<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarterly Period Ended:September 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Transition Period from to .
----------- ---------------
Commission File Number: 1-11064
BRITESMILE, INC.
(Exact name of business issuer as specified in its charter)
UTAH 87-0410364
-------------------------------- ---------------------------------
(State or other jurisdiction (IRS employer identification no.)
of incorporationor organization)
490 North Wiget Lane
Walnut Creek, California 94598
-------------------------------- ---------------------------------
(Address of principal (Zip Code)
executive offices)
(925) 941-6260
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
X yes no
The Company had 24,054,276 shares of common stock outstanding at October 24,
2000.
<PAGE>
BRITESMILE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000
and April 1, 2000..............................................................3
Condensed Consolidated Statements of Operations for the 13 weeks ended
September 30, 2000 and September 30, 1999, respectively........................5
Condensed Consolidated Statements of Operations for the 26 weeks ended
September 30, 2000 and September 30, 1999, respectively........................6
Condensed Consolidated Statements of Cash Flows for the 26 weeks ended
September 30, 2000 and September 30, 1999, respectively........................7
Notes to Condensed Consolidated Financial Statements...........................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................21
Item 2. Changes in Securities...............................................21
Item 4. Submission of Matters to a Vote of Security Holders.................22
Item 5. Other Information...................................................23
Item 6. Exhibits and Reports on Form 8-K....................................23
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRITESMILE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, 2000 April 1, 2000
---------------------- ------------------------
(Unaudited) (Note 2)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 4,948,684 $ 10,969,400
Cash, restricted as to use 843,000 843,000
Trade accounts receivable, net of allowance for doubtful
accounts of $110,402 and $110,828, respectively 2,005,157 1,180,506
Current portion, note receivable 307,263
Inventories 3,453,545 1,191,144
Prepaid expenses and other 707,655 833,778
---------------------- ------------------------
Total current assets 12,265,304 15,017,828
---------------------- ------------------------
PROPERTY, EQUIPMENT AND IMPROVEMENTS, at cost:
Furniture, fixtures and equipment 13,136,801 7,153,319
Leasehold improvements 11,248,925 7,604,464
---------------------- ------------------------
24,385,726 14,757,783
Less accumulated depreciation and amortization (3,952,993) (1,699,949)
---------------------- ------------------------
20,432,733 13,057,834
Construction in progress 769,094 2,844,644
---------------------- ------------------------
Net property, equipment and improvements, at cost 21,201,827 15,902,478
---------------------- ------------------------
NOTE RECEIVABLE 502,794 -
---------------------- ------------------------
OTHER ASSETS 1,387,200 1,468,800
---------------------- ------------------------
$ 35,357,124 $ 32,389,106
====================== ========================
</TABLE>
The accompanying notes to consolidated
financial statements are an integral part
of these consolidated balance sheets.
3
<PAGE>
BRITESMILE, INC.
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, 2000 April 1, 2000
---------------------- ------------------------
(Unaudited) (Note 2)
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 2,536,100 $ 1,864,358
Accrued expenses 1,854,882 2,161,749
Gift certificate liability 234,464 122,814
---------------------- ------------------------
Total current liabilities 4,625,446 4,148,921
Long-term debt, net 17,216,158 -
Other long-term liabilities 465,405 121,024
---------------------- ------------------------
Total long-term liabilities 17,681,563 121,024
Total liabilities 22,307,009 4,269,945
---------------------- ------------------------
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized; and
23,938,680 and 23,905,635 shares issued and outstanding,
respectively 23,939 23,905
Additional paid-in capital 76,609,564 73,389,439
Accumulated deficit (63,583,388) (45,294,183)
---------------------- ------------------------
Total shareholders' equity 13,050,115 28,119,161
---------------------- ------------------------
$ 35,357,124 $ 32,389,106
====================== ========================
</TABLE>
The accompanying notes to consolidated
financial statements are an integral part
of these consolidated balance sheets.
4
<PAGE>
BRITESMILE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended
September 30, 2000 September 30, 1999
--------------------------- --------------------
REVENUES:
<S> <C> <C>
Center whitening fees, net $ 3,252,876 $ 1,213,629
Associated Center whitening fees, net 1,515,169 230,205
Product sales 410,774 27,085
--------------------------- --------------------
Total revenues, net 5,178,819 1,470,919
--------------------------- --------------------
OPERATING COSTS AND EXPENSES:
Center selling and occupancy costs 7,656,236 3,521,013
Selling, general and administrative expenses 5,467,717 3,761,717
Research and development expenses 557,312 654,964
Depreciation and amortization 1,242,728 247,452
Termination benefits, impairment charges and write down of assets - 300,000
--------------------------- --------------------
Total operating costs and expenses 14,923,993 8,485,146
--------------------------- --------------------
Loss from operations (9,745,174) (7,014,227)
--------------------------- --------------------
OTHER INCOME (EXPENSE), net:
Interest expense (387,923) (112,123)
Interest income 79,840 231,284
--------------------------- --------------------
Total other income (expense), net (273,370) 119,161
--------------------------- --------------------
Loss before income tax provision (10,053,257) (6,895,066)
INCOME TAX PROVISION - -
--------------------------- --------------------
Net loss $ (10,053,257) $ (6,895,066)
=========================== ====================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.42) $ (0.37)
=========================== ====================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 23,931,977 18,627,000
=========================== ====================
</TABLE>
The accompanying notes to consolidated
financial statements are an integral
part of these consolidated statements.
5
<PAGE>
BRITESMILE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
September 30, 2000 September 30, 1999
--------------------- ---------------------
REVENUES:
<S> <C> <C>
Center whitening fees, net $ 5,463,390 $ 1,945,130
Associated Center whitening fees, net 3,400,536 372,730
Product sales 640,312 27,085
--------------------- ---------------------
Total revenues, net 9,504,238 2,344,945
--------------------- ---------------------
OPERATING COSTS AND EXPENSES:
Center selling and occupancy costs 12,164,953 4,845,229
Selling, general and administrative expenses 12,168,239 6,464,580
Research and development expenses 943,298 945,552
Depreciation and amortization 2,253,044 402,057
Termination benefits, impairment charges and write down of assets - 300,000
--------------------- ---------------------
Total operating costs and expenses 27,529,534 12,957,418
--------------------- ---------------------
Loss from operations (18,025,296) (10,612,473)
--------------------- ---------------------
OTHER INCOME (EXPENSE), net:
Interest expense (391,635) (165,039)
Interest income 151,088 355,477
--------------------- ---------------------
Total other income (expense), net (240,547) 190,438
--------------------- ---------------------
Loss before income tax provision (18,265,842) (10,422,035)
INCOME TAX PROVISION 23,362 -
--------------------- ---------------------
Net loss $ (18,289,204) $ (10,422,035)
===================== =====================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.76) $ (0.58)
===================== =====================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 23,926,334 18,032,000
===================== =====================
</TABLE>
The accompanying notes to consolidated
financial statements are an integral
part of these consolidated statements.
6
<PAGE>
BRITESMILE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
September 30, 2000 September 30, 1999
---------------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (18,289,204) $ (10,422,035)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,253,044 402,057
Termination benefits, impairment charges and write-down of assets - 300,000
Cost recognized for issuance of long-term debt 128,779 -
Cost recognized for issuance of stock and stock options 328,177 1,063,465
Changes in assets and liabilities:
Trade accounts receivable (824,651) (42,148)
Note receivable (810,057) -
Inventories (2,262,401) (46,068)
Prepaid expenses and other 126,123 (222,037)
Accounts payable 671,743 (256,324)
Accrued expenses & other current liabilities (195,217) 1,687,255
Other long term liabilities 344,381 157,250
---------------------------- --------------------
Net cash used in operating activities (18,529,283) (7,378,585)
---------------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from assets held for sale, net - 1,250,000
Purchase of property and equipment (7,552,393) (5,561,056)
---------------------------- --------------------
Net cash used in investing activities (7,552,393) (4,311,056)
---------------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principle payments on borrowing - (806,000)
Proceeds from convertible debenture offering (Note 4) 20,000,000 -
Proceeds from common stock offering - 15,356,000
Proceeds from exercise of stock options 60,960 -
---------------------------- --------------------
Net cash provided by financing activities 20,060,960 14,550,000
---------------------------- --------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,020,716) 2,860,359
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 10,969,400 6,199,701
---------------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 4,948,684 $ 9,060,060
============================ ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,712 $ 19,167
============================ ====================
Cash paid for income taxes $ 23,362 $ -
Warrants issued with long-term debt, the fair market value of which was
capitalized as a discount to long-term debt $ 2,912,621 $ -
============================ ====================
</TABLE>
Theaccompanying notes to consolidated
financial statements are an integral
part of these consolidated statements.
7
<PAGE>
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2000
(1) DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
BriteSmile, Inc., a Utah corporation (the "Company" or "BriteSmile") and its
affiliates develop, produce, license and sell advanced teeth whitening products,
services and technologies. The Company's operations include the development of
technologically advanced teeth whitening processes that are distributed in
professional salon settings known as BriteSmile Professional Teeth Whitening
Centers ("Centers"). The Company also offers its products and technologies
through licensing arrangements with existing dental offices known as BriteSmile
Professional Teeth Whitening Associated Centers ("Associated Centers").
BriteSmile offers consumers a new, simple and safe way to return their teeth to
their optimal natural whiteness in a one and one-half hour visit to a Center or
Associated Center.
Centers are located in major metropolitan areas nationwide and offer clients a
salon-like environment dedicated solely to the business of teeth whitening.
Centers are staffed by licensed dentists and trained dental assistants.
Alternatively, consumers can visit an Associated Center, where a local dentist
administers the BriteSmile procedure in the dentist's established office.
The Company developed its current tooth whitening technology (the "BriteSmile
2000 Light Activated Teeth Whitening System," "BS2000" or "LATW") and began
distribution in 1999. In November 1999 the Company introduced its new BriteSmile
3000 LATW keycard system (the "BS3000") to Associated Centers. The BS3000, a
mobile version of the BS2000, can be installed quickly and provides the
flexibility and mobility required in dental offices.
The BS2000 and BS3000 teeth whitening devices utilize a gas plasma light
technology. The unique fiberoptic delivery arm of the BS2000 and BS3000 permits
blue green light to reach all 16 front teeth simultaneously, whitening the teeth
by activating BriteSmile's wavelength specific gel during three consecutive
twenty-minute sessions.
In February 1999, the LATW was introduced in the Company's first Center in
Walnut Creek, California. In March 1999, the Company opened its first Associated
Center in Louisville, Kentucky. As of September 30, 2000, the Company had 17
Centers and 884 Associated Centers in operation.
The Company is not engaged in the practice of dentistry. Each licensed dentist
who operates a Center or Associated Center maintains full control over dental
matters, including the supervision of dental auxiliaries and the administration
of the LATW procedure.
The Company does not believe that its business follows seasonal trends. However,
because certain of the Company's Centers are located within a mall environment,
the potential for seasonality exists. As a result, the Company's sales
performance could potentially be affected.
Unless specified to the contrary herein, references to BriteSmile or to the
Company refer to the Company and its subsidiaries on a consolidated basis.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulations S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals)considered necessary for a fair presentation have
been included.
8
<PAGE>
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
Operating results for the 13 and 26 weeks ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the remainder of
the fiscal year ending December 30, 2000. The balance sheet at April 1, 2000 has
been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant Company and Subsidiaries annual
report on form 10-KSB for the year ended April 1, 2000.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist primarily of dental supplies and component parts for the
manufacturing of teeth whitening systems as of September 30, 2000 and April 1,
2000, respectively, and are summarized as follows:
<TABLE>
<CAPTION>
September 30, 2000 April 1, 2000
--------------------------- ----------------------
<S> <C> <C>
Dental Supplies & Merchandise $ 845,906 $ 184,828
Finished Goods 1,450,559 105,181
Work in Progress 1,157,080 901,135
--------------------------- ----------------------
Total Inventory $ 3,453,545 $ 1,191,144
=========================== ======================
</TABLE>
Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to be applied to taxable income in the years in which
those temporary differences are expected to be settled or recovered. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date.
The Company recognized no tax benefit for the net operating losses incurred
during the 26 weeks ended September 30, 2000 due to uncertainties about the
Company's ability to generate future earnings to offset such losses.
Basic and Diluted Net Loss Per Common Share
Basic net loss per common share is calculated based upon the weighted average
number of common shares outstanding during the periods presented.
In calculating net loss per share for the 26 weeks ended September 30, 2000,
warrants and options to purchase 7,688,806 potential common shares were not
included in the computation as their effect would have been anti-dilutive,
thereby decreasing the net loss per common share.
9
<PAGE>
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
Reclassifications
Certain reclassifications have been made in the prior period's consolidated
financial statements to conform with the current year presentation.
(3) ACCRUED LIABILITIES
Accrued liabilities consists of the following at September 30, 2000
<TABLE>
<CAPTION>
September 30, 2000
-------------------------
<S> <C>
Accrued salaries and benefits $ 607,114
Accrued incentive 268,841
Accrued professional services 298,510
Accrued interest 231,564
Other accrued expenses 448,853
=========================
Total $ 1,854,882
=========================
</TABLE>
(4) LONG TERM DEBT
On June 27, 2000, the Company signed a Securities Purchase Agreement with nine
investors (the "Initial Investors"), pursuant to which the Company sold in a
private placement (the "Note Offering") its 5% Subordinated Convertible Notes
due June 29, 2005 in the aggregate principal amount of $15,583,333 (the
"Notes").
The Notes are convertible into shares of the Company's Common Stock, par value
$.001 per share ("Common Stock"), at a per share conversion price of $6.18,
which was 120% of the average closing bid price of the Common Stock during the
ten-trading day period immediately prior to June 27, 2000, the date the
transaction documents were signed. The Company also issued to the Initial
Investors, pro rata, warrants (the "Warrants") to purchase a total of 1,260,787
shares of Common Stock. The Warrants have a term of five years and an exercise
price of $7.21 per share. The number of shares underlying the Notes and the
exercise price of the Warrants are subject to certain reset and penalty
provisions as set forth in the transaction documents.
Certain Initial Investors are presently affiliates of the Company and include
LCO Investments Limited ("LCO") (shareholder and affiliated with director
Anthony Pilaro), John Reed (shareholder, CEO and director), Gasper Lazzara, Jr.
(director), Pequot Private Equity Fund II, L.P., Pequot Partners Fund, L.P., and
Pequot International Fund, Inc. (the "Pequot Entities") (shareholders and
affiliated with director Gerald Poch), and Andrew McKelvey (shareholder and
affiliated with director Bradford Peters).
Effective August 3, 2000, the Company completed a subsequent sale (the
"Subsequent Closing") of an additional $4,416,667 principal amount of the Notes,
together with Warrants to purchase 357,334 shares of Common Stock, as part of
the same private placement. The Notes sold in the Subsequent Closing are due
August 3, 2005, and the Warrants are exercisable for 5 years until August 3,
2005. In all other material respects, the Note and Warrants have the same terms
and conditions as the those sold in the Initial Closing.
Purchasers in the Subsequent Closing included five of the seven Initial
Investors affiliated with the Company (LCO, Andrew McKelvey, Pequot Private
Equity Fund II, L.P., Pequot International Fund, Inc., and Pequot Partners Fund,
L.P.) for $3,616,668 principal amount of the Notes. Two new investors, VenCap
Opportunities Fund, L.P. and Wendell Starke, also purchased Notes and Warrants
in the Subsequent closing for an aggregate principal investment of $800,000.
10
<PAGE>
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) LONG TERM DEBT - (continued)
The fair market value of all of the warrants utilizing the Black-Scholes
valuation model is $2,912,621 and is being amortized over five years. The
remaining fair market value is reflected in discount to long-term debt on the
balance sheet. The compensation expense for the warrants issued is taken as an
expense in interest expense.
Pursuant to a Registration Rights Agreement the Company filed a registration
statement with the SEC covering the shares of Common Stock underlying the Notes
and Warrants, which was declared effective on August 25, 2000.
(5) STOCKHOLDERS' EQUITY
In June 1999 the Company completed a private placement of 1,355,555 shares of
its Common Stock for $15,000,000. 1,004,043 shares were sold to private
investors, and the remaining 351,512 shares were sold to members of senior
management, the Company's Board of Directors and key consultants.
In October 1999 LCO, the principal shareholder of the Company, exercised options
to purchase 1,173,334 shares of Common Stock, resulting in proceeds of
$5,280,000 to the Company. The Company granted the options to LCO in April 1996
and May 1997 in connection with private placements of Common Stock.
In January 2000, the Company issued and sold to the Pequot Entities in a private
placement 3,333,333 shares (the "Pequot Shares") of its Common Stock for
aggregate proceeds of $20,000,000. The purchase price of the Pequot Shares was
$6.00 per share. The Pequot Shares represented 14.2% of the Company's total
shares of Common Stock then issued and outstanding after giving effect to the
issuance of the Pequot Shares.
In February 2000 the Company issued an aggregate 30,927 shares of restricted
Common Stock to three existing shareholders (Quota Rabbicco II, Ltd., Argonaut
Partnership, L.P. and David E. Gerstenhaber) in a private placement for cash
proceeds to the Company of $186,000. Also, in February 2000, the Company issued
77,318 shares of restricted Common Stock to Andrew J. McKelvey in a private
placement for cash proceeds to the Company of $464,000.
(6) STOCK OPTIONS
During 1990 the Company adopted an employee stock option plan, which was
approved by the shareholders on September 5, 1990 (the "1990 Plan"). In January
1997, the Company adopted the 1997 Stock Option and Incentive Plan. The Plan was
amended by the Board of Directors of the Company in May 1998, and ratified by
the shareholders of the Company, to increase the total number of shares
available for issuance under the plan from 2 million to 4 million. Subsequently,
on June 9, 2000, the Board of Directors further amended the Plan to increase the
total number of shares available for issuance under the Plan from 4 million to 5
million (the "Revised 1997 Plan"). Substantially all of the employee stock
options outstanding at July 1, 2000 have been issued pursuant to the Revised
1997 Plan. Only 182,000 of all stock options outstanding at July 1, 2000 were
granted under the 1990 Plan.
Under the Revised 1997 Plan, the Company is authorized to issue up to five
million shares of Common Stock pursuant to stock awards or upon the exercise of
options granted under the plan. The option price per share is determined by the
Board of Directors, but is no less than the fair market value of the underlying
shares on the date of the grant. Options granted under the Revised 1997 Plan
generally vest at various intervals up to five years and expire after ten years.
(7) WARRANTS
In June 1999, the Company issued warrants for 300,000 shares (the "OCA Shares")
of Common Stock to Orthodontic Centers of America, Inc. ("OCA") in consideration
for OCA entering into an agreement to install BS 3000 systems in OCA facilities.
The Warrants were exercisable at $11.0625 per share and expired on June 2, 2000.
The fair value of the OCA Warrants utilizing the Black-Scholes valuation model
was $1,632,000 and is being
11
<PAGE>
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(7) WARRANTS - (continued)
amortized over the life of the agreement between the Company and OCA, which is
ten years. The remaining fair market value is reflected in other assets on the
balance sheet. The compensation expense for the OCA Warrants is taken against
Associated Center Revenue.
(8) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended,
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities on the balance sheet and measure those instruments at fair
value. Management does not expect the initial adoption of SFAS 133 to have a
material effect on the Company's operations or financial position. The Company
is required to adopt SFAS 133 in the first quarter of fiscal 2001.
(9) LITIGATION
Effective August 22, 2000 the Company entered into a Settlement Agreement in
connection with the full settlement and termination of the lawsuit first filed
by Natural White, Inc. and its affiliated corporations against the Company in
the Supreme Court of the State of New York, Erie County in April 2000. Also
named as a defendant in the original action was R. Eric Montgomery, a director
of the Company and the principal owner of IDEX Dental Sciences ("IDEX").
BriteSmile removed the case to the United States District Court for the Western
District of New York and filed a motion to dismiss the complaint.
IDEX licensed certain dental products and technology to Natural White for use
outside the professional field. Through Montgomery, BriteSmile was granted a
separate license to use tooth whitening products and technology in the
professional field. The complaint filed by Natural White alleged that the
defendants misappropriated proprietary rights and trade secrets of Natural
White, that they interfered with the contract between IDEX and Natural White,
and that they have been unjustly enriched as a result of this conduct. The
Complaint asserted compensatory damages in excess of $6 million, and also sought
punitive damages and a permanent injunction enjoining the Company from using the
IDEX technology licensed to Natural White.
Pursuant to the Settlement Agreement, Natural White dismissed with prejudice all
claims alleged in the lawsuit. Under the Settlement Agreement, Natural White
purchased from IDEX for the sum of $950,000 a worldwide, royalty free, fully
paid-up, exclusive license covering the tooth whitening products and technology
it is currently using to manufacture and sell its products outside the
professional field. In order to facilitate Natural White's purchase of its
license from IDEX, the Company made a secured loan to Natural White in the
principal amount of $838,000 to cover a portion of the purchase price. The loan
bears interest in the amount of $62,000. Natural White is obligated to repay the
loan at the rate of 30,000 per month for 60 months. Natural White specifically
acknowledged in the Settlement Agreement that the Company's Teeth Whitening
Centers and Associated Centers are in the professional field and do not infringe
Natural White's license, and that Natural White is prohibited from selling the
licensed products in the professional field.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these other matters will not have a material adverse effect on
the Company's operations or financial condition.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTANTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS ANTICIPATED BY THE COMPANY AND DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE
DISCUSSED BELOW IN THE SECTION ENTITLED "FORWARD-LOOKING STATEMENTS."
The following table sets forth certain information relating to the
growth in the number of BriteSmile Centers and Associated Centers for the 26
weeks ended September 30, 2000 compared to the fiscal year ended April 1, 2000:
<TABLE>
<CAPTION>
BriteSmile, Inc. Fiscal Year
Roll-out Status Ended
as of September 30, 2000 April 1, 2000
------------------------------------------------------------------------------------------------------------------ ----------------
Number of Centers at the Number of Centers Opened Number of Centers
Centers beginning of Period During Period At End of Period Total
------------------------ ---------------------------- -------------------------- ---------------------- --------------
<S> <C> <C> <C> <C>
14 3 17 14
</TABLE>
<TABLE>
<CAPTION>
Grand
Associated Centers AC's OCA Total U.S. Int'l Total Total
---------------------------- ---------------- --------------- ---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Total Developed 789 96 885 128 1,013 490
Contracts Received 761 93 854 128 982 375
Active - In Business 684 82 766 118 884 235
In Process (1) 77 11 88 10 98 140
</TABLE>
(1) Represents Associated Centers for which a contract has been received but
where the dentist who will operate the Associated Center is either awaiting
training or shipment of the BS3000 device.
The following table sets forth, for the periods indicated, certain information
relating to the operations of the Company. During the fourth quarter of Fiscal
2000, the Company adopted a 52/53-week (4 week - 4 week - 5 week) fiscal
calendar. This change necessitated adding one day to the Fiscal 2000 year. Data
in the table reflects the consolidated results of the Company for the 13 and 26
weeks ended September 30, 2000 and September 30, 1999, respectively. All
amounts, except share data, in the following table and discussion are in
thousands.
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 26 Weeks Ended
(Unaudited) (Unaudited)
----------------------------------------- -----------------------------------------------
% OF % OF
CHG CHG
FROM FROM
SEPTEMBER SEPTEMBER 1999 TO SEPTEMBER SEPTEMBER 1999 TO
30, 2000 30, 1999 2000 30, 2000 30, 1999 2000
-------------- -------------- ----------- --------------- -------------- ----------------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Center whitening fees, net $ 3,253,000 $ 1,214,000 168.0% $ 5,463,000 $ 1,945,000 180.9%
Associated Center whitening fees,
net 1,515,000 230,000 558.7 3,401,000 373,000 811.8
Product sales 411,000 27,000 1,422.2 640,000 27,000 2,270.3
-------------- -------------- --------------- --------------
Total revenues, net 5,179,000 1,471,000 252.1 9,504,000 2,345,000 305.3
-------------- -------------- --------------- --------------
Operating Costs and Expenses:
Selling and occupancy costs 7,656,000 3,020,000 153.5 12,165,000 4,845,000 151.1
Selling, general and administrative 5,468,000 4,263,000 28.3 12,168,000 6,465,000 88.2
Research and development expenses 557,000 655,000 (15.0) 943,000 945,000 -
Depreciation and amortization 1,243,000 247,000 403.2 2,253,000 402,000 460.4
Termination benefits, impairment
charges and write-down of assets - 300,000 - - 300,000 -
-------------- -------------- --------------- --------------
Total operating costs and
Expenses 14,924,000 8,485,000 75.9 27,529,000 12,957,000 112.5
-------------- -------------- --------------- --------------
Other Income (Expense), net:
Interest expense (388,000) (112,000) 246.4 (392,000) (165,000) 137.5
-------------- -------------- --------------- --------------
Interest income 80,000 231,000 (65.3) 151,000 355,000 57.4
-------------- -------------- --------------- --------------
Income tax expense - - - 23,000 - -
-------------- -------------- --------------- --------------
Net income (loss) $ (10,053,000) $ (6,895,000) 45.8% $ (18,289,000) $(10,422,000) 75.4%
============== ============== =============== ==============
</TABLE>
The following are explanations of significant period-to-period changes for the
13 weeks ended September 30, 2000 and September 30, 1999:
13
<PAGE>
Revenues
Total Revenues, net. Total revenues, net increased by $3,708, or 252.1% to
$5,179 for the 13 weeks ended September 30, 2000 from $1,471 for the 13 weeks
ended September 30, 1999.
Center Whitening Fees, net. Center whitening fees, net increased by $2,039, or
168.0%, to $3,253 for the 13 weeks ended September 30, 2000 from $1,214 for the
13 weeks ended September 30, 1999. This increase was primarily due to the
operation of 17 Centers during the 13 weeks ended September 30, 2000 compared to
6 Centers that were in operation during the 13 weeks ended September 30, 1999.
The Company opened 3 new Centers during the 13 weeks ended September 30, 2000.
Teeth whitening fees are expected to increase during the next twelve months as a
result of the planned opening of 3 additional Centers and full year operating
results for existing Centers.
Associated Center Whitening Fees, net. Associated Center whitening fees, net
increased by $1,285, or 558.7% to $1,515 for the 13 weeks ended September 30,
2000 from $373 for the 13 weeks ended September 30, 1999. This increase was
primarily due to the operation of 884 Associated Centers at the end of the 13
weeks ended September 30, 2000 compared to 29 Associated Centers that were in
operation at the end of the 13 weeks ended September 30, 1999. Of the 884
Associated Centers in operation at September 30, 2000, 118 were international
locations.
During the 13 weeks ended September 30, 2000, the Company opened 352 new
Associated Centers, of which 19 were international locations. At September 30,
2000, there were 98 Associated Centers in the process of being placed into
operation, of which 10 were international locations. Due to training and
shipping requirements, there is approximately 45 days of lead-time between the
signing of an Associated Center agreement and the first paid procedures at an
Associated Center.
Although the Company does not believe that its business follows seasonal trends,
it has recognized that during the months of July and August and again during
December and January, that a substantial number of Associated Center locations
(both Domestic and International) shut down their practices for vacation. As a
result, the frequency of key card purchases by Associated Centers during these
months declines as well. In addition, during the 13 weeks ended September 30,
2000, the Company changed the number of procedures on the key card that is sold
to Associated Centers, from 20 procedures to 5 procedures. The Company also
modified the payment terms on the first key card only that is sold to a new
Associated Center location, from Net 30 to Net 60. These changes allow an
Associated Center to have the necessary time to receive both training and the
BS3000 device and begin performing paid procedures. The Company effectuated
these changes at the request of the Associated Center dentists.
The Company is aggressively executing its strategic plan of expanding
distribution into the professional dental practice channel through its
Associated Centers. This plan includes the expansion of strategic partnerships
like the OCA relationship and other special dental groups, identifying and
expanding the international distributor base, and expanding domestic direct
selling teams while enhancing the support of new and existing Associated
Centers. Additionally, the Company anticipates opening approximately 1,500
additional Associated Centers in domestic and international locations over the
next twelve months. As a result, Associated Center whitening fees are expected
to increase during the next twelve months. There can be no guarantee that the
Company will be successful in executing its business plan.
Product Sales. Product sales increased by $384, or 1,422.2% to $411 for the 13
weeks ended September 30, 2000 from $27 for the 13 weeks ended September 30,
1999. Product sales represent the Company's toothpaste and Sonicare toothbrush
products sold at Centers and Associated Centers. Product sales are expected to
increase during the next twelve months as a result of the introduction of
additional oral care products to be sold at Centers, Associated Centers, and
through an E-Commerce website (to be introduced in late calendar year 2000).
Operating Costs and Expenses
Center Selling and Occupancy Costs. Center selling and occupancy costs increased
by $4,636, or 153.5%, to $7,656 for the 13 weeks ended September 30, 2000 from
$3,020 for the 13 weeks ended September 30, 1999. This increase is primarily due
to the operation of 17 Centers during the 13 weeks ended September 30, 2000
compared to 6 Centers that were in operation during the 13 weeks ended September
30, 1999. Of this increase, $2,138 was advertising and promotional costs
directed to increase consumer awareness, $988 related to Center salaries and
benefits, and $865 related to rent at the 17 existing Centers. Center selling
and occupancy costs, as a percentage of Center whitening fees, decreased to
235.4% for the 13 weeks ended September 30, 2000 from 248.8% for the 13 weeks
ended September 30, 1999. The low operating margins represent newly opened
Centers and partial year results from existing Centers.
14
<PAGE>
Center selling and occupancy costs are expected to increase during the next
twelve months as a result of the planned opening of 3 additional Centers as well
as full year operating results over the next twelve months at existing Centers.
However, Center selling and occupancy costs as a percentage of Center whitening
fees are expected to continue to decrease as marketing expenditures in each
market is leveraged more effectively across a greater number of locations. In
addition, during September 2000, the Company reduced the number of operating
days at 13 of its 17 Centers, from 6 days to 5 days, eliminating Mondays. This
change has not effected the number of paid procedures performed at its Centers
in relationship to historical trends.
Product cost of sales as a percentage of product sales increased to 35.7% for
the 13 weeks ended September 30, 2000 from 30.0% for the 13 weeks ended
September 30, 1999. This increase is primarily due to the introduction of the
Sonicare toothbrush product during the period which has lower margins. Product
cost of sales consisted primarily of the Company's toothpaste and Sonicare
toothbrush products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,205, or 28.3%, to $5,468 for the 13 weeks
ended September 30, 2000 from $4,263 for the 13 weeks ended September 30, 1999.
During the 13 weeks ended September 30, 2000, the Company added 15 additional
market managers, executive, selling and administrative personnel to effectively
execute the Company's business strategy, including the introduction of 17 new
Centers, the addition of 1,013 Associated Centers, and costs incurred to open
future Centers and Associated Centers.
Included in the selling, general and administrative expenses for the 13 weeks
ended September 30, 2000 were $770 of advertising, promotional, and call center
costs directed to increase consumer awareness, and sales of the whitening
service to prospective Associated Center dentists. The Company also incurred
$1,855 of professional service costs during the 13 weeks ended September 30,
2000, related to public relations, executing Center and Associated Center
agreements, executing leases, intellectual property protection, legal fees,
employee recruitment and general corporate matters. The Company also incurred
$670 related to the development and expansion of international Associated
Centers in Japan, Argentina, Switzerland, Italy, Holland, France, Singapore,
Germany, Netherlands and Belgium.
Additionally, management has and is implementing several cost saving initiatives
totaling over $3.8 million over the next twelve months. These cost savings will
be achieved in the areas of Center operations, procedure kit production, legal
and consulting fees and management leveraging its marketing spend more
effectively by utilizing smaller media specific agencies, thereby reducing
agency fees. As a result, management expects selling, general and administrative
expenses to be leveraged more efficiently as sales from Centers and Associated
Centers increase in the future.
Research and Development Expenses. Research and development expenses decreased
by $98, or 15.0%, to $557 for the 13 weeks ended September 30, 2000 from $655
for the 13 weeks ended September 30, 1999. Research and development costs
incurred during the 13 weeks ended September 30, 2000 was primarily attributable
to the development of the Company's next generation LATW system. Research and
development costs incurred during the 13 weeks ended September 30, 1999
represent the development of the BS3000 system and keycard which was introduced
into Associated Centers during November 1999. The Company also incurred
additional expenses related to clinical and efficacy studies and costs incurred
in connection with the Company's efforts to obtain ADA approval.
Depreciation and Amortization. Depreciation and amortization increased by $996,
or 403.2%, to $1,243 for the 13 weeks ended September 30, 2000 from $247 for the
13 weeks ended September 30, 1999. This increase was primarily attributable to
the operation of 17 existing Centers and the operation of 884 BS3000 systems in
Associated Centers.
Stock Option and Warrant Issuance Expense. During the 13 weeks ended September
30, 2000, the Company recognized non-cash charges totaling $92 for the fair
value of stock options granted to various consultants to the Company. These
expenses have been allocated to the appropriate expense category on the income
statement. On June 27, 2000, the Company issued Warrants for 1,618,123 shares of
the Company's common stock to nine investors in connection with a private
placement of a Notes. The Warrants are exercisable at $7.21 per share and expire
on June 29, 2005. The fair value of the Warrants utilizing the Black-Scholes
valuation model is $2,913 and is being amortized over five years. The remaining
unamortized balance is reflected as a discount to long-term debt on the balance
sheet.
Total Operating Costs and Expenses. Total operating costs and expenses increased
by $6,439, or 75.9%, to $14,924 for the 13 weeks ended September 30, 2000 from
$8,485 for the 13 weeks ended September 30, 1999, for the reasons discussed
above.
Interest Expense. Interest expense increased $276, or 246.4%, to $388 for the 13
weeks ended September 30, 2000 from $112 for the 13 weeks ended September 30,
1999. Interest expense for the 13 weeks ended September 30, 2000 represents a
pro-rata amount of the 5% interest to be accrued and paid on a semi-annual basis
15
<PAGE>
on the outstanding amount of the Notes, as well as the amortization of the fair
market value of the warrants issued with the debt. Interest expense for the 13
weeks ended September 30, 1999 consisted primarily of mortgage interest paid on
the Company's former headquarters facility.
Interest Income. Interest income decreased $151, or 65.3%, to $80 for the 13
weeks ended September 30, 2000 from $231 for the 13 weeks ended September 30,
1999. This decrease was primarily related to decreased average available cash
on-hand to invest.
Net Loss. The net loss increased by $3,158, or 45.8%, to $10,053 for the 13
weeks ended September 30, 2000 from $6,895 for the 13 weeks ended September 30,
1999 due to a combination of the factors described above.
The following are explanations of significant period-to-period changes for the
26 weeks ended September 30, 2000 and September 30, 1999:
Revenues
Total Revenues, net. Total revenues, net increased by $7,159, or 305.3% to
$9,504 for the 26 weeks ended September 30, 2000 from $2,345 for the 26 weeks
ended September 30, 1999.
Center Whitening Fees, net. Center whitening fees, net increased by $3,518, or
180.9%, to $5,463 for the 26 weeks ended September 30, 2000 from $1,945 for the
26 weeks ended September 30, 1999. This increase was primarily due to the
operation of 17 Centers during the 26 weeks ended September 30, 2000 compared to
6 Centers that were in operation during the 26 weeks ended September 30, 1999.
The Company opened 3 new Centers during the 26 weeks ended September 30, 2000.
Teeth whitening fees are expected to increase during the next twelve months as a
result of the planned opening of 6 additional Centers and full year operating
results for existing Centers.
Associated Center Whitening Fees, net. Associated Center whitening fees, net
increased by $3,028, or 811.8% to $3,401 for the 26 weeks ended September 30,
2000 from $373 for the 26 weeks ended September 30, 1999. This increase was
primarily due to the operation of 884 Associated Centers at the end of the 26
weeks ended September 30, 2000 compared to 29 Associated Centers that were in
operation at the end of the 26 weeks ended September 30, 1999. Of the 884
Associated Centers in operation at September 30, 2000, 118 were international
locations.
During the 26 weeks ended September 30, 2000, the Company opened 649 new
Associated Centers, of which 94 were international locations. At September 30,
2000, there were 98 Associated Centers in the process of being placed into
operation, of which 10 were international locations. Due to training and
shipping requirements, there is approximately 45 days of lead-time between the
signing of an Associated Center agreement and the first paid procedures at an
Associated Center.
Although the Company does not believe that its business follows seasonal trends,
it has recognized that during the months of July and August and again during
December and January, that a substantial number of Associated Center locations
(both Domestic and International) shut down their practices for vacation. As a
result, the frequency of key card purchases by Associated Centers during these
months declines as well. In addition, during the 26 weeks ended September 30,
2000, the Company changed the number of procedures on the key card that is sold
to Associated Centers, from 20 procedures to 5 procedures. The Company also
modified the payment terms on the first key card only that is sold to a new
Associated Center location, from Net 30 to Net 60. These changes allow an
Associated Center to have the necessary time to receive both training and the
BS3000 device and begin performing paid procedures. The Company effectuated
these changes at the request of the Associated Center dentists.
The Company is aggressively executing its strategic plan of expanding
distribution into the professional dental practice channel through its
Associated Centers. This plan includes the expansion of strategic partnerships
like the OCA relationship and other special dental groups, identifying and
expanding the international distributor base, and expanding domestic direct
selling teams while enhancing the support of new and existing Associated
Centers. Additionally, the Company anticipates opening approximately 1,500
additional Associated Centers in domestic and international locations over the
next twelve months. As a result, Associated Center whitening fees are expected
to increase during the next twelve months. There can be no guarantee that the
Company will be successful in executing its business plan.
Product Sales. Product sales increased by $613, or 2,270.3% to $640 for the 26
weeks ended September 30, 2000 from $27 for the 26 weeks ended September 30,
1999. Product sales represent the Company's toothpaste and Sonicare toothbrush
products sold at Centers and Associated Centers. Product sales are expected to
increase during the next twelve months as a result of the introduction of
additional oral care products to be sold at Centers, Associated Centers, and
through an E-Commerce website (to be introduced in late calendar year 2000).
16
<PAGE>
Operating Costs and Expenses
Center Selling and Occupancy Costs. Center selling and occupancy costs increased
by $7,320, or 151.1%, to $12,165 for the 26 weeks ended September 30, 2000 from
$4,845 for the 26 weeks ended September 30, 1999. This increase is primarily due
to the operation of 17 Centers at the end of the 26 weeks ended September 30,
2000 compared to 6 Centers that were in operation at the end of the 26 weeks
ended September 30, 1999. Of this increase, $2,723 was advertising and
promotional costs directed to increase consumer awareness, $1,851 related to
Center salaries and benefits, and $1,424 related to rent at the 17 existing
Centers. Center selling and occupancy costs, as a percentage of Center whitening
fees, decreased to 222.7% for the 26 weeks ended September 30, 2000 from 249.1%
for the 26 weeks ended September 30, 1999. The low operating margins represent
newly opened Centers and partial year results from existing Centers.
Center selling and occupancy costs are expected to increase during the next
twelve months as a result of the planned opening of 3 additional Centers as well
as full year operating results over the next twelve months at existing Centers.
However, Center selling and occupancy costs as a percentage of Center whitening
fees are expected to continue to decrease as marketing expenditures in each
market is leveraged more effectively across a greater number of locations. In
addition, during September 2000, the Company reduced the number of operating
days at 13 of its 17 Centers, from 6 days to 5 days, eliminating Mondays. This
change has not effected the number of paid procedures performed at its Centers
in relationship to historical trends.
Product cost of sales as a percentage of product sales increased to 37.5% for
the 26 weeks ended September 30, 2000 from 30.0% for the 26 weeks ended
September 30, 1999. This increase is primarily due to the introduction of the
Sonicare toothbrush product during the period which has lower margins. Product
cost of sales consisted primarily of the Company's toothpaste and Sonicare
toothbrush products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $5,703, or 88.2%, to $12,168 for the 26 weeks
ended September 30, 2000 from $6,465 for the 26 weeks ended September 30, 1999.
During the 26 weeks ended September 30, 2000, the Company added 26 additional
market managers, executive, selling and administrative personnel to effectively
execute the Company's business strategy, including the introduction of 17 new
Centers, the addition of 1,013 Associated Centers, and costs incurred to open
future Centers and Associated Centers.
Included in the selling, general and administrative expenses for the 26 weeks
ended September 30, 2000 were $3,079 of advertising, promotional, and call
center costs directed to increase consumer awareness, and sales of the whitening
service to prospective Associated Center dentists. The Company also incurred
$3,223 of professional service costs during the 26 weeks ended September 30,
2000, related to public relations, executing Center and Associated Center
agreements, executing leases, intellectual property protection, legal fees,
employee recruitment and general corporate matters. The Company also incurred
$1,074 related to the development and expansion of international Associated
Centers in Japan, Argentina, Switzerland, Italy, Holland, France, Singapore,
Germany, Netherlands and Belgium.
Additionally, management has and is implementing several cost saving initiatives
totaling over $3.8 million over the next twelve months. These cost savings will
be achieved in the areas of Center operations, procedure kit production, legal
and consulting fees and management leveraging its marketing spend more
effectively by utilizing smaller media specific agencies, thereby reducing
agency fees. As a result, management expects selling, general and administrative
expenses to be leveraged more efficiently as sales from Centers and Associated
Centers increase in the future.
Research and Development Expenses. Research and development expenses decreased
by $2, to $943 for the 26 weeks ended September 30, 2000 from $945 for the 26
weeks ended September 30, 1999. Research and development costs incurred during
the 26 weeks ended September 30, 2000 was primarily attributable to the
development of the Company's next generation LATW system. Research and
development costs incurred during the 26 weeks ended September 30, 1999
represent the development of the BS3000 system and keycard which was introduced
into Associated Centers during November 1999. The Company also incurred
additional expenses related to clinical and efficacy studies and costs incurred
in connection with the Company's efforts to obtain ADA approval.
Depreciation and Amortization. Depreciation and amortization increased by
$1,851, or 460.4%, to $2,253 for the 26 weeks ended September 30, 2000 from $402
for the 26 weeks ended September 30, 1999. This increase was primarily
attributable to the operation of 17 existing Centers and the operation of 884
BS3000 systems in Associated Centers.
Stock Option and Warrant Issuance Expense. During the 26 weeks ended September
30, 2000, the Company recognized non-cash charges totaling $402 for the fair
value of stock options granted to various consultants to the Company. These
expenses have been allocated to the appropriate expense category on the income
statement. On June 27, 2000, the Company issued Warrants for 1,618,123 shares of
the Company's common stock to nine investors in connection with a private
17
<PAGE>
placement of a Notes. The Warrants are exercisable at $7.21 per share and expire
on June 29, 2005. The fair value of the Warrants utilizing the Black-Scholes
valuation model is $2,913 and is being amortized over five years. The remaining
unamortized balance is reflected as a discount to long-term debt on the balance
sheet.
Total Operating Costs and Expenses. Total operating costs and expenses increased
by $14,572, or 112.5%, to $27,529 for the 26 weeks ended September 30, 2000 from
$12,957 for the 26 weeks ended September 30, 1999, for the reasons discussed
above.
Interest Expense. Interest expense increased $227, or 137.5%, to $392 for the 26
weeks ended September 30, 2000 from $165 for the 26 weeks ended September 30,
1999. Interest expense for the 26 weeks ended September 30, 2000 represents a
pro-rata amount of the 5% interest to be accrued and paid on a semi-annual basis
on the outstanding amount of the Notes, as well as the amortization of the fair
market value of the warrants issued with the debt. Interest expense for the 26
weeks ended September 30, 1999 consisted primarily of mortgage interest paid on
the Company's former headquarters facility.
Interest Income. Interest income decreased $204, or 57.4%, to $151 for the 26
weeks ended September 30, 2000 from $355 for the 26 weeks ended September 30,
1999. This decrease was primarily related to decreased average available cash
on-hand to invest.
Net Loss. The net loss increased by $7,867, or 75.4%, to $18,289 for the 26
weeks ended September 30, 2000 from $10,422 for the 26 weeks ended September 30,
1999 due to a combination of the factors described above.
Liquidity and Capital Resources
General
The Company's principal sources of liquidity have been issuances of common stock
and common stock equivalents. At September 30, 2000, the Company had $5,792 of
cash and cash equivalents. The Company expects to open additional Centers and
sign contracts for additional Associated Centers during the next twelve months.
This expansion is contingent upon several factors, including available cash
resources, ability to secure leases for its Centers and acceptance by consumers
and Associated Center dentists of the Company's LATW services. The Company
expects that operating losses will continue through the transition fiscal year
ending December 30, 2000 and that it's principal uses of cash will be to provide
working capital, to finance capital expenditures, and to satisfy other general
corporate expenses. In particular, the Company plans to use its cash to finance
its marketing strategy, to build out 3 additional BriteSmile Centers and to fund
the production of additional BS3000 devices for Associated Centers as a result
of the Company's planned expansion of its business platform.
Effective June 27, 2000, the Company signed a Securities Purchase Agreement with
nine investors (the "Initial Investors") pursuant to which the Company sold
$15,583 of 5% Subordinated Convertible Notes (the "Notes") due June 29, 2005
(the "Initial Closing"). Effective August 3, 2000, the Company completed a
subsequent sale (the "Subsequent Closing") of an additional $4,417 principal
amount of the Notes, together with Warrants to purchase 357,334 shares of Common
Stock, as part of the same private placement. The Notes sold in the Subsequent
Closing are due August 3, 2005, and the Warrants are exercise for 5 years until
August 3, 2005. In all other material respects, the Note and Warrants have the
same terms and conditions as the those sold in the Initial Closing. Pursuant to
a Registration Rights Agreement the Company filed a registration statement with
the SEC covering the shares of Common Stock underlying the Notes and Warrants,
which was declared effective on August 25, 2000.
In the opinion of management, the Company must increase its debt and equity
capital resources to pursue its goals in the next twelve months. While
management believes that the Company can continue its current operating strategy
without additional funding, cash flows are difficult to forecast accurately.
Therefore, there can be no assurance that additional capital will not be
required, or that it will be available on terms that are acceptable to the
Company. Additionally, there can be no assurance that the Company's business
will generate cash flows at or above current levels. Accordingly, the Company
may choose to defer capital expenditure plans. On May 26, 2000, the Company
entered into a Revolving Credit Line Agreement (the "Credit Facility") with Bank
of Hawaii. Under the Credit Facility, the Company may borrow from time to time
through May 25, 2001 up to $2 million outstanding at any one time. Loan proceeds
must be used for working capital, capital expenditures, and general corporate
purposes only, and are secured by a Letter of Credit from Scotiabank. The Credit
Facility requires monthly payments to the Bank of interest only, with all
principal and accrued interest due May 25, 2001. To date, the Company has no
borrowings under the Credit Facility.
18
<PAGE>
September 30, 2000 Compared to April 1, 2000
As of September 30, 2000, the Company had liquid assets (cash and cash
equivalents and trade accounts receivable and notes receivable) of $7,261, a
decrease of 40.2%, or $4,889, from April 1, 2000 when liquid assets were
$12,150. Cash and cash equivalents decreased $6,020, or 54.9%, to $4,949 at
September 30, 2000 from $10,969 at April 1, 2000. This decrease in cash was
primarily the result of $18,254 of net loss and $7,837 in capital expenditures,
offset in part by the $20,000 of proceeds from the Notes received in June and
August 2000. Trade accounts receivable increased $824, or 69.7%, to $2,005 at
September 30, 2000 from $1,181 at April 1, 2000. This increase was primarily the
result of the increased number of Associated Centers in operation during the 26
weeks ended September 30, 2000. Although accounts receivable has increased
significantly as a result of new Associated Centers placed into operation, DSO
(" Days Sales Outstanding", or the amount of time required to collect on an
outstanding invoice) has decreased to 59.74 days at September 30, 2000, from
122.48 days at April 1, 2000. The Company will continue to aggressively manage
its accounts receivable.
Current assets decreased by $2,753, or 18.3%, to $12,265 at September 30, 2000
from $15,018 at April 1, 2000. This decrease was primarily the result of an
increase in accounts receivable of $822, described above, as well as an increase
in inventory of $2,262 resulting from increased production of the BS3000 device
being shipped to Associated Center locations. This increase was offset in part
by a decrease in cash of $6,020 described above.
Long-term assets increased $5,721, or 32.9%, to $23,092 at September 30, 2000
from $17,371 at April 1, 2000. This increase was primarily the result of
leasehold improvements at the 3 Centers opened during the period, the shipment
of 649 additional BS3000 devices, and deferred warrant expense during the 26
weeks ended September 30, 2000.
Current liabilities increased by $476, or 11.5%, to $4,625 at September 30, 2000
from $4,149 at April 1, 2000. This increase was primarily the result of an
increase in trade payables of $672 and accrued gift certificate liability of
$112, offset in part by a decreases in accrued liabilities of $307.
The Company's working capital decreased by $3,229, or 29.7% to $7,640 at
September 30, 2000 from $10,869 at April 1, 2000, for the reasons described
above. Current ratio (current assets divided by current liabilities) was 2.65:1
at September 30, 2000 compared to 3.62:1 at April 1, 2000.
The Company used net cash of $18,529 in operating activities during the 26 weeks
ended September 30, 2000, primarily as a result of the net loss incurred during
the period.
The Company used net cash of $7,552 in investing activities during the 26 weeks
ended September 30, 2000, primarily for capital expenditures relating to the
Company's expansion efforts in Centers and Associated Centers.
The Company provided net cash of $20,061 from financing activities during the 26
weeks ended September 30, 2000, primarily due to the private placements of
$20,000 of Notes. Additionally, the Company received $61 in proceeds from the
exercise of stock options.
Inflation
Most of the Company's products are purchased in finished form and packaged by
the supplier or at the Company's headquarters. The Company anticipates usual
inflationary increases in the price of its products and does not intend to pass
these increases along to its customers, primarily as a result of other operating
efficiencies gained through changing the sourcing of certain of its products. In
general, the Company does not believe that inflation has had a material effect
on its results of operations in recent years. However, there can be no assurance
that the Company's business will not be affected by inflation in the future.
Seasonality
The Company does not believe that its business follows seasonal trends. However,
because certain of the Company's Centers are located within a mall environment,
the potential for seasonality exists. As a result, the Company's sales
performance could potentially be affected.
Forward Looking Statements
The statements contained in this Report that are not purely historical are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act.
These statements relate to the Company's expectations, hopes, beliefs,
anticipations, commitments, intentions and strategies regarding the future. They
may be identified by the use of words or phrases such as "believes," "expects,"
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"anticipates," "should," "plans," "estimates," and "potential," among others.
Forward-looking statements include, but are not limited to, statements contained
in Management's Discussion and Analysis of Financial Condition and Results of
Operations regarding the Company's financial performance, revenue and expense
levels in the future and the sufficiency of its existing assets to fund future
operations and capital spending needs. Actual results could differ materially
from the anticipated results or other expectations expressed in such
forward-looking statements. The Company believes that many of the risks set
forth here and in the Company's filings with the Securities and Exchange
Commission are part of doing business in the industry in which the Company
operates and competes and will likely be present in all periods reported. The
forward-looking statements contained in this Report are made as of the date of
this Report and the Company assumes no obligation to update them or to update
the reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations of the Company include:
o Government regulation of the Company's products and teeth whitening
procedures, including: (i) current restrictions or controls on the
practice of dentistry by general business corporations, and (ii)
future, unknown enactments or interpretations of current regulations
which could, in the future, affect the Company's operational structure
and relationships with licensed dentists.
o Failure of the Company to generate, sustain or manage growth,
including failure to develop new products and expand Center and
Associated Center locations;
o The loss of product market share to competitors and/or development of
new or superior technologies by competitors;
o Ongoing operating losses associated with the development, marketing
and implementation of new, light-activated teeth whitening
technologies;
o Failure of the Company to secure additional financing to complete its
aggressive plan for the rollout of a broad base of teeth whitening
centers nationwide;
o Unproven market for the Company's new whitening products, whitening
process, "Whitening Center" and "Associated Center" concepts, in light
of competition from traditional take-home whitening products and
bleaching tray methods;
o Lack of product diversity.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Effective August 22, 2000 the Company entered into a Settlement Agreement in
connection with the full settlement and termination of the lawsuit first filed
by Natural White, Inc. and its affiliated corporations filed suit against the
Company in the Supreme Court of the State of New York, Erie County in April
2000. Also named as a defendant in the original action was R. Eric Montgomery, a
director of the Company and the principal owner of IDEX Dental Sciences
("IDEX"). BriteSmile removed the case to the United States District Court for
the Western District of New York and filed a motion to dismiss the complaint.
IDEX licensed certain dental products and technology to Natural White for use
outside the professional field. Through Montgomery, BriteSmile was granted a
separate license to use tooth whitening products and technology in the
professional field. The complaint filed by Natural White alleged that the
defendants misappropriated proprietary rights and trade secrets of Natural
White, that they interfered with the contract between IDEX and Natural White,
and that they have been unjustly enriched as a result of this conduct. The
Complaint asserted compensatory damages in excess of $6 million, and also sought
punitive damages and a permanent injunction enjoining the Company from using the
IDEX technology licensed to Natural White.
Pursuant to the Settlement Agreement, Natural White dismissed with prejudice all
claims alleged in the lawsuit. Under the Settlement Agreement, Natural White
purchased from IDEX for the sum of $950,000 a worldwide, royalty free, fully
paid-up, exclusive license covering the tooth whitening products and technology
it is currently using to manufacture and sell its products outside the
professional field. In order to facilitate Natural White's purchase of its
license from IDEX, the Company made a secured loan to Natural White in the
principal amount of $838,000 to cover a portion of the purchase price. The loan
bears interest in the amount of $62,000. Natural White is obligated to repay the
loan at the rate of 30,000 per month for 60 months. Natural White specifically
acknowledged in the Settlement Agreement that the Company's Teeth Whitening
Centers and Associated Centers are in the professional field and do not infringe
Natural White's license, and that Natural White is prohibited from selling the
licensed products in the professional field.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these other matters will not have a material adverse effect on
the Company's operations or financial condition.
ITEM 2. CHANGES IN SECURITIES.
Initial Note Purchases June 29, 2000
On June 29, 2000 the Company closed a Securities Purchase Agreement with nine
investors (the "Initial Investors"), pursuant to which the Company sold in a
private placement (the "Initial Closing") its 5% Subordinated Convertible Notes
due June 29, 2005 (the "Notes") in the aggregate principal amount of
$15,583,332.
The Notes are convertible into shares of the Company's Common Stock, par value
$.001 per share (the "Common Stock"), at a per share conversion price of $6.18,
which is 120% of the average of the closing bid price of the Common Stock during
the ten-trading day period immediately prior to June 27, 2000, the date the
transaction documents were signed. The Company also issued to the Investors, pro
rata, warrants (the "Warrants") to purchase a total of 1,260,787 shares of
Common Stock, which have a term of five years and an exercise price of $7.21 per
share. The conversion price of the Notes and the exercise price of the Warrants
are subject to certain reset and/or penalty provisions as set forth in the
transaction documents.
Two of the Initial Investors, who purchased a total of $3,500,000 principal
amount of the Notes, are unaffiliated with the Company. These unaffiliated
investors are CapEx, L.P. and Pacific Mezzanine Fund.
Seven of the Initial Investors, who purchased an aggregate amount of $12,083,332
of the Notes, are presently affiliates of the Company. The affiliated Initial
Investors include LCO Investments Limited (shareholder and affiliated with
director Anthony Pilaro), John Reed (shareholder, CEO and director), Gasper
Lazzara, Jr. (director), Andrew McKelvey (shareholder and affiliated with
director Bradford Peters), and Pequot Private Equity Fund II, L.P., Pequot
International Fund, Inc., and Pequot Partners Fund, L.P.
(shareholders and affiliated with director Gerald Poch).
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Subsequent Note Purchases August 3, 2000
Effective August 3, 2000, the Company completed a subsequent sale (the
"Subsequent Closing") of an additional $4,416,667 principal amount of the Notes,
together with Warrants to purchase 357,334 shares of Common Stock, as part of
the same private placement. The Notes sold in the Subsequent Closing are due
August 3, 2005, and the Warrants are exercise for 5 years until August 3, 2005.
In all other material respects, the Note and Warrants have the same terms and
conditions as those sold in the Initial Closing.
Purchasers in the Subsequent Closing included five of the seven Initial
Investors affiliated with the Company (LCO, Andrew McKelvey, Pequot Private
Equity Fund II, L.P., Pequot International Fund, Inc., and Pequot Partners Fund,
L.P.) for $3,616,668 principal amount of the Notes. Two new investors, VenCap
Opportunities Fund, L.P. and Wendell Starke, also purchased Notes and Warrants
in the Subsequent closing for an aggregate principal investment of $800,000.
Pursuant to a Registration Rights Agreement between the Initial Investors, the
investors in the Subsequent Closing, and the Company, the Company has registered
with the Securities and Exchange Commission, effective August 25, 2000, the
shares of Common Stock underlying the Notes and Warrants for resale under the
Securities Act of 1933, as amended.
All sales of the Notes and Warrants in the Initial Closing and the Subsequent
Closing were made in private transactions, exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) of the Act
and Rule 506 promulgated by the Securities and Exchange Commission thereunder.
Each person acquired the Notes and related warrants for investment purposes
only, with no intent to distribute the securities. The Notes and Warrants are
subject to standard restrictive legends with respect to transfer or resale. All
recipients received or had meaningful access to all Company reports filed with
the Commission pursuant to the Securities Exchange Act of 1934.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on September 12, 2000, the
shareholders of the Company voted on the following three proposals:
Proposal 1 - To elect the following nine directors, each to serve
until the next annual meeting of shareholders and until his successor
is elected and shall have qualified: Anthony M. Pilaro, John L. Reed,
Gerald Poch, Dr. Gasper Lazzara, Jr., Brad Peters, Harry Thompson,
Peter Schechter, Linda S. Oubre, and R. Eric Montgomery.
Proposal 2 - To ratify and approve an amendment to the Company's
Revised 1997 Stock Option and Incentive Plan. The amendment increases
the aggregate number of shares of common stock of the Company
available for issuance under the Plan from 4,000,000 shares to
5,000,000 shares.
Proposal 3 -- To ratify and approve a series of transactions pursuant
to which the Company (i) has issued its 5% convertible subordinated
notes in the aggregate principal amount of $20,000,000 to eleven
investors, including seven investors presently affiliated with the
Company, which notes are convertible into 3,236,245 shares of common
stock, and (ii) has issued warrants to the investors to purchase a
total of 1,618,122 shares of common stock. The net effect of the
forgoing transactions, if the notes are converted and the warrants are
exercised, will be the issuance of more than 20% of the total number
of shares of the Company's common stock issued and outstanding prior
to the commencement of such transactions.
Proposal 4 - To approve the Board of Directors' selection of Ernst &
Young LLP as the Company's independent auditors.
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Voting results were as follows:
For Withheld
Proposal 1: ------------ --------------
Mr. Pilaro 22,463,878 394,319
Mr. Reed 22,470,578 387,619
Mr. Poch 22,469,578 388,619
Mr. Thompson 22,470,678 387,519
Mr. Schechter 22,469,978 388,219
Mr. Lazzara, Jr. 22,469,678 388,519
Ms. Oubre 22,465,978 392,219
Mr. Montgomery 22,470,678 387,519
Mr. Peters 22,470,478 387,719
For Against Abstain
Proposal 2 22,364,012 482,533 11,652
For Against Abstain Not Voted
Proposal 3 18,440,938 400,820 14,959 4,001,480
For Against Abstain
Proposal 4 22,847,081 8,706 2,410
ITEM 5. OTHER INFORMATION.
Effective August 14, 2000, the Company named Robert Berg as its new Vice
President, Associated Center Sales. Prior to joining the Company, Mr. Berg most
recently served as Regional Sales Manager for Baxter International, Inc. From
1991 to 1999, Mr. Berg held several posts at Baxter, including National Sales
Training Manager and IV Therapy Territory Manager. Mr. Berg is a graduate of
California Polytechnic State University, San Luis Obispo.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
Exhibit No. Description
27 Financial Data Schedule for September 30, 2000 Form 10-Q.
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter for which this report is
filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRITESMILE, INC.
/s/ John L. Reed October 31, 2000
----------------------------- --------------------
John L. Reed Date
Chief Executive Officer
/s/ Paul A. Boyer October 31, 2000
----------------------------- --------------------
Paul A. Boyer Date
Chief Financial Officer
