of common stock at prices ranging from $5.94
to $7.00 per share were outstanding at April 30, 2000 but were not included in
the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares and,
therefore, the effect would be anti-dilutive.
7. COMMITMENTS
-----------
Effective February 15, 2000, Equidyne Systems, Inc. relocated its principal
offices within San Diego, California, terminating its month-to-month lease, and
entering into a new 36-month lease. The new lease provides for monthly rent
beginning at $6,282 and increasing annually to $8,077 and $8,301 per month in
years two and three, respectively. In addition, in December 1999, the Company
entered into a lease amendment for its Aliso Viejo, California facility, adding
new space within the same office complex. The amended lease has a 39 month term,
expiring February 2003, and provides for monthly rent of $6,528 through February
2001. Monthly rent for the subsequent two twelve-month periods is fixed at
$6,854 and $7,197, respectively.
In January 2000, the Company relocated from its Amherst, New Hampshire
offices to Westford, Massachusetts, entering into a three year lease at the rate
of $2,606 per month.
In May 2000, the Company entered into an amendment to its San Diego office
lease for additional space adjacent to its San Diego office facility. The
amended lease will commence upon completion of improvements for a term of 36
months. The monthly rent for the additional space is $4,832 for the first year,
and increasing to $5,025 and $5,227 for years two and three, respectively.
F-29
<PAGE>
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS 242,500 SHARES
OTHER THAN THOSE CONTAINED IN THIS COMMON STOCK
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 EQUIDYNE CORPORATION
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 PROSPECTUS
AS OF THE EFFECTIVE DATE OF THE
REGISTRATION STATEMENT. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY................... 2
THE COMPANY.......................... 2 September 6, 2000
THE OFFERING......................... 3
SUMMARY FINANCIAL AND
OPERATING INFORMATION.............. 4
RISK FACTORS......................... 5
USE OF PROCEEDS...................... 12
DIVIDEND POLICY...................... 12
MARKET FOR THE COMPANY'S
COMMON STOCK AND RELATED
STOCKHOLDER MATTERS................ 12
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS......................... 13
BUSINESS............................. 17
LEGAL PROCEEDINGS.................... 25
MANAGEMENT........................... 25
EXECUTIVE COMPENSATION............... 27
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS............... 31
PRINCIPAL STOCKHOLDERS............... 32
DESCRIPTION OF SECURITIES............ 33
SELLING STOCKHOLDERS................. 34
PLAN OF DISTRIBUTION................. 35
LEGAL MATTERS........................ 36
EXPERTS.............................. 36
AVAILABLE INFORMATION................ 37
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS...............F-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of this offering in connection with the issuance and
distribution of the securities being registered, all of which are to be paid by
the Registrant, are as follows:
Registration Fee $ 218.96
Legal Fees and Expenses............................... 20,000.00
Accounting Fees and Expenses.......................... 20,000.00
Printing.............................................. 5,000.00
Miscellaneous Expenses................................ 4,781.04
Total............................................ $50,000.00
ITEM 27. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
---------------------------------
3.1.1 Certificate of Incorporation of the Company (filed as Exhibit 3(a)(1)
to Registration No. 2-71775, and incorporated herein by reference).
3.1.2 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State of the State of Delaware on
January 27, 1987 (filed as Exhibit 3(a)(2) to the Company's Form 10-Q
for the fiscal quarter ended January 31, 1987, and incorporated herein
by reference).
3.1.3 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State of the State of Delaware on
October 9, 1990 (filed as Exhibit 3(a)(3) to the Company's Form 10-K
for the fiscal year ended July 28, 1990, and incorporated herein by
reference).
3.1.4 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State of Delaware on November 7,
1996 (filed as Exhibit 3.1.4 to the Company's Form 10-K for the fiscal
year ended July 31, 1997, and incorporated herein by reference).
3.1.5 Certificate of Amendment to Certificate of Incorporation of the
Company filed with the Secretary of State on May 4, 1998 (filed as
Exhibit 2.1 to the Company's Form 8-K for an event of May 5, 1998 (the
"May 1998 Form 8-K"), and incorporated herein by reference).
3.1.6 Certificate of Designations of Series A Convertible Preferred Stock of
the Company (filed with the Secretary of State of Delaware on May 5,
1998, filed as Exhibit 2.2 to the May 1998 Form 8-K, and incorporated
herein by reference).
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
II-1
<PAGE>
February 3, 1999 (the "February 1999 Form 8-K"), and incorporated
herein by reference).
3.1.8 Certificate of Amendment of Certificate of Incorporation of American
Electomedics Corp., filed with the Secretary of State of Delaware on
January 5, 2000 (filed as Exhibit 10.1 to the Company's Form 8-K for
an event of January 5, 2000 (the January 2000 Form 8-K"), and
incorporated herein by reference).
3.2.1 By-Laws of the Company (filed as Exhibit 3(b) to Registration No.
2-71775, and incorporated herein by reference).
3.3.1 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).
5.* Opinion of Thelen Reid & Priest LLP.
10.1 Commercial Lease, dated March 23, 1998, by and between Mareld Company,
Inc. and the Company.
10.2.1 1983 Incentive Stock Option Plan (filed as Exhibit A to the Company's
Information Statement, and incorporated herein by reference).
10.2.2 Form of 1983 Incentive Stock Option Certificate (filed as Exhibit
(10)-12 to the Company's Form 10-K for the fiscal year ended July 28,
1984 ["1984 Form 10-K"] and incorporated herein by reference).
10.2.3* Stock Option Agreement, dated October 15, 1999 by and between the
Company and Wall Street Group, Inc.
10.2.4 Stock Option Agreement, dated June 8, 2000 by and between the Company
and Jason Chautin.
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 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).
10.6 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).
10.7 Amended Employment Agreement, dated as of January 1, 1998, between the
Company and Thomas A. Slamecka.
10.8* Termination Agreement, dated as of June 15, 2000, between the Company
and Thomas A. Slamecka.
II-2
<PAGE>
10.9 Employment Agreement, dated January 1, 1998, between the Company and
Michael T. Pieniazek.
10.10* Termination Agreement, dated as of June 15, 2000, between the Company
and Michael T. Pieniazek.
10.10.1* Addendum to Termination Agreement, dated as of September 1, 2000,
between the Company and Michael T. Pieniazek.
10.11 Employment Agreement, dated December 1, 1999, between the Company and
Joseph R. Nelson.
10.12.1 Agreement and Plan of Merger, dated as of April 30, 1998, among the
Company, DDS Acquisition Corporation, Dynamic Dental Systems, Inc.
("DDS") and others (without Exhibits or Schedules thereto) (filed as
Exhibit 2.3 to the May 1998 Form 8-K and incorporated herein by
reference).
10.12.2 Certificate of Merger between DDS Acquisition Corporation and DDS,
filed with the Secretary of State of Delaware on May 5, 1998 (filed as
Exhibit 2.4 to the May 1998 Form 8-K and incorporated herein by
reference).
10.13 Agreement and Plan of Merger, dated as of March 27, 1998, among the
Company, ESI Acquisition Corporation and Equidyne Systems Inc. ("ESI")
(incorporated by reference to Exhibit 2 to the Company's Form 8-K for
an event of March 27, 1998).
10.14 Employment Agreement, dated as of April 30, 1998, by and between
Dental Dynamic Systems, Inc. and Henry J. Rhodes (filed as Exhibit 2.8
to the May 1998 Form 8-K and incorporated herein by reference).
10.15 Employment Agreement, dated as of May 11, 1998, by and between
Equidyne Systems, Inc. and Lawrence Petersen (filed as Exhibit 2.9 to
the May 1998 Form 8-K and incorporated herein by reference).
10.16.1 Securities Purchase Agreement, dated as of May 5, 1998, among the
Company, West End Capital LLC and the Purchaser listed therein (filed
as Exhibit 10.1 to the May 1998 Form 8-K and incorporated herein by
reference).
10.16.2 Form of Warrant issued to West End Capital LLC (filed as Exhibit 10.2
to the May 1998 Form 8-K and incorporated herein by reference).
10.16.3 Registration Rights Agreement, dated as of May 5, 1998, among the
Company, West End Capital LLC and the Purchaser listed therein (filed
as Exhibit 10.3 to the May 1998 Form 8-K and incorporated herein by
reference).
10.16.4 Securities Exchange Agreement, dated November 17, 1999 between the
Company and Jubilee Investors LLC (filed as Exhibit 10.2 to the
Company's Form 8-K for an event of November 15, 1999 (the "November
1999 Form 8-K") and incorporated herein by reference).
10.16.5 Promissory Note and Security Agreement, dated November 17, 1999,
between the Company and Jubilee Investors LLC (filed as Exhibit 10.3
to the Company's November 1999 Form 8-K and incorporated herein by
reference).
10.17 Stock Purchase Option Agreement, dated November 1, 1997, between the
Company and Andy Rosch (without exhibits) (filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-QSB for the period ended
October 31, 1997 and incorporated herein by reference).
II-3
<PAGE>
10.18 Consulting Agreement, dated February 19, 1998, between the Company and
Liviakis Financial. Communications, Inc. (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the quarterly period
ended January 31, 1998 and incorporated herein by reference).
10.19* Consulting Agreement, dated June 8, 2000, between the Company and
American Financial. Communications, Inc.
10.20 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).
10.21 Consulting Agreement, dated as of April 23, 1999, between the Company
and American Financial Communications (filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended July
31, 1999 and incorporated herein by reference).
10.22 Sales Contract for Patents, dated July 8, 1999, by and between the
Company, Equidyne Systems, Inc. and Rosch GmbH Medizintechnik (filed
as Exhibit 10.21 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended July 31, 1999 (the "1999 Form 10-KSB") and
incorporated herein by reference).
10.23 Assets Purchase Agreement, dated April 8, 1999, by and between the
Company, Rosch GmbH Medizintechnik and Maico Diagnostic GmbH (filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB for the
period ended April 30, 1999 and incorporated herein by reference).
10.24 Investment Agreement, dated July 8, 1999, by and between the Company,
Rosch GmbH Medizintechnik, Concord Effeckten AG and Andy Rosch (filed
as Exhibit 10.23 to the 1999 Form 10-KSB and incorporated herein by
reference).
10.25 Participation Agreement, dated September 30, 1999, by and between the
Company, Rosch GmbH Medizintechnik, Concord Effeckten AG and Andy
Rosch (filed as Exhibit 10.24 to the 1999 Form 10-KSB and incorporated
herein by reference).
10.26.1 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).
10.26.2 Form of Warrant Agreement (filed as Exhibit 10.2 to the February 1999
Form 8-K and incorporated herein by reference).
10.26.3 Form of Registration Rights Agreement (filed as Exhibit 10.3 to the
February 1999 Form 8-K and incorporated herein by reference).
10.26.4 Agreement, dated as of November 1, 1999, among the Company and the
purchasers of the Series B Preferred Stock (filed as Exhibit 10.4 to
the November 1999 Form 8-K and incorporated herein by reference).
10.27 Distribution Agreement, dated as of January 1, 1999, between ESI and
Precision Medmark, Inc. (filed as Exhibit 10.29 to Amendment No. 3 to
Registration Statement No. 333-58937 and incorporated herein by
reference).
10.28 Letter Agreement, dated October 21, 1999, between the Company and Jim
Fukushima (filed as Exhibit 10.1 to the November 1999 Form 8-K and
incorporated herein by reference).
II-4
<PAGE>
10.29 Letter Agreement, dated November 15, 1999, between the Company and
Concord Effekten AG (filed as Exhibit 10.5 to the November 1999 Form
8-K and incorporated herein by reference).
23.1* Consent of Ernst & Young LLP
23.2* Consent of Thelen Reid & Priest LLP (included as part of Exhibit 5).
------------------------
* Filed herewith.
ITEM 28. UNDERTAKINGS.
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.
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
General Corporation Law of the State of Delaware 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
II-5
<PAGE>
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-6
<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 WESTFORD, MASSACHUSETTS, ON THE 6TH DAY OF SEPTEMBER, 2000.
EQUIDYNE CORPORATION
BY: /s/Michael T. Pieniazek
------------------------------------
Michael T. Pieniazek
Executive Vice President
and Chief Financial Officer
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/ Joseph R. Nelson Director, President September 6, 2000
----------------------------- Chief Executive
Joseph R. Nelson Officer
/s/ Michael T. Pieniazek Director, Executive September 6, 2000
----------------------------- Vice President and
Michael T. Pieniazek Chief Financial
Officer
Director, Vice September 6, 2000
----------------------------- Chairman
Jim Fukushima
/s/ Thomas A. Slamecka Director and adviser September 6, 2000
-----------------------------
Thomas A. Slamecka
/s/ Blake C. Davenport Director September 6, 2000
-----------------------------
Blake C. Davenport
/s/ Dr. James R. Gavin Director September 6, 2000
-----------------------------
Dr. James R. Gavin
Director September 6, 2000
-----------------------------
Marcus R. Rowan
II-7
