AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 2000
Registration No. 333-75399
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
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 (Primary (I.R.S.
jurisdiction of Standard Industrial Employer
incorporation or Classification) Identification
organization) Code Number 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 OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED BE REGISTERED UNIT(1) PRICE(1) REGISTRATION FEE
- ----------------------------------------- ----------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
Common Stock, 4,202,919 shares $3.14 $13,197,165.66 $3,484.05
$.10 par value
- ----------------------------------------- ----------------------- ---------------------- -----------------------
Common Stock, 845,000 shares $3.14 2,653,300.00 $700.47
$.10 par value(2)(3)
- ----------------------------------------- ----------------------- ---------------------- -----------------------
Total - - $2,967.07(4)
========================================= ======================= ====================== =======================
</TABLE>
(1) Estimated solely for the purpose of computing amount of the registration
fee pursuant to Rule 457(c) promulgated under the Securities Act of 1933,
as amended, based on the average of the bid and asked prices on the OTC
Bulletin Board on January 20, 2000.
(2) In accordance with Rule 457(g), the registration fee for these shares is
calculated upon a price which represents the highest of (i) the price at
which the warrants or options may be exercised; (ii) the offering price of
securities of then same class included in this registration statement; or
(iii) the price of securities of the same class, as determined pursuant to
Rule 457(c).
(3) Represents shares of Common Stock underlying 845,000 warrants.
(4) The sum of $1,217.45 was paid in connection with the filing of the initial
registration statement.
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 January 31, 2000
5,047,919 SHARES OF COMMON STOCK
EQUIDYNE CORPORATION
(FORMERLY AMERICAN ELECTROMEDICS CORP.)
This prospectus relates to the resale by the selling stockholders of up
to 5,047,919 shares of common stock of Equidyne Corporation. The selling
stockholders may sell the shares from time to time at the prevailing market
price or in negotiated transactions. Of the shares offered:
- 4,202,919 shares are presently outstanding, and
- 845,000 shares are issuable upon exercise of warrants and options.
The selling stockholders may sell their shares at various times in
usual brokerage transactions at the market price at the time of sale, at prices
related to market price or at negotiated prices. The selling stockholders and
any agents, broker-dealers or underwriters who act with or for the selling
stockholders in the distribution of the shares may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, and any
commission received by them and any profit on the resale of the common stock may
be deemed underwriting discounts or commissions under the Securities Act of
1933.
We will not receive any proceeds from the sale of the shares but we
will receive $1,950,000 if all the warrants are exercised. We agreed to pay all
expenses of registration of these shares, but we will not pay the selling
stockholders' selling and brokerage expenses.
On January 5, 2000, we changed our corporate name to Equidyne
Corporation from American Electromedics Corp.
Our stock is traded in the over-the-counter market on the OTC
Electronic Bulletin Board under the symbol INJX. On January 26, 2000, the
closing bid and asked prices were $3.09 and $3.25.
AN INVESTMENT IN SHARES OF OUR COMMON STOCK INVOLVES A HIGH
DEGREE OF RISK. WE URGE YOU TO CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON
PAGE 4.
THE SECURITIES AND EXCHANGE COMMISSION (SEC) AND STATE SECURITIES
REGULATORS HAVE NOT APPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE AND SHOULD BE REPORTED IMMEDIATELY TO THE SEC BY CALLING 1-800-SEC-0330.
1
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in
this prospectus. This summary does not contain all the information that you
should consider before investing in the common stock. You should
read carefully read the entire prospectus, including "Risk Factors" and the
Consolidated Financial Statements, before making an investment decision.
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
THE COMPANY
We develop, manufacture and sell needle-free drug delivery systems.
In January 1999, we announced our intention to focus only upon the needle-free
drug delivery system and to sell all of our other product lines. Our
41.43%-owned subsidiary in Germany, Rosch AG Medizintechnik (Rosch AG),
will continue to market and distribute dental cameras and related products, but
will focus primarily on the needle-free drug delivery system in Europe.
Effective January 14, 2000, Rosch GmbH Medizintechnik became Rosch AG, a stock
company.
Our INJEX(TM) needle-free drug injection system is a hand-held,
spring-powered device that injects drugs from a needle-free syringe through the
skin as a narrow, high-pressure stream of liquid. The INJEX(TM) System is
intended to eliminate risks of contaminated needle stick accidents and the
resulting diseases from hypodermic needles and syringes. The INJEX(TM) System
has received U.S. FDA 510(k) clearance to market the system in the U.S., and we
expect to begin marketing the product in early 2000. Our wholly-owned
subsidiary, Equidyne Systems, Inc. (ESI) holds the U.S. patents to the INJEX(TM)
System and will market it world-wide, except for Europe, which will be marketed
through Rosch AG, which holds all European patents to the INJEX(TM) System.
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 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.
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.
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......... 5,047,919 Shares of Common Stock.
COMMON STOCK OUTSTANDING... 14,561,600 shares as of December 31, 1999.
USE OF PROCEEDS............ We will receive none of the proceeds of the sale
of the common stock. We will receive $1,950,000
upon the exercise of the warrants of which
845,000 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"
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<PAGE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the common stock.
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.
<TABLE>
<CAPTION>
YEAR ENDED
SUMMARY OF OPERATIONS 7/31/99 7/31/98 7/31/97 7/27/96 7/29/95
<S> <C> <C> <C> <C> <C>
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
DILUTED (1.39) (1.01) (.37) .18 .08
(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
</TABLE>
THREE MONTHS
ENDED
SUMMARY OF OPERATIONS 10/31/99 10/31/98
NET SALES $802 $2,150
LOSS BEFORE PROVISION FOR
INCOME TAXES AND EXTRAORDINARY
ITEMS (120) (1,286)
NET LOSS (120) (1,286)
NET LOSS PER COMMON SHARE:
BASIC (.03) (.20)
DILUTED (.03) (.20)
WEIGHTED AVERAGE COMMON SHARES 9,798,732 7,064,636
FINANCIAL AS OF AS OF AS OF AS OF AS OF
POSITION 10/31/99 7/31/99 7/31/98 7/27/97 7/29/96
Total assets $8,368 $7,421 $11,458 $3,060 $2,771
Working capital
(deficit) 704 (1,262) 793 1,060 906
Long-term debt -0- -0- -0- 1,100 94
Stockholders'
equity 3,946 2,756 8,512 1,168 1,948
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<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 warrants and 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, and a net loss of $120,000 for the
fiscal quarter ended October 31, 1999, or $.03 per share. There can be no
assurance that we will ever achieve the level of revenues needed to be
profitable in the future or, if profitability is achieved, that it will be
sustained.
OUR ACCOUNTANT'S REPORT RAISES DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING
CONCERN
The report of our independent accountants 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. As shown in the financial statements, we incurred net losses
of $120,000 for the three month period ended October 31, 1999, and $9,861,000
for the year ended July 31, 1999. If we are unable to continue as a going
concern, your entire investment in us could be lost.
WE ARE SELLING OUR OTHER LINES OF BUSINESS TO CONCENTRATE ON ONE PRODUCT
THAT IS NOT YET FULLY DEVELOPED OR COMMERCIALLY ACCEPTED
Broad acceptance of our products is critical to our success and ability
to generate revenues. We have decided to focus our business on the INJEX(TM)
needle free drug injection system. We sold our assets connected with our
audiometric equipment product line in April 1999, and are actively seeking to
sell our U.S. intraoral dental camera business. There can be no assurance that
we will successfully sell this business or that we will recognize a gain after
we sell this business.
The INJEX(TM) System is in the final stages of development. Moreover,
the system has not yet been commercially accepted 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
additional development, manufacturing and marketing. There can be no assurance
that we will be successful in developing and marketing of the INJEX(TM) System.
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.
However, 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
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<PAGE>
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
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.
We believe that our intraoral camera has at least five major
competitors in the video market and that the market is largely mature with
little room for growth. On the other hand, the digital camera market is
expanding with no one company or group of companies yet dominating the market.
Nevertheless, we anticipate that the digital market will become increasingly
competitive as demand among dental practitioners for digital equipment grows.
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. See "BUSINESS - Needle-Free Drug Delivery System." 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)
5
<PAGE>
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 successful human trials of a device to inhale insulin 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. We may also apply in the
future for patent protection for 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.
WE 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, insurance companies
and other third-party payers reimburse the cost of dental x-ray equipment,
certain insurers reimburse the cost of some dental camera work, and the cost of
needle-free injectors are subject to reimbursement on a case-by-case basis.
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. In this regard, changes in the reimbursement policy for our
audiometric products in Germany had negatively impacted our earnings.
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 be realize broad market acceptance.
6
<PAGE>
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
Chairman, Thomas A. Slamecka, and our Executive Vice President and Chief
Financial Officer, Michael T. Pieniazek, and principal officers of the operating
subsidiaries. Competition for these highly skilled individuals 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 do not carry any "key-man" insurance on the
life of any of our officer or employees.
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 increasing 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
largely because of 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
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<PAGE>
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 for
purposes of testing and demonstrations. Because our products are made by hand
and not mass produced, our management has decided not to manufacture the
INJEX(TM) System in-house. As a result, we have contracted with manufacturers
of specialty medical devices for the production of all component parts. 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.
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 it 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 not actively traded, and the bid and asked prices for our
common stock have fluctuated significantly. In the past two fiscal years, the
common stock traded from a high of $4.94 to a low of $0.66. 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 STATEMENT.
All of the shares registered for sale on behalf of the selling
stockholders are "restricted securities" as that term is defined in rule 144
under the Securities Act. We have filed a registration statement to register
these restricted shares for sale into the public market by the selling
stockholders. On December 20, 1999, we filed a Post-Effective Amendment to our
Registration Statement on Form SB-2 (File No. 333-58937) (the December
Registration) to register the resale by selling stockholders of 5,817,140
shares of common Stock and 50,000 warrants to purchase shares of common stock
that was declared effective on January 4, 2000. All of the shares and warrants
registered in the December Registration are also "restricted securities" as that
term is defined in rule 144 of the Securities Act. These restricted securities,
if sold in the market all at once or at about the same time could depress the
market price during the period the 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.
8
<PAGE>
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.
SHARES ELIGIBLE FOR FUTURE SALE COULD NEGATIVELY AFFECT YOUR INVESTMENT IN US
At January 20, 2000, we had an aggregate of 5,120,619 shares of common
stock reserved for the exercise of options and warrants, including the warrants
for 845,000 shares covered by this Registration Statement. All Series A and
Series B Preferred Stock have been converted to common stock or redeemed.
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 January 26, 2000, the closing bid and asked prices for our common stock were
$3.09 and $3.25 per share and therefore, it is designated a "Penny Stock." As 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.
WE MAY DEFAULT ON OUR NOTE TO THE HOLDER OF OUR SERIES A PREFERRED STOCK.
Effective November 17, 1999, pursuant to a Securities Exchange
Agreement with the holder of our outstanding Series A Preferred Stock, we made a
cash payment of $840,000, issued 2,228,312 shares of Common Stock and issued a
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Promissory Note and Security Agreement (the Note) in the principal amount of
$1,050,000 in exchange for (i) the conversion of 1,350 shares of Series A
Preferred Stock, (ii) the redemption of 700 shares of Series A Preferred Stock
and (iii) the exchange of 350 shares of Series A Preferred Stock. The Note is
non-interest bearing, and due in full on the earlier of (i) five business days
of the closing date of the initial public offering in Germany of Rosch AG or
(ii) April 30, 2000, secured by of our certain intellectual property rights, and
the principal amount may be reduced to $700,000 if the average closing bid price
of our Common Stock for the five trading days prior to maturity exceeds $3.00
per share. We cannot assure you that we will have funds available to satisfy the
Note when it matures, which would cause a default on our Note.
USE OF PROCEEDS
We will not receive any portion of the proceeds from the sale of common
stock by the selling stockholders. We may receive proceeds of up to $1,950,000
if all the selling stockholders exercise the 845,000 warrants the undelying
shares of which are included in this Registration Statement. Management
currently anticipates that any such proceeds will be utilized for working
capital and other general corporate purposes.
We will bear the expenses of the registration of the shares and
warrants and we anticipate that these expenses will be approximately $[80,000].
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 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, 1999 and for the period from August 1, 1999
through January 28, 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.
<TABLE>
<CAPTION>
FISCAL PERIOD FISCAL YEAR ENDING FISCAL YEAR ENDING FISCAL YEAR ENDED
7/31/00 7/31/99 7/31/98
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter $1.34 $.72 $4.31 $2.38 $1.88 $1.00
Second Quarter $3.94* .75* 2.31 .88 1.50 .66
Third Quarter 2.50 .84 4.94 .88
Fourth Quarter 2.56 1.03 4.81 3.19
</TABLE>
* To January 28, 2000
APPROXIMATE NUMBER OF HOLDERS OF OUR COMMON STOCK
- -------------------------------------------------
On November 4, 1999, there were approximately 920 stockholders of
record of our common stock. We believe that a substantial amount of the shares
are held in nominee name for beneficial owners.
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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.
COMPARISON OF THE THREE MONTHS ENDED
OCTOBER 31, 1999 AND OCTOBER 31, 1998
RESULTS OF OPERATIONS
- ---------------------
Net sales for the three months ended October 31, 1999 were $802,000,
compared to $2,150,000 for the three month period ended October 31, 1998. The
sale of our audiometrics business assets in April 1999 resulted in a decrease in
sales of approximately $357,000 as compared to the same period in 1998. The
remainder of the decrease in sales is attributable to our shift in focus towards
the INJEX(TM) System, and away from the intraoral dental camera equipment
market.
Cost of sales for the three month periods ended October 31, 1999 and
October 31, 1998 were 62.6% and 58.7% of net sales, respectively. The decrease
is attributable to the continual decline in gross profit margins experienced in
the intraoral dental camera equipment market, resulting primarily from increased
competition in that marketplace.
Selling, general and administrative expenses ended October 31, 1999
were $1,253,000, compared to $1,922,000 for the comparable prior year period.
The decrease reflects the impact of the sale of our audiometrics business assets
in April 1999, and cost reduction measures implemented within Dynamic Dental
Systems, Inc. (DDS) in anticipation that DDS would be sold. Also contributing to
the net decrease was a reduction of approximately $345,000 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. These cost decreases were partially offset by
increased costs incurred in connection with ESI, and its preparation for
full-scale market introduction of the INJEX(TM) System.
Net loss for the three month period ended October 31, 1999 was
$120,000, compared to a net loss of $1,286,000, for the same period in the prior
fiscal year. The decrease in net loss is primarily the result of the $862,000
gain recognized on the partial sale of our ownership in Rosch GmbH. The net loss
for the three month period ended October 31, 1999 was also decreased by the sale
of the audiometrics business assets in April 1999 and the decreased business
activity within the intraoral dental equipment business, both of which
resulted in significant losses during the three months ended
October 31, 1998. These decreases in our net loss were partially offset by the
increased costs incurred in connection with ESI and its preparation for
full-scale market introduction of the INJEX(TM) System.
COMPARISON OF FISCAL YEARS ENDED
JULY 31, 1999 AND JULY 31, 1998
RESULTS OF OPERATIONS
- ---------------------
11
<PAGE>
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 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 at October 31, 1999 was $704,000, compared to
$(1,262,000) at July 31, 1999. The increase of $1,966,000 resulted primarily
from the proceeds from the sale of a portion of our ownership in Rosch GmbH of
approximately $1.6 million and the proceeds from the capital infusion into Rosch
GmbH by a minority stockholder of approximately $1.6 million. The increases
were partially offset by the net effect of our operating losses.
During November 1999, we completed certain transactions which had
significant impact on our capital structure. All outstanding shares of Series A
and Series B convertible preferred stock were eliminated through the issuance of
a total of 2,597,312 shares of common stock, issuance of a Promissory Note and
Security Agreement in the principal amount of $1,050,000, and a cash payment of
$2,010,000. The Promissory Note is due in full no later than April 30, 2000. In
addition, we sold, through two private placements, an aggregate of 2,133,333
shares of common stock, we issued a three-year warrant to purchase up to 300,000
shares of common Stock at an exercise price of $2.00 per share, and we sold a 5%
ownership interest in Rosch GmbH, for gross proceeds of $3 million. These
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<PAGE>
transactions had a minimal net impact on working capital, however, by
eliminating the preferred stock, future working capital requirements for the
dividends associated with those shares where eliminated.
Though we have significantly improved our working capital position, we
do not currently have sufficient working capital to sustain us through the
expected time necessary to achieve positive cash flows from operations.
Additional working capital will be needed, and therefore, we continue to seek
additional capital through equity and/or debt placements or secured financing;
however, no assurance can be given that such financing arrangements would be
successfully completed immediately and, if so, on terms not dilutive to existing
stockholders.
Our working capital requirements, along with the net losses incurred of
$9,861,000 for the years ended July 31, 1999 and $120,000 for the three month
period ended October 31, 1999, as well as other factors, raise substantial doubt
about our ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should we be unable to continue as a going
concern.
YEAR 2000
- ---------
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of our
computer programs or hardware that have date-sensitive software embedded chips
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
We completed our plan to resolve the Year 2000 Issue, which involved
the following four phases: assessment, remediation, testing and implementation.
The assessment indicated that most of our significant information technology
systems would be affected, including our financial information system, which
includes our general ledger, accounts payable, billing and inventory systems.
The assessment was also undertaken on our products, however, following the sale
of the audiometrics assets in April 1999 (See Note 3), we no longer sell
products which utilize software and hardware (embedded chips) which could
require remediation to be Year 2000 compliant. Accordingly, we do not believe
that the Year 2000 presents a material exposure as it relates to our products.
Our manufacturing processes consist principally of unautomated assembly of
components manufactured by outside third parties. We have begun to gather
information about the Year 2000 compliance status of our significant suppliers,
and will take appropriate steps to monitor their compliance on an ongoing basis.
Regarding our information technology exposures, we utilize an
unmodified off-the-shelf software package. We have purchased and installed a
year 2000-compliant upgrade, and is now fully year 2000 compliant with respect
to our financial information systems, and as the new software is also an
unmodified off-the-shelf package, testing to ensure Year 2000 compliance is not
necessary.
We do not presently maintain direct interfaces with any third-party
vendors. We have made various queries of our significant suppliers that do not
share information systems with us (external agents). To date, we are not aware
of any external agent with a Year 2000 issue that would materially impact our
results of operations, liquidity, or capital resources. However, we have no
means of assuring that external agents will be Year 2000 ready. The
inability of external agents to complete their Year 2000 resolution process in a
timely fashion could materially impact our business and results of operations.
The effect of non-compliance by external agents is not determinable.
The total cost of our Year 2000 project was approximately $5,000, which
was funded through operating cash flows. The project costs consisted principally
of the cost of new software, which has been capitalized.
Our Management believes it has effectively resolved the Year 2000
Issue. However, exposure continues to exist relative to our outside suppliers,
which could have a materially adverse effect on our manufacturing and shipping
operations. In addition, disruptions in the economy generally resulting from
Year 2000 issues could also materially adversely affect our business or results
13
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of operations. We currently have no contingency plans in place in the event of
an unforeseen Year 2000 problem. We plan to continue to monitor our suppliers,
and will develop such a plan if necessary.
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
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.
FACTORS AFFECTING FUTURE RESULTS
- --------------------------------
As originally announced in January 1999, we have shifted our focus to
concentrate our resources on the INJEX needle-free drug delivery system.
This shift of focus has led us to sell our audiometrics assets in April 1999, as
well as our plan to sell our U.S. intraoral dental camera operation.
As a result, our future operating results are difficult to predict and
will be affected by a number of factors, including; our timely ability to bring
the INJEX(TM) System to market, our ability to obtain sufficient working
capital, continued development of the INJEX(TM) System and its components,
sufficiency of manufacturing capacity, the demand for the INJEX(TM) System and
our ability to capture sufficient market share, development and sales and
marketing results of competing products, competitive pricing pressures and
fluctuating economic conditions in the U.S., Europe, Asia and other
international markets. In addition, the sale of our audiometrics assets,
the planned sale of our U.S. intraoral dental camera operation and reductions to
our equity ownership stake in Rosch GmbH makes it impractical to use our past
performance as a predictor of our future results.
This past year has been a year of transition for our company. We began
the year with a strategy of growth through acquisitions. However, the response
to the INJEX(TM) System, combined with market forces which contributed to
operating losses in the audiometrics and U.S. dental product lines, led to our
decision to focus our resources on ESI and our INJEX(TM) System.
As with most small developing companies, raising and maintaining
sufficient operating capital is a continuing issue. During the year, a shortage
of capital has, at times, slowed our development activities. However, we have
made strides towards fully automated production in an effort to supply the
anticipated demand for the INJEX(TM) System. We currently have manual production
capabilities which recently began supplying product to German and U.S. markets.
The automated systems, which are being developed concurrently in Europe and the
U.S., will allow us to serve a larger market, reduce costs, and assuming
sufficient working capital, work towards improved financial condition and
profitability.
Other milestones reached during the 1999 fiscal year include: The
signing of a long-term distribution contract with La Sociedad Mercantil Mexicana
(LSM), a Mexican medical supplies distributor; an agreement with Precision
MedMark (PMM) to distribute the INJEX(TM) System throughout the U.S.; agreements
with HNS International, Inc. to distribute the INJEX(TM) System throughout
Japan and Asia; the sale of certain assets of the audiometric product line to
Maico Diagnostic GmbH, a German company; a contract with
Diamed-depot-system to distribute the INJEX(TM) System in Germany, along with
an agreement with Medical Service Europe BV to distribute the INJEX(TM) System
in Belgium, Luxembourg and the Netherlands, which are expected to generate
significant revenues; receipt of ISO 9001 and EN-46001 quality certifications
for the INJEX(TM) System; receipt of the European CE Mark, allowing
distribution of the INJEX(TM) System throughout Europe, both through normal
distribution channels, and directly to the consumer; and an agreement with
Concord Effekten AG (Concord), an investment banking firm based in Frankfurt,
Germany, to bring our Germany-based subsidiary, Rosch GmbH to the Frankfurt
New Market Exchange through an initial public offering of its shares.
In July and September, Concord made substantial investments in Rosch
GmbH, which have provided us with substantial working capital.
14
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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 is currently 41.43%. 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,
and are actively seeking to sell our U.S. intraoral dental camera business.
Sale of Audiometric Business Assets. In April 1999, we completed a sale
of substantially all of our assets connected with our audiometrics business,
pursuant to an Assets Purchase Agreement for a total sale price of $625,000.
These assets consisted mainly of our domestic audiometric inventory, as well as
all patents, trademarks and other rights associated with the audiometrics
business, including the name "American Electromedics". As a result, we are no
longer in the business of selling audiometric medical devices.
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
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.
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
15
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Synergy for 1 million Deutsche Marks ($520,000). As a result of these
transactions, our ownership of Rosch GmbH is currently 41.43%.
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,
1999, in exchange for all outstanding shares of Series A Convertible Preferred
Stock and all outstanding accrued dividends.
Private Placements of Common Stock. 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.
We have received approximately $35 million in orders for the INJEX(TM)
System for both testing and end-user purposes. These orders are primarily for
Europe. Currently, we have adequate manufacturing capacity in place for the
injector pens and reset boxes, and intend to expand our manufacturing capacity
as necessary in order to meet current and expected future demand. We do not
possess the internal manufacturing capacity for the ampules required for
utilization of the INJEX(TM) System, instead we subcontract the production of
ampules to specialized contract manufacturers. Our subcontractors currently have
in place limited production capabilities for the ampules, and are currently
expanding production capacity. Our ability to increase capacity is dependent
upon our ability to raise the necessary working capital.
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.
16
<PAGE>
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
will begin marketing the system in the U.S. in the spring of 2000. At the start,
ESI will market the system through exclusive arrangements with medical product
distributors. ESI is also discussing licensing and joint development agreements
with pharmaceutical companies in the U.S. to market the system. ESI also has
plans to market its products overseas. Currently, it has distribution
arrangements 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
- ----------------
The largest segment of our business over the past 12 months has been
the sale of intraoral dental camera systems and related dental products, sold in
the U.S. and Europe through our subsidiaries, DDS and Rosch GmbH, respectively.
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. Rosch AG continues to sell dental products in Europe, however DDS has
ceased operations.
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, and we are no
longer involved in the manufacture and sale of audiometrics products.
ROSCH AG MEDIZINTECHNIK
- -----------------------
As of November 30, 1999, Rosch GmbH was a 45.01%-owned subsidiary
located in Berlin, Germany. It is involved in the marketing and distribution of
healthcare products, primarily products we produce, to primary care physicians
throughout Europe. Substantially all of our foreign and export sales are
conducted through Rosch GmbH. In the near term, it is expected that Rosch GmbH
will concentrate our efforts on the introduction of the INJEX(TM) System
into European markets. Effective January 14, 2000, Rosch GmbH became Rosch AG,
a stock company.
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
17
<PAGE>
Synergy for 1 million Deutsche Marks ($520,000). As a result of these
transactions, our ownership of Rosch AG is currently 41.43%.
PRODUCT DEVELOPMENT
- -------------------
We are committed to fund the continued development, manufacturing
capabilities and marketing necessary to bring the INJEX(TM) needle-free
injection system to market by Spring 2000, and to continue increasing
manufacturing capacity based on demand and our working capital. We anticipate
that approximately $2 to $4 million may be required for multiple fully
automated production lines and marketing.
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. However,
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 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
18
<PAGE>
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. We also possess
certain registered trademarks and copyrights for names we believe are important
to our business.
PROPERTIES
- ----------
Our corporate offices are located in Westford, Massachusetts in
facilities containing 2,000 square feet that are leased under an operating lease
for $3,300 per month through December 2003.
ESI maintains its administrative and sales operations in San Diego,
California where it leases a facility containing 1,200 square feet under a
renewable quarterly lease currently expiring in March 2000 for $1,000 per month.
ESI is also leasing a production facility in Aliso Viejo, California containing
approximately 1,700 square feet at $2,000 per month, expiring in September 2000.
Rosch AG maintains its administrative and sales offices in Berlin,
Germany where it leases a facility containing 6,400 square feet at $8,800 per
month. The five-year lease expires in May 2002.
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 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.
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.
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 January 1999, we entered into an agreement for Precision Medmark
Inc. (PMM) to establish and manage a network of medical device dealers within
the United States. Specifically excluded from such agreement are ampules
pre-filled by pharmaceutical companies or for use in conjunction with specific
proprietary drugs and individual stand-alone injectors to support initial sales
of the pharmaceutical companies' products. The agreement with PMM is for an
initial term of 18 months, with the renewal terms on a non-exclusive basis.
We participate in exhibitions at major medical, educational and public
health conventions. We also advertise our products domestically and
internationally in journals for dentists, pediatricians, allergists,
otolaryngologists, otologists and family practitioners and also for schools,
public health clinics and HMOs.
19
<PAGE>
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 contracted with manufacturers of specialty medical devices
for the production of the component parts of the INJEX(TM) System. We are in the
process of expanding our contract manufacturing capacity to meet our anticipated
future demand.
The intraoral cameras and other dental equipment we distribute are
purchased from suppliers and resold to our customers.
PRODUCT WARRANTY
- ----------------
Our intraoral camera systems are sold with the manufacturer's warranty.
Neither DDS nor Rosch GmbH provides any additional warranties for the products
they distribute.
We plan to offer a one-year warranty on the injector component of our
INJEX(TM) System.
EMPLOYEES
- ---------
At January 21, 2000, we had 45 employees, 11 of whom were management or
administrative personnel, 22 were engaged in sales activities, and 12 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 the our employees is 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, Inc., founded in 1979, has previously marketed a needle-free
injector system known as the "MediJector," which consists of an injector without
a removable or disposable component. Medi-Ject, Inc. has entered into various
licensing and development agreements with multi-national pharmaceutical and
medical device companies covering the design and manufacture of customized
injection systems for specific drug therapies.
Another principal manufacturer of needle-free injection systems is
Bio-Ject Inc., formed in 1985. Bio-Ject, Inc. has sold a CO2 powered injector
since 1993. The injector is designed for and used almost exclusively for
vaccinations in doctors' offices or public clinics. Bio-Ject, Inc. 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.
20
<PAGE>
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.
We expect Equidyne to compete with the smaller safety syringe
manufacturers and jet injector firms, based on factors such as health care
worker safety, ease of use, costs of controlled disposal and patient comfort. We
expect that when all costs are considered, the INJEX(TM) System will compete
successfully.
With respect to the intraoral camera market, we have at least five
major competitors in the video market which we view as being largely mature with
little room for growth. Conversely, the digital camera market is expanding with
no one company or group of companies yet dominating the market. Nevertheless, we
anticipate that the digital market will become increasingly competitive as
demand among dental practitioners grows for digital equipment.
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. Although this action is at a preliminary stage,
preliminary discovery has commenced, and 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 November 30,
1999.
Year
Became
Name Age Position Director
---- --- -------- --------
Thomas A. Slamecka 59 Chairman of the Board and Director 1996
Jim Fukushima 55 Vice Chairman and Director 1999
Joseph R. Nelson 47 Director, President and Chief Executive 1999
Officer
21
<PAGE>
Michael T. Pieniazek 41 Director, Chief Financial Officer and 1999
Treasurer
Blake C. Davenport 32 Director 1997
Andy Rosch 39 Director and General Manager of Rosch 1997
GmbH
Marcus R. Rowan 38 Director 1996
Matthew A. Slepian 35 Vice President-Finance and Secretary 1999
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.
Thomas A. Slamecka has been our Chairman of the Board since February
1997. 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.
Joseph R. Nelson became our President and Chief Executive Officer
in 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 President from April 1997 through
December 1999, Chief Financial Officer and Treasurer since July 1995, 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.
Andy Rosch has served as General Manager of Rosch AG since July 1990.
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.
Matthew A. Slepian has been our Vice President of Finance since
January 1999, and became Secretary in December 1999. Mr. Slepian was
assistant controller for American Eco Corporation, an environmental
remediation, construction and related services company based in Houston,
Texas from June 1999 through December 1999. From January 1992 through June
1999, Mr. Slepian was an auditor with Ernst & Young LLP.
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.
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.
22
<PAGE>
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
Chairman of the Board and 1998 100,000 -- -- 618,550
Director (1) 1997 133,374 -- -- --
Michael T. Pieniazek 1999 125,000 -- -- 166,334
President, Chief Financial 1998 125,000 -- -- 402,750
Officer, Secretary, Treasurer and 1997 113,000 -- -- --
Director (2)
Andy Rosch (3) 1999 110,565 $49,904 -- --
1998 73,053 34,342 -- --
</TABLE>
- -----------------
(1) Mr. Slamecka became Chairman of the Board in 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 became a Director in December 1997 and serves as General
Manager of Rosch GmbH 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
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.
23
<PAGE>
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 January 1, 1998, we entered into an employment agreement with
Thomas A. Slamecka to serve as Chairman of the Board for an initial term
terminating on March 15, 2001, subject to annual renewals, and his February 1997
employment agreement was terminated. Mr. Slamecka received an annual base salary
of $52,000 through July 31, 1998 and thereafter at $100,000, plus a profits
bonus equal to 10% of the amount that consolidated net after-tax operating
profits exceeds $500,000, provided for such year the Company earns a 12% return
on its common stock equity, and may also receive a supplemental bonus. In
addition, the Company agreed to make available certain loans to Mr. Slamecka.
See "Certain Relationships and Related Transactions." The employment agreement
also provided for the grant of options to him for the purchase of 400,000 shares
of common stock at $1.00 per share, which was the fair market value of the
Company's common stock on the date of grant, vesting immediately as to 212,500
shares and the balance vesting at 46,875 shares per month through May 1998. The
Company is to issue 100,000 shares of common stock to Mr. Slamecka if during the
term of his employment the closing price for the common stock is at least $6.20
per share, subject to adjustment, for a period of three consecutive trading
days. Further, the employment agreement provide that if the Company issued any
shares of common stock (other than pursuant to compensation or employee benefit
plans) it would grant to Mr. Slamecka additional options to purchase shares
equal to 9.3% of the outstanding common stock at a purchase price equal to the
per share price of the shares issued by the Company (but not less than $1.00 per
share). In calculating Mr. Slamecka's ownership for purposes of such 9.3% level,
unvested options held by him and shares sold by him during the initial term of
the employment agreement would be included in such calculation. By reason of the
foregoing provision, through July 31, 1999 the Company had granted options to
Mr. Slamecka for an aggregate of 456,535 shares of common stock at exercise
prices ranging from $0.94 to $3.33 per share. As of July 31, 1999, the
employment agreement was amended to terminate the option grant provision.
Effective August 31, 1999, the employment agreement was further modified whereby
no further salary or loans would be provided to Mr. Slamecka. In lieu of these
provisions, Mr. Slamecka was granted an option to purchase 250,000 shares of
common stock at an exercise price of $1.25 per share, exercisable six months
after grant and terminating after five years. All other terms and conditions of
Mr. Slamecka's employment agreement remain in effect as of the date hereof.
As of January 1, 1998, the Company entered into an employment agreement
with Michael T. Pieniazek to serve as President for an initial term terminating
on December 31, 2001, subject to automatic renewal for consecutive one-year
terms unless terminated not less than 60 days prior to end of any term. Mr.
Pieniazek receives an annual base salary of $125,000 and a discretionary bonus.
The employment agreement also provided for the grant of options to Mr. Pieniazek
to purchase 250,000 shares of common stock at $1.00 per share, which was the
fair market value of the Company's common stock on the date of grant, vesting
immediately as to150,000 shares, vesting ratably over the succeeding seven
months as to the balance, and for the Company to issue 50,000 shares of common
stock to Mr. Pieniazek if during the term of his employment the closing price
for the common stock is at least $6.20 per share, subject to adjustment, for
three consecutive trading days. In addition, the employment agreement provided
that if the Company issued any shares of common stock (other than pursuant to
compensation or employee benefit plans) it would grant to Mr. Pieniazek
additional options to purchase shares in amount equal to 6.5% of such issuance.
In calculating Mr. Pieniazek's ownership for purposes of such 6.5% level,
unvested options held by him and shares sold by him during the term of the
employment agreement would be included in such calculation. By reason of the
foregoing provision, through July 31, 1999, the Company had granted options to
Mr. Pieniazek for an aggregate of 319,084 shares of common stock at exercise
prices ranging from $0.94 to $3.33 per share. As of July 31, 1999, the
employment agreement was amended to terminate the option grant provision.
The employment agreements of Messrs. Slamecka and Pieniazek provide for
lump sum payments of $299,000 for Mr. Slamecka and an amount equal to 2.99 times
the current base salary for Mr. Pieniazek, plus continuation of health benefits
for 12 months, upon a change of control of the Company. A change of control of
the Company would include a person or group becoming the beneficial owner
of 20% of the voting power of the Company's securities or individuals who
24
<PAGE>
are current directors of the Company, or successors chosen by them, cease
to constitute a majority of the whole Board of Directors. In the event the
amount payable upon a change of control would result in the application of an
excise tax under Section 4999 of Internal Revenue Code of 1986, as amended, the
payment would be made over such period of time in order not to cause the
application of such excise tax.
On December 18, 1997, Rosch GmbH entered into an amendment to the
employment agreement for Andy Rosch pursuant to which he serves as its Managing
Director for an initial term of three years, terminating on December 31, 2000,
and automatically renewable for one-year terms thereafter unless either party
gives notice of an intention not to renew not less than three months prior to
the end of any term. Mr. Rosch received an annual base salary of 200,000 DM and
an annual cash bonus equal to 1% of net sales of Rosch GmbH, but not to exceed
the amount of his base salary.
In July 1999, Mr. Rosch entered into a new employment agreement with
Rosch GmbH providing for an annual base salary of 400,000 DM and a bonus equal
to 2% of net profits of Rosch GmbH, beginning October 1, 1999 for a term ending
December 31, 2004, with automatic one year renewals thereafter unless notice of
termination is given.
In August 1999, the Company granted options to Messrs. Pieniazek and
Rosch each for the purchase of 50,000 shares of common stock at an exercise
price of $1.25 per share exercisable six months after grant and terminating
after five years.
OPTION GRANTS
The following table sets forth certain information regarding grants of
stock options made during the fiscal year ended July 31, 1999 to the named
executive officers.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES OF STOCK
APPRECIATION FOR OPTION TERM (2)
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR (1) ($/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
Andy Rosch
--0-- - - - - -
</TABLE>
- -----------------
(1) Based on an aggregate of 554,320 options granted by the Company to
employees in the fiscal year ended July 31, 1999.
25
<PAGE>
(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
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.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY
JULY 31, 1999 OPTIONS AT JULY 31, 1999(1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas A. Slamecka 766,535 -- $68,938 --
Michael T. Pieniazek 519,084 -- $46,634 --
Andy Rosch -- -- -- --
</TABLE>
- -----------------
(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.
26
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of July 31, 1999, the Company had loaned Thomas A. Slamecka,
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
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, a Director of the Company 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 January 21, 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
November 30, 1999.
27
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(*)
NAME STATUS SHARES PERCENTAGE
---- ------ ------ ----------
<S> <C> <C> <C>
Jubilee Investors LLC(1)* Stockholder 2,965,939 20.4%
Jim Fukushima Director and Vice Chairman 2,300,000 (2) 15.8%
Concord Effekten AG(3) Stockholder 1,423,333 9.8%
Thomas A. Slamecka Director and Chairman of 1,072,535 (4) 7.4%
the Board
New Emerson Capital LLC(5) Stockholder 1,070,000 7.9%
Joseph R. Nelson Director, President and 600,000 (6) 4.0%
Chief Executive Officer
Michael T. Pieniazek Director, Chief Financial 571,084 (7) 0.39%
Officer and Treasurer
Marcus R. Rowan Director 357,000 (8) 0.25%
Andy Rosch Director 310,000 0.21%
Blake C. Davenport Director 70,000 (9) 0.05%
All executive officers 4,180,619 (10) 29.7%
and directors
as a group
(7 persons)
</TABLE>
- -----------------
* 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 January
21, 2000 pursuant to stock options, warrants and convertible
securities.
(1) This entity is controlled by WEC Asset Management LLC, an entity
controlled by Ethan Benovitz, Mark Nordlicht and Daniel Saks.
(2) Includes indirect beneficial ownership of (i) 500,000 shares and (ii)
presently exercisable options and warrants for 1,000,000 shares of
common stock.
(3) 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."
(4) Includes presently exercisable options for 766,535 shares of common
stock.
(5) New Emerson Capital is an entity managed by Howard Feder.
(6) Includes presently exercisable options for 600,000 shares of common
stock.
(7) Includes presently exercisable options for 519,084 shares of common
stock.
(8) Includes presently exercisable options for 310,000 shares of common
stock.
(9) Includes presently exercisable options for 50,000 shares of common
stock.
28
<PAGE>
(10) Includes presently exercisable options and warrants for Common Stock
listed in notes 2, 4, 6, 7, 8 and 9 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 January 21, 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.
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
The shares and warrants offered by this prospectus may be offered from
time to time by the selling stockholders. The selling stockholders are comprised
of: (i) persons who own an aggregate of 4,202,919 shares of common stock which
were purchased or received in private placements, (ii) holders of warrants and
options to purchase an aggregate of 845,000 shares of common stock at exercise
prices ranging from $ 1.25 to $3.00 per share and (iii) the purchasers of the
Series B Preferred Stock. None of the selling stockholders has held any position
or office or had any material relationship with the Company or any of its
predecessors or affiliates within three years of the date of this Prospectus,
except for Jim Fukushima, HNS International, Inc., and Henry J. Rhodes. Mr.
Fukushima been our Vice Chairman and a director of the Company since October
1999 and is President of HNS International, Inc. Mr. Rhodes was a principal of
DDS at the time of its acquisition by the Company in May 1998 and has continued
as an officer of DDS.
The following table sets forth, as of January 21, 2000 and upon
completion of this offering, information with regard to the beneficial ownership
of our common stock and warrants by each of the selling stockholders.
The information included below is based upon information provided by
the selling stockholders. Because the selling stockholders may offer all, some
or none of their common stock and warrants, no definitive estimate as to the
number of shares thereof that will be held by the selling stockholders after
such offering can be provided and the following table has been prepared on the
assumption that all shares of common stock and warrants offered under this
Prospectus will be sold.
29
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
SHARES WARRABTS BENEFICIALLY
BENEFICIALLY BENEFICIALLY OWNED
OWNED PRIOR OWNED PRIOR SHARES TO BE AFTER
NAME(1) TO OFFERING TO OFFERING OFFERED OFFERING(2)
------- ----------------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Jim Fukushima 800,000 300,000 800,000 0
HNS International, Inc. (3) 500,000 500,000 500,000 0
Concord Effekten AG (4) 1,423,333 N/A 1,423,333 0
Jeffrey Lamberson 200,000 N/A 200,000 0
Richard Carpenter 200,000 N/A 200,000 0
Michael A. Chatelier 133,334 N/A 133,334 0
Thelen Reid & Priest LLP 60,000 20,000 60,000 0
Henry J. Rhodes 85,722 N/A 85,722 0
Dominion Capital Fund Ltd. (5) 270,847 8,594 270,847 0
Sovereign Capital Fund LP (6) 420,238 12,500 420,238 0
Canadian Advantage LP (7) 109,445 3,906 109,445 0
</TABLE>
(1) Unless otherwise indicated in the footnotes to this table, the persons
and entities named in the table have sole voting and sole investment
power with respect to all shares beneficially owned, subject to
community property laws where applicable.
(2) Assumes the sale of all shares offered hereby.
(3) This entity is controlled by Jim Fukushima.
(4) 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."
(5) This entity is controlled by David Sims.
(6) This entity is controlled by Steven Hicks and Dan Pickett.
(7) This entity is controlled by Mark Valentine.
Under the terms of the Registration Agreement for the Preferred Stock
Private Placement, the Company is obligated to file the Registration Statement
and to use its best efforts to cause the Registration Statement to become
effective. Pursuant to the Registration Agreement, the failure to have this
Registration Statement become effective by July 30, 1999 caused the Company to
incur penalties payable to the Series B Preferred Stockholders at the rate of 2%
per month of the face amount of the Series B Preferred Stock, up to a maximum of
$100,000.
PLAN OF DISTRIBUTION
The selling stockholders have advised the Company that, prior to the
date of this Prospectus, they have not made any agreement or arrangement with
any underwriters, brokers or dealers regarding the distribution and resale of
the shares or warrants. If the Company is notified by a selling stockholder that
any material arrangement has been entered into with an underwriter for the sale
of the shares or warrants, a supplemental prospectus will be filed to disclose
such of the following information as the Company believes appropriate: (i) the
name of the participating underwriter; (ii) the number of the shares or warrants
involved; (iii) the price at which these shares or warrants are
sold, the commissions paid or discounts or concessions allowed to such
underwriter; and (iv) other facts material to the transaction.
The Company expects that the selling stockholders will sell their
shares covered by this Prospectus through customary brokerage
channels, either through broker-dealers acting as agents or brokers for the
seller, or through broker-dealers acting as principals, who may then resell the
shares or warrants in the over-the-counter market, or at private sale or
otherwise, at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at negotiated prices. The selling stockholders
may effect such transactions by selling the shares or warrants to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
30
<PAGE>
concessions or commissions from the selling stockholders and/or the purchasers
of the shares or warrants for whom they may act as agent (which compensation may
be in excess of customary commissions). The selling stockholders and any
broker-dealers that participate with the selling stockholders in the
distribution of shares or Warrants may be deemed to be underwriters and
commissions received by them and any profit on the resale of shares or warrants
positioned by them might be deemed to be underwriting discounts and commissions
under the Securities Act. There can be no assurance that any of the selling
stockholders will sell any or all of the shares or warrants offered by them
hereunder.
Sales of the shares on the OTC Electronic Bulletin Board or other
trading system may be by means of one or more of the following: (i) a block
trade in which a broker or dealer will attempt to sell the shares
as agent, but may position and resell a portion of the block as principal to
facilitate the transaction; (ii) purchases by a dealer as principal and resale
by such dealer for its account pursuant to this prospectus; and (iii) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
In effecting sales, brokers or dealers engaged by the selling stockholders may
arrange for other brokers or dealers to participate.
The selling stockholders are not restricted as to the price or prices
at which they may sell their shares. Sales of such shares at less than market
prices may depress the market price of the Company's common stock. Moreover, the
selling stockholders are not restricted as to the number of shares or warrants
which may be sold at any one time.
Pursuant to the Registration Agreement for the Preferred Stock Private
Placement and other agreements by the Company granting certain "piggy-back"
registration rights, the Company will pay all of the expenses incident to the
offer and sale of the shares to the public by the selling stockholders other
than commissions and discounts of underwriters, dealers or agents. The Company
and the selling stockholders have agreed to indemnify each other and certain
persons, including broker-dealers or others, against certain liabilities in
connection with the offering of the shares or warrants, including liabilities
arising under the Securities Act.
The Company has advised the selling stockholders that the
anti-manipulative rules under the Exchange Act, including Regulation M, may
apply to sales in the market of the shares and warrants offered hereby and has
furnished the selling stockholders with a copy of such rules. The Company has
also advised the selling stockholders of the requirement for the delivery of
this Prospectus in connection with resales of the shares and warrants offered
hereby.
LEGAL MATTERS
Thelen Reid & Priest LLP, New York will pass upon the validity of the
common stock and warrants being offered hereby for the Company. This firm owns
60,000 shares of common stock and warrants to purchase 20,000 shares at $1.25
per share exercisable through August 2004. The firm is one of the selling
stockholders.
EXPERTS
The consolidated financial statements of the Company 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,
31
<PAGE>
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,
including the Company. The common stock of the Company is quoted on the OTC
Electronic Bulletin Board.
32
<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
October 31, 1999................................................ F-21
Unaudited Consolidated Statements of Operations for the
three months ended October 31, 1999 and 1998.................... F-22
Unaudited Consolidated Statements of Cash Flows for the
three months ended October 31, 1999 and 1998.................... 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 $ 396
Accounts receivable, net of allowance
of $44,000 and
$13,000 in 1999 and 1998, 897 1,169
respectively................................
Inventories................................. 1,480 1,951
Prepaid and other current assets............ 196 223
---------------- --------------
Total current assets................ 2,783 3,739
Property and Equipment:
Machinery and equipment.................... 36 475
309 --
Tooling.....................................
Furniture and fixtures..................... 371 306
Leasehold improvements..................... 29 13
---------------- --------------
745 794
Accumulated depreciation.................... (115) (436)
---------------- --------------
630 358
Goodwill.................................... 715 4,298
Patents..................................... 2,897 3,027
Other....................................... 216 36
---------------- --------------
$7,241 $11,458
================ ==============
LIABILITIES & STOCKHOLDERS'
EQUITY
Current Liabilities:
Bank debt................................... $1,073 $1,033
Accounts payable............................ 1,784 1,118
Accrued liabilities......................... 815 723
Dividends payable........................... 373 72
---------------- --------------
Total current liabilities................ 4,045 2,946
Minority interest in consolidated
subsidiary................................. 440 --
Stockholders' Equity:
Preferred stock, $.01 par value;
Authorized-1,000,000 shares:
Series A Convertible; Outstanding
- 2,400 shares
in 1999 and 3,000 in 1998............... 1,909 2,387
Series B Convertible; Outstanding
- 1,170 shares
in 1999 and none in
1998.................................... 982 --
Common stock, $.10 par value; Authorized-
20,000,000 shares; Outstanding - 9,637,621
and 7,058,136 shares in 1999 and 1998,
respectively.............................. 963 705
Additional paid-in capital.................. 14,837 12,643
Retained deficit............................ (15,541) (5,680)
Accumulated other comprehensive loss........ (200) (249)
---------------- --------------
2,950 9,806
Deferred compensation....................... (194) (1,294)
---------------- --------------
Total stockholder's equity......... 2,756 8,512
---------------- --------------
$7,241 $11,458
================ ==============
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
PREFERRED STOCK COMMON STOCK PAID-IN RETAINED
CAPITAL DEFICIT
-------------------------------------------------------------------------------
SHARES BOOK SHARES PAR VALUE
VALUE
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at August 1, 1997....................... -- -- 2,553 $ 255 $2,919 $(2,006)
Conversion of convertible debentures, net....... -- -- 720 72 625 --
Private placement of common stock, net.......... -- -- 1,050 105 923 --
Issuance of common stock for investment in
affiliates, net............................... -- -- 210 21 159 --
Issuance of common stock for acquisitions, net.. -- -- 1,350 135 5,490 --
Stock and warrants issued for services.......... -- -- 1,000 100 1,480 --
Exercise of stock options...................... -- -- 175 17 158 --
Sale of convertible preferred stock and
warrants...................................... 3 $2,387 -- -- 255 --
Dividend on convertible preferred stock......... -- -- -- -- (72) --
Conversion feature on convertible preferred
stock......................................... -- (1,000) -- -- 1,000 --
Dividend on beneficial conversion feature....... -- 1,000 -- -- (1,000) --
Deferred compensation related to common
stock options................................. -- -- -- -- 706 --
Amortization of deferred compensation........... -- -- -- -- -- --
Translation adjustment.......................... -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- (3,674)
-------------------------------------------------------------------------------
Balance at July 31, 1998 3 2,387 7,058 705 12,643 (5,680)
Private placements of common stock, -- -- 590 59 427 --
net............
Common stock issued for -- -- 200 20 168 --
services.......................
Exercise of stock options and -- -- 610 61 (39) --
warrants................
Dividends on convertible preferred -- -- -- -- (391) --
stock............
Sale of convertible preferred stock and warrants 2 1,384 -- -- 114 --
Conversion feature on convertible
preferred -- (533) -- -- 533 --
stock...................................................................
Dividend on beneficial conversion -- 533 -- -- (533) --
feature...........
Conversion of convertible preferred (1) (880) 1,179 118 837 --
stock...........
Amortization of deferred compensation........... -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE DEFERRED STOCKHOLDERS'
LOSS COMPENSATION EQUITY
------------------------------------------------
<S> <C> <C> <C>
Balance at August 1, 1997....................... -- -- $1,168
Conversion of convertible debentures, net....... -- -- 697
Private placement of common stock, net.......... -- -- 1,028
Issuance of common stock for investment in
affiliates, net............................... -- -- 180
Issuance of common stock for acquisitions, net.. -- -- 5,625
Stock and warrants issued for services.......... -- $(1,580) --
Exercise of stock options...................... -- -- 175
Sale of convertible preferred stock and
warrants...................................... -- -- 2,642
Dividend on convertible preferred stock......... -- -- (72)
Conversion feature on convertible preferred
stock......................................... -- -- --
Dividend on beneficial conversion feature....... -- -- --
Deferred compensation related to common
stock options................................. -- (706) --
Amortization of deferred compensation........... -- 992 992
Translation adjustment.......................... $(249) -- (249)
Net loss........................................ -- -- (3,674)
---------------- ----------- -------------
Balance at July 31, 1998 (249) (1,294) 8,512
Private placements of common stock, -- -- 486
net............
Common stock issued for -- (188) --
services.......................
Exercise of stock options and -- -- 22
warrants................
Dividends on convertible preferred -- -- (391)
stock............
Sale of convertible preferred stock and warrants -- -- 1,498
Conversion feature on convertible
preferred -- -- --
stock...........................................
Dividend on beneficial conversion -- -- --
feature...........
Conversion of convertible preferred -- -- 75
stock...........
Amortization of deferred compensation........... -- 1,288 1,288
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Translation adjustment.......................... -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- (9,861)
Sale of subsidiary capital stock................ -- -- -- -- 1,078 --
-------------------------------------------------------------------------------
Balance at July 31, 1999 4 $2,891 9,637 $963 $14,837 $(15,541)
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Translation adjustment.......................... 49 -- 49
Net loss........................................ -- -- (9,861)
Sale of subsidiary capital stock................ -- -- 1,078
---------------- ----------- --------------
Balance at July 31, 1999 $(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 1,553 --
subsidiary.............................
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 stock............................ -- $ 697
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 Electromedics 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 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.
F-9
<PAGE>
Income Taxes
- ------------
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Foreign Currency Translation
- ----------------------------
The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation. All balance sheet
amounts have been translated using the exchange rates in effect at the balance
sheet date. Statement of Operations amounts have been translated using average
exchange rates. The gains and losses resulting from changes in exchange rates
from the date of acquisition of Rosch GmbH to July 31, 1999 have been reported
separately as a component of stockholders' equity. The aggregate transaction
gains and losses are insignificant.
Comprehensive Income (Loss)
- ---------------------------
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130
establishes new rules for the reporting and display of comprehensive income or
loss and its components; however, the adoption of this statement had no impact
on the Company's results of operations or stockholders' equity. For the year
ended July 31, 1999, the Company's only item of other comprehensive income was
the foreign currency translation adjustment recognized in consolidation of its
German subsidiary, Rosch GmbH. SFAS 130 requires such adjustments, which prior
to adoption were reported separately in stockholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
The foreign currency translation adjustment and comprehensive loss for
the year ended July 31, 1999 was $49,000 and ($9,812,000), respectively. The
foreign currency translation adjustment and comprehensive loss for the year
ended July 31, 1998 was ($249,000) and ($3,923,000), respectively. As of July
31, 1999 and 1998, the cumulative translation adjustment and accumulated other
comprehensive loss was ($200,000) and ($249,000), respectively. The foreign
currency translation adjustment and comprehensive loss for the three months
ended October 31, 1999 was $(40,000) and $(160,000), respectively. As of October
31, 1999, the cumulative translation adjustment and accumulated other
comprehensive loss was $(240,000).
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.
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
F-10
<PAGE>
purchase and, accordingly, the operating results of DDS have been included
in the Company's consolidated financial statements since the date of
acquisition.
On May 12, 1998, the Company acquired Equidyne Systems, Inc. ("ESI).
ESI was founded in 1990 and is engaged in the development of the INJEX(TM)
needle-free drug injection delivery system, which is designed to eliminate the
risks of contaminated needle stick accidents and the resulting cross
contamination of hepatitis, HIV, and other diseases. The total cost of
acquisition was approximately $2.6 million consisting of 600,000 shares of the
Company's common stock. The acquisition was accounted for as a purchase and,
accordingly, the operating results of ESI have been included in the company's
consolidated financial statements since the date of acquisition. The excess of
the aggregate purchase price over the fair market value of net assets acquired
of approximately $3.0 million, which was allocated to patents, is being
amortized over 15 years, the remaining life of the patent.
The following unaudited proforma consolidated financial results of
operations assume the acquisitions of DDS, ESI and Rosch GmbH (See Note 5)
occurred as of the beginning of Fiscal 1998:
Year Ended July 31, 1998
----------------------------
Net sales................... $ 8,970,000
Net loss.................... $(3,813,000)
Loss per share:
Basic.............. $(.66)
======
Diluted............ $(.66)
======
3. DIVESTITURES
------------
In January 1999, the Company announced its intention to focus its
resources on the needleless injection system ("INJEX(TM)") being developed by
its wholly-owned subsidiary, ESI, and hired an investment banking firm to assist
in the marketing and selling of the Company's audiometric and U.S. dental
businesses.
In April 1999, the Company sold certain assets of its audiometrics
business for $625,000. The sale was made pursuant to an Assets Purchase
Agreement whereby the purchaser obtained all of the Company's domestic
audiometric inventory, as well as all trademarks, patents and other rights
associated with the audiometrics business, including the name "American
Electromedics". As a result, the Company intends to effect a change in the name
of the Corporation in the near future. The sale resulted in the recognition of a
net loss of $98,000.
To date, the Company's efforts to sell DDS have been unsuccessful, and
based upon these results, the Company has revised its estimates as to the
ultimate sale price which could be obtained for DDS. In addition, since 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.
F-11
<PAGE>
4. INVENTORIES:
------------
Inventories consist of the following at July 31:
1999 1998
---- ----
Raw materials $ 133,000 $ 291,000
Work-in-process - 29,000
Finished goods 1,347,000 1,631,000
-- --------- - ---------
$1,480,000 $1,951,000
========== ==========
5. INVESTMENT IN AFFILIATE:
-----------------------
The Company changed its method of accounting for Rosch GmbH from the
equity method to a consolidated basis on August 11, 1997 based upon the
Company's determination that it had reached the definition of control of Rosch
GmbH as of August 11, 1997 under generally accepted accounting principles. The
Company's determination of control of Rosch GmbH was based primarily upon the
successful completion of negotiations with the remaining owner to acquire
effective voting control. For the first quarterly period ended October 31, 1997,
the Company continued to recognize earnings of Rosch GmbH up to its 50%
ownership share. On December 18, 1997, the Company closed on the purchase of the
remaining 50% of the outstanding capital stock of Rosch GmbH, for $50,000 plus
105,000 shares of common stock, pursuant to a Stock Purchase Option Agreement,
dated as of November 1, 1997. As a result of this transaction, the Company
recognized 100% of all activity of Rosch GmbH for the second quarterly period
ended January 31, 1998, and thereafter.
On July 8, 1999, the Company's German subsidiary, Rosch GmbH, received
a capital infusion of approximately $1.5 million from an outside investment
banking firm. This contribution of capital diluted the Company's ownership in
Rosch GmbH from 100% to 75%. As the Company continues to maintain a controlling
interest in Rosch GmbH, it continues to consolidate the operation of Rosch GmbH.
As a result, the Company has recognized a minority interest in the consolidated
subsidiary in an amount equivalent to 25% of the subsidiary's net assets as of
July 31, 1999, or $440,000. This balance includes the minority shareholder's 25%
share of Rosch GmbH's net losses attributed to the period July 8 through July
31, 1999, which was approximately $35,000.
In September 1999, a minority stockholder of Rosch GmbH acquired an
additional 24.99% of Rosch GmbH through two transactions consisting of (1) a
capital contribution into Rosch GmbH of approximately $1.6 million, and (2) a
direct purchase of a portion of the Company's ownership interest in Rosch GmbH
for approximately $1.6 million. These transactions resulted in the recognition
of a gain on the sale of Rosch GmbH capital stock of approximately $862,000, and
a reduction in the Company's ownership percentage of Rosch GmbH from 75% to
50.01%. As the Company continues to maintain a controlling interest in Rosch
GmbH, it continues to consolidate the operations of Rosch GmbH. The transactions
also resulted in the recognition of an increase in the minority interest of the
consolidated subsidiary in the amount necessary to bring that interest up to the
current minority ownership percentage of 49.99% of Rosch GmbH's net assets as of
October 31, 1999, or $1,067,000. This amount includes the minority stockholders'
share of Rosch GmbH's net losses for the three month period ended October 31,
1999, which was approximately $113,000.
F-12
<PAGE>
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. During
the three month period ended October 31, 1999, the total outstanding balance
under these loans decreased by approximately $564,000 based upon scheduled
payments under the term loans and principle payments under the lines of credit
made based upon the Company's cash position.
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.
F-13
<PAGE>
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 assets (4,095,000) (1,650,000)
------------------- --------------------
Net deferred tax assets $ -0- $ -0-
=================== ====================
A reconciliation of income taxes computed at the federal statutory rates to
income tax expense is as follows:
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%
==================================================
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
F-14
<PAGE>
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.
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
F-15
<PAGE>
could obtain a significant portion of the common stock upon
conversion, to the detriment of the then holders of the common stock.
The Series A Preferred Stock has a liquidation preference of $1,000 per
share, plus any accrued and unpaid dividends, and provides for an annual
dividend equal to 5% of the liquidation preference, which may be paid at the
election of the Company in cash or shares of its common stock. The annual
dividend rate was increased to 12% as of June 5, 1998 because the Company did
not file the Registration Statement covering the common stock underlying the
Series A Preferred Stock within 30 days of the initial closing. The Registration
Statement was filed on July 10, 1998, and was declared effective in March 1999.
The rate had increased to 18% through the effective date of the Registration
Statement, at which time the dividend rate returned to 5%.
The conversion discount of the preferred stock is considered to be an
additional preferred stock dividend. The maximum discount available of
$1,000,000 was initially recorded as a reduction of preferred stock and an
increase to additional paid-in capital. As the preferred stock was immediately
convertible upon issuance, the Company then recognized additional dividends, by
recording a charge to income available to common stockholders.
During the year ended July 31, 1999, the holder of Series A Convertible
Preferred Stock exercised its option and converted 600 shares of preferred stock
and accrued dividends of approximately $66,000 into 747,627 shares of the
Company's common stock.
Series B:
On February 3, 1999, the Company sold 1,600 shares of Series B
Preferred Stock to three purchasers for $1,000 per share or an aggregate
purchase price of $1.6 million, together with Warrants to purchase up to 25,000
shares of the Company's Common Stock at an exercise price of $3.00 per share and
exercisable until January 31, 2002. In addition, the Company issued warrants to
purchase up to 60,000 shares of the Company's common stock to the placement
agent, exercisable at $3.00 per share until September 23, 2001. On the date of
issuance, the Company determined these warrants had a value of $114,000.
The Series B Preferred Stock is convertible into shares of common stock
at a conversion rate equal to $1,000 divided by the lower of (i) $2.00 or (ii)
75% of the average closing bid price for the common stock for the five trading
days immediately preceding the conversion date. The Company may force conversion
of all ( and not less than all) of the outstanding shares of Series B Preferred
Stock at any time after the first anniversary of the effective date of a
registration statement covering the underlying shares of common stock. There is
no minimum conversion price. Should the bid price of the Common Stock fall
substantially prior to conversion, the holders of the Series B Preferred Stock
could obtain a significant portion of the Common Stock upon conversion, to the
detriment of the then holders of the common stock.
The Series B Preferred Stock has a liquidation preference of $1,000 per
share, plus any accrued and unpaid dividends, and provides for an annual
dividend equal to 5% of the liquidation preference, which may be paid at the
election of the Company in cash or shares of its common stock.
The conversion discount of the Series B Preferred Stock is considered
to be an additional preferred stock dividend. The maximum discount available of
$533,000 was initially recorded as a reduction of preferred stock and an
increase to additional paid-in capital. As the preferred stock became fully
convertible effective May 1, 1999, the Company recognized the additional
dividends at that date by recording a charge to income available to common
stockholders.
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.
F-16
<PAGE>
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.
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)
F-17
<PAGE>
Pro forma net loss per share $ (1.50) $ (1.17)
Option activity for the years ended 1999 and 1998 is summarized below:
1999 1998
-------------------------------------------------------
Shares Weighted Shares Weighted
Average Average
Exercise Exercise
Price Price
-------------------------------------------------------
Outstanding at 1,774,633 $1.71 403,333 $3.23
beginning 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 2,195,619 1.62 1,774,633 1.71
of year ========= =========
Exercisable at end 1,643,292 1.57 1,494,133 1.63
of year ========= =========
Available for 20,000 20,000
future grants ====== ======
Weighted-average $2.76 $8.20
fair value of options ============= =============
granted during year
The following table presents weighted-average price and life information about
significant option grants outstanding at July 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00 - $2.25 1,797,319 3.5 years $1.14 1,344,992 $1.02
$3.00 - $4.38 398,300 3.67 years $3.76 298,300 $4.02
---------------- --------------
2,195,619 1,643,292
================ ==============
</TABLE>
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
F-18
<PAGE>
audiometrics business assets (See Note 3). Effective May 1, 1999, the Company
commenced a sublease of its corporate offices which expires in February 2000.
Rent expense for the years ended July 31, 1999 and 1998 was $34,000 and $33,000,
respectively.
Rosch GmbH leases its administrative and sales offices under a 60-month
lease expiring in May 2002. Rent expense for the years ended July 31, 1999 and
1998 was $98,000 and $105,000, respectively.
The Company's domestic subsidiaries lease operating facilities under
various operating leases expiring through October 2001. Total rent expense under
these leases for the year ended July 31, 1999 was $57,000.
11. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS:
------------------------------------------------
The Company's primary customers are in the medical field. At July 31,
1999 and July 31, 1998, substantially all accounts receivable balances are
concentrated in this industry. The Company sells products and extends credit
based on an evaluation of the customer's financial condition, generally without
regard to collateral. Exposure to losses on receivables is principally dependent
on each customer's financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
12. BUSINESS SEGMENT AND FOREIGN OPERATIONS:
---------------------------------------
The Company operates in one business segment - the sale of medical equipment.
The Company's foreign operations are subject to certain economic and regulatory
risks and uncertainties specific to Germany and the European geographic region.
Such risks and uncertainties could disrupt the Company's foreign operations and
have a material impact on the Company's financial results.
Transfers to affiliates are made at prices above the Company's cost and include
charges for freight and handling.
<TABLE>
<CAPTION>
DOMESTIC GERMAN
OPERATIONS OPERATIONS ELIMINATIONS CONSOLIDATED
------------------ ------------------- ------------------- --------------------
Year ended July 31, 1999: (Thousands)
<S> <C> <C> <C> <C>
Net sales $1,787 $5,002 $6,789
Transfers between
geographic areas 79 121 $(200) --
------------------ ------------------- ------------------- --------------------
Net sales 1,866 5,123 (200) 6,789
Loss from operations (9,667) (542) (10,209)
Assets 3,582 3,659 7,241
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
DOMESTIC GERMAN
OPERATIONS OPERATIONS ELIMINATIONS CONSOLIDATED
------------------ ------------------- ------------------- --------------------
Year ended July 31, 1998: (Thousands)
<S> <C> <C> <C> <C>
Net sales $2,155 $4,870 $7,025
Transfers between
geographic areas 131 530 (661) --
------------------ ------------------- ------------------- --------------------
Net sales 2,286 5,400 (661) 7,025
Loss from operations (2,989) (381) (3,370)
Assets 8,933 2,525 11,458
</TABLE>
Prior to the acquisition and consolidation of Rosch GmbH in fiscal year 1998,
the Company did not conduct any significant business in foreign countries.
13. GOING CONCERN
-------------
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements, the Company has incurred net losses of $9,861,000 and $3,674,000 for
the years ended July 31, 1999, and 1998, respectively. In addition, the Company
incurred net losses of $120,000 for the three month period ended October 31,
1999 and its current liabilities exceeded 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>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
OCTOBER 31,
----------------
1999
----------------
(UNAUDITED)
ASSETS (THOUSANDS)
Current Assets:
Cash and cash equivalents..................... $ 1,071
Accounts 777
receivable....................................
Inventories................................... 1,552
Prepaid and other current assets.............. 219
----------------
Total current assets.................. 3,619
Property and 754
Equipment.....................................
Accumulated depreciation...................... (152)
----------------
602
Goodwill...................................... 708
Patents....................................... 2,807
Other......................................... 632
----------------
$8,368
================
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Bank debt..................................... $509
Accounts payable.............................. 1,244
Accrued liabilities........................... 648
Dividends payable............................. 514
----------------
Total current liabilities.................. 2,915
Minority interest in consolidated subsidiary.. 1,507
Stockholders' Equity:
Preferred stock, $.01 par value;
Authorized-1,000,000 shares:
Series A Convertible; Outstanding - 2,400
shares...................................... 1,909
Series B Convertible; Outstanding - 1,170 982
shares.....................................
Common stock, $.10 par value; Authorized
- 20,000,000 shares;
Outstanding - 9,830,955 shares.............. 983
Additional paid-in capital.................... 16,080
Retained deficit.............................. (15,661)
Accumulated other comprehensive loss.......... (240)
----------------
4,053
Deferred compensation......................... (107)
----------------
Total stockholder's equity........... 3,946
----------------
$8,368
================
See accompanying notes.
F-21
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED OCTOBER 31
-------------------------------------
1999 1998
-----------------------------------
(Thousands, except per share
amounts)
Net sales.............................. $ 802 $ 2,150
Cost of goods sold..................... 502 1,263
-----------------------------------
Gross profit........................ 300 887
Selling, general and
administrative expenses............... 1,253 1,922
Research and development............... 136 128
-----------------------------------
Total operating expenses............ 1,389 2,050
-----------------------------------
Operating loss......................... (1,089) (1,163)
Other income (expenses):
Gain on sale of subsidiary
capital stock....................... 862 --
Interest, net....................... (12) (17)
Minority interest in affiliate...... 113 --
Other............................... 6 (106)
-----------------------------------
969 (123)
-----------------------------------
Net loss............................... $ (120) $ (1,286)
===================================
Net loss attributable
to common stockholders*............... $ (261) $ (1,403)
===================================
Weighted average number
of common and common equivalent shares
outstanding........................... 9,798,732 7,064,636
===================================
Net loss per share,
basic and diluted..................... $ (.03) $ (.20)
===================================
See accompanying notes.
* The quarters ended October 31, 1999 and 1998 include the impact of $141,000
and $117,000, respectively, of dividends on Preferred Stock.
F-22
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31
-----------------------------
1999 1998
-----------------------------
OPERATING ACTIVITIES: (Thousands)
<S> <C> <C>
Net loss............................................................. $(120) $(1,286)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........................................ 185 132
Deferred compensation amortization................................... 87 432
Gain on sale of subsidiary capital stock............................. (862) --
Minority interest ................................................... (113) --
Changes in operating assets and liabilities:
Accounts receivable................................................ 108 (206)
Inventories, prepaid and other current assets...................... (120) (402)
Accounts payable and accrued liabilities........................... (622) 532
---------------- ------------
Net cash used in operating activities................................ (1,457) (798)
INVESTING ACTIVITIES:
Proceeds from sale of subsidiary capital stock....................... 1,638 --
Purchase of property and equipment, net.............................. (494) (36)
---------------- ------------
Net cash provided by (used in) investing activities.................. 1,144 (36)
FINANCING ACTIVITIES:
Net proceeds (payments) on debt and bank lines-of-credit............. (549) 682
Issuance of common stock, net........................................ 100 (79)
Issuance of capital stock by consolidated 1,635 --
subsidiary..........................................................
Proceeds from exercise of common stock options....................... -- 15
---------------- ------------
Net cash provided by financing activities............................ 1,186 618
---------------- ------------
Effect of exchange rate on cash...................................... (12) 1
---------------- ------------
Increase (decrease) in cash and cash equivalents..................... 861 (215)
Cash and cash equivalents, beginning of period....................... 210 396
---------------- ------------
Cash and cash equivalents, end of period............................. $ 1,071 $ 181
================ ============
Noncash transaction:
Common Stock issued for
services............................................................ $ 75 --
</TABLE>
See accompanying notes.
F-23
<PAGE>
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999
(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 month period ended October 31, 1999 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
The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with Statement of Financial Standards
No. 52, Foreign Currency Translation. All balance sheet amounts have been
translated using the exchange rates in effect at the balance sheet date.
Statement of Operations amounts have been translated using average exchange
rates. The gains and losses resulting from the changes in exchange rates from
the date of acquisition of Rosch GmbH to October 31, 1999 have been reported
separately as a component of stockholders equity. The aggregate transaction
gains and losses are insignificant.
Comprehensive Income (Loss)
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130
establishes new rules for the reporting and display of comprehensive income or
loss and its components, however, the adoption of this statement had no impact
on the Company's net income or shareholders' equity. For the three months ended
October 31, 1999, the Company's only item of other comprehensive income was the
foreign currency translation adjustment recognized in consolidation of its
partially-owned German subsidiary, Rosch GmbH. SFAS 130 requires such
adjustments, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
The foreign currency translation adjustment and comprehensive loss for
the three months ended October 31, 1999 was $(40,000) and ($160,000),
respectively. As of October 31, 1999, the cumulative translation adjustment and
accumulated other comprehensive loss was ($240,000).
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 a net losses of $120,000 for the three
month period ended October 31, 1999. In addition, the Company incurred a net
loss of $9,861,000 for the year ended July 31, 1999. This and other factors
indicate that the Company may be unable to continue as a going concern for a
reasonable period of time.
F-24
<PAGE>
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.
2 DEBT
----
The Company's 50.01% owned German subsidiary, Rosch GmbH Medizitechnik
("Rosch GmbH") has two term loans and two revolving lines of credit with
German-based banks. During the three month period ended October 31, 1999, the
total outstanding balance under these loans decreased by approximately $564,000
based upon scheduled payments under the term loans and principle repayments
under the lines of credit made based upon the Company's cash position.
3. INVESTMENT IN AFFILIATE
-----------------------
In September 1999, a minority shareholder of Rosch GmbH acquired an
additional 24.99% of Rosch GmbH through two transactions consisting of (1) a
capital contribution into Rosch GmbH of approximately $1.6 million, and (2) a
direct purchase of a portion of the Company's ownership interest in Rosch GmbH
for approximately $1.6 million. These transactions resulted in the recognition
of a gain on the sale of Rosch GmbH capital stock of approximately $862,000, and
a reduction in the Company's ownership percentage of Rosch GmbH from 75% to
50.01%. As the Company continues to maintain a controlling interest in Rosch
GmbH, it continues to consolidate the operations of Rosch GmbH. The transactions
also resulted in the recognition of an increase in the minority interest of the
consolidated subsidiary in the amount necessary to bring that interest up to the
current minority ownership percentage of 49.99% of Rosch GmbH's net assets as of
October 31, 1999, or $1,067,000. This amount includes the minority stockholders'
share of Rosch GmbH's net losses for the three month period ended October 31,
1999, which was approximately $113,000.
4. EQUITY
------
During the three month period ended October 31, 1999, the Company
closed one private placement for 133,334 shares of its Common Stock for
$100,000, and issued 60,000 shares of its Common Stock, plus a five-year warrant
to purchase up to 20,000 shares of the Company's 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.
5. YEAR 2000
---------
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company has completed its plan to resolve the Year 2000 Issue which
involved the following four phases: assessment, remediation, testing and
implementation. The assessment indicated that most of the Company's significant
information technology systems would be affected, including its financial
information system which includes its general ledger, accounts payable, billing
and inventory systems. The assessment was also undertaken on the Company's
products, however, following the sale of the audiometrics assets in April 1999,
the Company no
F-25
<PAGE>
longer sells products which utilize software and hardware (embedded chips)
which could require remediation to be Year 2000 compliant. Accordingly, the
Company does not believe that the Year 2000 presents a material exposure as it
relates to the Company's products. The Company's manufacturing processes consist
principally of unautomated assembly of components manufactured by outside
third-parties. The Company has begun to gather information about the Year 2000
compliance status of its significant suppliers, and will take appropriate steps
to monitor their compliance on an ongoing basis.
Regarding its information technology exposures, the Company utilizes an
unmodified off-the-shelf software package. The Company has purchased and
installed a year 2000-compliant upgrade, and is now fully year 2000 compliant
with respect to its financial information systems, and as the new software is
also an unmodified off-the-shelf package, testing to ensure Year 2000 compliance
is not necessary.
The Company does not presently maintain direct interfaces with any
third-party vendors. The Company has made various queries of its significant
suppliers that do not share information systems with the Company (external
agents). To date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of assuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
The total cost of the Company's Year 2000 project was approximately
$5,000. The project costs consisted principally of the cost of new software,
which has been capitalized.
Management of the Company believes it has effectively resolved the Year
2000 Issue. However, exposure continues to exist relative to the Company's
outside suppliers, which could have a materially adverse effect on its
manufacturing and shipping operations. In addition, disruptions in the economy
generally resulting from Year 2000 issues could also materially adversely affect
the Company. The Company currently has no contingency plans in place in the
event of an unforeseen Year 2000 problem. The Company plans to continue to
monitor its suppliers, and will develop such a plan if necessary.
6. SUBSEQUENT EVENTS
-----------------
Effective November 15, 1999, the Company closed an agreement (the
"Fukushima Agreement") with Jim Fukushima, a director and Vice Chairman of the
Company, whereby Mr. Fukushima purchased 800,000 shares of the Company's 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, through a sub-participation contract with Andy Rosch, the general
manager of Rosch GmbH, in exchange for a payment of $2 million. The proceeds
were used principally for the cash payments described below. This sale resulted
in the reduction of the Company's ownership percentage in Rosch GmbH to 45.01%.
Effective November 16, 1999, pursuant to an agreement with the holders
of the Company's outstanding 1,170 shares of Series B Preferred Stock, the
Company redeemed all such outstanding shares, together with all accrued and
unpaid dividends, penalties and redemption premiums, in exchange for a payment
of $1,170,000 in cash and the issuance of 369,000 shares of the Company's Common
Stock.
Effective November 17, 1999, pursuant to a Securities Exchange
Agreement with the holder of the Company's outstanding Series A Preferred Stock,
the Company made a cash payment of $840,000, issued 2,228,312 shares of its
Common Stock and issued a Promissory Note and Security Agreement (the "Secured
Note") in the principal amount of $1,050,000 in exchange for (i) the conversion
of 1,350 shares of Series A Preferred Stock and the accrued dividends on all
outstanding Series A Preferred Stock, (ii) the redemption of 700 shares of
Series A
F-26
<PAGE>
Preferred Stock and (iii) the exchange of 350 shares of Series A Preferred
Stock for the Secured Note. The Secured Note is non-interest bearing, 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 GmbH or (ii) April 30, 2000,
secured by certain intellectual property rights of the Company, and the
principal amount may 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 exceeds
$3.00 per share.
Effective November 18, 1999, the Company sold 1,333,333 shares of
Common Stock to Concord Effekten AG, a minority stockholder of Rosch GmbH, for a
purchase price of $1 million.
F-27
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS
BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN 5,047,919 SHARES
THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE COMMON STOCK
BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
SELLING STOCKHOLDERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN EQUIDYNE CORPORATION
OFFER TO BUY ANY SECURITIES OTHER THAN THOSE
SPECIFICALLY OFFERED HEREBY OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THESE
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
EXCEPT WHERE OTHERWISE INDICATED, THIS PROSPECTUS
SPEAKS AS OF THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE PROSPECTUS
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY........................... 2
THE COMPANY.................................. 2
THE OFFERING................................. 2
SUMMARY FINANCIAL AND OPERATING INFORMATION.. 3 JANUARY 31, 2000
RISK FACTORS................................. 4
USE OF PROCEEDS.............................. 10
DIVIDEND POLICY.............................. 10
MARKET FOR THE COMPANY'S
COMMON STOCK AND RELATED
STOCKHOLDER MATTERS..................... 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS.............................. 11
BUSINESS..................................... 15
LEGAL PROCEEDINGS............................ 22
MANAGEMENT................................... 23
EXECUTIVE COMPENSATION....................... 24
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................. 28
PRINCIPAL STOCKHOLDERS....................... 29
DESCRIPTION OF SECURITIES.................... 30
SELLING STOCKHOLDERS......................... 31
PLAN OF DISTRIBUTION......................... 32
LEGAL MATTERS................................ 33
EXPERTS...................................... 33
AVAILABLE INFORMATION........................ 33
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 $ 2,781.92
Legal Fees and Expenses......... 35,000.00
Accounting Fees and Expenses.... 30,000.00
Printing........................ 5,000.00
Miscellaneous Expenses.......... 7,218.08
Total.................. $80,000.00
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
II-1
<PAGE>
Company's Form 8-K for an event of February 3, 1999 (the
"February 1999 Form 8-K"), and incorporated herein by
reference).
3.2 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).
3.3 By-Laws of the Company (filed as Exhibit 3(b) to Registration
No. 2-71775, and incorporated herein by reference).
3.4 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).
10.3.1 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).
10.6.1 Loan Agreement, dated October 4, 1996, between the Company and
Citizens Bank New Hampshire (the "Bank") (filed as Exhibit 10.9.1
to the Company's Form 10-KSB for the fiscal year ended July 27,
1996 (the "1996 Form 10-KSB") and incorporated herein by
reference).
10.6.2 Security Agreement, dated October 4, 1996, between the Company
and the Bank (filed as Exhibit 10.9.2 to the Company's 1996 form
10-KSB, and incorporated herein by reference).
10.6.3 Revolving Line of Credit Promissory Note, dated October 4, 1996,
from the Company to the Bank (filed as Exhibit 10.9.3 to the
Company's 1996 Form 10-KSB, and incorporated herein by
reference).
10.6.4 Term Promissory Note, dated October 4, 1996, from the Company to
the Bank (filed as Exhibit 10.9.4 to the Company's 1996 Form
10-KSB, and incorporated herein by reference).
II-2
<PAGE>
10.6.5 Forebearance and Workout Agreement, dated as of October 28, 1997,
between the Company and the Bank (filed as Exhibit 10.12 to the
Company's Form 10-KSB for the fiscal year ended July 31, 1997,
and incorporated herein by reference).
10.7 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).
10.8** Amended Employment Agreement, dated as of January 1, 1998,
between the Company and Thomas A. Slamecka.
10.9** Employment Agreement, dated January 1, 1998, between the Company
and Michael T. Pieniazek.
10.10* Employment Agreement, dated December 1, 1999, between the Company
and Joseph R. Nelson.
10.11.1 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).
10.11.2 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).
10.12 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).
10.13 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).
10.14 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).
10.15.1 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).
10.15.2 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).
10.15.3 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).
10.15.4 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).
II-3
<PAGE>
10.15.5 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).
10.16 Stock Purchase Option Agreement, dated November 1, 1997,
between the Company and Andy Rosch (without exhibits) (filed
as Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB
for the period ended October 31, 1997 and incorporated herein by
reference).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
10.24.1 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).
10.24.2 Form of Warrant Agreement (filed as Exhibit 10.2 to the
February 1999 Form 8-K and incorporated herein by reference).
10.24.3 Form of Registration Rights Agreement (filed as Exhibit 10.3
to the February 1999 Form 8-K and incorporated herein by
reference).
10.24.4 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).
II-4
<PAGE>
10.25 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).
10.26 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).
10.27 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).
21.** List of subsidiaries.
23.1* Consent of Ernst & Young LLP
23.2* Consent of Thelen Reid & Priest LLP (included as part of Exhibit
5).
24.** Power of Attorney.
- -------------------------------------
* Filed herewith.
** Previously Filed.
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
DGCL or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer of
controlling person of the Registrant in the successful defense of any action,
II-5
<PAGE>
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-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 28TH DAY OF JANUARY, 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
--------- ----- ----
* Chairman of the Board
- ---------------------------
Thomas A. Slamecka
Director
- ---------------------------
J. Randall Nelson
/s/Michael T. Pieniazek Director, Executive Vice January 28, 2000
- --------------------------- President and Chief
Michael T. Pieniazek Financial Officer
Director
- ---------------------------
Jim Fukushima
* Director
- ---------------------------
Blake C. Davenport
* Director
- ---------------------------
Andy Rosch
* Director
- ---------------------------
Marcus R. Rowan
*By: /s/Michael T. Pieniazek Attorney-in-fact for January 28, 2000
--------------------------- each of the persons
Michael T. Pieniazek indicated by an asterisk
II-7
EXHIBIT 5
New York, New York
January 27, 2000
Equidyne Corporation
238 Littleton Road
Westford, Massachusetts 01886
Gentlemen:
We have acted as counsel to Equidyne Corporation, a Delaware
corporation (the "Company"), in connection with the preparation of an
Amendment No. 1 to a Registration Statement on Form SB-2 (the "Registration
Statement") relating to the registration of (A) 4,202,919 shares of the
Company's Common Stock, $.10 par value per share (the "Common Stock"), which
have been issued in various private placements (the "Private Placements"),
(B) 845,000 shares of Common Stock issuable upon exercise of presently
exercisable warrants (the "Warrants").
- ------
This opinion is being rendered in connection with the filing by the
Company of an Amendment No. 1 to the Registration
Statement.
For purposes of this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the
Registration Statement, including the amendments thereto; (ii) the
Certificate of Incorporation and By-Laws of the Company, as in effect on the
date hereof; (iii) the warrant agreements relating to the Warrants; (iv)
agreements and documents relating to the Private Placements; (v) the resolutions
adopted by the Board of Directors of the Company relating to each of the
foregoing and (vi) such other documents, certificates or other records as we
have deemed necessary or appropriate.
Based upon the foregoing, and subject to the qualifications hereinafter
expressed, we are of the opinion that:
(1) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware.
(2) The shares of Common Stock included in the Registration Statement
which are presently issued and outstanding were duly authorized,
validly issued, and are fully paid and non-assessable.
(3) The shares of Common Stock included in the Registration Statement
to be issued upon the exercise of the Warrants will be
duly authorized and validly issued, and fully paid and
non-assessable when the Warrants are duly exercised and
the exercise price is paid for the shares of Common Stock
underlying such warrants in accordance with the terms
of the respective warrant agreements.
We are members of the Bar of the State of New York and do not hold
ourselves out as experts concerning, or qualified to render opinions with
respect to, any laws other than the laws of the State of New York, the
federal laws of the United States and the General Corporation Law of the
State of Delaware.
We hereby consent to the reference to this firm under the caption
"Legal Matters" in the Prospectus included in the Registration Statement and
to the filing of this opinion with the Securities and Exchange Commission as
Exhibit 5 to the Registration Statement.
Very truly yours,
/s/Thelen Reid & Priest LLP
THELEN REID & PRIEST LLP
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT, dated as of December 1, 1999 by and between
AMERICAN ELECTROMEDICS, INC., a Delaware corporation (the "Company"), and J.
Randall Nelson (the "Executive").
W I T N E S E T H
-----------------
WHEREAS, the Company desires to employ the Executive in the capacity of
President and Chief Executive Officer, and the Executive desires to render such
services and to be so employed, all upon and subject to the terms and conditions
set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements hereinafter set forth, the parties hereto, intending to be legally
bound, agree as follows:
1. Retention of Employment. The Company hereby agrees to employ the
------------------------
Executive as President and Chief Executive of the Company , and the Executive
hereby accepts such employment, all upon and subject to the terms and conditions
hereinafter set forth.
2. Term. The term (the "Term") of the employment under this
-----
Agreement shall be for an initial period which commencing on December 1, 1999,
and terminating on December 1, 2002 and automatically renewed for additional one
(1) year periods thereafter, unless either party gives the other written notice
of termination not less than sixty (60) days prior to the end of the initial
Term or any renewal Term.
3. Position, Duties and Representations.
-------------------------------------
3.01 Service with the Company. The Executive shall serve
------------------------
as President and Chief Executive Officer of the Company. The Executive agrees
to perform such executive employment duties for the Company consistent with
such position specified above, and as the Chairman of The Board shall assign
to him from time to time consistent with his position with the Company.
3.02 Scope of Services. The Executive agrees to serve the
------------------
Company faithfully and to the best of his ability and to devote his full
business time, attention and efforts necessary to advance the business and
affairs of the Company during the Term of this Agreement. If requested, the
Executive shall serve as a director of the Company and as Officer and/or
Director of any subsidiary of the Company, without any additional compensation
hereunder.
3.03 Representations. The Executive hereby represents to
----------------
the Company that upon the commencement of the Initial Term the Executive was
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<PAGE>
not bound by the terms of any non-competition, confidentiality or similar
agreement or understanding (written or oral) which would have prevented or
restricted the Executive's employment with the Company as contemplated
hereunder, and that the Executive does not possess confidential information
arising out of his prior employments which would be utilized in connection with
his employment by the Company.
4. Compensation.
-------------
4.01 Annual Salary. The Executive shall receive an
---------------
annual base salary ("Base Salary") of two hundred fifty thousand dollars
($250,000) per year, payable in accordance with the Company's normal payroll
practices. In addition, on an annual basis the Board of Directors or a
compensation committee thereof (the "Compensation Committee") shall review the
Executive's compensation with a view toward increasing the Base Salary, based
upon the Executive's performance during the preceding year or pursuant to
guidelines established by the Compensation Committee.
4.02 Bonus. (a) In further consideration of the
------
Executive's agreement to perform services hereunder, the Executive shall be
entitled to a cash bonus (the "Profits Bonus") in an amount equal to five
percent (5%) of the Company's consolidated net after-tax operating profits
(excluding any extraordinary and/or non-recurring items) in excess of $1,000,000
(the "Threshold") for each fiscal year during the Term, provided the Company has
earned in such fiscal year a twelve percent (12%) return on its equity on its
Common Stock..
(b) The Executive will be eligible for a bonus
of up to Twenty Percent (20%) of annual salary based upon milestones to be
mutually set and agreed upon by Executive and the Company, two months from
Executive's start date.
(c) The Executive will receive an interest free
loan of One Hundred Fifty Thousand Dollars ($150,000), with one-third to be paid
upon initiation of employment and two-thirds to be paid upon successful
completion of the Rosch AG IPO in February, 2000. This loan will be forgiven
over a three year period in three equal installments as long as Executive
remains an employee of the Company.
4.03 Stock Options. In consideration of the Executive
--------------
entering into this Agreement, the Company shall cause AEC to grant to the
Executive stock options (the "Options") for the purchase of up to Six Hundred
Thousand (600,000) shares of the Company's Common Stock, par value $.10 per
share (the "Common Stock"), exercisable at a purchase price of $1.125 per share,
with all such Options to vest immediately, all upon the terms and conditions set
forth in the Company's Stock Option Plan, and attached hereto as Exhibit A.
Should the Executive voluntarily terminate his employment within the first six
months of this agreement, all unexercised stock options will be forfeited and
the Company will be entitled to reimbursement for any options which have been
exercised.
4.04 Expenses. In accordance with the Company's policies
--------
established from time to time, the Company shall pay or reimburse the Executive
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<PAGE>
for all reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, subject to the presentment of
appropriate vouchers and receipts.
4.05 Participation in Benefit Plans. The Executive shall
-------------------------------
also be entitled, to the extent that his position, title, tenure, salary, age,
health and other qualifications make him eligible, to participate in all
employee benefit plans or programs (including, but not limited to,
medical/dental insurance, disability, stock option, retirement and pension plans
and vacation time, sick leave and holidays) of the Company currently in
existence on the date hereof or as may hereafter be instituted from time to
time. The Executive's participation in any such plan or program shall be subject
to the provisions, rules and regulations applicable thereto.
4.06 Insurance. The Executive acknowledges and agrees that
----------
the Company may obtain a life insurance policy on the life of the Executive with
the Company named as the beneficiary. The Executive shall cooperate fully with
the Company's efforts to obtain such insurance policy, including making him self
available for physical examinations.
5. Non-Disclosure of Confidential Information; Non-Competition.
------------------------------------------------------------
5.01 Confidentiality. Except as may be in furtherance of the
----------------
Executive's performance of his functions as a senior executive officer of the
Company, the Executive shall not, throughout the Term of this Agreement and
thereafter, disclose to any third party or use or authorize any third party to
use, any information relating to the business, business plans, trade secrets or
other interests of the Company (including customers and clients of the Company)
which is confidential and valuable to the Company or AEC or any of their
subsidiaries or any third party (including customers and clients of the Company)
and which is not known to the public (the "Confidential Information"). The
Confidential Information is and will remain the sole and exclusive property of
the Company, and during the Term of this Agreement, the Confidential
Information, when entrusted to the Executive's custody, shall be deemed to
remain at all times in the Company's sole possession and control.
Notwithstanding the foregoing, the Executive may, after prior written notice to
the Company (to the extent such notice is possible under the circumstances)
disclose such Confidential Information pursuant to subpoena or other legal
process, and promptly thereafter shall advise the Company in writing as to the
Confidential Information which was disclosed and the circumstances of such
disclosure.
5.02 Return of Documents. The Executive agrees that,
---------------------
upon the termination of his employment with the Company for any reason, he
shall forthwith deliver to the Company any and all documents and other material
however recorded or stored in any medium or by any method, and all copies
thereof, in his possession or under his control relating to any Confidential
Information which is otherwise the property of the Company.
5.03 Non-Competition. The Executive recognizes that the
----------------
services to be performed by him for the Company are special and unique. The
Executive further recognizes that the nature of the Company's business is such
that the Executive will have full knowledge of the Company's business plans and
-3-
<PAGE>
practices. The parties therefore confirm that, in order to protect the Company's
goodwill, and in consideration of the Company entering into this Agreement
providing for a fixed term of employment of the Executive, it is necessary that
the Executive agree, and the Executive hereby does agree that he will not in the
United States of America and/or the Federal Republic of Germany, for a period of
two (2) years after the termination of this Agreement, become employed by, a
consultant to or a director of, or hold any equity interest as a partner, member
or shareholder (to the extent of 5% or more of the equity interest thereof), of
any sole proprietorship, partnership, joint venture, corporation or other
business entity which engages in a business directly competitive to any business
that the Company is engaged (or has formulated plans to engage) in at the time
of termination of this Agreement. This Section shall not be applicable if the
Executive terminates this Agreement pursuant to Section 6.03 hereof or if the
Company terminates this Agreement pursuant to Section 6.04 hereof.
5.04 Remedies. The Executive agrees that any breach or
---------
threatened breach by him of any provision of this Section 5 shall entitle the
Company, in addition to any other legal remedies available to it, to apply to
any court of competent jurisdiction to enjoin such breach or threatened breach.
The parties understand and intend that each restriction agreed to by the
Executive herein above shall be construed as separable and divisible from every
other restriction, and that the unenforceability, in whole or in part, of any
restriction, will not affect the enforceability of the remaining restrictions
and that one or more or all of such restrictions may be enforced in whole or in
part as the circumstances warrant. No waiver of any breach of the restrictions
contained in this Section 5 shall be deemed a waiver of any future breach.
6. Termination.
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6.01 Disability. If the Executive is determined to be
-----------
disabled (as defined below), the Company shall have the option to terminate
this Agreement by written notice to the Executive stating the date of
termination, which date may be any time subsequent to the date of such
determination. The Executive shall be considered disabled if, due to illness or
injury, either physical or mental, he is unable to perform his customary duties
and responsibilities as required by this Agreement for more than two (2) months
in the aggregate out of any period of six (6) consecutive months. The
determination that the Executive is disabled shall be made by the Board of
Directors of the Company (with the Executive abstaining from the decision if he
is then a member of the Board), based upon an examination and certification by a
physician selected by the Company subject to the Executive's approval, which
approval shall not be unreasonably withheld. The Executive agrees to submit
timely to any required medical or other examination, provided that such
examination shall be conducted at a location convenient to the Executive and
that if the examining physician is other than the Executive's personal
physician, the Executive shall have the right to have such personal
physician present at such examination.
6.02 Death. If the Executive shall die during the Term
------
of this Agreement, this Agreement and the Executive's employment hereunder shall
terminate immediately upon the Executive's death.
6.03 By the Executive for Cause. The Executive may terminate
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this Agreement for "cause" at any time. For purposes of this Section 6.03, the
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term "cause" shall be the failure of the Company to perform in a material
respect of its material obligations under this Agreement without proper
justification after notice thereof from the Executive and, if curable, the
opportunity to cure, within thirty (30) days after the receipt of written notice
thereof to the Company.
6.04 By the Company for Cause. The Company may terminate
-------------------------
this Agreement for "cause" at any time. For purposes of this Section 6.04, the
term "cause" shall be limited to (i) conviction of a felony or equivalent crime
under the laws of the United States or any state, (ii) conviction of a felony or
equivalent crime under the laws of any other country or political subdivision
thereof involving moral turpitude, (iii) action involving gross negligence
having a material adverse effect on the Company, including wilfully aiding the
competition, (iv) willful misrepresentation at any time during the term hereof
by the Executive to the Board of Directors of the Company of any material
information, (v) the Executive's failure or refusal to perform specific
directives of the Company's Board of Directors, Chairman of the Board or
President which directives are consistent with the scope and nature of the
Executive's duties and responsibilities, and which are not remedied by the
Executive within thirty (30) days after the receipt of written notice thereof,
or (vi) the breach by the Executive of any of his material obligations under
this Agreement without proper justification, which breach is not cured within
ten (10) days after receipt of written notice thereof. Upon termination of
employment by the Company pursuant to this Section, the Executive shall receive
any accrued Base Salary through the termination date, less any amounts by reason
of claims the Company may have against the Executive.
6.05 Termination Benefit. Upon termination of employment
---------------------
(i) upon the disability of the Executive pursuant to Section 6.01 hereof, (ii)
by the Executive's death pursuant to Section 6.02 hereof, (iii) by the
Executive, pursuant to Section 6.03 hereof, or (iv) by the Company other than
for "cause" pursuant to Section6.04 hereof, the Executive (or his estate or
representative) shall receive (A) a severance payment equal to the greater of
(i) the amount of the then current annual Base Salary or (ii) the continuation
of the Base Salary for the balance of the current Term, (B) other than in
connection with termination upon the death of the Executive, the continuation
of his health benefits for a period of one (1) year from the date of such
termination, at the Company's expense, subject to discontinuance of health
benefits upon the Executive becoming covered by a comparable plan offered by a
subsequent employer, and (C) all outstanding unvested stock options granted to
the Executive by the Company for the purchase of shares of its Common Stock
shall automatically vest and become exercisable, subject to their respective
terms.
6.06 Change in Control of the Company. (a) If, at anytime
----------------------------------
during the Term hereof, a change in control of the Company (as defined in
Subsection (b) below) occurs, then within sixty (60) days after receipt of
written notice of such change in control of the Company, the Executive may, by
written notice to the Company (or its successor), terminate this Agreement. In
the event of said termination, (i) the Executive shall receive a lump sum
payment equal to two (2) times his then current Base Salary, payable within
thirty (30) days after termination of this Agreement, (ii) the Company (or its
successor) shall maintain, at its expense, the health plan coverage of the
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<PAGE>
Executive for a period of twelve (12) months after such termination, subject
to termination of such health plan benefits upon the Executive becoming covered
by a comparable plan offered by a subsequent employer and also subject to any
changes in such plan as applicable to other executive officers and (iii) all
outstanding unvested stock options granted to the Executive under a plan of the
Company for the purchase of shares of its Common Stock shall automatically vest
and become exercisable subject to their respective terms; provided, however, if
the amount to be paid or distributed to the Executive pursuant to this Section
6.06 (taken together with any amounts otherwise to be paid or distributed to the
Executive by the Company) (such amounts collectively the "Section 6.06 Payment")
would result in the application of an excise tax under Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any successor or
similar provision thereto, the Section 6.06 Payment shall not be paid or
distributed in the amounts or at the times otherwise required by this Agreement,
but shall instead be paid or distributed annually, beginning within thirty (30)
days after the termination date and thereafter on each anniversary thereof, in
the maximum substantially equal amounts and over the minimum number of years
that are determined to be required to reduce the aggregate present value of
Section 6.06 Payment to an amount that will not cause any Section 6.06 Payment
to be non-deductible under Section 280G of the Code. For purposes of this
Section 6.06, present value shall be determined in accordance with Section
280G(d)(4) of the Code.
(a) "Change of control of the Company" shall be
deemed to have occurred if:
(b)
(i) any "person" or "group" (as "person" and "group" are
defined in Sections 13(d) and 14(d) of Securities Exchange Act of 1934 (the
"Exchange Act"), other than (A) the Executive or a person controlled by him, (B)
a trustee or other fiduciary holding securities under an employee benefit plan
of the Company, (C) a person or group by reason of a transaction with the
Company approved by the Company Board of Directors as constituted in accordance
with Paragraph (ii) below, or (D) a corporation owned, directly or indirectly,
by the stockholders of the Company in substantially the same proportions, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 20% or
more of the combined voting power of the Company's then outstanding securities;
or (ii) individuals who on the commencement date of this Agreement constitute
members of the Board of Directors, or successors chosen by such individuals,
shall cease for any reason to constitute a majority of the whole Board of
Directors.
7. Notices. All notices, requests, demands or other
--------
communications hereunder shall be deemed to have been given if delivered in
writing personally or by registered mail to each party at the address set forth
below, or at such other address as each party may designate in writing to the
other:
If to the Company:
American Electromedics Corp.
13 Columbia Drive
Amherst, New Hampshire 03031
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Attn: Thomas A. Slamecka, Chairman
If to Executive:
J. Randall Nelson
13813 San Sebastian Way
Poway, California 92064
8. Entire Agreement. This Agreement contains the entire
----------------
understanding of the parties with respect to the subject matter hereof,
supersedes any prior agreement (oral or written) between the parties. No change,
termination or attempted waiver of any of the provisions hereof shall be binding
unless in writing and signed by the party against whom the same is sought to be
enforced.
9. Successors and Assigns; Binding Effect. This Agreement will be
---------------------------------------
binding upon and inure to the benefit of the Company and its successors and
assigns, and the Executive, and his heirs and administrators. The Company may
assign this Agreement to any corporation which is in a consolidated group with
the Company, provided that the Company shall remain liable hereunder.
10. Waiver and Severability. The waiver by either party of a
------------------------
breach of any terms or conditions of this Agreement shall not operate or be
construed as a waiver of any subsequent breach by such party. In the event that
any one or more of the provisions of this Agreement shall be declared to be
illegal or unenforceable under any law, rule or regulation of any government
having jurisdiction over the parties hereto, such illegality or unenforceability
shall not affect the validity and enforceability of the other provisions of this
Agreement.
11. Heading; Interpretations. The headings and captions used
-------------------------
in this Agreement are for convenience only and shall not be construed in
interpreting this Agreement.
12. Governing Law. All matters concerning the validity and
--------------
interpretation of and performance under this Agreement shall be governed by the
laws of the State of New Hampshire without regard to the conflicts of law
principles thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
AMERICAN ELECTROMEDICS CORP.
By:
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Thomas A. Slamecka, Chairman
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---------------------------------------
J. Randall Nelson
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated October 26, 1999 in Amendment No. 1 to
the Registration Statement (Form SB-2) and the related Prospectus of
Equidyne Corporation for the registration of 4,202,919 shares
of common stock and 845,000 of its common stock purchase warrants.
/s/Ernst & Young LLP
Manchester, New Hampshire
January 26, 2000
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