-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JU0amtojoFpk+cEd3wBn/uvxk9zzJ0qJTNnWyby7TQuk4ZkwsvHmv4vWVIupV91w IFaMcY1vx+n7E9KUikF70g== 0000950120-98-000254.txt : 19980714 0000950120-98-000254.hdr.sgml : 19980714 ACCESSION NUMBER: 0000950120-98-000254 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19980713 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN ELECTROMEDICS CORP CENTRAL INDEX KEY: 0000352281 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 042608713 STATE OF INCORPORATION: DE FISCAL YEAR END: 0727 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-58937 FILM NUMBER: 98664895 BUSINESS ADDRESS: STREET 1: 13 COLUMBIA DR STE 5 CITY: AMHERST STATE: NH ZIP: 03031 BUSINESS PHONE: 6038806300 MAIL ADDRESS: STREET 1: 13 COLUMBIA DR STREET 2: STE 18 CITY: AMHERST STATE: NH ZIP: 03031 SB-2 1 FORM SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1998 Registration No. 333- -------- ========================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------- AMERICAN ELECTROMEDICS CORP. (Name of Small Business Issuer in Its Charter) ------------- DELAWARE 3845 04-2608713 (State Or Jurisdiction (Primary Standard (I.R.S. Employer of Incorporation Industrial Identification No.) or Organization) Classification Code Number) ------------- 13 COLUMBIA DRIVE, SUITE 5 AMHERST, NEW HAMPSHIRE 03031 (603) 880-6300 (Address and Telephone Number of Principal Executive Offices and Principal Place of Business) ------------- MICHAEL T. PIENIAZEK PRESIDENT AND CHIEF FINANCIAL OFFICER 13 COLUMBIA DRIVE, SUITE 5 AMHERST, NEW HAMPSHIRE 03031 (603) 880-6300 (Name, Address and Telephone Number of Agent For Service) ------------- Copies to: BRUCE A. RICH, ESQ. THELEN REID & PRIEST LLP 40 WEST 57TH STREET NEW YORK, NEW YORK 10019 (212) 603-2000 ------------- APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: from time to time after the effective date of this Registration Statement as determined by market conditions and other factors. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] --------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE ========================================================================== PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH AMOUNT OFFERING AGGREGATE AMOUNT OF CLASS OF SECURITIES TO BE PRICE PER OFFERING REGISTRATION TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) FEE(4) -------------------------------------------------------------------------- Common Stock, 3,153,556 $3.31 $10,438,270.36 $3,079.29 $.10 par value shares -------------------------------------------------------------------------- Common Stock, 723,335 3.31 2,394,238 706.30 $.10 par value(2) shares -------------------------------------------------------------------------- Common Stock, 1,380,000 3.31 4,567,800 1,347.50 $.10 par value(3) shares -------------------------------------------------------------------------- Common Stock, 50,000 4.80 240,000 70.80 $.10 par shares value(3)(4) -------------------------------------------------------------------------- Common Stock, 13,333 7.50 99,997.50 29.50 $.10 par value(3) shares -------------------------------------------------------------------------- Warrants 50,000 .10 5,000 -- -------------------------------------------------------------------------- Total -- -- $5,233.39 =========================================================================== (1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) promulgated under the Securities Act of 1933, as amended, based on the average of the bid and asked prices on the OTC Bulletin Board on July 8, 1998. (2) Includes a presently indeterminate number of shares issued or issuable upon conversion of or otherwise in respect of Registrant's Series A Convertible Preferred Stock. This is not intended to constitute a prediction as to the number of shares of Common Stock into which the Preferred Stock will be convertible. (3) In accordance with Rule 457(g), the registration fee for these shares is calculated upon a price which represents the highest of (i) the price at which the warrants or options may be exercised; (ii) the offering price of securities of the same class included in this registration statement; or (iii) the price of securities of the same class, as determined pursuant to Rule 457(c). (4) Represents shares of Common Stock underlying the 50,000 warrants being registered hereby. 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. =========================================================================== Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or a solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. PRELIMINARY PROSPECTUS (SUBJECT TO COMPLETION) DATED JULY 10, 1998 5,320,224 SHARES OF COMMON STOCK ($.10 PAR VALUE) 50,000 COMMON STOCK PURCHASE WARRANTS AMERICAN ELECTROMEDICS CORP. All of the shares (the "Shares") of Common Stock, par value $.10 per share ("Common Stock") of American Electromedics Corp., a Delaware corporation (the "Company"), and all of the Company's Common Stock Purchase Warrants (the "Warrants"), offered hereby are being offered for resale by certain stockholders and warrant holders of the Company (collectively the "Selling Stockholders") as described more fully herein. The shares of Common Stock offered hereby by the Selling Stockholders consist of (A) 3,153,556 shares presently issued and outstanding, (B) 1,443,333 shares issuable upon exercise of presently exercisable warrants and options and (C) 723, 335 shares issuable upon conversion of Series A Preferred Stock. The number of shares issuable upon conversion of the Series A Preferred Stock is subject to adjustment and could be materially more than the amount presented herein depending on the future market price of the Common Stock. See "RISK FACTORS -- MARKET RISKS" and "SELLING STOCKHOLDERS." Each Warrant entitles the holder thereof to purchase one share of Common Stock at a price per share of $4.80, subject to customary anti-dilution adjustments. Each Warrant may be exercised until 5:00 p.m., New York time, on May 5, 2001. The Selling Stockholders will sell the Shares and Warrants from time to time 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 and 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 and any agents, broker-dealers or underwriters who participate with the Selling Stockholders in the distribution of the Shares may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), and any commission received by them and any profit on the resale of the Common Stock or Warrants purchased by them may be deemed to be underwriting discounts or commissions under the Securities Act. See "PLAN OF DISTRIBUTION." The Company will not receive any proceeds from the sale of the Shares or Warrants offered hereby. The Company will receive proceeds of $1,822,000 upon the exercise of all the warrants and options of which the underlying shares of Common Stock are included herein. The Company has agreed to bear all expenses of registration of the Shares and Warrants, excluding the selling and brokerage expenses of the Selling Stockholders. The Company's Common Stock is traded on the over-the-counter market on the OTC Electronic Bulletin Board under the symbol AMER. On July 8, 1998, the closing bid and asked prices were $3.25 and $3.38 per share of Common Stock. There is no market for the Warrants and it is not anticipated that any public market will develop for the Warrants. See "MARKET PRICE INFORMATION." ------------- AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGES 9 THROUGH 15 HEREOF. ------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is July . , 1998 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "SEC"). Such reports and other information can be inspected and copied at the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; or at its offices at Northwest Atrium Center, 500 West Madison Street, 14th Floor, Chicago, IL 60661; or Seven World Trade Center, 13th Floor, New York, NY 10048. Copies of this material can also be obtained at prescribed rates by writing to the Public Reference Section of the SEC at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC maintains a Web site (http://www.sec.gov) that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC, including the Company. The Common Stock of the Company is quoted on the OTC Electronic Bulletin Board. This Prospectus constitutes a part of a Registration Statement on Form SB-2 (together with all amendments and exhibits thereto, the "Registration Statement") filed by the Company with the SEC under the Securities Act. This Prospectus omits certain information contained in the Registration Statement, and reference is hereby made to the Registration Statement and to the exhibits relating thereto for further information with respect to the Company and the Shares and Warrants offered hereby. -2- PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Investors should carefully consider the information set forth in "Risk Factors." Certain of the information contained in this summary and elsewhere in this Prospectus, including information with regard to the Company's strategy for expanding operations and market share and related financing requirements are forward looking statements. For a discussion of important factors that could affect such matters, see "Risk Factors." In November 1996, the Company effected a one-for-five reverse split of its Common Stock. All share and per share information in this Prospectus is on a post-split basis. THE COMPANY The Company is principally engaged in the manufacture and sale of medical equipment. The focus of the Company's business has shifted in the past year with the two acquisitions described below. Today, the largest segment of the business is the marketing of intraoral dental camera systems and related dental equipment. The Company's intraoral camera systems display close- up high quality color video or digital images of dental patients' teeth and gums. These images help dentists and other dental care workers in displaying dental health and hygiene problems. Using these systems, treatment plans, discussions and on-going patient information are enhanced so patients can better see, understand and accept treatment recommendations. The Company also manufactures and sells the Tympanometer(R), a medical diagnostic instrument which, by applying a combination of air pressure and sound to the ear drum, identifies diseases and disorders of the middle ear which are not revealed by standard hearing tests. In addition, the Company is in the process of developing a needle- free drug injection system which it expects to begin marketing by the end of calendar 1998. The Company was incorporated under the laws of the State of Delaware on January 28, 1977. The Company's executive offices are located at 13 Columbia Drive, Suite 5, Amherst, New Hampshire 03031, and its telephone number is (603) 880-6300. RECENT DEVELOPMENTS ------------------- ACQUISITIONS Acquisition of Rosch GmbH Medizintechnik and interest in Meditronic Medizinelektronik GmbH. On January 11, 1996, the Company acquired a 50% interest in Rosch GmbH Medizintechnik, a German corporation ("Rosch GmbH"). Rosch GmbH is a marketing and distribution company based in Berlin, Germany specializing in the distribution of products in Europe. On December 18, 1997, the Company closed on the purchase of the remaining 50% of the outstanding capital stock of Rosch GmbH paying $50,000 plus 105,000 shares of Common Stock, pursuant to a Stock Purchase Option Agreement, dated November 1, 1997. On that day the Company simultaneously acquired 45% of the outstanding shares of a second German company, Meditronic Medizinelektronik GmbH ("Meditronic GmbH"), for $150,000 plus 105,000 shares of the company's Common Stock, pursuant to a Stock Purchase Option Agreement, dated November 1, 1997. 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. Acquisition of Dynamic Dental Systems, Inc. On May 5, 1998, the Company acquired Dynamic Dental Systems, Inc., a Delaware corporation ("DDS"), in exchange for 750,000 shares of the Company's Common Stock and $225,000, pursuant to an Agreement and Plan of Merger, dated as of April 30, 1998, by and among the Company, DDS Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of the Company, DDS, and the sole stockholders of DDS (the "DDS Merger"). DDS is based in Gainesville, Georgia and is a distributor of digital operator hardware, cosmetic imaging software, intraoral dental camera systems and digital x-ray equipment. Acquisition of Equidyne Systems, Inc. On May 12, 1998, the Company acquired Equidyne Systems, Inc., a California corporation ("ESI"), in exchange for 600,000 shares of the Company's Common Stock, pursuant to an Agreement and Plan of Merger, dated as of March 27, 1998, among the Company, ESI Acquisition Corporation, a California corporation and a wholly-owned subsidiary of the Company, and ESI (the "ESI Merger"). ESI is based in San Diego, -3- California. It is engaged in the development of the INJEX(TM) needle-free drug injection system, which is designed to eliminate the risks of contaminated needle stick accidents and the resulting cross contamination of hepatitis, HIV and other diseases. ESI holds two U.S. patents for its features of the injection system and has received U.S. Food and Drug Administration ("FDA") 510(k) clearance to market the system in the United States. ESI anticipates commencing the marketing of the system in late calendar 1998. Initially, ESI plans to market and distribute its products through licensing and joint development agreements with drug companies and manufacturers of injectible pharmaceuticals in the United States. These acquisitions are part of management's strategic plan to expand the scope of the medical products to be offered by the Company. The Company is considering future growth through acquisitions of companies or business segments in related lines of business or other lines of business, as well as through expansion of the existing line of business. There is no assurance that management will find suitable acquisitions candidates or effect the necessary financial arrangements for such acquisitions or that such acquisitions will be successful. OTHER RECENT DEVELOPMENTS The Viola(TM) Intraoral Camera System. In 1997, the Company was granted the exclusive right to market and sell the Viola(TM) intraoral camera system in North America, South America and Australia. The Viola(TM) intraoral camera is manufactured by Meditronic GmbH in Germany. In 1997, Rosch GmbH began selling and distributing the Viola(TM) intraoral camera in markets outside North America, South America and Australia. In September 1997, the Company received U.S. FDA clearance to sell this system, and in November 1997, the Company began a marketing program to introduce the system in the United States. To date, United States marketing efforts have proven unsuccessful and the Company has largely discontinued its United States distribution of the Viola(TM) system in favor of the camera systems that DDS had previously been marketing in the United States. Conversion of Debentures. As of November 3, 1997, the Company issued an aggregate of 720,000 shares of its Common Stock upon the conversion of $720,000 principal amount of its 14% Convertible Subordinated Debentures due October 31, 1999 (the "Debentures"). This represented the entire issue of Debentures. The Company had reduced the conversion price of the Debentures to $1.00 per share from $3.75 per share, effective October 17, 1997 through October 27, 1997, in connection with October 1997 amendments to arrangements with its primary bank pursuant to a Forbearance and Workout Agreement and its efforts to obtain additional equity capital. Private Placement of Common Stock. As of November 26, 1997, the Company closed a private placement (the "Common Stock 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 $375,000 of the placement proceeds to repay portions of its bank indebtedness, and used the balance of the proceeds for working capital, including increasing its ownership interest in Rosch GmbH. Private Placement of Preferred Stock. On May 5, 1998, the Company closed the placement of 1,000 shares of 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 $1 million, pursuant to a Securities Purchase Agreement, dated as of May 5, 1998 (the "Purchase Agreement"), among the Company, West End Capital LLC ("West End") and the Purchaser. The Purchase Agreement also provided that the Purchaser would purchase a second tranche of 1,000 shares of Series A Preferred Stock for $1 million upon the Company acquiring DDS on or prior to May 15, 1998, and a third tranche of 1,000 shares of Series A Preferred Stock for $1 million upon the Company acquiring ESI on or prior to May 25, 1998. 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 to West End the 50,000 Warrants being registered hereby. The Company also granted options for the purchase of 30,000 shares of Common Stock to a finder, exercisable at $4.40 per share for three years. The Registration Agreement requires the Company to file a registration statement (the "Registration Statement") under the Securities Act for the Warrants and shares of Common Stock underlying the Series A Preferred Stock and the Warrants. -4- On May 8, 1998, following the DDS Merger, the Company closed the second tranche of the Series A Preferred Stock. On May 13, following the ESI Merger, the Company closed the third tranche of the Series A Preferred Stock. The three placements of Series A Preferred Stock with the Purchaser and the sale of the Warrants to West End are collectively referred to herein as the "Preferred Stock Private Placement." The net proceeds from the sale of the 3,000 shares of Series A Preferred Stock was $2,665,000 (after placement fees and other related costs), of which $225,000 was used as the cash portion of the purchase price for the DDS Merger, $600,000 was used to repay the outstanding indebtedness to Citizens Bank New Hampshire, and the balance will be used for possible future acquisitions and working capital. The Series A Preferred Stock is immediately convertible into shares of Common Stock at a conversion rate equal to $1,000 divided by the lower of (i) $4.00 or (ii) 75% of the average closing bid price for the Common Stock for the five trading days immediately preceding the conversion date. The Company may force conversion of all (and not less than all) of the outstanding shares of Series A Preferred Stock at any time after the first anniversary of the effective date of the Registration Statement. There is no minimum conversion price. Should the bid price of the Common Stock fall substantially prior to conversion, the holders of the Series A Preferred Stock could obtain a significant portion of the Common Stock upon conversion, to the detriment of the then holders of the Common Stock. The Series A Preferred Stock has a liquidation preference of $1,000 per share, plus any accrued and unpaid dividends. The Company was to pay an annual dividend equal to 5% of the liquidation preference, which may be paid at the election of the Company in cash or shares of its Common Stock. The dividend rate was increased to 12% on June 5, 1998 due to the Company's failure to file the Registration Statement covering the Common Stock underlying the Series A Preferred Stock within 30 days of the initial closing. If the Registration Statement is not declared effective within 120 days of the initial closing such rate will increase to 18% until the effective date of the Registration Statement. The Company may redeem up to $1 million face amount of Series A Preferred Stock at a redemption price equal to 120% of the liquidation preference if the closing bid price of the Company's Common Stock is below $2.75 per share for five consecutive trading days. The Company may redeem an additional $1 million face amount of Series A Preferred Stock at a redemption price equal to 120% of the liquidation preferences if the closing bid price of the Company's Common Stock is below $2.50 per share for five consecutive dates. Retention of Liviakis Financial Communications, Inc. as Financial Consultant. Effective as of March 15, 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. LFC would receive a finder's fee equal to 2.5% of the gross funding of any debt or equity placement and 2% of the gross consideration on any acquisition for which LFC acts as a finder for the Company. THE OFFERING SECURITIES OFFERED . . . . . . An aggregate of 5,320,224 shares of Common Stock and 50,000 Warrants may be offered from time to time by the Selling Stockholders. See "SELLING STOCKHOLDERS." COMMON STOCK OUTSTANDING . . . 7,038,136 shares as of June 30, 1998. RISK FACTORS . . . . . . . . . An investment in the Common Stock and Warrants involves a high degree of risk, including recent financial losses, a highly competitive industry, regulatory compliance, changing healthcare policies both domestically and abroad, and technological changes. See "RISK FACTORS" USE OF PROCEEDS . . . . . . . . None of the proceeds of the sale of the Common Stock or Warrants registered hereunder -5- will accrue to the Company. The Company will receive gross proceeds of $1,822,000 if all of the warrants and options of which the underlying shares of Common Stock are included herein are exercised which the Company would use for general corporate purposes. See "USE OF PROCEEDS." OTC ELECTRONIC BULLETIN BOARD SYMBOL . . . . . . . . "AMER" RISK FACTORS See "RISK FACTORS" for a discussion of certain factors that should be considered in evaluating an investment in the Common Stock. -6- SUMMARY FINANCIAL AND OPERATING INFORMATION The summary financial information set forth below is derived from and should be read in conjunction with the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. All numbers are in thousands, except for share and per share amounts. ------------------------------------------------- YEAR ENDED -------------------------------------------------------------------- SUMMARY OF 7/31/97 7/27/96 7/29/95 7/30/94 7/31/93 OPERATIONS --------------------------------------------------------------------- Net sales $2,309 $3,337 $2,443 $1,965 $2,358 --------------------------------------------------------------------- Income (loss) before provision for income taxes and extraordinary items (926) 467 184 61 203 --------------------------------------------------------------------- Net income (loss) (926) 442 172 57 399 --------------------------------------------------------------------- Earnings (loss) per common share: Basic (.37) .18 .08 .03 .25 Diluted (.37) .18 .08 .03 .25 ---------------------------------------------------------------------- Weighted average common shares 2,510,296 2,493,854 2,238,483 1,833,666 1,594,651 ---------------------------------------------------------------------- ------------------- NINE MONTHS ENDED ---------------------------------------------------------------- 4/30/98 4/26/97 SUMMARY OF OPERATIONS ---------------------------------------------------------------- Net sales $5,095 $1,486 ---------------------------------------------------------------- Loss before provision for income taxes and extraordinary items (745) (926) ---------------------------------------------------------------- Loss (747) (926) ---------------------------------------------------------------- Loss per common share: Basic (.19) (.37) Diluted (.19) (.37) ---------------------------------------------------------------- Weighted average common shares 4,002,804 2,495,232 ---------------------------------------------------------------- --------------------------------------------------------------------- AS OF AS OF AS OF AS OF AS OF FINANCIAL POSITION 7/31/97 7/27/96 7/29/95 7/30/94 7/31/93 --------------------------------------------------------------------- Total assets $3,060 $2,771 $1,513 $899 $1,023 --------------------------------------------------------------------- Working capital 1,060 906 915 485 402 --------------------------------------------------------------------- Long-term debt 1,100 94 0 4 0 --------------------------------------------------------------------- Stockholders' equity 1,168 1,948 1,196 771 704 --------------------------------------------------------------------- -7- -------------------------------------- AS OF FINANCIAL POSITION 4/30/98 -------------------------------------- Total assets $6,363 -------------------------------------- Working capital 2,916 -------------------------------------- Long-term debt 1,118 -------------------------------------- Stockholders' equity 3,401 -------------------------------------- -8- RISK FACTORS An investment in the Common Stock and Warrants involves a high degree of risk and, therefore, should be considered extremely speculative. They should not be purchased by persons who cannot afford the possibility of the loss of their entire investment. Prospective investors should consider carefully among other risk factors, the risk factors and other special considerations relating to the Company and this offering set forth below. The discussion in this Prospectus contains, in addition to historical information, certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, beliefs, expectations and intentions. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include the following 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. FINANCIAL RISKS Recent Losses. The Company had a net loss of $926,000, or $.37 per share, for the fiscal year ended July 31, 1997 compared to a net income of $442,000, or $.18 per share, for the comparable period in fiscal 1996. The Company had a net loss for the nine months period ended April 30, 1998 of $747,000, or $.19 per share, compared to a net loss of $926,000, or $.37 per share, for the same period in the prior year. The loss in fiscal 1997 was attributable primarily to decreases in sales from Germany, initially because of regulatory delays, which became less of a factor in the second quarter of 1997, and subsequently because of changes in the reimbursement policy for the Company's products in Germany. The net loss in the first nine months of fiscal year 1998 was attributable to a transition in the third quarter from utilizing a major distributor for the sales of its dental cameras in Europe to direct sales, to lower gross margins on the sales of the cameras compared to gross margins on the sale of other products, and to higher interest costs. The increase in sales in the first nine months of fiscal 1998 was attributable to accounting for sales of Rosch GmbH on a consolidated basis as well as sales of new intraoral dental camera systems. There can be no assurance that the Company will realize increased sales of the camera systems through selling on a direct basis or will be able to increase the gross margins, or will be successful in marketing ESI's INJEX(TM) needle-free drug injection system. BUSINESS AND REGULATORY RISKS Expansion Through Undetermined Acquisitions. The Company intends to expand its product lines and domestic and international markets, in part, through acquisitions. The Company's ability to expand successfully through acquisitions will depend upon the availability of suitable acquisition candidates at prices acceptable to the Company, the Company's ability to consummate such transactions and the availability of equity and/or debt financing on terms acceptable to the Company, which could be dilutive to stockholders. There can be no assurance that the Company will be successful in completing acquisitions. Such transactions involve numerous risks, including possible adverse short-term effects on the Company's operating results or the market price of the Common Stock. These acquisitions may not be subject to approval or review by the Company's stockholders. Certain of the Company's future acquisitions may also give rise to an obligation by the Company to make contingent payments or to satisfy certain repurchase obligations, which payments could have an adverse financial effect on the Company. In addition, integrating acquired businesses may result in a loss of customers or product lines of the acquired businesses and also require significant management attention and may place significant demands on the Company's operations, information systems and financial resources. The failure effectively to integrate acquired businesses with the Company's operations could adversely affect the Company. In addition, the Company competes for acquisition opportunities with companies which have significantly greater financial and management resources than those of the Company. There can be no assurance that suitable acquisition opportunities will be identified, that any such transactions can be consummated, or that, if acquired, such new businesses can be integrated successfully and profitably into the Company's operations. Moreover, there can be no assurance that the Company will continue to successfully expand, or that growth or expansion will result in profitability. -9- Government Regulations. Government regulation in the United States and certain foreign countries is a significant factor in the Company's business. In the United States, the Company's products and its manufacturing practices are subject to regulation by the FDA pursuant to the Federal Food, Drug and Cosmetic Act ("FDC Act"), and by other state regulatory agencies. Under the FDC Act, medical devices, including those under development by the Company, such as its needle-free injection system, must receive FDA clearance before they may be sold, or be exempted from the need to obtain such clearance or approval. The FDA regulatory process may delay the marketing of new systems or devices for significant periods of time and impose substantial additional costs. Moreover, FDA marketing clearance regulations depend heavily on administrative interpretation, and there can be no assurance that interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect the Company. There can be no assurance that the Company will be able to obtain clearance of any future Company products or any expanded uses of current or future Company products in a timely manner or at all. In addition, even if obtained, FDA clearances are subject to ongoing review, and if the FDA believes the Company is not in compliance with applicable requirements, it can institute proceedings to detain or seize the Company's products, require a recall, suspend production, distribution, marketing and sales, enjoin future violations and assess civil and criminal penalties against the Company, its directors, officers or employees. The FDA may also suspend or withdraw market approval for the Company's products or require the Company to repair, replace or refund the cost of any product manufactured or distributed by the Company. FDA regulations also require the Company to adhere to certain "Good Manufacturing Practices" ("GMP") regulations, which include validation testing, quality control and documentation procedures. The Company's compliance with applicable regulatory requirements is subject to periodic inspections by the FDA. The Company will need 510(k) approval for any new medical products which it develops. Compliance with these requirements requires the Company to expend time, resources and effort in the areas of production and quality control for itself and for its contract manufacturers. Moreover, there can be no assurance that required regulatory clearances will be obtained, and those obtained may include significant limitations on the uses of the product in question. In addition, changes in existing regulations or the adoption of new regulations could make regulatory compliance by the Company more difficult in the future. Although the Company believes that its products and procedures are in material compliance with all relevant FDA requirements, the failure to obtain the required regulatory clearances or to comply with applicable regulations would have a material adverse effect on the Company. Sales of medical devices outside the United States that are manufactured within the United States are subject to United States export requirements, and all medical devices sold abroad are subject to applicable foreign regulatory requirements. Legal restrictions on the sale of imported medical devices vary from country to country. The requirements for obtaining approval by foreign countries may differ substantially from those required for FDA approval. There can be no assurance that the Company will be able to obtain regulatory approvals or clearances for its products in foreign countries. Competition; Risk of Technological Obsolescence. The manufacture and distribution of medical and dental devices is intensely competitive. The Company competes with numerous other companies, including several major manufacturers and distributors. With respect to the intraoral camera market, the Company has at least five major competitors in the video market. The digital equipment market is less mature, but the Company anticipates growing competition in this market as well. There has been some recent consolidation among the Company's major competitors in the audiometric business, which has resulted in some price erosion for those products. The Company's current competition for injection systems is primarily from traditional hypodermic needles and syringes which are used for the vast majority of injections administered today. In order to make needles and syringes easier and safer to use, certain companies have developed syringes with hidden needles, spring-powered needle injectors and injectors with sheathed needles, sometimes referred to as safety syringes. In addition to competing with these types of traditional hypodermic needles and syringes, the Company's needle-free injection systems also -10- compete with other needle-free injection devices. Currently, competition in the needle-free injection market is generally limited to other small companies with modest financial and other resources, but the barriers to entry are currently low and additional competitors may enter the needle-free injection systems market, including companies with substantially greater resources and experience than the Company. Further, as discussed herein, the Company's major competitor in the needle-free injection business formed a joint venture with the largest producer of needles and syringes for purposes of manufacturing a new design of disposable needle-free system. See "BUSINESS - Needle-Free Drug Delivery System." There can be no assurance that the Company will be able to compete effectively against current or future competitors in the needle-free injection market. Competition in this market could also force the Company to reduce the prices of its systems below currently planned levels, thereby adversely affecting the Company's revenues and future profitability. Injection is generally used only with drugs for which other drug delivery methods are not possible, in particular with biopharmaceutical proteins (drugs derived from living organisms, such as insulin and human growth hormone) that cannot currently be delivered orally, transdermally (through the skin) or pulmonarily (through the lungs). Many companies, both large and small are engaged in research and development efforts on novel techniques aimed at delivering such drugs without injection. For example, Pfizer, Inc. recently announced successful human trials of a device to inhale insulin and is competing with several other large companies to develop such a device. The successful development and commercial introduction of such a non-injection technique would likely have a material adverse effect on the Company's business, financial condition, results of operations and general prospects. Most of the Company's competitors in all segments of its business have greater financial and other resources than the Company. Consequently, such entities may begin to develop, manufacture, market and distribute medical devices which are substantially similar or superior to the Company's products. Dependence on Proprietary Technology Rights and Lack of Patent Protection. The Company's success will depend in part on its ability to protect proprietary rights and to operate without infringing on the proprietary right of third parties. The Company holds no patents, except for those held in connection with its needle-free injection system for which it holds two United States patents and has applied for 9 foreign patents. In appropriate circumstances, the Company may in the future apply for patent protection for uses, processes, products and systems that it develops. There can be no assurance that any of the Company's current or future patent applications will result in issued patents, that the scope of any current or future patents will prevent competitors from introducing competitive products or that any of the Company's current or future patents would be held valid or enforceable if challenged. Patenting medical devices involves complex legal and factual questions and there is no consistent policy regarding the breadth of claims pertaining to such technologies; the ultimate scope and validity of patents issued to the Company or to its competitors are thus unknown. Further, although the Company is unaware of any infringement by its products, no infringement studies have been conducted. In addition, there can be no assurance that measures taken by the Company to protect its unpatented proprietary rights will be sufficient to protect these rights against third parties. Likewise, there can be no assurance that others will not independently develop or otherwise acquire unpatented technologies or products similar or superior to those of the Company. There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry, and the Company may in the future be required to defend its intellectual property rights against infringement, duplication and discovery by third parties or to defend itself against third-party claims of infringement. Likewise, disputes may arise in the future with respect to ownership of technology developed by consultants or under research or development agreements with pharmaceutical companies, or with respect to the ownership of technology developed by employees who were previously employed by other companies. Any such disputes or related litigation could result in substantial costs to, and a diversion of effort by, the Company. An adverse determination could subject the Company to significant liabilities to third parties, require the Company to seek licenses from or pay royalties to third parties or require the Company to develop appropriate alternative technology. There can be no assurance that any such licenses would be available on acceptable terms or -11- at all, or that the Company could develop alternate technology at an acceptable price or at all. Any of these events could have a material adverse effect on the Company's business, financial condition and results of operations. Risks Associated with Third-Party Reimbursement of End Users. Sales of the Company's current and proposed products in certain markets are dependent in part on the availability of adequate reimbursement from third-party healthcare payors. Currently, insurance companies and other third-party payors reimburse the cost of dental x-ray equipment and [certain audiometric testing], 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. Such companies may refuse reimbursement if they do not perceive benefits to the use of the Company's equipment in a particular case. Third-party payors are increasingly challenging the pricing of medical products and services, and there can be no assurance that such third-party payors 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 the Company to achieve or maintain market acceptance of its 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. Any such trend could negatively impact the market for the Company's products. The Company is also subject to the reimbursement policies of private and governmental healthcare payors in foreign countries with respect to its international sales. In this regard, recent changes in the reimbursement policy for the Company's audiometric products in Germany have negatively impacted the Company's earnings. See "RISK FACTORS - Financial Risks." New Products and Technological Change. The Company is in the "high tech" end of the health care industry. This industry has been historically marked by very rapid technological change and frequent introductions of new products. Accordingly, the Company's future growth and profitability depend in part on its ability to continue to respond to technological changes and successfully develop and market new products that achieve significant market acceptance. There is no assurance that the Company will be able to do so. Products Liability Exposure. The malfunction or misuse of the medical devices sold by the Company may result in potential injury to physicians' patients, thereby subjecting the Company to possible liability. Although the Company's insurance coverage is $4,000,000 per occurrence and $5,000,000 in the aggregate with a deductible of $5,000, which amounts and deductibles are customary in the industry, there can be no assurance that such insurance will be sufficient to cover any potential liability. Further, as the result of either adverse claim experience or of medical device or insurance industry trends, the Company may in the future have difficulty in obtaining product liability insurance or be forced to pay very high premiums, and there can be no assurance that insurance coverage will continue to be available on commercially reasonable terms or at all. In addition, there can be no assurance that insurance will adequately cover any product liability claim against the Company. 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 the Company's business, financial condition and operations. Dependence on Key Personnel. The success of the Company is highly dependent on its ability to attract and retain highly qualified personnel, including Thomas A. Slamecka, Chairman of the Board, and Michael T. Pieniazek, President, Chief Financial Officer and Secretary, and the principal officers of the operating subsidiaries. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining key personnel in the future. Any failure to do so could adversely affect the Company. The Company does not carry any "key-man" insurance on the life of any officer of the Company. ADDITIONAL BUSINESS RISK FACTORS RELATING TO NEEDLE-FREE INJECTION BUSINESS Uncertainty of Market Acceptance. The success of the Company's needle-free injector system will depend upon increasing market acceptance of the system as an alternative to needle injections. Needle-free injection systems of other companies -12- have had only limited success competing with traditional needles and syringes. The Company believes this largely because of the size, cost and complexity of use of the systems that have been previously marketed. The Company's improvements in the functionality and design may not adequately address the actual or perceived complexity of using needle-free injection systems or adequately reduce the cost. There can be no assurance that the Company will be successful in these efforts or that its needle- free injection systems will ever gain sufficient market acceptance to sustain profitable operations. Dependence on Collaborative Relationships. The Company believes that the introduction and acceptance of its system depends in part upon the success of its efforts at obtaining licensing arrangements with pharmaceutical and medical device companies covering the development, manufacture or use of the system with specific parenteral drug therapies. The Company anticipates 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. There can be no assurance that the Company 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 the Company's needle-free injection systems. As a result of such agreements, the Company would be dependent upon the development, data collection and marketing efforts of such pharmaceutical and medical device companies. The amount and timing of resources such pharmaceutical and medical device companies would devote to these efforts are not within the control of the Company, and such 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 Company's sales of its systems for those uses. Limited Manufacturing Experience. To date, the Company's manufacturing experience with its needle-free injection system has involved only the assembly of products in limited quantities for purposes of testing and demonstrations. The Company's planned commercialization necessitates the development of a manufacturing and assembly process capable of producing an adequate number of systems and components to satisfy commercial demand. These systems must be manufactured in compliance with regulatory requirements, in a timely manner and in sufficient quantities while maintaining quality and acceptable manufacturing costs. In the course of developing its manufacturing and production methods, the Company may encounter difficulties, 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. There can be no assurance that the Company will be able to produce and manufacture successfully the Company's needle-free injection systems. Dependence on Third Party Suppliers for Production of Components. The Company has not yet chosen the companies that it will use as its suppliers for the component parts of its needle- free injection system. Further, once it does, regulatory requirements applicable to medical device manufacturing can make substitution of suppliers costly and time-consuming. There can be no assurance that the Company 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. 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 the Company's ability to manufacture and market its products. MARKET RISKS Securities Market Volatility. There have been periods of extreme volatility in the stock markets, which in many cases were unrelated to the operating performance of, or announcements concerning, the issuers of the affected stock. The Company's Common Stock is not actively traded, and the bid and asked prices for its Common Stock have fluctuated significantly. In the past two fiscal years and the eleven-month period ended June 30, 1998, -13- the Common Stock traded from a high of $9.06 to a low of $0.66, after giving effect to a one-for-five reverse stock split in November 1996. See "MARKET PRICE INFORMATION." General market price declines, market volatility, especially for low priced securities, or factors related to the general economy or the Company in the future could adversely affect the price of the Common Stock. All of the Shares and Warrants registered for sale on behalf of the Selling Stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act. The Company has filed the Registration Statement of which this Prospectus is a part to register these restricted Shares and Warrants for sale into the public market by the Selling Stockholders, thereby creating a market overhang which could depress the market price during the period the Registration Statement remains effective and also could affect the Company's ability to raise equity capital. Any outstanding Shares or Warrants not sold by the Selling Stockholders pursuant to this Prospectus will remain as "restricted shares" in the hands of the holder. Lack of Dividends. The Company has never declared any cash dividends on its Common Stock, and if the Company were to become profitable, it would expect that all of such earnings would be retained to support the business of the Company. Accordingly, the Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Shares Eligible for Future Sale. At June 30, 1998, the Company had an aggregate of 2,939,633 shares of Common Stock reserved for the exercise of options and warrants. The Series A Preferred Stock is convertible into shares of Common Stock at a conversion rate equal to $1,000 per Series A share divided by the lower of (i) $4.00 or (ii) 75% of the average closing bid price for the Common Stock for the free trading days immediately preceding the conversion date. Since there is no minimum conversion price, a reduction on the bid price could require the Company to issue a significant amount of Common Stock upon conversion of the Series A Preferred Stock. The sale, or availability for sale, of substantial amounts of Common Stock in the public market could adversely affect the prevailing market price of the Common Stock and could impair the Company's ability to raise additional capital when needed through the sale of its equity securities. Risks Relating to Low-Priced Stock; Possible Effect of "Penny Stock" Rules on Liquidity for the Company's Securities. Depending upon the market price of the Company's Common Stock, the Company's net tangible assets and revenues, the Common Stock may become subject to Rule 15g-9 under the Exchange Act. This Rule (the "Penny Stock 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. Consequently, such Rule may affect the ability of broker-dealers to sell the Company's securities and may affect the ability of purchasers to sell any of the Company's securities in the secondary market. The SEC regulations define a "penny stock" to be any equity security that has a market price (as therein defined) of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. 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 the Company's Common Stock will qualify for exemption from the penny stock restrictions. In any event, even if the Company's Common Stock were exempt from such restrictions, the Company would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority -14- 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. If the Company's Common Stock were subject to the rules on penny stocks, the market liquidity for the Company's Common Stock could be materially adversely affected. Investors should check the then current market prices before making an investment decision with respect to the securities of the Company. The current market price of the Common Stock reflects a one-for-five reverse stock split of the Company's outstanding Common Stock, effective November 8, 1996. See "MARKET PRICE INFORMATION." Antitakeover Effect of Certain Charter Provisions. Certain provisions of the Company's Certificate of Incorporation and of Delaware law could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such 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. Such provisions may 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 of the Company. 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. USE OF PROCEEDS The Company will not receive any of the proceeds from the sale of the Shares or Warrants by the Selling Stockholders. The Company will receive gross proceeds of $1,822,000 if all the warrants and options of which underlying shares of Common Stock included herein are exercised. The Company will use such proceeds for general working capital purposes, including possible acquisitions. The Company will bear the expenses of the registration of the Shares and Warrants. The Company estimates that these expenses will be approximately $70,000. DIVIDEND POLICY The Company has never paid any cash dividends on its Common Stock and its Board of Directors has no present intention of declaring any cash dividends in the foreseeable future. If the Company were to become profitable in the future, it expects that all earnings would be retained to support the business of the Company. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRINCIPAL MARKET AND MARKET PRICES ---------------------------------- The Common Stock of the Company is traded in the over-the- counter market on the OTC Electronic Bulletin Board under the symbol AMER. 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, 1997 and the eleven months ended June 30, 1998, and gives effect to a one-for-five reverse stock split effective as of November 8, 1996. 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. -15- ----------------------------------------------------------------- FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDING ENDED ENDED FISCAL PERIOD 7/31/98 7/31/97 7/27/96 ----------------------------------------------------------------- High Low High Low High Low ----------------------------------------------------------------- First Quarter $1.88 $1.00 $5.16 $3.13 $3.75 $2.66 ----------------------------------------------------------------- Second Quarter 1.50 .66 4.38 1.88 4.06 2.34 ----------------------------------------------------------------- Third Quarter 4.94 .88 3.75 1.38 3.44 2.66 ----------------------------------------------------------------- Fourth Quarter 4.81* 3.19* 1.63 .84 9.06 4.22 ----------------------------------------------------------------- * Through June 30, 1998. APPROXIMATE NUMBER OF HOLDERS OF COMPANY'S COMMON STOCK ------------------------------------------------------- As of June 30, 1998, there were approximately 205 stockholders of record of the Company's Common Stock. The Company believes that a substantial amount of the shares are held in nominee name for beneficial owners. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion in this Prospectus contains, in addition to historical information, certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, beliefs, expectations and intentions. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include the those 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 NINE MONTH PERIODS ENDED APRIL 30, 1998 AND APRIL 26, 1997 Net sales for the nine month period ended April 30, 1998 were $5,095,000 compared to $1,486,000 for the nine month period ended April 26, 1997. The increase in sales in fiscal 1998 was attributable to accounting for sales of Rosch GmbH on a consolidated basis as well as sales of the new intraoral dental camera system. Sales of the dental camera system commenced in the second quarter of fiscal 1997. During the third quarter of fiscal 1998, Rosch GmbH began a transition from utilizing a major distributor for the sale of its dental cameras in Europe to direct sales. Management believes that selling the cameras on a direct basis should result in increased sales and profits commencing in early fiscal 1999. This transitioning though resulted in decreased sales in the third quarter of fiscal 1998 when compared with sales for the second quarter of fiscal 1998. Cost of sales for the nine month period ended April 30, 1998 was 58.5% compared to 56.6% of net sales during the same period in the prior year. The increase in cost as a percentage of sales can be attributed to the product mix which included sales of Rosch GmbH on a consolidated basis. As the Company's sales mix becomes more significantly related to dental camera products, and as costs of sales for dental camera products is greater than for other product lines, as expected, costs of sales as a percentage increased. Selling, general and administrative ("SGA") expenses for the nine month period ended April 30, 1998 were $2,637,000 compared to $1,100,000 for the comparable prior year period. The increase -16- reflects increased corporate activity, as well as accounting for the selling, general and administrative expenses of Rosch GmbH on a consolidated basis. The Company expects that the higher level of marketing and selling expenses will continue for the balance of fiscal 1998, when compared to the prior year, as the Company seeks to promote its new dental camera product line. The increased corporate activity relates to management time and related expenses in connection with preliminary acquisition discussions conducted during the third quarter of fiscal 1998. These discussions resulted in the two acquisitions closed early in the fourth quarter of fiscal 1998. The Company expects to continue incurring expenses related to acquisition discussions as its current strategy is to grow through acquisitions. Additionally, as a result of the Company's entering into a consulting agreement with LFC, the Company will incur additional SGA expense related to the ratable amortization of the fair value of the services performed at a rate of $250,000 per quarter over a one-year period ending March 15, 1999. Net loss for the nine month period ended April 30, 1998 was $747,000, or $.19 per share, compared to a net loss of $926,000, or $.37 per share, for the same period in the prior fiscal year. The increase in net loss is the result of decreased sales, as described above, and the per share amounts were also affected by increases during fiscal 1998 in the number of outstanding shares upon which such calculation was based. COMPARISON OF FISCAL YEARS ENDED JULY 31, 1997 AND JULY 27, 1996 Net sales were $2,309,000 for the fiscal year ended July 31, 1997 ("Fiscal 1997") compared to $3,337,000 during fiscal year ended July 27, 1996 ("Fiscal 1996"). The $1,028,000 decrease in sales result primarily from a substantial decline in sales in Germany, which had constituted the Company's major international market, initially because of temporary regulatory delays. The Company's products intended to be sold in Germany are required to be manufactured under an approved quality system, i.e., ISO 9000. The Company received ISO 9000 certification at the end of the second fiscal quarter of 1997 and resumed shipments into Germany and, therefore, as of July 31, 1997, any temporary regulatory delays relating to ISO 9000 issues were no longer a factor. Sales continued to be affected, however, by a change in medical reimbursement in Germany whereby separate reimbursement was terminated for audiometric tests performed with the Company's products. The temporary regulatory delays related to ISO 9000 certification and the change in medical reimbursement in Germany both came into effect at approximately the same time, late in the fourth quarter of fiscal 1996. Sales to Germany decreased by $900,000 in fiscal 1997 as a result of these factors. Inasmuch as both factors impacted upon sales at the same time, it is not possible to quantify their impact separately. Net loss for Fiscal 1997 was $926,000, or $.37 per share, compared to a net income of $442,000, or $.18 per share, for Fiscal 1996. The overall decrease in profits in Fiscal 1997 was primarily the result of the above-mentioned decline in sales in addition to increased debt service costs. The conversion of the Debentures mentioned below should reduce future annual debt service costs by approximately $100,000. Cost of sales, as a percentage of net sales, for Fiscal 1997 was 56.8% versus 49.5% for Fiscal 1996. The increase in cost as a percentage of sales can be attributed to the product mix and unfavorable overhead variances as a result of decreased manufacturing levels in response to the general domestic industry-wide slowdown and the previously mentioned decline in sales in Germany. SG&A expenses increased and research and development (R&D) expense decreased in Fiscal 1997 over Fiscal 1996. The Company attributes the $355,000 increase in SG&A expenses to increased marketing and promotional activity. General and administrative expenses increased by $145,000 as a result of corporate development expense and the retention of senior level executives. These costs are more fixed in nature. Selling expenses increased by $210,000 as a result of the market introduction of the new QuikTymp(TM) Tympanometer line of products in December 1996. These selling expenses were high as a result of heavy promotion at the front end of the product introduction period and should become more variable over time. The increase in other income/expense in 1997 when compared to 1996 primarily related to $100,000 of additional interest expense as a result of new -17- convertible debentures and other bank debt as well as write-off of purchased technology from BioFlo Systems together with $125,000 associated with the legal proceeding involving the former president of the Company. The Company decreased R&D expenditures in Fiscal 1997 to $85,000 compared to $215,000 in Fiscal 1996 when the Company redesigned its line of tympanometers. LIQUIDITY AND CAPITAL RESOURCES Working capital of the Company at April 30, 1998 was $2,916,000, compared to $1,060,000 at fiscal year ended July 31, 1997. The $1,856,000 increase in working capital primarily reflects the accounting for Rosch GmbH on a consolidated basis. As mentioned in Note 3 of the Notes to the Unaudited Condensed Financial Statements in this Prospectus, the Company applied $150,000 to repay portions of its bank indebtedness and $200,000 as the cash portion of the purchase price of its acquisition of Rosch GmbH and investment in Meditronic. Further, the November 1997 conversion of the Debentures should reduce the annual interest expense going forward by approximately $100,000 a year. The principal components of the increase in working capital were inventory and accounts receivable as the result of accounting for Rosch GmbH on a consolidated basis. Subsequent to April 30, 1998, the Company received $2,665,000 in net proceeds from the placement of the Series A Preferred Stock. It used $225,000 of such proceeds for the cash portion of the DDS Merger and $600,000 to repay the outstanding bank indebtedness. The Company expects that available cash should be sufficient to meet its normal operating requirements, including research and development expenditures, for the next 12 months, subject to needs of further cash for possible future acquisitions. The Company would seek additional capital through equity and/or debt placements or secured financings; however, no assurance can be given that such financing arrangements would be successfully completed and, if so, on terms not dilutive to existing stockholders. The Company is considering future growth through acquisitions of companies or business segments in related lines of business or other lines of business, as well as through expansion of existing lines of business. There is no assurance that management will find suitable acquisition candidates or effect the necessary financial arrangements for such acquisitions. In May 1998, the Company acquired DDS and ESI. The Company, through DDS, is marketing intraoral dental cameras in the United States and expects to commence marketing the ESI INJEX(TM) needle-free injection system at the end of calendar 1998. It anticipates spending approximately $1 million for developing, manufacturing capabilities and marketing of this injection system. YEAR 2000 The Company has completed an assessment of Year 2000 issues with respect to its computer systems. The Company believes that the Year 2000 issue will not pose significant operational problems for its computer systems in that all required modifications and conversions to comply with Year 2000 requirements should be fully completed by the third quarter of 1999. In the opinion of management, the total cost of addressing the Year 2000 issue will not have a material impact on the Company's financial position or results of operations. BUSINESS The Company is engaged in developing, manufacturing and selling the following three categories of healthcare products: (i) intraoral dental cameras and related products, (ii) diagnostic audiometric medical devices and (iii) needle-free drug delivery systems. -18- INTRAORAL DENTAL CAMERAS AND ---------------------------- RELATED PRODUCTS ---------------- The largest segment of the Company's business today is the sale of intraoral dental camera systems and related dental products. Intraoral cameras display close-up high quality color video or digital images of dental patients' teeth and gums. These images help dentists and other dental care workers in displaying dental health and hygiene problems. Using these systems, treatment plans, discussions and on-going patient information are enhanced so patients can better see, understand and accept treatment recommendations. Through DDS and Rosch GmbH, the Company markets two kinds of camera systems, the ViperCam(TM) and the Viola(TM). In 1997, the Company began selling and distributing the Viola(TM) camera system, manufactured in Germany by Meditronic GmbH, in markets outside North America, South America and Australia. In September 1997, the Company received FDA clearance to sell this system. In November 1997, the Company began a marketing program to introduce the system in the United States. Due to differences in the U.S. and German markets, the Company has had only limited success in marketing the Viola(TM) in the U.S. In particular, unlike the German and other European markets, where the majority of dental offices contain a single or small number of operatories (rooms where patients receive dental care), the majority of U.S. dental offices contain multiple operatories. The Viola(TM) intraoral camera system, as currently designed, is generally not as cost effective for offices containing multiple operatories as systems designed for such uses such as the ViperCam(TM). The Company has now significantly reduced its marketing of the Viola(TM) in the U.S. in favor of the ViperCam(TM). In the United States, the Company focuses its efforts on selling intraoral cameras as part of a complete digital operatory system, including cameras, dental and cosmetic imaging software, and related hardware and equipment. The Company also offers digital x-ray equipment that can be combined with its camera system. Digital operatory hardware and software allow the dentist and his/her assistants to capture and store the pictures taken by the intraoral camera on their computer system. Once digitized, these images are stored in a database for that specific patient and can be recalled for viewing and comparison. The basic system allows dentists to store over 45,000 individual images on their system as compared to four images on most intraoral camera systems. The dentist can enhance the picture, giving the patients a better view of their teeth and helps the patient accept the recommended treatment plan. Images can also be transferred to other dentists via the video conferencing module or on the Internet. The system also integrates with most practice management software packages, allowing the dentist to save time by not having to reenter the patient's name in each program. Cosmetic imaging software takes a digitized image of a patients smile and gives the dentist the ability to make changes to the smile. This allows the patient to see what their smile would look like if they accept the treatment proposed by the dentist. Cosmetic dentistry is the fastest growing part of a dental practice, and is also the most profitable to the dentist. Cosmetic imaging software allows the dentist to enhance this part of their practice and attract new patients. Digital x-ray is a new method of obtaining traditional dental x-rays. Instead of x-ray film being placed in the patient's mouth, exposed to radiation, then developed in a solution in a dark room, this system does it digitally. A small computer sensor, the size of the film, is placed in the mouth and exposed, using a 90% reduction in radiation. The image is instantly displayed on a computer screen and sent via computer into a data base containing the patient's file. The x-ray image can be enhanced and enlarged and measurements taken giving both the dentist and the patient more information. As with the other software sold by the Company, the image can be viewed and sent via video conferencing or on the Internet. Through DDS, the Company acquired a non-exclusive distribution agreement with Integra Medical to distribute Integra Medical's intraoral camera model # IMI-AC4 and certain related ViperSoft software packages throughout the United States. Through DDS, the Company also possesses a distribution agreement -19- with the Sony Business and Professional Group, a division of Sony Electronic, Inc., for the distribution of printers, monitors and digital cameras. The Company also purchases and distribute various other products relating to digital operatory system without formal distribution agreements. These include computers, computer accessories and workstation cards. DIAGNOSTIC AUDIOMETRIC MEDICAL DEVICES -------------------------------------- Prior to the recent acquisitions of DDS and ESI, the Company's business was based primarily on the development, manufacture and sale of Tympanometers(R). The Company expects Tympanometers(R) to continue to be a significant portion of its business. The name Tympanometer(R) is a registered trademark of the Company. The Tympanometer(R), an automatic impedance audiometer, is a medical diagnostic instrument which, by applying a combination of air pressure and sound to the ear drum, identifies diseases and disorders of the middle ear which are not revealed by standard hearing tests. In September 1995, the Company introduced the Race Car(TM) Tympanometer, which is directed for use in screening pre-school children for hearing disorders. In December 1996, the Company began selling the QuikTymp(TM) Tympanometer, a version of the Race Car Tympanometer that can test for middle ear disease in adults and children. The Company also manufactures and sells audiometers which use sound at descending decibel levels to screen for hearing loss. Production and sales of the Pilot(TM) Audiometer began in August 1994. In the Fall of 1995, the Company decided to increase its presence in the European market. Efforts were made to identify opportunities which would result in greater market penetration for its product line as well as increased exposure to potential manufacturing partners or joint ventures. This was accomplished in part by the Company's purchase of Rosch GmbH and its equity investment in Meditronic GmbH. The impedance audiometer is used to perform a series of diagnostic tests of the hearing process. The instrument tests the response of the middle ear muscle to sound stimulus, the functioning of the nerve endings which transmit the hearing message to the brain, and the functioning of the middle ear to determine the presence of any disease. The test of the middle ear to detect disease is called "tympanometry." Tympanometry detects middle ear diseases regardless of whether such diseases result in a hearing loss. Certain types of middle ear diseases may not initially cause hearing loss and, consequently, cannot be discovered or diagnosed in their early stages by standard hearing tests. By the time those diseases cause discernible hearing loss, the damage to the ear may be extensive and often irreparable. Early detection through the use of tympanometry permits treatment which, in many cases, can reverse or ameliorate the effects of the disease. The Company recognized that tympanometry had applications beyond the use of the ear specialists and could be used in the recognition and diagnosis of ear disorders by other practitioners if an instrument was developed which was fully automated and produced results which were easily interpreted. Consequently, in 1977, the Company introduced a Company-designed impedance audiometer called the Tympanometer(R). The Tympanometer(R) has a rubber tipped probe which is placed against the ear canal for a three second procedure that applies sound and air pressure to the ear drum and produces a graphic (hard copy) representation of the middle ear function. Family practitioners, pediatricians and allergists confront, on a daily basis, problems affecting the middle ear. The principal method of determining the nature of the middle ear problem is through a visual impression obtained with the assistance of a hand-held instrument that is placed in the patient's ear. The graphic result provided by the Tympanometer(R) eliminates the uncertainties which may result from visual examination. The person administering the Tympanometer(R) test, who may be a physician, school nurse or other health care professional, can determine from the graph whether the ear condition is caused by an infection, a perforation of the ear drum, a retraction of the ear drum or other pathological condition, and can treat the condition or refer the patient to the appropriate specialist. The Company manufactures and sells four different models of Tympanometers(R). -20- In August 1994, the Company completed the design process and began production of an audiometer which facilitates the testing for hearing loss in very young children. The Pilot(TM) Audiometer performs "select picture" and puretone audiometry and is particularly useful in screening young children for hearing loss because it is as simple as identifying pictures. A test board with twelve easily identifiable pictures is displayed within reach of the child, who is outfitted with a headset connected to an audiometer. The child is then asked, through the headset, to identify ten pictures presented at eight descending decibel levels. Select picture audiometry is a technique developed by the Mayo Clinic in the 1960s and has been used by audiologists for decades. Using new digital voice chip technology, the Company has automated the procedure so that it can be used simply and efficiently in a primary care or screening environment. Since its introduction, the Pilot(TM) Audiometer has continued to receive favorable response from the market. In fiscal 1996, the Company introduced the Race Car Tympanometer(R) to the marketplace. The Race Car Tympanometer(R) is designed to test for middle ear disease in young children using up-dated graphics for visual distraction of the child during testing. In fiscal 1997, the Company presented the new Quik Tymp(TM) Tympanometer line at the Health Industry Distributors Association (HIDA) Meeting. The Quik Tymp(TM) Tympanometer tests for middle ear disease in children and adults. This easy to use unit features the Company's "Little Car" visual distraction for testing children and the traditional graph display for adults. The Quik Tymp(TM) can include the option of a built-in pure tone audiometer. Marketing had commenced in December 1996. NEEDLE-FREE DRUG DELIVERY SYSTEMS --------------------------------- Through ESI, the Company is in the business of developing, manufacturing and marketing its INJEX(TM) needle-free injector system (the "INJEX(TM) 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 and manipulate a plunger with the needle inserted through the skin, thus eliminating the risk of potentially contaminated needle stick incidents and the resulting blood-borne pathogen transmission. The INJEX(TM) System is smaller, easier to use, less expensive and more comfortable than previous needle-free injection systems marketed by ESI's competitors, and the Company believes that the key to widespread market acceptance of the INJEX(TM) System will depend on its ability to compete on the basis of such criteria. A first generation INJEX(TM) System was tested and received 510(k) market clearance from the FDA in August 1995. The first generation system was not commercially marketed. Since then, certain improvements have been made to the System and the Company expects to begin marketing a second generation system by the end of this calendar year. The Company does not believe the modifications or enhancements made to the system for the current version require a new FDA 510(k) submission. The INJEX(TM) System consists of three components: (i) a pen sized reusable jet injector, (ii) a reset box which acts as a carrying case and resets the spring for the jet injector and (iii) a plastic, sterile, disposable ampule which contains the medication fluid. In addition, ESI has designed and will produce disposable transfer adapters to be used as a channelling device between drug bottles and ampules for ampules that are delivered empty but sterile. The INJEX(TM) System is currently designed to deliver variable doses of fluid medication from .02 ml to .5 ml. The ampules can be pre-filled by the medication manufacturer for resale through pharmacies or delivered sterilized and empty to be filled by patients or providers of care using ESI's transfer adapter to transfer fluid from a standard medication vial. 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 the physician's office, hospital and clinic -21- environments, self administered injections by people with diabetes, allergies or human growth disorders and vaccine inoculations such as for polio, tetanus, rabies or flu. The INJEX(TM) System may also have applications in the dental and veterinary markets. PRODUCT DEVELOPMENT ------------------- The Company is committed to fund the developing, manufacturing capabilities and marketing necessary to bring the INJEX needle-free injection system to market by the end of calendar year 1998. The Company anticipates that approximately $1 million may be required for this purpose. In the fields of audiometrics, the Company is continually engaged in product development. As mentioned above, the Quik Tymp(TM) Tympanometer was introduced in fiscal 1997. The Company is currently exploring new product opportunities both in audiometrics and also in other lines. In fiscal 1997, the Company expended $85,000 for research and development with respect to its audiometric products. It expects to continue to incur research and development costs in fiscal 1998 depending upon the success of the development activities and available funds. The Company has not presently committed any significant funds for research and development with respect to the intraoral camera equipment it markets. GOVERNMENT REGULATION --------------------- Government regulation in the United States and certain foreign countries is a significant factor in the Company's business. In the United States, the Company's products and its manufacturing practices are subject to regulation by the FDA pursuant to the Federal Food, Drug and Cosmetic Act ("FDC Act"), and by other state regulatory agencies. Under the FDC Act, medical devices, including those under development by the Company, such as its needle-free injection system, must receive FDA clearance or approval before they may be sold, or be exempted from the need to obtain such clearance or approval. The FDA regulatory process may delay the marketing of new systems or devices for lengthy periods and impose substantial additional costs. Moreover, FDA marketing clearance regulations depend heavily on administrative interpretation, and there can be no assurance that interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect the Company. There can be no assurance that the Company will be able to obtain clearance of any future Company products or any expanded uses of current or future Company products in a timely manner or at all. In addition, even if obtained, FDA clearances are subject to continual review, and if the FDA believes that the Company is not in compliance with applicable requirements, it can institute proceedings to detain or seize the Company's products, require a recall, suspend production, distribution, marketing and sales, enjoin future violations and assess civil and criminal penalties against the Company, its directors, officers or employees. The FDA may also suspend or withdraw market approval for the Company's products or require the Company to repair, replace or refund the cost of any product manufactured or distributed by the Company. FDA regulations also require the Company to adhere to certain "Good Manufacturing Practices" ("GMP") regulations, which include validation testing, quality control and documentation procedures. The Company's compliance with applicable regulatory requirements is subject to periodic inspections by the FDA. The Company will need 510(k) approval for any new medical products which are developed in the future. Compliance with these requirements requires the Company to expend time, resources and effort in the areas of production and quality control for itself and for its contract manufacturers. Moreover, there can be no assurance that the required regulatory clearances will be obtained, and those obtained may include significant limitations on the uses of the product in question. In addition, changes in existing regulations or the adoption of new regulations could make regulatory compliance by the Company more difficult in the future. Although the Company believes that its products and procedures are currently in material compliance with all relevant FDA requirements, the failure to obtain the required regulatory clearances or to comply with applicable regulations would have a material adverse effect on the Company. -22- Sales of medical devices outside the United States that are manufactured within the United States are subject to United States export requirements, and all medical devices sold abroad are subject to applicable foreign regulatory requirements. Legal restrictions on the sale of imported medical devices vary from country to country. The time and requirements to obtain approval by a foreign country may differ substantially from those required for FDA approval. There can be no assurance that the Company will be able to obtain regulatory approvals or clearances for its products in foreign countries. PATENTS AND TRADEMARKS ---------------------- With respect to the Company's INJEX(TM) needle-free drug injection system, the Company holds two United States patents and has applied for nine foreign patents. The Company also possesses certain registered trademarks and copyrights for names which it believes are important to its business. PROPERTIES ---------- The Company's administrative offices and audiometric operations are located in Amherst, New Hampshire in facilities containing 7,800 square feet leased to the Company for three years at $3,800 per month under a lease expiring in May 2001. DDS maintains offices in two locations, in Gainesville, Georgia, where it rents 2,400 square feet of office space, and in Newport Beach, California, where it rents 1,500 square feet of office space. ESI maintains an office in San Diego, California, where it rents 1,200 square feet of office space under a lease expiring in November 1998. ESI may rent additional space in connection with the commercialization of the INJEX(TM) system. It believes that such additional space would be available. Rosch GmbH maintains an office in Berlin, Germany, where it rents approximately 2,150 square feet of office space under a lease expiring in January 2001. The Company believes that these facilities are adequate for its current business needs. MARKETING --------- The Company's intraoral camera systems and other dental products are marketed to dental practitioners throughout the United States by DDS through 32 independent regional dealers who are retained by DDS on a non-exclusive, best efforts basis. The Viola(TM) system is marketed throughout Europe through Rosch GmbH. Rosch GmbH both distributes products directly and through regional dealers. The market for the Company's audiometric products includes physicians, particularly those in medical specialties such as pediatrics, allergy medicine, family practice, otolaryngology and otology (the latter two specialties deal with diseases of the ear). The audiometric products are marketed mainly through independent regional dealers both domestically and internationally who sell principally hearing related health care products. These dealers are retained by the Company on a non- exclusive, best efforts basis. The Company also distributes these products throughout Europe using Rosch GmbH. Initially the Company plans to market and distribute the INJEX(TM) needle-free injection system through licensing and joint development agreements with drug companies and manufacturers of injectible pharmaceuticals in the United States. The Company expects that product sales will be directed to pharmaceutical companies, pediatric clinics, infectious disease wards, and outpatient clinics where the threat of accidental needle pricks and patient trauma are highest. Thereafter, the Company expects to broaden its market to home care applications such as for people with diabetes, allergies, human growth disorders, arthritis, osteoporosis or other diseases involving in home self injections. The Company's marketing plans may change significantly depending on its discussions with drug companies -23- and manufacturers and its success in securing licensing and/or joint development agreements with such entities. The Company participates in exhibitions at major medical, educational and public health conventions. It also advertises its products domestically and internationally in journals for dentists, pediatricians, allergists, otolaryngologists, otologists and family practitioners and also for schools, public health clinics and HMOs. MATERIALS --------- The intraoral cameras and other dental equipment distributed by the Company are purchased from suppliers and resold to the Company's customers. The Viola(TM) system is manufactured by Meditronic GmbH. The principal materials purchased by the Company in the manufacture of Tympanometers are electronic components, pumps and metal stamped parts. All of these materials are readily available from a number of sources in the quantities required. The graph paper and accessories sold for use with the Company's instruments are purchased by the Company from suppliers and resold to the Company's customers. In fiscal 1997, the Company received ISO 9000 certification in conformance with the international standard for the manufacture of medical devices with respect to its audiometric products. The Company has not yet begun manufacturing the INJEX(TM) System for commercial distribution. Pre-production aluminum injectors and reset boxes were built for FDA testing and limited clinical trials, internal testing and inspection and for marketing demonstrations and evaluations. The Company expects the finished product to be made of a combination of anodized aluminum and stainless steel metal parts. Prototypes will be built from automated drawings prior to making a commitment to molds. The injector has three molded parts and the reset box has four molded parts. The disposable plastic parts of the INJEX(TM) System include the ampule which contains the drug and the transfer device, which to date have been produced using single cavity molds that are not capable of producing high volumes of ampules or adapters in a cost effective manner. The Company has determined that the current designs for the ampule and transfer device are functional but can be improved for reliability. Once the design for these components is finalized, the Company will progress to multi- cavity molds and tools. Initially, the Company plans to rely on established FDA licensed medical products manufacturing facilities for the manufacturing of the disposable components of the INJEX(TM) System. The Company will also outsource component manufacturing for the injector and reset device and has developed a list of vendors for this purpose. Assembly of the injector and reset device will eventually be performed in house. The Company will oversee the quality assurance of all products manufactured by assembling a team of quality assurance professionals with expertise in disposable and medical devices. As demand develops for the INJEX(TM) System, the Company will evaluate the feasibility of assuming a larger role in the manufacturing of its products. PRODUCT WARRANTY ---------------- The Company's intraoral camera systems are sold with the manufacturer's warranty. Neither DDS nor Rosch GmbH provide any additional warranties for the products they distribute. All audiometric products are sold with a one year warranty against defects in parts and workmanship. The Company repairs, at no charge, defects covered by the warranty if the instrument is returned to the Company's factory in Amherst, New Hampshire or to an authorized factory service station. If the repair is performed at the customer's office, there is no charge for warranty work. The Company believes that it has no warranty problem with its audiometric products. The Company plans to offer a one-year warranty on the injector component of its INJEX(TM) system. -24- EMPLOYEES --------- At June 30, 1998, the Company and its subsidiaries had 45 employees, 11 of whom were management or administrative personnel, 27 were engaged in sales activities, and 7 were engaged in manufacturing and service related activities. In addition, when necessary, the Company uses independent engineering consultants for design support and new product development. None of the Company's employees are covered by collective bargaining agreements. The Company considers its employee relations to be satisfactory. COMPETITION ----------- The distribution of medical and dental devices is intensely competitive. The Company competes with numerous other companies, including several major manufacturers and distributors. Most of the Company's competitors have greater financial and other resources than the Company. Consequently, such entities may begin to develop, manufacture, market and distribute systems which are substantially similar or superior to the Company's products. Further, other companies may enter this marketplace. No assurance can be given that the Company will be able to compete against these other companies which may have substantially greater marketing and financial resources than the Company. With respect to the intraoral camera market, the Company has at least five major competitors in the video market which the Company views as being largely mature with little room for growth. Conversely, the digital camera market is expanding with no one company or group of companies yet dominating the market. Nevertheless, the Company anticipates that the digital market will become increasingly competitive as demand among dental practitioners grows for digital equipment. There has been some recent consolidation among the Company's major competitors in the audiometric business, which has resulted in some price erosion for those products. The major competitive factors are price, utilization of latest technology and ease of use. In fiscal year 1996, the Company completed the redesign of its Tympanometer(R) line to take advantage of more cost effective technology and to address customer needs. The Company's INJEX(TM) needle-free injection system will compete with standard needle syringes, safety syringes and other manufacturers of needle-free injection systems. These competitors have been in business longer than the Company and have substantially greater technical, marketing, financial, sales, and customer service resources. Becton, Dickinson and Company ("BDC") has as much as 85% of the domestic needle syringe market. BDC has very low product cost and high quality through superior manufacturing. BDC has also entered in marketing and distribution arrangements with Medi-Ject, Inc., a manufacturer of needle-free injection systems. Medi-Ject, Inc., founded in 1979, has previously marketed a needle-free injector system known as the "MediJector," which consists of an injector without a removable or disposable component. Medi-Ject, Inc. has a collaborative arrangement with BDC and has also entered into various licensing and development agreements with multi-national pharmaceutical and medical device companies covering the design and manufacture of customized injection systems for specific drug therapies. The other principal manufacturer of needle-free injection systems is Bio-Ject Inc., formed in 1985. Bio-Ject, Inc. has sold a CO2 powered injector since 1993. The injector is designed for and used almost exclusively for vaccinations in doctors' offices or public clinics, and is both expensive and complicated to use. Two other companies, Health-Mor Personal Care Corp. and Vitajet Corporation, currently sell coil spring injector systems. Vitajet has recently introduced a product which incorporates a disposable needle-free syringe. Vitajet was recently acquired by Bio-Ject. -25- Safety syringes are presently made by a small number of new firms, none of which has a significant share of the total syringe market. BDC also manufactures these devices, but the high cost of safety syringes and the continued problem of controlled disposal has weakened the demand for them. The Company expects ESI to compete with the smaller safety syringe manufacturers and jet injector firms, based on health care worker safety, ease of use, reduced overall costs of controlled disposal and patient comfort. The Company expects that when all indirect costs are considered, the INJEX(TM) System should be able to successfully compete on a cost basis. LEGAL PROCEEDINGS On June 26, 1998, Christer O. Andreasson filed an action against ESI, the Company, and four former directors of ESI, in Superior Court of California, County of San Diego, seeking an indeterminate amount of damages arising from his employment relationship as Chief Executive Officer of ESI over several months spanning late 1995 and early 1996. At this stage, and absent any investigation or discovery, the Company cannot estimate the merits of the claim or the effect on the Company. -26- MANAGEMENT The following table sets forth certain information concerning the directors, executive officers and other significant employees of the Company as of June 30, 1998. Position with the Year Became Name Age Company Director ---- --- ------- -------- Thomas A. Slamecka 57 Chairman of the Board 1996 and Director Michael T. Pieniazek 39 President, Chief N/A Financial Officer, Treasurer and Secretary Blake C. Davenport 31 Director 1997 Andy Rosch 37 Director and General 1997 Manager of Rosch GmbH Marcus R. Rowan 37 Director 1996 Joseph Wear 63 Director 1995 Lawrence A. Petersen 53 President of ESI N/A Henry J. Rhodes 43 President of DDS N/A The terms of the Board of Directors will expire at the next annual meeting of stockholders. The Company's officers are elected by the Board of Directors and hold office at the will of the Board. Thomas A. Slamecka has been Chairman of the Board for the Company since February 1997, and a director of the Company since October 1996. Mr. Slamecka was President of the ConAgra Poultry Company, Inc., Duluth, Georgia, from 1995 to February 1997, and from 1990 to 1994, he was President and Chief Executive Officer of CEEC Inc., Atlanta, Georgia. Michael T. Pieniazek has been President of the Company since April 1997 and Chief Financial Officer and Treasurer since July 1995, and Secretary since January 1996. From 1987 to 1995, Mr. Pieniazek served in various executive positions, the last having been Executive Vice President and Chief Financial Officer, for Organogenesis Inc., a Massachusetts-based, biotechnology company. From 1980 to 1987, Mr. Pieniazek was an auditor with Coopers & Lybrand LLP. Blake C. Davenport has been a director of the Company since December 1997. For more than the past five years, he has been the President and owner of Davenport Interests, Inc., a private investment company. Andy Rosch has been a Director of the Company since December 1997 and General Manager of Rosch GmbH since July 1990. Marcus R. Rowan has been a director of the Company since October 1996. For more than the past five years he has been President of Berkshire Interests, Inc., Dallas, Texas, which specializes in commercial real estate and investments. Joseph Wear has been a director of the Company since March 1995. Since November 1995, he has been Executive Director of Wellness Community-Delaware, a provider of psychosocial support to people with cancer and their families. From 1987 to 1995, he was a partner in Philadelphia Entrepreneurial Partners which was -27- engaged in management consulting to small and medium businesses. From 1970 to 1987, Mr. Wear was President and Chief Executive Officer of Summit Airlines. Lawrence A. Petersen has been Chief Executive Officer of ESI since September 1, 1997. Prior to the acquisition of ESI by the Company in May, Mr. Petersen had been both President and Chief Executive Officer ESI. From October 1, 1995 to August 15, 1997, Mr. Petersen was Chief Executive Officer of Solid State Farms, Inc., a medical device company involved in the blood glucose monitoring business. From 1993 to 1996, Mr. Petersen was President of Capital Solutions, Ltd., a financial services company. Henry J. Rhodes has been President of DDS since August 1996. From July 1992 to August 1996, Mr. Rhodes was a sales manager for New Image Industries Inc., a provider of intraoral camera systems, digital x-ray and associated products, and Dental Medical Diagnostics, Inc., a provider of intraoral camera systems and video network components. In October 1996, the Company granted each director an option under the 1996 Stock Option Plan for 10,000 shares of Common Stock exercisable at $4.38 per share vesting after one year and terminating no later than five years from grant. There is no family relationship among the directors or executive officers of the Company. Directors are each paid $500 per board meeting attended plus travel expenses. -28- EXECUTIVE COMPENSATION The following table sets forth all cash compensation for the fiscal year ended July 31, 1997 of the executive officers whose compensation exceeded $100,000 and of all executive officers as a group for services rendered to the Company. CASH COMPENSATION TABLE ------------------------------------------------------------------ # LONG NAME AND PRINCIPAL FISCAL OPTIONS TERM POSITION YEAR SALARY BONUS GRANTED AWARDS ------------------------------------------------------------------- Noel A. Wren, 1997 $ 76,000 -- 10,000 -- President & Chief 1996 105,000 $10,700 -- -- Executive Officer 1./ 1995 97,500 -- -- -- -- ------------------------------------------------------------------- Michael T. Pieniazek, 1997 $113,000 -- -- -- President & CFO 2./ -- ------------------------------------------------------------------- --------------------------------- 1/ Mr. Wren's employment terminated in March 1997. -- 2/ Mr. Pieniazek became President in April 1997 and continues to -- serve as Chief Financial Officer. Mr. Wren was furnished with an automobile for business and personal use. The compensation specified in the preceding table does not include the value of non-business use as the amounts were not material. AGGREGATED OPTION EXERCISES FOR THE FISCAL YEAR ENDED JULY 31, 1997 AND FY-END OPTION VALUES ---------------------------------------------------------------------- VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT FY- OPTIONS AT FY- END (#) END ($) ---------------------------------------------------------------------- SHARES ACQUIRED ON VALUE EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/ NAME (#) ($) UNEXERCISABLE UNEXERCISABLE ---------------------------------------------------------------------- Noel A. Wren -- -- -0- -0- ---------------------------------------------------------------------- Michael T. Pieniazek -- -- 30,000/0 -- ---------------------------------------------------------------------- EMPLOYMENT AGREEMENTS As of July 31, 1995, the Company had entered into an Employment Agreement with Noel Wren to serve as President and Chief Executive Officer of the Company for a term of three years terminating on July 31, 1998, at a base salary of $115,000 for fiscal 1997. The Company terminated the Agreement in March 1997, and paid Mr. Wren $62,500 in connection with the termination of his Employment Agreement. As of January 1, 1998, the Company entered into an Employment Agreement with Thomas A. Slamecka to serve as Chairman of the Board for an initial term terminating on March 15, 2001, subject to annual renewals, and his February 1997 Employment Agreement was terminated. Mr. Slamecka receives an annual base salary of $52,000 through July 31, 1998 and thereafter at $100,000, plus a profits bonus equal to 10% of the amount that consolidated net after-tax operating profits exceeds $500,000, provided for such year the Company earns a 12% return on its Common Stock equity, and may also receive a supplemental bonus. The Employment Agreement also provided for the grant of options to him for the purchase of 400,000 shares of Common Stock at $1.00 per share, -29- which was the fair market value of the Company's Common Stock on the date of grant, vesting immediately as to 212,500 shares and the balance vesting at 46,875 shares per month through May 1998. The Company is to issue 100,000 shares of Common Stock to Mr. Slamecka if during the term of his employment the closing price for the Common Stock is at least $20 per share for a period of three consecutive trading days. Further, the Employment Agreement provides that if the Company issues any shares of Common Stock (other than pursuant to compensation or employee benefit plans) it will grant to Mr. Slamecka additional options to purchase shares equal to 9.3% of the outstanding Common Stock at a purchase price equal to the per share price of the shares issued by the Company (but not less than $1.00 per share). In calculating Mr. Slamecka's ownership for purposes of such 9.3% level, unvested options held by him and shares sold by him during the initial term of the Employment Agreement would be included in such calculation. In addition, the Company agreed to make available certain loans to Mr. Slamecka, see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." As of January 1, 1998, the Company entered into an Employment Agreement with Michael T. Pieniazek to serve as President for an initial term of three years terminating on December 31, 2001, subject to automatic renewal for consecutive one-year terms unless terminated not less than 60 days prior to end of any term. Mr. Pieniazek receives an annual base salary of $125,000 and a discretionary bonus. The Agreement also provided for the grant of options to Mr. Pieniazek to purchase 250,000 shares of Common Stock at $1.00 per share, which was the fair market value of the Company's Common Stock on the date of grant, vesting immediately as to 150,000 shares, vesting ratably over the succeeding seven months as to the balance, and for the Company to issue 50,000 shares of Common Stock to Mr. Pieniazek if during the term of his employment the closing price for the Common Stock is at least $20 per share for three consecutive trading days. In addition, the Employment Agreement provides that if the Company issues any shares of Common Stock (other than pursuant to compensation or employee benefit plans) it will grant to Mr. Pieniazek additional options to purchase shares in amount equal to 6.5% of such issuance. In calculating Mr. Pieniazek's ownership for purposes of such 6.5% level, unvested options held by him and shares sold by him during the term of the Employment Agreement would be included in such calculation. The Employment Agreements of Messrs. Slamecka and Pieniazek provide for lump sum payments equal to 2.99 times the current base salary, plus continuation of health benefits for 12 months, upon a change of control of the Company. A change of control of the Company would include a person or group becoming the beneficial owner of 20% of the voting power of the Company's securities or individuals who are current directors of the Company, or successors chosen by them, cease to constitute a majority of the whole Board of Directors. In the event the amount payable upon a change of control would result in the application of an excise tax under Section 4999 of Internal Revenue Code of 1986, as amended, the payment would be made over such period of time in order not to cause the application of such excise tax. On May 5, 1998, upon the closing of the DDS Merger, DDS entered into an Employment Agreement with Mr. Rhodes pursuant to which he will serve as President of DDS for an initial term of three years at an annual base salary of $125,000. Mr. Rhodes was also granted stock options to purchase up to 100,000 shares of the Company's Common Stock at an exercise price of $1.00 per share, vested as of May 5, 1998, and stock options to purchase 100,000 shares of the Company's Common Stock at an exercise price of $3.00 per share, vested as of November 1, 2000, all such stock options expire in May 2003. On May 12, 1998, upon the closing of the ESI Merger, ESI entered into Employment Agreements with Lawrence Petersen and Richard Battelle. Mr. Petersen is to serve as President of ESI for an initial term of three and one-half years at an annual salary of $125,000. Mr. Petersen was also granted stock options to purchase an aggregate of 100,000 shares of the Company's Common Stock, 50,000 of such options at an exercise price of $1.00 per share, with 5,000 of such options immediately vested and 45,000 of such options to vest ratably over the term of the Employment Agreement, and the remaining 50,000 of such options at an exercise price of $3.00 per share, with 5,000 of such options immediately vested and 45,000 of such options to vest ratably over the term of the Employment Agreement. Mr. Battelle is to serve as Director of Finance and Administration of ESI for an initial term of one year at an annual salary of $60,000, and was also granted stock options to purchase an aggregate of 40,000 shares of the Company's Common Stock, 20,000 of such options at -30- an exercise price of $1.00 per share to vest ratably over the term of the Employment Agreement, and the remaining 20,000 of such options at an exercise price of $3.00 per share to vest ratably over the term of the Employment Agreement. All such stock options granted to Mr. Petersen and Mr. Battelle expire in May 2003. On December 18, 1997, upon the closing of the purchase by the Company of the remaining 50% of the outstanding capital stock of Rosch GmbH, Rosch GmbH entered into an amendment to the employment agreement for Andy Rosch pursuant to which he serves as Managing Director of Rosch GmbH. Under the agreement, as amended, Mr. Rosch is to serve as Managing Director of Rosch GmbH for an initial term of 3 years, terminating on December 31, 2000, and automatically renewable for one-year terms thereafter unless either party gives notice of an intention not to renew not less than three months prior to the end of any term. Mr. Rosch is to receive an annual base salary of 200,000 DM and an annual cash bonus equal to 1% of net sales of Rosch GmbH, but not to exceed the amount of his base salary. STOCK OPTIONS In 1995, the Company granted options to two officers to purchase a total of 50,000 shares of the Company's Common Stock, of which options for 30,000 shares at an exercise price of $1.41, which was the fair market value on the date of grant, remain outstanding. During fiscal 1997, options to purchase 3,550 shares of Common Stock were exercised and options for 16,450 shares were canceled. There remains outstanding an option for 30,000 shares which is exercisable and expires no later than four years from the date of grant. In May 1996, the Company granted to a consultant an option to purchase a total of 13,333 shares of the Company's Common Stock at $7.50 per share, which was the fair market value on the date of grant. The option is exercisable and expires no later than three years from the date of grant. In October 1996, the Company's stockholders approved the 1996 Stock Option Plan (the "Option Plan") providing for the issuance of up to 300,000 shares of the Company's Common Stock. The Option Plan is administered by the Board of Directors or an Option Committee. Options granted under this Plan would be either incentive stock options or non-qualified stock options which would be granted to employees, officers, directors and other persons who perform services for or on behalf of the Company. Options are exercisable as determined at the time of grant except options to officers or directors may not vest earlier than six months from the date of grant, and the exercise price of all the option cannot be less than the fair market value at the date of grant. At June 30, 1998, options for an aggregate of 300,000 shares were granted, of which options for 75,000 shares were exercised and options for 225,000 remaining outstanding at an exercise price of $1.00 per share and expiring from January 2002 to February 2002. Pursuant to Employment Agreements with Messrs. Slamecka, Pieniazek, Rhodes, Petersen and Battelle, the Company has granted stock options to such persons and in the cases of Messrs. Slamecka and Pieniazek is obligated to grant additional options upon certain issuances of Common Stock. See "Employment Agreements" herein. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As of July 31, 1997, the Company had loaned Thomas A. Slamecka, Chairman of the Board, an aggregate of $41,666 pursuant to his Employment Agreement. The Employment Agreement provided that the Company make available to Mr. Slamecka a loan in the amount of $8,333.33 each month during the initial term of such Agreement. 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. -31- PRINCIPAL STOCKHOLDERS The following table sets forth information as of June 30, 1998 concerning (i) persons known to the Company to be the beneficial owners of more than 5% of the Company's Common Stock, (ii) the ownership interest of each director and executive officer of the Company listed in the compensation table and (iii) by all directors and executive officers as a group. Note: stock options and warrants are considered presently exercisable if exercisable within 60 days of June 30, 1998. ---------------------------------------------------------------------- AMOUNT & NATURE OF NAME AND ADDRESS OF BENEFICIAL PERCENT BENEFICIAL OWNER STATUS OWNERSHIP OF CLASS ---------------------------------------------------------------------- Liviakis Financial Stockholder 1,500,000 shs(1) 19.3% Communications, Inc. 2420 K Street Sacramento, California 95816 ---------------------------------------------------------------------- Thomas A. Slamecka* Director 834,550 shs(2) 11.0% and Chairman ---------------------------------------------------------------------- Jubilee Investors LLC Stockholder 723,335 shs(3) 9.3% c/o West End Capital LLC One World Trade Center Suite 4563 New York, New York 10048 ---------------------------------------------------------------------- Robert B. Prag Stockholder 500,000 shs(4) 6.9% 2420 K Street Sacramento, California 95816 ---------------------------------------------------------------------- Marcus R. Rowan* Director 391,550 shs(5) 5.3% ---------------------------------------------------------------------- Michael T. Pieniazek* President 334,750 shs(6) 4.6% and CFO ---------------------------------------------------------------------- Andy Rosch* Director 310,000 shs 4.4% ---------------------------------------------------------------------- Blake C. Davenport* Director 70,000 shs(7) 1.0% ---------------------------------------------------------------------- Joseph Wear* Director 66,825 shs(8) 0.9% ---------------------------------------------------------------------- All Executive Officers and Directors as a Group (6 persons) 2,007,675 shs(9) 27.2% ---------------------------------------------------------------------- ----------------------------- 1) Includes presently exercisable warrants for 750,000 shares. 2) Includes presently exercisable options for 528,550 shares. -32- 3) Represents an estimate of the total number of shares which Jubilee Investors LLC would receive upon conversion of its 3,000 shares of Series A Preferred Stock. 4) Includes presently exercisable warrants for 250,000 shares. 5) Includes presently exercisable options for 10,000 shares and warrants for 300,000 shares. Represents shares owned directly by Mr. Rowan and his IRA and Keogh account. 6) Includes presently exercisable options for 282,750 shares. 7) Includes presently exercisable warrants to purchase 50,000 shares. 8) Includes presently exercisable options for 10,000 shares. 9) See Notes 3, 5, 6, 7 and 8. * The address of the persons listed above is c/o American Electromedics Corp., 13 Columbia Drive, Suite 5, Amherst, New Hampshire 03031. DESCRIPTION OF SECURITIES COMMON STOCK The Company is authorized to issue 20,000,000 shares of Common Stock, $.10 par value, of which 7,038,136 shares were issued and outstanding as of June 30, 1998. 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 Company is authorized to issue 1,000,000 shares of Preferred Stock, par value $.01 per share, issuable from time to time in one or more series, having such designation, rights, preferences, powers, restrictions and limitations as may be fixed by the Board of Directors. On May 5, 1998, the Company filed with the Delaware Secretary of State a Certificate of Designations establishing the Series A Preferred Stock consisting of 3,000 shares. The Series A Preferred Stock is immediately convertible into shares of Common Stock at a conversion rate equal to $1,000 divided by the lower of (i) $4.00 or (ii) 75% of the average closing bid price for the Common Stock for the five trading days immediately preceding the conversion date. The Company may force conversion of all (and not less than all) of the outstanding shares of Series A Preferred Stock at any time after the first anniversary of the effective date of the Registration Statement. There is no minimum conversion price. Should the bid price of the Common Stock fall substantially prior to conversion, the holders of the Series A Preferred Stock could obtain a significant portion of the Common Stock upon conversion, to the detriment of the then holders of the Common Stock. The Series A Preferred Stock has a liquidation preference of $1,000 per share, plus any accrued and unpaid dividends. The Company was to pay an annual dividend equal to 5% of the liquidation preference, which may be paid at the election of the -33- Company in cash or shares of its Common Stock. Pursuant to a Registration Agreement, the dividend rate was increased to 12% on June 5, 1998 due to the Company's failure to file the Registration Statement covering the Common Stock underlying the Series A Preferred Stock within 30 days of the initial closing of the Series A Preferred Stock. If the Registration Statement is not declared effective within 120 days of the initial closing, such rate will increase to 18% until the effective date the Registration Statement. The Company may redeem up to $1 million face amount of Series A Preferred Stock at a redemption price equal to 120% of the liquidation preference if the closing bid price of the Company's Common Stock is below $2.75 per share for five consecutive trading days. The Company may redeem an additional $1 million face amount of Series A Preferred Stock at a redemption price equal to 120% of the liquidation preferences if the closing bid price of the Company's Common Stock is below $2.50 per share for five consecutive dates. -34- 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 3,153,556 shares of Common Stock which were purchased since October 1996 in private placements, (ii) holders of warrants and options to purchase an aggregate of 1,443,333 shares of Common Stock at exercise prices ranging from $1.00 to $7.50 per share and (iii) the Purchaser of the Series A Preferred Stock and the purchaser of the Warrants in the Preferred Stock Private Placement. See "THE COMPANY - Recent Developments." Except for Thomas A. Slamecka, Marcus Rowan and Blake C. Davenport, none of the Selling Stockholders has held any position, office or material relationship with the Company or any of its predecessors or affiliates within three years of the date of this Prospectus. Mr. Slamecka has been the Chairman of the Board of the Company since February 1997, and a director of the Company since October 1996, and Mr. Rowan has been a director of the Company since October 1996, and Mr. Davenport has been a director of the Company since December 1997. The following table sets forth, as of June 30, 1998 and upon completion of this offering, information with regard to the beneficial ownership of the Company's 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. SHARES WARRANTS AMOUNT BENEFICIALLY BENEFICIALLY SHARES WARRANTS BENEFICIALLY OWNED PRIOR OWNED PRIOR TO BE TO BE OWNED AFTER NAME(1) TO OFFERING TO OFFERING OFFERED OFFERED OFFERING(2) ----------------- ------------ ------------ --------------- ---------- Stanley I. Aber 12,000 N/A 12,000 N/A 0 Alexander Enterprise Holdings Corp. 10,256 N/A 10,256 N/A 0 Jose Arozamena 6,700 N/A 6,700 N/A 0 Jonathan F. Boucher 30,000 N/A 30,000 N/A 0 Thomas Cabe 100,000 N/A 100,000 N/A 0 Cedar Capital 15,000 N/A 15,000 N/A 0 Cohig & Associates Inc.(3) 30,000 N/A 30,000 N/A 0 Simon Coley 7,500 N/A 7,500 N/A 0 Harvey H. Conger Trust No. 2 120,000 N/A 120,000 N/A 0 Amy Davenport 25,000 N/A 25,000 N/A 0 Blake C. Davenport(4) 70,000 N/A 50,000 N/A 20,000 Robert M. Davenport 170,000 N/A 170,000 N/A 0 Robert M. Davenport Jr. 25,000 N/A 25,000 N/A 0 Bruce Exton 3,500 N/A 3,500 N/A 0 Andrew Fackrell 5,000 N/A 5,000 N/A 0 Daniel Faucetta 9,891 N/A 9,891 N/A 0 Erwin Fried and Jenny Fried 25,000 N/A 25,000 N/A 0 Jack Friedler and Stefanie Friedler JTWROS 50,000 N/A 50,000 N/A 0 Andrew M. Hall 10,000 N/A 10,000 N/A 0 David W. Hood and Ellen P. Hood JTWROS 10,000 N/A 10,000 N/A 0 Sam W. Hunsaker 25,000 N/A 25,000 N/A 0 Jubilee Investors LLC(5) 723,335 N/A 723,335 N/A 0 H. Ward Lay 100,000 N/A 100,000 N/A 0 Lay Trust 100,000 N/A 100,000 N/A 0 -35- SHARES WARRANTS AMOUNT BENEFICIALLY BENEFICIALLY SHARES WARRANTS BENEFICIALLY OWNED PRIOR OWNED PRIOR TO BE TO BE OWNED AFTER NAME(1) TO OFFERING TO OFFERING OFFERED OFFERED OFFERING(2) ----------------- ------------ ------------ --------------- ---------- John Lindeman 25,000 N/A 25,000 N/A 0 Liviakis Financial Communications, Inc.(6) 1,500,000 N/A 1,500,000 N/A 0 Harris R. L. Lydon Jr. 25,000 N/A 25,000 N/A 0 Maloney & Fox, LLC 10,000 N/A 10,000 N/A 0 Arnold Mandelstam 25,000 N/A 25,000 N/A 0 Madsen Family Partners, Ltd. 10,000 N/A 10,000 N/A 0 Metropolis Equity Fund LP 100,000 N/A 100,000 N/A 0 James B. Metzger 129,491 N/A 129,491 N/A 0 Thomas Meyerhoeffer 4,500 N/A 4,500 N/A 0 David Miller 10,000 N/A 10,000 N/A 0 Richard O'Connell 6,700 N/A 6,700 N/A 0 Matthew D. Pieniazek 25,000 N/A 25,000 N/A 0 Frank Lyon Polk Jr. and Nancy Wear Polk 24,728 N/A 24,728 N/A 0 Frank Lyon Polk III 74,871 N/A 74,871 N/A 0 J. Bucky Polk 10,000 N/A 10,000 N/A 0 Potter Wear Polk 5,000 N/A 5,000 N/A 0 Robert B. Prag(7) 500,000 N/A 500,000 N/A 0 Round Hill Holdings 100,000 N/A 100,000 N/A 0 Marcus Rowan(8) 364,810 N/A 320,400 N/A 44,410 Marcus Rowan Keogh Acct. 26,740 N/A 9,600 N/A 17,140 Alan Schnall 20,000 N/A 20,000 N/A 0 Richard Silvergleid 75,000 N/A 75,000 N/A 0 Thomas A. Slamecka 834,550 N/A 260,000 N/A 574,550 Mark Smith 10,000 N/A 10,000 N/A 0 Glenn Solomon 50,000 N/A 50,000 N/A 0 Wall Street Consultants(9) 13,333 N/A 13,333 N/A 0 West End Capital LLC(10) 50,000 50,000 50,000 50,000 0 Roy Willetts 4,000 N/A 4,000 N/A 0 Addison Wilson III, Trustee for Richard A. Gray Jr. Childrens Trust 199,978 N/A 199,978 N/A 0 Tse Wo Wong and Bianca T.T. Wu TIC 54,491 N/A 54,491 N/A 0 ------------------------------ (1) Unless otherwise indicated in the footnotes to this table, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. (2) Assumes the sale of all shares offered hereby. (3) Includes 30,000 shares under presently exercisable warrants. (4) Includes 50,000 shares under presently exercisable warrants. (5) Represents an estimate of the number of shares into which the 3,000 shares of Series A Preferred Stock held by Jubilee Investors LLC may be converted. (6) Includes 750,000 shares under presently exercisable warrants. (7) Includes 250,000 shares under presently exercisable warrants. -36- (8) Includes 300,000 shares under presently exercisable warrants. (9) Includes 13,333 shares under presently exercisable options. (10) Includes the 50,000 shares underlying the Warrants. 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 filed this Registration Statement by June 5, 1998 caused the dividend rate for the Series A Preferred Stock to be increased from 5% of the liquidation preference for such Stock to 12% of the liquidation preference. If the Registration Statement is not declared effective by September 2, 1998, the dividend rate will increase to 18%. Most of the other Selling Stockholders were granted "piggyback" registration rights at the time of their purchase of shares of Common Stock or the issuance of warrants. -37- 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 such 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 and Warrants 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 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 and Warrants 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 and Warrants 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. -38- The Company has been advised by the Selling Stockholders that none of them has, as of , 1998, entered into any ------------- -- arrangement with a broker-dealer for the sale of the Shares or Warrants through block trade, special offering, exchange distribution or secondary distribution of a purchase by a broker- dealer. LEGAL MATTERS The validity of the Common Stock and Warrants being offered hereby will be passed upon for the Company by Thelen Reid & Priest LLP, New York, New York. EXPERTS The financial statements of the Company at July 31, 1997 and July 27, 1996, and for each of the three years in the period ended July 31, 1997, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. -39- AMERICAN ELECTROMEDICS CORP. INDEX TO FINANCIAL STATEMENTS PAGE ---- AMERICAN ELECTROMEDICS CORP.: ---------------------------- Report of Independent Auditors . . . . . . . . . . . . F-2 Balance Sheets as of July 31, 1997 and July 26, 1996 . . . . . . . . . . . . . . . . . . F-3 Statements of Operations for the years ended July 31, 1997, July 27, 1996 and July 29, 1995 . F-4 Statements of Changes in Stockholders' Equity for the years ended July 31, 1997, July 27, 1996 and July 29, 1995 . . . . . . . . . . . . . . . . . . F-5 Statements of Cash Flows for the years ended July 31, 1997, July 27, 1996 and July 29, 1995 . F-6 Notes to Financial Statements . . . . . . . . . . . . F-7 AMERICAN ELECTROMEDICS CORP. (UNAUDITED): ---------------------------------------- Unaudited Condensed Balance Sheet as of April 30, 1998 . . . . . . . . . . . . . . . . . F-15 Unaudited Condensed Statements of Operations for the nine months ended April 30, 1998 and April 26, 1997 . . . . . . . . . . . . . . . . . F-16 Unaudited Condensed Statements of Cash Flows for the nine months ended April 30, 1998 and April 26, 1997 . . . . . . . . . . . . . . . . . F-17 Notes to Unaudited Condensed Financial Statements . . F-18 F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders American Electromedics Corp. We have audited the accompanying balance sheets of American Electromedics Corp. as of July 31, 1997 and July 27, 1996, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended July 31, 1997. 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 financial position of American Electromedics Corp. at July 31, 1997 and July 27, 1996, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Manchester, New Hampshire September 29, 1997, except as to Note 10, as to which the date is November 3, 1997. F-2 AMERICAN ELECTROMEDICS CORP. BALANCE SHEETS JULY 31, JULY 27, 1997 1996 -------- ---------- ASSETS (Thousands) Current Assets: Cash and cash equivalents . . . . . $ 471 $ 317 Accounts receivable, net of allowance of $7,000 and $11,000 in 1997 and 1996, respectively: 283 303 Trade . . . . . . . . . . . . . . 379 402 Affiliate . . . . . . . . . . . . ------ ------ 662 705 Inventories . . . . . . . . . . . . 475 480 Prepaid and other current assets . 244 133 ------ ------ Total current assets . . . . . . 1,852 1,635 Property and Equipment: Machinery and equipment . . . . . . 361 318 Furniture and fixtures . . . . . . 79 79 Leasehold improvements . . . . . . 9 9 ------ ------ 449 406 Accumulated depreciation . . . . . (396) (365) ------ ------ 53 41 Deferred financing costs . . . . . 128 -- Investment in affiliate . . . . . . 819 876 Goodwill . . . . . . . . . . . . . 208 219 ------ ------ $3,060 $2,771 ====== ====== LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable . . . . . . . . . $ 187 $ 324 Bank line of credit . . . . . . . . 300 300 Accrued liabilities . . . . . . . . 153 38 Current portion of long-term debt . 152 67 ------ ------ Total current liabilities . . . 792 729 Convertible subordinated debentures . . . . . . . . . . . . 720 -- Long-term debt . . . . . . . . . . 380 94 Stockholders' Equity: Preferred stock, $.01 par value; Authorized- 1,000,000 shares; Outstanding-none . . . . . -- -- Common stock, $.10 par value; Authorized- 20,000,000 shares; Outstanding- 2,553,136 and 2,454,666 shares in 1997 and 1996, respectively . . . . . . 255 245 Additional paid-in capital . . . . 2,919 2,783 Retained deficit . . . . . . . . . (2,006) (1,080) ------ ------ Total stockholders' equity . . . 1,168 1,948 ------ ------ $3,060 $2,771 ====== ====== See accompanying notes. F-3 AMERICAN ELECTROMEDICS CORP. STATEMENTS OF OPERATIONS YEARS ENDED ------------------------------ JULY 31, JULY 27, JULY 29, 1997 1996 1995 -------- -------- -------- (Thousands, except per share amounts) Net sales . . . . . . . . . . . $2,309 $3,337 $2,443 Cost of goods sold . . . . . . 1,311 1,652 1,371 ------ ------ ------ Gross profit . . . . . . . . 998 1,685 1,072 Selling, general and administrative . . . . . . . . 1,394 1,039 719 Research and development . . . 85 215 182 ------ ------ ------ Total operating expenses . . 1,479 1,254 901 ------ ------ ------ Operating income (loss) . . . . (481) 431 171 Other income (expenses): Undistributed earnings (loss) of affiliate . . . . . . . (57) 52 -- Interest, net . . . . . . . (125) (16) 9 Other . . . . . . . . . . . (263) -- 4 ------ ------ ------ (445) 36 13 Income (loss) before provision for income taxes . . . . . . . (926) 467 184 Provision for income taxes . . -- 25 12 ------ ------ ------ Net income (loss) . . . . . . . $ (926) $ 442 $ 172 ====== ====== ====== Earnings (loss) per common share: Basic . . . . . . . . . . . $ (.37) $ .18 $ .08 ====== ====== ====== Diluted . . . . . . . . . . $ (.37) $ .18 $ .08 ====== ====== ====== See accompanying notes. F-4 AMERICAN ELECTROMEDICS CORP. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY COMMON STOCK ------------ ADDITIONAL TOTAL PAID-IN RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY ------ ------ ---------- -------- ------------ (THOUSANDS) Balance at July 30, 1994 . . . . . $1,838 $ 184 $2,281 $(1,694) $ 771 Exercise of stock options . . . 505 50 203 -- 253 Net income . . -- -- -- 172 172 ------ ------ ------ ------ ------ Balance at July 29, 1995 . . . 2,343 234 2,484 (1,522) 1,196 Investment in affiliate . . 100 10 290 -- 300 Exercise of stock options . . . 11 1 9 -- 10 Net income . . -- -- -- 442 442 ------ ------ ------ ------ ------ Balance at July 27, 1996 . . . . . 2,454 245 2,783 (1,080) 1,948 Sale of capital stock . . . . 48 5 139 -- 144 Exercise of stock options, net . . . . . 51 5 (3) -- 2 Net loss . . . -- -- -- (926) (926) ------ ------ ------ ------ ------ Balance at July 31, 1997 . . . . . $2,553 $ 255 $2,919 $(2,006) $1,168 ====== ====== ====== ====== ====== See accompanying notes. F-5 AMERICAN ELECTROMEDICS CORP. STATEMENTS OF CASH FLOWS YEARS ENDED ------------------------------ JULY 31, JULY 27, JULY 29, 1997 1996 1995 -------- -------- -------- (Thousands) OPERATING ACTIVITIES: Net income (loss) . . . . . . $ (926) $ 442 $ 172 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization . . . . . . . . 80 38 35 Provision for doubtful accounts . . . . . . . . . . (4) -- 8 Undistributed earnings (loss) of affiliate . . . . . . . . 57 (52) -- Changes in operating assets and liabilities: Accounts receivable . . . . 43 (274) (277) Inventories, prepaid and other current assets . . . (106) (317) (114) Accounts payable and accrued liabilities . . . (22) 49 195 ----- ----- ----- Net cash provided by (used in) operating activities . . (878) (114) 19 INVESTING ACTIVITIES: Investment in affiliate . . . -- (519) -- Purchase of property and equipment, net . . . . . . . (39) (22) (26) ----- ----- ----- Net cash used in investing activities . . . . . . . . . (39) (541) (26) FINANCING ACTIVITIES: Principal payments on long-term debt . . . . . . (129) (43) (6) Proceeds from long-term debt and bank line of credit . . . . . . . . . . . 500 500 -- Issuance of common stock, net . . . . . . . . . . . . 144 -- -- Issuance of convertible subordinated debt . . . . . 720 -- -- Deferred financing costs . . (166) -- -- Proceeds from exercise of stock options . . . . . . . 2 10 253 ----- ----- ----- Net cash provided by financing activities . . . . 1,071 467 247 ----- ----- ----- Increase (decrease) in cash and cash equivalents . 154 (188) 240 Cash and cash equivalents, beginning of year . . . . . . . . . . 317 505 265 ----- ----- ----- Cash and cash equivalents, end of year . . $ 471 $ 317 $ 505 ===== ===== ===== NONCASH TRANSACTION: Stock issued for investment in affiliate . . $ -- $ 300 $ -- See accompanying notes. F-6 AMERICAN ELECTROMEDICS CORP. NOTES TO FINANCIAL STATEMENTS JULY 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ------------------------------------------ Business Description -------------------- American Electromedics Corp. (the Company ) is engaged in the manufacture and sale of medical testing equipment principally to the United States and European medical community. The Company currently produces two devices designed for audiological testing purposes: Tympanometers(R), which apply a combination of pressure and sound to the ear drum to detect diseases of the middle ear, and Audiometers,which use sound at descending decibel levels to screen for hearing loss. The Company recognizes revenue upon receipt of a firm customer order and shipment of the product, net of allowances for warranties, which have not been material. The Company does not recognize revenue on product shipments that are subject to rights of return, evaluation periods, customer acceptance, or any other contingencies until such contingency has expired. Cash and Cash Equivalents ------------------------- For the purpose of reporting cash flows, cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less. The carrying amount reported in the balance sheets for cash and cash equivalents approximates its fair value. Inventories ----------- Inventories are stated at the lower of cost (first-in, first- out method) or market. Depreciation ------------ Property and equipment is stated at cost. The Company provides for depreciation using the straight-line method over the various estimated useful lives of the assets. Leasehold improvements are amortized over the life of the lease agreement. Repairs and maintenance costs are expensed as incurred and betterments are capitalized. Goodwill -------- 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 40 years. Amortization expense for each of the years ended 1997, 1996, and 1995 was $11,000. Accumulated amortization at July 31, 1997 and July 27, 1996 is $242,000 and $231,000, respectively. The Company continually assesses the recoverability of its goodwill based on estimated future results of operations and undiscounted cash flows in accordance with Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Based on the Company's assessment, there was no impairment in the carrying value of goodwill or its other long-lived assets at July 31, 1997 or July 27, 1996. F-7 Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock Options ------------- The Company grants stock options for a fixed number of shares to employees and others with an exercise price equal to or greater than the fair value of the shares at the date of grant. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its stock- based compensation plans because the alternative fair value accounting provided for under Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of options granted equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Income Taxes ------------ Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company's deferred tax assets (which result primarily from net operating loss carryforwards and accrued expenses) as of July 31, 1997 and July 27, 1996 are $561,000 and $248,000, 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 $561,000 and $248,000 as of July 31, 1997 and July 27, 1996, respectively. As of July 31, 1997, the Company has net operating loss carryforwards for Federal income tax purposes of $1,286,000 that expire from 2004 to 2012. The net provision for income taxes for the years ended July 31, 1997, July 27, 1996 and July 29, 1995 of $-0-, $25,000, and $12,000, respectively, are comprised entirely of currently payable state income taxes. There was no current Federal income tax provision due to the utilization of net operating loss carryforwards. Approximately $-0-, $511,000 and $190,000 of the Federal net operating loss carryforward was utilized during the years ended July 31, 1997, July 27, 1996 and July 29, 1995, respectively. Significant components of the Company's deferred tax assets are as follows: 1997 1996 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 437,000 $183,000 Accrued expenses 67,000 3,000 Inventory 24,000 43,000 Other 16,000 -- Reserves 17,000 19,000 --------- -------- Total deferred tax assets 561,000 248,000 Valuation allowance for deferred tax assets (561,000) (248,000) ---------- -------- Net deferred tax assets $ -0- $ -0- ========== ========= F-8 A reconciliation of income taxes computed at the federal statutory rates to income tax expense is as follows: 1997 1996 1995 ----------------------------------------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- Tax (Benefit) at Federal Statutory Rates $(315,000) (34%) $159,000 34% $63,000 34% State Income Taxes, net of federal tax benefit -- -- 17,000 4 8,000 4 Change in Valuation Reserve 313,000 34 (122,000) (26) (63,000) (34) Goodwill Amortization 13,000 1 4,000 1 4,000 2 Other (11,000) (1) (33,000) (7) -- -- ------- ---- ------- ---- ------ --- Total $ -- 0% $25,000 6% $12,000 6% ======= ==== ======= ==== ====== === Reverse Stock Split ------------------- In November 1996, the Company effected a one-for-five reverse stock split. The weighted average shares outstanding and all share, stock option share and per share amounts included in the accompanying financial statements and notes have been restated giving retroactive effect to the reverse stock split. Certain amounts in fiscal 1996 and 1995 with respect to par value of common stock and additional paid-in capital have been reclassified to effect the reverse stock split. Change in Year End ------------------ Effective July 31, 1997, the Company is reporting its month end on the last day of each month for accounting purposes. 2. INVENTORIES: ------------ Inventories consist of the following at: July 31, 1997 July 27, 1996 ------------- ------------- Raw materials $264,000 $339,000 Work-in-process 31,000 51,000 Finished goods 180,000 90,000 -------- -------- $475,000 $480,000 ======== ======== F-9 3. INVESTMENT IN AFFILIATE: ----------------------- In January 1996, the Company invested $519,000 of cash and issued 100,000 shares of its common stock for a fifty percent interest in Rosch GmbH Medizintechnik ("Rosch GmbH"). The 100,000 shares were valued at $3.00 per share, which represents the fair market value of the stock. This investment is being accounted for by the Company under the equity method of accounting. Rosch GmbH is a marketing and distribution company based in Berlin, Germany specializing in the distribution of healthcare products, including the Company's products, to primary care physicians throughout Europe. In January 1996, Rosch GmbH sold its exclusive distributorship rights for a manufacturer's ear, nose, and throat ("ENT") line of products in order to concentrate on the Company's products as well as other healthcare products. At July 31, 1997, the investment in Rosch GmbH exceeded the Company's share of the underlying net assets by approximately $646,000. This amount is being amortized over twenty-five years. Amortization expense for the years ended July 31, 1997 and July 27, 1996 was $28,000 and $16,000, respectively. Accounts receivable from affiliates recorded in the Company's balance sheets represent trade receivables arising through the normal course of business. The balances consist primarily of sales of the Company's audiometric products to Rosch GmbH. As discussed in Note 9, Rosch GmbH represents a significant customer of the Company. Intercompany profits relating to sales of the Company's products to Rosch GmbH are eliminated based on the Company's 50% equity ownership of Rosch GmbH. Summarized unaudited financial information of Rosch GmbH is as follows: Year Ended 7 Months Ended July 31, 1997 July 27, 1996 ------------- ------------- Sales . . . . . . . . . $3,920,000 $1,893,000 Gross profit . . . . . 1,340,000 853,000 Net (loss) income . . . (58,000) 136,000 Current assets . . . . 2,435,000 1,365,000 Non-current assets . . 211,000 179,000 Current liabilities . . 1,687,000 770,000 Non-current liabilities . . . . . 737,000 370,000 4. DEBT: ----- In 1996, the Company entered into a term loan agreement with a bank. The loan is payable in equal monthly installments through December 1998. Interest is based on the Wall Street Journal Prime Rate plus 1/2% (9.0% as of July 31, 1997). As of July 31, 1997, there was $95,000 outstanding under this loan. In October 1996, the Company completed a placement (the "Placement") of 12 units (the "Units") at a price of $75,000 per Unit, or an aggregate of $900,000. Each Unit consisted of a $60,000 principal amount 14% Convertible Subordinated Debenture due October 31, 1999 (the "Debenture") and 4,000 shares of Common Stock valued at $3.75 per share, the fair market value, or an aggregate of $720,000 principal amount of Debentures and 48,000 shares of Common Stock. The aggregate financing costs of the Placement was $202,000, of which $36,000 was for the Common Stock and $166,000 was for the Debentures. The Debentures are convertible into Common Stock at $3.75 per share upon or after the Debentures are called for redemption or the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Act"), covering the underlying shares of Common Stock, subject to customary anti- dilution provisions. The Company may call all or part of the Debentures at par, plus accrued interest, at any time after October 31, 1997. The Debentures contain various covenants, including a restriction on the payment of cash dividends on its Common Stock. F-10 In October 1996, the Company received a $500,000 Term Loan from its bank and the Company's revolving line of credit was increased to $400,000 from $300,000. The bank had conditioned the closing of the Term Loan on the Company receiving at least $700,000 from the issuance of subordinated debentures and/or capital stock, which condition was fulfilled by the Placement. The Term Loan is repayable over five years, bears annual interest at prime plus 1/2%. As of July 31, 1997 there was $437,000 outstanding under the Term Loan and $300,000 outstanding under this revolving line of credit. Borrowings under the bank loans are collateralized by essentially all of the assets of the Company. Principal payments due on long-term debt are as follows: 1998 $ 152,000 1999 173,000 2000 895,000 2001 32,000 -------- $1,252,000 ========= As of July 31, 1997, the Company was not in compliance with certain financial covenants under its loan agreement. As a result, the Company received waivers and entered into a Forbearance and Workout Agreement with the bank, as described in Note 10. 5. EARNINGS PER COMMON SHARE: ------------------------- In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statementt 128 requirements. Earnings per common share for the years ended July 31, 1997, July 27, 1996 and July 29, 1995 were computed using weighted average shares outstanding of 2,510,296, 2,493,854 and 2,238,483, respectively. 6. STOCK OPTIONS: ------------- In 1988, the Company adopted the 1987 Nonqualified Stock Option Plan providing for the issuance of up to 200,000 shares of the Company's common stock. This Plan expired in July 1997 and no options remain outstanding thereunder. In 1995, the Company granted certain officers options to purchase a total of 50,000 shares of the Company's common stock at fair market value on the date of grant. During fiscal 1997, options to purchase 3,550 shares of common stock were exercised and options for 16,450 shares were canceled. There remains outstanding an option for 30,000 shares which is exercisable and expires no later than four years from the date of grant. In 1996, the Company granted to a consultant an option to purchase a total of 13,000 shares of the Company's common stock at fair market value on the date of grant. The option is exercisable and expires no later than three years from the date of grant. The Company expensed approximately $10,000 and $50,000 in 1996 and 1997, respectively, based on the fair market value of the consultant's services over the twelve-month term of the consulting agreement. In 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 F-11 services for or on behalf of the Company. Options are exercisable as determined at the time of grant except options to officers or directors may not vest earlier than six months from the date of grant, and the exercise price of all the option cannot be less than the fair market value at the date of grant. In 1997, the Company granted certain directors and officers of the Company options to purchase 480,000 shares under separate option agreements. The options were granted at the fair market value of the Company's Common Stock on the date of grant. The options vest over four years and expire ten years from the date of grant. 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: OPTIONS 1997 1996 ---- ---- Expected life (years) 4.7 4 Interest rate 6% 6% Volatility 1.15 1.13 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: 1997 1996 ---- ---- Pro forma net income (loss) $(1,238,759) $429,134 Pro forma net income (loss) per share $ (0.49) $ 0.17 Option activity for the years ended 1997, 1996 and 1995 is summarized below: 1997 1996 1995 ------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ -------- ------ -------- ------ ------ Outstanding at beginning of year 133,000 $1.58 131,000 $0.93 585,000 $0.53 F-12 Granted 480,000 3.36 13,000 7.50 120,000 0.93 Expired or canceled (136,000) 3.45 -- -- ( 69,000) 0.68 Exercised ( 74,000) 0.66 ( 11,000) 0.94 (505,000) 0.50 -------- -------- -------- Outstanding at end of year 403,000 3.23 133,000 1.58 131,000 0.93 ======== ======== ======== Exercisable at end of year 111,000 3.11 107,000 0.87 11,000 0.94 ======== ======== ======== Available for future grants 240,000 10,000 10,000 ========= ======== ======== Weighted -average fair value of options granted during year $2.54 $4.52 The following table presents weighted-average price and life information about significant option grants outstanding at July 31, 1997: Options Options Outstanding Exercisable ---------------------------------------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ---------- ---------- ---------- -------- ----------- -------- $1.41 30,000 1 Year $1.41 30,000 $1.41 $3.00 - $4.37 360,000 1 Year 3.23 68,000 3.00 $7.50 13,000 3 Years 7.50 13,000 7.50 ------- ------- 403,000 111,000 ======= ======= 7. OTHER EXPENSES -------------- The Company incurred $263,000 in other charges during 1997. This amount included $125,000 associated with the legal proceeding involving the former president of the Company and $100,000 for the write-off of purchased technology from BioFlo Systems. This technology was intended to measure the viscosity of human blood plasma. However, it was subsequently determined not to be commercially feasible. 8. COMMITMENTS: ----------- The Company leased its principal offices and manufacturing facility under an operating lease which expired in March 1997. Since that time the Company has leased the facilities on a month- to-month basis. Rent expense for the year ended July 31, 1997 was $15,500 and for the years ended July 27, 1996 and July 29, 1995 was $13,500 and $12,000, respectively. 9. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS: ------------------------------------------------ The Company's primary customers are in the medical field. At July 31, 1997 and July 27, 1996, 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. A major customer of the Company accounted for 20%, 41% and 15% of the Company's net sales for the years ended July 31, 1997, July 27, 1996 and July 29, 1995, respectively. F-13 10. SUBSEQUENT EVENTS ----------------- The Company entered into a Forbearance and Workout Agreement (the "Workout Agreement") with its bank on October 28, 1997 as a result of it not being in compliance with certain financial covenants under its loan agreement as of July 31, 1997. Under the Workout Agreement, the bank has waived the non-compliance of the covenants for a period of one year on the condition that the Company agreed to, among other things, raise within 30 days an additional $250,000 of equity capital and to apply $150,000 of such amount against outstanding term loans. Additionally, as part of the Workout Agreement, the Company's revolving line of credit was reduced to $300,000. Certain of the loan agreement financial covenants were also amended to more reasonably reflect the Company's current financial position. In connection with the October 1997 amendments to the bank arrangements and its efforts to obtain additional equity capital, the conversion price of the Debentures had been reduced from $3.75 to $1.00 per share. As of November 3, 1997, the holders of all $720,000 principal amount of Debentures have elected to convert. As a result of this conversion, the Company has reduced its long-term debt by $720,000 and issued 720,000 shares of common stock. The Company also will record a charge of approximately $100,000 to write-off deferred financing costs capitalized upon initial issuance of the Debentures. F-14 AMERICAN ELECTROMEDICS CORP. UNAUDITED CONDENSED BALANCE SHEET AS OF APRIL 30, 1998 APRIL 30, 1998 ---------------- (Thousands) ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . $ 110 Accounts receivable, Trade . . . . . . . . 1,242 Inventories . . . . . . . . . . . . . . . . 1,829 Prepaid and other current assets . . . . . 1,579 ----- Total current assets . . . . . . . . . . 4,760 Property and equipment . . . . . . . . . . 840 Accumulated depreciation . . . . . . . . . (418) ----- 422 Deferred financing costs . . . . . . . . . 21 Investment in affiliate . . . . . . . . . . 311 Goodwill . . . . . . . . . . . . . . . . . 849 ----- $6,363 ====== LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable . . . . . . . . . . . . . $ 923 Bank line of credit . . . . . . . . . . . . 285 Accrued liabilities . . . . . . . . . . . . 469 Current portion of long-term debt . . . . . 167 ----- Total current liabilities . . . . . . . 1,844 Convertible subordinated debentures . . . . -- Long-term debt . . . . . . . . . . . . . . 1,118 Stockholders' Equity: Preferred stock, $.01 par value; Authorized- 1,000,000 shares; Outstanding-none . . . -- Common stock, $.10 par value; Authorized- 20,000,000 shares; Outstanding- 5,663,136 shares at April 30, 1998 . . . . . . . . 566 Additional paid-in capital . . . . . . . . 5,682 Retained deficit . . . . . . . . . . . . . (2,752) Foreign currency translation adjustment . . (95) ----- Total stockholders' equity . . . . . . . 3,401 ----- $6,363 ===== See notes to Unaudited Condensed Financial Statements. F-15 AMERICAN ELECTROMEDICS CORP. UNAUDITED CONDENSED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 1998 AND APRIL 26, 1997 Nine Months Ended ----------------- April 30, 1998 April 26, 1997 -------------- -------------- (Thousands, except per share amounts) Net sales . . . . . . . . . . . . . . . $ 5,095 $ 1,486 Cost of goods sold . . . . . . . . . . 2,979 841 ---------- ---------- Gross profit . . . . . . . . . . . . 2,116 645 Selling, general and administrative . . 2,637 1,100 Research and development . . . . . . . -- 85 ---------- ---------- Total operating expenses . . . . . . 2,637 1,185 ---------- ---------- Operating loss . . . . . . . . . . . . (521) (540) Other income (expenses): Undistributed earnings of affiliate . 56 (55) Interest, net . . . . . . . . . . . . (137) (81) Minority interest in affiliate . . . (85) -- Other . . . . . . . . . . . . . . . . (58) (250) ---------- ---------- (224) (386) Loss before income taxes . . . . . . . . . . . . . (745) (926) Income tax Benefit . . . . . . . . . . (2) -- ---------- ---------- Net loss . . . . . . . . . . . . . . . $ (747) $ (926) ========== ========== Weighted average common shares outstanding . . . . . . . . . . 4,002,804 2,495,232 ========== ========== Loss per common share: Basic . . . . . . . . . . . . . . . . $ (.19) $ (.37) ========== ========== Diluted . . . . . . . . . . . . . . . $ (.19) $ (.37) ========== ========== See notes to Unaudited Condensed Financial Statements. F-16 AMERICAN ELECTROMEDICS CORP. UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED APRIL 30, 1998 AND APRIL 26, 1997 NINE MONTHS ENDED ----------------- APRIL 30, 1998 APRIL 26, 1997 -------------- -------------- (THOUSANDS) Operating activities: Net loss . . . . . . . . $ (747) $ (926) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization . . . . 265 56 Undistributed earnings of affiliate . . . . . . (56) 55 Minority interest in affiliate . . . . 85 -- Changes in operating assets and liabilities: Accounts receivable . . . 189 135 Inventories, prepaid and other current assets . . . . . (985) (361) Accounts payable and accrued liabilities . . . (233) 16 ------ ------ Net cash used in operating activities . . . (1,482) (1,025) Investing activities: Purchase of property and equipment, net . . . . . (267) (36) ------ ------ Net cash used in investing activities . . (267) (36) Financing activities: Principal payments on long-term debt . . . . . (265) (84) Proceeds from long-term debt and bank line of credit . . . . . . . . . 236 500 Proceeds from issuance of common stock, net . . 1,924 144 Proceeds from issuance of convertible subordinated debt . . . -- 720 Redemption of convertible subordinated debt . . . (720) -- Deferred financing costs -- (166) Proceeds from exercise of stock options . . . . 150 2 ------ ------ Net cash provided by financing activities 1,325 1,116 Effect of exchange rate changes on cash and cash equivalents . . 1 -- Increase (decrease) in cash and cash equivalents . . . . . . (423) 55 Cash and cash equivalents, beginning of period . . 533 317 ------ ------ Cash and cash equivalents, end of period . . . . . . . $ 110 $ 372 ====== ====== Supplemental disclosure of cash flow information Non-cash activities Common stock issued in connection with consulting agreement . . $ 1,000 $ -- ======= ====== See notes to Unaudited Condensed Financial Statements. F-17 AMERICAN ELECTROMEDICS CORP. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS APRIL 30, 1998 (Unaudited) 1. BASIS OF PRESENTATION --------------------- The accompanying unaudited 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. The Company changed its method from the equity method of accounting for Rosch GmbH Medizintechnik ("Rosch GmbH") 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 to acquire effective voting control. For the quarterly period ended October 31, 1997, the Company consolidated the Company and Rosch GmbH, however, the Company continued only to recognize earnings of Rosch GmbH up to its 50% ownership share until the remaining 50% was purchased. On December 18, 1997, the Company closed on the purchase of the remaining 50% of the outstanding capital stock of Rosch GmbH paying $50,000 plus 105,000 shares of the Company's Common Stock, pursuant to a Stock Purchase Option Agreement, dated as of November 1, 1997. As a result of this transaction, the Company has recognized 100% of earnings by Rosch GmbH since the quarter ended January 31, 1998. The following proforma information is presented for comparative purposes to disclose information on the financial position and results of operations of the Company and Rosch GmbH had they been consolidated for the nine months ended April 30, 1998: (IN 000's) Nine Months Nine Months Ended Ended April 30, 1998 April 26, 1997 -------------- -------------- Sales $ 5,095 $ 3,302 Gross profit 2,116 1,086 Net loss (747) (967) Current assets 4,760 3,722 Non-current assets 1,603 1,294 Current liabilities 1,844 2,052 Non-current liabilities 1,118 1,744 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 April 30, 1998 have been reported separately as a component of stockholders equity. The aggregate transaction gains and losses are insignificant. F-18 2. INVESTMENT IN AFFILIATE ----------------------- On December 18, 1997, the Company invested $150,000 and issued 105,000 shares of its Common Stock for a 45% interest in Meditronic Medizinelektronik GmbH ("Meditronic"), pursuant to a Stock Purchase Option Agreement, dated as of November 1, 1997. Meditronic is a development and manufacturing company based in Germany, specializing in the manufacture of medical camera systems. Substantially all of Meditronic's sales are to Rosch GmbH. At April 30, 1998, the investment in Meditronic exceeded the Company's share of the underlying equity in net assets by approximately $190,000 and is being amortized over twenty-five years. 3. DEBT ---- On October 28, 1997, the Company entered into a Forbearance and Workout Agreement with its bank as a result of the Company not being in compliance with certain financial covenants under its loan agreement as of July 31, 1997. The bank waived the non-compliance and the Company agreed to, among other things, raise an additional $250,000 of equity capital and to apply $150,000 of such amount against outstanding term loans. Additionally, as part of this Agreement, the Company's revolving line of credit was reduced to $300,000. Certain of the loan agreement financial covenants were also amended to more reasonably reflect the Company's current financial position. See Note 6, Subsequent Events. As of November 26, 1997, the Company closed a private placement of 1,030,000 shares of Common Stock at a price of $1.00 per share, and used $150,000 of the placement proceeds to repay portions of its bank indebtedness. In connection with the October 1997 amendments to its bank arrangements and efforts to obtain additional equity capital, the Company reduced the conversion price of its outstanding 14% Convertible Subordinated Debentures (the "Debentures") from $3.75 to $1.00 per share of Common Stock. As of November 3, 1997, the holders of all outstanding $720,000 principal amount of Debentures elected to convert. As a result of these conversions, the Company also reduced its long-term debt by $720,000 and issued 720,000 shares of Common Stock. 4. CAPITAL STOCK ------------- Effective as of March 15, 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. LFC would receive a finder's fee equal to 2.5% of the gross funding of any debt or equity placement and 2% of the gross consideration on any acquisition for which LFC acts as a finder for the Company. 5. YEAR 2000 --------- The Company has completed an assessment of Year 2000 issues with respect to its computer systems. The Company believes that the Year 2000 issue will not pose significant operational problems for its computer systems in that all required modifications and conversions to comply with Year 2000 requirements should be fully completed by the third quarter of 1999. In the opinion of management, the total cost of addressing the Year 2000 issue will not have a material impact on the Company's financial position or results of operations. 6. SUBSEQUENT EVENTS ----------------- On May 5, 1998, the Company acquired Dynamic Dental Systems, Inc., a Delaware corporation ("DDS"), in exchange for 750,000 shares of the Company's Common Stock and $225,000, pursuant to an Agreement and Plan of Merger, whereby DDS became a wholly-owned subsidiary of the Company. DDS is based in Gainesville, Georgia and is a distributor of digital operator hardware, cosmetic imaging software, and intraoral dental cameras. F-19 On May 12, 1998, the Company acquired Equidyne Systems, Inc., a California corporation ("ESI"), in exchange for 600,000 shares of the Company's Common Stock, pursuant to an Agreement and Plan of Merger, whereby ESI became a wholly-owned subsidiary of the Company. ESI is based in San Diego, California and is engaged in the development of the INJEX(TM) needle-free drug injection system. 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. The Registration Agreement requires the Company to file a registration statement (the "Registration Statement") under the Securities Act of 1933, as amended, for the Warrants and shares of the Company's Common Stock underlying the Series A Preferred Stock and the Warrants. 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. Such rate may increase up to 18% by reason of further delays in the effective date of the Registration Statement, and remain in effect until the effective date thereof when the dividend rate would return to 5%. F-20 ================================================================= NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THESE SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. EXCEPT WHERE OTHERWISE INDICATED, THIS PROSPECTUS SPEAKS AS OF THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ---------------- TABLE OF CONTENTS Page ---- Prospectus Summary . . . . . . . . . . . . . . . . . . . . Risk Factors . . . . . . . . . . . . . . . . . . . . . . . Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . Dividend Policy . . . . . . . . . . . . . . . . . . . . . . Capitalization . . . . . . . . . . . . . . . . . . . . . . Dilution . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Information . . . . . . . . . . . . . . Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . Business . . . . . . . . . . . . . . . . . . . . . . . . . Management . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Management and Certain Securityholders . . . . . . . . . . . . . . . . Certain Transactions . . . . . . . . . . . . . . . . . . . Description of Securities . . . . . . . . . . . . . . . . . Plan of Distribution . . . . . . . . . . . . . . . . . . . Shares Eligible for Future Sale . . . . . . . . . . . . . . Legal Matters . . . . . . . . . . . . . . . . . . . . . . . Experts . . . . . . . . . . . . . . . . . . . . . . . . . . Additional Information . . . . . . . . . . . . . . . . . . Index to Financial Statements . . . . . . . . . . . . . . . ---------------- ================================================================= ================================================================= 5,320,224 SHARES COMMON STOCK AND 50,000 COMMON STOCK PURCHASE WARRANTS AMERICAN ELECTROMEDICS CORP. ---------------- PROSPECTUS ---------------- ( ) , 1998 ================================================================= PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article VII of the By-laws of the Company provides in part that the Company shall indemnify its directors, officers, employees and agents to the fullest extent permitted by the General Corporation Law of the State of Delaware (the "DGCL"). Section 145 of the DGCL permits a corporation, among other things, to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. A corporation also may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. However, in such an action by or on behalf of a corporation, no indemnification may be made in respect of any claim, issue or matter as to which the person is adjudged liable to the corporation unless and only to the extent that the court determines that, despite the adjudication of liability but in view or all the circumstances, the person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. In addition, the indemnification and advancement of expenses provided by or granted pursuant to Section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. The Company has purchased and maintains insurance for its officers and directors against certain liabilities, including liabilities under the Securities Act. The effect of such insur- ance is to indemnify any officer or director of the Company against expenses, judgements, fines, attorney's fees and other amounts paid in settlements incurred by him, subject to certain exclusions. Such insurance does not insure against any such amount incurred by an officer or director as a result of his own dishonesty. II-1 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 . . . . . . . . . . . . . . . $ 5,233.39 Legal Fees and Expenses . . . . . . . . . . . . [ ] Accounting Fees and Expenses . . . . . . . . . [ ] Printing . . . . . . . . . . . . . . . . . . . [ ] Miscellaneous Expenses . . . . . . . . . . . . [ ] ------------- Total . . . . . . . . . . . . . . . . . . . $ [ ] ============= ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. The following is a summary of transactions by the Company during the last three years preceding the date hereof involving sales of the Company's securities that were not registered under the Securities Act. In January 1996, the Company purchased a fifty percent interest in Rosch GmbH Medizintechnik ("Rosch GmbH") from Andy Rosch ("Rosch") for a sum of cash and 100,000 shares of the Company's Common Stock. The Company relied on the exemption provided by Section 4(2) of the Securities Act. In October 1996, the Company completed a private placement of 12 Units at a price of $75,000 per Unit to a group of accredited investors. Each Unit consisted of a $60,000 principal amount 14% Convertible Subordinated Debenture due October 31, 1999 (a "Debenture") and 20,000 shares of the Company's Common Stock, or an aggregate of $720,000 principal amount of Debentures and 48,000 shares of Common Stock. The Company relied on the exemption provided by Section 4(2) of the Securities Act. In November 1997, the Company issued 720,000 shares of Common Stock upon the conversion of the Debentures. The Company relied on the exemption provided by Section 3(a)(9) of the Securities Act. In November 1997, the Company completed a private placement of 1,050,000 shares of Common Stock at a purchase price of $1.00 per share to a group of accredited investors. The Company relied on the exemption provided by Section 4(2) of the Securities Act. In December 1997, the Company purchased the remaining fifty percent interest in Rosch GmbH from Rosch and a forty-five percent interest in Meditronic Medizinelektronik for a sum of cash and 210,000 shares of the Company's Common Stock. The Company relied on the exemption provided by Section 4(2) of the Securities Act. In February 1998, the Company issued 1,000,000 shares of Common Stock and warrants to purchase an additional 1,000,000 shares of Common Stock, exercisable at $1.00 per share for four years, in payment of the fee under a financial consulting agreement between the Company and Liviakis Financial II-2 Communications, Inc. The Company relied on the exemption provided by Section 4(2) of the Securities Act. In April 1998, pursuant to an Agreement and Plan of Merger, dated as of April 30, 1998, by and among the Company, DDS Acquisition Corporation, a wholly-owned subsidiary of the Company, Dynamic Dental Systems, Inc. ("DDS"), Henry J. Rhodes, Charles S. Aviles, Jr., and Barry A. Hochstadt, the Company acquired all of the outstanding shares of common stock of DDS for a sum of cash and 750,000 shares of the Company's Common Stock. The Company relied on the exemption provided by Section 4(2) of the Securities Act. In May 1998, pursuant to an Agreement and Plan of Merger, dated as of March 27, 1998, by and among the Company, ESI Acquisition Corporation, a wholly-owned subsidiary of the Company, and Equidyne Systems, Incorporated ("ESI"), the Company acquired all of the outstanding shares of common stock of ESI for 600,000 shares of the Company's Common Stock. The Company relied on the exemption provided by Section 4(2) of the Securities Act. In May 1998, the Company closed the private placement of three tranches of 1,000 shares each of Series A Convertible Preferred Stock, $.01 par value (the "Series A Preferred Stock"), to one accredited investor (the "Purchaser") at a purchase price of $1,000 per share or an aggregate purchase price of $3 million, pursuant to a Securities Purchase Agreement, dated as of May 5, 1998 (the "Purchase Agreement"), among the Company, West End Capital LLC ("West End") and the Purchaser. As part of its entry into the Purchase Agreement, the Company entered into a Warrant Agreement. Concurrently with the closing for the first tranche of Series A Preferred Stock, the Company issued warrants under the Warrant Agreement (the "Warrants") to West End for the purchase of 50,000 shares of the Company's Common Stock at an exercise price of $4.80 per share for three years. The Company also issued Warrants for the purchase of 30,000 shares of Common Stock to the placement agent, exercisable at $4.40 per share for three years. The Company relied on the exemption provided by Section 4(2) of the Securities Act. 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). II-3 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 Description 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). 3.2 By-Laws of the Company (filed as Exhibit 3(b) to Registration No. 2-71775, and incorporated herein by reference) 3.3 Amendments to the By-Laws of the Company (filed as Exhibit 3(c) to the Company's 1990 Form 10-K and incorporated herein by reference) 4.1 Form of Common Stock Certificate (filed as Exhibit 4 to the Registration No. 2-71775 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 Registrant's 1983 Information Statement, and incorporated herein by reference). 10.2.2 Form of 1983 Incentive Stock Option Certificate (filed as Exhibit (10)-12 to the Compoany'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 Company's 1996 Proxy Statement, and incorporated herein by reference). 10.5 Form of Employment Agreement, dated as of July, 31, 1995, between the Company and Noel A. Wren (filed as Exhibit 10.5 to the Company's Form 10-KSB for the fiscal year ended July 29, 1995 ["1995 Form 10-KSB"], and incorporated herein by reference). 10.6 Consulting Agreement, dated as of March 24, 1995, between the Company and Alan Gelband Company, Inc. (filed as Exhibit 10.6 to the Company's 1995 Form 10-KSB, and incorporated herein by reference). 10.7 Stock Purchase Agreement, dated January 11, 1996, between the Company and Andy Rosch (filed as Exhibit 1 to the Company's Form 8- K for an event of January 11, 1996, and incorporated herein by reference). II-4 10.8.1 Loan Agreement, dated October 4, 1996, between the Company and Citizens Bank New Hampshire (the "Bank") (filed as Exhibit 10.9.1 to the Company's Form 10-KSB for the fiscal year ended July 27, 1996 (the "1996 Form 10-KSB") and incorporated herein by reference). 10.8.2 Security Agreement, dated October 4, 1996, between the Company and the Bank (filed as Exhibit 10.9.2 to the Company's 1996 form 10-KSB, and incorporated herein by reference). 10.8.3 Revolving Line of Credit Promissory Note, dated October 4, 1996, from the Company to the Bank (filed as Exhibit 10.9.3 to the Company's 1996 Form 10-KSB, and incorporated herein by reference). 10.8.4 Term Promissory Note, dated October 4, 1996, from the Company to the Bank (filed as Exhibit 10.9.4 to the Company's 1996 Form 10-KSB, and incorporated herein by reference). 10.9 Form of 14% Convertible Subordinated Debenture, due October 31, 1999 (filed as Exhibit 4 to the Company's Form 8-K for an event of October 25, 1996, and incorporated herein by reference). 10.10* Amended Employment Agreement, dated as of January 1, 1998, between the Company and Thomas A. Slamecka. 10.11* Employment Agreement, dated January 1, 1998, between the Company and Michael T. Pieniazek. 10.12 Forbearance and Workout Agreement, dated October 28, 1997, between Registrant and the Bank (filed as Exhibit 10.12 to Registrant's Form 10-K for the fiscal year ended July 31, 1997 ["1997 Form 10-K"] and incorporated herein by reference). 10.13 Standstill Agreement, dated October 1, 1997, between Registrant and Alan Gelband (filed as Exhibit 10.13 to the Company's 1997 Form 10-K and incorporated herein by reference). 10.14* Contract of Employment between Rosch GmbH Medizintechnik and Andy Rosch effective January 1, 1996. 10.15 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, filed to report an event of May 5, 1998 [the "May 5, 1998 Form 8-K"] and incorporated herein by reference). 10.16 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). 10.17 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). 10.18 Employment Agreement, dated as of April 30, 1998, by and between Dental Dynamic Systems, Inc. and Henry J. Rhodes (filed as Exhibit 2.8 to the May 1998 Form 8-K and incorporated herein by reference). 10.19 Employment Agreement, dated as of May 11, 1998, by and between Equidyne Systems, Inc. and Lawrence Petersen (filed as Exhibit 2.9 to the May 1998 Form 8-K and incorporated herein by reference). 10.20 Securities Purchase Agreement, dated as of May 5, 1998, among the Company, West End Capital LLC and the Purchaser listed therein (filed as Exhibit 10.1 to the May 1998 Form 8-K and incorporated herein by reference). 10.21 Form of Warrant issued to West End Capital LLC (filed as Exhibit 10.2 to the May 1998 Form 8-K and incorporated herein by reference). 10.22 Registration Rights Agreement, dated as of May 5, 1998, among the Company, West End Capital LLC and the Purchaser listed therein (filed as Exhibit 10.3 to the May 1998 Form 8-K and incorporated herein by reference). 10.23 Stock Purchase Option Agreement, dated November 1, 1997, between the Company and Andy Rosch (without exhibits) (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB for the period ended October 31, 1997 and incorporated herein by reference). 10.24 Consulting Agreement, dated February 19, 1998, between the Company and Liviakis Financial. Communications, Inc. (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended January 31, 1998 and incorporated herein by reference). 10.25 Form of Stock Purchase Agreement (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed to report an event of November 26, 1997 and incorporated herein by reference). 21.* List of subsidiaries. 23.1* Consent of Ernst & Young LLP 23.2** Consent of Thelen Reid & Priest LLP (to be included as part of Exhibit 5) 24. Power of Attorney (including on p.II-8) ------------------------------------- * Filed herewith. ** To be filed by amendment. II-6 ITEM 28. UNDERTAKINGS. UNDERTAKINGS REQUIRED BY REGULATION S-B, ITEM 512(A). The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registra- tion 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 State- ment. 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-effecti- ve amendment any of the securities being registered which remain unsold at the termination of the offering. UNDERTAKING REQUIRED BY REGULATION S-B, ITEM 512(E). Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and con- trolling persons of the Registrant pursuant to the provi- sions of its Certificate of Incorporation, By-Laws, the DGCL or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer of controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-7 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 THE TOWN OF AMHERST, AND STATE OF NEW HAMPSHIRE, ON THE 9TH DAY OF JULY, 1998. AMERICAN ELECTROMEDICS CORP. BY: /s/Thomas A. Slamecka ------------------------ Thomas A. Slamecka Chairman of the Board POWER OF ATTORNEY EACH DIRECTOR AND/OR OFFICER OF THE REGISTRANT WHOSE SIGNATURE APPEARS BELOW HEREBY APPOINTS MICHAEL T. PIENIAZEK AS HIS ATTORNEY-IN-FACT TO SIGN IN HIS NAME AND BEHALF, IN ANY AND ALL CAPACITIES STATED BELOW AND TO FILE WITH THE SEC, ANY AND ALL AMENDMENTS, INCLUDING POST-EFFECTIVE AMENDMENTS, TO THIS REGISTRATION STATEMENT. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOW- ING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE --------- ----- ---- /s/Thomas A. Slamecka Chairman of the July 9, 1998 --------------------- Board Thomas A. Slamecka /s/Michael T. Pieniazek President and Chief July 9, 1998 ----------------------- Financial Officer Michael T. Pieniazek /s/Blake C. Davenport Director July 9, 1998 ---------------------- Blake C. Davenport /s/Andy Rosch Director July 9, 1998 ---------------------- Andy Rosch /s/Marcus R. Rowan Director July 9, 1998 ---------------------- Marcus R. Rowan Director , 1998 ---------------------- ------ Joseph Wear II-8 EXHIBIT INDEX ------------- Exhibit ------- 10.1 Commercial Lease, dated March 23, 1998, by and between Mareld Company, Inc. and the Company 10.10 Amended Employment Agreement, dated as of January 1, 1998, between the Company and Thomas A. Slamecka 10.11 Employment Agreement, dated January 1, 1998, between the Company and Michael T. Pieniazek 10.14 Contract of Employment between Rosch GmbH Medizintechnik and Andy Rosch effective January 1, 1996 21. List of Subsidiaries 23.1 Consent of Ernst & Young LLP 24. Power of Attorney (included on p.II-8) EX-10 2 EXHIBIT 10.1 COMMERCIAL LEASE THIS INDENTURE OF LEASE made this 23 day of March 1998 by and between MARELD COMPANY, INC., a New Hampshire Corporation, having a usual place of business at 400 Amherst St., Suite 202, Nashua, NH 03063 (hereinafter designated as the LESSOR ) and AMERICAN ELECTROMEDICS CORPORATION, a New Hampshire Corporation, having a usual place of business at 13 Columbia Drive, Suite 18, Amherst, NH 03031 (hereinafter designated as the LESSEE ). WITNESSETH: 1. PREMISES. In consideration of the rent and covenants herein reserved and contained on the part of the Lessee to be paid, performed or observed, and subject to the conditions hereinafter set forth, the Lessor does hereby demise and lease unto the Lessee certain premises (hereinafter Premises ) consisting of approximately 7,800 square feet in the building (hereinafter Building ) known as 13 Columbia Drive, Amherst, New Hampshire. The Premises are commonly known as Building #2, Units #5, #6, #201, and #202 and are more particularly described in Exhibit A attached hereto and incorporated herein. 2. APPURTENANT RIGHTS AND RESERVATIONS. Lessee shall have, as appurtenant to the Premises, the nonexclusive right to use, and permit its invitees to use in common with others, common parking facilities and other interior and exterior common areas. Such appurtenant rights shall always be subject to rules and regulations from time to time established by Lessor and to the right of Lessor to designate and change from time to time such common areas and facilities, provided same shall not unreasonably impair or restrict ingress or egress to the Premises. 3. TERM. Subject to the conditions herein stated, the Lessee shall hold the said Premises for a term of three (3) years and one half month commencing on May 15, 1998 (hereinafter the "Commencement Date") and terminating on May 31, 2001 (hereinafter the "Expiration Date"). If the space is not delivered by May 15, 1998, the rent will be abated until it is delivered. 4. RENT PAYABLE BY LESSEE. Lessee covenants and agrees to pay Lessor yearly and every year during the term of this Lease, without demand, set-off, or any deduction whatsoever except as otherwise provided herein; (a) a BASE RENT of $45,935.70 per year payable on the first day of each month in advance in equal monthly installments of $3,827.98. (b) such other amounts as shall become due and payable under the provisions of this Lease as ADDITIONAL RENT as hereinafter provided in Section 5. Rent for any fraction of a month at the commencement or expiration of the Term of this Lease shall be prorated. 5. ADDITIONAL RENT PAYABLE BY LESSEE. In addition to the Base Rent set forth in Section 4 above, the Lessee shall beginning with the Lease Year (as hereinafter defined) commencing on the first anniversary of the Commencement Date and every year thereafter pay as additional rent ("Additional Rent") its pro- rata share of any increase in Common Costs and Real Estate Taxes (as hereinafter defined) over such costs incurred by Lessor during the Base Year (as hereinafter defined). The Lessor shall, from time to time, furnish the Lessee with a statement, certified as correct by the Lessor, setting forth the Common Costs and Real Estate Taxes for the current year, and the Additional Rent to be paid. Within fifteen (15) days of receipt of such statement, the Lessee shall pay the Additional Rent shown to be due for the period prior to the date of such statement, and thereafter shall pay the monthly Additional Rent shown on such statement at the times specified for the payment of Base Rent. Lessor shall act in good faith to furnish Lessee with such statement within thirty (30) days of the expiration of the year that the Common Costs were incurred, and, with respect to Real Estate Taxes, within 30 days of the end of the fiscal year. Notwithstanding that the Base Year may not be a calendar year (January 1 December 31), Lessor may at any time during the Term elect to bill such Additional Rent on a calendar year basis so long as there is proper pro-ration between Lease Year and the calendar year. For purposes of this Lease the following definitions shall apply: Pro-rata Share: "Pro-Rata Share" means a fraction of the numerator of which is 7,800 (Lessee's Gross Rentable Area) and the denominator of which is 89,600 (Gross Rentable are of the Building). Lease Year: "Lease Year" means the twelve month period beginning on the Commencement Date and each twelve month period thereafter. Base Year: "Base Year" means the first lease year of the Term commencing on the Commencement Date and ending one year thereafter, except that with respect to real estate taxes it means the fiscal year April 1, 1998 to March 31, 1999. Common Costs: "Common Costs" means the sum of all costs and expenses of every nature and description paid or incurred by Lessor for the repair and maintenance of the Building common areas, (excluding capital improvements and replacements) including but not limited to: (a) cleaning, operation, maintenance and repair of the interior and exterior of all common areas, and all systems and facilities servicing the Common Areas, including but not limited to electrical systems, water and sewer systems, HVAC systems, sprinkler systems, fire alarm systems, security alarm systems, elevator, snow removal, trash and refuse collection and removal, landscaping and lawn mowing, paving repairs and restriping of the parking areas, plus (b) service of all utilities servicing the Common Areas; including but not limited to electricity, gas, water and sewer, plus (c) the maintenance of all insurance (including, but not limited to fire, broad form extended coverage, rent, water risk, liability, products liability, flood, etc.) covering the Office Building, the improvements, the Common Areas and every other facility or property used or required or deemed necessary in connection with any of them, plus (d) fifteen percent (15%) of all costs set forth in the foregoing subparagraphs (a), (b), and (c) to cover Lessor's administrative and overhead costs. Real Estate Taxes: Real Estate Taxes means the sum of all real property taxes and assessments assessed against the land and the Building of which the Premises are a part, including, but not limited to, betterments, water and sewer assessments and other taxes or levies levied or assessed in lieu of or as a substitute for real property taxes less the Lessee's share of any abatements after costs that the Lessor may receive. The Lessor is not obligated to file for an abatement. 6. BUSINESS TAXES AND TAXES UPON IMPROVEMENTS. Lessee shall pay all business taxes or other similar rates and taxes which may be levied or imposed upon the business carried on in the demised premises only, all other rates and taxes which are or may be payable by Lessee as tenant and occupant in the demised premises only and any and all taxes that may be levied upon the improvements. If by law, regulation or otherwise, such business taxes or other similar rates and taxes or taxes upon improvements are made payable by landlords or proprietors, or if the mode of collecting such taxes be so altered as to make Lessor liable therefor instead of Lessee, Lessee shall repay to Lessor within seven (7) days after demand upon Lessee that amount of the charge imposed on Lessor as a result of such change, and shall save Lessor harmless from any costs or expense in respect thereof, all subject, however, to the provisions of this Lease with respect to each party's obligation for said charges. 7. USE. It is understood and the Lessee so agrees that the Premises shall be utilized only for the purpose of the manufacture, repair and storage of electronic medical equipment and related office uses. 8. RULES AND REGULATIONS. Lessee shall at all times comply with, and cause its invitees, agents, guests, employees and licensees to comply with, any Rules and Regulations which may be promulgated by Lessor. 9. LESSOR'S RIGHT TO PLACE, ETC. UTILITY FACILITIES, ETC. The Lessor reserves the right to place, maintain, repair and replace such utility facilities or lines, pipes, wires and the like, over, upon and through the Premises as may be necessary or advisable for the servicing of the Premises or the Building; provided, however, the Lessee's use of the Premises shall be interfered with only temporarily during such servicing. Such interference shall not materially interfere with the Lessee's normal business operations. 10. LESSEE'S INSTALLATION OF SEPARATE METERS. The Lessee shall maintain its own public utility meters and facilities which are to be used to provide and measure utilities for appliance operations of the business. All charges under the separate meters will be billed directly to the Lessee by the public utilities servicing the meters. 11. MAINTENANCE OF PARKING AREA/SNOW REMOVAL. The Lessor shall maintain and keep clean the parking area and shall remove snow therefrom with reasonable dispatch when required. Reasonable piling of snow shall be permitted. Lessee shall be responsible to clean and remove snow from the walkways, entrances and rear exits of the Premises. The Lessor shall provide adequate lighting for the parking area from 6:00 A.M. through 6:00 P.M. 12. LESSEE'S COVENANTS. In addition to all other covenants and agreements of the Lessee contained in this lease, the Lessee covenants and agrees at all times during the term hereof, and for any further time as it shall hold the Premises or any part thereof to: (a) pay when due all rent provided for herein; (b) procure any authorizations or licenses required for Lessee's use of the Premises; (c) make all necessary non-capital repairs to or replacements for the interior of the Premises and to keep the same in as good order, repair and condition as the same are in at the commencement of the term or may be put in thereafter (reasonable wear and tear and damage by fire excepted); (d) install and operate machines and mechanical equipment in such a manner as to prevent vibrations and noise outside the Premises; (e) keep the Premises equipped with all safety appliances required by law or ordinance or any regulation of any public authority for the particular use of the Premises by the Lessee and make all repairs, alterations, replacements, or additions so required; (f) use the septic, sewage or other waste disposal system only for disposal of human waste and not dump, flush, or in any way, introduce any hazardous, toxic or chemical substances into said waste disposal system or use it in such a manner which would damage, impair or cause accelerated deterioration; (g) permit the Lessor or its agents to enter at reasonable times upon reasonable prior notice to view the Premises and, if the Lessee has failed to, make repairs, within three days after notice to make repairs, or alterations necessary for the preservation and safety thereof; (h) permit the Lessor to show the Premises to others at any time within one hundred twenty days (120) before the expiration of the term so long as the Lessor does not materially interfere with the Lessee's operation; (i) remove its goods and effects and those of all persons claiming under it at the termination or expiration of this Lease and peaceably yield up said Premises and all additions thereto to the Lessor, leaving the same clean and in such repair, order and condition as in at the commencement of the term or as may be put in during the continuancy thereof, (excepting only such alterations as are made or authorized by the Lessor, or from reasonable wear and tear and damage by fire); (j) not generate, store or dispose of hazardous, toxic or chemical substances in or on the Premises; (k) not permit the emission from the Premises of any objectionable noise or odor; (l) not carry on any business or occupation which shall be unlawful, or contrary to any law or ordinance in force for the term of the Lease; (m) not do any act or thing upon the Premises (other than in its normal conduct of business) which will make it uninsurable against fire or which is liable to increase the premium for fire insurance on the Building; (n) Tenant will be responsible to remove snow and ice on front walkways and immediately in front of overhead door entrances. 13. LESSOR'S RESPONSIBILITY FOR MAINTENANCE. The Lessor covenants and agrees to keep in good order and repair, the roof, exterior wall (but not including plate or other glass unless the same be damaged by fire), foundations and structure of the Premises and all utility entrances exterior to the premises, excepting for damage caused by any act or negligence of the Lessee or other person or persons for which it is legally responsible. 14. LESSEE'S RESPONSIBILITIES FOR MAINTENANCE. (a) The Lessee covenants and agrees to keep in good order, condition and repair (excepting for reasonable wear and tear and damage by fire) the exterior and interior portions of all doors, windows and plate glass, all plumbing and heating fixtures, interior walls, floors, ceilings and the wiring and electrical fixtures and equipment within the Premises. The Lessee agrees to replace immediately all glass and glass windows in the Premises with glass of the same quality as that which may become injured or broken, unless damaged or broken by fire. If the Lessee shall not within three (3) days after written notice by Lessor of repairs to be made by the Lessee, commence to make such repairs and complete same within a reasonable time, the Lessor may make such repairs and the expense thereof shall constitute a debt by the Lessee payable as Additional Rent, with interest Payable to Lessor at the maximum legal rate. (b) HVAC: Lessee shall maintain and perform non-capital repairs to the HVAC system and keep the same in good working order and condition during the Term and, in furtherance thereof, Lessee shall, on or before the commencement of the Term, enter into and maintain a service agreement with a reputable and experienced service company to perform regular maintenance (including, but not limited to, changing filters, oiling, lubricating and replacement of all belts and pulleys) and to make repairs to the HVAC system, with the obligation of said company to examine such equipment no less frequently than quarterly. Lessor shall be responsible for all major capital repairs and replacements. 15. TENANT'S PROPERTY. All furnishings, fixtures, equipment, effects and property of every kind, nature and description of Lessee, and of all persons claiming, by, through or under Lessee, shall be kept on the Premises or Building at the sole risk of the Lessee; and if the whole or any part thereof shall be destroyed or damaged by fire, water or other casualty (including the bursting or leakage of water pipes, steam pipes or other pipes, or by theft or from any other cause), such damage or destruction shall be Lessee's responsibility. 16. HAZARDOUS MATERIALS. Lessee shall not (either with or without negligence) by its actions or those of its contractors, employees, servants, agents, licensees or invitees (i) cause or permit the escape, disposal or release of any biologically or chemically active or other hazardous substances or materials (ii) store or use such substances or materials in any manner not sanctioned by law or by the highest standards prevailing in the industry for the storage and use of such substances or materials, nor allow to be brought into the Premises or the Building or onto the land on which the Building is situated any such materials or substances except to use in the ordinary course of Lessee's business, and then only after written notice is given to Lessor of the identity of such substances or materials. Without limitations, hazardous substances and materials shall include those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ( CERCLA ), 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., and any applicable state or local laws and the regulations adopted under these acts. If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release of hazardous materials, then Lessee shall upon demand reimburse Lessor for the reasonable costs thereof if, and only to the extent, such requirement applies to the Premises and it is determined that Lessee or any of its agents, employees, servants or contractors caused the release of hazardous substances or materials. In addition, Lessee shall execute affidavits, representations, certifications and the like from time to time at Lessor's request concerning Lessee's best knowledge and belief regarding the presence of hazardous substances or materials on the Premises. Lessee shall indemnify Lessor to the extent and manner set forth in Section 22 of this Lease on account of any release of hazardous materials if caused by Lessee or persons acting under Lessee. The within covenants shall survive the expiration or earlier termination of the Lease term. 17. SIGNS. Lessor shall at its expense place Lessee's name (or its d/b/a as Lessor may approve) on the Pylon Sign Directory in front of the Building. Lessee may at its expense paint or place a directory sign on its entry door, subject to the reasonable approval of Lessor as to design, material, color and other aesthetic qualities. Except as stated above, Lessee shall not without Lessor s prior written consent (a) paint or place any signs on the Premises or anywhere on or in the Building which is or are visible from outside the Premises, or (b) place any curtains, blinds, shades, awnings, aerials or flagpoles or the like, in the Premises or anywhere on or in the Building which is or are visible from outside the Premises. Any sign placed or painted by Lessee with Lessor s approval shall comply with any applicable ordinances of the Town of Amherst. 18. FLOOR LOAD, HEAVY MACHINERY. Lessee shall not place a load upon any floor in the Premises exceeding the load per square foot of floor of area which such floor was designed to carry and which is allowed by law. Lessor reserves the right to prescribe the weight and position of all business machines and mechanical equipment (including safes or vaults) or as to distribute the weight in a safe and reasonable manner. Lessee shall not move any safe, vault, heavy machinery or heavy equipment in such a manner as to jeopardize or threaten the safety or well-being of the Building, other tenants or the public. Any moving of such heavy machinery or equipment shall be done by licensed professionals in compliance with applicable law and at such times as Lessor shall require for the safety and convenience of the Building's occupants. 19. ALTERATIONS AND/OR ADDITIONS. The Lessee shall not make structural alterations or additions to the Premises, but may make non-structural alterations provided the Lessor consents thereto in writing, such consent not to be unreasonably withheld. All such allowed alterations shall be at Lessee's expense and shall be in quality at least equal to the present construction. Lessee shall not permit any mechanic's lien or similar liens to remain upon the Premises for labor and materials furnished to Lessee in connection with work of any character performed or claimed to have been performed at the direction of the Lessee and shall cause any such lien to be released of record forthwith without cost to the Lessor. Any alterations or improvements made by the Lessee shall become the property of the Lessor at the termination of the occupancy as provided therein, except for ordinary removable trade fixtures. At the conclusion of the lease term, the Lessor reserves the right to require the Lessee to remove any alterations that it made during the lease term. 20. LESSEE'S LIABILITY INSURANCE. The Lessee shall maintain with respect to the leased premises and the property of which the leased premises are a part comprehensive public liability insurance in the amount of $1,000,000 with property damage insurance in limits of $500,000 in responsible companies qualified to do business in New Hampshire and in good standing therein, insuring the Lessor as well as Lessee against injury to persons or damage to property as provided. The Lessee shall deposit with the Lessor certificates for such insurance at or prior to the commencement of the term, and thereafter within thirty (30) days prior to the expiration of any such policies. All such insurance certificates shall provide that such policies shall not be canceled without at least ten (10) days prior written notice to each insured named therein. 21. DESTRUCTION BY FIRE. 21.01 DUTY TO REPAIR. If the Premises should be damaged during the Term by fire or other casualty covered by the usual extended coverage carried by Lessor, Lessor shall (except as hereinafter provided) repair the Premises. 21.02 RIGHT TO TERMINATE. If, however, the Premises or the Building of which the Premises are a part should be damaged or destroyed: (a) by fire or other casualty covered by the usual extended coverage carried by Lessor (i) to the extent of thirty (30%) percent or more of the cost of replacement of either the Premises or the Building, or (ii) so that thirty percent (30%) or more of the Gross Leasable Area contained in either thereof shall be rendered untenantable; or (b) by any casualty other than those covered by standard fire and extended coverage insurance policies; or (c) the Premises shall be damaged in whole or in part during the last year of the term; or (d) if Lessor s insurer shall refuse, for any reason, to settle a covered claim; or (e) if any Mortgagee shall require that the insurance recovery arising from the damage or destruction be applied against the principal balance due on such Mortgage; then, in any such event, Lessor may, at its option, either terminate this lease or elect to repair the Premises. Lessor shall notify Lessee as to its election within ninety (90) days after the occurrence of the damage in the event of an uninsured casualty. If Lessor elects to terminate this Lease, the term hereof shall end at the end of the calendar month in which such election is made. If Lessor does not elect to terminate this Lease, then Lessor shall perform such repairs and rebuilding as is necessary to provide Lessee with the same or nearly the same demised premises as was delivered at the commencement of the Lease (or as altered during the term by mutual consent); and the term shall continue without interruption and this Lease shall remain in full force and effect. If the Premises are not repaired within one hundred eighty days after casualty, Lessee will have the option to terminate this lease. 21.03 RENT ABATEMENT. If this Lease is not terminated as above provided, then from and after such damage and until the Premises are restored as above provided, the rent reserved herein shall abate, either wholly or proportionately, according to the extent that the Premises have been rendered untenantable by such damage or destruction. 22. INDEMNIFICATION AND LIABILITY. Lessee shall save harmless and indemnify Lessor from any liability for injury, loss, accident, or damage to any person or property, and from any claims, actions, proceedings and expenses and costs in connection therewith, including without limitation reasonable counsel fees (i) arising from the omission, fault, willful act, negligence, or other misconduct of Lessee or its employees, servants, agents, licensees or invitees or from any use made or occurrence on or about the Premises. Lessee shall also indemnify and hold Lessor harmless from and against any losses, costs, damages or claims of whatever nature, arising out of or in connection with the compliance requirements set forth in the Americans with Disabilities Act of 1990, Title III, relating to Lessee's design, renovations, alteration and/or construction of the Premises. 23. LESSOR'S ACCESS. The Lessor or agents of the Lessor may, at reasonable times, enter to view the Premises and may remove placards and signs not approved and affixed as herein provided, and make repairs and alterations as Lessor should elect to do subject to paragraph 14 excepting those repairs necessary to protect the building or people from damage and may show the Premises to others at any time within one hundred twenty (120) days before the expiration of the term. 24. SUBORDINATION. This Lease shall be subject and subordinate to any and all mortgages, deeds of trust and other instruments in the nature of a mortgage, now or at any time hereafter, a lien or liens on the property of which the Premises are a part. Lessee shall upon request promptly execute and deliver such written instruments as shall be necessary to show the subordination of this Lease to said mortgages, deeds of trust or other such instruments in the nature of a mortgage, provided that in the instruments of subordination, the mortgagee or trustee or assignee shall agree that so long as the Lessee shall not be in default of the Lease, the Lessee shall not be disturbed in the quiet enjoyment of the Premises. 25. DEFAULT AND BANKRUPTCY. In the event that: (a) the Lessee shall default in the payment of any installment of rent or other sum herein specified and such default shall continue for five (5) days after written notice thereof; or (b) the Lessee shall default in the observance or performance of any other of the Lessee's covenants, agreements, or obligations hereunder and such default shall not be corrected within twenty (20) days after written notice theretofor. (c) the Lessee shall be declared bankrupt or insolvent according to law, or, if any assignment shall be made of Lessee's property for the benefit of creditors, then the Lessor shall have the right thereafter, while such default continues, to re-enter and take complete possession of the Premises, to declare the Term of this Lease ended, and remove the Lessee's effects without prejudice to any remedies which might be otherwise used for arrears of rent or other default. The Lessee shall indemnify the Lessor against all loss of rent and other payments which the Lessor may incur by reason of such termination during the residue of the term. If the Lessee shall default, after reasonable notice thereof, in the observance or performance of any conditions or covenants or Lessee's part to be observed or performed under or by virtue of any of the provisions in any article of this lease, the Lessor, without being under any obligation to do so and without thereby waiving such default, may remedy such default for the account and at the expense of the Lessee. If the Lessor makes any expenditures or incurs any obligations for the payment of money in connection therewith, including but not limited to reasonable attorney's fees, in instituting, prosecuting or defending any action or legal proceeding, such sums paid or obligations incurred, with interest at the rate of eighteen percent (18%) per annum and costs, shall be paid to the Lessor by the Lessee as damages for Lessee's breach. 26. NOTICE TO PARTIES. Any notice from the Lessor to the Lessee relating to the Premises or to the occupancy thereof (including but not limited to any notice of default or termination pursuant to Section 24, or any legal process relating thereto for possession or for rent due), shall be deemed duly served, if mailed to the Premises, to the attention of the President, registered or certified mail, return receipt requested, postage prepaid, addressed to the Lessee. Any notice from the Lessee to the Lessor relating to the Premises or to the occupancy thereof, shall be deemed duly served, if mailed to the Lessor by registered or certified mail, return receipt requested, postage prepaid, at 400 Amherst St., Suite 202, Nashua, NH 03063. 27. LIMITATION OF LIABILITY. In the event Lessor shall default in the performance of its obligations hereunder, Lessee shall look only to Lessor's then equity interest in the Building for the satisfaction of any judgement; and in no event shall Lessor be liable for any consequential damages. In the event of any sale of the Premises or Lessor s assignment of this Lease, the Lessor shall be and hereby is entirely released and discharged from any and all further liability and obligations of the Lessor hereunder, except for such thereof as may have theretofore accrued. 28. SURRENDER. The Lessee shall at the expiration or other termination of this Lease remove all Lessee's goods and effects from the Premises, including, without hereby limiting the generality of the foregoing, all signs and lettering affixed or painted by the Lessee, either inside or outside the Premises. Lessee shall deliver to the Lessor the Premises and all keys, locks thereto, and other fixtures connected therewith and all alterations and additions made to or upon the leased premises, in good condition, damage by fire or other casualty only excepted. In the event of the Lessee's failure to remove any of Lessee's property from the Premises, Lessor is hereby authorized, without liability to Lessee for loss or damage thereto, and at the sole risk of Lessee, to remove and store any of the property at Lessee's expense, or to retain same under Lessor s control or to sell at public or private sale without notice any or all of the property not so removed and to apply the net proceeds of such sale to the payment of any sum due hereunder, or to destroy such property. 29. LESSOR'S FAILURE TO ACT UPON LESSEE'S BREACH. The failure of the Lessor to insist in any one or more instances upon a strict performance or observance of any of the terms, provisions or covenants of the Lease or to exercise any right therein contained shall not be construed or deemed to be a waiver or relinquishment for the future of such terms, provisions, covenant or right; but the same shall continue and remain in full force and effect. Receipt by the Lessor of rent with knowledge of the breach of any provision of the foregoing Lease shall not be deemed a waiver of such breach. 30. SERVICES PROVIDED BY LESSOR. With respect to any services to be furnished to Lessee, the Lessor shall in no event be liable for failure or delay to furnish the same when prevented from so doing by war, strikes, labor difficulties, lockouts, breakdown, accident, order or regulation of governmental authority, failure of supply, or inability by exercise of reasonable diligence, to obtain supplies, parts or employees necessary to perform such services, or for any cause beyond Lessor s reasonable control, or of any cause due to any act or neglect on the part of the Lessee or its servants, agents, employees, licensees or any person claiming by, through or under the Lessee. 31. ASSIGNMENT, SUBLETTING. Lessee shall not assign, mortgage, pledge, or otherwise encumber this Lease or sublet the Premises (or any portion thereof) without first obtaining the written consent of the Lessor. Notwithstanding any assignment or subletting hereunder, Lessee shall continue to be liable for the performance and/or observance of the covenants, agreements, terms, and provisions of this Lease. If the Lessee is a corporation or a trust, the sale or transfer at any time during the term of this Lease of more than fifty percent (50%) of the corporate stock or of the beneficial interest of the trust shall be deemed an assignment of the Lease requiring Lessor s prior written consent. 32. CERTIFICATE OF ESTOPPEL. The Lessee shall, at the request of the Lessor, provide to whomsoever the Lessor shall name, a Certificate of Estoppel regarding the terms, covenants, and conditions of the Lease. 33. MARGINAL HEADINGS. The marginal headings appearing in this Lease are for purposes of easy reference and shall not be considered a part of this Lease or in any way to modify, to amend, or to affect the provisions thereof. 34. ENTIRE AGREEMENT. This Lease and any exhibit attached hereto and forming a part hereof sets forth all of the covenants, promises, agreements, conditions and understandings between Lessor and Lessee concerning the Premises and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them other than herein set forth. No subsequent alteration, amendment, change or addition to the Lease shall be binding upon Lessor or Lessee unless reduced to writing and signed by them. 35. HEIRS, EXECUTORS, ETC. The covenants, conditions and agreements contained in this Lease shall bind and enure to the benefit of Lessor and Lessee and their respective heirs, distributees, executors, administrators, successors and assigns, except as otherwise provided in this Lease. 36. REPRESENTATION AS TO BROKERS. Lessee materially warrants and represents to Lessor that it has dealt with no broker or agent in connection with this transaction other than Hirsch & Company, Inc. and Lessee agrees to indemnify and hold Lessor harmless from and against any cost, liability or damage including reasonable attorney's fees and expenses) incurred by Lessor arising from a claim by any person or firm other than Hirsch & Company, Inc. alleging entitlement to a broker's commission or finder s fee for the rental of the Premises. 37. JOINT AND SEVERAL LIABILITY. If Lessee shall at any time comprise or include more than one person, firm, corporation or entity, the liability of each thereof shall be joint and several. 38. GOVERNING LAW. This Lease shall be construed and interpreted in accordance with the laws of the State of New Hampshire. 39. PREPARATORY WORK (a) Lessor shall perform in a diligent, workmanlike manner at its sole cost and expense the renovation of the Premises in accordance with the specifications set forth in Exhibit B attached hereto. (b) Lessee shall perform in a diligent, workmanlike manner at its sole cost and expense the renovation of the Premises in accordance with the specifications set forth in Exhibit C attached hereto. (c) In connection with the plans and construction referenced in Exhibits B and C, Lessor and Lessee hereby authorize the other to rely upon the approval and other actions on such party's behalf by the construction representative designated hereafter. The following persons are designated construction representatives for the purposes of this Section 39: For Lessor: Tim Paige Telephone: 603-886-7300 Fax: 603-880-7176 For Lessee: Debra Doyon Telephone: 880-6300 Fax: 880-8977 40. RECORDING. Lessee shall not record this Lease in any Registry of Deeds or public registration office. Any recording of this Lease shall constitute a material breach by Lessee, entitling Lessor, at its election, to immediately terminate this Lease. 41. COMPLIANCE WITH ADA. If the Premises are now, or at any time during the Lease Term become a Public Accommodation under the Americans with Disabilities Act of 1990 (hereinafter "ADA"), Lessee shall at its sole expense be responsible for (a) compliance with Title III of the ADA to the extent that the ADA imposes obligations on the procedure and design of any alterations to the Premises made by Lessee, including but not limited to partitions, furnishings, doors, door frames and all accessories thereof, and (b) drawing and implementing modifications in its policies, practices and procedures in connection with the operation of Lessee's business and occupancy of the Premises. If Lessee fails to comply with its obligations hereunder and such noncompliance constitutes a violation of the ADA, Lessee shall indemnify and hold harmless Lessor from and against all claims, expenses or liability suffered or incurred by Lessor resulting therefrom. 42. SECURITY DEPOSIT. Coincidental with the execution of this Lease, Lessee shall deliver to Lessor a security deposit in the amount of $3,827.98 which shall be held in security for Lessee's full, faithful and diligent performance under this Lease. Said deposit shall be non-interest bearing and shall be refunded to Lessee at the expiration of the Lease, subject to Lessee's satisfactory compliance with the terms and conditions hereof. 43. OPTION TO EXTEND LEASE Lessee shall have the option to extend the term of the Lease for one additional term of three (3) years provided that: (a) Lessee is not in default (beyond the expiration of any grace period granted herein for the curing of same) under any of the terms and conditions of the Lease at the time it elects to extend the term and at the commencement of the Extension Term, and (b) Lessee has given Lessor written notice of its election to extend the term no later than six months prior to the Expiration Date of the Lease. In the event that Lessee shall extend the term as aforesaid, such extension shall be upon the same terms and conditions as set forth herein, except that no further right to extend shall be deemed to be included, and except for the Base Rent, which shall be determined as hereinafter set forth. The Base Rent during the Extension Term shall be the Base Rent in effect during the last year of the Term or the "Market Rent" (as hereinafter defined), whichever is greater. The term "Market Rent" shall mean the rent being charged for comparable existing space at the time the extension option is exercised, as reasonably determined by the Lessor. Lessor shall send a written notice to Lessee specifying the rent for the extension term within thirty (30) days of its receipt of Lessee's exercise of option to extend. Lessee shall be deemed to have rejected the new rent level if it has not sent Lessor a notice approving the same within ten (10) days of receipt of Lessor s notice. In the event Lessee disapproves the new rent level, then Market Rent shall be determined as follows: Each party shall within ten (10) days of Lessee's disapproval appoint an arbitrator to act on its behalf, which person shall be a real estate broker or other person experienced in the appraisal or management of real estate within the Nashua metropolitan area. If the two arbitrators are unable to reach agreement within ten (10) days after their appointment, then the two arbitrators shall appoint a third arbitrator and the decision by a majority of the arbitrators shall be binding upon the parties. Each party shall each bear the cost of the arbitrators selected by it and shall jointly bear the cost of any third arbitrator. In the event the arbitrators have failed to establish "Market Rent" by the commencement of the Extension Term, Lessee shall pay at the rental rate proposed by Lessor in its notice to Lessee, with a prompt adjustment between the parties retroactive to the commencement date of the Extension Term in the event such arbitration results in a reduction of the rental rate. Under no circumstances shall the Base Rent during the Extension Term be less than the Base Rent in effect during the last year of the Term. IN WITNESS WHEREOF, the parties have caused this Lease to be executed by their respective authorized representatives the day and year first written above. LESSOR: MARELD COMPANY, INC. By: /s/ Eliot W. Denalut /s/ Patricia Stark Rice ------------------------- --------------------------- Eliot W. Denalut, III Witness Its duly authorized: President LESSEE: AMERICAN ELECTROMEDICS CORP. By: /s/ Michael T. Pieniazek /s/ Debra A. Illegible ------------------------- -------------------------- Michael T. Pieniazek Witness Its duly authorized: President EXHIBIT A Diagram of Floor Plan of 13 Columbia Dr., Unit #5 & 6 First Floor, Unit #201 & 202 Second Floor Date 2-17-98 Final EXHIBIT B LESSOR'S CONSTRUCTION American Electromedics 13 Columbia Drive Amherst, NH A. PARTITIONS ---------- 1. INTERIOR WALLS New partitions will be constructed using 3-5/8" metal studs with 5/8" gypsum board applied to each side. Walls will be finished with dry wall tape and joint compound. Partitions will be constructed and finished to the underside of the ceiling. Partitions which are not finished on both sides (shop area) will receive gypsum board on the unfinished side. 2. PARTITION LAYOUT The partitions will be laid out in accordance with the attached plan. B. CEILING ------- 1. TYPE The ceiling in the office area (except where there is presently a sheetrocked ceiling) will consist of a 2' x 4' suspended system utilizing acoustical tiles (Armstrong Cortega or equal) installed in a metal grid. As necessary, the existing ceiling grid will be repaired, cleaned or painted. All ceiling tiles will be replaced. C. HEATING, VENTILATING, AIR CONDITIONING -------------------------------------- 1. SYSTEM The existing HVAC systems will be utilized. The air conditioning units in the first floor offices will be replaced. The Lessor will install a two ton roof top air conditioning unit to cool the first floor kitchen area and new office. The Lessor will add electric baseboard heat for the kitchen area and new first floor office. On the second floor, the Lessor will make any necessary repairs to the existing systems prior to lease commencement so that it is in good working order. 2. BALANCING The Lessor will make all required modifications to the HVAC system to provide the lessee space with reasonably acceptable air quality and comfort levels. Additionally, the HVAC system will be adjusted so that proper balancing of the lessee space may be achieved. D. TELEPHONE/COMPUTERS ------------------- 1. It will be the lessee's responsibility to install its own telephone system and computer cable. Lessor will make reasonable efforts to coordinate with lessee's contractor. E. LIGHTING -------- 1. TYPE Lighting will consist of 2' x 4' four tube fluorescent lamp fixtures with acrylic prismatic type lens. The existing fixtures will be cleaned and, if necessary, repaired. 2. QUANTITY The number of fixtures is anticipated to be one (1) fixture for every 125 square feet. 3. SWITCHING All enclosed spaces will have a single wall mounted switch to control the fixtures within the space. F. FLOOR COVERINGS --------------- 1. TYPE The office areas will receive new carpet -Encounter #26 "Waterfall". At the option of the Lessor, carpet installation will be either direct glue-down over existing floor slab or tackless installation over pad. The floors in the kitchen area and restrooms will be tiled with vct tile. The tile will be Awesome #10", color #580. Vinyl cove base will be installed throughout suite. The base will be Mercer #204. G. DOORS ----- 1. TYPE Office Doors: The existing doors will be utilized throughout the suite. The new doors in the office area will be replaced with doors similar to the ones currently in the space. Fire Doors: The three doors between the office/kitchen areas and the production area will be fire-rated steel doors. Appropriate hardware will be provided. 2. QUANTITY As shown on attached floor plan. 3. HARDWARE All door hardware will be passage type of a lever style. 4. EXIT DOOR (Unit 202) -Once the Lessor is able to install a new exit door in for the tenant in Units 7 and 8, it will remove the existing door at the top of the staircase and will either remove or secure the door at the foot of the staircase leading in to Units 7 and 8. H. PAINTING -------- 1. PARTITION All partitions within the demised space will receive two finish coats of latex paint, eggshell finish. The paint used with be Muralo Superfinish ; the color will be "Coral White" #16. Prior to painting, all partitions will be patched as required. 2. DOORS The three metal fire doors will be painted with Muralo oil based, semi-gloss paint; the color will be Coral White #16. I. FIRE PROTECTION --------------- 1. EMERGENCY LIGHTS, EXIT SIGNAGE, etc. -Will be provided as required by building codes. J. KITCHEN ------- 1. A five foot base cabinet with laminated countertop and stainless steel sink and faucet will be installed when shown on floor plan. K. REST ROOMS ---------- 1. Existing restrooms on the second floor will be thoroughly cleaned. If the fixtures cannot be cleaned, they will be replaced. 2. The existing mens room on the first floor will be removed. The ladies room on the first floor will be modified as shown on the attached floorplan. L. STAIRCASE INTO SHOP AREA ------------------------ -The Lessor will construct the staircase shown on the attached plan from the rear of unit 201 to the shop floor. EXHIBIT C LESSEE'S CONSTRUCTION The Lessee will be responsible for the wiring of its telephones and computers. EX-10 3 EXHIBIT 10.10 AMENDED EMPLOYMENT AGREEMENT ---------------------------- AMENDED AGREEMENT, dated as of the lst day of January, 1998, by and between AMERICAN ELECTROMEDICS CORP., a Delaware corporation (the "Company"), and THOMAS A. SLAMECKA (the "Executive"). W I T N E S S E T H: -------------------- WHEREAS, the Company has employed the Executive in the capacity of Chairman of the Board of Directors, and the Executive has rendered such services, pursuant to an Employment Agreement, dated as of February 5, 1997 (the"Original Agreement"); and WHEREAS, the Company and the Executive desire to amend their Original Agreement to assure the continuity of their relationship, all subject to the terms and conditions contained herein. 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 continues the employment of the Executive as Chairman of the Board of Directors of the Company, and the Executive hereby accepts the continuation of such employment, all upon and subject to the terms and conditions hereinafter set forth. 2. Term. ---- The term of the employment under this Agreement shall be for an initial period which had commenced on February 5, 1997 and shall terminate on March 15, 2001 (the "Initial Term"), and be automatically renewed for additional one (1) year periods thereafter (the "Renewal Term"), 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 (collectively, the "Term"). 3. Position, Duties and Representations. ------------------------------------ 3.01. Service with the Company. ------------------------ The Executive shall serve as Chairman of the Board of Directors of the Company. The Executive agrees to perform such executive employment duties for the Company consistent with the position specified above, and as the Board of Directors 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 an 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 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 will receive an annual base salary ("Base Salary") at an annual rate of $100,000 for the Initial Term, except for the period beginning March 15, 1998 and ending July 31, 1998 when the Base Salary will be $52,000 annually, paid in accordance with the Company's normal payroll practices. In addition on an annual basis the Board of Directors or a compensation thereof (the "Compensation Committee") shall review the Executive's compensation with a view towards increasing the Base Salary and granting additional options, based on the Executives 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 ten percent (10%) of the Company's consolidated before-tax operating profits (excluding any extraordinary and/or non-recurring items of profit or expense) (the "Company Profits") in excess of $500,000 (the "Threshold") for each fiscal year during the Term (the Profits ), provided the Company has earned in such fiscal year a twelve percent (12%) return on its equity on its common stock. (b) The Profits Bonus amount shall be calculated initially by the Chief Financial Officer of the Company based upon the Company's audited financial statements for the relevant fiscal year. Promptly after completion of the Profits Bonus calculation for each fiscal year, a report of the calculation shall be sent to the Board of Directors. The Board of Directors will then present the proposed Profits Bonus to the Executive. The Executive may object to the calculation, within thirty (30) days after receipt thereof, by requesting that the accounting firm then auditing the financial statements of the Company review the calculation. The results of such accountants' review shall be final and binding on the Executive and the Company. Any Profits Bonus shall be paid to the Executive within (30) days after the Executive receives the Profits Bonus calculation, except that if he objects thereto, the payment shall be made as soon as practicable after the resolution of the objection. The Executive shall bear the cost of the accounting firm s review, except if upon such review of the Profits Bonus calculation the accounting firm determines that the amount of the Profits Bonus should be increased by ten percent (10%) or more from the amount calculated by the Company, in which case the Company shall bear the cost of the accounting firm's review. (c) In the event the period of the Term for which a Profits Bonus is being determined is less than the entire fiscal year being used for the calculation, the Profits Bonus, if any, and the Threshold for such period shall be multiplied by a fraction, the numerator of which shall be the number of whole months during such fiscal year that the Executive was an employee of the Company and the denominator of which shall be 12. (d) Notwithstanding any Profits Bonus which may be paid to the Executive pursuant to this Section 4.02, for each fiscal year during the Term the Compensation Committee may award the Executive a supplemental bonus based upon factors other than the Company's Profits for such fiscal year, as determined by such Committee. 4.03 Stock Options: Conditional Grant. -------------------------------- (a) In consideration of the Executive entering into this Agreement, the Company shall grant to the executive stock options (the "Options") to purchase up to 400,000 shares of the Company s common stock, par value $.10 per share (the "Common Stock"), exercisable at a purchase price of $1.00 per share, vesting as to 212,500 shares upon grant and as to 46,875 shares a month commencing upon January 1, 1998 and continuing through May 1, 1998, all upon the terms and conditions set forth in the Stock Option Agreement between the Company and the Executive, dated as of the date hereof (the "Stock Option Agreement"), and attached hereto as Exhibit A. The options shall be in substitution for the remaining stock options granted to the Executive under the Original Agreement. (b) If at any time during the Initial Term hereof the Company issues any shares of Common Stock, the Options Committee shall immediately grant stock options to the Executive in order that the Executive would beneficially own (as determined in accordance with Rule 13d-2 under the Securities Exchange Act of 1934, as amended (the Exchange Act ) nine and three-tenths (9.3%) of the outstanding common stock of the company. For purposes of the immediately preceding sentence, all Options granted to the Executive, including Options not yet vested, and also all shares of Common Stock sold by the Executive during the Initial Term shall be included in the calculations of beneficial ownership. Said new options being exercisable at a purchase price to the Executive equal to the per share price of the shares issued by the Company which caused the Executive to receive these additional new stock options. Under no circumstance shall the per share cost to the Executive be less than one dollar. (c) The Company hereby agrees to issue to the Executive 100,000 shares (the "Bonus Shares") of the Company's Common Stock, as presently constituted, in the event that the closing price of the Company's Common Stock as reported on the OTC Bulletin Board or other national market quote system or exchange where the Common Stock is then traded (the Trading Price ) equals or exceeds $20.00 per share for a period of three (3) trading days during the Term. In the event of any increase in shares outstanding, stock split, stock dividend, reorganization or other change in the Common Stock, the number of Bonus Shares and or the Trading Price shall be proportionately adjusted. The Company shall immediately register the Bonus Shares under the Securities Act of 1933, as amended, after the issuance thereof, subject to the availability of audited financial information and regulatory review. 4.04 Monthly Loans. ------------- (a) The Company shall make available to the Executive a loan in the amount of $8333.33 (each, a "Monthly Loan") on the first day of each month (each, a "Loan Date") for so long as the Executive remains employed hereunder commencing with the month of March 1997 and terminating on February 2, 2001, subject to earlier termination of fifty per-cent (50%) of the value of the Monthly Loan upon the Trading Price of the Company's Common Stock equaling or exceeding $10.00 per share for a period of twenty (20) consecutive trading days during the Term. In order to obtain a Monthly Loan on a Loan Date, the Executive shall notify the Company in writing at least ten (10) days prior to each Loan Date, whereupon the Company shall disburse the amount of such Monthly Loan on the next succeeding Loan Date against delivery by the Executive of a promissory note (the Note ) as described below, to the Company. (b) Each Monthly Loan shall be evidenced by a Note executed by the Executive in favor of the Company and shall bear interest commencing on the Loan Date at a rate of seven percent (7%) per annum, compounded annually. The principal of each Monthly Loan, plus all accrued and unpaid interest thereon, shall mature and be payable to the Company in full on the earliest of February 4, 2002, (ii) two (2) years from the date on which the Executive ceases to be employed by the Company hereunder, other than pursuant to Section 6.03 hereof, or (iii) upon the date of termination of this Agreement pursuant to Section 6.03 hereof (the "Maturity Date"), and (I) shall be repaid on the Maturity Date by payment, in whole or part at the discretion of the Executive: (v) in cash, (w) delivery of shares of the Company's Common Stock or fully vested stock options exercisable therefor, which in the case of the Common Stock shall be valued at the Trading Price as of the Maturity Date, and in the case of the stock options shall be valued at the difference between the Trading Price as of the Maturity Date and the respective exercise prices of such Stock Option or (x) by crediting against the amount due any amount then outstanding and owed to the Executive as a Profits Bonus pursuant to Section 4.02 hereof, or (II) shall be forgiven by the Company (y) in the event the Executive continues in the employ of the Company for the entire Initial Term hereof or the Company terminates this Agreement during the Initial Term other than for cause pursuant to Section 6.03 hereof, or (z) in the event of a merger or consolidation of the Company whereby it is not the surviving entity or the stockholders of the Company are not the controlling stockholders of the surviving entity, the sale of all or substantially all of the Company's assets, liquidation, dissolution or entry by the Company (voluntarily or involuntarily) into insolvency or bankruptcy proceedings, or any person or group becomes the beneficial owner (as defined in Rule 13d-2 under the Exchange Act) of more than twenty-five percent (25%) of the Company's outstanding voting securities other than in a transaction approved by the Board of Directors of the Company as presently constituted or by their chosen successors as directors. The Executive agrees that should there be any income tax withholding obligation by reason of the Monthly Loans or their repayment or forgiveness, he will bear his portion of such withholding obligation. 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 Automobile. ---------- The Company shall provide the Executive with (i) the use of an automobile or (ii) an allowance or reimbursement for the use by the Executive of his personal automobile for Company purposes, provided that the cost to the Company does not exceed $700 a month. 4.07 Expenses. -------- In accordance with the Company's policies established from time to time, the Company shall pay or reimburse the Executive 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. 4.08 Insurance. --------- The Executive acknowledges and agrees that the Company may obtain a life insurance policy on the life of the Executive in the amount of at least $2,000,000 with the Company named as the beneficiary. The Executive shall cooperate fully with the Company's efforts to obtain such insurance policy, including making himself 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 any of its 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 expiration of his employment with the Company for any reason, he shall forthwith deliver up to the Company any and all documents and other material, 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 practices. The parties therefore confirm that, in order to protect the Company's goodwill, it is necessary that the Executive agree, and the Executive hereby does agree that he will not in the United States, at any tune during and for a period of two (2) years after he ceases to be employed by the Company, hold any equity interest or act as a sole proprietor, partner, coventurer, principal, director or shareholder (to the extent of 5% or more of the equity interest thereof), directly or indirectly, of any sole proprietorship, partnership, joint venture, corporation, or other business entity engaged in the business of the research, development, manufacture and sale of audiometers and other devices designed to test hearing, or engaged in any other business competitive to any business that the Company is engaged (or has formulated plans to engage) or at the time the Executive ceases to be employed by the Company. 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 hereinabove 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 one breach of the restrictions contained in this Section 5 shall be deemed a waiver of any future breach. 6. Termination. ----------- 6.01 Disability. ---------- (a) 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 Executive Committee or, if there is no Executive Committee, by the Board of Directors of the Company (with the Executive abstaining from the decision if he is then a member of such Committee or 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. (b) If the Executive is determined to be disabled pursuant to this Section 6.01, 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. 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 Company for Cause. ------------------------ The Company may terminate this Agreement for cause at any time. For purposes of this Agreement, 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 willful gross misconduct having a material adverse effect on the Company including willfully aiding the competition, or (iv) the breach by the Executive of any of his material obligations under this Agreement without proper justification, which breach is not cured within thirty (30) days after written notice thereof from the Company. Upon termination of employment by the Company for cause, 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. 6.04 By the Executive for Cause. -------------------------- The Executive may terminate this Agreement for "cause" at any time. For purposes of this Section 6.04, the term "cause" shall be the failure of the Company to perform in a material respect of its material obligation 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 giving of written notice thereof to the Company. 6.05 Termination Benefit. ------------------- Upon termination of employment (i) by the Company other than for cause pursuant to Section 6.03 hereof, (ii) upon the disability of the Executive pursuant to Section 6.01 hereof, (iii) by the Executive's death pursuant to Section 6.02 hereof, or (iv) by the Executive for "cause" pursuant to Section 6.04 hereof, the Executive (or his estate or representative) shall receive a severance payment equal to the greater of (i) the amount of the then current annual Base Salary or (ii) the continuation of the then Base Salary for the balance of the Term. 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 2.99 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 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 stock options and other equity based awards granted to the Executive by the Company shall become fully vested and 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. (b) "Change of control of the Company" shall be deemed to have occurred if: (i) any "person" or "group" (as "person" and "group" are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (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 Attn: Michael T. Pieniazek, President If to Executive: Thomas A. Slamecka 3055 Mossy Pointe Duluth, Georgia 30155 Fax: (770) 613-9963 8. Entire Agreement. ---------------- This Agreement contains the entire understanding of the parties with respect to the subject matter hereof, supersedes any prior agreement 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. 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: /s/ Michael T. Pieniazek -------------------------- Michael T. Pieniazek Chief Financial Officer /s/ Thomas A. Slamecka ----------------------------- Thomas A. Slamecka EX-10 4 EXHIBIT 10.11 EMPLOYMENT AGREEMENT AGREEMENT, dated as of January 1, 1998, by and between AMERICAN ELECTROMEDICS CORP., a Delaware corporation (the "Company"), and MICHAEL T. PIENIAZEK (the "Executive"). W I T N E S S E T H: -------------------- WHEREAS, the Executive has been employed by the Company, and the Company and the Executive desire to assure continuity of the Executive's services upon the terms and conditions of 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 employs the Executive as President 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 commencing on January 1, 1998 and terminating on December 31, 2001 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. 3. Position, Duties and Representations. ------------------------------------ 3.01 Service with the Company. ------------------------ The Executive shall serve as President of the Company. Subject to the Board appointing other persons the Executive will act as Chief Financial Officer and Secretary. The Executive agrees to perform such executive employment duties for the Company consistent with the positions specified above, and as the Board, the Executive Committee, or 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 to advance the business of the Company during the Term of this Agreement. If requested, the Executive shall serve as a director of the Company and officer and/or director of any subsidiary of the Company without any additional compensation hereunder. 4. Compensation. ------------ 4.01 Annual Salary. ------------- The Executive shall receive an annual base salary ("Base Salary") of $125,000 per year payable in accordance with the Company's normal payroll practices. In addition, on an annual basis the Board or the Compensation Committee shall review the Executive's compensation with a view towards increases in the Base Salary, and/or payment of a bonus, based on the Executive's performance during the preceding year or pursuant to guidelines established by the Compensation Committee. Payment of a bonus shall be entirely at the discretion of the Board of Directors. 4.02 Participation in Benefit Plans. ------------------------------ The Executive shall also be entitled, to the extent his position, 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. 4.03 Stock Options. ------------- The Company shall grant to the executive stock options (the "Options") under its 1996 Stock Options Plan for the purchase of 250,000 shares of Common Stock as an exercise price of one dollar ($1.00) per share. The Options to the maximum extent possible shall be "incentive" stock options, as defined in Section 422 of the Internal Revenue Service Code of 1986, as amended, and vest as follows: 150,000 shares initially upon grant, and the balance of the 250,000 shares by July 31, 1998 or sooner, subject to acceleration as provided herein. If during any fiscal year during the Term hereof the Company issues any shares of Common Stock (other than pursuant to compensation or employee benefit plans), the Options Committee shall immediately grant stock options to the Executive in order that the Executive would beneficially own (as determined in accordance with Rule 13d-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") six and one-half percent (6.5%) of the outstanding common stock of the Company. For purposes of the immediately preceding sentence, all Options granted to the Executive, including Options not yet vested, and also all shares of Common Stock sold by the Executive during the term shall be included in the calculation of beneficial ownership. 4.04 Bonus Shares. ------------ The Company hereby agrees to issue to the Executive 50,000 shares (the "Bonus Shares") of the company's Common Stock as reported on the OTC Bulletin Board or other national market quote system or exchange where the Common Stock is then traded (the "Trading Price") equals or exceeds $20.00 per share for a period of three (3) trading days during the Term. In the event of any increase in shares outstanding, stock split, stock dividend, reorganization or other change in the Common Stock, the number of Bonus Shares and or the Trading price shall be proportionately adjusted. The Company shall immediately register the Bonus Shares under the Securities Act of 1933, as amended, after the issuance thereof, subject to the availability of audited financial information and regulatory review. 4.05 Automobile. ---------- The Company shall provide the Executive with (i) the use of an automobile or (ii) an allowance or reimbursement for the use by the Executive of his personal automobile for Company purposes, provided the cost to the Company does not exceed $700 per month. 4.06 Expenses. -------- In accordance with the Company's policies established from time to time, the Company shall pay or reimburse the Executive 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. 5. Non-disclosure of Confidential Information: Non- ------------------------------------------------- Competition. ----------- 5.01 Confidentiality. --------------- Except as may be in the 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, work-in-progress, trade secrets or other interests of the Company (including customers and clients of the Company) which is confidential and valuable to the Company or any of its 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 expiration of his employment with the Company for any reason, he shall forthwith deliver up to the Company any and all documents and other material, 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 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, 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, and the Executive's primary duties with such entity relate directly to the competitive entity. 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 other than for "cause" as defined in 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 hereinabove 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. ----------- 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 this Agreement for "cause" at any time. For purposes of this Section 6.03, the 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 ten (10) days after the giving 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 willful gross misconduct having a material adverse effect on the Company including wilfully aiding the competition, or (iv) the breach by the Executive of any of his material obligations under this Agreement without proper justification, which breach is not cured within thirty (30) days after written notice thereof from the Company. 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) by the Company other than for "cause" pursuant to Section 6.04 hereof, (ii) upon the disability of the Executive pursuant to Section 6.01 hereof, (iii) by the Executive's death, or (iv) by the Executive for "cause," pursuant to Section 6.03 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 Term, (B) other than 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 2.99 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 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 nondeductible under Section 28OG of the Code. For purposes of this Section 6.06, present value shall be determined in accordance with Section 28OG(d)(4) of the Code. (b) "Change of control of the Company" shall be deemed to have occurred if: (i) any "person" or "group" (as "person" and "group" are defined in Sections 13(d) and 14(d) of 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 Attn: Thomas A. Slamecka, Chairman If to Executive: Michael T. Pieniazek 38 Westview Road Worcester, MA 01602 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. Headings; 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: /s/ Thomas A. Slamecka ------------------------------------ Thomas A. Slamecka, Chairman /s/ Michael T. Pieniazek -------------------------------------- Michael T. Pieniazek EX-10 5 EXHIBIT 10.14 Contract of Employment ---------------------- between ROSCH GmbH, Medizintechnik, Alt Buckow 6, 12349 Berlin hereinafter called the company - - on the one hand - and Mr. Andy Rosch, resident at Kornblumenring 3, 12357 Berlin - hereinafter called the Managing Director - on the other. This contract replaces the original Managing Director's contract dated the first of July 1990 and all the amendments to it by shareholders' decision. This Contract comes into force retroactively from the first of January 1996 as per the shareholders' decision of the eleventh of January 1996. SECTION I SCOPE OF FUNCTIONS/MANAGERIAL AND REPRESENTATIVE RIGHTS/ADDITIONAL OCCUPATIONS 1.1 The Managing Director is responsible together with the other managing directors for the management of the company and its outward representation. He manages the company and is responsible for all its commercial activities. 1.2 The Managing Director must comply with all applicable laws and the company's shareholders' agreement in managing the company, whereby the decisions of the shareholders' meeting are to be respected and carried out. He is entitled to perform all normal business on his own initiative and is sole authorized signatory for such activities. He must first obtain the shareholders' agreement in those special cases stipulated in the shareholders' agreement and for legal actions outside the scope of normal business activities which are not inconsequential. 1.3 The Managing Director may only take on an additional occupation or participate in another commercial undertaking in the same line of business as the company with the agreement of a shareholders' meeting. The same applies to the acceptance of seats on supervisory boards, advisory boards or similar bodies, including honorary offices of any kind. SECTION 2 EMOLUMENTS/EXPENSES AND ALLOWANCES/SICKNESS 2.1 The Managing Director will receive the following emoluments for his activities. A. A monthly gross salary of fifteen thousand German Marks. B. A share in the annual profits as calculated for tax purposes before adding the trade tax reduction due to payment of this share and after deduction of those company expenses not tax-deductible insofar as the employment relationship has subsisted throughout the entire year amounting to 15% (fifteen percent), payable after approval of the relevant annual accounts by the shareholders' meeting. In the event of payment on a loan basis, interest is payable to the company at the rate of seven percent per annum, beginning with the first day of the financial year following the date of transfer or of crediting of the money. Any such loan is subject to quarterly notice of termination. C. Special payment can be made for overtime, Sunday and holiday work, but only when the Managing Director was demonstrably not at his usual place of work, i.e. overtime was incurred during traveling on business, congresses, etc. D. In addition to the emoluments mentioned above, the Managing Director will also receive the employer's portion of all social security payments due, or a comparable sum in the event that no obligation to make such payments exists. The company has taken out direct accident insurance with guaranteed refund of contributions as company pension. This insurance began on the first of February, 1995. An endowment assurance policy numbered 211309134 with capital payment in the event of death and an annuity option was taken out on the eleventh of February, 1994 on the Managing Director's life. E. The Managing Director also has a right to all the company's usual social security benefits and services. F. The Managing Director will receive a thirteenth month's salary as Christmas bonus. 2.2 Travelling and other expenses necessarily incurred on the company's behalf will be appropriately recompensed. All such expenses exceeding the permissible limits in taxation law must be documented. The Managing Director has a right to a company car, which he may also use privately. The payment of tax on the financial benefit involved is due in accordance with the tax authorities' guidelines. 2.3 The company is entitled to reduce the Managing Director's emoluments as appropriate should he be absent from work due to illness, accident or other causes for more than 12 weeks. 2.4 Any adjustment in the Managing Director's emoluments can only be made by shareholders' decision. SECTION 3 HOLIDAY The Managing Director is entitled to thirty working days holiday per annum. This is to be taken with due regard to the company's affairs and at such a time as not to damage the company in any way. The Managing Director is entitled to compensation for any unused annual holiday entitlement. SECTION 4 OBLIGATION TO CONFIDENTIALITY 4.1 The Managing Director is obliged to maintain confidentiality regarding all the company's affairs toward all outsiders unless passing on such information is essential in the normal course of his duties. This obligation remains in force when this Contract expires. SECTION 5 DURATION OF EMPLOYMENT, PERIOD OF NOTICE 5.1 The employment relationship has existed since the first of July, 1990 and is valid for an indefinite period. 5.2 The employment relationship can be terminated by either party to it, the period of notice being six months to the end of a company financial year. 5.3 An important reason in the person of the Managing Director making continuation of the employment relationship intolerable to the company must exist, as well as an appropriate shareholders' decision, before the company may terminate this Contract. 5.4 The company is entitled to send the Managing Director on leave of absence with full pay in the event that lawful notice of termination of this Contract has been served. Such leave is to be deducted from any annual holiday entitlement the Managing Director may have remaining at the time. 5.5 Notice of termination must be in writing. SECTION 6 RETURN OF DOCUMENTS 6.1 The Managing Director has a duty to treat all documents and records pertaining to his professional activities as company property entrusted to him on loan, to keep same under lock and key and to return them to the company in full on expiry of this Contract without being asked to do so. The company will then decide whether to retain all or any such documents and records. SECTION 7 CHANGES TO THIS CONTRACT 7.1 All changes and/or amendments to this Contract must be in writing. Should any stipulation in this contract be or become null and void for any reason whatsoever, this will not affect the validity of the rest of the contract. Any such null and void stipulations are to be replaced by mutual consent with effective equivalents fulfilling the same economic purpose. Place of jurisdiction and of performance of this Contract is the company's head office site for both parties. Place: Berlin ------------------------------------------------------ Date: 11.1.96 --------------------------------------------------------- Signature (Employee) /s/ Andy Rosch ------------------------------------------- Place: Berlin ----------------------------------------------------- Date: 11.1.96 --------------------------------------------------------- Signature (Shareholder) /s/ Andy Rosch ---------------------------------------- Andy Rosch /s/ Michael T. Pieniazek ------------------------------------------------ American Electromedics - Michael Pieniazek Chief Financial Officer EX-21 6 EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARIES Dynamic Dental Systems, Inc., a Delaware corporation (100%) Equidyne Systems, Inc., a California corporation (100%) Rosch GmbH Medizintechnik, a German corporation (100%) EX-23 7 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 September 29, 1997 (except Note 10, as to which the date is November 3, 1997) in the Registration Statement (Form SB-2) and the related Prospectus of American Electromedics Corp. for the registration of 5,320,224 shares of its common stock and 50,000 of its common stock purchase warrants. /s/ Ernst & Young LLP Manchester, New Hampshire July 7, 1998 -----END PRIVACY-ENHANCED MESSAGE-----