**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, 2003, 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) |

 

**5655 Bear Lane, Corpus Christi, TX78405**

(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 theExchange Act:  **None**

 

Securities registered pursuant to Section 12(g) of theAct:

**Common Stock, $.04 par value pershare**

(Title of Class)

 

Indicate by check markwhether the registrant (1) filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.  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 markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).  Yes o     No ý

 

The aggregate market valueof the registrant’s Common Stock held by non-affiliates of the registrant wasapproximately $2,350,210 as of March 31, 2004 based upon the closing price of $0.60 reported onthe OTC Bulletin Board on that date.  For purposes of this calculationonly, all directors, executive officers and owners of more than ten percent ofthe registrant’s Common Stock areassumed to be affiliates.  There were 7,939,306 shares of the registrant’sCommon Stock issued and outstanding on April 13, 2004.

 

Documents incorporated byreference:  None.

 

 

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**PART I**

 

ITEM 1.          DESCRIPTION OF BUSINESS

 

**Introduction/RecentDevelopments**

 

AmericanMedical Technologies, Inc. (“American Medical” or “Company”) develops,manufactures and markets high technology products designed primarily forgeneral dentistry.  American Medical’s primary products are high speedcuring lights; air abrasive kinetic cavity preparation systems (“KCP”), andintra oral cameras marketed under the name “Ultracam**Ò**“, which are developed and manufactured at itsmanufacturing facility in Corpus Christi, Texas.  American Medical alsodevelops, manufactures and markets precision air abrasive jet machining (“AJM”)systems for industrial applications.  American Medical, incorporated inDelaware in November 1989, completed its initial public offering in June1991.  American Medical changed its name from American DentalTechnologies, Inc. on July 13, 2000.

 

American Medical started2003 under very difficult and challenging circumstances.  The Company’s revenues and profitabilityfell significantly in 2000, 2001 and 2002. During this period, the Company incurred aggregate losses of $28 millionand was facing possible bankruptcy.  In2002 the former CEO resigned and a restructuring program was implemented underwhich operating expenses were dramatically reduced. In late 2002, BiolaseTechnology, Inc. (“Biolase”) filed a patent infringement lawsuit against theCompany in Federal District Court in California. The suit sought, among otherthings, injunctive relief and an unspecified amount of actual and trebleddamages.  The Company had anticipatedfiling patent counterclaims against Biolase in response to the lawsuit,however, because of the anticipated high costs of such litigation and theCompany’s scarce financial resources, the Company initiated settlementdiscussions with Biolase prior to filing the counterclaims.  As a result of those discussions, in May,2003 the Company sold its dental laser product line (the “Dental Laser Assets”)to Biolase for cash and Biolase stock, and the patent infringement lawsuit wasdismissed.

 

Biolase paid $5.5 millionfor the Company’s Dental Laser Assets, including related inventory, patents andother intellectual property.  $1.825million of the purchase price was paid in cash directly to the Company’sprimary lender, and the remainder was paid with 307,500 shares of Biolasecommon stock (the “Biolase Shares”). In connection with the transaction, theCompany and Biolase also released their respective claims against eachother.  The Biolase Shares had anaggregate value of $3,693,075 based on the closing price for Biolase stock of$12.01 on the closing date of the sale. The $1.825 million in cash paid in full the Company’s bank loan with itsprincipal secured creditor.  The BiolaseShares that the Company received were restricted shares which Biolase agreed toregister for resale to the public as soon as practicable.  The Company had originally anticipated thatthe Biolase Shares would be sold within a few months of the May 2003 closing ofthe Biolase transaction.  As a result ofnumerous unanticipated delays by Biolase in registering the Company’s BiolaseShares, the shares were not actually sold until March of 2004.  The Company’s Biolase Shares were sold forgross proceeds of $18.50 per share, or a total of $5,688,750.  The net proceeds to the Company were$5,335,125.  The Company is in theprocess of paying off its remaining debt and payables, amounting toapproximately $3.0 million at March 3, 2004. Upon payment of such obligations, American Medical anticipates that itwill be a debt free company with approximately $3 million in cash.  The Company believes that the payment of allof its debt and its cash position will enable it to concentrate on growthopportunities as it goes forward.

 

Becauseof the lengthy, unanticipated delay in the sale of the Company’s BiolaseShares, during most of 2003 and early 2004, the Company was forced to makeadditional severe reductions in costs, expenses and personnel in order tosurvive.  As a result of the sale of theDental Laser Assets to Biolase and such reductions in cost, expenses andpersonnel, American Medical’s sales dropped from $8.9 million in 2002 to $2.7million in 2003.  The cost reductions anda gain on the sale of the Dental Laser Assets to Biolase did result in theCompany realizing an approximately $50,000 profit, as compared to a loss of $7million in 2002. The Company today is very lean, and intends to acquire newproduct lines or dental companies to increase its presence in the dental marketand build revenues and profits.  TheCompany may also make other strategic acquisitions in the medical products, airabrasion or other related industries. The terms of sale of the Dental Laser Assets prohibit the Company fromcompeting with Biolase in the dental laser market until after May 2007 and inthe veterinary or biostimulation markets until after May 2005.

 

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**Products**

 

Describedbelow are the Company’s current principal product lines.

 

*KCPCavity Preparation Systems*

 

American Medicalcurrently offers several KCP models that vary in size, power and features, fromthe KCP 5 counter top model to the deluxe KCP 1000PAC model.  AmericanMedical’s KCP products remove tooth decay and tooth structure, includingenamel, by means of a narrow stream of minute particles of alpha aluminapropelled at high velocity by compressed air and delivered to the tooth via alightweight handpiece.  The KCP shapes restoration sites, removes oldcomposites and modifies underlying hard tissue, often helping to increase bondstrength.  It is also used for sealant preparations; stain removal andintraoral porcelain removal and repair.  The KCP can often be used inplace of a drill.  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.  In 2003, the Companyintroduced the KCP FlexiJetÒ, an air abrasion unit with an integratedwater system that dramatically diminishes overspray, lessens patientsensitivity and provides faster, more precise cutting.

 

The KCP is best used inconjunction with modern tooth-colored composite restoration materials.  Itis not recommended for removing large amalgam fillings.  The precision ofthe KCP, and the manner in which it prepares surfaces for restorations, allowfor earlier treatment of decay and less destruction of the tooth whilerestoring it.  In many cases, the KCP may be used without anesthesia,allowing a dentist to treat teeth in different quadrants of the mouth during asingle visit.  This is generally not possible when conventionalinstruments and anesthesia are used.

 

American Medical alsomarkets its Plasma Arc Curing System (“PAC”) as an accessory to its KCP. The KCP1000 PAC combines an air abrasive cavity preparation system togetherwith a composite curing light in a single instrument.  This allowsdentists to efficiently switch from cavity preparation to curing.

 

The KCP is sold primarilyin North America and Europe.  The KCP represented approximately 5%, 4% and8% of American Medical’s total revenues in 2003, 2002 and 2001, respectively.

 

*PlasmaArc Curing Systems*

 

American Medical marketsa PAC that utilizes a high intensity light source to rapidly cure compositetooth fillings.  Curing occurs in five to ten seconds, or at least twiceas fast as most conventional curing lights.

 

American Medical’s PACproducts, components and accessories are sold primarily in North America andEurope.  PAC products represented approximately 9%, 7% and 7% of AmericanMedical’s total revenues during 2003, 2002 and 2001, respectively.

 

*IntraOral Camera Products*

 

The Ultracam is asophisticated camera system that allows the dentist to take pictures of apatient’s teeth during an examination.  The pictures can be projected on avideo monitor in the examination room for immediate viewing by the dentist andthe patient, and printed or stored on a computer disk.  The Ultracamsystems offered vary in size from the basic cart system, which is a portable cameraand printer housed in a mobile cart, to a networked system that can be utilizedin several examination rooms.  The networked systems combine the cartsystem with central printing stations, digital docking stations and examinationroom monitors.

 

The Ultracam is utilizedin the dental practice for presentation, education and as a means ofcommunicating services through multi-media.  The Digital Docking Station,introduced in 1999, greatly enhances the value of an intra oral camera byallowing the storage of up to 40 images on a 3-1⁄2 inch computer floppy disk.

 

Ultracam products aresold primarily in North America and Europe.  The Ultracam productsrepresented approximately 8%, 8% and 10% of American Medical’s total revenue in2003, 2002 and 2001, respectively.

 

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*Anthos*

 

In prior years, theCompany distributed the Anthos system dental chairs and units, but discontinuedsales of that product in 2003.

 

*IndustrialProducts*

 

AmericanMedical also develops, manufactures and markets precision AJM systems forindustrial applications.  The AJM system has a wide range of applications,including drilling, cutting, abrading, deburring, dressing, beveling, etching,shaping and polishing.  Its principal advantage over conventionalmachining is that the AJM process, which accomplishes its work through kineticparticle displacement (an erosion process), produces no heat, shock orvibration.  This enables precise work to be done on fragile materialswithout deburring or further processing.  Generally, the same is not trueof drills, saws, laser or other types of conventional machining equipmentbecause all of these systems rely on heat and/or friction to perform thework.  These machining techniques generally require further processing,and in many instances do not provide the precision available with AJM,particularly with fragile materials.  AJM systems are often used to removethe slag, burrs and flash resulting from conventional machiningprocesses.  Some examples include deburring needles, beveling siliconwafers and cutting fiber optics.

 

Industrialproducts accounted for 12% of American Medical’s total revenues in 2003, andless than 5% in 2002 and 2001, respectively.

 

Partsand consumable sales represented 50% of revenues.  The remaining percentage of revenues not itemized representdiscontinued product lines.

 

**Marketing,Sales and Training**

 

AmericanMedical markets its dental products through independent distributors to generaldental practitioners and certain other dental specialists in the United States.

 

TheCompany relies heavily on sales made at trade shows, dental exhibitions, anddental society meetings.

 

AmericanMedical presently has several industrial product distributors for its AJMproduct.  Such distributors have been and are anticipated to be theprimary source of sales for American Medical’s industrial products in thefuture.  Industrial product distributorsare supported by American Medical primarily through advertising in the ThomasRegister 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 dentistrytraining 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 been established.

 

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.  To date, AmericanMedical has not experienced significant service problems.  AmericanMedical generally provides a one-year warranty on all of its products

 

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 United Statesoffice.

 

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**Competition**

 

AmericanMedical has patents in the basic technologies, which the Company believesprovide a competitive advantage.  American Medical believes there areapproximately 4 companies that presently sell competing dental air abrasiveproducts and approximately 13 companies that presently sell competing intraoral camera systems.  American Medical’s PAC and KCP products must alsocompete with conventional treatment methods using dental instruments orequipment that are generally less expensive and with which dentists are morefamiliar.

 

Manyof these competing companies, particularly those which manufacture traditionaldental equipment, have been in business longer, have greater resources and havea larger 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 hasadversely affected, and may in the future adversely affect, American Medical’sbusiness.

 

**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 haspatents related to dental air abrasive systems and methods for using an airabrasive stream for dentistry that do not begin expiring until 2011, technologypatents for air abrasive cavity preparation systems that will begin expiring in2004, and industrial air abrasive patents that have expiration dates rangingfrom 2004 to 2016.  American Medical also holds several industrial airabrasive patents in various other countries. The Company has recently notified other companies that are selling airabrasion products in the dental industry of possible patent infringement.

 

**Manufacturingand Suppliers**

 

AmericanMedical manufactures, assembles and services its products at its ISO 9001:2000and EN13485****certified facility inCorpus Christi, Texas.  American Medical’s products are manufactured fromparts, components and subassemblies obtained from a number of unaffiliatedsuppliers or fabricated internally at its manufacturing facility. AmericanMedical has modern machining capability allowing it to control the productionof certain non-standard parts.  American Medical uses numerous suppliersfor standard parts and for fabrication of certain parts.  Although most ofthe parts and components used in its products are available from multiplesources, American Medical presently obtains several parts and components fromsingle sources.  Lack of availability of certain parts and componentscould result in production delays.  Management has identified alternatesuppliers and believes any delays would be minimal and would not materiallyaffect American Medical’s business.

 

**Researchand Development**

 

Mostresearch and development, prototype production and testing activities takeplace at the Company’s Texas facility, although some research and developmentwork is performed for American Medical by consultants.  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 2003, 2002 and 2001 were$233,898, $595,156 and $796,424, 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 Medicalmust comply 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.

 

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*UnitedStates Regulatory Requirements*

 

The Federal Food, Drug and Cosmetic Act (“FDC Act”)regulates medical devices in the United States by classifying them into one ofthree classes based on the extent of regulation believed necessary to ensuresafety and effectiveness. Class I devices are those devices for which safetyand effectiveness canreasonably be ensured through general controls, such as device listing,adequate labeling, pre-market notification and adherence to the Quality SystemRegulation (“QSR”) as well as medical device reporting (“MDR”), labeling andother regulatory requirements.  SomeClass I medical devices are exempt from the requirement of pre-market approvalor clearance.  Class II devices arethose devices for which safety and effectiveness can reasonably be ensuredthrough the 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 are devices that generally must receivepre-market approval by the FDA pursuant to a pre-market approval (“PMA”)application to ensure their safety and effectiveness.  Generally, Class III devices are limited to life sustaining, lifesupporting or implantable devices; however, this classification can also applyto novel technology 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 a 510(k) Clearance may be obtained if amanufacturer or seller of medical devices can establish that a new device is“substantially equivalent” to a predicate device other than one that has anapproved 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 is required to be filedand cleared by the FDA prior to introducing a device into commercialdistribution. Market clearance for a 510(k) notification submission may take 3to 12 months or longer.  If the FDAfinds that the device is not substantially equivalent to a predicate device,the device is deemed a Class III device, and a manufacturer or seller isrequired to file a PMA application. Approval of a PMA application for a newmedical device usually requires, among other things, extensive clinical data onthe safety and effectiveness of the device. PMA applications may take years to be approved after they are filed. Inaddition to requiring clearance or approval for new medical devices, FDA rules alsorequire a new 510(k) filing and review period, prior to marketing a changed ormodified version of an existing legally marketed device, if such changes ormodifications could significantly affect the safety or effectiveness of thatdevice.  FDA prohibits the advertisementor promotion of any approved or cleared device for uses other than those thatare stated in the device’s approved or cleared application.

 

TheFDA granted 510(k) Clearance to market the KCP for hard-tissue applications inlate 1992.  510(k) Clearance to market the PAC was granted by the FDA inmid-1995.

 

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 issubject to inspection on a routine basis for compliance with FDAregulations.  These regulations includethose covering the QSR, which, unless the device is a Class I exempt device,require that the Company manufacture its products and maintain its documents ina prescribed manner with respect to issues such as design controls,manufacturing, testing and validation activities.  Further, the Company is required to comply with other FDArequirements with respect to labeling, and the MDR regulations which requirethat the Company provide information to the FDA on deaths or serious injuriesalleged to have been associated with the use of its products, as well asproduct malfunctions that are likely to cause or contribute to death or seriousinjury if the malfunction were to recur. The Company believes that it is currently in material compliance withall relevant QSR and MDR requirements.

 

In addition, our products are subject to regulatoryrequirements covering third-party reimbursement.   Our products are generally purchased by dental or medicalprofessionals who then bill various third party payors, such as governmentprograms or private insurance plans, for the procedures conducted using theseproducts.  In the United States thirdparty payors review and frequently challenge the prices charged for medicalservices. In many foreign countries, the prices are predetermined throughgovernment regulation.  Payors may denycoverage and reimbursement if they determine that the procedure was not medicallynecessary (for example, cosmetic) or that the device used in the procedure was investigational.  We believe that most of the procedures beingperformed with our current products generally have been reimbursed. Theinability to obtain reimbursement for services using our

 

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products could deter dentists and physicians frompurchasing or using our products.  Wecannot predict the effect of future healthcare reforms or changes in financingfor health and dental plans.  Any suchchanges could have an adverse effect on the ability of a dental or medicalprofessional to generate a return on investment using our current or futureproducts.  Such changes would act asdisincentives for capital investments by dental and medical professionals andcould have an adverse effect on our business, financial condition and resultsof operations.

 

*ForeignRegulatory Requirements*

 

Internationalsales of medical devices are also subject to the regulatory requirements ofeach country.  Regulation of medicaldevices in foreign countries varies between countries.  The Company, in general, will rely upon itsdistributors and sales representatives in the foreign countries in which itmarkets its products to ensure that the Company complies with the regulatorylaws of such countries.  In Europe, the regulations of the European Unionrequire that a device have a CE mark before it can be sold in that market.  The KCP, PAC, intraoral cameras and lasershave been granted CE mark approvals which are recognized by most Europeancountries, and may be sold in Germany and many other European markets.   Additional foreign authorizations to marketits 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 such countries. Exports of most medical devices are also subject to certain limited FDAregulatory controls.

 

**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 insurancewith coverage per occurrence and in the aggregate of $5,000,000.  There isno assurance that such coverage will be sufficient to protect American Medicalfrom all risks to which it may be subject or that product liability insurancewill be available at a reasonable cost, if at all, in the future.

 

**ForeignOperations and Segment Information**

 

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

 

**Employees**

 

On March 26, 2004, American Medical had 17 full-timeemployees.  Of these employees, 2 were engaged in direct sales and marketingactivities in addition to the 2 non-employee sales representatives.  Eightemployees are engaged in manufacturing activities, and the remaining 7employees are in finance, administration, customer service, and research anddevelopment.  American Medical has no collective bargaining agreementswith any unions and believes that its overall relations with its employees aregood.

 

**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   |   | 62      |   | President, Chief  Executive Officer, Chair of the Board of Directors |
| Barbara D. Woody |   | 42      |   | Controller                                                           |

 

*RogerW. Dartt-*Mr.Dartt**was selected by the Boardof Directors of the Company to serve as the Company’s Chief Executive Officeron June 1, 2002.  Prior to that date Mr. Dartt served as the President ofMediatrix International, Inc., a management consulting company that specializedin providing and implementing business growth strategies, mergers andacquisitions, turnaround restructuring and financial support to companies.

 

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In the past five years, Mr. Dartt had severalshort-term assignments as a turnaround specialist in companies engaged inelectronic circuit board manufacturing, specialty retail sales, commercialglass manufacturing and in the supply of durable medical equipment to the homehealthcare industry.  Prior to formingMediatrix, Mr. Dartt was president; chief executive officer or chief operatingofficer of eight companies in the medical, dental electronic and specialtyretail markets, including subsidiaries of Bristol Meyers and PepsiCo.

 

*BarbaraD. Woody –*Ms.Woody was appointed Controller in December 2002.  Prior to joining theCompany, she had served as Controller for Roy Smith Shoes, Inc. and as BusinessManager for Henley Healthcare, Inc.

 

**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-lookingstatements are subject to risks and uncertainties and include information aboutits expectations and possible or assumed future results of operations. When the Company uses any of the words “believes”, “expects”, “anticipates”,“estimates” or similar expressions, it is making forward-looking statements.

 

The Company claims the protection of the safe harborfor forward-looking statements contained in the Private Securities LitigationReform Act of 1995 for all of its forward-looking statements.  While theCompany believes that its forward-looking statements are reasonable, you shouldnot place undue reliance on any such forward-looking statements, which speakonly as of the date made.  Because these forward-looking statements are basedon estimates and assumptions that are subject to significant business, economicand competitive uncertainties, many of which are beyond the Company’s controlor are subject to change, actual results could be materially different. Factors that might cause such a difference include, without limitation, thefollowing:  the Company’s inability to generate sufficient cash flow tomeet its current liabilities, the inability of the Company to find suitable newacquisitions or the expense or difficulty of integrating such acquisitions withcurrent Company operations, adverse results in any of the Company’s materiallawsuits, 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 original equipmentmanufacturer agreements or strategic alliances and the other risks and uncertaintiesset forth in this report.

 

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 OF PROPERTY

 

AmericanMedical owns an approximately 45,000 square foot manufacturing facility on 5.2acres located at 5655 Bear Lane, Corpus Christi, Texas 78405, which houses itsmanufacturing and administration facilities.  A mortgage on this propertywas held by ValueBank to secure the Company’s line of credit with ValueBank andthe U.S. Small Business Administration. On June 17, 2003, ValueBank assigned the mortgage and related securityinstruments to Aimee Maroney.

 

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

 

ITEM 3.          LEGAL PROCEEDINGS

 

In September of 2003, Big Sky Laser Technologies, Inc.sued American Medical in the U.S. District Court, Southern District of Texas,Houston Division, for breach of contract, fraud, misrepresentation andviolation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”)arising out of an alleged willful and fraudulent breach of contract by AmericanMedical to purchase equipment known as resonator assemblies and opticsets.  Big Sky seeks $285,000 in actualdamages, along with attorney’s fees and interest.  Big Sky also seeks $500,000 in punitive damages or alternativelytreble damages under RICO in the amount of $850,000 based upon its assertion

 

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that American Medicalfraudulently misrepresented its intentions of paying amounts owed under thecontract.  American Medical isvigorously contesting the amounts due under the contract on the basis that thegoods, the subject of the contract, were non-conforming and appropriatelyrejected.  In addition, the Company hasfiled a motion to strike the RICO claims and a counterclaim for breach ofcontract and delivery of defective goods in the amount of $22 million.

 

As aresult of the Company restructuring and moving out of 12 leased sales offices,the Company has received notice of 3 lawsuits or judgments from landlords thattotal approximately $70,000.  In addition, the Company has receivednotices of additional vendor collection lawsuits that total approximately$680,000. The Company is in negotiation with all parties, has reached asettlement in some cases, and expects to reach a settlement in the others, as aresult of the availability of proceeds from sale of the Biolase Shares for suchpurposes.

 

ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Notapplicable.

 

**PART II**

 

ITEM 5.          MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

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’s common stock because themarket value of its publicly held shares had fallen below the minimum of$1,000,000, and its closing bid price had fallen below the minimum of $1.00 pershare required for continued listing on the Nasdaq SmallCap Market.  SinceMarch 26, 2003, the Company’s common stock has been quoted on the OTC BulletinBoard  (Symbol: ADLI).

 

The following table sets forth the high and low salesprices per share of the Company’s common stock as reported by Nasdaq throughMarch 26, 2003, and the high and low bid quotations in the over-the-countermarket thereafter, for each quarterly period during the last two years.  The over-the-counter market quotationsreflect inter-dealer prices, without retail mark-up, mark-down or commission,and may not necessarily represent actual transactions.

 
|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| **2002**       |   |     |   |    |   |
| First Quarter  |   | $        | 1.37   |    | $      | .53 |   |
| Second Quarter |   | .60      |   | .26     |   |
| Third Quarter  |   | .45      |   | .11     |   |
| Fourth Quarter |   | .28      |   | .05     |   |
|           |   |     |   |    |   |
| **2003**       |   |     |   |    |   |
| First Quarter  |   | $        | .27    |    | $      | .11 |   |
| Second Quarter |   | .37      |   | .15     |   |
| Third Quarter  |   | .43      |   | .30     |   |
| Fourth Quarter |   | .60      |   | .35     |   |

 

As ofMarch 26, 2004, there were approximately 374 holders of record of AmericanMedical common stock based upon the records of the Company’s stock transferagent and security position listings.

 

OnOctober 16, 2003, the Company issued to Bank One N.A. 516,958 shares of itscommon stock pursuant to the exercise by Bank One of the warrant held by it topurchase up to 721, 510 shares at an exercise price of  $.11 per share.  Bank One exercised the warrant in full and tendered 204,552shares of Company stock in payment for the shares issued to it.  The securities sold to Bank One were issuedin a private placement made in reliance on Section 4(2) of the Securities Actof 1933 and did not involve any underwriters.

 

TheBoard of Directors presently intends to retain all earnings to financeoperations and does not expect to authorize cash dividends in the foreseeablefuture.  Any payment of cash dividendsin the future will depend upon

 

8

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earnings, capital requirements, any restrictivecovenants in future loan agreements and other factors considered relevant bythe Board of Directors.

 

ITEM 6.          SELECTED FINANCIAL DATA

 

Thefollowing selected financial data, as of and for each of the five years endedDecember 31, 2003, is derived from the audited financial statements of theCompany.  The table also includes proforma balance sheet data at December31, 2003, which gives effect to the March 3, 2004 sale of Biolase Shares as ifit occurred December 31, 2003. Operating results for prior years are not necessarily indicative of theresults that may be expected for any other periods.  The data should beread in conjunction with the financial statements and related notes included inthis report and with Item 7 “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.”

 
|                                                 |   |   |   | **2003** |   | **2002**  |   | **2001** |   | **2000** |   | **1999** |   |
|------------------------------------------------------|--------|--------|--------|----------|--------|-----------|--------|----------|--------|----------|--------|----------|--------|
| Operating Data:                                      |   |   |   |     |   |      |   |     |   |     |   |     |   |
| Net revenues                                         |   |   |   | $        | 2,999  |      | $      | 9,084    |   | $        | 14,689 |     | $      | 19,902 |   | $ | 24,370 |   |
| Net income (loss)                                    |   |   |   | $        | 54     |  (1) | $      | (7,044   | )(2)   | $        | (3,978 | )        | $      | (18,403 | )(3) | $ | 392 |   |
|                                                 |   |   |   |     |   |      |   |     |   |     |   |     |   |
| Net income (loss) per common share assuming dilution |   |   |   | $        | 0.01   |      | $      | (0.98    | )      | $        | (0.57  | )        | $      | (2.53 | ) | $ | 0.05 |   |
|                                                 |   |   |   |     |   |      |   |     |   |     |   |     |   |
| Weighted average number of common shares             |   |   |   | 7,533    |   | 7,181     |   | 6,923    |   | 7,284    |   | 7,446    |   |

 
| **Balance Sheet Data (at year end):** |   | **Proforma(4)  2003** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** |   |
|---------------------------------------|--------|-----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|--------|
| Current Assets                        |   | $                     | 6,815      |     | $          | 1,480    |       | $        | 4,349      |     | $          | 9,346    |   | $ | 12,502 |   | $ | 20,100 |   |
| Total Assets                          |   | $                     | 8,051      |     | $          | 8,051    |       | $        | 8,103      |     | $          | 14,196   |   | $ | 18,291 |   | $ | 40,348 |   |
| Long-term obligations                 |   | 682                   |       | 682      |       | 4        |       | 78       |       | 2,673    |       | 5,373    |   |
| Stockholders’ equity(5)          |   | 3,701                 |       | 3,471    |       | 1,934    |       | 8,626    |       | 13,002   |       | 32,018   |   |
| Working capital (deficit)             |   | 3,316                 |       | (1,952   | )          | (1,515   | )          | 3,854    |       | 9,886    |       | 17,144   |   |

 

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(1)   Includes impairment charges of  $1.9 million related to the write off ofgoodwill related to the acquisition of Incisive, a dental laser company, due tothe Company’s decision not to continue in the laser market and a gain of $3.9on the sale of Dental Laser Assets to Biolase

 

(2)   Includes impairment charges of $.6 million related tothe write off of ADL Japan goodwill and PAC Rim distribution rights and acharge to increase the reserve for slow moving inventory by $2.1 million and awrite-off of demonstration inventory of $.4 million.

 

(3)   Includes impairment charges of $9.2 million related tointangibles associated with the air abrasion and camera product lines, a chargeto increase the reserve for slow moving inventory by $.8 million, a write offof demonstration inventory of $1.2 million related to the change in thebusiness model, and a deferred income tax valuation allowance of $5.6 million.

 

(4)   The 2003 Proforma column reflects the sale of the307,500 Biolase Shares on March 3, 2004. The gross sale proceeds were $5,688,750; the net proceeds received afterunderwriters’ fees were $5,335,125. This cash amount is reflected in current assets, with the additionalrealized gain on available for sale securities of $230,625 reflected instockholders’ equity.

 

(5)   No dividends were paid on the common stock during theperiods presented.

 

ITEM 7.          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION 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 certainforward-looking statements relating to the Company’s anticipated futurefinancial condition and operating results and its current

 

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business plans. In the future, the Company’s financial condition and operating resultscould differ materially from those discussed herein and its current businessplans could be altered in response to market conditions and other factorsbeyond its control.  Important factorsthat could cause or contribute to such differences or changes include thosediscussed elsewhere in this report.  Seethe disclosures under “Item 1-Business-Forward Looking Statements.”

 

**CriticalAccounting Policies**

 

Thepreparation of financial statements in conformity with accounting principles generallyaccepted in the United States requires the Company to make estimates andassumptions that affect amounts reported in the accompanying consolidatedfinancial statements and related footnotes. These estimates and assumptions are evaluated on an on-going basis basedon historical developments, market conditions, industry trends and otherinformation the Company believes to be reasonable under the circumstances.  There can be no assurance that actualresults will conform to the Company’s estimates and assumptions, and thatreported results of operations will not be materially adversely affected by theneed to make accounting adjustments to reflect changes in these estimates andassumptions from time to time.  Thefollowing policies are those the Company believes to be the most sensitive toestimates and judgments.  The Company’ssignificant accounting policies are more fully described in Note 1 to ourconsolidated financial statements.

 

*RevenueRecognition*

 

The Company recognizesrevenue when all of the following criteria are met:  1) a contract or sales arrangement exists; 2) productshave been shipped, and if necessary installed, and title has been transferredor services have been rendered; 3) the price of the products or servicesis fixed or determinable; 4) no further obligation exists on the part ofthe Company (other than warranty obligations); and 5) collectibility isreasonably assured.  The Companyrecognizes the related estimated warranty expense when title is transferred tothe customer, generally upon shipment. The Company recognizes revenue on certain sales to two of itsinternational distributors under terms that require shipment to a localindependent warehouse.  The Company’spolicy is to include shipping and handling costs, net of the related revenues,in costs of goods sold. Only the Company’s Anthos dental chairs and itsnetworked camera systems required installation and revenue is not recordeduntil the installation is complete. There are no significant estimates orassumptions involved in determining the appropriate recognition of revenues.

 

*Allowancefor Doubtful Accounts*

 

TheCompany evaluates the collectibility of accounts receivable based on acombination of factors.   Incircumstances where the Company is aware of a specific customer’s inability tomeet its financial obligations (e.g., bankruptcy filings, substantialdown-grading of credit scores), the Company records a specific reserve for baddebts against amounts due to reduce the net recognized receivable to the amountreasonably believed to be collectible. For all accounts not specifically analyzed, the Company recognizesreserves of 100% of all accounts over 90 days past due and 5% for allremaining accounts.  If circumstanceschange (i.e., higher than expected defaults or an unexpected material adversechange in a major customer’s ability to meet its financial obligations), theestimates of the recoverability of amounts due could be reduced by a materialamount.

 

*Inventories—SlowMoving*

 

TheCompany’s reserve for slow moving inventory is evaluated periodically based onits current and projected sales and usage.  Prior to the fourth quarter2002, the Company’s inventory reserve was calculated by comparing on handquantities as of the measurement date to the prior twelve months’ sales. The reserve calculation assumed that sales for each unit or part will not beless than sales for the prior twelve months.  If sales are significantlydifferent than prior year’s sales for the unit or part, the reserve could bematerially impacted.  Changes to the reserves are included in costs ofgoods sold and have a direct impact on the Company’s financial position andresult of operations.  The reserve is calculated differently for finishedunits than it is for parts.  For parts, when the on hand quantity exceededthe prior twelve months’ sales and usage, the excess inventory was calculatedby subtracting the greater of the prior twelve months’ sales and usage or abase quantity of 50 from the quantity on hand.  This excess was then 100%reserved.  The base quantity of 50 represented management’s determinationof the minimum quantity of parts needed to fulfill its service, repair, andwarranty obligations.  All parts or units with less than twelve months ofsales or usage history were excluded from the calculation.

 

10

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In thefourth quarter of 2002, the Company changed certain assumptions it uses incomputing the inventory valuation allowance.  The inventory reservecalculation remained the same for finished units, but was changed forparts.  For parts, the new policy assumes that any parts on hand exceedingthree years of projected usage are subject to complete write-off.  Forpurposes of computing the valuation allowance at December 31, 2002, part usagewas projected at 50% of 2002 part usage. In 2002, the adoption of these new assumptions resulted in an increasein the valuation allowance of $1.4 million over what the allowance would havebeen under previous assumptions.

 

Theinventory reserve calculation method remained the same in 2003.  Thevaluation allowance could change materially, either up or down, if actual partusage in future years is materially different than the usage projected atDecember 31, 2003.

 

*LongLived Assets—Impairment Testing*

 

TheCompany evaluates its property, plant, and equipment for impairment wheneverindicators of impairment exist.  TheCompany follows the guidance of FASB Statement No. 121 *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed Of*, and StatementNo. 142 *Goodwill and Other IntangibleAssets*, and projects future cash flows for the related products andoperating segments based on management’s best estimates of likely future sales,less costs of goods sold and selling expenses based on historical data andperceived trends in the industry.  Theseresults are then compared to the recorded value of the related assets andintangibles and if less than the recorded value, an impairment charge isrecognized.  If actual results aresignificantly worse than management’s estimates, the Company could be requiredto recognize an impairment, which could have a material adverse effect on itsfinancial position and results of operations.

 

*IntangibleAsset Impairment*

 

Asthe Company has decided not to continue in the dental laser market, thegoodwill related to Incisive, a dental laser company, is considered impairedand was charged-off in the fourth quarter of 2003.  This charge-off resulted in a one-time expense in the amount of$1,971,427.

 

**Resultsof Operations**

 

Forthe year ended December 31, 2003, the Company’s revenues decreased 69% comparedto 2002.  This decrease in revenues wasprimarily due to two reasons.  First,the Company’s weakened financial condition during the previous two yearsnecessitated a change in management and restructuring of the Company, whichcommenced in 2002.  The Companyimplemented severe cost cutting in connection with its restructuring whichenabled it to survive, but made it increasingly difficult to develop, marketand sell products.  In late 2002,Biolase filed a patent infringement lawsuit against the Company, which allegedthat the Company’s Cavilase laser, which was under development, infringed oneor more Biolase patents.  This lawsuitdirectly impacted the Company’s ability to complete development and marketingof the Cavilase and to sell the remainder of its laser product line, andultimately resulted in the sale of the Dental Laser Assets to Biolase. The saleof the Dental Laser Assets to Biolase reduced sales in 2003 by an estimated$3.8 million.

 

Thesecond reason for the decrease in revenues was a result of the Company notbeing able to immediately sell the 307,500 Biolase Shares it received as partof the consideration for the sale of the Dental Laser Assets. The BiolaseShares that the Company received were restricted shares which Biolase agreed toregister for resale to the public as soon as practicable.  The Company had originally anticipated thatthe Biolase Shares would be sold within a few months of the May 2003 closing ofthe Biolase transaction.  As a result ofnumerous unanticipated delays in registering the Company’s Biolase Shares, theshares were not actually sold until March of 2004.  The Company’s Biolase Shares were sold on March 3, 2004 for grossproceeds of $18.50 per share, or a total of $5,688,750.  The net proceeds to the Company were$5,335,125.  American Medical is in theprocess of paying off its remaining debt and payables, amounting toapproximately $3.0 million at March 3, 2004. Upon payment of such obligations, American Medical anticipates that itwill be a debt free company with approximately $3 million cash.  The Company believes that the payment of allof its debt and its cash position will enable it to concentrate on futuregrowth opportunities as it goes forward.

 

Becauseof the lengthy, unanticipated delay in the sale of the Company’s BiolaseShares, during most of 2003 and early 2004, the Company had very littleoperating cash to support a sales and marketing effort.  The Company made repeated significantefforts to arrange temporary debt financing using the Biolase Shares as

 

11

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collateral; however, due to the Company’s weakenedfinancial condition, market conditions regarding Biolase stock and otherfactors, the Company was unable to obtain any loan using the Biolase Shares, orotherwise raise additional capital. Therefore, the Company reduced personnel and operating expenditures tothe level that allowed the Company to operate on its own cash flow until thesale of the Biolase Shares.  This lackof cash resulted in the Company’s inability to attend trade shows and buy keyparts for the Company’s remaining product lines.  These factors were a prime contributor to a decline of non-laserproduct sales to $2.1 million in 2003, from $4.3 million in 2002.

 

Forthe year ended December 31, 2002, the Company’s revenues decreased 32% comparedto 2001.  This decrease in revenues was primarily due to three reasons.First, the weakened financial condition of the Company during the first andsecond quarter necessitated a change in management and restructuring of theCompany’s sales and distribution, as reported in the Quarterly Report for theperiod ended September 30, 2002.  The Company in the first two quarterssold directly to dentists through 12 sales offices and 34 salesemployees.  In June, the Company re-evaluated its business model andadapted the restructuring plan described above, which was designed tosignificantly reduce operating expenses.  The Company began reintroducingitself to the dental dealers and entered into a dealer distribution agreementwith Sullivan-Schein Dental on October 3, 2002, who then began promoting theCompany’s dental products through their nationwide sales force. During thistransition period, all products experienced revenue declines, domestically by$3.4 million and internationally by $1.9 million.  Domestically, revenuesof Diolase declined by $800,000, UltraCam by $900,000, and Pulsemaster, KCP andPower Pac by $400,000 each.  Parts and service 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 inNovember 2002 a patent infringement lawsuit by Biolase stopped all efforts onthe product while the two companies entered into negotiations to resolve thedispute.  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 the Anthos system increased by $477,000as 2002 was its first full year after being introduced into the market in 2001.

 

Thethird reason for the revenue decrease was that international sales declined$1.9 million due to the loss of the Japanese distributor, reported earlier, andrestructuring of the Company’s German subsidiary to reduce operating lossesexperienced previously.

 

Grossprofit as a percentage of revenues was 40% for the year ended December 31, 2003compared to 12% for the year ended December 31, 2002.  The reason for this improvement was the elimination of the needto increase inventory reserves and resulting increases in cost of goods.

 

Selling,general and administrative expenses were $2,644,729 in 2003, $6,772,812 in 2002and $9,195,306 in 2001.  The reductionin expenses is the result of the Company’s restructuring efforts referred toearlier.

 

Otherincome was $4,123,763 in 2003, $17,927 in 2002 and $118,237 in 2001.  Of the amount for 2003, $3.9 million isrelated to a gain on the sale of the Dental Laser Assets to Biolase.

 

Interestexpense declined from $281,957 in 2002 to $136,518 in 2003.  This reduction is due to the pay off of theBank One loan in May 2003 as part of the Biolase transaction.

 

Researchand development expenses were $233,898 in 2003, $595,156 in 2002, and $796,424in 2001.  The limited funds available for research and development wereused to further development of the Company’s KCP FlexiJet® product.

 

Restructuringexpenses for the year 2002 were $708,242, and arose out of the restructuringprogram implemented in June 2002 and described elsewhere in this report.  In 2003 an adjustment was made to decreaserestructuring in the amount of $5,723.

 

The Company had no income tax expense in 2003.  The Company applied and received a taxrefund in 2002 of $237,418 for NOL’s carried back to 1996, 1997, 1998 and 1999. In 2001, the Company had no income tax expense.  At December 31, 2003, the Company had approximately$25 million of net operating loss carry forwards. These net operating losscarry forwards expire in various amounts in the years 2006 through 2023.

 

12

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**Liquidityand Capital Resources**

 

TheCompany’s operating activities used $590,593 in cash resources in 2003. Cash used by operating activities in 2003 was due largely to payments ofexisting accounts payable.  This item was partially offset by collectionson accounts receivable, a decrease in inventory and prepaid expenses and othercurrent assets.  This loss included non-cash charges totaling $2,180,707consisting of depreciation and amortization expense and impairment charges forintangible assets.  In addition, inventory and accounts receivabledeclined by $1,447,031 and $60,245, respectively from December 31, 2002 toDecember 31, 2003.

 

TheCompany’s investing activities provided $1,835,076 in cash in 2003.  Thecash provided by investing activities in 2003 related primarily to proceedsfrom the sale of the Dental Laser Assets to Biolase, reduced by purchases ofproperty and equipment.

 

TheCompany’s financing activities used $1,650,019 in cash to pay off the line ofcredit owed to Bank One.

 

On June 17, 2003, ValueBank assigned its interest in the Company’s $750,000 note and related securityinstruments to Aimee Maroney for $682,056, which was the outstanding principalbalance under the note, and agreed to release Mrs. Maroney and the Company fromall claims arising out of the note and security documents.  Subsequently, the Company negotiated theamendment of the note to provide for an interest rate of 5% per annum, with allprincipal and accrued interest payable in a single payment on December 31,2004.  As consideration for the purchaseof the note by Mrs. Maroney and the amendment of the terms of the note, theCompany issued to Mrs. Maroney 100,000 shares of its Series B Preferred Stockon July 29, 2003.  Mrs. Maroney is thewife of Mr. William Maroney, a director of the Company.  The preferred shares were valued based onrecently subscribed price of $1.00 per share, which was the most recent priceat which preferred shares had been purchased. The value of the preferred shares issued to Mrs. Maroney has beenreflected as a deferred financing cost and will be amortized as interestexpense over the remaining term of the note.

 

TheCompany’s Biolase Shares were sold in March of 2004 for gross proceeds of $18.50per share, or a total of $5,688,750. The net proceeds of the Company were $5,335,125.  American Medical is in the process of payingoff its remaining debt and payables, amounting to approximately $3.0 million atMarch 3, 2004.  Upon payment of such obligations,American Medical anticipates that it will be a debt free company withapproximately $3 million cash.  TheCompany believes that the payment of all of its debt and its cash position willenable it to concentrate on growth opportunities as it goes forward and to meetits working capital needs for at least the next twelve months.

 

Thefollowing table summarizes our contractual obligations as of December 31, 2003:

 
|                               |   | **2004** |    | **2005** |   | **2006** |   | **2007 and  thereafter** |   | **Total** |   |
|------------------------------------|--------|----------|---------|----------|--------|----------|--------|--------------------------|--------|-----------|--------|
| Long term debt                     |   | $        | 682,056 |     | $      | —   |   | $                        | — |      | $      | — |   | $ | 682,056 |   |
| Capital leases                     |   | —   |    | —   |   | —   |   | —                   |   | —    |   |
| Operating leases                   |   | 3,922    |    | 3,714    |   | 1,287    |   | —                   |   | 8,923     |   |
| Total contractual cash obligations |   | $        | 685,978 |     | $      | 3,714    |   | $                        | 1,287  |      | $      | — |   | $ | 690,979 |   |
|                                    |        |          |         |          |        |          |        |                          |        |           |        |  |  |  |  |  |  |

 

**NewAccounting Standards and Disclosures**

 

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”).  Under FIN 46, a variable interest entity (“VIE”) is defined as a corporation, trust, partnership or other entity where the equity investment holders have not contributed sufficient capital to finance the activities of the VIE or the equity investment holders do not have defined rights and obligations normally associated with an equity investment.  FIN 46 requires consolidation of a VIE by the enterprise that has the majority of the risks and rewards of ownership, referred to as the primary beneficiary.  FIN 46 did not have a significant impact on our results of operations and financial position.

 

In May 2003, Statement ofFinancial Accounting Standards No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity” (“SFAS 150”),was issued.  SFAS 150 clarifies theaccounting for certain financial instruments with characteristics of bothliabilities and equity and requires that these

 

13

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instruments be classified as liabilities in statementsof financial position. SFAS 150 was effective immediately for financialinstruments entered into or modified after May 31, 2003, and for interim orannual periods beginning after June 15, 2003 for transactions entered intobefore June 1, 2003.  The adoption ofSFAS 150 did not have a significant impact on our results of operations orfinancial position.

 

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.  The transition and annual disclosureprovisions of SFAS No. 148 are effective for fiscal years ending after December15*,*2002.   In addition, SFAS No. 148 amends thedisclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults. The Company will continue to account for stock-based compensation toemployees under APB Opinion No. 25 and related interpretations. The Companyadopted the disclosure requirements of this Statement as of December 31, 2002.

 

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK

 

In thenormal course of business, the Company is subject to market risk from changesin foreign exchange rates and interest rates.

 

**ForeignCurrency Exchange Rate Risk**

 

TheCompany sells its products in North America, Europe (primarily Germany), andother foreign countries.  The Company is headquartered in the UnitedStates and has a German subsidiary. Except for revenues generated by its German subsidiary, the Companysells its products to its foreign customers in United States dollars.  Asa result, the Company’s financial results could be affected by factors such aschanges in foreign currency exchange rates or weak economic conditions in theforeign markets in which the Company distributes its products.  TheCompany’s operating results are primarily exposed to changes in exchange ratesbetween the United States dollar and the European Union 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.

 

As of December 31, 2003 and 2002, the Company’s net assets subject toforeign currency translation risk (defined as current assets less currentliabilities) were $124,729 and $476,373, respectively.  The potential decrease in net assets from ahypothetical 10% adverse change in quoted foreign currency exchange rates wouldbe approximately $12,000 and $48,000 for 2003 and 2002, respectively.

 

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ITEM 8.          FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

 

INDEPENDENT AUDITOR’S REPORT

 

To The Stockholders andBoard of Directors

American MedicalTechnologies, Inc.

 

We have audited theaccompanying consolidated balance sheets of American Medical Technologies, Inc.as of December 31, 2003 and 2002 and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for the years ended December31, 2003 and 2002.  Our audits alsoincluded the financial statement schedule listed in the index at Item 15. These financial statements 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.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America.  Those standards require that we plan and perform the auditsto obtain reasonable assurance about whether the financial statements are freeof material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our audits providea reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of American MedicalTechnologies, Inc. as of December 31, 2003 and 2002 and the consolidatedresults of its operations and its cash flows for the years then ended, inconformity with accounting principles generally accepted in the United Statesof America.  Also, in our opinion, the related financial statementschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly, in all material respects the information set forththerein.

 

 
| /s/ Hein &  Associates LLP |   |
|--------------------------------|--------|
| HEIN & ASSOCIATES  LLP     |
| Houston, Texas                 |
| February  21, 2004             |

 

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**REPORT OF INDEPENDENT AUDITORS**

 

To the Stockholders andBoard of Directors

American MedicalTechnologies, Inc.

 

We have audited theaccompanying consolidated statements of operations, stockholders’ equity, andcash flows for the year ended December 31, 2001.  These financial statements are the responsibility of theCompany’s management.  Our responsibility is to express an opinion onthese financial statements based on our audit.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statements presentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated results of operations, stockholders’equity, and cash flows of American Medical Technologies, Inc. for the yearended December 31, 2001, in conformity with accounting principles generallyaccepted in the United States of America.

 

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern.  As discussed in Note 1 to theconsolidated 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 financial statements. These matters raise substantial doubt about the Company’s ability to continueas a going concern. The consolidated financial statements do not includeany adjustments to reflect the possible future effect on the recoverability andclassification of assets or the amounts and classification of liabilities thatmay result from the outcome of this uncertainty.

 

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

 

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#### **Consolidated BalanceSheets**

 

**DECEMBER 31, 2003 AND 2002**

 
|                                                                                                                              |   | **2003**    |      | **2002**    |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-----------|-------------|--------|
| *ASSETS*                                                                                                                          |   |        |      |        |   |
| **CURRENT ASSETS:**                                                                                                               |   |        |      |        |   |
| Cash                                                                                                                              |   | $           | 217,581   |        | $      | 566,436 |   |
| Accounts receivable, less allowance of  $170,682 in 2003 and $261,118 in 2002                                                |   | 210,442     |      | 472,354     |   |
| Inventories                                                                                                                       |   | 914,935     |      | 3,113,060   |   |
| Prepaid expenses and other current assets                                                                                         |   | 137,381     |      | 197,577     |   |
| Total current assets                                                                                                              |   | 1,480,339   |      | 4,349,427   |   |
|                                                                                                                              |   |        |      |        |   |
| **DEFERRED FINANCING COST**                                                                                                       |   | 66,667      |      | —      |   |
|                                                                                                                              |   |        |      |        |   |
| **SECURITIES AVAILABLE FOR SALE**                                                                                                 |   | 5,104,500   |      | —      |   |
|                                                                                                                              |   |        |      |        |   |
| **PROPERTY AND EQUIPMENT,** net                                                                                                   |   | 1,389,546   |      | 1,753,997   |   |
|                                                                                                                              |   |        |      |        |   |
| **INTANGIBLE ASSETS**, net                                                                                                        |   |        |      |        |   |
| Goodwill                                                                                                                          |   | —      |      | 1,971,427   |   |
| Other                                                                                                                             |   | 10,381      |      | 27,847      |   |
|                                                                                                                              |   | 10,381      |      | 1,999,274   |   |
|                                                                                                                              |   |        |      |        |   |
| Total assets                                                                                                                      |   | $           | 8,051,433 |        | $      | 8,102,698 |   |
|                                                                                                                              |   |        |      |        |   |
| *LIABILITIES AND STOCKHOLDERS’ EQUITY*                                                                                       |   |        |      |        |   |
| ***Current Liabilities:***                                                                                                        |   |        |      |        |   |
|                                                                                                                              |   |        |      |        |   |
| Accounts payable                                                                                                                  |   | $           | 1,892,215 |        | $      | 2,714,003 |   |
| Compensation and employee benefits                                                                                                |   | 600,540     |      | 81,538      |   |
| Accrued restructuring costs                                                                                                       |   | 355,831     |      | 418,335     |   |
| Other accrued liabilities                                                                                                         |   | 650,097     |      | 318,728     |   |
| Current notes payable                                                                                                             |   | —      |      | 2,332,075   |   |
| Total current liabilities                                                                                                         |   | 3,498,683   |      | 5,864,679   |   |
| **NOTE PAYABLE TO RELATED PARTY**                                                                                                 |   | 682,056     |      | —      |   |
|                                                                                                                              |   |        |      |        |   |
| **OTHER NON-CURRENT LIABILITIES**                                                                                                 |   | —      |      | 4,103       |   |
| Total liabilities                                                                                                                 |   | 4,180,739   |      | 5,868,782   |   |
|                                                                                                                              |   |        |      |        |   |
| **COMMITMENTS AND CONTINGENCIES (Note 8)**                                                                                        |   |        |      |        |   |
|                                                                                                                              |   |        |      |        |   |
| **SERIES B PREFERRED STOCK,** $.01 par value, authorized 575,000 shares;  Outstanding: 400,000 shares in 2003 and 300,000 in 2002 |   | 400,000     |      | 300,000     |   |
| **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: 7,939,306 in 2003 and 7,362,348 in 2002                 |   | 317,572     |      | 294,497     |   |
| Additional paid-in capital                                                                                                        |   | 41,709,102  |      | 41,717,178  |   |
| Warrants and options                                                                                                              |   | 927, 046    |      | 927,046     |   |
| Accumulated deficit                                                                                                               |   | (40,493,192 | )         | (40,546,865 | )      |
| Unrealized gain on available for sale securities                                                                                  |   | 1,411,425   |      | —      |   |
| Foreign currency translation                                                                                                      |   | (401,259    | )         | (457,940    | )      |
| Total stockholders’ equity                                                                                                   |   | 3,470,694   |      | 1,933,916   |   |
| Total liabilities and stockholders’ equity                                                                                   |   | $           | 8,051,433 |        | $      | 8,102,698 |   |

 

17

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# **CONSOLIDATED STATEMENTS OF OPERATIONS**

 

**FOR YEARS ENDED DECEMBER 31, 2003,2002 AND 2001**

 
|                                          |   | **2003**   |      | **2002**   |   | **2001**   |   |
|-----------------------------------------------|--------|------------|-----------|------------|--------|------------|--------|
| **REVENUES**                                  |   | $          | 2,779,795 |       | $      | 8,943,076  |   | $ | 14,473,051 |   |
|                                          |   |       |      |       |   |       |   |
| **ROYALTIES**                                 |   | 218,721    |      | 141,370    |   | 215,635    |   |
|                                          |   | 2,998,516  |      | 9,084,446  |   | 14,688,686 |   |
| **COST OF SALES**                             |   | 1,880,535  |      | 8,025,136  |   | 8,634,543  |   |
| Gross profit                                  |   | 1,117,981  |      | 1,059,310  |   | 6,054,143  |   |
|                                          |   |       |      |       |   |       |   |
| **COST AND EXPENSES:**                        |   |       |      |       |   |       |   |
| Selling, general and administration           |   | 2,644,729  |      | 6,772,812  |   | 9,195,306  |   |
| Goodwill impairment                           |   | 1,971,427  |      | —     |   | —     |   |
| Accrued losses on vendor settlements          |   | 207,222    |      | —     |   | —     |   |
| Research and development                      |   | 233,898    |      | 595,156    |   | 796,424    |   |
| Restructuring costs                           |   | (5,723     | )         | 708,242    |   | —     |   |
| Loss from operations                          |   | (3,933,572 | )         | (7,016,900 | )      | (3,937,587 | )      |
|                                          |   |       |      |       |   |       |   |
| **OTHER INCOME (EXPENSES):**                  |   |       |      |       |   |       |   |
| Gain on sale of dental laser assets           |   | 3,909,936  |      | —     |   | —     |   |
| Other income                                  |   | 213,827    |      | 17,927     |   | 118,237    |   |
| Interest expense                              |   | (136,518   | )         | (281,957   | )      | (158,909   | )      |
| Income (Loss) before income taxes             |   | 53,673     |      | (7,280,930 | )      | (3,978,259 | )      |
| Income tax (benefit) expense                  |   | —     |      | (237,418   | )      | —     |   |
| Net income (loss)                             |   | $          | 53,673    |       | $      | (7,043,512 | )      | $ | (3,978,259 | ) |
|                                          |   |       |      |       |   |       |   |
| Net income (loss) per share                   |   | $          | 0.01      |       | $      | (0.98      | )      | $ | (0.57 | ) |
|                                          |   |       |      |       |   |       |   |
| Net income (loss) per share assuming dilution |   | $          | 0.01      |       | $      | (0.98      | )      | $ | (0.57 | ) |

 

18

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# **CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

 

**FOR YEARS ENDED DECEMBER 31, 2003,2002 AND 2001**

 
|                                             |   |             |   |        |    |           |   |            |   |         |    |            |   | **UNREALIZED** |   |       |     |
|--------------------------------------------------|--------|------------------|--------|-------------|---------|----------------|--------|-----------------|--------|--------------|---------|-----------------|--------|----------------|--------|------------|----------|
|                                             |   |             |   |        |    |           |   |            |   |         |    |            |   | **GAIN ON**    |   |       |     |
|                                             |   |             |   |        |    | **ADDITIONAL** |   | **WARRANTS**    |   |         |    | **FOREIGN**     |   | **AVAILABLE**  |   |       |     |
|                                             |   | **COMMON STOCK** |   | **PAID-IN** |    | **AND**        |   | **ACCUMULATED** |   | **CURRENCY** |    | **FOR SALE**    |   |           |   |
|                                             |   | **SHARES**       |   | **AMOUNT**  |    | **CAPITAL**    |   | **OPTIONS**     |   | **DEFICIT**  |    | **TRANSLATION** |   | **SECURITIES** |   | **TOTAL**  |     |
| 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  |     |
| Net income for 2003                              |   | —           |   | —      |    | —         |   | —          |   | 53,673       |    | —          |   | —         |   | 53,673     |     |
| Unrealized gain on available for sale securities |   | —           |   | —      |    | —         |   | —          |   | —       |    | —          |   | 1,411,425      |   | 1,411,425  |     |
| Foreign currency translation                     |   | —           |   | —      |    | —         |   | —          |   | —       |    | 56,681          |   | —         |   | 56,681     |     |
| Comprehensive income                             |   | —           |   | —      |    | —         |   | —          |   | —       |    | —          |   | —         |   | 1,521,779  |     |
| Issuance of common stock                         |   | 576,958          |   | 23,075      |    | (8,076         | )      | —          |   | —       |    | —          |   | —         |   | 14,999     |     |
|                                             |   |             |   |        |    |           |   |            |   |         |    |            |   |           |   |       |     |
| Balance at December 31, 2003                     |   | 7,939,306        |   | $           | 317,572 |           | $      | 41,709,102      |   | $            | 927,046 |            | $      | (40,493,192    | )      | $          | (401,259 | ) | $ | 1,411,425 |   | $ | 3,470,694 |   |
|                                                  |        |                  |        |             |         |                |        |                 |        |              |         |                 |        |                |        |            |          |  |  |  |  |  |  |  |

 

19

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                                                         |   | **2003**   |    | **2002**  |   | **2001**   |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|------------|---------|-----------|--------|------------|--------|
| **OPERATING ACTIVITIES:**                                                                                                    |   |       |    |      |   |       |   |
| Net income/(loss)                                                                                                            |   | $          | 53,673  |      | $      | (7,043,512 | )      | $ | (3,978,259 | ) |
| Adjustments to reconcile net income/(loss) to net cash provided by  (used in) operating activities:                          |   |       |    |      |   |       |   |
| Depreciation                                                                                                                 |   | 204,920    |    | 342,839   |   | 423,102    |   |
| Amortization                                                                                                                 |   | 4,360      |    | 106,536   |   | 486,473    |   |
| Impairment of intangible assets                                                                                              |   | 1,971,427  |    | 615,924   |   | 213,181    |   |
| Amortization of deferred financing charges                                                                                   |   | 33,333     |    | —    |   | —     |   |
| Provision for slow-moving inventory                                                                                          |   | (148,316   | )       | 2,114,863 |   | 588,026    |   |
| Provision of doubtful accounts                                                                                               |   | 110,774    |    | 85,118    |   | —     |   |
| Net loss on disposal of assets                                                                                               |   | 147,013    |    | 127,555   |   | 1,541      |   |
| Gain on sale of dental laser assets                                                                                          |   | (3,909,936 | )       | —    |   | —     |   |
| Compensation expense related to warrant and option grants                                                                    |   | —     |    | 126,046   |   | —     |   |
| Other                                                                                                                        |   | 3,423      |    | —    |   | —     |   |
|                                                                                                                         |   |       |    |      |   |       |   |
| Changes in operating assets and liabilities; net of assets and  liabilities associated with the sale of dental laser assets: |   |       |    |      |   |       |   |
| Accounts receivable                                                                                                          |   | 60,245     |    | 715,231   |   | 2,095,015  |   |
| Inventories                                                                                                                  |   | 1,447,031  |    | 1,934,501 |   | (886,251   | )      |
| Prepaid expenses and other current assets                                                                                    |   | 60,196     |    | 113,092   |   | 109,741    |   |
| Accounts payable                                                                                                             |   | (858,535   | )       | (37,267   | )      | 1,119,524  |   |
| Compensation and employee benefits                                                                                           |   | (34,963    | )       | (181,165  | )      | (23,605    | )      |
| Accrued restructuring costs                                                                                                  |   | (62,504    | )       | 418,335   |   | —     |   |
| Other accrued liabilities                                                                                                    |   | 331,369    |    | (200,188  | )      | (183,904   | )      |
| Other non-current liabilities                                                                                                |   | (4,103     | )       | (73,944   | )      | (94,916    | )      |
| Net cash used in operating activities                                                                                        |   | (590,593   | )       | (836,036  | )      | (130,332   | )      |
|                                                                                                                         |   |       |    |      |   |       |   |
| **INVESTING ACTIVITIES:**                                                                                                    |   |       |    |      |   |       |   |
| Purchases of property, plant and equipment                                                                                   |   | (14,924    | )       | (37,533   | )      | (130,821   | )      |
| Proceeds from sales of assets                                                                                                |   | 1,850,000  |    | 40,897    |   | 1,300      |   |
| Collections on notes receivable                                                                                              |   | —     |    | —    |   | 224,785    |   |
| Increase in intangible assets                                                                                                |   | —     |    | —    |   | (60,164    | )      |
| Net cash provided by investing activities                                                                                    |   | 1,835,076  |    | 3,364     |   | 35,100     |   |
|                                                                                                                         |   |       |    |      |   |       |   |
| **FINANCING ACTIVITIES:**                                                                                                    |   |       |    |      |   |       |   |
| Payments on note payable                                                                                                     |   | (1,650,019 | )       | (90,000   | )      | (754,344   | )      |
| 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   | )      |
|                                                                                                                         |   |       |    |      |   |       |   |
| Net cash provided by (used in) financing activities                                                                          |   | (1,650,019 | )       | 794,836   |   | (868,944   | )      |
|                                                                                                                         |   |       |    |      |   |       |   |
| Decrease in cash                                                                                                             |   | (405,536   | )       | (37,836   | )      | (964,176   | )      |
| Effect of exchange rates on cash                                                                                             |   | 56,681     |    | 24,605    |   | (5,904     | )      |
| Decrease in cash                                                                                                             |   | (348,855   | )       | (13,231   | )      | (970,080   | )      |
|                                                                                                                         |   |       |    |      |   |       |   |
| **CASH,** at beginning of year                                                                                               |   | 566,436    |    | 579,667   |   | 1,549,747  |   |
|                                                                                                                         |   |       |    |      |   |       |   |
| **CASH,** at end of year                                                                                                     |   | $          | 217,581 |      | $      | 566,436    |   | $ | 579,667 |   |

 

20

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**Notesto Financial Statements**

 

**1.****            ****ORGANIZATION ANDSIGNIFICANT ACCOUNTING POLICIES**

 

*Principlesof Consolidation*— American Medical Technologies, Inc. (the “Company”) develops, manufactures,markets and sells high technology products primarily for dentistry.  Theconsolidated financial statements include the accounts and operations of theCompany and American Medical Technologies GmbH, its German subsidiary. All intercompany transactions and balances have been eliminated.

 

*GoingConcern*— 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.  In 2002 and 2001, due to net losses andmatters related to credit agreements, there was a substantial doubt about theCompany’s ability to continue as a going concern.

 

In2003, the cash received from the sale of the Dental Laser Assets to Biolaseallowed the Company to settle its outstanding long term debt, and the sale ofthe Biolase shares in March 2004 is allowing the Company to pay off allremaining liabilities.  Because of thecurrent available assets, the Company feels the doubt about its ability tocontinue as a going concern has been removed.

 

*RestructuringCosts* — Inthe second quarter of 2002 the Company adopted a restructuring plan that calledfor the closure of its remaining sales and service branches and significantreductions in the number of employees in mid-June.  As part of therestructuring, a total of 49 employees were terminated, comprised of fieldsales and service personnel, manufacturing employees and administrativepersonnel.  As of September 30, 2002 the Company had vacated all of itsformer sales and service centers.  Costs such as employee severance, leasetermination costs and other exit costs have been recorded as of the date therestructuring plan was finalized.  Other restructuring costs includeapproximately $5,000 in accrued attorney’s fees related to the termination ofseveral of the Company’s German employees, approximately $34,000 in non-cashexpenses associated with the write-off of abandoned leasehold improvements andproperty due to the closure of the branch offices and approximately $18,500 offorfeited security deposits related to the abandoned offices.  None of theexpenses accrued as part of the restructuring have any benefit for futureoperations.  Certain costs were estimated based on the latest availableinformation.  The breakdown 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                 | )       | (49,896                         | )      | (66,109                          | )      | 2,190     |    | (129,982  | )      |
| Non-cash expenses              |   | —                  |    | (27,802                         | )      | —                           |   | —    |    | (27,802   | )      |
| Payments                       |   | (140,905                | )       | (55,043                         | )      | (45,032                          | )      | (73,084   | )       | (314,064  | )      |
| Balance at December 31, 2003   |   | $                       | 245,291 |                            | $      | 85,315                           |   | $         | 25,225  |      | $      | — |   | $ | 355,831 |   |

 

*Inventories* — Inventories are stated at the lower ofcost, determined by the first-in first-out method, or market.  At December31, 2003 inventories consisted of the following:

 
|                              |   | **2003** |    | **2002**  |   |
|-----------------------------------|--------|----------|---------|-----------|--------|
| Finished goods                    |   | $        | 169,650 |      | $      | 1,566,978 |   |
| Raw materials, parts and supplies |   | 745,285  |    | 1,546,082 |   |
|                              |   | $        | 914,935 |      | $      | 3,113,060 |   |

 

Inventories at December 31, 2003 and 2002 are net ofvaluation allowances of $2,611,145 and $4,243,345, respectively. In 2003the valuation allowance of inventory decreased primarily due to the sale of thelaser assets.

 

The Company changed certain assumptions it uses incomputing the inventory valuation allowance during the fourth quarter of2002.  The prior assumptions relating to the valuation allowance for partswere as follows:  When the on handquantity exceeded the prior twelve month’s sales and usage, the excessinventory was calculated by subtracting the greater of the prior twelve months’sales and usage or a base quantity of 50 from

 

21

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the quantity on hand. This excess was then 100% reserved. All parts or units with less than twelve months of sales or usagehistory were excluded from the calculation.

 

The new assumptions assume that three years ofprojected part usage of any given part will not be subject to a valuationallowance.  Any parts on hand exceeding three years of projected usage aresubject to a 100% valuation allowance.

 

*Propertyand Equipment*— Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated usefullives of the related assets, which range from three to thirty-nine years.  Depreciation is not included in cost of sales. At December 31, 2003 and 2002 property and equipment consisted of thefollowing:

 
|                           |   | **2003**   |      | **2002**   |   |
|--------------------------------|--------|------------|-----------|------------|--------|
| Building and improvements      |   | $          | 1,547,532 |       | $      | 1,560,699 |   |
| Machinery and equipment        |   | 636,944    |      | 1,410,699  |   |
| Office furniture and computers |   | 388,995    |      | 915,297    |   |
|                           |   | 2,573,471  |      | 3,886,695  |   |
| Accumulated depreciation       |   | (1,183,925 | )         | (2,132,698 | )      |
|                           |   | $          | 1,389,546 |       | $      | 1,753,997 |   |

 

*RevenueRecognition**—* The Company recognizes revenue when all of the following criteria aremet:  1) a contract or salesarrangement exists; 2) products have been shipped, and if necessary installed,and title has been transferred or services have been rendered; 3) theprice of the products or services is fixed or determinable; 4) no furtherobligation exists on the part of the Company (other than warranty obligations);and 5) collectibility is reasonably assured.  The Company recognizesthe related estimated warranty expense when title is transferred to thecustomer, generally upon shipment.  TheCompany recognizes revenue on certain sales to two of its internationaldistributors under terms that require shipment to a local independentwarehouse.  Only the Company’s Anthosdental chairs and its networked camera systems required installation, andrevenue is not recorded until the installation is complete.  The Company’s policy is to include shippingand handling costs, net of the related revenues, in costs of goods sold.

 

*Receivablesand Credit Policies*

 

Trade receivables are uncollateralized customerobligations due under normal trade terms requiring payment within 30 days fromthe invoice date.

 

Payments on trade receivables are allocated to thespecific invoices identified on the customer’s remittance advice or, ifunspecified, are applied to the earliest unpaid invoices.

 

The carrying amount of trade receivables is reduced bya valuation allowance for any invoices over 90 days old and 5% of the remainingbalance.

 

*IntangibleAssets* —Intangible assets consist of goodwill, and patents, and are stated at cost lessaccumulated amortization.  The Company amortized goodwill over periodsranging from 15 to 25 years, and patents over 18 years. Accumulatedamortization for goodwill was $0 and $3,639,271****at December 31, 2003 and 2002, respectively.

 

In June 2001, the Financial Accounting Standards Boardissued Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).SFAS 142 changes the way companies account for goodwill and intangible assets.Effective January 1, 2002, the Company adopted the provisions of SFAS 142.  Under SFAS 142, goodwill and intangibleassets that have indefinite useful lives are no longer subject to amortizationover their estimated useful life. Rather, goodwill and intangible assets that have indefinite useful livesare tested at least annually for impairment. SFAS 142 provides specific guidance for testing goodwill for impairment.Intangible assets with finite useful lives will continue to be amortized overtheir useful lives. Goodwill was tested for impairment during the first quarterof 2002 and again in the first quarter of 2003 using the prescribed two-step process.  The first step is an impairment screeningwhich compares an estimation of the fair value of a reporting unit with thereporting unit’s carrying value. The Company has determined that its reportingunits are to be defined as the two operating segments - Domestic andInternational.  If the fair value of a reporting unit exceeds its carryingamount, the goodwill of the reporting unit is not considered impaired, and as aresult, the second

 

22

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step of the impairment test is not required.  If required, the second step compares thefair value of reporting unit goodwill with the carrying amount of thatgoodwill.  If the Company determinesthat reporting unit goodwill is impaired, the fair value of reporting unitgoodwill would be measured by comparing the discounted expected future cashflows of the reporting unit with the carrying value of reporting unitgoodwill.  Any excess in the carryingvalue of reporting unit goodwill to the estimated fair value would berecognized in expense at the time of the recognition.  The goodwill of a reporting unit will be tested between theannual test if an event occurs or circumstances change that would likely reducethe fair value of a reporting unit below its carrying amount.

 

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

 
|                                                                         |   | **2003** |   | **2002** |   | **2001**   |   |
|------------------------------------------------------------------------------|--------|----------|--------|----------|--------|------------|--------|
| Net income (loss) – as reported                                         |   | $        | 53,673 |     | $      | (7,043,512 | )      | $ | (3,978,259 | ) |
| Amortization of goodwill                                                     |   | —   |   | —   |   | 368,465    |   |
| Adjusted net income (loss)                                                   |   | $        | 53,673 |     | $      | (7,043,512 | )      | $ | (3,609,794 | ) |
|                                                                         |   |     |   |     |   |       |   |
| Net income (loss) per common share – as reported,  primary and dilutive |   | $        | 0.01   |     | $      | (0.98      | )      | $ | (0.57 | ) |
| Amortization                                                                 |   | —   |   | —   |   | 0.05       |   |
| Adjusted net income (loss) per common share,  primary and dilutive           |   | $        | 0.01   |     | $      | (0.98      | )      | $ | (0.52 | ) |

 

During 2001, the Company’s distributorship agreementwith its Japanese supplier expired.  The Company has been unable to securea distributor for its products in Japan.  As a result, sales in Japan werenominal in 2002.  As of December 31, 2002, the Company had intangibleassets with a carrying value of $615,924 relating to various rights todistribute products to Japan.  These circumstances are indicative of animpairment of these intangible assets.  During the fourth quarter of 2002,these intangible assets were charged off in accordance with FASB Statement No.144, Accounting for the *Impairment orDisposal of Long-Lived Assets*, which was adopted on January 1,2002.  This impairment expense is included in Selling, General andAdministrative Expenses in the Statement of Operations.

 

The Company had goodwill with a carrying value of$1,971,427 relating to the purchase of Incisive, a dental laser business.  As the Company has decided not to continuein the dental laser market, the goodwill is considered impaired and wascharged-off in the fourth quarter of 2003. This impairment expense is includedas a separate line item in the Statement of Operations.

 

The Company has amortizable intangible assets as ofDecember 31, 2003 and 2002 as follows:

 
|                          |   | **2003** |   | **2002** |   |
|-------------------------------|--------|----------|--------|----------|--------|
| Patents, trademarks and other |   | $        | 59,376 |     | $      | 118,751 |   |
| Accumulated amortization      |   | (48,995  | )      | (90,904  | )      |
|                          |   |     |   |     |   |
|                          |   | $        | 10,381 |     | $      | 27,847 |   |

 

Amortization expense related to finite livedintangibles was $4,360, $106,536 and $118,008 for the years ended December 31,2003, 2002 and 2001, respectively.  The following table shows theestimated amortization expense in total for all finite lived intangible assetsto be incurred over the next five years.

 
| **Year Ended December 31,** |   |   |   |   |
|-----------------------------|--------|--------|--------|--------|
| 2004                        |   |   | $      | 2,970  |   |
| 2005                        |   |   | 2,970  |   |
| 2006                        |   |   | 2,970  |   |
| 2007                        |   |   | 1,471  |   |
| 2008                        |   |   | — |   |
|                        |   |   | $      | 10,381 |   |

 

23

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*NetIncome (Loss) Per Share* — The following table sets forth the computation forbasic and diluted earnings per share:

 
|                                                                                                                         |   | **2003**  |   | **2002**  |   | **2001**   |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|-----------|--------|-----------|--------|------------|--------|
| Numerator:                                                                                                                   |   |      |   |      |   |       |   |
| Net income(loss)                                                                                                             |   | $         | 53,673 |      | $      | (7,043,512 | )      | $ | (3,978,259 | ) |
|                                                                                                                         |   |      |   |      |   |       |   |
| Numerator for basic and diluted earnings per share  – income available to common stockholders after assumed conversions |   | $         | 53,673 |      | $      | (7,043,512 | )      | $ | (3,978,259 | ) |
|                                                                                                                         |   |      |   |      |   |       |   |
| Denominator:                                                                                                                 |   |      |   |      |   |       |   |
| Denominator for basic earnings per share –  weighted-averaged shares                                                    |   | 7,532,924 |   | 7,180,978 |   | 6,923,347  |   |
|                                                                                                                         |   |      |   |      |   |       |   |
| Effect of dilutive securities:                                                                                               |   |      |   |      |   |       |   |
| Employee stock options                                                                                                       |   | —    |   | —    |   | —     |   |
| Warrants                                                                                                                     |   | —    |   | —    |   | —     |   |
|                                                                                                                         |   |      |   |      |   |       |   |
| Dilutive potential common shares                                                                                             |   | —    |   | —    |   | —     |   |
| Denominator for diluted earnings per share –  adjusted weighted-average shares after assumed conversions                |   | 7,532,924 |   | 7,180,978 |   | 6,923,347  |   |
|                                                                                                                         |   |      |   |      |   |       |   |
| Net income(loss) per share                                                                                                   |   | $         | 0.01   |      | $      | (0.98      | )      | $ | (0.57 | ) |
| Net income(loss) per share assuming dilution                                                                                 |   | $         | 0.01   |      | $      | (0.98      | )      | $ | (0.57 | ) |

 

*ComprehensiveIncome (Loss)***—The financial Accounting Standards Board’s Statement 130, *Reporting Comprehensive Income* requiresforeign currency translation adjustments and unrealized income on available forsale securities to be included, along with net income (loss), in comprehensiveincome (loss).  For 2003, 2002, and 2001 the Company’s ComprehensiveIncome (Loss) was $1,521,779, $(6,940,384), and ($4,047,433), respectively.

 

*Translationof Non-U. S. Currency Amounts* — For non-U.S. subsidiaries that operate in a localcurrency environment, assets and liabilities are translated to U.S. dollars atthe current exchange rates at the balance sheet date.  Income and expenseitems are translated at average rates of exchange prevailing during theyear.  Translation adjustments are accumulated in a separate component ofstockholders’ equity.

 

*StockBased Compensation* — The Company grants stock options for a fixed number of shares toemployees with an exercise price no less than the fair value of the shares atthe date of grant.  The Company accounts for stock option grants inaccordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,and, accordingly, recognizes no compensation expense for the stock optiongrants.

 

*Advertising* — The Company expenses advertising costsas incurred.  Advertising expenseapproximated $22,500, $251,000, and $134,000 in 2003, 2002, and 2001,respectively.

 

*Use ofEstimates*— The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanyingnotes.  Actual results could differ from these estimates.  Thedetermination of the Company’s valuation allowance for inventory is a significantestimate that could change materially over the next year should circumstancesaffecting the Company’s current sales volumes change.

 

24

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*FairValue of Financial Instruments***— The fair value of the Company’s cash, accountsreceivable, note payable and accounts payable approximates their carrying valuedue to their short-term nature.  Thefair value of the Company’s notes payable and preferred stock approximate fairvalue as their terms and yield approximate current market conditions.

 

*New Accounting Standards and Disclosures* - In December 2002, the FASB issued SFASNo. 148, “Accounting for Stock-Based Compensation Transition and Disclosure, anamendment of FASB Statement No. 123,” which amends SFAS No. 123, “Accountingfor Stock-Based Compensation,” to provide alternative methods of transition fora voluntary change to the fair value based method of accounting for stock-basedemployee compensation. The transition and annual disclosure provisions of SFASNo. 148 are effective for fiscal years ending after December 15*,*2002. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No.123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  The Company will continue to account forstock-based compensation to employees under APB Opinion No. 25 and relatedinterpretations.  The Company adopted thedisclosure requirements of this Statement as of December 31, 2002.

 

In January 2003, the FASB issued Interpretation No. 46,  “Consolidation of Variable Interest Entities” (“FIN 46”).  Under FIN 46, a variable interest entity (“VIE”) is defined as a corporation, trust, partnership or other entity where the equity investment holders have not contributed sufficient capital to finance the activities of the VIE or the equity investment holders do not have defined rights and obligations normally associated with an equity investment.  FIN 46 requires consolidation of a VIE by the enterprise that has the majority of the risks and rewards of ownership, referred to as the primary beneficiary.  FIN 46 did not have a significant impact on our results of operations and financial position.

 

In May 2003, Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”), was issued.  SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that these instruments be classified as liabilities in statements of financial position.  SFAS 150 was effective immediately for financial instruments entered into or modified after May 31, 2003, and for interim or annual periods beginning after June 15, 2003 for transactions entered into before June 1, 2003.  The adoption of SFAS 150 did not have a significant impact on our results of operations or financial position.

 

**2.****            ****SALE OF DENTAL LASERASSETS**

 

On May 21, 2003, the Company consummated the sale ofits laser assets to Biolase Technology, Inc. for an aggregate purchase price ofapproximately  $5,518,075.  Of that total, $1.825 million was paid incash directly to the Company’s principal lender, Bank One, to retire in fullthe Company’s debt to Bank One, which was in default.  The noncash portionof the purchase price from the sale of assets was 307,500 restricted shares ofBiolase common stock with an aggregate value of $3,693,075, based on theclosing price for Biolase stock of $12.01 on the closing date of thesale.  The Company classifies the Biolase stock as available for salesecurities that have a readily determinable fair value based upon the closing priceof these securities on the publicly traded market.  Unrealized holdinggains and losses arising during the period, net of related tax effect, areexcluded from net earnings and are included in other comprehensive income(loss).

 

The Company recognized a gain of $3,909,936 on thesale of the dental laser assets.  This gain is comprised of the $5,518,075aggregate purchase price less the following deductions associated with thesale: fixed assets $1,519, patents $13,106, inventory $899,410, $550,000 bonusdue Roger Dartt and other expenses of $144,104 On March 3, 2004 the Company’sBiolase Shares were sold for gross proceeds of $18.50 per share, or a total of$5,688,750.  The net proceeds to theCompany were $5,335,125.

 

**3.****            ****AGREEMENTS WITH RELATEDPARTIES**

 

*RogerDartt*—TheCompany entered into an employment agreement with Mr. Dartt effective as ofJune 1, 2002, naming him as the Company’s President and Chief Executive Officerfor a term ending May 31, 2004.  The employment agreement provides for anannual base salary of $250,000, a cash bonus of up to 25% of salary for theyear ending June 30, 2003 based on an incentive compensation program to beapproved by the Board of Directors, the grant of options to purchase 250,000shares of stock at a price of $.33 per share, and a performance based incentivesimilar to those currently employed in the industry by similarly situated

 

25

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executives, to be established by the Board ofDirectors.  The stock options vest at the rate of 31,250 every threemonths, subject to acceleration upon a change in control.   The employmentagreement can be terminated for cause if Mr. Dartt fails to follow thereasonable instructions of the Board or Directors, commits acts that are felonious,dishonest, unethical or inconsistent with normal business standards, wrongfullydiscloses confidential information, competes with the Company in violation ofthe agreement or grossly neglects his duties.  If his employment isterminated without cause, Mr. Dartt will be entitled to nine months salary andimmediate vesting of the number of stock options that would have vested throughthe nine-month period.  If the Company experiences a change in control andMr. Dartt is unable to negotiate a satisfactory employment arrangement with thenew controlling party, Mr. Dartt shall be entitled to a change of controlpayment of twelve months salary.  Mr. Dartt agreed not to compete with theCompany during his employment and for one year after termination.    The Board awarded Mr. Dartt a bonus of 10%of gross consideration received in any sale of assets or merger of theCompany.  The Company has accrued a$550,000 bonus for Mr. Dartt in consideration of the laser asset sale in May2003.

 

*BenGallant* — OnApril 24, 2002 Ben Gallant resigned his positions with the Company as ChiefExecutive Officer and Chairman of Board. 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 a loan until it is repaidor refinanced. The fair value of these warrants was estimated at the date ofgrant using a Black-Scholes option pricing model with the followingassumptions: risk-free interest rate of 4.5%; dividend yield of 0%; and volatilityfactors of the expected market price over the expected life of the warrant ofthree years. The calculated fair value of the warrant was $16,500, which wasrecorded as expense on the date of the grant.

 

*AimeeMaroney*—Aimee Maroney, the wife of William Maroney who is a director of the Company, isthe holder of the Company’s $750,000 note due December 31, 2004 and relatedsecurity instruments.  The Companyissued Mrs. Maroney 100,000 shares of Series B Preferred Stock as considerationfor her agreement to assume the note and amend its terms.

 

**4.****            ****LINE OF CREDIT AND OTHERNON-CURRENT LIABILITIES**

 

On June 17, 2003, Value Bank assigned its interest inthe Company’s $750,000 note and related security instruments to Aimee Maroneyfor $682,056, which was the outstanding principal balance under the note, andagreed to release Mrs. Maroney and the Company from all claims arising out ofthe note and security documents. Subsequently, the Company negotiated the amendment of the note toprovide for an interest rate of 5% per annum, with all principal and accruedinterest payable in a single payment on December 31, 2004.  As consideration for the purchase of thenote by Mrs. Maroney and the amendment of the terms of the note, the Companyissued to Mrs. Maroney 100,000 shares of its Series B Preferred Stock on July29, 2003.  Mrs. Maroney is the wife ofMr. William Maroney, a director of the Company.  The preferred shares were valued based on recently subscribedprice of $1.00 per share.  The charge isreflected as deferred financing cost and is being amortized as interest expenseover the remaining term of the note.

 

The Company paid interest of approximately $137,000,$213,000, and $170,000 in 2003, 2002 and 2001, respectively.

 

**5.****            ****PREFERRED STOCK,STOCKHOLDERS’ EQUITY, STOCK OPTIONS AND WARRANTS**

 

In 2002 the Company authorized up to 575,000 shares ofSeries B Preferred Stock at a per share price of $1 per share.  The holders of Series B Preferred Stock areentitled to (i) receive an annual cumulative dividend at the rate of 10%,payable prior to dividends on any shares of common stock, (ii) two and one-halftimes the number of votes to which a holder of the same number of common sharesis entitled, (iii) receive two and one-half shares of common stock for eachshare of Series B Preferred Stock tendered for conversion after September 30,2005, (iv) require the Company to redeem shares of Series B Preferred Stock atthe original sale price, plus accrued cumulative dividends, upon prior noticebeginning after September 30, 2005, or in the event of a merger, sale of amajority of the stock or sale of substantially all the assets of the Company,and (v) receive a liquidation preference equal to the original sale price plusaccrued cumulative dividends, prior to the rights of holders of the Series APreferred Stock and the common stock.  On September 30, 2007, all outstanding shares of Series B PreferredStock are redeemable at the original sale price plus accrued cumulativedividends.

 

As of December 31, 2003, the Company has issued400,000 shares of Series B Preferred Stock to persons who were officers,directors or accredited investors in a private placement.  No underwriter was used in the sale. The

 

26

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shares were offered by management to a limited numberof informed investors in a transaction exempt from registration as a privateplacement under Section 4(2) of the Securities Act of 1933 and Regulation Dpromulgated thereunder.  The purchaseprice was $1.00 per share.

 

The Company has authorized three stock option plansfor employees, officers, directors, consultants and other key personnel. As of December 31, 2003, the Nonqualified Stock Option Plan has optionsoutstanding to acquire 158,178 shares; the Long-Term Incentive Plan has optionsoutstanding to acquire 251,206 shares; and the Stock Option Plan for Employeeshas options outstanding to acquire 1,565 shares.

 

The Company issued a warrant to Bank One in 2002 for 721,510 shares ofthe Company’s common stock for 5 years at a price of $.11 per share, the marketprice on the date of the grant, as consideration for Bank One’s entering into aForbearance Agreement. The fair value of the warrants issued to Bank One wasestimated at the date of the grant using a Black Scholes option pricing modelwith the following assumptions: risk-free interest rate of 1.84%; dividend 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**.**

 

The Company has elected to follow AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(APB 25) and related Interpretations in accounting for its employee stockoptions because, as discussed below, the alternative fair value accountingprovided for under FASB Statement No. 123, “Accounting for Stock-BasedCompensation,” requires use of option valuation models that were not developedfor use in valuing employee stock options.  Under APB 25, because theexercise price of the Company’s employee stock options equals the market priceof the underlying stock on the date of grant, no compensation expense isrecognized.

 

Pro forma information regarding net income andearnings per share is required by Statement 123 and SFAS 148 and has beendetermined as if the Company had accounted for its employee stock options underthe fair value method of that Statement.  The fair value for these optionswas estimated at the date of grant using a Black-Scholes option pricing modelwith the following weighted-average assumptions for 2001 and 2002,respectively: risk-free interest rate of 4.4% and 1.84%; dividend yield of 0%;volatility factors of the expected market price of the Company’s common stockof .913 and .999 and a weighted-average expected life of the option of three tofive years.  There were no employeestock options granted in 2003.

 

The Black-Scholes option valuation model was developedfor use in estimating the fair value of traded options that have no vestingrestrictions and are fully transferable.  In addition, option valuationmodels require the input of highly subjective assumptions including theexpected stock price volatility.  Because the Company’s employee stockoptions have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions can materiallyaffect the fair value estimate, in management’s opinion, the existing models donot necessarily provide a reliable single measure of the fair value of itsemployee stock options.

 

For purposes of pro forma disclosures, the estimatedfair value of the option is amortized to expense over the options’ vestingperiod.  The Company’s pro forma information follows:

 
|                                                                                      |   | **2003** |    | **2002** |   | **2001**   |   |
|-------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|------------|--------|
| Net income(loss), as reported                                                             |   | $        | 53,673  |     | $      | (7,043,512 | )      | $ | (3,978,259 | ) |
| Net income(loss) per share, primary and dilutive,  as reported                            |   | $        | .01     |     | $      | (.98       | )      | $ | (.57 | ) |
|                                                                                      |   |     |    |     |   |       |   |
| Stock based employee compensation, net of tax  effects, included in net loss, as reported |   | $        | —  |     | $      | —     |   | $ | — |   |
|                                                                                      |   |     |    |     |   |       |   |
| Stock based compensation, net of tax effects,  under the fair value method                |   | $        | (66,272 | )        | $      | (16,568    | )      | $ | (16,672 | ) |
|                                                                                      |   |     |    |     |   |       |   |
| Pro forma net income(loss)                                                                |   | $        | (12,599 | )        | $      | (7,060,080 | )      | $ | (3,994,931 | ) |
| Pro forma net income(loss) per share, primary and  dilutive                               |   | $        | .00     |     | $      | (.98       | )      | $ | (.58 | ) |

 

27

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Stock option activity issummarized as follows:

 
|                             |   | **Number  of shares** |   | **Weighted-  Average  Exercise  Price** |   |
|----------------------------------|--------|-----------------------|--------|-----------------------------------------|--------|
| Outstanding at December 31, 2000 |   | 696,891               |   | $                                       | 3.24   |   |
| Exercisable at December 31, 2000 |   | 309,786               |   | 5.49                                    |   |
|                             |   |                  |   |                                    |   |
| Options granted                  |   | 76,560                |   | .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                                    |   |
|                             |   |                  |   |                                    |   |
| Options granted                  |   | —                |   | —                                  |   |
| Options exercised                |   | —                |   | —                                  |   |
| Options canceled                 |   | (5,193                | )      | 4.23                                    |   |
|                             |   |                  |   |                                    |   |
| Outstanding at December 31, 2003 |   | 724,229               |   | 1.65                                    |   |
| Exercisable at December 31, 2003 |   | 660,949               |   | 1.78                                    |   |
|                                  |        |                       |        |                                         |        |  |

 

The weighted-average fair value of options grantedduring 2002 and 2001 was $.14, and $.43, respectively.  No options were granted in 2003.

 

A summary of options outstanding as of December 31,2003 is as follows:

 
| **Range of Exercise  Prices**                                                 |   | **Number of  Options  Outstanding** |   | **Number of  Options  Exercisable** |   | **Weighted  Average  Exercise Price** |   | **Weighted  Average  Remaining  Contractual Life** |   |
|-------------------------------------------------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|---------------------------------------|--------|----------------------------------------------------|--------|
| $5.38 —9.50                                                              |   | 118,237                             |   | 118,237                             |   | $                                     | 5.60   |                                               | 3.33   |   |
| $2.00 —4.00                                                              |   | 10,312                              |   | 10,312                              |   | 3.31                                  |   | 1.24                                               |   |
| $0.60 —1.38                                                              |   | 345,680                             |   | 344,900                             |   | 1.21                                  |   | 6.88                                               |   |
|             $0.33 |   | 250,000                             |   | 187,500                             |   | .33                                   |   | 8.50                                               |   |
|                                                                               |        |                                     |        |                                     |        |                                       |        |                                                    |        |  |

 

28

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Warrant activity issummarized as follows:

 
|                             |   | **Number of  shares** |   | **Weighted-  Average Exercise Price** |   |
|----------------------------------|--------|-----------------------|--------|---------------------------------------|--------|
| 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                  |   | —                |   | .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                                  |   |
|                             |   |                  |   |                                  |   |
| Warrants issued                  |   |                  |   |                                  |   |
| Warrants exercised               |   | 721,510               |   | .11                                   |   |
| Warrants canceled                |   | 600,000               |   | 5.50                                  |   |
|                             |   |                  |   |                                  |   |
| Outstanding at December 31, 2003 |   | 173,250               |   | 2.44                                  |   |
| Exercisable at December 31, 2003 |   | 173,250               |   | 2.44                                  |   |
|                                  |        |                       |        |                                       |        |  |

 

There were no warrants granted in 2003.  Exercise prices for warrants outstanding as of December 31, 2003 ranged from$0.40 to $4.00.  The weighted-average remaining contractual life of thosewarrants is 4.88 years.

 

**6.****            ****INCOME TAXES**

 

At December 31, 2003, the Company had approximately$25,000,000 of net operating loss carry forwards (“NOL’s”) for federal incometax purposes, which expire in various amounts in the years 2006 through 2023.

 

Deferred taxes represent thenet tax effects of temporary differences between the carrying amounts of assetsand liabilities for financial reporting purposes and amounts used for incometax purposes.  Significant components of the Company’s deferred tax assetsare as follows:

 
|                               |   | **2003**   |   | **2002**   |   |
|------------------------------------|--------|------------|--------|------------|--------|
| Allowance for doubtful accounts    |   | $          | 58,000 |       | $      | 89,000 |   |
| Inventory valuation reserves       |   | 927,000    |   | 1,496,000  |   |
| Compensation and employee benefits |   | 200,000    |   | 28,000     |   |
| Warranty reserve                   |   | 34,000     |   | 39,000     |   |
| NOL’s                         |   | 8,551,000  |   | 6,806,000  |   |
| Other                              |   | 121,000    |   | 140,000    |   |
| Deferred tax asset                 |   | 9,891,000  |   | 8,598,000  |   |
| Deferred tax liabilities           |   | (50,000    | )      | (68,000    | )      |
| Net deferred tax asset             |   | 9,841,000  |   | 8,530,000  |   |
| Valuation allowance                |   | (9,841,000 | )      | (8,530,000 | )      |
| Net deferred tax asset             |   | $          | — |       | $      | — |   |

 

29

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The Company’s income tax provision included thefollowing:

 
|                      |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current expense (benefit) |   | $        | — |     | $      | (237,418 | )      | $ | — |   |
| Deferred expense          |   | —   |   | —   |   | —   |   |
|                      |   | $        | — |     | $      | (237,418 | )      | $ | — |   |

 

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

 
|                                              |   | **2003**   |   | **2002**  |   | **2001**   |   |
|---------------------------------------------------|--------|------------|--------|-----------|--------|------------|--------|
| Income taxes (benefit) at US statutory rate       |   | $          | 86,250 |      | $      | (2,475,516 | )      | $ | (1,353,000 | ) |
| Non-deductible amortization and expenses          |   | 1,446,766  |   | 258,000   |   | —     |   |
| Deferred tax asset valuation allowance adjustment |   | 1,310,780  |   | 1,579,000 |   | 1,302,000  |   |
| Net operating losses                              |   | (2,843,796 | )      | —    |   | —     |   |
| Other                                             |   | —     |   | 401,098   |   | 51,000     |   |
|                                              |   | $          | — |      | $      | (237,418   | )      | $ | — |   |

 

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 valuation allowance during 2003 of $1,311,000reflects the increase in NOLs during 2003.

 

The Company paid no federal income tax during 2001,2002 or 2003.

 

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

 

**7.****    ****OPERATIONS BY INDUSTRY SEGMENT,GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS**

 

SFAS No. 131, Disclosures about Segments of anEnterprise and Related Information, established standards for reportinginformation about operating segments in annual financial statements andrequires selected information about operating segments in interim financialreports issued to stockholders.  It also established standards for relateddisclosures about products and services, and geographic areas.  Operatingsegments are defined as components of the enterprise about which separatefinancial information is available that is evaluated regularly by the chiefoperating decision maker, or decision making group, in deciding how to allocateresources and in assessing performance.

 

The Company develops, manufactures, markets and sellshigh technology dental products, such as air abrasive equipment, curing lightsand intra oral cameras.  American Medical markets its dental productsthrough independent distributors to general dental practitioners and certainother dental specialists.   Internationally, the Company has not maintainedits own sales force and continues to sell its products through internationaldistributor networks.  American Medicalpresently markets its industrial products through independent distributors. Thereportable segments are reviewed and managed separately because sellingtechniques and market environments differ from selling domestically versusselling through international distributor networks.  The remainingrevenues of the Company, which are reported as “Other”, represent royaltyincome in 2003; “Other” included industrial products and royalty income in 2002and 2001.

 

The accounting policies of the business segments areconsistent with those described in Note 1.

 

30

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|                                                                    |   | **2003**   |       | **2002**   |   | **2001**   |   |
|-------------------------------------------------------------------------|--------|------------|------------|------------|--------|------------|--------|
| Revenues:                                                               |   |       |       |       |   |       |   |
| Domestic                                                                |   | $          | 1,981,838  |       | $      | 7,075,806  |   | $ | 10,430,196 |   |
| International                                                           |   | 797,957    |       | 1,531,260  |   | 3,459,628  |   |
|                                                                    |   | $          | 2,779,795  |       | $      | 8,607,066  |   | $ | 13,889,824 |   |
|                                                                    |   |       |       |       |   |       |   |
| Reconciliation of revenues:                                             |   |       |       |       |   |       |   |
| Total segment revenues                                                  |   | $          | 2,779,795  |       | $      | 8,607,066  |   | $ | 13,889,824 |   |
| Other                                                                   |   | 218,721    |       | 477,380    |   | 798,862    |   |
| Total revenues                                                          |   | $          | 2,998,516  |       | $      | 9,084,446  |   | $ | 14,688,686 |   |
|                                                                    |   |       |       |       |   |       |   |
| Operational earnings (loss):                                            |   |       |       |       |   |       |   |
| Domestic                                                                |   | $          | 233,800    |       | $      | (3,990,009 | )      | $ | (733,584 | ) |
| International                                                           |   | 160,212    |       | (125,258   | )      | 660,017    |   |
|                                                                    |   | $          | 394,012    |       | $      | (4,115,267 | )      | $ | (73,567 | ) |
|                                                                    |   |       |       |       |   |       |   |
| Reconciliation of operational earnings (loss) to  loss from operations: |   |       |       |       |   |       |   |
| Total segment operational earnings (loss)                               |   | $          | 394,012    |       | $      | (4,115,267 | )      | $ | (73,567 | ) |
| Other operational earnings                                              |   | 218,721    |       | 302,562    |   | 493,946    |   |
| Research and development expenses                                       |   | (233,898   | )          | (595,156   | )      | (796,424   | )      |
| Administrative expenses                                                 |   | (2,133,758 | )          | (2,609,039 | )      | (3,561,542 | )      |
| Goodwill impairment                                                     |   | (1,971,427 | )          | —     |   | —     |   |
| Accrued losses on vendor settlements                                    |   | (207,222   | )          | —     |   | —     |   |
| Loss from operations                                                    |   | $          | (3,933,572 | )          | $      | (7,016,900 | )      | $ | (3,937,587 | ) |
|                                                                    |   |       |       |       |   |       |   |
| International revenues by country:                                      |   |       |       |       |   |       |   |
| Japan                                                                   |   | $          | 125,514    |       | $      | 38,548     |   | $ | 1,260,492 |   |
| Germany                                                                 |   | 397,012    |       | 538,339    |   | 831,472    |   |
| Italy                                                                   |   | 67,268     |       | 290,848    |   | 909,520    |   |
| Canada                                                                  |   | 75,603     |       | 436,118    |   | 183,937    |   |
| Other                                                                   |   | 132,560    |       | 227,407    |   | 274,207    |   |
|                                                                    |   | $          | 797,957    |       | $      | 1,531,260  |   | $ | 3,459,628 |   |
|                                                                    |   |       |       |       |   |       |   |
| Long lived assets (excluding deferred Taxes):                           |   |       |       |       |   |       |   |
| Domestic                                                                |   | $          | 1,388,404  |       | $      | 1,752,217  |   | $ | 4,834,723 |   |
| International                                                           |   | 1,142      |       | 1,782      |   | 15,888     |   |
|                                                                    |   | $          | 1,389,546  |       | $      | 1,753,999  |   | $ | 4,850,611 |   |
|                                                                    |   |       |       |       |   |       |   |
| Current assets                                                          |   |       |       |       |   |       |   |
| Domestic                                                                |   | $          | 1,349,239  |       | $      | 3,8559,570 |   | $ | 8,144,021 |   |
| International                                                           |   | 131,100    |       | 489,857    |   | 1,207,797  |   |
|                                                                    |   | $          | 1,480,339  |       | $      | 4.349.427  |   | $ | 9,345,818 |   |

 

**8.****            ****COMMITMENTS ANDCONTINGENCIES**

 

Rental expense for operating leases in 2003, 2002 and2001 approximated $39,000**,**$223,000,and $497,000, respectively.

 

 In March 2004,the Company settled a claim for $200,000 made by certain former employees andrelated family matters against a portion of the proceeds from the Biolasetransaction.  The amount of thesettlement was included on the accompanying balance sheet.

 

The Company received a lawsuit from a vendor forbreach of contract and other matters totaling $1.1 million.    TheCompany has reserved $109,000 as potential settlement of this claim. TheCompany is vigorously

 

31

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defending this lawsuit and has filed a $22 millioncounterclaim for breach of contract and delivery of defective goods.

 

As of December 31, 2003, the Company had receivednotices of vendor collection lawsuits totaling approximately $680,000. Sincethe sale of the Biolase shares in March 2004, the Company has settled severalof these claims and reduced this amount by over $300,000.  The ultimate outcome of these negotiationsis unknown, however, substantially all of these claims are recorded in accountspayable in the accompanying balance sheet. In addition, the Company recorded an additional $98,000 for potentialsettlement of these claims.

 

The Company is currently in arbitration for breach ofemployment contract claims filed by two former employees totaling $250,000. TheCompany is vigorously defending both of these claims; however it is prematureto judge the potential liability or outcome of these claims.

 

The Company’s management believes that the results ofany of these claims or litigation singly or in the aggregate, will not have amaterial effect on the Company’s consolidated financial position or results ofoperations**.**

 

**9.****            ****SELECTED QUARTERLYFINANCIAL DATA (UNAUDITED)**

 
|                                          |   | **March 31  2003** |      | **June 30  2003** |   | **September  30  2003** |   | **December  31  2003** |    |
|-----------------------------------------------|--------|--------------------|-----------|-------------------|--------|-------------------------|--------|------------------------|---------|
| Revenues                                      |   | $                  | 1,024,612 |              | $      | 812,044                 |   | $                      | 585,648 |   | $ | 576,212 |   |
| Gross profit                                  |   | 133,266            |      | 30,294            |   | 342,554                 |   | 611,867                | (1)     |
| Net income (loss)                             |   | (567,053           | )         | 3,386,007         |   | (20,951                 | )      | (2,744,330             | )(2)    |
| Net income (loss) per share assuming dilution |   | (0.08              | )         | 0.44              |   | 0.00                    |   | (0.35                  | )       |
|                                               |        |                    |           |                   |        |                         |        |                        |         |  |  |  |  |

 
|                                          |   | **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             | )         |
| Net income (loss)                             |   | (788,746           | )         | (2,601,634        | )      | (857,674                | )      | (2,795,458             | )         |
| Net income (loss) per share assuming dilution |   | $                  | (.11      | )                 | $      | (.35                    | )      | $                      | (.12      | ) | $ | (.40 | ) |

 

----

(1)   An adjustment was made to account for inventoryreturned to vendors as cost of sales that was previously accounted for as acost of the sale of the laser assets.

(2)   $207,222 of accrued expensesfor vendor settlements, and a $1.9 million write off of goodwill were recordedin the fourth quarter of 2003.

 

ITEM 9.          CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM9A.      CONTROLS AND PROCEDURES.

 

As ofDecember 31, 2003, the Company carried out an evaluation, under the supervisionand with the participation of the Company’s management, including the Company’sChief Executive Officer and Controller, of the effectiveness and design andoperation of the Company’s disclosure controls and procedures pursuant toExchange Act Rule 13a-14.  Based uponthe evaluation, the Chief Executive Officer and Controller concluded that theCompany’s disclosure controls and procedures are effective.  Subsequent tothe evaluation and through the date of this filing of Form 10-K for the yearended December 31, 2003, there have been no significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls.

 

32

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**PART III**

 

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

**Directors**

 

Thefollowing sets forth information with respect to the members of the Board ofDirectors regarding the individual’s age, principal occupation, other businessexperience, other directorships and term of service as a director of theCompany.

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **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. |   | 62      |   | 2002                              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |    |   |                              |   |
| GARY A. CHATHAM  Mr. Chatham currently serves as Marketing Director for Combex Westhem, LLC, a  manufacturer of structural insulated panels located in Robstown, Texas, a  position he has held since February 2003.   Mr. Chatham is also a principal in that firm.  His principal responsibilities include  product development, domestic and international market development for  projects incorporating the company’s products, and the development of a  franchise program for expanding the company’s manufacturing presence into  other countries.  He is also President  of Gary Chatham and Associates, Inc., a project planning and management  consulting firm he has operated since 1981.   Mr. Chatham was a director of Texas Airsonics Inc. from 1988 until its  merger with the company in August 1996.                                                                                                                                                                                           |   | 59      |   | 1999                              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |    |   |                              |   |
| WAYNE A. JOHNSON, II  Mr. Johnson is currently executive vice president, general counsel and  secretary 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, general counsel and secretary.  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.                                                                                                                                                                                                                                                                                                                                                                   |   | 55      |   | 1996                              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |    |   |                              |   |
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | 66      |   | 1997                              |   |

 

33

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| 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.                                                              |   | 79     |   | 1984   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |   |   |   |
| 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. |   | 75     |   | 1990   |   |

 

The term of office of Messrs. Chatham, Maroney,Nichols and Williams has expired, but in the absence of a shareholders meeting,each has continued to serve until his successor is duly elected andqualified.  Mr. Johnson’s term expiresin 2004, and Mr. Dartt’s term of office will expire in 2005.

 

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

 

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

 

Based solely upon areview of 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 2003 pursuant to Section 16(a) ofthe Securities Exchange Act of 1934, as amended.

 

# **Codeof Ethics**

 

Because of the demandson management and operating challenges experienced by the Company in 2003, theCompany has not yet adopted a Code of Ethics that applies to its principalexecutive officer, principal financial officer, principal accounting officer orcontroller, or persons performing similar functions.  The Company intends to adopt a Code of Ethics in the near future,which it will file with the Commission, post on its website and make availableto any person without charge.

 

34

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ITEM 11.       EXECUTIVE COMPENSATION

 

**Summary**

 

Thefollowing table provides a summary of compensation paid or accrued by theCompany and its subsidiaries during 2003, 2002 and 2001 to or on behalf of theCompany’s Chief Executive Officer and two additional individuals who served asthe Company’s chief executive officer and earned in excess of $100,000 insalary and bonus in prior years (the “Named Officers”).

 

**SummaryCompensation Table**

 
|                                                      |   |         |   |    |   | **Long Term  Compensation  Awards** |   |                                         |   |
|-----------------------------------------------------------|--------|--------------|--------|---------|--------|-------------------------------------|--------|----------------------------------------------|--------|
| **Name and Principal Position**                           |   | **Year**     |   |    |   |                                |   | **Securities  Underlying  Option/SARs  (#)** |   | **All Other  Compensation  ($)(a)** |   |
|                                                      |   |         |
| **Annual  Compensation**                                  |
| **Salary($)**                                             |   | **Bonus($)** |
| Roger W.  Dartt(b)  Chief Executive Officer and President |   | 2003         |   | 250,000 |   | 550,000                             |   |                                         |   | 7,200 |   |
|                                                      |   | 2002         |   | 145,834 |   |                                |   | 250,000                                      |   |   |   |
|                                                      |   |         |   |    |   |                                |   |                                         |   |   |   |
| Ben J.  Gallant(b)  Chief Executive Officer and President |   | 2002         |   | 107,371 |   |                                |   |                                         |   | 4,731 |   |
|                                                      |   | 2001         |   | 250,000 |   | 15,000                              |   |                                         |   | 10,629 |   |
|                                                      |   |         |   |    |   |                                |   |                                         |   |   |   |
| John E. Vickers III(b)                                    |   | 2002         |   | 144,599 |   |                                |   |                                         |   | 500 |   |
| Chief Operating Officer                                   |   | 2001         |   | 175,000 |   | 10,000                              |   |                                         |   | 500 |   |

 

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(a)           Includes medical insurance reimbursement for Mr.Dartt, life insurance premiums and $3,000 automobile allowance for Mr. Gallant,and a matching contribution under the 401(k) Plan for Mr. Vickers.

 

(b)           Mr. Dartt’s employment began effective June 1, 2002,Mr. Gallant’s employment terminated effective April 24, 2002 and Mr. Vickers’employment terminated effective October 8, 2002.

 

**OptionHoldings**

 

Thefollowing table provides information with respect to the unexercised optionsheld as of the end of 2003 by the Named Officers.  The Named Officers didnot exercise any options during 2003

 

**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 ($)** |   |
|----------------|--------|------------------------------------------------------------------|--------|------------------------------------------------------------------------------|--------|
|           |   | **Exercisable**                                                  |   | **Unexercisable**                                                            |   | **Exercisable** |   | **Unexercisable** |   |
| Roger W. Dartt |   | 187,500                                                          |   | 62,500                                                                       |   | $ | 97,500 |   | $ | 32,500 |   |
|                |        |                                                                  |        |                                                                              |        |  |  |  |  |  |  |

 

**EmploymentAgreements**

 

The Company entered intoan employment agreement with Mr. Dartt effective as of June 1, 2002, naming himas the Company’s President and Chief Executive Officer for a term ending May31, 2004.  The employment agreementprovides for an annual base salary of $250,000, a cash bonus of up to 25% ofsalary for the year ending June 30, 2003 based on an incentive compensationprogram to be approved by the Board of Directors, the grant of options topurchase 250,000 shares of stock at a price of $.33 per share, and aperformance based incentive similar to those currently employed in the industryby similarly situated executives, to be established by the Board ofDirectors.  The stock options vest at the rate of 31,250 every three months,subject to acceleration upon a change in control.  The

 

35

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employment agreement canbe terminated for cause if Mr. Dartt fails to follow the reasonableinstructions of the Board or Directors, commits acts that are felonious,dishonest, unethical or inconsistent with normal business standards, wrongfullydiscloses confidential information, competes with the Company in violation ofthe agreement or grossly neglects his duties.  If his employment is terminatedwithout cause, Mr. Dartt will be entitled to nine months salary and immediatevesting of the number of stock options that would have vested through thenine-month period.  If the Company experiences a change in control and Mr.Dartt is unable to negotiate a satisfactory employment arrangement with the newcontrolling party, Mr. Dartt shall be entitled to a change of control paymentof twelve months salary.  Mr. Dartt agreed not to compete with the Companyduring his employment and for one year after termination.  The Boardawarded Mr. Dartt a bonus of 10% of the gross consideration received in anysale of assets or merger of the Company. The Company has accrued a $550,000 bonus for Mr. Dartt in considerationof the sale of the Dental Laser Assets to Biolase in May 2003.

 

**Compensationof Directors**

 

Directorswho are not officers or employees of the Company are entitled to a fee of$1,000 for each Board meeting attended and are reimbursed for expenses incurredin connection with their attendance at meetings; however no directors’ feeswere paid in 2003.

 

ITEM12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Thefollowing table sets forth certain information regarding the ownership of theCommon and Preferred Stock as of March 26, 2004, by each current director, eachof the Named Officers, all current directors and executive officers as a group,and each person who is known by the Company to own beneficially 5% or more ofthe Company’s outstanding shares of Common Stock. For purposes of calculatingthe percentage of Common Stock beneficially owned by any person in the table,the shares 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 5 tothe Consolidated Financial Statement, holders of Series B Preferred Stock havevoting rights equal to two and a half times the vote of holders of commonshares**.**

 
| **Name and Address**                                                  |   | **Number of  Common  Shares (1)** |   | **Percent  of Class** |    | **Number of  Series  B  Preferred Shares** |   | **Percent  of Class** |   | **Percentage  Of  Aggregate  Votes** |   |
|-----------------------------------------------------------------------|--------|-----------------------------------|--------|-----------------------|---------|--------------------------------------------|--------|-----------------------|--------|--------------------------------------|--------|
| William D. Myers  29877 Telegraph Road  Southfield, MI 48034          |   | 1,082,586                         | (2)    | 13.6                  |    |                                       |   |                  |   | 12.1                                 |   |
| Ben J. Gallant  P.O. Box 238  Douglas, TX 75943                       |   | 1,001,971                         |   | 12.4                  |    |                                       |   |                  |   | 11.0                                 |   |
| Robert Hayman  8550 Higuera Street  Culver City, CA  90232       |   | 823,961                           |   | 10.4                  |    |                                       |   |                  |   | 9.2                                  |   |
| Irene M. Myers  29877 Telegraph Road  Southfield, MI 48034            |   | 549,072                           | (2)    | 6.9                   |    |                                       |   |                  |   | 6.1                                  |   |
| Michael F. Radner  16500 North Park Dr., # 1507  Southfield, MI 48075 |   | 532,601                           |   | 6.7                   |    |                                       |   |                  |   | 5.9                                  |   |
| BankOne, N.A.  1 Bank One Plaza  Chicago, IL 60670                    |   | 516,958                           |   | 6.5                   |    |                                       |   |                  |   | 5.7                                  |   |
| Charles A. Nichols(3)  5655 Bear Lane  Corpus Christi, TX 78405       |   | 502,178                           |   | 6.3                   |    | 100,000                                    |   | 25                    |   | 8.4                                  |   |
| William D. Maroney(4)  5655 Bear Lane  Corpus Christi, Texas 78405    |   | 411,921                           |   | 5.2                   |    | 200,000                                    |   | 50                    |   | 10.2                                 |   |
| Wayne A. Johnson, II                                                  |   | 316,313                           | (5)    | 4.0                   |    |                                       |   |                  |   | 3.5                                  |   |
| Roger W. Dartt                                                        |   | 232,950                           |   | 2.9                   |    |                                       |   |                  |   | 2.5                                  |   |
| John E. Vickers III                                                   |   | 150,000                           |   | 1.9                   |    |                                       |   |                  |   | 1.6                                  |   |
| Bertrand R. Williams, Sr.                                             |   | 9,315                             |   |                  | *  | 100,000                                    | (6)    | 25                    |   | 2.9                                  |   |
| Gary Chatham                                                          |   | 8,255                             |   |                  | *  |                                       |   |                  |   |                                 | *      |
| All current executive officers and directors as a group (6 persons)   |   | 1,480,932                         |   | 18.1                  |    | 400,000                                    |   | 100                   |   | 27.1                                 |   |

 

36

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----

* Less than one percent.

 

(1)       The column sets forth shares of Common Stock which aredeemed to be “beneficially owned” by the persons named in the table under Rule13d-3 of the SEC, including shares of Common Stock that may be acquired uponthe exercise of stock options or warrants that are presently exercisable orbecome exercisable within 60 days, as follows: Mr. Gallant – 141,000; Mr.Nichols – 1,716; Mr. Maroney – 1,404; Mr. Johnson, II – 1,716; Mr. Vickers –150,000; Mr. Dartt – 218,750; Mr. Williams, Sr. – 1,794 shares; Mr. Chatham -780 shares; and all current executive officers and directors as a group –  226,160 shares.  Each of the personsnamed in the table has sole voting and investment power with respect to allshares beneficially owned by them, except as described in the followingfootnotes.

 

(2)       The number of shares is based on information containedin an amended Schedule 13D, dated April 23, 2000, filed with the Securities andExchange Commission by Dr. William D. Myers and his wife, Irene Myers. Includes 533,514 shares owned by Dr. Myers, 399,072 shares owned jointly by Dr.and Mrs. Myers and 150,000 shares owned individually by Mrs. Myers.  Mr. Myers shares voting and dispositivepower with respect to the latter two groups of shares.

 

(3)       Includes 2,000 shares of Common Stock owned by Mr.Nichols’ wife, and 100,000 shares of Preferred Stock owned jointly with Mrs.Nichols, as to both of which Mr. Nichols shares voting and dispositive power.

 

(4)       Includes 308,666 shares of Common Stock and 200,000shares of Preferred Stock owned by Mr. Maroney’s wife, and 7,692 shares ownedjointly by Mr. and Mrs. Maroney, as to which Mr. Maroney shares voting anddispositive power.

 

(5)       Includes 100,423 shares of Common Stock owned byfamily trusts for which Mr. Johnson is the trustee.

 

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

 

**EquityCompensation Plans**

 

Thefollowing table reflects the information described as of December 31, 2003 withrespect to compensation plans under which the Company’s stock is authorized forissuance.

 
| **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     |   | 474,229                                                                                       |   | $                                                                                   | 2.34   |                                                                                  | 161,086 |   |
| Equity compensation plans not approved by security holders |   | 250,000                                                                                       |   | .33                                                                                 |   |                                                                                  |    |
| Total                                                      |   | 724,229                                                                                       |   | 1.78                                                                                |   | 161,086                                                                               |    |
|                                                            |        |                                                                                               |        |                                                                                     |        |                                                                                       |         |  |

 

ITEM 13.                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

On June 17, 2003, theCompany’s principal creditor, Value Bank, assigned its interest in theCompany’s $750,000 note and related security instruments to Aimee Maroney for$682,056, which was the outstanding principal balance under the note, andagreed to release Mrs. Maroney and the Company from all claims arising out ofthe note and security documents. Subsequently, the Company negotiated the amendment of the note to providefor an interest rate of 5% per annum, with all principal and accrued interestpayable in a single payment on

 

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December 31, 2004. As consideration for the purchase of the note by Mrs. Maroney and theamendment of the terms of the note, the Company issued to Mrs. Maroney 100,000shares of its Series B Preferred Stock on July 29, 2003.  The preferred shares were valued based onrecently subscribed price of $1.00 per share. Mrs. Maroney is the wife of Mr. William Maroney, a director of the Company.

 

ITEM 14.                PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

*Audit Fees.*  The Company incurred aggregate professional fees to its currentauditors, Hein & Associates LLP (“Hein”), in the amount of $70,000 for the2003 audit and $68,000 for the 2002 audit, and to its previous auditors, Ernst& Young, LLP  (“EY”), in the amountof  $14,000 for 2002.

 

*Audit-Related Fees.* The Company incurredno additional fees to Hein during 2003 and no additional fees to EY, during2002 for assurance and related services that are reasonably related to theperformance of the audit or review of the Company’s financial statements,

 

*Tax Fees.* The Company incurred $6,760 in fees to Hein during 2003 and $27,250 infees to EY during 2002 for tax compliance, tax advice and tax planning, composedprincipally of tax preparation services.

 

*All Other Fees.*  For each of the last two fiscal years, the Company incurred noadditional fees for products and services provided by Hein or EY other thanthose reported above.

 

TheAudit Committee considered whether the provision of these services wascompatible with maintaining the independence of Hein and EY as the Company’sprincipal independent accounting firms.   All of the non-audit services described above were approved by the AuditCommittee in accordance with its policies and procedures.

 

**PART IV**

 

ITEM 15.                EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ONFORM 8-K

 

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

 
| Independent Auditor’s  Report - Hein & Associates LLP                                               |
|--------------------------------------------------------------------------------------------------------------|
| Independent Auditor’s  Report - Ernst & Young LLP                                                   |
| Consolidated Balance Sheets  as of December 31, 2003 and 2002                                                |
| Consolidated  Statements of Operations for the Years Ended December 31, 2003, 2002, and  2001                |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended December 31, 2003,  2002, and 2001 |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2003, 2002, and  2001                |
| Notes to Financial  Statements                                                                               |

 

2.             Financial Statement Schedules: The following financialstatement schedule is attached to this report.

 

Schedule II—Valuation and Qualifying Accounts

All other schedules are omitted because they are notapplicable, not required, or the information is included in the financialstatements or the notes thereto.

 

3.             Exhibits: The exhibits included as part of this reportare listed in the attached Exhibit Index, which    is incorporated herein by reference.

 

(b)Reports on Form 8-K: No reports on Form 8-K were filed during the quarter endedDecember 31, 2003.

 

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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, 2001                |   |                                  |    |                                           |   |                      |   |                          |   |
| Valuation allowance for accounts receivable |   | $                                     | 230,000 |                                           | $      | —                    |   | $                             | 54,000 | (3) | $ | 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                                      | (4)    | —                    |   | 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                     |   |
|                                        |   |                                  |    |                                           |   |                      |   |                          |   |
| Year Ended December 31, 2003                |   |                                  |    |                                           |   |                      |   |                          |   |
| Valuation allowance for accounts receivable |   | 261,000                               |    | 111,000                                        |   | 201,000                   | (3)    | 171,000                       |   |
| Valuation allowance for inventories         |   | 4,243,000                             |    |                                           |   | 1,632,000                 | (5)    | 2,611,000                     |   |
| Valuation allowance for deferred taxes      |   | 8,530,000                             |    | 1,311,000                                      |   |                      |   | 9,841,000                     |   |
|                                             |        |                                       |         |                                                |        |                           |        |                               |        |  |  |  |  |

 

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(1)        Increase in accounts receivable valuation allowance.

 

(2)        Increase in inventory valuation allowance.

 

(3)        Reduction in accounts receivable allowance due tocollection and write off of reserved accounts.

 

(4)        Increase in deferred tax valuation allowance.

 

(5)        Reduction in inventory allowance due to sale of laserassets and use of product previously included in the allowance.

 

39

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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, 2004.

 
|   | 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 same as date above, 2004.

 
| /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/ Bertrand R. Williams,  Sr. |   |                                              |   |
| Bertrand R. Williams,  Sr.     |   | Director                                          |   |
|                                |        |                                                   |  |  |

 

40

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**EXHIBIT INDEX**

 

Certain of the followingexhibits have been previously filed with the Securities and Exchange Commissionpursuant to the requirements of the Securities Act of 1933 and the SecuritiesExchange Act of 1934.  Such exhibits are identified by the parentheticalreferences following the listing of each such exhibit and are incorporatedherein by reference.  The Company’s Commission file number is 0-19195.

 
| **Exhibit  Number** |   | **Description  of Document**                                                                                                                                                                               |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                 |   | Asset Purchase Agreement  dated as of May 12, 2003 between Biolase Technology, Inc. and the Company  (Form 10-Q for quarter ended March 31, 2003)                                                          |
|                |   |                                                                                                                                                                                                       |
| 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 (Form 10-Q for the quarter ended September 30,  2002)                                                                                                        |
|                |   |                                                                                                                                                                                                       |
| 3.3                 |   | Certificate of Correction  to the Second Restated Certificate of Incorporation (Form 10-K for year ended  December 31, 2002)                                                                               |
|                |   |                                                                                                                                                                                                       |
| 3.4                 |   | Certificate of Designation  of Series B Preferred Stock (Form 10-K for year ended December 31, 2002)                                                                                                       |
|                |   |                                                                                                                                                                                                       |
| 3.5                 |   | Amended and Restated  Bylaws (Form 10-K for year ended December 31, 1998)                                                                                                                                  |
|                |   |                                                                                                                                                                                                       |
| 4.1                 |   | 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)                                          |
|                |   |                                                                                                                                                                                                       |
| 4.2                 |   | 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) |
|                |   |                                                                                                                                                                                                       |
| 4.3                 |   | Stock Purchase Warrant  dated October 30, 2003 for 721,510 shares issued to BankOne, N.A. (Form 10-K  for year ended December 31, 2002)                                                                    |
|                |   |                                                                                                                                                                                                       |
| 4.4                 |   | Fourth Amended and  Restated Forbearance Agreement between Bank One and American Medical  Technologies, Inc., effective February 1, 2003 (Form 10-K for year ended  December 31, 2002)                     |
|                |   |                                                                                                                                                                                                       |
| 4.5                 |   | Amendment Agreement with  Aimee Maroney effective as of June 17, 2003 (Form 10-Q for quarter ended June  30, 2003)                                                                                         |
|                |   |                                                                                                                                                                                                       |
| 4.6                 |   | Agreement to Assign Lien  and Release Claims with Aimee Maroney and Value Bank Texas dated as of June  17, 2003 (Form 10-Q for quarter ended June 30, 2003)                                                |
|                |   |                                                                                                                                                                                                       |
| 4.7                 |   | 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                |   | 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)                |

 

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| 10.5**       |   | 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)                                     |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                              |
| 10.6         |   | Assignment from Sunrise  Technologies International, Inc. to Lares Research dated June 24, 1997 (Form  10-K for year ended December 31, 1997)                                                                     |
|         |   |                                                                                                                                                                                                              |
| 10.7         |   | Patent License Agreement  dated June 29, 1998 Prep-Technology Corp. and American Medical Technologies,  Inc. (Form 10-Q for quarter ended June 30, 1998)                                                          |
|         |   |                                                                                                                                                                                                              |
| 10.8**       |   | 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)                                    |
|         |   |                                                                                                                                                                                                              |
| 10.9         |   | Patent licensing agreement  dated June 10, 1999 between American Medical Technologies, Inc. and Kreativ,  Inc. (Form 10-Q for quarter ended June 30, 1999)                                                        |
|         |   |                                                                                                                                                                                                              |
| 10.10 * |   | 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           |   | 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                                                                                                                                                                                 |
|         |   |                                                                                                                                                                                                              |
| 31.1         |   | Certification of Roger W.  Dartt, President & Chief Executive Officer, as required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                |
|         |   |                                                                                                                                                                                                              |
| 31.2         |   | Certification of Barbara  Woody, Controller and principal accounting officer, as required pursuant  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                |
|         |   |                                                                                                                                                                                                              |
| 32           |   | Certification of Roger W.  Dartt, President and Chief Executive Officer, and Barbara Woody, Controller  and principal accounting officer, as required pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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  *Identifiescurrent management contracts or compensatory plans or arrangements.

 

**Portions of thisagreement were filed separately with the Commission pursuant to Rule 24b-2 ofthe Securities Act of 1934 governing requests for confidential treatment ofinformation.

 

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