Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K405 Dated December 31, 1997 54 269K
2: EX-23 Consent of Coopers & Lybrand LLP 1 6K
3: EX-27 Financial Data Schedule 2 9K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
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: (714) 361-1200
________________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
(Title of class)
________________________________
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 24, 1998, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $39,879,667 computed using the closing
price of $3.40625 per share of common stock on March 24, 1998 as reported by
Nasdaq based on the assumption that directors and officers and more than 10%
stockholders are affiliates. On March 24, 1997, there were 13,462,636 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 1998 Annual Meeting of Stockholders
to be held May 19, 1998, which will be filed with the Securities and Exchange
Commission within 120 days after the close of the 1997 fiscal year.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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, high-speed mechanical cutting water
particles, 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 in the United States for dental soft tissue
applications, and is distributed in Germany for both hard and soft tissue dental
applications. In July 1997, the Company received clearance from the 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 this laser-based system in a configuration designed for
lower power settings to the domestic market, under the name DermaLase(TM), in
mid-1998. The Company supports its earlier generations of laser-based systems
with replacement parts and service. The Company also has (i) an automated system
used in endodontic procedures for locating and shaping root canals, known as the
Canal Finder System(TM), which the Company markets 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, that is incorporated into the Company's
laser-based systems and can be employed with fiber-coupled laser systems
manufactured by others. The Company is also developing LaserBrush(TM), a
toothbrush that utilizes a light source to activate whitening and anti-bacterial
agents in special toothpaste compounds also being developed by the Company; a
fluid conditioning system known as FlavorFlow(TM), 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.
The Company's predecessor, Societe Endo Technic, S.A. ("SET"), was formed
in Marseilles, France in 1984. Three years later, the Company acquired 77% of
the outstanding shares of SET. Subsequently, various patents and other
intellectual property utilized by SET were transferred to the Company.
General
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Until 1991, the Company's principal products were the Canal Finder
System(TM), an automated endodontic (root canal) handpiece, and other endodontic
products. In August 1991, the Company completed development of the Laser-35(TM),
a 25-Watt, Nd:YAG (neodymium: yttrium aluminum garnet) dental laser-based
system, and in February 1992, commenced the first deliveries of the Laser-35(TM)
manufactured by the Company. In the first quarter of 1993, the Company completed
development of a second generation of Nd:YAG dental laser-based systems, the
Nylad(TM) series with 6, 12 and 20-Watt systems, and commenced shipments in June
1993. In 1993, the Company commenced development of Elmer(TM), a 6-Watt,
Er,Cr:YSGG specialized laser which incorporated proprietary technology that
served as the forerunner for the Company's new Millennium(TM) surgical tissue
cutting system. In 1995, the Company commenced design of its Millennium(TM)
system, which incorporates its patent-pending HydroKinetic(TM) technology. This
technology employs electromagnetic energy laser pulses which, at higher power
settings, rapidly energize and transform small atomized water droplets from
Millennium's(TM) air-water spray into smaller, high-speed mechanical cutting
particles of water. When operating in this manner, the Millennium(TM) is
intended for use primarily in hard tissue applications. The design of the
Millennium(TM) system for dental and oral surgical applications was completed in
late 1996, at which point the Company commenced marketing efforts in Germany. In
a configuration utilizing lower power settings, the Er,Cr: YSGG laser
2
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 completed development of LaserSpray(TM), an air-water
spray accessory using its proprietary Target Tissue Cooling System(TM)
("TTCS(TM)") technology and thereafter incorporated into all of the Company's
laser-based systems. LaserSpray(TM), which is designed to cool the tissue
receiving laser energy and adjacent tissue, can also be employed in conjunction
with fiber-coupled laser systems not manufactured by the Company. In 1996, the
Company commenced the development of a toothbrush for the consumer market,
called the LaserBrush(TM), that utilizes a light source to activate whitening
and anti-bacterial agents in special toothpaste compounds developed by the
Company, which it anticipates introducing during the second half of 1998. (The
preceding sentence constitutes a forward looking statement [hereinafter
identified as "FLS"]. Each of the forward looking statements in this Annual
Report on Form 10-K is subject to various factors that could cause actual
results to differ materially from the results anticipated in such forward
looking statement, as more fully discussed in this section under "--Forward
Looking Statements".) More recently, the Company commenced development of
FlavorFlow(TM), a system which sanitizes and alters the flavor and scent of
fluids administered during medical, dental and oral surgical treatments.
The Company is also developing a group of biomaterials under the trade
names PerioFil(TM), PerioSeal(TM), LaserBond(TM) and EndoPlas(TM) for use in
periodontics, endodontics, general dentistry, orthopedics and other medical
applications; commercialization of these biomaterials depends on completion of
development and regulatory approval.
Laser Background
----------------
The term "laser" is an acronym for Light Amplification by Stimulated
Emission of Radiation. A laser is an apparatus that stimulates the atoms in a
core material (such as a gas or crystal) to emit packets of light and then
amplifies and focuses the light in a single beam. Laser light, which consists of
a single wavelength of light, differs from light emitted from an ordinary light
bulb primarily through greater concentration and intensity. Lasers are typically
classified by the element or compound that emits light when energized, such as
carbon dioxide (CO2), Nd:YAG, argon, ruby and erbium.
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.
Lasers are currently used in a wide variety of medical fields including
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 tissue,
bone, tooth enamel and dentin. Temperature increases in excess of five degrees
centigrade 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 (i.e. bone,
enamel, 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) can also be available as an accessory to be
installed on fiber-coupled lasers manufactured by other companies.
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The Millennium(TM) System
-------------------------
The Company has recently developed its Millennium(TM) system which, in
certain applications, involves a new use of 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 erbium laser-based system to generate electromagnetic energy pulses that
rapidly energize and transform atomized water droplets into smaller high-speed
mechanical cutting water particles capable of precisely removing hard tissue,
such as tooth, bone and cartilage. 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 current Millennium(TM) system configured for dental and oral surgical
applications (19"H x 24"W x 18"D) consists of a flexible fiber-optic delivery
system and mobile floor HydroKinetic(TM) tissue cutting system. This system
contains an erbium laser, power supply, internal cooling system, control panel
and HydroKinetic(TM) tissue cutting system modules. The Millennium(TM) system
uses electromagnetic energy pulses from the erbium laser to rapidly energize and
transform atomized water droplets, a safe, biocompatible cutting agent, into
smaller, high-speed mechanical cutting water particles. Through this unique
process of HydroKinetic(TM) tissue cutting, the Millennium(TM) system is capable
of cutting both hard and soft human tissue, though to date, the Company has not
yet received clearance from the FDA to market the Millennium(TM) system for hard
tissue dental applications. See "--Government Regulation". To give medical
practitioners more flexibility, Millennium(TM) systems may also be used without
water or with water as a cooling medium at a lower power setting for standard
laser-based soft tissue applications, in fields such as dermatology,
ophthalmology and otolaryngology (ENT). BioLase commenced marketing the
Millennium(TM) system configured for dental and oral surgical applications in
Germany during the second half of 1996, and initial shipments to Germany
commenced during the second quarter of 1997.
The Company believes that its Millennium(TM) system, utilizing its patent-
pending HydroKinetic(TM) technology, 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 Germany.
In July 1997, the Company received FDA clearance to market a laser system that
utilizes a variation of the Millennium(TM) technology for a broad range of
dermatological and general surgical soft tissue applications, and the Company
expects to commence marketing that system, under the name DermaLase(TM), in mid-
1998. (FLS) Other medical disciplines presently being explored for utilization
of this proprietary technology include orthopedic surgery, otolaryngology (ENT)
and ophthalmology. (FLS) Any marketing of the Millennium(TM) system in the
United States for use in dental, oral maxillofacial, orthopedic,
otolaryngological (ENT), ophthalmological and certain other medical applications
would require regulatory clearance for each protocol. The Company may be
required to engage in further development of the Millennium(TM) system or to
complete clinical studies successfully in order to pursue regulatory clearance
for the use of the Millennium(TM) system in various protocols. (FLS) No
assurances can be given that any such regulatory clearances will be granted.
See "--Government Regulation". Use of the Millennium(TM) system for various
non-dental applications will require certain modifications in the hardware and
software configurations of the Millennium(TM) system currently being marketed in
Germany.
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 CSA
mark allows the Company to import and market its Millennium(TM) system in
Canada. See "--Government Regulation".
While the Company believes that its Millennium(TM) surgical tissue cutting
system should be effective in a broad range of medical and dental applications,
this belief (except with respect to dental hard tissue and certain
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 Millennium(TM) surgical tissue cutting system will
prove to be applicable to, or will find market acceptance in, any medical or
dental fields or that the Company will receive clearance
4
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.
Applications and Potential Applications of the Millennium(TM) System.
--------------------------------------------------------------------
Dentistry. The Millennium(TM) system currently being marketed by the
---------
Company in Germany is configured for dental and oral surgical applications.
There are approximately 150,000 dentists in active practice in the United States
and an additional 400,000 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); however, this device
has received clearance for only soft tissue dental applications in the United
States and both hard and soft tissue dental applications in Germany. See
"--Government Regulation".
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 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. (FLS)
Osseous (Bone) Implant Surgery. Bone implants are used for bone
------------------------------
stabilization, to add strength to existing bone and to serve as the
infrastructure for reconstructive dental procedures. For such procedures, it is
important that the bone cutting for the implant placement be clean and that the
practitioner not damage the bone itself during cutting by the generation of
excessive heat. Thermal damage, such as that caused by conventional dental
drills, can impede or destroy the fusion of the bone to the implant. The
Company believes that the Millennium(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. (FLS)
Prosthodontics. The replacement of missing teeth and the significant
--------------
restoration of decayed or damaged teeth have evolved as dental specialties as a
result of the development of stronger ceramic, porcelain and composite
materials. The onlay and inlay require not only precise cavity preparation, but
also strong adhesion of the bonding which is necessary for enhancement of
retention. The Company believes that the Millennium(TM) system can effectively
minimize cracking, melting and fracturing of the enamel or dentin structure
during cavity
5
preparation and promote a stronger bond or adhesion, thereby facilitating a more
durable and aesthetic restoration. (FLS)
The Company also believes the Millennium(TM) system has the ability to
precisely cut the appropriate shoulder preparation to be used to retain
removable or partial dentures and distribute stress force along the anchor
tooth. (FLS) The Company believes that because the Millennium(TM) system
minimizes vibration, use of the system can provide increased patient comfort and
conserve tooth structure. (FLS)
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. (FLS)
The Millennium(TM) system can also be utilized in the preparation of
crowns to shape shoulders and margins, facilitating improved impressions and
enabling secure and closed margins for longer life of the crown. 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. (FLS)
The soft tissue that surrounds the crown preparation area usually requires
shaping or lengthening 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.
Dermatology and Plastic/Cosmetic Surgery. An estimated 400,000
----------------------------------------
worldwide laser-based skin resurfacing procedures will be performed this year.
Laser skin resurfacing, which has been evolving as a surgical technique since it
was first introduced in 1993, involves using a high-energy laser beam to remove
dermal 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 alone. This installed base is expected to grow to
10,000 units by the year 2000.
The Company's Millennium(TM) system has been clinically tested for
removal of wrinkles, scars and warts and skin resurfacing and appears to be as
effective as current laser technology offered by other manufacturers. (FLS) The
Company believes that the Millennium(TM) system may also offer some clinical
advantages in terms of non-thermal, controlled removal of dermal soft tissue.
(FLS) In particular, a practitioner would have the ability to use
HydroKinetic(TM) technology for certain cosmetic surgery procedures (e.g., bone,
cartilage, and skin reshaping) or to reduce the power and 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 Millennium(TM) system. (FLS) A newer skin toning technique under development
will use Er,Cr:YSGG laser energy from the Millennium(TM) system, at a very low
power setting, to tighten the skin by slightly heating the underlying layer of
collagen to cause shrinkage. (FLS)
In July 1997, the Company received 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, which the Company expects to market under the name DermaLase(TM)
commencing in mid-1998, utilizes the Er,Cr:YSGG laser employed in Millennium(TM)
but at a lower power setting that does not result in the transformation of water
droplets into mechanical cutting water particles. At the lower power setting,
the system operates like a traditional laser with the air-water spray acting as
a cooling agent. In the Company's opinion, the combination of the air-water
spray and the specific wavelength employed provides improved histological
effects on tissue, such as reduced tissue trauma and faster healing.
Oral/Maxillofacial Surgery. Over 7,000 specialists practice
--------------------------
oral/maxillofacial surgery in the U.S. The highest volume procedure is
temporomandibular joint (TMJ) surgery, where the surgeon reshapes the patient's
jaw to correct a bite problem. These specialists have also become involved with
cosmetic surgery, including facial skin resurfacing with lasers. The Company
believes that its Millennium(TM) system can provide significant advantages in
TMJ
6
surgery, as a single surgical instrument that efficiently cuts bone, cartilage,
and soft tissue. (FLS)
Orthopedic Surgery. According to the American College of Surgeons,
------------------
nearly 21,000 orthopedic surgeons in the U.S. perform in excess of 3,000,000
annual surgeries, including joint arthroscopy, spinal disc alterations and
arthroplasties of knee, shoulder and hip. Statistics on international procedures
are not compiled, but industry experts estimate at least 1,000,000 annual
procedures outside of the United States. Laser use in orthopedic surgery has
been limited to a very small percentage of surgeons using long-pulse holmium
lasers in arthroscopic procedures. The main advantage of a holmium laser is
finesse for tissue sculpting. However, the medical community has criticized the
holmium laser as being too slow compared to the traditional mechanical
endoscopic cutting devices. Thermal damage caused by the pulsed holmium laser
has also been an issue. By contrast, the Company believes that the
Millennium(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. (FLS)
Otolaryngology. The Company believes that the unique bone-cutting
--------------
capability of the Millennium(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. (FLS) Approximately 400,000 ear,
nose, and throat (ENT) surgical procedures are performed in the United States
each year by some 10,000 specialists with an estimated 650,000 additional annual
procedures internationally. Currently, lasers are utilized in less than 5% of
these surgeries. Primary applications for lasers in ENT now include: laser
assisted palatoplasty (partial removal of the palate); uvulopalatoplasty
(partial removal of the uvula and the palate to reduce sleep apnea and snoring);
tonsillectomy (surgical removal of tonsils); and myringotomy (surgical creation
of a small hole in the tympanic membrane of a child's ear for drainage of fluid
caused by chronic ear infection). The Company believes, based on in-vitro tests,
that the Millennium(TM) system may provide an improved surgical tool for
performing some types of ENT procedures. (FLS)
Ophthalmology. The Company is targeting its Millennium(TM) technology
-------------
for two main ophthalmic surgical procedures: cataract removal and vitreal
microsurgery (where strands of vitreous membrane in the eye must be cut),
especially in medically compromised patients, such as diabetics. Approximately
5,000,000 cataract extractions are performed annually, worldwide. Due to the
growth rate of the elderly segment of the population, the number of cataract
removals is expected to expand at an annual rate of at least 10%. There is also
an increasing demand for improved high-technology methods of cataract removal.
A cataract forms as part of the aging process, as the lens of the eye
hardens and opacifies, leading to reduced vision. Conventional methods of
cataract removal involve the use of ultrasonic devices to emulsify the lens and
surgical instruments to remove the lens. Drawbacks to these techniques include
postoperative discomfort for the patient and unnecessary trauma to healthy
ocular tissue. In-vitro studies suggest that the Millennium(TM) system may offer
a less traumatic method of cataract lens removal. Vitreal surgery, which
currently involves the use of mechanical cutting instruments, could also benefit
from the increased precision and decreased pressure offered by the
Millennium(TM) system's tissue cutting technology. (FLS)
Other Dental and Medical Products
---------------------------------
LaserBrush(TM). In 1996, BioLase commenced the development of a toothbrush
--------------
for the consumer market, called the LaserBrush(TM), that utilizes a light source
to activate whitening and anti-bacterial agents in special toothpaste compounds
developed by the Company. The LaserBrush(TM), which utilizes the Company's
patented and patent-pending technology, is designed to bring into the consumer's
home technology which utilizes optical energy to activate ingredients in
toothpastes, formulated by the Company, to neutralize certain harmful bacteria,
and clean and whiten teeth. (FLS) The LaserBrush(TM), which is configured much
like a conventional toothbrush, is smaller than conventional motorized tooth
brushing instruments. The Company is currently preparing for production of the
LaserBrush(TM), and a launch of the product is anticipated during the second
half of 1998. (FLS) The Company's marketing strategy will focus on the
selective replacement of traditional and motorized toothbrushes at a price
competitive with conventional motorized toothbrushes. (FLS)
7
Nylad(TM) Series and Laser-35(TM) -- Mobile Laser Systems. The Nylad 6(TM),
---------------------------------------------------------
Nylad 12(TM) and Nylad 20(TM) (24"H x 18"W x 23"D) consisted of mobile floor
systems, each containing an Nd:YAG 6, 12 or 20-Watt laser, appropriate power
supply and cooling system, a computerized console to regulate intensity and
pulse characteristics, and the TTCS(TM). The Laser-35(TM) (42"H x 16"W x 22"D)
consisted of a mobile floor system containing an Nd:YAG 25-Watt laser,
appropriate power supply and cooling system, a computerized console to regulate
intensity and pulse characteristics and the TTCS(TM). These laser-based systems
were designed to be used in both soft and hard tissue dental procedures; BioLase
received FDA clearance to market these systems for soft tissue procedures. See
"--Government Regulation". The Company has discontinued the manufacturing of
its Nylad(TM) series and its Laser-35(TM), although it may elect to manufacture
and market any or all of these laser-based systems in the future; however, the
Company continues to support those systems that are in operation, both
domestically and abroad, with the fabrication and distribution of replacement
parts that are utilized by its service department, its distributors' service
departments and other technically qualified service affiliates.
LaserSpray(TM). LaserSpray(TM) is a stand-alone product that incorporates
--------------
a patented technology to allow a dental or medical practitioner to deliver a
coolant spray of air and water to tissue sites during surgical laser
interventions. Its technology has been incorporated into all of the Company's
laser-based systems and LaserSpray(TM) may be installed with 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. (FLS) The Company has
completed development of LaserSpray(TM), and is currently discussing licensing
the system with certain manufacturers; however, to date no such licensing
arrangements have been consummated.
FlavorFlow(TM) Fluid Conditioning System. In response to recently proposed
----------------------------------------
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 bacterial
infection being introduced through the fluids used during medical and dental
interventions would be significantly reduced. (FLS) The Company expects that a
market for the FlavorFlow(TM) fluid conditioning system will exist only after
new standards regarding sanitized fluids are imposed. (FLS)
Biomaterials. Biomaterials are natural or synthetic materials that are
------------
compatible with living tissue and are suitable for surgical implanting into the
human body. The Company's biomaterials, under the trade names PerioFil(TM),
PerioSeal(TM), EndoPlas(TM) and LaserBond(TM), for use in endodontics,
periodontics and general dentistry, as well as medical applications in
orthopedics and oral/maxillofacial surgery, are currently in the product
development stage. PerioFil(TM) and PerioSeal(TM) are being developed to permit
bone regeneration and tissue welding without interference of soft tissue and may
permit the dental or medical practitioner to avoid the second surgical
intervention associated with certain other implantable membranes. (FLS)
PerioFil(TM) is a thin, transparent film of synthetic collagen and other
biocompatible compounds. PerioSeal(TM) is a thin, semi-transparent synthetic
membrane of collagen, hydroxyapatite and other biocompatible compounds. Both
PerioFil(TM) and PerioSeal(TM) are being developed to provide protection and
comfort for dentin and bone from the migration of epithelium following
periodontal surgery as it slowly dissolves in the human body. (FLS)
EndoPlas(TM) is an endodontic enhancing biomaterial that, when energized by
certain laser wavelengths, enlarges and promotes sealing of the root canal. The
Company believes that the benefits associated with the use of EndoPlas(TM) will
include reduced trauma to the canal wall (which in turn may lead to fewer post-
operative complications), increased patient comfort and reduced chair time
compared to conventional root canal therapy. (FLS)
LaserBond(TM) is a patented paste formulation that can be used to seal
pits, fissures and cracks that develop in the tooth structure. When activated
with certain laser systems. LaserBond(TM) fuses to the tooth structure and acts
as a filling material. The Company's patents cover any such filling materials
involving hydroxyapatite, which constitutes 90% of dental
8
enamel and bone tissue. The Company believes that the hydroxyapatite-based
filling material can be successfully laser-fused with the natural hydroxyapatite
in the enamel and dentin to form a solid crystalline bond and thus become an
integral part of the tooth. (FLS)
Upon completion of the Company's testing and regulatory clearance, certain
formulations of the biomaterials will be marketed. (FLS) The Company intends to
submit applications to the FDA for clearance to market these biomaterials in the
United States; however, no such applications have been submitted to date. The
approval process can be expensive and time-consuming, and no assurance can be
given that any agency will grant approval for the sale of the Company's products
for routine clinical applications, or that the length of time the approval
process will require will not be extensive. (FLS) See "- Government
Regulation".
Canal Finder System. Endodontic procedures (root canals) involve removing
-------------------
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.
(FLS)
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. (FLS)
Other Endodontic Products. The Company offers a full range 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.
By offering a wide assortment of products to the dentist and endodontist,
management believes it is better positioned to cross-sell products, increase its
sales per sales call, and provide a full-service image to its customers. The
Company has an ongoing development effort, and may develop additional products
for which patents may be applied. (FLS)
Manufacturing
-------------
The Company, as a medical device manufacturer, is required by the FDA to
comply with Good Manufacturing Practice ("GMP") regulations. As a result, the
Company's manufacturing processes must meet certain standards regarding quality
assurance and documentation. See "--Government Regulation".
The Company fabricates certain proprietary components of the Millennium(TM)
system and Laser-35(TM) and Nylad(TM) series laser-based systems, and inspects,
tests and packages all
9
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.
Each laser-based system is assembled and tested by trained Company
production personnel. After assembly of a system is complete, it undergoes pre-
shipment testing, including extended periods of continuous operation.
The Company contracts with various non-affiliated companies to manufacture
certain of its laser-based components and other non-laser-based products under
private label, 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 almost all of its
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 thus impairing the Company's ability to
distribute its systems in many European countries requiring such an approval.
Product repairs are currently performed by the Company's distributors and
service affiliates overseas and by Company personnel and service affiliates in
the United States.
Engineering and Development
---------------------------
During the years ended December 31, 1997, 1996, and 1995, the Company
expended approximately $1,023,000, $984,000 and $927,000, 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 LaserBrush(TM).
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.
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 company to date that has
obtained FDA clearance to market a laser system, its Er:YAG laser system, for
certain hard-tissue applications. Premier manufactures Er:YAG, Nd:YAG and argon
laser systems. Certain foreign competitors, including KaVo, Inc. and Fotona,
Inc., have developed Er:YAG laser systems and are marketing them in Europe and
the Pacific Rim. Several companies, such as HGM, Inc. and Ion Laser Technology,
Inc., manufacture argon laser systems adapted from the industrial field and
typically used for specialized teeth-whitening applications and the curing of
various bonding acrylics. The Company believes that its HydroKinetic(TM)
technology incorporated in its Millennium(TM) system has certain advantages in
comparison to the traditional laser technology employed by its competitors for
hard-tissue applications, as clinical studies have indicated that there is no
adverse thermal effect associated with the use of the HydroKinetic(TM)
technology. (FLS) The Company is not aware of any other medical or dental
laser-based system that can cut through bone, enamel and dentin as effectively
as its Millennium(TM) system, that can be used efficiently on as wide a range of
applications, or that can incorporate air, water and a laser beam within a
single handpiece or delivery system. (FLS) 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. (FLS)
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
10
received clearance from the FDA for various related cosmetic surgical
applications for which BioLase intends to compete. In July 1997, the Company
received clearance by the FDA to market a laser-based surgical tissue cutting
system, the DermaLase(TM) system, for a broad range of dermatological and
general surgical soft tissue applications. The Company's primary competitors in
this field include Coherent, Inc., Sharplan Laser, Inc., and Palomar Medical
Technologies, Inc. which manufacture a variety of CO2 laser systems. The Company
believes that the wavelength employed in the Millennium(TM) 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 if and when it receives regulatory clearance to market Millennium(TM) for
appropriate hard tissue applications, the variability offered by its
Millennium(TM) system, by adjusting the amount of power and air and water used,
will provide a more versatile instrument to the practitioner. (FLS) 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 to reduce the power setting 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
Millennium(TM) system. (FLS)
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. (FLS) However, there can be no assurance that
technology superior to that of the Company will not be developed or that the
Company's patent and patent-pending protection will be upheld or will prove to
have commercial value. See "--Patents and Proprietary Technology".
BioLase faces substantial competition in all markets which it seeks to
distribute the Millennium(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 in the dental field and scalpels, saws, drills and punches
in the medical field. These 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 Millennium(TM) system represents a strong candidate to replace existing
technologies in various markets. (FLS)
Patents and Proprietary Technology
----------------------------------
The Company has patented and patent-pending technology related to the
Millennium(TM) system and the Laser-35(TM) and Nylad(TM) series systems,
including the U.S. patent issued on the TTCS(TM), and additional U.S. and
foreign patents and patent-pending technologies related to LaserSpray(TM),
LaserBrush(TM) and FlavorFlow(TM). 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 LaserBrush(TM). 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.
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.
11
Marketing
---------
The Company markets its Millennium(TM) system in Germany through a
distributor in that country, its other laser-based and related products through
distributors throughout the world and its endodontic product line via
telemarketing in the United States and through distributors in the international
market. The Company currently distributes its laser-based and endodontic
products in the United States, Europe, Middle East and Far East and is actively
working to expand its worldwide network. The Company is presently developing a
marketing plan for DermaLase(TM) in response to the FDA clearance received in
July 1997.
The Company seeks third-party endorsements from respected practitioners,
professional associations and universities. By inviting selected entities to
conduct independent evaluations, the Company hopes to induce those entities to
become influential independent supporters of the Company's products. (FLS)
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. (FLS)
The Company attends regional and national trade shows and sponsors seminars
to promote its Millennium(TM) system as well as its other 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. Management believes that establishing lasers and advanced
technology as competitive marketing advantages for practitioners will be
important in creating sales growth. (FLS)
The Company's long-term marketing strategy is based on the belief that the
consuming public will come to demand the use of laser-based and HydroKinetic(TM)
technologies in medical and dental treatments. (FLS) The Company believes 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. (FLS)
The Company expects to commence marketing of its LaserBrush(TM) and
FlavorFlow(TM) products in 1998 and 1999, respectively. (FLS) Distribution of
the LaserBrush(TM) will include marketing through (i) the use of infomercials
scheduled for release in the second half of 1998 and (ii) independent
distributors on a non-exclusive basis. The Company intends to market its
FlavorFlow(TM) and LaserSpray(TM) through major catalog houses in the United
States and through medical and dental distributors internationally. (FLS)
LaserSpray(TM) has been cleared for marketing by the FDA, and the Company
intends to introduce it commercially in 1999. (FLS)
Customers
---------
The Company's customers include distributors, dentists, medical doctors and
hospitals. With the introduction of the Company's LaserBrush(TM) scheduled for
release in the second half of 1998, the Company's customer base is expected to
extend to consumers as well. 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. Two distributors, Dental-
Fachhandel and Graham Field Asia Co. Ltd., accounted for approximately 41% and
17%, respectively, of the Company's sales during fiscal 1995. No other
customers accounted for more than 10% of the Company's sales in 1997, 1996 or
1995.
Although the Company's German distributor is required to purchase in excess
of an additional $10 million of Millennium(TM) systems under its minimum
purchase commitment, the amount of unfilled orders on hand is not significant.
At present, the Company maintains adequate inventories to supply other current
orders of 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.
12
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 clearance for the sale of the Company's products for routine
clinical applications, that the length of time the process will require will not
be extensive, or that the cost of the process will not be substantial.
There are two principal methods by which FDA regulated devices may be
marketed in the United States. One method is under a Pre-Market Approval
("PMA"). A PMA application is required for a Class III medical device that does
not qualify for consideration under Section 510(k), discussed below. The review
period for a PMA application is fixed at 180 days, but the FDA typically takes
much longer to complete its review. As part of the approval of a PMA
application, the FDA typically requires clinical testing to determine safety and
efficacy of the device. To conduct human clinical testing, typically the FDA
must approve an Investigational Device Exemption ("IDE"). Currently, the Company
does not have PMA applications pending for any of its products.
The other method is under Section 510(k) of the Food, Drug and Cosmetics
Act where applicants must demonstrate that the device for which clearance is
sought is substantially equivalent to a predicate device. The FDA's stated
intention is to review 510(k) notifications as quickly as possible, generally
within 90 days; however, the complexity of a submission or a requirement for
additional information will typically extend the review period beyond 90 days.
Domestic marketing of the product must be deferred until clearance is received
by the applicant from the FDA. In some instances, an IDE is required for
clinical trials for a 510(k) notification. In the event that a 510(k)
notification is turned down by the FDA, a PMA is generally then required. The
Company intends to utilize the 510(k) notification procedure whenever
applicable. Pursuant to a 510(k) application submitted by the Company to the
FDA, the Company in July 1997 received FDA clearance to market a laser system
for a broad range of dermatological and general surgical soft tissue
applications.
In 1991, the FDA granted the Company clearance to market its Laser-35(TM)
for soft tissue cutting in dentistry, and in 1992, the Nylad(TM) series lasers
also received clearance by the FDA for soft tissue cutting in dentistry. The
Company also received clearance from the FDA for its LaserSpray(TM) tissue
cooling system in 1995. The Company has received clearance to market its erbium
laser technology for certain soft tissue cutting applications.
The Company is actively pursuing clearance to market its Millennium(TM)
system for certain applications within the dental field and expects to pursue
clearances to market the Millennium(TM) 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 in its attempt to obtain
clearance from the FDA to market its Millennium(TM) system for that purpose. The
results of those studies were submitted by the Company to support its
application filed with the FDA under 510(k) equivalency to obtain clearance to
market its Millennium(TM) system in the United States for certain hard tissue
dental applications. The application is currently under review by the FDA.
During 1996, the Company successfully completed clinical studies in Germany
for both soft and hard tissue applications resulting in its obtaining clearance
to market its Millennium(TM) system in Germany for various dental 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 the appropriate 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
approvals, would prevent the Company from commercializing its products as
anticipated and could have a materially adverse effect on the business of the
Company. (FLS)
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
13
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 by June, 1998 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 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 24, 1998, the Company employed 34 people on a full-time basis,
consisting of 22 people in engineering/development/manufacturing, 5 in
administration and 7 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.
Forward Looking Statements
--------------------------
The forward looking statements contained in this Annual Report on Form
10-K, including those contained in Item 8 "Management's Discussion and Analysis
of Financial Condition and Results of Operations", are subject to various risks,
uncertainties and other factors that could cause actual results to differ
materially from the results anticipated in such forward looking statements.
Included among the important risks, uncertainties and other factors are those
hereinafter discussed.
Few of the forward looking statements in this Annual Report on Form 10-K
deal with matters that are within the unilateral control of the Company. There
is substantial government regulation of the manufacture and sale of medical
products, including many of the Company's products, by governmental agencies in
both the United States and foreign countries. These governmental agencies often
have considerable discretion in determining whether and when to approve the
marketing of the Company's products that have not yet received such approval.
14
The availability of equity and debt financing to the Company is affected
by, among other things, domestic and world economic conditions and the
competition for funds. Rising interest rates might affect the feasibility of
debt financing that is offered. Potential investors and lenders will be
influenced by their evaluations of the Company and its products and comparisons
with alternative investment opportunities.
The Company's products do not provide the exclusive means for accomplishing
an objective, and customers may choose alternative means. Many of the Company's
competitors have much greater financial resources and technical capabilities
than does the Company, which may enable such competitors to design and produce
superior products or to market their products in a manner that achieves
commercial success even in the face of technical superiority on the part of the
Company's products.
The Company's patents may not offer effective protection against
competitors. Competitors may be able to design around the Company's patents or
employ technologies not covered by such patents. In addition, the Company's
patents may be challenged, and even if such patents are upheld, the diversion of
financial and human resources associated with patent litigation could adversely
affect the Company. The Company may be found to be violating the patents of
others and forced to obtain a license under such patents or modify the design of
its products.
Rapid technological developments are expected to continue in the industries
in which the Company competes. The Company may not be able to develop,
manufacture and market products which meet changing user requirements or which
successfully anticipate or respond to technological changes on a cost-effective
and timely manner.
While the Company believes that its technology incorporated into its
Millennium(TM) surgical tissue cutting system should be effective in a broad
range of medical and dental applications, this belief (except with respect to
dental hard tissue and certain 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 Millennium(TM)
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 or variations thereof for any
additional applications or in any additional jurisdictions. See "Business - The
Millennium(TM) System."
ITEM 2. PROPERTIES
The Company's principal offices are at 981 Calle Amanecer, San Clemente,
California where the Company leases approximately 23,000 square feet pursuant to
a lease expiring in 2000. In addition, the Company's sales office is located at
8029 Forsyth Boulevard, Suite 201, Clayton, Missouri where the Company leases
approximately 600 square feet pursuant to a month-to-month lease. The Company
believes that its facilities are sufficient for its current needs.
ITEM 3. LEGAL PROCEEDINGS
On August 8, 1997, the Company filed a Complaint, which was subsequently
amended, in the United States District Court for the Central District of
California, Western Division, in an action entitled BioLase Technology, Inc. v.
Rudolf Schneider. In this action, the Company 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
in amounts owned to the Company by this former distributor for goods sold and
delivered and services performed by the Company. On March 6, 1998, Schneider
answered the complaint denying liability and filed counterclaims against the
Company. Mr. Schneider's counterclaims 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. Concerning the
distribution agreement, Schneider seeks damages arising from the Company's
alleged failure to disclose that the value of his distributorship had been
impaired by the Company's alleged previous practice of selling allegedly
defective product in the
15
relevant territory. Concerning the goods and services, Schneider admits receipt
of the relevant goods but contends they were defective and nonconforming. The
Company intends both to pursue its claims and to defend against the counter-
claim vigorously. Discovery has not yet commenced, and no trial date has yet
been scheduled.
On April 26, 1995, the Company was named as an additional defendant in
Hazel Lafern Moore v. David A. Pyner, D.D.S., Florida Dental Team, P.A.,
Princeton Medical Management Southeast, Inc. and Laser Endo Technic, Inc.
initially filed in the 17th Judicial Circuit in and for Broward County, Florida
on April 21, 1994. The plaintiff alleges that she underwent laser dental surgery
with a laser allegedly produced by the Company and seeks unspecified damages
from the Company in excess of $15,000 on theories of product liability, based on
allegations that the laser was defective by reason of design, manufacture and
lack of product warnings. The Company has answered the complaint, denying the
majority of the plaintiff's material factual allegations and asserting various
affirmative defenses. The Company is vigorously contesting liability. There has
been little activity in this case since the beginning of 1997 and the case has
not yet been set for trial. The Company believes that liability, should there be
any resulting from plaintiff's claims, would be covered by insurance.
Trans Leasing International v. Elie M. Makhoul v. Laser Endo Technic
Corporation, was filed July 6, 1994 in the Circuit Court of Cook County,
Illinois, Municipal Department, First District. This action involves a third-
party claim against the Company in a suit in which a dentist, who was the lessee
of a dental laser system manufactured by the Company, had been sued for breach
of the equipment lease by the financing institution that was the lessor.
Plaintiff's theories include common law fraud, violation of the Consumer Fraud
And Deceptive Business Practices Act, and intentional and negligent
misrepresentations. The third party claim against the Company in this action is
for $78,408 in compensatory damage, $15,000 in lost profits, $50,000 in punitive
damages, and attorney's fees and related costs. The Company intends to defend
against the claims vigorously. The case has been inactive since the third party
plaintiff filed for protection under the U.S. Bankruptcy Law on July 10, 1995, a
filing that was dismissed during 1997.
The Company does not believe that these lawsuits or any other lawsuits to
which it is a party will have a material adverse effect on the Company's
financial condition. (FLS)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since November 12, 1992, the Company's common stock has been authorized for
inclusion on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") and is included in the Nasdaq Stock Market, Inc.'s SmallCap
Market. The Company's common stock is quoted on such system under the symbol
"BLTI". The following table sets forth, for the periods indicated, the high and
low sales prices for the common stock as reported by NASDAQ. The following
quotations should not be construed to imply that an established trading market
for the common stock exists.
16
[Download Table]
High Low
------------ ------------
1997
----
1st Quarter 4 9/16 3
2nd Quarter 6 1/4 2 1/2
3rd Quarter 4 5/8 2 15/16
4th Quarter 4 3/4 2 13/16
1996
----
1st Quarter 3 7/8 2 1/8
2nd Quarter 5 9/16 3 1/8
3rd Quarter 4 5/8 2 1/2
4th Quarter 4 3/4 2 5/16
On November 17, 1997, the one share of the Company's Series A 6% Redeemable
Cumulative Convertible Preferred Stock ("Preferred Stock") then remaining
outstanding was converted by the holder thereof (the "Holder") into 17,109
shares of the Company's common stock. Shares of Preferred Stock were
convertible into a variable number of shares of common stock calculated, subject
to certain upper and lower limits, by dividing the sum of Fifty Thousand Dollars
($50,000) by eighty percent (80%) of the average closing price of the Company's
common stock during the five trading days preceding conversion. No underwriters
were involved in the conversion, and no additional consideration was received by
the Company in connection therewith.
The issuance of the common stock upon conversion was exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Sections 3(a)(9) and 4(2) thereof as an exchange
of securities by an issuer with its existing security holders exclusively where
no commission or other remuneration was paid or given directly or indirectly for
soliciting such exchange and as a transaction by an issuer not involving any
public offering. The Holder represented and agreed that the shares of common
stock issued upon conversion of the Preferred Stock would be acquired by the
Holder in good faith for investment and not with a view to the distribution
thereof. The Holder also agreed that the Holder will only offer or resell such
shares of common stock in compliance with the provisions of all applicable
securities laws and regulations and that, in particular, Holder will offer or
resell such shares of common stock only if such shares are registered under the
Securities Act or an exemption from such registration is available (in which
latter case the Company shall have received an opinion of counsel, in form and
substance reasonably satisfactory to the Company, to such effect). The
certificate representing the shares of common stock issued upon conversion of
the share of Preferred Stock had a legend endorsed thereon reflecting the
restrictions on transferability arising out of the foregoing matters, and the
Company has issued "stop transfer" instructions to its transfer agent.
The Company has not paid any cash dividends on its common stock since its
incorporation and anticipates that, for the foreseeable future, earnings, if
any, will continue to be retained for use in its business.
As of March 24, 1998, the total number of record holders of the Company's
common stock was 349.
17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data for
the five years ended December 31, 1997, 1996, 1995, 1994 and 1993. This
information should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto included in Item 8 herein and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 herein.
[Enlarge/Download Table]
Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993 (1)
-------- -------- -------- -------- --------
(in thousands, except per share data)
-------------------------------------
Consolidated Statements of
Operations Data:
Sales............................ $ 1,786 $ 692 $ 1,152 $ 1,136 $ 2,416
Gross profit (loss).............. $ 259 $ 133 $ 311 $ (57) $ (491)
Operating expenses............... $ 3,258 $ 2,622 $ 2,356 $ 3,918 $ 7,014
Loss from operations............. $(2,999) $(2,489) $(2,045) $(3,975) $(7,506)
Loss before extraordinary item... $(2,824) $(2,463) $(2,024) $(3,472) $(7,549)
Net loss......................... $(2,824) $(2,463) $(2,024) $(3,050) $(7,549)
Basic loss per share:
Loss before extraordinary item. $ (0.21) $ (0.21) $ (0.21) $ (0.45) $ (1.57)
Extraordinary gain............. $ -- $ -- $ -- $ 0.05 $ --
Net loss....................... $ (0.21) $ (0.21) $ (0.21) $ (0.40) $ (1.57)
Shares used in computation of
basic loss per share (2)....... 13,385 11,532 9,851 7,671 4,794
December 31,
------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands)
--------------
Consolidated Balance Sheet Data:
Working capital.................. $ 1,719 $ 3,670 $ 1,524 $ 1,170 $ 1,370
Total assets..................... $ 3,396 $ 4,689 $ 2,512 $ 2,427 $ 4,894
Long-term liabilities............ $ -- $ -- $ -- $ 22 $ 629
Stockholders' equity (3)......... $ 2,095 $ 3,914 $ 1,844 $ 1,684 $ 2,691
(1) 1993 includes the operations of Societe Endo Technic, S.A. which was
divested in 1994.
(2) The basis for determining the number of shares used in computing basic loss
per share is described in Note 1 to Consolidated Financial Statements.
(3) The Company has never declared or paid dividends on its common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
18
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 a
laser-based surgical tissue cutting system in the United States 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) under the name DermaLase(TM). (FLS) The Company is presently
developing its marketing plan for the DermaLase(TM) system and anticipates
commencement of production of DermaLase(TM) in mid-1998. (FLS)
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. (FLS) The
continued design and manufacturing of various test and production fixtures
contributed to the manufacturing inefficiencies experienced during the year.
The Company expects to realize improved margins on its Millennium(TM) sales
during 1998 through improved production layouts and efficiencies and improved
pricing in its cost of materials. (FLS) Additionally, gross profit in 1997 was
affected by an increase in the inventory reserve related to the Company's prior
generation 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 as yet unreleased LaserBrush(TM). (FLS) 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, net, increased $149,000, to $175,000 in 1997, compared to
$26,000 in 1996. The increase was due to the Company recording interest income
on higher average levels of United States Treasury Notes held during 1997.
19
The Company's net loss increased $361,000, or 15%, to $2,824,000 in 1997,
compared to a net loss of $2,463,000 in 1996. The loss per share remained the
same at $0.21 per share for 1997 and 1996 due to the increase in the weighted
average shares outstanding; 13,385,318 in 1997 compared to 11,531,527 in 1996.
Results of Operations - 1996 as Compared to 1995
------------------------------------------------
Sales for 1996 were $692,000, compared to $1,152,000 reported in 1995, a
decrease of $460,000, or 40%. The Company's laser division reported sales of
$290,000, a decrease of $447,000 from the $737,000 reported in 1995. The
Company's endodontic division reported sales in 1996 comparable to those
reported in 1995.
The decrease in laser division sales principally reflects reduced laser
unit shipments to Germany, the primary user market for the Company's laser-based
systems, attributable to a pending product introduction and the Company's
establishing new distribution arrangements for the German market. These
arrangements were partially motivated by a desire to obtain a more experienced
German distributor in anticipation of the introduction of the Company's new
Millennium(TM) tissue cutting system, which addresses a broader market than the
Company's previous laser-based systems. (FLS) The Company shipped its first
production unit of Millennium(TM) to Germany for clinical evaluation and
demonstration purposes during the third quarter of 1996. Following such
evaluation and demonstration, the Company executed a distribution agreement with
a major German dental equipment distributor for distribution of the
Millennium(TM). Minimum purchase commitments under the agreement are $12,000,000
with shipments under the agreement that commenced in the second quarter of 1997.
Domestically, the Company does not anticipate a significant increase in sales
for its laser division unless and until it receives regulatory clearance to
market its laser-based systems for certain hard tissue applications within the
dental field, soft tissue applications within the dermatological field, and
various other hard and soft tissue applications. (FLS) The Company plans to
apply for additional FDA clearances relating to dermatology and cosmetic surgery
utilizing its HydroKinetic(TM) technology. (FLS)
Gross profits were $133,000, or 19% of sales for 1996, compared to
$311,000, or 27% of sales, for 1995. The Company's laser division reported a
gross loss of $89,000 on sales of $290,000 for 1996 compared to a gross profit
of $84,000 on sales of $737,000 reported in 1995. The movement from a gross
profit to a gross loss position for the laser division was due principally to
the reduction in sales for 1996. While product contribution margins in 1996 for
the laser division were similar to those in 1995, the disproportionate reduction
in gross profit compared to sales was due principally to the lower absorption
during 1996 of fixed overhead costs as a result of the lower sales volume. The
Company's endodontic division reported gross profits in 1996 comparable to those
reported in 1995 on similar sales for both years.
Operating expenses increased $266,000, or 11%, to $2,622,000 in 1996, from
the $2,356,000 reported in 1995. Sales and marketing expenses in 1996 were
comparable to 1995 while general and administrative expenses increased $183,000,
or 22%, to $1,018,000 in 1996, compared to $835,000 reported in 1995. The
Company anticipates increased sales and marketing expenses during 1997 in
support of the planned launching of its Millennium(TM) system. (FLS) The
increase in general and administrative expenses is due principally to
promotional expenses incurred in communicating the Company's technology to the
investment, medical, dental and scientific communities, costs related to the
Company's decision to settle a legal claim filed in 1995 and other legal costs
related to contract and patent counsel, partially offset by reductions in the
Company's general insurance premiums. Engineering and development expenses were
$984,000 in 1996, an increase of $57,000, or 6%, from the $927,000 reported in
1995. The increase was due principally to costs related to engineering design
and clinical studies of its Millennium(TM) system. Increased engineering and
development costs are anticipated during 1997 in support of the design of the
LaserBrush(TM) toothbrush and other product related research. (FLS)
The Company's net loss for 1996 increased by $439,000, or 22%, from a net
loss of $2,024,000 in 1995, to a net loss of $2,463,000 in 1996. The net loss
per share remained the same at $0.21 per share for 1996 as in 1995 due to the
increase in weighted average shares outstanding; 11,532,000 in 1996 compared to
9,851,000 in 1995.
20
Financial Condition
-------------------
The Company's working capital needs have been financed by the issuance of
various equity securities through several private placement offerings over the
past three years, which generated net proceeds of $720,000, $4,400,000 and
$1,293,000 during the years ended December 31, 1997, 1996 and 1995,
respectively. Working capital at December 31, 1997 was $1,719,000, compared to
$3,670,000 at December 31, 1996, reflecting the substantial proceeds received
from the sale of equity securities in the fourth quarter of 1996 and the use of
such proceeds to fund 1997 operations.
Cash and cash equivalents and marketable securities decreased an aggregate
of $3,009,000 in 1997 due principally to cash used by operating activities of
$4,009,000, partially offset by net proceeds of $720,000 received from the
issuance of the Company's common stock through a private placement and net
proceeds of $301,000 from a new bank line of credit established to finance
inventories. Cash used by operating activities in 1996 was $2,151,000. The
increase in cash used by operating activities in 1997 was due principally to
substantial increases in accounts receivable and inventories associated with
Millennium(TM) sales and production and an additional $361,000 in net loss. Net
cash provided by investing activities totaled $2,715,000 in 1997 compared to net
cash used by investing activities of $3,576,000 in 1996. The significant change
in investing activity cash flows is primarily due to a $4,000,000 purchase of
United States Treasury Notes reduced by the liquidation of $500,000 of such
notes during 1996, followed by the additional liquidation of such notes totaling
$2,872,000 to fund operations in 1997. Net cash provided by financing activities
decreased $3,353,000, to $1,158,000 in 1997, from $4,511,000 in 1996. The
decrease was due principally to the decrease in proceeds from issuance and sale
of equity securities.
Current assets decreased $1,425,000, or 32%, from December 31, 1996 to
December 31, 1997. This change was due mainly to the $2,872,000 decrease in
marketable securities in the form of United States Treasury Notes held by the
Company at December 31, 1997 as compared to 1996, partially offset by a $632,000
increase in inventories and a $915,000 increase in accounts receivable, both of
which were related to Millennium(TM) sales and production in 1997.
Current liabilities at December 31, 1997 increased $526,000, or 68%, from
$775,000 at December 31, 1996. This change was due principally to $301,000 in
net borrowings under a bank line of credit established in 1997 and a $372,000
increase in accounts payable, reflecting an increase in inventory purchase
activity associated with the Millennium(TM) production in 1997, partially offset
by a decrease in accrued expenses of $135,000, reflecting lower 1997
professional fees and other costs associated with financing activity.
Property and equipment balances were comparable as of December 31, 1997 and
1996, reflecting the fact that 1997 capital expenditures approximated 1997
depreciation charges. Patents, trademarks and licenses at December 31, 1997
increased $64,000 from December 31, 1996 due to capitalized costs related to
various patent and trademark applications. Other assets at December 31, 1997
increased $80,000 from December 31, 1996 due to expenditures consisting mainly
of deposits with vendors.
Stockholders' equity at December 31, 1997 was $2,095,000 compared to
$3,914,000 at December 31, 1996. In October 1996, the Company completed a
private placement of 100 shares of its Series A 6% Redeemable Cumulative
Convertible Preferred Stock, receiving net proceeds of $4,400,000. 99 shares of
the preferred stock were converted into an aggregate 1,800,018 shares of the
Company's common stock prior to the end of 1996. The remaining share of
preferred stock was converted into 17,109 shares of the Company's common stock
in November 1997. In February 1997, the Company issued 200,000 shares of common
stock in another private placement and received net proceeds of $720,000. The
net loss of $2,824,000
21
in 1997, partially offset by the private placement proceeds, is responsible for
the decrease in stockholders' equity from December 31, 1996 to 1997.
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
stocks or through borrowings until it achieves sustained profitability through
increased sales and product improvement through engineering and cost
containment. (FLS) The Company's focus has been realigned to emphasize the
marketing of its laser-based HydroKinetic(TM) tissue cutting system, the
Millennium(TM), its yet-to-be-released LaserBrush(TM) and a new reduced-power
variation of the Millennium(TM), called DermaLase(TM), which shall be configured
to accommodate applications in dermatology and general soft-tissue surgery.
(FLS)
Financing the development of laser-based medical and dental devices and
instruments and the operations of the Company have been achieved principally
through the private placements of preferred and common stocks and the exercises
of stock options and warrants. During the three years ended December 31, 1997,
the Company has raised approximately $6,413,000 of equity funds. Management
believes that significant additional resources will be required, commencing in
the first half of 1998, to complete the processes designed to lead to FDA
clearance to market the Company's laser-based technologies for various dental
and medical applications in the United States and to fund the Company's working
capital needs.
The Company expects to generate the necessary capital resources through the
sale of its products, the issuance of equity securities in either public or
private placements, or debt financing. No assurance can be given, however, that
the Company will be able to obtain such capital resources. (FLS)
Based on the Company's current business plan, the Company anticipates that
it will need additional financing during the first half of 1998 to support
additional working capital requirements. There are no assurances that the
Company will be successful in obtaining such financing. If unsuccessful in
arranging such financing, the Company may be able to extend the period before
additional financing is required by deferring the creation or satisfaction of
various commitments and deferring the introduction of various products or entry
to various markets. If the Company were unable to obtain such financing, 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 Company
is presently considering various options to obtain financing sufficient to meet
its operational needs during 1998. (FLS)
The Company is presently analyzing various computer software and hardware
to meet its operational needs and anticipates capital expenditures to increase
significantly during 1998 in connection with the acquisition of such software
and hardware. (FLS) 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 manufacturer of such software. The Company
believes that its present software and hardware is Year 2000 compliant and
intends to obtain certification of such for any future purchases of computer
software and hardware. Additionally, the ability of third parties with whom the
Company transacts business to adequately address their Year 2000 issues is
outside the control of the Company. There can be no assurance that the failure
of the Company or such third parties to adequately address their respective Year
2000 issues will not have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
22
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which sets forth accounting and disclosure
requirements for stock-based compensation arrangements. SFAS No. 123
encourages, but does not require, companies to measure stock-based compensation
cost using a fair-value method, rather than the intrinsic-value method
prescribed by Accounting Principles Board Opinion No. 25. The Company has
adopted the disclosure-only provisions of SFAS No. 123. See Note 9 of Notes to
Consolidated Financial Statements for information regarding the Company's stock-
based compensation plans.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
was adopted by the Company effective for the year ended December 31, 1997, as
required by the statement. For the years ended December 31, 1997, 1996 and
1995, the Company's potential common shares have an antidilutive effect on the
loss per share and, therefore, have not been used in determining the total
weighted average shares outstanding. See Note 9 of Notes to Consolidated
Financial Statements for a description of the securities that could potentially
dilute earnings per share in the future, should the Company report income.
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 incur increases in the cost of labor
and some materials, in the face of requests for price reductions from customers.
Due to intense competition in 1997, 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. (FLS)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not currently hold any market risk sensitive instruments
for trading or other purposes
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company at December 31, 1997
and 1996 and for the three year period ended December 31, 1997, along with the
notes thereto, and the Report Of Independent Accountants thereon, required to be
filed in response to this Item 8, begin at page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 of Part III is incorporated by reference
to the definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to
be held May 19, 1998, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
23
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 of Part III is incorporated by reference
to the definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to
be held May 19, 1998, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 12 of Part III is incorporated by reference
to the definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to
be held May 19, 1998, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 13 of Part III is incorporated by reference
to the definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to
be held May 19, 1998, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are being filed with this Annual Report on Form
10-K or are incorporated by reference therein in accordance with the
designated footnote references.
3. Articles of Incorporation and Bylaws
3.1 Restated Certificate of Incorporation, as Amended. (2)
3.2 Amended and Restated Bylaws. (3)
4. Instruments Defining the Rights of Holders, Including Indentures
4.3 Certificate of Designations, Preferences and Rights of Series
A 6% Redeemable Cumulative Convertible Preferred Stock of
BioLase Technology, Inc. (5)
4.4 Form of Participant Stock Purchase Warrant Certificate. (6)
4.5 Form of Agent Stock Purchase Warrant Certificate. (6)
10. Material Contracts
10.1 Premises Lease for 981 Calle Amanecer, San Clemente,
California. (1)
10.2 1990 Stock Option Plan. (1)
10.9 1992 Stock Option Plan. (1)
10.18 Amended and Restated 1993 Stock Option Plan. (3)
10.18a First Amendment to Amended and Restated 1993 Stock Option
Plan. (4)
10.19 Amended and Restated 1993 Stock Compensation Plan. (2)
10.20 Form of Stock Option Agreement under the 1993 Stock Option
Plan. (2)
10.26* Distribution Agreement between the Company and Orbis High
Tech Dental GmbH. (6)
24
21. Subsidiaries (1)
23. Consents of Experts and Counsel
27. Financial Data Schedule (electronic filing only)
_______________
* Portions of this Agreement have been omitted pursuant to a
confidentiality request filed with the Securities and Exchange
Commission.
(1) Filed with the Company's Registration Statement on Form S-1 dated
October 9, 1992 and incorporated by reference.
(2) Filed with the Company's 1993 Annual Report on Form 10-K dated
April 14, 1994 and incorporated by reference.
(3) Filed with the Company's 1995 Second Quarter Report on Form 10-
QSB dated September 15, 1995 and incorporated by reference.
(4) Filed with the Company's 1995 Annual Report on Form 10-KSB dated
May 6, 1996 and incorporated by reference.
(5) Filed with the Company's 1996 Third Quarter Report on Form 10-QSB
dated November 19, 1996 and incorporated by reference.
(6) Filed with the Company's 1996 Annual Report on Form 10-KSB dated
April 11, 1997 and incorporated by reference.
(b) Reports on Form 8-K
None
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BIOLASE TECHNOLOGY, INC.
a Delaware corporation
/s/ Donald A. La Point
----------------------
Donald A. La Point
President, Chief Executive Officer,
and Director
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 31, 1998.
Signatures Title
---------- -----
Principal Executive Officer:
/s/ Donald A. La Point President, Chief Executive Officer,
-------------------------------- and Director
(Donald A. La Point)
Principal Financial and Accounting Officer:
/s/ Stephen R. Tartamella Vice President, Chief Financial Officer,
-------------------------------- and Secretary
(Stephen R. Tartamella)
/s/ Federico Pignatelli Director and Chairman of the Board
--------------------------------
(Federico Pignatelli)
/s/ George V. d'Arbeloff Director
--------------------------------
(George V. d'Arbeloff)
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
__________
[Download Table]
Page
----
FINANCIAL STATEMENTS
Report Of Independent Accountants F-2
Consolidated Balance Sheets As Of December 31, 1997 And 1996 F-3
Consolidated Statements of Operations For The Years Ended
December 31, 1997, 1996 And 1995 F-4
Consolidated Statements of Stockholders' Equity For The Years Ended
December 31, 1997, 1996 And 1995 F-5
Consolidated Statements of Cash Flows For The Years Ended
December 31, 1997, 1996 And 1995 F-6
Notes To Consolidated Financial Statements F-8
SCHEDULES
Schedules numbered in accordance with Rule 5.04 of Regulation S-X:
Report Of Independent Accountants S-1
II - Consolidated Valuation And Qualifying Accounts And Reserves S-2
All Schedules, except Schedule II, have been omitted as the required information
is shown in the consolidated financial statements, or notes thereto, or the
amounts involved are not significant or the schedules are not applicable.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
__________
The Board of Directors
BioLase Technology, Inc.
We have audited the accompanying consolidated balance sheets of BioLase
Technology, Inc. and its subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BioLase
Technology, Inc. and its subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
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.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
February 27, 1998
F-2
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 And 1996
__________
[Enlarge/Download Table]
1997 1996
---- ----
ASSETS:
Current assets:
Cash and cash equivalents $ 213,074 $ 349,457
Marketable securities 627,817 3,500,000
Accounts receivable, less allowance of $117,464 in 1997 and $21,957
in 1996 1,060,252 145,463
Inventories, net of reserves of $620,949 in 1997 and $485,154 in 1996 1,008,777 376,479
Prepaid expenses and other current assets 110,094 73,723
------------ ------------
Total current assets 3,020,014 4,445,122
Property and equipment, net 181,804 194,078
Patents, trademarks and licenses, less accumulated amortization of
$330,466 in 1997 and $327,614 in 1996 95,508 31,215
Other assets 98,666 18,929
------------ ------------
Total assets $ 3,395,992 $ 4,689,344
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Line of credit $ 301,233 $ --
Accounts payable 481,240 109,582
Accrued expenses 480,440 615,635
Accrued costs related to dissolution of foreign subsidiary 38,069 46,167
Other current liabilities -- 3,980
------------ ------------
Total liabilities 1,300,982 775,364
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.001, 1,000,000 shares authorized:
Series A 6% Redeemable Cumulative Convertible Preferred Stock, no
shares issued and outstanding at December 31, 1997 and 1 share issued
and outstanding at December 31, 1996 -- --
Common stock, par value, $.001, 50,000,000 shares authorized, issued
13,462,636 in 1997 and 13,129,949 in 1996 13,463 13,130
Additional paid-in capital 29,755,652 28,700,279
Receivable from stockholders and unearned services (50,766) --
Accumulated deficit (27,623,339) (24,799,429)
------------ ------------
Total stockholders' equity 2,095,010 3,913,980
------------ ------------
Total liabilities and stockholders' equity $ 3,395,992 $ 4,689,344
============ ============
See accompanying notes to consolidated financial statements.
F-3
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1997, 1996 And 1995
__________
[Download Table]
1997 1996 1995
---- ---- ----
Net sales $ 1,786,285 $ 691,829 $ 1,152,182
Cost of sales 1,527,242 559,169 841,162
------------ ------------ ------------
Gross profit 259,043 132,660 311,020
------------ ------------ ------------
Operating expenses:
Sales and marketing 955,192 618,964 594,651
General and administrative 1,280,171 1,018,270 834,669
Engineering and development 1,022,733 984,418 926,752
------------ ------------ ------------
Total operating expenses 3,258,096 2,621,652 2,356,072
------------ ------------ ------------
Loss from operations (2,999,053) (2,488,992) (2,045,052)
Interest income, net 175,143 25,733 21,230
------------ ------------ ------------
Net loss $ (2,823,910) $ (2,463,259) $ (2,023,822)
============ ============ ============
Basic loss per share $(0.21) $(0.21) $(0.21)
====== ====== ======
Weighted average shares outstanding 13,385,318 11,531,527 9,850,961
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1997, 1996 And 1995
__________
[Enlarge/Download Table]
Receivable
From
Preferred Stock Common Stock Additional Stockholders
---------------- --------------------- Paid-In And Unearned Accumulated
Shares Amount Shares Amount Capital Services Deficit Total
---------- ------ ------------ -------- ------------ ------------ ------------- -----------
Balances at January 1, 1995 8,412,112 $ 8,412 $22,016,913 $(29,374) $(20,312,348) $ 1,683,603
Private placements of common stock 2,300,000 2,300 1,290,407 -- -- 1,292,707
Exercise of stock options 39,150 39 67,986 -- -- 68,025
Exercise of stock purchase
warrants 489,900 490 793,712 -- -- 794,202
Issuance of shares for fractional
interest on reverse split 2 -- -- -- -- --
Earned escrow shares -- -- -- 29,374 -- 29,374
Net loss -- -- -- -- (2,023,822) (2,023,822)
---------- ------- ----------- -------- ------------ -----------
Balances at December 31, 1995 11,241,164 11,241 24,169,018 -- (22,336,170) 1,844,089
Private placement of preferred
stock 100 $ -- -- -- 4,400,000 -- -- 4,400,000
Exercise of stock options -- -- 88,766 89 133,061 -- -- 133,150
Conversion of preferred stock to
common stock (99) -- 1,800,018 1,800 (1,800) -- -- --
Issuance of shares for fractional
interest on reverse split -- -- 1 -- -- -- -- --
Net loss -- -- -- -- -- -- (2,463,259) (2,463,259)
--------- ------ ---------- ------- ----------- -------- ------------ -----------
Balances at December 31, 1996 1 -- 13,129,949 13,130 28,700,279 -- (24,799,429) 3,913,980
Private placement of common stock -- -- 200,000 200 719,685 -- -- 719,885
Exercise of stock options -- -- 99,000 99 137,151 -- -- 137,250
Issuance of stock primarily for
services -- -- 43,850 44 147,761 -- -- 147,805
Issuance of stock primarily for
unearned services -- -- 14,250 14 50,752 (50,766) -- --
Cancellation of previously issued
stock -- -- (41,523) (41) 41 -- -- --
Conversion of preferred stock to
common stock (1) -- 17,109 17 (17) -- -- --
Issuance of shares for fractional
interest on reverse split -- -- 1 -- -- -- -- --
Net loss -- -- -- -- -- -- (2,823,910) (2,823,910)
--------- ------ ---------- ------- ----------- -------- ------------ -----------
Balances at December 31, 1997 -- $ -- 13,462,636 $13,463 $29,755,652 $(50,766) $(27,623,339) $ 2,095,010
========= ====== ========== ======= =========== ======== ============ ===========
See accompanying notes to consolidated financial statements.
F-5
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1997, 1996 And 1995
__________
[Enlarge/Download Table]
1997 1996 1995
------------ ----------- -----------
Cash flows from operating activities:
Net loss $(2,823,910) $(2,463,259) $(2,023,822)
Adjustments to reconcile net loss to net cash used by
operating activities:
Earned escrow shares of common stock -- -- 29,374
Depreciation and amortization 105,649 149,746 183,442
Issuance of common stock for services 147,805 -- --
Provision for bad debts 95,507 (5,900) 337
Provision for inventory write-off 164,488 37,663 24,500
Changes in assets and liabilities:
Accounts receivable (1,010,296) (74,941) (14,689)
Inventories (796,786) (23,214) 228,664
Prepaid expenses and other assets (116,108) 98,850 (46,762)
Accounts payable 371,658 67,702 (37,561)
Accrued expenses (135,195) 210,883 (16,633)
Accrued costs related to dissolution of foreign subsidiary (8,098) (63,581) (17,526)
Other current liabilities (3,980) (85,020) 18,000
------------ ------------ ------------
Net cash used by operating activities (4,009,266) (2,151,071) (1,672,676)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of marketable securities -- (4,000,000) --
Sale of marketable securities 2,872,183 500,000 --
Additions to property and equipment (90,523) (54,808) (47,041)
Additions to patents, trademarks and licenses (67,145) (21,145) (10,070)
------------ ------------ ------------
Net cash (used) provided by investing activities 2,714,515 (3,575,953) (57,111)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings under the line of credit, net 301,233 -- --
Payments of capital lease obligations -- (22,324) (21,533)
Proceeds from issuance of common stock, net 719,885 -- 1,292,707
Proceeds from exercise of stock options 137,250 133,150 68,025
Proceeds from exercise of stock purchase warrants -- -- 794,202
Proceeds from issuance of preferred stock, net -- 4,400,000 --
------------ ------------ ------------
Net cash provided by financing activities 1,158,368 4,510,826 2,133,401
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (136,383) (1,216,198) 403,614
Cash and cash equivalents at beginning of year 349,457 1,565,655 1,162,041
------------ ------------ ------------
Cash and cash equivalents at end of year $ 213,074 $ 349,457 $ 1,565,655
============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For The Years Ended December 31, 1997, 1996 And 1995
__________
[Download Table]
1997 1996 1995
---- ---- ----
Supplemental cash flow disclosure:
Cash paid during the year for interest $ 4,005 $ 4,410 $13,312
======== ========== =======
Noncash financing activities:
Issuance of common stock for earned services $147,805 $ -- $ --
======== ========== =======
Conversion of preferred stock to common stock $ 44,000 $4,356,000 $ --
======== ========== =======
See accompanying notes to consolidated financial statements.
F-7
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 And 1995
__________
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 BioLase
Technology, Inc. and its 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, 1997 and 1996, the Company had approximately $38,000 and
$161,000, respectively, of cash balances that were in excess of the
federally-insured limit of $100,000 per bank.
Continued
F-8
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
-----------
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, 1997 and 1996 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.
Continued
F-9
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
-----------
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 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 Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-
Based Compensation". SFAS No. 123 defines a fair value based method of
accounting for employee stock options. Fair value of the stock option is
determined considering factors such as the exercise price, the expected
life of the option, 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 of the option. Under the fair value based
method, compensation cost is
Continued
F-10
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
1. Summary Of Significant Accounting Policies, Continued:
Stock-Based Compensation, Continued:
-----------------------------------
measured at the grant date based on the fair value of the award and is
recognized over the service period. Pro forma disclosures for entities
that elect to continue to measure compensation cost under the intrinsic
method provided by Accounting Principles Board No. 25 must include the
effects of all awards granted in fiscal years that begin after December 15,
1995.
Basic Loss Per Share:
--------------------
Basic loss per share was determined by dividing the net loss by the
weighted average number of shares outstanding during the applicable period.
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 128, "Earnings Per Share," which was adopted by the Company
effective for the year ended December 31, 1997, as required by the
statement. For the years ended December 31, 1997, 1996 and 1995, the
Company's potential common shares have an antidilutive effect on the loss
per share and, therefore, have not been used in determining the total
weighted average shares outstanding. Diluted loss per share for 1997, 1996
and 1995 is antidilutive and, therefore, has not been presented. See Note
9 for a description of those securities that could potentially dilute
earnings per share in the future, should the Company report income.
Other New Accounting Pronouncements:
-----------------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement, which establishes standards for reporting and
disclosure of comprehensive income, is effective for interim and annual
periods beginning after December 15, 1997, although earlier adoption is
permitted. Reclassification of financial information for earlier periods
presented for comparative purposes is required under SFAS No. 130. As this
statement only requires additional disclosures in the Company's
consolidated financial statements, its adoption will not have any impact on
the Company's consolidated financial position or results of operations.
The Company will adopt SFAS No. 130 effective January 1, 1998.
Reclassification:
----------------
Certain prior year items have been reclassified to conform with the current
year presentation.
Continued
F-11
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
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 $2,823,910,
$2,463,259 and $2,023,822 for the years ended December 31, 1997, 1996 and
1995, respectively, and has an accumulated deficit of $27,623,339 at
December 31, 1997. These recurring losses and the need for continued
funding, discussed below, raise substantial doubt about the Company's
ability to continue as a going-concern.
The Company remains dependent upon its ability to obtain outside financing
either through the issuance of additional shares of its common or preferred
stocks or through borrowings until it achieves sustained profitability
through increased sales, continued efforts of engineering redesign, and
cost containment. The Company's focus has been realigned to emphasize the
marketing of its laser-based HydroKinetic(TM) tissue cutting system (the
Millennium(TM)), its DermaLase(TM) system, which is a variation of the
Millennium(TM), LaserBrush(TM), a light-activating toothbrush and other
laser and endodontic products, and the continued development of biomaterial
products and cost- effective laser technologies for medical and dental
surgical applications.
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 stocks and the exercises
of stock options and warrants. During the three years ended December 31,
1997, the Company has raised approximately $6,413,000 of equity funds.
Management believes that significant additional resources will be required
commencing in the first half of 1998, to complete the process designed to
lead to FDA clearance, to market the Company's laser-based technologies for
dental and medical applications in the United States and to fund the
Company's working capital needs during 1998.
The Company expects to generate the necessary capital resources through the
sale of its products, the issuance of equity securities in either public
offerings or private placements, or debt financing. No assurance can be
given, however, that the Company will be able to obtain such capital
resources.
Based on the Company's current business plan, the Company anticipates that
it will need additional financing during the first half of 1998 to support
additional working capital requirements. There are no assurances that the
Company will be successful in obtaining such financing. If unsuccessful in
arranging such financing, the Company may be able to extend the period
before additional financing is required by deferring the creation or
satisfaction of various commitments and deferring the introduction of
various products or entry into various markets. If the Company were unable
to obtain such financing, its ability to meet its obligations and to
continue its operations would be adversely affected. The Company's
financial statement 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.
Continued
F-12
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
3. Inventories:
Inventories consist of the following at December 31:
[Download Table]
1997 1996
---------- --------
Raw materials $ 804,631 $ 96,823
Work-in-process 36,609 --
Finished goods 167,537 279,656
---------- --------
$1,008,777 $376,479
========== ========
4. Property And Equipment:
Property and equipment consist of the following at December 31:
[Download Table]
1997 1996
----------- -----------
Leasehold improvements $ 149,282 $ 149,282
Equipment and computers 754,152 725,882
Furniture and fixtures 168,419 107,208
Demonstration units 247,354 247,354
----------- -----------
1,319,207 1,229,726
Less, Accumulated depreciation and
amortization (1,137,403) (1,035,648)
----------- -----------
$ 181,804 $ 194,078
=========== ===========
Included in property and equipment are assets held under capital leases of
approximately $1,027 in 1996, net of accumulated amortization.
Continued
F-13
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
5. Line Of Credit:
At December 31, 1997, the Company had $301,233 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 with
monthly interest payments equal to LIBOR plus 0.5% (6.6% at December 31,
1997) and requires collateral consisting substantially of the Company's
accounts receivable and inventories. The revolving credit agreement expires
on December 1, 1998 and has two six-month renewal options.
6. Accrued Expenses:
Accrued expenses consist of the following at December 31:
[Download Table]
1997 1996
-------- --------
Accrued professional fees $ 82,876 $158,416
Accrued legal and settlement costs 91,880 88,292
Accrued private placement costs -- 72,984
Sales tax payable 7,846 46,514
Accrued warranty 83,000 15,000
Accrued vacation 64,270 48,354
Other 150,568 186,075
-------- --------
$480,440 $615,635
======== ========
7. 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
Continued
F-14
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
7. Litigation, Continued:
associated with the transactions on which the complaint is based.
Concerning the distribution agreement, Schneider seeks damages arising
from the Company's alleged failure to disclose that the value of his
distributorship had been impaired by the Company's alleged previous
practice of selling allegedly defective product in the relevant territory.
Concerning the goods and services, Schneider admits receipt of the relevant
goods but contends they were defective and nonconforming. The Company
intends both to pursue its claims and to defend against the counterclaims
vigorously. This action is at a preliminary stage and no trial date has
yet been scheduled.
On April 26, 1995, the Company was named as an additional defendant in
Hazel Lefern Moore v. David A. Pyner, D.D.S., Florida Dental Team, P.A.,
Princeton Medical Management Southeast, Inc. and Laser Endo Technic, Inc.,
initially filed in the 17th Judicial Circuit in and for Broward County,
Florida on April 21, 1995. The plaintiff alleges that she underwent laser
dental surgery with a laser allegedly produced by the Company and seeks
unspecified damages from the Company on theories of product liability,
based on allegations that the laser was defective by reason of design,
manufacture and lack of product warnings. The Company has answered the
complaint, denying the majority of plaintiff's material factual allegations
and asserting various affirmative defenses. The Company is vigorously
contesting liability. There has been little activity in this case since the
beginning of 1997. The case has not yet been set for trial. The Company
believes that liability, should any result from plaintiff's claims, would
be covered by insurance.
Trans Leasing International v. Elie M. Makhoul v. Laser Endo Technic
Corporation, was filed July 6, 1994 in the Circuit Court of Cook County,
Illinois, Municipal Department, First District. This action involves a
third-party claim against the Company in a suit in which a dentist, who was
the lessee of a dental laser system manufactured by the Company, had been
sued for breach of the equipment lease by the financing institution that
was the lessor. The theories of the third-party plaintiff include common
law fraud, violation of the Consumer Fraud and Deceptive Business Practices
Act, and intentional and negligent misrepresentations. The third-party
claim against the Company in this action is for $78,408 in compensatory
damage, $15,000 in lost profits, $50,000 in punitive damages, and
attorney's fees and related costs. The Company intends to defend against
the claims vigorously. The case has been inactive since the third-party
plaintiff filed for protection under the U.S. Bankruptcy Law on July 10,
1995, a filing that was dismissed during 1997.
The Company does not believe that these lawsuits or any other lawsuits to
which it is a party will have a material adverse effect on the Company's
results of operations, financial condition or liquidity.
Continued
F-15
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
8. 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 non-
cancellable lease terms in excess of one year as of December 31, 1997:
[Download Table]
1998 $140,780
1999 140,780
2000 93,853
--------
$375,413
========
Rent expense was $141,385, $136,938 and $148,775 for the years ended
December 31, 1997, 1996 and 1995, respectively.
9. Stockholders' Equity:
Equity Financing:
----------------
The Company has raised equity capital through several private offerings in
the three years ended December 31, 1997, as follows:
[Download Table]
Number
Of Shares
Of Common Net Cash
Years Ended December 31, Stock Consideration
------------------------ --------- -------------
1997 217,109* $ 719,885
1996 1,800,018** $4,400,000
1995 2,300,000 $1,292,707
* Includes 17,109 shares issued upon conversion of one share of Preferred
Stock - see below.
**Excludes one share of Preferred Stock - see below.
Continued
F-16
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
9. Stockholders' Equity, Continued:
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 "Placement Warrants") expiring 1998 which are
exercisable under certain conditions. Gross proceeds in the Placement were
$5,000,000 and net proceeds, after commissions of $400,000 and estimated
expenses, were $4,400,000.
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 aggregate 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"). Accordingly,
such shares may be resold only pursuant to a registration statement under
the Act or in accordance with an exemption from such registration
requirement. In August 1997, the Company filed a registration statement
covering the resale of such shares of common stock.
Common Stock:
------------
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 shares of common stock issued in connection
with the private placement were "restricted securities" as defined in Rule
144 promulgated under the Act. Accordingly, such shares may be resold only
pursuant to a registration statement under the Act or in accordance with an
exemption from such registration requirement. The registration statement
filed by the Company in 1997 also covered the resale of such shares of
common stock.
Continued
F-17
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
9. Stockholders' Equity, Continued:
Common Stock, Continued:
-----------------------
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 58,100 shares for service valued at $198,571 in 1997, of
which 43,850 of the shares valued at $147,805 were for earned services
during 1997 and 14,250 of the shares valued at $50,766 were for services
that will be earned in 1998. No shares were issued for service in 1996 or
1995.
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") and the 1993 Stock Option Plan
(the "1993 Plan" and collectively with the 1990 Plan and 1992 Plan, the
"Plans"). Each of the Plans enable 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, 1997, 152,500 had been
issued upon option exercise, 158,750 were reserved for issuance upon
exercise of outstanding options and 63,750 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,
1997, 51,016 shares had been issued upon option exercise, 98,875 were
reserved for issuance upon exercise of outstanding options and 109 were
available for the granting of additional options. A total of 1,500,000
shares of common stock were authorized for issuance under the 1993 Plan, of
which, at December 31, 1997, 85,900 had been issued upon option exercise,
1,084,785 were reserved for issuance upon exercise of outstanding options,
and 329,315 were available for the granting of additional options. Any
shares which are reserved for issuance under an outstanding option which
expires or terminates unexercised, or any shares which are used by
participants to pay all or part of the purchase price of any option
exercised, may again be reserved for issuance upon exercise of newly
granted options under the respective Plans. However, shares with respect
to which stock appreciation rights have been exercised may not again be
made subject to an award.
Continued
F-18
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
9. Stockholders' Equity, Continued:
Common Stock Options And Warrants, Continued:
--------------------------------------------
At the discretion of 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% 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
1990 and 1992 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 of notes, cash and shares of the
Company's common stock. Incentive stock options have not been awarded
under any of the Plans to date. The following table summarizes the
activity under the Plans:
Continued
F-19
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
9. Stockholders' Equity, Continued:
Common Stock Options And Warrants, Continued:
--------------------------------------------
[Download Table]
Option Price Per
Shares Share
--------- ---------------
Options outstanding, December 31, 1994 866,000 $2.00 - $10.50
Granted 725,000 0.75 - 7.20
Exercised (39,150) 1.50 - 2.38
Surrendered (412,400) 1.50 - 2.38
--------- --------------
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
========= ==============
Options exercisable, December 31, 1997 1,127,514 $0.75 - $10.50
========= ==============
Stock options granted under the 1990 Plan may include the right to acquire
an Accelerated Ownership Nonqualified Stock Option ("AO"). If an option grant
contains the AO feature and if the participant pays all or part of the purchase
price of the option with shares of the Company's common stock held by the
participant for at least six months, then upon exercise of the option, the
participant is granted an AO to purchase at the fair market value as of the date
of the AO grant the number of shares of common stock of the Company equal to the
sum of the number of whole shares used by the participant in payment of the
purchase price and the number of whole shares, if any, withheld by the Company
as payment for withholding taxes. An AO may be exercised between the date of
grant and the date of expiration, which will be the same as the date of
expiration of the option to which the AO is related. At December 31, 1997,
25,000 options outstanding under the 1990 Plan include the AO feature.
Continued
F-20
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
9. Stockholders' Equity, Continued:
Common Stock Options And Warrants, Continued:
--------------------------------------------
In addition to the option plans discussed above, the Company has several
agreements with certain 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 filed in August
1997.
The following table summarizes option transactions outside the option
plans:
[Download Table]
Option Price Per
Shares Share
------- ----------------
Options outstanding, December 31, 1994 102,500 $5.00 - $12.00
Granted 20,000 2.00
Surrendered -- --
------- --------------
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
======= ==============
Options exercisable, December 31, 1997 272,500 $2.00 - $12.00
======= ==============
The majority of all the Company's options outstanding and exercisable at
December 31, 1997 are at exercise prices between $0.75 and $3.00.
Additionally, at December 31, 1997, the weighted average exercise price for
options outstanding and exercisable was $3.06 with a weighted average
remaining term of 6.5 years.
Continued
F-21
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
9. Stockholders' Equity, Continued:
Common Stock Options And Warrants, Continued:
--------------------------------------------
Warrants to purchase 489,900 shares of common stock at $3.25 per share were
issued in conjunction with a placement of the Company's common stock in
1994, including 14,900 warrants issued as commission to the placement
agent. The warrants included a call feature whereby the Company had the
right, upon thirty days' notification, to call such warrants for redemption
at any time the market price per share exceeded 138.46% of the exercise
price for ten consecutive trading days. In the event of such a call, the
Company could redeem any warrants remaining outstanding at the end of the
notification period for nominal consideration.
On June 2, 1995, the Company reduced the exercise price of such warrants
from $3.25 to $1.625 per share, which had the effect of making the warrants
subject to call when the common stock traded at or above $2.25 per share.
The closing bid price of the Company's common stock on June 2, 1995 was
$0.6875 per share. On August 24, 1995, the Company called for redemption
all such warrants which would be outstanding on September 25, 1995. All of
the outstanding warrants were exercised prior to the redemption date. The
Company issued 489,900 shares of its common stock upon exercise of the
warrants; net proceeds received aggregated $794,202, excluding direct
expenses of $1,885.
In October 1996, the Company issued 500,000 Placement Warrants expiring
December 31, 1998, each entitling the holder to purchase one share of
common stock at $3.50 per share under certain conditions. At October 1997,
the Company retired 3,334 of the Placement Warrants as certain conditions
were not met to bring such warrants to full vesting status. An additional
190,910 warrants, expiring December 31, 1998, were also issued in
connection with the Placement, which are also exercisable at $3.50 per
share.
On December 2, 1996, the Company granted warrants to purchase 10,000 shares
of common stock at $3.50 per share to consultants. These warrants expire
December 31, 1998.
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. 50,000 of the warrants were issued at an
exercise price of $5.00 and 25,000 were issued at an exercise price of
$4.00, all expiring December 1, 2000.
Continued
F-22
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
9. Stockholders' Equity, Continued:
Pro Forma Effect Of Stock-Based Compensation:
--------------------------------------------
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Had compensation cost been determined based on the fair value of awards
under the 1990, 1992 and 1993 Plans on the respective dates of grant in a
manner consistent with the method promulgated by SFAS No. 123, the
Company's net loss and loss per share would have been increased to the pro
forma amounts below:
[Download Table]
For The Years Ended
December 31,
---------------------------
1997 1996
----------- -----------
Net loss:
As reported $(2,823,910) $(2,463,259)
Pro forma $(3,115,928) $(2,730,811)
Basic loss per share:
As reported $(0.21) $(0.21)
Pro forma $(0.23) $(0.24)
The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes option pricing model. The assumptions used for
the Black-Scholes computation for the years ended December 31, 1997 and
1996 are as follows: the risk-free interest rate was the U.S. Zero Coupon
Bond rate for the corresponding grant date, ranging from 5.7% to 6.0% in
1997 and 5.4% to 5.6% in 1996; the exercise price is equal to the fair
market value of the underlying common stock at the grant date; the expected
life of the option is the term to expiration, ranging from 1-4 years;
volatility is 78.6%; and the common stock will pay no dividends.
Continued
F-23
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
10. Income Taxes:
The following table presents the current and deferred provision for federal
and state income taxes for the years ended December 31, 1997, 1996 and
1995:
[Download Table]
1997 1996 1995
---------- ---------- ----------
Current:
Federal $ -- $ -- $ --
State 1,600 1,600 1,600
------ ------ ------
1,600 1,600 1,600
Deferred:
Federal -- -- --
State -- -- --
------ ------ ------
$1,600 $1,600 $1,600
====== ====== ======
The foregoing tax provisions are included in general and administrative
expense in the accompanying consolidated statements of operations.
The effects of temporary differences which give rise to deferred tax
provision at December 31, 1997, 1996 and 1995 consist of:
[Download Table]
1997 1996 1995
----------- ----------- -----------
Property and equipment $ (25,726) $ 20,796 $ 320,965
Research and development 222,978 -- --
Reserves not currently deductible 129,170 (89,418) (346,611)
Inventories 7,542 (7,925) 41,518
Capital loss carryforward -- -- 21,498
State taxes -- (226) 770
Net operating losses 990,372 1,462,117 1,395,841
----------- ----------- -----------
1,324,336 1,385,344 1,433,981
Change in valuation allowance (1,324,336) (1,385,344) (1,433,981)
----------- ----------- -----------
Total $ -- $ -- $ --
=========== =========== ===========
Continued
F-24
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
------------
10. Income Taxes, Continued:
The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate at December 31, 1997, 1996
and 1995 as follows:
[Download Table]
1997 1996 1995
---- ---- ----
Statutory regular federal income tax rate (34.0%) (34.0%) (34.0%)
Stock options (3.1) (2.3) --
Change in valuation allowance 43.0 36.1 33.6
Other (5.9) 0.2 0.4
----- ----- -----
Total 0.0% 0.0% 0.0%
===== ===== =====
The components of the deferred income tax assets as of December 31, 1997
and 1996 are as follows:
[Download Table]
1997 1996
------------ -----------
Property and equipment $ 316,035 $ 341,760
Research and development 222,978 --
Reserves not currently deductible 410,142 280,972
Inventories 41,135 33,594
Capital loss carryforward 277,498 277,498
State taxes 544 544
Net operating losses 9,888,331 8,897,958
------------ -----------
11,156,663 9,832,326
Valuation allowance (11,156,663) (9,832,326)
------------ -----------
Total $ -- $ --
============ ===========
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management periodically evaluates the recoverability of the deferred tax
assets. At such time as it is determined that deferred tax assets are
realizable, the valuation allowance will be reduced.
At December 31, 1997, the Company had a capital loss carryforward of
$640,873, which will expire in 2000.
Continued
F-25
BIOLASE TECHNOLOGY, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1997, 1996 And 1995
__________
10. Income Taxes, Continued:
As of December 31, 1997, the Company had net operating loss carryforwards
for federal and state purposes of approximately $25,311,000 and
$13,782,000, respectively. The net operating loss carryforwards begin
expiring in 2002 and 1998, respectively. 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:
The Company designs, manufactures and markets advanced laser products for
dental and other surgical applications, and markets and distributes
endodontic products manufactured by third parties. These activities
comprise the Company's only business segment.
The Company has distributorship agreements for dental lasers in Europe, the
Middle East and the Far East. In 1997, 1996 and 1995, export sales were
$1,307,000, $328,000 and $807,000, respectively, of which 93%, 80% and 72%,
respectively, were sales to Europe.
Sales to one customer were approximately $1,188,000, $142,000 and $473,000
for the years ended December 31, 1997, 1996 and 1995, respectively. The
Company also had sales to a second customer of approximately $193,000 for
the year ended December 31, 1995. No other customers accounted for more
than 10% of consolidated sales in 1997, 1996 or 1995.
Accounts receivable concentrations have resulted from sales activity to
individual customers. Accounts receivable for one customer totaled
approximately $884,000 and $97,000 at December 31, 1997 and 1996,
respectively. No other customer accounted for more than 10% of accounts
receivable at December 31, 1997 or 1996.
F-26
REPORT OF INDEPENDENT ACCOUNTANTS
__________
The Board of Directors
BioLase Technology, Inc.
Our report, which contains an explanatory paragraph regarding the Company's
ability to continue as a going-concern, on the consolidated financial statements
of BioLase Technology, Inc. and its subsidiary is included on page F-2 of this
Form 10-K. In connection with our audits of such consolidated financial
statements, we have also audited the related financial statement schedule listed
in the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
February 27, 1998
S-1
BIOLASE TECHNOLOGY, INC.
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
AND RESERVES
For The Years Ended December 31, 1997, 1996 And 1995
__________
[Download Table]
Allowance For
Doubtful Accounts Slow-Moving Inventory
----------------- ---------------------
Balances at December 31, 1994 $ 99,566 $ 577,132
Charged to operations 337 24,500
Write-offs (35,286) (110,297)
-------- ---------
Balances at December 31, 1995 64,617 491,335
Charged (credited) to operations (5,900) 37,663
Write-offs (36,760) (43,844)
-------- ---------
Balances at December 31, 1996 21,957 485,154
Charged to operations 95,507 164,448
Write-offs -- (28,653)
-------- ---------
Balances at December 31, 1997 $117,464 $ 620,949
======== =========
S-2
Dates Referenced Herein and Documents Incorporated by Reference
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