UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)
ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the Quarter Ended September 30, 2003.
o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from                to

 

Commission File No:  0-19195

 

AMERICAN MEDICAL TECHNOLOGIES, INC.

(Exact Name of Registrant as specified in its charter)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

 

Number of shares outstanding of the registrant’s common stock as of November 6, 2003:

7,939,306 Shares

 

 

ITEM 1.          Condensed Financial Statements

 

American Medical Technologies, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)

 

		Three Months Ended September 30						Nine Months Ended September 30
		2003			2002			2003			2002
Revenues		$	565,648		$	2,018,124		$	2,229,991		$	7,698,832
Royalties		20,085			24,933			192,398			111,540
		585,733			2,043,057			2,422,389			7,810,372
Cost of sales		243,179			1,546,210			1,916,275			5,142,352
Gross profit		342,554			496,847			506,114			2,668,020
Selling, general and administrative		277,623			1,089,486			1,479,966			5,190,405
Disposal of fixed assets		—			—			172,013			—
Research and development		50,053			150,955			163,909			445,376
Depreciation and amortization		33,558			103,634			178,157			346,826
Restructuring costs		—			(48,888		)	(5,723		)	778,791
Loss from operations		(18,680		)	(798,340		)	(1,482,208		)	(4,093,378		)
Other income (expense):
Gain on sale of dental laser assets		—			—			4,209,199			—
Other income		23,800			1,223			180,913			16,910
Interest expense		(26,071		)	(60,557		)	(108,874		)	(171,586		)
Income(loss) before income taxes		(20,951		)	(857,674		)	2,799,030			(4,248,054		)
Income tax expense		—			—			977			—
Net income(loss)		$	(20,951	)	$	(857,674	)	$	2,798,053		$	(4,248,054	)
Net income(loss) per share		$	0.00		$	(0.12	)	$	0.38		$	(0.60	)
Net income(loss) per share assuming dilution		$	0.00		$	(0.12	)	$	0.36		$	(0.60	)

 

See accompanying notes.

 

2

 

American Medical Technologies, Inc.
Condensed Consolidated Balance Sheets

 

		September 30 2003			December 31 2002
		(Unaudited)
ASSETS
Current assets:
Cash		$	417,997		$	566,436
Accounts receivable, less allowance of $153,721 in 2003 and $261,118 in 2002		291,960			472,354
Inventories		855,573			3,113,060
Prepaid expenses and other current assets		196,499			197,577
Total current assets		1,762,029			4,349,427
Deferred financing cost		83,333			—
Securities available for sale		3,508,575			—
Property and equipment, net		1,407,901			1,753,997
Intangible assets, net:
Goodwill		1,971,427			1,971,427
Other		10,381			27,847
		1,981,808			1,999,274
Total assets		$	8,743,646		$	8,102,698

 

See accompanying notes.

 

3

 

American Medical Technologies, Inc.
Condensed Consolidated Balance Sheets

 

		September 30 2003			December 31 2002
		(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,809,514		$	2,714,003
Compensation and employee benefits		612,403			81,538
Accrued restructuring costs		367,540			418,335
Other accrued liabilities		254,676			318,728
Current notes payable		8,205			2,332,075
Total current liabilities		3,052,338			5,864,679
Other non-current liabilities:		682,056			4,103
Series B Preferred Stock, $0.01 par value, mandatorily redeemable, authorized 575,000 shares		400,000			300,000
Stockholders’ equity:
Series A Preferred stock, $.01 par value, authorized 10,000,000 shares; none outstanding
Common stock, $.04 par value, authorized 12,500,000 shares; outstanding: 7,422,348  shares in 2003  and 7,362,348 shares in 2002		296,893			294,497
Warrants and options		927,046			927,046
Additional paid-in capital		41,729,782			41,717,178
Accumulated deficit		(37,748,812		)	(40,546,865		)
Net unrealized loss on available for sale securities		(184,500		)	—
Foreign currency translation		(411,157		)	(457,940		)
Total stockholders’ equity		4,609,252			1,933,916
Total liabilities and stockholders’ equity		$	8,743,646		$	8,102,698

 

See accompanying notes.

 

4

 

American Medical Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 

		Nine Months Ended September 30
		2003			2002
OPERATING ACTIVITIES:
Net income(loss)		$	2,798,053		$	(4,248,054	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation		173,797			266,924
Amortization		4,360			79,902
Provision for warranty expense		—			(46,650		)
Provision for doubtful accounts		93,815			80,000
Provision for slow-moving inventory		245,830			275,660
Loss on disposal of assets		172,013			63,405
Impairment of long-lived assets		—			26,699
Amortization of deferred financing costs		16,667			—
Issuance of warrant as compensation		—			16,500
Gain on sale of dental laser assets		(4,209,199		)	—
Changes in operating assets and liabilities, net of assets and liabilities associated with the sale of dental laser assets:
Accounts receivable		86,579			559,258
Inventories		1,406,035			1,849,016
Prepaid expenses and other current assets		1,078			(51,023		)
Assets held for sale		—
Accounts payable		(1,029,351		)	(233,406		)
Compensation and employee benefits		(19,135		)	(128,508		)
Other accrued liabilities		(64,052		)	(1,536		)
Other non-current liabilities		(4,103		)	(73,944		)
Restructuring Accrual		(50,795		)	496,067
Net cash used in operating activities		(378,408		)	(1,069,690		)
INVESTING ACTIVITIES:
Purchases of property and equipment		—			(121,448		)
Proceeds from sales of assets		1,825,000			76,926
Net cash provided by (used in) investing activities		1,825,000			(44,522		)
FINANCING ACTIVITIES:
Net borrowings (payments) on notes payable		(1,641,814		)	373,000
Deposits from director		—			300,000
Sale of common stock		—			121,836
Net cash provided by (used in) financing activities		(1,641,814		)	794,836
Decrease in cash before effect of exchange rates		(195,222		)	(319,376		)
Effect of exchange rates on cash		46,783			(15,044		)
Decrease in cash		(148,439		)	(334,420		)
Cash at beginning of period		566,436			579,667
Cash at end of period		$	417,997		$	245,247
Noncash activities      See footnote for sale of dental laser assets

 

See accompanying notes.

 

5

 

1.     Basis of Presentation and Other Accounting Information

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of American Medical Technologies, Inc. (the “Company” or “American Medical”) have been prepared by management in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

 

The results of operations for the nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for other quarters of 2003 or for the year ended December 31, 2003.  The accompanying unaudited condensed consolidated financial statements should be read with the annual consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

 

Sale of Dental Laser Assets

 

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

 

The Company recognized a gain of $4,209,199 on the sale of the dental laser assets.  This gain is comprised of the $5,518,075 aggregate purchase price less the following deductions associated with the sale:  fixed assets $29,059, patents $13,106, inventory $519,338, $550,000 bonus due Roger Dartt and other expenses of $197,373.

 

 

Debt

 

On June 17, 2003, ValueBank assigned its interest in the Company’s $750,000 note and related security instruments to Aimee Maroney for $682,056, which was the outstanding principal balance due under the note, and agreed to release Mrs. Maroney and the Company from all claims arising out of the note and security documents.  Subsequently, the Company negotiated the amendment of the note to provide for an interest rate of 5% per annum, with all principal and accrued interest payable in a single payment on December 31, 2004.  As consideration for the purchase of the note by Mrs. Maroney and the amendment of the terms of the note, the Company issued to Mrs. Maroney 100,000 shares of its Series B Preferred Stock on July 29, 2003.  Mrs. Maroney is the wife of Mr. William Maroney, a director of the Company.  The preferred shares were valued based on recently subscribed price of $1.00 per share.  The charge is reflected as deferred financing costs and will be amortized as interest expense over the remaining term of the note.

 

6

 

Revenue Recognition

 

The Company recognizes revenue when all of the following criteria are met: 1) a contract or sales arrangement exists; 2) products have been shipped, and if necessary installed, and title has been transferred or services have been rendered; 3) the price of the products or services is fixed or determinable; 4) no further obligation exists on the part of the Company (other than warranty obligations); and 5) collectibility is reasonably assured. The Company recognizes the related estimated warranty expense when title is transferred to the customer, generally upon shipment. The Company recognizes revenue on certain sales to two of its international distributors under terms that require shipment to a local independent warehouse. The Company’s policy is to include shipping and handling costs, net of the related revenues, which are not material in costs of goods sold.   There are no significant estimates or assumptions involved in determining the appropriate recognition of revenues.

 

Inventories - Inventories consist of the following:

 

		September 30, 2003			December 31, 2002
Finished goods		$	261,698		$	1,566,978
Raw materials, parts and supplies		593,875			1,546,082
Total inventory net of reserve		$	855,573		$	3,113,060

 

The Company’s reserve for slow moving inventory is evaluated periodically based on its current and projected sales and usage.  Prior to the fourth quarter 2002, the Company’s inventory reserve was calculated by comparing on hand quantities as of the measurement date to the prior twelve months’ sales.  The reserve calculation assumed that sales for each unit or part will not be less than sales for the prior twelve months.  If sales 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 a direct impact on the Company’s financial position and result of operations.  The reserve is calculated differently for finished units than it is for parts.  For parts, when the on hand quantity exceeded the prior twelve months’ sales and usage, the excess inventory was calculated by subtracting the greater of the prior twelve months’ sales and usage or a base quantity of 50 from the quantity on hand.  This excess was then 100% reserved.  The base quantity of 50 represented management’s determination of the minimum quantity of parts needed to fulfill its service, repair, and warranty obligations.  All parts or units with less than twelve months of sales or usage history were excluded from the calculation.

 

In the fourth quarter of 2002, the Company changed certain assumptions it uses in computing the inventory valuation allowance.  The inventory reserve calculation remained the same for finished units, but was changed for parts.  For parts, the new policy assumes that three years of projected parts usage of any given part will not be subject to a valuation allowance.  Any parts on hand exceeding three years of projected usage are subject to a 100% valuation allowance.  For purposes of computing the valuation allowance at September 30, 2003, part usage was projected at 50% of the prior 12 months part usage.

 

The Company recorded a $245,830 increase to the reserve for the nine-month period ended September 30, 2003 and a $275,660 increase to the reserve for the nine-month period ended September 30, 2002.   The Company’s reserve for slow moving inventory was $2,697,660 as of September 30, 2003 and $4,243,345 as of December 31, 2002. The valuation allowance could change materially, either up or down, if actual part usage in future years is materially different than the usage projected at September 30, 2003.

 

Property and equipment - Accumulated depreciation aggregated $1,956,046 at September 30, 2003 and $2,132,698 at December 31, 2002.

 

7

 

Intangible Assets - Accumulated amortization aggregated $2,302,029 at September 30, 2003 and $2,343,938 at December 31, 2002.

 

Net Income Per Share - The following table sets forth the computation for basic and diluted income(loss) per share:

 

		Three Months Ended September 30						Nine Months Ended September 30
		2003			2002			2003			2002
Net income/(loss)		$	(20,951	)	$	(857,674	)	$	2,798,053		$	(4,248,054	)
Numerator for basic and diluted earnings  (loss) per share		(20,951		)	(857,674		)	2,798,053			(4,248,054		)
Denominator for basic earnings (loss) per share - weighted average shares		7,422,348			7,362,348			7,395,974			7,119,857
Effect of dilutive securities:
Employee stock options		—			—			—			—
Warrants		—			—			423,377			—
Dilutive potential common shares		—			—			423,377			—
Denominator for diluted earnings per share adjusted weighted average shares after assumed conversions		7,422,348			7,362,348			7,819,352			7,119,857
Basic income (loss) per share		$	0.00		$	(0.12	)	$	0.38		$	(0.60	)
Basic income (loss) per share assuming dilution		$	0.00		$	(0.12	)	$	0.36		$	(0.60	)

 

2.     Employee Stock Options

 

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

 

Pro forma information regarding net income and earnings per share is required by Statement 123, as amended by Statement of Financial Accounting Standard No. 148, “Accounting for Stock Based Compensation Transition and Disclosure,” and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement.  The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2000, 2001 and 2002, respectively: risk-free interest rate of 6.5%, 4.4% and 1.84%; dividend yield of 0%; volatility factors of the expected market price of the Company’s common stock of .771, .913 and .999 and a weighted-average expected life of the option of three to five years.

 

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.  There were no options granted in 2003.

 

8

 

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

 

		September 2003			September 2002
Net income(loss), as reported		$	2,798,053		$	(4,248,054	)
Net income(loss) per share, basic, as reported		$	0.38		$	(0.60	)
Net income(loss) per share, assuming dilution, as reported		0.36			(0.60		)
Stock based employee compensation, net of tax effects, included in net loss, as reported		$	—		$	—
Stock based compensation, net of tax effects, under the fair value method		$	(16,568	)	$	—
Pro forma net income(loss)		$	2,781,485		$	(4,248,054	)
Pro forma net income(loss) per share, basic		$	0.38		$	(0.60	)
Pro forma net income(loss) per share, assuming dilution		$	0.36		$	(0.60	)

 

3.             Segment Reporting

 

The Company develops, manufactures, markets and sells high technology dental products, such as air abrasive equipment, curing lights and intra oral cameras.   The reportable segments are reviewed and managed separately because selling techniques and market environments differ from selling domestically versus selling through international distributor networks.  The remaining revenues of the Company, which are reported as “Other”, includes royalty income.

 

The accounting policies of the business segments are consistent with those used in prior years.

 

		Nine Months Ended September 30
		2003			2002
Revenues:
Domestic		$	1,558,597		$	6,136,014
International		671,394			1,341,146
		$	2,229,991		$	7,477,160
Reconciliation of revenues:
Total segment revenues		$	2,229,991		$	7,477,160
Other		192,398			333,212
Total revenues		$	2,422,389		$	7,810,372
Operational earnings (loss):
Domestic		$	(183,887	)	$	(855,898	)
International		142,057			(159,315		)
		$	(41,830	)	$	(1,015,213	)
Reconciliation of operational loss to loss from operations:
Total segment operational losses		$	(41,830	)	$	(1,015,213	)
Other operational earnings		192,398			209,461
Research & development expenses		(163,909		)	(445,376		)
Restructuring expenses		5,723			(697,547		)
Administrative expenses		(1,440,378		)	(2,144,703		)
Loss from operations		$	(1,482,208	)	$	(4,093,378	)
International revenues by country:
Japan		$	101,551		$	41,096
Germany		359,139			462,011
Italy		65,170			272,310
Canada		55,049			413,962
Other		90,485			151,767
		$	671,394		$	1,341,146

 

9

 

		September 30, 2003			December 31, 2002
Long-lived assets:
Domestic		$	1,405,950		$	1,752162
International		1,952			1,835
		$	1,407,901		$	1,753,997

 

4.             Comprehensive Income/(Loss)

 

Total comprehensive income/(loss), net of the related estimated tax, was $2,660,336 and ($4,167,724) for the nine months ended September 30, 2003 and 2002, respectively.  The components of other comprehensive loss are net unrealized loss on available for sale securities and foreign currency translation.

 

5.             Restructuring Costs

 

In the second quarter of 2002 the Company adopted a restructuring plan that called for the closure of its remaining sales and service branches and significant reductions in the number of employees in mid-June.  As part of the restructuring, a total of 49 employees were terminated, comprised of field sales and service personnel, manufacturing employees and administrative personnel.  As of September 30, 2002 the Company had vacated all of its former sales and service centers.  Costs such as employee severance, lease termination costs and other exit costs have been recorded as of the date the restructuring plan was finalized.  Other restructuring costs include approximately $5,000 in accrued attorney’s fees related to the termination of several of the Company’s German employees, approximately $34,000 in non-cash expenses associated with the write-off of abandoned leasehold improvements and property due to the closure of the branch offices and approximately $18,500 of forfeited security deposits related to the abandoned offices.  None of the expenses accrued as part of the restructuring have any benefit for future operations.  Certain costs were estimated based on the latest available information.  The breakdown of the Company’s restructuring costs follows:

 

		Employee Severance			Office Lease Terminations			Vehicle Lease Terminations			Other			Total
Adoption of restructuring plan		$	402,363		$	218,056		$	136,366		$	70,894		$	827,679
Additions (Reductions)		(16,167		)	(49,896		)	(66,109		)	2,190			(129.982		)
Non-cash expenses		—			(27,802		)	—			—			(27,802		)
Payments		(140,905		)	(55,044		)	(33,322		)	(73,084		)	(302,355		)
Balance at September 30, 2003		$	245,291		$	85,314		$	36,935		$	—		$	367,540

 

10

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

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

 

The Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of its forward-looking statements.  While the Company believes that its forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made.  Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond the Company’s control or are subject to change, actual results could be materially different.  Factors that might cause such a difference include, without limitation, the following:  the Company’s inability to generate sufficient cash flow to meet its current liabilities, the Company’s potential inability to hire and retain qualified sales and service personnel, the potential for an extended decline in sales, the possible failure of revenues to offset additional costs associated with its change in business model, the potential lack of product acceptance, the Company’s potential inability to introduce new products to the market, the potential failure of customers to meet purchase commitments, the potential loss of customer relationships, the potential failure to receive or maintain necessary regulatory approvals, the extent to which competition may negatively affect prices and sales volumes or necessitate increased sales expenses, the timing of and proceeds from the sale of restricted securities held by the Company and the other risks and uncertainties set forth in this report.

 

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

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect amounts reported in the accompanying consolidated financial statements and related footnotes. These estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information the Company believes to be reasonable under the circumstances. There can be no assurance that actual results will conform to the Company’s estimates and assumptions, and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time.  The policies the Company believes to be the most sensitive to estimates and judgments are described in Item 7 of the Company’s 2002 Annual Report on Form 10-K. There have been no material changes to that information during the first nine months of 2003, except for the policy described in Note 1 for available for sale securities.

 

Results of Operations

 

On May 21, 2003, the Company consummated the sale of its dental laser to Biolase Technology, Inc. (“Biolase”).  The total purchase price of $5,518,075, was paid $1.825 million in cash and the remainder in 307,500 shares of Biolase stock with an aggregate value of $3,693,075, based on the closing price for Biolase stock of $12.01 on the closing date of the sale. The sale to Biolase included the Company’s inventory, equipment, patents, trademarks and other intellectual property, and rights under certain contracts, relating to its dental laser business.  The Company has now ceased operations in the dental laser business and agreed not to engage in the dental laser market for four years following the May 21, 2003 closing.  As a result of this sale, the Company’s results of operations have significantly changed from the previous periods.

 

11

 

The Company had revenues of $565,648 for the three-month period ended September 30, 2003 compared to $2,018,124 for the same period in 2002, a decrease of 72%. For the nine-month period, domestic revenues declined 75%, while international revenues declined 50% over the same period.  The decrease in domestic revenues is partially attributable to the absence of revenues from the sale of laser assets since the latter half of the quarter ended June 30, 2003 and, to a lesser extent, to the continued decline in unit sales under the direct sales model and a slowdown in sales activity during the initial transition back to the dealer sales model.  Continued restructuring to offset declining cash flow resulted in reduced sales activities and reduced ability to purchase parts for manufacturing and to attend industry trade shows.

 

Gross profit as a percentage of revenues was 61% and 23% for the three and nine-month periods ended September 30, 2003, compared to 25% and 35% for the same periods in 2002. 

 

Selling, general and administrative expenses were $277,623 and $1,479,966, for the three and nine-month periods ended September 30, 2003 compared to $1,089,486 and $5,190,405 for the same periods in 2002, constituting a decrease of 75% and 71%.  The decrease is due primarily to the restructuring program adopted in June of 2002 and continued throughout the third quarter of 2003.

 

Research and development expenses were $50,053 and $163,909 for the three and nine-month periods ended September 30, 2003 compared to $150,955 and $445,376 for the same periods in 2002, a decrease of 67% and 63% respectively.  The decreases are primarily due to there being fewer projects in the research and development pipeline in 2003 and the reduction of employees in 2002.

 

Depreciation and amortization expenses were $33,558 and $103,634 for the three and nine-month periods ended September 30, 2003 compared to $178,157 and $346,826 for the same periods in 2002, a decrease of 81% and 70% respectively.  The decrease is due primarily to the assets reaching their full life and few new assets being purchased.

 

For the nine-month period ended September 30, 2003, net income was $2,798,053 compared to a net loss of ($4,248,054) for the same period in 2002. Of that $2,798,053 in income in 2003, $4,209,199 was other income arising from the sale of assets to Biolase.  The Company experienced a loss from operations of $1,482,208 for the nine months ended September 30, 2003, compared to a loss from operations of $4,093,378 in the same period of 2002, constituting a decrease of 64%.  The reduction in losses for the nine-month period ended September 30, 2003 was primarily due to reduced costs of the restructuring program adopted in June of 2002.  For the three-month period ended September 30, 2003, the net loss was ($20,951) compared to a net loss of ($857,674) for the same period in 2002.  The loss from operations for the three-month period ended September 30, 2003 was ($18,680), compared to a net operating loss of ($798,340) for the same three months of 2002 constituting a decrease of 98%.  These changes also reflect the aforementioned items.

 

Liquidity and Capital Resources

 

The Company’s operating activities used $378,408 in cash resources during the nine-month period ended September 30, 2003.

 

On May 21, 2003, the Company consummated the sale of its laser assets to Biolase for an aggregate purchase price of $5,518,075.  Of that total, $1.825 million was paid in cash directly to the Company’s principal lender, Bank One, to retire in full the Company’s debt to Bank One, which was in default.  Upon payment in full of that debt, Bank One released its security interest in all the assets pledged to secure the debt.  On October 13, 2003, Bank One exercised its warrant to purchase up to 721,510 shares of the Company’s common stock at a price of $.11 per share, the market price on the date of grant, by paying the exercise price in 204,552 tendered shares and receiving 516,958 shares of Company common stock.

 

The noncash portion of the purchase price from the sale of assets was 307,500 restricted shares of Biolase common stock with an aggregate value of $3,693,075, based on the closing price for Biolase stock of $12.01 on the closing date of the sale.  Biolase is required to register the sale of those shares to enable the Company to sell the stock as soon as practicable.  The Company must sell the stock, or obtain a loan secured by the stock, to obtain funds to settle its obligations to other creditors and to pursue its business.  The actual value of the stock consideration received by the Company in this transaction is subject to fluctuations in value of the Biolase stock until the shares are sold.  Because the market for Biolase stock has been fairly volatile recently, there is considerable uncertainty as to the actual value of the transaction until the Biolase stock is ultimately sold.  As of November 7, 2003, the fair value of the Biolase common stock was $12.64 per share.  The delay in the sale of the Biolase stock has impaired the Company’s marketing efforts and its ability to develop new products and has hurt its relationship with vendors.  The Company is unable to predict when the Biolase shares received by it will be registered so that the Company can realize the remaining proceeds from their sale.

 

As of May 31, 2003, the Company was in default under its note to ValueBank, the Company’s remaining principal lender, for up to $750,000 issued under the loan agreement dated October 3, 2001.   The note was secured by a first priority lien on certain real estate and assets and the guarantee of Ben Gallant, a former executive officer of the Company.    On June 17, 2003, ValueBank assigned its interest in the Loan Agreement, Note, Deed of Trust, Security Agreement and Assignment of Rents, and Gallant guarantee to Aimee Maroney for $682,056, which was the outstanding principal balance under the note,

 

12

 

and agreed to release Mrs. Maroney and the Company from all claims arising out of the note and security documents.  Subsequently, the Company negotiated the amendment of the note to provide for an interest rate of 5% per annum, with all principal and accrued interest payable in a single payment on December 31, 2004.  No additional advances may be made under the note.  As consideration for the purchase of the note by Mrs. Maroney and the amendment of the terms of the note, the Company issued to Mrs. Maroney 100,000 shares of its Series B Preferred Stock on July 29, 2003.  Mrs. Maroney is the wife of Mr. William Maroney, a director of the Company.

 

The Company believes that the cash generated from its operations, together with the proceeds from the sale of Biolase stock received in the sale of assets to Biolase, will be sufficient to meet the Company’s current needs for cash.  It is the Company’s intent to settle its other obligations to creditors and continue the remainder of its historical medical, dental and industrial products business.  The Company will continue to market to the dental industry its air abrasion, curing light and camera lines, while seeking opportunities to expand its dental product line with consumable products that will appeal to a larger segment of the dental market.  Management is considering several alternatives, including expanding historical businesses with increased sales and marketing efforts, strategic acquisitions of complementary businesses or product lines, and other potential business opportunities.  Management will continue to explore opportunities for strategic alternatives for the Company to pursue to enhance its operations and maximize value for its shareholders.

 

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risks

 

Reference is made to the response to Item 7A of Form 10-K for the year ended December 31, 2002.  There have been no material changes in the information required to be disclosed from December 31, 2002 to September 30, 2003.

 

ITEM 4.         Controls and Procedures

 

As of September 30, 2003, an evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and the principal accounting officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and principal accounting officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2003. There have been no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect internal controls subsequent to September 30, 2003.

 

13

 

PART II.  OTHER INFORMATION

 

ITEM 1.         Legal Proceedings.

 

On July 23, 2003, the Company was dismissed from the patent infringement lawsuit previously reported and filed in the Federal District Court for the Central District of California by Diodem LLC.

 

The Company is subject to a number of claims by its creditors for amounts due them which the Company has been unable to pay.  Management is attempting to negotiate settlements of these claims, but does not anticipate being able to pay the claims until the Biolase shares held by it can be sold.

 

ITEM 2          Changes in Securities and Use of Proceeds.

 

On July 29, 2003, the Company issued 100,000 shares of its Series B Preferred Stock to Aimee Maroney in connection with the assumption by her of the ValueBank note.  In October, 2003 BankOne exercised its warrant for 516,958 shares of common stock.  The securities sold in both those transactions were issued in private placements made in reliance on Section 4(2) of the Securities Act of 1933, and did not involve an underwriter

 

ITEM 3          Defaults Upon Senior Securities

 

Reference is made to the description of the Company’s loans from Bank One and ValueBank in Part I, Section 2 of this report, entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, which description is incorporated by reference herein.

 

ITEM 6.         Exhibits and Reports on Form 8-K:

 

(a)		Exhibits.
2.1		Asset Purchase Agreement dated as of May 12, 2003 between Biolase Technologies, Inc. and the Company (Form 10-Q for quarter ended March 31, 2003).
3.1		First Restated Certificate of Incorporation, as amended (Form 10-Q for quarter ended September 30, 2000)
3.2		Second Restated Certificate of Incorporation (filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2002)
3.3		Certificate of Correction to the Second Restated Certificate of Incorporation (Form 10-K for year ended December 31, 2002.)
3.4		Certificate of Designation of Series B Preferred Stock (Form 10-K for year ended December 31, 2002.)
3.5		Amended and Restated Bylaws (Form 10-K for year ended December 31, 1998)
4.1		Line of Credit Agreement between Bank One and American Medical Technologies, Inc. effective September 21, 2000 (Form 10-Q for quarter ended September 30, 2000)
4.2		Revolving Business Credit Note (LIBOR — Based Interest Rate between Bank One and American Medical Technologies, Inc. effective September 21, 2000 (Form 10-Q for quarter ended September 30, 2000)
4.3		Stock Purchase Warrant dated October 30, 2003 for 721,510 shares issued to BankOne, N.A.(Form 10-K for year ended December 31, 2002.)
4.4		Fourth Amended and Restated Forbearance Agreement between Bank One and American

 

14

 

		Medical Technologies, Inc., effective February 1, 2003 (Form 10-K for the year ended December 31, 2003.)
4.5		Amendment Agreement between American Medical Technologies, Inc. and Aimee Maroney effective as of June 17, 2003. (Form 10-Q for the quarter ended June 30, 2003)
4.6		Agreement to Assign Lien and Release Claims among American Medical Technologies, Inc., Aimee Maroney and ValueBank Texas dated as of June 17, 2003.  (Form 10-Q for the quarter ended June 30, 2003)
10.1	*	Employment Agreement dated effective as of June 1, 2002, between American Medical Technologies, Inc. and Roger W. Dartt  (Form 10-Q for the quarter ended June 30, 2002)
31.1		Certification of Roger W. Dartt, President and Chief Executive Officer of the Company, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Barbara Woody, principal accounting officer of the Company, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of Chief Executive Officer and of principal accounting officer of the Company, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*                                         Identifies current management contracts or compensatory plans or arrangements.

 

(b)                                 During the quarter ended September 30, 2003, the Company filed no reports on Form 8-K.

 

15

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

		American Medical Technologies, Inc.
Date:    November 13, 2003		/s/  Roger W. Dartt
		Roger W. Dartt
		President and Chief Executive Officer
Date:     November 13, 2003		/s/  Barbara Woody
		Barbara Woody
		Principal Accounting Officer

 

16