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
OCTOBER 31, 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 __
As of December 13, 1999, there were outstanding 14,761,600 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, October 31, 1999 and
July 31, 1999...........................................................3
Consolidated Statements of Operations for the Three
Months Ended October 31, 1999 and October 31, 1998......................4
Consolidated Statements of Cash Flows for the Three
Months Ended October 31, 1999 and October 31,1998.......................5
Notes to Consolidated Financial Statements...............................6
Item 2. Management's Discussion and Analysis or Plan of Operation............9
PART II - OTHER INFORMATION
Item 2. Changes in Securities................................................10
Item 6. Exhibits and Reports on Form 8-K.....................................10
SIGNATURES...................................................................11
-2-
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, July 31,
1999 1999
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(Unaudited)
Assets (Thousands)
Current Assets:
Cash and cash equivalents.................... $1,071 $ 210
Accounts receivable.......................... 777 897
Inventories.................................. 1,552 1,480
Prepaid and other current assets............. 219 196
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Total current assets................. 3,619 2,783
Property and Equipment....................... 754 745
Accumulated depreciation..................... (152) (115)
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602 630
Goodwill..................................... 708 715
Patents...................................... 2,807 2,897
Other........................................ 632 216
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$8,368 $7,241
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Liabilities & Stockholders' Equity
Current Liabilities:
Bank debt.................................... $ 509 $1,073
Accounts payable............................. 1,244 1,784
Accrued liabilities.......................... 648 815
Dividends payable............................ 514 373
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Total current liabilities................. 2,915 4,045
Minority interest in consolidated subsidiary. 1,507 440
Stockholders' Equity:
Preferred stock, $.01 par value;
Authorized-1,000,000 shares:
Series A Convertible; Outstanding- 2,400 shares 1,909 1,909
Series B Convertible; Outstanding- 1,170 shares 982 982
Common stock, $.10 par value;
Authorized - 20,000,000 shares;
Outstanding - 9,830,955 and 9,637,621 shares at
October 31, 1999 and July 31, 1999, respectively 983 963
Additional paid-in capital................. 16,080 14,837
Retained deficit........................... (15,661) (15,541)
Accumulated other comprehensive loss....... (240) (200)
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4,053 2,950
Deferred compensation...................... (107) (194)
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Total stockholder's equity........ 3,946 2,756
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$8,368 $7,241
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See accompanying notes.
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AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended October 31,
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1999 1998
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(Thousands, except per share amounts)
Net sales..................................... $ 802 $ 2,150
Cost of goods sold............................ 502 1,263
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Gross profit............................... 300 887
Selling, general and administrative expenses.. 1,253 1,922
Research and development...................... 136 128
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Total operating expenses................... 1,389 2,050
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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)
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969 (123)
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Net loss...................................... $ (120) $ (1,286)
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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.
-4-
AMERICAN ELECTROMEDICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended October 31
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1999 1998
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Operating activities: (Thousands)
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
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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)
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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
subsidiary.................................... 1,635 -
Proceeds from exercise of common stock options. - 15
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Net cash provided by financing activities...... 1,186 618
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Effect of exchange rate on cash................ (12) 1
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Increase (decrease) in cash and cash equivalents 861 (215)
Cash and cash equivalents, beginning of period 210 396
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Cash and cash equivalents, end of period....... $1,071 $181
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Noncash transaction:
Common stock issued for services............... $ 75 -
See accompanying notes.
-5-
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 loss 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.
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
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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 principal repayments
under the lines of credit made based upon the Company's cash position.
-6-
3. INVESTMENT IN AFFILIATE
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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. These
transactions resulted the recognition of an increase in the minority interest in
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
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During the three month period ended October 31, 1999, the Company closed on
a 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
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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 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.
-7-
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 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
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.
-8-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
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Net sales for the three month period ended October 31, 1999 were $802,000,
compared to $2,150,000 for the three month period ended October 31, 1998. The
Company's sale of its audiometrics business assets in April 1999 resulted in a
decrease in sales of approximately $357,000 as compared to the same period in
the prior fiscal year. The remainder of the decrease in sales is attributable to
the Company's shift in focus towards its INJEX(TM) needle-free injection 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 for the three month period
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 Company's
sale of its audiometrics business assets in April 1999, and cost reduction
measures implemented within DDS in anticipation of the sale of that subsidiary.
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. This deferred compensation was
fully amortized during the fiscal year ended July 31, 1999. These decreases in
expense 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 the Company's 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 the Company's 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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital of the Company 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 the Company's 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 the Company's operating
losses.
During November 1999, the Company completed certain transactions which had
significant impact on its capital structure. All outstanding shares of the
Company's Series A and Series B Convertible Preferred Stock were eliminated, via
the issuance of a total of 2,597,312 shares of its 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, the Company sold, through two private
placements, an aggregate of 2,133,333 shares of its Common Stock, issued a
three-year warrant to purchase up to 300,000 shares of its Common Stock at an
exercise price of $2.00 per share, and sold a 5% ownership interest in Rosch
GmbH, for gross proceeds of $3 million. These 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 were
eliminated.
-9-
Though the Company has significantly improved its working capital position,
it does not currently have sufficient working capital to sustain the Company
through the expected time necessary to achieve positive cash flows from
operations. Additional working capital will be needed, and therefore, the
Company continues 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.
The Company's working capital requirements, along with net losses incurred
of $9,861,000 for the year 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 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.
PART II. - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
During the three month period ended October 31, 1999, the Company closed on
a 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.
During November 1999, the Company completed the following transactions:
|X| 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.
|X| The Company redeemed all 1,170 outstanding shares of Series B
Preferred Stock, together with all accrued and unpaid dividends,
penalties and redemption premiums, in exchange for a cash payment of
$1,170,000 and the issuance of 369,000 shares of the Company's Common
Stock.
|X| 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 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 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.
|X| 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.
All shares issued under the above transactions were with "accredited
investors", as such term is defined in Regulation D under the Securities Act.
See Form 8-K filed for events as of November 15, 1999 for further information.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
Exhibits -
27. Financial Data Schedule
-10-
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.
----------------------------
/s/Thomas A. Slamecka Dated: October 15, 1999
- --------------------------
Thomas A. Slamecka
Chairman
(Principal Executive Officer)
/s/Michael T. Pieniazek Dated: October 15, 1999
- --------------------------
Michael T. Pieniazek
President and
Chief Financial Officer
(Principal Financial Officer)
-11-
EXHIBIT INDEX
Exhibit Description
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27 Financial Data Schedule