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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: September 28, 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 October 8,
2002.
BRITESMILE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 28, 2002 and
December 29, 2001....................................................3
Condensed Consolidated Statements of Operations for the 13 and
39 weeks ended September 28, 2002 and September 29, 2001.............5
Condensed Consolidated Statements of Cash Flows for the 39 weeks
ended September 28, 2002 and September 29, 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
Item 4. Controls and Procedures.............................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................20
Item 2. Changes in Securities...............................................20
Item 4. Submission of Matters to a Vote of Security Holders.................21
Item 5. Other Information...................................................21
Item 6. Exhibits and Reports on Form 8-K....................................22
Signatures....................................................................23
Certifications................................................................24
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
($ in thousands, except share data)
(Unaudited)
September 28, December 29,
2002 2001
--------------- ---------------
(Note 1)
CURRENT ASSETS:
Cash and cash equivalents $ 103 $ 7,162
Cash, restricted as to use (note 11) 843 843
Trade accounts receivable, net of allowance
for doubtful accounts of $459 and $615,
respectively 2,244 4,311
Inventories 2,735 2,540
Prepaid expenses and other 801 423
Notes receivable-current portion 140 335
--------------- ---------------
Total current assets 6,866 15,614
--------------- ---------------
PROPERTY AND EQUIPMENT, net 20,814 22,514
OTHER ASSETS 2,144 1,719
--------------- ---------------
TOTAL ASSETS $ 29,824 $ 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)
September 28, December 29,
2002 2001
------------------ ----------------
(Note 1)
CURRENT LIABILITIES:
Accounts payable $ 4,624 $ 5,512
Accrued expenses 2,267 4,959
Deferred revenue 1,185 763
Note payable to related party, net of discount 500 500
Accrual for store closures 415 310
Line of credit 3,218 -
Capital lease obligation with related party-current portion 641 641
------------------ ----------------
Total current liabilities 12,850 12,685
------------------ ----------------
Note payable to related party, less current portion 1,152 1,583
Subordinated convertible debenture, net of discount 744 729
Capital lease obligations with related party, less current portion 2,117 2,537
Accrual for store closures 569 900
Other long-term liabilities 2,537 857
------------------ ----------------
Total long-term liabilities 7,119 6,606
------------------ ----------------
Total liabilities 19,969 19,291
------------------ ----------------
COMMITMENTS AND CONTINGENCIES
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 138,118 137,097
Accumulated deficit (128,299) (116,577)
------------------ ----------------
Total shareholders' equity 9,855 20,556
------------------ ----------------
Total liabilities and shareholders' equity $ 29,824 $ 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 and Per Share data)
Unaudited
13 Weeks 13 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
----------------- ----------------- ----------------- -----------------
(as Restated) (as Restated)
----------------- ----------------- ----------------- -----------------
REVENUES:
Center whitening fees, net $ 3,209 $ 3,182 $ 9,827 $ 11,385
Associated Center whitening fees, net 5,818 8,668 17,283 18,859
Product sales 919 1,509 3,182 3,602
----------------- ----------------- ----------------- -----------------
Total revenues, net 9,946 13,359 30,292 33,846
----------------- ----------------- ----------------- -----------------
OPERATING COSTS AND EXPENSES:
Operating and occupancy costs 3,675 4,376 11,217 11,956
Selling, general and administrative
expenses 8,703 11,675 24,837 32,664
Research and development expenses 425 334 717 901
Depreciation and amortization 1,580 1,059 4,571 3,439
----------------- ----------------- ----------------- -----------------
Total operating costs and expenses 14,383 17,444 41,342 48,960
----------------- ----------------- ----------------- -----------------
Loss from operations (4,437) (4,085) (11,050) (15,114)
----------------- ----------------- ----------------- -----------------
OTHER INCOME (EXPENSE), net:
Interest expense (162) (186) (667) (823)
Interest income 14 139 49 245
----------------- ----------------- ----------------- -----------------
Total other income (expense), net (148) (47) (618) (578)
----------------- ----------------- ----------------- -----------------
Loss before income tax provision (4,585) (4,132) (11,668) (15,692)
INCOME TAX PROVISION 18 - 54 57
----------------- ---------------- ----------------- -----------------
Net loss $ (4,603) $ (4,132) $ (11,722) $ (15,749)
================= ================= ================= =================
BASIC AND DILUTED NET LOSS PER SHARE
$ (0.13) $ (0.12) $ (0.32) $ (0.48)
================= ================= ================= =================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED
36,426,961 35,873,103 36,405,917 32,663,705
================= ================= ================= =================
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)
39 Weeks Ended
39 Weeks Ended September 29,
September 28, 2001
2002 (as Restated)
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,722) $ (15,749)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,571 3,439
Store closure accrual (226) (340)
Cost for issuance of stock warrants and stock options 628 72
Changes in assets and liabilities 303 (5,136)
----------------- -----------------
Net cash used in operating activities (6,446) (17,714)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,809) (7,518)
Patents and other (675) -
----------------- -----------------
Net cash used in investing activities (3,484) (7,518)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit 3,218 -
Proceeds from debt financing - 2,500
Proceeds from common stock offering - 26,622
Principal payments on long-term debt (431) -
Payments on capital lease obligations (420) (213)
Proceeds from exercise of stock options 504 4,631
----------------- -----------------
Net cash provided by financing activities 2,871 33,540
----------------- -----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,059) 8,308
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 7,162 5,701
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ $ 14,009
103
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON CASH INFORMATION:
Cash paid for interest $ 58 $ 142
================= =================
Cash paid for income taxes $ 72 $ 57
================= =================
================= =================
Equipment acquired under capital lease $ - $ 2,419
================= =================
================= =================
Options granted for consulting services $ - $ 325
================= =================
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)
September 28, 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 September 28, 2002,
the Company had 14 Centers and there were 4,441 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 4,441 Associated Centers,
including 3,306 in the United States, and 1,135 in 40 countries outside the
United States. However, 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. The LATW treatment consists of a gentle hydrogen-peroxide
whitening gel activated by a special, patented light operating in the "blue
spectrum." The unique delivery arm of the LATW device permits the blue light to
reach all 16 front teeth simultaneously. The patented BriteSmile light is not
UV, heat or laser-activated. It is a blue light that is wavelength-matched to
BriteSmile's whitening gel to effectively whiten and brighten teeth in a
treatment lasting about 1 hour. In November 1999 the Company introduced its
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. It is activated to perform
a whitening treatment by "swiping" a key card which can be purchased only from
the Company. Each key card will activate the BS3000 for a specified number of
whitening treatments (currently 5 treatments). In May 2001, the Company
introduced its more versatile mobile device, the BS3000PB, which is the device
currently shipped to Associated Centers. The BS3000PB is activated by entering
an "access code" (a series of numbers) which can be purchased only from the
Company. Each access code presently authorizes 5 whitening procedures. The
BS2000, BS3000, and BS3000PB teeth whitening devices all utilize the Company's
patented blue light.
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
provision of services relating to 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 of America 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 of America 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 39 weeks ended September 28,
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)
September 28, 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 inasmuch 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 dental services.
Revenue Recognition
BriteSmile recognizes revenue related to retail products at the time such
products are shipped to customers. The difference between recognizing retail
product revenue at time of shipment to customer versus receipt of shipment by
the customer is not material.
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 is provided.
Previously, the Company recognized revenues from Associated Centers when the
keycard or access code to activate the whitening device was delivered. Revenue
is reported net of discounts and allowances. As of September 28, 2002, the
Company recorded deferred revenue totaling $1.2 million, which will be
recognized as revenue in the fourth 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.
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 there
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 LATW system) and sells
(i) key card and access codes which activate the LATW devices prior to each
whitening procedure and (ii) supplies (procedure kits and retail products) to
Associated Centers to enable the Associated Centers to perform the whitening
procedures for their customers. Prior to December 29, 2001, the Company
recognized revenue related to the sale of the procedure kits upon shipment of
key cards or access codes and whitening supplies. Following discussions 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 the sale of key cards
and access codes to Associated Centers 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 33 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 13 and
39 weeks ended September 29, 2001:
13 weeks Ended
September 29, 2001
As previously
reported As restated
Consolidated Statement of Operations Data:
Total Associated Centers revenue....................$...8,010 $ 8,668
Total revenues......................................$..12,701 $ 13,359
Net loss............................................$...4,790 $ 4,132
Net loss per share, basic and diluted...............$...(0.13) $ (0.12)
39 weeks Ended
September 29, 2001
As previously
reported As restated
Consolidated Statement of Operations Data:
Total Associated Centers revenue....................$..19,755 $ 18,859
Total revenues......................................$..34,742 $ 33,846
Net loss............................................$..14,057 $ 15,748
Net loss per share, basic and diluted...............$...(0.43) $ (0.49)
7. Financing Arrangements
Following is a summary of the Company's long and short-term debt financing
arrangements (in thousands):
September 28, December 29,
2002 2001
---- ----
Note Payable to EVL, a related party,
due May 10, 2006 $ 1,652 $ 2,083
5% Subordinated Convertible Notes due and
payable on June 29, 2005 (including
discount of $56 and $71) 744 729
Line of credit 3,218 -
-------------- ------------
$ 5,614 $ 2,812
================ ============
On July 19, 2002, BriteSmile International amended its Credit and Security
Agreement with CAP Advisers, which provided for a $2.5 million line of credit
facility to BriteSmile International, a subsidiary of the Company. The maximum
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.
9
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).
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 $1.2 million related to lease
termination costs including, the present value of future lease payments, net of
estimated sublease income. BriteSmile recorded charges of $219,000 and $112,000
during the quarters ended March 30, 2002 and June 29, 2002 which primarily
related to the difference between the Company's current rent obligations and the
rate at which the Company expects to be able to sublease the properties. During
the current quarter, the reserve increased ($105,000) due to a reclassification
of deferred rent to the Store Closure Account. As of September 2002, all four of
the spaces have been subleased.
The following table sets forth the store closure reserve activity during the
thirty-nine weeks ended September 28, 2002, (in thousands):
Balance at December 29, 2001 $ 1,210
Cash Payments (387)
Reclassification 161
Balance at September 28, 2002 $ 984
9. Impact of Recently Issued Accounting Standards and Accounting Bulletins
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets." 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 No 142 on December 30, 2001. The adoption of SFAS No 142
did not have a material impact on its condensed 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 condensed 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, which did not have a
material impact on the Company's condensed consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal 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
10
affect the timing of recognizing future restructuring costs as well as the
amounts recognized.
10. Stock Option Exchange Offer
In September 2002, the Company completed a voluntary stock option exchange offer
for its eligible employees. Participating employees had the opportunity to
cancel previously granted options in exchange for an equal number of new options
to be granted on a specified future date, which will be at least six months and
one day following the date on which the Company canceled the old options. The
exercise price of these new options will be set at the fair market value of the
Company's common stock on the new grant date, which is currently expected to
occur during the second quarter of 2003. As a result of this program, options to
purchase 2,252,000 shares of common stock were canceled.
11. Cash, Restricted as to Use
The Company currently has $843,000 in cash that is restricted through various
dates through 2008. The restricted cash represents standby letters of credit on
the following real property leases:
Walnut Creek Center $ 75,000
Pasadena Center 125,000
Boston Center 225,000
San Francisco Center 168,000
Corporate Office 250,000
Total $ 843,000
---------
12. Commitments and Contingencies
The Company is party to certain litigation and claims arising in the normal
course of business. At this time, management believes that such matters will not
have a material impact on the Company's financial position or results of
operations.
13. Subsequent Events
The Company has received a notice from The Nasdaq Stock Market that the Company
has not maintained the minimum bid price of $1.00 required for continued listing
on the Nasdaq National Market System. The Company has until January 27, 2003 to
regain compliance. Otherwise, Nasdaq may provide notification that the Company
will be delisted. At such time, the Company can appeal the determination to a
Listing Qualifications Panel, or apply for a transfer to the Nasdaq Small Cap
Market. The Company can regain compliance with the minimum bid price requirement
if, at any time before January 27, 2003, the bid price of its common stock
closes at $1.00 per share or more for a minimum of 10 consecutive trading days.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking Statements and Risk Factors
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
11
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 The potential de-listing from the National Market System of The Nasdaq
Stock Market may adversely affect the trading volume and price of the
Company's common stock and discourage some investors from purchasing
the Company's common stock;
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 (i) complete
its plan for the rollout of a broad base of Associated Centers and (ii)
pay operating expenses which exceed revenues;
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 of America. The preparation of these
financial 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, 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.
12
Revenue Recognition
BriteSmile recognizes revenue related to retail products at the time such
products are shipped to customers. The difference between recognizing retail
product revenue at time of shipment to customers versus receipt of shipment by
customers is not material.
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 at the Associated Centers, currently 33 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 at the time the
refund is given to the ultimate whitening customer.
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 dentist who operates an Associated Center. If the financial condition of
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 inventories 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
BriteSmile evaluates its property, equipment and improvements for impairment
whenever indicators of impairment exist. 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 the first nine months of Fiscal 2001. Had BriteSmile's recoverability
estimates resulted in a 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 Fiscal 2002,
although no assurance of such can be given.
Store Closures
In prior periods, BriteSmile recorded significant reserves in connection with
store closures. These reserves included estimates pertaining to future payments
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.
13
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 representing BriteSmile in these 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 LATW devices provided
to 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 Consolidated Annual Report on Form 10-K for the
fiscal year ended December 29, 2001.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
14
The following table sets forth unaudited operating results for the thirteen week
periods and thirty-nine week periods ended September 28, 2002 and September 29,
2001, as a percentage of revenues in each of these periods. This data has been
derived from the unaudited financial statements.
Thirteen Thirteen Thirty-nine Thirty-nine
Weeks ended Weeks ended Weeks ended Weeks ended
(as Restated) (as Restated)
(Note 6) (Note 6)
September September September September
28, 29, 28, 29,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Income Statement Data:
Revenues:
Center whitening fees, net 32.3% 23.8% 32.4% 33.6%
Associated Center whitening fees, net 58.5% 64.9% 57.1% 55.7%
Product sales 9.2% 11.3% 10.5% 10.7%
------ ------ ------ ------
Total revenues, net 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating Costs and Expenses:
Operating and occupancy costs 36.9% 32.8% 37.0% 35.3%
Selling, general and administrative
expenses 87.5% 87.4% 82.0% 96.5%
Research and development expenses 4.3% 2.5% 2.4% 2.7%
Depreciation and amortization 15.9% 7.9% 15.1% 10.2%
------ ------ ------ ------
Total operating costs and expenses 144.6% 130.6% 136.5% 144.7%
------ ------ ------ ------
Loss from operations -44.6% -30.6% -36.5% -44.7%
------ ------ ------ ------
Interest income (expense), net -1.5% -0.3% -2.0% -1.7%
------ ------ ------ ------
Loss before income tax provision -46.1% -30.9% -38.5% -46.4%
Provision for income taxes 0.2% 0.0% 0.2% 0.2%
------ ------ ------ ------
Net Loss -46.3% -30.9% -38.7% -46.6%
The following are explanations of significant period-to-period changes for the
13 weeks ended September 28, 2002 and September 29, 2001:
Revenues
Total Revenues. Total revenues decreased by $3.4 million, or 25.5%, to $9.9
million for the 13 weeks ended September 28, 2002, from $13.4 million for the 13
weeks ended September 29, 2001. The decrease in revenues occurred in both
Company Centers and domestic Associated Centers primarily as a result of
decreased sales of whitening procedures. International whitening procedures and
revenues increased in the 13 weeks ended September 28, 2002 compared to the same
quarter of 2001. Sales in the third quarter of 2001 relating to Associated
Centers opened during the third quarter were $0.2 million in the third quarter
of 2002 compared to $2.0 million in the third quarter of 2001.
As of September 28, 2002, the Company recorded deferred revenue totaling $1.2
million compared to $1.7 million of deferred revenue as of September 29, 2001.
The deferred revenue balance at September 28, 2002 will be recognized in the
fourth quarter 2002 in accordance with the Company's policy of recognizing
revenue over the period in which the whitening procedures are performed after
shipment of key cards or access codes to Associated Centers. The deferred
revenue balance of $1.2 million at the end of the third quarter decreased
$600,000 compared to the deferred revenue of $1.8 million at June 29, 2002 as a
result of lower Associated Center whitening fees in September 2002 compared to
June 2002.
15
Center Whitening Fees. Center whitening fees were flat for the 13 weeks ended
September 28, 2002, and September 29, 2001 at $3.2 million. The number of
procedures performed in the Centers increased to 7,136 in the third quarter of
2002, compared to 7,116 in the same quarter of 2001.
Associated Center Whitening Fees. Associated Center whitening fees decreased by
$2.9 million, or 32.9%, to $5.8 million for the 13 weeks ended September 28,
2002, from $8.7 million for the 13 weeks ended September 29, 2001. This decrease
was due to the sale of fewer key cards and access codes in the 13 weeks ended
September 28, 2002 compared to the 13 weeks ended September 29, 2001. The number
of whitening procedures sold in the Associated Centers in the third quarter of
2002 decreased 19.3% to 29,940 compared to 37,080 procedures in the same quarter
of 2001. Domestic Associated Center whitening procedures were 23,345 in the 13
weeks ended September 28, 2002 compared to 31,785 in the same quarter of 2001.
International Associated Center whitening procedures were 6,595 in the 13 weeks
ended September 28, 2002 compared to 5,295 in the same quarter of 2001.
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 decreased by $590,000 or 39.1% to $0.9 million for
the 13 weeks ended September 28, 2002, from $1.5 million for the 13 weeks ended
September 29, 2001. Product sales represent revenue from sales of the Company's
toothpaste, mouthwash, whitening gum, and the Sonicare toothbrush products at
Centers and Associated Centers. There can be no assurance that the Company will
be successful in selling greater volumes of retail product in the future.
Operating Costs and Expenses
Operating and Occupancy Costs. Operating and occupancy costs were $3.7 million
or 36.9% as a percentage of revenues for the thirteen weeks ended September 28,
2002, compared to $4.4 million or 32.8% as a percentage of revenues in the
thirteen weeks ended September 29, 2001. This decrease was primarily due to a
2.5% 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 $8.7 million or 87.5% as a
percentage of revenues for the third quarter of 2002 compared to $11.7 million
or 87.4% as a percentage of revenues for the corresponding period in 2001. The
$3.0 million decrease was in line with the Company's expense restructuring
program instituted in late Fiscal 2001 as discussed in further detail below
under "Liquidity and Capital Resources," and is a result of decreased head count
and lower advertising expense. The Company expects that savings as a result of
the expense restructuring will continue to be achieved through the end of Fiscal
2002.
Research and Development Expenses. Research and development expenses of $425,000
were 4.3% as a percentage of revenues for the thirteen weeks ended September 28,
2002 compared to $334,000 or 2.5% as a percentage of revenues for the
corresponding period in 2001. Expenses incurred in the third quarter of 2002
were 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 $1.6
million or 15.9% as a percentage of revenues for the third quarter of 2002
compared to $1.1 million or 7.9% as a percentage of revenues for the
corresponding period in 2001. The increase of $500,000 in depreciation and
amortization expense for the third quarter of 2002 is due to a greater number of
BS3000 and BS3000PB devices in operation in a greater number of active
Associated Centers.
Interest Expense, net. Interest expense, net increased to $148,000 or 1.5% as a
percentage of revenues for the third quarter of 2002 compared to interest
expense, net of $47,000 or 0.3% as a percentage of revenues for the
corresponding quarter of 2001. The higher interest expense in the third quarter
of 2002 was primarily due to an increase in the Company's line of credit and
amortization of the fair market value of the warrants issued with the long-term
debt. In addition, the decrease in interest income due to lower cash balances
lead to an increase in the interest expense.
Net Loss. Net loss increased $0.5 million to $4.6 million for the third quarter
of 2002 compared to a net loss of $4.1 million for the corresponding quarter of
2001. This represents an 11.4% increase in losses due to a combination of the
factors described above. The net loss per share for the third quarter of 2002
was ($0.13) versus ($0.12) reported for the second quarter of 2001.
16
The following are explanations of significant period-to-period changes for the
39 weeks ended September 28, 2002 and September 29, 2001:
Revenues
Total Revenues. Total revenues decreased by $3.6 million, or 10.5%, to $30.3
million for the 39 weeks ended September 28, 2002, from $33.8 million for the 39
weeks ended September 29, 2001. As of September 28, 2002, the Company recorded
deferred revenue totaling $1.2 million compared to $1.7 million of deferred
revenue as of September 29, 2001.
Center Whitening Fees. Center whitening fees decreased by $1.6 million, or
13.7%, to $9.8 million for the 39 weeks ended September 28, 2002, from $11.4
million for the 39 weeks ended September 29, 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. The remainder of the decrease occurred
in the Company's remaining 14 Centers. The number of procedures performed in the
Centers decreased to 22,053 for the 39 weeks ended September 28, 2002, compared
to 24,947 for the same period of 2001.
Associated Center Whitening Fees. Associated Center whitening fees decreased by
$1.6 million, or 8.4%, to $17.3 million for the 39 weeks ended September 28,
2002, from $18.9 million for the 39 weeks ended September 29, 2001. This
decrease was due to the sale of fewer key cards or access codes to domestic
Associated Centers. Domestic Associated Center whitening procedures were 78,010
in the 39 weeks ended September 28, 2002 compared to 81,345 in the same period
of 2001. However, the number of procedures sold in the Associated Centers
increased 8.6% to 97,000 procedures in the 39 weeks ended September 28, 2002
compared to 89,285 procedures in the same period of 2001. International
Associated Center whitening procedures were 18,990 in the 39 weeks ended
September 28, 2002 compared to 7,940 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 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, which the Company
believes will result in increased Associated Center whitening fees. There can be
no assurance that the Company will be successful in executing its business plan.
Product Sales. Product sales decreased by $400,000 to $3.2 million for the 39
weeks ended September 28, 2002, from $3.6 million for the 39 weeks ended
September 29, 2001. Product sales represent revenue from sales of the Company's
toothpaste, mouthwash, whitening gum, and the Sonicare toothbrush products at
Centers and Associated Centers. There can be no assurance that the Company will
be successful in selling greater volumes of retail product in the future.
Operating Costs and Expenses
Operating and Occupancy Costs. Operating and occupancy costs were $11.2 million
or 37.0% as a percentage of revenues for the thirty-nine weeks ended September
28, 2002, compared to $12.0 million or 35.3% as a percentage of revenues for the
thirty-nine weeks ended September 29, 2001. The consistent cost percentage is
due to the consistency of the operating costs, which include 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 $24.8 million or 82.0% as a
percentage of revenues for the thirty-nine weeks ended September 28, 2002
compared to $32.7 million or 96.5% as a percentage of revenues for the
corresponding period in 2001. The $7.8 million decrease was in line with the
Company's expense restructuring instituted in late Fiscal 2001 as discussed in
further detail below under "Liquidity and Capital Resources." The Company
expects that savings as a result of expense restructuring will continue to be
achieved through the end of Fiscal 2002.
Research and Development Expenses. Research and development expenses of $717,000
were 2.4% as a percentage of revenues for the thirty-nine weeks ended September
28, 2002 compared to $901,000 or 2.7% as a percentage of revenues for the
corresponding period in 2001. Although the Company continues to incur costs for
research studies to expand its leadership position in the teeth-whitening
17
industry, the Company has reduced the number of studies compared to the same
period in 2001.
Depreciation and Amortization. Depreciation and amortization increased to $4.6
million or 15.1% as a percentage of revenues for the thirty-nine weeks ended
September 28, 2002 compared to $3.4 million or 10.2% as a percentage of revenues
for the corresponding period in 2001. The increase of $1.2 million in
depreciation and amortization expense is due to a greater number of BS3000 and
BS3000PB devices in operation in a greater number of active Associated Centers.
Interest Expense, net. Interest expense, net increased to $618,000 or 2.0% as a
percentage of revenue for the thirty-nine weeks ended September 28, 2002
compared to interest expense, net of $578,000 or 1.7% as a percentage of revenue
in the corresponding period of 2001.
Net Loss. The net loss decreased $4.0 million to $11.7 million for the
thirty-nine weeks ended September 28, 2002 compared to a net loss of $15.7
million in the corresponding period of 2001. This represents a 25.6% improvement
due to a combination of the factors described above. The net loss per share for
the thirty-nine weeks ended September 28, 2002 was ($0.32) versus ($0.48)
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. The Company has also enhanced
its liquidity through the expense reductions, CAP Advisers Line of Credit, EVL
Lease Amendments, and Working Capital Guarantees described below. At September
28, 2002, the Company had $946,000 of cash and cash equivalents. The Company has
received commitments for an additional $4 million in financing as discussed
below in Additional Working Capital Guarantees. The Company intends to utilize
the commitments. 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.
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 continuing to implement several cost saving initiatives totaling
approximately $14 million during Fiscal 2002. Through the last three months of
Fiscal 2001 and first nine months of Fiscal 2002, the Company has achieved its
cost targets and expects to do the same through the remainder of Fiscal 2002 in
order to achieve its $14 million cost reduction goal. The Company expects to
achieve these cost savings in the areas of Center operations, procedure kit
production, and various selling, general and administrative costs including
legal and consulting fees. The Company also expects to achieve cost savings by
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
operating results, the Company may increase its advertising spending.
CAP Advisers Line of Credit. In December 2001, as amended in March and July
2002, BriteSmile International, a wholly-owned subsidiary of the Company,
entered into Credit and Security Agreements with CAP Advisers which provide for
a $5.0 million line of credit facility. As of September 28, 2002, $3.2 million
has been drawn on the line.
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 4,441 LATW devices in
operation at Associated Centers at September 28, 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 resulting in
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, 2004, 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 September 28,
18
2002, the deferred amount for the third quarter of 2002 was $524,500. A total of
$1,756,250 has been deferred for the thirty-nine weeks ended September 28, 2002.
The deferred amount is included in the other long-term liabilities balance as of
September 28, 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 $11.3 million to negative $(6.4)
million for the thirty-nine weeks ended 2002 from negative $(17.7) 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 $2.9 million for the thirty-nine
weeks ended September 28, 2002, compared to $33.5 million for the same period in
2001. The $2.9 million net cash consisted of: 1) $504,000 of proceeds from the
exercise of stock options, 2) $3.2 million cash net from the Company's line of
credit used to fund the rollout of LATW devices, 3) $(431,000) principal payment
on long-term debt and 4) $(420,000) payments on capital lease obligations.
The $33.5 million of net cash provided by financing activities for the
thirty-nine weeks ended September 29, 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 $3.5 million for the thirty-nine weeks ended September
28, 2002, compared to $7.5 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 but does not intend to pass
these increases along to its customers, primarily as a result of other operating
efficiencies gained through changing the sourcing of certain of its products.
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 staff vacation. As a result, the
frequency of key card or access code 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
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing date of
this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rule
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
are effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Smile Inc. Asia Pte. Ltd. v. BriteSmile, Inc. and BriteSmile Management, Inc.,
a wholly owned subsidiary of the Company, filed in the Third Judicial District
Court in Salt Lake City, Utah. There have been no material developments in this
lawsuit during the Company's fiscal quarter ended September 30, 2002. For a
brief description of this case, see Part II, Item 1 of the Quarterly Report on
Form 10-Q of the Company for the Quarter ended June 29, 2002.
BriteSmile, Inc. v. Discus Dental, Inc., filed in the United States District
Court for the Northern District of California. For a brief description of this
case, see Part II, Item 1 of the Quarterly Report on Form 10-Q of the Company
for the Quarter ended June 29, 2002. Discus has filed its Answer to BriteSmile's
complaint. The Answer raises counterclaims against BriteSmile based upon, among
other things, patent misuse, unfair business practices, and tortious
interference with contract. Discovery has not yet been completed. The parties
have recently entered into a Standstill Agreement that stays and puts on hold
all activity in the litigation through December 31, 2002.
BriteSmile, Inc. v. Discus Dental, Inc., filed in the Contra Costa County
Superior Court, California, case no. C02-01611. For a brief description of this
case, see Part II, Item 1 of the Quarterly Report on Form 10-Q of the Company
for the Quarter ended June 29, 2002. Discus has filed its Answer to BriteSmile's
complaint. The Answer raises counterclaims against BriteSmile, among other
things, unfair business practices and tortious interference with contract.
Discovery has not yet been completed. The parties have recently entered into a
Stand Still Agreement that stays and puts on hold all activity in the litigation
through December 31, 2002.
Banc of America Securities, Inc. v. BriteSmile, filed in the United States
District Court for the Southern District of New York. For a brief description of
this case, see Part I, Item 3 of the Annual Report on Form 10-K of the Company
for the fiscal year ended December 29, 2001. On October 22, 2002, the Company
and Banc of America filed a Stipulation of Dismissal with the court. Pursuant to
the Stipulation, the lawsuit was dismissed without prejudice, each party
agreeing to bear its own costs in connection with the litigation.
ITEM 2. CHANGES IN SECURITIES
During the period June 29, 2002 to September 28, 2002, the Company granted to
key employees under its 1997 Stock Option and Incentive Plan non-qualified
options to purchase an aggregate of 49,000 shares of the Company's common stock,
at exercise prices ranging from $1.25 to $2.08 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.
In September 2002, the Company completed a voluntary stock option exchange offer
for its eligible employees. Participating employees had the opportunity to
cancel previously granted options in exchange for an equal number of new options
to be granted on a specified future date, which will be at least six months and
one day following the date on which the Company canceled the old options. The
exercise price of these new options will be set at the fair market value of the
Company's common stock on the new grant date, which is currently expected to
occur during the second quarter of 2003. As a result of this program, 2,252,000
options were canceled.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on August 23, 2002, the
shareholders of the Company voted on the following three proposals:
Proposal 1 - To elect the following ten directors, each to serve until the next
annual meeting of shareholders and until his successor is elected and shall have
qualified: Anthony M. Pilaro, John L. Reed, Gerald Poch, Dr. Gasper Lazzara,
Jr., Bradford G. Peters, Harry Thompson, Peter Schechter, Dennis F. Hightower,
R. Eric Montgomery and Bruce Fleming.
Proposal 2 - To ratify and approve an amendment to the Company's Revised 1997
Stock Option and Incentive Plan. The amendment increases the aggregate number of
shares of common stock of the Company available for issuance under the Plan from
7,000,000 shares to 7,500,000 shares.
Proposal 3 - To approve the Board of Directors' selection of Deloitte and
Touche, LLP as the Company's independent auditors for the fiscal year ending
December 28, 2002.
Voting results were as follows:
For Withheld
--- --------
Proposal 1:
Mr. Pilaro 33,005,631 179,967
Mr. Reed 32,707,312 478,286
Mr. Poch 33,008,895 176,703
Mr. Lazzara, Jr. 32,997,595 188,003
Mr. Peters 32,982,096 203,502
Mr. Thompson 33,009,395 176,203
Mr. Schechter 33,009,295 176,303
Mr. Bruce Fleming 32,741,869 443,729
Mr. Hightower 33,002,392 183,206
Mr. Montgomery 32,717,127 468,471
For Against Abstain
--- ------- -------
Proposal 2: 29,979,954 3,190,801 14,843
For Against Abstain
--- ------- -------
Proposal 3: 33,166,934 14,384 4,280
ITEM 5. OTHER INFORMATION
Dennis Hightower resigned from the Company's board of directors on September 3,
2002.
The Company has received a notice from The Nasdaq Stock Market stating that the
Company has not maintained the minimum bid price of $1.00 required for continued
listing on the Nasdaq National Market System. The Company has until January 27,
2003 to regain compliance. Otherwise, Nasdaq may provide notification that the
Company will be delisted. At such time, the Company can appeal the determination
to a Listing Qualifications Panel, or apply for a transfer to the Nasdaq Small
Cap Market. The Company can regain compliance with the minimum bid price
requirement if, at any time before January 27, 2003, the bid price of its common
stock closes at $1.00 per share or more for a minimum of 10 consecutive trading
days. Management is in the process of completing the Company's strategic plan
for fiscal 2003 and intends to take steps to enable the Company to regain
compliance with the continued listing requirements prior to January 27, 2003.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
99 Certifications of John L. Reed, CEO, and John C. Dong, Acting CFO,
pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002 (filed
herewith).
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the period covered by this Report.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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 November 12, 2002
- -------------------------------------- -----------------
John L. Reed Date
Chief Executive Officer
/s/ John C. Dong November 12, 2002
- -------------------------------------- ------------------
John Dong, Acting CFO Date
Principal Financial and Accounting Officer
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, John L. Reed, Chief Executive Officer of BriteSmile, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of BriteSmile, Inc.
(the "Registrant");
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this Quarterly Report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ John L. Reed
----------------- ------------------------------
John L. Reed
Chief Executive Officer
(Principal Executive Officer)
24
CHIEF FINANCIAL OFFICER CERTIFICATION
I, John C. Dong, Chief Financial Officer of BriteSmile, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of BriteSmile, Inc.
(the "Registrant");
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this Quarterly Report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ John C. Dong
----------------------------
John C. Dong
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25
Exhibit 99
CERTIFICATION OF PERIODIC FINANCIAL REPORTS
The undersigned hereby certify, to the best of their knowledge, that the
Quarterly Report on Form 10-Q of BriteSmile, Inc. for the quarterly period ended
September 28, 2002, as filed with the Securities and Exchange Commission on the
date hereof, fully complies with the requirements of Section 13(a) of The
Securities Exchange Act of 1934 (15 U.S.C. 78m) and that the information
contained in the quarterly report fairly presents, in all material respects, the
financial condition and results of operations of BriteSmile, Inc.
Date: November 12, 2002 /s/ John L. Reed
-------------------------------
John L. Reed
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 2002 /s/ John C. Dong
-------------------------------
John C. Dong
Chief Financial Officer
(Principal Financial and
Accounting Officer)
26