SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission File Number
APRIL 30, 1999 0-9922
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AMERICAN ELECTROMEDICS CORP.
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(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 04-2608713
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(State or Other Jurisdiction (IRS Employer ID No.)
of Incorporation or Organization)
13 COLUMBIA DRIVE, SUITE 5, AMHERST, NEW HAMPSHIRE 03031
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(Address and Zip Code of Principal Executive Offices)
Issuer's telephone number, including area code: 603-880-6300
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Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
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Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
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(Title of Class)
Indicate by check mark whether the Issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months,
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
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As of June 10, 1999, there were outstanding 8,765,220 shares of the Issuer's
Common Stock, $.10 par value.
AMERICAN ELECTROMEDICS CORP.
Index
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets, April 30, 1999 and
July 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three and
Nine Months Ended April 30, 1999 and April 30, 1998. . . . . . . . 4
Consolidated Statements of Cash Flows for the Nine
Months Ended April 30, 1999 and April 30, 1998 . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis or Plan
of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II - OTHER INFORMATION
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . 12
Item 5. Other information . . . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
-2-
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, JULY 31,
1999 1998
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(Unaudited)
ASSETS (Thousands)
Current Assets:
Cash and cash equivalents . . . . . . . $ 391 $ 396
Accounts receivable . . . . . . . . . . 1,486 1,169
Inventories . . . . . . . . . . . . . . 1,778 1,951
Prepaid and other current assets . . . 223 223
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Total current assets . . . . . . . . 3,878 3,739
Property and equipment . . . . . . . . 586 794
Accumulated depreciation . . . . . . . (81) (436)
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505 358
Goodwill . . . . . . . . . . . . . . . 722 4,298
Patents . . . . . . . . . . . . . . . 2,881 3,027
Other . . . . . . . . . . . . . . . . 30 36
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$ 8,016 $11,458
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank debt . . . . . . . . . . . . . . . $1,143 $1,033
Loans from related parties. . . . . . . 230 -
Accounts payable . . . . . . . . . . . 2,169 1,118
Accrued liabilities . . . . . . . . . . 501 723
Dividends payable . . . . . . . . . . . 363 72
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Total current liabilities . . . . . . 4,406 2,946
Stockholders' equity:
Preferred Stock, $.01 par value;
Authorized - 1,000,000 shares;
Series A Convertible Preferred-
Outstanding - 2,830 shares
at April 30, 1999 and 3,000 at
July 31, 1998 . . . . . . . . . . . . 2,251 2,387
Series B Convertible Preferred-
Outstanding - 1,600 shares
at April 30, 1999 and -0- at
July 31, 1998 . . . . . . . . . . . . 965 -
Common stock, $.10 par value;
Authorized - 20,000,000 shares;
Outstanding -8,692,854 shares at
April 30, 1999 and 7,058,136
at July 31, 1998 . . . . . . . . . . . 869 705
Additional paid-in capital . . . . . . 13,537 12,643
Retained deficit . . . . . . . . . . . (13,255) (5,680)
Accumulated other comprehensive loss. . (239) (249)
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4,128 9,806
Deferred compensation . . . . . . . . . (518) (1,294)
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Total stockholders' equity . . . . 3,610 8,512
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$ 8,016 $11,458
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See accompanying notes.
-3-
AMERICAN ELECTROMEDICS CORP.AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
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APRIL 30, APRIL 30, APRIL 30, APRIL 30,
1999 1998 1999 1998
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(Thousands, except per share amounts)
Net sales . . . . . . . . . $1,756 $1,495 $6,132 $5,095
Cost of goods sold. . . . . 1,343 1,134 4,024 2,979
------ ------ ------ ------
Gross profit. . . . . . . . 413 361 2,108 2,116
Selling, general and
administrative . . . . . . 1,765 1,048 5,616 2,637
Research and development. . 78 - 283 -
Write-down of goodwill. . . 3,196 - 3,196 -
------ ------ ------ ------
Total operating expenses . 5,039 1,048 9,095 2,637
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Operating loss. . . . . . . (4,626) (687) (6,987) (521)
Other income (expenses):
Loss on sale of
audiometrics assets . . . (98) - (98) -
Undistributed earnings
of affiliate. . . . . . . - (21) - 56
Interest, net . . . . . . (114) (19) (197) (137)
Minority interest in
affiliate . . . . . . . . - - - (85)
Other . . . . . . . . . . (95) (64) (293) (58)
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(307) (104) (588) (224)
Loss before provision for
income taxes . . . . . . (4,933) (791) (7,575) (745)
Provision for income taxes. - - - (2)
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Net loss. . . . . . . . . .$(4,933) $ (791) $(7,575) $(747)
======= ======= ======= ======
Net loss attributable to
common stockholders* . . .$(5,001) $ (791) $(7,898) $(747)
======= ======= ======= ======
Weighted average number
of common and
common equivalent
shares outstanding 7,806,813 5,404,146 7,413,750 4,002,804
========= ========= ========= =========
Loss per common and
common equivalent share:
Basic $ (.64) $ (.15) $(1.07) $ (.19)
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Diluted $ (.64) $ (.15) $(1.07) $ (.19)
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See accompanying notes.
* The three and nine months ended April 30,1999 includes the impact of
$68,000 and $323,000, respectively, of dividends on Preferred Stock.
-4-
AMERICAN ELECTROMEDICS CORP.AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
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APRIL 30, APRIL 30,
1999 1998
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(Thousands)
OPERATING ACTIVITIES:
Net loss $ (7,575) $(747)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 435 265
Deferred compensation 964 -
Undistributed earnings of affiliate - (56)
Loss on sale of audiometrics assets 98 -
Write-down of goodwill 3,196 -
Minority interest in affiliate - 85
Changes in operating assets and liabilities:
Accounts receivable (381) 189
Inventories, prepaid and other current assets (209) (775)
Accounts payable and accrued liabilities 694 (233)
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Net cash used in operating activities (2,778) (1,272)
INVESTING ACTIVITIES:
Purchase of property and equipment, net (246) (267)
Proceeds from sale of audiometrics assets 625 -
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Net cash provided by (used in)
investing activities 379 (267)
FINANCING ACTIVITIES:
Principal payments on long-term debt - (265)
Proceeds from long-term debt and bank
line of credit - 236
Proceeds from issuance of common stock, net - 994
Net proceeds from bank debt 157 -
Net proceeds from related party debt 231 -
Dividends paid (15) -
Issuance of common stock, net 485 -
Issuance of preferred stock, net 1,498 -
Proceeds from exercise of stock options 22 150
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Net cash provided by financing activities 2,378 1,115
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Effect of exchange rate changes on
cash and cash equivalents 16 1
Decrease in cash and cash equivalents (5) (423)
Cash and cash equivalents, beginning of period 396 533
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Cash and cash equivalents, end of period $ 391 $ 110
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NON-CASH ACTIVITIES:
Common stock issued in connection with
consulting agreement $ 188 $1,000
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Conversion of convertible subordinated
debt into common stock $ - $ 720
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Common Stock issued in connection
with acquisitions $ - $ 210
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Common stock issued under
conversion provision of warrants $ 59 $ -
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Conversion of convertible preferred
stock into common stock $ 135 $ -
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See accompanying notes.
-5-
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 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 and nine month periods ended April
30, 1999 are not necessarily indicative of the results that may be
expected for the year ending July 31, 1999. For further information,
refer to the financial statements and footnotes thereto included in
the Company's annual report on Form 10-KSB for the year ended July 31,
1998.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation. All balance
sheet amounts have been translated using the exchange rates in effect
at the balance sheet date. Statement of Operations amounts have been
translated using average exchange rates. The gains and losses
resulting from changes in exchange rates from the date of acquisition
of Rosch GmbH to April 30, 1999 have been reported separately as a
component of stockholders' equity. The aggregate transaction gains and
losses are insignificant.
Comprehensive Income (Loss)
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, Reporting Comprehensive Income (SFAS
130). SFAS 130 establishes new rules for the reporting and display of
comprehensive income or loss and its components, however, the adoption
of this statement had no impact on the Company's net income or
shareholders' equity. For the three and nine months ended April 30,
1999, the Company's only item of other comprehensive income was the
foreign currency translation adjustment recognized in consolidation of
its wholly-owned German subsidiary, Rosch GmbH. SFAS 130 requires such
adjustments, which prior to adoption were reported separately in
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 April 30, 1999 was $(49,000) and ($4,982,000),
respectively. For the nine months ended April 30, 1999, the foreign
currency translation adjustment and comprehensive loss was $10,000 and
($7,565,000), respectively. As of April 30, 1999, the cumulative
translation adjustment and accumulated other comprehensive loss was
($239,000).
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 net losses of
$4,933,000 and $7,575,000 for the three and nine month periods ended
April 30, 1999, respectively. This and other factors indicate that the
Company may be unable to continue as a going concern for a reasonable
period of time.
The financial statements do not include any adjustments relating to
the recoverability of assets and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern is dependent
upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing and
ultimately to attain profitability. The Company continues to pursue
strategies to improve the profitability of its current product lines,
and is actively pursuing additional debt and equity financing.
-6-
2. DEBT
In September 1998, the Company entered into a $505,000 line-of-credit
with Guardian Financial Services, Inc. (owned by an officer of the
Company). This line-of-credit is due on demand and bears an interest
rate of 10% per annum. As of April 30, 1999, $230,000 was outstanding
under this line-of-credit, which expired on February 28, 1999, and
remains outstanding as a demand loan, secured by substantially all
tangible and intangible assets of the Company.
3. PROFORMA FINANCIAL INFORMATION
On May 5, 1998, the Company acquired all of the issued and outstanding
capital stock of Dynamic Dental Systems, Inc. ("DDS"), for a total
cost of 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.
On May 12, 1998, the Company acquired all of the issued and
outstanding capital stock of Equidine Systems, Inc. ("ESI") for a
total cost of approximately $2.6 million consisting of 600,000 shares
of the Company's Common Stock.
The acquisitions were accounted for as purchases and, accordingly, the
operating results of DDS and ESI have been included in the Company's
consolidated financial statements since the date of acquisition.
The following unaudited proforma consolidated financial results of
operations for the three and nine months ended April 30, 1998 assume
the acquisitions of DDS and ESI occurred as of August 1, 1997.
Three months ended Nine months ended
April 30, 1998 April 30, 1998
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Net sales. . . . . . . . . . . . $2,207,000 $6,888,000
Net loss . . . . . . . . . . . . (1,014,000) (1,247,000)
Loss per share; basic and diluted (.15) (.23)
4. EQUITY
During the three month period ended April 30, 1999, the holder of
Series A Convertible Preferred Stock exercised its option and
converted 170 shares of the preferred stock into 234,390 shares of the
Company's 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
$565,000, to two "accredited investors", as such term is defined in
Regulation D under the Securities Act.
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.
The Series B Preferred Stock is convertible at any time after April
30, 1999 into shares of common stock at a conversion rate equal to
$1,000 divided by the lower of (i) $2.00 or (ii) 75% of the average
closing bid price for the common stock for the five trading days
immediately preceding the conversion date. The Company may force
conversion of all ( and not less than all) of the outstanding shares
of Series B Preferred Stock at any time after the first anniversary of
the effective date of a registration statement covering the underlying
shares of Common Stock. There is no minimum conversion price. Should
the bid price of the Common Stock fall substantially prior to
conversion, the holders of the Series B Preferred Stock could obtain a
significant portion of the Common Stock upon conversion, to the
detriment of the then holders of the Common Stock.
-7-
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 has been recorded as a reduction of preferred
stock and an increase to additional paid-in capital. As the preferred
stock was not convertible until May 1, 1999, the Company will fully
recognize the additional dividends at that date by recording a charge
to income available to common stockholders.
In December 1998, certain holders of oustanding warrants to purchase
an aggregate of 1 million shares of the Company's Common Stock at
$1.00 per share, exercised their rights under the related warrant
agreements to execute a cashless exercise. Upon exercise of these
warrants, the Company issued 589,828 shares of its Common Stock, par
value $.10.
5. DIVESTITURES
In January 1999, the Company announced its intention to focus its
resources on the needleless injection system 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
business and Dynamic Dental Systems, Inc. (U.S. dental business).
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 $1.2 million, including a net loss
for the quarter ended April 30, 1999 of $535,000. 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 primarily upon the factors described above, management has
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 by selling the outstanding DDS
common stock, as well as the expectation that DDS' net operating
results and cash flows during the period prior to such a sale 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 fiscal quarter ended April 30, 1999.
6. YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
of the Company's computer programs or hardware that have
date-sensitive software embedded chips may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will be
required to modify or replace significant portions of its software and
certain hardware so that those systems will properly utilize dates
beyond December 31, 1999. The Company presently believes that with
modifications or replacements of existing software and certain
hardware, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed
timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
-8-
The Company's plan to resolve the Year 2000 Issue involves the
following four phases: assessment, remediation, testing and
implementation. To date, the Company has substantially completed its
assessment of all systems that could be significantly affected by the
Year 2000. The assessment indicated that most of the Company's
significant information technology systems will be affected, including
its financial information system which includes its general ledger,
accounts payable, billing and inventory systems. The assessment was
also undertaken on the Company's products, which are also at risk, as
they utilize software and hardware (embedded chips) as well. However,
based on its review of its product line, the Company has determined
that most of the products it has sold and will continue to sell do not
require remediation to be Year 2000 compliant. Accordingly, the
Company does not believe that the Year 2000 presents a material
exposure as it relates to the Company's products. The Company's
manufacturing processes consist principally of unautomated assembly of
components manufactured by outside third-parties. The Company has
begun to gather information about the Year 2000 compliance status of
its significant suppliers, and will take appropriate steps to monitor
their compliance on an ongoing basis.
Regarding its information technology exposures, the Company utilizes
an unmodified off-the-shelf software package, which is not year 2000
compliant. The Company has purchased a year 2000-compliant upgrade
from its software vendor, which will provide full year 2000 compliance
upon installation. As the upgrade is also an unmodified off-the-shelf
package, testing to ensure Year 2000 compliance will not be necessary.
Implementation will take place as early as possible, no later than
July 31, 1999.
The Company does not presently maintain direct interfaces with any
third-party vendors. The Company has made various queries of its
significant suppliers that do not share information systems with the
Company (external agents). To date, the Company is not aware of any
external agent with a Year 2000 issue that would materially impact the
Company's results of operations, liquidity, or capital resources.
However, the Company has no means of assuring that external agents
will be Year 2000 ready. The inability of external agents to complete
their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by
external agents is not determinable.
The total cost of the Company's Year 2000 project is estimated at less
than $5,000, which will be funded through operating cash flows. To
date, the Company has incurred approximately $3,000 of direct costs
related to its Year 2000 project. The project costs will consist
principally of the cost of new software, which will be capitalized.
Management of the Company believes it has an effective plan in place
to resolve the Year 2000 Issue in a timely manner. As noted above, the
Company has not yet completed all necessary phases of its Year 2000
project. In the event that the Company does not complete any
additional phases, the Company could be unable to take customer
orders, manufacture and ship products, invoice customers or collect
payments. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect the
Company.
The Company currently has no contingency plans in place in the event
it does not complete all phases of its Year 2000 project. The Company
plans to evaluate the status of completion in July 1999 and determine
whether such a plan is necessary.
-9-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Report contains or refers to forward-looking information made
pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. That information covers future
revenues, products and income and is based upon current expectations
that involve a number of business risks and uncertainties. Among the
factors that could cause actual results to differ materially from
those expressed or implied in any forward-looking statement include,
but are not limited to, technological innovations of competitors,
delays in product introductions, changes in health care regulations
and reimbursements, changes in foreign economic conditions or currency
translation, product acceptance or changes in government regulation of
the Company's products, as well as other factors discussed in other
Securities and Exchange Commission filings for the Company.
RESULTS OF OPERATIONS
Net sales for the three and nine month periods ended April 30, 1999
were $1,756,000 and $6,132,000, respectively, compared to $1,495,000
and $5,095,000 for the three and nine month periods ended April 30,
1998. The increase in sales in fiscal 1999 was attributable to the
acquisitions of DDS and ESI in May 1998, partially offset by the loss
of sales from the audiometrics business unit whose assets were sold in
April 1999.
Cost of sales for the three and nine month periods ended April 30,
1999 were 76.5% and 65.6%, compared to 75.9% and 58.5% of net sales
during the same periods in the prior year. The increase in cost as a
percentage of sales can be attributed to changes in the product mix
which included sales from DDS in fiscal 1999. The intraoral dental
camera and related product lines in the U.S. generally produce lower
gross margins than the Company's other product lines.
Total operating expenses for the three and nine month periods ended
April 30, 1999 were $5,039,000 and $9,095,000, respectively, compared
to $1,048,000 and $2,637,000 for the comparable prior year periods.
The 1999 amounts include a non-cash charge of approximately $3.2
million representing a write-off of the unamortized goodwill
associated with DDS. As discussed in Note 5 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
financial results of DDS for the period prior to such a sale. These
revised estimates were based upon the Company's efforts to sell DDS
during the three month period ended April 30, 1999, as well as DDS'
recent operating results. The 1999 amounts also reflect increased
marketing, promotional, and development activity, as a result of
including the selling, general and administrative expenses of DDS and
ESI, acquired in May 1998. The increase also includes $132,000 and
$964,000 for the three and nine month periods ended April 30, 1999,
respectively, for amortization of deferred compensation for
consultants and for options granted in connection with the
acquisitions of DDS and ESI. This amortization for the nine months
ended April 30, 1999 relates primarily to the deferred compensation
recognized in connection with the Company's consulting agreement with
Liviakis Financial Communications, which is fully recognized as of
March 15, 1999.
Net loss for the three and nine month periods ended April 30, 1999
were $4,933,000, or $.64 per common share, and $7,575,000, or $1.07
per common share, compared to net loss of $791,000, or $.15 per share,
and $747,000, or $.19 per share for the same periods in the prior
fiscal year. The decrease in net results is primarily attributable to
the $3.2 million write-off of goodwill and the $98,000 net loss
recognized on the sale of the audiometrics business during the quarter
ended April 30, 1999, as well as increased selling,general and
administrative costs and decreased gross margins.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (deficit) of the Company at April 30, 1999 was
$(528,000), compared to $793,000 at fiscal year ended July 31, 1998.
The $1,321,000 decrease in working capital primarily reflects the
effect of operating losses, partially offset by the proceeds received
from the private placements of Series B Convertible Preferred Stock
and common stock (see Note 4) and the proceeds received from the sale
of the audiometrics business unit (see Note 3) during the quarter
ended April 30, 1999.
-10-
The Company has incurred net losses of $4,933,000 and $7,575,000,
respectively, for the three and nine month periods ended April 30,
1999, as well as a net loss of $3,674,000 for the year ended July 31,
1998. This and other factors, such as working capital needed for the
Company's operations, requires additional funding beyond that which
the Company currently has available. The Company therefore must
immediately raise additional capital.
On January 5, 1999, the Company announced its intention to change the
Company's business strategy and direction in order to focus all of its
resources on ESI, and the continued development of the
INJEX(TM)System. To affect this change, the Company has sold certain
assets of its audiometrics business unit, and plans to sell its U.S.
dental business unit (DDS). These sales will likely provide a
reduction in the Company's expected short-term working capital needs
as a result of eliminating the operating losses those business units
have been incurring. In addition, the Company continues to seek other
sources of additional working capital through equity and/or debt
placements or secured financing. No assurance can be given that the
Company's plans to sell its U.S. dental business unit will be
successfully achieved, or that such other financing arrangements will
be obtained. Further, no assurance can be given that such sales or
financing arrangements would be successfully completed within the
necessary time frame and, if so, on terms not dilutive to existing
stockholders.
As a result of the foregoing, substantial doubt exists about the
ability of the Company to continue as a going concern. The
accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
-11-
PART II. - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
During the three months ended April 30, 1999, the holder of Series A
Convertible Preferred Stock exercised its conversion rights,
converting an aggregate of 170 shares of the preferred stock to
234,390 shares of the Company's Common Stock.
In February 1999, the Company closed a private placement of 1,600
shares of Series B Convertible Preferred Stock to three purchasers at
a purchase price of $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 execise price of $3.00 per
share.
In April 1999, the Company issued 200,000 shares of its common stock
as a fee for the retention of a financial consultant. Also in April
1999, the Company closed two private placements of a total of 590,000
shares of the Common Stock with two "accredited investors".
The issuance of the foregoing shares of Common and Preferred Stock was
claimed exempt from the registration requirements of the Securities
Act of 1933, as amended, by reason of Section 4(2) thereof.
Item 5. OTHER INFORMATION
On April 8, 1999, the Company sold certain assets of its audiometric
business to Maico Diagnostic GmbH ("Maico"), a German company, for
$640,000. The sale was in furtherance of the Company's intention,
announced on January 5, 1999, to focus all of its business resources
on the development, manufacture and marketing of the needle-free drug
injection system of its wholly-owned subsidiary, Equidyne Systems,
Inc., and was made pursuant to an Assets Purchase Agreement, dated
April 8, 1999, by and between the Company, the Company's wholly-owned
subsidiary, Rosch Medizintechnik GmbH ("Rosch GmbH") and Maico.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed a report on Form 8-K for an event on February 3,
1999 to report that the Company sold 1,600 shares of Series B
Convertible Preferred Stock, in a private plavement 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.
Exhibits -
10.1 Assets Purchase Agreement, dated April 8, 1999, by and between
the Company, Rosch GmbH and Maico Diagnostic GmbH
27. Financial Data Schedule
-12-
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN ELECTROMEDICS CORP.
Dated: June 15, 1999 /s/ Thomas A. Slamecka
--------------------
Thomas A. Slamecka
Chairman (Principle
Executive Officer)
Dated: June 15, 1999 /s/ Michael T. Pieniazek
---------------------
Michael T. Pieniazek
Chief Financial Officer
(Principle Financial Officer)
-13-
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10.1 Assets Purchase Agreement, dated April 8, 1999, by and
between the Company, Rosch GmbH and Maico Diagnostic GmbH
27 Financial Data Schedule