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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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, $0.001 par value, as of April 30, 2003: 20,953,169.

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BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES

FORM 10-Q

For the Quarter Ended March 31, 2003

INDEX

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PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

See accompanying notes to consolidated financial statements.

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BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes to consolidated financial statements.

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BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED MARCH 31, 2003

NOTE 1 – BASIS OF PRESENTATION

          The unaudited consolidated financial statements included herein have been prepared on a basis consistent with the December 31, 2002 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein.  These unaudited interim consolidated financial statements do not include all the footnotes, presentations and disclosures normally required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements.  Therefore, these financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2002 and notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 24, 2003.

          The consolidated financial statements include the accounts of BioLase Technology, Inc. and its two wholly-owned subsidiaries: Societe Endo Technic, which is inactive and which we intend to dissolve, and BIOLASE Europe GmbH (“BIOLASE Europe”), a foreign subsidiary incorporated in Germany in December 2001.  We have eliminated all material intercompany transactions and balances in the accompanying financial statements.

          We follow the provisions of all applicable Statements of Financial Accounting Standards (“SFAS”) and related accounting pronouncements to prepare the accompanying financial statements in accordance with GAAP.

          The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes.  Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ materially from those estimates.

          The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full fiscal year.

NOTE 2 – SUPPLEMENTARY BALANCE SHEET INFORMATION

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NOTE 3 – DEBT

          At March 31, 2003, we had $1,792,000 outstanding under a revolving credit agreement with a bank.  The revolving credit agreement provides for borrowings of up to $1,800,000 for financing inventories and is collateralized by substantially all accounts receivable and inventories.  The interest rate is based upon LIBOR plus 0.5%.  At March 31, 2003, the interest rate on the outstanding balance was 1.88%.  The revolving credit agreement expires on July 31, 2003.

          In February 2002, our wholly-owned subsidiary, BIOLASE Europe, purchased a production facility in Germany for a maximum liability of $850,000 payable in Euros at the conversion rate of 0.8591 (Euros 989,000).  A payment of Euros 582,000 was due on April 1, 2003 and is currently pending based on further discussions with the seller, which may result in a deferral of the payment.  We are also negotiating with the seller and a third party for that third party to pay between $300,000 and $500,000 of the purchase price in exchange for certain rights that would be granted to the third party.  If we are not able to reach an agreement in this regard, we will be required to make another installment of $150,000 payable in Euros at the conversion rate of 0.8591 (Euros 175,000) on September 30, 2003.  The balance of amounts owed, if any, will be due by December 1, 2003.  At March 31, 2003, the balance outstanding was Euros 1,164,000 or $1.3 million.

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NOTE 4 – COMMITMENTS AND CONTINGENCIES

          In March 2001, we entered into a sale-leaseback transaction in which we sold and leased back our manufacturing facility in San Clemente, California.  The result of the sale was a $316,000 gain, which has been deferred and is being amortized over the four years remaining under the lease term.  The related lease is being accounted for as an operating lease.

          We also lease certain office equipment under operating lease arrangements.  Future minimum rental commitments under operating leases for each of the years ending March 31 are as follows:

          On May 2, 2003, we instituted a civil action in the U.S. District Court for the Central District of California against Diodem, LLC, a California limited liability corporation, seeking a judicial declaration against Diodem that we do not infringe four patents that relate to dental laser technology.  Diodem claims to have acquired the patents from Premier Laser Systems, Inc. which filed for bankruptcy protection in March 2000.  On May 5, 2003, we were named as a defendant in a civil action in the U.S. District Court for the Central District of California in which Diodem is seeking damages and an injunction against us and several other entities for infringing the four patents which are at issue in our suit against Diodem.  These actions are in their preliminary stages.  They are likely to involve complex issues of fact and law and may proceed for an extended period of time.  Although the potential outcome of these actions cannot be determined with certainty, we believe, based on the information presently available, that the ultimate outcome should not be material to our financial position.

          On October 31, 2002, we filed a lawsuit in the U. S. District Court for the Central District of California, Southern Division, against American Medical Technologies, Inc. (“AMT”).  In the lawsuit, we allege that AMT is infringing certain patents owned by us, which relate to the use of laser and water technology in the medical and dental fields.  Our claims arise out of AMT’s offer to sell and the sale in the United States of a dental device that uses laser and water technology.  In the lawsuit, we are seeking an award of monetary damages and injunctive relief against AMT.  While we believe that the case is meritorious, there is no assurance that we will achieve a favorable outcome.

          From time to time, we are involved in other legal proceedings incidental to our business.  We believe that pending actions, individually and in the aggregate, will not have a material adverse effect on our financial condition, results of operations or cash flows, and that adequate provision has been made for the resolution of such actions and proceedings.

NOTE 5 – COMPREHENSIVE INCOME

          Components of comprehensive income were as follows:

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NOTE 6 – EARNINGS PER SHARE

          We compute basic earnings per share by dividing net income by the weighted average number of common shares outstanding.  In computing diluted earnings per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities.

          Stock options totaling 78,000 were not included in the diluted earnings per share amounts for the three months ended March 31, 2002 as their effect would have been anti-dilutive.  No stock options were excluded from the diluted earnings per share amounts for the three months ended March 31, 2003.

NOTE 7 –  STOCK-BASED COMPENSATION

          On December 31, 2002, the Financial Accounting Standards Board issued SFAS No. 148, Accounting for Stock Based Compensation Transition and Disclosure, which amends SFAS No. 123.  SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation for annual and interim periods beginning after December 15, 2002.  The disclosure requirements apply to all companies, including those that continue to recognize stock-based compensation under the intrinsic value provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees.  We will continue to account for our stock based compensation according to the provisions of APB Opinion No. 25.

          If we had recognized compensation cost at the date of grant, our pro-forma net income (loss) and pro-forma income (loss) per share would have been as follows:

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          The pro forma amounts were estimated using the Black-Scholes option-pricing model with the following assumptions:

          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.  Our options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.

NOTE 8 – DERIVATIVE FINANCIAL INSTRUMENTS

          As of March 31, 2002, we had forward exchange contracts in Euros recorded at fair value in Other Assets on our balance sheet.  On February 3, 2003 the contracts expired and were not renewed.  Since these contracts were not designated as hedges pursuant to SFAS 133, we recognized the changes in fair value of those contracts in our consolidated statements of operations.  Gains on those contracts of $22,000 were recognized for the three months ended March 31, 2003.  No gain or loss was recognized for the three months ended March 31, 2002. 

NOTE 9 – PRODUCT WARRANTIES

          Our products are generally under warranty against defects in material and workmanship for a period of one year.  We estimate warranty costs at the time of sale based on historical experience, including the volume of sales and actual expenditures for warranty service.  Estimated warranty expenses are recorded as an accrued liability, with a corresponding provision to cost of sales.

          Changes in the product warranty accrual for the three months ended March 31, 2003 was as follows:

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

Cautionary Statement With Respect to Forward-Looking Information

          You should read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial Statements and related Notes thereto contained elsewhere in this quarterly report on Form 10-Q (the “Report”).  The information contained in this Report is not a complete description of our business or the risks associated with an investment in our common stock.  We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2002, and our subsequent reports on Forms 10-Q and other filings that discuss our business in greater detail.  This Report contains forward-looking statements that can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “potential,” “continue,” and variations of these words or similar expressions.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.  Examples of these forward-looking statements include, but are not limited to, statements concerning the application of our technology, the potential of our market and our position in it, our manufacturing capacity, estimates concerning asset valuation and loss contingencies and expectations concerning future costs and cash flow, and our ability to successfully finance our business or replace existing loans.  These forward-looking statements are based on our current expectations, estimates and projections about our industry, and reflect our beliefs and certain assumptions made by us.  These statements speak only as of the date of this Report and are based upon the information available to us at this time.  Such information is subject to change, and we will not necessarily inform you of such changes.  These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict.  Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are set forth in “Risk Factors,” below.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Overview

          BioLase Technology, Inc. is a medical technology company that designs, develops, manufactures and markets advanced dental, cosmetic and surgical lasers and related products. We hold a world leading position in the sale of hard tissue dental lasers. Our principal products are water-and-laser based systems currently focused for use in dentistry.  We hold patents and have received clearances from the United States Food and Drug Administration (“FDA”) for applications in markets other than dentistry; however, our current business plan is focused on the dental market because of the significant market potential and our leading position in that market.

          Our principal product is our Waterlase™ surgical cutting system, used for both hard and soft tissue dental procedures.  We also market the LaserSmile™ system for soft tissue and cosmetic tooth whitening procedures.

          In December 2001, we formed BIOLASE Europe, GmbH (“BIOLASE Europe”), a wholly owned subsidiary based in Germany.  In February 2002, BIOLASE Europe acquired a laser manufacturing facility in Germany and commenced manufacturing operations at that location.  This acquisition has enabled us to initiate an expansion of our sales in Europe and neighboring international regions.

          In 2002, we received FDA clearance to market the Waterlase system for complete root canal therapy (EndoLase™) and we received clearance to market this system for cutting, shaving, contouring and resection of oral osseous tissues (bone) (OsseoLase™).  In January 2003, we received FDA

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clearance to market the Waterlase for use in apicoectomy surgery, a treatment for root canal infections and complications that includes cutting gum, bone and the apex of the tooth to access the infected area.  The clearance also relates to flap surgical procedures, including periodontal procedures, implant placement and recovery, extracting wisdom teeth, exposure of impacted teeth for orthodontics as well as additional procedures involving flap surgery.

          Our fundamental business strategy is to expand our core technology in the dental market. However, we believe that our technology has broad uses beyond dentistry, and we have obtained patents and FDA clearance for certain of these applications in the cosmetic and surgical markets.

Critical Accounting Policies and Estimates

          Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period.

          The following represents a summary of our critical accounting policies, defined as those policies that we believe are: (a) the most important to the portrayal of our financial condition and results of operations, and (b) that require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. 

          Sales.  We record sales in accordance with the Securities Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (“SAB 101”), as amended by SAB 101A and 101B.  SAB 101 requires that four basic criteria must be met before revenue can be recognized:

          We record sales when we have received a valid customer purchase order for product at a stated price, the customer’s credit is approved and we have shipped the product to the customer.

          Valuation of Accounts Receivable.  We maintain an allowance for uncollectible accounts receivable to estimate the risk of extending credit to customers.  The allowance is estimated based on customer compliance with credit terms, the financial condition of the customer and collection history where applicable.  Additional allowances could be required if the financial condition of our customers were to be impaired beyond our estimates.

          Valuation of Inventory.  Inventory is valued at the lower of cost (estimated using the first-in, first-out method) or market value.  We periodically evaluate the carrying value of inventories and maintain an allowance for obsolescence to adjust the carrying value as necessary to the lower of cost or market value.  The allowance is based on physical and technical functionality as well as other factors affecting the recoverability of the asset through future sales.  Unfavorable changes in estimates of obsolete inventory would result in an increase in the allowance and a decrease in gross profit.

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          Valuation of Long-Lived Assets.  Property, plant and equipment, intangible and certain other long-lived assets are amortized over their useful lives.  Useful lives are based on our estimate of the period that the assets will generate revenue or otherwise productively support our business goals.  Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through future business operations.  In our estimate, no provision for impairment is currently required on any of our long-lived assets.

          Warranty Cost.  Products sold are generally covered by a warranty against defects in material and workmanship for a period of one year.  We accrue a warranty reserve to estimate the risk of incurring costs to provide warranty services.  The accrual is based on our historical experience and our expectation of future conditions.  An increase in warranty claims or in the costs associated with servicing those claims would result in an increase in the accrual and a decrease in gross profit. 

          Litigation and Other Contingencies.  We regularly evaluate our exposure to threatened or pending litigation and other business contingencies.  Because of the uncertainties related to the amount of loss from litigation and other business contingencies, the recording of losses relating to such exposures requires significant judgment about the potential range of outcomes.  We are not presently affected by any litigation or other contingencies that have had, or are currently anticipated to have, a material impact on our results of operations or financial position.  As additional information about current or future litigation or other contingencies becomes available, we will assess whether such information warrants the recording of additional expense.  To be recorded as an expense, a loss contingency must be both probable and measurable.  If a loss contingency is material but is not both probable and estimable, we will disclose it in the notes to the financial statements.

Results of Operations

          The following table sets forth certain statements of operations data expressed as a percentage of net sales:

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Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

          Comparing the results of operations between the three months ended March 31, 2003 and March 31, 2002, the most significant change affecting operating results is the increase in sales.  Sales for the three months ended March 31, 2003 increased 66% over sales for the three months ended March 31, 2002.

          Net Sales.  Net sales for the three months ended March 31, 2003 were $8.7 million, an increase of $3.4 million, as compared with net sales of $5.2 million for the three months ended March 31, 2002.  The increase in sales resulted primarily from an increased number of units sold. We began making direct sales in Germany in the third quarter of 2002.  In February of 2003, we terminated our distributor agreement in Germany and entered into contracts with independent sales agents within Germany.  We intend to continue to sell through dealers in our other international markets and to increase and strengthen our international dealer network. International sales were $1.7 million for the three months ended March 31, 2003 (19% of total net sales), as compared to $695,000 in 2002 (13% of total net sales).

          Gross Profit.  Gross profit for the three months ended March 31, 2003 was $5.5 million or 64% of net sales, an increase of $2.4 million or 77% from gross profit of $3.1 million or 60% of net sales for the three months ended March 31, 2002.  The increase in gross profit is primarily attributable to leveraging the increase in net sales against fixed and partially fixed manufacturing costs, reflecting better absorption of fixed manufacturing costs.  To a lesser extent, the increase in gross profit is also due to increased manufacturing efficiencies and design changes, which have reduced the cost of materials.  These efficiencies and cost savings have been partially offset by the addition of production and field technician resources to support anticipated sales growth.

          Operating Expenses.  Operating expenses for the three months ended March 31, 2003 and the three months ended March 31, 2002, were both 57% of net sales.  Approximately 80% of the increase in operating expenses for the three months ended March 31, 2003 is sales and marketing costs that have been incurred to generate the increase in net sales.

          Sales and marketing expenses generally include salaries and commissions for our direct sales force, advertising costs and expenses related to trade shows and seminars.  Although we expected sales to vary with our historical seasonality pattern, we continued to invest in marketing programs geared to achieve our target growth rate for the fiscal year.  Sales and marketing expense for the three months ended March 31, 2003 was $3.6 million or 41% of net sales, an increase of $1.5 million or 70%, as compared with sales and marketing expense for the three months ended March 31, 2002 of $2.1 million or 40% of net sales.  The increase in absolute dollars was primarily due to higher commission expense related to the increased sales, as well as increases in costs related to our national seminar marketing program. In addition, the size and scope of the World Clinical Laser Institute symposium held in January 2003 increased significantly over the program held in the first quarter of 2002.

          General and administrative expenses generally include the salaries of administrative personnel as well as professional and regulatory fees.  General and administrative expense for the three months ended March 31, 2003 was $844,000 or 10% of net sales, an increase of $368,000 or 78%, as compared with general and administrative expense for the three months ended March 31, 2002 of $474,000 or 9% of net sales.  The increase in absolute dollars was principally due to an increase in the provision for doubtful accounts, bank charges relating to credit card sales and increased insurance costs.  Other significant cost increases affecting both cost of sales and operating expenses include 52% and 17% increases in workers’ compensation insurance and group health insurance, respectively.  Additionally, the three months ended March 31, 2002 included a reduction of $95,000 from our allowance for uncollectible accounts due to previously unanticipated payments received from a foreign distributor. 

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          Engineering and development expenses generally include engineering personnel salaries, prototype supplies and contract services.  Engineering and development expense for the three months ended March 31, 2003 was $512,000 or 6% of net sales, an increase of $93,000 or 22%, as compared with engineering and development expense for the three months ended March 31, 2002 of $419,000 or 8% of net sales.  The increase in absolute dollars is prototype material costs and consulting fees related to product development.  The change in research and development expense as a percent of net sales reflects the larger sales base and normal fluctuations in the scope of current research and development projects.

          Gain on Forward Currency Transactions.  We realized a $46,000 gain on forward currency transactions for the three months ended March 31, 2003, primarily due to the changes in exchange rates between the United States dollar and the European Union euro.

          Gain on Forward Exchange Contract.  In the three months ended March 31, 2003, we realized a gain on forward contracts of $22,000, due to the increase in the fair market value of our forward exchange contract.  We acquired a production facility in Germany in February of 2002.  The debt related to those assets is payable in Euros at the exchange rate in effect as of the date of acquisition.  That exchange rate was 0.8591.  In conjunction with a portion of the debt due in 2003, we entered into a forward contract to purchase approximately $700,000 of Euros at an exchange rate of 0.8575.  On February 3, 2003, the contracts expired and were not renewed, resulting in a cumulative realized gain on the contracts of $174,000.

          Interest Income/Interest Expense.  Interest income primarily relates to interest earned on our cash balances, and interest expense primarily relates to interest expense on our line of credit.  Interest expense decreased $14,000 or 42% to $19,000 for the three months ended March 31, 2003 as compared to March 31, 2002 due to a decrease in the effective interest rate on our credit facility.

          Provision for Income Tax.  No provision for income tax was recognized for the three months ended March 31, 2003 due to the availability of net operating loss carry forwards.  No income tax benefit was recognized in the three months ended March 31, 2002, as there was no assurance that the benefit of the net operating loss carry forwards would be realized.  At such time, if in our judgment the recoverability of deferred tax assets, including the net operating loss carryforward, becomes realizable, we will reduce the valuation allowance against our deferred tax assets, record an income tax benefit and subsequently record a provision for income tax for financial statement purposes based on the amount of income reported.

          As of December 31, 2002, we had net operating loss carry forwards for federal and state purposes of approximately $34.9 million and $7.5 million, respectively, which began expiring in 2001.  As of December 31, 2002, we had research and development credit carry forwards for federal and state purposes of approximately $332,000 and $170,000, respectively.  The utilization of net operating loss and credit carry forwards may be limited under the provisions of Internal Revenue Code Section 382 and similar state provisions.

Liquidity and Capital Resources

          At March 31, 2003, we had $5.8 million in net working capital as compared to $3.5 million at December 31, 2002.  Our principal source of liquidity at March 31, 2003 consisted of our cash balance of $5.8 million.  For the three months ended March 31, 2003, our primary sources of cash were from operating activities of $296,000 and the exercise of stock options and warrants of $1.6 million.  These sources of cash were decreased by investments in property and equipment of $39,000.  The net effect on cash of operating, investing and financing transactions for the three months ended March 31, 2003 was

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an increase of $1.9 million.  For further details see the Unaudited Consolidated Statements of Cash Flows included in this Report.

          Accounts receivable, net, decreased 23% to $3.7 million at March 31, 2003 from $4.8 million at December 31, 2002.  This decrease was primarily due to the seasonality effect of the first quarter  and normal fluctuations in the collection cycle.  Day’s sales outstanding also decreased to 39 days from 45 days as of December 31, 2002.  Inventories, net, increased 32% to $3.7 million at March 31, 2003 from $2.8 million at December 31, 2002.  This increase was primarily due to increased production estimates to meet expected 2003 sales demand.

          During the quarter ended March 31, 2003, 410,000 warrant shares were exercised resulting in cash proceeds of $1.1 million.  Subsequent to March 31, 2003, the balance of outstanding warrants, 162,500 shares, were exercised, resulting in cash proceeds of $406,000.

          At March 31, 2003, we had $1.8 million outstanding under a $1.8 million revolving credit facility with a bank.  This same amount that was outstanding at December 31, 2002.  The interest rate is based upon LIBOR plus 0.5%.  At March 31, 2003, the interest rate on the outstanding balance was 1.88%.  In June 2002, the expiration date on this credit facility was extended from January 31, 2003 to July 31, 2003, at which point we will be required to pay any remaining balance, refinance or replace the credit facility.  The credit facility is collateralized by all of our accounts receivable and inventories.  We have received non-binding bank proposals for a replacement line of credit and expect to reach an agreement to replace our existing line of credit with a larger credit facility.

          In connection with the acquisition of our production facility in Germany, as discussed in Note 3 to the Unaudited Consolidated Financial Statements, BIOLASE Europe incurred a maximum liability of $850,000 payable in Euros at the conversion rate of 0.8591 (Euros 989,000).  A payment of Euros 582,000 was due on April 1, 2003 and is currently pending based on further discussions with the seller, which may result in a deferral of the payment.  We are also negotiating with the seller and a third party for that third party to pay between $300,000 and $500,000 of the purchase price in exchange for certain rights that would be granted to the third party.  If we are not able to reach an agreement in this regard, we will be required to make another installment of $150,000 payable in Euros at the conversion rate of 0.8591 (Euros 175,000) on September 30, 2003.  The balance of the amounts owed, if any, will be due by December 1, 2003.  At March 31, 2003, the balance outstanding was Euros 1,164,000 or $1.3 million.

          We had no material commitments for capital expenditures as of March 31, 2003.

          The following table presents our expected cash requirements for contractual obligations outstanding as of March 31, 2003 for the years ending March 31:

          We believe that our current cash balances, cash expected to be generated from our operations, together with additional cash expected to be received through the exercise of warrants and stock options will be adequate to meet our debt service requirements and sustain our operations for at least the next twelve months.

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Risk Factors

          Our business is subject to a number of risks, some of which are discussed below.  Other risks are presented elsewhere in this report and in our other filings with the Securities and Exchange Commission.  Before deciding to invest in our company or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this report and in our other filings with the Securities and Exchange Commission.  The risks and uncertainties described below are not the only ones facing our company.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations.  If any of these risks actually occur, our business, financial condition or results of operations could be seriously harmed.  In that event, the market price for our common stock could decline and you may lose all or part of your investment.

Dentists and Physicians May Be Slow to Adopt Laser Technologies, Which Could Limit the Market Acceptance of Our Products.

          Although our sales have increased year over year, our products represent new technologies in the dental market and currently only represent a very small portion of the market. Our future success will depend on continued momentum in demand, our ability to demonstrate to a broad spectrum of dentists and physicians the potential performance advantages (including clinical, cost, marketing and office practice) of our laser systems over traditional methods of treatment and over competitive laser systems.  Dental practitioners have historically been and may continue to be slow to adopt new technologies on a widespread basis.  Factors that may inhibit mass adoption of laser technologies by dentists and physicians include the cost of the products, concerns about the safety, efficacy and reliability of lasers and the ability to obtain reimbursement of laser procedures under health plans.  Current economic pressure may make dentists and physicians reluctant to purchase substantial capital equipment or invest in new technologies.  The failure of medical lasers to achieve broad market acceptance would have an adverse effect on our business, financial condition and results of operations.  We cannot assure you that we will have sufficient resources to continue to successfully market our products to achieve broad market acceptance.

We Depend on a Limited Number of Suppliers and If We Cannot Secure Alternate Suppliers, the Amount of Sales in Any Period Could Be Adversely Affected.

          We purchase certain materials and components included in our products from a limited group of qualified suppliers, and we do not have long-term supply contracts with most of our key suppliers.  Our growth and ability to meet customer demand depends in part on our ability to obtain timely deliveries of materials and components in acceptable quality and quantities from our suppliers.  Certain components of our products are currently available only from a single source or limited sources, particularly specialized components used in our lasers.  Although we believe that alternate sources of supply are available for most of our single-sourced materials and components, a change in a single or limited source supplier, or an inability to find an alternate supplier, would create manufacturing delays, disrupt sales and cash flow, and harm our reputation, any of which would adversely affect our business, financial condition and results of operations.

Our Quarterly Sales and Operating Results May Fluctuate in Future Periods and We May Fail to Meet Expectations, Which May Cause the Price of Our Common Stock to Decline.

          Our quarterly sales and operating results have fluctuated and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control.  If quarterly sales or operating results fall below the expectations of investors or securities analysts, the price of our

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common stock could decline substantially.  Factors that might cause quarterly fluctuations in our sales and operating results include the following:

          A significant amount of our sales in any quarter may consist of sales through a single distributor.  As a result, the timing of orders by distributors may impact our quarter-to-quarter results.  The loss of or a substantial reduction in orders from distributors could seriously harm our business, financial condition and results of operations.  The variation in demand due to seasonality may also cause variation in operating results.  Since many of our costs are fixed in the short term, if we have a shortfall in sales, we may be unable to reduce expenses quickly enough to avoid losses.  Due to all of the factors listed above and other risks, some of which are discussed in this report, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance.

We May Not Be Able to Secure Additional Financing to Meet Our Future Capital Needs.

          Our secured line of credit expires on July 31, 2003.  In addition, during 2003, all of our long-term debt related to the acquisition of our German production facility will become due and payable.  Although management expects to be able to secure a new credit facility to refinance the maturing debt, there is no assurance that we will be able to obtain such financing on acceptable terms in a timely manner, or at all.  If we are unable to obtain such financing, we will have to repay our debt obligations with cash, which may adversely affect our operations and financial condition and our ability to achieve future growth in our net sales.

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          Although we believe that we can generate sufficient cash flow from sustained profitability to meet our future operating and capital needs, there is no assurance that we will be able to do so.  If we are unable to do so, we will be dependent on the availability of external financing to meet our operating and capital needs, including the repayment of current debt obligations.  We may not be able to secure additional debt or equity financing on terms acceptable to us, or at all, at the time when we need such funding.  If we do raise funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced, and the securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock or may be issued at a discount to the current market price of our common stock which would result in dilution to our existing stockholders.  If we raise additional funds by issuing debt, we may be subject to debt covenants, which could place limitations on our operations including our ability to declare and pay dividends.  Our inability to raise additional funds on a timely basis would make it difficult for us to achieve our business plan and would have a material adverse effect on our business, financial condition and results of operations.

We Have Significant International Sales and Are Subject to Risks Associated with Operating in International Markets.

          International sales comprise a significant portion of our net sales and we intend to continue to pursue and expand our international business activities. Political and economic conditions outside the United States could make it difficult for us to increase our international sales or to operate abroad.  International operations, including our facility in Germany, are subject to many inherent risks, including:

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          We believe that international sales will continue to represent a significant portion of our net sales, and that continued growth and profitability may require further expansion of our international operations.  A substantial percentage of our international sales are denominated in the local currency.  As a result, an increase in the relative value of the dollar could make our products more expensive and potentially less price competitive in international markets.  We do not currently engage in any transactions as a hedge against risks of loss due to foreign currency fluctuations.  Any of these factors may adversely affect our future international sales and, consequently, affect our business, financial condition and operating results.

If We Are Not Successful in Generating and Increasing Sales from Our German Production Facility, Our Business and Financial Condition May Be Materially Adversely Affected.

          In February 2002, we made a significant investment in purchasing a German production facility with ten employees.  The production facility has a very limited operating history upon which to assess whether it will be able to meet all of the challenges required to successfully operate and generate and increase sales.  If we are not able to generate and increase sales and profits at the German facility, we will not receive the anticipated benefits of our investment in the German facility and our business, financial condition and results of operations would be materially and adversely affected.

We Are Exposed to Risks Associated with the Recent Worldwide Economic Slowdown and Related Uncertainties.

          Concerns about decreased consumer and investor confidence, reduced corporate profits and capital spending, and recent international conflicts and terrorist and military activity have resulted in a downturn in the equity markets and a slowdown in economic conditions, both domestically and internationally, and have caused concern about the strength or longevity of an economic recovery.  These unfavorable conditions could ultimately cause a slowdown in customer orders or cause customer order cancellations.  In addition, recent political and social turmoil related to international conflicts and terrorist acts may put further pressure on economic conditions in the U.S. and worldwide.  Unstable political, social and economic conditions make it difficult for our customers, our suppliers and us to accurately forecast and plan future business activities.  If such conditions continue or worsen, our business, financial condition and results of operations could be materially and adversely affected.

If We Are Unable to Protect Our Intellectual Property Rights, Our Competitive Position Could Be Harmed or We Could Be Required to Incur Expenses to Enforce Our Rights.

          We anticipate that our future success will depend, in part, on our ability to obtain and maintain patent protection for our products and technology, to preserve our trade secrets and to operate without infringing the intellectual property of others.  In part, we rely on patents to establish and maintain proprietary rights in our technology and products.  While we hold a number of issued patents and have other patent applications pending on our products and technology, we cannot assure you that any additional patents will be issued, that the scope of any patent protection will exclude competition or that any of our patents will be held valid if subsequently challenged.  In addition, other companies may independently develop similar products, duplicate our products or design products that circumvent our patents.

          Competitors may claim that we have infringed their current or future intellectual property rights.  We may not prevail in any future intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation.  Any claims, with or without merit, could be time-consuming and distracting to management, result in costly litigation, cause product shipment delays, or require us to enter into royalty or licensing agreements.  Additionally, in the event an intellectual property claim against us is successful, we might not be able to obtain a license on acceptable terms or

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license a substitute technology or redesign our products to avoid infringement.  Any of the foregoing adverse events could seriously harm our business, financial condition and results of operations.

Potential Future Acquisitions Could Have Unintended Negative Consequences Which Could Harm Our Business and Cause Our Stock Price to Decline.

          We are considering pursuing additional acquisitions of businesses, products or technologies in the future as part of our growth strategy.  Acquisitions could require significant capital infusions and could involve many risks, including, but not limited to, the following:

          We cannot assure you that we will be able to identify or consummate any future acquisitions on acceptable terms, or at all.  In the event we do pursue any acquisitions, it is possible that we may not realize the anticipated benefits from such acquisitions or that the market will positively view such acquisitions.

Product Liability Claims Against Us Could Be Costly and Could Harm Our Reputation.

          The sale of dental and medical products involves the inherent risk of product liability claims against us. While we currently maintain product liability insurance coverage, this insurance is expensive, is subject to various coverage exclusions and limits and may not be obtainable in the future on terms acceptable to us, or at all. We do not know whether claims against us with respect to our products, if any, would be successfully defended or whether our insurance would be sufficient to cover liabilities resulting from such claims.

Rapid Changes in Technology Could Harm the Demand for Our Products or Result in Significant Additional Costs.

          The markets in which our laser products compete are subject to rapid technological change, evolving industry standards, changes in the regulatory environment, frequent new device and pharmaceutical introductions and evolving dental and surgical techniques.  These changes could render our products noncompetitive or obsolete.  The success of our existing and future products is dependent on the differentiation of our products from those of our competitors, the timely introduction of new products and the perceived benefit to the customer in terms of patient service and return on investment.  The process of developing new medical devices is inherently complex and requires regulatory approvals or clearances that can be expensive, time-consuming and uncertain.  We have in the past experienced delays in product development.  We cannot assure you that we will successfully identify new product opportunities, be financially or otherwise capable of the research and development to bring new products

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to market in a timely manner or that products and technologies developed by others will not render our products obsolete.

We May Not Be Able to Compete Successfully Against Our Current and Future Competitors.

          We compete with a number of foreign and domestic companies, including companies that market traditional dental products such as dental drills, as well as other companies that market laser technologies in the dental and medical markets that we address.  Some of our competitors have greater financial, technical, marketing or other resources than us, which may allow them to respond more quickly to new or emerging technologies and to devote greater resources to the acquisition or development and introduction of enhanced products than we can.  In addition, the rapid technological changes occurring in the healthcare industry are expected to lead to the entry of new competitors, especially as dental and medical lasers gain increasing market acceptance.  Our ability to anticipate technological changes and to introduce enhanced products on a timely basis will be a significant factor in our ability to grow and remain competitive.  New competitors or technology changes in laser products and methods could cause commoditization of such products, require price discounting or otherwise adversely affect our gross margins.

Changes in Government Regulation or the Inability to Obtain Necessary Government Approvals Could Harm Our Business.

          Our products are subject to extensive government regulation, both in the United States and in other countries.  To clinically test, manufacture and market products for human diagnostic and therapeutic use, we must comply with regulations and safety standards set by the U.S. Food and Drug Administration and comparable state and foreign agencies.  Generally, products must meet regulatory standards as safe and effective for their intended use prior to being marketed for human applications.  The clearance process is expensive, time-consuming and uncertain.  The failure to receive requisite approvals for the use of our products or processes, or significant delays in obtaining such approvals, could prevent us from developing, manufacturing and marketing products and services necessary for us to remain competitive.

If Our Customers Cannot Obtain Third Party Reimbursement for Their Use of Our Products, They May Be Less Inclined to Purchase Our Products.

          Our products are generally purchased by dental or medical professionals who have various billing practices and patient mixes.  Such practices range from primarily private pay to those who heavily use third party payors, such as private insurance or government programs.  In the United States, third party payors review and frequently challenge the prices charged for medical services.  In many foreign countries, the prices are predetermined through government regulation.  Payors may deny coverage and reimbursement if they determine that the procedure was not medically necessary (for example, cosmetic) or that the device used in the procedure was investigational.  We believe that most of the procedures being performed with our current products generally are reimbursable, with the exception of cosmetic applications such as tooth whitening.  For the portion of dentists who rely on third party reimbursement and take assignment of patient insurance claims, the inability to obtain reimbursement for services using our products could deter them from purchasing or using our products.  We cannot predict the effect of future healthcare reforms or changes in financing for health and dental plans.  Any such changes could have an adverse effect on the ability of a dental or medical professional to generate a return on investment using our current or future products.  Such changes could act as disincentives for capital investments by dental and medical professionals and could have an adverse effect on our business, financial condition and results of operations.

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The Failure to Attract and Retain Key Personnel Could Adversely Affect Our Business.

          Our future success depends in part on the continued service of certain key personnel, including our chief executive officer, our chief financial officer, our vice president of Clinical Research, and our executive vice president.  We do not have employment agreements with any of our key employees, other than with our chief executive officer, whose employment agreement was renewed in January 2002 for a two-year term.

          Our success will also depend in large part on our ability to continue to attract, retain and motivate qualified engineering and other highly skilled technical personnel.  Competition for certain employees, particularly development engineers, is intense despite the effects of the economic slowdown. We may not be able to continue to attract and retain sufficient numbers of such highly skilled employees. Our inability to attract and retain additional key employees or the loss of one or more of our current key employees could adversely affect our business, financial condition and results of operations.

We May Not Be Able to Sustain or Increase Our Net Income in the Future, Which May Cause the Trading Price of Our Common Stock to Decline.

          Although we expect to be able to sustain and grow net income, there is no assurance that we will be able to do so.  Our ability to sustain or increase net income is dependent on many of the risk factors identified in this Report.  Until the third quarter of 2001, we had a history of losses through our research and development phase and during the early commercialization of our products.  It is possible that we may experience losses again in the future.  If we are unable to sustain or increase our net income in the future, we may not be able to successfully operate our business and our stock price may decline.

Our Common Stock Price Has Been Volatile, Which Could Result in Substantial Losses for Stockholders.

          Our common stock is currently traded on the Nasdaq National Market and the Nasdaq Europe Market and has limited daily trading volume.  The trading price of our common stock has been and may continue to be volatile.  The market for technology companies, in particular, has, from time to time, experienced extreme volatility that often has been unrelated to the operating performance of particular companies.  These broad market and industry fluctuations may significantly affect the trading price of our common stock, regardless of our actual operating performance.  The trading price of our common stock could be affected by a number of factors, including, but not limited to, changes in expectations of our future performance, changes in estimates by securities analysts (or failure to meet such estimates), quarterly fluctuations in our sales and financial results and a variety of risk factors, including the ones described elsewhere in this Report.  Periods of volatility in the market price of a company’s securities sometimes result in securities class action litigation.  If this were to happen to us, such litigation would be expensive and would divert management’s attention.  In addition, if we needed to raise equity funds under adverse conditions, it would be difficult to sell a significant amount of our stock without causing a significant decline in the trading price of our stock.  If our stock price drops below approximately $3.00 per share for an extended period of time or we are otherwise unable to satisfy the continued listing requirements of the Nasdaq National Market, our shares could be delisted from the Nasdaq National Market and the marketability, liquidity and price of our common stock would be adversely affected.

Future Sales of Our Common Stock Could Affect the Stock Price.

          If our stockholders sell substantial amounts of our common stock in the public market, including shares issued on the exercise of options and warrants, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

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We Have Adopted Anti-Takeover Defenses That Could Delay or Prevent an Acquisition of Our Company and May Affect the Price of Our Common Stock.

          Certain provisions of our certificate of incorporation and stockholder rights plan could make it difficult for a third party to acquire us, even though an acquisition might be beneficial to our stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.

          Our certificate of incorporation authorizes the issuance of up to 1,000,000 shares of “blank check” preferred stock on a specified pro-rata basis to shareholders of record, which will have terms as may be determined from time to time by our Board of Directors.  Accordingly, our Board of Directors may, without obtaining stockholder approval, issue preferred stock with terms, which could have preference over and adversely affect the rights of the holders of common stock.  This issuance may make it more difficult for a third party to acquire a majority of our outstanding voting stock.  We are also subject to the Delaware anti-takeover laws, which may prevent, delay or impede a merger or takeover of our company, and we have not opted out of the provisions of such laws through either our certificate of incorporation or our bylaws.

          In December 1998, we adopted a stockholder rights plan pursuant to which one preferred stock purchase right is distributed to our stockholders for each share of our common stock held by them.  In the event that a third party acquires 15% or more of our outstanding common stock, the holders of these rights will be able to purchase the underlying junior participating preferred stock as a way to discourage, delay or prevent a change in control of our company.  The mere existence of a stockholder rights plan often delays or makes a merger, tender offer or proxy contest more difficult.  The existence of these features could prevent others from seeking to acquire shares of our common stock in transactions at premium prices.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

          In the normal course of business, we are subject to market risk from changes in foreign exchange rates.  We are headquartered in the United States and have a German subsidiary.  We sell our products in United States dollars in North America, Europe, Australia and other foreign countries.  As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we distribute our products.  Our operating results are primarily exposed to changes in exchange rates between the United States dollar and the European Union euro.

          As discussed in Note 3 to the Unaudited Consolidated Financial Statements, we acquired a production facility in Germany in February of 2002.  The debt related to those assets is payable in Euros at the exchange rate in effect as of the date of acquisition.  That exchange rate was 0.8591.  In conjunction with portion of the debt due in 2003, we entered into a forward contract to purchase approximately $700,000 of Euros at an exchange rate of 0.8575.  On February 3, 2003, the contracts expired and were not renewed, resulting in a cumulative realized gain on the contracts of $174,000.

Item 4.  Controls and Procedures.

          Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by BioLase Technology, Inc. in reports that it files or submits under the Exchange Act is

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recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

          There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date our Chief Executive Officer and Chief Financial Officer carried out this evaluation.

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PART II – OTHER INFORMATION

Item 1.  Legal Proceedings.

          On May 2, 2003, we instituted a civil action in the U.S. District Court for the Central District of California against Diodem, LLC, a California limited liability corporation, seeking a judicial declaration against Diodem that we do not infringe four patents that relate to dental laser technology.  Diodem claims to have acquired the patents from Premier Laser Systems, Inc. which filed for bankruptcy protection in March 2000.  On May 5, 2003, we were named as a defendant in a civil action in the U.S. District Court for the Central District of California in which Diodem is seeking damages and an injunction against us and several other entities for infringing the four patents which are at issue in our suit against Diodem.  These actions are in their preliminary stages.  They are likely to involve complex issues of fact and law and may proceed for an extended period of time.  Although the potential outcome of these actions cannot be determined with certainty, we believe, based on the information presently available, that the ultimate outcome should not be material to our financial position.

          On October 31, 2002, we filed a lawsuit in the U. S. District Court for the Central District of California, Southern Division, against American Medical Technologies, Inc. (“AMT”).  In the lawsuit, we allege that AMT is infringing certain patents we own, which relate to the use of laser technology in the medical and dental fields.  Our claims arise out of AMT’s offer to sell and the sale in the United States of a dental device that uses laser and water technology.  In the lawsuit, we are seeking an award of monetary damages and injunctive relief against AMT.  While we believe that our case is meritorious, we cannot assure you that we will achieve a favorable outcome.

          From time to time, we are involved in other legal proceedings incidental to our business.  We believe that these other pending actions, individually and in the aggregate, will not have a material adverse effect on our financial condition, results of operations or cash flows, and that adequate provision has been made for the resolution of such actions and proceedings. 

Item 2.  Changes in Securities and Use of Proceeds.

              None.

Item 3.  Defaults Upon Senior Securities.

              None.

Item 4.  Submission of Matters to a Vote of the Security Holders.

              None.

Item 5.  Other information.

              None.

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Item 6.  Exhibits and Reports on Form 8-K.

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SIGNATURES

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

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CERTIFICATION PURSUANT TO RULE 13A-14 OF
THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

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CERTIFICATION PURSUANT TO RULE 13A-14 OF
THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

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