** **

**UNITED STATES**

**SECURITIES 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, 2001, 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 registrantas specified in its charter)

 

| **DELAWARE**                                                    |   | **38-2905258**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. employer  identification number) |
|                                                            |   |                                     |
| **5555  Bear Lane, Corpus Christi, TX 78405**                   |
| (Address of principal  executive offices)(Zip Code)             |
|                                                            |   |                                     |
| **(361)  289-1145**                                             |
| (Registrants telephone  number, including area code)            |

 

Securities registeredpursuant to Section 12(b) of the Exchange Act:

 
| **Title of Each Class** |   | **Name of Exchange on which registered** |
|-------------------------|--------|------------------------------------------|
| None                    |   | Not Applicable                           |

 

Securities registeredpursuant to Section 12(g) of the Act:

Common Stock, $.04 parvalue per share

(Title of Class)

 

Indicate by check mark whether the registrant (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes ý          No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.    o

 

The aggregate market value of the registrant’s Common Stock held bynon-affiliates of the registrant was approximately $2,623,924 as of March 20,2002, based upon the last sales price reported on The Nasdaq National Market onthat date.  For purposes of this calculationonly, all directors, executive officers and owners of more than ten percent ofthe registrant’s Common Stock are assumed to be affiliates.  There were 6,862,348 shares of theregistrant’s Common Stock issued and outstanding on March 20, 2002.

 

DOCUMENTS INCORPORATED BYREFERENCE

 

None.

 

 

PART I

 

 

ITEM 1      DESCRIPTION OF BUSINESS

 

**Introduction**

 

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

 

**Products**

 

*LaserProducts*

 

The PulseMaster 600-IQ is a neodymiumyttrium-aluminum-garnet (Nd:YAG) laser that delivers pulses of laser energythrough a flexible fiber optic delivery system that can reach into difficultrecesses of the mouth.  The PulseMastercan deliver a 100-microsecond energy pulse at rates varying from 10 to 200times per second, and at up to six watts of average power.  The PulseMaster is contained in a movablecabinet the size of a medium suitcase, weighs approximately 75 pounds and plugsinto a standard electrical outlet.

 

The Diolase is a diode laser that delivers acontinuous wave or gated continuous wave through a flexible fiber opticdelivery system that can reach difficult recesses of the mouth.  The Diolase delivers up to 6 watts of powerdepending upon the fiber size used.  TheDiolase is compact and portable in size, weighs approximately 11 pounds andplugs into a standard electrical outlet.

 

The Company introduced the “Cavilase”, an Erbium:YAGlaser, in late 2001 and began shipments in March of 2002.  The Cavilase delivers pulsed laser energythrough a flexible diamond fiber at pulse rates varying from 20 to 60 times persecond at up to 6 watts of power.  It iscontained in a movable cabinet weighing approximately 160 pounds and can beplugged into a standard outlet.

 

American Medical believes one important feature of itsdental lasers is their ability to help reduce the pain associated with theprocedures for which they are used. Additionally, because the laser is moreprecise than standard dental instruments, its use results in less cellulardestruction.  The laser minimizesbleeding during soft tissue surgery, creating a cleaner field in which tooperate by eliminating time-consuming removal of blood from the operativesite.  The laser also reduces the riskof post-operative infection.

 

American Medical’s dental lasers are used for bothsoft tissue and hard tissue applications. Soft tissue procedures include removing excess or diseased gum tissue,contouring gums, performing biopsies, preparing gums for crown and bridgeimpressions, trimming the gums to fit crowns and bridges, treating gum diseaseand for hemostasis (control of bleeding). Hard tissue applications include removing early decay from teeth,etching, increasing hardness of dentin, and desensitizing and anesthetizingteeth.  In 1999, American Medicalreceived FDA clearance to market the PulseMaster for the selective removal ofenamel decay.  Additionally, inSeptember of 2001, the Company received clearance to market the Cavilase forgeneral removal of enamel decay. American Medical has not received clearance from the FDA to marketdental lasers in the United States for any other hard tissue application, butdoes market these instruments in certain other countries for suchpurposes.  See “GovernmentalRegulation.”

 

American Medical’s dental lasers, components andaccessories are sold primarily in certain Asian and Pacific markets, Europe andNorth America.  Lasers representedapproximately 52%, 54% and 27% of American Medical’s total revenues during2001, 2000 and 1999, respectively.

 

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*Anthos System Dental Chairs andUnits*

 

In May of 2001, American Medical signed an agreementwith CEFLA S.c.r.l. granting the Company exclusive rights to distribute, in theUnited States, the operatory equipment which CEFLA manufactures in Italy underthe Anthos trade name. The parties also agreed to integrate the five high-techdental equipment lines of American Medical into the Anthos chairs and units.The five high-tech dental equipment lines have been integrated, and it is theonly chair and unit in the world with these technologies built in.  In September of 2001 the Company received510(k) FDA clearance to market Anthos System dental units and distributionbegan in the fourth quarter of 2001. Anthos System sales represented less than 5% of American Medical’s totalrevenues during 2001.

 

*Plasma Arc Curing Systems*

 

American Medical markets a Plasma Arc Curing System(“PAC”) that utilizes a high intensity light source to rapidly cure compositefillings.  Curing occurs in five to tenseconds, or at least twice as fast as most conventional curing lights.

 

American Medical’s PAC products, components andaccessories are sold primarily in North America, certain Asian and Pacificmarkets, and Europe.  PAC productsrepresented approximately 7%, 12% and 26% of American Medical’s total revenuesduring 2001, 2000 and 1999, respectively.

 

*KCP Cavity Preparation Systems*

 

American Medical currently offers several KCP modelsthat vary in size, power and features, from the KCP 5 counter top model to thedeluxe 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 alumina propelledat high velocity by compressed air and delivered to the tooth via a lightweighthandpiece.  The KCP shapes restorationsites, removes old composites and modifies underlying hard tissue, oftenhelping to increase bond strength.  Itis also used for sealant preparations, stain removal and intraoral porcelainremoval and repair.  The KCP can oftenbe used in place of a drill and may be used in many cases withoutanesthesia.  The dentist controls thecutting speed by selecting particle size (27 or 50 micron) and air pressure (40psi to 160 psi) with touch pads on a control panel.  The air abrasive stream is activated by a foot pedal.   The KCP floor models (KCP 100 and KCP 1000)are contained in a movable cabinet the size of a medium suitcase and plug intoa standard electrical outlet.

 

The KCP is best used in conjunction with moderntooth-colored composite restoration materials. It is not recommended for removing large amalgam fillings.  The precision of the KCP, and the manner inwhich it prepares surfaces for restorations, allow for earlier treatment ofdecay and less destruction of the tooth while restoring it.  In many cases, the KCP may be used withoutanesthesia, allowing a dentist to treat teeth in different quadrants of themouth during a single visit.  This isgenerally not possible when conventional instruments and anesthesia are used.

 

American Medical also markets its PAC as an accessoryto its KCP.  The KCP1000 PAC combines anair abrasive cavity preparation system together with a composite curing lightin a single instrument.  This allowsdentists to efficiently switch from cavity preparation to curing.

 

The KCP is sold primarily in North America, certainAsian and Pacific markets and Europe. The KCP represented approximately 8%, 6% and 15% of American Medical’stotal revenues in 2001, 2000 and 1999, respectively.

 

*Intra Oral Camera Products*

 

The Ultracam is a sophisticated camera system thatallows the dentist to take pictures of a patient’s teeth during anexamination.  The pictures can beprojected on a video monitor in the examination room for immediate viewing bythe dentist and the patient, and printed or stored on a computer disk.  The Ultracam systems offered vary in sizefrom the basic cart system, which is a portable camera and printer housed in amobile cart, to a networked system that can be utilized in several examinationrooms.  The networked systems combinethe cart system with central printing stations, digital docking stations andexamination room monitors.

 

3

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The Ultracam is utilized in the dental practice forpresentation, education and as a means of communicating their services throughmulti-media.  The Digital DockingStation, introduced in 1999, greatly enhances the value of an intra oral cameraby allowing the storage of up to 40 images on a 3 1⁄2 inch computer floppy disk.

 

Ultracam products are sold primarily in North Americaand Europe.  The Ultracam productsrepresented approximately 10%, 14% and 22% of American Medical’s total revenuein 2001, 2000 and 1999, respectively.

 

*Probe One and Chart-It*

 

The Probe One is a computerized periodontal probewhich works with practice management software to automate and streamlineperio-probing and charting.  Chart-It isan automated charting software program used to fully integrate a dentist’soperatory with most front office practice management systems.  These products represented less than 1% ofthe Company’s total revenues in 2001, 2000 and 1999, respectively.

 

*IndustrialProducts*

 

American Medical also develops, manufactures andmarkets precision air abrasive jet machining (“AJM”) systems for industrialapplications.  The AJM system has a widerange of applications, including drilling, cutting, abrading, deburring,dressing, beveling, etching, shaping and polishing.  Its principal advantage over conventional machining is that theAJM process, which accomplishes its work through kinetic particle displacement(an erosion process), produces no heat, shock or vibration.  This enables precise work to be done onfragile materials without deburring or further processing.  Generally, the same is not true of drills,saws, laser or other types of conventional machining equipment because all ofthese systems rely on heat and/or friction to perform the work.  These machining techniques generally requirefurther processing and in many instances do not provide the precision availablewith AJM, particularly with fragile materials. AJM systems are often used to remove the slag, burrs and flash resultingfrom conventional machining processes. Some examples include deburring needles, beveling silicon wafers andcutting fiber optics.

 

Industrial products accounted for less than 5% ofAmerican Medical’s total revenues in 2001, 2000 and 1999, respectively.

 

**Marketing, Sales and Training**

 

Prior to February 14, 2000, American Medical marketedits dental products through independent distributors, primarily PattersonDental Company and Sullivan Schein, Inc., to general dental practitioners andcertain other dental specialists in the United States. Sales to PattersonDental Company, a major domestic distributor of the Company’s kinetic cavitypreparation units, were approximately 16% of total revenues in 1999.

 

On February 14, 2000, the Company changed its businessmodel and began selling its dental products directly to dentists in the UnitedStates through its own sales force.  Therevised business model called for the establishment of dental sales and servicecenters in large metropolitan areas throughout the United States.  The centers are staffed with salespersonnel, an office coordinator responsible for scheduling, coordinating localmarketing and reporting to corporate headquarters, and service technicians forinstallation and technical service support. Outside the United States, including Canada, American Medical wouldcontinue selling its dental products through its strong distributor network.

 

Another key facet of the revised business model isthat the Company intends not only to sell the dental products it manufactures,but also to actively pursue OEM or strategic relationships with othermanufacturers of dental and other medical technology products.  Within five years, the Company hopes to beable to offer a line of products representing 80% to 90% of the equipment usedby dentists.

 

In the third quarter of 2001, in response to theapparent downturn in the economy, the Company made certain changes to thebusiness model.  The Company closed 2under-performing sales and service centers and 17 sales and sales supportpositions were eliminated.  Theremaining offices were reorganized with the creation of 5 regional offices eachsupporting 2 to 3 satellite offices.  Asof March 20, 2002, the Company has 5 regional offices and 9 additionalsatellite offices operational.

 

4

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Internationally, American Medical’s products wereexclusively marketed in Japan by Denics Co. Ltd. (“Denics”) or its affiliatesthrough March 2001.  Sales to Denics,the Company’s largest foreign distributor, were approximately 9%, 21% and 19%of total revenues in 2001, 2000 and 1999, respectively.  The Company’s contract with Denics expiredon March 31, 2001 and the Company is seeking new distributor partners inJapan.  In Germany, the Company’sprimary European market, American Medical sells directly to the end user aswell as selling through distributors. In the rest of Europe, American Medical’s products are marketed throughexclusive dental distributors, such as DLMedica in Italy, Casa Schmidt in Spainand Dentex in Russia.

 

The Company relies heavily on sales made at tradeshows, dental exhibitions, and dental society meetings.  In 2001, the September 11thterrorist attacks forced the cancellation of several such trade shows anddental meetings and reduced attendance at several others as potential attendeeswere less willing to travel to such events in the aftermath of the terroristattacks. In general, the Company’s marketing activities, such as dentalexhibitions and meetings, are typically lower in the summer months, whichresults in decreased revenues during the third quarter of the year.

 

American Medical presently has several industrialproduct distributors.  Such distributorshave been and are anticipated to be the primary source of sales for AmericanMedical’s industrial products in the future. Industrial product distributorsare supported by American Medical primarily through advertising in the ThomasRegister and trade journals, and by participation in trade shows.

 

American Medical also sells some industrial productsdirectly to customers through advertisements or customer referrals and throughoriginal equipment manufacturers of grinding equipment who purchase AJM systemsto incorporate into their equipment.

 

**Training and Service**

 

Because American Medical’s dental products representnew approaches to dentistry, training is a significant aspect of its marketingefforts.  American Medical offerscomplementary training on all of its products. American Medical encourages each purchaser to participate in ongoingcontinuing education regarding the use of American Medical’s dental productsand endeavors to share new developments as soon as reliable scientific supporthas been established.

 

American Medical provides warranty and repair servicefor American Medical’s products in the United States.  To service its dental products, American Medical has full-timeservice employees in its sales and service centers throughout the United Statesand has service arrangements with independent distributors for products inother markets.  If such arrangements areunavailable, certain American Medical sales personnel are trained to make minorservice repairs.  To date, AmericanMedical has not experienced significant service problems.  American Medical generally provides aone-year warranty on all of its products. Since the introduction of the sales and service centers, the Company’srevenues related to replacement parts and repair services have risen from 8% ofrevenues in 1999, to 11% of revenues in 2000, and 17% of revenues in 2001.

 

The Company also has a service center in Keltern,Germany that provides installation, training, service and technical support forEurope, Russia and the Middle-East.  Inother international markets, the distributors provide installation, trainingand service with technical support from the United States office.

 

**Competition**

 

In general, American Medical’s products are subject tointense competition, both from other advanced dental technology companies andfrom makers of conventional dental equipment. American Medical believes there are approximately 6 competing companieswhich presently offer Nd:YAG, diode, argon, erbium, holmium or CO2 lasers foruse in dentistry.  American Medical haspatents in the basic technologies, which the Company believes provide acompetitive advantage.  American Medicalbelieves there are approximately 3 companies that presently sell competingdental air abrasive products and approximately 13 companies that presently sellcompeting intra oral camera systems. American Medical’s laser, PAC and KCP products must also compete withconventional treatment methods using dental instruments or equipment that aregenerally less expensive and with which dentists are more familiar.

 

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Many of these competing companies, particularly thosewhich manufacture traditional dental equipment, may have been in businesslonger, have greater resources and have a larger distribution network thanAmerican 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 Medicalbelieves its products are competitive in terms of capabilities, quality andprice, competition has, and may in the future, adversely affect AmericanMedical’s business.

 

**Patents**

 

American Medical believes its patents provide acompetitive advantage in those countries where they have been issued.  American Medical believes its technologypatents and other patent rights provide a proprietary means to utilize thattechnology in dentistry.  In the UnitedStates, American Medical has patents related to dental laser methods andtechnology patents that have expiration dates ranging from 2002 to 2016, dentalair abrasive systems and methods for using an air abrasive stream for dentistrythat do not begin expiring until 2011, technology patents for air abrasivecavity preparation systems that do not begin expiring until 2004, andindustrial air abrasive patents that have expiration dates ranging from 2004 to2016.  American Medical also holds severalindustrial air abrasive patents in various other countries.

 

**Manufacturingand Suppliers**

 

American Medical manufactures, assembles and servicesits products at its ISO 9001-certified facility in Corpus Christi, Texas.  American Medical’s products are manufacturedfrom parts, components and subassemblies obtained from a number of unaffiliatedsuppliers and/or fabricated internally at its manufacturing facility. AmericanMedical has modern machining capability allowing it to control the productionof certain non-standard parts.  AmericanMedical uses numerous suppliers for standard parts and for fabrication ofcertain parts.  Although most of theparts and components used in its products are available from multiple sources,American Medical presently obtains several parts and components from singlesources.  Lack of availability ofcertain parts and components could result in production delays.  Management has identified alternatesuppliers and believes any delays would be minimal.  While the loss of American Medical’s relationship with a particularsupplier might result in some production delays, such a loss is not expected tomaterially affect American Medical’s business.

 

**Research and Development**

 

Most research and development, prototype productionand testing activities take place at the Texas facility, although some researchand development work is performed for American Medical by consultants. TheCompany also maintains research and development facilities in Wixom, Michiganand Santa Clara, California.  The Texasfacility has an engineering and CAD/CAM drafting staff which is capable ofproducing new product prototypes. Although American Medical expects to continue to conduct most of its ownresearch and development activities, American Medical will continue to workwith various domestic and international dental schools, consultants andresearchers to analyze dental applications and to develop product enhancementsand complementary products.

 

American Medical’s research and developmentexpenditures for 2001, 2000 and 1999 were $796,424, $966,382, and $931,189,respectively.  American Medical’scurrent research and development efforts are focused on new complementaryproducts for the dental market.

 

**Governmental Regulation**

 

American Medical’s dental products are subject tosignificant governmental regulation in the United States and certain othercountries.  In order to conduct clinicaltests and to market products for therapeutic use, American Medical must complywith procedures and standards established by the FDA and comparable foreignregulatory agencies.  Changes inexisting regulations or adoption of additional regulations may adversely affectAmerican Medical’s ability to market its existing products or to marketenhanced or new dental products.

 

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*United States RegulatoryRequirements*

 

The FDA granted clearance to market the KCP forhard-tissue applications and the PulseMaster dental lasers for soft-tissueprocedures in late 1992.  Clearance tomarket the PAC was granted by the FDA in mid-1995.  The PulseMaster received FDA clearance to market for lasercurettage in March 1997 and a diode laser was granted soft tissue clearance inSeptember 1997.  The PulseMaster receivedFDA clearance to market for selective removal of enamel dental caries in May1999.  The Anthos System line of dentalchairs and units received FDA clearance in August of 2001.  In September of 2001, clearance was grantedto market the Cavilase for general hard and soft tissue procedures.  The receipt of FDA clearance requires proofof the product’s safety and efficacy or that the product is substantiallyequivalent to products that have already received FDA clearance.  Such clearances, if obtained, may take fromthree months to several years to receive.

 

*Foreign Regulatory Requirements*

 

The KCP, PAC, intraoralcameras and lasers have been granted CE mark approvals which are recognized bymost European countries, and may be sold in Germany and many other Europeanmarkets.  The PulseMaster and KCP hasalso been approved for sale in Japan. American Medical’s dental lasers comply with government regulations inmost major countries in Europe, Asia, the Pacific Rim, and North and SouthAmerica and are marketed for both hard and soft tissue applications, except inJapan, where (as in the United States) they have not been cleared for certainhard-tissue procedures.  Additionalforeign authorizations to market its dental products are being sought whereneeded.  Regulation of medical devicesin other countries varies between countries such as Japan, which has standardssimilar to the FDA, to countries that have no regulations.  Regulation of medical devices in othercountries is also subject to change and there can be no assurance AmericanMedical will continue to be able to comply with such requirements.

 

European regulationsrequired ISO 9001 certification as of July 1998 for all medical productsdistributed or sold in Europe.  AmericanMedical’s manufacturing facility initially received ISO 9001 certification in1997.

 

**ProductLiability Exposure**

 

American Medical’sbusiness involves the inherent risk of product liability claims.  If such claims arise, they could have anadverse effect on American Medical. American Medical currently maintains product liability insurance on a“claims made” basis with coverage per occurrence of $2,000,000 and in theaggregate annually of $5,000,000.  Thereis no assurance that such coverage will be sufficient to protect AmericanMedical from all risks to which it may be subject or that product liabilityinsurance will be available at a reasonable cost, if at all, in the future.

 

**ForeignOperations and Segment Information**

 

For information regardingthe Company’s foreign operations and business segments, see Note 8 of the Notesto Consolidated Financial Statements. Such information is incorporated herein by reference.

 

**Employees**

 

On March 20, 2002,American Medical had 91 full-time employees. Of these employees, 34 were engaged in direct sales and marketingactivities and 33 in manufacturing activities. The remaining employees are in finance, administration, customerservice, and research and development. American Medical has no collective bargaining agreements with any unionsand believes that its overall relations with its employees are good.

 

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**ExecutiveOfficers of the Company**

 

The following table setsforth information concerning each of the current executive officers of AmericanMedical who are elected to serve at the discretion of the Board of Directors.

 
| **Name**             |   | **Age** |   | **Position**                                                         |   |
|----------------------|--------|---------|--------|----------------------------------------------------------------------|--------|
| Ben J. Gallant       |   | 68      |   | President, Chief Executive Officer, Chair of the  Board of Directors |   |
| John E. Vickers, III |   | 55      |   | Chief Operating Officer, Secretary and Director                      |   |
| Justin W. Grubbs     |   | 31      |   | Chief Financial Officer                                              |   |
| William S. Parker    |   | 56      |   | Senior Vice President — Dental                                  |   |
| John A. Miller       |   | 42      |   | Executive Vice President — Sales                                |   |

 

*Ben J.Gallant* - Mr. Gallant has been the Company’s President andChief Executive Officer since November 1996 and served as its Chief OperatingOfficer from September 1996 to May 2000. Mr. Gallant was a founder of TexasAirsonics, Inc., served as a director and chairman of the board from thatcompany’s inception in 1982, was elected president and chief executive officerin 1991 and served in those positions until that company’s acquisition byAmerican Medical in 1996. He is chiefly responsible for the design anddevelopment of the Company’s KCP and industrial product lines. Mr. Gallant hasbeen a director of the Company since 1996.

 

*John  E. Vickers III* - Mr.Vickers was appointed Chief Operating Officer of the Company in May 2000.  He previously served the Company asExecutive Vice President from August 1998 to May 2000 and as Senior VicePresident - Operations from November 1996 to August 1998.  Mr. Vickers had served as Texas AirsonicsInc.’s chief financial officer and legal counsel from June 1993 until itsacquisition by the Company in July 1996 and had various operatingresponsibilities with Texas Airsonics.  Mr. Vickers has practiced law for over 25 years. Mr. Vickers has been adirector of the Company since 1996.

 

*JustinW. Grubbs* – Mr. Grubbs was appointed Chief Financial Officerin July 2000.  Prior to joining theCompany he had been employed by the public accounting firm of Ernst & YoungLLP for seven years, specializing in entrepreneurial growth companies in theretail, distribution and manufacturing industries.  Mr. Grubbs graduated from Georgetown University in 1993 with dualconcentrations in accounting and finance and is a licensed certified publicaccountant.

 

*WilliamS. Parker* – Mr.Parker was appointed Senior Vice President – Dental of the Company in August1998 and became a Director in November 1999. He is chiefly responsible for the Company’s product development.  He had been a consultant, then an employeeof the Company in charge of product development since 1991.  From 1976 to 1991, he was the president andco-founder of the New Directions Group, Inc., a management consulting firmwhich had clients such as Ford, Exxon Enterprises, AT&T and Ross Laboratories.

 

*John A.Miller* – Mr. Miller was appointed Executive Vice President –Sales in June 2001.  Prior to that hehad served as the Vice President – Domestic Sales since June of 2000 and asVice President – Western Sales from May 1999 until June 2000.  Prior to joining American Medical, Mr.Miller was President of Source One, a marketing, consulting, planning andresearch firm he founded in 1996.  Mr.Miller has been involved in dental equipment related sales for over ten years.

 

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**Forward Looking Statements**

 

The Company makes forward-looking statements in thisreport and may make such statements in future filings with the Securities andExchange Commission.  The Company mayalso make forward-looking statements in its press releases or other publicshareholder communications.  TheCompany’s forward-looking statements are subject to risks and uncertainties andinclude information about its expectations and possible or assumed futureresults of operations.  When the Companyuses any of the words “believes”, “expects”, “anticipates”, “estimates” orsimilar 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 the Company believes that itsforward-looking statements are reasonable, you should not place undue relianceon any such forward-looking statements, which speak only as of the datemade.  Because these forward-lookingstatements are based on estimates and assumptions that are subject tosignificant business, economic and competitive uncertainties, many of which arebeyond the Company’s control or are subject to change, actual results could bematerially different.  Factors thatmight cause such a difference include, without limitation, the following:  the possible failure to maintain theCompany’s ability to borrow under its line of credit, the potential inabilityof the Company to refinance the line of credit indebtedness currently indefault prior to the expiration of the bank’s forbearance agreement and theother line of credit due in October of 2002, the Company’s potential inabilityto hire and retain qualified sales and service personnel, the potential for anextended decline in sales, the possible failure of revenues to offsetadditional costs associated with its new business model, the potential lack ofproduct acceptance, the Company’s potential inability to introduce new productsto the market, the potential failure of customers to meet purchase commitments,the potential loss of customer relationships, the potential failure to receiveor maintain necessary regulatory approvals, the extent to which competition maynegatively affect prices and sales volumes or necessitate increased sales expenses, the failure of negotiations toconclude OEM agreements or strategic alliances and the other risks anduncertainties set forth in this report.

 

Other factors not currently anticipated by managementmay also materially and adversely affect the Company’s results ofoperations.  Except as required byapplicable law, the Company does not undertake any obligation to publicly releaseany revisions which may be made to any forward-looking statements to reflectevents or circumstances occurring after the date of this report.

 

ITEM 2.  DESCRIPTION OF PROPERTIES

 

American Medical owns an approximately 45,000 squarefoot manufacturing facility on 5.2 acres located at 5555 Bear Lane, CorpusChristi, Texas 78405, which houses its manufacturing and administrationfacilities.  A mortgage on this propertysecures the Company’s line of credit with ValueBank and the U.S. Small BusinessAdministration and a second mortgage secures the prior line of credit with BankOne that is currently in default.

 

American Medical leases 14 sales and service centersthroughout the United States, each approximately 1,500 square feet and a totalof 2,000 square feet near Santa Clara, California for its product development,clinical and service activities.  Theleases are generally for one to three year terms.

 

ITEM 3.  LEGAL PROCEEDINGS

 

Not applicable.

 

ITEM 4.  SUBMISSION OF MATTERS TOVOTE OF SECURITY HOLDERS

 

Not applicable.

 

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PART II

 

ITEM 5.                                         MARKETFOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

 

American Medical’s common stock is traded on TheNasdaq National Market (Symbol: ADLI). The following table sets forth certain information as to the high andlow sales prices per share of American Medical common stock as reported byNasdaq for each quarterly period during the last two years.

 

|           |   | **Closing  Price** |   |
|----------------|--------|--------------------|--------|
|           |   | **High**           |   | **Low** |   |
| 2000           |   |               |   |   |   |
| First Quarter  |   | $                  | 3.063  |   | $ | 1.500 |   |
| Second Quarter |   | 1.969              |   | 1.094 |   |
| Third Quarter  |   | 1.875              |   | 1.125 |   |
| Fourth Quarter |   | 1.906              |   | 0.750 |   |
|           |   |               |   |   |   |
| 2001           |   |               |   |   |   |
| First Quarter  |   | $                  | 1.938  |   | $ | 1.000 |   |
| Second Quarter |   | 1.688              |   | 1.000 |   |
| Third Quarter  |   | 1.550              |   | 0.560 |   |
| Fourth Quarter |   | 1.600              |   | 0.410 |   |

 

The Company has received notice from Nasdaq that themarket value of its publicly held shares had fallen below the minimum of$5,000,000 (the “Minimum Public Float Requirement”) and that its closing bidprice had fallen below the minimum of $1.00 per share (the “Minimum Price Requirement”)required for continued listing on the Nasdaq National Market.  If the Company is unable to regaincompliance with the Minimum Public Float Requirement for at least 10consecutive trading days before May 15, 2002 and the Minimum Price Requirementfor at least 10 consecutive trading days before May 20, 2002, Nasdaq will givenotice to the Company that its shares will be delisted from the Nasdaq NationalMarket.  The Company has the right toappeal the delisting determination to a listing qualifications panel.  The Company can also apply to transfer itssecurities to the Nasdaq SmallCap Market. To transfer, the Company must satisfy the inclusion requirements for theSmallCap Market, which include a minimum closing bid price of $1.00 per shareand a minimum market value of publicly held shares of $1,000,000.  If the Company submits a transferapplication, the delisting proceedings will be stayed until Nasdaq hascompleted its review of the application. If the application to transfer isaccepted and the listing fee is paid, the Company would have until August 19,2002 to regain compliance with the Minimum Price Requirement.  The Company may also be eligible for anadditional 180 calendar day grace period provided that it meets the initiallisting criteria for the SmallCap Market. If the Company is not able to satisfy the Minimum Public FloatRequirement and Minimum Price Requirement within the allotted time, it intendsto apply for transfer to the SmallCap Market. There can be no assurance,however, that its application will be approved. In the event that the commonstock is no longer traded on the Nasdaq National Market or SmallCap Market, itmay become more difficult to buy and sell the common stock as there will be noestablished trading market for the stock.

 

As of March 20, 2002, there were approximately 3,200beneficial and record holders of American Medical common stock based upon therecords of the Company’s stock transfer agent and security position listings.

 

The Board of Directors presently intends to retain allearnings to finance operations and does not expect to authorize cash dividendsin the foreseeable future.  TheCompany’s debt agreement also prevents the Company from declaring or payingdividends without prior approval of the lender.  Any payment of cash dividends in the future will depend uponearnings, capital requirements and other factors considered relevant by theBoard of Directors.

 

10

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ITEM 6.  SELECTED FINANCIAL DATA

 

The following selected financial data, as of and foreach of the five years ended December 31, is derived from the audited financialstatements of American Medical. Operating results for prior years are not necessarily indicative of theresults that may be expected for any other periods.  The data should be read in conjunction with the financialstatements and related notes included in this report and with Item 7“Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 
|                                                 |   | **2001**                                              |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|------------------------------------------------------|--------|-------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                                 |   | **(dollars  in thousands, except per share amounts)** |   |
| Operating Data:                                      |   |                                                  |   |     |   |     |   |     |   |     |   |
| Net revenues                                         |   | $                                                     | 14,689 |     | $      | 19,902   |   | $        | 24,370 |     | $      | 28,285 |   | $ | 21,652 |   |
| Net income  (loss)                                   |   | $                                                     | (3,978 | )        | $      | (18,403  | )(1)   | $        | 392    |     | $      | 8,849 | (2) | $ | 3,622 |   |
|                                                 |   |                                                  |   |     |   |     |   |     |   |     |   |
| Net income  (loss)per common share assuming dilution |   | ($0.57                                                | )      | ($2.53   | )      | $        | 0.05   |     | $      | 1.20     |   | $ | 0.47 |   |
|                                                 |   |                                                  |   |     |   |     |   |     |   |     |   |
| Weighted average  number of common shares            |   | 6,923                                                 |   | 7,284    |   | 7,446    |   | 7,375    |   | 7,640    |   |
|                                                 |   |                                                  |   |     |   |     |   |     |   |     |   |
| Balance Sheet  Data (at year end):                   |   |                                                  |   |     |   |     |   |     |   |     |   |
| Total assets                                         |   | $                                                     | 14,196 |     | $      | 18,291   |   | $        | 40,348 |     | $      | 41,855 | (3) | $ | 22,530 |   |
| Long-term  obligations                               |   | 78                                                    |   | 2,673    |   | 5,373    |   | 6,271    |   | 135      |   |
| Stockholders’  equity (4)                       |   | 8,626                                                 |   | 13,002   |   | 32,018   |   | 31,809   |   | 20,257   |   |
| Working capital                                      |   | 3,854                                                 |   | 9,886    |   | 17,144   |   | 17,504   |   | 8,290    |   |
|                                                      |        |                                                       |        |          |        |          |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

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1)                                      Includesimpairment charges of $9.2 million related to intangibles associated with theair abrasion and camera product lines, a charge to increase the reserve forslow moving inventory by $.8 million, a write off of demonstration inventory of$1.2 million related to the change in the business model, and a deferred incometax valuation allowance of $5.6 million.

 

2)             Includes $5.1million income tax benefit related to reversal of a previously recordeddeferred tax asset valuation allowance.

 

3)                                      Includesgoodwill of $4.2 million and other assets of $3.9 million recorded inconnection with the acquisitions of The Dental Probe and Dental Vision Directin February 1998 and August 1998, respectively.

 

4)             No dividends werepaid on the common stock during the periods presented.

 

11

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ITEM 7.                                         MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be readin conjunction with the consolidated financial statements and the notes theretoincluded elsewhere in this report.  Thediscussion contains certain forward-looking statements relating to theCompany’s anticipated future financial condition and operating results and itscurrent business plans.  In the future,the Company’s financial condition and operating results could differ materiallyfrom those discussed herein and its current business plans could be altered inresponse to market conditions and other factors beyond its control.  Important factors that could cause orcontribute to such differences or changes include those discussed elsewhere inthis report.  See the disclosures under“Item 1 – Business – Forward-Looking Statements.”

 

**Critical Accounting Policies**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requires theCompany to make estimates and assumptions that affect amounts reported in theaccompanying consolidated financial statements and related footnotes. Theseestimates and assumptions are evaluated on an on-going basis based onhistorical developments, market conditions, industry trends and otherinformation the Company believes to be reasonable under the circumstances.There can be no assurance that actual results will conform to the Company’sestimates and assumptions, and that reported results of operations will not bematerially adversely affected by the need to make accounting adjustments toreflect changes in these estimates and assumptions from time to time.  The following policies are those the Companybelieves to be the most sensitive to estimates and judgments.  The Company’s significant accountingpolicies are more fully described in Note 1 to our consolidated financialstatements.

 

*Revenue Recognition*

 

The Company recognizes revenue when each of thefollowing four criteria are met: 1) a contract or sales arrangement exists; 2)products have been shipped and title has been transferred or services have beenrendered; 3) the price of the products or services is fixed or determinable;and 4) collectibility is reasonably assured. The Company recognizes the related estimated warranty expense when titleis transferred to the customer, generally upon shipment.  The Company recognizes revenue on certainsales to two of its international distributors under terms that requireshipment to a local independent warehouse. There are no significant estimates or assumptions involved in determiningthe appropriate recognition of revenues.

 

*Allowancefor Doubtful Accounts*

 

The Company evaluates the collectibility of accountsreceivable based on a combination of factors. In circumstances where theCompany is aware of a specific customer’s inability to meet its financialobligations (e.g., bankruptcy filings, substantial down-grading of creditscores), the Company records a specific reserve for bad debts against amountsdue to reduce the net recognized receivable to the amount reasonably believedto be collectible. For all accounts not specifically analyzed, the Companyrecognizes reserves for 80% of all accounts over 90 days past due and 2% forall remaining accounts. If circumstances change (i.e., higher than expecteddefaults or an unexpected material adverse change in a major customer’s abilityto meet its financial obligations), the estimates of the recoverability ofamounts due could be reduced by a material amount.

 

*Inventories– Slow Moving*

 

The Company’s reserve for slow moving inventory isevaluated periodically based on its current and projected sales and usage.  The Company’s inventory reserve iscalculated by comparing on hand quantities as of the measurement date to theprior twelve months’ sales.  The reservecalculation assumes that sales for each unit or part will not be less thansales for the prior twelve months.  Ifsales are significantly different than prior year’s sales for the unit or part,the reserve could be materially impacted.   Changes to the reserves are included in costs of goods sold and have adirect impact on the Company’s financial position and results ofoperations.  The reserve is calculateddifferently for finished units than it is for parts.  For finished units, in instances where the on hand quantityexceeds the prior twelve months’ sales, the number of units by which the onhand quantity exceeds the prior twelve months’ sales is 100% reserved.  For parts, when the on hand quantity exceedsthe prior twelve months’ sales and usage, the excess inventory is calculated bysubtracting the greater of the prior twelve months’ sales and usage or a basequantity of 50 from the quantity on hand.

 

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This excess is then 100% reserved. The base quantity of 50 represents management’s determination of theminimum quantity of parts needed to fulfill its service, repair, and warrantyobligations.  All parts or units withless than twelve months of sales or usage history are excluded from thecalculation.

 

*LongLived Assets —**ImpairmentTesting*

 

The Company evaluates its property, plant, andequipment for impairment whenever indicators of impairment exist.  The Company follows the guidance of FASBStatement No. 121 *Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of*,and Statement No. 142 *Goodwill and OtherIntangible Assets*, and projects future cash flows for the relatedproducts and operating segments based on management’s best estimates of likelyfuture sales, less costs of goods sold and selling expenses based on historicaldata and perceived trends in the industry. These results are then compared to the recorded value of the relatedassets and intangibles and if less than the recorded value, am impairmentcharge is recognized.  If actual resultsare significantly worse than management’s estimates, the Company could berequired to recognize an impairment, which could have a material adverse effecton its financial position and results of operations.

 

**Results of Operations**

 

For the year ended December 31, 2001, the Company’srevenues decreased 26% compared to 2000. This decrease in revenues was primarily due to a 60% decrease ininternational revenues due to the termination of a sales agreement with theCompany’s Japanese distributor.  In 2000and 1999, sales to this distributor represented 21% and 19% of total revenues,respectively.  The decrease is alsoattributable to a decline in attendance at dental trade shows subsequent to theSeptember 11th terrorist attack.

 

For the year ended December 31, 2000, the Company’srevenues decreased 18% compared to 1999. This decrease in revenues was primarily due to a 38% decrease inrevenues in the United States.  Thedecrease in domestic revenues was primarily due to lower revenues during thetransition to the new business model.

 

Gross profit as a percentage of revenues was 42% forthe year ended December 31, 2001, compared to 45% in 2000 and 48% in 1999.  The decrease in gross margin in 2001compared to 2000 is the result of the decline in sales, which resulted in anincrease in the reserve for slow moving inventory of approximately $691,000 in2001, and increased discounting domestically subsequent to the September 11thterrorist attacks.  The decrease ingross profit as a percentage of revenues in 2000 was due to the Companyincreasing its reserve for slow-moving inventory in response to the decline inthe air abrasion and camera markets.

 

Selling, general and administrative expenses were$9,195,306 in 2001, $21,226,253 in 2000 and $10,772,746 in 1999.  The amount of expenses in 2000 reflectsnon-cash impairment charges and charges related to demonstration inventoryunits.  In 2000, the continued declinein sales of the Company’s KCP and camera units, and the underperformance of thedental probe units, served as indicators of impairment for certain intangibleassets associated with the previous acquisitions of Texas Airsonics, Inc.,Dental Vision Direct, Inc., and Dental Probe, Inc.  Following the guidance of FASB Statement No.  121 *Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of*, the Company projected future cash flows for theseproducts based on management’s best estimates of likely future sales, lesscosts of goods sold and selling expenses. The undiscounted future cash flows were less than the recorded value ofthe assets related to these product lines, indicating impairment existed.  To determine the amount of the impairment,the fair value of the related assets was determined by comparing the future cashflows discounted at a rate of 8% to the fair value of the related long-livedassets based on current market selling prices of similar equipment.   The Company recorded an impairment ofapproximately $9.2 million to reduce the carrying value of the long-livedassets associated with the aforementioned acquisitions to the fair value ofthose assets.  This impairment expenseis included in selling, general and administrative expenses on the statement ofoperations in 2000.

 

In addition, as part of the transition in its businessmodel in 2000, the Company decided to discontinue its demonstration unit salesinitiative.  This change resulted in theCompany disposing of approximately $1.2 million in demonstration units that hadbeen on loan to sales personnel, universities, and prospective customers thatwere no longer deemed salable.  Thischarge was included in selling, general and administrative expenses in 2000.

 

The decrease in 2001 compared to 2000 reflects thenon-recurring nature of the items described above and reduced expensesresulting from the reorganization of the sales and service centers, whichresulted in 2001 selling, general and administrative expenses declining 15%compared to 2000, after elimination of the effects of the non-recurring itemsdescribed above.  The increase in 2000 

 

13

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compared to 1999 was almost entirely attributable to the non-recurringitems.

 

Research and development expenses were $796,424 in2001, $966,382 in 2000, and $931,189 in 1999. The expenditures related primarily to the development of new productsand enhancements to current products. The decrease in 2001 reflects the completion of two major projects in2001, the Cavilase and the Anthos System dental chairs and units.  Historically, research and development expenseshave been higher in the earlier stages of product development than in thefinishing stages..

 

Non-recurring license transfer fees of $665,000 werereceived in 1999.  These related to thelicensing agreement with ESC Medical Systems, Ltd. for $300,000, a licensingagreement with Chart-It for $65,000 and the $300,000 Kreativ patent litigationsettlement.

 

Other income was $118,237 in 2001, $83,773 in 2000,and $857,116 in 1999.  The decrease in2000 from 1999 is primarily due to non-recurring items in 1999 such as thereceipt of the Kreativ lawsuit settlement payment of $580,000 and a gain on thesale of the Michigan building of $180,000.

 

Interest expense was $158,909 in 2001, $322,475 in2000, and $401,438 in 1999.  The steadydecrease in interest expense is due to the reduction of the outstanding debtand, in 2001 declining interest rates.

 

In 2001, the Company had no income tax expense.  In 2000, the Company recorded a $4,744,000charge for income tax.  The Company’sincome taxes at U.S. statutory rates, differs from its recorded income taxexpense primarily due to nondeductible goodwill amortization.  With the loss incurred in 2000 and thecontinued downturn in the dental products industry, uncertainties exist as tothe future realization of the deferred tax asset under the criteria set forthunder FASB Statement No. 109. Therefore, the Company re-established the tax asset valuation allowance,which resulted in a non-cash tax expense of approximately $5.7 million in2000.  At December 31, 2001, the Companyhad approximately $15.4 million of net operating loss carryforwards.  These net operating loss carryforwardsexpire in various amounts in the years 2006 through 2021.

 

**Liquidityand Capital Resources**

 

The Company’s operating activities used $130,332 incash resources in 2001.  Cash used byoperating activities in 2001 was due largely to the net loss and the increasein inventory, reduced by the reduction in accounts receivable, the increase inaccounts payable, and non-cash expenses such as depreciation and amortization.

 

The Company’s investing activities provided $35,100 incash resources in 2001. The cash provided by investing activities in 2001related primarily to collections on notes receivable, reduced by purchases ofproperty and equipment.

 

The Company’s financing activities used $868,944 incash resources in 2001, representing amounts used to reduce borrowings on theCompany’s lines of credit by a net amount of $540,925 and to repurchase theCompany’s common stock.

 

During 2001, the Company repurchased 219,749 shares ofits common stock, representing approximately $328,000 of the $1 millionrepurchase authorized by the Board of Directors.  The repurchased shares constitute approximately 3% of the total numberof shares of common stock currently outstanding.

 

During 2001, the Company had a $7,500,000 revolvingline of credit from a bank which was to expire in September 2002.  The Company’s borrowings under that line aresecured by a pledge of the Company’s accounts receivable, inventory, equipment,instruments, patents, copyrights and trademarks.

 

The Company was not in compliance with some of thefinancial covenants in the agreement as of September 30, 2001, and was indefault.  On November 6, 2001, theCompany and the bank signed a Forbearance Agreement that increases the interestrate on the outstanding borrowings to the prime rate plus 4%, forbidsadditional borrowings, grants the bank a second mortgage on the Company’s realproperty, and requires the bank to forego the exercise of its legal remediesuntil December 20, 2001.  TheForbearance Agreement was amended to extend the termination date to September15, 2002, in order to give the Company additional time to secure a suitablereplacement for the credit facility. Under the terms of the Forbearance Agreement, the Company will makeprincipal payments of $30,000 per month beginning on April 15, 2002.  Starting on July 15, 2002, the monthlyprincipal payment will increase to $40,000. Monthly interest payments are also required.  The Company is currently working with an independent consultantto 

 

14

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acquire a new credit facility to refinance the existing debt.  The Forbearance Agreement also requires theCompany to submit monthly financial statements to the Bank and that the Companymaintain a minimum tangible net worth, defined as net assets less intangibles,of at least $4.5 million.  Should thenew credit facility not be in place by September 15, 2002, the Company will beforced to pay a $50,000 penalty and the bank will have the right to acceleratethe outstanding indebtedness and exercise its remedies under the related legaldocuments.  As of December 31, 2001, theoutstanding principal on this line of credit is $1,745,656.

 

On October 3, 2001, in order to obtain workingcapital, the Company entered into a $750,000 line of credit with ValueBankTexas and the U.S. Small Business Administration.  The loan is secured by a primary lien on the Company’s buildingand real property and is personally guaranteed by Ben Gallant, the Company’sChairman and Chief Executive Officer. The loan expires on October 3, 2002 and bears interest at the prime rateplus 2%.  As of December 31, 2001, theoutstanding principal on this line of credit is $213,419.

 

The Company believes, based upon its current businessplan, that current cash, available financing resources and cash generatedthrough operations should be sufficient to meet the Company’s anticipated shortterm and long term liquidity needs for the foreseeable future, assuming theCompany is successful in refinancing the defaulted line of credit.  If the Company is unable to refinance theline of credit it intends to explore other sources of financing which mayinclude the sale of equity or debt securities to private investors.  The Company’s ability to continue operationsis dependent on its ability to successfully refinance the defaulted line ofcredit or obtain additional financing. While the Company expects to be able torefinance the defaulted line of credit or otherwise obtain additionalfinancing, there is no assurance that the Company will be successful in doingso.

 

**New Accounting Standards and Disclosures**

 

In July 2001, the Financial Accounting Standards Boardissued Statement No. 141, “Business Combinations” (“FASB 141”), and StatementNo. 142, “Goodwill and Other Intangible Assets” (“FASB 142”). FASB 141 requiresall business combinations initiated after June 30, 2001 to be accounted forusing the purchase method. Under FASB 142, goodwill is no longer subject toamortization over its estimated useful life. Rather, goodwill is subject to atleast an annual assessment for impairment applying a fair-value based test.Additionally, any acquired intangible assets should be separately recognized ifthe benefit of the intangible asset is obtained through contractual or otherlegal rights, or if the intangible asset can be sold, transferred, licensed,rented, or exchanged, regardless of the acquirer’s intent to do so.  Amortization expense related to goodwill wasapproximately $368,000, $476,000 and $1,077,000 in 2001, 2000 and 1999,respectively.  The Company adopted bothstatements on January 1, 2002.

 

The FASB issued Statement No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” in August 2001. FASB144 supersedes FASB 121, “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of,” and other related accountingguidance. FASB 144 is effective for financial statements issued for fiscalyears beginning after December 15, 2001, and interim periods within thosefiscal years, with early application encouraged. The provisions of thisstatement generally are to be applied prospectively. The adoption of thispronouncement is not expected to have a material effect on earnings or theconsolidated financial position of the Company.

 

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ITEM 7A.                               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

In the normal course of business, the Company issubject to market risk from changes in foreign exchange rates and interestrates.

 

**Foreign Currency Exchange Rate Risk**

 

The Company sells its products in North America,Europe (primarily Germany), Japan and other foreign countries.  The Company is headquartered in the UnitedStates and has a German subsidiary. Except for revenues generated by its Germansubsidiary, the Company sells its products to its foreign customers in UnitedStates dollars.  As a result, theCompany’s financial results could be affected by factors such as changes inforeign currency exchange rates or weak economic conditions in the foreignmarkets in which the Company distributes its products.  The Company’s operating results areprimarily exposed to changes in exchange rates between the United States dollarand the European Union euro.

 

As currency rates change, translation of the incomestatements of the Company’s German subsidiary into United States dollarsaffects year-to-year comparability of operating results.  The Company does not generally hedgeoperating translation risks because cash flows from the German operations aregenerally reinvested locally.

 

As of December 31, 2001 and 2000, the Company’s netassets subject to foreign currency translation risk (defined as current assetsless current liabilities) were $1,152,129 and $1,795,121, respectively.  The potential decrease in net assets from ahypothetical 10% adverse change in quoted foreign currency exchange rates wouldbe approximately $115,000 and $180,000 for 2001 and 2000, respectively.

 

**Interest Rate Risk**

 

The Company’s variable interest expense is sensitiveto changes in the general level of United States interest rates. The Company’sdebt represents borrowings at the prime rate plus an applicable margin rangingfrom 2% to 4% and is sensitive to changes in interest rates.  The Company does not generally hedgeinterest rate risks. At December 31, 2001, the weighted average interest rateon the $1,959,075 million debt was approximately 8.5% and the fair value of thedebt approximates its carrying value.

 

The Company had interest expense of $158,909 in 2001as compared to $322,475 in 2000.  Thepotential increase in interest expense from a hypothetical 2% adverse change ininterest rates, assuming the December 31, 2001 and 2000 debt was outstandingfor the entire year, would be approximately $40,000 and $50,000, for the yearended December 31, 2001 and 2000, respectively.

 

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ITEM 8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA

 

 

Report of IndependentAuditors

 

 

Stockholders and Board of Directors

American Medical Technologies, Inc.

 

We have audited the accompanying consolidated balance sheets ofAmerican Medical Technologies, Inc. as of December 31, 2001 and 2000, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2001. Ouraudits also included the financial statement schedule listed in the Index atItem 14(a).  These financial statementsand schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof American Medical Technologies, Inc. at December 31, 2001 and 2000, and theconsolidated results of its operations and its cash flows for each of threeyears in the period ended December 31, 2001, in conformity with accountingprinciples generally accepted in the United States.  Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as a whole,presents fairly, in all material respects the information set forth therein.

 

The accompanying consolidated financial statements have been preparedassuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidatedfinancial statements, the Company was in technical default on certain financialcovenants in connection with its line of credit.  The Company and its bank have entered into a forbearanceagreement, under which the bank has agreed not to exercise its remedies underthe defaulted line of credit until September 15, 2002.   Accordingly, the entire amount outstanding underthe line of credit of approximately $1,750,000 has been classified as a currentliability in the accompanying consolidated financial statements.  Management’s plans in regard to thesematters are described in Note 1 to the consolidated financial statements.  These matters raise substantial doubt aboutthe Company’s ability to continue as a going concern.  The consolidated financial statements do not include anyadjustments 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.

 
|               |   | Ernst & Young llp |
|--------------------|--------|-----------------------|
|               |   |                  |
|               |   |                  |
| San Antonio, Texas |   |                  |
| March 1, 2002      |   |                  |

 

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American MedicalTechnologies, Inc.

Consolidated Statements ofOperations

 
|                                           |   | **Year Ended  December 31** |       |
|------------------------------------------------|--------|-----------------------------|------------|
|                                           |   | **2001**                    |       | **2000** |   | **1999** |   |
| Revenues                                       |   | $                           | 14,473,051 |   | $ | 19,685,222 |   | $ | 24,201,163 |   |
| Royalties                                      |   | 215,635                     |       | 217,024 |   | 168,364 |   |
|                                           |   | 14,688,686                  |       | 19,902,246 |   | 24,369,527 |   |
|                                           |   |                        |       |   |   |   |   |
| Cost of sales                                  |   | 8,634,543                   |       | 11,130,379 |   | 12,778,664 |   |
| Gross profit                                   |   | 6,054,143                   |       | 8,771,867 |   | 11,590,863 |   |
|                                           |   |                        |       |   |   |   |   |
| Selling, general  and administrative           |   | 9,195,306                   |       | 21,226,253 |   | 10,772,746 |   |
| Research and  development                      |   | 796,424                     |       | 966,382 |   | 931,189 |   |
| Income (loss) from operations                  |   | (3,937,587                  | )          | (13,420,768 | ) | (113,072 | ) |
| Other income  (expense)                        |   |                        |       |   |   |   |   |
| License transfer  fees                         |   | —                      |       | — |   | 665,000 |   |
| Other income                                   |   | 118,237                     |       | 83,773 |   | 857,116 |   |
| Interest expense                               |   | (158,909                    | )          | (322,475 | ) | (401,438 | ) |
| Income (loss)  before income taxes             |   | (3,978,259                  | )          | (13,659,470 | ) | 1,007,606 |   |
| Income tax  (benefit) expense                  |   | —                      |       | 4,744,000 |   | 616,000 |   |
| Net income  (loss)                             |   | $                           | (3,978,259 | ) | $ | (18,403,470 | ) | $ | 391,606 |   |
|                                           |   |                        |       |   |   |   |   |
| Net income  (loss) per share                   |   | $                           | (0.57      | ) | $ | (2.53 | ) | $ | 0.05 |   |
|                                           |   |                        |       |   |   |   |   |
| Net income  (loss) per share assuming dilution |   | $                           | (0.57      | ) | $ | (2.53 | ) | $ | 0.05 |   |

 

See accompanying notes.

 

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American MedicalTechnologies, Inc.

Consolidated BalanceSheets

 
|                                                                          |   | **December  31** |       |
|-------------------------------------------------------------------------------|--------|------------------|------------|
|                                                                          |   | **2001**         |       | **2000** |   |
| ASSETS                                                                        |   |             |       |   |   |
| Current assets:                                                               |   |             |       |   |   |
| Cash                                                                          |   | $                | 579,667    |   | $ | 1,549,747 |   |
| Accounts  receivable, less allowance of $176,000 in 2001 and $230,000 in 2000 |   | 1,272,703        |       | 3,371,341 |   |
| Inventories                                                                   |   | 7,182,780        |       | 6,897,157 |   |
| Prepaid expenses  and other current assets                                    |   | 310,669          |       | 440,077 |   |
| Notes receivable                                                              |   | —           |       | 243,593 |   |
| Total current assets                                                          |   | 9,345,819        |       | 12,501,915 |   |
|                                                                          |   |             |       |   |   |
| Property and  equipment, net                                                  |   | 2,090,970        |       | 2,389,951 |   |
| Intangible  assets, net:                                                      |   |             |       |   |   |
| Goodwill                                                                      |   | 2,175,238        |       | 2,295,966 |   |
| Other                                                                         |   | 584,403          |       | 1,103,165 |   |
|                                                                          |   | 2,759,641        |       | 3,399,131 |   |
|                                                                          |   |             |       |   |   |
| Total assets                                                                  |   | $                | 14,196,430 |   | $ | 18,290,997 |   |

 

See accompanying notes.

 

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American MedicalTechnologies, Inc.

Consolidated BalanceSheets

 
|                                                                                                                              |   | **December  31** |       |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|------------------|------------|
|                                                                                                                              |   | **2001**         |       | **2000** |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                        |   |             |       |   |   |
| Current  liabilities:                                                                                                             |   |             |       |   |   |
| Accounts payable                                                                                                                  |   | $                | 2,751,270  |   | $ | 1,627,496 |   |
| Compensation and  employee benefits                                                                                               |   | 262,703          |       | 286,211 |   |
| Other accrued  liabilities                                                                                                        |   | 518,916          |       | 702,459 |   |
| Current notes  payable                                                                                                            |   | 1,959,075        |       | — |   |
| Total current liabilities                                                                                                         |   | 5,491,964        |       | 2,616,166 |   |
|                                                                                                                              |   |             |       |   |   |
| Other  non-current liabilities                                                                                                    |   | 78,048           |       | 172,964 |   |
| Notes payable                                                                                                                     |   | —           |       | 2,500,000 |   |
|                                                                                                                              |   |             |       |   |   |
| Stockholders’  equity:                                                                                                       |   |             |       |   |   |
| Preferred stock,  $.01 par value, authorized 10,000,000 shares; none outstanding                                                  |   |             |       |   |   |
| Common stock,  $.04 par value, authorized 12,500,000 shares; outstanding: 6,862,348 shares  in 2001; and 7,081,097 shares in 2000 |   | 274,497          |       | 283,247 |   |
| Additional  paid-in capital                                                                                                       |   | 41,615,342       |       | 41,934,608 |   |
| Warrants and  options                                                                                                             |   | 801,000          |       | 801,000 |   |
| Accumulated  deficit                                                                                                              |   | (33,503,353      | )          | (29,525,094 | ) |
| Foreign currency  translation                                                                                                     |   | (561,068         | )          | (491,894 | ) |
| Total  stockholders’ equity                                                                                                  |   | 8,626,418        |       | 13,001,867 |   |
| Total  liabilities and stockholders’ equity                                                                                  |   | $                | 14,196,430 |   | $ | 18,290,997 |   |

 

See accompanyingnotes.

 

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American MedicalTechnologies, Inc.

Consolidated Statementsof Cash Flows

 
|                                                                                                 |   | **Year ended  December 31** |       |
|------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                                 |   | **2001**                    |       | **2000** |   | **1999** |   |
| OPERATING  ACTIVITIES                                                                                |   |                        |       |   |   |   |   |
| Net income  (loss)                                                                                   |   | $                           | (3,978,259 | ) | $ | (18,403,470 | ) | $ | 391,606 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |                        |       |   |   |   |   |
| Depreciation                                                                                         |   | 423,102                     |       | 502,624 |   | 413,977 |   |
| Amortization                                                                                         |   | 486,473                     |       | 1,466,407 |   | 1,454,401 |   |
| Impairment of  intangible assets                                                                     |   | 213,181                     |       | 9,233,907 |   | — |   |
| Deferred taxes                                                                                       |   | —                      |       | 4,744,000 |   | 558,619 |   |
| Provision for  slow-moving inventory                                                                 |   | 690,689                     |       | 873,298 |   | 256,615 |   |
| Provision for  doubtful accounts                                                                     |   | —                      |       | 42,000 |   | 13,000 |   |
| Net (gain) loss  on disposal of assets                                                               |   | 1,541                       |       | 1,243,887 |   | (179,368 | ) |
| Changes in operating  assets and liabilities:                                                        |   |                        |       |   |   |   |   |
| Accounts  receivable                                                                                 |   | 2,095,015                   |       | 1,282,575 |   | 198,110 |   |
| Inventories                                                                                          |   | (988,914                    | )          | 864,588 |   | 1,144,392 |   |
| Prepaid expenses  and other current assets                                                           |   | 109,741                     |       | 111,056 |   | 400,884 |   |
| Accounts payable                                                                                     |   | 1,119,524                   |       | (689,035 | ) | (556,620 | ) |
| Compensation and  employee benefits                                                                  |   | (23,605                     | )          | 68,535 |   | (187,112 | ) |
| Other accrued  liabilities                                                                           |   | (183,904                    | )          | 130,164 |   | (248,727 | ) |
| Other  non-current liabilities                                                                       |   | (94,916                     | )          | (50,314 | ) | (798,880 | ) |
| Net cash  provided by (used in) operating activities                                                 |   | (130,332                    | )          | 1,420,222 |   | 2,860,897 |   |
|                                                                                                 |   |                        |       |   |   |   |   |
| INVESTING  ACTIVITIES                                                                                |   |                        |       |   |   |   |   |
| Purchases of  property, plant & equipment                                                        |   | (130,821                    | )          | (399,981 | ) | (986,982 | ) |
| Proceeds from  sales of assets                                                                       |   | 1,300                       |       | 1,000 |   | 769,367 |   |
| Collections on  notes receivable                                                                     |   | 224,785                     |       | 531,407 |   | 300,000 |   |
| Increase in  intangible assets                                                                       |   | (60,164                     | )          | (173,544 | ) | (231,480 | ) |
| Net cash  provided by (used in) investing activities                                                 |   | 35,100                      |       | (41,118 | ) | (149,095 | ) |
|                                                                                                 |   |                        |       |   |   |   |   |
| FINANCING  ACTIVITIES                                                                                |   |                        |       |   |   |   |   |
| Payments on note  payable                                                                            |   | (754,344                    | )          | (2,650,000 | ) | (800,000 | ) |
| Proceeds from  note payable                                                                          |   | 213,419                     |       | — |   | — |   |
| Repurchase of  common stock                                                                          |   | (328,019                    | )          | (389,498 | ) | (91,339 | ) |
| Proceeds from  exercise of stock options                                                             |   | —                      |       | — |   | 42,903 |   |
| Net cash used in  financing activities                                                               |   | (868,944                    | )          | (3,039,498 | ) | (848,436 | ) |
| Increase  (decrease) in cash                                                                         |   | (964,176                    | )          | (1,660,394 | ) | 1,863,366 |   |
| Effect of  exchange rates on cash                                                                    |   | (5,904                      | )          | (20,506 | ) | (42,123 | ) |
| Increase  (decrease) in cash                                                                         |   | (970,080                    | )          | (1,680,900 | ) | 1,821,243 |   |
|                                                                                                 |   |                        |       |   |   |   |   |
| Cash at  beginning of year                                                                           |   | 1,549,747                   |       | 3,230,647 |   | 1,409,404 |   |
|                                                                                                 |   |                        |       |   |   |   |   |
| Cash at end of  year                                                                                 |   | $                           | 579,667    |   | $ | 1,549,747 |   | $ | 3,230,647 |   |

 

See accompanying notes.

 

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American MedicalTechnologies, Inc

Consolidated Statementsof Stockholders’ Equity

 

 
|                                            |   | **Common Stock** |   | **Additional  Paid-In  Capital** |    | **Warrants  and  Options** |   | **Accumulated  Deficit** |   | **Foreign  Currency  Translation** |    | **Total** |   |
|-------------------------------------------------|--------|------------------|--------|----------------------------------|---------|----------------------------|--------|--------------------------|--------|------------------------------------|---------|-----------|--------|
|                                            |   | **Shares**       |   | **Amount**                       |
| Balance at  December 31, 1998                   |   | 7,419,259        |   | $                                | 296,773 |                       | $      | 42,359,016               |   | $                                  | 772,500 |      | $      | (11,513,230 | ) | $ | (105,757 | ) | $ | 31,809,302 |   |
| Net income for  1999                            |   |             |   |                             |    |                       |   |                     |   | 391,606                            |    |      |   | 391,606 |   |
| Foreign currency  translation                   |   |             |   |                             |    |                       |   |                     |   |                               |    | (162,589  | )      | (162,589 | ) |
| Comprehensive  income                           |   |             |   |                             |    |                       |   |                     |   |                               |    |      |   | 229,017 |   |
| Exercise of  stock options                      |   | 12,788           |   | 512                              |    | 42,391                     |   |                     |   |                               |    |      |   | 42,903 |   |
| Issuance of  common stock for intangible assets |   |             |   |                             |    |                       |   | 28,500                   |   |                               |    |      |   | 28,500 |   |
| Repurchase of  common stock                     |   | (64,200          | )      | (2,568                           | )       | (88,771                    | )      |                     |   |                               |    |      |   | (91,339 | ) |
| Balance at  December 31, 1999                   |   | 7,367,847        |   | 294,717                          |    | 42,312,636                 |   | 801,000                  |   | (11,121,624                        | )       | (268,346  | )      | 32,018,383 |   |
| Net loss for  2000                              |   |             |   |                             |    |                       |   |                     |   | (18,403,470                        | )       |      |   | (18,403,470 | ) |
| Foreign currency  translation                   |   |             |   |                             |    |                       |   |                     |   |                               |    | (223,548  | )      | (223,548 | ) |
| Comprehensive  loss                             |   |             |   |                             |    |                       |   |                     |   |                               |    |      |   | (18,627,018 | ) |
| Repurchase of  common stock                     |   | (286,750         | )      | (11,470                          | )       | (378,028                   | )      |                     |   |                               |    |      |   | (389,498 | ) |
| Balance at  December 31, 2000                   |   | 7,081,097        |   | 283,247                          |    | 41,934,608                 |   | 801,000                  |   | (29,525,094                        | )       | (491,894  | )      | 13,001,867 |   |
| Net loss for  2001                              |   |             |   |                             |    |                       |   |                     |   | (3,978,259                         | )       |      |   | (3,978,259 | ) |
| Foreign currency  translation                   |   |             |   |                             |    |                       |   |                     |   |                               |    | (69,174   | )      | (69,174 | ) |
| Comprehensive  loss                             |   |             |   |                             |    |                       |   |                     |   |                               |    |      |   | (4,047,433 | ) |
| Repurchase of  common stock                     |   | (218,749         | )      | (8,750                           | )       | (319,266                   | )      |                     |   |                               |    |      |   | (328,016 | ) |
| Balance at  December 31, 2001                   |   | 6,862,348        |   | $                                | 274,497 |                       | $      | 41,615,342               |   | $                                  | 801,000 |      | $      | (33,503,353 | ) | $ | (561,068 | ) | $ | 8,626,418 |   |
|                                                 |        |                  |        |                                  |         |                            |        |                          |        |                                    |         |           |        |  |  |  |  |  |  |  |  |  |

 

See accompanying notes.

 

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Notes to ConsolidatedFinancial Statements

December 31, 2001

 

1.             Organization andSignificant Accounting Policies

 

*Principles of Consolidation*

 

American Medical Technologies, Inc. (the “Company”) develops,manufactures, markets and sells high technology products primarily fordentistry.  The consolidated financialstatements include the accounts and operations of the Company and itssubsidiary.  All intercompanytransactions and balances have been eliminated.

 

*GoingConcern*

 

The Company’s financial statements are prepared using generallyaccepted accounting principles applicable to a going concern, whichcontemplates the realization of assets and the satisfaction of liabilities inthe normal course of business.  Asdiscussed in Note 3, the Company has a line of credit with Bank One (the“Bank”).  The line of credit agreementcontains covenants that, among other things, require maintenance of certainfinancial ratios.  The covenants arerequired to be calculated at the end of each quarter.

 

The Company was not in compliance with some of the financial covenantsin the agreement as of September 30, 2001, and was in default.  On November 6, 2001, the Company and the banksigned a Forbearance Agreement that increases the interest rate on theoutstanding borrowings to the prime rate plus 4%, forbids additionalborrowings, grants the bank a second mortgage on the Company’s real property,and requires the bank to forego the exercise of its legal remedies untilDecember 20, 2001.  The ForbearanceAgreement was amended to extend the termination date to September 15, 2002, inorder to give the Company additional time to secure a suitable replacement forthe credit facility.  Under the terms ofthe Forbearance Agreement, the Company will make principal payments of $30,000per month beginning on April 15, 2002. Starting on July 15, 2002, the monthly principal payment will increaseto $40,000.  Monthly interest paymentsare also required.  The Company iscurrently working with an independent consultant to acquire a new creditfacility to refinance the existing debt. The Forbearance Agreement also requires the Company to submit monthlyfinancial statements to the Bank and that the Company maintain a minimumtangible net worth, defined as net assets less intangibles, of at least $4.5million.  Should the new credit facilitynot be in place by September 15, 2002, the Company will be forced to pay a$50,000 penalty and the bank will have the right to accelerate the outstandingindebtedness and exercise its remedies under the related legal documents.  As of December 31, 2001, the outstandingprincipal on this line of credit is $1,745,656.

 

While the Company believes that it will be successful in refinancingthe defaulted line of credit, there can be no assurance that the Company willable accomplish this.  If the Company isunable to refinance the line of credit it intends to explore other sources offinancing which may include the sale of equity or debt securities to privateinvestors.  While the Company expects tobe able to refinance the defaulted line of credit or otherwise obtainadditional financing, there is no assurance that management will be successfulin its efforts.  The Company’s abilityto operate as a going concern is dependent on its ability to successfullynegotiate a new credit facility or find other sources of financing.  (See Note 3)

 

*Inventories*

 

Inventories are stated at the lower of cost, determined by the first-infirst-out method, or market.  AtDecember 31, inventories consisted of the following:

 

|                               |   | **2001**  |      | **2000**  |   |
|------------------------------------|--------|-----------|-----------|-----------|--------|
| Finished goods                     |   | $         | 2,719,012 |      | $      | 1,277,189 |   |
| Raw materials,  parts and supplies |   | 4,463,768 |      | 5,619,968 |   |
|                               |   | $         | 7,182,780 |      | $      | 6,897,157 |   |

 

Inventories at December 31, 2001 and 2000 are net of valuationallowances of $2,649,169 and $1,685,013, respectively.

 

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*Property and Equipment*

 

Property and equipment are stated at cost less accumulateddepreciation.  Depreciation is computedby the straight-line method over the estimated useful lives of the relatedassets, which range from three to thirty-nine years.  At December 31, property and equipment consisted of the following:

 

|                            |   | **2001**   |      | **2000**   |   |
|---------------------------------|--------|------------|-----------|------------|--------|
| Building and  improvements      |   | $          | 1,567,939 |       | $      | 1,561,219 |   |
| Machinery and  equipment        |   | 1,446,614  |      | 1,357,287  |   |
| Office furniture  and computers |   | 864,522    |      | 843,140    |   |
| Vehicles                        |   | 119,316    |      | 118,144    |   |
|                            |   | 3,998,391  |      | 3,879,790  |   |
| Accumulated  depreciation       |   | (1,907,421 | )         | (1,489,839 | )      |
|                            |   | $          | 2,090,970 |       | $      | 2,389,951 |   |

 

*Revenue Recognition*

 

The Company recognizes revenue when each of the following four criteriaare met: 1) a contract or sales arrangement exists; 2) products have beenshipped and title has been transferred or services have been rendered; 3) theprice of the products or services is fixed or determinable; and 4)collectibility is reasonably assured. The Company recognizes the related estimated warranty expense when titleis transferred to the customer, generally upon shipment.  The Company recognizes revenue on certainsales to two of its largest distributors under terms that require shipment to alocal independent warehouse.  InSeptember 2000, the Emerging Issues Task Force issued EITF 00-10 which requiresdisclosure of shipping and handling costs that are not included in costs ofgoods sold.  The Company’s policy is toinclude shipping and handling costs, net of the related revenues, in costs ofgoods sold.

 

*Intangible Assets*

 

Intangible assets consist of goodwill, patents, distribution rights andother intangibles and are stated at cost less accumulated amortization.  The Company amortized goodwill over periodsranging from 15 to 25 years, patents and distribution agreements over theirrespective lives, and other intangible assets over lives ranging from 5 to 17years.  Accumulated amortization was$3,544,828 and $3,097,675 at December 31, 2001 and 2000, respectively.

 

The Company periodically evaluates intangible assets for indicators ofimpairment in value.  When impairment isindicated, the Company revalues the assets based on their estimated fairvalue.  In 2000, the continued declinein sales of the Company’s KCP and camera units, and the underperformance of thedental probe units, served as indicators of impairment for certain intangibleassets associated with the previous acquisitions of Texas Airsonics, Inc.,Dental Vision Direct, Inc., and Dental Probe, Inc.  Following the guidance of FASB Statement No.  121 *Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of*, the Company projected future cash flows for theseproducts based on management’s best estimates of likely future sales, lesscosts of goods sold and selling expenses. The undiscounted future cash flows were less than the recorded value ofthe assets related to these product lines, indicating impairment existed.  To determine the amount of the impairment,the fair value of the related assets was determined by comparing the futurecash flows discounted at a rate of 8% to the fair value of the relatedlong-lived assets based on current market selling prices of similarequipment.   The Company recorded animpairment of approximately $9.2 million to reduce the carrying value of thelong-lived assets associated with the aforementioned acquisitions to the fairvalue of those assets.  This impairmentexpense is included in Selling General and Administrative Expenses on theStatement of Operations.

 

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*Net Income Per Share*

 

The following table sets forth the computation for basic and dilutedearnings per share:

 
|                                                                                                                          |   | **2001**  |       | **2000**  |   | **1999**    |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-----------|------------|-----------|--------|-------------|--------|
| Numerator:                                                                                                                    |   |      |       |      |   |        |   |
| Net  income (loss)                                                                                                            |   | $         | (3,978,258 | )         | $      | (18,403,470 | )      | $ | 391,606 |   |
|                                                                                                                          |   |      |       |      |   |        |   |
| Numerator  for basic and diluted earnings per share — income available to common  stockholders after assumed conversions |   | $         | (3,978,258 | )         | $      | (18,403,470 | )      | $ | 391,606 |   |
|                                                                                                                          |   |      |       |      |   |        |   |
| Denominator:                                                                                                                  |   |      |       |      |   |        |   |
| Denominator  for basic earnings per share —weighted-average shares                                                       |   | 6,923,347 |       | 7,284,443 |   | 7,424,433   |   |
|                                                                                                                          |   |      |       |      |   |        |   |
| Effect  of dilutive securities:                                                                                               |   |      |       |      |   |        |   |
| Employee  stock options                                                                                                       |   | —    |       | —    |   | 21,736      |   |
| Warrants                                                                                                                      |   | —    |       | —    |   | —      |   |
|                                                                                                                          |   |      |       |      |   |        |   |
| Dilutive  potential common shares                                                                                             |   |      |       |      |   |        |   |
| Denominator  for diluted earnings per share — adjusted weighted-average shares after  assumed conversions                |   | 6,923,347 |       | 7,284,443 |   | 7,446,169   |   |
|                                                                                                                          |   |      |       |      |   |        |   |
| Net  income (loss) per share                                                                                                  |   | ($.57     | )          | ($2.53    | )      | $           | 0.05   |   |
| Net  income (loss) per share assuming dilution                                                                                |   | ($.57     | )          | ($2.53    | )      | $           | 0.05   |   |

 

*Comprehensive Income (Loss)*

 

The Financial Accounting Standards Board’s Statement 130, *ReportingComprehensive Income* requires foreign currency translationadjustments to be included, along with net income, in comprehensiveincome.  For 2001, 2000, and 1999 theCompany’s Comprehensive Income (Loss) was ($4,047,433), ($18,627,018), and$229,017, respectively.

 

The components of Accumulated Other Comprehensive Income (Loss) are asfollows:

 

|                                      |   | **2001** |     | **2000** |   | **1999** |   |
|-------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Foreign currency  translation adjustments |   | $        | (69,174  | )        | $      | (223,548 | )      | $ | (162,589 | ) |
| Accumulated  other comprehensive income   |   | $        | (561,068 | )        | $      | (491,894 | )      | $ | (268,346 | ) |

 

*Translation of non-U.S. currencyamounts*

 

For non-U.S. subsidiaries that operate in alocal currency environment, assets and liabilities are translated to U.S.dollars at the current exchange rates at the balance sheet date.  Income and expense items are translated ataverage rates of exchange prevailing during the year.  Translation adjustments are accumulated in a separate componentof stockholders’ equity.

 

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*Stock Based 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 accountsfor stock option grants in accordance with APB Opinion No. 25, *Accountingfor Stock Issued to Employees,* and, accordingly, recognizes nocompensation expense for the stock option grants.

 

*Advertising*

 

The Company expenses advertising costs as incurred.  Advertising expense approximated $417,000,$867,000, and $1,544,000 in 2001, 2000 and 1999, respectively.

 

*Use of Estimates*

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes.  Actual resultscould differ from these estimates.

 

*Fair Value of Financial Instruments*

 

The fair value of the Company’s cash, accounts receivable, notereceivable and accounts payable approximates their carrying value due to theirshort term nature. The fair value of the Company’s note payable to the bankapproximates its carrying value due to the variable interest rate.

 

*New Accounting Standards andDisclosures*

 

In July 2001, the Financial Accounting Standards Board issued StatementNo. 141, “Business Combinations” (“FASB 141”), and Statement No. 142, “Goodwilland Other Intangible Assets” (“FASB 142”). FASB 141 requires all businesscombinations initiated after June 30, 2001 to be accounted for using thepurchase method. Under FASB 142, goodwill is no longer subject to amortizationover its estimated useful life. Rather, goodwill is subject to at least anannual assessment for impairment applying a fair-value based test.Additionally, any acquired intangible assets should be separately recognized ifthe benefit of the intangible asset is obtained through contractual or otherlegal rights, or if the intangible asset can be sold, transferred, licensed,rented, or exchanged, regardless of the acquirer’s intent to do so.  Amortization expense related to goodwill wasapproximately $368,000, $476,000 and $1,077,000 in 2001, 2000 and 1999,respectively.  The Company adopted bothstatements on January 1, 2002.

 

The FASB issued Statement No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets,” in August 2001. FASB 144 supersedesFASB 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of,” and other related accounting guidance.FASB 144 is effective for financial statements issued for fiscal yearsbeginning after December 15, 2001, and interim periods within those fiscalyears, with early application encouraged. The provisions of this statementgenerally are to be applied prospectively. The adoption of this pronouncementis not expected to have a material effect on earnings or the consolidatedfinancial position of the Company.

 

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2.       Agreementswith Related Parties

 

*DenicsCo., Ltd.*

 

In December 1999, the Company agreed to convert $675,000 of outstandingaccounts receivable from Denics to a note receivable, with interest payable at8.5%, due February 2001.  The note waspaid in full in 2001.

 

Denics previously owned 4.89% of the Company’s common stock and hadwarrants to acquire an additional 1.43% of the Company’s common stock.  These warrants expired in 1999 without beingexercised and Denics is no longer considered a “related party.”  Accordingly, trade sales and accountsreceivable balances with Denics are no longer presented as a “related party” onthe face of the financial statements for all periods presented to provideconsistent disclosure.

 

3.       Line ofCredit and Other Non-Current Liabilities

 

During 2001, the Company had a $7,500,000 revolving line of credit froma bank which was to expire in September 2002. The Company’s borrowings under that line are secured by a pledge of theCompany’s accounts receivable, inventory, equipment, instruments, patents,copyrights and trademarks.

 

The Company was not in compliance with some of the financial covenantsin the agreement as of September 30, 2001, and was in default.  On November 6, 2001, the Company and thebank signed a Forbearance Agreement that increases the interest rate on theoutstanding borrowings to the prime rate plus 4%, forbids additionalborrowings, grants the bank a second mortgage on the Company’s real property,and requires the bank to forego the exercise of its legal remedies untilDecember 20, 2001.  The ForbearanceAgreement was amended to extend the termination date to September 15, 2002, inorder to give the Company additional time to secure a suitable replacement forthe credit facility.  Under the terms ofthe Forbearance Agreement, the Company will make principal payments of $30,000per month beginning on April 15, 2002. Starting on July 15, 2002, the monthly principal payment will increaseto $40,000.  Monthly interest paymentsare also required.  The Company iscurrently working with an independent consultant to acquire a new creditfacility to refinance the existing debt. The Forbearance Agreement also requires the Company to submit monthlyfinancial statements to the Bank and that the Company maintain a minimumtangible net worth, defined as net assets less intangibles, of at least $4.5million.  Should the new credit facilitynot be in place by September 15, 2002, the Company will be forced to pay a$50,000 penalty and the bank will have the right to accelerate the outstandingindebtedness and exercise its remedies under the related legal documents.  As of December 31, 2001, the outstandingprincipal on this line of credit is $1,745,656.

 

On October 3, 2001, in order to obtain working capital, the Companyentered into a $750,000 line of credit with ValueBank Texas and the U.S. SmallBusiness Administration.  The loan issecured by a primary lien on the Company’s building and real property and ispersonally guaranteed by Ben Gallant, the Company’s Chairman and ChiefExecutive Officer.  The loan expires onOctober 3, 2002 and bears interest at the prime rate plus 2%.  As of December 31, 2001, the outstandingprincipal on this line of credit is $213,419.

 

The Company leases certain manufacturing equipment under capitalleases.  Equipment related to thesecapital leases had a net book value of approximately $81,000 at December 31,2001.  Amortization related to assetsheld under capital leases is included in depreciation expense.  The Company leases office space, vehicles,and office machines under operating leases. Future minimum lease payments under capital and operating leases as ofDecember 31, 2001 are as follows:

 

| **Year**                           |   | **Operating  Leases** |    | **Capital  Leases** |    |
|------------------------------------|--------|-----------------------|---------|---------------------|---------|
| 2002                               |   | $                     | 351,687 |                | $       | 79,066 |   |
| 2003                               |   | 122,334               |    | 47,777              |    |
| 2004                               |   | 23,908                |    | —              |    |
|                               |   | $                     | 497,929 |                | 126,843 |   |
| Less amount  representing interest |   |                  |    | (12,174             | )       |
|                               |   |                  |    | $                   | 114,669 |   |

 

27

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Capital lease obligations at December 31, 2001 consisted of thefollowing:

 

| Current portion                  |   | $      | 69,347  |   |
|----------------------------------|--------|--------|---------|--------|
| Non-current  portion             |   | 45,322 |    |
| Total capital  lease obligations |   | $      | 114,669 |   |

 

Rental expense for operating leases in 2001, 2000 and 1999 approximated$497,000, $344,000, and $94,000, respectively.

 

The Company paid interest of approximately $170,000, $322,000 and$401,000 in 2001, 2000 and 1999, respectively.

 

4.       Stockholders’Equity, Stock Options and Warrants

 

The Company has authorized three stock option plans for employees,officers, directors, consultants and other key personnel.  As of December 31, 2001, the NonqualifiedStock Option Plan has 287,500 shares reserved, 59,336 shares available forissuance and 189,127 shares outstanding; the Long-Term Incentive Plan has625,000 shares reserved, 88,062 shares available for issuance and 466,052shares outstanding; and the Stock Option Plan for Employees has 17,405 sharesreserved, 2,401 shares available and 13,536 shares outstanding.

 

The Company also authorized and granted 81,392 stock options exclusiveof the above described plans, none of which were ever exercised prior to theirexpiration in 2000.

 

The Company has elected to follow Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (APB 25) and relatedInterpretations in accounting for its employee stock options because, asdiscussed below, the alternative fair value accounting provided for under FASBStatement No. 123, “Accounting for Stock-Based Compensation,” requires use ofoption valuation models that were not developed for use in valuing employeestock options.  Under APB 25, becausethe exercise price of the Company’s employee stock options equals the marketprice of the underlying stock on the date of grant, no compensation expense isrecognized.

 

Pro forma information regarding net income and earnings per share isrequired by Statement 123 and has been determined as if the Company hadaccounted for its employee stock options under the fair value method of thatStatement.  The fair value for theseoptions was estimated at the date of grant using a Black-Scholes option pricingmodel with the following weighted-average assumptions for 1999, 2000 and 2001,respectively: risk-free interest rate of 6.5%, 6.5%, and 4.4%; dividend yieldof 0%; volatility factors of the expected market price of the Company’s commonstock of 1.437, .771 and .913 and a weighted-average expected life of the optionof five years.

 

The Black-Scholes option valuation model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand are fully transferable.  Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility.  Because the Company’s employee stock optionshave characteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models do notnecessarily provide a reliable single measure of the fair value of its employeestock options.

 

For purposes of pro forma disclosures, the estimated fair value of theoption is amortized to expense over the options’ vesting period.  The Company’s pro forma information follows:

 

|                                                     |   | **2001** |       | **2000** |   | **1999**    |   |
|----------------------------------------------------------|--------|----------|------------|----------|--------|-------------|--------|
| Pro forma net  income (loss)                             |   | $        | (3,994,931 | )        | $      | (18,429,417 | )      | $ | 366,875 |   |
| Pro forma net  income (loss) per share                   |   | $        | (0.58      | )        | $      | (2.53       | )      | $ | 0.05 |   |
| Pro forma net  income (loss) per share assuming dilution |   | $        | (0.58      | )        | $      | (2.53       | )      | $ | 0.05 |   |

 

28

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Stock option activity is summarized as follows:

 

|                              |   | **Number of  Shares** |   | **Weighted-Average  Exercise Price** |   |
|-----------------------------------|--------|-----------------------|--------|--------------------------------------|--------|
| Outstanding at  January 1, 1999   |   | 739,108               |   | 5.57                                 |   |
| Exercisable at  January 1, 1999   |   | 535,598               |   | 5.63                                 |   |
|                              |   |                  |   |                                 |   |
| Options granted                   |   | 111,872               |   | 3.47                                 |   |
| Options  exercised                |   | (12,788               | )      | 3.36                                 |   |
| Options canceled                  |   | (182,928              | )      | 6.29                                 |   |
|                              |   |                  |   |                                 |   |
| Outstanding at  December 31, 1999 |   | 655,264               |   | 5.06                                 |   |
| Exercisable at  December 31, 1999 |   | 535,598               |   | 6.19                                 |   |
|                              |   |                  |   |                                 |   |
| Options granted                   |   | 401,248               |   | 1.38                                 |   |
| Options  exercised                |   | —                |   | —                               |   |
| Options canceled                  |   | (359,621              | )      | 4.49                                 |   |
|                              |   |                  |   |                                 |   |
| Outstanding at  December 31, 2000 |   | 696,891               |   | 3.24                                 |   |
| Exercisable at  December 31, 2000 |   | 309,786               |   | 5.49                                 |   |
|                              |   |                  |   |                                 |   |
| Options granted                   |   | 76,560                |   | 0.61                                 |   |
| Options  exercised                |   | —                |   | —                               |   |
| Options canceled                  |   | (104,736              | )      | 4.64                                 |   |
|                              |   |                  |   |                                 |   |
| Outstanding at  December 31, 2001 |   | 668,715               |   | 2.12                                 |   |
| Exercisable at  December 31, 2001 |   | 182,108               |   | 3.93                                 |   |

 

The weighted-average fair value of options granted during the year was$.43, $.92 and $3.46 in 2001, 2000 and 1999, respectively.  Exercise prices for options outstanding asof December 31, 2001 ranged from $.60 to $.86. The weighted-average remaining contractual life of those options is 7.6years.

 

Warrant activity issummarized as follows:

 

|                              |   | **Shares** |   | **Weighted-Average  Exercise Price** |   |
|-----------------------------------|--------|------------|--------|--------------------------------------|--------|
| Outstanding at  January 1, 1999   |   | 2,930,868  |   | 5.46                                 |   |
| Exercisable at  January 1, 1999   |   | 2,930,868  |   | 5.46                                 |   |
|                              |   |       |   |                                 |   |
| Warrants issued                   |   | 50,000     |   | 4.13                                 |   |
| Warrants  exercised               |   | —     |   | —                               |   |
| Warrants  canceled                |   | (2,232,618 | )      | 5.50                                 |   |
| Outstanding at  December 31, 1999 |   | 748,250    |   | 5.21                                 |   |
| Exercisable at  December 31, 1999 |   | 748,250    |   | 5.21                                 |   |
|                              |   |       |   |                                 |   |
| Warrants issued                   |   | —     |   | —                               |   |
| Warrants exercised                |   | —     |   | —                               |   |
| Warrants  canceled                |   | —     |   | —                               |   |
| Outstanding at  December 31, 2000 |   | 748,250    |   | 5.21                                 |   |
| Exercisable at  December 31, 2000 |   | 748,250    |   | 5.21                                 |   |
|                              |   |       |   |                                 |   |
| Warrants issued                   |   | —     |   | —                               |   |
| Warrants  exercised               |   | —     |   | —                               |   |
| Warrants  canceled                |   | —     |   | —                               |   |
| Outstanding at  December 31, 2001 |   | 748,250    |   | 5.21                                 |   |
| Exercisable at  December 31, 2001 |   | 748,250    |   | 5.21                                 |   |

 

29

----

 

There were no warrants granted in 2000 or 2001.  The weighted average fair value of warrantsgranted during 1999 was $4.13.  Exerciseprices for warrants outstanding as of December 31, 2001 ranged from $4 to$5.50.  The weighted-average remainingcontractual life of those warrants is 2.2 years.

 

5.       Transferof License

 

In June 1997, the Company agreed to the transfer of the licenses forthe sales of dental lasers and air abrasive instruments from SunriseTechnologies, Inc. (“Sunrise”) to Lares Co. (“Lares”) in connection with thesale of Sunrise’s dental business to Lares. The Company received a payment of $275,000 and a note receivable for$100,000, due in June 2000.  The Companywill also continue to receive royalties on air abrasive and dental lasers fromLares.  The Company received Sunrisestock with a market value of $81,192 in 2001. This amount was applied against the note and the remaining amount wasdeemed uncollectible.

 

In 1999, the Company sold a license to ESC Medical Systems, Ltd. for$300,000 for the use of certain patents. The Company delivered the license to ESC Medical Systems, Ltd. in 1999and recorded the income in 1999 as a license transfer fee since the Company hasno additional requirements under this license.

 

6.       IncomeTaxes

 

At December 31, 2001, the Company had approximately $15,359,000 millionof net operating loss carryforwards for federal income tax purposes, whichexpire in various amounts in the years 2006 through 2021.

 

Deferred taxes represent the net tax effects of temporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and amounts used for income tax purposes.  Significant components of the Company’s deferred tax assets areas follows:

 

|                                         |   | **December  31** |   |
|----------------------------------------------|--------|------------------|--------|
|                                         |   | **2001**         |   | **2000** |   |
| Allowance for  doubtful accounts             |   | $                | 60,000 |   | $ | 78,000 |   |
| Inventory  valuation reserves                |   | 807,000          |   | 611,000 |   |
| Depreciation                                 |   | 326,000          |   | 322,000 |   |
| Compensation and  employee benefits          |   | 50,000           |   | 72,000 |   |
| Alternative  minimum tax credit carryforward |   | 236,000          |   | 195,000 |   |
| Warranty reserve                             |   | 54,000           |   | 88,000 |   |
| Other                                        |   | 250,000          |   | 266,000 |   |
| Net operating  loss carryforwards            |   | 5,222,000        |   | 4,064,000 |   |
| Deferred tax  asset                          |   | 7,005,000        |   | 5,696,000 |   |
|                                         |   |             |   |   |   |
| Deferred tax  liabilities                    |   | (54,000          | )      | (47,000 | ) |
|                                         |   |             |   |   |   |
| Net deferred tax  asset                      |   | 6,951,000        |   | $ | 5,649,000 |   |
|                                         |   |             |   |   |   |
| Valuation  allowance                         |   | 6,951,000        |   | 5,649,000 |   |
|                                         |   |             |   |   |   |
| Net deferred tax  asset                      |   | $                | — |   | $ | — |   |

 

30

----

 

The Company’s income tax provision included the following:

 

|                                               |   | **2001**  |       | **2000**  |   | **1999**   |   |
|----------------------------------------------------|--------|-----------|------------|-----------|--------|------------|--------|
| Current expense                                    |   | $         | —     |      | $      | —     |   | $ | 58,000 |   |
| Deferred expense  (benefit)                        |   | —    |       | 4,744,000 |   | 558,000    |   |
|                                               |   | $         | —     |      | $      | 4,744,000  |   | $ | 616,000 |   |
|                                               |   |      |       |      |   |       |   |
| Income taxes  (benefit) at US statutory rate       |   | $         | (1,353,000 | )         | $      | (4,644,000 | )      | $ | 343,000 |   |
| State taxes                                        |   | —    |       | —    |   | 58,000     |   |
| Non-deductible  amortization                       |   | —    |       | 3,248,000 |   | 251,000    |   |
|                                               |   |      |       |      |   |       |   |
| Deferred tax asset  valuation allowance adjustment |   | 1,302,000 |       | 5,649,000 |   | —     |   |
| Other                                              |   | 51,000    |       | 491,000   |   | (36,000    | )      |
|                                               |   | $         | —     |      | $      | 4,744,000  |   | $ | 616,000 |   |

 

In 2000, uncertainties existed as to the future realization of thedeferred tax asset under the criteria set forth under FASB Statement No.109.  Therefore, the Company establisheda valuation allowance for the deferred tax asset of $6,951,000 at December 31,2000.

 

The Company paid no federal income tax during 2000 or 2001.  Income taxes paid were approximately$134,000 in 1999.

 

The Company’s investment in its foreign subsidiary is considered to bepermanently invested and no provision for U.S. federal and state income taxeson these translation adjustments have been provided.

 

7.       Operationsby Industry Segment, Geographic Area and Significant Customers

 

SFAS No. 131, Disclosures about Segments of an Enterprise and RelatedInformation, established standards for reporting information about operatingsegments in annual financial statements and requires selected information aboutoperating segments in interim financial reports issued to stockholders.  It also established standards for relateddisclosures about products and services, and geographic areas.  Operating segments are defined as componentsof the enterprise about which separate financial information is available thatis evaluated regularly by the chief operating decision maker, or decisionmaking group, in deciding how to allocate resources and in assessingperformance.

 

The Company develops, manufactures, markets and sells high technologydental products, such as air abrasive equipment, lasers, curing lights andintra oral cameras.  With the adoptionof its new business model in February 2000, the Company utilizes two distinctsales methods for these products. Domestically, the Company sells its products direct to the consumerthrough its nationwide network of sales and service branch offices.Internationally, the Company continues to sell its products through regionaldental distributors.  The reportablesegments are managed separately because selling techniques and marketenvironments differ from direct selling versus selling through a distributornetwork.  The remaining activities ofthe Company, which are reported as “Other”, include industrial, parts andaccessories and royalty income.

 

31

----

 

The accounting policies of the business segments are consistent withthose described in Note 1.  Operatingresults for Domestic, substantially all of which is attributable to the United States,include the effects of the business acquisitions, as described in Note 2.  The Company’s Chief Operating Decision Makerevaluates segmental performance and allocates resources based on operationalearnings (gross profit less selling and marketing expenses).

 

|                                                             |   | **2001**   |       | **2000**    |   | **1999**    |   |
|------------------------------------------------------------------|--------|------------|------------|-------------|--------|-------------|--------|
| Revenues:                                                        |   |       |       |        |   |        |   |
| Domestic                                                         |   | $          | 8,315,022  |        | $      | 8,724,106   |   | $ | 14,045,796 |   |
| International                                                    |   | 3,219,867  |       | 7,990,695   |   | 7,981,420   |   |
|                                                             |   | $          | 11,534,889 |        | $      | 16,714,801  |   | $ | 22,027,216 |   |
| Reconciliation  of revenues:                                     |   |       |       |        |   |        |   |
| Total segment  revenues                                          |   | $          | 11,534,889 |        | $      | 16,714,801  |   | $ | 22,027,216 |   |
| Other                                                            |   | 3,153,797  |       | 3,187,445   |   | 2,342,311   |   |
| Total revenues                                                   |   | $          | 14,688,686 |        | $      | 19,902,246  |   | $ | 24,369,527 |   |
|                                                             |   |       |       |        |   |        |   |
| Operational  earnings (loss):                                    |   |       |       |        |   |        |   |
| Domestic                                                         |   | $          | (397,324   | )           | $      | (1,815,833  | )      | $ | 1,094,190 |   |
| International                                                    |   | 705,871    |       | 3,214,002   |   | 2,843,931   |   |
|                                                             |   | $          | 308,547    |        | $      | 1,398,169   |   | $ | 3,938,121 |   |
|                                                             |   |       |       |        |   |        |   |
| Reconciliation  of operational earnings to loss from operations: |   |       |       |        |   |        |   |
| Total segment  operational earnings                              |   | $          | 308,547    |        | $      | 1,398,169   |   | $ | 3,938,121 |   |
| Other  operational earnings                                      |   | 111,832    |       | 171,521     |   | 782,868     |   |
| Research &  development expenses                             |   | (796,424   | )          | (966,382    | )      | (931,189    | )      |
| Administrative  expenses                                         |   | (3,561,542 | )          | (14,024,076 | )      | (3,902,872  | )      |
| Loss from  operations                                            |   | $          | (3,937,587 | )           | $      | (13,420,768 | )      | $ | (113,072 | ) |
|                                                             |   |       |       |        |   |        |   |
| Long lived  assets (excluding deferred taxes):                   |   |       |       |        |   |        |   |
| Domestic                                                         |   | $          | 2,075,082  |        | $      | 2,370,204   |   | $ | 2,436,122 |   |
| International                                                    |   | 15,888     |       | 19,747      |   | 11,784      |   |
|                                                             |   | $          | 2,090,970  |        | $      | 2,389,951   |   | $ | 2,447,906 |   |

 

Sales to Patterson Dental Company, a major domestic distributor of theCompany’s products, were approximately 2%, 3% and 16% of total revenues in2001, 2000 and 1999, respectively. Sales to Denics for certain Asian andPacific markets, primarily Japan, were approximately 9%, 21% and 19% of totalrevenues in 2001, 2000 and 1999, respectively.

 

8.       Litigationand Contingencies

 

In July 2000, the Company filed a lawsuit in the District Court ofNueces County, Texas against Henry Schein, Inc. to recover approximately$293,000 of past due receivables plus interest and cost of collection.  In September 2001, the Company settled thislawsuit out of court.  Under theprovisions of the settlement agreement, the terms of the settlement cannot bedisclosed.

 

All of the litigation involving Kreativ, Inc. was settled during 1999as previously disclosed.  The Companyreceived a $580,000 settlement from Kreativ, Inc. in the false advertising suitand received $300,000 in exchange for a paid-up license in settlement of thetwo patent suits.  The proceeds from thefalse advertising suit are included in other income in the Statement ofOperations and the proceeds from the patent suits are included in the licensetransfer fees in the Statement of Operations.

 

32

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9.       SelectedQuarterly Financial Data (unaudited)

 
|                                           |   | **Three  Months Ended** |      |
|------------------------------------------------|--------|-------------------------|-----------|
|                                           |   | **March 312001**        |      | **June 302001** |   | **September  302001** |   | **December  312001** |   |
| Revenues                                       |   | $                       | 4,495,770 |   | $ | 3,697,468 |   | $ | 2,605,788 |   | $ | 3,889,660 |   |
| Gross profit                                   |   | 2,512,819               |      | 1,718,325 |   | 1,107,738 |   | 715,261 |   |
| Net income  (loss)                             |   | 104,833                 |      | (806,699 | ) | (1,209,242 | ) | (2,067,151 | ) |
| Net income  (loss) per share assuming dilution |   | $                       | 0.01      |   | $ | (0.12 | ) | $ | (0.18 | ) | $ | (.28 | ) |

 
|                                           |   | **Three  Months Ended** |      |
|------------------------------------------------|--------|-------------------------|-----------|
|                                           |   | **March 312000**        |      | **June 302000** |   | **September  302000** |   | **December  312000** |   |
| Revenues                                       |   | $                       | 4,700,106 |   | $ | 5,489,878 |   | $ | 4,557,731 |   | $ | 5,154,532 |   |
| Gross profit                                   |   | 1,955,616               |      | 3,126,379 |   | 2,589,671 |   | 1,100,202 |   |
| Net income  (loss)                             |   | (745,980                | )         | 138,117 |   | (247,908 | ) | (17,547,669 | )(1) |
| Net income  (loss) per share assuming dilution |   | $                       | (0.10     | ) | $ | 0.02 |   | $ | (0.03 | ) | $ | (2.43 | ) |

 

----

(1)               Includes impairmentcharges of $9.2 million related to intangibles associated with the air abrasionand camera product lines, a charge to increase the reserve for slow movinginventory by $.8 million, a write off of demonstration inventory of $1.2million related to the change in the business model, and a deferred income taxvaluation allowance of $5.6 million. Such adjustments were booked in the fourth quarter, as the effects ofthe implementation of the new business model could not be evaluated untilmanagement deemed the transition to the new business model was substantiallycompleted.

 

33

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

 

None.

PART III

 

ITEM 10.                            DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

 

**Directors**

 

The following sets forth information with respect tothe members of the Board of Directors regarding the individual’s age, principaloccupation, other business experience, other directorships and term of serviceas a director of the Company.

 
| **Directors Whose Terms Expire in 2002**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **Age** |   | **Year First  Became Director** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|---------------------------------|--------|
| BEN J. GALLANT  Mr. Gallant has been the Company’s President and Chief Executive Officer since  November 1996 and served as its Chief Operating Officer from September 1996  to May 2000. Mr. Gallant was a founder of Texas Airsonics, Inc., served as a  director and chairman of the board from that company’s inception in 1982, was  elected president and chief executive officer in 1991 and served in those  positions until that company’s acquisition by American Medical in 1996. He is  chiefly responsible for the design and development of the Company’s KCP and  industrial product lines.     |   | 68      |   | 1996                            |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |    |   |                            |   |
| GARY A. CHATHAM  Mr. Chatham currently serves as senior consultant to Valls Group, an  international trade services provider, a position he has held since November  1990.  His main responsibilities  include major international business projects, warehouse development,  materials handling systems and management and information systems. From 1981  to 1990, he operated Gary Chatham and Associates, a project planning and  management consulting firm.  Mr.  Chatham   was also a director of   Texas  Airsonics,  Inc. from 1988 until its merger with the  Company in August 1996. |   | 57      |   | 1999                            |   |

 
| **Directors  Whose Terms Expire in 2003**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | **Age** |   | **Year First  Became Director** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|---------------------------------|--------|
| 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, 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.                                                                                                                                                                                                                                                                                                                                   |   | 64      |   | 1997                            |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |    |   |                            |   |
| 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.  Prior to founding GFMD, Mr. Williams had been the chief  executive officer of Rupp & Bowman Company, a marketer of high technology  medical equipment and diagnostics for more than 30 years. 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. |   | 73      |   | 1990                            |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |    |   |                            |   |
| 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.                                                                                                                                                                                                                                                               |   | 77      |   | 1996                            |   |

 

34

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| **Directors  Whose Terms Expire in 2004**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **Age** |   | **Year First  Became Director** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|---------------------------------|--------|
| WAYNE A. JOHNSON, II  Mr. Johnson is currently general counsel for T-NETIX, Inc., a company engaged  in providing specialized telephone call processing and other services to the  corrections industry.  He is also  legal counsel for, and a director and secretary/treasurer of, 4-0 Studio,  Inc., a personalized fitness and nutrition concept center which he co-founded  in January 1997.  Mr. Johnson acted as  President of 4-0 Studio from its inception through February 1999. From  January 1996 to January 2000, Mr. Johnson served as a legal counsel to Racer  Components, Inc. and Automotive Digital Systems, Inc., manufacturers and  marketers of automotive performance and racing products.  Mr. Johnson served as a director of Texas  Airsonics, Inc., from 1984 until its acquisition by the Company in July 1996. |   | 53      |   | 1996                            |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |    |   |                            |   |
| JOHN E. VICKERS III  Mr. Vickers was appointed Chief Operating Officer of the Company in May  2000.  He previously served the  Company as Executive Vice President from August 1998 to May 2000 and as  Senior Vice President — Operations from November 1996 to August 1998.  Mr. Vickers had served as Texas Airsonics  Inc.’s chief financial officer and legal counsel from June 1993 until its  acquisition by the Company in July 1996 and had various operating  responsibilities with Texas Airsonics.    From December 1991 until July 1994, Mr. Vickers has practiced law for  over 25 years.                                                                                                                                                                                                                     |   | 55      |   | 1996                            |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |    |   |                            |   |
| WILLIAM S. PARKER  Mr. Parker was appointed Senior Vice President — Dental of the Company in  August 1998.  He is chiefly  responsible for the Company’s product development.  He had been a consultant, then an employee of the Company in  charge of product development since 1991.   From 1976 to 1991, he was the president and co-founder of the New  Directions Group, Inc., a management consulting firm which had clients such  as Ford, Exxon Enterprises, AT&T and Ross Laboratories.                                                                                                                                                                                                                                                                                                                             |   | 56      |   | 1999                            |   |

* *

**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 2001 pursuant to Section 16(a) ofthe Securities Exchange Act of 1934, as amended.

 

35

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ITEM 11.                            EXECUTIVECOMPENSATION

 

**Summary**

 

The following table provides a summary of compensation paid or accruedby the Company and its subsidiaries during 2001, 2000 and 1999 to or on behalfof the Company’s Chief Executive Officer and each of the four other executiveofficers, as of December 31, 2001, who earned in excess of $100,000 in salaryand bonus in 2001 (the “Named Officers”).

 

**Summary Compensation Table**

 
|                                                              |   |     |    | **Annual  Compensation** |   | **Long Term  Compensation Awards** |    | **All Other**                               |   |
|-------------------------------------------------------------------|--------|----------|---------|--------------------------|--------|------------------------------------|---------|---------------------------------------------|--------|
| **Name and  Principal Position**                                  |   | **Year** |    | **Salary($)**            |   | **Bonus($)**                       |    | **Securities  Underlying  Option/SARs (#)** |   | **Compensation  ($)(a)** |   |
| Ben J. Gallant  Chief Executive Officer   and President |   | 2001     |    | 250,000                  |   | 15,000                             |    | -0-                                         |   | 10,629 |   |
|                                                              | 2000   |     | 250,000 |                     | -0-    |                               | 150,000 |                                        | 9,709  |   |
|                                                              | 1999   |     | 225,000 |                     | 10,000 |                               | 37,500  |                                        | 8,911  |   |
|                                                              |   |     |    |                     |   |                               |    |                                        |   |   |   |
| John E. Vickers III  Chief Operating Officer                      |   | 2001     |    | 175,000                  |   | 10,000                             |    | -0-                                         |   | 500 |   |
|                                                              | 2000   |     | 175,000 |                     | -0-    |                               | 75,000  |                                        | 500    |   |
|                                                              | 1999   |     | 150,000 |                     | 7,500  |                               | 25,000  |                                        | 500    |   |
|                                                              |   |     |    |                     |   |                               |    |                                        |   |   |   |
| William S. Parker  Senior Vice President — Dental            |   | 2001     |    | 135,000                  |   | 6,500                              |    | -0-                                         |   | 500 |   |
|                                                              | 2000   |     | 135,000 |                     | -0-    |                               | 100,000 |                                        | 500    |   |
|                                                              | 1999   |     | 131,625 |                     | 7,500  |                               | 25,000  |                                        | 500    |   |
|                                                              |   |     |    |                     |   |                               |    |                                        |   |   |   |
| John A. Miller  Executive Vice President — Sales             |   | 2001     |    | 148,750                  |   | 6,500                              |    | 50,000                                      |   | -0- |   |
|                                                              | 2000   |     | 135,000 |                     | -0-    |                               | 35,000  |                                        | -0-    |   |
|                                                              | 1999   |     | 80,000  |                     | 5,000  |                               | 5,000   |                                        | -0-    |   |
|                                                              |   |     |    |                     |   |                               |    |                                        |   |   |   |
| Hans H. Nahme (b)  Vice President Sales — International      |   | 2001     |    | 135,000                  |   | 6,500                              |    | -0-                                         |   | 500 |   |
|                                                              | 2000   |     | 135,000 |                     | -0-    |                               | 35,000  |                                        | 500    |   |
|                                                              | 1999   |     | 68,750  |                     | 7,500  |                               | 5,000   |                                        | -0-    |   |

 

----

(a)                                  Includes$500 401(k) contribution matching (other than for Mr. Miller) and, with respectto Mr. Gallant, $10,129 for life insurance premiums, paid during 2001.

(b)                                 Mr.Nahme resigned from the Company on January 11, 2002.

 

36

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**OptionGrants**

 

The followingtable provides information with respect to options granted to the NamedOfficers during 2001:

 

**OptionGrants in Last Fiscal Year**

 
|                 |   | **Individual  Grants**                         |   |                                        |   |
|----------------------|--------|------------------------------------------------|--------|---------------------------------------------|--------|
|                 |   | **Number of  Securities  Underlying  Options** |   | **% of  options  granted to  employees in** |   | **Exercise  or base** |   | **Expiration** |   | **Potential  realizable  value at assumed  annual rates of  stock price  appreciation for  option term (b)** |   |
|                 |   | **Granted  (a)**                               |   | **fiscal  year**                            |   | **price  ($/sh)** |   | **date** |   | **5%($)** |   | **10%($)** |   |
| John A. Miller       |   | 50,000                                         |   | 66                                          | %      | $ | 0.60 |   | 12/20/2011 |   | $ | 78,320 |   | $ | 142,480 |   |
| Ben J. Gallant       |   | —                                         |   | —                                      |   | — |   | n/a |   | — |   | — |   |
| John E. Vickers  III |   | —                                         |   | —                                      |   | — |   | n/a |   | — |   | — |   |
| William S.  Parker   |   | —                                         |   | —                                      |   | — |   | n/a |   | — |   | — |   |
| Hans H. Nahme        |   | —                                         |   | —                                      |   | — |   | n/a |   | — |   | — |   |
|                      |        |                                                |        |                                             |        |  |  |  |  |  |  |  |  |  |  |  |

 

----

 

(a)          These options weregranted December 20, 2001 under the Company’s Non-Qualified and Long-TermIncentive Plan and vest at the rate of one-half on March 20, 2002 and theremaining shares on September 20, 2002, or immediately upon a change in controlof the Company.

 

(b)         Represents the value ofthe option at the end of its term, assuming the market price of the CommonStock appreciates at annually compounded rates of 5% and 10%.  These amounts represent assumed rates ofappreciation only.  Actual gains, ifany, will be dependent on overall market conditions and on future performanceof the Common Stock.  There can be noassurance that the amounts reflected in the table will be achieved.

 

**OptionHoldings**

 

The following table provides information with respectto the unexercised options held as of the end of 2001 by the NamedOfficers.  The Named Officers did notexercise any options during 2001.

 

**Aggregated Option/SAR Exercises In**

**Last Fiscal Year and Fiscal Year-End Option/SAR Values**

 
| **Name**             |   | **Number of  Unexercised  Options/SARs at Fiscal  Year End (#)** |   | **Value of  Unexercised  In-the-Money Options/SARs  At Fiscal Year End ($)(a)** |   |
|----------------------|--------|------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|--------|
|                 |   | **Exercisable**                                                  |   | **Unexercisable**                                                               |   | **Exercisable** |   | **Unexercisable** |   |
| Ben J. Gallant       |   | 65,000                                                           |   | 160,000                                                                         |   | -0- |   | -0- |   |
| John E. Vickers  III |   | 43,333                                                           |   | 106,667                                                                         |   | -0- |   | -0- |   |
| William S.  Parker   |   | 49,584                                                           |   | 66,666                                                                          |   | -0- |   | -0- |   |
| John A. Miller       |   | 11,667                                                           |   | 73,333                                                                          |   | -0- |   | $36,500 |   |
| Hans H. Nahme        |   | 11,667                                                           |   | 23,333                                                                          |   | -0- |   | -0- |   |

 

----

(a)                      Value wasdetermined by multiplying the number of shares subject to an option by thedifference between the closing price of the Common Stock at year-end on TheNasdaq National Market and the option exercise price.

 

37

----

 

**EmploymentAgreements**

 

Effective August 1, 1996, the Company entered into anemployment agreement with Ben J. Gallant, naming Mr. Gallant as the Company’sChief Executive Officer, Chief Operating Officer and President.  The employment agreement had an initial termof three years.  The term of theagreement has now been extended through July 31, 2003.  The employment agreement, as amended,provides for an annual base salary of $250,000, maintenance of a life insurancepolicy, an automobile allowance and the right to such benefits under theCompany’s employee benefit plans as are available to executive management.  The employment agreement may be terminatedat any time if Mr. Gallant commits a material criminal act, fraud, dishonestyor malfeasance with respect to the Company or his employment.  In the event (i) his employment isterminated without cause, or (ii) the Company liquidates, dissolves, mergeswith, or transfers substantially all of its assets to a company which does notassume the Company’s obligations under the employment agreement, Mr. Gallantwill continue to be entitled to his base salary and health coverage through theend of the term. Mr. Gallant has agreed not to compete with the Company duringhis employment and for one year after termination.

 

**Compensationof Directors**

 

Directors who are not officers or employees of theCompany are entitled to a fee of $1,000 for each Board meeting attended and arereimbursed for expenses incurred in connection with their attendance atmeetings. In addition, such directors receive an annual option grant topurchase 312 shares of Common Stock at an exercise price equal to the marketvalue per share on the date of grant. Such options become exercisable in equal annual installments over fouryears as long as the optionee remains a director and expire ten years after thegrant date.  In 2001, each director wasgranted an additional option to purchase 312 shares under the Long-TermIncentive Plan of Common Stock at an exercise price equal to $0.86.

 

38

----

 

ITEM 12.                                               SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain informationregarding the ownership of the Common Stock as of March 20, 2002, except asotherwise indicated, by each current director, each director nominee, each ofthe executive officers named in the Summary Compensation Table under “ExecutiveCompensation,” all current directors and executive officers as a group, andeach person who is known by the Company to own beneficially 5% or more of theCompany’s outstanding shares of Common Stock (each, a “5% Owner”).

 
| **Name (1)**                                                          |   | **Number of  Shares (2)** |   | **Percent of  Class (3)** |   |
|-----------------------------------------------------------------------|--------|---------------------------|--------|---------------------------|--------|
| William D. Myers                                                      |   | 1,084,714                 | (4)    | 14.5                      |   |
| Ben J. Gallant                                                        |   | 1,006,864                 |   | 13.5                      |   |
| Irene M. Myers                                                        |   | 549,072                   | (4)    | 7.3                       |   |
| Ultrak, Inc.                                                          |   | 540,000                   |   | 7.2                       |   |
| Michael F.  Radner                                                    |   | 532,601                   | (5)    | 7.1                       |   |
| Charles A.  Nichols                                                   |   | 498,794                   |   | 6.7                       |   |
| William D.  Maroney                                                   |   | 411,308                   | (6)    | 5.5                       |   |
| Wayne A. Johnson  II                                                  |   | 255,621                   | (7)    | 3.4                       |   |
| John E. Vickers  III                                                  |   | 132,783                   |   | 1.8                       |   |
| William S.  Parker                                                    |   | 49,584                    |   | *                         |   |
| John A. Miller                                                        |   | 36,667                    |   | *                         |   |
| Hans H. Nahme                                                         |   | 11,667                    |   | *                         |   |
| Bertrand R.  Williams, Sr.                                            |   | 10,173                    |   | *                         |   |
| Gary Chatham                                                          |   | 7,943                     |   | *                         |   |
| All current  executive officers and directors as a group (10 persons) |   | 2,421,404                 | (8)    | 32.4                      |   |

 

----

* Less than one percent.

 

(1)                      The businessaddresses of the 5% Owners are as follows: William D. Myers and Irene M. Myers,29877 Telegraph Road, Southfield, Michigan 48034; Ben J. Gallant, William D.Maroney and Charles A. Nichols, 5555 Bear Lane, Corpus Christi, Texas 78405;Michael F. Radner, 18860 West Ten Mile Road, Southfield, Michigan 48075;Ultrak, Inc., 1301 Water’s Ridge Dr., Lewisville, Texas 75057.

 

(2)                      The columnsets forth shares of Common Stock which are deemed to be “beneficially owned”by the persons named in the table under Rule 13d-3 of the SEC, including sharesof Common Stock that may be acquired upon the exercise of stock options orwarrants that are presently exercisable or become exercisable within 60 days,as follows: Ben J. Gallant — 65,000 shares; William D. Myers — 2,128 shares;William D. Maroney — 780 shares; Charles A. Nichols — 1,092 shares; Wayne A.Johnson, II — 1,092 shares; John E. Vickers — 43,333 shares; William S. Parker— 49,584 shares; Ultrak, Inc. — 540,000 shares; Bertrand R. Williams, Sr. —2,652 shares Gary Chatham — 468 shares; and all current executive officers anddirectors as a group — 56,277 shares. Each of the persons named in the table has sole voting and investmentpower with respect to all shares beneficially owned by them, except asdescribed in the following footnotes.

 

(3)                      For purposesof calculating the percentage of Common Stock beneficially owned by any personin the table, the shares issuable to such person under stock options orwarrants exercisable currently or within 60 days are considered outstanding andare added to the shares of Common Stock actually outstanding.

 

(4)                      The numberof shares is based on information contained in an amended Schedule 13D, datedApril 23, 2000, filed with the Securities and Exchange Commission by Dr.William D. Myers and his spouse, Irene Myers. Includes 533,514 owned by Dr. Myers, 2,128 shares which Dr. Myers hasthe right to acquire currently or within the next 60 days, 399,072 shares ofCommon Stock owned jointly by Dr. and Mrs. Myers and 150,000 shares ownedindividually by Irene Myers.

 

(5)                      The numberof shares is based on information contained in an amended Schedule 13D, datedApril 18, 2000, filed with the Securities and Exchange Commission by Mr.Radner.

 

39

----

 

(6)                      Includes316,359 shares of Common Stock owned by Mr. Maroney’s wife, Aimeé Maroney, asto which Mr. Maroney shares voting and dispositive power.

 

(7)                      Includes37,975 shares of Common Stock owned by three family trusts for which Mr.Johnson is the trustee.

 

(8)                      Includes theshares described in footnotes 2 (other than shares beneficially owned byWilliam D. Myers, and Ultrak, Inc.), 6 and 7.

 

ITEM 13.                                               CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

                                      Notapplicable.

 

PART IV

 

ITEM 14.                                               EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

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

 
| Report of Independent Auditors                                                                              |
|-------------------------------------------------------------------------------------------------------------|
| Consolidated Statements of Operations for the Years  Ended December 31, 2001, 2000, and 1999                |
| Consolidated Balance Sheets as of December 31, 2001  and 2000                                               |
| Consolidated Statements of Stockholders’ Equity for  the Years Ended December 31, 2001, 2000, and 1999 |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2001, 2000, and 1999                |
| Notes to Consolidated Financial Statements                                                                  |

 

2.       FinancialStatement Schedules: The following financial statement schedule is attached tothis report.

 

Schedule II —Valuation and Qualifying Accounts

 

All other schedules are omitted because they are not applicable, notrequired, or the information is included in the financial statements or thenotes thereto.

 

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

 

(b) Reports on Form 8-K: No reports on Form 8-K werefiled during the quarter ended December 31, 2001.

 

40

----

 

**SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS**

**American Dental Technologies, Inc.**

 
| **Column A**                                 |   | **Column B**                         |   | **Column C**                                   |   | **Column D**             |   | **Column E**                   |   |
|----------------------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|--------------------------|--------|--------------------------------|--------|
| **Description**                              |   | **Balance at  Beginning  of Period** |   | **Additions  Charged to  Costs and  Expenses** |   | **Deductions  Describe** |   | **Balance  at End  of Period** |   |
| Year Ended  December 31, 1999                |   |                                 |   |                                           |   |                     |   |                           |   |
|                                         |   |                                 |   |                                           |   |                     |   |                           |   |
| Valuation  allowance for accounts receivable |   | 175,000                              |   | 13,000                                         | (1)    | —                   |   | 188,000                        |   |
| Valuation  allowance for inventories         |   | 555,000                              |   | 257,000                                        | (2)    | —                   |   | 812,000                        |   |
| Valuation  allowance for deferred taxes      |   | —                               |   | —                                         |   | —                   |   | —                         |   |
|                                         |   |                                 |   |                                           |   |                     |   |                           |   |
| Year Ended  December 31, 2000                |   |                                 |   |                                           |   |                     |   |                           |   |
|                                         |   |                                 |   |                                           |   |                     |   |                           |   |
| Valuation  allowance for accounts receivable |   | 188,000                              |   | 42,000                                         | (3)    | —                   |   | 230,000                        |   |
| Valuation  allowance for inventories         |   | 812,000                              |   | 873,000                                        | (4)    | —                   |   | 1,685,000                      |   |
| Valuation  allowance for deferred taxes      |   | —                               |   | 5,649,000                                      | (5)    | —                   |   | 5,649,000                      |   |
|                                         |   |                                 |   |                                           |   |                     |   |                           |   |
| Year Ended  December 31, 2001                |   |                                 |   |                                           |   |                     |   |                           |   |
|                                         |   |                                 |   |                                           |   |                     |   |                           |   |
| Valuation  allowance for accounts receivable |   | 230,000                              |   | —                                         |   | 54,000                   | (6)    | 176,000                        |   |
| Valuation  allowance for inventories         |   | 1,685,000                            |   | 964,000                                        | (7)    | —                   |   | 2,649,000                      |   |
| Valuation  allowance for deferred taxes      |   | 5,649,000                            |   | 1,302,000                                      | (8)    |                     |   | 6,951,000                      |   |

 

----

(1)           Increase in accountsreceivable valuation allowance.

(2)           Increase ininventory valuation allowance.

(3)           Increase in accountsreceivable valuation allowance.

(4)           Increase ininventory valuation allowance.

(5)           Recording ofvaluation allowance.

(6)           Reduction inaccounts receivable allowance due to collection of reserved accounts.

(7)           Increase ininventory valuation allowance.

(8)           Increase in deferredtax valuation allowance.

 

41

----

 

Signatures

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this annualreport to be signed on its behalf by the undersigned, thereunto dulyauthorized, in the City of Corpus Christi, State of Texas, on the 29thday of March, 2002.

 
|   |   | AMERICAN MEDICAL TECHNOLOGIES, INC. |
|--------|--------|-------------------------------------|
|   |   |                                |
|   |   |                                |
|   |   | /s/ Ben J. Gallant                  |   |
|   |   | Ben J. Gallant, President and CEO   |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities indicated on March29, 2002.

 
| /s/ Ben J. Gallant            |   |   |                                                                                    |   |
|-------------------------------|--------|--------|-----------------------------------------------------------------------------------------|--------|
| Ben J. Gallant                |   |   | President, CEO, Director and  Chairman of the Board  (Principal Executive Officer)      |   |
|                          |   |   |                                                                                    |   |
|                          |   |   |                                                                                    |   |
| /s/ Justin W. Grubbs          |   |   |                                                                                    |   |
| Justin W. Grubbs              |   |   | Chief Financial Officer (Principal Financial Officer  and Principal Accounting Officer) |   |
|                          |   |   |                                                                                    |   |
|                          |   |   |                                                                                    |   |
| /s/ John E. Vickers III       |   |   |                                                                                    |   |
| John E. Vickers III           |   |   | Chief Operating Officer and Director                                                    |   |
|                          |   |   |                                                                                    |   |
|                          |   |   |                                                                                    |   |
| /s/ Gary A. Chatham           |   |   |                                                                                    |   |
| Gary A. Chatham               |   |   | Director                                                                                |   |
|                          |   |   |                                                                                    |   |
|                          |   |   |                                                                                    |   |
| /s/ Wayne A. Johnson II       |   |   |                                                                                    |   |
| Wayne A. Johnson II           |   |   | Director                                                                                |   |
|                          |   |   |                                                                                    |   |
|                          |   |   |                                                                                    |   |
| /s/ William D. Maroney        |   |   |                                                                                    |   |
| William D. Maroney            |   |   | Director                                                                                |   |
|                          |   |   |                                                                                    |   |
|                          |   |   |                                                                                    |   |
| /s/ Charles A. Nichols        |   |   |                                                                                    |   |
| Charles A. Nichols            |   |   | Director                                                                                |   |
|                          |   |   |                                                                                    |   |
|                          |   |   |                                                                                    |   |
| /s/ William S. Parker         |   |   |                                                                                    |   |
| William S. Parker             |   |   | Director                                                                                |   |
|                          |   |   |                                                                                    |   |
|                          |   |   |                                                                                    |   |
| /s/ Bertrand R. Williams, Sr. |   |   |                                                                                    |   |
| Bertrand R. Williams, Sr.     |   |   | Director                                                                                |   |

 

42

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**EXHIBIT INDEX**

 

Certain of the following exhibits have been previously filed with theSecurities and Exchange Commission pursuant to the requirements of theSecurities Act of 1933 and the Securities Exchange Act of 1934.  Such exhibits are identified by theparenthetical references following the listing of each such exhibit and areincorporated herein by reference.  TheCompany’s Commission file number is 0-19195.

 
| **Exhibit  Number** |   | **Description of Document**                                                                                                                                                                                                                   |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                          |
| 3.1                 |   | First Restated Certificate of Incorporation, as  amended (Form 10-Q for quarter ended September 30, 2000)                                                                                                                                     |
|                |   |                                                                                                                                                                                                                                          |
| 3.4                 |   | Amended and Restated Bylaws (Form 10-K for year  ended December 31, 1998)                                                                                                                                                                     |
|                |   |                                                                                                                                                                                                                                          |
| 4.1                 |   | Nontransferable Common Stock Purchase Warrant, dated  August 5, 1998, 540,000 shares (Form 8-K filed August 20, 1998)                                                                                                                         |
|                |   |                                                                                                                                                                                                                                          |
| 4.2                 |   | Nontransferable Common Stock Purchase Warrant, dated  August 5, 1998, 60,000 shares (Form 8-K filed August 20, 1998)                                                                                                                          |
|                |   |                                                                                                                                                                                                                                          |
| 4.3                 |   | Line of Credit of Agreement between Bank One and  American Medical Technologies, Inc. effective September 21, 2000 (Form 10-Q  for quarter ended September 30, 2000)                                                                          |
|                |   |                                                                                                                                                                                                                                          |
| 4.4                 |   | Revolving Business Credit Note (LIBOR — Based  Interest Rate) between Bank One and American Medical Technologies, Inc.  effective September 21, 2000 (Form 10-Q for quarter ended September 30, 2000)                                    |
|                |   |                                                                                                                                                                                                                                          |
| 4.5                 |   | Non-transferable Common Stock Purchase Warrant dated  March 24, 1999 (Form 10-Q for quarter ended March 31, 1999)                                                                                                                             |
|                |   |                                                                                                                                                                                                                                          |
| 4.6                 |   | Non-transferable Common Stock Purchase Warrant dated  March 24, 1999 (Form 10-Q for quarter ended March 31, 1999)                                                                                                                             |
|                |   |                                                                                                                                                                                                                                          |
| 4.7                 |   | Amendment to Revolving Business Credit Note (LIBOR —  Based Interest Rate) and Line of Credit Agreement between Bank One and  American Medical Technologies, Inc. dated March 23, 2001 (Form 10-K for the  year ended December 31, 2000) |
|                |   |                                                                                                                                                                                                                                          |
| 4.8                 |   | Amendment to Revolving Business Credit Note (LIBOR —  Based Interest Rate) and Line of Credit Agreement between Bank One and  American Medical Technologies, Inc. dated June 25, 2001 (Form 10-Q for the  period ended June 30, 2001)    |
|                |   |                                                                                                                                                                                                                                          |
| 4.9                 |   | Loan Agreement between ValueBank Texas and American  Medical Technologies, Inc., dated October 3, 2001 (Form 10-Q for the period  ended September 30, 2001)                                                                                   |
|                |   |                                                                                                                                                                                                                                          |
| 4.10                |   | Note Agreement between U.S. Small Business  Administration and American Medical Technologies, Inc., dated October 3, 2001  (Form 10-Q for the period ended September 30, 2001)                                                                |
|                |   |                                                                                                                                                                                                                                          |
| 4.11                |   | Deed of Trust, Security Agreement and Assignment of  Rents between American Medical Technologies, Inc. and ValueBank Texas, dated  October 3, 2001 (Form 10-Q for the period ended September 30, 2001)                                        |
|                |   |                                                                                                                                                                                                                                          |
| 4.12                |   | Deed of Trust, Assignment of Rents and Leases and  Security Agreement between American Medical Technologies, Inc. and Bank One,  dated November 8, 2001 (Form 10-Q for the period ended September 30, 2001)                                   |
|                |   |                                                                                                                                                                                                                                          |
| 4.13                |   | Second Amended and Restated Forbearance Agreement  between Bank One and American Medical Technologies, Inc., effective February  18, 2002                                                                                                     |

 

 

43

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| 10.1*  |   | Amended and Restated Nonqualified Stock Option  Plan  (Registration No. 33-40140)                                                                                                      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                        |
| 10.2*  |   | Stock Option Plan for Employees (Registration No.  33-40140)                                                                                                                                |
|   |   |                                                                                                                                                                                        |
| 10.3*  |   | Amended and Restated Long-Term Incentive Plan (Form  10-Q for quarter ended September 30, 1996)                                                                                             |
|   |   |                                                                                                                                                                                        |
| 10.4*  |   | Employment Agreement dated August 1, 1996 between  American Medical Technologies, Inc. and Ben J. Gallant (Form 10-K for year  ended December 31, 1996)                                     |
|   |   |                                                                                                                                                                                        |
| 10.5   |   | License Agreement between Texas Airsonics, Inc., a  wholly owned subsidiary of American Medical Technologies, Inc. and Texas  Airsonics, L.P. (Form 10-K for year ended December 31, 1996)  |
|   |   |                                                                                                                                                                                        |
| 10.6** |   | Patent License Agreement dated October 18, 1997  between Danville Engineering, Inc. and American Medical Technologies, Inc.  (Form 10-Q for quarter ended September 30, 1997)               |
|   |   |                                                                                                                                                                                        |
| 10.7   |   | Assignment from Sunrise Technologies International,  Inc. to Lares Research dated June 24, 1997 (Form 10-K for year ended December  31, 1997)                                               |
|   |   |                                                                                                                                                                                        |
| 10.8   |   | Patent License Agreement dated June 29, 1998  Prep-Technology Corp. and American Medical Technologies, Inc. (Form 10-Q for  quarter ended June 30, 1998)                                    |
|   |   |                                                                                                                                                                                        |
| 10.9** |   | Patent License Agreement dated as of January 21,  1999 between ESC Medical Systems, Ltd. and American Medical Technologies,  Inc. (Form 10-Q for quarter ended March 31, 1999)              |
|   |   |                                                                                                                                                                                        |
| 10.10  |   | Patent licensing agreement dated June 10, 1999  between American Medical Technologies, Inc. and Kreativ, Inc. (Form 10-Q for  quarter ended June 30, 1999)                                  |
|   |   |                                                                                                                                                                                        |
| 10.11* |   | First Amendment, dated August 1, 1999 to Employment  Agreement between American Medical Technologies, Inc. and Ben J. Gallant  (Form 10-K for the year ended December 31, 1999)             |
|   |   |                                                                                                                                                                                        |
| 10.12* |   | Second Amendment, effective August 1, 2001 to  Employment Agreement between American Medical Technologies, Inc. and Ben J.  Gallant  (Form 10-K for the year ended  December 31, 2000) |
|   |   |                                                                                                                                                                                        |
| 21.1   |   | Subsidiaries of the Registrant (Form 10-K for year  ended December 31, 1999)                                                                                                                |
|   |   |                                                                                                                                                                                        |
| 23.1   |   | Consent of Independent Auditors                                                                                                                                                             |

 

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*Identifies current management contracts orcompensatory plans or arrangements.

 

**Portions of this agreement were filed separately with the Commissionpursuant to Rule 24b-2 of the Securities Act of 1934 governing requests forconfidential treatment of information.

 

44

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