**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

| **ý** |   | **Annual  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                  |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                       |
|       |   | **For the fiscal year ended December 31, 2002, or**                                                                                                                                                                                                                                        |
|       |   |                                                                                                                                                                                                                                                                                       |
| o          |   | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                              |
|       |   |                                                                                                                                                                                                                                                                                       |
|       |   | **For the transition period  from                      to                      .** |

 

**Commission File No. 0-19195**

 

**AMERICAN MEDICAL TECHNOLOGIES, INC.**

(Exact name of registrant as specified in its charter)

 
| **DELAWARE**                                                   |   | **38-2905258**                          |
|----------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (I.R.S. employer identification number) |

 

**5555 Bear Lane, Corpus Christi, TX 78405**

(Address of principal executive offices)(Zip Code)

 

**(361) 289-1145**

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the ExchangeAct:  **None**

 

Securities registered pursuant to Section 12(g) of the Act:

**Common Stock, $.04 par value per share**

(Title of Class)

 

Indicate by check mark whetherthe registrant (1) filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.                                         Yes ý      No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  ý

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).  Yes o       No ý

 

The aggregate market value ofthe registrant’s Common Stock held by non-affiliates of the registrant wasapproximately $603,508 as of March 31, 2003, based upon the closingprice of $.17 reported on the OTC Bulletin Board on that date.  Forpurposes of this calculation only, all directors, executive officers and ownersof more than ten percent of the registrant’s Common Stock are assumed to beaffiliates.  There were 7,362,348 shares of the registrant’s Common Stockissued and outstanding on March 31, 2003.

 

Documents incorporated byreference:  None.

 

 

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**PART I**

 

ITEM 1.     DESCRIPTION OF BUSINESS

 

**Introduction**

 

AmericanMedical Technologies, Inc. (“American Medical” or “Company”) develops,manufactures and markets high technology products designed primarily forgeneral dentistry.  American Medical’s primary products are pulsed dentallasers, primarily the Diolase and PulseMaster models; the Anthos System line ofdental chairs and units, high speed curing lights; air abrasive kinetic cavitypreparation systems, and intra oral cameras (“Ultracam”), which are developedand manufactured at its manufacturing facility in Corpus Christi, Texas. American Medical also develops, manufactures and markets precision air abrasivejet machining (“AJM”) systems for industrial applications.  AmericanMedical, incorporated in Delaware in November 1989, completed its initialpublic offering in June 1991.  American Medical changed its name fromAmerican Dental Technologies, Inc. on July 13, 2000.

 

AmericanMedical had a very difficult and challenging year in 2002.  The Company’s revenues and profitabilityfell significantly in late 2001 and 2002, culminating in a loss ofapproximately $7 million for 2002.  Thisloss was primarily the result of (i) a decline in sales following the decisionby the Company in February 2000 to switch its product distribution from salesby independent distributors and dealers to a direct sales force, (ii) a morechallenging business environment following the September 11, 2001 terroristattack, (iii) a delay in the introduction of a key product and (iv) the loss in2001 of the Japanese distributor resulting in a decline in internationalsales.  These events were followed bythe resignation of the Company’s former Chief Executive Officer in April 2002,the eventual replacement or termination of virtually all of the Company’sremaining executive management later in 2002 and in 2003, and the continueddefault by the Company on secured debt to its bank lenders aggregatingapproximately $2.55 million. Although the Company’s operating expenses havebeen dramatically reduced, the Company may continue to experience losses in2003.  As a result, the Company’sindependent auditors have expressed substantial doubt about the Company’sability to continue as a going concern.

 

TheCompany is actively pursuing all available strategic alternatives, includingmerger or sale of the Company, the sale of certain of the Company’s assets orproduct lines, the sale of debt or equity securities, and restructuring itsexisting credit facilities and other liabilities.  If the Company is not able to repay or refinance its outstandingbank debt, and the banks enforce their security interest in the Company assetssecuring the debt, the Company may be forced to seek protection under thebankruptcy laws or cease operations.

 

** Products**

 

*Laser Products*

 

ThePulseMaster 600-IQ is a neodymium yttrium-aluminum-garnet (Nd:YAG) laser thatdelivers pulses of laser energy through a flexible fiber optic delivery systemthat can reach into difficult recesses of the mouth.  The PulseMaster candeliver a 100-microsecond energy pulse at rates varying from 10 to 200 timesper second, and at up to six watts of average power.  The PulseMaster iscontained in a movable cabinet the size of a medium suitcase, weighsapproximately 75 pounds and plugs into a standard electrical outlet.

 

TheDiolase is a diode laser that delivers a continuous wave or gated continuouswave through a flexible fiber optic delivery system that can reach difficultrecesses of the mouth.  The Diolase delivers up to 6 watts of powerdepending upon the fiber size used.  The Diolase is compact and portablein size, weighs approximately 11 pounds and plugs into a standard electricaloutlet.

 

TheCompany introduced the “Cavilase”, an Erbium:YAG laser, in late 2001.  However, technical problems with the productcould not be resolved and the product was withdrawn from the market in 2002.

 

AmericanMedical believes one important feature of its dental lasers is their ability tohelp reduce the pain associated with the procedures for which they are used.Additionally, because the laser is more precise than standard dentalinstruments, its use results in less cellular destruction.  The laserminimizes bleeding during soft tissue surgery,

 

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creatinga cleaner field in which to operate by eliminating time-consuming removal ofblood from the operative site.  The laser also reduces the risk ofpost-operative infection.

 

AmericanMedical’s dental lasers are used for soft tissue applications, which includeremoving excess or diseased gum tissue, contouring gums, performing biopsies,preparing gums for crown and bridge impressions, trimming the gums to fitcrowns and bridges, treating gum disease and for hemostasis (control ofbleeding).  In 1999, American Medical received FDA clearance to market thePulseMaster for the selective removal of enamel decay.

 

AmericanMedical’s dental lasers, components and accessories are sold primarily in NorthAmerica, certain Asian and Pacific markets, and Europe.  Lasersrepresented approximately 48%, 52% and 54% of American Medical’s total revenuesduring 2002, 2001 and 2000, respectively.

 

*Anthos System Dental Chairs and Units*

 

InMay of 2001, American Medical signed an agreement with CEFLA S.c.r.l. grantingthe Company exclusive rights to distribute, in the United States, the operatoryequipment which CEFLA manufactures in Italy under the Anthos trade name. Theparties also agreed to integrate the five high-tech dental equipment lines ofAmerican Medical into the Anthos chairs and units. The five high-tech dentalequipment lines have been integrated, and it is the only chair and unit in theworld with these technologies built in.  In September of 2001 the Companyreceived 510(k) FDA clearance to market Anthos System dental units anddistribution began in the fourth quarter of 2001.  Anthos System salesrepresented 8% of American Medical’s total revenues during 2002.

 

*Plasma Arc Curing Systems*

 

AmericanMedical markets a Plasma Arc Curing System (“PAC”) that utilizes a highintensity light source to rapidly cure composite fillings.  Curing occursin five to ten seconds, or at least twice as fast as most conventional curinglights.

 

AmericanMedical’s PAC products, components and accessories are sold primarily in NorthAmerica, certain Asian and Pacific markets, and Europe.  PAC productsrepresented approximately 7%, 7% and 12% of American Medical’s total revenuesduring 2002, 2001 and 2000, respectively.

 

*KCP Cavity Preparation Systems*

 

AmericanMedical currently offers several Cavity Preparation Systems (“KCP”) models thatvary in size, power and features, from the KCP 5 counter top model to thedeluxe KCP 1000PAC model.  American Medical’s KCP products remove toothdecay and tooth structure, including enamel, by means of a narrow stream ofminute particles of alpha alumina propelled at high velocity by compressed airand delivered to the tooth via a lightweight handpiece.  The KCP shapesrestoration sites, removes old composites and modifies underlying hard tissue,often helping to increase bond strength.  It is also used for sealantpreparations, stain removal and intraoral porcelain removal and repair. The KCP can often be used in place of a drill and may be used in many caseswithout anesthesia.  The dentist controls the cutting speed by selectingparticle size (27 or 50 micron) and air pressure (40 psi to 160 psi) with touchpads on a control panel.  The air abrasive stream is activated by a footpedal.   The KCP floor models (KCP 100 and KCP 1000) are contained ina movable cabinet the size of a medium suitcase and plug into a standardelectrical outlet.

 

TheKCP is best used in conjunction with modern tooth-colored composite restorationmaterials.  It is not recommended for removing large amalgamfillings.  The precision of the KCP, and the manner in which it preparessurfaces for restorations, allow for earlier treatment of decay and lessdestruction of the tooth while restoring it.  In many cases, the KCP maybe used without anesthesia, allowing a dentist to treat teeth in differentquadrants of the mouth during a single visit.  This is generally notpossible when conventional instruments and anesthesia are used.

 

AmericanMedical also markets its PAC as an accessory to its KCP.  The KCP1000 PACcombines an air abrasive cavity preparation system together with a compositecuring light in a single instrument.  This allows dentists to efficientlyswitch from cavity preparation to curing.

 

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TheKCP is sold primarily in North America, certain Asian and Pacific markets andEurope.  The KCP represented approximately 4%, 8% and 6% of AmericanMedical’s total revenues in 2002, 2001 and 2000, respectively.

 

*Intra Oral Camera Products*

 

TheUltracam is a sophisticated camera system that allows the dentist to takepictures of a patient’s teeth during an examination.  The pictures can beprojected on a video monitor in the examination room for immediate viewing bythe dentist and the patient, and printed or stored on a computer disk. The Ultracam systems offered vary in size from the basic cart system, which isa portable camera and printer housed in a mobile cart, to a networked systemthat can be utilized in several examination rooms.  The networked systemscombine the cart system with central printing stations, digital dockingstations and examination room monitors.

 

TheUltracam is utilized in the dental practice for presentation, education and asa means of communicating their services through multi-media.  The DigitalDocking Station, introduced in 1999, greatly enhances the value of an intraoral camera by allowing the storage of up to 40 images on a 3 1⁄2 inch computerfloppy disk.

 

Ultracamproducts are sold primarily in North America and Europe.  The Ultracamproducts represented approximately 8%, 10% and 14% of American Medical’s totalrevenue in 2002, 2001 and 2000, respectively.

 

*Probe One and Chart-It*

 

TheProbe One is a computerized periodontal probe which works with practicemanagement software to automate and streamline perio-probing andcharting.  Chart-It is an automated charting software program used tofully integrate a dentist’s operatory with most front office practice managementsystems.  These products represented less than 1% of the Company’s totalrevenues in 2002, 2001 and 2000, respectively. The Chart-It program was sold in 2002 for $35,000, and the probe productand inventory was sold by the Company in March 2003 for $50,000.

 

*Industrial Products*

 

AmericanMedical also develops, manufactures and markets precision air abrasive jetmachining (“AJM”) systems for industrial applications.  The AJM system hasa wide range of applications, including drilling, cutting, abrading, deburring,dressing, beveling, etching, shaping and polishing.  Its principaladvantage over conventional machining is that the AJM process, whichaccomplishes its work through kinetic particle displacement (an erosionprocess), produces no heat, shock or vibration.  This enables precise workto be done on fragile materials without deburring or further processing. Generally, the same is not true of drills, saws, laser or other types ofconventional machining equipment because all of these systems rely on heat and/orfriction to perform the work.  These machining techniques generallyrequire further processing and in many instances do not provide the precisionavailable with AJM, particularly with fragile materials.  AJM systems areoften used to remove the slag, burrs and flash resulting from conventionalmachining processes.  Some examples include deburring needles, bevelingsilicon wafers and cutting fiber optics.

 

Industrialproducts accounted for less than 5% of American Medical’s total revenues in2002, 2001 and 2000, respectively.

 

**Marketing,Sales and Training**

 

Priorto February 14, 2000, American Medical marketed its dental products throughindependent distributors, primarily Patterson Dental Company and SullivanSchein, Inc., to general dental practitioners and certain other dentalspecialists in the United States.

 

OnFebruary 14, 2000, the Company changed its business model and began selling itsdental products directly to dentists in the United States through its own salesforce.  The revised business model called for the establishment of dentalsales and service centers in large metropolitan areas throughout the UnitedStates.  The centers were staffed with sales personnel, an officecoordinator responsible for scheduling, coordinating local marketing andreporting to corporate headquarters, and service technicians for installationand technical service support.  Outside the

 

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UnitedStates, including Canada, American Medical continued selling its dentalproducts through its distributor network.

 

In the secondand third quarters of 2002 the Company adopted a restructuring plan that calledfor change in distribution of its products from selling directly to dentists inthe United States through its own sales force to marketing its dental productsthrough independent distributors, primarily Sullivan-Schein.  This allowed the Company to close 12 salesbranches and reduce operating expenses by over $300,000 per month.  The Company employs independent sales representativesto coordinate sales opportunities with distributors.

 

The Companyrelies heavily on sales made at trade shows, dental exhibitions, and dentalsociety meetings.  In general, the Company’s marketing activities, such asdental exhibitions and meetings, are typically lower in the summer months,which results in decreased revenues during the third and fourth quarters of theyear.

 

AmericanMedical presently has several industrial product distributors.  Suchdistributors have been and are anticipated to be the primary source of salesfor American Medical’s industrial products in the future. Industrial productdistributors are supported by American Medical primarily through advertising inthe Thomas Register and trade journals, and by participation in trade shows.

 

AmericanMedical also sells some industrial products directly to customers throughadvertisements or customer referrals and through original equipmentmanufacturers of grinding equipment who purchase AJM systems to incorporateinto their equipment.

 

**Trainingand Service**

 

BecauseAmerican Medical’s dental products represent new approaches to dentistry,training is a significant aspect of its marketing efforts.  AmericanMedical offers complementary training on all of its products.  AmericanMedical encourages each purchaser to participate in ongoing continuingeducation regarding the use of American Medical’s dental products and endeavorsto share new developments as soon as reliable scientific support has beenestablished.

 

AmericanMedical provides warranty and repair service for American Medical’s products inthe United States.  To service its dental products, American Medical has aservice department in Corpus Christi and has service arrangements withindependent distributors for products in other markets.  If sucharrangements are unavailable, certain American Medical sales personnel aretrained to make minor service repairs.  To date, American Medical has notexperienced significant service problems.  American Medical generallyprovides a one-year warranty on all of its products.  Since theintroduction of the sales and service centers, the Company’s revenues relatedto replacement parts and repair services have risen from 11% of revenues in2000, to 17% of revenues in 2001, and 20% of revenues in 2002.

 

TheCompany also has a service center in Keltern, Germany that providesinstallation, training, service and technical support for Europe, Russia andthe Middle-East.  In other international markets, the distributors provideinstallation, training and service with technical support from the UnitedStates office.

 

**Competition**

 

Ingeneral, American Medical’s products are subject to intense competition, bothfrom other advanced dental technology companies and from makers of conventionaldental equipment.  American Medical believes there are approximately 6competing companies which presently offer Nd:YAG, diode, argon, erbium, holmiumor CO2 lasers for use in dentistry.  American Medical has patents in thebasic technologies, which the Company believes provide a competitiveadvantage.  American Medical believes there are approximately 3 companiesthat presently sell competing dental air abrasive products and approximately 13companies that presently sell competing intra oral camera systems. American Medical’s laser, PAC and KCP products must also compete withconventional treatment methods using dental instruments or equipment that aregenerally less expensive and with which dentists are more familiar.

 

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Many of thesecompeting companies, particularly those which manufacture traditional dentalequipment, may have been in business longer, have greater resources and have alarger distribution network than American Medical.  American Medical’scompetitive position is dependent upon its pricing and marketing practices, itsability to make ongoing improvements in its existing products, to develop newproducts, and to successfully promote the capabilities and treatment benefitsof its products.  While American Medical believes its products arecompetitive in terms of capabilities, quality and price, competition has, andmay in the future, adversely affect American Medical’s business.

 

**Patents**

 

AmericanMedical believes its patents provide a competitive advantage in those countrieswhere they have been issued.  American Medical believes its technologypatents and other patent rights provide a proprietary means to utilize thattechnology in dentistry.  In the United States, American Medical has patentsrelated to dental laser methods and technology patents that have expirationdates ranging from 2002 to 2016, dental air abrasive systems and methods forusing an air abrasive stream for dentistry that do not begin expiring until2011, technology patents for air abrasive cavity preparation systems that donot begin expiring until 2004, and industrial air abrasive patents that haveexpiration dates ranging from 2004 to 2016.  American Medical also holdsseveral industrial air abrasive patents in various other countries.

 

**Manufacturingand Suppliers**

 

AmericanMedical manufactures, assembles and services its products at its ISO9001-certified facility in Corpus Christi, Texas.  American Medical’sproducts are manufactured from parts, components and subassemblies obtainedfrom a number of unaffiliated suppliers and/or fabricated internally at itsmanufacturing facility. American Medical has modern machining capabilityallowing it to control the production of certain non-standard parts. American Medical uses numerous suppliers for standard parts and for fabricationof certain parts.  Although most of the parts and components used in itsproducts are available from multiple sources, American Medical presentlyobtains several parts and components from single sources.  Lack ofavailability of certain parts and components could result in productiondelays.  Management has identified alternate suppliers and believes anydelays would be minimal.  While the loss of American Medical’srelationship with a particular supplier might result in some production delays,such a loss is not expected to materially affect American Medical’s business.

 

**Researchand Development**

 

Mostresearch and development, prototype production and testing activities takeplace at the Texas facility, although some research and development work isperformed for American Medical by consultants. The Texas facility has an engineering staff capable of producing newproduct prototypes.  Although AmericanMedical expects to continue to conduct most of its own research and developmentactivities, American Medical will continue to work with various domestic andinternational dental schools, consultants and researchers to analyze dentalapplications and to develop product enhancements and complementary products.

 

AmericanMedical’s research and development expenditures for 2002, 2001 and 2000 were$595,156, $796,424 and $966,382, respectively.  American Medical’s currentresearch and development efforts are focused on new complementary products forthe dental market.

 

**GovernmentalRegulation**

 

AmericanMedical’s dental products are subject to significant governmental regulation inthe United States and certain other countries.  In order to conductclinical tests and to market products for therapeutic use, American Medical mustcomply with procedures and standards established by the FDA and comparableforeign regulatory agencies.  Changes in existing regulations or adoptionof additional regulations may adversely affect American Medical’s ability tomarket its existing products or to market enhanced or new dental products.

 

*United States Regulatory Requirements*

 

TheFederal Food, Drug and Cosmetic Act (“FDC Act”) regulates medical devices inthe United States by classifying them into one of three classes based on theextent of regulation believed necessary to ensure safety and effectiveness.Class I devices are those devices for which safety and

 

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effectivenesscan reasonably be ensured through general controls, such as device listing,adequate labeling, premarket notification and adherence to the Quality SystemRegulation (“QSR”) as well as medical device reporting (“MDR”), labeling andother regulatory requirements. Some Class I medical devices are exempt from therequirement of pre-market approval or clearance. Class II devices are thosedevices for which safety and effectiveness can reasonably be ensured throughthe use of special controls, such as performance standards, post-marketsurveillance and patient registries, as well as adherence to the generalcontrols provisions applicable to Class I devices. Class III devices aredevices that generally must receive premarket approval by the FDA pursuant to apremarket approval (“PMA”) application to ensure their safety and effectiveness.Generally, Class III devices are limited to life sustaining, life supporting orimplantable devices; however, this classification can also apply to noveltechnology or new intended uses or applications for existing devices.

 

Beforethey can be marketed, most medical devices introduced to the United Statesmarket are required by the FDA to secure either clearance of a pre-marketnotification pursuant to Section 510(k) of the FDC Act (a “510(k) Clearance”)or approval of a PMA. Obtaining approval of a PMA application can take severalyears. In contrast, the process of obtaining 510(k) Clearance generallyrequires a submission of substantially less data and generally involves ashorter review period. Most Class I and Class II devices enter the market viathe 510(k) Clearance procedure, while new Class III devices ordinarily enterthe market via the more rigorous PMA procedure. In general, approval of a510(k) Clearance may be obtained if a manufacturer or seller of medical devicescan establish that a new device is “substantially equivalent” to a predicatedevice other than one that has an approved PMA. The claim for substantialequivalence may have to be supported by various types of information, includingclinical data, indicating that the device is as safe and effective for itsintended use as its legally marketed equivalent device. The 510(k) Clearance isrequired to be filed and cleared by the FDA prior to introducing a device intocommercial distribution. Market clearance for a 510(k) notification submissionmay take 3 to 12 months or longer. If the FDA finds that the device is notsubstantially equivalent to a predicate device, the device is deemed a ClassIII device, and a manufacturer or seller is required to file a PMA application.Approval of a PMA application for a new medical device usually requires, amongother things, extensive clinical data on the safety and effectiveness of thedevice. PMA applications may take years to be approved after they are filed. Inaddition to requiring clearance or approval for new medical devices, FDA rulesalso require a new 510(k) filing and review period, prior to marketing achanged or modified version of an existing legally marketed device, if suchchanges or modifications could significantly affect the safety or effectivenessof that device. FDA prohibits the advertisement or promotion of any approved orcleared device for uses other than those that are stated in the device’sapproved or cleared application.

 

TheFDA granted 510(k) Clearance to market the KCP for hard-tissue applications andthe PulseMaster dental lasers for soft-tissue procedures in late 1992. 510(k) Clearance to market the PAC was granted by the FDA in mid-1995. The PulseMaster received 510(k) Clearance to market for laser curettage inMarch 1997 and a diode laser was granted soft tissue 510(k) Clearance inSeptember 1997.  The PulseMaster received 510(k) Clearance to market forselective removal of enamel dental caries in May 1999.  The Anthos Systemline of dental chairs and units received 510(k) Clearance in August of 2001.

 

Pursuantto FDC Act requirements, the Company has registered its manufacturing facilitywith the FDA as a medical device manufacturer, and listed the medical devicesit manufactures. The Company also is subject to inspection on a routine basisfor compliance with FDA regulations. These regulations include those coveringthe QSR, which, unless the device is a Class I exempt device, require that theCompany manufacture its products and maintain its documents in a prescribedmanner with respect to issues such as design controls, manufacturing, testingand validation activities. Further, the Company is required to comply withother FDA requirements with respect to labeling, and the MDR regulations whichrequire that the Company provide information to the FDA on deaths or seriousinjuries alleged to have been associated with the use of its products, as wellas product malfunctions that are likely to cause or contribute to death orserious injury if the malfunction were to recur. The Company believes that itis currently in material compliance with all relevant QSR and MDR requirements.

 

Inaddition, our products are subject to regulatory requirements coveringthird-party reimbursement.  Our products are generally purchased by dentalor medical professionals who then bill various third party payors, such asgovernment programs or private insurance plans, for the procedures conductedusing these products. In the United States third party payors review andfrequently challenge the prices charged for medical services. In many foreigncountries, the prices are predetermined through government regulation. Payorsmay deny coverage and reimbursement if they determine that the procedure wasnot medically necessary (for example, cosmetic) or that the device used in the

 

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procedurewas investigational. We believe that most of the procedures being performedwith our current products generally have been reimbursed. The inability toobtain reimbursement for services using our products could deter dentists andphysicians from purchasing or using our products. We cannot predict the effectof future healthcare reforms or changes in financing for health and dentalplans. Any such changes could have an adverse effect on the ability of a dentalor medical professional to generate a return on investment using our current orfuture products. Such changes would act as disincentives for capitalinvestments by dental and medical professionals and could have an adverseeffect on our business, financial condition and results of operations.

 

*Foreign Regulatory Requirements*

 

Internationalsales of medical devices are also subject to the regulatory requirements ofeach country. Regulation of medical devices in foreign countries varies betweencountries such as Japan, which has standards similar to the FDA, to countriesthat have no regulations. The Company, in general, will rely upon itsdistributors and sales representatives in the foreign countries in which it marketsits products to ensure that the Company complies with the regulatory laws ofsuch countries.  In Europe, the regulations of the European Union requirethat a device have a CE mark before it can be sold in that market. The KCP,PAC, intraoral cameras and lasers have been granted CE mark approvals which arerecognized by most European countries, and may be sold in Germany and manyother European markets. The PulseMaster and KCP has also been approved for salein Japan.  American Medical’s dental lasers comply with governmentregulations in most major countries in Europe, Asia, the Pacific Rim, and Northand South America and are marketed for both hard and soft tissue applications,except in Japan, where (as in the United States) they have not been cleared forcertain hard-tissue procedures.  Additional foreign authorizations tomarket its dental products are being sought by the Company where needed.

 

Regulationof medical devices in other countries is subject to change and there can be noassurance American Medical will continue to be able to comply with suchrequirements.  The Company believes that its international sales to datehave been in compliance with the laws of the foreign countries in which it hasmade sales. Failure to comply with the laws of such country could have amaterial adverse effect on the Company’s operations and, at the very least,could prevent the Company from continuing to sell products in suchcountries.  Exports of most medical devices are also subject to certainlimited FDA regulatory controls.

 

Europeanregulations required ISO 9001 certification as of July 1998 for all medicalproducts distributed or sold in Europe.  American Medical’s manufacturingfacility initially received ISO 9001 certification in 1997.

 

**ProductLiability Exposure**

 

AmericanMedical’s business involves the inherent risk of product liability claims. If such claims arise, they could have an adverse effect on AmericanMedical.  American Medical currently maintains product liability insuranceon a “claims made” basis with coverage per occurrence of $5,000,000 and in theaggregate annually of $5,000,000.  There is no assurance that suchcoverage will be sufficient to protect American Medical from all risks to whichit may be subject or that product liability insurance will be available at areasonable cost, if at all, in the future.

 

**ForeignOperations and Segment Information**

 

Forinformation regarding the Company’s foreign operations and business segments,see Note 7 of the Notes to Consolidated Financial Statements.  Suchinformation is incorporated herein by reference.

 

**Employees**

 

OnMarch 31, 2003, American Medical had 21 full-time employees.  Of theseemployees, 3 were engaged in direct sales and marketing activities in additionto the 10 non-employee sales representatives that interface with ourdistributors.  Eight employees areengaged in manufacturing activities, and the remaining 10 employees are infinance, administration, customer service, and research and development. American Medical has no collective bargaining agreements with any unions andbelieves that its overall relations with its employees are good.

 

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**ExecutiveOfficers of the Company**

 

Thefollowing table sets forth information concerning each of the current executiveofficers of American Medical who are elected to serve at the discretion of theBoard of Directors.

 
| **Name**           |   | **Age** |   | **Position**                                                         |
|--------------------|--------|---------|--------|----------------------------------------------------------------------|
|               |   |    |   |                                                                 |
| Roger  W. Dartt    |   | 61      |   | President,  Chief Executive Officer, Chair of the Board of Directors |
| Barbara  D. Woody  |   | 41      |   | Controller                                                           |
| William  S. Parker |   | 57      |   | Senior  Vice President — Dental                                 |

 

*Roger W. Dartt -*Mr. Dartt**was selected by the Board of Directors ofthe Company to serve as the Company’s Chief Executive Officer on June 6,2002.  Prior to that date Mr. Darttserved as the President of Mediatrix International, Inc., a managementconsulting company that specialized in providing and implementing businessgrowth strategies, mergers and acquisitions, turnaround restructuring andfinancial support to companies.  In thepast five years, Mr. Dartt had several short-term assignments as a turnaroundspecialist in companies engaged in electronic circuit board manufacturing,specialty retail sales, commercial glass manufacturing and in the supply ofdurable medical equipment to the home healthcare industry.  Prior to forming Mediatrix, Mr. Dartt waspresident, chief executive officer or chief operating officer of eightcompanies in the medical, dental electronic and specialty retail markets,including subsidiaries of Bristol Meyers and PepsiCo.

 

*Barbara D. Woody –*Ms. Woody was appointedController in December 2002.  Prior tojoining the Company, she had served as Controller for Roy Smith Shoes, Inc. andas Business Manager for Henley Healthcare, Inc.

 

*William S. Parker* - Mr. Parker was appointedSenior Vice President - Dental of the Company in August 1998 and became aDirector in November 1999.  He is chiefly responsible for the Company’sproduct development.  He had been a consultant, then an employee of theCompany in charge of product development since 1991.  From 1976 to 1991,he was the president and co-founder of the New Directions Group, Inc., amanagement consulting firm.

 

**ForwardLooking Statements**

 

TheCompany makes forward-looking statements in this report and may make suchstatements in future filings with the Securities and Exchange Commission. The Company may also make forward-looking statements in its press releases orother public shareholder communications.  The Company’s forward-looking statementsare subject to risks and uncertainties and include information about itsexpectations and possible or assumed future results of operations.  Whenthe Company uses any of the words “believes”, “expects”, “anticipates”,“estimates” or similar expressions, it is making forward-looking statements.

 

TheCompany claims the protection of the safe harbor for forward-looking statementscontained in the Private Securities Litigation Reform Act of 1995 for all ofits forward-looking statements.  While the Company believes that itsforward-looking statements are reasonable, you should not place undue relianceon any such forward-looking statements, which speak only as of the datemade.  Because these forward-looking statements are based on estimates andassumptions that are subject to significant business, economic and competitiveuncertainties, many of which are beyond the Company’s control or are subject tochange, actual results could be materially different.  Factors that mightcause such a difference include, without limitation, the following:  theCompany’s inability to generate sufficient cash flow to meet its currentliabilities, the potential inability of the Company to extend its forbearanceagreement with the bank for the current breach of financial covenants and torefinance or extend that line of credit and the other line of credit due priorto their expiration on May 31, 2003, the impact of recently filed patentinfringement litigation on relationships with the Company’s licensees,distributors and customers, the Company’s potential inability to hire andretain qualified sales and service personnel, the potential for an extendeddecline in sales, the possible failure of revenues to offset additional costsassociated with its new business model, the potential lack of productacceptance, the Company’s potential inability to introduce new products to themarket, the potential failure of customers to meet purchase commitments, thepotential loss of customer relationships, the potential failure to receive ormaintain necessary regulatory approvals, the extent to which competition maynegatively affect prices and sales volumes or  necessitate increased salesexpenses, the failure of negotiations to conclude OEM agreements or strategicalliances and the other risks and uncertainties set forth in this report.

 

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Otherfactors not currently anticipated by management may also materially andadversely affect the Company’s results of operations.  Except as requiredby applicable law, the Company does not undertake any obligation to publiclyrelease any revisions which may be made to any forward-looking statements toreflect events or circumstances occurring after the date of this report.

 

ITEM 2.  DESCRIPTION OFPROPERTIES

 

AmericanMedical owns an approximately 45,000 square foot manufacturing facility on 5.2acres located at 5555 Bear Lane, Corpus Christi, Texas 78405, which houses itsmanufacturing and administration facilities.  A mortgage on this propertysecures the Company’s line of credit with ValueBank and the U.S. Small BusinessAdministration and a second mortgage secures the prior line of credit with BankOne that is currently in default.

 

AmericanMedical leases approximately 600 square feet of office space in Keltern,Germany.

 

ITEM 3.  LEGAL PROCEEDINGS

 

On November 6,2002 the Company announced that Biolase Technologies, Inc. had filed a patentinfringement lawsuit against the Company in Federal District Court for theCentral District of California. The lawsuit alleges, among other things, thatthe Company’s Cavilase laser, which was under development, infringed one ormore Biolase patents. The suit seeks, among other things, injunctive relief andan unspecified amount of actual and trebled damages.  The Company is seeking to negotiate a resolution, and has enteredinto a standstill agreement with Biolase. In the meantime, the Company has stopped development of the Cavilaselaser until this issue is resolved. The Company does not presently believe thatresolution of this lawsuit will have a material impact on the financialcondition or operating results of the Company.

 

OnApril 4, 2003 the Company became aware of a patent infringement lawsuit filedagainst the Company in the Federal District Court for the Central District ofCalifornia by Diodem LLC.  The Companyhas not been served in this lawsuit. The suit alleges that the Companyinfringed on four patents which Diodem LLC has succeeded to the rights of, andseeks, among other things, injunctive relief and an unspecified amount ofactual and trebled damages.  The Companydoes not believe that resolution of this lawsuit will have a material impact onthe financial condition or operating results of the Company and is seeking a dismissalof the allegations against the Company.

 

Asa result of the Company restructuring and moving out of 12 leased salesoffices, the Company has received notice of 3 lawsuits or judgments fromlandlords that total approximately $70,000. In addition, the Company has received notices of vendor collectionlawsuits that total approximately $200,000. The Company is negotiation with all parties, has reached a settlement insome cases, and expects to reach a settlement in the others.

 

ITEM 4.  SUBMISSION OFMATTERS TO VOTE OF SECURITY HOLDERS

 

Not applicable.

 

**PART II**

 

ITEM 5.                                                     MARKET FOR REGISTRANT’S COMMON STOCK ANDRELATED STOCKHOLDER MATTERS

 

TheCompany’s common stock was traded on The Nasdaq National Market through June 7,2002, and on the Nasdaq SmallCap Market after that date until March 26, 2003.  On that date Nasdaq delisted the Company’scommon stock because the market value of its publicly held shares had fallenbelow the minimum of $1,000,000, and its closing bid price had fallen below theminimum of $1.00 per share required for continued listing on the NasdaqSmallCap Market.  Since March 26, 2003, the Company’s common stock hasbeen quoted on the OTC Bulletin Board (Symbol: ADLI).  The following table sets forth certain informationas to the high and low sales prices per share of the Company’s common stock asreported by Nasdaq for each quarterly period during the last two years.

 

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|           |   | **Closing  Price** |   |
|----------------|--------|--------------------|--------|
|           |   | **High**           |   | **Low** |   |
| 2001           |   |               |   |   |   |
| First Quarter  |   | $                  | 1.94   |   | $ | 1.00 |   |
| Second Quarter |   | 1.69               |   | 1.00 |   |
| Third Quarter  |   | 1.55               |   | 0.56 |   |
| Fourth Quarter |   | 1.60               |   | 0.41 |   |
|           |   |               |   |   |   |
| 2002           |   |               |   |   |   |
| First Quarter  |   | $                  | 1.37   |   | $ | .53 |   |
| Second Quarter |   | .60                |   | .26 |   |
| Third Quarter  |   | .45                |   | .11 |   |
| Fourth Quarter |   | .28                |   | .05 |   |

 

Asof March 31, 2003, there were approximately 3,200 beneficial and record holdersof American Medical common stock based upon the records of the Company’s stocktransfer agent and security position listings.

 

TheBoard of Directors presently intends to retain all earnings to financeoperations and does not expect to authorize cash dividends in the foreseeablefuture.  The Company’s debt agreement also prevents the Company fromdeclaring or paying dividends without prior approval of the lender.  Anypayment of cash dividends in the future will depend upon earnings, capitalrequirements and other factors considered relevant by the Board of Directors.

 

ITEM6.  SELECTED FINANCIAL DATA

 

Thefollowing selected financial data, as of and for each of the five years endedDecember 31, 2002 is derived from the audited financial statements of theCompany.  Operating results for prior years are not necessarily indicativeof the results that may be expected for any other periods.  The datashould be read in conjunction with the financial statements and related notesincluded in this report and with Item 7 “Management’s Discussion and Analysisof Financial Condition and Results of Operations.”

 
|                                                  |   | **2002**           |   | **2001** |   | **2000** |   | **1999** |    | **1998** |   |
|-------------------------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|----------|---------|----------|--------|
|                                                  |   | **(in thousands)** |   |
| Operating Data:                                       |   |               |   |     |   |     |   |     |    |     |   |
| Net revenues                                          |   | $                  | 9,084  |     | $      | 14,689   |   | $        | 19,902  |     | $      | 24,370 |   | $ | 28,285 |   |
| Net income (loss)                                     |   | $                  | (7,044 | )(1)     | $      | (3,978   | )      | $        | (18,403 | )(2)     | $      | 392 |   | $ | 8,849 | (3) |
|                                                  |   |               |   |     |   |     |   |     |    |     |   |
| Net income (loss) per common share assuming  dilution |   | $                  | (0.98  | )        | $      | (0.57    | )      | $        | (2.53   | )        | $      | 0.05 |   | $ | 1.20 |   |
|                                                  |   |               |   |     |   |     |   |     |    |     |   |
| Weighted average number of common shares              |   | 7,181              |   | 6,923    |   | 7,284    |   | 7,446    |    | 7,375    |   |
|                                                  |   |               |   |     |   |     |   |     |    |     |   |
| Balance Sheet Data (at year end):                     |   |               |   |     |   |     |   |     |    |     |   |
| Total Assets                                          |   | $                  | 8,103  |     | $      | 14,196   |   | $        | 18,291  |     | $      | 40,348 |   | $ | 41,855 | (4) |
| Long-term obligations                                 |   | 4                  |   | 78       |   | 2,673    |   | 5,373    |    | 6,271    |   |
| Stockholders’ equity(5)                          |   | 1,934              |   | 8,626    |   | 13,002   |   | 32,018   |    | 31,809   |   |
| Working capital (deficit)                             |   | (1,515             | )      | 3,854    |   | 9,886    |   | 17,144   |    | 17,504   |   |

 

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1)                                      Includes impairment charges of $.6 millionrelated to the write off of ADL Japan goodwill and PAC Rim distribution rightsand a charge to increase the reserve for slow moving inventory by $2.1 millionand a write-off of demonstration inventory of $.4 million.

 

2)                                      Includes impairment charges of $9.2 millionrelated to intangibles associated with the air abrasion and camera productlines, a charge to increase the reserve for slow moving inventory by $.8million, a write off of demonstration inventory of $1.2 million related to thechange in the business model, and a deferred income tax valuation allowance of$5.6 million.

 

3)                                      Includes $5.1 million income tax benefitrelated to reversal of a previously recorded deferred tax asset valuationallowance.

 

4)                                      Includes goodwill of $4.2 million and otherassets of $3.9 million recorded in connection with the acquisitions of TheDental Probe and Dental Vision Direct in February 1998 and August 1998,respectively.

 

5)                                      No dividends were paid on the common stockduring the periods presented.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Thefollowing discussion and analysis should be read in conjunction with theconsolidated financial statements and the notes thereto included elsewhere inthis report. The discussion contains certain forward-looking statementsrelating to the Company’s anticipated future financial condition and operatingresults and its current business plans. In the future, the Company’s financialcondition and operating results could differ materially from those discussedherein and its current business plans could be altered in response to marketconditions and other factors beyond its control. Important factors that couldcause or contribute to such differences or changes include those discussedelsewhere in this report. See the disclosures under “Item 1-Business-ForwardLooking Statements.”

 

**Critical Accounting Policies**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires the Company to make estimatesand assumptions that affect amounts reported in the accompanying consolidatedfinancial statements and related footnotes. These estimates and assumptions areevaluated on an on-going basis based on historical developments, market conditions,industry trends and other information the Company believes to be reasonableunder the circumstances. There can be no assurance that actual results willconform to the Company’s estimates and assumptions, and that reported resultsof operations will not be materially adversely affected by the need to makeaccounting adjustments to reflect changes in these estimates and assumptionsfrom time to time. The following policies are those the Company believes to bethe most sensitive to estimates and judgments. The Company’s significantaccounting policies are more fully described in Note 1 to our consolidatedfinancial statements.

 

*Revenue Recognition*

 

TheCompany recognizes revenue when all of the following criteria are met:1) a contract or sales arrangement exists; 2) products have beenshipped, and if necessary installed, and title has been transferred or serviceshave been rendered; 3) the price of the products or services is fixed ordeterminable; 4) no further obligation exists on the part of the Company(other than warranty obligations); and 5) collectibility is reasonablyassured. The Company recognizes the related estimated warranty expense whentitle is transferred to the customer, generally upon shipment. The Companyrecognizes revenue on certain sales to two of its international distributorsunder terms that require shipment to a local independent warehouse. TheCompany’s policy is to include shipping and handling costs, net of the relatedrevenues, in costs of goods sold. Only the Company’s Anthos dental chairs andits networked camera systems require installation and revenue is not recordeduntil the installation is complete. There are no significant estimates orassumptions involved in determining the appropriate recognition of revenues.

 

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*Allowance for Doubtful Accounts*

 

TheCompany evaluates the collectibility of accounts receivable based on acombination of factors. In circumstances where the Company is aware of aspecific customer’s inability to meet its financial obligations (e.g.,bankruptcy filings, substantial down-grading of credit scores), the Companyrecords a specific reserve for bad debts against amounts due to reduce the netrecognized receivable to the amount reasonably believed to be collectible. Forall accounts not specifically analyzed, the Company recognizes reserves of 80%of all accounts over 90 days past due and 2% for all remaining accounts.If circumstances change (i.e., higher than expected defaults or an unexpected materialadverse change in a major customer’s ability to meet its financialobligations), the estimates of the recoverability of amounts due could bereduced by a material amount.

 

*Inventories—Slow Moving*

 

TheCompany’s reserve for slow moving inventory is evaluated periodically based onits current and projected sales and usage. Prior to the fourth quarter 2002, the Company’s inventory reserve wascalculated by comparing on hand quantities as of the measurement date to theprior twelve months’ sales.  The reservecalculation assumed that sales for each unit or part will not be less thansales for the prior twelve months.  Ifsales are significantly different than prior year’s sales for the unit or part,the reserve could be materially impacted. Changes to the reserves are included in costs of goods sold and have adirect impact on the Company’s financial position and result ofoperations.  The reserve is calculateddifferently for finished units than it is for parts.  For parts, when the on hand quantity exceeded the prior twelvemonths’ sales and usage, the excess inventory was calculated by subtracting thegreater of the prior twelve months’ sales and usage or a base quantity of 50from the quantity on hand.  This excesswas then 100% reserved.  The base quantityof 50 represented management’s determination of the minimum quantity of partsneeded to fulfill its service, repair, and warranty obligations.  All parts or units with less than twelvemonths of sales or usage history were excluded from the calculation.

 

Inthe fourth quarter of 2002, the Company changed certain assumptions it uses incomputing the inventory valuation allowance. The inventory reserve calculation remained the same for finished units,but was changed for parts.  For parts,the new policy assumes that three years of projected parts usage of any givenpart will not be subject to a valuation allowance.  Any parts on hand exceeding three years of projected usage aresubject to a 100% valuation allowance. For purposes of computing the valuation allowance at December 31, 2002,part usage was projected at 50% of 2002 part usage.

 

Theadoption of these new assumptions resulted in an increase in the valuationallowance of $1.4 million over what the allowance would have been under theprevious assumptions.  The valuationallowance could change materially, either up or down, if actual part usage infuture years is materially different than the usage projected at December 31,2002.

 

*Long Lived Assets—Impairment Testing*

 

TheCompany evaluates its property, plant, and equipment for impairment wheneverindicators of impairment exist. The Company follows the guidance of FASBStatement No. 121 *Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of*,and Statement No. 142 *Goodwill andOther Intangible Assets*, and projects future cash flows for therelated products and operating segments based on management’s best estimates oflikely future sales, less costs of goods sold and selling expenses based onhistorical data and perceived trends in the industry. These results are thencompared to the recorded value of the related assets and intangibles and ifless than the recorded value, an impairment charge is recognized. If actualresults are significantly worse than management’s estimates, the Company couldbe required to recognize an impairment, which could have a material adverseeffect on its financial position and results of operations.

 

*Changes in Management and Restructuring*

 

OnApril 24, 2002 Ben Gallant resigned his position as Chief Executive Officer andresigned from the Company’s Board of Directors. John Vickers, the Company’sChief Operating Officer, was appointed Chairman of the

 

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Boardand Interim Chief Executive Officer.  Asearch committee formed by the Board of Directors selected Roger Dartt as theCompany’s new Chief Executive Officer. Mr. Dartt joined the Company on June 1, 2002. On October 8, 2002 JohnVickers resigned his position as Chief Operating Officer and resigned from theCompany’s Board of Directors.     Mr. Dartt was then appointed to the Board ofDirectors and elected Chairman of the Board of Directors.  On October 23, 2002 Justin Grubbs resignedas the Company’s Chief Financial Officer, and on March 31, 2003 the employmentof John A. Miller, Executive Vice President – Sales, was terminated.

 

Due to the continued decline in sales, the Company re-evaluated itsbusiness model and adopted a restructuring plan in mid-June of 2002 designed tosignificantly reduce operating expenses. The Company decided to abandon the direct sales model it adopted inFebruary of 2000 and return to its previous business model of sellingdomestically through dental dealers.  Aspart of this new direction, the Company closed its remaining sales and servicebranches and reduced its number of employees by approximately 50%.  Restructuring expenses were comprisedprimarily of approximately $386,000 in severance expenses for terminated employees,approximately $174,000 in expenses related to the closure of the Company’sremaining sales and service branch offices and approximately $70,000 in vehiclelease terminations.  Of the totalinitial restructuring expenses of $708,000, approximately $630,242 is relatedto the Company’s U.S. operations and the remaining approximately $78,000 isrelated to the Company’s German subsidiary. As of December 31, 2002, $418,335 of restructuring charges remainunpaid.  The Company is also activelyimplementing other cost reducing policies and procedures.  The Company began reintroducing itself tothe dealers, and on October 3, 2002 announced that that it has entered into adealer distribution agreement with Sullivan-Schein Dental, part of the HenrySchein Company.  Sullivan-Schein Dentalis now promoting the Company’s dental products through their nationwide salesforce.

 

**Results of Operations**

 

Forthe year ended December 31, 2002, the Company’s revenues decreased 32% comparedto 2001.  This decrease in revenues wasprimarily due to three reasons. First, the weakened financial condition of theCompany during the first and second quarter necessitated a change in managementand restructuring of the Company’s sales and distribution, as reported in theQuarterly Report for the period ended September 30, 2002.  The Company in the first two quarters solddirectly to dentists through 12 sales offices and 34 sales employees.  In June, the Company re-evaluated itsbusiness model and adapted the restructuring plan described above, which wasdesigned to significantly reduce operating expenses.  The Company began reintroducing itself to the dental dealers andentered into a dealer distribution agreement with Sullivan-Schein Dental onOctober 3, 2002, who then began promoting the Company’s dental products throughtheir nationwide sales force. During this transition period, all productsexperienced revenue declines, domestically by $3.4 million and internationallyby $1.9 million.  Domestically, revenuesof Diolase declined by $800,000, UltraCam by $900,000, and Pulsemaster, KCP andPower Pac by $400,000 each.  Parts andservice revenues declined by $800,000 as overall sales declined.

 

Asecond reason for the decrease in revenues was that sales in 2002 were affectedby the fact that the Company designed and planned to introduce the Cavilase, ahard tissue laser.  Initially,engineering problems caused delays, and in November 2002 a patent infringementlawsuit by Biolase stopped all efforts on the product while the two companiesentered into negotiations to resolve the dispute.  This product withdrawal had an adverse effect on expectedrevenues from the sale of the Cavilase laser, as well as on the sale of relatedCompany products.  Revenues from theAnthos system increased by $477,000 as 2002 was its first full year after beingintroduced into the market in 2001.

 

Thethird reason for the revenue decrease was that international sales declined$1.8 million due to the loss of the Japanese distributor, reported earlier, andrestructuring of the Company’s German subsidiary to reduce operating lossesexperienced previously.

 

Forthe year ended December 31, 2001, the Company’s revenues decreased 26%compared to 2000. This decrease in revenues was primarily due to a 59% decreasein international revenues due to the expiration of a sales agreement with theCompany’s Japanese distributor. Our Japanese distributor opted not to renewthis agreement indicating that it had too much product in stock. The Company iscurrently seeking new distributor partners in Japan, however, due to adverseeconomic conditions in Japan, we have been unable to engage a new distributor.In 2000, sales to this distributor represented 21% of total revenues.  The decrease in revenues is alsoattributable to a decline in attendance at dental trade shows subsequent to theSeptember 11th terrorist attacks. The overall decline in revenues in 2001is

 

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attributableto all product lines, with the largest revenue decreases in the dental laser,intra-oral camera and plasma arc curing lines. These three product lines postedrevenue declines in 2001 of approximately $2.5 million, $1.3 million,and $1.1 million, respectively. The Company’s parts and service revenuescontinued to increase in 2001, growing by approximately $500,000. Theintroduction of the Anthos Systems dental chairs added approximately $250,000to revenues in 2001.

 

Grossprofit as a percentage of revenues was 12% for the year ended December 31, 2002compared to 41% in 2001 and 42% in 2000. The decreases in the margins are primarily due to increased discountingin both the domestic and international markets as a reaction to the decliningsales and general economic slowdown both domestically and abroad, decliningsales and increases in the inventory valuation allowance of $1,970,000 in 2002,$588,000 in 2001, and $873,000 in 2000, reported elsewhere in this report,which resulted in an increase in the reserve for slow moving inventory ofapproximately $2.5 million in 2002. This added reserve is applied to cost-of-goods and caused a decline ingross profit.  The decrease in grossprofit as a percentage of revenues in 2000 was due to the Company increasingits reserve for slow-moving inventory in response to the decline in the airabrasion and camera markets.

 

Selling,general and administrative expenses were $6,772,812 in 2002, $9,195,306 in 2001and $21,226,253 in 2000.  The Companyinstituted a restructuring program in June 2002.  The Company decided to abandon the direct sales model, close itssales and service branches and return to its previous business model of sellingdomestically through dental dealers. This restructuring resulted in reducing the number of employees from 91,at the beginning of the year, to 21 at year end.  This reduced payroll and benefits $1.9 million and general officeand occupancy costs $450,000.

 

Inaddition, as part of the transition in its business model in 2000, the Companydecided to discontinue its demonstration unit sales initiative. This changeresulted in the Company disposing of approximately $1.2 million indemonstration units that had been on loan to sales personnel, universities, andprospective customers that were no longer deemed saleable. This charge wasincluded in selling, general and administrative expenses in 2000.  Thedecrease in 2001 compared to 2000 reflects the non-recurring nature of theitems described above and reduced expenses resulting from the reorganization ofthe sales and service centers, which resulted in 2001 selling, general andadministrative expenses declining 15% compared to 2000, after elimination ofthe effects of the non-recurring items described above

 

Researchand development expenses were $595,156 in 2002, $796,424 in 2001 and $966,382in 2000.  The decreases are primarilydue to there being fewer projects in the research and development pipeline in2002 and the reduction in employees during 2002.  The decrease in 2001 reflects the substantial completion of twomajor projects in 2001, the Cavilase and the Anthos System dental chairs andunits. Historically, research and development expenses have been higher in theearlier stages of product development than in the finishing stages.

 

Restructuringexpenses for the year 2002 were $708,242, and arose out of the restructuringprogram implemented in June 2002 and described elsewhere in this report.

 

Otherincome was $17,927 for 2002, $118,237 for 2001 and $83,773 in 2000.  Interest expense increased from $158,909 in2001 to $281,957 in 2002 due in part to increased borrowing of $450,000 and anincrease in credit card balances.

 

TheCompany applied and received a tax refund in 2002 of $237,418 for NOL’s carriedback to 1996, 1997, 1998 and 1999.  In2001, the Company had no income tax expense. In 2000, the Company recorded a$4,744,000 charge for income tax. The Company’s income taxes at U.S. statutoryrates, differs from its recorded income tax expense primarily due tonondeductible goodwill amortization. With the losses incurred in 2000, 2001 and2002 and the continued downturn in the dental products industry, uncertaintiesexist as to the future realization of the deferred tax asset under the criteriaset forth under FASB Statement No. 109. Therefore, the Companyre-established the tax asset valuation allowance, which resulted in a non-cashtax expense of approximately $5.7 million in 2000. At December 31,2002, the Company had approximately $20 million of net operating losscarryforwards. These net operating loss carryforwards expire in various amountsin the years 2006 through 2021.

 

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**Liquidity and Capital Resources**

 

TheCompany’s operating activities used $836,036 in cash resources in 2002.  Cash used by operating activities in 2002was due largely to the net loss of $7,043,512 and accrued compensationexpenses.  These items were partiallyoffset by collections on accounts receivable, a decrease in inventory andaccrued restructuring costs.  This lossincluded non-cash charges totaling $3,306,208 consisting of depreciation andamortization expense, impairment charges for intangible assets, provision forslow-moving inventory, and stock-based compensation.  In addition, inventory and accounts receivable declined by$1,934,501 and $715,231, respectively from December 31, 2001 to December 31,2002.  As a result of the non-cashexpenses and declines in inventory and accounts receivable, the Company’s cashused in operations was $5,955,940 less than its net loss for 2002 of$7,043,512.  As the Company continuesits transition back to selling through dealers, cash flows could be adverselyimpacted due to increase in accounts receivable as more sales are made on openaccount.  The Company may requireadditional working capital to fund this transition.

 

TheCompany’s investing activities provided $3,364 in cash in 2002.  The cash provided by investing activities in2002 related primarily to proceeds from sales of assets, reduced by purchasesof property and equipment

 

TheCompany’s financing activities provided $794,836 in cash resources in 2002,representing amounts increased on the Company’s lines of credit by a net amountof $373,000 and the issuance of preferred and common stock totaling $421,836.

 

TheCompany has a $7,500,000 revolving line of credit with Bank One, which issecured by a pledge of the Company’s accounts receivable, inventory, equipment,patents, copyrights and trademarks. The Company is in default under the creditfacility and has been operating since November 6, 2001 under a ForbearanceAgreement with the bank, which increases the interest rate on the outstandingborrowings to the prime rate plus 4%, forbids additional borrowings, grants thebank a second mortgage on the Company’s real property, amends the borrowingbase and requires the Company to pay additional loan fees prior to the expirationof the forbearance period. If the Company maintains a tangible net worth of atleast $2,000,000 and otherwise complies with the terms of the ForbearanceAgreement, the bank has agreed to forego the exercise of its legal remediesunder the credit agreement until May 31, 2003. As consideration for the bank’sentering into the Forbearance Agreement, the Company granted the bank a warrantto purchase up to 721,510 shares of the Company’s common stock for five yearsat a price of $.11 per share, the market price on the date of grant. TheCompany made monthly principal payments to the bank of $30,000 from April 15through June 15, 2002, in addition to monthly interest payments, but has madeonly interest payments since that date. Should a new credit facility not be inplace by May 31, 2003, the Company would be forced to pay penalties aggregating$150,000, and the bank will have the right to accelerate the outstandingindebtedness and exercise its remedies under the related legal documents,including selling the Company’s assets to repay the outstanding indebtedness.As of December 31, 2002, the outstanding principal on this line of credit andrelated credit card debt amounted to $1.8 million, and the Company’s tangiblenet worth was below the $2,000,000 required by the Forbearance Agreement.  The bank has orally indicated to the Companythat it will continue to forbear in exercising its rights under the LoanAgreement until an amendment to the Forbearance Agreement is negotiated andexecuted.

 

OnOctober 3, 2001, in order to obtain working capital, the Company entered into a$750,000 line of credit with ValueBank Texas and the U.S. Small BusinessAdministration.  The loan is secured by a primary lien on the Company’sbuilding and real property and is personally guaranteed by Ben Gallant, whopreviously served as the Company’s Chairman and Chief Executive Officer. Mr. Gallant resigned from the Company on April 24, 2002, but remains aguarantor on this loan.  The Companygranted Mr. Gallant a warrant to purchase 75,000 shares of its common stock at$.40 per share, expiring April 23, 2007 for remaining a guarantor of the loanuntil it is repaid or refinanced.  Theloan was to expire on October 3, 2002, but has been extended by ValueBankthrough May 31, 2003.  The Companycontinues to pay interest at the prime rate plus 2%.  As of December 31,2002, the outstanding principal on this line of credit is $676,419.

 

To obtain additional financing, the Company sold an aggregate of300,000 shares of Series B Preferred Stock at a per share purchase price of$1.00 to certain of its directors through a private placement in 2002.  The shares have voting rights equal to twoand a half times the rights of common shares, a par value of $0.01, the rightto annual, cumulative dividends of 10%, a liquidation preference, and arefreely convertible at the option of the holder into shares

 

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of the Company’s common stock at a rate of two and a half shares ofcommon for each share of preferred and redeemable by either party afterSeptember 30, 2005.

 

In2000 and 2001, after comparing the book value of the Company’s shares of itscommon stock to the trading price, the Company’s Board of Directors authorizedand implemented a stock repurchase program pursuant to which it wouldrepurchase up to $1 million of its common stock. At the time ofauthorization, the Company was generating positive cash flows and the Board ofDirectors perceived the repurchase program to be in the best interests of the Company.During 2001, the Company repurchased 218,749 shares of its common stock,representing approximately $328,000 of the $1 million repurchaseauthorized by the Board of Directors. The repurchased shares constituteapproximately 3% of the total number of shares of common stock currentlyoutstanding. As sales continued to decline and cash flow became a concern, theBoard of Directors decided to cease repurchasing shares. The last date sharesof common stock were repurchased by the Company was July 17, 2001.  No shares of Common Stock were repurchasedin 2002.

 

TheCompany’s independent auditors have expressed substantial doubt about theCompany’s ability to continue as a going concern. While the Company hopes thatit will be successful in refinancing the defaulted line of credit, there can beno assurance that the Company will be able to accomplish this.  The Company is actively pursuing allavailable sources of financing and other corporate alternatives in order to repayits line of credit prior to the end of the forbearance period, including apotential merger or acquisition partner, the sale of selected assets, theplacement of equity or debt securities to private investors, factoringreceivables and a restructured credit facility.  The Company’s ability to continue operations is dependent on itsability to successfully refinance the defaulted line of credit or obtain asufficient amount of additional financing to repay the outstanding indebtednessand provide additional working capital. While the Company expects to be able torefinance the defaulted line of credit or otherwise obtain such additionalfinancing, there is no assurance that the Company will be successful in doingso.  If the Company is not able to repaythe outstanding indebtedness on the lines of credit, and the banks enforcetheir security interest in the Company assets securing the debt, the Companymay be forced to cease operations.

 

Ifthe Company seeks to raise additional funds through public or private debt orequity financings, any additional capital raised through the sale of equity maydilute a stockholder’s ownership percentage in the Company.  The issuance of 500,000 shares of commonstock in the second quarter of 2002 to a consultant upon exercise of stockoptions and 300,000 shares of Series B Preferred Stock convertible into commonstock in the third quarter of 2002 in a private placement could result indownward pressure on the trading price of the Company’s stock.

 

**New Accounting Standards and Disclosures**

 

InJuly 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146requires that a liability for a cost that is associated with an exit ordisposal activity be recognized when the liability is incurred. It supersedesthe guidance in EITF Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring).” Under EITF 94-3, an entity recognizeda liability for an exit cost on the date that the entity committed itself to anexit plan. Under SFAS 146, an entity’s commitment to a plan does not, byitself, create a present obligation that meets the definition of a liability.SFAS 146 also establishes that fair value is the objective for the initialmeasurement of the liability. SFAS 146 will be effective for exit or disposalactivities that are initiated after December 31, 2002, with early applicationencouraged.  The Company will follow theguidance of SFAS 146 for its restructuring plan implemented in 2002 anddiscussed at Note 1 to Consolidated Financial Statements, effective January 1,2003.

 

17

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InDecember 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation Transition and Disclosure, an amendment of FASB Statement No.123,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation,” toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Thetransition and annual disclosure provisions of SFAS No. 148 are effective forfiscal years ending after December 15*,*2002. In addition, SFAS No. 148amends the disclosure requirements of SFAS No. 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results. The Company will continue to account for stock-basedcompensation to employees under APB Opinion No. 25 and related interpretations.The Company adopted the disclosure requirements of this Statement as ofDecember 31, 2002.

 

ITEM 7A.                                           QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

Inthe normal course of business, the Company is subject to market risk fromchanges in foreign exchange rates and interest rates.

 

**Foreign Currency Exchange Rate Risk**

 

TheCompany sells its products in North America, Europe (primarily Germany), Japanand other foreign countries.  The Company is headquartered in the UnitedStates and has a German subsidiary. Except for revenues generated by its Germansubsidiary, the Company sells its products to its foreign customers in UnitedStates dollars.  As a result, the Company’s financial results could beaffected by factors such as changes in foreign currency exchange rates or weakeconomic conditions in the foreign markets in which the Company distributes itsproducts.  The Company’s operating results are primarily exposed tochanges in exchange rates between the United States dollar and the EuropeanUnion euro.

 

Ascurrency rates change, translation of the income statements of the Company’sGerman subsidiary into United States dollars affects year-to-year comparabilityof operating results.  The Company does not generally hedge operatingtranslation risks because cash flows from the German operations are generallyreinvested locally.

 

Asof December 31, 2002 and 2001, the Company’s net assets subject to foreigncurrency translation risk (defined as current assets less current liabilities)were $476,373 and $1,152,129, respectively.  The potential decrease in netassets from a hypothetical 10% adverse change in quoted foreign currencyexchange rates would be approximately $66,000 and $115,000 for 2002 and 2001,respectively.

 

**Interest Rate Risk**

 

TheCompany’s variable interest expense is sensitive to changes in the generallevel of United States interest rates. The Company’s debt represents borrowingsat the prime rate plus an applicable margin ranging from 2% to 4% and issensitive to changes in interest rates.  The Company does not generallyhedge interest rate risks. At December 31, 2002, the weighted average interestrate on the $2,332,075 debt was approximately 8.2%, and the fair value of thedebt approximates its carrying value.

 

TheCompany had interest expense of $227,329 in 2002, as compared to $158,909 in2001.  The potential increase in interest expense from a hypothetical 2%adverse change in interest rates, assuming the December 31, 2002 and 2001 debtwas outstanding for the entire year, would be approximately $47,000 and$40,000, for the year ended December 31, 2002 and 2001, respectively.

 

18

----

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEPENDENT AUDITOR’S REPORT

 

ToThe Stockholders and Board of Directors

AmericanMedical Technologies, Inc.

 

Wehave audited the accompanying consolidated balance sheet of American MedicalTechnologies, Inc. as of December 31, 2002 and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for the yearended December 31, 2002. Our audit also included the financial statementschedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of theCompany’s management.  Our responsibility is to express an opinion onthese financial statements and schedule based on our audit.

 

Weconducted our audit in accordance with auditing standards generally accepted inthe United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement.  An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audit provides a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofAmerican Medical Technologies, Inc. as of December 31, 2002 and theconsolidated results of its operations and its cash flows for the year thenended, in conformity with accounting principles generally accepted in theUnited States of America.  Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly, in allmaterial respects the information set forth therein.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern.  As discussed in Note 1 tothe consolidated financial statements, the Company has incurred a net loss of$7,043,512 for the year ended December 31, 2002, had negative working capitalof $1,515,252 at December 31, 2002 and was in technical default on certainfinancial covenants in connection with its credit agreements.  Thesematters raise substantial doubt about the Company’s ability to continue as agoing concern.  Management’s plans in regard to these matters aredescribed in Note 1 to the consolidated financial statements.  Theconsolidated financial statements do not include any adjustments to reflect thepossible future effect on the recoverability and classification of assets orthe amounts and classification of liabilities that may result from the outcomeof this uncertainty.

 

Asdiscussed in note 1 to the financial statements, effective January 1, 2002, theCompany adopted the provisions of Statement of Financial Accounting Standards(SFAS) No. 142 Goodwill and Other Intangible Assets.

 

 
| /s/ Hein + Associates LLP |   |
|---------------------------|--------|
| Hein + Associates llp     |
| Houston,  Texas           |
| March  15, 2003           |

 

19

----

 

**REPORT OF INDEPENDENT AUDITORS**

 

Tothe Stockholders and Board of Directors

AmericanMedical Technologies, Inc.

 

Wehave audited the accompanying consolidated balance sheet of American MedicalTechnologies, Inc. as of December 31, 2001 and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for the twoyears in the period ended December 31, 2001. Our audits also included thefinancial statement schedule listed in the index at Item 14(a). These financialstatements and schedule are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements and schedule based on our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofAmerican Medical Technologies, Inc. as of December 31, 2001 and theconsolidated results of its operations and its cash flows for the two years inthe period ended December 31, 2001, in conformity with accounting principlesgenerally accepted in the United States of America.  Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as a whole,presents fairly, in all material respects the information set forth therein.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern.  As discussed in Note 1 tothe consolidated financial statements, the Company was in technical default oncertain financial covenants in connection with its line of credit. Accordingly, the entire amount outstanding under the line of credit of approximately$1,750,000 has been classified as a current liability in the accompanyingconsolidated financial statements.  Management’s plans in regard to thesematters are described in Note 1 to the consolidated financialstatements. These matters raise substantial doubt about the Company’sability to continue as a going concern. The consolidated financialstatements do not include any adjustments to reflect the possible future effecton the recoverability and classification of assets or the amounts and classificationof liabilities that may result from the outcome of this uncertainty.

 

 
| /s/  Ernst & Young LLP |   |
|----------------------------|--------|
| Ernst  & Young LLP     |
| San  Antonio, Texas        |
| March  1, 2002             |

 

20

----

 

#### **Consolidated Balance Sheets**

 

**December31, 2002 and 2001**

 
|                                                                                                              |   | **2002**    |      | **2001**    |   |
|-------------------------------------------------------------------------------------------------------------------|--------|-------------|-----------|-------------|--------|
| ASSETS                                                                                                            |   |        |      |        |   |
| **Current  assets**:                                                                                              |   |        |      |        |   |
| Cash                                                                                                              |   | $           | 566,436   |        | $      | 579,667 |   |
| Accounts receivable, less allowance of $261,118 in  2002 and $176,000 in 2001                                     |   | 472,354     |      | 1,272,703   |   |
| Inventories                                                                                                       |   | 3,113,060   |      | 7,182,780   |   |
| Prepaid expenses and other current assets                                                                         |   | 197,577     |      | 310,669     |   |
| Total current assets                                                                                              |   | 4,349,427   |      | 9,345,819   |   |
|                                                                                                              |   |        |      |        |   |
| **Property  and equipment**, net                                                                                  |   | 1,753,997   |      | 2,090,970   |   |
|                                                                                                              |   |        |      |        |   |
| **Intangible  assets**, net:                                                                                      |   |        |      |        |   |
| Goodwill                                                                                                          |   | 1,971,427   |      | 2,175,238   |   |
| Other                                                                                                             |   | 27,847      |      | 584,403     |   |
|                                                                                                              |   | 1,999,274   |      | 2,759,641   |   |
|                                                                                                              |   |        |      |        |   |
| Total assets                                                                                                      |   | $           | 8,102,698 |        | $      | 14,196,430 |   |
|                                                                                                              |   |        |      |        |   |
| *LIABILITIES AND STOCKHOLDERS’  EQUITY*                                                                      |   |        |      |        |   |
| ***Current  Liabilities:***                                                                                       |   |        |      |        |   |
|                                                                                                              |   |        |      |        |   |
| *Accounts payable*                                                                                                |   | $           | 2,714,003 |        | $      | 2,751,270 |   |
| *Compensation and employee benefits*                                                                              |   | 81,538      |      | 262,703     |   |
| Accrued restructuring costs                                                                                       |   | 418,335     |      | —      |   |
| Other accrued liabilities                                                                                         |   | 318,728     |      | 518,916     |   |
|                                                                                                              |   |        |      |        |   |
| **Current  notes payable**                                                                                        |   | 2,332,075   |      | 1,959,075   |   |
| Total current liabilities                                                                                         |   | 5,864,679   |      | 5,491,964   |   |
|                                                                                                              |   |        |      |        |   |
| **Other  Non-Current Liabilities**                                                                                |   | 4,103       |      | 78,048      |   |
|                                                                                                              |   |        |      |        |   |
| **Series B  Preferred Stock**, $.01 par value, authorized 575,000 shares; 300,000  shares outstanding in 2002     |   | 300,000     |      | —      |   |
|                                                                                                              |   |        |      |        |   |
| **Contingencies** (Note 8)                                                                                        |   |        |      |        |   |
|                                                                                                              |   |        |      |        |   |
| **Stockholders’  equity**:                                                                                   |   |        |      |        |   |
| Series A Preferred stock, $.01 par value,  authorized 10,000,000 shares;none outstanding                          |   | —      |      | —      |   |
| Common stock, $.04 par value, authorized  12,500,000 shares; Outstanding: 7,362,348 in 2002 and 6,862,348 in 2001 |   | 294,497     |      | 274,497     |   |
| Additional paid-in capital                                                                                        |   | 41,717,178  |      | 41,615,342  |   |
| Warrants and options                                                                                              |   | 927,046     |      | 801,000     |   |
| Accumulated deficit                                                                                               |   | (40,546,865 | )         | (33,503,353 | )      |
| Foreign currency translation                                                                                      |   | (457,940    | )         | (561,068    | )      |
| Total stockholders’ equity                                                                                   |   | 1,933,916   |      | 8,626,418   |   |
|                                                                                                              |   |        |      |        |   |
| Total liabilities and stockholders’ equity                                                                   |   | $           | 8,102,698 |        | $      | 14,196,430 |   |

# ** **

# **21**

# ****

# ** **

# **ConsolidatedStatements of Operations**

 

**For YearsEnded December 31, 2002, 2001 and 2000**

 

 
|                                 |   | **2002**   |       | **2001**   |       | **2000**    |       |
|--------------------------------------|--------|------------|------------|------------|------------|-------------|------------|
| **Revenues**                         |   | $          | 8,943,076  |       | $          | 14,473,051  |       | $ | 19,685,222 |   |
|                                 |   |       |       |       |       |        |       |
| **Royalties**                        |   | 141,370    |       | 215,635    |       | 217,024     |       |
|                                 |   | 9,084,446  |       | 14,688,686 |       | 19,902,246  |       |
| **Cost of  Sales**                   |   | 8,025,136  |       | 8,634,543  |       | 11,130,379  |       |
| Gross profit                         |   | 1,059,310  |       | 6,054,143  |       | 8,771,867   |       |
|                                 |   |       | ** ** |       | ** ** |        | ** ** |
| **Cost and  Expenses**:              |   |       | ** ** |       | ** ** |        | ** ** |
| Selling, general and administration  |   | 6,772,812  |       | 9,195,306  |       | 21,226,253  |       |
| Research and development             |   | 595,156    |       | 796,424    |       | 966,382     |       |
| Restructuring costs                  |   | 708,242    |       | —     |       | —      |       |
| Loss from operations                 |   | (7,016,900 | )          | (3,937,587 | )          | (13,420,768 | )          |
|                                 |   |       |       |       |       |        |       |
| **Other  Income (Expenses)**:        |   |       |       |       |       |        |       |
| Other income                         |   | 17,927     |       | 118,237    |       | 83,773      |       |
| Interest expense                     |   | (281,957   | )          | (158,909   | )          | (322,475    | )          |
| Loss before income taxes             |   | (7,280,930 | )          | (3,978,259 | )          | (13,659,470 | )          |
| Income tax (benefit) expense         |   | (237,418   | )          | —     |       | 4,744,000   |       |
| Net loss                             |   | $          | (7,043,512 | )          | $          | (3,978,259  | )          | $ | (18,403,470 | ) |
|                                 |   |       |       |       |       |        |       |
| Net loss per share                   |   | $          | (0.98      | )          | $          | (0.57       | )          | $ | (2.53 | ) |
|                                 |   |       |       |       |       |        |       |
| Net loss per share assuming dilution |   | $          | (0.98      | )          | $          | (0.57       | )          | $ | (2.53 | ) |

# ** **

# **22**

# ****

#  

# **ConsolidatedStatements of Stockholders’ Equity**

 

**For YearsEnded December 31, 2002, 2001 and 2000**

 
|                          |   | **Common Stock** |   | **Additional  Paid-In  Capital** |    | **Warrants  and  Options** |   | **Accumulated  Deficit** |   | **Foreign  Currency  Translation** |    | **Total** |   |
|-------------------------------|--------|------------------|--------|----------------------------------|---------|----------------------------|--------|--------------------------|--------|------------------------------------|---------|-----------|--------|
| **Shares**                    |   | **Amount**       |
| Balance  at December 31, 1999 |   | 7,367,847        |   | $                                | 294,717 |                       | $      | 42,312,636               |   | $                                  | 801,000 |      | $      | (11,121,624 | ) | $ | (268,346 | ) | $ | 32,018,383 |   |
| Net  loss for 2000            |   | —           |   | —                           |    | —                     |   | —                   |   | (18,403,470                        |    | —    |   | (18,403,470 | ) |
| Foreign  currency translation |   | —           |   | —                           |    | —                     |   | —                   |   | —                             |    | (223,548  | )      | (223,548 | ) |
| Comprehensive  loss           |   | —           |   | —                           |    | —                     |   | —                   |   | —                             |    | —    |   | (18,627,018 | ) |
| Repurchase  of common stock   |   | (286,750         | )      | (11,470                          | )       | (378,028                   | )      | —                   |   | —                             |    | —    |   | (389,498 | ) |
|                          |   |             |   |                             |    |                       |   |                     |   |                               |    |      |   |   |   |
| Balance  at December 31,2000  |   | 7,081,097        |   | 283,247                          |    | 41,934,608                 |   | 801,000                  |   | (29,525,094                        | )       | (491,894  | )      | 13,001,867 |   |
| Net  loss for 2001            |   | —           |   | —                           |    | —                     |   | —                   |   | (3,978,259                         | )       | —    |   | (3,978,259 | ) |
| Foreign  currency translation |   | —           |   | —                           |    | —                     |   | —                   |   | —                             |    | (69,174   | )      | (69,174 | ) |
| Comprehensive  loss           |   | —           |   | —                           |    | —                     |   | —                   |   | —                             |    | —    |   | (4,047,433 | ) |
| Repurchase  of common stock   |   | (218,749         | )      | (8,750                           | )       | (319,266                   | )      | —                   |   | —                             |    | —    |   | (328,016 | ) |
|                          |   |             |   |                             |    |                       |   |                     |   |                               |    |      |   |   |   |
| Balance  at December 31,2001  |   | 6,862,348        |   | 274,497                          |    | 41,615,342                 |   | 801,000                  |   | (33,503,353                        | )       | (561,068  | )      | 8,626,418 |   |
| Net  loss for 2002            |   | —           |   | —                           |    | —                     |   | —                   |   | (7,043,512                         | )       | —    |   | (7,043,512 | ) |
| Foreign  currency translation |   | —           |   | —                           |    | —                     |   | —                   |   | —                             |    | 103,128   |   | 103,128 |   |
| Comprehensive  loss           |   | —           |   | —                           |    | —                     |   | —                   |   | —                             |    | —    |   | (6,940,384 | ) |
| Issuance  of common stock     |   | 500,000          |   | 20,000                           |    | 101,836                    |   | —                   |   | —                             |    | —    |   | 121,836 |   |
| Warrant  and option grants    |   | —           |   | —                           |    | —                     |   | 126,046                  |   | —                             |    | —    |   | 126,046 |   |
|                          |   |             |   |                             |    |                       |   |                     |   |                               |    |      |   |   |   |
| Balance  at December 31, 2002 |   | 7,362,348        |   | $                                | 294,497 |                       | $      | 41,717,178               |   | $                                  | 927,046 |      | $      | (40,546,865 | ) | $ | (457,940 | ) | $ | 1,933,916 |   |

 

23

----

 

**ConsolidatedStatements of Cash Flows**

 
|                                                                                      |   | **2002**  |       | **2001**  |       | **2000**   |       |
|-------------------------------------------------------------------------------------------|--------|-----------|------------|-----------|------------|------------|------------|
| **Operating  Activities**:                                                                |   |      | ** ** |      | ** ** |       | ** ** |
| Net loss                                                                                  |   | $         | (7,043,512 | )         | $          | (3,978,259 | )          | $ | (18,403,470 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |   |      |       |      |       |       |       |
| Depreciation                                                                              |   | 342,839   |       | 423,102   |       | 502,624    |       |
| Amortization                                                                              |   | 106,536   |       | 486,473   |       | 1,466,407  |       |
| Impairment of intangible assets                                                           |   | 615,924   |       | 213,181   |       | 9,233,907  |       |
| Deferred taxes                                                                            |   | —    |       | —    |       | 4,744,000  |       |
| Provision for slow-moving inventory                                                       |   | 2,114,863 |       | 588,026   |       | 873,298    |       |
| Provision of doubtful accounts                                                            |   | 85,118    |       | —    |       | 42,000     |       |
| Net loss on disposal of assets                                                            |   | 127,555   |       | 1,541     |       | 1,243,887  |       |
| Compensation expense related to warrant and option grants                                 |   | 126,046   |       | —    |       | —     |       |
| Changes in operating assets and liabilities:                                              |   |      |       |      |       |       |       |
| Accounts receivable                                                                       |   | 715,231   |       | 2,095,015 |       | 1,282,575  |       |
| Inventories                                                                               |   | 1,934,501 |       | (886,251  | )          | 864,588    |       |
| Prepaid expenses and other current assets                                                 |   | 113,092   |       | 109,741   |       | 111,056    |       |
| Accounts payable                                                                          |   | (37,267   | )          | 1,119,524 |       | (689,035   | )          |
| Compensation and employee benefits                                                        |   | (181,165  | )          | (23,605   | )          | 68,535     |       |
| Accrued restructuring costs                                                               |   | 418,335   |       | —    |       | —     |       |
| Other accrued liabilities                                                                 |   | (200,188  | )          | (183,904  | )          | 130,164    |       |
| Other non-current liabilities                                                             |   | (73,944   | )          | (94,916   | )          | (50,314    | )          |
| Net cash provided by (used in) operating activities                                       |   | (836,036  | )          | (130,332  | )          | 1,420,222  |       |
|                                                                                      |   |      |       |      |       |       |       |
| **Investing  Activities**:                                                                |   |      |       |      |       |       |       |
| Purchases of property, plant and equipment                                                |   | (37,533   | )          | (130,821  | )          | (399,981   | )          |
| Proceeds from sales of assets                                                             |   | 40,897    |       | 1,300     |       | 1,000      |       |
| Collections on notes receivable                                                           |   | —    |       | 224,785   |       | 531,407    |       |
| Increase in intangible assets                                                             |   | —    |       | (60,164   | )          | (173,544   | )          |
| Net cash provided by (used in) investing activities                                       |   | 3,364     |       | 35,100    |       | (41,118    | )          |
|                                                                                      |   |      |       |      |       |       |       |
| **Financing  Activities**:                                                                |   |      |       |      |       |       |       |
| Payments on note payable                                                                  |   | (90,000   | )          | (754,344  | )          | (2,650,000 | )          |
| Proceeds from note payable                                                                |   | 463,000   |       | 213,419   |       | —     |       |
| Issuance of preferred stock                                                               |   | 300,000   |       | —    |       | —     |       |
| Issuance of common stock                                                                  |   | 121,836   |       | —    |       | —     |       |
| Repurchase of common stock                                                                |   | —    |       | (328,019  | )          | (389,498   | )          |
|                                                                                      |   |      |       |      |       |       |       |
| Net cash provided by (used in) financing activities                                       |   | 794,836   |       | (868,944  | )          | (3,039,498 | )          |
|                                                                                      |   |      |       |      |       |       |       |
| Decrease in cash                                                                          |   | (37,836   | )          | (964,176  | )          | (1,660,394 | )          |
| Effect of exchange rates on cash                                                          |   | 24,605    |       | (5,904    | )          | (20,506    | )          |
| Decrease in cash                                                                          |   | (13,231   | )          | (970,080  | )          | (1,680,900 | )          |
|                                                                                      |   |      |       |      |       |       |       |
| **Cash**,  at beginning of year                                                           |   | 579,667   |       | 1,549,747 |       | 3,230,647  |       |
|                                                                                      |   |      |       |      |       |       |       |
| **Cash**, at end of year                                                                  |   | $         | 566,436    |      | $          | 579,667    |       | $ | 1,549,747 |   |

 

24

----

 

**Notes to Financial Statements**

 

**1.****                                     ****Organizationand Significant Accounting Policies**

 

*Principles of Consolidation* — American Medical Technologies, Inc. (the“Company”) develops, manufactures, markets and sells high technology productsprimarily for dentistry.  The consolidated financial statements includethe accounts and operations of the Company and its subsidiary.  Allintercompany transactions and balances have been eliminated.

 

*Going Concern* — The Company’s financial statements areprepared using accounting principles generally accepted in the United States ofAmerica applicable to a going concern, which contemplates the realization ofassets and the satisfaction of liabilities in the normal course of business.The Company incurred a net loss of $7,043,512 for the year ended December 31,2002, had negative working capital of $1,515,252 at December 31, 2002, and wasin technical default under its credit agreements.  These matters raise substantial doubt about the Company’s abilityto continue as a going concern.

 

TheCompany is exploring other sources of financing and other sources of funds,including the sale of selected assets, and has substantially reduced itsoperating costs.  There can be noassurance that the Company will be successful in finding other sources offunding or be able to sell selected assets and that any such amounts will besufficient to meet the Company’s debt obligations and operation requirements.

 

*Restructuring Costs* — In the second quarter of 2002 the Companyadopted a restructuring plan that called for the closure of its remaining salesand service branches and significant reductions in the number of employees inmid-June.  As part of the restructuring,a total of 49 employees were terminated, comprised of field sales and servicepersonnel, manufacturing employees and administrative personnel.  As of September 30, 2002 the Company hadvacated all of its former sales and service centers.  Costs such as employee severance, lease termination costs andother exit costs have been recorded as of the date the restructuring plan wasfinalized.  Other restructuring costsinclude approximately $5,000 in accrued attorney’s fees related to thetermination of several of the Company’s German employees, approximately $34,000in non-cash expenses associated with the write-off of abandoned leaseholdimprovements and property due to the closure of the branch offices andapproximately $18,500 of forfeited security deposits related to the abandonedoffices.  None of the expenses accruedas part of the restructuring have any benefit for future operations.  Certain costs were estimated based on thelatest available information.  Thebreakdown of the Company’s restructuring costs follows:

 
|                           |   | **Employee  Severance** |    | **Office  Lease  Terminations** |   | **Vehicle  Lease  Terminations** |   | **Other** |    | **Total** |   |
|--------------------------------|--------|-------------------------|---------|---------------------------------|--------|----------------------------------|--------|-----------|---------|-----------|--------|
| Adoption of restructuring plan |   | $                       | 402,363 |                            | $      | 218,056                          |   | $         | 136,366 |      | $      | 70,894 |   | $ | 827,679 |   |
| Additions (Reductions)         |   | (16,167                 | )       | (44,173                         | )      | (66,109                          | )      | 7,012     |    | (119,437  | )      |
| Non-cash expenses              |   | —                  |    | (33,525                         | )      | —                           |   | —    |    | (33,525   | )      |
| Payments                       |   | (140,905                | )       | (34,680                         | )      | (9,903                           | )      | (70,894   | )       | (256,382  | )      |
| Balance at December 31, 2002   |   | $                       | 245,291 |                            | $      | 105,678                          |   | $         | 60,354  |      | $      | 7,012 |   | $ | 418,335 |   |
|                                |        |                         |         |                                 |        |                                  |        |           |         |           |        |  |  |  |  |  |  |

 

*Inventories* — Inventories are stated at the lower ofcost, determined by the first-in first-out method, or market.  At December31, inventories consisted of the following:

 
|                              |   | **2002**  |      | **2001**  |   |
|-----------------------------------|--------|-----------|-----------|-----------|--------|
| Finished goods                    |   | $         | 1,566,978 |      | $      | 2,719,012 |   |
| Raw materials, parts and supplies |   | 1,546,082 |      | 4,463,768 |   |
|                              |   | $         | 3,113,060 |      | $      | 7,182,780 |   |

 

Inventoriesat December 31, 2002 and 2001 are net of valuation allowances of $4,243,345 and$2,273,039, respectively.  The increasein the valuation allowance for 2002 is attributable to the continued decline insales which resulted in uncertainty as to whether or not significant portionsof the Company’s inventory costs will be recoverable and a change in certainassumptions upon which the valuation allowance is determined.

 

25

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TheCompany changed certain assumptions it uses in computing the inventoryvaluation allowance during the fourth quarter of 2002.  The prior assumptions relating to thevaluation allowance for parts were as follows:

 

•                  Parts purchased in the current year are notsubject to a valuation allowance.

•                  Parts in inventory in excess of the precedingyear’s usage were considered 100% obsolete; and,

•                  The first 50 parts of any given part, whichwas intended to represent five years of projected usage, were not subject to avaluation allowance without regard to historical usage.

 

Thenew assumptions assume that three years of projected part usage of any givenpart will not be subject to a valuation allowance.  Any parts on hand exceeding three years of projected usage aresubject to a 100% valuation allowance for purposes of computing the valuationallowance at December 31, 2002.  Partusage was projected at 50 percent of 2002 part usage.

 

Theadoption of these new assumptions resulted in an increase in the valuationallowance of $1.4 million over what the allowance would have been under theprevious assumptions.  

 

*Property and Equipment* – Property and equipment are stated at costless accumulated depreciation.  Depreciation is computed by thestraight-line method over the estimated useful lives of the related assets,which range from three to thirty-nine years.  At December 31, 2002property and equipment consisted of the following:

 
|                           |   | **2002**   |      | **2001**   |   |
|--------------------------------|--------|------------|-----------|------------|--------|
| Building and improvements      |   | $          | 1,560,699 |       | $      | 1,567,939 |   |
| Machinery and equipment        |   | 1,410,699  |      | 1,446,614  |   |
| Office furniture and computers |   | 915,297    |      | 864,522    |   |
| Vehicles                       |   | —     |      | 119,316    |   |
|                           |   | 3,886,695  |      | 3,998,391  |   |
| Accumulated depreciation       |   | (2,132,698 | )         | (1,907,421 | )      |
|                           |   | $          | 1,753,997 |       | $      | 2,090,970 |   |

 

*Revenue Recognition**–* The Company recognizes revenue when all ofthe following criteria are met: 1) a contract or sales arrangement exists;2) products have been shipped, and if necessary installed, and title hasbeen transferred or services have been rendered; 3) the price of the productsor services is fixed or determinable; 4) no further obligation exists onthe part of the Company (other than warranty obligations); and5) collectibility is reasonably assured. The Company recognizes the related estimated warranty expense when titleis transferred to the customer, generally upon shipment.  The Companyrecognizes revenue on certain sales to two of its largest distributors underterms that require shipment to a local independent warehouse. The Company’spolicy is to include shipping and handling costs, net of the related revenues,in costs of goods sold.

 

*Intangible Assets* — Intangible assets consist of goodwill,patents, distribution rights and other intangibles and are stated at cost lessaccumulated amortization.  The Company amortized goodwill over periodsranging from 15 to 25 years, patents and distribution agreements over theirrespective lives, and other intangible assets over lives ranging from 5 to 17years.  Accumulated amortization was $3,639,271 and $3,544,828 at December31, 2002 and 2001, respectively. Goodwill amortization expense amounted to approximately $368,000 in 2001and $476,000 in 2000.

 

In June 2001, the Financial Accounting Standards Board issued Statement No. 142, “Goodwill and OtherIntangible Assets” (“SFAS 142”). SFAS 142 changes the way companies account for goodwill and intangible assets. Effective January 1, 2002, the Company adopted the provisionsof SFAS 142. Under SFAS142, goodwill and intangible assetsthat have indefinite useful lives are no longer subject to amortization over their estimated useful life.Rather, goodwill and intangible assetsthat have indefinite useful livesare tested at least

 

26

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annually for impairment. SFAS 142provides specific guidance fortesting goodwill for impairment. Intangibleassets with finite useful lives will continue to be amortized over their usefullives. Goodwill was tested for impairmentduring the first quarter of 2002 and again in the first quarter of2003 using the prescribed two-step process. The first step is an impairment screening which compares an estimation of the fair value of a reportingunit with the reporting unit’s carryingvalue. The Company has determinedthat its reporting units are tobe defined as the two operating segments - Domestic and International.  Ifthe fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired, and as a result, the second step of the impairment test is not required. If required, the second step compares thefair value of reporting unitgoodwill with the carrying amount of that goodwill. If the Company determines that reporting unitgoodwill is impaired, the fair valueof reporting unit goodwill would be measured by comparing thediscounted expected future cash flows of the reporting unit with the carrying value of reportingunit goodwill. Any excess in thecarrying value of reporting unitgoodwill to the estimated fair valuewould be recognized in expense at the time of the recognition. The goodwill of a reporting unit will be tested between the annual testif an event occurs or circumstances change that would likely reduce the fairvalue of a reporting unit below itscarrying amount.

 

The following table shows the effect of the adoptionof SFAS 142 on the Company’s net loss for the years ended December 31, 2001 and2000 as if SFAS had been adopted on January 1, 2000.

 
|                                                                |   | **2001** |       | **2000** |   |
|---------------------------------------------------------------------|--------|----------|------------|----------|--------|
| Net loss – as reported                                         |   | $        | (3,978,259 | )        | $      | (18,403,470 | ) |
| Amortization of goodwill                                            |   | 368,465  |       | 475,867  |   |
| Adjusted net loss                                                   |   | $        | (3,609,794 | )        | $      | (17,927,603 | ) |
|                                                                |   |     |       |     |   |
| Net loss per common share – as reported, primary  and dilutive |   | $        | (0.57      | )        | $      | (2.53 | ) |
| Amortization                                                        |   | 0.05     |       | 0.07     |   |
| Adjusted net loss per common share, primary and  dilutive           |   | $        | (.52       | )        | $      | (2.46 | ) |

 

In2000, the continued decline in sales of the Company’s KCP and camera units, andthe underperformance of the dental probe units, served as indicators ofimpairment for certain intangible assets associated with the previousacquisitions of Texas Airsonics, Inc., Dental Vision Direct, Inc., and DentalProbe, Inc.  Following the guidance of FASB Statement No. 121 Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed Of, the Companyprojected future cash flows for these products based on management’s bestestimates of likely future sales, less costs of goods sold and sellingexpenses.  The undiscounted future cash flows were less than the recordedvalue of the assets related to these product lines, indicating impairment existed. To determine the amount of the impairment, the fair value of the related assetswas determined by comparing the future cash flows discounted at a rate of 8% tothe fair value of the related long-lived assets based on current market sellingprices of similar equipment.   The Company recorded an impairment ofapproximately $9.2 million to reduce the carrying value of the long-livedassets associated with the aforementioned acquisitions to the fair value ofthose assets.  This impairment expense is included in Selling, General andAdministrative Expenses in the Statement of Operations. In the fourth quarterof 2001, the Company decided not to enter the digital dental x-raymarket.  The Company had previously purchased the rights to a digital dentalx-ray technology for $252,500.  With the decision not to enter the digitaldental x-ray market at this time, the unamortized balance of $213,181 relatedto this asset was determined to be impaired.

 

During2001, the Company’s distributorship agreement with its Japanese supplierexpired.  The Company has been unable tosecure a distributor for its products in Japan.  As a result, sales in Japan were nominal in 2002.  As of December 31, 2002, the Company hadintangible assets with a carrying value of $615,924 relating to various rightsto distribute products to Japan.  Thesecircumstances are indicative of an impairment of these intangible assets.  During the fourth quarter of 2002, theseintangible assets were charged off in accordance with FASB Statement No. 144,Accounting for the *Impairment or Disposal ofLong-Lived Assets*, which was adopted on January 1, 2002.  This impairment expense is included inSelling, General and Administrative Expenses in the Statement of Operations.

 

27

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TheCompany has amortizable intangible assets as of December 31, 2002 and 2001 asfollows:

 
|                          |   | **2002** |    | **2001**  |   |
|-------------------------------|--------|----------|---------|-----------|--------|
| Patents, trademarks and other |   | $        | 118,751 |      | $      | 118,751 |   |
| Distribution agreements       |   | —   |    | 1,000,000 |   |
|                          |   | 118,751  |    | 1,118,751 |   |
|                          |   |     |    |      |   |
| Accumulated amortization      |   | (90,904  | )       | (534,348  | )      |
|                          |   |     |    |      |   |
|                          |   | $        | 27,847  |      | $      | 584,403 |   |

 

Amortizationexpense related to finite lived intangibles was $106,536, $118,008 and $118,008for the years ended December 31, 2002, 2001 and 2000, respectively.  The following table shows the estimatedamortization expense in total for all finite lived intangible assets to beincurred over the next five years.

 
| **Year Ended December 31,** |   |   |   |   |
|-----------------------------|--------|--------|--------|--------|
| 2003                        |   |   | $      | 6,540  |   |
| 2004                        |   |   | 6,540  |   |
| 2005                        |   |   | 6,540  |   |
| 2006                        |   |   | 6,540  |   |
| 2007                        |   |   | 1,687  |   |
|                             |        |        |        |        |  |

 

*Net Income (Loss) Per Share* — The following table sets forth thecomputation for basic and diluted earnings per share:

 
|                                                                                                                          |   | **2002**  |       | **2001**  |   | **2000**   |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-----------|------------|-----------|--------|------------|--------|
| Numerator:                                                                                                                    |   |      |       |      |   |       |   |
| Net loss                                                                                                                      |   | $         | (7,043,512 | )         | $      | (3,978,259 | )      | $ | (18,403,470 | ) |
|                                                                                                                          |   |      |       |      |   |       |   |
| Numerator for basic and diluted earnings per share  – incomeavailable to  common stockholders after  assumed conversions |   | $         | (7,043,512 | )         | $      | (3,978,259 | )      | $ | (18,403,470 | ) |
|                                                                                                                          |   |      |       |      |   |       |   |
| Denominator:                                                                                                                  |   |      |       |      |   |       |   |
| Denominator for basic earnings per share –  weighted-averagedshares                                                      |   | 7,180,978 |       | 6,923,347 |   | 7,284,443  |   |
|                                                                                                                          |   |      |       |      |   |       |   |
| Effect of dilutive securities:                                                                                                |   |      |       |      |   |       |   |
| Employee stock options                                                                                                        |   | —    |       | —    |   | —     |   |
| Warrants                                                                                                                      |   | —    |       | —    |   | —     |   |
|                                                                                                                          |   |      |       |      |   |       |   |
| Dilutive potential common shares                                                                                              |   | —    |       | —    |   | —     |   |
| Denominator for diluted earnings per share –  adjusted weighted-average shares after assumedconversions                  |   | 7,180,978 |       | 6,923,347 |   | 7,284,443  |   |
|                                                                                                                          |   |      |       |      |   |       |   |
| Net loss per share                                                                                                            |   | $         | (.98       | )         | $      | (.57       | )      | $ | (2.53 | ) |
| Net loss per share assuming dilution                                                                                          |   | $         | (.98       | )         | $      | (.57       | )      | $ | (2.53 | ) |

 

28

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*Comprehensive Income (Loss)***— The financial Accounting Standards Board’sStatement 130, *Reporting ComprehensiveIncome* requires foreign currency translation adjustments to beincluded, along with net income (loss), in comprehensive income (loss). For 2002, 2001, and 2000 the Company’s Comprehensive Loss was $(6,940,384),($4,047,433) and ($18,627,018), respectively.

 

Thecomponents of Accumulated Other Comprehensive Loss are as follows:

 
|                                     |   | **2002** |     | **2001** |   | **2000** |   |
|------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Foreign currency translation adjustments |   | $        | 103,128  |     | $      | (69,174  | )      | $ | (223,548 | ) |
| Accumulated other comprehensive income   |   | $        | (457,940 | )        | $      | (561,068 | )      | $ | (491,894 | ) |

 

*Translation of Non-U. S. Currency Amounts* — For non-U.S. subsidiaries that operate ina local currency environment, assets and liabilities are translated to U.S.dollars at the current exchange rates at the balance sheet date.  Incomeand expense items are translated at average rates of exchange prevailing duringthe year.  Translation adjustments are accumulated in a separate componentof stockholders’ equity.

 

*Stock Based Compensation* — The Company grants stock options for afixed number of shares to employees with an exercise price no less than thefair value of the shares at the date of grant.  The Company accounts forstock option grants in accordance with APB Opinion No. 25, Accounting for StockIssued to Employees, and, accordingly, recognizes no compensation expense forthe stock option grants.

 

*Advertising* — The Company expenses advertising costs asincurred.  Advertising expense approximated $251,000, $134,000, and$867,000 in 2002, 2001, and 2000, respectively.

 

*Use of Estimates*— Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes.  Actual results could differ from these estimates.  The determination of the Company’s valuationallowance for inventory is a significant estimate that could change materiallyover the next year should circumstances affecting the Company’s current salesvolumes change.

 

*Fa*i*r Value of Financial Instruments***— The fair value of the Company’s cash,accounts receivable, note receivable and accounts payable approximates theircarrying value due to their short term nature. The fair value of the Company’s note payable to the bank approximatesits carrying value due to the variable market interest rate.

 

*New Accounting Standards and Disclosures* — In July 2002, the Financial AccountingStandards Board (FASB) issued SFAS No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities.” SFAS 146 requires that a liability for acost that is associated with an exit or disposal activity be recognized whenthe liability is incurred. It supersedes the guidance in EITF Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring).” Under EITF 94-3, an entity recognized a liability for an exitcost on the date that the entity committed itself to an exit plan. Under SFAS146, an entity’s commitment to a plan does not, by itself, create a presentobligation that meets the definition of a liability. SFAS 146 also establishesthat fair value is the objective for the initial measurement of the liability.SFAS 146 will be effective for exit or disposal activities that are initiatedafter December 31, 2002, with early application encouraged.  The Company will follow the guidance of SFAS146 for its restructuring plan implemented in 2002 and discussed at Note 1effective January 1, 2003.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation Transition and Disclosure, an amendment of FASB Statement No.123,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation,” toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Thetransition and annual disclosure provisions of SFAS No. 148 are effective forfiscal years ending after December 15*,*2002. In addition, SFAS No. 148amends the disclosure requirements of SFAS No. 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results. The Company will continue to account for stock-basedcompensation to employees under APB Opinion No. 25 and related interpretations.The Company adopted the disclosure requirements of this Statement as ofDecember 31, 2002.

 

29

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**2.****                                     ****Agreementswith Related Parties**

 

*Ben Gallant* — On April 24, 2002 Ben Gallant resigned hispositions with the company as Chief Executive Officer and Chairman of Board.The Company granted Mr. Gallant a warrant to purchase 75,000 shares of itscommon stock at $.40 per share, expiring April 23, 2007 for remaining aguarantor of a loan until it is repaid or refinanced. The fair value of thesewarrants was estimated at the date of grant using a Black-Scholes optionpricing model with the following assumptions: risk-free interest rate of 4.5%;dividend yield of 0%; volatility factors of the expected market price over theexpected life of the warrant of three years. The calculated fair value of thewarrant was $16,500, which was recorded as expense on the date of the grant.

 

**3.****                                     ****Lineof Credit and Other Non-Current Liabilities**

 

TheCompany has a $7,500,000 revolving line of credit with Bank One, which issecured by a pledge of the Company’s accounts receivable, inventory, equipment,patents, copyrights and trademarks. The Company is in default under the creditfacility and has been operating since November 6, 2001 under a ForbearanceAgreement with the bank, which increases the interest rate on the outstandingborrowings to the prime rate plus 4%, forbids additional borrowings, grants thebank a second mortgage on the Company’s real property, amends the borrowingbase and requires the Company to pay additional loan fees prior to theexpiration of the forbearance period. If the Company maintains a tangible networth of at least $2,000,000 and otherwise complies with the terms of theForbearance Agreement, the bank has agreed to forego the exercise of its legalremedies under the credit agreement until May 31, 2003. As consideration forthe bank’s entering into the Forbearance Agreement, the Company granted thebank a warrant to purchase up to 721,510 shares of the Company’s common stockfor five years at a price of $.11 per share, the market price on the date ofgrant. The Company made monthly principal payments to the bank of $30,000 fromApril 15 through June 15, 2002, in addition to monthly interest payments, buthas made only interest payments since that date.  Should a new credit facility not be in place by May 31, 2003, theCompany would be forced to pay penalties aggregating $150,000, and the bankwill have the right to accelerate the outstanding indebtedness and exercise itsremedies under the related legal documents, including selling the Company’sassets to repay the outstanding indebtedness. As of December 31, 2002, theoutstanding principal on this line of credit amounted to $1,655,656 and theCompany’s tangible net worth was below the $2,000,000 required by theForbearance Agreement.

 

Thefair value of the warrants issued to Bank One was estimated at the date ofgrant using a Black-Scholes option pricing model with the followingassumptions: risk-free interest rate of 1.84%; divided yield of 0%; volatilityfactors of the expected market price over the estimated life of the warrant ofthree years.  The calculated fair valueof the warrant was $54,629 which is recorded as interest expense over the termof the forbearance period.

 

OnOctober 3, 2001, in order to obtain working capital, the Company entered into a$750,000 line of credit with ValueBank Texas and the U.S. Small BusinessAdministration.  The loan is secured by a primary lien on the Company’sbuilding and real property and is personally guaranteed by Ben Gallant, whopreviously served as the Company’s Chairman and Chief Executive Officer. Mr. Gallant resigned from the Company on April 24, 2002, but remains aguarantor on this loan.  The Companygranted Mr. Gallant a warrant to purchase 75,000 shares of its common stock at$.40 per share, expiring April 23, 2007 for remaining a guarantor of the loanuntil it is repaid or refinanced (Note 2). The loan was to expire on October 3, 2002, but has been extended byValueBank through May 31, 2003.  TheCompany continues to pay interest at the prime rate plus 2%.  As ofDecember 31, 2002, the outstanding principal on this line of credit is$676,419.

 

TheCompany leases certain manufacturing equipment under capital leases. Equipment related to capital leases had a total cost of $286,179 at December31, 2002 and 2001 and accumulated amortization of $262,331 and $205,096 atDecember 31, 2002 and 2001, respectively. Amortization related to assets heldunder capital leases is included in depreciation expense.  In connectionwith the restructuring described in Note 1, the Company terminated or abandonedall office space and vehicle leases during 2002. Future minimum lease paymentsunder capital leases as of December 31, 2002 are as follows:

 

30

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| **Year Ended December 31,**       |   | **Capital********Leases** |   |
|-----------------------------------|--------|---------------------------|--------|
| 2003                              |   | $                         | 49,818 |   |
|                              |   |                      |   |
| Less amount representing interest |   | (2,455                    | )      |
|                              |   |                      |   |
|                              |   | $                         | 47,363 |   |

 

Capitallease obligations at December 31, 2002 consisted of the following:

 
| Current portion                 |   | $     | 43,260 |   |
|---------------------------------|--------|-------|--------|--------|
| Non-current portion             |   | 4,103 |   |
| Total capital lease obligations |   | $     | 47,363 |   |

 

Rentalexpense for operating leases in 2002, 2001 and 2000 approximated $223,000,$497,000 and $344,000, respectively.

 

TheCompany paid interest of approximately $213,000, $170,000 and $322,000 in 2002,2001 and 2000, respectively.

 

**4.****                                     ****PreferredStock, Stockholders’ Equity, Stock Options and Warrants**

 

TheCompany authorized a new series of up to 575,000 shares of Series B PreferredStock at a per share price of $1 per share. The holders of Series B PreferredStock are entitled to (i) receive an annual cumulative dividend at the rate of10%, payable prior to dividends on any shares of common stock, (ii) two andone-half times the number of votes to which a holder of the same number ofcommon shares is entitled, (iii) receive two and one-half shares of commonstock for each share of Series B Preferred Stock tendered for conversion afterSeptember 30, 2005, (iv) require the Company to redeem shares of Series BPreferred Stock at the original sale price, plus accrued cumulative dividends,upon prior notice beginning after September 30, 2005, or in the event of amerger, sale of a majority of the stock or sale of substantially all the assetsof the Company, and (v) receive a liquidation preference equal to the originalsale price plus accrued cumulative dividends, prior to the rights of holders ofthe Series A Preferred Stock and the common stock. On September 30, 2007, alloutstanding shares of Series B Preferred Stock are redeemable at the originalsale price plus accrued cumulative dividends.

 

Asof December 31, 2002, the Company has issued 300,000 shares of Series BPreferred Stock to persons who were officers, directors or accredited investorsin a private placement. No underwriter was used in the sale. The shares wereoffered by management to a limited number of informed investors in atransaction exempt from registration as a private placement under Section 4(2)of the Securities Act of 1933 and Regulation D promulgated thereunder. Thepurchase price was $1.00 per share.

 

TheCompany has authorized three stock option plans for employees, officers,directors, consultants and other key personnel.  As of December 31, 2002,the Nonqualified Stock Option Plan has options outstanding to acquire 158,490shares; the Long-Term Incentive Plan has options outstanding to acquire 569,367shares; and the Stock Option Plan for Employees has options outstanding toacquire 1,565 shares.

 

TheCompany also authorized and granted options to acquire 81,392 shares of itscommon stock, exclusive of the above described plans, none of which were everexercised prior to their expiration in 2000.

 

31

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TheCompany has elected to follow Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (APB 25) and related Interpretationsin accounting for its employee stock options because, as discussed below, thealternative fair value accounting provided for under FASB Statement No. 123,“Accounting for Stock-Based Compensation,” requires use of option valuationmodels that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company’s employee stockoptions equals the market price of the underlying stock on the date of grant,no compensation expense is recognized.

 

Proforma information regarding net income and earnings per share is required byStatement 123 and SFAS 148 and has been determined as if the Company hadaccounted for its employee stock options under the fair value method of thatStatement.  The fair value for these options was estimated at the date ofgrant using a Black-Scholes option pricing model with the following weighted-averageassumptions for 2000, 2001 and 2002, respectively: risk-free interest rate of6.5%, 4.4% and 1.84%; dividend yield of 0%; volatility factors of the expectedmarket price of the Company’s common stock of .771, .913 and .999 and aweighted-average expected life of the option of three to five years.

 

TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options that have no vesting restrictions and are fullytransferable.  In addition, option valuation models require the input ofhighly subjective assumptions including the expected stock pricevolatility.  Because the Company’s employee stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models do notnecessarily provide a reliable single measure of the fair value of its employeestock options.

 

Forpurposes of pro forma disclosures, the estimated fair value of the option isamortized to expense over the options’ vesting period.  The Company’s proforma information follows:

 
|                                                                                      |   | **2002** |       | **2001** |   | **2000**   |   |
|-------------------------------------------------------------------------------------------|--------|----------|------------|----------|--------|------------|--------|
| Net loss, as reported                                                                     |   | $        | (7,043,512 | )        | $      | (3,978,259 | )      | $ | (18,403,470 | ) |
| Net loss per share, primary and dilutive, as  reported                                    |   | $        | (.98       | )        | $      | (0.57      | )      | $ | (2.53 | ) |
| Net loss per share, primary and dilutive, as  reported                                    |   |     |       |     |   |       |   |
|                                                                                      |   |     |       |     |   |       |   |
| Stock based employee compensation, net of tax  effects, included in netloss,  as reported |   | $        | —     |     | $      | —     |   | $ | — |   |
|                                                                                      |   |     |       |     |   |       |   |
| Stock based compensation, net of tax effects,  under the fair value method                |   | $        | 16,568     |     | $      | 16,672     |   | $ | 25,947 |   |
|                                                                                      |   |     |       |     |   |       |   |
| Pro forma net loss                                                                        |   | $        | (7,060,080 | )        | $      | (3,994,931 | )      | $ | (18,429,417 | ) |
| Pro forma net loss per share, primary and dilutive                                        |   | $        | (.98       | )        | $      | (0.58      | )      | $ | (2.53 | ) |

 

32

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Stockoption activity is summarized as follows:

 
|                             |   | **Number********of shares** |   | **Weighted-  Average Exercise  Price** |   |
|----------------------------------|--------|-----------------------------|--------|----------------------------------------|--------|
| Outstanding at December 31, 1999 |   | 655,264                     |   | $                                      | 5.06   |   |
| Exercisable at December 31, 1999 |   | 535,598                     |   | 6.19                                   |   |
|                             |   |                        |   |                                   |   |
| Options granted                  |   | 401,248                     |   | 1.38                                   |   |
| Options exercised                |   | —                      |   | —                                 |   |
| Options canceled                 |   | (359,621                    | )      | 4.49                                   |   |
|                             |   |                        |   |                                   |   |
| Outstanding at December 31, 2000 |   | 696,891                     |   | 3.24                                   |   |
| Exercisable at December 31, 2000 |   | 309,786                     |   | 5.49                                   |   |
|                             |   |                        |   |                                   |   |
| Options granted                  |   | 76,560                      |   | 0.61                                   |   |
| Options exercised                |   | —                      |   | —                                 |   |
| Options canceled                 |   | (104,736                    | )      | 4.64                                   |   |
|                             |   |                        |   |                                   |   |
| Outstanding at December 31, 2001 |   | 668,715                     |   | 2.12                                   |   |
| Exercisable at December 31, 2001 |   | 215,112                     |   | 3.93                                   |   |
|                             |   |                        |   |                                   |   |
| Options granted                  |   | 750,000                     |   | .35                                    |   |
| Options exercised                |   | (500,000                    | )      | .36                                    |   |
| Options canceled                 |   | (189,293                    | )      | 2.81                                   |   |
|                             |   |                        |   |                                   |   |
| Outstanding at December 31, 2002 |   | 729,422                     |   | 1.28                                   |   |
| Exercisable at December 31, 2002 |   | 467,915                     |   | 2.25                                   |   |
|                                  |        |                             |        |                                        |        |  |

 

Theweighted-average fair value of options granted during 2002, 2001 and was $.14,$.43 and $.92, respectively.

 

Asummary of options outstanding as of December 31, 2002 is as follows:

 
| **Range of Exercise  Prices** |   | **Number of Options  Outstanding** |   | **Number of Options  Exercisable** |   | **Weighted Average  Exercise Price** |   | **Weighted Average  Remaining  Contractual Life** |   |
|-------------------------------|--------|------------------------------------|--------|------------------------------------|--------|--------------------------------------|--------|---------------------------------------------------|--------|
| 10.75                         |   | 312                                |   | 312                                |   | $                                    | 10.75  |                                              | 0.96   |   |
| 5.38 —9.50               |   | 118,237                            |   | 118,237                            |   | 5.60                                 |   | 4.33                                              |   |
| 2.00 —4.00               |   | 15,193                             |   | 15,193                             |   | 3.48                                 |   | 1.81                                              |   |
| 0.60 —1.38               |   | 345,680                            |   | 271,673                            |   | 1.21                                 |   | 7.91                                              |   |
| .33                           |   | 250,000                            |   | 62,500                             |   | .33                                  |   | 9.50                                              |   |
|                               |        |                                    |        |                                    |        |                                      |        |                                                   |        |  |

 

33

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Warrantactivity is summarized as follows:

 
|                             |   | **Number********of shares** |   | **Weighted-  Average Exercise  Price** |   |
|----------------------------------|--------|-----------------------------|--------|----------------------------------------|--------|
| Outstanding at December 31, 1999 |   | 748,250                     |   | $                                      | 5.21   |   |
| Exercisable at December 31, 1999 |   | 748,250                     |   | 5.21                                   |   |
|                             |   |                        |   |                                   |   |
| Warrants issued                  |   | —                      |   | —                                 |   |
| Warrants exercised               |   | —                      |   | —                                 |   |
| Warrants canceled                |   | —                      |   | —                                 |   |
|                             |   |                        |   |                                   |   |
| Outstanding at December 31, 2000 |   | 748,250                     |   | 5.21                                   |   |
| Exercisable at December 31, 2000 |   | 748,250                     |   | 5.21                                   |   |
| Warrants issued                  |   | —                      |   | —                                 |   |
| Warrants exercised               |   | —                      |   | —                                 |   |
| Warrants canceled                |   | —                      |   | —                                 |   |
|                             |   |                        |   |                                   |   |
| Outstanding at December 31, 2001 |   | 748,250                     |   | 5.21                                   |   |
| Exercisable at December 31, 2001 |   | 748,250                     |   | 5.21                                   |   |
|                             |   |                        |   |                                   |   |
| Warrants issued                  |   | 796,510                     |   | .11                                    |   |
| Warrants exercised               |   | —                      |   | —                                 |   |
| Warrants canceled                |   | (50,000                     | )      | 4.13                                   |   |
|                             |   |                        |   |                                   |   |
| Outstanding at December 31, 2002 |   | 1,494,760                   |   | 2.54                                   |   |
| Exercisable at December 31, 2002 |   | 1,494,760                   |   | 2.54                                   |   |
|                                  |        |                             |        |                                        |        |  |

 

Therewere no warrants granted in 2000 or 2001. The weighted average fair value of warrants granted during 2002 was$.09.  Exercise prices for warrantsoutstanding as of December 31, 2002 ranged from $0.11 to $5.50.  The weighted-average remaining contractuallife of those warrants is 2.9 years.

 

**5.****                                     ****Transferof License**

 

InJune 1997, the Company agreed to the transfer of the license for the sales ofdental lasers and air abrasive instruments from Sunrise Technologies, Inc.(“Sunrise”) to Lares Co. (“Lares”) in connection with the sale of Sunrise’sdental business to Lares.  The Company received a payment of $275,000 anda note receivable for $100,000, due in June 2000.  The Company will alsocontinue to receive royalties on air abrasive and dental lasers fromLares.  The Company received Sunrise stock with a market value of $81,192in 2001.  This amount was applied against the note and the remaining amountwas deemed uncollectible.

 

**6.****                                     ****IncomeTaxes**

 

AtDecember 31, 2002, the Company had approximately $20,000,000 million of netoperating loss carryforwards (“NOL’s”) for federal income tax purposes, whichexpire in various amounts in the years 2006 through 2022.

 

Deferredtaxes represent the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andamounts used for income tax purposes.  Significant components of theCompany’s deferred tax assets are as follows:

 

34

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|                                        |   | **2002**   |   | **2001**   |   |
|---------------------------------------------|--------|------------|--------|------------|--------|
| Allowance for doubtful accounts             |   | $          | 89,000 |       | $      | 60,000 |   |
| Inventory valuation reserves                |   | 1,496,000  |   | 807,000    |   |
| Depreciation                                |   | —     |   | 326,000    |   |
| Compensation and employee benefits          |   | 28,000     |   | 50,000     |   |
| Alternative minimum tax credit carryforward |   | —     |   | 236,000    |   |
| Warranty reserve                            |   | 39,000     |   | 54,000     |   |
| NOL’s                                  |   | 6,806,000  |   | 5,222,000  |   |
| Other                                       |   | 140,000    |   | 250,000    |   |
| Deferred tax asset                          |   | 8,598,000  |   | 7,005,000  |   |
| Deferred tax liabilities                    |   | (68,000    | )      | (54,000    | )      |
| Net deferred tax asset                      |   | 8,530,000  |   | 6,951,000  |   |
| Valuation allowance                         |   | (8,530,000 | )      | (6,951,000 | )      |
| Net deferred tax asset                      |   | $          | — |       | $      | — |   |

 

The Company’s income tax provision included thefollowing:

 
|                      |   | **2002** |     | **2001** |   | **2000**   |   |
|---------------------------|--------|----------|----------|----------|--------|------------|--------|
| Current expense (benefit) |   | $        | (237,418 | )        | $      | —     |   | $ | — |   |
| Deferred expense          |   | —   |     | —   |   | 4,744,000  |   |
|                      |   | $        | (237,418 | )        | $      | **—** |   | $ | 4,744,000 |   |

 

The following is a reconciliation of the Company’sexpected income tax expense (benefit) based on statutory rates to the actualexpense (benefit):

 
|                                              |   | **2002**  |       | **2001**  |   | **2000**   |   |
|---------------------------------------------------|--------|-----------|------------|-----------|--------|------------|--------|
| Income taxes (benefit) at US statutory rate       |   | $         | (2,475,516 | )         | $      | (1,353,000 | )      | $ | (4,644,000 | ) |
| Non-deductible amortization and expenses          |   | 258,000   |       | —    |   | 3,248,000  |   |
| Deferred tax asset valuation allowance adjustment |   | 1,579,000 |       | 1,302,000 |   | 5,649,000  |   |
| Other                                             |   | 401,098   |       | 51,000    |   | 491,000    |   |
|                                              |   | $         | (237,418   | )         | $      | —     |   | $ | 4,744,000 |   |

 

Uncertainties exist as to the future realization ofthe deferred tax asset under the criteria set forth under FASB Statement No.109.  The change in the valuationallowance during 2002 of $1,579,000 reflects the increase in NOLs during 2002.

 

The Company paid no federal income tax during 2000,2001 or 2002.

 

The Company’s investment in its foreign subsidiaryis considered to be permanently invested and no provision for U.S. federal andstate income taxes on these translation adjustments has been provided.

 

**7.****             ****Operationsby Industry Segment, Geographic Area and Significant Customers**

 

SFASNo. 131, Disclosures about Segments of an Enterprise and Related Information, establishedstandards for reporting information about operating segments in annualfinancial statements and requires selected information

 

35

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aboutoperating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products andservices, and geographic areas.  Operating segments are defined ascomponents of the enterprise about which separate financial information isavailable that is evaluated regularly by the chief operating decision maker, ordecision making group, in deciding how to allocate resources and in assessingperformance.

 

TheCompany develops, manufactures, markets and sells high technology dentalproducts, such as air abrasive equipment, lasers, curing lights and intra oralcameras.  Domestically, prior to the adoption of its new business model inFebruary 2000, the Company maintained a nationwide sales force to generatesales and assist its dealer network.  Subsequent to the adoption of thenew business model, the Company sold its products direct to the consumerthrough its nationwide network of sales and service branch offices. In thesecond quarter of 2002, the Company closed its sales and service branches in arestructuring plan and renewed contracts with one of its previousdistributors.  Internationally, with theexception of a small number of personnel in Germany, the Company has notmaintained its own sales force and continues to sell its products throughregional dental distributors.  The reportable segments are reviewed andmanaged separately because selling techniques and market environments differfrom selling domestically versus selling through international distributornetworks.  The remaining revenues of the Company, which are reported as“Other”, include industrial products and royalty income.

 

Theaccounting policies of the business segments are consistent with thosedescribed in Note 1.

 

36

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|                                                                    |   | **2002**   |       | **2001**   |   | **2000**    |   |
|-------------------------------------------------------------------------|--------|------------|------------|------------|--------|-------------|--------|
| Revenues:                                                               |   |       |       |       |   |        |   |
| Domestic                                                                |   | $          | 7,075,806  |       | $      | 10,430,196  |   | $ | 10,646,392 |   |
| International                                                           |   | 1,531,260  |       | 3,459,628  |   | 8,339,465   |   |
|                                                                    |   | $          | 8,607,066  |       | $      | 13,889,824  |   | $ | 18,985,857 |   |
|                                                                    |   |       |       |       |   |        |   |
| Reconciliation of revenues:                                             |   |       |       |       |   |        |   |
| Total segment revenues                                                  |   | $          | 8,607,066  |       | $      | 13,889,824  |   | $ | 18,985,857 |   |
| Other                                                                   |   | 477,380    |       | 798,862    |   | 916,389     |   |
| Total revenues                                                          |   | $          | 9,084,446  |       | $      | 14,688,686  |   | $ | 19,902,246 |   |
|                                                                    |   |       |       |       |   |        |   |
| Operational earnings (loss):                                            |   |       |       |       |   |        |   |
| Domestic                                                                |   | $          | (3,990,009 | )          | $      | (733,584    | )      | $ | (2,085,460 | ) |
| International                                                           |   | (125,258   | )          | 660,017    |   | 3,088,126   |   |
|                                                                    |   | $          | (4,115,267 | )          | $      | (73,567     | )      | $ | 1,002,666 |   |
|                                                                    |   |       |       |       |   |        |   |
| Reconciliation of operational earnings (loss) to  loss from operations: |   |       |       |       |   |        |   |
| Total segment operational earnings (loss)                               |   | $          | (4,115,267 | )          | $      | (73,567     | )      | $ | 1,002,666 |   |
| Other operational earnings                                              |   | 302,562    |       | 493,946    |   | 563,755     |   |
| Research and development expenses                                       |   | (595,156   | )          | (796,424   | )      | (966,382    | )      |
| Administrative expenses                                                 |   | (2,609,039 | )          | (3,561,542 | )      | (14,024,076 | )      |
| Loss from operations                                                    |   | $          | (7,016,900 | )          | $      | (3,937,587  | )      | $ | (13,420,768 | ) |
|                                                                    |   |       |       |       |   |        |   |
| International revenues by country:                                      |   |       |       |       |   |        |   |
| Japan                                                                   |   | $          | 38,548     |       | $      | 1,260,492   |   | $ | 3,890,017 |   |
| Germany                                                                 |   | 538,339    |       | 831,472    |   | 1,601,502   |   |
| Italy                                                                   |   | 290,848    |       | 909,520    |   | 1,269,305   |   |
| Canada                                                                  |   | 436,118    |       | 71,772     |   | 315,343     |   |
| Other                                                                   |   | 227,407    |       | 146,611    |   | 914,528     |   |
|                                                                    |   | $          | 1,531,260  |       | $      | 3,219,867   |   | $ | 7,990,695 |   |
|                                                                    |   |       |       |       |   |        |   |
| Long lived assets (excluding deferred Taxes):                           |   |       |       |       |   |        |   |
| Domestic                                                                |   | $          | 1,752,217  |       | $      | 4,834,723   |   | $ | 5,769,335 |   |
| International                                                           |   | 1,782      |       | 15,888     |   | 19,747      |   |
|                                                                    |   | $          | 1,753,997  |       | $      | 4,850,611   |   | $ | 5,789,082 |   |

 

Salesto one customer for certain Asian and Pacific markets, primarily Japan, wereapproximately <1%, 9% and 21% of total revenues in 2002, 2001 and 2000,respectively.

 

**8.****                                     ****Litigationand Contingencies**

 

InJuly 2000, the Company filed a lawsuit in the District Court of Nueces County,Texas against Henry Schein, Inc. to recover approximately $293,000 of past duereceivables plus interest and collection cost.  In September 2001, theCompany settled this lawsuit out of court.  Under the provisions of thesettlement agreement, the terms of the settlement cannot be disclosed.

 

TheCompany is a defendant in a patent infringement lawsuit.  The Company is seeking to negotiate aresolution to the lawsuit.  The Companydoes not presently believe that resolution of this lawsuit will have a materialimpact on the financial condition or operating results of the Company.

 

37

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**9.****                                     ****SelectedQuarterly Financial Data (unaudited****)**

 
|                                         |   | **March 31********2002** |      | **June 30********2002** |   | **September  30********2002** |   | **December 31********2002** |      |
|----------------------------------------------|--------|--------------------------|-----------|-------------------------|--------|-------------------------------|--------|-----------------------------|-----------|
| Revenues                                     |   | $                        | 3,054,971 |                    | $      | 2,712,343                     |   | $                           | 2,043,057 |   | $ | 1,274,075 |   |
| Gross profit                                 |   | 1,272,965                |      | 898,208                 |   | 496,847                       |   | (1,608,710                  | )(2)      |
| Net income (loss)                            |   | (788,746                 | )         | (2,601,634              | )      | (857,674                      | )      | (2,795,458                  | )         |
| Net income (loss) per share assumingdilution |   | (.11                     | )         | (.35                    | )      | (.12                          | )      | (.40                        | )         |
|                                              |        |                          |           |                         |        |                               |        |                             |           |  |  |  |  |

 
|                                         |   | **March 31********2001** |      | **June 30********2001** |   | **September  30********2001** |   | **December 31********2001** |      |
|----------------------------------------------|--------|--------------------------|-----------|-------------------------|--------|-------------------------------|--------|-----------------------------|-----------|
| Revenues                                     |   | $                        | 4,495,770 |                    | $      | 3,697,468                     |   | $                           | 2,605,788 |   | $ | 3,889,600 |   |
| Gross profit                                 |   | 2,512,819                |      | 1,718,325               |   | 1,107,738                     |   | 715,261                     | (1),(2)   |
| Net income (loss)                            |   | 104,833                  |      | (806,699                | )      | (1,209,242                    | )      | (2,067,151                  | )         |
| Net income (loss) per share assumingdilution |   | $                        | 0.01      |                    | $      | (0.12                         | )      | $                           | (0.18     | ) | $ | (.28 | ) |

 

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(1)          Inthe fourth quarter of each year the Company conducts its annual physicalinventory count.  Any expense or lossbooked in association with the physical count is booked in the fourthquarter.  Inventory count adjustmentscharged to expense in the fourth quarter were approximately $50,000 and$360,000 in 2002 and 2001, respectively.

 

(2)          Inthe fourth quarter of 2001, the Company reassessed its slow moving inventoryreserve based on the events of September 11 and the decline in revenues.  This reassessment resulted in a charge ofapproximately $650,000 in the fourth quarter of 2001.  In the fourth quarter of 2002, the Company reassessed its slowmoving inventory in light of the continued decline in revenues.  This reassessment resulted in a charge ofapproximately $1.9 million in the fourth quarter of 2002.

 

38

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ITEM 9.                            CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

The Company’s change in itsauditors was reported on Form 8-K/A filed with the SEC on March 6, 2003.

 

**PART III**

 

ITEM10.                      DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT

 

**Directors**

 

The following sets forthinformation with respect to the members of the Board of Directors regarding theindividual’s age, principal occupation, other business experience, otherdirectorships and term of service as a director of the Company.

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **Age** |   | **Year  First  Became Director** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|----------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |    |   |                             |   |
| ROGER W. DARTT  Mr. Dartt was selected by the Board of Directors of the Company to serve as  the Company’s Chief Executive Office effective on June 1, 2002.  Prior to that date Mr. Dartt served as the  President of Mediatrix International, Inc., a management consulting company  that specialized in providing and implementing business growth strategies,  mergers and acquisitions, turnaround restructuring and financial support to  companies.  In the past five years,  Mr. Dartt had several short-term assignments as a turnaround specialist in  companies engaged in electronic circuit board manufacturing, specialty retail  sales, commercial glass manufacturing and in the supply of durable medical  equipment to the home healthcare industry.   Prior to forming Mediatrix, Mr. Dartt was president, chief executive  officer or chief operating officer of eight companies in the medical, dental  electronic and specialty retail markets, including subsidiaries of Bristol  Meyers and PepsiCo. |   | 61      |   | 2002                             |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |    |   |                             |   |
| GARY A. CHATHAM  Mr. Chatham currently serves as senior consultant to Valls Group, an  international trade services provider, a position he has held since November  1990.  His main responsibilities include major international business  projects, warehouse development, materials handling systems and management  and information systems. From 1981 to 1990, he operated Gary Chatham and  Associates, a project planning and management consulting firm.   Mr.  Chatham  was also a director of  Texas   Airsonics,  Inc. from 1988 until its merger with the Company in August  1996.                                                                                                                                                                                                                                                                                                                                                                                                                |   | 58      |   | 1999                             |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |    |   |                             |   |
| WAYNE A. JOHNSON, II  Mr. Johnson is currently general counsel for T-NETIX, Inc., a company engaged  in providing specialized telephone call processing and other services to the  corrections industry.  Mr. Johnson joined T-NETIX in December 2000 and  served as Vice-President, General Counsel and Secretary until November 2002,  when he became Executive Vice-President.   Prior to joining that company, Mr. Johnson was in the private practice  of law.  During his career he has  served as founder, officer, director and owner of various public and private  businesses.                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 54      |   | 1996                             |   |

 

39

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| WILLIAM D. MARONEY  Mr. Maroney is a private investor.  From January 1987 to December 1996,  Mr. Maroney had been in private law practice in New York City, New  York.  Prior thereto, Mr. Maroney was a senior tax counsel for ITT  Corporation. Mr. Maroney previously served as a director of the Company from  May 1990 to May 1993.                                                                                                                                    |   | 65     |   | 1997   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |
| CHARLES A. NICHOLS  Mr. Nichols is a pharmacist at Southside Pharmacy, Inc. in Corpus Christi,  Texas, where he has been the President since 1954.  Mr. Nichols was one  of the founders of Texas Airsonics, Inc. and served as a director from that  company’s inception in 1982 until its acquisition by the Company in July  1996.  He also served as treasurer for Texas Airsonics from 1989 to  1996.                                                             |   | 78     |   | 1984   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |
| WILLIAM S. PARKER  Mr. Parker was appointed Senior Vice President — Dental of the Company in  August 1998.  He is chiefly responsible for the Company’s product  development.  He had been a consultant, then an employee of the Company  in charge of product development, since 1991.                                                                                                                                                                           |   | 57     |   | 1999   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |
| BERTRAND R. WILLIAMS, SR  Mr. Williams has been the chief executive officer of Global Focus Marketing  and Distribution (“GFMD”) since February 1995.  GFMD sells specialized  clinical laboratory supplies and diagnostics, research and industrial  equipment.  Since 1981, he has also been chairman of the board and chief  executive officer of Immuno Concepts, Inc., a manufacturer of  immuno-diagnostic and virology products in Sacramento, California. |   | 74     |   | 1990   |   |

 

Messrs. Maroney, Nichols andWilliams are serving a three year term to expire at the Annual Meeting ofShareholders in 2003, or when their respective successors are duly elected andqualified.  Messrs. Johnson and Parker’sterm of office expires in 2004. Mr. Chatham’s term of office was to expire in2002 but, in the absence of a 2002 shareholders meeting, he will continue toserve until his successor is duly elected and qualified.  Mr. Dartt’s term of office will expire in2005.

 

Messrs. Chatham, Johnson,Maroney and Nichols serve on the Audit Committee of the Board.** **Mr.Maroney is an independent, audit committee financial expert.

 

**Section16(a) Beneficial Ownership Reporting Compliance**

 

Based solely upon a reviewof Forms 3, 4 and 5 and amendments thereto and written representationsfurnished to the Company, the Company’s officers, directors and ten percentowners timely filed all required reports for 2001 pursuant to Section 16(a) ofthe Securities Exchange Act of 1934, as amended.

 

**Code ofEthics**

 

Because of the significantchanges in management and operating challenges experienced by the Company in2002, the Company has not yet adopted a Code of Ethics that applies to itsprincipal executive officer, principal financial officer, principal accountingofficer or controller, or persons performing similar functions.  The Company intends to adopt a Code ofEthics in the near future, which it will file with the Commission, post on itswebsite and make available to any person without charge.

 

40

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ITEM11.                      EXECUTIVE COMPENSATION

 

**Summary**

 

The following table providesa summary of compensation paid or accrued by the Company and its subsidiariesduring 2002, 2001 and 2000 to or on behalf of the Company’s Chief ExecutiveOfficers and each of the three other executive officers, as of December 31,2002, who earned in excess of $100,000 in salary and bonus in 2002 (the “NamedOfficers”).

 

**Summary Compensation Table**

 
|                                                      |   |     |   | **Annual  Compensation** |   | **Long  Term  Compensation  Awards** |   | **All  Other**                              |   |
|-----------------------------------------------------------|--------|----------|--------|--------------------------|--------|--------------------------------------|--------|---------------------------------------------|--------|
| **Name  and  Principal Position**                         |   | **Year** |   | **Salary($)**            |   | **Bonus($)**                         |   | **Securities  Underlying  Option/SARs (#)** |   | **Compensation  ($)(a)** |   |
| Roger  W. Dartt(b)  Chief Executive Officer and President |   | 2002     |   | 145,834                  |   |                                 |   | 250,000                                     |   |   |   |
|                                                      |   |     |   |                     |   |                                 |   |                                        |   |   |   |
| Ben  J. Gallant(b)                                        |   | 2002     |   | 107,371                  |   |                                 |   |                                        |   | 4,731 |   |
| Chief Executive Officer and President                     |   | 2001     |   | 250,000                  |   | 15,000                               |   |                                        |   | 10,629 |   |
|                                                      |   | 2000     |   | 250,000                  |   |                                 |   | 150,000                                     |   | 9,709 |   |
|                                                      |   |     |   |                     |   |                                 |   |                                        |   |   |   |
| John E. Vickers III(b)                                    |   | 2002     |   | 144,599                  |   |                                 |   |                                        |   | 500 |   |
| Chief Operating Officer                                   |   | 2001     |   | 175,000                  |   | 10,000                               |   |                                        |   | 500 |   |
|                                                      |   | 2000     |   | 175,000                  |   |                                 |   | 75,000                                      |   | 500 |   |
|                                                      |   |     |   |                     |   |                                 |   |                                        |   |   |   |
| William S. Parker                                         |   | 2002     |   | 135,000                  |   |                                 |   |                                        |   | 500 |   |
| Senior Vice President - Dental                            |   | 2001     |   | 135,000                  |   | 6,500                                |   |                                        |   |   |   |
|                                                      |   | 2000     |   | 135,000                  |   |                                 |   | 100,000                                     |   |   |   |
|                                                      |   |     |   |                     |   |                                 |   |                                        |   |   |   |
| John A. Miller(b)                                         |   | 2002     |   | 155,000                  |   |                                 |   |                                        |   |   |   |
| Executive Vice President — Sales                     |   | 2001     |   | 148,750                  |   | 6,500                                |   | 50,000                                      |   |   |   |
|                                                      |   | 2000     |   | 135,000                  |   |                                 |   | 35,000                                      |   |   |   |

 

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(a)                                  Includes a $500 matching contribution underthe 401(k) Plan for each of Messrs Vickers and Parker, and $1,731 for lifeinsurance premiums and $3,000 automobile allowance for Mr. Gallant, paid during2002.

 

(b)                                 Mr. Dartt’s employment began effective June1, 2002; Mr. Gallant’s employment terminated effective April 24, 2002; Mr.Vickers’ employment terminated effective October 8, 2002 and Mr. Miller’semployment terminated effective March 31, 2003.

 

**Option Grants**

 

The following table providesinformation with respect to options granted to the Named Officers during 2002:

 

41

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**Option Grants in Last Fiscal Year**

 
|           |   | **Individual  Grants**                                       |   |                                                        |      |                                |       |
|----------------|--------|--------------------------------------------------------------|--------|-------------------------------------------------------------|-----------|-------------------------------------|------------|
|           |   | **Number  of  Securities  Underlying  Options  Granted (a)** |   | **%****of  options  granted to  employees in  fiscal year** |      | **Exercise  or base  price ($/sh)** |       | **Expiration  date** |   | **Potential  realizable  value at assumed   annual rates of  stock price  appreciation for  option term (b)** |   |
|           |   |                                                         |   |                                                        | **5%($)** |                                | **10%($)** |   |
| Roger W. Dartt |   | 250,000                                                      |   | 100                                                         | %         | .33                                 |       | 5/31/12 |   | 134,384 |   | 213,984 |   |

 

----

(a)                                  These options were granted June 1, 2002 underthe Company’s Long Term Incentive Plan and vest at the rate of 31,250 sharesper quarter, or immediately upon a change in control of the Company.

 

(b)                                 Represents the value of the option at the endof its term, assuming the market price of the Common Stock appreciates atannually compounded rates of 5% and 10%.  These amounts represent assumedrates of appreciation only.  Actual gains, if any, will be dependent onoverall market conditions and on future performance of the Common Stock. There can be no assurance that the amounts reflected in the table will beachieved.

 

**Option Holdings**

 

Thefollowing table provides information with respect to the unexercised optionsheld as of the end of 2002 by the Named Officers.  The Named Officers didnot exercise any options during 2002

 

**Aggregated Option/SAR Exercises InLast Fiscal Year and Fiscal Year-End Option/SAR Values**

 
| **Name**            |   | **Number  of Unexercised  Options/SARs at Fiscal  Year End (#)** |   | **Value  of Unexercised  In-the-Money Options/SARs  At Fiscal Year End ($)(a)** |   |
|---------------------|--------|------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|--------|
|                |   | **Exercisable**                                                  |   | **Unexercisable**                                                               |   | **Exercisable** |   | **Unexercisable** |   |
| Roger W. Dartt      |   | 62,500                                                           |   | 187,500                                                                         |   |   |   |   |   |
| Ben J. Gallant      |   | 66,000                                                           |   |                                                                            |   |   |   |   |   |
| John E. Vickers III |   | 116,667                                                          |   | 33,333                                                                          |   |   |   |   |   |
| William S. Parker   |   | 96,042                                                           |   | 18,333                                                                          |   |   |   |   |   |
| John A. Miller      |   | 73,333                                                           |   | 11,667                                                                          |   |   |   |   |   |

 

----

(a)                                  Theclosing price of the Common Stock at year-end on The Nasdaq SmallCap Marketwas, in each case, lower than the option exercise price.

 

**EmploymentAgreements**

 

The Companywas a party to an employment agreement with Ben J. Gallant, naming Mr. Gallantas the Company’s Chief Executive Officer, Chief Operating Officer andPresident, which was effective through July 31, 2003.  The employmentagreement provided for an annual base salary of $250,000, maintenance of a lifeinsurance policy, an automobile allowance and the right to such benefits underthe Company’s employee benefit plans as were available to executivemanagement.  The employment agreement could be terminated at any time ifMr. Gallant committed a material criminal act, fraud, dishonesty or malfeasancewith respect to the Company or his employment.  In the event (i) hisemployment was terminated without cause, or (ii) the Company liquidated,dissolved, merged with, or transferred substantially all of its assets to acompany which did not assume the Company’s obligations under the employmentagreement, Mr. Gallant was entitled to his base salary and health coveragethrough the end of the term. Mr. Gallant agreed not to compete with the Companyduring his employment and for one year after termination.  Mr. Gallant resigned from the Company onApril 24, 2002.  In connection with thetermination, the Company agreed to pay the compensation due Mr. Gallant underthe employment agreement, and to provide health insurance coverage, throughJuly 31, 2003.  The Company paid

 

42

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Mr. Gallant’s salary throughAugust 30, 2002, and provided health insurance coverage through January 31,2003, and has accrued amounts owing to him since that date.

 

The Companyentered into an employment agreement with Mr. Dartt effective as of June 1,2002, naming him as the Company’s President and Chief Executive Officer for aterm ending May 31, 2004.  Theemployment agreement provides for an annual base salary of $250,000, a cashbonus of up to 25% of salary for the year ending June 30, 2003 based on anincentive compensation program to be approved by the Board of Directors, thegrant of options to purchase 250,000 shares of stock at a price of $.33 pershare, and a performance based incentive similar to those currently employed inthe industry by similarly situated executives, to be established by the Boardof Directors.  The stock options vest atthe rate of 31,250 every three months, subject to acceleration upon a change incontrol.   The employment agreement can be terminated for cause if Mr.Dartt fails to follow the reasonable instructions of the Board or Directors,commits acts that are felonious, dishonest, unethical or inconsistent withnormal business standards, wrongfully discloses confidential information,competes with the Company in violation of the agreement or grossly neglects hisduties.  If his employment is terminated without cause, Mr. Dartt will beentitled to nine months salary and immediate vesting of the number of stockoptions that would have vested through the nine month period.  If the Company experiences a change incontrol and Mr. Dartt is unable to negotiate a satisfactory employmentarrangement with the new controlling party, Mr. Dartt shall be entitled to achange of control payment of twelve months salary.  Mr. Dartt agreed not to compete with the Company during hisemployment and for one year after termination. In January 2003, the Board awarded Mr. Dartt a bonus of 10% of the grossconsideration received in any sale or merger of the Company, payable in restrictedshares of Company common stock.

 

**Compensationof Directors**

 

Directors whoare not officers or employees of the Company are entitled to a fee of $1,000for each Board meeting attended and are reimbursed for expenses incurred inconnection with their attendance at meetings; however no directors’ fees werepaid in 2002.

 

ITEM 12.  SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The followingtable sets forth certain information regarding the ownership of the Common andPreferred Stock as of March 31, 2003, by each current director, each of theNamed Officers, all current directors and executive officers as a group, andeach person who is known by the Company to own beneficially 5% or more of theCompany’s outstanding shares of Common Stock. For purposes of calculating thepercentage of Common Stock beneficially owned by any person in the table, theshares issuable to such person under stock options or warrants exercisablecurrently or within 60 days are considered outstanding and are added to theshares of Common Stock actually outstanding. As described in Note 4 to the Consolidated Financial Statement, holdersof Series B Preferred Stock have voting rights equal to two and a half timesthe vote of holders of common shares**.**

 
| **Name and Address**                                              |   | **Number  of Common  Shares (1)** |   | **Percent  of Class** |   | **Number  of Series B  Preferred Shares** |   | **Percent  of Class** |   |
|-------------------------------------------------------------------|--------|-----------------------------------|--------|-----------------------|--------|-------------------------------------------|--------|-----------------------|--------|
| William D. Myers  29877 Telegraph RoadSouthfield, MI 48034        |   | 1,084,714                         | (2)    | 14.7                  |   |                                      |   |                  |   |
| Ben J. GallantP.O. Box 238Douglas, TX 75943                       |   | 1,081,864                         |   | 14.4                  |   |                                      |   |                  |   |
| BankOne, N.A.1 Bank One PlazaChicago, IL 60670                    |   | 721,510                           |   | 8.9                   |   |                                      |   |                  |   |
| Irene M. Myers  29877 Telegraph RoadSouthfield, MI 48034          |   | 549,072                           | (2)    | 7.5                   |   |                                      |   |                  |   |
| Ultrak, Inc.1301 Water’s RidgeLewisville, TX 75057           |   | 540,000                           |   | 6.8                   |   |                                      |   |                  |   |
| Michael F. Radner16500 North Park Dr., # 1507Southfield, MI 48075 |   | 532,601                           |   | 7.2                   |   |                                      |   |                  |   |

 

43

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| Charles A. Nichols(3)  5555 Bear LaneCorpus Christi, TX 78405       |   | 501,866   |   | 6.8  |   | 100,000 |   | 33.3   |   |
|---------------------------------------------------------------------|--------|-----------|--------|------|--------|---------|--------|--------|--------|
| William D. Maroney(4)  5555 Bear LaneCorpus Christi, Texas 78405    |   | 411,609   |   | 5.6  |   | 100,000 |   | 33.3   |   |
| Wayne A. Johnson, II                                                |   | 316,001   | (5)    | 3.5  |   |    |   |   |   |
| John E. Vickers III                                                 |   | 213,467   |   | 2.9  |   |    |   |   |   |
| Roger W. Dartt                                                      |   | 107,950   |   | 1.4  |   |    |   |   |   |
| William S. Parker                                                   |   | 96,442    |   | 1.3  |   |    |   |   |   |
| John A. Miller                                                      |   | 73,333    |   | 1.0  |   |    |   |   |   |
| Bertrand R. Williams, Sr.                                           |   | 9,861     |   | *    |   | 100,000 | (6)    | 33.3   |   |
| Gary Chatham                                                        |   | 7,943     |   | *    |   |    |   |   |   |
| All current executive officers and directors as a group (7 persons) |   | 1,436,676 |   | 19.0 |   |    |   |   |   |

 

----

*Less than one percent.

 

(1)                      The column sets forth shares of Common Stock which are deemed to be“beneficially owned” by the persons named in the table under Rule 13d-3 of theSEC, including shares of Common Stock that may be acquired upon the exercise ofstock options or warrants that are presently exercisable or become exercisablewithin 60 days, as follows: Mr. Myers - 2,128; Mr. Gallant – 141,000; BankOne,N.A. – 721,510; Ultrak, Inc. – 540,000; Mr. Nichols – 1,404; Mr. Maroney –1,092; Mr. Johnson, II – 1,404; Mr. Vickers – 116,667; Mr. Dartt – 93,750; Mr.Parker – 96,042; Mr. Miller – 73,333; Mr. Williams, Sr. – 2,340  shares; Mr. Chatham - 468 shares; and allcurrent executive officers and directors as a group – 196,500 shares. Each of the persons named in the table has sole voting and investment powerwith respect to all shares beneficially owned by them, except as described inthe following footnotes.

 

(2)                      The number of shares is based on information contained in an amendedSchedule 13D, dated April 23, 2000, filed with the Securities and ExchangeCommission by Dr. William D. Myers and his wife, Irene Myers.  Includes533,514 shares owned by Dr. Myers, 2,128 shares which Dr. Myers has the rightto acquire currently or within the next 60 days, 399,072 shares of Common Stockowned jointly by Dr. and Mrs. Myers and 150,000 shares owned individually byMrs. Myers. Mr. Myers shares voting and dispositive power with respect to thelatter two groups of shares.

 

(3)                      Includes 2,000 shares of Common Stock owned by Mr. Nichols’ wife, and100,000 shares of Preferred Stock owned jointly with Mrs. Nichols, as to bothof which Mr. Nichols shares voting and dispositive power.

 

(4)                      Includes 308,666 shares of Common Stock and 100,000 shares of PreferredStock owned by Mr. Maroney’s wife, and 7,692 shares owned jointly by Mr. andMrs. Maroney, as to which Mr. Maroney shares voting and dispositive power.

 

(5)                      Includes 100,423 shares of Common Stock owned by family trusts forwhich Mr. Johnson is the trustee.

 

(6)                      These shares are owned by a family trust for which Mr. Williams is thetrustee.

 

**Equity Compensation Plans**

 

The following table reflectsthe information described as of December 31, 2002 with respect to compensationplans under which the Company’s stock is authorized for issuance.

 

44

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| **Plan Category**                                           |   | **No.  of Shares to be issued upon  exercise of outstanding options,  warrants and rights** |   | **Weighted  average exercise  price of outstanding  options, warrants and rights** |   | **No.  of Shares available  for future issuance  under equity compen-  sation plans** |    |
|-------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|---------|
| Equity compensation plans approved by security  holders     |   | 729,422                                                                                     |   | $                                                                                  | 1.28   |                                                                                  | 161,086 |   |
| Equity compensation plans not approved by security  holders |   | 250,000                                                                                     |   | .33                                                                                |   |                                                                                  |    |
| Total                                                       |   | 979,422                                                                                     |   |                                                                               |   | 161,086                                                                               |    |
|                                                             |        |                                                                                             |        |                                                                                    |        |                                                                                       |         |  |

 

ITEM 13.                                               CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

 

Mr. Gallant serves as aguarantor of the Company’s $750,000 line of credit with ValueBank Texas and theU.S. Small Business Administration. The Company granted Mr. Gallant awarrant to purchase 75,000 shares of its common stock at $.40 per share,expiring April 23, 2007 for remaining a guarantor of the loan until it isrepaid or refinanced.

 

ITEM14.                                               CONTROLS AND PROCEDURES

 

Within 90 days prior to thedate of this report, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Controller, of the effectiveness anddesign and operation of the Company’s disclosure controls and procedurespursuant to Exchange Act Rule 13a-14. Based upon the evaluation, the Chief Executive Officer and Controllerconcluded that the Company’s disclosure controls and procedures areeffective.  Subsequent to the evaluationand through the date of this filing of Form 10-K for the year ended December31, 2002, there have been no significant changes in the Company’s internalcontrols or in other factors that could significantly affect these controls.

 

**PART IV**

 

ITEM 15.                                               EXHIBITS, FINANCIAL STATEMENT SCHEDULES ANDREPORTS ON FORM 8-K

 

(a)   1.                                   Financial Statements:  The following financialstatements of American Medical Technologies, Inc.  are included in Item 8,“Financial Statements and Supplementary Data”:

 
| Independent Auditor’s Report – Hein + Associates LLP                                              |
|-------------------------------------------------------------------------------------------------------------|
| Independent Auditor’s  Report – Ernst & Young LLP                                             |
| Consolidated Statements of  Operations for the Years Ended December 31, 2002, 2001, and 2000                |
| Consolidated Balance Sheets as of December 31, 2002 and 2001                                                |
| Consolidated Statements of Cash  Flows for the Years Ended December 31, 2002, 2001, and 2000                |
| Consolidated Statements of  Stockholders’ Equity for the Years Ended December 31, 2002, 2001, and 2000 |
| Notes to Financial  Statements                                                                              |

 

2.                                       Financial Statement Schedules: The followingfinancial statement schedule is attached to this report.

 

Schedule II—Valuationand Qualifying Accounts

Allother schedules are omitted because they are not applicable, not required, orthe information is included in the financial statements or the notes thereto.

 

3.                                       Exhibits: The exhibits included as part ofthis report are listed in the attached Exhibit Index, which is incorporatedherein by reference.

 

(b)Reports on Form 8-K: No reports on Form 8-K were filed during the quarter endedDecember 31, 2002.

 

45

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**SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS**

 
|                                        |   | **Balance at  Beginning of  Period** |    | **Additions  Charged to  Costs and  Expenses** |   | **Deductions  Described** |   | **Balance at  End of Period** |   |
|---------------------------------------------|--------|--------------------------------------|---------|------------------------------------------------|--------|---------------------------|--------|-------------------------------|--------|
| Year Ended December 31, 2000                |   |                                 |    |                                           |   |                      |   |                          |   |
| Valuation allowance for accounts receivable |   | $                                    | 188,000 |                                           | $      | 42,000                    | (1)    | $                             | — |   | $ | 230,000 |   |
| Valuation allowance for inventories         |   | 812,000                              |    | 873,000                                        | (2)    | —                    |   | 1,685,000                     |   |
| Valuation allowance for deferred taxes      |   | —                               |    | 5,649,000                                      | (3)    | —                    |   | 5,649,000                     |   |
|                                        |   |                                 |    |                                           |   |                      |   |                          |   |
| Year Ended December 31, 2001                |   |                                 |    |                                           |   |                      |   |                          |   |
| Valuation allowance for accounts receivable |   | 230,000                              |    | —                                         |   | 54,000                    | (4)    | 176,000                       |   |
| Valuation allowance for inventories         |   | 1,685,000                            |    | 588,000                                        | (2)    | —                    |   | 2,273,000                     |   |
| Valuation allowance for deferred taxes      |   | 5,649,000                            |    | 1,302,000                                      | (5)    | —                    |   | 6,951,000                     |   |
|                                        |   |                                 |    |                                           |   |                      |   |                          |   |
| Year Ended December 31, 2002                |   |                                 |    |                                           |   |                      |   |                          |   |
| Valuation allowance for accounts receivable |   | 176,000                              |    | 85,000                                         | (1)    | —                    |   | 261,000                       |   |
| Valuation allowance for inventories         |   | 2,273,000                            |    | 1,970,000                                      | (2)    | —                    |   | 4,243,000                     |   |
| Valuation allowance for deferred taxes      |   | 6,951,000                            |    | 1,579,000                                      | (5)    | —                    |   | 8,530,000                     |   |
|                                             |        |                                      |         |                                                |        |                           |        |                               |        |  |  |  |  |

 

----

(1)              Increase in accounts receivable valuationallowance.

 

(2)              Increase in inventory valuation allowance.

 

(3)              Recording of valuation.

 

(4)              Reduction in accounts receivable allowancedue to collection of reserved accounts.

 

(5)              Increase in deferred tax valuation allowance.

 

46

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Signatures

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this annual report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the City of CorpusChristi, State of Texas, on the 14th day of April, 2003.

 
|   | AMERICAN  MEDICAL TECHNOLOGIES, INC. |
|--------|--------------------------------------|
|   |                                 |
|   | /s/  Roger W. Dartt                  |   |
|   | Roger  W. Dartt, President and CEO   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities indicated on April 14, 2003.

 
| /s/  Roger W. Dartt            |   |                                              |
|--------------------------------|--------|---------------------------------------------------|
| Roger  W. Dartt                |   | President  and Director (Chief Executive Officer) |
|                           |   |                                              |
| /s/  Barbara Woody             |   |                                              |
| Barbara  Woody                 |   | Controller  (Principal Accounting Officer)        |
|                           |   |                                              |
| /s/  Gary A. Chatham           |   |                                              |
| Gary  A. Chatham               |   | Director                                          |
|                           |   |                                              |
| /s/  Wayne A. Johnson II       |   |                                              |
| Wayne  A. Johnson II           |   | Director                                          |
|                           |   |                                              |
| /s/  William D. Maroney        |   |                                              |
| William  D. Maroney            |   | Director                                          |
|                           |   |                                              |
| /s/  Charles A. Nichols        |   |                                              |
| Charles  A. Nichols            |   | Director                                          |
|                           |   |                                              |
| /s/  William S. Parker         |   |                                              |
| William  S. Parker             |   | Director                                          |
|                           |   |                                              |
| /s/  Bertrand R. Williams, Sr. |   |                                              |
| Bertrand  R. Williams, Sr.     |   | Director                                          |

 

47

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**Certification**

 

I,Roger W. Dartt, certify that:

 

Ihave reviewed this annual report on Form 10-K of American Medical Technologies,Inc.;

 

Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions with regardto significant deficiencies and material weaknesses.

 
| Date  April 14, 2003 | /s/ Roger W. Dartt                    | .      |
|----------------------|---------------------------------------|--------|
|                 | Roger W. Dartt                        |   |
|                 | President and Chief Executive Officer |   |

 

48

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**Certification**

 

I,Barbara Woody, certify that:

 

Ihave reviewed this annual report on Form 10-K of American Medical Technologies,Inc.;

 

Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalent functions):

 

allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date  April 14, 2003 | /s/ Barbara Woody                            | .      |
|----------------------|----------------------------------------------|--------|
|                 | Barbara Woody                                |   |
|                 | Controller  and principal accounting officer |   |

 

 

49

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**EXHIBITINDEX**

 

Certain of the following exhibits have been previouslyfiled with the Securities and Exchange Commission pursuant to the requirementsof the Securities Act of 1933 and the Securities Exchange Act of 1934. Such exhibits are identified by the parenthetical references following thelisting of each such exhibit and are incorporated herein by reference. The Company’s Commission file number is 0-19195.

 
| **Exhibit  Number** |   | **Description  of Document**                                                                                                                                                                                 |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                         |
| 3.1                 |   | First Restated Certificate  of Incorporation, as amended (Form 10-Q for quarter ended September 30, 2000)                                                                                                    |
|                |   |                                                                                                                                                                                                         |
| 3.2                 |   | Second Restated  Certificate of Incorporation (filed as an exhibit to the Company’s Form 10-Q  for the quarter ended September 30, 2002)                                                                |
|                |   |                                                                                                                                                                                                         |
| 3.3                 |   | Certificate of Correction  to the Second Restated Certificate of Incorporation                                                                                                                               |
|                |   |                                                                                                                                                                                                         |
| 3.4                 |   | Certificate of Designation  of Series B Preferred Stock                                                                                                                                                      |
|                |   |                                                                                                                                                                                                         |
| 3.5                 |   | Amended and Restated  Bylaws (Form 10-K for year ended December 31, 1998)                                                                                                                                    |
|                |   |                                                                                                                                                                                                         |
| 4.1                 |   | Nontransferable Common  Stock Purchase Warrant, dated August 5, 1998, 540,000 shares (Form 8-K filed  August 20, 1998)                                                                                       |
|                |   |                                                                                                                                                                                                         |
| 4.2                 |   | Nontransferable Common  Stock Purchase Warrant, dated August 5, 1998, 60,000 shares (Form 8-K filed  August 20, 1998)                                                                                        |
|                |   |                                                                                                                                                                                                         |
| 4.3                 |   | Line of Credit Agreement  between Bank One and American Medical Technologies, Inc. effective September  21, 2000 (Form 10-Q for quarter ended September 30, 2000)                                            |
|                |   |                                                                                                                                                                                                         |
| 4.4                 |   | Revolving Business Credit  Note (LIBOR — Based Interest Rate between Bank One and American Medical  Technologies, Inc. effective September 21, 2000 (Form 10-Q for quarter ended  September 30, 2000)   |
|                |   |                                                                                                                                                                                                         |
| 4.5                 |   | Non-transferable Common  Stock Purchase Warrant dated March 24, 1999 (Form 10-Q for quarter ended  March 31, 1999)                                                                                           |
|                |   |                                                                                                                                                                                                         |
| 4.6                 |   | Non-transferable Common  Stock Purchase Warrant dated March 24, 1999 (Form 10-Q for quarter ended  March 31, 1999)                                                                                           |
|                |   |                                                                                                                                                                                                         |
| 4.7                 |   | Stock Purchase Warrant  dated October 30, 2003 for 721,510 shares issued to BankOne, N.A.                                                                                                                    |
|                |   |                                                                                                                                                                                                         |
| 4.8                 |   | Loan Agreement between  ValueBank Texas and American Medical Technologies, Inc., dated October 3,  2001 (Form 10-Q for the period ended September 30, 2001)                                                  |
|                |   |                                                                                                                                                                                                         |
| 4.9                 |   | Note Agreement between  U.S. Small Business Administration and American Medical Technologies, Inc.,  dated October 3, 2001 (Form 10-Q for the period ended September 30, 2001)                               |
|                |   |                                                                                                                                                                                                         |
| 4.10                |   | Deed of Trust, Security  Agreement and Assignment of Rents between American Medical Technologies, Inc.  and ValueBank Texas, dated October 3, 2001 (Form 10-Q for the period ended  September 30, 2001)      |
|                |   |                                                                                                                                                                                                         |
| 4.11                |   | Deed of Trust, Assignment  of Rents and Leases and Security Agreement between American Medical  Technologies, Inc. and Bank One, dated November 8, 2001 (Form 10-Q for the  period ended September 30, 2001) |

 

 

 

50

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|         |   |                                                                                                                                                                                        |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.12         |   | Fourth Amended and  Restated Forbearance Agreement between Bank One and American Medical  Technologies, Inc., effective February 1, 2003                                                    |
|         |   |                                                                                                                                                                                        |
| 4.13         |   | Non-Transferable Common  Stock Purchase Warrant issued to Ben J. Gallant, dated April 29, 2002. (Form  10-Q/A for the quarter ended March 31, 2002)                                         |
|         |   |                                                                                                                                                                                        |
| 10.1*        |   | Amended and Restated  Nonqualified Stock Option Plan  (Registration No. 33-40140)                                                                                                      |
|         |   |                                                                                                                                                                                        |
| 10.2*        |   | Stock Option Plan for  Employees (Registration No. 33-40140)                                                                                                                                |
|         |   |                                                                                                                                                                                        |
| 10.3*        |   | Amended and Restated  Long-Term Incentive Plan (Form 10-Q for quarter ended September 30, 1996)                                                                                             |
|         |   |                                                                                                                                                                                        |
| 10.4*        |   | Employment Agreement dated  August 1, 1996 between American Medical Technologies, Inc. and Ben J. Gallant  (Form 10-K for year ended December 31, 1996)                                     |
|         |   |                                                                                                                                                                                        |
| 10.5         |   | License Agreement between  Texas Airsonics, Inc., a wholly owned subsidiary of American Medical  Technologies, Inc. and Texas Airsonics, L.P. (Form 10-K for year ended  December 31, 1996) |
|         |   |                                                                                                                                                                                        |
| 10.6**       |   | Patent License Agreement  dated October 18, 1997 between Danville Engineering, Inc. and American  Medical Technologies, Inc. (Form 10-Q for quarter ended September 30, 1997)               |
|         |   |                                                                                                                                                                                        |
| 10.7         |   | Assignment from Sunrise  Technologies International, Inc. to Lares Research dated June 24, 1997 (Form  10-K for year ended December 31, 1997)                                               |
|         |   |                                                                                                                                                                                        |
| 10.8         |   | Patent License Agreement  dated June 29, 1998 Prep-Technology Corp. and American Medical Technologies,  Inc. (Form 10-Q for quarter ended June 30, 1998)                                    |
|         |   |                                                                                                                                                                                        |
| 10.9**       |   | Patent License Agreement  dated as of January 21, 1999 between ESC Medical Systems, Ltd. and American  Medical Technologies, Inc. (Form 10-Q for quarter ended March 31, 1999)              |
|         |   |                                                                                                                                                                                        |
| 10.10        |   | Patent licensing agreement  dated June 10, 1999 between American Medical Technologies, Inc. and Kreativ,  Inc. (Form 10-Q for quarter ended June 30, 1999)                                  |
|         |   |                                                                                                                                                                                        |
| 10.11*       |   | First Amendment, dated  August 1, 1999 to Employment Agreement between American Medical Technologies,  Inc. and Ben J. Gallant (Form 10-K for the year ended December 31, 1999)             |
|         |   |                                                                                                                                                                                        |
| 10.12*       |   | Second Amendment,  effective August 1, 2001 to Employment Agreement between American Medical  Technologies, Inc. and Ben J. Gallant  (Form 10-K for the year ended  December 31, 2000) |
|         |   |                                                                                                                                                                                        |
| 10.13*       |   | Letter Agreement dated  April 29, 2002 accepting the resignation of Ben J. Gallant as of April 23,  2002.)                                                                                  |
|         |   |                                                                                                                                                                                        |
| 10.14 * |   | Employment Agreement dated  effective as of June 1, 2002, between American Medical Technologies, Inc. and  Roger W. Dartt  (Form 10-Q for the  quarter ended June 30, 2002)            |
|         |   |                                                                                                                                                                                        |
| 21.1         |   | Subsidiaries of the  Registrant (Form 10-K for year ended December 31, 1999)                                                                                                                |
|         |   |                                                                                                                                                                                        |
| 23.1         |   | Consent of Hein +  Associates LLP                                                                                                                                                           |
|         |   |                                                                                                                                                                                        |
| 23.2         |   | Consent of Ernst &  Young LLP                                                                                                                                                           |

 

 

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|   |   |                                                                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 99.1   |   | Certification of CEO and  principal accounting officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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  *Identifies current management contracts orcompensatory plans or arrangements.

 

**Portions of this agreement were filed separatelywith the Commission pursuant to Rule 24b-2 of the Securities Act of 1934governing requests for confidential treatment of information.

 

 

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