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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
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 000-19627
BIOLASE TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 87-0442441
(State or Other Jurisdiction (I.R.S. Employer
Of 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
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 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
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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 the 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 March 1, 2002, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $111,078,508. On March 1, 2002, there were
19,835,448 shares of the Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III of this Form 10-K is incorporated by reference
to portions of the Registrant's proxy statement for the 2002 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after the close of the year ended December 31, 2001.
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BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I
Item 1. Business..............................................................4
Item 2. Properties............................................................7
Item 3. Legal Proceedings.....................................................7
Item 4. Submission of Matters to a Vote of Security Holders...................8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...............................................................8
Item 6. Selected Consolidated Financial Data..................................8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........23
Item 8. Financial Statements and Supplementary Data..........................23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................23
PART III
Item 10. Directors and Executive Officers of the Registrant...................24
Item 11. Executive Compensation...............................................24
Item 12. Security Ownership of Certain Beneficial Owners and Management.......24
Item 13. Certain Relationships and Related Transactions.......................24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......25
2
CAUTIONARY STATEMENT
This report contains forward-looking statements, which include, but are not
limited to, statements concerning projected results of operations and financial
condition, the market acceptance of our products, the competitive nature of and
anticipated growth in our markets and the need for additional capital. These
forward-looking statements are based on our current expectations, estimates,
assumptions and projections about our industry and reflect management's beliefs
based on information available to us at the time of this Report. Words such as
"anticipates," "expects," "plans," "believes," "seeks," "estimates," "may,"
"will," and variations of these words or similar expressions are intended to
identify forward-looking statements. These forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties and
assumptions that are difficult to predict, including those set forth under "Risk
Factors" in Item 7. These risks and uncertainties, some of which are more fully
discussed below and in our other filings with the Securities and Exchange
Commission include but are not limited to the following:
. Uncertainties relating to worldwide political stability, general economic
conditions and trade policies;
. Uncertainties relating to government and regulatory policies;
. Unforeseen technological developments by competitors;
. The entry of new, well-capitalized competitors;
. The availability and pricing of materials used in the manufacture of our
products;
. Uncertainties relating to the development, ownership and enforcement of
intellectual property rights;
. Adverse changes in the financing of commercial health and dental plans;
. Adverse changes in the financial markets affecting the availability and
cost of capital;
. The impact of natural disasters, including a major earthquake, on our
operations; or
. The ability to attract and retain qualified personnel to grow and compete
effectively.
Due to the foregoing risks and uncertainties, among others, our actual
results could differ materially and adversely from those expressed in any
forward-looking statements as a result of various factors. We undertake no
obligation to revise or update publicly any forward-looking statements for any
reason.
The information contained in this report is not a complete description of
our business or the risks associated with an investment in our common stock. We
urge you to carefully review and consider the various disclosures made by us in
the report and in our other reports filed with the Securities and Exchange
Commission.
3
PART I
Item 1. Business
Background and Overview of Current Business
BioLase Technology, Inc. is a medical technology company that designs,
develops, manufactures and markets advanced dental, cosmetic and surgical
products. Our principal products are water and laser based systems currently
focused for use in dentistry. We have patents and have received clearances from
the United States Food and Drug Administration ("FDA") for applications in
markets other than dentistry, such as dermatology. However, our current business
plan is focused on the dental market because of the significant market potential
and our leading position in that market.
From inception in 1987 until approximately 1999, we were engaged primarily
in the research and development of the use of water and laser technology. We
were financed by approximately $42 million in stockholder investments through a
series of private placements, related warrants and stock options.
In 1997, we received FDA clearance to market our patented core technology
for a broad range of dermatological and general surgical soft tissue
applications. In 1998, we received FDA clearance to market the Millenium(TM)
(predecessor model of our current Waterlase(TM) system) for certain dental hard
tissue applications. The clearance allowed us to commence domestic sales and
marketing of our technology for hard and soft tissue applications.
In 1999, after nearly 12 years of research and development, we began the
commercialization of our HydroKinetic(R) technology, which was financed by
private placements of $2.7 million and $2.5 million in 1999 and 2000,
respectively. Net sales, which had been $1.8 million in 1997 and $1.4 million in
1998, grew to $7.0 million in 1999, $9.7 million in 2000 and $17.9 million in
2001.
During 1999 and 2000, to meet the expanding demands for soft-tissue and
whitening cosmetic dentistry applications, we designed a semiconductor diode
laser system, which is now marketed as our LaserSmile(TM) system. We received
FDA clearance to market the laser for a variety of soft-tissue medical
applications in June 1999. In 2001, we received FDA clearance to market the
LaserSmile(TM) system for cosmetic teeth whitening. We launched LaserSmile as a
tooth whitening application in the third quarter of 2001.
In 2002, we have received two additional FDA clearances for our
Hydrokinetic(R) technology. First, we received clearance to market the system
for complete root canal therapy (EndoLase(TM)). Second, we received clearance to
market the system for cutting, shaving, contouring and resection of oral osseous
tissues (bone) (OsseoLase(TM)). We consider these clearances to be very
significant product development milestones.
In December 2001, we formed BIOLASE Europe GmbH ("BIOLASE Europe"), a
wholly-owned subsidiary based in Germany. In February 2002, BIOLASE Europe
acquired a laser manufacturing facility in Germany and commenced manufacturing
operations at that location. We anticipate that BIOLASE Europe and the new
facility will enable us to expand our sales in Europe and neighboring
international regions.
Leveraging our core Hydrokinetics(R) technology in the dental market is
fundamental to our current business strategy. However, we believe that our
technology has broad uses beyond dentistry and we have obtained patents and FDA
clearances for certain of these applications in the cosmetic and surgical
markets.
4
Products
The Waterlase(TM) system combines an erbium, chromium: yttrium, scandium,
gallium, garnet (Er,Cr:YSGG) laser with a wavelength of 2790 nanometers with an
air-water spray to create our patented HydroKinetic(R) technology. The
Waterlase(TM) system produces laser pulses rapidly energizing water to remove
enamel and dentin for cavity preparation (dental hard tissue). By adjusting the
air-water spray level, the laser can be used for soft tissue procedures as well.
When used outside of the HydroKinetic(R) mode (i.e., without the water), the
unique wavelength cuts efficiently and provides exceptional levels of
coagulation and hemostasis.
Important benefits of the technology include:
. Patients in most cases will not require anesthesia; trauma to the dental
structure is significantly reduced;
. The technology avoids the vibration and micro fractures associated with
the high speed dental drill.
. There is no smear layer as is commonly created by the dental drill;
. There is a reduced likelihood of infection; the bonding of biomaterials
can be significantly improved;
. Patient throughput can be significantly improved as procedure times are
reduced; and
. The dentist can be provided additional revenue opportunities for soft
tissue procedures which otherwise may need to be referred to a
specialist or deferred.
The LaserSmile(TM) system incorporates a diode semiconductor laser for a
broad range of dental soft tissue and cosmetic procedures. For cosmetic
whitening, a special arched photon hand piece is used to direct the laser light
to a full quadrant of the teeth being treated. A proprietary gel is applied to
the teeth, which gel is activated by the precise wavelength of the laser. This
process provides rapid activation of the gel, which significantly reduces the
time required for the procedure. Because of the efficiency of this system,
procedures can be performed at lower energy levels, which can minimize
sensitivity effects on the teeth.
We also manufacture a wide variety of accessories and disposable products
that add functionality to our two laser systems. The Waterlase(TM) system uses
disposable tips of differing sizes based on the procedure being performed. We
also market the gel and aftercare products related to the LaserSmile(TM) system.
Sales of these consumables are not currently a significant part of our total
sales; however, we anticipate that the sale of consumables in the future will
constitute a larger part of our total net sales.
Sales and Marketing
While we cannot determine the exact number of dental lasers currently in
use, we estimate that total market penetration is negligible, with the majority
of those lasers being used in soft tissue applications. Consequently, we believe
the potential market for our products in dentistry is substantial.
We are currently marketing both laser systems in the United States and in
over twenty countries internationally (principally in Europe and Asia). Domestic
sales are made through a direct sales force while international sales are made
through a network of independent distributors. Because our domestic
5
sales are generally to individual dentists, no single customer relationship has
the potential of having a material effect on our business. International sales
to distributors have not been concentrated and have generally been made through
letters of credit or with payment in advance. The exception to that have been
sales to our distributor in Germany, where we have extended credit after
receiving a substantial down payment.
We participate in regional, national and international trade shows and
sponsor seminars to promote our 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. We believe a
substantial marketing effort must be made through these types of educational
programs to increase the awareness of our technology and its benefits.
Manufacturing
We manufacture certain proprietary components of our products, and we
contract with various third party companies to manufacture other components for
assembly by us. Substantially all of the materials used in our products have
historically been manufactured domestically. While we have identified alternate
suppliers for most of the components we purchase, we do rely on a single
supplier for certain key components of our products.
Until February 2002, all of our manufacturing facilities were located in
San Clemente, California. With our recent formation of BIOLASE Europe and the
acquisition of the laser production facility in Germany, a substantial part of
our physical assets are located outside of the U.S.
Intellectual Property, Research and Product Development
We have built a substantial portfolio of intellectual property that is
protected by patents, patents pending, and trademarks relating to our core
technologies. We classify our patents in four different dimensions: laser and
water; hydrokinetics (laser energy exciting water); fluid conditioning; and
device, or laser, characteristics.
We are continually expanding and strengthening the protections afforded by
patents. In 2001, we received 4 additional patents, which strengthened our
positions on existing and expanded applications of our products. We rely on the
protection afforded to our proprietary technologies and consider our
intellectual property strategy to be a source of competitive advantage. We also
rely on trade secrets, other proprietary know-how, continuing technological
innovation and management experience to develop our competitive position.
During the years ended December 31, 2001, 2000 and 1999, engineering and
development expenses were approximately $1.5 million, $2.3 million and $2.4
million, respectively. Such expenditures were directed primarily to develop new
products and to expand the capabilities of our existing products.
Competition
In the domestic hard tissue dental market, we compete with several
companies that are in the market to some degree or that are attempting to enter
the market. In the international market, we have two competitors with
substantial resources and several smaller competitors. Competing companies
utilize a commonly available laser, the Erbium YAG (Er: YAG), developed
initially for non-dental applications and subsequently applied to dentistry. We
believe our Waterlase(TM) offers substantial performance advantages over the Er:
YAG lasers.
6
We compete with three companies in the in-office cosmetic teeth-whitening
market. Although these companies are substantial competitors, we believe the
cosmetic market is strong and will continue to grow. We believe that we are able
to differentiate our product based on the benefits of using a laser for the
procedure plus the benefits of being able to use our product for many soft
tissue procedures.
We also experience competition from other technologies, including the
traditional high and low-speed dental drills and air abrasion systems for
clinical dental procedures; and from take-home products and in-store products
for cosmetic teeth-whitening.
We believe competition is based on price and product performance. We have
priced our products at the high end of the range but believe that our product
performance and demonstrated return on investment for our customers have been
and will continue to be more important than price when competing.
We believe that the following factors provide us with competitive
advantages:
. Our lead position and customer base in the hard tissue dental market
. Our proprietary technology;
. Our network of university researchers and academic leaders;
. Our strong intellectual property portfolio; and
. Our focused business strategy, strong sales force and experienced
management team.
Employees
As of March 1, 2002, we had 109 full-time employees, including 10
employees in our German facility. This represents an increase of 22 employees or
25% from the 87 employees as of March 2001. Our employees are not represented by
any collective bargaining agreement, and we believe our employee relations are
good.
Item 2. Properties
Our principal offices are located at 981 Calle Amanecer, San Clemente,
California where, until August 2000, we had leased approximately 23,000 square
feet at this facility. We purchased our principal offices in August 2000 with
the property encumbered by a first trust deed to a bank. In March 2001, we sold
the building to an unrelated third party and entered into a lease, which expires
in March 2006. We believe that our facilities are sufficient for our current
needs.
In February 2002, our wholly-owned subsidiary, BIOLASE Europe, purchased a
20,000 square foot laser manufacturing facility in Floss, Germany. We anticipate
that this facility will enable us to increase our sales in Europe and
neighboring regions and to improve the technical support we provide there. We
currently lease half of the facility to a third party and have begun
manufacturing operations in the other half.
Item 3. Legal Proceedings
From time to time, we are involved in legal proceedings incidental to our
business. We believe that pending actions, individually and in the aggregate,
will not have a material adverse effect on our
7
financial condition, results of operations, cash flows or prospects, and that
adequate provision has been made for the resolution of such actions and
proceedings.
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
Our common stock is listed on the Nasdaq Small Cap Market under the symbol
"BLTI." The following table sets forth the high and low sales price per share
for our common stock as reported by Nasdaq for each quarter of 2001 and 2000:
High Low
---- ---
Year Ended December 31, 2001
First Quarter $3.03 $1.53
Second Quarter 5.07 2.09
Third Quarter 6.59 3.47
Fourth Quarter 6.80 3.60
Year Ended December 31, 2000
First Quarter 7.00 1.19
Second Quarter 3.75 2.00
Third Quarter 2.72 1.97
Fourth Quarter 2.28 1.03
As of March 1, 2002, the total number of record holders of our common
stock was 346.
Dividend Policy
We have never paid any cash dividends on our common stock since our
incorporation, and we anticipate that, for the foreseeable future, earnings, if
any, will continue to be retained for use in our business.
Sale of Unregistered Securities
On December 1, 2001, we issued to GEM Holdings Corp. ("GEM") 20,000 shares
of unregistered common stock. The securities were issued to GEM in consideration
for GEM's continuing to provide a guaranty of a $2.5 million credit facility
(scheduled to be reduced to $1.8 million in May 2002), which expires on January
31, 2003. 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.
Item 6. Selected Consolidated Financial Data
The following table sets forth our selected consolidated financial data
for the periods presented. You should read this data along with our Consolidated
Financial Statements and related Notes contained elsewhere in this report and in
our subsequent reports filed with the SEC, as well as the section of this
8
report and our other reports entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Years Ended December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ----------- ------------- ----------
(in thousands, except per share data)
Consolidated Statements of
Operations Data:
Sales.............................. $ 17,887 $ 9,657 $ 7,004 $ 1,465 $ 1,786
Gross profit....................... 10,588 4,828 2,852 47 259
Operating expenses (1)............. 10,952 8,462 7,601 10,369 3,258
Loss from operations............... (364) (3,634) (4,749) (10,322) (2,999)
Net loss........................... $ (408) $ (3,728) $ (4,798) $ (10,346) $ (2,824)
Loss per share
- basic and diluted (2)........... $ (0.02) $ (0.19) $ (0.28) $ (0.69) $ (0.21)
Shares used in computation of
basic loss per share.............. 19,510 19,171 17,254 15,062 13,385
Years Ended December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ----------- ------------- ----------
(in thousands)
Consolidated Balance Sheet Data:
Working capital.................... $ 1,135 $ (206) $ (1,331) $ 89 $ 1,719
Total assets....................... 7,561 6,599 2,672 3,911 3,396
Long-term liabilities.............. 205 1,175 -- -- --
Stockholders' equity (deficit)..... 1,579 1,056 (939) 662 2,095
(1) Operating expenses include non-recurring charges of $ 1.1 million and $ 5.1
million in 1999 and 1998, respectively. These charges were related to a
severance agreement, a consulting agreement and write-off of product development
assets in 1999. In 1998, the charge related to the write-off of in-process
research and development costs related to the purchase of Laser Skin Toner, Inc.
assets.
(2) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the calculation of loss per share.
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion and analysis in conjunction with
our Consolidated Financial Statements and Notes thereto, contained elsewhere in
this report, before deciding to invest in our company or to maintain or increase
your investment.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses for
each period.
The following represents a summary of our critical accounting policies,
defined as those policies that we believe are: (a) the most important to the
portrayal of our financial condition and results of operations, and (b) that
require our most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effects of matters that are inherently
uncertain. For a detailed discussion on the application of these and other
accounting policies, see Note 2 in the Notes to the Consolidated Financial
Statements in Item 8 of this Annual Report on Form 10-K, beginning on page F-8.
Revenue Recognition. We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101), as amended by SAB 101A and 101B. SAB 101 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
is fixed and determinable; and (4) collectibility is reasonably assured. We have
concluded that our revenue recognition policy is appropriate and in accordance
with generally accepted accounting principles and SAB 101.
Warranty Expense. Products sold are generally covered by a warranty
against defects in material and workmanship for a period of one year. We accrue
a warranty reserve for estimated costs to provide warranty services. We estimate
costs to service warranty obligations based on historical experience and
expectation of future conditions. To the extent we experience increased warranty
claim activity or increased costs associated with servicing those claims,
warranty accrual will increase, resulting in decreased gross profit.
Valuation of Long-Lived Assets. Property, plant and equipment, intangible
and certain other long-lived assets are amortized over their useful lives.
Useful lives are based on our estimate of the period that the assets will
generate revenue. Intangible assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable.
Inventory. Inventory is valued at the lower of cost or market (determined
by the first-in, first-out method). We periodically evaluate the carrying value
of inventories and record an allowance for obsolescence based on such
evaluation, with a corresponding provision included in cost of sales. Material
differences in estimates of obsolete inventory may result in the amount and
timing of cost of sales for any period if we made different judgments or
utilized different estimates.
Allowance For Doubtful Accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
10
additional allowances may be required.
Litigation and Other Contingencies. We regularly evaluate our exposure to
threatened or pending litigation and other business contingencies. Because of
the uncertainties related to the amount of loss from litigation and other
business contingencies, the recording of losses relating to such exposures
requires significant judgment about the potential range of outcomes. To date, we
have not been affected by any litigation or other contingencies that have had,
or are currently anticipated to have, a material impact on our results of
operations or financial position. As additional information about current or
future litigation or other contingencies becomes available, we will assess
whether such information warrants the recording of additional expense relating
to its contingencies. Such additional expense could potentially have a material
impact on our results of operations and financial position.
Results of Operations
Net Sales. Net sales increased by 85% to $17.9 million in 2001 from $9.7
million in 2000. This increase was primarily due to a 176%, or $7.7 million
growth in domestic sales of our Waterlase(TM) system. Domestic sales were also
boosted in the third and fourth quarters of 2001 by the introduction of our
LaserSmile(TM) cosmetic whitening system. These increases were offset by a 28%,
or $1.1 million decrease in international sales in 2001 as we concentrated our
resources on growing sales in the domestic market. We are re-evaluating our
international distribution methods and taking steps to strengthen our position
internationally. The acquisition of the laser facility in Germany represents one
of those steps. In addition to being able to manufacture closer to the customer,
we anticipate that the local presence of a field technical staff will improve
our customer service and enhance sales growth.
We anticipate that our recent receipt of FDA clearances to market our
Waterlase(TM) system for root canal therapy and for bone applications should
have an incrementally positive effect on sales growth in 2002. However, the full
benefit of these clearances may not be realized until years beyond 2002 as
practitioners learn to apply this technology to complex procedures.
Net sales grew 38% to $9.7 million in 2000 from $7.0 million in 1999. A key
factor in the growth was a 78% increase in export sales to $4.2 million in 2000.
Alliances with international distributors primarily drove the increase in export
sales. In particular, during 2000, we recommenced sales to Germany through a new
German distributor. We believe the German market represents one of the largest
markets for our products in Europe. We also commenced sales in France, Korea,
Taiwan and Japan during 2000.
Domestic sales also grew in 2000 but at a lesser rate than in the previous
year as some customers deferred purchases in anticipation of the introduction of
a new and improved model of our hard tissue laser system, now known as the
Waterlase(TM). The introduction of the TwiLite(TM) diode laser system
(predecessor of our LaserSmile(TM) system) also added to sales growth in 2000.
Both products were introduced during the third quarter of 2000.
Gross Profit. Gross profit increased 119% to $10.6 million in 2001 from
$4.8 million in 2000. This increase was largely the result of spreading the
fixed costs of manufacturing over more units, an improvement in labor
productivity, and engineering cost reductions in the material components of the
products. Gross margin increased from 50% of net sales in 2000 to 59% of net
sales in 2001. We expect to make further productivity improvements in labor and
materials. However, we also expect to see step increases in fixed costs related
to growth, which will constrain the increases in gross profit resulting from
volume and productivity improvements. Fixed costs related to our German
facility, although not expected to be significant, are an example of such step
costs.
11
Gross profit increased 69% in 2000 from $2.9 million in 1999. Gross margin
increased to 50% of net sales in 2000 from 41% of net sales in 1999. The
improvement in the gross margin was due principally to increased sales volume,
combined with the improved design of the Waterlase(TM) system, which resulted in
lower material costs and increased manufacturing efficiencies. The introduction
of the TwiLite(TM) diode laser system during the third quarter of 2000 also
contributed to the higher gross margins.
Sales and Marketing Expense. Sales and marketing expense increased 71% to
$7.4 million in 2001 compared to $4.3 million in 2000. As a percent of net
sales, however, these expenses decreased to 42% in 2001 from 45% in 2000. The
increase in absolute dollars was largely due to the 85% increase in net sales in
2001 and included increased sales commissions and an increase in the number of
sales representatives. Marketing costs also increased as we increased the number
of trade shows, seminars and symposiums that we attended and sponsored.
We plan to continue to invest heavily in sales and marketing activities to
increase dentists' awareness of the benefits of our technology. However, we
expect that, as a percent of sales, these expenses will continue to decrease
slowly.
Sales and marketing expense increased 60% in 2000 from $2.7 million in
1999. As a percent of net sales, sales and marketing expense increased to 45% in
2000 from 39% in 1999. The increase in absolute dollars and as a percent of net
sales was primarily due to (i) higher sales volume, (ii) the expansion of our
domestic sales force and marketing infrastructure, (iii) increased marketing and
advertising costs, and (iv) an increase in the number of teaching and
educational seminars and activities promoting our products, both domestically
and abroad.
General and Administrative Expense. General and administrative expense
increased 9% to $2.0 million in 2001 from $1.8 million in 2000. As a percent of
net sales, general and administrative expense decreased to 11% of net sales in
2001 from 19% of net sales in 2000. The increase in absolute dollars in 2001
primarily related to the cost of infrastructure needed to support the growth of
the business. We also experienced increases in the cost of insurance not only
related to growth but also as a result of tighter insurance market conditions.
We expect insurance pricing increases to continue in 2002.
General and administrative expense decreased 26% in 2000 from $2.5 million
in 1999. Absent $610,000 in non-recurring charges, which were included in 1999,
general and administrative expense in absolute dollars for 2000 would reflect a
nominal decrease of 1% compared to 1999.
Engineering and Development Expense. Engineering and development expense
decreased 34% to $1.5 million in 2001 from $2.3 million in 2000. As a percent of
net sales, engineering and development expense decreased to 9% of net sales in
2001 from 24% of net sales in 2000. This decrease was related to the change in
the development cycle for our products. Engineering costs also decreased as a
result of process improvements, which reduced the number of employees needed to
sustain the activities of the function. Our engineering efforts are currently
directed at new product development plus continuing product improvement on our
laser systems. Development efforts are currently focused on strengthening our
patent portfolio and obtaining FDA clearances for additional applications for
existing and future products.
Engineering and development expense decreased 6% in 2000 from $2.4 million
in 1999. After consideration of $483,000 of non-recurring charges included in
fiscal 1999 related to the acquisition of Laser Skin Toner, Inc. (see Note 6 in
the Consolidated Financial Statements), engineering and development expense for
2000 would have reflected an increase of 18% from 1999. This increase was
principally due to development of the Waterlase(TM) system and the
LaserSmile(TM) system.
12
Gain on Sale of Assets. The gain on sale of assets of $79,000 in 2001 is
primarily related to two transactions. In 2000, we purchased our San Clemente
manufacturing facility and offices in order to avoid moving our operations. In
2001, we sold the facility and leased it back for a five-year term with an
additional five year option, resulting in a gain of $316,000. We are recognizing
that gain for accounting purposes over the term of the lease. In 2001, we
recognized $48,000 of this gain. We also sold inventory and assets relating to
our inactive subsidiary, Societe Endotechnic, in 2001 for a gain of $31,000.
Interest income decreased 36% in 2001 principally due to lower short-term
interest rates in 2001. Interest expense remained relatively unchanged from 2000
to 2001. Although the variable interest rate on our line of credit decreased
with other short-term interest rates in 2001, we incurred interest expense on
the mortgage note payable that financed the purchase of our facility. The
interest expense from the mortgage note for three months of 2001 offset the
decrease in interest on our line of credit.
Interest income increased 53% in 2000 primarily due to higher average cash
balances maintained in interest-bearing accounts over the previous year, as well
as higher interest rates on short-term cash investments. Interest expense
increased 75% over 1999 primarily due to a higher average balance during 2000 on
our line of credit than in 1999, as well as higher interest rates for short-term
debt.
Liquidity and Capital Resources
At December 31, 2001, we had $1.1 million in working capital. Our working
capital requirements in 2000 and 1999 were financed through the private
placement of equity securities, netting proceeds of $2.5 million and $2.7
million, respectively. We also received proceeds in 2000 and 1999 from the
exercise of warrants and stock options in the amounts of $3.2 million and
$85,000, respectively. In 2001, we incurred negative cash flow of $1.0 million
from operating activities, substantially all resulting from the net increase in
working capital. We financed our negative cash flow from operations through
exercise of warrants and options of $803,000 and from net cash received on the
sale of our facility of $1.1 million. At December 31, 2001, cash and cash
equivalents was $2.7 million compared to $2.0 million at the end of 2000.
Accounts receivable, net, increased to $2.1 million at December 31, 2001
from $758,000 at December 31, 2000. The increase was due to the higher sales
volume experienced in the fourth quarter for which the receivable will be
collected in the first quarter of 2002. We believe that the allowance for
doubtful accounts at December 31, 2001 of $195,000 is adequate to provide for
anticipated losses on uncollectible amounts.
Inventories, net, increased to $1.9 million at December 31, 2001 from $1.2
million at December 31, 2000. The increase was due to increased production
necessary to meet 2001 sales and expected 2002 demand. Inventory turnover
improved during 2001 to an average of 5.3 times, or every 69 days, from an
average of 4.8 times, or every 76 days in 2000. We expect inventory levels to
increase in 2002 in support of anticipated higher sales levels.
Our business continues to focus on the manufacturing and marketing of
laser-based technologies the Waterlase(TM) and the LaserSmile(TM) laser systems.
Financing the development of our products and our operations has been achieved
principally through the private placements of common stock and the exercise of
stock options and warrants, though we have experienced significant increased
sales over the last two years. During the three years ended December 31, 2001,
we have raised approximately $9.4 million of net equity funds in this manner.
We believe that cash and cash equivalents, cash generated from operations
and amounts available under our current revolving credit agreement will be
adequate to meet our debt service requirements,
13
capital expenditures and sustain our operations through the end of fiscal 2002.
Should we require further capital resources in 2002, we would most likely
address such requirement through a combination of product sales, sales of equity
securities through private placements, and/or debt financing. If such additional
debt or equity is needed, no assurances can be given that we would be able to
obtain such additional capital resources. If unexpected events occur requiring
us to obtain additional capital and we are unable to do so, we then might
attempt to preserve our 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 our
operations. If we were unable to raise such additional capital or defer certain
costs as described above, such inability would have an adverse effect on our
financial position, results of operations and cash flows.
At December 31, 2001, we had $1.8 million outstanding under a revolving
credit agreement with a bank. The revolving credit agreement provides for
borrowings of up to $2.5 million for the financing of inventory and is
collateralized by substantially all of our accounts receivable and inventories.
The interest rate is computed based upon LIBOR plus 0.5%. The balance at
December 31, 2000 was $1.8 million and during 2001, there were no draws or
repayments. We do not intend to make any further borrowings under this line of
credit in the immediate future. In May 2002, this line of credit will be reduced
to $1.8 million. The current revolving credit agreement expires on January 31,
2003, at which point we will be required either to pay any remaining balance of
the credit facility or refinance the credit facility. In addition, during 2002,
we expect that warrants expiring in 2002 will be exercised, generating up to an
additional $2.2 million from external sources.
In February 2002, our wholly-owned subsidiary, BIOLASE Europe purchased a
production facility in Germany with ten employees for $1,000,000. We are
required to pay the first installment of the purchase price by May 31, 2002. The
amount of the first installment will be determined by us, but must be between
$300,000 and $500,000. Thereafter, we must pay $500,000 by April 1, 2003 and the
balance of the purchase price, if any, must be paid by December 1, 2003. We are
currently negotiating with a third party for that party to pay all or a portion
of the first installment in exchange for certain rights that we would grant to
the third party. In the event we do not reach an agreement with this third
party, then both the purchase price and the initial installment will be reduced
by $150,000.
The facility, which is ISO 9001 certified, consists of two buildings
equipped for laser production. This facility will substantially increase our
production capacity. BIOLASE Europe also has a highly qualified technical staff
experienced in laser principles and design, delivery systems, optics, technical
service and field support. BIOLASE Europe will manufacture our products in
Germany, provide direct support for our expanding international dealer network
and contribute to our ongoing research and development of new products.
We have no other material commitments for capital expenditures.
14
Selected Quarterly Financial Data
Quarters Ended
--------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
(amounts in thousands, except per share data)
2001
- ----
Net sales .......................... $ 3,083 $ 4,335 $ 4,676 $ 5,793
Gross profit ....................... 1,729 2,601 2,805 3,453
Income (loss) from operations ...... (703) (121) 82 378
Net income (loss) .................. (773) (147) 102 410
Net income (loss) per share -
basic and diluted ............... (0.04) (0.01) 0.01 0.02
2000
- ----
Net sales .......................... 1,527 2,259 2,187 3,684
Gross profit ....................... 536 1,039 1,002 2,251
Loss from operations ............... (1,016) (883) (1,149) (586)
Net loss ........................... (1,032) (888) (1,165) (643)
Net loss per share -
basic and diluted ............... (0.06) (0.04) (0.06) (0.03)
Impact of Changing Prices on Sales and Income
Inflation has not historically had a material impact on our operating
expenses. The effect of deflation on the pricing of technology products has not
yet had a material impact on our ability to price our products. We are currently
unable to predict what effect, if any, it may have in the future.
New Accounting Pronouncements
In June 2001, Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets," were issued. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of accounting
and establishes criteria for the separate recognition of intangible assets
acquired in a business combination. SFAS No. 142 requires that goodwill and
certain other intangible assets having indefinite lives no longer be amortized
to earnings, but instead be subject to periodic testing for impairment.
Intangible assets determined to have definite lives will continue to be
amortized over their useful lives. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. However, goodwill and intangible assets
acquired after June 30, 2001 are subject immediately to the non-amortization and
amortization provisions of this statement. As we do not have any goodwill or
material intangible assets, the adoption of these statements will not have a
material impact on our financial position, results of operations or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which is effective for fiscal years beginning after
June 15, 2002. This statement provides the accounting requirements for
retirement obligations associated with tangible long-lived assets. This
statement requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The adoption of
this statement is not expected to have a material impact on our financial
position, results of operations or cash flows.
15
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. This Statement retains the requirements
of SFAS No. 121 related to long-lived asset impairment loss recognition and
measurement, but removes goodwill and certain intangibles from its scope. The
Statement also requires that one accounting model be used for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired,
and broadens the presentation of discontinued operations to include more
disposal transactions. The adoption of this Statement is not expected to have a
material impact on our financial position, results of operations or cash flows.
Risk Factors
Before investing in our company or deciding to maintain or increase your
investment, you should carefully consider the risks described below, in addition
to the other information contained in this report and in our other filings with
the Securities and Exchange Commission. The risks and uncertainties described
below are not the only ones facing our company. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also affect our business operations. If any of these risks actually occur, our
business, financial condition or results of operations could be seriously
harmed. In that event, the market price for our common stock could decline and
you may lose all or part of your investment.
We May Not Be Able to Continue or Increase Our Net Income in the Future,
Which May Cause the Trading Price of Our Common Stock to Decline.
We may not be able to continue to achieve net income. Prior to the third
and fourth quarters of 2001, we had not reached the break-even point as we
transitioned from our research and development phase and began commercializing
our technology. Even if we continue to achieve net income, we may not be able to
increase net income on a quarterly or annual basis in the future. Our ability to
achieve sustained or increased net income is, in turn, dependent on many of the
other risk factors identified in this report below. If we are unable to continue
or increase our net income in the future, we may not be able to successfully
operate our business and our stock price may decline.
We May Not Be Able to Secure Additional Financing to Meet Our Future
Capital Needs.
Our line of credit expires on January 31, 2003. If we are unable to renew
our line of credit at that time on acceptable terms, or at all, and we are
required to repay the line of credit, absent sufficient cash flow from
operations or the sale of securities, the diversion of resources for that
purpose will adversely affect our operations and financial condition and our
ability to achieve future growth in our net sales. Unless we can generate
sufficient cash flow from sustained profitability, we will continue to be
dependent on the availability of external financing to meet our operating and
capital needs, including the repayment of current debt obligations. We may not
be able to secure additional debt or equity financing on terms acceptable to us,
or at all, at the time when we need such funding. If we do raise funds by
issuing additional equity or convertible debt securities, the ownership
percentages of existing stockholders would be reduced, and the securities that
we issue may have rights, preferences or privileges senior to those of the
holders of our common stock. If we raise additional funds by issuing debt, we
may be subject to limitations on our operations, including limitations on the
payment of dividends. Our inability to raise additional funds on a timely basis
will make it difficult for us to achieve our business plan and will have a
material adverse effect on our business, financial condition and results of
operations.
16
Our Quarterly Revenues and Operating Results May Fluctuate in Future
Periods and We May Fail to Meet Expectations, Which May Cause The Price of
Our Common Stock to Decline.
Our quarterly revenues and operating results have fluctuated and are likely
to continue to vary from quarter to quarter due to a number of factors, many of
which are not within our control. If quarterly revenues or operating results
fall below the expectations of investors or securities analysts, the price of
our common stock could decline substantially. Factors that might cause quarterly
fluctuations in our revenues and operating results include the factors described
in the subheadings below as well as:
. the evolving and varying demand for dental and medical lasers;
. our ability to develop, introduce, market and gain market acceptance
of new products and product enhancements in a timely manner;
. our ability to control costs;
. the size, timing, rescheduling or cancellation of significant customer
orders;
. the introduction of new products by competitors;
. the availability and reliability of components used to manufacture our
products;
. changes in our pricing policies or those of our suppliers and
competitors, as well as increased price competition in general;
. the mix of our domestic and international sales, and the risks and
uncertainties associated with our international business;
. costs associated with any future acquisitions of technologies and
businesses; and
. general global economic and political conditions, including
international conflicts and acts of terrorism.
In addition, a significant amount of our sales in any quarter may consist
of sales through a single distributor. As a result, the timing of orders by this
distributor may impact our quarter to quarter results. The loss of or a
substantial reduction in orders from this distributor could seriously harm our
business, financial condition and results of operations. Due to all of the
factors listed above and the other risks discussed in this report, you should
not rely on quarter-to-quarter comparisons of our operating results as an
indication of our future performance.
Our Business Depends on the Acceptance of Our Products, and It Is Uncertain
Whether the Market Will Broadly Accept Our Products.
Our future success will depend on our ability to demonstrate to dentists
and physicians the potential cost and performance advantages of our laser
systems over traditional methods of treatment and, to a lesser extent, over
competitive laser systems. Our products represent relatively new technologies in
the dental market, and have not yet achieved widespread market acceptance.
Factors that may inhibit mass adoption of laser technologies by dentists and
physicians include the cost of the products, concerns about the safety, efficacy
and reliability of lasers and the ability to obtain reimbursement of laser
procedures under health plans. Current economic pressure may make dentists and
physicians reluctant to purchase substantial capital equipment or invest in new
technologies. The failure of medical lasers to
17
achieve broad market acceptance would have an adverse effect on our business,
financial condition and results of operations. We cannot assure you that we will
have sufficient resources to continue to successfully market our products to
achieve broad market acceptance.
We Depend on a Limited Number of Suppliers, and If We Cannot Secure
Alternate Suppliers, Our Business May Be Harmed.
We purchase certain raw materials and components included in our products
from a limited group of qualified suppliers, and we do not have long-term supply
contracts with any of our key suppliers. Our growth and ability to meet customer
demand depends in part on our ability to obtain timely deliveries of materials
and components from our suppliers. Certain components of our products are
currently available only from a single source or limited sources. Although we
believe that alternate sources of supply are available for most of our
single-sourced materials and components, a change in a single or limited source
supplier, or an inability to find an alternate supplier, could create
manufacturing delays, disrupt sales and cash flow, and harm our reputation, any
of which could adversely affect our business, financial condition and results of
operations.
If We Are Unable to Protect Our Intellectual Property Rights, Our
Competitive Position Could Be Harmed or We Could Be Required to Incur
Expenses to Enforce Our Rights.
Our success will depend, in part, on our ability to obtain patent
protection for our products and technology, to preserve our trade secrets and to
operate without infringing the intellectual property of others. We rely on
patents to establish and maintain proprietary rights in our technology and
products. However, we cannot assure you that we will be able to obtain any
further patents, that any of our proprietary rights will not be challenged,
invalidated or circumvented, or that any such rights will provide a sustainable
competitive advantage. Competitors may claim that we have infringed their
current or future intellectual property rights. We may not prevail in any future
intellectual property infringement litigation given the complex technical issues
and inherent uncertainties in litigation. Any claims, with or without merit,
could be time-consuming and distracting to management, result in costly
litigation, cause product shipment delays, or require us to enter into royalty
or licensing agreements. Additionally, in the event an intellectual property
claim against us is successful, we might not be able to obtain a license on
acceptable terms or license a substitute technology or redesign our products to
avoid infringement. Any of the foregoing adverse events could seriously harm our
business, financial condition and results of operations.
We Have Significant International Sales and Are Subject to Risks Associated
with Operating in International Markets.
In the past few years, international sales have comprised a significant
portion of our net sales. Our international sales declined significantly in the
current year, and political and economic conditions outside the United States
could make it difficult for us to increase our international sales or to operate
abroad.
In the future, we intend to continue to pursue and expand our international
business activities. International operations are subject to many inherent
risks, including:
. political, social and economic instability;
. fluctuations in currency exchange rates;
. exposure to different legal standards;
18
. reduced protection for our intellectual property in some countries;
. burdens of complying with a variety of foreign laws;
. import and export license requirements and restrictions of the United
States and each other country in which we operate;
. trade restrictions;
. the imposition of governmental controls;
. unexpected changes in regulatory or certification requirements;
. changes in tariffs;
. difficulties in staffing and managing international operations;
. longer collection periods and difficulties in collecting receivables
from foreign entities; and
. potentially adverse tax consequences.
We believe that international sales will continue to represent a
significant portion of our net sales, and that continued growth and
profitability may require further expansion of our international operations. A
substantial percentage of our international sales are denominated in the local
currency. As a result, an increase in the relative value of the dollar could
make our products more expensive and potentially less price competitive in
international markets. We do not currently engage in any transactions as a hedge
against risks of loss due to foreign currency fluctuations. Any of these factors
may adversely affect our future international sales and, consequently, affect
our business, financial condition and operating results.
Product Liability Claims Against Us Could Be Costly and Could Harm Our
Reputation.
The sale of dental and medical products involves the inherent risk of
product liability claims against us. While we currently maintain product
liability insurance coverage in an amount that we believe is adequate for our
level of sales, this insurance is expensive, is subject to various coverage
exclusions and may not be obtainable in the future on terms acceptable to us, or
at all. We do not know whether claims against us, if any, with respect to our
products will be successfully defended or whether our insurance will be
sufficient to cover liabilities resulting from such claims.
Rapid Changes in Technology Could Harm the Demand for Our Products or
Result in Significant Additional Costs.
The markets in which our laser products compete are subject to rapid
technological change, evolving industry standards, changes in the regulatory
environment, frequent new device and pharmaceutical introductions and evolving
dental and surgical techniques. These changes could render our products
noncompetitive or obsolete. The success of our existing and future products is
dependent on the differentiation of our products from those of our competitors,
the timely introduction of new products and the perceived benefit to the
customer in terms of patient service and return on investment. The process of
developing new medical devices is inherently complex and requires regulatory
approvals or clearances that can be expensive, time-consuming and uncertain. We
have in the past experienced delays in product development. We cannot assure you
that we will successfully identify new product opportunities, be financially or
otherwise capable of the research and development to bring new products
19
to market in a timely manner or that product and technologies developed by
others will not render our products obsolete.
We May Not Be Able to Compete Successfully Against Our Current and Future
Competitors.
Our products compete with those of a number of foreign and domestic
companies, including those companies that market traditional dental products
such as dental drills, as well as other companies that market laser technologies
in the dental and medical markets that we address. Some of our competitors have
greater financial, technical, marketing or other resources than us. This may
allow them to respond more quickly to new or emerging technologies and to devote
greater resources to the development and introduction of enhanced products than
we can. In addition, the rapid technological changes occurring in the healthcare
industry are expected to lead to the entry of new competitors, especially as
dental and medical lasers gain increasing market acceptance. Our ability to
anticipate technological changes and to introduce enhanced products on a timely
basis will be a significant factor in our ability to grow and remain
competitive. New competitors or technology changes in laser products and methods
could cause commoditization of such products, require price discounting or
otherwise adversely affect our gross margins.
Changes in Government Regulation or the Inability to Obtain Necessary
Government Approvals Could Harm Our Business.
Our products are subject to extensive government regulation, both in the
United States and other countries. To clinically test, manufacture and market
products for human diagnostic and therapeutic use, we must comply with
regulations and safety standards set by the U.S. Food and Drug Administration
and comparable state and foreign agencies. Generally, products must meet
regulatory standards as safe and effective for their intended use prior to being
marketed for human applications. The clearance process is expensive,
time-consuming and uncertain. The failure to receive requisite approvals for the
use of our products or processes, or significant delays in obtaining such
approvals, could prevent us from developing, manufacturing and marketing
products and services necessary for us to remain competitive.
If Our Customers Cannot Obtain Third Party Reimbursement for Their Use of
Our Products, They May Be Less Inclined to Purchase Our Products.
Our products are generally purchased by dental or medical professionals who
then bill various third party payors, such as government programs or private
insurance plans, for the procedures conducted using these products. In the
United States third party payors review and frequently challenge the prices
charged for medical services. In many foreign countries, the prices are
predetermined through government regulation. Payors may deny coverage and
reimbursement if they determine that the procedure was not medically necessary
(for example, cosmetic) or that the device used in the procedure was
investigational. We believe that most of the procedures being performed with our
current products generally have been reimbursed, with the exception of cosmetic
applications such as tooth whitening. The inability to obtain reimbursement for
services using our products could deter dentists and physicians from purchasing
or using our products. We cannot predict the effect of future healthcare reforms
or changes in financing for health and dental plans. Any such changes could have
an adverse effect on the ability of a dental or medical professional to generate
a return on investment using our current or future products. Such changes would
act as disincentives for capital investments by dental and medical professionals
and could have an adverse effect on our business, financial condition and
results of operations.
20
The Failure to Attract and Retain Key Personnel Could Adversely Affect Our
Business.
Our future success depends in part on the continued service of certain key
personnel, including Jeffrey W. Jones, our Chief Executive Officer, Edson J.
Rood, our Chief Financial Officer, Ioana Rizoiu, our Vice President of Clinical
Research, and Keith Bateman, our Vice President of Global Sales. We do not have
employment agreements with any of our key employees, other than with Mr. Jones,
whose employment agreement was renewed in January 2002 for an additional
two-year term.
Our success will also depend in large part on our ability to continue to
attract, retain and motivate qualified engineering and other highly skilled
technical personnel. Competition for employees, particularly development
engineers, is intense. We may not be able to continue to attract and retain
sufficient numbers of such highly skilled employees. Our inability to attract
and retain additional key employees or the loss of one or more of our current
key employees could adversely affect our business, financial condition and
results of operations.
Potential Future Acquisitions Could Have Unintended Negative Consequences
Which Could Harm Our Business and Cause Our Stock Price to Decline.
We may consider pursuing acquisitions of businesses, products or
technologies in the future as a part of our growth strategy. Acquisitions could
require significant capital infusions and could involve many risks, including
but not limited to the following:
. We may encounter difficulties in assimilating and integrating the
operations, products and workforce of the acquired companies;
. Acquisitions may materially and adversely affect our results of
operations because they may require large one-time charges or could
result in increased debt or contingent liabilities, adverse tax
consequences, substantial depreciation or deferred compensation
charges, or the amortization of amounts related to deferred
compensation, goodwill and other intangible assets;
. Acquisitions may be dilutive to our existing stockholders;
. Acquisitions may disrupt our ongoing business and distract our
management; and
. Key personnel of the acquired company may decide not to work for us.
We cannot assure you that we will be able to identify or consummate any
future acquisitions on acceptable terms, or at all. In the event we do pursue
any acquisitions, it is possible that we may not realize the anticipated
benefits from such acquisitions.
Our Common Stock Price Has Been Volatile, Which Could Result in Substantial
Losses for Individual Stockholders.
Our common stock is currently traded on the Nasdaq Small Cap Market and has
only limited daily trading volume. The trading price of our common stock has
been and may continue to be volatile. The market for technology companies, in
particular, has, from time to time, experienced extreme volatility that often
has been unrelated to the operating performance of particular companies. These
broad market and industry fluctuations may significantly affect the trading
price of our common stock, regardless of our actual operating performance. For
example, the closing per share sale price of our common stock fluctuated from
$7.00 to $1.03 over the prior fiscal year despite steady improvement in our
21
financial performance. On August 9, 2001, the closing sale price of our common
stock declined 12% from $5.87 per share on volume of approximately 900,000
shares, absent any news about or announcements by us. The trading price of our
common stock could be affected by a number of factors, including, but not
limited to, changes in expectations of our future performance, changes in
estimates by securities analysts (or failure to meet such estimates), quarterly
fluctuations in our revenue and financial results and a variety of risk factors,
including the ones described elsewhere in this report. Periods of volatility in
the market price of a company's securities sometimes result in securities class
action litigation. If this were to happen to us, such litigation would be
expensive and would divert management's attention. In addition, with only a
limited public market for our stock, it would be difficult to sell a significant
amount of our stock, which could cause a significant decline in the trading
price of our stock. If our stock price drops below $1.00 per share for an
extended period of time or we are otherwise unable to satisfy the continued
listing requirements of the Nasdaq Small Cap Market, our shares could be
delisted from the Nasdaq Small Cap Market and the marketability, liquidity and
price of our common stock would be adversely affected.
We are Exposed to Risks Associated with the Recent Worldwide Economic
Slowdown and Related Uncertainties.
Concerns about decreased consumer confidence, reduced corporate profits and
capital spending, and recent international conflicts and terrorist and military
activity have resulted in a downturn in economic conditions, both domestically
and internationally. These unfavorable economic conditions could ultimately
cause a slowdown in customer orders, an increase in the number of cancellations
and the rescheduling of backlog, if any. In addition, recent political and
social turmoil related to international conflicts and terrorist acts may put
further pressure on economic conditions in the U.S. and worldwide. Unstable
political, social and economic conditions make it difficult for our customers,
our suppliers and us to accurately forecast and plan future business activities.
If such conditions continue or worsen, our business, financial condition and
results of operations could be materially and adversely affected.
Future Sales of Our Common Stock Could Affect the Stock Price.
If our stockholders sell substantial amounts of our common stock, including
shares issued on the exercise of options and warrants, in the public market, the
market price of our common stock could fall. These sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. As of December 31, 2001, we had
19,733,848 shares of common stock outstanding. All of these shares, other than
shares held by affiliates, are freely tradable.
We Have Adopted Anti-Takeover Defenses That Could Delay or Prevent an
Acquisition of Our Company and May Affect the Price of Our Common Stock.
Certain provisions of our certificate of incorporation and stockholder
rights plan could make it difficult for a third party to acquire us, even though
an acquisition might be beneficial to our stockholders. These provisions could
limit the price that investors might be willing to pay in the future for shares
of our common stock.
Our certificate of incorporation authorizes the issuance of up to 1,000,000
shares of "blank check" preferred stock, which will have terms as may be
determined from time to time by our Board of Directors. Accordingly, our Board
of Directors may, without obtaining stockholder approval, issue preferred stock
with terms which could have preference over and adversely affect the rights of
the holders of common stock. This issuance may make it more difficult for a
third party to acquire a majority of our outstanding voting stock. We are also
subject to the Delaware anti-takeover laws which may prevent,
22
delay or impede a merger or takeover of our company, and we have not opted out
of the provisions of such laws through either our certificate of incorporation
or our bylaws.
In December 1998, we adopted a stockholder rights plan pursuant to which
one preferred stock purchase right is distributed to our stockholders for each
share of our common stock held by them. In the event that a third party acquires
15% or more of our outstanding common stock, the holders of these rights will be
able to purchase the underlying junior participating preferred stock as a way to
discourage, delay or prevent a change in control of our company. The mere
existence of a stockholder rights plan often delays or makes a merger, tender
offer or proxy contest more difficult. The existence of these features could
prevent others from seeking to acquire shares of our common stock in
transactions at premium prices.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our debt currently consists of a financing arrangement for a revolving line
of credit of up to $2.5 million. The interest rate on our line of credit varies
with the short-term interest markets and is adjusted quarterly to match LIBOR
plus 0.5%. At December 31, 2001, the interest rate on the outstanding balance
was 2.7%.
We have sales to, and purchase a small amount of components from, foreign
countries. Foreign currency exchange risks in these transactions have been
minimal. Until our acquisition of the laser production facility in Germany in
February 2002, we had no assets located outside of the United States. In
conjunction with the $700,000 of promissory notes issued by us in that
acquisition, which are due in 2003, we purchased a forward contract to hedge the
risk of currency fluctuations.
Item 8. Financial Statements and Supplementary Data
All financial statements and supplementary data required by this Item are
included in Part IV, Item 14 of this Form 10-K and are presented beginning on
Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
23
PART III
Item 10. Directors and Executive Officers of the Registrant
Information called for by this item is incorporated by reference to the
definitive proxy statement for the 2002 Annual Meeting of Stockholders, to be
filed with the SEC within 120 days of December 31, 2001.
Item 11. Executive Compensation
Information called for by this item is incorporated by reference to the
definitive proxy statement for the 2002 Annual Meeting of Stockholders, to be
filed with the SEC within 120 days of December 31, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information called for by this item is incorporated by reference to the
definitive proxy statement for the 2002 Annual Meeting of Stockholders, to be
filed with the SEC within 120 days of December 31, 2001.
Item 13. Certain Relationships and Related Transactions
Information called for by this item is incorporated by reference to the
definitive proxy statement for the 2002 Annual Meeting of Stockholders, to be
filed with the SEC within 120 days of December 31, 2001.
24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) Financial Statements:
Page
----
Report of Independent Accountants .................................... F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 ......... F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 ................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999 ............................. F-5
Consolidated Statements of Cash Flow for the years ended
December 31, 2001, 2000 and 1999 ................................... F-6
Notes to the Consolidated Financial Statements ....................... F-7
(2) Financial Statement Schedule:
Schedule II - Consolidated Valuation and Qualifying Accounts and
Reserves for the years ended December 31, 2001, 2000 and 1999 ...... S-1
(3) 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.
Exhibit
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation, as Amended. (2)
3.2 Amended and Restated Bylaws. (3)
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 Registrant
and U.S. Stock Transfer Corporation. (7)
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)
10.28 Amended and Restated Employment Agreement, dated December 18, 1998, by
and between the Registrant and Jeffrey W. Jones. (8)
21. Subsidiaries (1)
23. Consent of Independent Accountants
- -----------------
25
(1) Filed with the Registrant's Registration Statement on Form S-1 dated
October 9, 1992 and incorporated by reference.
(2) Filed with the Registrant's 1993 Annual Report on Form 10-K dated
April 14, 1994 and incorporated by reference.
(3) Filed with the Registrant's 1995 Second Quarter Report on Form 10-QSB
dated September 15, 1995 and incorporated by reference.
(4) Filed with the Registrant's 1995 Annual Report on Form 10-KSB dated
May 6, 1996 and incorporated by reference.
(5) Filed with the Registrant's 1996 Third Quarter Report on Form 10-QSB
dated November 19, 1996 and incorporated by reference.
(6) Filed with the Registrant's 1996 Annual Report on Form 10KSB dated
April 11, 1997 and incorporated by reference.
(7) Filed with the Registrant's Registration Statement on Form 8-A dated
December 29, 1998 and incorporated by reference.
(8) Filed with Amendment No. 1 to the Registrant's Registration Statement
on Form S3 dated February 12, 1999 and incorporated by reference.
(b) Reports on Form 8-K.
None.
26
SIGNATURES
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, in the City of San
Clemente, State of California, on March 28, 2002.
BIOLASE TECHNOLOGY, INC.,
a Delaware corporation
By: /s/ Jeffrey W. Jones
--------------------------------------
Jeffrey W. Jones
President, Chief Executive Officer and
Director
POWER OF ATTORNEY
We, the undersigned officers and directors of BioLase Technology, Inc., do
hereby constitute and appoint Jeffrey W. Jones and Edson J. Rood, and each of
them, our true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this report, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby, ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Jeffrey W. Jones President, Chief Executive Officer and March 28, 2002
- ----------------------------- Director (Principal Executive Officer)
Jeffrey W. Jones
/s/ Frederico Pignatelli Director and Chairman of the Board March 28, 2002
- -----------------------------
Frederico Pignatelli
/s/ William A. Owens Director March 28, 2002
- -----------------------------
William A. Owens
/s/ George V. d'Arbeloff Director March 28, 2002
- -----------------------------
George V. d'Arbeloff
/s/ Edson J. Rood Vice President and Chief Financial Officer March 28, 2002
- ----------------------------- (Principal Financial Officer)
Edson J. Rood
27
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
- --------------------------------------------------------------------------------
Page
Report of Independent Accountants .......................................... F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 ............... F-3
Consolidated Statements of Operations for the years ended December 31, 2001,
2000 and 1999 .............................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 2001, 2000 and 1999 ..................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999 .............................................................. 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 Stockholders of
BioLase Technology, Inc. and Subsidiaries
San Clemente, California
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
BioLase Technology Inc. and Subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the 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 financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and 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 of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orange County, California
March 1, 2002
F-2
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
----------------------
2001 2000
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 2,670,000 $ 2,002,000
Accounts receivable, less allowance of $195,000 and
$121,000 in 2001 and 2000, respectively 2,095,000 758,000
Inventories 1,887,000 1,222,000
Prepaid expenses and other current assets 260,000 180,000
------------- ------------
Total current assets 6,912,000 4,162,000
Property, plant and equipment, net 392,000 2,329,000
Patents, trademarks and licenses, net 91,000 104,000
Other assets 166,000 4,000
------------- ------------
Total assets $ 7,561,000 $ 6,599,000
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $ 1,792,000 $ 1,792,000
Accounts payable 1,656,000 946,000
Accrued liabilities 1,976,000 1,410,000
Customer deposits 290,000 200,000
Deferred gain on sale of building, current portion 63,000 -
Current portion of long-term debt - 20,000
------------- ------------
Total current liabilities 5,777,000 4,368,000
Deferred gain on sale of building 205,000 -
Long-term debt, net of current portion - 1,175,000
------------- ------------
Total liabilities 5,982,000 5,543,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.001; 1,000,000 shares
authorized; no shares issued and outstanding in 2001
and 2000 - -
Common stock, par value $0.001, 50,000,000 shares
authorized; 19,734,000 shares and 19,367,000 shares
issued and outstanding in 2001 and 2000, respectively 20,000 19,000
Additional paid-in capital 48,462,000 47,532,000
Accumulated deficit (46,903,000) (46,495,000)
------------- ------------
Total stockholders' equity 1,579,000 1,056,000
------------- ------------
Total liabilities and stockholders' equity $ 7,561,000 $ 6,599,000
============= ============
See accompanying notes to the consolidated financial statements.
F-3
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------
2001 2000 1999
----------- ----------- ------------
Net sales $17,887,000 $ 9,657,000 $ 7,004,000
Cost of sales 7,299,000 4,829,000 4,152,000
----------- ----------- ------------
Gross profit 10,588,000 4,828,000 2,852,000
Operating expenses:
Sales and marketing 7,421,000 4,333,000 2,701,000
General and administrative 2,011,000 1,841,000 2,473,000
Engineering and development 1,520,000 2,288,000 2,427,000
----------- ----------- ------------
10,952,000 8,462,000 7,601,000
----------- ----------- ------------
Loss from operations (364,000) (3,634,000) (4,749,000)
Other income 79,000 - -
Interest income 44,000 69,000 45,000
Interest expense (167,000) (163,000) (94,000)
----------- ----------- ------------
Net loss $ (408,000) $ 3,728,000) $ (4,798,000)
=========== =========== ============
Net loss per share - basic and diluted $ (0.02) $ (0.19) $ (0.28)
=========== =========== ============
Weighted average shares
outstanding - basic and diluted 19,510,000 19,171,000 17,254,000
=========== =========== ============
See accompanying notes to the consolidated financial statements.
F-4
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
Total
Common Stock and Stockholders'
Preferred Stock Additional Paid-in Capital Accumulated Equity
Shares Amount Shares Amount Deficit (Deficit)
-------- --------- ------------ ------------ ------------ ------------
Balances at January 1,
1999 - $ - 16,312,000 $38,631,000 $(37,969,000) $ 662,000
Private placement of
common stock, net - - 1,116,000 2,748,000 - 2,748,000
Issuance of stock and
warrants for earned
services - - 98,000 269,000 - 269,000
Exercise of stock options - - 57,000 85,000 - 85,000
Extension of stock options - - - 94,000 - 94,000
Net loss - - - - (4,798,000) (4,798,000)
------- ------- ----------- ----------- ------------ ----------
Balances at December 31,
1999 - - 17,583,000 41,827,000 (42,767,000) (940,000)
Private placement of
common stock, net - - 1,250,000 2,450,000 - 2,450,000
Issuance of stock and
warrants for earned
services - - 37,000 73,000 - 73,000
Cancellation of stock - - (525,000) - - -
Exercise of stock options - - 203,000 322,000 - 322,000
Exercise of warrants - - 819,000 2,879,000 - 2,879,000
Net loss - - - - (3,728,000) (3,728,000)
------- ------- ----------- ----------- ------------ -----------
Balances at December 31,
2000 - - 19,367,000 47,551,000 (46,495,000) 1,056,000
Issuance of stock and
warrants for earned
services - - 20,000 128,000 - 128,000
Exercise of stock options - - 172,000 367,000 - 367,000
Exercise of warrants - - 175,000 436,000 - 436,000
Net loss - - - - (408,000) (408,000)
------- ------- ----------- ----------- ------------ -----------
Balances at December 31,
2001 - $ - 19,734,000 $48,482,000 $(46,903,000) $ 1,579,000
======= ======= =========== =========== ============ ===========
See accompanying notes to the consolidated financial statements.
F-5
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------
2001 2000 1999
----------- ------------ -----------
Cash flows from operating activities:
Net loss $ (408,000) $ (3,728,000) $(4,798,000)
Adjustments to reconcile net loss to net cash used by
operating activities:
Issuance of common stock and warrants
for earned services 127,000 73,000 269,000
Extension of stock options - - 94,000
Depreciation and amortization 165,000 166,000 112,000
(Gain) loss on disposal of assets (43,000) -- 179,000
Provision for bad debts 104,000 102,000 17,000
Provision for inventory excess and obsolescence 108,000 326,000 82,000
Accrued expense related to the reacquisition
of foreign distribution rights - - 480,000
Changes in assets and liabilities:
Accounts receivable (1,441,000) (530,000) 216,000
Inventory (773,000) (889,000) 1,190,000
Prepaid expenses and other assets (242,000) (12,000) 16,000
Accounts payable and accrued expenses 1,276,000 514,000 246,000
Customer deposits 90,000 200,000 -
----------- ------------ -----------
Net cash used by operating activities (1,037,000) (3,778,000) (1,897,000)
Cash flows from investing activities:
Sale of marketable securities - - 251,000
Additions to property, plant and equipment (154,000) (1,069,000) (66,000)
Proceeds from the sale of property, plant and
equipment 2,261,000 - -
Additions to patents, trademarks and licenses (10,000) - (2,000)
----------- ------------ -----------
Net cash provided (used) by investing activities 2,097,000 (1,069,000) 183,000
Cash flows from financing activities:
Borrowings (payments) under the line of credit, net - 450,000 (363,000)
Payments on mortgage note payable (1,195,000) (5,000) -
Payment of note payable - (428,000) -
Proceeds from issuance of common stock, net - 2,450,000 2,748,000
Proceeds from exercise of stock options and warrants 803,000 3,201,000 85,000
----------- ------------ -----------
Net cash (used in) provided by financing activities (392,000) 5,668,000 2,470,000
Increase in cash and cash equivalents 668,000 821,000 756,000
Cash and cash equivalents at beginning of year 2,002,000 1,181,000 425,000
----------- ------------ -----------
Cash and cash equivalents at end of year 2,670,000 2,002,000 1,181,000
=========== ============ ===========
Supplemental cash flow disclosure:
Cash paid during the year for interest $ 130,000 $ 148,000 $ 97,000
=========== ============ ===========
Cash paid during the year for taxes $ 2,000 $ 2,000 $ 2,000
=========== ============ ===========
Non-cash financing activities:
Conversion of accrued expenses to a note payable $ - $ 428,000 $ -
Issuance of debt to purchase manufacturing facility - 1,200,000 -
----------- ------------ -----------
$ - $ 1,628,000 $ -
=========== ============ ===========
See accompanying notes to the consolidated financial statements.
F-6
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The Company
BioLase Technology Inc., incorporated in Delaware in 1987, is a medical
technology company operating in one business segment that designs, manufactures
and markets advanced dental, cosmetic and surgical laser products.
During the periods from 1987 to 1999, when we were engaged primarily in
research and development, and from 1999 through the present when we have been
commercializing our technology, we financed our operations through the sale of
our equity securities and through a line of credit (see Notes 4 and 6). In 2001
we achieved operating and net income in the third and fourth quarters. We
believe that cash and cash equivalents, cash generated from operations and
amounts available under our current revolving credit agreement will be adequate
to meet our debt service requirements, capital expenditures and working capital
through at least the end of fiscal 2002. Based upon the expected growth in sales
and normal vendor financing for increases in inventory, we believe we will have
sufficient capital resources during the year in relation to our fiscal year 2002
business plan. Should we require further capital resources in 2002, we would
most likely address such requirement through a combination of product sales,
sales of equity securities through private placements, and/or debt financing. If
such additional debt or equity is needed, no assurances can be given that we
would be able to obtain such additional capital resources. If unexpected events
occur requiring us to obtain additional capital and we are unable to do so, we
then might attempt to preserve our 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 our
operations. If we were unable to raise such additional capital or defer certain
costs as described above, such inability would have an adverse effect on our
financial position, results of operations and cash flows.
Basis of Presentation
The consolidated financial statements include the accounts of BioLase
Technology, Inc. and its two wholly-owned subsidiaries: Societe Endo Technic,
which is inactive and which we intend to dissolve, and BIOLASE Europe GmbH
("BIOLASE Europe"), a foreign subsidiary incorporated in Germany in December of
2001. We have eliminated all material intercompany transactions and balances in
the accompanying financial statements. As of December 31, 2001, $186,000 of net
assets were located outside of the United States, in BIOLASE Europe.
We follow the provisions of all applicable Statements of Financial
Accounting Standards ("SFAS") and related accounting pronouncements to prepare
the accompanying financial statements in accordance with generally accepted
accounting principles ("GAAP").
Use of Estimates
In order to prepare the financial statements in accordance with GAAP, we
use estimates and assumptions that may affect reported amounts and disclosures.
Significant estimates in these financial statements include valuation allowances
on accounts receivable and inventories, accrued warranty expenses, pro-forma
effects of stock-based compensation and the provision for deferred taxes and
related valuation allowances. Due to the inherent uncertainty involved in making
estimates, actual results reported in future periods may be based on amounts
that differ from those estimates.
F-7
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
Reclassifications
Certain amounts in the prior period consolidated financial statements have
been reclassified to be consistent with the current year presentation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three
months or less as cash equivalents. We invest excess cash primarily in a money
market account consisting of U.S. Treasury securities. Cash equivalents are
carried at cost, which approximates market.
Accounts Receivable
We regularly evaluate the collectibility of accounts receivable based upon
customer compliance with credit terms. The allowance for doubtful accounts is
adjusted based on such evaluation, with a corresponding provision included in
general and administrative expenses.
Inventory
We value inventories at the lower of cost or market (determined by the
first-in, first-out method). We periodically evaluate the carrying value of
inventories. The allowance for obsolescence is adjusted based on such
evaluation, with a corresponding provision included in cost of sales.
Property, Plant and Equipment
We state property, plant and equipment at acquisition 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, plant and equipment is depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which are generally not greater than five years, except for leasehold
improvements, which are amortized over the lesser of the estimated useful lives
of the respective assets or the related lease terms.
We continually monitor events and changes in circumstances which could
indicate that the carrying balances of property, plant and equipment may exceed
the undiscounted expected future cash flows from those assets. If such a
condition were to exist, we will recognize 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 defend patents, trademarks and licenses and
to acquire products and process technologies 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.
F-8
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
The continuing carrying value of patents is assessed based upon our
operating experience, expected cash flows from related products and other
factors we deem appropriate.
Revenue Recognition
We recognize sales and related cost of sales upon the shipment of product
to customers, provided we have received a purchase order, the price is fixed,
collection of the resulting receivable is probable, product returns are
reasonably estimable and there are no remaining obligations.
Provision for Warranty Expense
Our products are generally under warranty against defects in material and
workmanship for a period of one year. We estimate warranty costs at the time of
sale based on historical experience. Estimated warranty expenses are recorded as
an accrued liability, with a corresponding provision to cost of sales.
Shipping and Handling Costs
All shipping and handling costs are expensed as incurred and are recorded
as a component of cost of sales.
Advertising Costs
All advertising costs are expensed as incurred. Advertising costs
incurred for the years ended December 31, 2001, 2000 and 1999, were
approximately $609,000, $420,000 and $204,000, respectively.
Engineering and Development
Engineering and development costs related to both present and future
products are expensed as incurred.
Income Taxes
Differences between accounting for financial statement purposes and
accounting for tax return purposes are stated as deferred tax assets or deferred
tax liabilities in the accompanying consolidated financial statements. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. We have established valuation allowances to
reduce deferred tax assts until we can estimate when the tax benefits of those
assets will 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
In accordance with SFAS 123, we have elected to account for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25. The
exercise price of stock options granted equals the market price on the date of
grant. Therefore, there is no expense related to grants of stock options.
F-9
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
Loss Per Share - Basic and Diluted
We compute net loss per share by dividing the net loss attributable to
common stockholders by the weighted average number of shares outstanding.
Potentially dilutive securities, including options and warrants, were excluded
from the calculation of weighted shares because the effect would have decreased
the loss per share amount and therefore would have been anti-dilutive. See Note
6 for a description of those securities that could potentially dilute earnings
per share in the future.
New Accounting Pronouncements
In June 2001, SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets," were issued. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and establishes criteria for the separate
recognition of intangible assets acquired in a business combination. SFAS No.
142 requires that goodwill and certain other intangible assets having indefinite
lives no longer be amortized to earnings, but instead be subject to periodic
testing for impairment. Intangible assets determined to have definite lives will
continue to be amortized over their useful lives. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. However, goodwill and intangible
assets aquired after June 30, 2001 are subject immediately to the
non-amortization and amortization provisions of this statement. As we do not
have any goodwill or material intangible assets, the adoption of these
statements will not have a material impact on our financial position, results of
operations or cash flows.
In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations",
which is effective for fiscal years beginning after June 15, 2002, was issued.
This statement provides the accounting requirements for retirement obligations
associated with tangible long-lived assets. This statement requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. The adoption of this statement is not expected
to have a material impact on our financial position, results of operations or
cash flows.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after December
15, 2001, was issued. This Statement retains the requirements of SFAS No. 121
related to long-lived asset impairment loss recognition and measurement, but
removes goodwill and certain intangibles from its scope. The Statement also
requires that one accounting model be used for long-lived assets to be disposed
of by sale, whether previously held and used or newly acquired, and broadens the
presentation of discontinued operations to include more disposal transactions.
The adoption of this Statement is not expected to have a material impact on our
financial position, results of operations or cash flows.
F-10
BIOLASE TECHNOLOGY, INC. AND SUDSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 3 - SUPPLEMENTARY BALANCE SHEET INFORMATION
2001 2000
- --------------------------------------------------------------------------------
INVENTORIES
Materials $ 1,020,000 $ 801,000
Work-in-process 656,000 319,000
Finished goods 211,000 102,000
----------- -----------
Inventories $ 1,887,000 $ 1,222,000
============ ============
PROPERTY, PLANT AND EQUIPMENT, NET
Building $ - $ 2,004,000
Leasehold improvements 54,000 -
Equipment and computers 448,000 359,000
Furniture and fixtures 202,000 215,000
------------ ------------
Total property, plant and equipment 704,000 2,578,000
Less accumulated depreciation and amortization (312,000) (249,000)
------------ ------------
Property, plant and equipment, net $ 392,000 $ 2,329,000
============ ============
PATENTS, TRADEMARKS AND LICENSES, NET
Patents $ 112,000 $ 102,000
Trademarks 69,000 69,000
Licenses - 107,000
------------ ------------
Total patents, trademarks and licenses 181,000 278,000
Less accumulated depreciation and amortization (90,000) (174,000)
------------ ------------
Patents, trademarks and licenses, net $ 91,000 $ 104,000
============ ============
ACCRUED LIABILITIES
Accrued payroll and benefits $ 652,000 $ 373,000
Accrued warranty 561,000 391,000
Other accrued liabilities 763,000 646,000
------------ ------------
Accrued liabilities $ 1,976,000 $ 1,410,000
============ ============
NOTE 4 - LINE OF CREDIT AND MORTGAGE NOTE PAYABLE
Line of Credit
At December 31, 2001, we had $1,792,000 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 accounts receivable and inventories. The interest rate is
based upon LIBOR plus 0.5% at the time of any borrowings. At December 31, 2001,
the interest rate on the outstanding balance was 2.7%. The effective interest
rate for the year ended December 31, 2001,
F-11
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
including the amortization of the fair value of warrants in connection with
issuing our line of credit was 13.4%. The revolving credit agreement expires in
January 2003. The maximum available under the line will decrease to $1,800,000
on May 1, 2002.
Mortgage Note Payable
2001 2000
--------------------------------------------------------------------------------------
Mortgage note payable at prime rate plus 0.25%,
twenty-year amortization, collateralized by a first trust
deed on land and building $ - $ 1,195,000
Less, current portion - (20,000)
---------- -----------
$ - $ 1,175,000
========== ===========
In March of 2001, we entered into a $2,261,000 sale-leaseback transaction
whereby we sold and leased back our manufacturing facility located in San
Clemente, California. The result of the sale was a $316,000 gain, which has been
deferred and is being amortized over the five-year lease term. The related lease
is being accounted for as an operating lease. In connection with the sale and
leaseback of our manufacturing facility, the mortgage note was retired in March
2001.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Litigation
We are party to pending lawsuits and are subject to a number of threatened
lawsuits. While the ultimate outcome of pending and threatened lawsuits cannot
be predicted with certainty at this time, in our opinion the ultimate resolution
of these matters will not have a material effect on our consolidated financial
position, results of operations or liquidity.
Commitments
We lease our principal offices and manufacturing facility. We also lease
certain office equipment under operating lease arrangements. Future minimum
rental commitments under operating leases for each of the years ending December
31 are as follows:
2002 $ 267,000
2003 267,000
2004 262,000
2005 249,000
2006 61,000
Thereafter -
------------
Total future minimum lease payments $ 1,106,000
============
Rent expense was $198,000, $97,000 and $153,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
F-12
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
401(k) Plan
We have a section 401(k) defined contribution retirement plan covering
substantially all of our full-time employees. We are not obligated to match
employee contributions or make other annual contributions to this plan. We made
no contributions to the 401(k) plan other than administrative expenses paid on
behalf of this plan, which were nominal for the years ended December 31, 2001,
2000 and 1999.
Concentration of Credit Risk
Significant customers consisted primarily of international distributors. We
have distributorship agreements for dental lasers in Canada, Mexico, Europe, the
Middle East, Australia and the Far East. For the years ended December 31, 2001,
2000 and 1999, export sales were $3,265,000, $4,189,000 and $2,356,000,
respectively, of which 50%, 54% and 72%, respectively, were sales to Europe and
8%, 15% and 15%, respectively, were sales to Canada. Sales concentration to a
major distributor were approximately $1,817,000 and $1,299,000, respectively,
for the years ended December 31, 2001 and 1999. No other customer accounted for
more than 10% of consolidated sales in 2001, 2000 or 1999.
Financial instruments that subject us to concentrations of credit risk
consist principally of cash and cash equivalents and accounts receivable. We
maintain our cash accounts with established commercial banks. Such cash deposits
periodically exceed the Federal Deposit Insurance Corporation insured limit of
$100,000 for each account.
Accounts receivable concentrations have resulted from sales activity to
primary distributors. Accounts receivable for such distributors totaled
approximately $517,000, $529,000 and $262,000, respectively, at December 31,
2001, 2000 and 1999. No other customer accounted for more than 10% of accounts
receivable at December 31, 2001, 2000 or 1999.
NOTE 6 - STOCKHOLDERS' EQUITY
Equity Financing
We raised equity capital through private offerings in 2000 and 1999 as
follows:
Years Ended Number of Shares Net Cash
December 31, of Common Stock Consideration
- ----------------------------------------------------------------------
2000 1,250,000 $ 2,450,000
1999 1,116,000 $ 2,748,000
In March 2000, we issued 1,250,000 shares of common stock and 625,000
redeemable stock purchase warrants in a private placement. The shares of common
stock are "restricted securities" as defined in Rule 144 of the Securities Act
of 1933, as amended, (the "Securities Act) and may be only resold pursuant to a
registration statement under the Securities Act or an exemption from such
requirement. Each warrant entitles the holder to purchase one share of common
stock at an exercise price of $2.50 per share and expired on March 31, 2002,
subsequently extended to May 31, 2002. As of December 31, 2001, all of the
warrants are outstanding.
F-13
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
In February 1999, we issued 1,100,000 shares of common stock and 550,000
redeemable stock purchase warrants in a private placement. As of December 31,
2001 all of the warrants had been exercised or had expired.
We have also issued common stock and warrants as compensation in connection
with the annual extensions of our bank line of credit as follows:
Shares
Year of Stock Warrants Valuation
-----------------------------------------------------------
2001 20,000 - $ 95,000
2000 36,600 100,000 $ 115,000
1999 54,900 75,000 $ 179,000
The value of the stock and warrants issued for services is charged to
expense as compensation for services. The value of shares issued in December
2001 will be charged to interest expense over the renewal term of the line of
credit.
The following table summarizes warrant activity:
Weighted-Average
Exercise
Shares Per Share
- --------------------------------------------------------------------------------
Warrants outstanding, December 31, 1998 1,521,576 $ 3.70
Issuance of warrants 724,000 3.41
Cancellation of warrants (697,576) 3.50
-------------- -----------
Warrants outstanding, December 31, 1999 1,548,000 3.66
Issuance of warrants 787,500 2.87
Exercise of warrants (819,150) 3.51
Cancellation of warrants (75,000) 4.67
-------------- -----------
Warrants outstanding, December 31, 2000 1,441,350 3.32
Issuance of warrants 50,000 3.00
Exercise of warrants (175,000) 2.50
Cancellation of warrants (428,850) 3.00
-------------- -----------
Warrants outstanding, December 31, 2001 887,500 $ 2.50
============== ===========
F-14
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
The following table summarizes additional information about the warrants,
which are outstanding as of December 31, 2001:
Shares Expiration Date Exercise Price
- -------------------------------------------------------
687,500 May 31, 2002 $ 2.50
50,000 December 1, 2002 $ 3.00
50,000 May 1, 2003 $ 3.00
100,000 December 1, 2003 $ 2.00
- ----------
887,500
==========
Preferred Stock
On December 18, 1998, our 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 our 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 our
common stock while the rights are outstanding, each right will be exercisable to
purchase shares of common stock having a market value equal to two times the
then current exercise price of a right (initially $30.00). The rights also
provide that, if on or after the occurrence of such event, we are merged into
any other corporation or 50% or more of our assets or earning power are sold,
each right will be exercisable to purchase common stock of the acquiring
corporation having a market value equal to two times the then current exercise
price of such stock. The rights will expire on December 31, 2008, unless
previously triggered, and are subject to redemption at $0.001 per right at any
time prior to the first date upon which they become exercisable to purchase
common shares.
Cancellation of Common Stock
In 1998 we acquired substantially all of the assets of Laser Skin Toner,
Inc. ("LSTI"), a development stage company, for 1,600,000 shares of our common
stock. We assigned the full amount of the consideration we paid to in-process
research and development and charged the entire amount to expense in 1998. In
1999 we exchanged the LSTI technology for a royalty based upon future sale of
product covered by patents on the LSTI technology. In 2000 we entered into an
agreement with the former shareholders of LSTI whereby the former shareholders
agreed to return (for cancellation) 525,000 of the shares of common stock issued
to them in 1998. Each party also exchanged general releases, including the
release of all claims, if any, relating to our acquisition of the assets of
LSTI.
Common Stock Options
We have stock option plans that enable us to offer equity participation to
employees, officers and directors as well as certain non-employees. At December
31, 2001, a total of 4,025,000 shares have been authorized for issuance, of
which 760,033 shares have been issued for options which have been exercised,
2,753,334 shares have been reserved for options that are outstanding and 511,633
shares are available for the granting of additional options.
Stock options may be granted as incentive or nonqualified options; however,
no incentive stock options have been granted to date. The exercise price of
options generally equals or is greater than the market price of the stock as of
the date of grant. Options may vest over various periods but typically vest over
three years. Options expire after ten years or upon termination of employment,
if earlier.
F-15
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
The following table summarizes option activity:
Weighted-Average
Exercise
Shares Per Share
- --------------------------------------------------------------------------------
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
Granted at fair market value 270,500 2.26
Granted above fair market value 280,500 2.23
Exercised (202,466) 1.59
Canceled (349,334) 2.55
------------- ------------
Options outstanding, December 31, 2000 2,135,285 2.19
Granted at fair market value 971,000 4.37
Granted above fair market value 25,000 2.50
Exercised (172,326) 2.13
Canceled (205,625) 2.59
------------- ------------
Options outstanding, December 31, 2001 2,753,334 $ 3.08
============= ============
Options exercisable, December 31, 1999 1,524,583 $ 2.40
============= ============
Options exercisable, December 31, 2000 1,674,578 $ 2.40
============= ============
Options exercisable, December 31, 2001 1,885,376 $ 2.44
============= ============
The following table summarizes additional information for those options
that are outstanding and exercisable as of December 31, 2001:
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 2.53 1,480,999 $2.08 6.83 1,359,129 $2.06
$2.56 to 6.10 1,272,335 $4.26 8.41 526,247 $3.40
--------- ---------
2,753,334 1,885,376
========= =========
In addition to the options granted under our stock option plans, we have
issued options to certain other individuals through various agreements. Options
to purchase 272,500 shares of common stock were outstanding at December 31,
1998; 182,500 options with a weighted average exercise price of $4.88 were
canceled in 1999, leaving 90,000 options with a weighted average exercise price
of $9.78 outstanding and exercisable at December 31, 2001. Such options will
expire in 2003.
F-16
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
During 2001, options to purchase 35,000 shares of common stock were granted
to non-employees for services valued at $17,000. The fair value of these options
was charged to operating expense.
Pro Forma Effect of Stock-Based Compensation
We have adopted the disclosure-only provisions of SFAS No. 123 for options
issued to employees. SFAS No. 123 encourages companies to account for
compensation cost for stock options when they are granted based on a method
which recognizes the time value of options. If we had recognized compensation
cost at the date of grant, our pro-forma net loss and pro-forma loss per share
would have been as follows:
2001 2000 1999
- --------------------------------------------------------------------------------
Net loss - basic and diluted $(1,343,000) $(4,190,000) $(5,410,000)
Loss per share - basic and diluted $ (0.07) $ (0.22) $ (0.31)
The pro forma amounts were estimated using the Black-Scholes option-pricing
model with the following assumptions:
2001 2000 1999
- --------------------------------------------------------------------------------
Expected term (years) 3.50 3.50 3.50
Volatility 64% 83% 56%
Annual dividend per share $0.00 $0.00 $0.00
Risk free interest rate 4.68% 6.21% 5.81%
Weighted-average fair value of options granted $2.19 $1.34 $1.24
NOTE 7 - INCOME TAXES
The following table presents the current and deferred provision for federal
and state income taxes for the years ended December 31:
2001 2000 1999
- --------------------------------------------------------------------------------
Current
Federal $ - $ - $ -
State 2,000 2,000 2,000
-------- -------- --------
2,000 2,000 2,000
Deferred
Federal - - -
State - - -
-------- -------- --------
$2,000 $2,000 $2,000
======== ======== ========
F-17
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
The foregoing tax provisions are included in general and administrative
expense in the accompanying consolidated statements of operations.
The tax effects of temporary differences that give rise to the deferred tax
provision for the years ended December 31 are as follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------
Property and equipment $ 7,000 $ (5,000) $ (107,000)
Research and development (39,000) 227,000 594,000
Reserves not currently deductible 28,000 131,000 96,000
Inventories 40,000 79,000 (34,000)
Capital loss carryforward - (275,000) (3,000)
Research and development credits 616,000 - -
Net operating losses (603,000) 1,286,000 928,000
--------- ---------- -----------
49,000 1,443,000 1,474,000
Change in valuation allowance (49,000) (1,443,000) (1,474,000)
--------- ----------- -----------
Total deferred tax provision $ - $ - $ -
========= =========== ===========
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:
2001 2000 1999
- --------------------------------------------------------------------------------------------
Statutory regular federal income tax rate (34.0%) (34.0%) (34.0%)
Stock options (43.0%) (4.5%) (0.4%)
Change in valuation allowance 71.8% 38.1% 37.5%
Other 5.2% 0.4% (3.1%)
------- ------ ------
Total 0.0% 0.0% 0.0%
======= ====== ======
F-18
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
The components of the deferred income tax assets are as follows at December
31:
2001 2000
- --------------------------------------------------------------------------------
Property and equipment $ 170,000 $ 163,000
Research and development 1,053,000 1,092,000
Reserves not currently deductible 489,000 461,000
Inventories 142,000 102,000
State taxes 1,000 1,000
Research and development credits 616,000 -
Net operating losses 13,427,000 14,030,000
------------ ------------
15,898,000 15,849,000
Valuation allowance (15,898,000) (15,849,000)
------------ ------------
Total $ - $ -
============ ============
We have established a valuation allowance against deferred tax assets due
to the uncertainty surrounding the realization of such assets. We periodically
evaluate 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.
As of December 31, 2001, we had net operating loss carryforwards for
federal and state purposes of approximately $37,837,000 and $6,356,000,
respectively, which began expiring in 2001. The utilization of net operating
loss carryforwards may be limited under the provisions of Internal Revenue Code
Section 382 and similar state provisions.
NOTE 8 - SUBSEQUENT EVENTS
In February 2002, our wholly-owned subsidiary, BIOLASE Europe purchased a
production facility in Germany with ten employees for $1,000,000. We are
required to pay the first installment of the purchase price by May 31, 2002. The
amount of the first installment will be determined by us, but must be between
$300,000 and $500,000. Thereafter, we must pay $500,000 by April 1, 2003 and the
balance of the purchase price, if any, must be paid by December 1, 2003. We are
currently negotiating with a third party for that party to pay all or a portion
of the first installment in exchange for certain rights that we would grant to
the third party. In the event we do not reach an agreement with this third
party, then both the purchase price and the initial installment will be reduced
by $150,000.
F-19
BIOLASE TECHNOLOGY, INC. AND SUBSIDIARIES
Schedule II - Consolidated Valuation and Qualifying Accounts and Reserves
For The Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
Reserve for Valuation
Allowance for Excess and Allowance
Doubtful Obsolete for Deferred
Accounts Inventory Tax Asset
- --------------------------------------------------------------------------------
Balances at December 31, 1998 $118,000 $ 227,000 $12,931,000
Charged to operations 17,000 82,000 1,475,000
Write-off's (17,000) - -
------------ ---------- ------------
Balances at December 31, 1999 118,000 309,000 14,406,000
Charged to operations 102,000 326,000 1,443,000
Write-off's (99,000) (185,000) -
------------ ---------- ------------
Balances at December 31, 2000 121,000 450,000 15,849,000
Charged to operations 104,000 108,000 49,000
Write-off's (30,000) (326,000) -
------------ ---------- ------------
Balances at December 31, 2001 $195,000 $ 232,000 $15,898,000
============ ========== ============
S-1