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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File Number 0-19627
BIOLASE TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 87-0442441
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
981 Calle Amanecer, San Clemente, California 92673
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 361-1200
________________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
(Title of class)
________________________________
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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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 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 31, 1999, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $46,909,283 computed using the closing
price of $2.675 per share of common stock on March 31, 1999 as reported by
Nasdaq based on the assumption that directors and officers and more than 10%
stockholders are affiliates. On March 31, 1999, there were 17,657,387 shares of
the Registrant's common stock outstanding.
Information required by Part III is incorporated by reference to portions
of the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders
to be held May 25, 1999, which will be filed with the Securities and Exchange
Commission within 120 days after the close of the 1999 fiscal year.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Qualifying Statement With Respect To Forward-Looking Information
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The United States Private Securities Litigation Reform Act of 1995 provides
a "safe harbor" for certain forward-looking statements. Such forward-looking
statements are based upon the current expectations of the Company and speak only
as of the date made. These forward-looking statements involve risks,
uncertainties and other factors. The factors discussed below under "Forward-
Looking Statements" and elsewhere in this Annual Report on Form 10-K are among
those factors that in some cases have affected the Company's historic results
and could cause actual results in the future to differ significantly from the
results anticipated in forward-looking statements made in this Annual Report on
Form 10-K, future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases and in oral statements made by
authorized officers of the Company. When used in this Annual Report on Form 10-
K, the words "estimate," "project," "anticipate," "expect," "intend," "believe,"
"hope," "may" and similar expressions, as well as "will," "shall" and other
indications of future tense, are intended to identify forward-looking
statements.
Introduction
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BioLase Technology, Inc., a Delaware corporation ("BioLase" and together with
its consolidated subsidiary, the "Company") designs, develops, manufactures and
markets laser-based systems for use in dental and medical applications. The
current generation of the Company's laser-based systems incorporates its
proprietary HydroKinetic(TM) technology into its surgical tissue cutting system,
Millennium(TM), which utilizes electromagnetic energy laser pulses from an
erbium, chromium: yttrium scandium gallium garnet ("Er,Cr:YSGG") laser and a
proprietary air-water spray. In a configuration utilizing higher power
settings, the laser pulses act to rapidly energize and transform atomized water
droplets from the air-water spray into smaller, energized water molecules that
can precisely remove both dental hard and soft tissues, and the Millennium(TM)
system, when operating in this manner, is intended for use primarily in hard
tissue applications. In a configuration utilizing lower power settings, the
Er,Cr:YSGG laser incorporated into the Millennium(TM) system acts as a
conventional laser, with the air-water spray serving as a cooling agent. When
operating in this manner, the Millennium(TM) system is intended for use in soft
tissue applications. The Millennium(TM) system is currently marketed both in
the United States and internationally for dental hard and soft tissue
applications.
The Company also has clearance from the United States Food and Drug
Administration ("FDA") to market a laser-based surgical tissue cutting system in
the United States for a broad range of dermatological and general surgical soft
tissue applications. In response to this clearance, the Company intends to
introduce a laser-based system in a configuration designed for aesthetic and
dermatologic applications in late 1999 or early 2000.
The Company has (i) an automated system used in endodontic procedures for
locating and shaping root canals, known as the Canal Finder System(TM), along
with a full range of other proprietary and non-proprietary endodontic products,
and (ii) an air-water spray laser accessory, LaserSpray(TM), designed to cool
the tissue receiving laser energy and the surrounding tissue,
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that is incorporated into the Company's laser-based systems and has the
potential to be employed with fiber-coupled laser systems manufactured by
others. The Company has developed a home consumer product called LazerSmile(TM),
a toothbrush that utilizes a light source and a proprietary gel for whitening
teeth. The Company has under development a fluid conditioning system known as
FlavorFlow(TM), for which it has been granted a patent, that sanitizes, flavors
and administers fluids and enhances the scent of air present during dental and
medical procedures; and a line of biomaterials for dental and medical
applications.
General
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Prior to 1995, the Company's principal products were Nd:YAG (neodymium:
yttrium aluminum garnet) laser systems that were marketed domestically for
dental soft tissue applications and internationally for certain dental hard and
soft tissue applications, and an automated endodontic (root canal) handpiece.
In 1994, the Company commenced its research and development efforts related to
what is now its patented and proprietary Er,Cr:YSGG HydroKinetic technology.
This technology employs electromagnetic energy laser pulses which, at higher
power settings, rapidly energize and transform small atomized water droplets
from an air-water spray into smaller, energized water molecules that can
precisely remove both dental hard and soft tissues. This technology has proved
to be effective and efficient in removing enamel and dentin tooth structure in a
precise, non-thermal manner. In 1995, the Company started developing this
technology into a product that has evolved into the Millennium(TM). The initial
design of a system for dental and oral surgical applications was completed in
late 1996, while refinement and enhancements to its design has continued through
the present time. In a configuration utilizing lower power settings, the
Er,Cr:YSGG laser incorporated into the Millennium(TM) system acts as a
conventional laser, with the air-water spray serving as a cooling agent. When
operating in this manner, the Millennium(TM) system is intended for use in soft
tissue applications.
In 1995, the Company developed LaserSpray(TM), an air-water spray accessory
using its proprietary Target Tissue Cooling System(TM) ("TTCS(TM)") technology
which is designed to cool the tissue receiving laser energy and adjacent tissue.
LaserSpray(TM) is incorporated into the Company's laser-based systems and has
the potential to be employed in conjunction with fiber-coupled laser systems
manufactured by other companies.
In 1996, the Company commenced the development of a toothbrush for the
consumer market, originally called the LaserBrush(TM), that utilizes a
monochromatic optical energy light source embedded within a toothbrush in
conjunction with a clear, non-abrasive tooth whitening gel developed by the
Company. In August 1998, the Company changed the name of the LaserBrush(TM) to
LazerSmile(TM). The Company is in the process of introducing the LazerSmile(TM)
nationwide through a variety of channels attuned to the distribution of home
consumer products.
More recently, the Company commenced development of FlavorFlow(TM), a patented
product that sanitizes and alters the flavor and scent of fluids administered
during medical, dental and oral surgical treatments.
The Company also possesses patents and proprietary technology for a group of
biomaterials under the trade names PerioFil(TM), PerioSeal(TM), LaserBond(TM)
and EndoPlas(TM) for use in periodontics, endodontics, general dentistry,
orthopedics and other medical applications.
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Commercialization of these biomaterials will depend on, among other things,
resource availability and completion of development and regulatory approval.
Laser Background
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The term "laser" is an acronym for Light Amplification by Stimulated Emission
of Radiation. A laser is an apparatus that stimulates the atoms in a core
material (such as a gas or crystal) to emit packets of light and then amplifies
and focuses the light in a single beam. Laser light, which consists of a single
wavelength of light, differs from light emitted from an ordinary light bulb
primarily through greater concentration and intensity. Lasers are typically
classified by the element or compound that emits light when energized, such as
carbon dioxide (CO2), Nd:YAG, argon, ruby and erbium.
Lasers were first developed for research, industrial and military uses and,
more recently, have been adapted for many medical and dental applications. The
benefits of lasers in medical and dental applications are generally believed to
include reduced pain, minimized infection, promotion of rapid healing, reduced
bleeding, reduced scarring, increased precision and time-effective procedures.
In many cases, lasers perform procedures which otherwise could not be achieved
through traditional surgical means. Lasers are currently used in a wide variety
of medical fields including dentistry, dermatology, plastic surgery,
ophthalmology, otolaryngology (ear, nose and throat ("ENT")), gynecology,
urology, cardiology, gastroenterology and general surgery.
Medical and dental laser-based systems, including the Company's Millennium(TM)
system, are highly specialized tools specifically designed for a particular
application or set of applications. The most important factors in developing a
laser-based system for a specific application are the wavelength of the laser,
its pulse length, energy per pulse, the method of delivery of the laser energy
to the tissue, and the method, if any, of cooling the tissue.
A matter that has required attention in the development of lasers for medical
and dental applications is the temperature sensitivity of soft and hard tissue,
including skin, bone, tooth enamel and dentin. Elevated temperatures can cause
irreversible deterioration in vital tissue. The Company's patented TTCS(TM),
incorporated into its laser-based systems, is intended to enable the user to
apply focused energy levels on hard tissue, such as bone, enamel and dentin, and
avoid damage to the tissue being lased and the surrounding tissue by cooling
with an air-water spray the tissue receiving the energy and the contiguous
region. TTCS(TM) is incorporated into the Company's laser-based systems and has
the potential to be installed as an accessory on most fiber-coupled lasers
manufactured by other companies.
The Millennium(TM) System
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The Company has recently developed its Millennium(TM) system, an Er,Cr:YSGG
laser incorporating the Company's patented HydroKinetic technology which
involves the use of this proprietary laser-based technology for a variety of
dental and medical applications. HydroKinetic(TM) technology permits the
Millennium(TM) at higher power settings to combine the Company's TTCS(TM) with
its Er,Cr:YSGG laser-based system to generate electromagnetic energy pulses that
rapidly energize and transform water spray into an energized state capable of
precisely removing hard tissue, such as tooth, bone and cartilage. In a
modified configuration, the Er,Cr:YSGG laser incorporated into the
Millennium(TM) system acts as a
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conventional laser, with the air-water spray serving as a cooling agent. When
operating in this manner, the Millennium(TM) system is intended for use in soft
tissue applications.
The current Millennium(TM) system configured for dental and oral surgical
applications consists of a flexible fiber-optic delivery system and mobile floor
system containing an Er,Cr:YSGG laser, power supply, internal cooling system and
control panel. The Millennium(TM) system uses electromagnetic energy pulses
from the Er,Cr:YSGG laser to rapidly energize and transform water spray into a
safe, cool and precise biocompatible tissue removing device. The Millennium(TM)
system is capable of cutting both hard and soft human tissue. To give medical
practitioners more flexibility, Millennium(TM) systems may also be used without
water or with water as a cooling medium for standard laser-based soft tissue
applications, in fields such as dermatology, orthopedics and otolaryngology
(ENT), although specific applications within these fields would require
additional regulatory clearances by the FDA. See " - Government Regulation".
The Company believes that its Millennium(TM) system has a broader range of
applications than conventional laser systems. The Company currently is marketing
the Millennium(TM) system only for dental and oral surgical applications in the
U.S. and internationally. The Company has FDA clearance to market its
Millennium(TM) for certain dental hard and soft tissue applications and has also
received clearance by the FDA to market a laser system that utilizes a variation
of the Er,Cr:YSGG HydroKinetic(TM) technology for a broad range of
dermatological, aesthetic and general surgical soft tissue applications. The
Company intends to continue the development of these applications during 1999.
Marketing for certain expanded applications of the Er,Cr:YSGG HydroKinetic(TM)
system in the United States would require additional regulatory clearance. The
Company may be required to engage in further development of the Er,Cr:YSGG
HydroKinetic(TM) technology or to complete clinical studies successfully in
order to pursue certain expanded applications. No assurances can be given that
any such clinical studies will be successfully completed or such regulatory
clearances will be granted. See " - Government Regulation". Use of the Company's
proprietary technology for various non-dental applications will require certain
modifications to the hardware and software configurations of the technology.
The Company has received certification for its Millennium(TM) system
signifying its compliance with the Medical Device Directive, evidenced by the
"CE" mark, established within the European Community. The Millennium(TM) system
has also been granted the Canadian Standards Association ("CSA") mark
symbolizing compliance with certain safety and performance standards. The CE
and CSA marks allow the Company to import and market its Millennium(TM) system
in the European Community and Canada, respectively. See " - Government
Regulation".
While the Company believes that its Er,Cr:YSGG HydroKinetic(TM) surgical
system should be effective in a broad range of medical and dental applications,
this belief, except with respect to certain dental and dermatological
applications, for which clinical research has been and is being conducted, is
based largely on preliminary in vitro and in vivo research and extrapolation of
observations in such clinical research. No assurances can be given that the
Company's proprietary technology will prove to be applicable to, or will find
market acceptance in, any medical or dental fields or that the Company will
receive clearance from the FDA or other regulatory agencies to market the
Millennium(TM) system or other products embodying its HydroKinetic(TM)
technology for additional applications in any such fields.
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Applications and Potential Applications of the Millennium(TM) System.
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Dentistry. The Millennium(TM) system, currently marketed by the Company in
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the United States and internationally (principally in Canada, Western Europe
and, for clinical evaluations, Japan), is configured for dental and oral
surgical applications. The Company intends to expand its marketing emphasis to
other significant markets that appear to present potential interest in its
Er,Cr:YSGG HydroKinetic(TM) products. These markets may include, but are not
limited to Mexico and various South American countries, the Pacific Rim
countries, Australia and New Zealand. Depending on the local regulatory
requirements within these respective countries, further regulatory clearances
may be necessary prior to entry into these markets. See " - Government
Regulation".
There are approximately 140,000 dentists in active practice in the United
States and an even greater number of dentists in other countries where the
Company intends to market its products. Industry analysts believe that, as the
U.S. population grows and ages and more natural teeth are retained, the demand
for dental services will increase along with the demand for newer and improved
technology. The Company believes that the Millennium(TM) system is well suited
for a variety of dental and oral surgical applications such as cavity
preparation and restoration, implant preparation, aesthetic dentistry,
periodontics (treatment of gum disease) and prosthodontics (replacement of
teeth).
Plaque and Periodontal Disease. Plaque is a sticky, colorless film of
bacteria that forms on teeth. If not removed regularly, it can cause cavities or
gum (periodontal) disease. Most adults have periodontal disease, which can
exist without symptoms for years. When plaque is allowed to build up in the
crevice between tooth and gum, it eventually separates the gum from the tooth
root. As the gum pulls away, the bone underneath deteriorates. The resulting
periodontitis causes tooth loss in 70% of all adults, according to the American
Academy of Periodontology.
When plaque hardens, it becomes tartar, a rough, porous material that can
be removed only by professional cleaning. Although tartar itself is not believed
to cause periodontal disease, the presence of tartar makes plaque harder to
remove. The Millennium(TM) system can be utilized for the removal of plaque and
tartar as well as the treatment of infected tissue associated with periodontal
disease.
Cavity Preparation/Aesthetic Dentistry. Aesthetic considerations are
gaining increased importance in dentistry, as patients seek natural looking
dental restorations. Due to these aesthetic and health concerns, natural colored
composites are replacing amalgam (gold and silver) fillings in the restoration
of cavities.
When working with composites in cavity restorations, dentists must preserve
the tooth structure and veneer (the thin ceramic covering the front surface) to
enhance bonding of the composite and minimize stress upon the reconstructed
tooth. Penetration of the bonding materials into the tooth structure and thus
the strength of the adhesive bond between the tooth and the composite material
depend upon cavity preparation procedures that minimize cracks, fuses and
fractures of the enamel rods and dentin tubules. In addition, decay must be
removed, and the interior of the cavity preparation must be clean and free of
debris such as that left by conventional dental drills. The Company believes
that its Millennium(TM) system can cut precisely and cleanly with minimal
disruption to tooth structure, thus providing improved preparation for
restorations with enhanced adhesive and aesthetic qualities.
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Prosthodontics. The replacement of missing teeth and the significant
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restoration of decayed or damaged teeth have evolved as dental specialties as a
result of the development of stronger ceramic, porcelain and composite
materials. The onlay and inlay require not only precise cavity preparation, but
also strong adhesion of the bonding which is necessary for enhancement of
retention. The Company believes that the Millennium(TM) system can effectively
minimize cracking, and avoid the heating and fracturing of the enamel or dentin
structure during cavity preparation and promote a stronger bond or adhesion,
thereby facilitating a more durable and aesthetic restoration.
The Company also believes the Millennium(TM) system has the potential to
precisely cut the appropriate shoulder preparation to be used to retain
removable or partial dentures and distribute stress force along the anchor
tooth. The Company believes that because the Millennium(TM) system minimizes
vibration, use of the system can provide increased patient comfort and conserve
tooth structure.
The Millennium(TM) system can also be utilized to shape shoulders and margins,
facilitate improved impressions and promote secure and closed margins. The
Company believes that benefits associated with this potential use of the
Millennium(TM) system include reduction of the vibration, high-pitched noise and
microfracturing of teeth associated with the conventional dental drill. The
soft tissue that surrounds the crown preparation area usually requires shaping
prior to taking an impression. The Company believes that use of the
Millennium(TM) system to remove or reshape the tissue will result in reduced
bleeding and increased patient comfort.
Osseous (Bone) Implant Surgery. Bone implants are used for bone
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stabilization, to add strength to existing bone and to serve as the
infrastructure for reconstructive dental procedures. For such procedures, it is
important that the bone cutting for the implant placement be clean and that the
practitioner not damage the bone itself during cutting by the generation of
excessive heat. Thermal damage, such as that caused by conventional dental
drills, can impede or destroy the fusion of the bone to the implant. The
Company believes that the Millennium(TM) system, through its HydroKinetic(TM)
technology, can effectively cut bone cleanly and without thermal damage;
however, the device is presently not cleared by the FDA for marketing for
cutting bone in the United States. See " - Government Regulation".
The osseous (bone) implant placement process usually requires procedures
uncovering the soft tissue and shaping around the neck of the tooth. The
Company believes that the Millennium(TM) system can be used effectively for
these procedures, as a result of its ability to cut oral soft tissue cleanly,
precisely and without induced bleeding.
Dermatology and Plastic/Cosmetic Surgery. An estimated 400,000 worldwide
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laser-based skin resurfacing procedures will be performed this year. Laser skin
resurfacing, which has been evolving as a surgical technique since it was
introduced in 1993, involves using a high-energy laser beam to remove epidermal
layers. This surgical process normally leaves a swollen, red wound which must
heal over a period of weeks or months. If successful, this procedure reduces
wrinkles and produces some tightening of the skin. Most of these surgeries are
performed by dermatologists, plastic surgeons, oculoplastic surgeons, and
various other sub-specialists using short-pulsed carbon-dioxide lasers.
Currently, there is a worldwide installed base of approximately 4,000 lasers for
this application. This installed base is expected to grow to 10,000 units by
the year 2000.
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The Company believes that its Er,Cr:YSGG HydroKinetic(TM) technology may
provide a significant technological breakthrough for the treatment of wrinkles,
scars and warts and for skin resurfacing. The Company believes the Er,Cr:YSGG
HydroKinetic(TM) system may also offer some clinical advantages in terms of non-
thermal, controlled removal of dermal soft tissue. In particular, a practitioner
would have the ability to use the Er,Cr:YSGG HydroKinetic(TM) technology for
certain cosmetic surgery procedures (e.g., bone, cartilage, and skin reshaping)
or to reduce the power, adjust the energy characteristics and alter the amount
of air and water used during an application, thereby allowing the use of the
laser medium to remove the skin surface with less depth of radiation than that
typically experienced when using laser systems with wavelengths that differ from
that of the Er,Cr:YSGG HydroKinetic(TM) system.
The Company has FDA clearance to market a laser system for a broad range of
dermatological and general surgical soft tissue applications, including scar
revision, removal of tumors and cysts, skin resurfacing and diagnostic biopsies.
See " - Government Regulation". This system, formally under the name
"DermaLase(TM)", which the Company continues to develop, utilizes the Er,Cr:YSGG
laser employed in Millennium(TM), but configured with laser energy, water and
air characteristics optimized for its specific application. In this
configuration, the system utilizes the air-water spray as a cooling agent. In
the Company's opinion, the combination of the air-water spray and the specific
wavelength employed provides improved histological effects on tissue, such as
reduced tissue trauma and faster healing.
Oral/Maxillofacial Surgery. Over 7,000 specialists practice
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oral/maxillofacial surgery in the U.S. These specialists have also become
involved with cosmetic surgery, including facial skin resurfacing with lasers.
The Company believes that its Er,Cr:YSGG HydroKinetic(TM) system can provide
significant advantages in oral/maxillofacial surgery, as a single surgical
instrument that efficiently cuts bone, cartilage, and soft tissue. While the
Company presently has clearance to market its Er,CR:YSGG Hydrokinetic(TM) system
for various dermatological and other various soft tissue procedures, the device
is presently not cleared for marketing in the United States by the FDA for the
cutting of bone. See " - Government Regulation".
Orthopedic Surgery. According to the American College of Surgeons, nearly
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21,000 orthopedic surgeons in the U.S. perform in excess of 3,000,000 annual
surgeries, including joint arthroscopy, spinal disc alterations and
arthroplasties of knee, shoulder and hip. Statistics on international
procedures are not compiled, but industry experts estimate at least 1,000,000
annual procedures outside of the United States. Laser use in orthopedic surgery
has been limited to a very small percentage of surgeons using long-pulse holmium
lasers in arthroscopic procedures. The main advantage of a holmium laser is
finesse for tissue sculpting. However, the medical community has criticized the
holmium laser as being too slow compared to the traditional mechanical
endoscopic cutting devices. Thermal damage caused by the pulsed holmium laser
has also been an issue. By contrast, the Company believes that the Er,Cr:YSGG
HydroKinetic(TM) system can offer significant advantages in terms of improved
speed, non-thermal effect, and providing one surgical device that can perform
all the functions that a surgeon needs for bone and cartilage cutting, along
with the ability to perform bone shaping and sculpting. The device, however, is
presently not cleared for marketing in the United States by the FDA for the
cutting of bone. See " - Government Regulation".
Otolaryngology. The Company believes that the unique bone-cutting capability
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of the Er,Cr:YSGG HydroKinetic(TM) system lends itself to surgical procedures in
the ear and nasal passages, where hard tissue (primarily cartilage) must be
precisely removed under endoscopic control. Approximately 400,000 ear, nose,
and throat (ENT) surgical procedures
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are performed in the United States each year by some 10,000 specialists with an
estimated 650,000 additional annual procedures internationally. Currently,
lasers are utilized in less than 5% of these surgeries. Primary applications for
lasers in ENT now include: laser assisted palatoplasty (partial removal of the
palate); uvulopalatoplasty (partial removal of the uvula and the palate to
reduce sleep apnea and snoring); tonsillectomy (surgical removal of tonsils);
and myringotomy (surgical creation of a small hole in the tympanic membrane of a
child's ear for drainage of fluid caused by chronic ear infection). The Company
believes, based on in-vitro tests, that the Millennium(TM) system may provide an
improved surgical tool for performing some types of ENT procedures. While the
Company's Er,Cr:YSGG HydroKinetic(TM) system is cleared for marketing in the
United States for a variety of general surgical applications, including
resection of internal organs, tumors and lesions, further clearances may be
required for specific applications when and if the Company decides to enter this
market arena. See " - Government Regulation".
Other Dental and Medical Products
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LazerSmile(TM). In 1996, BioLase commenced the development of a toothbrush
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for the consumer market, originally called the LaserBrush(TM), that utilizes a
monochromatic optical energy source embedded within a toothbrush in conjunction
with a clear, non-abrasive, proprietary, tooth-whitening gel. The Company
completed its design in 1998 and renamed the product LazerSmile(TM). The
LazerSmile(TM), which utilizes the Company's patented and patent-pending
technologies, is designed to bring into the consumer's home technology that
utilizes optical energy to activate ingredients in its proprietary tooth-
whitening gel, formulated by the Company, to clean and whiten teeth. The
LazerSmile(TM), which is configured much like a conventional toothbrush, is
smaller than conventional motorized tooth brushing instruments. During 1999,
the Company intends to focus its marketing strategy for LazerSmile(TM) on
utilization of experienced consumer marketing groups that specialize in the
distribution of home consumer health products through such channels as
television shopping networks, specialty catalogs and traditional consumer
distribution channels.
LaserSpray(TM). LaserSpray(TM) is a stand-alone product that incorporates a
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patented technology to allow a dental or medical practitioner to deliver a
coolant spray of air and water to tissue sites during surgical laser
interventions. LaserSpray(TM) has the potential to be installed with most
fiber-coupled lasers manufactured by other companies. The LaserSpray(TM) uses
BioLase's proprietary TTCS(TM) which has applications for various medical and
dental lasers. The Company believes that thermal effects resulting from high
temperatures can be significantly reduced when the LaserSpray(TM) cooling system
is used during application of laser-based energy. To date, the Company has not
pursued marketing of the LaserSpray(TM) as available resources have been
dedicated to the completion and marketing of its Millennium(TM) and
LazerSmile(TM) products.
FlavorFlow(TM) Fluid Conditioning System. In response to recently proposed
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standards for use of sanitized fluids in dental and medical procedures, BioLase
has been developing the FlavorFlow(TM) fluid conditioning system, a system
utilizing patent-pending technology to sanitize, flavor and administer fluids
and enhance the scent of air present during medical and dental treatments.
FlavorFlow(TM) is designed to overcome the unpleasant tastes and odors which
patients typically associate with pain and discomfort and which contribute to
negative clinical experiences. The Company believes that when the
FlavorFlow(TM) system is utilized to deliver sanitized fluids, the possibility
of parasitic (such as potentially lethal cryptosporidium) and
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bacterial infection being introduced through the fluids used during medical and
dental interventions would be significantly reduced. The Company expects that a
market for the FlavorFlow(TM) fluid conditioning system will exist only after
new standards regarding sanitized fluids are imposed.
Canal Finder System(TM). Endodontic procedures (root canals) involve removing
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pulp and dentin material from the root of the tooth, typically by drilling
through the crown of the tooth and inserting flexible micro-files in the tooth
canal. The practitioner must file the inside cavity, with ever-increasing size
instrumentation, to enlarge the canal and remove debris. Since most human tooth
canals are highly curved and conventional files are flat and inflexible, they
tend to remove excess dentin material from the inside of curves, while leaving
the outside of curves unworked. In addition, conventional files tend to push
debris deeper into the canal, rather than pulling out debris, which can lead to
the growth of a cyst or granuloma.
The Company has developed its patented Canal Finder System(TM) ("CFS")
designed to be used in endodontic root canal procedures for locating and shaping
root canals. The CFS handpiece embodies a patented automated method that is
geared to impart lengthwise vibratory motion to the file, with no rotation.
There is a clutch action that allows the file to stop working when too great a
resistance is met, so that if a curve is not being negotiated the file will not
create its own canal. The clutch action and the non-rotational movement of the
file are also designed to minimize the damage resulting from files breaking in
the root canal, which often requires extraction of the tooth. The proprietary
CFS files are engineered to have a maximized cutting angle on the outside of a
curve, and a minimized cutting angle on the inside of a curve, to compensate for
a file's natural tendency to straighten canals. The cutting angles of the files
are also engineered to cut only on withdrawal, and to migrate debris up and out
of the tooth, rather than to compact debris at the base of the canal. CFS files
are rounded at the tip to enhance the file's ability to follow a tightly curved
canal without forming a ledge or groove. Management believes that the principal
advantages of the CFS are, first, that the system is designed to adapt
automatically to the resistance placed on the file and, second, the CFS allows
root canals to be done substantially faster than other traditional techniques.
The CFS allows the dentist to stock fewer instruments, since the CFS can
complete a given procedure using fewer files and can facilitate the filing of
canals. The Company believes that CFS shapes and cleans root canals better than
conventional techniques, thus reducing tooth trauma and providing a more
successful root canal procedure with less risk of infection. The CFS, however,
is not one of the primary pursuits of the Company.
Other Endodontic Products. The Company offers a variety of proprietary and
-------------------------
non-proprietary endodontic products used by dentists and endodontic specialists.
Proprietary products include an irrigation/washing device, reamers, filling
compounds, an endodontic storage and sterilization system, and patented hand-
held filing instruments. The Company also distributes a variety of non-
proprietary products such as gutta percha and paper points to provide a full
endodontic product line for its dental and endodontic customers. The Company has
an ongoing development effort, and may develop additional products for which
patents may be applied.
Acquisition of Laser Skin Toner, Inc.
- -------------------------------------
On July 2, 1998, the Company acquired substantially all of the assets of Laser
Skin Toner, Inc., a development stage company ("LSTI"). The assets acquired
relate primarily to the proprietary laser-based technology being developed by
LSTI for non-invasive laser treatment in the field of aesthetic skin
rejuvenation, including all intellectual property rights consisting of patents,
patent applications, a trademark application and certain know-how. At the time
of the acquisition, the intellectual property embodying this developmental
effort represented substantially all of LSTI's assets, and the developmental
efforts did not appear applicable to any alternative use. As consideration for
the assets acquired, the Company issued to LSTI an aggregate 1,600,000 shares of
the Company's common stock, including 182,880 shares of common stock retained by
the Company pending the achievement by the business of specified performance
objectives. Pursuant to a separate agreement, the Company also issued 50,000
shares of its common stock to O'Donnell Eye Centers, Incorporated, a Missouri
corporation ("OECI") in consideration for the license of certain technology, the
subject of a pending patent application, and a continuation of the basic
technology acquired from LSTI. Because the technology licensed from OECI does
not appear to have any use apart from the technology acquired from LSTI, the
Company did not capitalize the value of its Common Stock issued to OECI in
consideration of the license agreement.
A valuation of LSTI's in-process research and development effort as of the
date of acquisition assigned a value of $5,134,920, the full amount of the
consideration paid by the Company in its acquisition of LSTI's assets and the
license of the OECI technology, to the in-process research and development. In
accordance with Financial Accounting Standards Boards ("FASB") Interpretation
No. 4, "Application of FASB No. 2 to Business Combinations Accounted for by the
Purchase Method", the $5,134,920 assigned to the in-process research and
development effort, for which only the single use existed, was charged to
expense on the date of the acquisition.
The valuation process included, but was not limited to, an analysis of (i) the
estimated costs associated with completing the development of the LSTI
technology; (ii) the markets for products based on LSTI's technology; (iii) the
anticipated cash flows attributable to the development of the LSTI technology
and the products to be based on that technology; and (iv) the risks associated
with realizing such cash flows. The forecasts used in valuing the in-process
research and development were based on assumptions the Company believed at the
time of the LSTI acquisition to be reasonable but which are inherently
uncertain. For example, material cash flows were assumed to commence in 1999 and
to be realized over a five-year period, based upon the assumed successful
development of the LSTI technology and market acceptance of the products to be
based on such technology.
At the time of acquisition, the Company intended to proceed with those
additional research and development efforts necessary to complete development of
the LSTI technology and to fund the costs from working capital. In anticipation
of and then in response to the clearance it received in October 1998 from the
FDA to market its Millennium (TM) tissue cutting system for dental hard tissue
applications, the Company shortly after acquiring the LSTI technology decided to
focus its limited resources on the marketing of its Millennium (TM) system,
including a build-up of inventory and expansion of sales staff.
The Company has since determined that it is in the best interests of its
stockholders to continue its focus on the marketing and further enhancement of
products embodying its HydroKinetic (TM) technology, including its Millennium
(TM) system, and not to further develop the LSTI technology.
The Company's efforts devoted to the LSTI technology since the date of
acquisition have not provided a basis for the Company either to revise or to
validate its estimates made at the time of acquisition regarding the time and
resources required to complete the development of the LSTI technology.
Manufacturing
- -------------
The Company, as a medical device manufacturer, is required by the FDA to
comply with Good Manufacturing Practice ("GMP") regulations. As a result, the
Company's manufacturing
9
<PAGE>
processes must meet certain standards regarding quality assurance and
documentation. See " - Government Regulation".
The Company fabricates certain proprietary components of its products and
inspects, tests and packages all components prior to inclusion within a finished
product or shipment as a replacement part. By designing and manufacturing key
proprietary products, the Company believes it can better control quality, limit
outside access to its proprietary technology, control costs and manage
manufacturing process changes more efficiently and effectively.
During assembly, appropriate steps are taken to maintain quality
standardization. Prior to release, the Company's products are submitted to a
formal factory acceptance test which must be passed prior to transfer as a
finished product.
The Company contracts with various non-affiliated companies to manufacture
certain components according to the Company's specifications. Substantially all
of the Company's products are manufactured in the United States. At present,
all products manufactured by third parties are sent to the Company's
headquarters in San Clemente, California for quality control, final assembly if
necessary, and shipment to customers or distributors.
The Company has identified alternate suppliers for most of its components.
There are certain key components for which there is a single supplier. The
Company is diligently searching for alternative sources for these components. A
change in the suppliers of certain system components, however, would require new
regulatory approvals and, in particular, could require an amendment to the "CE"
mark granted to the Company pursuant to the European Community's Medical Device
Directive, which would hamper the Company's ability to distribute its systems in
the European countries requiring such an approval.
Field service repairs in the United States are currently performed by the
Company's direct employee technicians. International field repairs are
performed by the corresponding distributor's service technicians who are
technically trained by the Company in the servicing of its products. The
Company also provides technical assistance and training seminars to its
international distributor technicians on an as-needed basis.
Engineering and Development
- ---------------------------
During the years ended December 31, 1998, 1997 and 1996, the Company expended
approximately $1,825,000, $1,023,000 and $984,000, respectively, on engineering
and development. Such expenditures were directed primarily to development of
the Company's HydroKinetic(TM) technology and the design and development of the
LazerSmile(TM) tooth whitening system.
Competition
- -----------
The medical and dental laser marketplaces are extremely competitive, with
several wavelengths competing for acceptance and a number of manufacturers
competing for sales to that segment of the healthcare community, which is
positioned to purchase laser-based products.
10
<PAGE>
The Company's principal competitors within the dental field have included
American Dental Technology, Inc., a manufacturer of an Nd:YAG laser system,
Sunrise Technologies, Inc., a manufacturer of a series of Nd:YAG lasers and a
holmium laser, and Luxar Corporation, the manufacturer of a line of CO2 lasers.
Presently, the Company's primary competitors in the dental marketplace include
Premier Laser Systems, Inc. ("Premier"), the only other company to date that has
obtained FDA clearance to market a laser system for dental hard-tissue
applications. Premier manufactures Er:YAG, Nd:YAG and distributes argon laser
systems. Certain foreign competitors, including Continuum Biomedical (ConBio),
a wholly owned subsidiary of Continuum Electro-Optics, Inc., KaVo, Inc. and
Fotona, Inc., have developed Er:YAG laser systems and are marketing them in
Europe and the Pacific Rim. ConBio has applied for FDA clearances to market its
Er:YAG laser in the U.S. There may be additional companies seeking FDA
clearance for dental hard tissue applications. Several companies, such as HGM,
Inc. and LaserMed, Inc. manufacture argon laser systems typically used for
specialized teeth-whitening applications and the curing of various bonding
acrylics. The Company believes that its Er,Cr:YSGG HydroKinetic(TM) technology
incorporated in its Millennium(TM) system has important advantages in comparison
to the traditional laser technology employed by its competitors for hard-tissue
applications, as evidenced by clinical studies indicating that there is no
adverse thermal effect associated with the use of the HydroKinetic(TM)
technology. The Company is not aware of any other medical or dental laser-based
system that can both cut through bone, enamel and dentin as effectively as its
Millennium(TM) system, and be used efficiently on as wide a range of
applications. The Company believes that a wide range of applications is
important to provide a sufficient cost justification to the practitioner to
support the expenditure related to a purchase of capital equipment.
Competition within the aesthetic surgery and oral/maxillofacial fields is
intense and technological developments are expected to continue at a rapid pace.
Several companies have received clearance from the FDA for various related
cosmetic surgical applications for which BioLase intends to compete. The
Company has FDA clearance to market its Er,Cr:YSGG system for a broad range of
dermatological and general surgical soft tissue applications. The Company's
primary competitors in this field include Coherent, Inc., ESC Medical Systems
Ltd., ConBio and Aesculap-Meditec which manufacture a variety of CO2 and Er:YAG
laser systems. The Company believes that its unique Er,Cr:YSGG system together
with the air-water spray will provide an improved histological effect on tissue,
such as reduced tissue trauma and faster healing. In addition, the Company
believes that the variability offered by its Millennium(TM) system, by adjusting
the amount of power and air and water used, provides a more versatile instrument
to the practitioner for both hard and soft tissue applications. For example, a
practitioner will have the ability to use HydroKinetic(TM) technology for
certain cosmetic surgery procedures (e.g., bone, cartilage, and skin reshaping)
or change the laser settings and the amount of air and water used during an
application, thereby allowing the use of the conventional laser medium to remove
the skin surface with less depth of radiation than that typically experienced
when using laser systems with wavelengths that differ from that of the BioLase
Er,CR:YSGG laser system.
A number of the Company's competitors have substantially greater financial
resources and engineering, development, manufacturing and marketing
capabilities. The Company believes that its patent protection, and pending
patent protection, should provide a competitive advantage to the Company over
the next several years. However, there can be no assurance that technology
superior to that of the Company will not be developed or that the Company's
patent and patent-pending protection will be upheld or will prove to have
commercial value. See " - Patents and Proprietary Technology".
11
<PAGE>
BioLase faces substantial competition in all markets which it seeks to
distribute the Millennium(TM) system. Competition in these markets consists of
numerous medical laser manufacturers promoting their respective lasers to users
via trade show exhibitions, advertisements, product demonstrations, educational
workshops, and sales representatives. In addition, the Company will compete
against conventional non-laser surgical methodologies and devices such as high
and low-speed drills, and air abrasion systems in the dental field and air
abrasion, electrosurgery, scalpels, saws, drills and punches in the medical
field. Some of these alternative and traditional methods have been proven and
tested, require minimal special training for established practitioners, and
generally require less capital investment than the Millennium(TM) system.
However, the Company believes that users of conventional methods and traditional
laser-based methods are continually evaluating new technologies that may provide
improved and effective techniques to replace existing technologies. BioLase
believes that the Er,Cr:YSGG HydroKinetic system represents a strong candidate
to replace existing technologies in various markets.
Patents and Proprietary Technology
- ----------------------------------
The Company has patented and patent-pending technology related to the
Millennium(TM) system and its HydroKinetic(TM) technology. In April, 1998, the
U.S. Patent and Trademark Office granted BioLase a patent (U.S. Patent No.
5,741,247) entitled "Atomized Fluid Particles for Electromagnetically Induced
Cutting" with broad applicability in dentistry, medicine and various industrial
applications. The proprietary technology encompassed within this patent serves
as the foundation for BioLase's Er,Cr:YSGG Hydrokinetic(TM) platform.
In June 1998, the U.S. Patent and Trademark Office granted BioLase a patent
(U.S. Patent No. 5,762,501) entitled "Surgical and Dental Procedures using Laser
Radiation" that provides the Company with broader claims related to its
proprietary air and water cooling technology (TTCS(TM)), designed to cool the
tissue receiving laser energy and adjacent tissue. This patent serves as a
continuation of U.S. Patent No. 5,020,995 awarded the Company in June 1991.
In July 1998, the Company was awarded a patent (U.S. Patent No. 5,785,521)
entitled "Fluid Conditioning System". This proprietary fluid conditioning
technology allows the practitioner to simultaneously apply medications,
anesthesia, vitamins and flavored fluids during certain dental and medical
procedures, thereby eliminating the need for separate, more cumbersome tools
while reducing operating time and the risk of infection. The Company intends
to incorporate this technology into its FlavorFlow(TM) product that is under
development.
In 1994, the United States Patent Office granted the Company a patent covering
a portable, hand-held laser tooth brushing instrument which was the predecessor
to the LazerSmile tooth whitening system. Other patents included within the
Company's domestic and foreign patent portfolios consist of awards issued and
pending related to the Company's Er,Cr:YSGG HydroKinetic(TM) technology, its
LaserSpray(TM), LazerSmile(TM) and FlavorFlow(TM) products, and other
proprietary laser technology.
The Company also holds a patent on its Canal Finder System(TM) and on certain
of its filing instruments. There can be no assurance that the issued patents or
subsequent patents, if issued, will adequately protect the Company's technology
or that such patents will provide protection against infringement claims by
competitors.
12
<PAGE>
BioLase also relies upon trade secrets, unpatented proprietary know-how and
continuing technological innovation to develop its competitive position. The
Company enters into confidentiality and technology agreements with its employees
pursuant to which such employees agree to maintain the confidentiality of the
Company's proprietary information and to assign to the Company any inventions
relating to the Company's business made by them while in the Company's employ.
There can be no assurance, however, that others may not acquire or independently
develop similar technology or, if patents are not issued with respect to
products arising from the Company's engineering and development activities, that
the Company will be able to maintain information pertinent to such research as
proprietary technology or trade secrets.
Marketing
- ---------
The Company markets its Millennium(TM) system in the U.S. through a direct
sales force and Sullivan-Schein, the largest domestic dental distributor. As of
year-end 1998, the Company was in the process of significantly expanding its
domestic sales force. Internationally, the Company sells its Millennium(TM)
through distributors that are trained by the Company in the clinical and service
aspects of the related technology.
The Company currently distributes its laser-based products in the United
States, Western Europe, Middle East and Far East and is actively working to
expand its worldwide network through pursuance of qualified and proven
distributors. The Company is presently developing aesthetic and dermatologic
applications for its Er,Cr:YSGG HydroKinetic(TM) technology.
The Company seeks third-party endorsements from respected practitioners,
professional associations and universities. By working with selected entities
to conduct testing and evaluation, the Company hopes to induce those entities to
become influential independent supporters of the Company's products. Management
believes that the perceived benefits of the Company's products to practitioners
and patients will result in positive word-of-mouth publicity for the Company.
The Company attends regional, national and international trade shows and
sponsors seminars to promote its products. Health professionals often
participate in seminars and in some regions are required to engage in continuing
certified education regarding advancements in the dental and medical fields.
The Company's marketing strategy adopts the premise that establishing lasers and
advanced technology as competitive marketing advantages for practitioners will
be important in creating sales growth.
It also adopts the premise that the consuming public will come to demand the
use of laser-based and HydroKinetic(TM) technologies in medical and dental
treatments. The Company accepts the evidence that the public is becoming
increasingly aware of the benefits of lasers in dental, ENT, ophthalmological,
dermatological, cosmetic and general surgical applications and that the
consuming public will be a key factor in increasing demand for laser and
HydroKinetic(TM) technologies within the medical and dental professions.
The Company is in the process of marketing of its LazerSmile(TM) tooth
whitening system. Distribution of the LazerSmile(TM) will include marketing
through the use of established companies that are experienced in mass market
penetration using television and catalogs.
13
<PAGE>
Customers
- ---------
The Company's customers include dentists, distributors, medical doctors and
hospitals. With the introduction of the Company's LazerSmile(TM) tooth whitening
system, the Company's customer base is expected to extend to consumers as well.
During fiscal 1998, two distributors, Sweden & Martina, the Company's Italian
distributor, and Ash Temple, the Company's Canadian distributor, accounted for
approximately 20% and 11%, respectively, of the Company's sales. During fiscal
1997, Orbis High Tech Dental, the Company's German distributor, accounted for
approximately 67% of the Company's sales. The Company's previous German
distributor, Dental-Fachhandel, accounted for approximately 20% of the Company's
sales in 1996. No other customers accounted for more than 10% of the Company's
sales in 1998, 1997 or 1996.
The Company has various distribution agreements requiring minimum purchase
commitments by certain distributors of its Millennium(TM) system. The amount of
unfilled orders on hand at December 31, 1998 was not significant. The Company
maintains adequate inventories to supply current orders for its products, and no
significant amount of backlog exists for such products.
Government Regulation
- ---------------------
The Company's products are subject to significant government regulation in the
United States and other countries. To clinically test, manufacture and market
products for human diagnostic and therapeutic use, the Company must comply with
mandatory regulations and safety standards established by the FDA and comparable
state and foreign regulatory agencies. Typically, products must meet regulatory
standards as safe and effective for their intended use prior to being marketed
for human applications. The clearance process is expensive and time consuming,
and no assurance can be given that any agency will grant additional clearance
for the sale of the Company's products for routine clinical applications, that
the length of time the process will require will not be extensive, or that the
cost of the process will not be substantial.
There are two principal methods by which FDA regulated devices may be marketed
in the United States. One method is under a Pre-Market Approval ("PMA"). A PMA
application is required for a Class III medical device that does not qualify for
consideration under Section 510(k), discussed below. The review period for a
PMA application is fixed at 180 days, but the FDA typically takes much longer to
complete its review. As part of the approval of a PMA application, the FDA
typically requires clinical testing to determine safety and efficacy of the
device. To conduct human clinical testing, typically the FDA must approve an
Investigational Device Exemption ("IDE"). Currently, the Company does not have
PMA applications pending for any of its products.
The other method is under Section 510(k) of the Food, Drug and Cosmetics Act
where applicants must demonstrate that the device for which clearance is sought
is substantially equivalent to a predicate device. The FDA's stated intention
is to review 510(k) notifications as quickly as possible, generally within 90
days; however, the complexity of a submission or a requirement for additional
information will typically extend the review period beyond 90 days. Domestic
marketing of the product must be deferred until clearance is received by the
applicant from the FDA. In some instances, an IDE is required for clinical
trials for a 510(k) notification.
14
<PAGE>
In the event that a 510(k) notification is turned down by the FDA, a PMA is
generally then required. The Company intends to utilize the 510(k) notification
procedure whenever applicable.
In October 1998, the Company received its long-awaited FDA clearance to market
the Millennium(TM) system, which incorporates the Company's proprietary
Er,Cr:YSGG HydroKinetic(TM) technology, for certain dental hard tissue
applications. The hard tissue clearance allowed the Company to commence sales
and marketing domestically of its Millennium(TM) system for hard tissue
applications during the fourth quarter of 1998. In July 1997, the Company
received FDA clearance to market a laser system, incorporating the Company's
Er,Cr:YSGG HydroKinetic(TM) technology, for a broad range of dermatological and
general surgical soft tissue applications.
The Company also received clearance from the FDA for its LaserSpray(TM) tissue
cooling system in 1995.
The Company expects to pursue clearances to market its Er,Cr:YSGG
HydroKinetic(TM) systems for other medical applications. The Company completed
clinical studies in the U.S. related to certain hard tissue dental applications
of its HydroKinetic(TM) technology that are on file with the FDA in connection
with the Company's submission of its 510(k) application. Such data was the basis
for the Company's successful clearance to market such technology in the U.S. for
certain dental hard tissue applications.
During 1996, the Company obtained clearance to market its Millennium(TM)
system in Germany for various dental applications based upon clinical studies in
Germany for both soft and hard tissue applications.
The FDA also imposes various requirements on manufacturers and sellers of
products it regulates under its jurisdiction, such as labeling, manufacturing
practices, record keeping and reporting. The FDA also may require post-
marketing practices, record keeping and reporting requirements.
There can be no assurance that additional approvals from the FDA will be
granted, that the process to obtain such approvals will not be expensive or
lengthy, or that the Company will have sufficient funds to pursue such
approvals. The failure to receive requisite approvals for the Company's
products or processes, when and if developed, or significant delays in obtaining
such additional approvals, could prevent the Company from commercializing its
products as anticipated and could have a materially adverse effect on the
financial condition, results of operations, cash flows and prospects of the
Company.
The following table sets forth the status of FDA clearance of the Company's
principal products:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Product Market Date Cleared Status
<S> <C> <C> <C>
Millennium(TM) Dental October 8, 1998 Cleared To Market
DermaLase(TM) Dermatology, General Surgery July 18, 1997 Cleared To Market
LazerSmile(TM) Tooth Whitening N/A Clearance Not Required
CanalFinder(TM) Endodontic Instrumentation N/A Clearance Not Required
FlavorFlow(TM) Dental Fluid Conditioning N/A Application Not Yet Submitted
- --------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
The Company is also subject to regulation under the Radiation Control for
Safety and Health Act of 1968 (the "Safety Act") administered by the Center for
Devices and Radiological Health ("CDRH") of the FDA. The CDRH controls energy
emissions of light and sound and electronic waves from electronic products.
These regulations require a laser manufacturer to file new product and annual
reports, to maintain quality control, product testing and sales records, to
distribute appropriate operation manuals, to incorporate certain design and
operating features in lasers sold to end-users and to certify and label each
laser sold to end-users as one of four classes of lasers (based on the level of
radiation from the laser). In addition, various warning labels must be affixed
to the product and certain protective devices must be installed, depending upon
the class of product. Under the Safety Act, the Company is also required to
register with the FDA as a medical device manufacturer and is subject to
inspection on a routine basis by the FDA for compliance with Good Manufacturing
Practice ("GMP") regulations. The GMP regulations impose certain procedural and
documentation requirements upon the Company relevant to its manufacturing,
testing and quality control activities. The CDRH is empowered to seek remedies
for violations of these regulatory requirements under the Federal Food, Drug and
Cosmetic Act. The Company believes that it is currently in substantial
compliance with these regulations.
Various state dental boards are considering the adoption of restrictions on
the use of lasers by dental hygienists. In addition, dental boards in a number
of states are considering educational requirements regarding the use of dental
lasers. The scope of these restrictions and educational requirements is not now
known, and they could have an adverse effect on sales of the Company's laser-
based products.
Foreign sales of the Company's laser-based products are subject to the
regulatory requirements of the importing country or, if applicable, the
harmonized standards of the European Community. These vary widely among the
countries and may include technical approvals, such as electrical safety, as
well as demonstration of clinical efficacy. The Company is currently working to
meet certain foreign country regulatory requirements for certain of its
products, and there can be no assurance that additional approvals will be
obtained.
The Millennium(TM) system has been granted the "CE" mark evidencing compliance
with quality, safety and performance requirements mandated by the Medical Device
Directive adopted by the European Community. The Medical Device Directive is
the latest standard of medical device safety and performance which has been
adopted by the fourteen member states of the European Community and requires
that all medical device products be compliant to be eligible for marketing
within the member states.
The Millennium(TM) system has also been granted the Canadian Standards
Association ("CSA") mark symbolizing compliance with certain safety and
performance standards. The CSA mark allows the Company to import and market its
Millennium(TM) system in Canada.
The Company has not filed applications for regulatory approval with the
Japanese Ministry of Health and Welfare for any of its products, but is
developing clinical data in preparation for said application for the
Millennium(TM) system.
16
<PAGE>
The FDA and other governmental agencies, both in the United States and in
foreign countries, may adopt additional rules and regulations that may affect
the Company's ability to develop and market its products. There can be no
assurances that the Company's existing products will meet any future legislative
acts or requirements.
Employees
- ---------
As of March 31, 1999, the Company employed 61 people on a full-time basis,
consisting of 36 people in engineering/development/manufacturing, 8 in
administration and 17 in sales/customer service. The Company's employees are
not represented by a labor union, and it has experienced no work stoppage. The
Company believes that its employee relations are good.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations - 1998 as Compared to 1997
Sales for 1998 were $1,465,000, compared to $1,786,000 reported in 1997.
The decrease in sales reflects primarily a decrease in shipments of the
Company's laser-based HydroKinetic(TM) systems during the first nine months of
1998 due principally to a reduction in the Company's export sales during 1998,
down approximately $709,000 from those reported in 1997. The reduction in export
sales was due primarily to a decrease in sales to the Company's German
distributor which had been the most significant customer for Millennium(TM)
systems in 1997. The German distributor requested a deferral of Millennium(TM)
systems pending a partial redesign of the hand piece to address more effectively
the requirements of the German market. The decrease was partially offset by an
increase in sales during 1998 of $455,000 in aggregate to the Company's new
Italian and Canadian distributors. The Company expects that completion of the
hand piece redesign effort and the successful testing of the redesigned hand
piece will result in a resumption of sales to the German market and further
increase sales to other countries within the European community.
The United States Food and Drug Administration ("FDA") in October 1998
granted clearance to the Company to market the Millennium(TM) system in the
United States for certain dental hard tissue applications. The FDA had
previously granted clearance for the marketing of Millennium(TM) for certain
soft tissue applications. The October 1998 action by the FDA has permitted the
Company to commence active marketing of the Millennium(TM) system in the United
States. Sales for December 1998 were $777,000, attributable primarily to sales
of Millennium(TM) systems. This represents a dramatic increase over sales for
October and November, bringing total 1998 fourth quarter sales to $879,000.
Increased sales during December 1998 are attributable to initial domestic market
acceptance of the Millennium(TM), more aggressive marketing through the
Company's expanded domestic sales force and the addition of new international
distributors. The Company expects that this level of increased sales will
continue into 1999. Commencing June 1997, sales of Millennium(TM) systems
replaced sales of an earlier generation of laser system which had been phased
out by early 1997 and are currently not being sold or marketed by the Company.
In August 1998, the Company introduced its first consumer product, the
LazerSmile(TM) Tooth Whitening System, which utilizes a monochromatic optical
energy light source embedded within a toothbrush in conjunction with a clear,
non-abrasive tooth whitening gel. The Company recognized a nominal amount of
revenue from LazerSmile(TM) test marketing in 1998. The Company is attempting to
establish marketing and distribution alliances with third parties to effect the
distribution of LazerSmile(TM). These alliances could include arrangements
involving television shopping channels, specialty catalogs and traditional
distribution arrangements. No assurances can be given that the Company will be
successful in establishing these alliances or that, if they are established,
they will result in the successful commercialization of LazerSmile(TM).
The laser division represents management's primary focus. Laser division
operating results are regularly reviewed by the Company's management in order to
assess resources to be allocated and to assess overall performance. This
division includes all of the Company's core technologies, research and
development expenditures and substantially all operating activity.
Management devotes substantially less time to the Endodontic division. The
Company maintains the division primarily as an ancillary business to service
recurring customers. Revenues from this division have been steadily declining,
inventory balances are decreasing and management has no expansion plans for this
division.
Gross profits were $47,000, or 3% of net sales, in 1998, compared to
$259,000, or 15% of net sales, in 1997. The Company's laser division reported a
gross loss of $86,000 on net sales of $1,202,000 in 1998, compared to a gross
profit of $79,000 on net sales of $1,398,000 in 1997. The decrease in gross
profits in 1998 was due principally to production inefficiencies brought about
by the delay in receipt of the anticipated FDA hard tissue clearance coupled
with ongoing product development. Gross profit margins attributable to the
Millennium(TM) were still below desired levels in 1998 and remain below desired
levels into 1999.
18
<PAGE>
The Company expects to realize improved margins on its Millennium(TM) sales
during 1999 through improved production layouts, other production efficiencies
and lower cost of materials. Gross profit in 1997 was adversely affected by a
$164,000 increase in the inventory reserve related to the termination of the
active marketing of the Company's prior generation of laser-based
systems. The Company's endodontic division reported gross profits in 1998 of
$133,000, compared to $180,000 in 1997.
Operating expenses, net of write off of purchased research and development
costs, increased $1,976,000, or 61%, to $5,234,000 in 1998, compared to
$3,258,000 in 1997. Sales and marketing expenses increased $674,000, to
$1,629,000 in 1998, compared to $955,000 reported in 1997. The increase was due
mainly to greater participation by the Company at various dermatological and
dental trade shows, payroll and other costs associated with the Company's
establishment of a domestic sales force, its continued pursuit of qualified
international distributors, and the initial sales efforts associated with the
introduction of LazerSmile(TM). General and administrative expenses increased
$500,000, to $1,780,000 in 1998, compared to $1,280,000 reported in 1997. This
change was primarily a result of increased expenses associated with advertising
and promotion of the Company through various publications and investor forums,
public relation announcements associated with the Company's products and
regulatory clearances, and increases in employee related expenses associated
with increased staffing and additions to management. Engineering and development
expenses reported in 1998 were $1,825,000, compared to $1,023,000 reported in
1997. The increase relates principally to costs associated with the 1998
redesign of the Millennium(TM) hand piece, enhancements to the existing
Millennium(TM) configuration and the finalization of the design of
LazerSmile(TM) in anticipation of its product launch.
In connection with the acquisition of Laser Skin Toner Inc.("LSTI"), the
Company allocated the $5,135,000 purchase price to incomplete research and
development. This allocation represents the estimated fair value based on cash
flows estimated at the time of acquisition. The Company's management had the
responsibility for estimating the fair value of the purchased in-process
research and development ("IPR&D"). The value ascribed to IPR&D reflected the
asset's completion percentage estimated at the time of acquisition of
approximately 50%. At the acquisition date, the development of the LSTI
technology had not reached technological feasibility, and the research and
development in progress had no alternative future uses. Accordingly, these costs
were expensed as of the acquisition date.
The value assigned to the LSTI IPR&D was determined by identifying
significant research elements for which technological feasibility had not been
established. In the case of LSTI, these included the development, prototyping,
and testing activities associated with the creation of a proprietary laser-based
skin resurfacing system, which is a new laser system for the field of aesthetic
skin rejuvenation. Valuation of development efforts in the future has been
excluded from the appraisal of IPR&D.
The nature of the efforts to develop the acquired IPR&D into a
technologically and commercially viable product relates to the completion of all
planning, designing, prototyping, and FDA approval activities that are necessary
to establish that the proposed technologies meet their design specifications
including functional, technical, and economic performance requirements. The
value assigned to purchased IPR&D was determined by estimating the contribution
of the purchased in-process technology in developing a viable product,
estimating the expected net cash flows from the expected sales of
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such a product, and discounting the estimated net cash flows to their present
value using an appropriate discount rate.
Revenue growth rates for LSTI were estimated as of the date of acquisition
based on a detailed forecast prepared at that time by management of the Company
and LSTI. Estimated revenue growth rates beyond 2001 were based on industry
growth expectations. Allocation of total projected LSTI revenues to IPR&D was
based on an analysis by the management of the Company and LSTI made as of the
date of acquisition. All future revenue projected to be generated by the LSTI
technology was expected to originate from the sale of products that were not yet
completed. One of the significant risks associated with realizing forecasted
revenues is the successful completion of the acquired R&D projects which, as of
the acquisition date, had not reached technological feasibility. Operating
profit projections were based upon estimates of (i) cost of goods sold, (ii) R&D
expenses, and (iii) selling, general and administrative expenses. Cost of goods
sold was projected at the date of acquisition to be approximately 31%, 26%, and
25% of revenues for 1999, 2000 and 2001, respectively. For R&D expenses,
projections were based on the costs estimated to be necessary to complete the
acquired elements and totaled approximately $2 million. R&D expense for 1999
was forecast at the time of acquisition at approximately 15% of 1999 revenues.
R&D expense was forecast to decrease as a percent of revenues through 2001 to
approximately 10% and was expected to remain constant thereafter throughout the
projection period. Selling, general and administrative expenses were projected
at the time of acquisition at 50% of revenues in 1999, and were expected to
decrease to approximately 40% of revenue thereafter. These estimates of revenue
and expense, made at the time of acquisition, would have provided an estimated
pretax margin of approximately 4% in 1999, which was estimated to increase to
approximately 25% in 2002. These profitability estimates were compared to
reported results of similar public companies and were determined to be
reasonable. Since LSTI was a development stage enterprise, the Company did not,
at the time of acquisition, anticipate any expense reductions or other synergies
as a result of the acquisition. Since the skin resurfacing market would be a
new market for BioLase historical margins were not considered.
The projections utilized in the transaction pricing and purchase price
allocation analysis exclude the potential synergistic benefits related
specifically to the Company's ownership. The rates utilized to discount the
estimated net cash flows to their present value were based on venture capital
rates of return. Due to the nature of the forecast and the risks associated
with completion of the development project and the projections made at the time
of acquisition regarding profitability and growth, a discount rate of 50% was
deemed appropriate for the IPR&D. This discount rate was consistent with the
stage of development for the LSTI technology; the uncertainties in the economic
estimates described above; the inherent uncertainty at the time of the
acquisition surrounding the successful development of the purchased in-process
technology; the expected useful life of such technology; the estimated
profitability levels of such technology; and, the inherent uncertainties of the
technological advances that were indeterminable at the time of the acquisition.
The forecasts used in valuing the IPR&D were based upon assumptions the
Company believed to be reasonable at the time of the acquisition but which were
inherently uncertain and unpredictable. For this reason, actual results may
vary from projected results. In addition, all of the assumptions are
interrelated; therefore they are all equally important. In the event the
Company fails to complete the development of the LSTI technology, the revenues
and profits estimated at the time of acquisition with respect to the IPR&D would
not be realized by the Company. Commercial results will also be subject to
uncertain market events and risks, which are beyond the Company's control, such
as trends in technology, government regulations, market size and growth, product
introduction or other actions by competitors and other factors.
The in-process laser system technology acquired by the Company from LSTI
consists of six critical components: (1) a coupling system; (2) a pneumatic
control system; (3) a distal end; (4) packaging/cabinetry; (5) a pharmaceutical
membrane; and (6) FDA clearance. Each of these components were estimated to
require additional research and development efforts, as set forth below:
Coupling System. The coupling system involves integration of the
----------------
laser receptacle, proximal end of the fiber, the fiber and jacket, the hand
piece and the wand of the laser system, and allows the transfer of power
through each phase of the laser. The transfer of power from the laser to
the fiber delivery system and ultimately to the device that touches the
patient's face (the distal end) involves linking different technologies; it
also requires further development of the LSTI "SmartConnect" technology,
which is intended to assure the appropriate therapeutic dose of laser
energy and to monitor skin contraction during the procedure. Management
had estimated at the time of acquisition that this component was less than
50% complete and would require the efforts of two mechanical engineers and
one electrical engineer for three months, estimated at a cost of $70,000,
to bring it to the production phase. In addition, the Company estimated at
the time of acquisition that it would be required to incur $350,000 of non-
recurring engineering fees for an original equipment manufacturer to
provide the customized power source for the laser.
Pneumatic Control System. The pneumatic control system is intended to
------------------------
ensure that the laser does not burn the patient. It is a cooling mechanism
using a pressure system to maintain the correct temperature through a pump
and fiber interface, and requires interaction with the laser, fiber and
distal end. Steps remaining at the time of acquisition to complete this
component included the selection of a suitable compressed air system,
estimated at $30,000, and design and test of the pump and fiber interface.
The Company estimated at the time of acquisition that approximately two
engineers would be required to work on this project for three months at an
estimated cost of $81,000.
Distal End. The distal end of the laser system will provide the
-----------
surgeon with control while housing all of the electronics needed to deliver
the correct amount of power and pulse duration. At the time of
acquisition, it was contemplated that the laser system would initially
include three distal ends, each tailored for different sized wrinkles
located on different parts of the body. At that time, it was also
anticipated that three additional distal ends would be made available in
the second half of 1999. Management of the Company had estimated at the
time of acquisition that development of the distal end was then less than
40% complete. Completion of the initial three distal ends was estimated at
the time of acquisition to require the efforts of two optical engineers for
approximately three months, with an additional four months required for the
remaining three distal ends. Estimated costs to complete this portion of
the project were estimated at the time of acquisition to be $138,000.
Packaging/Cabinetry. The packaging/cabinetry of the laser will
--------------------
provide the housing or outer surface for the entire system. This housing
can be quite elaborate and may be comprised of different types of metal or
plastic. Management believes that this component of the system is the only
one that will not require the development of technology in order to
complete; however, the design of the packaging/cabinetry is required to
ensure an efficient, aesthetically pleasing medical devise for the
practitioner. The Company estimated at the time of acquisition that
completion of this portion of the project would require the efforts of two
engineers for approximately ten and one-half months at an estimated cost of
$259,000.
Pharmaceutical Membrane. LSTI contemplated that pharmaceutical
------------------------
membranes would be applied to the patient for a 90-day period after the
resurfacing procedure. The membranes would carry an active pharmaceutical
agent employing a specific concentration, mix and delivery of an anti-
inflammatory agent, various anti-oxidants and a neo-collagen-promoting
agent. At the time of the acquisition, the pharmaceutical membrane was in
the initial phase of development. Significant tasks remaining at the time
of acquisition included integration of the chemicals and membrane material,
which had never before been accomplished, and design, development and
integration of a time release system to be incorporated with the membrane
system. Non-recurring engineering related the membranes was estimated at
the time of acquisition to cost approximately $350,000 to $450,000, with an
additional $50,000 to $75,000 for each of four clinical trials then
expected. Management estimated at the time of acquisition that completion
of this portion of the project would require approximately seven and one-
half months of full-time effort by one engineer at an estimated cost of
$40,000.
FDA Clearance. The completed laser system must go through two FDA
--------------
approval processes, one of which was subsequently received following the
acquisition of the LSTI technology. The remaining process was estimated at
the date of acquisition to require approximately four to six months of data
gathering prior to submission to the FDA for approval. The costs estimated
for the approval process remaining at the date of acquisition were
$312,000.
The Company estimated at the time of acquisition that the additional
research and development effort required to complete the LSTI technology would
cost approximately $2,000,000 and would take approximately nine months of
concentrated effort.
At the time of acquisition, the Company intended to proceed with those
additional research and development efforts promptly and to fund the costs from
working capital. In anticipation of and then in response to the clearance it
received in October 1998 from the FDA to market its Millennium(TM) tissue
cutting system for dental hard tissue applications, the Company shortly after
acquiring the LSTI technology decided to focus its limited resources on the
marketing of its Millennium(TM) system, including a build-up of inventory and
expansion of sales staff. The Company continued the clinical trials related to
the LSTI technology, while other research and development efforts required to
complete and commercialize the LSTI technology were largely deferred.
The Company has since determined that it is in the best interests of its
stockholders to continue its focus on the marketing and further enhancement of
products embodying its HydroKinetic(TM) (technology, including its
Millennium(TM) system, and not to further develop the LSTI technology.
The Company's efforts devoted to the LSTI technology since the date of
acquisition have not provided a basis for the Company either to revise or to
validate its estimates made at the time of acquisition regarding the time and
resources required to complete the development of the LSTI technology.
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Interest income decreased $126,000, to $58,000 in 1998, compared to
$184,000 in 1997. This decrease reflects lower 1998 average balances of cash,
cash equivalents and interest-bearing marketable securities. Interest expense
increased $73,000, to $82,000 in 1998, compared to $9,000 in 1997, due to the
existence of borrowings under a line of credit during the entire 1998 period as
compared to only one month during 1997.
Results of Operations - 1997 as Compared to 1996
Sales for 1997 were $1,786,000, compared to $692,000 reported in 1996, an
increase of $1,094,000, or 158%. The increase was primarily due to the laser
division's shipments of the Company's new HydroKinetic(TM) tissue cutting
system, the Millennium(TM) to the Company's German distributor. The Company's
endodontic division reported sales of $388,000 in 1997 compared to sales of
$402,000 in 1996.
In July 1997, the Company received clearance from the FDA to market in the
United States a laser-based surgical tissue cutting system that utilizes a
variation of the Millennium(TM) technology for a broad range of dermatological
and general surgical soft tissue applications. In response to this clearance,
the Company intends to introduce to the domestic market a laser-based system in
a configuration that is designed for lower power settings than those of the
Millennium(TM) system. The Company is presently developing its marketing plan
for such a system and expects it to begin to contribute to sales late in 1999.
Gross profits were $259,000, or 15% of net sales in 1997, compared
to $133,000, or 19% of net sales in 1996. The Company's laser division reported
a gross profit of $79,000 on net sales of $1,398,000 in 1997, compared to a
gross loss of $89,000 on net sales of $290,000 in 1996. Gross profit margins
attributable to the Millennium(TM) are still below desired levels. The continued
design and manufacturing of various test and production fixtures contributed to
the manufacturing inefficiencies experienced during the year. Additionally,
gross profit in 1997 was affected by an increase in the inventory reserve
related to the Company's prior generation
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Nylad(TM) laser-based systems of $164,000. The Company's endodontic division
reported gross profits in 1997 of $180,000, compared to $222,000 in 1996.
Operating expenses increased $636,000, or 24%, to $3,258,000 in 1997,
compared to $2,622,000 in 1996. Sales and marketing expenses increased
$336,000, to $955,000 in 1997, compared to $619,000 reported in 1996. The
increase was due mainly to greater participation by the Company at various
dermatological and dental trade shows, payroll and other costs associated with
the Company's establishment of a domestic sales force and its continued pursuit
of qualified international distributors. General and administrative expenses
increased $262,000, to $1,280,000 in 1997, compared to $1,018,000 reported
in 1996. This change was due principally to increases in: (i) a charge of
$123,000 related to common stock issued in connection with the Company obtaining
a $2,500,000 credit facility for the financing of inventories, (ii) costs
related to domestic and foreign patents and patent applications, (iii) legal
costs related primarily to regulatory, contractual and international matters,
(iv) public relations costs incurred by promotion of the Company through various
publications and investor forums, and (v) a $96,000 increase in the provision
for bad debt as a result of a bank claiming technical defects in documentation
and thereby refusing to honor a letter of credit for goods shipped to a foreign
customer. The Company has recently filed a complaint against the foreign
customer in the United States District Court for various claims including
collection of the $96,000 debt. Engineering and development expenses reported
in 1997 were $1,023,000, compared to $984,000 reported in 1996. The moderate
increase in these expenses related primarily to costs incurred with respect to
clinical studies utilizing the Company's HydroKinetic(TM) technology in its
effort to obtain clearance by the FDA to market the Millennium(TM) system for
certain dental hard tissue applications and final development costs related to
the Company's LazerSmile(TM). These 1997 year costs were partially offset by a
reduction in 1997 project design costs related to the Millennium(TM) system as
the present version was placed into production during the second quarter of
1997.
Interest income increased $154,000, to $184,000 in 1997, compared to
$30,000 in 1996. This increase was due to higher levels of United States
Treasury Notes held during 1997.
FINANCIAL CONDITION
The Company's working capital requirements have been financed over the past
several years through the private placement of the Company's equity securities.
Such placements generated net proceeds of $3,593,000, $720,000 and $4,400,000
during 1998, 1997 and 1996, respectively. In March 1999, the Company raised
approximately $2,758,000 of net proceeds through a private placement of equity
securities. In addition, the Company financed its 1998 inventory build-up
through a $1,404,000 increase in the amount drawn under a short-term line of
credit.
The aggregate of cash and cash equivalents and marketable securities
decreased $165,000 during 1998. Operating activities in 1998 utilized
$4,849,000 of cash. Investing activities in 1998, not including the liquidation
of marketable securities, utilized $371,000 of cash, while 1998 financing
activities provided $5,055,000 of cash.
Accounts receivable decreased $496,000 during 1998. The decrease is
attributable primarily to the payment during 1998 of $884,000 by the German
distributor of Millennium(TM) for
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sales made during 1997. The effect of this payment was partially offset by
accounts receivable in 1998 relating to sales aggregating $777,000 made during
December 1998.
Inventories increased $971,000 from 1997 to 1998, reflecting the Company's
decision to continue to build subassemblies for its Millennium(TM) system while
awaiting completion of the redesign of the Millennium(TM) hand piece and
clearance from the FDA to market Millennium(TM) in the United States for dental
hard tissue applications. There was also a build-up of inventory in connection
with the product launch of LazerSmile(TM). The Company believes that through
1998 its operations involved primarily research and development while awaiting
key regulatory clearances and that accordingly its operations did not reflect
normal business cycles, so that information about inventory turns would not be
meaningful. The Company believes that such information should become meaningful
once a pattern of deliveries of Millennium(TM) systems has been established. The
Company's inventory reserve decreased by $393,000 during 1998, as the Company
wrote-off its Nylad(TM) and Laser 35(TM) laser based systems, which are no
longer being marketed or sold by the Company.
Liability under a line of credit established in December 1997 to finance
inventory increased $1,404,000 from 1997 to 1998. This increase is associated
with the build-up of inventory required to support the Company's current sales
level. The Company has extended this line of credit through June 1, 1999 and
has the option to extend it for an additional six month period.
The aggregate of accounts payable and accrued liabilities increased
$546,000 from December 31, 1997 to December 31, 1998. This increase is
attributable to increased purchases of materials late in 1998 in connection with
an effort to increase Millennium(TM) production to 25 systems per month, as well
as the Company's conservation of cash resources.
Capital expenditures during 1998 totaled $300,000 primarily related to the
purchase of plastic injection molds for the production of the LazerSmile(TM).
Patents, trademarks and licenses in 1998 increased $71,000 from 1997 principally
as a result of the Company pursuing patent and trademark protection for its
proprietary technology, names and symbols.
Stockholders' equity at December 31, 1998 was $662,000, compared to
$2,095,000 at December 31, 1997. In May 1998, the Company completed a private
placement of 1,320,000 shares of common stock for net proceeds of $3,593,000.
In July 1998, the Company completed the acquisition of the assets of LSTI by
issuing 1,467,000 shares of common stock, net of 183,000 held in escrow, valued
at $5,135,000. These increases in stockholders' equity were offset by the
current year loss of $10,346,000, which included a $5,135,000 write-off of
purchased in-process research and development costs for which no alternative use
existed.
LIQUIDITY AND CAPITAL RESOURCES
The Company remains dependent upon its ability to obtain outside financing
either through the issuance of additional shares of its common or preferred
stock or through borrowings until it achieves sustained profitability through
increased sales and cost containment. The Company's business now focuses and is
expected to continue to focus on the manufacturing and marketing of its laser-
based HydroKinetic(TM) tissue cutting system, the Millennium(TM); a new,
reduced-power variation of the Millennium(TM) which is being configured for
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applications in dermatology and general soft-tissue surgery; and its recently-
released consumer tooth-whitening system, the LazerSmile(TM) toothbrush.
Financing the development of laser-based medical and dental devices and
instruments and the operations of the Company has been achieved principally
through the private placements of preferred and common stock and the exercise of
stock options and warrants, though the Company has experienced increased sales
of its Millennium(TM) system during December 1998 and the first quarter of 1999.
During the three years ended December 31, 1998, the Company raised approximately
$8,713,000 of equity funds in this manner.
Management believes that the Company will require significant resources in
1999, principally to fund the Company's working capital needs to support the
production and marketing of the Company's laser-based products for various
dental and medical applications, efforts directed towards further extensions and
refinements of existing products, and continuing research and development
activities. The Company expects to generate the necessary resources for its
1999 business plan through a combination of the contribution from the sales of
its products, the sale of equity securities in a private placement, and debt
financing. No assurances can be given, however, that the Company will be able
to obtain such additional resources.
If the Company is unsuccessful in generating anticipated resources from one
or more of the anticipated sources and is unable to replace any shortfall with
resources from another source, the Company may be able to extend the period for
which available resources would be adequate by deferring the creation or
satisfaction of various commitments, deferring the introduction of various
products or entry into various markets, and otherwise scaling back operations.
If the Company were unable to generate the required resources, its ability to
meet its obligations and to continue its operations would be adversely affected.
The Company's financial statements have been prepared under the assumption of a
going concern. Failure to generate required resources and to achieve sustained
profitability would have an adverse effect on the financial position, results of
operations, cash flows and prospects of the Company and ultimately on its
ability to continue as a going concern.
In March, 1999, the Company completed a private placement in which it
issued 1,116,000 shares of its common stock, 550,000 redeemable warrants to
purchase common stock at an exercise price of $3.50 per share and 99,000
redeemable warrants to purchase common stock at an exercise price of $2.75 per
share. The warrants expire March 31, 2001 and allow for the Company to call the
warrants, with not less than 30 days written notice, at a redemption price of
$.01 each, provided that the average between the high and low prices at which
the shares of common stock trade in the principal market in which they then
trade exceeds 142% of the exercise price for ten consecutive trading days
preceding the date of such call. Gross proceeds received from the private
placement were $3,025,000. Net proceeds, after placement agent cash commissions
and expenses of $242,000 and estimated expenses incurred by the Company of
$35,000, were approximately $2,758,000.
At December 31, 1998, the Company had $1,705,000 outstanding under a
revolving credit agreement with a bank. The revolving credit agreement provides
for borrowings of up to $2,500,000 for the financing of inventory and is
collateralized by substantially all of the Company's accounts receivable and
inventories. The interest rate is fixed throughout the term of the credit
agreement and is computed based upon LIBOR plus 0.5% at the time of any
borrowings. At December 31, 1998, the weighted average interest rate on the
outstanding balance was 5.97%. The Company is required to reduce the
outstanding loan balance by an
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amount equal to the cost of goods sold associated with sales of inventory upon
collection of sales proceeds. Effective December 1, 1998, the Company exercised
its right to extend the credit agreement for an additional six months by issuing
18,300 shares of common stock and warrants to purchase 25,000 shares of the
Company's common stock at an exercise price of $5.00 per share. The value of the
shares and warrants so issued was $61,000 which was recorded as expense in 1998.
The current revolving credit agreement expires on June 1, 1999, and the Company
has one six-month renewal option remaining. The Company expects that it will
exercise its option to extend the line of credit through December 1, 1999. The
Company will be required, however, to pay off or refinance this line of credit
by December 1, 1999. No assurances can be given that the Company will be able to
refinance the line of credit or that the terms on which it may be able to
refinance the line of credit will be as favorable as the terms of the existing
line. If the Company is unable to refinance and therefore required to repay the
line of credit, the diversion of resources to that purpose may adversely affect
the Company's operations and financial condition.
The Company is presently continuing its analysis of its computer software
and hardware requirements, including non-information technology systems, and
anticipates capital expenditures to increase significantly during 1999 in
connection with the acquisition of such software and hardware. Included among
the software to be purchased would be a new accounting system. That system,
unlike the present system, would be Year 2000 compliant. The Company's present
software and hardware is personal computer based and is unaltered from its
original purchased state except for those upgrades offered by the suppliers of
such software. The Company has received assurances from the suppliers of the
software it employs, other than the accounting system software, that such
software is Year 2000 compliant. The Company intends to obtain certification
that any computer software and hardware purchased in 1999 is Year 2000
compliant. The Company does not believe that its insistence upon Year 2000
compliant hardware or software will materially increase the cost of any hardware
or software acquired. Should the Company be unable to obtain Year 2000
compliant software or hardware, the worst case scenario would require the
Company to transition to a manual financial reporting and information gathering
system.
The Year 2000 problem arises out of the convention by which years have been
represented in computer programs by a two digit number representing the final
two digits in the year's designation and concern that time sensitive components
could fail or provide erroneous output if they do not correctly recognize years
beginning with 20 rather than 19.
The Company currently has limited information regarding the Year 2000
compliance status of its principal suppliers of goods and services and of its
principal customers. The Company has initiated formal communications with all
such suppliers and customers with respect to the status of such persons'
computer systems in terms of Year 2000 compliance. If any principal customers
lack systems that are Year 2000 compliant or programs that provide reasonable
assurance that such systems will be Year 2000 compliant well before the end of
1999, the Company will attempt to establish communications channels with such
customers that bypass the non-compliant computer systems. If any principal
suppliers lack systems that are Year 2000 compliant or programs that provide
reasonable assurance that such systems will be Year 2000 compliant well before
the end of 1999, the Company will attempt to identify and establish relations
with alternate suppliers who have Year 2000 compliant systems. There is a
single source supplier of optic fiber for the Millennium(TM) which could not be
easily replaced if it has non-compliant systems, and in the event such supplier
had a non-compliant system, the Company would attempt to establish
communications channels with such supplier that bypass the supplier's non-
compliant computer system. There can be no assurance however that the
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Company would be successful in locating new suppliers and an inability to do so
could create difficulties in the Company obtaining certain components used in
its manufacturing process. The Company believes that the costs associated with
monitoring Year 2000 compliance by suppliers and customers and dealing with any
non-compliance will not be material. The failure of the Company or any of its
principal suppliers and customers to become Year 2000 compliant in a timely
manner and the failure to establish alternate communications channels could have
a material adverse effect on the Company's business, financial condition,
results of operations and cash flow.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and becomes effective for the Company for the
year ending December 31, 1998. Comprehensive income includes such items as
foreign currency translation adjustments and unrealized holding gains and losses
on available-for-sale securities. SFAS No. 130 does not affect current
principles of measurement of revenues and expenses and accordingly the adoption
of SFAS No. 130 will not have any effect on the Company's results of operations
or financial position.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. SFAS No. 131 establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This statement supersedes SFAS No. 14, Financial Reporting
for Segments of a Business Enterprise. The new standard became effective for
the Company for the year ending December 31, 1998, and requires that comparative
information from earlier years be restated to conform to the requirements of
this standard.
In June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and becomes effective for the
Company for the first quarter of 2000. The Company does not currently engage in
any program of hedging and consequently the Company does not expect the adoption
of SFAS No. 133 to have a material effect on the Company's consolidated
financial position, cash flows, or results of operations.
Impact of Changing Prices on Sales and Income
The Company attempts to minimize the impact of inflation on production and
operating costs through cost control programs and productivity improvements.
Over the past three years, the inflation rate has been relatively low.
Nonetheless, the Company has continued to experience increases in the cost of
labor and some materials, in the face of requests for price reductions from
customers. Due to competitive forces in 1998, the Company was not able to raise
prices to its customers to pass along the cost increases experienced. The
Company, however, shall continue to pursue price reductions from its materials
vendors in an attempt to improve or maintain margins.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company at December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998,
along with the notes thereto, and the Report Of Independent Accountants thereon,
required to be filed in response to this Item 8, begin at page F-1 of this
report.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 9, 1999 BIOLASE TECHNOLOGY, INC.
a Delaware corporation
/s/ Jeffrey W. Jones
-----------------------------
Jeffrey W. Jones
President, Chief Executive Officer,
and Director
28
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
__________
<TABLE>
<CAPTION>
Page
----
<S> <C>
FINANCIAL STATEMENTS
Report Of Independent Accountants F-2
Consolidated Balance Sheets As Of December 31, 1998 And 1997 F-3
Consolidated Statements of Operations For The Years Ended
December 31, 1998, 1997 And 1996 F-4
Consolidated Statements of Stockholders' Equity For The Years Ended
December 31, 1998, 1997 And 1996 F-5
Consolidated Statements of Cash Flows For The Years Ended
December 31, 1998, 1997 And 1996 F-6
Notes To Consolidated Financial Statements F-7
</TABLE>
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
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
__________
To the Board of Directors
BioLase Technology, Inc.
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 its Subsidiary at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that BioLase Technology, Inc. and its Subsidiary will continue as a going-
concern. As discussed in Note 2 to the consolidated financial statements, the
Company has suffered recurring losses from operations and shows a need for
continued funding that raises substantial doubt about its ability to continue
as a going-concern. Management's plans in regard to these matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Newport Beach, California
March 16, 1999
F-2
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 And 1997
__________
<TABLE>
<CAPTION>
1998 1997
---- ----
A S S E T S:
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 424,539 $ 213,074
Marketable securities 251,485 627,817
Accounts receivable, less allowance of $118,015 in 1998 and
$117,464 in 1997 563,236 1,060,252
Inventories, net of reserves of $227,694 in 1998 and $620,949 in
1997 1,930,117 1,008,777
Prepaid expenses and other current assets 168,725 110,094
------------ ------------
Total current assets 3,338,102 3,020,014
Property and equipment, net 407,142 181,804
Patents, trademarks and licenses, less accumulated amortization of
$129,312 in 1998 and $330,466 in 1997 147,199 95,508
Other assets 18,929 98,666
------------ ------------
Total assets $ 3,911,372 $ 3,395,992
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Line of credit $ 1,705,025 $ 301,233
Accounts payable 806,335 481,240
Accrued expenses 701,016 480,440
Accrued costs related to dissolution of foreign subsidiary 37,144 38,069
------------ ------------
Total liabilities 3,249,520 1,300,982
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value, $.001, 1,000,000 shares authorized:
no shares issued and outstanding at December 31, 1998 and
1997 - -
Common stock, par value, $.001, 50,000,000 shares authorized, issued
16,312,007 in 1998 (after deducting 182,880 of escrow
shares) and 13,462,636 in 1997 16,312 13,463
Additional paid-in capital 38,614,948 29,755,652
Receivable from stockholders and unearned services - (50,766)
Accumulated deficit (37,969,408) (27,623,339)
Total stockholders' equity 661,852 2,095,010
------------ ------------
Total liabilities and stockholders' equity $ 3,911,372 $ 3,395,992
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1998, 1997 And 1996
__________
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 1,465,191 $1,786,285 $ 691,829
Cost of sales 1,418,560 1,527,242 559,169
------------- ------------ ------------
Gross profit 46,631 259,043 132,660
------------- ------------ ------------
Operating expenses:
Sales and marketing 1,628,821 955,192 618,964
General and administrative 1,780,015 1,280,171 1,018,270
Engineering and development 1,824,901 1,022,733 984,418
In-process research and development 5,134,920 - -
------------- ------------ ------------
Total operating expenses 10,368,657 3,258,096 2,621,652
------------- ------------ ------------
Loss from operations (10,322,026) (2,999,053) (2,488,992)
Interest income 57,591 184,245 30,142
Interest expense (81,634) (9,102) (4,409)
------------- ------------ ------------
Net loss ($10,346,069) ($2,823,910) ($2,463,259)
========== ========= =========
Loss per share - basic and diluted ($0.69) ($0.21) ($0.21)
==== ==== ====
Weighted-average shares outstanding - basic and
diluted 15,061,814 13,385,318 11,531,527
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1998, 1997 And 1996
------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balances at January 1, 1996 - $ - 11,241,164 $ 11,241
Private placement of preferred stock 100 - - -
Exercise of stock options - - 88,766 89
Conversion of preferred stock to common stock (99) - 1,800,018 1,800
Issuance of shares for fractional interest on reverse split - - 1 -
Net loss - - - -
------ ------- ----------- ---------
Balances at December 31, 1996 1 - 13,129,949 13,130
Private placement of common stock - - 200,000 200
Exercise of stock options - - 99,000 99
Issuance of stock primarily for services - - 43,850 44
Issuance of stock primarily for unearned services - - 14,250 14
Cancellation of stock issued for unearned services - - (41,523) (41)
Conversion of preferred stock to common stock (1) - 17,109 17
Issuance of shares from fractions interest in reverse split - - 1 -
Net loss - - - -
------ ------- ----------- ---------
Balances at December 31, 1997 - - 13,462,636 13,463
Private placement of common stock - - 1,320,000 1,320
Issuance of stock for Laser Skin Toner purchase - - 1,467,120 1,467
Issuance of stock and warrants for earned services - - 23,300 23
Exercise of stock options - - 38,950 39
Earned services - - - -
Issuance of shares for fractional interest on reverse split - - 1 -
Net loss - - -
------ ------- ----------- ---------
Balances at December 31, 1998 - $ - 16,312,007 $ 16,312
====== ======= =========== =========
</TABLE>
<TABLE>
<CAPTION>
Receivable
From
Additional Stockholders
Paid-In And Unearned Accumulated
Capital Services Deficit Total
------- -------- ------- -----
<S> <C> <C> <C> <C>
Balances at January 1, 1996 24,169,018 $ - $ (22,336,170) 1,844,089
Private placement of preferred stock 4,400,000 - - 4,400,000
Exercise of stock options 133,061 - - 133,150
Conversion of preferred stock to common stock (1,800) - - -
Issuance of shares for fractional interest on reverse split - - - -
Net loss - - (2,463,259) (2,463,259)
------------ ----------- -------------- ----------
Balances at December 31, 1996 28,700,279 - (24,799,429) 3,913,980
Private placement of common stock 719,685 - - 719,885
Exercise of stock options 137,151 - - 137,250
Issuance of stock primarily for services 147,761 - - 147,805
Issuance of stock primarily for unearned services 50,752 (50,766) - -
Cancellation of stock issued for unearned services 41 - - -
Conversion of preferred stock to common stock (17) - - -
Issuance of shares from fractions interest in reverse split - - - -
Net loss - - (2,823,910) (2,823,910)
------------ ---------- --------------- ----------
Balances at December 31, 1997 29,755,652 (50,766) (27,623,339) 2,095,010
Private placement of common stock 3,591,480 - - 3,592,800
Issuance of stock for Laser Skin Toner purchase 5,133,453 - - 5,134,920
Issuance of stock and warrants for earned services 75,976 - - 75,999
Exercise of stock options 58,387 - - 58,426
Earned services - 50,766 - 50,766
Issuance of shares for fractional interest on reverse split - - - -
Net loss - - (10,346,069) (10,346,069)
------------ ---------- --------------- ----------
Balances at December 31, 1998 $ 38,614,948 $ - $(37,969,408) $ 661,852
============ ========== ============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1998, 1997 And 1996
__________
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($10,346,069) ($2,823,910) ($2,463,259)
Adjustments to reconcile net loss to net cash used by
operating activities:
Issuance of common stock and warrants for earned
service 126,765 147,805 -
In-process research and development 5,134,920 - -
Depreciation and amortization 94,156 105,649 149,746
Provision for bad debts 551 95,507 (5,900)
Provision for inventory write-off 49,247 164,488 37,663
Changes in assets and liabilities:
Accounts receivable 496,465 (1,010,296) (74,941)
Inventories (970,587) (796,786) (23,214)
Prepaid expenses and other assets 21,106 (116,108) 98,850
Accounts payable and accrued expenses 544,746 224,385 129,984
------------- ------------ ------------
Net cash used by operating activities (4,848,700) (4,009,266) (2,151,071)
------------- ------------ ------------
Cash flows from investing activities:
Purchase of marketable securities (2,522,563) - (4,000,000)
Sale of marketable securities 2,898,895 2,872,183 500,000
Additions to property and equipment (299,925) (90,523) (54,808)
Additions to patents, trademarks and licenses ( 71,260) (67,145) (21,145)
------------- ------------ ------------
Net cash (used) provided by investing activities 5,147 2,714,515 (3,575,953)
------------- ------------ ------------
Cash flows from financing activities:
Borrowings under the line of credit, net 1,403,792 301,233 -
Payments of capital lease obligations - - (22,324)
Proceeds from issuance of common stock, net 3,592,800 719,885 -
Proceeds from exercise of stock options 58,426 137,250 133,150
Proceeds from issuance of preferred stock, net - - 4,400,000
------------- ------------ ------------
Net cash provided by financing activities 5,055,018 1,158,368 4,510,826
------------- ------------ ------------
Increase (decrease) in cash and cash equivalents 211,465 (136,383) (1,216,198)
Cash and cash equivalents at beginning of year 213,074 349,457 1,565,655
------------- ------------ ------------
Cash and cash equivalents at end of year $ 424,539 $ 213,074 $ 349,457
============= ============ ============
Supplemental cash flow disclosure:
Cash paid during the year for interest $ 74,370 $ 4,005 $ 4,410
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 And 1996
-------------
1. Summary Of Significant Accounting Policies:
BioLase Technology, Inc. (the "Company"), which changed its name from Laser
Medical Technology, Inc. in May 1995, was incorporated in Delaware in
February 1987. In 1987, the Company acquired 77% of the outstanding shares
of Societe Endo Technic, S.A. ("SET"), a French corporation, which in turn
had a 100%-owned subsidiary, Societe Endo Technic, Inc., doing business as
Endo Technic Corporation (a California corporation). In 1994, the Company
discontinued the operations of SET and purchased certain assets of SET,
including 100% of the stock of Societe Endo Technic, Inc., for nominal
consideration.
The Company's primary business is developing, manufacturing and marketing
advanced laser products for dental and other surgical applications, and
distributing endodontic products manufactured by third parties.
Principles Of Consolidation:
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, after eliminating intercompany accounts
and transactions. Certain amounts in the prior period consolidated
financial statements have been reclassified to conform to the current
year's presentation.
Revenue Recognition:
-------------------
Sales and related cost of sales are recognized upon shipment of products.
The Company's laser products and endodontic handpieces are generally under
warranty against defects in material and workmanship for a period of one
year.
Cash Equivalents:
----------------
The Company considers all highly liquid debt instruments with a maturity of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents are carried at cost, which approximates market.
At December 31, 1998 and 1997, the Company had approximately $211,000 and
$38,000, respectively, of cash balances that were in excess of the
federally-insured limit of $100,000 per bank.
F-7
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997 And 1996
-------------
1. Summary Of Significant Accounting Policies, Continued:
Marketable Securities:
---------------------
Marketable securities consist of United States government treasury notes
having maturities greater than three months but less than one year at the
time of acquisition. Marketable securities are classified as available-
for-sale securities and are reported at fair value. Gross unrealized gains
and losses on marketable securities at December 31, 1998 and 1997 are not
material.
Inventories:
-----------
Inventories are valued at the lower of cost or market (determined by the
first-in, first-out method).
Property And Equipment:
----------------------
Property and equipment, including property under capital lease agreements,
are carried at cost less accumulated depreciation and amortization.
Maintenance and repairs are expensed as incurred. Upon sale or disposition
of assets, any gain or loss is included in the consolidated statement of
operations.
The cost of property and equipment is generally depreciated using the
straight-line method over the estimated useful lives of the respective
assets, which are generally not greater than five years. Leasehold
improvements are amortized over the lesser of the estimated useful lives of
the assets or the related lease terms.
Patents, Trademarks And Licenses:
--------------------------------
Costs incurred to establish and successfully defend patents, trademarks and
licenses and to acquire product and process technology are capitalized.
All amounts assigned to these patents, trademarks and licenses are
amortized on a straight-line basis over an estimated eight-year useful
life.
The continuing carrying value of patents is assessed based upon the
Company's operating experience, expected cash flows from related products
and other factors as deemed appropriate.
F-8
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997 And 1996
-------------
1. Summary Of Significant Accounting Policies, Continued:
Engineering And Development:
---------------------------
Company-sponsored engineering and development costs related to both present
and future products are expensed as incurred.
Estimates:
---------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Income Taxes:
------------
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes", which requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized
for the tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at
each year-end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision
for income taxes represents the tax payable for the period and the change
during the period in deferred tax assets and liabilities.
Stock-Based Compensation:
------------------------
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", related to employee stock
options. SFAS No. 123 defines a fair value based method of accounting for
both employee and non-employee stock options and warrants. Fair value of
the stock option and warrant is determined considering factors such as the
exercise price, the expected life, the current price of the underlying
stock and its volatility, expected dividends on the stock, and the risk-
free interest rate for the expected term. Under the fair value based
method, compensation cost is measured at the grant date based on the fair
value of the award and is recognized over the service
F-9
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997 And 1996
-------------
1. Summary Of Significant Accounting Policies, Continued:
Stock-Based Compensation, Continued:
-----------------------------------
period. Pro forma disclosures for entities that elect to continue to
measure compensation cost under the intrinsic method provided by Accounting
Principles Board ("APB") No. 25 for employee stock options must include the
effects of all awards granted in fiscal years that begin after December 15,
1994. The fair value of options and warrants issued to non-employees is
recorded as expense over the service period. Pursuant to the provisions of
APB No. 25 and its related interpretations, the Company treats all members
of the Board of Directors as functionally equivalent employees and,
accordingly, no compensation is recorded for stock option awards to such
individuals if the exercise price of the stock option equals or exceeds the
market value of the underlying stock on the date of grant.
Loss Per Share - Basic And Diluted:
----------------------------------
In 1997, the Company follows SFAS No. 128, "Earnings Per Share". Basic
earnings per shares is computed by dividing income available to common
stockholders by the weighted-average number of shares outstanding. In
computing diluted earnings per share, the weighted-average number of shares
outstanding is adjusted to reflect the effect of potentially dilutive
securities including options, warrants, preferred stock or contingently
issuable (or escrowed) stock, and income available to common stockholders
is adjusted to reflect any changes in income or loss that would result from
the issuance of the dilutive common shares.
There were no potential common shares included in the calculation of
diluted loss per share for the years ended December 31, 1998, 1997 and
1996, because the effect would have decreased the loss per share amount and
therefore been antidilutive. See Note 9 for a description of those
securities that could potentially dilute earnings per share in the future,
should the Company report income.
Comprehensive Income:
--------------------
During the year ended December 31, 1998, the Company adopted SFAS No. 130
"Reporting Comprehensive Income". The standard establishes guidelines for
the reporting and display of comprehensive income and its components in
financial statements. Comprehensive income generally represents the change
in equity from transactions and other events and circumstances from non-
owner sources. It includes all changes in stockholders' equity, except
those resulting from investments by and distributions to stockholders. The
Company has no items of other comprehensive income for the years ended
December 31, 1998, 1997 and 1996.
2. Basis Of Presentation:
The Company's consolidated financial statements have been presented on the
basis that it will continue as a going-concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company reported net losses of $10,346,069,
$2,823,910 and $2,463,259 for the years ended December 31, 1998, 1997 and
1996, respectively, and has an accumulated deficit of $37,969,408 at
December 31, 1998. These recurring losses and the need for continued
funding, discussed below, raise substantial doubt about the Company's
ability to continue as a going-concern.
F-10
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997 And 1996
-------------
2. Basis Of Presentation, Continued:
The Company remains dependent upon its ability to obtain outside financing
either through the issuance of additional shares of its common or preferred
stock or through borrowings until it achieves sustained profitability
through increased sales, continued efforts of engineering redesign, and
cost containment. The Company's business now focuses on and is expected to
continue to focus on the manufacturing and marketing of its laser-based
HydroKinetic(TM) tissue cutting system, the Millenium(TM); a new reduced-
power variation of the Millenium(TM) which is being configured for
applications in dermatology and general soft-tissue surgery; and its
recently-released consumer tooth-whitening system, the LazerSmile(TM)
toothbrush.
Financing the development of laser-based medical and dental devices and
instruments and the operations of the Company has been achieved principally
through private placements of preferred and common stock and the exercises
of stock options and warrants. During the three years ended December 31,
1998, the Company has raised approximately $8,713,000 of equity funds.
Management believes that the Company will require significant resources in
1999, principally to fund the Company's working capital needs to support
the production and marketing of the Company's laser-based products for
various dental and medical applications, efforts directed towards further
extensions and refinements of existing products, and continuing research
and development activities.
The Company expects to generate the necessary resources for its 1999
business plan through a combination of the contribution from the sales of
its products, the sale of equity securities in a private placement, and
debt financing. No assurances can be given, however, that the Company will
be able to obtain such additional resources. If the Company is
unsuccessful in generating anticipated resources from one or more of the
anticipated sources and is unable to replace any shortfall with resources
from another source, the Company may be able to extend the period for which
available resources would be adequate by deferring the creation or
satisfaction of various commitments, deferring the introduction of various
products or entry into various markets, and otherwise scaling back
operations. If the Company were unable to generate the required resources,
its ability to meet its obligations and to continue its operations would be
adversely affected. The Company's financial statements have been prepared
under the assumption of a going-concern. Failure to arrange such financing
on acceptable terms and to achieve profitability would have an adverse
effect on the financial position, results of operations, cash flows and
prospects of the Company and ultimately its ability to continue as a going-
concern. The consolidated financial statements do not give effect to any
adjustments that might be necessary if the Company were unable to meet its
obligations or continue operations.
F-11
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997 And 1996
-------------
3. Acquisition of Laser Skin Toner, Inc.:
On July 2, 1998, the Company acquired substantially all of the assets of
Laser Skin Toner, Inc., a development stage company ("LSTI"). The assets
acquired relate primarily to the proprietary laser-based technology being
developed by LSTI for non-invasive laser treatment in the field of
aesthetic skin rejuvenation, including all intellectual property rights
consisting of patents, patent applications, a trademark application and
certain know-how. At the time of the acquisition, the intellectual
property embodying this developmental effort represented substantially all
of LSTI's assets, and the developmental efforts did not appear applicable
to any alternative use. As consideration for the assets acquired, the
Company issued to LSTI an aggregate 1,600,000 shares of the Company's
common stock (the "Shares"), including 182,880 shares of common stock
retained by the Company pending the achievement by the business of
specified performance objectives. Pursuant to a separate agreement, the
Company also issued 50,000 shares of its common stock to O'Donnell Eye
Centers, Incorporated, a Missouri corporation ("OECI"), in consideration
for the license of technology that is the subject of a pending patent
application and a continuation of the basic technology acquired from
LSTI. The purchase price of $5,134,920 was based upon the fair market
value of the common stock, based upon the quoted market price as of the
date of the acquisition, issued to LSTI, less the 182,880 performance
shares, and the shares issued to OECI.
A valuation of LSTI's in-process research and development effort as of the
date of acquisition assigned a value of $5,134,920, the full amount of the
consideration paid by the Company in its acquisition of LSTI's assets, to
the in-process research and development. The Company's management had the
primary responsibility for estimating the value of the in-process research
and development. Additionally, the value of the shares issued to OECI in
consideration of the license agreement was included as part of the
valuation of the in-process research and development due to a lack of any
use for said licensed technology separate and apart from the technology
acquired from LSTI. This allocation represented the estimated fair value
based on future cash flows. The value ascribed to in-process research and
development at the time of the acquisition reflected the asset's estimated
completion percentage of approximately 50%. In accordance with Financial
Accounting Standards Boards ("FASB") Interpretation No. 4, "Application of
FASB No. 2 to Business Combinations Accounted for by the Purchase Method",
the $5,134,920 assigned to the in-process research and development effort,
was charged to expense on the date of the acquisition as the development of
this project had not yet reached technological feasibility and the research
and development had no alternative future uses.
The Income Approach was the primary technique utilized in valuing the
purchased research and development. This approach included, but was not
limited to, an analysis of (i) the costs associated with completing the
development of the LSTI technology; (ii) the markets for products based on
LSTI's technology; (iii) the anticipated cash flows attributable to the
development of the LSTI technology and the products to be based on that
technology; and (iv) the risks associated with realizing such cash flows.
The assumptions underlying the cash flow projections were derived primarily
from the business records and plans of the Company and LSTI, investment
banking reports, independent analyst reports, and discussions with the
management of LSTI. Basic financial assumptions, such as revenue growth and
profitability, were compared to published results of public companies for
similar activities, as well as industry analyst reports, to test the
reasonableness of the assumptions.
F-12
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997 And 1996
-------------
3. Acquisition of Laser Skin Toner, Inc., Continued:
The values assigned to this asset as of the date of the acquisition were
determined by identifying significant research elements for which
technological feasibility had not been established. In the case of LSTI,
this included the development, prototyping, and testing activities
associated with the creation of the proprietary laser-based skin
resurfacing system, a new laser system for the field of aesthetic skin
rejuvenation. Valuation of development efforts in the future has been
excluded from the research and development appraisal.
At the date of acquisition, the nature of the efforts to develop the
acquired in-process technology into a technologically and commercially
viable product related to the completion of all planning, designing,
prototyping, and FDA approval activities that were necessary to establish
that the proposed technologies met their design specifications including
functional, technical, and economic performance requirements.
The value assigned to purchased in-process technology was determined by
estimating the contribution of the purchased in-process technology in
developing a viable product, estimating the resulting net cash flows from
the expected sales of such a product, and discounting the net cash flows to
their present value using an appropriate discount rate.
Revenue growth estimates were developed by management and based on an
assessment of the industry. The preponderance of future revenues was
expected to originate from the sale of products yet to be completed. At the
date of acquisition, management believed that sales of the new laser
system, if successfully completed, would have begun as early as the first
quarter of 1999. Revenues were estimated to continue to climb in 2000 and
2001 and, after the peak in 2001, revenues for the in-process project were
expected to decline for the next two years.
Cost of goods sold for the project was expected at the date of acquisition
to be comparable to percentages reported by similar public companies. These
estimates were determined through management's expectations regarding the
needed production costs anticipated to produce the laser system. Selling,
general and administrative expenses and profitability estimates at the date
of acquisition were determined by management forecasts, and these expenses
were projected to be approximately 50% of revenue in 1999 and approximately
40% thereafter. Research and development expenses for the in-process
project at the date of acquisition were expected to total approximately
$2,000,000 as the Company brought the project to technological
feasibility.
The projections utilized in the transaction pricing and purchase price
allocation analysis excluded the potential synergistic benefits related
specifically to the Company's ownership. Due to the relatively early stage
of the development and reliance on future, unproven products and
technologies, the cost of capital (discount rate) for LSTI was estimated
using venture capital rates of return. Due to the nature of the forecast
and the risks associated with the projected growth and profitability of the
development projects, a discount rate of 50% was used to discount cash
flows from the in-process product. This discount rate was commensurate with
LSTI's market position, the uncertainties in the economic estimates
described above, the inherent uncertainty surrounding the successful
development of the purchased in-process technology, the useful life of such
technology, the profitability levels of such technology, and the
uncertainty related to technological advances that could render even LSTI's
development stage technologies obsolete.
The Company believed that the foregoing assumptions used in the forecasts
were reasonable at the time of the acquisition but were inherently
uncertain. No assurance can be given, however, that the underlying
assumptions used to estimate sales, development costs or profitability, or
the events associated with such projections, will transpire as estimated.
For these reasons, actual results may vary significantly from those
utilized in the forecasts.
Subsequent to the acquisition of the LSTI assets, the Company decided to
defer development of the LSTI technology in order to devote maximum
resources to the marketing of its Millennium(TM) laser-based system. The
Company is uncertain as to when development of the LSTI technology may
resume.
The following table presents unaudited consolidated pro forma financial
information for the twelve months ended December 31, 1998 and 1997, as
though the acquisition made in 1998 occurred January 1, 1997:
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Net sales $ 1,465,191 $ 1,786,285
Net loss (10,438,124) (3,129,002)
Loss per share - basic and diluted ($0.69) ($0.23)
</TABLE>
F-13
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997 And 1996
-------------
3. Acquisition of Laser Skin Toner, Inc., Continued:
The unaudited pro forma consolidated financial information is presented for
information purposes only and is not necessarily indicative of the
operating results that would have occurred had the acquisition taken place
on January 1, 1997. In addition, the pro forma results are not intended to
be a projection of the future results and do not reflect any synergies that
might be achieved from the combined operations.
4. Inventories:
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials $1,372,172 $ 804,631
Work-in-process 183,889 36,609
Finished goods 374,056 167,537
---------- ----------
$1,930,117 $1,008,777
========== ==========
</TABLE>
5. Property And Equipment:
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ---
<S> <C> <C>
Leasehold improvements $ 170,927 $ 149,282
Equipment and computers 1,001,263 754,152
Furniture and fixtures 199,588 168,419
Demonstration units 247,354 247,354
----------- -----------
1,619,132 1,319,207
Less, Accumulated depreciation and
amortization (1,211,990) (1,137,403)
--------- ---------
$ 407,142 $ 181,804
=========== ===========
</TABLE>
F-14
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997 And 1996
-------------
6. Line Of Credit:
At December 31, 1998, the Company had $1,705,025 outstanding under a
revolving credit agreement with a bank. The revolving credit agreement
provides for borrowings of up to $2,500,000 for financing inventories and
is collateralized by substantially all of the Company's accounts receivable
and inventories. The interest rate is fixed throughout the term of the
credit agreement and is computed based upon LIBOR plus 0.5% at the time of
any borrowings. At December 31, 1998, the weighted average interest rate
on the outstanding balance was 5.97%. The revolving credit agreement
expires on June 1, 1999, subject to the Company's right to extend it for an
additional six months.
7. Accrued Expenses:
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accrued professional fees $ 89,124 $ 82,876
Accrued legal and settlement costs 144,166 91,880
Accrued warranty 40,315 83,000
Other 427,411 222,684
-------- --------
$701,016 $480,440
======== ========
</TABLE>
8. Commitments and Contingencies:
Litigation:
-----------
On August 8, 1997, the Company initiated an action in the United States
District Court entitled, BioLase Technology, Inc. v. Rudolf Schneider, in
--------------------------------------------
which the Company is seeking to recover from Rudolf Schneider
("Schneider"), a former distributor, (i) lost profits attributable to the
former distributor's failure to perform its obligations, particularly its
commitment to purchase minimum quantities of products, pursuant to the
distribution agreement between the Company and this distributor, and (ii)
$96,000 claimed to be owed to the Company by this former distributor for
goods sold and delivered and services performed by the Company. On March 6,
1998, Schneider answered the complaint denying liability and filed
counterclaims against the Company. Schneider's counterclaims seek
unspecified actual and punitive damages for alleged fraud, breach of
contract and breach of warranty associated with the transactions on which
the complaint is based.
F-15
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997, And 1996
-----------------
8. Commitments and Contingencies, Continued:
Litigation, continued:
----------------------
The Company does not believe this lawsuit or any other lawsuits to which it
is a party will have a material adverse effect on the Company's results of
operations, financial condition or liquidity.
Lease Commitments:
------------------
The Company leases plant and office facilities under long-term operating
leases. The following is a schedule of future minimum rental payments
required under operating leases that have initial or remaining
noncancellable lease terms in excess of one year as of December 31, 1998:
<TABLE>
<S> <C>
1999 $140,780
2000 93,853
--------
$234,633
========
</TABLE>
Rent expense was $156,178, $141,385 and $136,938 for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-16
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997, And 1996
-----------------
9. Stockholders' Equity:
Equity Financing:
----------------
The Company has raised equity capital through several private offerings in
the three years ended December 31, 1998, as follows:
<TABLE>
<CAPTION>
Number
Of Shares
Of Common Net Cash
Years Ended December 31, Stock Consideration
----------------------- ----------------------------------------
<S> <C> <C>
1998 1,320,000 $3,592,800
1997 217,109* $ 719,885
1996 1,800,018** $4,400,000
</TABLE>
*Includes 17,109 shares issued upon conversion of one share of Preferred
Stock - see below.
**Excludes one share of Preferred Stock - see below.
Preferred Stock:
---------------
On October 16, 1996, the Company completed a private placement (the
"Placement") in which the Company issued and sold 100 units, each
consisting of one share of its Series A 6% Redeemable Cumulative
Convertible Preferred Stock (the "Preferred Stock") which, at the option of
the holder, was convertible into a variable number of shares of common
stock that could not exceed 18,182 shares, and 5,000 Redeemable Common
Stock Purchase Warrants (the 1996 Warrants"). Gross proceeds in the
Placement were $5,000,000 and net proceeds, after commissions of $400,000
and estimated expenses, were approximately $4,400,000. Each 1996 Warrant
entitles the holder to purchase a share of common stock at $3.50, subject
to satisfaction of certain conditions. The 1996 Warrants were initially
scheduled to expire in 1998, however, during 1998 the exercise period was
extended through April 30, 1999. An additional 190,910 warrants were also
issued in connection with the Placement, which are exercisable at $3.50 per
share, and expire on April 30, 1999.
F-17
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997, And 1996
-----------------
9. Stockholders' Equity, Continued:
In November 1996, 99 of the 100 shares of Preferred Stock were converted to
common stock at a rate of 18,182 common shares for each preferred share,
resulting in an aggre- gate conversion to 1,800,018 shares of common stock.
In November 1997, the remaining share of Preferred Stock was converted into
17,109 shares of common stock. The shares of common stock issued upon the
conversions were "restricted securities" as defined in Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Act"). Accord- ingly,
such shares may be resold only pursuant to a registration statement under
the Act or in accordance with an exemption from such registration
requirement. The Company filed a registration statement covering the resale
of such shares of common stock, which was declared effective during August,
1997.
On December 18, 1998, the Board of Directors adopted a stockholder rights
plan under which one preferred stock purchase right was distributed on
January 11, 1999 with respect to each share of Registrant's common stock
outstanding at the close of business on December 31, 1998. The rights
provide among other things that, in the event any person becomes the
beneficial owner of 15% or more of the Company's common stock while the
rights are outstanding, each right will be exercisable to purchase shares
of the common stock of the Company having a market value equal to two times
the then current exercise price of a right (initially $30.00). The rights
will also provide that, if on or after the occurrence of such event the
Company is merged into any other corporation or 50% or more of the
Company's assets or earning power is sold, each right will be exercisable
to purchase common shares of the acquiring corporation having a market
value equal to two times the then current exercise price. The rights will
expire on December 31, 2008, unless previously triggered, and are subject
to redemption by the Company at $.001 per right at any time prior to the
first date upon which they become exercisable to purchase common shares.
Common Stock:
------------
On May 19, 1998, the Company completed a private placement in which it
issued and sold 132 units to accredited investors. Each unit consisted of
10,000 shares of the Company's common stock and 5,000 Redeemable Stock
Purchase Warrants ("the 1998 Warrants"). Gross proceeds from the private
placement were $3,960,000 before direct expenses of $367,200. The shares of
common stock issued in connection with the private placement were
"restricted securities" as defined in Rule 144 promulgated under the Act.
Accordingly, such shares may be resold only pursuant to a registration
statement under the Act or in
F-18
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997, And 1996
-----------------
9. Stockholders' Equity, Continued:
accordance with an exemption from such registration requirement. A
registration statement has been filed by the Company covering the resale of
such shares of common stock but has not been declared effective. Each 1998
Warrant entitles the holder to purchase a share of common stock at $3.75
and expires on April 30, 2000. An additional 64,000 warrants were issued in
connection with the placement, which are exercisable at $3.75 per share.
On February 28, 1997, the Company completed a private placement in which it
issued and sold 200,000 shares of its common stock to an accredited
investor. Gross proceeds from the private placement were $725,000 before
direct expenses of $5,115.
The Company has occasionally issued shares of its common stock to
individuals for services rendered. The estimated fair value of the common
stock is charged to earnings as compensation for these services. The
Company issued 23,300 shares for services valued at $64,185 in 1998. The
Company issued 58,100 shares for services valued at $198,571 in 1997, of
which 43,850 of the shares valued at $147,805 were for services rendered
during 1997 and 14,250 of the shares valued at $50,766 were for services
rendered in 1998. No shares were issued for services in 1996.
Common Stock Options And Warrants:
---------------------------------
The Company has adopted the 1990 Stock Option Plan (the "1990 Plan"), the
1992 Stock Option Plan (the "1992 Plan"), the 1993 Stock Option Plan (the
"1993 Plan") and the 1998 Stock Option Plan (the "1998 Plan" and
collectively with the 1990 Plan, 1992 Plan and 1993 Plan, the "Plans"). The
1998 Plan is subject to stockholder approval. Each of the Plans enables the
Company to offer equity participation to employees, officers, directors and
consultants of the Company through stock options and, with respect to the
1990 and 1992 Plans, stock appreciation rights.
A total of 375,000 shares of common stock were authorized for issuance
under the 1990 Plan, of which, at December 31, 1998, 175,500 had been
issued upon option exercise, 185,750 were reserved for issuance upon
exercise of outstanding options and 13,750 were available for the granting
of additional options. A total of 150,000 shares of common stock were
authorized for issuance under the 1992 Plan, of which, at December 31,
1998, 66,266 had been issued upon option exercise, 73,625 were reserved for
issuance upon exercise of outstanding options and 10,109 were available for
the granting of additional options. A total of 1,500,000 shares of common
stock were authorized for issuance under the 1993 Plan, of which, at
December 31, 1998, 86,600 had been issued upon option exercise, 1,309,585
were reserved for issuance upon exercise of outstanding options, and
103,815
F-19
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997, And 1996
-----------------
9. Stockholders' Equity, Continued:
were available for the granting of additional options. A total of 1,000,000
shares of common stock were authorized for issuance under the 1998 Plan, of
which, at December 31, 1998, 507,000 were reserved for issuance upon
exercise of outstanding options, and 493,000 were available for granting of
additional options. Any shares which are reserved for issuance under an
outstanding option which expires or terminates unexer- cised, or any shares
which are used by participants to pay all or part of the purchase price of
any option exercised, may again be reserved for issuance upon exercise of
newly granted options under the respective Plans. However, shares with
respect to which stock appreciation rights have been exercised may not
again be made subject to an award.
At the discretion of the Board of Directors or a committee comprised of
non-employee directors or other non- employees appointed by the Board of
Directors (the "Committee"), employees, officers, directors and consultants
of the Company and its subsidiary may become participants in the Plans upon
receiving grants in the form of stock options or, in the case of the 1990
and 1992 Plans, stock appreciation rights.
Stock options may be granted as nonqualified stock options or incentive
stock options, but incentive stock options may not be granted at a price
less than 100% of the fair market value of the stock as of the date of
grant (110% as to any 10% or greater stockholder at the time of grant);
nonqualified stock options may not be granted at a price less than 85% of
the fair market value of the stock as of the date of grant. Stock options
may be exercised no more than ten years after the date of grant and no more
than three years after death or disability, whichever occurs earlier. In
the case of options granted under the 1993 Plan, payment of the purchase
price for shares of stock acquired through the exercise of stock options
must be paid in cash. At the discretion of the Committee, the purchase
price for shares of stock acquired through the exercise of stock options
under the 1998, 1992 and 1990 Plans may be paid by cash, shares of common
stock valued at their fair market value at the date of exercise or by
delivery of recourse promissory notes or a combination thereof. Under the
1998 Plan, 152,174 incentive stock options have been awarded; to date, no
other incentive stock options have been awarded under any other plans. The
following table summarizes the activity under the Plans:
F-20
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997, And 1996
-----------------
9. Stockholders' Equity, Continued:
Common Stock Options And Warrants, Continued:
--------------------------------------------
<TABLE>
<CAPTION>
Option Price Per
Shares Share
------ ----------------
<S> <C> <C>
Options outstanding, December 31, 1995 1,139,450 $0.75 - $10.50
Granted 318,335 2.53 - 4.13
Exercised (88,766) 1.50
Surrendered (67,109) 1.50 - 2.80
--------- ---------------
Options outstanding, December 31, 1996 1,301,910 0.75 - 10.50
Granted 234,500 3.00 - 3.94
Exercised (99,000) 0.75 - 3.00
Surrendered (95,000) 4.13 - 7.20
--------- ---------------
Options outstanding, December 31, 1997 1,342,410 0.75 - 10.50
Granted 834,500 2.13 - 3.94
Exercised (38,950) 1.50
Surrendered (62,000) 3.75 - 10.50
--------- ----------------
Options outstanding, December 31, 1998 2,075,960 $0.75 - $4.13
========= ================
Options exercisable, December 31, 1996 1,301,910 $0.75 - $10.50
========= ================
Options exercisable, December 31, 1997 1,127,514 $0.75 - $10.50
========= ================
Options exercisable, December 31, 1998 1,284,751 $0.75 - $4.13
========= ================
</TABLE>
Stock options granted under the 1990 Plan may include the right to acquire an
Accelerated Ownership Nonqualified Stock Option ("AO"). If an option grant
contains the AO feature and if the participant pays all or part of the purchase
price of the option with shares of the Company's common stock held by the
participant for at least six months, then upon exercise of the option, the
participant is granted an AO to purchase at the fair market value as of the date
of the AO grant the number of shares of common stock of the Company equal to the
sum of the number of whole shares used by the participant in payment of the
purchase price and the number of whole shares,
F-21
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997, And 1996
-----------------
9. Stockholders' Equity, Continued:
Common Stock Options And Warrants, Continued:
--------------------------------------------
if any, withheld by the Company as payment for withholding taxes. An AO
may be exercised between the date of grant and the date of expiration,
which will be the same as the date of expiration of the option to which the
AO is related. At December 31, 1998, there were no options outstanding
under the 1990 Plan that included the AO feature.
In addition to the Plans discussed above, the Company has several
agreements with vendors and other persons under which options, not under
any of the Plans, to purchase shares of the Company's common stock have
been granted. The shares issuable upon exercise of such options have not
been registered under the Act, except for 20,000 shares which were
registered in conjunction with a registration statement declared effective
in August 1997.
The following table summarizes option transactions outside the Plans:
<TABLE>
<CAPTION>
Option Price Per
Shares Share
-------------- -----------------
<S> <C> <C>
Options outstanding, December 31, 1995 122,500 $2.00 - $12.00
Granted - -
Surrendered - -
Options outstanding, December 31, 1996 122,500 2.00 - 12.00
Granted 150,000 5.00
Surrendered - -
------- ----------------
Options outstanding, December 31, 1997 272,500 $2.00 - $12.00
Granted - -
Surrendered - -
------- ----------------
Options outstanding, December 31, 1998 272,500 $2.00 - $12.00
======= ================
Options exercisable, December 31, 1998 272,500 $2.00 - $12.00
======= ================
</TABLE>
F-22
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997, And 1996
-----------------
9. Stockholders' Equity, Continued:
Common Stock Options And Warrants, Continued:
--------------------------------------------
A majority of the Company's options outstanding and exercisable at December
31, 1998 are exercisable at prices between $0.75 and $3.94. Options
outstanding and exercisable at December 31, 1998, had a weighted average
exercise price of $3,00 and a weighted average remaining term of 6.9 years.
In December 1997, the Company issued 75,000 warrants in connection with
obtaining a $2,500,000 credit facility for financing inventories. Each
warrant entitles the holder to purchase one share of common stock and
vested fully at date of issuance. Of such warrants, 50,000 were issued at
an exercise price of $5.00 and 25,000 were issued at a per share exercise
price of $4.00, all expiring December 1, 2000. In December 1998, the
Company issued an additional 25,000 warrants in connection with the
Company's exercise of an option to extend the term of the credit facility.
Each warrant entitles the holder to purchase one share of common stock and
vested fully at the date of issuance. The warrants were issued at a per
share exercise price of $5.00 and expire on December 1, 2001.
As of December 31, 1998, the Company has 660,000 (1998 Warrants) and
496,666 (1996 Warrants) redeemable warrants outstanding. At the sole
option of the Company, it may call for redemption all of the then
outstanding 1998 or 1996 Warrants provided the closing price of the
Company's common stock has equaled or exceeded $6.00 per share for the 10
and 20 days, respectively, preceding the call for redemption. The notice
of redemption shall specify a redemption date no less than 30 days after
the date of such notice on which all of the then remaining unexercised 1996
and 1998 Warrants shall be redeemed by the Company at a cash price of $.01
per warrant.
The fair value of options and warrants issued to non-employees during the
years ended December 31, 1998, 1997 and 1996 was not material.
F-23
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997, And 1996
-----------------
9. Stockholders' Equity, Continued:
Pro Forma Effect Of Stock-Based Compensation:
--------------------------------------------
The Company has adopted the disclosure only provisions of SFAS No. 123 for
options issued to employees. Accordingly, no compensation cost has been
recognized for options granted under the Plans. Had compensation cost for
the Company's Plans been determined based on the fair value at the grant
date for awards in 1998, 1997 and 1996 consistent with the provisions of
SFAS No. 123, the Company's net loss and loss per share would have been the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss ($10,645,045) ($3,053,766) ($2,730,811)
Loss per share -- basic and diluted (0.71) (0.23) (0.24)
</TABLE>
The pro forma amounts were estimated using the Black-Scholes option-pricing
model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted-average life (years) 1.90 1.60 1.60
Volatility 75% 79% 53%
Annual dividend per share $0.00 $0.00 $0.00
Risk-free interest rate 4.93% 5.77% 5.77%
Weighted-average fair value of options $1.03 $1.30 $0.46
granted
</TABLE>
F-24
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997, And 1996
-----------------
10. Income Taxes:
The following table presents the current and deferred provision for federal
and state income taxes for the years ended December 31, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State 1,600 1,600 1,600
----- ------ -----
1,600 1,600 1,600
Deferred:
Federal - - -
State - - -
------ ------ ------
$1,600 $1,600 $1,600
====== ====== =====
</TABLE>
The foregoing tax provisions are included in general and administrative
expense in the accompanying consolidated statements of operations.
The effects of temporary differences which give rise to the deferred tax
provision at December 31, 1998, 1997 and 1996 consist of:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
Property and equipment ($41,135) $ (25,726) $ 20,796
Research and development 47,883 222,978 -
Reserves not currently deductible (175,348) 129,170 (89,418)
Inventories 15,155 7,542 (7,925)
State taxes - - (226)
Net operating losses 2,172,161 990,372 1,462,117
------------- ------------ -----------
2,018,716 1,324,336 1,385,344
Change in valuation allowance (2,018,716) (1,324,336) (1,385,344)
------------- ------------ -----------
Total $ - $ - $ -
============= ============ ===========
</TABLE>
F-25
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997, And 1996
-----------------
10. Income Taxes, Continued:
The provision for income taxes differs from the amount that would result
from applying the federal statutory rate at December 31, 1998, 1997 and
1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory regular federal income tax rate (34.0%) (34.0%) (34.0%)
In-process research and development 16.9 - -
Stock options (0.2) (3.1) (2.3)
Change in valuation allowance 18.5 43.0 36.10
Other (1.2) (5.9) 0.2
----- ----- -----
Total 0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
The components of the deferred income tax assets as of December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Property and equipment $ 274,900 $ 316,035
Research and development 270,861 222,978
Reserves not currently deductible 234,794 410,142
Inventories 56,290 41,135
Capital loss carryforward 277,498 277,498
State taxes 544 544
Net operating losses 11,816,477 9,644,316
------------ ------------
12,931,364 10,912,648
Valuation allowance (12,931,364) (10,912,648)
------------ ------------
Total $ - $ -
============ ============
</TABLE>
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management periodically evaluates the recoverability of the deferred tax
assets. At such time as it is determined that deferred tax assets are
realizable, the valuation allowance will be reduced.
F-26
<PAGE>
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 1998, 1997, And 1996
-----------------
10. Income Taxes, Continued:
At December 31, 1998, the Company had a capital loss carryforward of
$640,873, which will expire in 2000.
As of December 31, 1998, the Company had net operating loss carryforwards
for federal and state purposes of approximately $30,323,000 and
$16,199,000, respectively. The federal net operating loss carryforward
begins expiring in 2002. The state net operating loss carryforwards begin
expiring in 1999. The utilization of net operating loss carryforwards may
be limited under the provisions of Internal Revenue Code Section 382 and
similar state provisions.
11. Business Segment And Sales Concentrations:
In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information", which requires reporting certain
financial information according to the "management approach." This approach
requires reporting information regarding operating segments on the basis
used internally by management to evaluate segment performance. SFAS 131
also requires disclosures about products and services, geographic areas and
major customers. The Statement was effective December 31, 1998 and has been
adopted for all periods presented.
The Company operates in one primary segment, Laser division, and one
ancillary segment, Endodontic division. The Laser division includes all of
the Company's core technologies, research and development expenditures and
substantially all operating activity. Revenues generated by the Laser
division are principally sales of the Millennium(TM) laser based system.
The Company maintains the Endodontic division primarily as an ancillary
business to service recurring customers. The accounting policies of each of
the divisions are the same as describe in Note 1.
The table below presents information about the two divisions for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Revenues Operating income (loss)
------------------------------------------- ------------------------------------------------
1998 1997 1996 1998 1997 1996
------------- ------------- ------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Laser Division $ 1,202,425 $ 1,398,127 $ 290,432 $ (10,357,188) $ (2,971,943) $ (2,647,033)
Endodontic Division 262,766 388,158 401,397 35,162 (27,110) 158,041
------------- ------------- ------------- --------------- -------------- --------------
Consolidated revenues
and operating loss $ 1,465,191 $ 1,786,285 $ 691,829 (10,322,026) (2,999,053) (2,488,992)
============= ============= =============
Interest income 57,591 184,245 30,142
Interest expense (81,634) (9,102) (4,409)
--------------- -------------- --------------
Net loss $ (10,346,069) $ (2,823,910) $ (2,463,259)
=============== ============== ==============
Assets
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
Laser Division $ 3,762,190 $ 3,294,833 $ 4,492,846
Endodontic Division 149,182 101,159 196,498
------------- ------------- -------------
Consolidated assets $ 3,911,372 $ 3,395,992 $ 4,689,344
============= ============= =============
</TABLE>
During the years ended December 31, 1998, 1997 and 1996 depreciation and
amortization was $94,156, $105,649 and $149,746 and capital expenditures
were $299,925, $90,523 and $54,808, respectively, which relate solely to
the Laser division.
In 1998, 1997 and 1996, major customers consisted primarily of domestic and
international distributors. The Company has distributorship agreements for
dental lasers in Canada, Europe, the Middle East and the Far East. In 1998,
1997 and 1996, export sales were $598,000, $1,307,000 and $328,000,
respectively, of which 66%, 93% and 80%, respectively, were sales to
Europe. Also in 1998, 27% of export sales were to Canada. Sales to two
customers were approximately $160,000 and $296,000, respectively, for the
year ended December 31, 1998. Sales to one customer were approximately
$1,188,000 and $142,000 for the years ended December 31, 1997 and 1996,
respectively. No other customer accounted for more than 10% of consolidated
sales in 1998, 1997 or 1996.
Financial instruments which subject the Company to concentrations of credit
risk consist principally of accounts receivable. Accounts receivable
concentrations have resulted from sales activity to individual customers.
Accounts receivable for two customer totaled approximately $332,000 at
December 31, 1998. Accounts receivable for one customer totaled
approximately $884,000 at December 31, 1997. No other customer accounted
for more than 10% of accounts receivable at December 31, 1998 or 1997.
F-27
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No.'s 33-51234, 33-73300 and 333-09093) and Form S-3
(No. 333-31023) of BioLase Technology, Inc. of our report dated March 16, 1999
relating to the consolidated financial statements and consolidated financial
statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Costa Mesa, California
August 8, 1999
