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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 29, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Transition Period from to .
----------- ------------
Commission File Number: 1-11064
BRITESMILE, INC.
(Exact name of business issuer as specified in its charter)
UTAH 87-0410364
- --------------------------------------------- ---------------------------------
(State or other jurisdiction of incorporation (IRS employer identification no.)
or organization)
490 North Wiget Lane
Walnut Creek, California 94598
- ---------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
(925) 941-6260
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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.
X yes no
The Company had 36,426,961 shares of common stock outstanding at July 16, 2002.
BRITESMILE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 29, 2002 and
December 29, 2001......................................................3
Condensed Consolidated Statements of Operations for the 13 and 26 weeks ended
June 29, 2002 and June 30, 2001................................................5
Condensed Consolidated Statements of Cash Flows for the 26 weeks ended
June 29, 2002 and June 30, 2001, respectively..................................6
Notes to Condensed Consolidated Financial Statements...........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................19
Item 2. Changes in Securities...............................................19
Item 5. Other Information...................................................19
Item 6. Exhibits and Reports on Form 8-K....................................19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
($ in thousands, except share data)
(Unaudited)
June 29, December 29,
2002 2001
----------------- ---------------------
(Note 1)
CURRENT ASSETS:
Cash and cash equivalents $ 1,778 $ 7,162
Cash, restricted as to use 843 843
Trade accounts receivable, net of allowance for doubtful
accounts of $330 and $615, respectively 2,412 4,311
Inventories 2,397 2,540
Prepaid expenses and other 598 423
Notes receivable-current portion 223 335
----------------- ---------------------
Total current assets 8,251 15,614
----------------- ---------------------
PROPERTY AND EQUIPMENT, net. 21,143 22,514
OTHER ASSETS 1,779 1,719
----------------- ---------------------
TOTAL ASSETS.. $ 31,173 $ 39,847
================= =====================
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
3
BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in thousands, except share data)
(Unaudited)
June 29, December 29,
2002 2001
--------------------- ---------------------
(Note 1)
CURRENT LIABILITIES:
Accounts payable $ 4,387 $ 5,512
Accrued expenses 2,685 4,959
Deferred revenue 1,783 763
Note payable to related party, net of discount 500 500
Accrual for store closures 310 310
Line of credit. 728 -
Capital lease obligation with related party -current portion. 641 641
--------------------- ---------------------
Total current liabilities 11,034 12,685
--------------------- ---------------------
Note payable to related party, less current portion 1,355 1,583
Subordinated convertible debenture, net of discount. 739 729
Capital lease obligations with related party, less current portion. 2,278 2,537
Accrual for store closures. 569 900
Other long-term liabilities 922 857
--------------------- ---------------------
Total long-term liabilities 5,863 6,606
--------------------- ---------------------
Total liabilities 16,897 19,291
--------------------- ---------------------
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized;
36,426,961 and 36,226,961 shares issued and outstanding, respectively
36 36
Additional paid-in capital 137,936 137,097
Accumulated deficit (123,696) (116,577)
--------------------- ---------------------
Total shareholders' equity 14,276 20,556
--------------------- ---------------------
Total liabilities and shareholders' equity $ 31,173 $ 39,847
===================== =====================
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
4
BRITESMILE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands except share data)
Unaudited
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
------------- -------------------- ------------------ ------------------
(as Restated) (as Restated)
------------- -------------------- ------------------ ------------------
REVENUES:
Center whitening fees, net $ 3,553 $ 3,904 $ 6,618 $ 7,909
Associated Center whitening fees, net 6,265 6,458 11,466 10,484
Product sales 1,195 1,208 2,263 2,094
------------- -------------------- ------------------ ------------------
Total revenues, net 11,013 11,570 20,347 20,487
------------- -------------------- ------------------ ------------------
OPERATING COSTS AND EXPENSES:
Operating and occupancy costs 3,924 4,383 7,542 7,580
Selling, general and administrative expense 8,266 11,156 16,134 20,989
Research and development expenses 181 19 292 567
Depreciation and amortization 1,507 1,166 2,991 2,380
------------- -------------------- ------------------ ------------------
Total operating costs and expenses 13,878 16,724 26,959 31,516
------------- -------------------- ------------------ ------------------
Loss from operations (2,865) (5,154) (6,612) (11,029)
------------- -------------------- ------------------ ------------------
OTHER INCOME (EXPENSE), net:
Interest expense (112) (417) (505) (636)
Interest income 9 102 35 106
------------- -------------------- ------------------ ------------------
Total other income (expense), net (103) (315) (470) (530)
------------- -------------------- ------------------ ------------------
Loss before income tax provision (2,968) (5,469) (7,082) (11,559)
INCOME TAX PROVISION 18 4 36 57
------------- -------------------- ------------------ ------------------
Net loss $ (2,986) $ (5,473) $ (7,118) $ (11,616)
============= ==================== ================== ==================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.08) $ (0.16) $ (0.20) $ (37)
============= ==================== ================== ==================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED
$ 36,418,648 $ 33,301,498 $ 36,395,396 $ 31,059,007
============= ==================== ================== ==================
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements of operations.
5
BRITESMILE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
($ in thousands, except share data)
26 Weeks Ended
26 Weeks Ended June 30, 2001
June 29, 2002 (as Restated)
--------------------- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,118) $ (11,616)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,991 2,380
Store closure accrual (331) (225)
Cost for issuance of stock warrants and stock options 405 253
Changes in assets and liabilities (253) (3,033)
--------------------- -----------------------
Net cash used in operating activities (4,306) (12,241)
--------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,822) (3,261)
--------------------- -----------------------
Net cash used in investing activities (1,822) (3,261)
--------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit 728 -
Proceeds from debt financing. - 2,500
Proceeds from common stock offering. - 26,629
Principal payments on long-term debt (229) (146)
Payments on capital lease obligations. (259) (69)
Proceeds from exercise of stock options. 504 788
--------------------- -----------------------
Net cash provided by financing activities 744 29,702
--------------------- -----------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,384) 14,200
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 7,162 5,701
--------------------- -----------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 1,778 $ 19,901
===================== =======================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 58 $ 138
====================== ========================
Cash paid for income taxes $ 72 $ 57
====================== ========================
Equipment acquired under capital lease $ - $ 1,618
====================== ========================
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements of cash flows.
6
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 29, 2002
1. Description of Business and Nature of Operations
BriteSmile, Inc., a Utah corporation ("BriteSmile" or the "Company"), and its
affiliates develop and sell advanced teeth whitening products, services and
technology. Unless specified to the contrary herein, references to BriteSmile or
to the Company refer to the Company and its subsidiaries on a consolidated
basis. The Company's operations include the development of technologically
advanced teeth whitening processes that are distributed in professional salon
settings known as BriteSmile Professional Teeth Whitening Centers ("Centers").
The Company also offers its products and technologies through arrangements with
existing independent dental offices known as BriteSmile Professional Teeth
Whitening Associated Centers ("Associated Centers"). As of June 29, 2002, the
Company had 14 Centers and there were 4,404 Associated Centers in operation.
Centers are located in major metropolitan areas nationwide and offer clients a
salon-like environment dedicated solely to the business of teeth whitening.
Centers are staffed by licensed dentists and trained dental assistants.
Alternatively, consumers can visit an Associated Center, where a local dentist
administers the BriteSmile procedure in the dentist's established office. To
date, the Company has entered into contracts with 4,404 Associated Centers,
including 3,389 in the United States, and 1,015 in 40 countries outside the
United States. The Company is not engaged in the practice of dentistry. Each
licensed dentist who operates a Center or Associated Center maintains full
control over dental matters, including the supervision of dental auxiliaries and
the administration of the teeth whitening procedure.
The Company developed its current teeth whitening technology (the "BriteSmile
Light Activated Teeth Whitening System," "BS2000," or "LATW") and began
distribution in 1999. In November 1999 the Company introduced its new BriteSmile
3000 LATW keycard system (the "BS3000") to Associated Centers. The BS3000, a
mobile version of the BS2000, can be installed quickly and provides improved
flexibility and mobility in dental offices. In May 2001, the Company introduced
its more versatile mobile device, the BS3000PB, which is the device currently
shipped to Associated Centers. The BS2000, BS3000, and BS3000PB teeth whitening
devices utilize a light technology. The unique delivery arm that permits blue
green light to reach all 16 front teeth simultaneously, whitening the teeth by
activating BriteSmile's wavelength-specific gel during three consecutive
twenty-minute sessions.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," established standards for reporting
information about operating segments in financial statements. Operating segments
are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief decision
maker, or chief decision making group, in deciding how to allocate resources and
in assessing performance. Our CEO is our chief decision maker. Our business is
focused on one industry segment, products and procedures to whiten teeth. All of
our revenues and profits are generated through the sale, licensing, and service
of products for this one segment.
2. Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions in
Form 10-Q and Article 10 of Regulations S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States 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. Operating
results for the 13 and 26 weeks ended June 29, 2002 are not necessarily
indicative of the results that may be expected for the remainder of the fiscal
year ending December 28, 2002.
7
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 29, 2002
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
52 weeks ended December 29, 2001.
The accompanying consolidated financial statements include the accounts of the
Company, its subsidiaries, and entities (Centers) in which the Company has a
controlling interest. The Company consolidates the operating results of the
Centers as the Company has a controlling financial interest in the Centers in
accordance with the criteria of EITF 97-2, "Application of FASB Statement No. 94
and APB Opinion #16 to Physician Practice Management Entities ("PPM") and
Certain Other Entities with Contractual Management Arrangements." The agreements
with the Centers are 30 year, non-terminable agreements, that provide the
Company a financial interest in the PPM and exclusive authority over all
decision making other than the dispensing of medical services.
Revenue Recognition
The Company recognizes revenue related to retail products at the time such
products are shipped to customers.
The Company recognizes revenue from teeth whitening procedures performed at its
Centers when the procedures have been performed.
During the last quarter of the transition period ended December 30, 2000 and
retroactive to April 1, 2000, the Company has changed its method of accounting
to recognize revenue from Associated Centers, and does so ratably over the
estimated period in which the Associated Centers perform the procedures,
commencing when the key card is shipped or the access code provided. Previously,
the Company recognized revenues from Associated Centers when the keycard or
access code to activate the whitening device was shipped. Revenue is reported
net of discounts and allowances. As of June 29, 2002, the Company recorded
deferred revenue totaling $1.8 million, which will be recognized as revenue in
the third quarter of 2002. At December 29, 2001, the deferred revenue balance
was $763,000 and was recognized in the first quarter ended March 30, 2002. At
March 30, 2002, the deferred revenue balance was $1,300,000 and was recognized
in the quarter ended June 29, 2002.
3. Loss Per Common Share
The Company computes loss per common share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." In accordance with
FAS 128, basic net loss per share is calculated as net loss divided by the
weighted-average number of common shares outstanding, less shares subject to
repurchase. Diluted net loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding and dilutive common stock
equivalents outstanding during the period. Common equivalent shares from stock
options and warrants (using the treasury stock method) and convertible notes
payable have been excluded from the calculation of net loss per share as their
effect is anti-dilutive.
4. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist primarily of dental supplies, retail products and component
parts for the repair of teeth whitening systems.
5. Reclassifications
Certain reclassifications have been made in the prior period's condensed
consolidated financial statements to conform with the current period
presentation.
8
6. Revisions to Previously Issued Financial Statements
The Company provides the use of whitening equipment (the teeth whitening system)
and sells key card and supplies (procedure kits and retail products) to
Associated Centers to enable the Associated Center to perform the whitening
procedures for its customers. Prior to December 29, 2001, the Company recognized
revenue related to the sale of the procedure kits upon shipment of the key cards
and whitening supplies. Following discussion with the staff of the Securities
and Exchange Commission regarding application of Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements," the Company revised its
revenue recognition policy related to these agreements to defer revenues, and to
amortize these revenues into operations over the estimated period in which the
procedures are performed by the Associated Centers, which is generally 30 days.
As a result of this change in accounting policy, the Company has restated its
quarterly financials for 2001. The following is the restatement for the
comparative quarter ended June 30, 2001:
As previously
reported As restated
Consolidated Statement of Operations Data:
Total Associated Centers revenue...............................$ 6,932 $ 6,458
Total revenues.................................................$ 12,337 $ 11,570
Net loss.......................................................$ 4,374 $ 5,473
Net loss per share, basic and diluted..........................$ (0.13) $ (0.16)
7. Financing Arrangements
Following is a summary of the Company's long and short term debt financing
arrangements (in thousands):
June 29, December 29,
2002 2001
Note Payable to EVL, a related party,
due May 10, 2006 $ 1,855 $ 2,083
5% Subordinated Convertible Notes due and
payable on June 29, 2005 (including discount
of $61 and $71) 739 729
Line of credit 729 -
------------------- -------------------
------------------- -------------------
$ 3,323 $ 2,812
=================== ===================
8. Store Closure Reserve
During the 39 weeks ended December 30, 2000, the Company's Board of Directors
and management decided to close three of its less productive wholly-owned
Centers. These Centers were located in Pasadena, California; Ft. Lauderdale,
Florida, and Coral Gables, Florida. During the 52 weeks ended December 29, 2001,
the Company's Board of Directors and management decided not to continue the
construction of a Center in San Francisco, California. The Company recorded a
store closure accrual to reserve for an estimated $934,000 related to the
remaining lease obligation. As a result of the closures, at December 29, 2001,
the Company had a store closure reserve accrual of $1.3 million related to lease
termination costs including the present value of future lease payments, net of
estimated sublease income. We recorded charges of $219,000 and $112,000 during
the quarter ended March 30, 2002 and the current quarter respectively, which
primarily related to the difference between our current rent obligations and the
rate at which we expect to be able to sublease the properties. As of July 2002,
all four of the spaces have been subleased.
The following table sets forth the store closure reserve activity during the
twenty-six weeks ended June 29, 2002, (in thousands):
Balance at December 29, 2001 $1,210
Payments/Deductions ($331)
Balance at June 29, 2002 $879
9
9. Impact of Recently Issued Accounting Standards and Accounting Bulletins
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 eliminates the pooling of interests method of accounting
for business combinations, except for qualifying business combinations that were
initiated prior to July 1, 2001. Under SFAS No. 142, goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed annually, or
more frequently if impairment indicators arise, for impairment. The Company
adopted SFAS Nos. 141 and 142 on December 30, 2001. The adoption of SFAS Nos.
141 and 142 did not have a material impact on its consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of the fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for the Company for fiscal 2003. The
Company believes that the adoption of SFAS No. 143 will not have a material
impact on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and provides a single accounting model for long-lived assets to be disposed
of. The Company adopted SFAS No. 144 on December 30, 2001. The adoption of SFAS
No. 144 did not have a material impact on the Company's consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Diposal Activities," which addresses accounting for restructuring
and similar costs. SFAS 146 supersedes previous accounting guidance, principally
Emerging Issues Task Force Issue No. 94-3. The Company will adopt the provisions
of SFAS 146 for restructuring activities after December 31, 2002. SFAS 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost was recognized at the date of the Company's
commitment to an exit plan. SFAS 146 also establishes that the liability should
initially be measured and recorded at fair value. Accordingly, SFAS 146 may
affect the timing of recognizing future restructuring costs as well as the
amounts recognized.
10. Subsequent Event
On July 19, 2002, the Company amended its Credit and Security Agreement with CAP
Advisers which provided for a $2.5 million line of credit facility to a
subsidiary of the Company. The maximum line of credit available was increased to
$5.0 million. Advances under the line of credit may be used for general business
purposes, including the purchase of whitening devices.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking Statements and Risk Factors
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements may be deemed to include
information that is not historical. The statements contained in this Report that
are not purely historical are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act. These statements relate to the Company's expectations,
hopes, beliefs, anticipations, commitments, intentions and strategies regarding
the future. They may be identified by the use of words or phrases such as
"believes," "expects," "anticipates," "should," "plans," "estimates," and
"potential," among others. Forward-looking statements include, but are not
limited to, statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations regarding the Company's financial
performance, revenue and expense levels in the future, and the sufficiency of
its existing assets to fund future operations and capital spending needs. Actual
results could differ materially from the anticipated results or other
expectations expressed in such forward-looking statements. The Company believes
that many of the risks set forth here and in the Company's 10-K Annual Reports
filed with the SEC are part of doing business in the industry in which the
Company operates, and will likely be present in all periods reported. The
forward-looking statements contained in this Report are made as of the date of
this Report and the Company assumes no obligation to update them or to update
the reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations of the Company include:
o Government regulation of the Company's products and teeth
whitening procedures, including: (i) current restrictions or
controls on the practice of dentistry by general business
corporations, and (ii) future, unknown enactments or
interpretations of current regulations which could, in the
future, affect the Company's operational structure and
relationships with licensed dentists.
o Failure of the Company to generate, sustain or manage growth,
including failure to develop new products and expand Center and
Associated Center locations and revenues;
o The loss of product market share to competitors and/or
development of new or superior technologies by competitors;
o Ongoing operating losses associated with the development,
marketing and implementation of new, light-activated teeth
whitening technologies;
o Failure of the Company to secure additional financing to complete
its plan for the rollout of a broad base of Associated Centers;
o Unproven market for the Company's new whitening products,
whitening process, and "Whitening Center" and "Associated Center"
concepts, in light of competition from traditional take-home
whitening products and bleaching tray methods;
o Failure to develop marketing strategies and delivery methods to
penetrate non-U.S. markets; and
o Lack of product diversity.
Critical Accounting Policies And Estimates
General
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
11
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to customer programs
and incentives, bad debts, inventories, income taxes, warranty obligations,
financing operations, restructuring, and contingencies and litigation. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its condensed
consolidated financial statements.
Revenue Recognition
BriteSmile recognizes revenue related to retail products at the time such
products are shipped to customers.
BriteSmile recognizes revenue at Centers at the time a whitening procedure is
performed.
BriteSmile records deferred revenue at the time of sale of key cards and access
codes to Associated Centers. Deferred revenue is recorded for the full value of
the key cards and access codes at the time of sale only if BriteSmile is
contractually entitled to invoice the Associated Center for the full value of
the sale and the Associated Center is obligated to pay such invoice, thereby
creating a corresponding account receivable. Deferred revenue is subsequently
recognized as revenue over the estimated period that the whitening procedures,
which can be performed via the key cards and access codes are expected to be
used, currently 30 days from the date of shipment. A material change to the
estimated time period over which the key cards and access codes are used could
have a significant impact on BriteSmile's revenue in the period of change as
well as future periods.
BriteSmile's policy is not to accept any return of key cards or access codes
during the course of the agreement with an Associated Center; however, it does
provide credits to the ultimate whitening customer for a "whitening guarantee."
BriteSmile recognizes those credits by reducing its revenue.
Bad Debt
BriteSmile maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. A
considerable amount of judgment is required in assessing the ultimate
realization of accounts receivable including the current credit-worthiness of
each customer. If the financial condition of BriteSmile's customers (dentists
who operate Associated Centers) were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
Inventory
BriteSmile is required to state its inventories at the lower of cost or market.
BriteSmile writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions, as well as for damaged goods. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
Property, Equipment and Improvements - Carrying Value Near Recoverability
Estimate
BriteSmile evaluates its property, equipment and improvements for impairment
whenever indicators of impairment exist. Management determined that impairment
indicators did exist in Fiscal 2001 based upon continued operating losses and
negative cash flow. BriteSmile's current estimates of recoverability for its
property, equipment and improvements indicated those assets would not have been
recoverable if management's estimates of future cash flows had been 295% lower
than its current estimate. BriteSmile's recoverability estimates are based on
current revenue levels continuing to grow at approximately 20% per annum
compared to an historical growth rate of approximately 114%. BriteSmile has
further assumed that operating costs will increase by approximately 3% per annum
compared to an historical increase of approximately 157%. The Company completed
a major restructuring of its cost structure in the fourth quarter of Fiscal 2001
with plans to reduce operating costs by approximately $14 million per year
compared to Fiscal 2001. Had BriteSmile's recoverability estimates resulted in a
12
determination that these assets were not recoverable, BriteSmile would have
recognized an impairment loss in Fiscal 2001. The Company does not believe
impairment losses will need to be recognized in 2002, although no guarantee of
such can be given.
Store Closures
During Fiscal 2001 (fiscal year ended December 29, 2001) and the Transition
Period (nine-month transition period ended December 30, 2000), BriteSmile
recorded significant reserves in connection with store closures. These reserves
included estimates pertaining to the settlements of contractual obligations,
primarily property leases. Although the Company does not anticipate significant
changes, the actual costs related to the closures may differ from these
estimates.
Legal Contingencies
BriteSmile is currently a party to certain legal actions. Management does not
believe that current pending litigation will have a material adverse effect on
BriteSmile's consolidated financial position. This conclusion has been developed
in consultation with outside counsel handling BriteSmile's defenses in the
matters. It is possible, however, that future results of operations for any
particular quarterly or annual period could be materially affected by changes in
management's assumptions and the effectiveness of BriteSmile's strategies
related to these legal actions.
BriteSmile recognizes the costs of legal services in the periods incurred.
Overview
Operating and occupancy costs are composed primarily of three main groups: 1)
the cost of goods for both the Center and Associated Center whitening procedure
kits and retail products; 2) the financing costs for the devices in the
Associated Centers; and 3) the operating and occupancy costs for the Centers.
Selling, general and administrative expenses are composed of expenses associated
with all corporate and administrative functions that support existing operations
and provide an infrastructure to support future growth, including management and
staff salaries, employee benefits, travel, information systems, operating costs
of the Call Center, training, field support, and marketing and advertising.
Expenses of recruiting and training sales, market support, and training staff
are also included in general and administrative expenses.
The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q and in the Company's Annual Report on Form 10-K for the fiscal year
ended December 29, 2001.
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13
The following table sets forth unaudited operating results for the thirteen week
periods and twenty-six week periods ended June 29, 2002 and June 30, 2001, as a
percentage of sales in each of these periods. This data has been derived from
the unaudited financial statements.
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks ended
Weeks ended Weeks ended ended
(as Restated) (as Restated)
(Note 6) (Note 6)
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Income Statement Data:
Revenues:
Center whitening fees, net 32.3% 33.7% 32.5% 38.6%
Associated Center whitening fees, net 56.9% 55.8% 56.4% 51.2%
Product sales 10.8% 10.5% 11.1% 10.2%
Total revenues, net 100.0% 100.0% 100.0% 100.0%
Operating Costs and Expenses:
Operating and occupancy costs 35.6% 37.9% 37.1% 37.0%
Selling, general and administrative expenses 75.1% 96.4% 79.3% 102.4%
Research and development expenses 1.6% 0.2% 1.4% 2.8%
Depreciation and amortization 13.7% 10.1% 14.7% 11.6%
Total operating costs and expenses 126.0% 144.6% 132.5% 153.8%
Loss from operations -26.0% -44.6% -32.5% -53.8%
Interest income (expense), net -0.9% -2.7% -2.3% -2.6%
Loss before income tax provision -26.9% -47.3% -34.8% -56.4%
Provision for income taxes 0.2% 0.0% 0.2% 0.3%
Net Loss -27.1% -47.3% -35.0% -56.7%
============================ ===========================
The following are explanations of significant period-to-period changes for the
13 weeks ended June 29, 2002 and June 30, 2001:
Revenues
Total Revenues. Total revenues decreased by $557,000, or 4.8%, to $11.0 million
for the 13 weeks ended June 29, 2002, from $11.6 million for the 13 weeks ended
June 30, 2001. The decrease in revenues occurred in the Company Centers and
domestic Associated Centers primarily as a result of selling fewer whitening
procedures in the higher yield centers. International whitening procedures and
revenues increased in the 13 weeks ended June 29, 2002 compared to the same
quarter of 2001. Sales in the second quarter of 2001 relating to newly placed
Associated Centers were $2.8 million compared to $0.4 million in the second
quarter of 2002.
As of June 29, 2002, the Company recorded deferred revenue totaling $1.8 million
compared to $2.3 million of deferred revenue as of June 30, 2001. The deferred
revenue balance at June 29, 2002 will be recognized in the third quarter 2002 in
accordance with the Company's policy of recognizing revenue over the period in
14
which the whitening procedures are performed after shipment of key cards or
access codes to Associated Centers. The deferred revenue balance of $1.8 million
at the end of the second quarter increased $400,000 compared to the deferred
revenue of $1.4 million at March 30, 2002 as a result of higher Associated
Center whitening fees in June 2002 compared to March 2002
Center Whitening Fees. Center whitening fees decreased by $351,000, or 9.0%, to
$3.6 million for the 13 weeks ended June 29, 2002, from $3.9 million for the 13
weeks ended June 30, 2001. The number of procedures performed in the Centers
decreased to 8,067 in the second quarter of 2002, compared to 8,735 in the same
quarter of 2001.
Associated Center Whitening Fees. Associated Center whitening fees decreased by
$193,000, or 3.0%, to $6.3 million for the 13 weeks ended June 29, 2002, from
$6.5 million for the 13 weeks ended June 30, 2001. This decrease was due to the
sale of fewer procedures in the 13 weeks ended June 29, 2002 compared to the 13
weeks ended June 30, 2001. The number of procedures sold in the Associated
Centers increased 19.5% to 36,295 procedures in the second quarter of 2002
compared to 30,360 procedures in the same quarter of 2001. Domestic Associated
Center whitening procedures were 27,970 in the 13 weeks ended June 29, 2002
compared to 28,905 in the same quarter of 2001. International Associated Center
whitening procedures were 8,325 in the 13 weeks ended June 29, 2002 compared to
1,455 in the same quarter of 2001. Sales in the second quarter of 2001 relating
to newly placed Associated Centers were $2.8 million compared to $0.4 million in
the second quarter of 2002.
The Company continues to execute its strategic plan of expanding distribution
into the professional dental practice channel through its Associated Centers.
The Company also anticipates adding additional Associated Centers in domestic
and international locations over the next twelve months, resulting in increased
Associated Center whitening fees. There can be no guarantee that the Company
will be successful in executing its business plan.
Product Sales. Product sales slightly decreased by $13,000 or 1.1% to $1.19
million for the 13 weeks ended June 29, 2002, from $1.2 million for the 13 weeks
ended June 30, 2001. Product sales represent the Company's toothpaste,
mouthwash, whitening gum, and the Sonicare toothbrush products sold at Centers
and Associated Centers. There can be no assurance that the Company will be
successful selling more retail products in the future.
Operating Costs and Expenses
Operating and Occupancy Costs. Operating and occupancy costs was $3.9 million or
35.6% as a percentage of revenues for the thirteen weeks ended June 29, 2002,
compared to $4.4 million or 37.9% as a percentage of revenues in the thirteen
weeks ended June 30, 2001. This decrease was primarily due to a 1.82% decrease
in cost of goods sold as a percentage of sales due to the reduction of various
individual component unit costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased significantly to $8.3 million or 75.1% as a
percentage of revenue for the second quarter of 2002 compared to $11.2 million
or 96.4% as a percentage of revenue in the corresponding period in 2001. The
$2.9 million decrease was in line with the expense restructuring instituted in
late fiscal 2001 as discussed in further detail in the Liquidity and Capital
Resources section. The Company expects that savings as a result of the new
infrastructure will continue to be achieved throughout fiscal 2002, although no
guarantee of such can be given.
Research and Development Expenses. Research and development expenses of $181,000
was 1.6% as a percentage of revenue for the thirteen weeks ended June 29, 2002
compared to $19,000 or 0.2% as a percentage of revenue in the corresponding
period in 2001. The expense incurred in the first quarter of 2002 was primarily
related to research studies to expand the Company's leadership position in the
teeth-whitening industry.
Depreciation and Amortization. Depreciation and amortization increased to $1.5
million or 13.7% as a percentage of revenue for the second quarter of 2002
compared to $1.2 million or 10.1% as a percentage of revenue in the
corresponding period in 2001. The increase of $341,000 in depreciation and
amortization expense to $1.5 million for the second quarter of 2002 is the
result of a greater number of BS3000 and BS3000PB devices in operation as a
result of the increase in the number of active Associated Centers.
Interest Expense, net. Interest expense, net decreased to $103,000 or 0.9% as a
percentage of revenue for the second quarter of 2002 compared to interest
expense, net of $315,000 or 2.7% as a percentage of revenue in the corresponding
quarter of 2001. The higher interest expense in the second quarter of 2001
primarily was due to the acceleration of interest expense for the December 2000
15
Note in the amount of $253,000, along with other debt incurred by the Company
and the amortization of the fair market value of the warrants issued with that
debt.
Net Loss. The net loss decreased $2.5 million to $3.0 million for the second
quarter of 2002 compared to a net loss of $5.5 million in the corresponding
quarter of 2001. This represents a 45.4% improvement due to a combination of the
factors described above. The net loss per share for the second quarter of 2002
was ($0.08) versus ($0.16) reported for the second quarter of 2001.
The following are explanations of significant period-to-period changes for the
26 weeks ended June 29, 2002 and June 30, 2001:
Revenues
Total Revenues. Total revenues decreased by $140,000, or 0.7%, to $20.4 million
for the 26 weeks ended June 29, 2002, from $20.5 million for the 26 weeks ended
June 30, 2001. As of June 29, 2002, the Company recorded deferred revenue
totaling $1.8 million compared to $2.3 million of deferred revenue as of June
30, 2001.
Center Whitening Fees. Center whitening fees decreased by $1.3 million, or
16.3%, to $6.6 million for the 26 weeks ended June 29, 2002, from $7.9 million
for the 26 weeks ended June 30, 2001. $265,000 of this decrease was primarily
due to the closure of three underperforming Centers that were open for a portion
of the first quarter of 2001 and the remainder of the decrease was in the
existing 14 Centers. The number of procedures performed in the Centers decreased
to 14,917 for the 26 weeks ended June 29, 2002, compared to 17,889 for the same
period of 2001.
Associated Center Whitening Fees. Associated Center whitening fees increased by
$982,000, or 9.4%, to $11.5 million for the 26 weeks ended June 29, 2002, from
$10.5 million for the 26 weeks ended June 30, 2001. This increase was due to the
operation of 4,404 Associated Centers at the end of the 26 weeks ended June 29,
2002 compared to 2,206 Associated Centers that were in operation at the end of
the 26 weeks ended June 30, 2001. The number of procedures sold in the
Associated Centers increased 31.8% to 68,320 procedures in the 26 weeks ended
June 29, 2002 compared to 51,820 procedures in the same period of 2001. Domestic
Associated Center whitening procedures were 54,665 in the 26 weeks ended June
29, 2002 compared to 49,560 in the same period of 2001. International Associated
Center whitening procedures were 13,655 in the 26 weeks ended June 29, 2002
compared to 2,260 in the same period of 2001.
Although the Company does not believe that its business follows seasonal trends,
it has recognized that at various times during the months of July and August and
again during December and January, a substantial number of Associated Centers
(both domestic and international) shut down their practices for vacation. As a
result, the frequency of key card and access code purchases by Associated
Centers during these months declines as well.
The Company continues to execute its strategic plan of expanding distribution
into the professional dental practice channel through its Associated Centers.
The Company also anticipates opening additional Associated Centers in domestic
and international locations over the next twelve months, resulting in increased
Associated Center whitening fees. There can be no guarantee that the Company
will be successful in executing its business plan.
Product Sales. Product sales increased by $169,000 to $2.3 million for the 26
weeks ended June 29, 2002, from $2.1 million for the 26 weeks ended June 30,
2001. Product sales represent the Company's toothpaste, mouthwash, whitening
gum, and the Sonicare toothbrush products sold at Centers and Associated
Centers. However, there can be no assurance that the Company will be successful
in selling more retail products in the future.
Operating Costs and Expenses
Operating and Occupancy Costs. Operating and occupancy costs was $7.54 million
or 37.1% as a percentage of revenues for the twenty-six weeks ended June 29,
2002, compared to $7.58 million or 37.0% as a percentage of revenue in the
twenty-six weeks ended June 30, 2001. The consistent cost percentage is due to
the consistency of the operating costs which includes costs of goods sold and
lease financing costs for both the Centers and Associated Centers and the
operating and occupancy costs for the Centers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased significantly to $16.1 million or 79.3% as a
percentage of sales for the twenty-six weeks ended June 29, 2002 compared to
16
$21.0 million or 102.4% as a percentage of revenue in the corresponding period
in 2001. The $4.9 million decrease was in line with the expense restructuring
instituted in late fiscal 2001 as discussed in further detail in the Liquidity
and Capital Resources section. The Company expects that savings as a result of
the new infrastructure will continue to be achieved throughout fiscal 2002,
although no guarantee of such can be given.
Research and Development Expenses. Research and development expenses of $292,000
was 1.4% as a percentage of sales for the twenty-six weeks ended June 29, 2002
compared to $567,000 or 2.8% as a percentage of revenue in the corresponding
period in 2001. This reduction in expenses is primarily due to the fact the
Company continues to incur costs for research studies to expand its leadership
position in the teeth-whitening industry, but the number of studies has
decreased versus the same period in 2001.
Depreciation and Amortization. Depreciation and amortization increased to $3.0
million or 14.7% as a percentage of revenue for the twenty-six weeks ended June
29, 2002 compared to $2.4 million or 11.6% as a percentage of revenue in the
corresponding period in 2001. The increase of $611,000 in depreciation and
amortization expense to $3.0 million for the twenty-six weeks ended June 29,
2002 is the result of a greater number of BS3000 and BS3000PB devices in
operation as a result of the increase in the number of active Associated
Centers.
Interest Expense,net. Interest expense, net decreased to $470,000 or 2.3% as a
percentage of revenue for the twenty-six weeks ended June 29, 2002 compared to
interest expense, net of $530,000 or 2.6% as a percentage of revenue in the
corresponding period of 2001.
Net Loss. The net loss decreased $4.5 million to $7.1 million for the twenty-six
weeks ended June 29,2002 compared to a net loss of $11.6 million in the
corresponding period of 2001. This represents a 38.7% improvement due to a
combination of the factors described above. The net loss per share for the
twenty-six weeks ended June 29, 2002 was ($0.20) versus ($0.37) reported for the
same period of 2001.
Liquidity and Capital Resources
The Company's principal sources of liquidity have been issuances of convertible
debt, common stock and common stock equivalents. At June 29, 2002, the Company
had $1.8 million of cash and cash equivalents. The Company expects to sign
contracts for additional Associated Centers during the next twelve months. This
expansion is contingent upon several factors, including available cash resources
and acceptance by consumers and Associated Center dentists of the Company's LATW
products. The Company expects that its principal uses of cash will be to provide
working capital, to finance capital expenditures, and to satisfy other general
corporate expenses. In particular, the Company plans to use its cash to finance
its marketing strategy.
During the first quarter of 2002, the Company obtained a $2.5 million line of
credit from CAP Advisers, and $4 million in shortfall guarantees. See "CAP
Advisers Line of Credit," and "Additional Working Capital Guarantees" below. In
July 2002, this line of credit from CAP Advisers was amended and increased to
$5.0 million The Company also amended its EVL Lease Agreement to defer payment
of monthly rental on LATW devices to year 2003. See "EVL Lease Line Amendment"
below.
Post September 11 Expense Reductions. During the weeks following the September
11, 2001 terrorist attacks, the Company saw an immediate drop in revenue. The
New York area Associated Centers, and the Company's own Center in New York, were
affected most severely. The Company assessed the operating variables that could
be controlled and immediately responded to the decline in sales. Management has
and is implementing several cost saving initiatives totaling approximately $14
million over Fiscal 2002. Through the first six months of Fiscal 2002, the
Company has hit its cost targets and expects to do the same throughout Fiscal
2002 to achieve the $14 million cost reduction goal. The Company expects to
achieve these cost savings in the areas of Center operations, procedure kit
production, various selling, general and administrative costs including legal
and consulting fees, and leveraging its marketing spending more effectively by
utilizing smaller media specific agencies, thereby reducing agency fees. As a
result, management expects selling, general and administrative expenses to be
leveraged more efficiently as sales from Centers and Associated Centers increase
in the future. Depending upon the operating results, the Company may increase
its advertising spending.
CAP Advisers Line of Credit. In December 2001, as amended in March 2002,
BriteSmile International, a wholly-owned subsidiary of the Company, entered into
Credit and Security Agreements with CAP Advisers which provide for a $2.5
17
million line of credit facility to a subsidiary of the Company. In July 2002
this line of credit was increased to $5.0 million.
EVL Lease Amendment. The Company pays EVL a monthly rental for each LATW device
leased, consisting of a fixed amount, plus a "variable rent" payment in the
amount of $125 for each key card or access code sold to an Associated Center
where EVL is the lessor of the LATW device. Of the 4,404 LATW devices in
operation at Associated Centers at June 29, 2002, 3,000 of such devices were
leased to the Company by EVL. Each key card or access code enables Associated
Center dentists to perform 5 teeth whitening procedures (i.e. variable rent of
$25 per procedure).
On March 8, 2002, the Company and EVL amended their lease agreement to provide
that the variable rent portion of the monthly rental payments during 2002, in
the amount of $25 for each BriteSmile procedure, will be deferred and paid to
EVL in twelve equal monthly installments beginning January 9, 2003, with
interest payable on the deferred amount at a rate equal to LIBOR, as quoted by
The Bank of Nova Scotia for the applicable adjustment dates for deposits in U.S.
Dollars for one month maturities, plus 200 basis points. As of June 29, 2002,
the deferred amount for the second quarter of 2002 was $599,500; $1,192,125 has
been deferred for the twenty-six weeks ended June 29, 2002. The deferred amount
is included in the accrued expenses balance as of June 29, 2002.
Additional Working Capital Guarantees. In March 2002 the Company received
Commitment Letters from certain guarantors (the "Guarantors") to severally
purchase, on or before December 31, 2002, up to $4 million of additional shares
of common stock of the Company (or to otherwise secure, collateralize, or make
available such funds to the Company). The aggregate purchase amount committed by
the Guarantors equals the difference between $4 million, and the "Excess Cash
Receipts" to be realized by the Company in 2002. "Excess Cash Receipts," for
this purpose, is defined to mean cash received by the Company through sales of
the Company's debt or equity securities, additional borrowings, or cash receipts
in excess of projections at December 29, 2001. In consideration for the
Guarantors' Commitment Letters, the Company issued to the Guarantors five-year
warrants to purchase an aggregate of 80,000 shares of common stock of the
Company at an exercise price of $5.00 per share.
There can be no assurance that additional capital will not be required, or that
it will be available on terms that are acceptable to the Company. Additionally,
there can be no assurance that the Company's business will generate cash flows
at or above current levels. Accordingly, the Company may choose to defer capital
expenditure plans or further reduce operating expenditures.
Cash flow used in operations improved by $7.9 million to negative $(4.3) million
for the twenty-six weeks ended 2002 from negative $(12.2) million used in
operating activities during the same period of 2001, primarily due to the
decrease in the net loss recognized and the net effect of timing differences in
the collection and disbursement of working capital components. Between the two
periods, there has been a significant improvement in the average number of days
receivables outstanding.
Net cash provided by financing activities was $744,000 for the twenty-six weeks
ended June 29, 2002, compared to $29.7 million for the same period in 2001. The
$744,000 net cash consisted of: 1) $504,000 of proceeds from the exercise of
stock options, 2) $728,000 cash from net proceeds from the Company's
international line of credit to fund the rollout of devices, and 3) $229,000
principal payment on long-term debt and 4) $259,000 payments on capital lease
obligations.
The $29.7 million of net cash provided by financing activities for the
twenty-six weeks ended June 30, 2001 primarily was due to the private placement
of the Company's common stock in the net amount of $26.6 million completed in
April 2001.
Capital expenditures were $1.8 million for the twenty-six weeks ended June 29,
2002, compared to $3.3 million for the same period in 2001. Starting in June
2001, the Company commenced a rapid expansion of new Associated Centers which
continued through August 2001. The capital expenditures for both periods were
primarily related to the purchase of BS3000PB systems for deployment at new
domestic and international Associated Centers.
Inflation
Most of the Company's products are purchased in finished form and packaged by
the supplier or at the Company's headquarters. The Company anticipates usual
inflationary increases in the price of its products and does not intend to pass
18
these increases along to its customers, primarily as a result of other operating
efficiencies gained through changing the sourcing of certain of its products. In
general, the Company does not believe that inflation has had a material effect
on its results of operations in recent years. However, there can be no assurance
that the Company's business will not be affected by inflation in the future.
Seasonality
Although the Company does not believe that its business follows seasonal trends,
it has recognized that at various times during the months of July and August and
again during December and January, a substantial number of Associated Centers
(both domestic and international) shut down for vacation. As a result, the
frequency of key card purchases by Associated Centers during these months
declines as well. Additionally, the Company's Centers have recognized some
seasonality during the same months because of customer vacations.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 23, 2002, Smile Inc. Asia Pte. Ltd. ("Smile") sued the Company and
BriteSmile Management, Inc., a wholly owned subsidiary of the Company, in the
Third Judicial District Court in Salt Lake City, Utah. The Complaint alleges
that BriteSmile Management breached its 1998 distributor agreement with Smile by
failing to fill orders placed and to perform other obligations under the
agreement. The Complaint also alleges that BriteSmile Management and the Company
fraudulently induced Smile to enter into the distributor agreement, and includes
claims for damages based on alleged unjust enrichment, civil conspiracy, breach
of the duty of good faith and fair dealing, interference with contractual and
economic relations, and fraudulent transfer. The Company believes that the
claims asserted by Smile are entirely without merit and will vigorously defend
the lawsuit. The Company has commenced discovery with regard to Smile's claims.
The Company filed a complaint against Discus Dental, Inc. in the United States
District Court for the Northern District of California on July 8, 2002. The
complaint, civil action number C02-3220JF, alleges infringement of the Company's
United States Patents No. 6,343,933, issued February 5, 2002, and No. 6,361,320,
issued March 26, 2002. The complaint alleges that Discus Dental, Inc.'s sale of
infringing products sold to dental professionals under the Zoom! trademark
infringes both patents under 35 USC ss. 271, seeks injunctive relief, damages
under 35 USC ss. 284, and costs and attorneys' fees. As of August 1, 2002,
Discus Dental, Inc. had not filed an answer to the complaint.
On May 31, 2002, the Company filed a complaint against Discus Dental, Inc. in
Contra Costa County Superior Court, California, case no. C02-01611, alleging
causes of action for Intentional Interference with Contractual Relationship,
Negligent Interference with Contractual Relationship, Violation of Unfair
Business Practice Act - Loss Leader, Violation of Unfair Business Practice Act,
Trade Libel and Injunctive Relief. The complaint alleges that Discus Dental and
other defendants yet to be identified wrongfully interfered with the Company's
contractual relationships with its Associated Center dentists, in part by
writing letters with the purpose of inducing the Company's Associated Dentists
to terminate their contracts with BriteSmile and switch to Discus' Zoom! system,
and by making false and disparaging statements concerning BriteSmile's system.
The Complaint seeks damages for loss of business, punitive damages, injunctive
relief, and costs of suit. On June 27, 2002, Discus filed a demurrer to
BriteSmile's complaint, challenging the legal sufficiency of the complaint. On
June 30, 2002, the court ruled that BriteSmile will be able to pursue its claims
as alleged in the complaint except for the second cause of action alleging
Negligent Interference with Contractual Relationship.
ITEM 2. CHANGES IN SECURITIES
During the period December 30, 2001 to June 29, 2002, the Company granted to key
employees under its 1997 Stock Option and Incentive Plan non-qualified options
to purchase an aggregate of 1,724,684 shares of the Company's common stock, at
exercise prices ranging from $3.30 to $9.69 per share. The options vest over a
period of time following their respective dates of grant. The Company claimed
exemption from registration under the Securities Act of 1933 for these grants in
that the Company believes such grants were not "sales" within the meaning of the
Act. Shares issuable upon exercise of the options have been or will be
registered with the SEC pursuant to Registration Statements on Form S-8.
ITEM 4. CHANGE IN REGISTRANTS' CERTIFYING ACCOUNTANT
On June 26, 2002, the Company filed with the Securities and Exchange Commission
a Current Report on Form 8-K to report a change in the Company's certifying
accountant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10(a) Supplemental Agreement dated July 19, 2002 to Credit and Security
Agreement dated December 13, 2001 and to Unsecured Credit Agreement
dated March 8, 2002 (filed herewith).
10(b) Employment agreement effective June 17, 2002 between the Company and
Bruce Fleming (filed herewith).
20
99(a) Certification of Peter P. Hausback, CFO, pursuant to Section 906 Of
The Sarbanes-Oxley Act Of 2002 (filed herewith).
99(b) Certification of John L. Reed, CEO, pursuant to Section 906 Of The
Sarbanes-Oxley Act Of 2002 (filed herewith).
(B) REPORTS ON FORM 8-K
On June 26, 2002, the Company filed with the Securities and Exchange Commission
a Current Report on Form 8-K to report a change in the Company's certifying
accountant..
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21
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.
BRITESMILE, INC.
/s/ John L. Reed August 9, 2002
John L. Reed Date
Chief Executive Officer
/s/ Peter P. Hausback August 9, 2002
Peter P. Hausback Date
Chief Financial Officer