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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
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 0-19627
BIOLASE TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 87-0442441
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
981 Calle Amanecer, San Clemente, California 92673
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 361-1200
________________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
(Title of class)
________________________________
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of April 7, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $65,667,949 computed using the closing
price of $3.375 per share of common stock on April 7, 2000 as reported by Nasdaq
based on the assumption that directors and officers and more than 10%
stockholders are affiliates. On April 7, 2000, there were 19,749,852 shares of
the Registrant's common stock outstanding.
Information required by Part III is incorporated by reference to portions
of the Registrant's Proxy Statement for the 2000 Annual Meeting of Stockholders
to be held May 23, 2000, which will be filed with the Securities and Exchange
Commission within 120 days after the close of the 1999 fiscal year.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Qualifying Statement With Respect To Forward-Looking Information
- ----------------------------------------------------------------
The United States Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for certain forward-looking statements. Such forward-looking
statements are based upon the current expectations of the Company and speak only
as of the date made. These forward-looking statements involve risks,
uncertainties and other factors. The factors discussed below under "Forward-
Looking Statements" and elsewhere in this Annual Report on Form 10-K are among
those factors that in some cases have affected the Company's historic results
and could cause actual results in the future to differ significantly from the
results anticipated in forward-looking statements made in this Annual Report on
Form 10-K, future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases and in oral statements made by
authorized officers of the Company. When used in this Annual Report on Form 10-
K, the words "estimate," "project," "anticipate," "expect," "intend," "believe,"
"hope," "may" and similar expressions, as well as "will," "shall" and other
indications of future tense, are intended to identify forward-looking
statements.
Introduction
- ------------
BioLase Technology, Inc., a Delaware corporation ("BioLase" and together with
its consolidated subsidiary, the "Company") designs, develops, manufactures and
markets laser-based systems for use in dental and medical applications. The
current generation of the Company's laser-based systems incorporates its
proprietary HydroKinetic(TM) technology into its surgical tissue cutting system,
Millennium(R), which utilizes an erbium, chromium: yttrium scandium gallium
garnet ("Er,Cr:YSGG") laser and a proprietary air-water spray. The unique laser
pulses act to rapidly energize and transform atomized water droplets from the
air-water spray into smaller, energized water molecules that can precisely
remove both dental hard and soft tissues. This patented break-through technology
is Er,Cr:YSGG laser induced hydrokinetics. When operating in this hydrokinetic
mode, the Millennium(R) system has dramatic benefit over any previously
available technology for cutting the entire range from hard to soft tissues.
Hard tissue refers to enamel, dentin, cementum and bone.
BioLase is the only company commercializing the revolutionary Er,Cr:YSGG
Hydrokinetic(TM) medical technology. The Millennium(R) system is currently in
the early stages of being marketed both in the United States and internationally
for dental hard and soft tissue applications.
The Company also has clearance from the United States Food and Drug
Administration ("FDA") to market a laser-based surgical tissue cutting system in
the United States for a broad range of dermatological and general surgical soft
tissue applications. This clearance provides the Company the opportunity to
expand use of its HydroKinetic(TM) technology to areas outside of dentistry. In
response to this clearance, the Company began its design of a laser-based system
DermaLase(TM), in a configuration designed for aesthetic and dermatologic
applications. The Company has temporarily deferred further development of the
DermaLase(TM) to focus its resources on enhancements of its existing products
and the design of new products within the
dental market. The Company intends to continue with the gathering of clinical
data during 2000 in support of future development of the DermaLase(TM).
The Company also has a soft-tissue laser system, Twilite(TM), introduced
in late 1999 that incorporates the newest state-of-the-art semiconductor diode
technology for a broad range of dental cosmetic and soft tissue procedures. The
Company expects the Twilite(TM) to be in full production with significant sales
in the second quarter of 2000. The Company has developed a home consumer product
called LazerSmile(TM), a toothbrush that utilizes a light source and a
proprietary gel for whitening teeth. In mid-1999, the Company licensed the
manufacturing and distribution rights of the LaserSmile(TM) to a home consumer
product distributor for a royalty on future sales. The Company also has under
development LaserSpray(TM), an air-water spray accessory designed to be used on
a variety of medical and dental laser systems to cool the tissue being lazed and
a fluid conditioning system known as FlavorFlow(TM), for which it has been
granted a patent, that sanitizes, flavors and administers fluids and enhances
the scent of air present during dental and medical procedures.
General
- -------
In 1994, the Company commenced its research and development efforts related to
what is now its patented and proprietary Er,Cr:YSGG HydroKinetic(TM) technology.
This technology employs laser pulses which rapidly energize and transform small
atomized water droplets from an air-water spray into smaller, energized water
molecules that can precisely remove both dental hard and soft tissues. This
technology has proved to be effective and efficient in removing enamel and
dentin tooth structure in a precise, non-thermal manner. The Company developed
this technology into a product that has evolved into the Millennium(R).
Refinements and enhancements to its design have continued through the present
time.
In 1996, the Company commenced the development of a toothbrush for the
consumer market, originally called the LaserBrush(TM), that utilizes a
monochromatic optical energy light source embedded within a toothbrush in
conjunction with a clear, non-abrasive tooth whitening gel developed by the
Company. In August 1998, the Company changed the name of the LaserBrush(TM) to
LazerSmile(TM). During the second quarter of 1999, the Company licensed the
LazerSmile(TM) technology to a home-consumer product distributor to manufacture
and market the
technology under the distributor's product name, the IGEA LazerWhite Tooth
Whitening System. The one-year exclusive agreement provides for a royalty to be
paid to the Company on future sales of the LazerWhite product. The Company's
1999 operations did not include any significant royalty revenues from the sale
of the LazerWhite product. Accordingly, the Company is reevaluating its
opportunities related to the distribution of its technology as the existing
agreement expires in June 2000.
More recently, the Company commenced development of FlavorFlow(TM), a patented
product that sanitizes and alters the flavor and scent of fluids administered
during medical, dental and oral surgical treatments. The Company has deferred
introduction of the FlavorFlow(TM) until anticipated standards addressing
sanitized fluids are imposed in the medical industry.
During 1999, the Company designed its first semiconductor diode laser system,
the TwiLite(TM), to meet the demands of today's soft-tissue cosmetic dentistry
applications. The product incorporates the newest state-of-the-art technology
for a broad range of dental cosmetic and soft tissue procedures utilizing an 810
nanometer wavelength packaged in a light-weight system that only weighs
approximately 11 pounds. The Company received FDA clearance to market the
Twilite(TM) for a variety of soft-tissue medical applications in June 1999. The
first significant revenues from Twilite(TM) sales are now being recognized in
the second quarter of 2000.
The Company also possesses patents and proprietary technology for a group of
biomaterials under the trade names PerioFil(TM), PerioSeal(TM), LaserBond(TM)
and EndoPlas(TM) for use in periodontics, endodontics, general dentistry,
orthopedics and other medical applications. Commercialization of these
biomaterials will depend on, among other things, resource availability and
completion of development and regulatory approval.
Laser Background
- ----------------
The term "laser" is an acronym for Light Amplification by Stimulated Emission
of Radiation. A laser is an apparatus that stimulates the atoms in a core
material (such as a gas or crystal) to emit packets of light and then amplifies
and focuses the light in a single beam. Laser light, which consists of a single
wavelength of light, differs from light emitted from an ordinary light bulb
primarily through greater concentration and intensity. Lasers are typically
classified by the element or compound that emits light when energized, such as
carbon dioxide (CO2), Nd:YAG, argon, ruby and erbium-yag, and the unique Biolase
Erbium Gri YSAG.
Lasers were first developed for research, industrial and military uses and,
more recently, have been adapted for many medical and dental applications. The
benefits of lasers in medical and dental applications are generally believed to
include reduced pain, minimized infection, promotion of rapid healing, reduced
bleeding, reduced scarring, increased precision and time-effective procedures.
In many cases, lasers perform procedures which otherwise could not be achieved
through traditional surgical means. Lasers are currently used in a wide variety
of medical fields including dentistry, dermatology, plastic surgery,
ophthalmology, otolaryngology (ear, nose and throat ("ENT")), gynecology,
urology, cardiology, gastroenterology and general surgery.
Medical and dental laser-based systems, including the Company's Millennium(R)
system, are highly specialized tools specifically designed for a particular
application or set of applications. The most important factors in developing a
laser-based system for a specific
application are the wavelength of the laser, its pulse length, energy per pulse,
the method of delivery of the laser energy to the tissue, and the method, if
any, of cooling the tissue.
The Millennium(R) System
- ---------------------
The Company has recently developed its Millennium(R) system, an Er,Cr:YSGG
laser incorporating the Company's patented HydroKinetic(TM) technology for a
variety of dental and medical applications. The HydroKinetic(TM) Er,Cr:YSGG
laser-based system transforms water spray into an energized state capable of
precisely removing hard tissue, such as tooth, bone and cartilage. In a
different mode, without the full water spray, the Er,Cr:YSGG laser incorporated
into the Millennium(R) system has a wide range of soft tissue applications with
effective hemostaces and cutting efficiency.
The current Millennium(R) system configured for dental and oral surgical
applications consists of a flexible fiber-optic delivery system and mobile floor
system containing an Er,Cr:YSGG laser, power supply, internal cooling system and
control panel. The Millennium(R) rapidly energizes and transforms water spray
into a safe, cool and precise biocompatible tissue removing device. The
Millennium(R) system is capable of cutting both hard and soft human tissue. To
give medical practitioners more flexibility, Millennium(R) systems may also be
used without water or with water as a cooling medium for standard laser-based
soft tissue applications, in fields such as dermatology, orthopedics and
otolaryngology (ENT), although specific applications within these fields would
require additional regulatory clearances by the FDA. See " - Government
Regulation".
The Company believes that its Millennium(R) system has a broader range of
applications than conventional laser systems. The Company currently is
marketing the Millennium(R) system only for dental and oral surgical
applications in the U.S. and internationally. The Company has FDA clearance to
market its Millennium(R) for certain dental hard and soft tissue applications
and has also received clearance by the FDA to market a laser system that
utilizes a variation of the Er,Cr:YSGG HydroKinetic(TM) technology for a broad
range of dermatological, aesthetic and general surgical soft tissue
applications. The Company intends to continue the gathering of clinical data
related to such applications during 2000. Marketing for certain expanded
applications of the Er,Cr:YSGG HydroKinetic(TM) system in the United States
would require additional regulatory clearance. The Company may be required to
engage in further development of the Er,Cr:YSGG HydroKinetic(TM) technology or
to complete clinical studies
successfully in order to pursue certain expanded applications. No assurances
can be given that any such clinical studies will be successfully completed or
such regulatory clearances will be granted. See " - Government Regulation". Use
of the Company's proprietary technology for various non-dental applications will
require certain modifications to the hardware and software configurations of the
technology.
The Company has received certification for its Millennium(R) system signifying
its compliance with the Medical Device Directive, evidenced by the "CE" mark,
established within the European Community. The Millennium(R) system has also
been granted the Canadian Standards Association ("CSA") mark symbolizing
compliance with certain safety and performance standards. The CE and CSA marks
allow the Company to import and market its Millennium(R) system in the European
Community and Canada, respectively. See " - Government Regulation".
While the Company believes that its Er,Cr:YSGG HydroKinetic(TM) surgical
system should be effective in a broad range of medical and dental applications,
this belief, except with respect to certain dental and dermatological
applications, for which clinical research has been and is being conducted, is
based largely on preliminary in vitro and in vivo research and extrapolation of
observations in such clinical research. No assurances can be given that the
Company's proprietary technology will prove to be applicable to, or will find
market acceptance in, any medical or dental fields or that the Company will
receive clearance from the FDA or other regulatory agencies to market the
Millennium(R) system or other products embodying its HydroKinetic(TM) technology
for additional applications in any such fields.
Applications and Potential Applications of the Millennium(R) System.
-------------------------------------------------------------------
Dentistry. The Millennium(R) system, currently marketed by the Company
---------
in the United States and internationally (principally in Canada, Mexico,
Western Europe, the Middle East, Australia and Taiwan), is configured for
dental and oral surgical applications. The Company intends to expand its
marketing emphasis to other significant markets that appear to present potential
interest in its Er,Cr:YSGG HydroKinetic(TM) products. These markets may include,
but are not limited to, various South American countries and the Pacific Rim
countries. Depending on the local regulatory requirements within these
respective countries, further regulatory clearances may be necessary prior to
entry into these markets. See " - Government Regulation".
There are approximately 140,000 dentists in active practice in the United
States and an even greater number of dentists in other countries where the
Company intends to market its products. Industry analysts believe that, as the
U.S. population grows and ages and more natural teeth are retained, the demand
for dental services will increase along with the demand for newer and improved
technology. The Company believes that the Millennium(R) system is well suited
for a variety of dental and oral surgical applications such as cavity
preparation and restoration, implant preparation, aesthetic dentistry,
periodontics (treatment of gum disease) and prosthodontics (replacement of
teeth).
Plaque and Periodontal Disease. Plaque is a sticky, colorless film of
bacteria that forms on teeth. If not removed regularly, it can cause cavities or
gum (periodontal) disease. Most adults have periodontal disease, which can
exist without symptoms for years. When plaque is allowed to build up in the
crevice between tooth and gum, it eventually separates the gum from the tooth
root. As the gum pulls away, the bone underneath
deteriorates. The resulting periodontitis causes tooth loss in 70% of all
adults, according to the American Academy of Periodontology.
When plaque hardens, it becomes tartar, a rough, porous material that can
be removed only by professional cleaning. Although tartar itself is not
believed to cause periodontal disease, the presence of tartar makes plaque
harder to remove. The Millennium(R) system can be utilized for the removal of
plaque and tartar as well as the treatment of infected tissue associated with
periodontal disease.
Cavity Preparation/Aesthetic Dentistry. Aesthetic considerations are
gaining increased importance in dentistry, as patients seek natural looking
dental restorations. Due to these aesthetic and health concerns, natural colored
composites are replacing amalgam (gold and silver) fillings in the restoration
of cavities.
When working with composites in cavity restorations, dentists must preserve
the tooth structure and veneer (the thin ceramic covering the front surface) to
enhance bonding of the composite and minimize stress upon the reconstructed
tooth. Penetration of the bonding materials into the tooth structure and thus
the strength of the adhesive bond between the tooth and the composite material
depend upon cavity preparation procedures that minimize cracks, fuses and
fractures of the enamel rods and dentin tubules. In addition, decay must be
removed, and the interior of the cavity preparation must be clean and free of
debris such as that left by conventional dental drills. The Company believes
that its Millennium(R) system can cut precisely and cleanly with minimal
disruption to tooth structure, thus providing improved preparation for
restorations with enhanced adhesive and aesthetic qualities.
Prosthodontics. The replacement of missing teeth and the significant
--------------
restoration of decayed or damaged teeth have evolved as dental specialties as a
result of the development of stronger ceramic, porcelain and composite
materials. The onlay and inlay require not only precise cavity preparation, but
also strong adhesion of the bonding which is necessary for enhancement of
retention. The Company believes that the Millennium(R) system can effectively
minimize cracking, and avoid the heating and fracturing of the enamel or dentin
structure during cavity preparation and promote a stronger bond or adhesion,
thereby facilitating a more durable and aesthetic restoration.
The Company also believes the Millennium(R) system has the potential to
precisely cut the appropriate shoulder preparation to be used to retain
removable or partial dentures and distribute stress force along the anchor
tooth. The Company believes that because the Millennium(R) system minimizes
vibration, use of the system can provide increased patient comfort and conserve
tooth structure.
The Millennium(R) system can potentially be utilized to shape shoulders and
margins, facilitate improved impressions and promote secure and closed margins.
The Company believes that benefits associated with this use of the Millennium(R)
system include reduction of the vibration, high-pitched noise and
microfracturing of teeth associated with the conventional dental drill. The soft
tissue that surrounds the crown preparation area usually requires shaping prior
to taking an impression. The Company believes that use of the Millennium(R)
system to remove or reshape the tissue will result in reduced bleeding and
increased patient comfort.
Osseous (Bone) Implant Surgery. Bone implants are used for bone
------------------------------
stabilization, to add strength to existing bone and to serve as the
infrastructure for reconstructive dental procedures. For such procedures, it is
important that the bone cutting for the implant placement be clean and that the
practitioner not damage the bone itself during cutting by the generation of
excessive heat. Thermal damage, such as that caused by conventional dental
drills, can impede or destroy the fusion of the bone to the implant. The
Company believes that the Millennium(R) system, through its HydroKinetic(TM)
technology, can effectively cut bone cleanly and without thermal damage;
however, the device is presently not cleared by the FDA for marketing for
cutting bone in the United States. See " - Government Regulation".
The osseous (bone) implant placement process usually requires procedures
uncovering the soft tissue and shaping around the neck of the tooth. The
Company believes that the Millennium(R) system can be used effectively for these
procedures, as a result of its ability to cut oral soft tissue cleanly,
precisely and without induced bleeding.
Dermatology and Plastic/Cosmetic Surgery. Laser skin resurfacing, which
----------------------------------------
has been evolving as a surgical technique since it was introduced in 1993,
involves using a high-energy laser beam to remove epidermal layers. This
surgical process normally leaves a swollen, red wound which must heal over a
period of weeks or months. If successful, this procedure reduces wrinkles and
produces some tightening of the skin. Most of these surgeries are performed by
dermatologists, plastic surgeons, oculoplastic surgeons, and various other sub-
specialists using short-pulsed carbon-dioxide lasers.
The Company believes that its Er,Cr:YSGG HydroKinetic(TM) technology may
provide a significant technological breakthrough for the treatment of wrinkles,
scars and warts and for skin resurfacing. The Company believes the Er,Cr:YSGG
HydroKinetic(TM) system may also offer some clinical advantages in terms of non-
thermal, controlled removal of dermal soft tissue. In particular, a practitioner
would have the ability to use the Er,Cr:YSGG HydroKinetic(TM) technology for
certain cosmetic surgery procedures (e.g., bone, cartilage, and skin reshaping)
or to reduce the power, adjust the energy characteristics and alter the amount
of air and water used during an application, thereby allowing the use of the
laser medium to remove the skin surface with less depth of radiation than that
typically experienced when using laser systems with wavelengths that differ from
that of the Er,Cr:YSGG HydroKinetic(TM) system.
The Company has FDA clearance to market a laser system for a broad range of
dermatological and general surgical soft tissue applications, including scar
revision, removal of tumors and cysts, skin resurfacing and diagnostic biopsies.
See " - Government Regulation". This system, formally under the name of
DermaLase(TM) which the Company has temporarily deferred development, can
utilize the Er,Cr:YSGG laser employed in Millennium(R), but configured with
laser energy, water and air characteristics optimized for its specific
application. In this configuration, the system can utilize the air-water spray
as a cooling agent. In the Company's opinion, the combination of the air-water
spray and the specific wavelength employed provides improved histological
effects on tissue, such as reduced tissue trauma and faster healing.
Oral/Maxillofacial Surgery. Over 7,000 specialists practice
--------------------------
oral/maxillofacial surgery in the U.S. These specialists have also become
involved with cosmetic surgery,
including facial skin resurfacing with lasers. The Company believes that its
Er,Cr:YSGG HydroKinetic(TM) system can provide significant advantages in
oral/maxillofacial surgery, as a single surgical instrument that efficiently
cuts bone, cartilage, and soft tissue. While the Company presently has
clearance to market its Er,CR:YSGG Hydrokinetic(TM) system for various
dermatological and other various soft tissue procedures, the device is presently
not cleared for marketing in the United States by the FDA for the cutting of
bone. See " - Government Regulation".
Orthopedic Surgery. According to the American College of Surgeons, nearly
------------------
21,000 orthopedic surgeons in the U.S. perform in excess of 3,000,000 annual
surgeries, including joint arthroscopy, spinal disc alterations and
arthroplasties of knee, shoulder and hip. Statistics on international
procedures are not compiled, but industry experts estimate at least 1,000,000
annual procedures outside of the United States. Laser use in orthopedic surgery
has been limited to a very small percentage of surgeons using long-pulse holmium
lasers in arthroscopic procedures. The main advantage of a holmium laser is
finesse for tissue sculpting. However, the medical community has criticized the
holmium laser as being too slow compared to the traditional mechanical
endoscopic cutting devices. Thermal damage caused by the pulsed holmium laser
has also been an issue. By contrast, the Company believes that the Er,Cr:YSGG
HydroKinetic(TM) system can offer significant advantages in terms of improved
speed, non-thermal effect, and providing one surgical device that can perform
all the functions that a surgeon needs for bone and cartilage cutting, along
with the ability to perform bone shaping and sculpting. The device, however, is
presently not cleared for marketing in the United States by the FDA for the
cutting of bone. See " - Government Regulation".
Otolaryngology. The Company believes that the unique bone-cutting
--------------
capability of the Er,Cr:YSGG HydroKinetic(TM) system lends itself to surgical
procedures in the ear and nasal passages, where hard tissue (primarily
cartilage) must be precisely removed under endoscopic control. Approximately
400,000 ear, nose, and throat (ENT) surgical procedures are performed in the
United States each year by some 10,000 specialists with an estimated 650,000
additional annual procedures internationally. Currently, lasers are utilized in
less than 5% of these surgeries. Primary applications for lasers in ENT now
include: laser assisted palatoplasty (partial removal of the palate);
uvulopalatoplasty (partial removal of the uvula and the palate to reduce sleep
apnea and snoring); tonsillectomy (surgical removal of tonsils); and myringotomy
(surgical creation of a small hole in the tympanic membrane of a child's ear for
drainage of fluid caused by chronic ear infection). The Company believes, based
on in-vitro tests, that the Millennium(R) system may provide an improved
surgical tool for performing some types of ENT procedures. While the Company's
Er,Cr:YSGG HydroKinetic(TM) system is cleared for marketing in the United States
for a variety of general surgical applications, including resection of internal
organs, tumors and lesions, further clearances may be required for specific
applications when and if the Company decides to enter this market arena. See "-
Government Regulation".
Other Dental and Medical Products
- ---------------------------------
TwiLite(TM) Diode Laser System. In 1999, the Company developed its first
------------------------------
soft-tissue semiconductor diode laser system for use in the dental cosmetic and
aesthetic market. The laser system, called the Twilite(TM), incorporates the
latest state-of-the-art technology for use in a broad range of dental cosmetic
and soft tissue procedures. The light-weight, space-saving laser system
incorporates features absent from other competitive soft tissue laser systems
and is
priced at a level affordable to all dentists. The dental laser can also be used
to treat early stage gum disease, postponing or in some cases eliminating the
need for periodontal surgery and providing the opportunity for overall cost
savings. The Company introduced the Twilite(TM) in late 1999 and anticipates
full production and shipment of the product in the second quarter of 2000. The
Company received FDA clearance to market the Twilite(TM) for a variety of dental
and other soft tissue surgical applications. See "- Government Regulation".
LazerSmile(TM). In 1996, BioLase commenced the development of a toothbrush
--------------
for the consumer market, originally called the LaserBrush(TM), that utilizes a
monochromatic optical energy source embedded within a toothbrush in conjunction
with a clear, non-abrasive, proprietary, tooth-whitening gel. The Company
completed its design in 1998 and renamed the product LazerSmile(TM). The
LazerSmile(TM), which utilizes the Company's patented and patent-pending
technologies, is designed to bring into the consumer's home technology that
utilizes optical energy to activate ingredients in its proprietary tooth-
whitening gel, formulated by the Company, to clean and whiten teeth. The
LazerSmile(TM), which is configured much like a conventional toothbrush, is
smaller than conventional motorized tooth brushing instruments. During the
second quarter of 1999, the Company licensed the LazerSmile technology to a
home-consumer product distributor to manufacture and market the technology
under the distributor's product name, the IGEA LazerWhite Tooth Whitening
System. The one-year exclusive agreement provides for a royalty to be paid to
the Company on future sales of the LazerWhite product. In 1999, no significant
royalty revenues were generated from the sale of the LazerWhite product.
Accordingly, the Company is reevaluating its opportunities related to the
distribution of its technology as the existing agreement expires in June 2000.
LaserSpray(TM). LaserSpray(TM) is a stand-alone product that incorporates a
--------------
patented technology to allow a dental or medical practitioner to deliver a
coolant spray of air and water to tissue sites during surgical laser
interventions. LaserSpray(TM) has the potential to be installed with most
fiber-coupled lasers manufactured by other companies. The LaserSpray(TM) uses a
cool air-water spray for cooling lazed tissue and has applications for various
medical and dental lasers. The Company believes that thermal effects resulting
from high temperatures can be significantly reduced when the LaserSpray(TM)
cooling system is used during application of laser-based energy. To date, the
Company has not pursued marketing of the LaserSpray as available resources have
been dedicated to the completion and marketing of its Millennium(R) and other
related laser-based products.
FlavorFlow(TM) Fluid Conditioning System. In response to recently proposed
----------------------------------------
standards for use of sanitized fluids in dental and medical procedures, BioLase
had under development the FlavorFlow(TM) fluid conditioning system, a system
utilizing patent-pending technology to sanitize, flavor and administer fluids
and enhance the scent of air present during medical and dental treatments.
FlavorFlow(TM) is designed to overcome the unpleasant tastes and odors which
patients typically associate with pain and discomfort and which contribute to
negative clinical experiences. The Company believes that when the
FlavorFlow(TM) system is utilized to deliver sanitized fluids, the possibility
of parasitic (such as potentially lethal cryptosporidium) and bacterial
infection being introduced through the fluids used during medical and dental
interventions would be significantly reduced. The Company expects that a market
for the FlavorFlow(TM) fluid conditioning system will exist only after new
standards regarding sanitized fluids are imposed. Accordingly, introduction of
the FlavorFlow(TM) has been deferred until such standards are imposed.
Acquisition of Laser Skin Toner, Inc.
- -------------------------------------
On July 2, 1998, the Company acquired substantially all of the assets of
Laser Skin Toner, Inc., a development stage company ("LSTI"). The assets
acquired related primarily to a proprietary in-process laser-based technology
being developed by LSTI for non invasive laser treatment in the field of
aesthetic skin rejuvenation, including all intellectual property rights
consisting of patents, patent applications, a trademark application and certain
know-how.
At the time of the acquisition, the intellectual property embodying this
developmental effort represented substantially all of LSTI's assets, and the
developmental efforts did not appear applicable to any alternative use. At the
time of acquisition, the Company intended to proceed with those additional
research and development efforts needed to bring the product to market and to
fund the costs from working capital. In anticipation of and then in response to
the clearance it received in October 1998 from the FDA to market its
Millennium(R) tissue cutting system for dental hard tissue applications, the
Company shortly after acquiring the LSTI technology decided to focus its limited
resources on the marketing of its Millennium(R) system, including a build-up of
inventory and expansion of sales staff. The Company, though, did continue the
clinical trials related to the LSTI technology.
The Company has since determined that it is in the best interests of
its stockholders to continue its focus on the marketing and further enhancement
of products embodying its HydroKinetic(TM) technology, including its
Millennium(R) system, and not to further develop the LSTI technology.
In December 1999, the Company transferred the LSTI technology and all
associated assets in exchange for the undertaking of the transferee to pay to
the Company a royalty based on future sale of products covered by patents on the
LSTI technology. The Company's receipt of any royalty payments beyond a nominal
amount of required minimum royalties is wholly dependent upon the transferee's
successful development and commercialization of the LSTI technology, and no
assurances can be given that the LSTI technology will be successfully developed
and commercialized or that the Company will receive any meaningful royalty
payments relating to the LSTI technology.
In March 2000, the Company entered into an arrangement with the former
shareholders of LSTI, which by then had liquidated, pursuant to which:
. The former shareholders of LSTI, as successors-in-interest to LSTI, agreed
to return to the Company for cancellation 525,000 of the 1,417,120 shares
of Company Common Stock issued and delivered in 1998 as consideration for
the assets of LSTI, subject to the Company's performance of certain
ministerial acts relating to the shares of Company Common Stock retained by
the former shareholders of LSTI;
. The Company cancelled 182,880 shares of Company Common Stock that had been
issued and placed in escrow for possible delivery to LSTI, or its
successors, based upon the future performance of the business to be based
on the LSTI technology; and
. The Company and the former shareholders of LSTI exchanged general releases,
including the release of all claims, if any, relating to the Company's
acquisition of the assets of LSTI.
Manufacturing
- -------------
The Company, as a medical device manufacturer, is required by the FDA to
comply with Good Manufacturing Practice ("GMP") regulations. As a result, the
Company's manufacturing processes must meet certain standards regarding quality
assurance and documentation. See " - Government Regulation".
The Company fabricates certain proprietary components of its products and
inspects, tests and packages all components prior to inclusion within a finished
product or shipment as a replacement part. By designing and manufacturing key
proprietary products, the Company believes it can better control quality, limit
outside access to its proprietary technology, control costs and manage
manufacturing process changes more efficiently and effectively.
During assembly, appropriate steps are taken to maintain quality
standardization. Prior to release, the Company's products are submitted to a
formal factory acceptance test which must be passed prior to transfer as a
finished product.
The Company contracts with various non-affiliated companies to manufacture
certain components according to the Company's specifications. Substantially all
of the Company's products are manufactured in the United States. At present, all
products manufactured by third parties are sent to the Company's headquarters in
San Clemente, California for quality control, final assembly if necessary, and
shipment to customers or distributors.
The Company has identified alternate suppliers for most of its components.
There are certain key components for which there is a single supplier. The
Company is diligently searching for alternative sources for these components. A
change in the suppliers of certain system components, however, would require new
regulatory approvals and, in particular, could require an amendment to the "CE"
mark granted to the Company pursuant to the European Community's Medical Device
Directive, which would hamper the Company's ability to distribute its systems in
the European countries requiring such an approval.
Field service repairs in the United States are currently performed by the
Company's direct employee technicians. International field service repairs are
performed by the corresponding distributor's service technicians who are
technically trained by the Company in the servicing of its products. The Company
also provides technical assistance and training seminars to its international
distributor technicians on an as-needed basis.
Engineering and Development
- ---------------------------
During the years ended December 31, 1999, 1998 and 1997, the Company
expended approximately $2,428,000, $1,825,000 and $1,023,000, respectively, on
engineering and development. Such expenditures were directed primarily to
further development of the Company's HydroKinetic(TM) technology and other laser
related products and technologies.
Competition
- -----------
The dental laser market currently has a limited number of serious
competitors. In the next two to three years, additional serious companies may
move into the dental hard and soft tissue markets due to projections of
significant growth. According to a recent report, "U.S. Market for Dental Lasers
2000", published by the Millennium Research Group, during 2000 and 2001 dental
laser sales are expected to increase by 45% and 40% respectively.
The entities referenced as hard tissue competitors to BioLase utilize a
commonly available laser, the Erbium Yag (Er:YAG). Biolase believes its
Millennium(R) laser has a dramatic advantage and differentiation in that BioLase
is the only company in the world that utilizes Er,Cr:YSGG and patented
Hydrokinetic(TM) technology. BioLase believes the Millennium is the only dental
laser available that is capable of effectively performing both hard and soft
tissue procedures.
The Company's main competitors in the U.S. hard tissue dental market is a
privately held company, Continuum Biomedical, which recently obtained clearance
for an Er:YAG hard tissue laser. Continuum only recently started shipping their
Er:YAG laser in the U.S. Er:YAG is considered by BioLase to be a previous
generation product. Premier Laser Systems is not currently a competitor. Premier
marketed the Er:YAG, which did not perform competitively, and Premier has since
dropped out of the market, filing Chapter 11. American Dental Technology, Inc,
(ADT) produces two types of soft tissue lasers, the Nd:YAG and diode systems.
ADT also sells a range of other dental products and is in the process of
restructuring to become a general distributor. CeramOptec sells a diode dental
laser for soft tissue procedures. CeramOptec is a provider of laser fibers and,
to date, has not had a significant impact on the dental laser market. Lares
Research has an Nd:YAG soft tissue laser and an argon laser for curing and
bleaching teeth, but is not focused on lasers selling several other dental
products. HGM Medical Lasers produces high powered argon lasers for dentistry
that are used for curing, bleaching and soft tissue procedures. For several
years HGM has been consistently selling a small number of dental lasers each
month, but does not currently have an established distribution system for the
dental market. Luxar Corporation, with its CO2 soft tissue laser, was acquired
by ESC Medical Systems. In recent years sales of CO2 dental lasers soft tissue
laser have declined in the U.S. as they are being replaced by diode laser
systems. Lasermed produces a low powered argon for curing and bleaching.
Internationally, there are an additional small number of hard tissue lasers
that are not yet available in the U.S.: ESC Medical Systems, an Israeli
corporation, has produced with limited success, a combination Er:YAG/CO2 hard
and soft tissue laser. In 1999, ESC started selling this system in Europe and
Latin America; Fotona, Inc, a Slovenian company, produces a combination
Er:YAG/Nd:YAG for hard and soft tissue procedures. Fotona is most active in a
few European markets and to a limited degree in Latin America; KaVo, Inc, a
large German dental company, sells an Er:YAG hard tissue laser, mostly in Europe
and Latin America. KaVo does not manufacture this system, but has it contracted
with another German company, Aesculap-Meditec to manufacture this system.
A number of the Company's competitors have substantially greater financial
resources and engineering, development, manufacturing and marketing
capabilities. The Company believes that its patent protection, and pending
patent protection, should provide a competitive advantage to the Company over
the next several years. However, there can be no assurance that technology
superior to that of the Company will not be developed or that the Company's
patent and patent-pending protection will be upheld or will prove to have
commercial value. See " - Patents and Proprietary Technology".
BioLase faces substantial competition in all markets which it seeks to
distribute the Millennium(R) system. Competition in these markets consists of
numerous medical laser manufacturers promoting their respective lasers to users
via trade show exhibitions, advertisements, product demonstrations, educational
workshops, and sales representatives. In addition, the Company will compete
against conventional non-laser surgical methodologies and devices such as high
and low-speed drills, and air abrasion systems in the dental field and air
abrasion, electrosurgery, scalpels, saws, drills and punches in the medical
field. Some of these
alternative and traditional methods have been proven and tested, require minimal
special training for established practitioners, and generally require less
capital investment than the Millennium(R) system. However, the Company believes
that users of conventional methods and traditional laser-based methods are
continually evaluating new technologies that may provide improved and effective
techniques to replace existing technologies. BioLase believes that the
Er,Cr:YSGG HydroKinetic(TM) system represents a strong candidate to replace
existing technologies in various markets.
Patents and Proprietary Technology
- ----------------------------------
The Company has patented and patent-pending technology related to the
Millennium(R) system and its HydroKinetic(TM) technology. In April 1998, the
U.S. Patent and Trademark Office granted BioLase a patent (U.S. Patent No.
5,741,247) entitled "Atomized Fluid Particles for Electromagnetically Induced
Cutting" with broad applicability in dentistry, medicine and various industrial
applications. The proprietary technology encompassed within this patent serves
as the foundation for BioLase's Er,Cr:YSGG Hydrokinetic(TM) platform.
Further strengthening the Company's proprietary position of its
HydroKinetic technology, in October 1999, the Company was awarded a patent (U.S.
Patent No. 5,968,037) entitled "User Programmable Combination of Atomized
Particles for Electromagnetically Induced Cutting". This patent provides the
Company with broad claims related to a laser/water cutting apparatus and the
user controls specifying the resolution and penetration depth of the cut. This
apparatus is intended for cutting various tissues and materials including but
not limited to cartilage, bone, tooth, glass and semi-conductor chips.
In March 1999, the U.S. Patent and Trademark Office awarded BioLase a
patent (U.S. Patent No. 5,885,082) entitled "Dental and Medical Procedures
Employing Laser Radiation" that further broadens the Company's claims related to
its proprietary air and water cooling technology. The patent claims a method for
cutting dental tissues such as enamel, dentin, cementum, root material and bone
with a laser having a wavelength suitable for cutting such tissues and a cooling
fluid that contains water or a water and air mixture. This patent serves as a
continuation of U.S. Patent No. 5,020,995 awarded the Company in June 1991.
In June 1998, a patent (U.S. Patent No. 5,762,501) entitled "Surgical and
Dental Procedures using Laser Radiation" was awarded the Company which provides
it with broader claims related to its proprietary air and water cooling
technology (TTCS(TM)), designed to cool the tissue receiving laser energy and
adjacent tissue. This patent also serves as a continuation of U.S. Patent No.
5,020,995 awarded the Company in June 1991.
In July 1998, the Company was awarded a patent (U.S. Patent No. 5,785,521)
entitled "Fluid Conditioning System". This proprietary fluid conditioning
technology allows the practitioner to simultaneously apply medications,
anesthesia, vitamins and flavored fluids during certain dental and medical
procedures, thereby eliminating the need for separate, more cumbersome tools
while reducing operating time and the risk of infection. The Company intends to
incorporate this technology into its FlavorFlow(TM) product that is under
development.
In 1994, the United States Patent Office granted the Company a patent
covering a portable, hand-held laser tooth brushing instrument which was the
predecessor to the LazerSmile(TM) tooth whitening system. Other patents included
within the Company's domestic
and foreign patent portfolios consist of awards issued and pending related to
the Company's Er,Cr:YSGG HydroKinetic(TM) technology, its LaserSpray(TM),
LazerSmile(TM) and FlavorFlow(TM) products, and other proprietary laser
technology.
There can be no assurance that the issued patents or subsequent patents, if
issued, will adequately protect the Company's technology or that such patents
will provide protection against infringement claims by competitors.
BioLase also relies upon trade secrets, unpatented proprietary know-how,
continuing technological innovation and management experience to develop its
competitive position. The Company enters into confidentiality and technology
agreements with its employees pursuant to which such employees agree to maintain
the confidentiality of the Company's proprietary information and to assign to
the Company any inventions relating to the Company's business made by them while
in the Company's employ. There can be no assurance, however, that others may not
acquire or independently develop similar technology or, if patents are not
issued with respect to products arising from the Company's engineering and
development activities, that the Company will be able to maintain information
pertinent to such research as proprietary technology or trade secrets.
Marketing
- ---------
The Company markets its Millennium(R) system in the U.S. through a direct
sales force. The Company is in the process of expanding its domestic sales force
to better serve the domestic market. Internationally, the Company sells its
Millennium(R) through distributors that are trained by the Company in the
clinical and service aspects of the related technology.
The Company currently distributes its laser-based products in the United
States, Western Europe, the Middle East and the Far East and is actively working
to expand its worldwide network through pursuance of qualified and proven
distributors. The Company is presently developing aesthetic and dermatologic
applications for its Er,Cr:YSGG HydroKinetic(TM) technology.
The Company seeks third-party endorsements from respected practitioners,
professional associations and universities. By working with selected entities to
conduct testing and evaluation, the Company hopes to induce those entities to
become influential independent supporters of the Company's products. Management
believes that the perceived benefits of the Company's products to practitioners
and patients will result in positive word-of-mouth publicity for the Company.
The Company attends regional, national and international trade shows and
sponsors seminars to promote its products. Health professionals often
participate in seminars and in some regions are required to engage in continuing
certified education regarding advancements in the dental and medical fields. The
Company's marketing strategy adopts the premise that establishing lasers and
advanced technology as competitive marketing advantages for practitioners will
be important in creating sales growth.
It also adopts the premise that the consuming public will come to demand
the use of laser-based and HydroKinetic(TM) technologies in medical and dental
treatments. The Company
accepts the evidence that the public is becoming increasingly aware of the
benefits of lasers in dental, ENT, ophthalmological, dermatological, cosmetic
and general surgical applications and that the consuming public will be a key
factor in increasing demand for laser and HydroKinetic(TM) technologies within
the medical and dental professions.
Distribution of the Company's LazerSmile(TM) technology is presently done
through a third-party home-consumer product distributor. The manufacturing and
distribution rights have been licensed exclusively to this distributor through
June, 2000. The distributor currently markets the LazerSmile(TM) system through
various specialty catalogs and advertising pages in specialty and professional
magazines and journals. Sales to date of the product have been minimal and the
Company is reevaluating its opportunities related to the distribution of the
LazerSmile(TM) technology.
Customers
- ---------
The Company's customers include dentists, distributors, medical doctors and
hospitals. During 1999, one distributor, Sweden & Martina, the Company's Italian
distributor, accounted for approximately 19% of the Company's sales. During
1998, two distributors, Sweden & Martina and Ash Temple, the Company's Canadian
distributor, accounted for approximately 20% and 11%, respectively, of the
Company's sales. During 1997, Orbis High Tech Dental, the Company's previous
German distributor, accounted for approximately 67% of the Company's sales. No
other customers accounted for more than 10% of the Company's sales in 1999, 1998
or 1997.
Government Regulation
- ---------------------
The Company's products are subject to significant government regulation in
the United States and other countries. To clinically test, manufacture and
market products for human diagnostic and therapeutic use, the Company must
comply with mandatory regulations and safety standards established by the FDA
and comparable state and foreign regulatory agencies. Typically, products must
meet regulatory standards as safe and effective for their intended use prior to
being marketed for human applications. The clearance process is expensive and
time consuming, and no assurance can be given that any agency will grant
additional clearance for the sale of the Company's products for routine clinical
applications, that the length of time the process will require will not be
extensive, or that the cost of the process will not be substantial.
There are two principal methods by which FDA regulated devices may be
marketed in the United States. One method is under a Pre-Market Approval
("PMA"). A PMA application is required for a Class III medical device that does
not qualify for consideration under Section 510(k), discussed below. The review
period for a PMA application is fixed at 180 days, but the FDA typically takes
much longer to complete its review. As part of the approval of a PMA
application, the FDA typically requires clinical testing to determine safety and
efficacy of the
device. To conduct human clinical testing, typically the FDA must approve an
Investigational Device Exemption ("IDE"). Currently, the Company does not have
PMA applications pending for any of its products.
The other method is under Section 510(k) of the Food, Drug and Cosmetics
Act where applicants must demonstrate that the device for which clearance is
sought is substantially equivalent to a predicate device. The FDA's stated
intention is to review 510(k) notifications as quickly as possible, generally
within 90 days; however, the complexity of a submission or a requirement for
additional information will typically extend the review period beyond 90 days.
Domestic marketing of the product must be deferred until clearance is received
by the applicant from the FDA. In some instances, an IDE is required for
clinical trials for a 510(k) notification. In the event that a 510(k)
notification is turned down by the FDA, a PMA is generally then required. The
Company intends to utilize the 510(k) notification procedure whenever
applicable.
In 1999, the Company received several FDA clearances to market its laser
systems under various claims. Two of these clearances enhanced the hard-tissue
marketing claims already obtained in 1998 for the Company's HydroKinetic(TM)
technology incorporated in its Millennium(R) laser system. These additional
claims allow the Company to market its Millennium(R) laser system for all
classes of cavity preparation and other various hard-tissue applications on all
patients, young and old alike.
The Company also received clearance to market its Twilite(TM) soft-tissue
diode laser system in June 1999 for a variety of dental soft-tissue procedures
and other surgical soft-tissue applications in various medical fields.
In October 1998, the Company received its long-awaited FDA clearance to
market the Millennium(R) system, which incorporates the Company's proprietary
Er,Cr:YSGG HydroKinetic(TM) technology, for certain dental hard tissue
applications. The hard tissue clearance allowed the Company to commence sales
and marketing domestically of its Millennium(R) system for hard tissue
applications. In July 1997, the Company received FDA clearance to market a laser
system, incorporating the Company's Er,Cr:YSGG HydroKinetic(TM) technology, for
a broad range of dermatological and general surgical soft tissue applications.
The Company also received clearance from the FDA for its LaserSpray(TM)
tissue cooling system in 1995.
The Company expects to pursue clearances to market its Er,Cr:YSGG
HydroKinetic(TM) systems for other medical applications as well. The Company
completed clinical studies in the U.S. related to certain hard tissue dental
applications of its HydroKinetic(TM) technology that are on file with the FDA in
connection with the Company's submission of its 510(k) application. Such data
was the basis for the Company's successful clearance to market such technology
in the U.S. for certain dental hard tissue applications.
The Company continues to gather clinical data to strengthen its claims for
dental applications and to pursue claims in other medical fields that can
benefit from the use of the Company's HydroKinetic(TM) technology.
The FDA imposes various requirements on manufacturers and sellers of
products it regulates under its jurisdiction, such as labeling, manufacturing
practices, record keeping and
reporting. The FDA also may require post-marketing practices, record keeping and
reporting requirements.
There can be no assurance that additional approvals from the FDA will be
granted, that the process to obtain such approvals will not be expensive or
lengthy, or that the Company will have sufficient funds to pursue such
approvals. The failure to receive requisite approvals for the Company's products
or processes, when and if developed, or significant delays in obtaining such
additional approvals, could prevent the Company from commercializing its
products as anticipated and could have a materially adverse effect on the
financial condition, results of operations, cash flows and prospects of the
Company.
The following table sets forth the status of FDA clearance of the Company's
principal products:
- ------------------------------------------------------------------------------------------
Product Market Date Cleared Status
- ------------------------------------------------------------------------------------------
Millennium(R) Dental 1998/1999 Cleared To Market
TwiLite(TM) Dental / General Surgical 1999 Cleared To Market
DermaLase(TM) Dermatology, General Surgery 1997 Cleared To Market
LazerSmile(TM) Tooth Whitening N/A Clearance Not Required
FlavorFlow(TM) Dental Fluid Conditioning N/A Application Not Yet
Submitted
- ------------------------------------------------------------------------------------------
The Company is also subject to regulation under the Radiation Control for
Safety and Health Act of 1968 (the "Safety Act") administered by the Center for
Devices and Radiological Health ("CDRH") of the FDA. The CDRH controls energy
emissions of light and sound and electronic waves from electronic products.
These regulations require a laser manufacturer to file new product and annual
reports, to maintain quality control, product testing and sales records, to
distribute appropriate operation manuals, to incorporate certain design and
operating features in lasers sold to end-users and to certify and label each
laser sold to end-users as one of four classes of lasers (based on the level of
radiation from the laser). In addition, various warning labels must be affixed
to the product and certain protective devices must be installed, depending upon
the class of product. Under the Safety Act, the Company is also required to
register with the FDA as a medical device manufacturer and is subject to
inspection on a routine basis by the FDA for compliance with Good Manufacturing
Practice ("GMP") regulations. The GMP regulations impose certain procedural and
documentation requirements upon the Company relevant to its manufacturing,
testing and quality control activities. The CDRH is empowered to seek remedies
for violations of these regulatory requirements under the Federal Food, Drug and
Cosmetic Act. The Company believes that it is currently in substantial
compliance with these regulations.
Various state dental boards are considering the adoption of restrictions on
the use of lasers by dental hygienists. In addition, dental boards in a number
of states are considering educational requirements regarding the use of dental
lasers. The scope of these restrictions and educational requirements is not now
known, and they could have an adverse effect on sales of the Company's laser-
based products.
Foreign sales of the Company's laser-based products are subject to the
regulatory requirements of the importing country or, if applicable, the
harmonized standards of the European Community. These vary widely among the
countries and may include technical approvals, such as electrical safety, as
well as demonstration of clinical efficacy. The Company
is currently working to meet certain foreign country regulatory requirements for
certain of its products, and there can be no assurance that additional approvals
will be obtained.
The Millennium(R) system has been granted the "CE" mark evidencing compliance
with quality, safety and performance requirements mandated by the Medical Device
Directive adopted by the European Community. The Medical Device Directive is
the latest standard of medical device safety and performance which has been
adopted by the fourteen member states of the European Community and requires
that all medical device products be compliant to be eligible for marketing
within the member states.
The Millennium(R) system has also been granted the Canadian Standards
Association ("CSA") mark symbolizing compliance with certain safety and
performance standards. The CSA mark allows the Company to import and market its
Millennium(R) system in Canada.
The Company has not filed applications for regulatory approval with the
Japanese Ministry of Health and Welfare for any of its products, but is
developing clinical data in preparation for said application for the
Millennium(R) system.
The FDA and other governmental agencies, both in the United States and in
foreign countries, may adopt additional rules and regulations that may affect
the Company's ability to develop and market its products. There can be no
assurances that the Company's existing products will meet any future legislative
acts or requirements.
Employees
- ---------
As of March 31, 2000, the Company employed 67 people on a full-time basis,
consisting of 43 people in engineering/development/manufacturing, 9 in
administration and 15 in sales/customer service. The Company's employees are
not represented by a labor union, and it has experienced no work stoppage. The
Company believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company's principal offices are at 981 Calle Amanecer, San Clemente,
California where the Company leases approximately 23,000 square feet pursuant to
a lease expiring in September 2000. The Company believes that its facilities
are sufficient for its current needs.
ITEM 3. LEGAL PROCEEDINGS
On August 8, 1997, the Company filed a Complaint, which was subsequently
amended, in the United States District Court for the Central District of
California, Western Division, in an action entitled BioLase Technology, Inc. v.
---------------------------
Rudolf Schneider. In this action, the Company sought to recover from Rudolf
- ----------------
Schneider ("Schneider"), a former distributor, (i) lost profits of at least
$550,000.00 attributable to the former distributor's failure to perform its
obligations, particularly its commitment to purchase minimum quantities of
products, pursuant to the distribution agreement between the Company and this
distributor and (ii)$96,498.72 in
amounts owned to the Company by this former distributor for goods sold and
delivered and services performed by the Company.
On March 6, 1998, Schneider answered the complaint denying liability and
filed counterclaims against the Company. Mr. Schneider's counterclaims at that
time sought unspecified actual and punitive damages for alleged fraud, breach of
contract and breach of warranty associated with the transactions on which the
Complaint is based. Concerning the distribution agreement, Schneider sought
damages arising from the Company's alleged failure to disclose that the value of
his distributorship had been impaired by the Company's alleged previous practice
of selling allegedly defective product in the relevant territory. Concerning
the goods and services, Schneider admitted receipt of the relevant goods but
contended they were defective and nonconforming.
On September 20, 1999, the Court dismissed Schneider's counterclaim and
struck his answer after issuance of an order to show cause why such an order
should not be entered because of Schneider's failure to comply with the Court's
various pre-trial rules and requirements. Schneider did not respond to the order
to show cause. The Company, thereafter, made application for and obtained a
default judgment against Schneider. His default was entered on September 27,
1999. On November 29, 1999, after notice and opportunity to be heard, the Court
entered judgment against Schneider on the Company's complaint in the amount of
$1,210,907. Schneider did not appeal from and has not sought to vacate this
judgment. The Company is now in the process of attempting to enforce this
judgment through the German courts.
MFC Merchant Bank v. BioLase Technology, Inc., was filed On March 10, 2000 in
---------------------------------------------
the U.S. District Court for the Central District of California, alleging that
the Company refused to allow the plaintiff to sell 60,000 shares of our common
stock under the exemption of Rule 144 promulgated under the Securities Act of
1933, as amended. The complaint seeks, among other things, declaratory relief as
to the ownership of the shares, imposition of a constructive trust and damages.
The Company answered the complaint on April 7, 2000 and has commenced the
discovery phase of the case. The Company believes the complaint to be without
merit and intends to vigorously contest this matter.
The Company does not believe that these lawsuits or any other lawsuits to
which it is a party will have a material adverse effect on the Company's
financial condition, results of operations, cash flows or prospects.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since November 12, 1992, the Company's common stock has been authorized for
inclusion on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") and is included in The Nasdaq Stock Market, Inc.'s SmallCap
Market. The Company's common stock is quoted on such system under the symbol
"BLTI". The following table sets forth, for the periods indicated, the high and
low sales prices for the common stock as reported by NASDAQ.
High Low
-------- -------
1999
----
1st Quarter 3 1/4 2
2nd Quarter 2 15/16 1 13/16
3rd Quarter 3 3/4 2 1/8
4th Quarter 2 7/8 2
1998
----
1st Quarter 3 5/8 2 7/16
2nd Quarter 4 3/8 2 13/16
3rd Quarter 4 2 13/16
4th Quarter 3 3/4 1 3/4
On December 1, 1999, the Company issued to GEM Holdings Corp. ("GEM")
16,600 shares of unregistered Common Stock, par value $.001 per share, and
common stock purchase warrants expiring December 1, 2002 (the "GEM Warrants")
entitling the holder to purchase up to 50,000 shares of Common Stock at an
exercise price of $3.00 per share. The securities were issued to GEM in
consideration for GEM continuing to provide a guaranty of a $2,500,000 credit
facility that the Company renewed on December 1, 1999.
The issuance of the securities to GEM was exempt from the registration
requirements of the Securities Act of 1933, as amended, (the "Securities Act")
pursuant to the provisions of Section 4(2) of the Securities Act as a
transaction by an issuer not involving any public offering. GEM represented to
the Company that it is an accredited investor as defined in Rule 501 promulgated
pursuant to the Securities Act and agreed that it would offer or resell the
securities issued only if they were registered under the Securities Act or an
exemption from such registration is available, in which case the Company, if it
so requests, shall have received an opinion of counsel to GEM, in form and
substance reasonably satisfactory to the Company, to that effect. GEM also
agreed that the Company shall not permit the transfer of such securities unless
such registration has been effected or such an exemption is available. The
Company has issued "stop transfer" instructions to the transfer agent of its
Common Stock with respect to the shares of Common Stock issued to GEM and acts
as the transfer agent for the GEM Warrants. The certificates representing
the securities issued to GEM have had legends endorsed thereon reflecting the
restrictions on transferability described above.
On February 11, 2000, the Company offered, and subsequently completed, the
issuance and sale of an aggregate 1,250,000 shares of its restricted Common
Stock, par value $.001 per share ("Unit Common Stock"), and 625,000 Redeemable
Stock Purchase Warrants ("Unit
Warrants") to institutional investors. In addition, the Company issued to
Eurocapital Limited (the "Placement Agent") 62,500 redeemable stock purchase
warrants (the "Agent Warrants" and, collectively with the Unit Common Stock and
Unit Warrants, the "Securities"). Each of the Unit and Agent Warrants entitles
the holder hereof to purchase one share of Common Stock at an exercise price of
$3.00 per share through March 31, 2002. The Securities were sold only to
accredited investors exclusively.
The Securities were sold in units ("Units") consisting of 10,000 shares of
Common Stock and 5,000 Warrants at a price of $21,775 per Unit, or aggregate
consideration of $2,721,875 for all of the Securities sold. Net proceeds
recorded by the Company, after commissions and non-accountable expenses paid to
the Placement Agent of $231,359 and estimated direct expenses of $40,000, were
$2,450,516.
The Company is obligated to file a registration statement with the
Securities and Exchange Commission to register the Securities no later than May
31, 2000 with such registration statement declared effective no later than
August 31, 2000. Should such registration statement not be declared effective by
the specified date, the Company is obligated to issue penalty shares of its
common stock at the rate of 100 common shares for each Unit sold for each of the
3 months (or portion thereof) following the specified effective date. The
penalty rate increases to 200 common shares for each Unit sold for each month
(or portion thereof) following November 30, 2000 to a maximum penalty share
issuance of 1,000 shares per Unit sold.
The Warrants and Agent Warrants (collectively, the "Warrants") include
certain call features whereby the Company may, by written notice to the
registered holders, call all of the then outstanding Warrants for redemption,
provided the average between the high and low prices at which shares of Common
Stock trade in the principal market in which they then trade exceeds two hundred
percent (200%) of the respective Warrant Exercise Price for the ten (20)
consecutive trading days preceding the date of such call. The notice shall
specify a date (the "Warrant Redemption Date") no less than thirty (30) days
after the date of such notice on which all Warrants then remaining unexercised
and outstanding shall be redeemed by the Company. In redemption for each
Warrant, the Company shall pay to the holder thereof in cash the sum (the
"Warrant Redemption Price") of One Cent ($0.01). Effective upon the Warrant
Redemption Date, each Warrant being called for redemption shall be deemed to be
no longer outstanding and shall represent only the right to receive from the
Company the Warrant Redemption Price upon surrender to the Company of the
certificate representing such Warrant. Between the date of the notice and the
Warrant Redemption Date, holders may exercise their Warrants to purchase Common
Stock.
The issuance and sale of the Securities was exempt from the registration
requirements of the Securities Act pursuant to Sections 4(2) and 4(6) of the
Securities Act as transactions by an issuer not involving any public offering
and as transactions involving offers and sales by an issuer solely to accredited
investors in which the aggregate offering price did not exceed the amount
allowed under Section 3(b) of the Securities Act, there was no advertising or
public solicitation in connection with the transactions, and the issuer filed
the prescribed notice with the Securities and Exchange Commission. Each
purchaser of Securities represented, with supporting information, that such
purchaser was an accredited investor; that such purchaser was acquiring the
Securities for such purchaser's own account and not for the account or benefit
of any other person; that the Securities were being acquired for investment and
not with a view to the distribution thereof; and that such purchaser did not
intend to sell or otherwise dispose of all or any part of the Securities at the
time of purchase or upon the occurrence or nonoccurrence of any predetermined
event. Each purchaser also agreed that such purchaser would offer or resell
Securities only if the Securities are registered under the Securities Act or an
exemption from such registration is available (and confirmed by an opinion of
counsel satisfactory to the Registrant). The Registrant placed restrictive
legends on the certificates representing the Securities and placed "stop
transfer" instructions with the transfer agent for Common Stock. Since the
Registrant is acting as transfer agent for the Warrants, it will impose
comparable procedures with respect to requests for the transfer of Warrants.
The Company has not paid any cash dividends on its common stock since its
incorporation and anticipates that, for the foreseeable future, earnings, if
any, will continue to be retained for use in its business.
As of March 31, 2000, the total number of record holders of the Company's
common stock was 399.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data for the
five years ended December 31, 1999, 1998, 1997, 1996 and 1995. This information
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto included in Item 8 herein and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7 herein.
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands, except per share data)
-------------------------------------
Consolidated Statements of
Operations Data:
Sales $ 7,004 $ 1,465 $ 1,786 $ 692 $ 1,152
Gross profit $ 2,852 $ 47 $ 259 $ 133 $ 311
Operating expenses (1) $ 7,601 $ 10,369 $ 3,258 $ 2,622 $ 2,356
Loss from operations $(4,748) $(10,322) $(2,999) $(2,489) $(2,045)
Net loss $(4,797) $(10,346) $(2,824) $(2,463) $(2,024)
Loss per share
- basic and diluted $ (0.28) $ (0.69) $ (0.21) $ (0.21) $ (0.21)
Shares used in computation of
basic loss per share(2) 17,254 15,062 13,385 11,532 9,851
December 31,
------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands)
--------------
Consolidated Balance Sheet Data:
Working capital (3) $(1,331) $ 89 $ 1,719 $ 3,670 $ 1,524
Total assets $ 2,672 $ 3,911 $ 3,396 $ 4,689 $ 2,512
Long-term liabilities $ - $ - $ - $ - $ -
Stockholders' equity (deficit) (4) $ (939) $ 662 $ 2,095 $ 3,914 $ 1,844
(1) Includes (1) non-recurring charges in 1999 and 1998 of $1,093,000 and
$5,135,000, respectively, related to (i) a severance agreement, (ii) a
consulting agreement, and (iii) a write-off of product development assets
in 1999, and a $5,135,000 write-off of in-process research and development
costs related to the purchase of Laser Skin Toner, Inc. assets in 1998.
(2) The basis for determining the number of shares used in computing basic loss
per share is described in Note 1 to Consolidated Financial Statements.
(3) During the first quarter of 2000, the Company received net proceeds in
excess of $4,000,000 related to a private placement of its securities and
exercises of certain warrants and options. All of the net proceeds have
been applied in a manner that increases working capital.
(4) The Company has never declared or paid dividends on its common stock.
refinance the credit facility. No assurances can be given that the Company will
be able to refinance the line of credit or that the terms on which it may be
able to refinance the line of credit will be as favorable as the terms of the
existing line. If the Company is unable to refinance and is therefore required
to repay the line of credit, the diversion of resources to that purpose may
adversely affect the Company's operations and financial condition.
Impact of Changing Prices on Sales and Income
- ---------------------------------------------
The Company attempts to minimize the impact of inflation on production and
operating costs through cost control programs and productivity improvements.
Over the past three years, the inflation rate has been relatively low.
Nonetheless, the Company has continued to experience increases in the cost of
labor and some materials, in the face of requests for price reductions from
customers. Due to competitive forces and market imposed selling price ceilings,
the Company was unable to raise prices to its customers to pass along the cost
increases experienced. The Company, however, shall continue to pursue price
reductions from its materials vendors in an attempt to improve or maintain
margins.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations - 1999 as Compared to 1998
- ------------------------------------------------
Sales for 1999 increased $5,539,000, or 378%, to $7,004,000 from the
$1,465,000 reported for 1998 representing the highest reported sales in the
Company's history. Export sales were $2,356,000 during 1999 compared to
$598,000 during 1998, an increase of $1,758,000, or 294%. Domestic sales
increased $3,781,000, or 436%, to $4,648,000 during 1999 from the $867,000
reported during 1998. The significant increase in consolidated sales is due
principally to the successful transition from a primarily research and
development company to the initial phases of a sales and marketing organization.
The increase is directly related to the Company's (i) marketing activities that
included educating dentists with the financial and clinical benefits associated
with the use of the Company's laser products, in particular, the Millennium
laser system; (ii) highly focussed domestic marketing efforts and upsizing of
its domestic sales force; and (iii) emphasis on obtaining prominent
international distributors to distribute its laser products.
During 1999 and 1998, the Company did not have any sales to its German
distributor. It is still management's belief that the German selling market
represents one of the, if not the single, largest selling markets in Europe.
Accordingly, the Company terminated its distribution agreement with its German
distributor and reacquired its distribution rights allowing it to pursue a
relationship with a new distributor. The Company is presently undergoing
negotiations with potential candidates to obtain a replacement distributor in
Germany and anticipates the completion of such negotiations no later than the
second quarter of 2000.
In June, 1999, the Company announced an exclusive distribution agreement
with a home-consumer product distributor to manufacture and market the Company's
LazerSmile Tooth Whitening product under the name IGEA LazerWhite Tooth
Whitening System. The agreement provides for a royalty to be paid to the
Company and includes a minimum annual sales quota of 500,000 units. The Company
has received certain prepaid royalties and has not recognized any such royalties
during 1999. Prior to the distribution agreement, the Company recorded a
nominal amount of sales related to its LazerSmile system. The exclusive
distribution agreement expires in June, 2000. The Company is currently
evaluating its opportunities related to the sales and marketing of its
LazerSmile technology and is uncertain at this time as to whether it intends to
continue its relationship with the present distributor of its LazerSmile
technology.
Gross profits were $2,853,000, or 41% of sales, in 1999, an increase of
$2,806,000 from the $47,000 reported in 1998. The increase in gross profits was
due to the significant increase in sales. The significant improvement in the
gross margin, from 3% in 1998 to 41% in 1999, was due principally to an improved
sales product mix and realized economies of scale associated with the higher
sales volume. The Company anticipates improvements to its gross margin as sales
increase and further economies of scale are realized. The Company's recent
introduction of its diode laser system, the Twilite, should also contribute to
the anticipated improvement in the Company's gross margin.
Operating expenses decreased $2,768,000 from the $10,369,000 reported in
1998 to $7,601,000 in 1999. Operating expenses for 1999 included non-recurring
charges of $1,093,000 and $5,135,000, respectively, for charges associated with
(i) a severance agreement for a former executive officer, (ii) a consulting
agreement, (iii) a write-off of assets related to product development, and (iv)
a provision related to the reacquisition of distribution rights in Germany from
the Company's previous distributor. 1998's operating expenses included a write-
off of purchased research and development costs related to the acquisition of
undeveloped technology from a developmental company, Laser Skin Toner, Inc.
("LSTI"). Absent these non-recurring charges, operating expenses for 1999
would have been $6,508,000 compared to $5,234,000 for 1998, a comparative
increase of $1,274,000, or 24%.
Sales and marketing expenses were $2,701,000 for 1999 compared to
$1,629,000 reported for 1998, an increase of $1,072,000, or 66%. The increase
is due principally to the significant rise in sales volume during 1999 and the
Company's increased marketing efforts associated with creating public awareness
of its technology and products. General and administrative expenses, absent the
non-recurring charges related to the severance agreement for a former executive
officer and costs related to the reacquisition of the Company's distribution
rights in Germany of $130,000 and $480,000, respectively, were $1,863,000 for
1999 compared to $1,780,000 for 1998, a modest increase of $83,000, or 5%. The
increase was due principally to higher levels of administrative staffing and
related personnel expenses combined with increases in various professional and
administrative costs associated with the Company's growth. Engineering and
development expenses were $1,944,000 in 1999 excluding non-recurring charges
related to the consulting agreement with a former principal of LSTI and the
write-off of assets related to product development of $101,000 and $382,000,
respectively, compared to $1,825,000 in 1998, an increase of $119,000, or 7%.
The comparative increase is due principally to increased engineering staffing
associated with the Company's growth and higher engineering project expenses
related to existing product enhancements and redesigns combined with new product
development, in particular, the Millennium II and the Twilite laser systems.
In December, 1999, the Company licensed the undeveloped LSTI technology
acquired for $5,135,000 in 1998 to a developmental company in exchange for a
royalty on future sales of products encompassing such technology. The decision
to license the undeveloped technology was based on the Company's intention to
focus on the marketing and further enhancement of products embodying its
HydroKinetic technology, including the Millennium II, and development of new
products. See Item I, "Description of Business - Acquisition of Laser Skin
Toner, Inc."
Interest income during 1999 was $45,000, a decrease of $13,000, or 22%,
from the $58,000 reported in 1998, while interest expense increased $12,000, or
15%, to $94,000 during 1999 from the $82,000 reported in 1998. The decrease in
interest income was due to lower average balances of cash and marketable
securities during 1999 compared to the balances held in interest-bearing
accounts in 1998. The increase in interest expense was due principally to
higher average outstanding balances under the Company's line of credit in 1999
versus 1998.
Results of Operations - 1998 as Compared to 1997
- ------------------------------------------------
Sales for 1998 were $1,465,000, compared to $1,786,000 reported in 1997.
The decrease in sales reflects primarily a decrease in shipments of the
Company's laser-based HydroKinetic systems during the first nine months of 1998
due principally to a reduction in the Company's export sales during 1998, down
approximately $709,000 from those reported in 1997. The reduction in export
sales was due primarily to a decrease in sales to the Company's German
distributor which had been the most significant customer for Millennium systems
in 1997. The German distributor requested a deferral of Millennium systems
pending a partial redesign of the hand piece to address more effectively the
requirements of the German market. The decrease was partially offset by an
increase in sales during 1998 of $455,000 in aggregate to the Company's new
Italian and Canadian distributors.
The United States Food and Drug Administration ("FDA") in October 1998
granted clearance to the Company to market the Millennium system in the United
States for certain dental hard tissue applications. The FDA had previously
granted clearance for the marketing of Millennium for certain soft tissue
applications. The October 1998 action by the FDA has permitted the Company to
commence active marketing of the Millennium system in the United States. Sales
for December 1998 were $777,000, attributable primarily to sales of Millennium
systems. This represents a dramatic increase over sales for October and
November, bringing total 1998 fourth quarter sales to $879,000. Increased sales
during December 1998 are attributable to initial domestic market acceptance of
the Millennium, more aggressive marketing through the Company's expanded
domestic sales force and the addition of new international distributors. The
Company expects that this level of increased sales will continue into 1999.
Commencing June 1997, sales of Millennium systems replaced sales of an earlier
generation of laser system which had been phased out by early 1997 and are
currently not being sold or marketed by the Company.
In August 1998, the Company introduced its first consumer product, the
LazerSmile Tooth Whitening System, which utilizes a monochromatic optical energy
light source embedded within a toothbrush in conjunction with a clear, non-
abrasive tooth whitening gel. The Company recognized a nominal amount of
revenue from LazerSmile test marketing in 1998.
Gross profits were $47,000, or 3% of net sales, in 1998, compared to
$259,000, or 15% of net sales, in 1997. The Company's laser division reported a
gross loss of $86,000 on net sales of $1,202,000 in 1998, compared to a gross
profit of $79,000 on net sales of $1,398,000 in 1997. The decrease in gross
profits was due principally to production inefficiencies brought about by the
delay in receipt of the anticipated FDA hard tissue clearance coupled with
ongoing product development. Gross profit margins attributable to the
Millennium were still below desired levels in 1998 and remain below desired
levels into 1999. The Company expects to realize improved margins on its
Millennium sales during 1999 through improved production layouts, other
production efficiencies and lower cost of materials. Gross profit in 1997 was
adversely affected by a $164,000 increase in the inventory reserve related to
the termination of the active marketing of the Company's prior generation of
laser-based systems.
Operating expenses, net of write off of purchased research and development
costs, increased $1,976,000, or 61%, to $5,234,000 in 1998, compared to
$3,258,000 in 1997. Sales and marketing expenses increased $674,000, to
$1,629,000 in 1998, compared to $955,000 reported in 1997. The increase was due
mainly to greater participation by the Company at various dermatological and
dental trade shows, payroll and other costs associated with the Company's
establishment of a domestic sales force, its continued pursuit of qualified
international distributors, and the initial sales efforts associated with the
introduction of LazerSmile. General and administrative expenses increased
$500,000, to $1,780,000 in 1998, compared to $1,280,000 reported in 1997. This
change was primarily a result of increased expenses associated with advertising
and promotion of the Company through various publications and investor forums,
public relation announcements associated with the Company's products and
regulatory clearances, and increases in employee related expenses associated
with increased staffing and additions to management. Engineering and
development expenses reported in 1998 were $1,825,000, compared to $1,023,000
reported in 1997. The increase relates principally to costs associated with the
1998 redesign of the Millennium hand piece, enhancements to the existing
Millennium configuration and the finalization of the design of LazerSmile in
anticipation of its product launch.
On July 2, 1998, the Company acquired substantially all of the assets of
Laser Skin Toner, Inc. ("LSTI"), a development stage company. The assets
acquired relate primarily to the proprietary laser-based technology being
developed by LSTI for non-invasive laser treatment in the field of aesthetic
skin rejuvenation, including all intellectual property rights consisting of
patents, patent applications, a trademark application and certain know-how. At
the time of the acquisition, the intellectual property embodying this
developmental effort represented substantially all of LSTI's assets, and the
developmental efforts did not appear applicable to any alternative use. As
consideration for the assets acquired, the Company issued to LSTI an aggregate
1,600,000 shares of the Company's common stock (the "Shares"), including 182,880
shares of common stock retained by the Company pending the achievement by the
business of specified performance objectives (the "Performance Shares").
Pursuant to a separate agreement, the Company also issued 50,000 shares of its
common stock to
O'Donnell Eye Centers, Inc. ("OECI"), a Missouri corporation, in consideration
for the license of technology that is the subject of a pending patent
application.
A valuation of LSTI's in-process research and development effort as of the
date of acquisition assigned a value of $5,134,920, the full amount of the
consideration paid by the Company in its acquisition of LSTI's assets, to the
in-process research and development. The Company's management had the primary
responsibility for estimating the value of the in-process research and
development. In accordance with Financial Accounting Standards Boards ("FASB")
Interpretation No. 4, "Application of FASB No. 2 to Business Combinations
Accounted for by the Purchase Method", the $5,134,920 assigned to the in-process
research and development effort, for which only the single use existed, was
charged to expense on the date of the acquisition.
The Company had since determined that it was in the best interests of its
stockholders to continue its focus on the marketing and further enhancement of
products embodying its HydroKinetic technology, including its Millennium system,
and not to further develop the LSTI technology. Accordingly, the Company
intends to pursue the sale or other disposition of the assets acquired from LSTI
encompassing the LSTI technology. No assurances can be given regarding either
the Company's ability to dispose of the LSTI technology on a basis acceptable to
the Company or the amount and form of the consideration that the Company might
receive in exchange for the LSTI technology.
The Company's efforts devoted to the LSTI technology since the date of
acquisition have not provided a basis for the Company either to revise or to
validate its estimates made at the time of acquisition regarding the time and
resources required to complete the development of the LSTI technology.
Interest income decreased $126,000, to $58,000 in 1998, compared to
$184,000 in 1997. This decrease reflects lower 1998 average balances of cash,
cash equivalents and interest-bearing marketable securities. Interest expense
increased $73,000, to $82,000 in 1998, compared to $9,000 in 1997, due to the
existence of borrowings under a line of credit during the entire 1998 period as
compared to only one month during 1997.
Financial Condition
- -------------------
The Company's working capital requirements have been financed over the past
several years through the private placement of the Company's equity securities.
Such placements generated net proceeds of $2,748,000, $3,593,000 and $720,000
during 1999, 1998, and 1997, respectively. Subsequent to December 31, 1999, the
Company raised approximately $2,450,000 of net proceeds through a private
placement of equity securities. Subsequent to the Company's 1999 year end,
proceeds in excess of $1,500,000 were received from the exercise of certain
stock purchase warrants and stock options. In addition, the Company has a
$2,500,000 short-term line of credit, of which, $1,158,000 is available, for the
purchase of inventory.
The aggregate of cash and cash equivalents and marketable securities
increased $505,0000 during 1999. Operating activities in 1999 utilized
$1,897,000 of cash compared to $4,849,000 and $4,009,000 in 1998 and 1997,
respectively; the decrease due principally to higher sales and reduced
receivables and inventory levels. Investing activities in 1999 provided
$184,000 in cash compared to $5,000 and $2,715,000 in 1998 and 1997,
respectively; 1997's large contribution due principally to the $2,872,000 sale
of marketable securities for use as working capital. 1999's financing
activities provided $2,470,000 in cash compared to $5,055,000 and $1,158,000 in
1998 and 1997, respectively; the decrease in 1999 versus 1998 due principally to
the Company's payment of $363,000 towards its line of credit compared to the
$1,404,000 draw-down of such line in 1998. 1999's financing activities
reflected a reduction of $845,000 in proceeds received from the issuance of
common stock compared to 1998.
Accounts receivable decreased $232,000 during 1999 compared to 1998 due
principally to improved collection efforts and ratable sales during the fourth
quarter of 1999 compared to those of the same period of 1998.
Inventories decreased $1,272,000 to $658,000 compared to $1,930,000 in
1998. The decrease is attributed to improved inventory control and
establishment of just-in-time relationships with certain primary material
vendors. The reduction in inventory was partially offset by an $82,000
provision for obsolete inventory charged in 1999 to transition from the
Company's previous Millennium laser system version to its recently introduced
Millennium II version. The Company believes that through 1998 its operations
involved primarily research and development while awaiting key regulatory
clearances and that accordingly its operations did not reflect normal business
cycles, so that information about inventory turns would not have been
meaningful. The Company believes that such information should become meaningful
once a pattern of deliveries of Millennium systems has been established.
Prepaid assets decreased $59,000 in 1999 compared to 1998 due principally
to the amortization of prepaid directors and officers liability insurance
related to a 2-year premium paid in 1998.
Liability under a line of credit established in December 1997 to finance
inventory decreased $363,000 from 1998 to 1999. This decrease is a net result
of draw-downs against the line aggregating $184,000 offset by payments made to
the line of $547,000. The balance available for future inventory purchases,
should the need arise, is $1,158,000. The line of credit is due to expire
December 1, 2000.
The aggregate of accounts payable and accrued liabilities increased
$725,000 in 1999 compared to 1998. This increase is attributable principally to
(i) higher payroll related accruals associated with the Company's increased
staffing, (ii) greater warranty level reserves required given the sales growth
experienced during 1999, and (iii) an accrual for $480,000 in estimated costs
associated with the reacquisition of distribution rights in Germany.
Capital expenditures during 1998 totaled $66,000 and were primarily related
to the purchase of various personal computer workstations associated with the
Company's growth. Depreciation of fixed assets was $112,000 for 1999 compared
to $94,000 for 1998 due principally to the addition of the computer equipment.
The Company also recognized a $179,000 charge to operating expenses representing
the carrying value of certain engineering molds that are no longer of use.
Patents, trademarks and licenses in 1999 decreased $20,000 from 1998 reflecting
principally the amortization of the intangible assets for 1999.
Other assets increased $43,000 in 1999 compared to 1998 due principally to
a deposit placed with an injection mold manufacturer for the creation of molds
for the Millennium II laser system.
Stockholders' equity at December 31, 1999 was in a deficit position of -
$939,000, compared to an equity position of $662,000 at December 31, 1998. The
deficit position in 1999 was created by the 1999 net loss of $4,797,000
partially offset by (i) equity fundings related to a private placement of the
Company's common stock and the exercise of stock purchase warrants and options
of $2,748,000 and $354,000, respectively, and (ii) a $94,000 increase to
stockholders' equity representing the extension of stock option terms related to
a severance agreement with a former executive officer. Subsequent to December
31, 1999, the Company completed a private placement of 1,250,000 shares of
restricted common stock and 687,500 stock purchase warrants for net proceeds of
$2,451,000. The Company executed an agreement with the former shareholders of
LSTI whereby 525,000 of the 1,417,120 shares of the Company's common stock
issued as consideration for the assets of LSTI are to be returned to the Company
for subsequent cancellation. The agreement also calls for the cancellation of
the 182,880 shares of the Company's common stock held in escrow for issuance to
LSTI based on future performance of the technology purchased from LSTI. See Item
I, "Description of Business - Acquisition of Laser Skin Toner, Inc."
Liquidity and Capital Resources
- --------------------------------
The Company remains dependent upon its ability to obtain outside financing
either through the issuance of additional shares of its common or preferred
stock or through borrowings until it achieves sustained profitability through
increased sales and cost containment. The Company's business continues to focus
on the manufacturing and marketing of its laser-based HydroKinetic tissue
cutting system, the Millennium II and its new diode laser product, the Twilite.
Financing the development of laser-based medical and dental devices and
instruments and the operations of the Company has been achieved principally
through the private placements of preferred and common stock and the exercise of
stock options and warrants, though the Company has experienced significant
increased sales of its Millennium system during 1999. During the three years
ended December 31, 1999, the Company raised approximately $7,061,000 of net
equity funds in this manner.
Prior to certain equity funding, management believed that the Company
required significant resources in 2000, principally to fund the Company's
working capital needs to support the production and marketing of the Company's
laser-based products for various dental and medical applications, efforts
directed towards further extensions and refinements of existing products, and
continuing research and development activities. Based upon the Company's private
placement subsequent to December 31, 1999, as more fully discussed below, the
Company believes that it should have sufficient capital resources to sustain it
for the next 12 months in relation to its fiscal year 2000 business plan. Should
the Company require further capital resources in fiscal year 2000, the Company
would most likely address such requirement through a combination of the sales of
its products, sale of equity securities in private placements, and/or debt
financings. No assurances can be given, however, that the Company would be able
to obtain such additional capital resources.
If the Company is required to raise additional capital in fiscal year 2000
and is unable to do so, the Company might attempt to preserve its available
resources by deferring the creation or satisfaction of various commitments,
deferring the introduction of various products or entry into various markets, or
otherwise scaling back its operations. If the Company were unable to raise such
additional capital or defer certain costs as described above, it would have an
adverse effect on the financial position, results of operations, cash flows and
prospects of the Company and ultimately on its ability to continue as a
going-concern.
Subsequent to December 31, 1999, the Company completed a private placement
in which it issued 1,250,000 shares of its restricted common stock to
institutional investors and 687,500 redeemable stock purchase warrants to
purchase common stock at an exercise price of $3.00 per share. The warrants
expire March 31, 2002 and allow for the Company to call the warrants, with not
less than 30 days written notice, at a redemption price of $.01 each, provided
that the average between the high and low prices at which the shares of common
stock trade in the principal market in which they then trade exceeds 200% of the
exercise price for twenty consecutive trading days preceding the date of such
call. Gross proceeds received from the private placement were approximately
$2,722,000. Net proceeds, after placement agent cash commissions and expenses of
approximately $231,000 and estimated expenses incurred by the Company of
$40,000, were approximately $2,451,000.
Subsequent to December 31, 1999, the Company also received proceeds of
approximately $2,451,000 representing the aggregate exercise price of certain
outstanding stock purchase warrants and stock options.
At December 31, 1999, the Company had $1,342,000 outstanding under a
revolving credit agreement with a bank. The revolving credit agreement provides
for borrowings of up to $2,500,000 for the financing of inventory and is
collateralized by substantially all of the Company's accounts receivable and
inventories. The interest rate is fixed throughout the term of the credit
agreement and is computed based upon LIBOR plus 0.5% at the time of any
borrowings. At December 31, 1999, the weighted average interest rate on the
outstanding balance was 6.69%. The Company is required to reduce the
outstanding loan balance by an amount equal to the cost of goods sold associated
with sales of inventory upon collection of sales proceeds. The current
revolving credit agreement expires on December 1, 2000 at which point the
Company will be required to either pay any remaining balance of the credit
facility or refinance the credit facility. No assurances can be given that the
Company will be able to refinance the line of credit or that the terms on which
it may be able to refinance the line of credit will be as favorable as the terms
of the existing line. If the Company is unable to refinance and is therefore
required to repay the line of credit, the diversion of resources to that purpose
may adversely affect the Company's operations and financial condition.
Impact of Changing Prices on Sales and Income
- ---------------------------------------------
The Company attempts to minimize the impact of inflation on production and
operating costs through cost control programs and productivity improvements.
Over the past three years, the inflation rate has been relatively low.
Nonetheless, the Company has continued to experience increases in the cost of
labor and some materials, in the face of requests for price reductions from
customers. Due to competitive forces and market imposed selling price ceilings
during 1999, the Company was not able to raise prices to its customers to pass
along the cost increases experienced. The Company, however, shall continue to
pursue price reductions from its materials vendors in an attempt to improve or
maintain margins.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not currently hold any market risk sensitive instruments for
trading or other purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company at December 31, 1999 and
1998 and for the three year period ended December 31, 1999, along with the notes
thereto, and the Report Of Independent Accountants thereon, required to be filed
in response to this Item 8, begin at page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 of Part III is incorporated by reference to
the definitive Proxy Statement for the 2000 Annual Meeting of Stockholders to be
held May 23, 2000, to be filed with the Commission within 120 days of the end of
the Company's last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 of Part III is incorporated by reference to
the definitive Proxy Statement for the 2000 Annual Meeting of Stockholders to be
held May 23, 2000, to be filed with the Commission within 120 days of the end of
the Company's last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information called for by Item 12 of Part III is incorporated by reference to
the definitive Proxy Statement for the 2000 Annual Meeting of Stockholders to be
held May 23, 2000, to be filed with the Commission within 120 days of the end of
the Company's last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 13 of Part III is incorporated by reference to
the definitive Proxy Statement for the 2000 Annual Meeting of Stockholders to be
held May 23, 2000, to be filed with the Commission within 120 days of the end of
the Company's last fiscal year.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Exhibits
The following exhibits are being filed with this Annual Report on Form
10-K or are incorporated by reference therein in accordance with the
designated footnote references.
3. Articles of Incorporation and Bylaws
3.1 Restated Certificate of Incorporation, as Amended. (2)
3.2 Amended and Restated Bylaws. (3)
4. Instruments Defining the Rights of Holders, Including Indentures
4.3 Certificate of Designations, Preferences and Rights of Series A
6% Redeemable Cumulative Convertible Preferred Stock of BioLase
Technology, Inc. (5)
4.4 Form of Participant Stock Purchase Warrant Certificate. (6)
4.5 Form of Agent Stock Purchase Warrant Certificate. (6)
4.6 Rights Agreement dated as of December 31, 1998 between the
Company and U.S. Stock Transfer Corporation. (7)
10. Material Contracts
10.1 Premises Lease for 981 Calle Amanecer, San Clemente,
California. (1)
10.2 1990 Stock Option Plan. (1)
10.9 1992 Stock Option Plan. (1)
10.18 Amended and Restated 1993 Stock Option Plan. (3)
10.18a First Amendment to Amended and Restated 1993 Stock Option
Plan. (4)
10.19 Amended and Restated 1993 Stock Compensation Plan. (2)
10.20 Form of Stock Option Agreement under the 1993 Stock Option
Plan. (2)
10.26* Distribution Agreement between the Company and Orbis High Tech
Dental GmbH. (6)
10.27* Distribution Agreement between the Company and Henry Schein,
Inc.
10.28 Amended and Restated Employment Agreement, dated December 18,
1998, by and between the Company and Jeffrey W. Jones. (8)
10.29 Offer of Employment, dated January 8, 1999, from the Company
to Keith G. Bateman. (8)
10.30* Distribution Agreement between the Company and Sweden &
Martina SpA. (8)
21. Subsidiaries (1)
23. Consents of Experts and Counsel
27. Financial Data Schedule (electronic filing only)
- -------------------
* Portions of these Agreements have been omitted pursuant to a
confidentiality request filed with the Securities and Exchange
Commission.
(1) Filed with the Company's Registration Statement on Form S-1 dated
October 9, 1992 and incorporated by reference.
(2) Filed with the Company's 1993 Annual Report on Form 10-K dated April
14, 1994 and incorporated by reference.
(3) Filed with the Company's 1995 Second Quarter Report on Form 10-QSB
dated September 15, 1995 and incorporated by reference.
(4) Filed with the Company's 1995 Annual Report on Form 10-KSB dated May 6,
1996 and incorporated by reference.
(5) Filed with the Company's 1996 Third Quarter Report on Form 10-QSB dated
November 19, 1996 and incorporated by reference.
(6) Filed with the Company's 1996 Annual Report on Form 10-KSB dated April
11, 1997 and incorporated by reference.
(7) Filed with the Company's Registration Statement on Form 8A dated
December 29, 1998 and incorporated by reference.
(8) Filed with Amendment No. 1 to the Company's Registration Statement on
Form S-3 dated February 12, 1999 and incorporated by reference.
(b) Reports on Form 8-K
None
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: April 14, 2000 BIOLASE TECHNOLOGY, INC.
a Delaware corporation
/s/ Jeffrey W. Jones
--------------------
Jeffrey W. Jones
President, Chief Executive Officer,
and Director
Pursuant to the requirements of the Securities Exchange act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April 14, 2000.
Signatures Title
- ---------- -----
Principal Executive Officer:
/s/ Jeffrey W. Jones President, Chief Executive Officer,
- -------------------- and Director
(Jeffrey W. Jones)
Principal Financial and Accounting Officer:
/s/ Stephen R. Tartamella Vice President, Chief Financial Officer,
- ------------------------- and Secretary
(Stephen R. Tartamella)
/s/ Federico Pignatelli Director and Chairman of the Board
- -----------------------
/s/ William A. Owens Director
- --------------------
/s/ George V. d'Arbeloff Director
- ------------------------
BioLase Technology, Inc.
And Subsidiary
Index to Consolidated Financial Statements and Schedule
- --------------------------------------------------------------------------------
Page
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 And 1997 F-6
Notes to Consolidated Financial Statements F-7
SCHEDULE
Schedule numbered in accordance with Rule 5.04 of Regulation S-X:
II Consolidated Valuation and Qualifying Accounts and Reserves S-1
All Schedules, except Schedule II, have been omitted as the required information
is shown in the consolidated financial statements, or notes thereto, or the
amounts involved are not significant or the schedules are not applicable.
F-1
Report of Independent Accountants
To the Board of Directors and Shareholders
BioLase Technology, Inc.
San Clemente, California
In our opinion, the consolidated financial statements listed in the index on
page F-1 present fairly, in all material respects, the financial position of
BioLase Technology, Inc. and its subsidiary at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
consolidated financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and the financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that BioLase Technology, Inc. and its subsidiary will continue as a
going-concern. As discussed in Note 2 to the consolidated financial statements,
the Company has suffered recurring losses from operations and shows a need for
continued funding that raises substantial doubt about its ability to continue as
a going-concern. Management's plans in regard to these matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Costa Mesa, California
March 17, 2000
F-2
BioLase Technology, Inc.
And Subsidiary
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 1,180,982 $ 424,539
Marketable securities - 251,485
Accounts receivable, less allowance of $117,745 in 1999 and
$118,015 in 1998 330,840 563,236
Inventories, net of reserves of $309,420 in 1999 and
$227,694 in 1998 658,462 1,930,117
Prepaid expenses and other current assets 110,062 168,725
------------- -------------
Total current assets 2,280,346 3,338,102
Property and equipment, net 203,529 407,142
Patents, trademarks and licenses, less accumulated amortization
of $151,278 in 1999 and $129,312 in 1998 126,958 147,199
Other assets 61,480 18,929
------------- -------------
Total assets $ 2,672,313 $ 3,911,372
============= =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Line of credit $ 1,341,925 $ 1,705,025
Accounts payable 792,073 806,335
Accrued expenses 997,287 738,160
Accrued expenses related to the reacquisition of foreign
distribution rights 480,300 -
------------- -------------
Total liabilities 3,611,585 3,249,520
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, par value $.001, 1,000,000 shares authorized,
no shares issued and outstanding in 1999 and 1998 - -
Common stock, par value $.001, 50,000,000 shares authorized,
issued and outstanding 17,583,305 in 1999 and 16,312,007 in 1998
(after deducting 182,880 of escrow shares in 1999 and 1998) 17,583 16,312
Additional paid-in capital 41,809,690 38,614,948
Accumulated deficit (42,766,545) (37,969,408)
------------- -------------
Total stockholders' equity (deficit) (939,272) 661,852
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 2,672,313 $ 3,911,372
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
BioLase Technology, Inc.
And Subsidiary
Consolidated Statements of Operations
For the years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
1999 1998 1997
------------- ------------ ------------
Net sales $ 7,004,272 $ 1,465,191 $ 1,786,285
Cost of sales 4,151,746 1,418,560 1,527,242
------------- ------------ ------------
Gross profit 2,852,526 46,631 259,043
------------- ------------ ------------
Operating expenses:
Sales and marketing 2,700,628 1,628,821 955,192
General and administrative 2,472,544 1,780,015 1,280,171
Engineering and development 2,427,510 1,824,901 1,022,733
In-process research and development - 5,134,920 -
------------- ------------ ------------
Total operating expenses 7,600,682 10,368,657 3,258,096
------------- ------------ ------------
Loss from operations (4,748,156) (10,322,026) (2,999,053)
Interest income 44,666 57,591 184,245
Interest expense (93,647) (81,634) (9,102)
------------- ------------ ------------
Net loss $ (4,797,137) $(10,346,069) $ (2,823,910)
============= ============ ============
Loss per share - basic and diluted $ (0.28) $ (0.69) $ (0.21)
============= ============ ============
Weighted average shares outstanding - basic and diluted 17,254,005 15,061,814 13,385,318
============= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
BioLase Technology, Inc.
And Subsidiary
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
-------- -------- ---------- -------- ------------
Balances at January 1, 1997 1 $ - 13,129,949 $ 13,130 $ 28,700,279
Private placement of common stock, net 200,000 200 719,685
Issuance of stock primarily for services 43,850 44 147,761
Issuance of stock primarily for unearned services 14,250 14 50,752
Cancellation of stock issued for unearned services (41,523) (41) 41
Exercise of stock options 99,000 99 137,151
Conversion of preferred stock to common stock (1) 17,109 17 (17)
Issuance of shares for fractional interest on reverse split 1
Net loss
-------- -------- ---------- --------- ------------
Balances at December 31, 1997 - - 13,462,636 13,463 29,755,652
Private placement of common stock, net 1,320,000 1,320 3,591,480
Issuance of stock for Laser Skin Toner purchase 1,467,120 1,467 5,133,453
Issuance of stock and warrants for earned services 23,300 23 75,976
Exercise of stock options 38,950 39 58,387
Earned escrow shares
Issuance of shares for fractional interest on reverse split 1
Net loss
-------- -------- ---------- --------- ------------
Balances at December 31, 1998 - - 16,312,007
16,312 38,614,948
Private placement of common stock, net 1,116,000 1,116 2,746,884
Issuance of stock and warrants for earned services 98,400 98 268,871
Exercise of stock options 56,875 57 85,256
Extension of stock options 93,731
Issuance of shares for fractional interest on reverse split 23
Net loss
-------- -------- ---------- --------- ------------
Balances at December 31, 1999 - $ - 17,583,305 $ 17,583 $ 41,809,690
======== ======== ========== ========= ============
Receivable From
Stockholders
And Unearned Accumulated
Services Deficit Total
--------------- -------------- ------------
Balances at January 1, 1997 $ - $ (24,799,429) $ 3,913,980
Private placement of common stock, net 719,885
Issuance of stock primarily for services 147,805
Issuance of stock primarily for unearned services (50,766) -
Cancellation of stock issued for unearned services -
Exercise of stock options 137,250
Conversion of preferred stock to common stock -
Issuance of shares for fractional interest on reverse split -
Net loss (2,823,910) (2,823,910)
--------------- -------------- ------------
Balances ar December 31, 1997 (50,766) (27,623,339) 2,095,010
Private placement of common stock, net 3,592,800
Issuance of stock for Laser Skin Toner purchase 5,134,920
Issuance of stock and warrants for earned services 75,999
Exercise of stock options 58,426
Earned escrow shares 50,766 50,766
Issuance of shares for fractional interest on reverse split -
Net loss (10,346,069) (10,346,069)
--------------- -------------- ------------
Balances at December 31, 1998 - (37,969,408) 661,852
Private placement of common stock, net 2,748,000
Issuance of stock and warrants for earned services 268,969
Exercise of stock options 85,313
Extension of stock options 93,731
Issuance of shares for fractional interest on reverse split -
Net loss (4,797,137) (4,797,137)
--------------- -------------- ------------
Balances at December 31, 1999 $ - $ (42,766,545) $ (939,272)
=============== ============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
BioLase Technology, Inc.
And Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
1999 1998 1997
------------- ------------- ------------
Cash flows from operating activities:
Net loss $ (4,797,137) $ (10,346,069) $ (2,823,910)
Adjustments to reconcile net loss to net cash used by
operating activities:
Issuance of common stock and warrants for
earned services 268,969 126,765 147,805
Extension of stock options 93,731 - -
In-process research and development - 5,134,920 -
Depreciation and amortization 112,392 94,156 105,649
Loss on disposal of assets 179,380 - -
Provision for bad debts 16,709 551 95,507
Provision for inventory excess and obsolescence 81,726 49,247 164,488
Accrued expenses related to the reacquisition of foreign
distribution rights 480,300 - -
Changes in assets and liabilities:
Accounts receivable 215,687 496,465 (1,010,296)
Inventories 1,189,929 (970,587) (796,786)
Prepaid expenses and other assets 16,112 21,106 (116,108)
Accounts payable and accrued expenses 244,865 544,746 224,385
------------- ------------- ------------
Net cash used by operating activities (1,897,337) (4,848,700) (4,009,266)
------------- ------------- ------------
Cash flows from investing activities:
Purchase of marketable securities - (2,522,563) -
Sale of marketable securities 251,485 2,898,895 2,872,183
Additions to property and equipment (66,193) (299,925) (90,523)
Additions to patents, trademarks and licenses (1,725) (71,260) (67,145)
------------- ------------- ------------
Net cash provided by investing activities 183,567 5,147 2,714,515
------------- ------------- ------------
Cash flows from financing activities:
Borrowing (payments) under the line of credit, net (363,100) 1,403,792 301,233
Proceeds from issuance of common stock, net 2,748,000 3,592,800 719,885
Proceeds from exercise of stock options 85,313 58,426 137,250
------------- ------------- ------------
Net cash provided by financing activities 2,470,213 5,055,018 1,158,368
------------- ------------- ------------
Increase (decrease) in cash and cash equivalents 756,443 211,465 (136,383)
Cash and cash equivalents at beginning of year 424,539 213,074 349,457
------------- ------------- ------------
Cash and cash equivalents at end of year $ 1,180,982 $ 424,539 $ 213,074
============= ============= ============
Supplemental cash flow disclosure:
Cash paid during the year for interest $ 96,547 $ 74,370 $ 4,005
============= ============= ============
Cash paid during the year for taxes $ 1,600 $ 1,600 $ 1,600
============= ============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
BioLase Technology, Inc.
And Subsidiary
Notes To Consolidated Financial Statements
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
1. Summary Of Significant Accounting Policies:
BioLase Technology, Inc. (the "Company") is primarily in the business of
developing, manufacturing and marketing advanced laser products for dental
and other surgical applications.
Principles Of Consolidation:
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, after eliminating intercompany accounts
and transactions.
Cash Equivalents:
----------------
The Company considers all highly liquid debt instruments with a maturity of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents are carried at cost, which approximates market.
At December 31, 1999 and 1998, the Company had approximately $1,074,000 and
$211,000, respectively, of cash balances that were in excess of the
federally insured limit of $100,000 per bank.
Marketable Securities:
---------------------
Marketable securities consist of United States government treasury notes
having maturities greater than three months, but less than one year at the
time of acquisition. Marketable securities are classified as available-for-
sale securities and are reported at fair value. Gross unrealized gains and
losses on marketable securities at December 31, 1999 and 1998 are not
material.
Accounts Receivable:
-------------------
The Company periodically evaluates the collectibility of its receivables
based upon various factors including the financial condition and payment
history of major customers, an overall review of collection experience on
other accounts and economic factors or events expected to affect the
Company's future collection experience.
Inventories:
-----------
Inventories are valued at the lower of cost or market (determined by the
first-in, first-out method). The Company periodically evaluates the
carrying value of its inventories, taking into account such factors as
historical and anticipated future sales compared with quantities on hand
and the price the Company expects to obtain for its product compared with
the historical cost.
F-7
BioLase Technology, Inc.
And Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Property And Equipment:
----------------------
Property and equipment, including property under capital lease agreements,
are carried at cost less accumulated depreciation and amortization.
Maintenance and repairs are expensed as incurred. Upon sale or disposition
of assets, any gain or loss is included in the consolidated statements of
operations.
The cost of property and equipment is generally depreciated using the
straight-line method over the estimated useful lives of the respective
assets, which are generally not greater than five years. Leasehold
improvements are amortized over the lesser of the estimated useful lives of
the respective assets or the related lease terms.
The Company continually monitors events and changes in circumstances that
could indicate the carrying balances of its property and equipment may not
be recoverable in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". When such
events or changes in circumstances are present, the Company assesses the
recoverability of long-lived assets by determining whether the carrying
value of such assets will be recovered through undiscounted expected future
cash flows. If the total of the future cash flows is less than the carrying
amount of those assets, the Company recognizes an impairment loss based on
the excess of the carrying amount over the fair value of the assets.
Patents, Trademarks And Licenses:
--------------------------------
Costs incurred to establish and successfully defend patents, trademarks and
licenses and to acquire product and process technology are capitalized. All
amounts assigned to these patents, trademarks and licenses are amortized on
a straight-line basis over an estimated eight-year useful life.
The continuing carrying value of patents is assessed based upon the
Company's operating experience, expected cash flows from related products
and other factors as deemed appropriate.
Revenue Recognition:
-------------------
Sales and related cost of sales are recognized upon shipment of products.
The Company's laser products and endodontic handpieces are generally under
warranty against defects in material and workmanship for a period of one
year. The Company provides for the estimated future returns of inventory
and the estimated costs of warranty at the time of sale based on historical
experience. Actual results have been within management's expectations.
Engineering and Development:
---------------------------
Company-sponsored engineering and development costs related to both present
and future products are expensed as incurred.
F-8
BioLase Technology, Inc.
And Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Income Taxes:
------------
The Company follows SFAS No. 109, "Accounting for Income Taxes", which
requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized. The provision for income taxes represents the tax payable for the
period and the change during the period in deferred tax assets and
liabilities.
Stock-Based Compensation:
------------------------
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", related to employee stock
options. SFAS No. 123 defines a fair value based method of accounting for
both employee and non-employee stock options and warrants. Fair value of
the stock option and warrant is determined considering factors such as the
exercise price, the expected life, the current price of the underlying
stock and its volatility, expected dividends on the stock, and the risk-
free interest rate for the expected term. Under the fair value based
method, compensation cost is measured at the grant date based on the fair
value of the award and is recognized over the service period. Pro forma
disclosures for entities that elect to continue to measure compensation
cost under the intrinsic method provided by Accounting Principles Board
("APB") No. 25 for employee stock options must include the effects of all
awards granted in fiscal years that begin after December 15, 1994. The fair
value of options and warrants issued to non-employees is recorded as
expense over the service period.
Loss Per Share - Basic And Diluted:
----------------------------------
The Company follows SFAS No. 128, "Earnings Per Share". Basic earnings per
shares is computed by dividing income available to common stockholders by
the weighted average number of shares outstanding. In computing diluted
earnings per share, the weighted average number of shares outstanding is
adjusted to reflect the effect of potentially dilutive securities including
options, warrants, preferred stock or contingently issuable (or escrowed)
stock, and income available to common stockholders is adjusted to reflect
any changes in income or loss that would result from the issuance of the
dilutive common shares.
There were no potential common shares included in the calculation of
diluted loss per share for the years ended December 31, 1999, 1998 and
1997, because the effect would have decreased the loss per share amount and
therefore been antidilutive. See Note 10 for a description of those
securities that could potentially dilute earnings per share in the future,
should the Company report net income.
F-9
BioLase Technology, Inc.
And Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Comprehensive Income:
--------------------
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income". The
standard establishes guidelines for the reporting and display of
comprehensive income and its components in financial statements.
Comprehensive income generally represents the change in equity from
transactions and other events and circumstances from non-owner sources. It
includes all changes in stockholders' equity, except those resulting from
investments by and distributions to stockholders. The Company has no items
of other comprehensive income for the years ended December 31, 1999, 1998
and 1997.
Estimates:
---------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications:
-----------------
Certain amounts in the prior period consolidated financial statements have
been reclassified to conform to the current year's presentation.
2. Basis Of Presentation:
The Company's consolidated financial statements have been presented on the
basis that it will continue as a going-concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company reported net losses of $4,797,137,
$10,346,069 and $2,823,910 for the years ended December 31, 1999, 1998 and
1997, respectively, and has an accumulated deficit of $42,766,545 at
December 31, 1999. These recurring losses and the need for continued
funding, discussed below, raise substantial doubt about the Company's
ability to continue as a going-concern.
The Company remains dependent upon its ability to obtain outside financing
either through the issuance of additional shares of its common or preferred
stock or through borrowings until it achieves sustained profitability
through increased sales, continued efforts of engineering redesign, and
cost containment. The Company's business now focuses on and is expected to
continue to focus on the manufacturing and marketing of its laser-based
HydroKinetic tissue cutting system, the Millennium, and certain other
related medical products.
F-10
BioLase Technology, Inc.
And Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Financing the development of laser-based medical and dental devices and
instruments and the operations of the Company has been achieved principally
through private placements of preferred and common stock and the exercises
of stock options and warrants. During the three years ended December 31,
1999, the Company has raised $7,060,685 of equity funds
through private placements. Management believes that the Company will
require significant resources in 2000, principally to fund the Company's
working capital needs to support the production and marketing of the
Company's laser-based products for various dental and medical applications,
efforts directed toward further extensions and refinements of existing
products, and continuing research and development activities (see Note 10
for disclosure related to the private placement of common stock in 2000).
The Company expects to generate the necessary resources for its 2000
business plan through a combination of the contribution from the sales of
its products, the sale of equity securities through private placements, the
exercise of stock purchase warrants and options and debt financing. No
assurances can be given, however, that the Company will be able to obtain
sufficient additional resources. If the Company is unsuccessful in
generating anticipated resources from one or more of the anticipated
sources and is unable to replace any shortfall with resources from another
source, the Company may be able to extend the period for which available
resources would be adequate by deferring the creation or satisfaction of
various commitments, deferring the introduction of various products or
entry into various markets, and otherwise scaling back operations. If the
Company were unable to generate the required resources, its ability to meet
its obligations and to continue its operations would be adversely affected.
The Company's consolidated financial statements have been prepared under
the assumption of a going-concern. Failure to arrange adequate financing on
acceptable terms and to achieve profitability would have an adverse effect
on the financial position, results of operations, cash flows and prospects
of the Company and ultimately its ability to continue as a going-concern.
The consolidated financial statements do not give effect to any adjustments
that might be necessary if the Company were unable to meet its obligations
or continue operations.
3. Acquisition of Laser Skin Toner, Inc.:
On July 2, 1998, the Company acquired substantially all of the assets of
Laser Skin Toner, Inc. ("LSTI"), a development stage company. The assets
acquired relate primarily to the proprietary laser-based technology being
developed by LSTI for non-invasive laser treatment in the field of
aesthetic skin rejuvenation, including all intellectual property rights
consisting of patents, patent applications, a trademark application and
certain know-how. At the time of the acquisition, the intellectual property
embodying this developmental effort represented substantially all of LSTI's
assets, and the developmental efforts did not appear applicable to any
alternative use. As consideration for the assets acquired, the Company
issued to LSTI an aggregate 1,600,000 shares of the Company's common stock
(the "Shares"), including 182,880 shares of common stock retained by the
Company pending the achievement by the business of specified performance
objectives. Pursuant to a separate agreement, the Company also issued
50,000 shares of its common stock to O'Donnell Eye Centers, Inc. ("OECI"),
a Missouri corporation, in consideration for the license of technology that
is the subject of a pending patent application.
F-11
BioLase Technology, Inc.
And Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
A valuation of LSTI's in-process research and development effort as of the
date of acquisition assigned a value of $5,134,920, the full amount of the
consideration paid by the Company in its acquisition of LSTI's assets, to
the in-process research and development. The Company's management had the
primary responsibility for estimating the value of the in-process research
and development. In accordance with Financial Accounting Standards Boards
("FASB") Interpretation No. 4, "Application of FASB No. 2 to Business
Combinations Accounted for by the Purchase Method", the $5,134,920 assigned
to the in-process research and development effort, for which only the
single use existed, was charged to expense on the date of the acquisition.
In December 1999, the Company transferred the LSTI technology and all
associated assets in exchange for a royalty based upon future sale of
product covered by patents on the LSTI technology. However, there can be no
assurance that the LSTI technology will be successfully developed and
commercialized or that the Company will receive any significant royalty
payments relating to the LSTI technology. In March 2000, the Company
entered into an agreement with the former shareholders of LSTI whereby the
former shareholders agreed to return to the Company for cancellation of
525,000 of the 1,417,120 shares of the Company's common stock held by them.
The agreement also called for the cancellation of the 182,880 shares of the
Company's common stock that had been issued and placed in escrow for
possible delivery based upon the future performance of the business to be
based on the LSTI technology. In addition, the Company and the former
shareholders of LSTI exchanged general releases, including the release of
all claims, if any, relating to the Company's acquisition of the assets of
LSTI.
4. Inventories:
Inventories consist of the following at December 31:
1999 1998
--------- ----------
Raw materials $ 434,315 $1,372,172
Work-in-process 151,203 183,889
Finished goods 72,944 374,056
--------- ----------
$ 658,462 $1,930,117
========= ==========
F-12
BioLase Technology, Inc.
And Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
5. Property and Equipment:
Property and equipment consist of the following at December 31:
1999 1998
----------- -----------
Leasehold improvements $ 171,445 $ 170,927
Equipment and computers 884,841 1,001,263
Furniture and fixtures 200,806 199,588
Demonstration units 247,354 247,354
----------- -----------
1,504,446 1,619,132
Less, Accumulated depreciation and amortization (1,300,917) (1,211,990)
----------- -----------
$ 203,529 $ 407,142
=========== ===========
6. Line Of Credit:
At December 31, 1999, the Company had $1,341,925 outstanding under a
revolving credit agreement with a bank. The revolving credit agreement
provides for borrowings of up to $2,500,000 for financing inventories and
is collateralized by substantially all of the Company's accounts receivable
and inventories. The interest rate is fixed throughout the term of the
credit agreement and is computed based upon LIBOR plus 0.5% at the time of
any borrowings. At December 31, 1999, the weighted average interest rate on
the outstanding balance was 6.69%. The revolving credit agreement expires
on December 1, 2000.
7. Accrued Expenses:
Accrued expenses consist of the following at December 31:
1999 1998
---------- ----------
Accrued professional fees $ 100,742 $ 89,124
Accrued legal and settlement costs 132,261 144,166
Accrued warranty 163,175 40,315
Accrued payroll and vacation 245,930 104,422
Other 355,179 360,133
---------- ----------
$ 997,287 $ 738,160
========== ==========
F-13
BioLase Technology, Inc.
And Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
8. Accrued Expenses Related To The Reacquisition Of Foreign Distribution
Rights:
On February 25, 2000, the Company finalized an agreement with its sole
German distributor to reacquire its distribution rights in Germany. The
Company began negotiating with the distributor in 1999 and has agreed to
pay an amount equal to $435,500 as consideration to reacquire such
distribution rights. Other ancillary charges and expenses in connection
with this transaction that have been incurred by the Company through
December 31, 1999 are estimated to be $44,800, which, along with the
distributor rights settlement fee of $435,500, have been included in
general and administrative expense in the accompanying consolidated
statements of operations.
9. Commitments and Contingencies:
Litigation:
----------
The Company is party to pending lawsuits or subject to a number of
threatened lawsuits. While the ultimate outcome of pending and threatened
lawsuits cannot be predicted with certainty, and an unfavorable outcome
could have a negative impact on the Company, at this time in the opinion of
management, the ultimate resolution of these matters will not have a
material effect on the Company's consolidated financial position, results
of operations or liquidity.
Lease Commitments:
-----------------
The Company leases plant and office facilities under operating leases that
expire in 2000. The Company is currently in negotiations to renew such
leases. Rent expense was $153,167, $156,178 and $141,385 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Purchase Commitments:
--------------------
In February 2000, the Company agreed to purchase 26 Millennium units
at a cost of approximately $12,800 per unit, which were held by a third
party financier. The Company expects to dispose of these units at a profit
in the normal course of operations.
F-14
BioLase Technology, Inc.
And Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
10. Stockholders' Equity:
Equity Financing:
----------------
The Company has raised equity capital through several private offerings in
the three years ended December 31, 1999, as follows:
Number
of Shares
of Common Net Cash
Years Ended December 31, Stock Consideration
----------------------- ----------- -------------
1999 1,116,000 $ 2,748,000
1998 1,320,000 3,592,800
1997 217,109 719,885
Preferred Stock:
---------------
On December 18, 1998, the Board of Directors adopted a stockholder rights
plan under which one preferred stock purchase right was distributed on
January 11, 1999 with respect to each share of Registrant's common stock
outstanding at the close of business on December 31, 1998. The rights
provide among other things that, in the event any person becomes the
beneficial owner of 15% or more of the Company's common stock while the
rights are outstanding, each right will be exercisable to purchase shares
of the common stock of the Company having a market value equal to two times
the then current exercise price of a right (initially $30.00). The rights
will also provide that, if on or after the occurrence of such event the
Company is merged into any other corporation or 50% or more of the
Company's assets or earning power is sold, each right will be exercisable
to purchase common shares of the acquiring corporation having a market
value equal to two times the then current exercise price. The rights will
expire on December 31, 2008, unless previously triggered, and are subject
to redemption by the Company at $.001 per right at any time prior to the
first date upon which they become exercisable to purchase common shares.
F-15
BioLase Technology, Inc.
And Subsidiary
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Common Stock:
------------
In February 2000, the Company offered 125 units to accredited investors in
a private placement. Each unit consisted of 10,000 shares of the Company's
common stock and 5,000 redeemable stock purchase warrants (the "2000
Warrants"). Gross proceeds from the private placement were $2,721,875
before direct expenses of $271,359. The shares of common stock issued in
connection with the private placement were "restricted securities" as
defined in Rule 144 promulgated under the Act. Accordingly, such shares may
be resold only pursuant to a registration statement under the Act or in
accordance with an exemption from such registration requirement. Each 2000
Warrant entitles the holder to purchase a share of common stock at $3.00
and expires on March 31, 2002. An additional 62,500 redeemable warrants
were issued in connection with the placement, which are exercisable at
$3.00 per share.
In February 1999, the Company offered a private placement in which it
issued and sold 110 units to accredited investors. Each unit consisted of
10,000 shares of the Company's common stock and 5,000 redeemable stock
purchase warrants (the "1999 Warrants"). Gross proceeds from the private
placement were $3,025,000 before direct expenses of $277,000. The Company
also issued an additional 16,000 shares for commissions related to this
private placement. The shares of common stock issued in connection with the
private placement were "restricted securities" as defined in Rule 144
promulgated under the Act. Accordingly, such shares may be resold only
pursuant to a registration statement under the Act or in accordance with an
exemption from such registration requirement. Each 1999 Warrant entitles
the holder to purchase a share of common stock at $3.50 and expires on
March 31, 2001. An additional 99,000 redeemable warrants were issued in
connection with the placement, which are exercisable at $2.75 per share.
In May 1998, the Company completed a private placement in which it issued
and sold 132 units to accredited investors. Each unit consisted of 10,000
shares of the Company's common stock and 5,000 redeemable stock purchase
warrants (the "1998 Warrants"). Gross proceeds from the private placement
were $3,960,000 before direct expenses of $367,200. The shares of common
stock issued in connection with the private placement were "restricted
securities" as defined in Rule 144 promulgated under the Act. Accordingly,
such shares may be resold only pursuant to a registration statement under
the Act or in accordance with an exemption from such registration
requirement. Each 1998 Warrant entitles the holder to purchase a share of
common stock at $3.75 and expires on April 30, 2000. An additional 64,000
warrants were issued in connection with the placement, which are
exercisable at $3.75 per share.
In February 1997, the Company completed a private placement in which it
issued and sold 200,000 shares of its common stock to an accredited
investor. Gross proceeds from the private placement were $725,000 before
direct expenses of $5,115.
F-16
BioLase Technology, Inc.
And Subsidiary
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
The Company also issued shares of its common stock to individuals for
services rendered. The estimated fair value of the common stock is charged
to earnings as compensation for these services. The Company issued 98,400
shares for services valued at $213,417 in 1999 and 23,300 shares for
services valued at $64,185 in 1998. The Company issued 58,100 shares for
services valued at $198,571 in 1997, of which 43,850 of the shares valued
at $147,805 were for services rendered during 1997 and 14,250 of the shares
valued at $50,766 were for services rendered in 1998.
Common Stock Options And Warrants:
---------------------------------
The Company has adopted the 1990 Stock Option Plan (the "1990 Plan"), the
1992 Stock Option Plan (the "1992 Plan"), the 1993 Stock Option Plan (the
"1993 Plan") and the 1998 Stock Option Plan (the "1998 Plan" and
collectively with the 1990 Plan, 1992 Plan and 1993 Plan, the "Plans").
Each of the Plans enables the Company to offer equity participation to
employees, officers, directors and consultants of the Company through stock
options and, with respect to the 1990 and 1992 Plans, stock appreciation
rights.
A total of 375,000 shares of common stock were authorized for issuance
under the 1990 Plan, of which, at December 31, 1999, 211,250 had been
issued upon option exercise, 160,000 were reserved for issuance upon
exercise of outstanding options and 3,750 were available for the granting
of additional options. A total of 150,000 shares of common stock were
authorized for issuance under the 1992 Plan, of which, at December 31,
1999, 67,391 had been issued upon option exercise, 82,500 were reserved for
issuance upon exercise of outstanding options and 109 were available for
the granting of additional options. A total of 1,500,000 shares of common
stock were authorized for issuance under the 1993 Plan, of which, at
December 31, 1999, 106,600 had been issued upon option exercise, 1,261,585
were reserved for issuance upon exercise of outstanding options, and
131,815 were available for the granting of additional options. A total of
1,000,000 shares of common stock were authorized for issuance under the
1998 Plan, of which, at December 31, 1999, 632,000 were reserved for
issuance upon exercise of outstanding options, and 368,000 were available
for the granting of additional options. Any shares which are reserved for
issuance under an outstanding option which expires or terminates
unexercised, or any shares which are used by participants to pay all or
part of the purchase price of any option exercised, may again be reserved
for issuance upon exercise of newly granted options under the respective
Plans. However, shares with respect to which stock appreciation rights have
been exercised may not again be made subject to an award.
At the discretion of the Board of Directors or a committee comprised of
non-employee directors or other nonemployees appointed by the Board of
Directors (the "Committee"), employees, officers, directors and consultants
of the Company and its subsidiary may become participants in the Plans upon
receiving grants in the form of stock options or, in the case of the 1990
and 1992 Plans, stock appreciation rights.
F-17
BioLase Technology, Inc.
And Subsidiary
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Stock options may be granted as nonqualified stock options or incentive
stock options, but incentive stock options may not be granted at a price
less than 100% of the fair market value of the stock as of the date of
grant (110% as to any 10% or greater stockholder at the time of grant);
nonqualified stock options may not be granted at a price less than 85% of
the fair market value of the stock as of the date of grant. Stock options
may be exercised no more than ten years after the date of grant and no more
than three years after death or disability, whichever occurs earlier. In
the case of options granted under the 1993 Plan, payment of the purchase
price for shares of stock acquired through the exercise of stock options
must be paid in cash. At the discretion of the Committee, the purchase
price for shares of stock acquired through the exercise of stock options
under the 1998, 1992 and 1990 Plans may be paid by cash, shares of common
stock valued at their fair market value at the date of exercise or by
delivery of recourse promissory notes or a combination thereof. No
incentive stock options have been awarded under the Plans.
The following table summarizes the activity under the Plans:
Weighted Average
Exercise Price
Shares Per Share
----------- ----------------
Options outstanding, December 31, 1996 1,301,910 $ 2.47
Granted 234,500 3.29
Exercised (99,000) 1.39
Canceled (95,000) 6.18
----------- ----------------
Options outstanding, December 31, 1997 1,342,410 2.43
Granted 834,500 2.58
Exercised (38,950) 1.50
Canceled (62,000) 6.02
----------- ----------------
Options outstanding, December 31, 1998 2,075,960 2.40
Granted at fair market value 254,500 2.34
Granted above fair market value 275,000 2.14
Exercised (56,875) 1.50
Canceled (412,500) 2.59
----------- ----------------
Options outstanding, December 31, 1999 2,136,085 $ 2.35
=========== ================
Options exercisable, December 31, 1997 1,127,514 $ 2.22
=========== ================
Options exercisable, December 31, 1998 1,284,751 $ 2.27
=========== ================
Options exercisable, December 31, 1999 1,524,583 $ 2.40
=========== ================
F-18
BioLase Technology, Inc.
And Subsidiary
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
At December 31, 1999, 503,674 options were available for grant under the
Plans.
Options Outstanding Exercisable
--------------------------------------- -------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Exercise Remaining Number Exercise
Prices of Shares Price Life (Years) of Shares Price
-------------- --------- -------- ------------ --------- --------
$0.75 to $2.25 1,270,250 $ 1.87 7.62 729,375 $ 1.70
$2.53 to $4.13 865,835 $ 3.04 7.70 795,208 $ 3.05
Stock options granted under the 1990 Plan may include the right to acquire
an Accelerated Ownership Nonqualified Stock Option ("AO"). If an option
grant contains the AO feature and if the participant pays all or part of
the purchase price of the option with shares of the Company's common stock
held by the participant for at least six months, then upon exercise of the
option, the participant is granted an AO to purchase at the fair market
value as of the date of the AO grant the number of shares of common stock
of the Company equal to the sum of the number of whole shares used by the
participant in payment of the purchase price and the number of whole
shares, if any, withheld by the Company as payment for withholding taxes.
An AO may be exercised between the date of grant and the date of
expiration, which will be the same as the date of expiration of the option
to which the AO is related. At December 31, 1999, there were no options
outstanding under the 1990 Plan that included the AO feature.
In addition to the Plans discussed above, the Company has agreements with
vendors and other persons under which options, not under any of the Plans,
to purchase shares of the Company's common stock have been granted. The
shares issuable upon exercise of such options have not been registered
under the Act.
F-19
BioLase Technology, Inc.
And Subsidiary
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
The following table summarizes option transactions outside the Plans:
Weighted Average
Shares Exercise Price
Under Option Per Share
--------------- ----------------
Options outstanding, December 31, 1996 122,500 $ 8.33
Granted 150,000 5.00
Canceled - -
--------------- ----------------
Options outstanding and exercisable, December 31, 1997 272,500 6.50
Granted - -
Canceled - -
--------------- ----------------
Options outstanding and exercisable, December 31, 1998 272,500 6.50
Granted - -
Canceled (182,500) 4.88
--------------- ----------------
Options outstanding and exercisable, December 31, 1999 90,000 $ 9.78
=============== ================
The Company's options outstanding and exercisable at December 31, 1999
represent grants of 2,500, 75,000 and 12,500 with per share exercise prices
of $12.00, $10.50 and $5.00, respectively, and remaining terms of 2.75,
3.13 and 3.76 years, respectively.
In December 1997, the Company issued 75,000 warrants in connection with
obtaining a $2,500,000 credit facility for financing inventories. Each
warrant entitles the holder to purchase one share of common stock and
vested fully at date of issuance. Of such warrants, 50,000 were issued at a
per share exercise price of $5.00 and 25,000 were issued at a per share
exercise price of $4.00, all expiring December 1, 2000. In December 1998,
the Company issued an additional 25,000 warrants in connection with the
Company's exercise of an option to extend the term of the credit facility.
Each warrant entitles the holder to purchase one share of common stock and
vested fully at the date of issuance. The warrants were issued at a per
share exercise price of $5.00 and expire on December 1, 2001. In June and
December 1999, the Company issued 25,000 and 50,000 warrants, respectively,
in connection with the Company's exercise of an option to extend the term
of the credit facility. Each warrant entitles the holder to purchase one
share of common stock and vested fully at the date of issuance. Of such
warrants, 25,000 were issued at a per share exercise price of $5.00 and
50,000 were issued at a per share exercise price of $3.00, expiring June 1,
2002 and December 1, 2002, respectively.
F-20
BioLase Technology, Inc.
And Subsidiary
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
As of December 31, 1999, the Company has 649,000 of the 1999 Warrants and
724,000 of the 1998 Warrants outstanding. At the sole option of the
Company, it may call for redemption 550,000 and 99,000 of the then
outstanding 1999 Warrants provided the closing price of the Company's
common stock has equaled or exceeded $4.97 and $3.91 per share for the 10
and 20 days, respectively, preceding the call for redemption. Also at the
sole option of the Company, it may call for redemption 660,000 and 64,000
of the then outstanding 1998 Warrants provided the closing price of the
Company's common stock has equaled or exceeded $6.00 per share for the 10
and 20 days, respectively, preceding the call for redemption. The notice of
redemption shall specify a redemption date no less than 30 days after the
date of such notice on which all of the then remaining unexercised 1998 and
1999 Warrants shall be redeemed by the Company at a cash price of $.01 per
warrant.
The fair value of options and warrants issued to non-employees during the
years ended December 31, 1999, 1998 and 1997 was not material.
Pro Forma Effect Of Stock-Based Compensation:
--------------------------------------------
The Company has adopted the disclosure only provisions of SFAS No. 123 for
options issued to employees. Accordingly, no compensation cost has been
recognized for options granted under the Plans. Had compensation cost for
the Company's Plans been determined based on the fair value at the grant
date for awards in 1999, 1998 and 1997 consistent with the provisions of
SFAS No. 123, the Company's net loss and loss per share would have been the
pro forma amounts indicated below:
1999 1998 1997
------------ ------------ -----------
Net loss - basic and diluted $(5,410,273) $(10,645,045) $(3,053,766)
Loss per share - basic and diluted $ (0.31) $ (0.71) $ (0.23)
The pro forma amounts were estimated using the Black-Scholes option-pricing
model with the following assumptions:
1999 1998 1997
-------- -------- --------
Weighted-average life (years) 6.40 1.90 1.60
Volatility 56% 75% 79%
Annual dividend per share $0.00 $0.00 $0.00
Risk free interest rate 5.81% 4.93% 5.77%
Weighted-average fair value of options granted $1.24 $1.03 $1.30
F-21
BioLase Technology, Inc.
And Subsidiary
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
11. Income Taxes:
The following table presents the current and deferred provision for
federal and state income taxes for the years ended December 31:
1999 1998 1997
-------- -------- --------
Current:
Federal $ - $ - $ -
State 1,600 1,600 1,600
-------- -------- --------
1,600 1,600 1,600
Deferred
Federal - - -
State - - -
-------- -------- --------
$ 1,600 $ 1,600 $ 1,600
======== ======== ========
The foregoing tax provisions are included in general and administrative
expense in the accompanying consolidated statements of operations.
The effects of temporary differences that give rise to the deferred tax
provision consist of the following for the years ended December 31:
1999 1998 1997
----------- ----------- -----------
Property and equipment $ (106,690) $ (41,135) $ (25,726)
Research and development 594,008 47,883 222,978
Reserves not currently deductible 95,444 (175,348) 129,170
Inventories (33,585) 15,155 7,542
Capital loss carryforward (2,948) - -
Net operating losses 928,251 2,172,161 990,372
----------- ----------- -----------
1,474,480 2,018,716 1,324,336
Change in valuation allowance (1,474,480) (2,018,716) (1,324,336)
----------- ----------- -----------
Total $ - $ - $ -
=========== =========== ===========
F-22
BioLase Technology, Inc.
And Subsidiary
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
The provision for income taxes differs from the amount that would result
from applying the federal statutory rate as follows for the years ended
December 31:
1999 1998 1997
---------- ---------- ----------
Statutory regular federal income tax rate (34.0%) (34.0%) (34.0%)
In-process research and development - 16.9 -
Stock options (0.4) (0.2) (3.1)
Change in valuation allowance 37.5 18.5 43.0
Other (3.1) (1.2) (5.9)
---------- ---------- ----------
Total 0.0% 0.0% 0.0%
========== ========== ==========
The components of the deferred income tax assets are as follows at December
31:
1999 1998
------------- ------------
Property and equipment $ 168,210 $ 274,900
Research and development 864,869 270,861
Reserves not currently deductible 330,238 234,794
Inventories 22,705 56,290
Capital loss carryforward 274,550 277,498
State taxes 544 544
Net operating losses 12,744,728 11,816,477
------------- ------------
14,405,844 12,931,364
Valuation allowance (14,405,844) (12,931,364)
------------- ------------
Total $ - $ -
============= ============
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management periodically evaluates the recoverability of the deferred tax
assets and at such time as it is determined that such assets are
realizable, the valuation allowance will be reduced.
At December 31, 1999, the Company had a capital loss carryforward of
$640,873, which will expire in 2000.
As of December 31, 1999, the Company had net operating loss carryforwards
for federal and state purposes of approximately $34,307,620 and
$12,213,090, respectively. The federal net operating loss carryforwards
begin to expire in 2002. The state net operating loss carryforwards began
expiring in 1999. The utilization of net operating loss carryforwards may
be limited under the provisions of Internal Revenue Code Section 382 and
similar state provisions.
F-23
BioLase Technology, Inc.
And Subsidiary
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
12. Business Segment And Sales Concentrations:
The Company operates in a single operating segment and is engaged in the
development, manufacturing and marketing of advanced laser products for
dental and other surgical applications, and also markets and distributes
related endodontic products manufactured by third parties.
Significant customers consisted primarily of domestic and international
distributors. The Company has distributorship agreements for dental lasers
in Canada, Mexico, Europe, the Middle East, Australia and the Far East. In
1999, 1998 and 1997, export sales were $2,356,000, $598,000 and $1,307,000,
respectively, of which 72%, 66% and 93%, respectively, were sales to
Europe. Also in 1999 and 1998, 15% and 27%, respectively, of export sales
were to Canada. Sales to one customer were approximately $1,299,000 and
$1,188,000, respectively, for the years ended December 31, 1999 and 1997.
Sales to two customers were approximately $456,000 for the year ended
December 31, 1998. No other customer accounted for more than 10% of
consolidated sales in 1999, 1998 or 1997.
Financial instruments that subject the Company to concentrations of credit
risk consist principally of accounts receivable. Accounts receivable
concentrations have resulted from sales activity to individual customers.
Accounts receivable for three and two customers totaled approximately
$262,000 and $332,000, respectively, at December 31, 1999 and 1998. No
other customer accounted for more than 10% of accounts receivable at
December 31, 1999 or 1998.
F-24
BioLase Technology, Inc.
Schedule II - Consolidated Valuation and Qualifying Accounts and Reserves
For The Years Ended December 31, 1999, 1998 And 1997
- --------------------------------------------------------------------------------
Reserve for Valuation
Allowance for Excess and Allowance
Doubtful Obsolete for Deferred
Accounts Inventory Tax Asset
------------- ------------- ------------
Balances at December 31, 1996 $ 21,957 $ 485,154 $ 9,588,312
Charged to operations 95,507 164,488 1,324,336
Write-offs - (28,693) -
------------- ------------- ------------
Balances at December 31, 1997 117,464 620,949 10,912,648
Charged to operations 551 49,247 2,018,716
Write-offs - (442,502) -
------------- ------------- ------------
Balances at December 31, 1998 118,015 227,694 12,931,364
Charged to operations 16,709 81,726 1,474,480
Write-offs (16,979) - -
------------- ------------- ------------
Balances at December 31, 1999 $ 117,745 $ 309,420 $ 14,405,844
============= ============= ============
S-1