UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 29, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Transition Period from to
----- -----------
Commission File Number: 1-11064
BRITESMILE, INC.
(Exact name of registrant as specified in its charter)
UTAH 87-0410364
------------------------------------- ---------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
490 North Wiget Lane
Walnut Creek, California 94598
---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
(925) 941-6260
----------------
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No __
-
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12B-2)
Yes __ No X
-
The Company had 2,429,940 shares of common stock outstanding at May 13, 2003.
BRITESMILE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 29, 2003 and December 28, 2002.................3
Condensed Consolidated Statements of Operations for the 13 weeks ended
March 29, 2003 and March 30, 2002................................................................5
Condensed Consolidated Statements of Cash Flows for the 13 weeks ended
March 29, 2003 and March 30, 2002, respectively..................................................6
Notes to Condensed Consolidated Financial Statements.............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........10
Item 3. Qualitative and Quantitative disclosure about Market Risk.......................................15
Item 4. Controls and Procedures.........................................................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................16
Item 2. Changes in Securities...........................................................................17
Item 3. Default upon Senior Securities.................................................................17
Item 4. Submission of Matters to a Vote of Security Holders...........................................17
Item 5. Other Information...............................................................................17
Item 6. Exhibits and Reports on Form 8-K................................................................19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(unaudited)
($ in thousands, except share data)
March 29, 2003 December 28, 2002
----------------------- ---------------------
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 1,271 $ 3,527
Trade accounts receivable, net of allowance for doubtful accounts
of $531 and $506, respectively................................... 1,491 2,364
Inventories...................................................... 2,145 2,502
Prepaid expenses and other....................................... 287 189
----------------------- ---------------------
Total current assets................................. 5,194 8,582
----------------------- ---------------------
PROPERTY AND EQUIPMENT, net.......................................... 19,418 20,289
OTHER ASSETS.........................................................
2,229 2,228
----------------------- ---------------------
TOTAL ASSETS.........................................................
$ 26,841 $ 31,099
======================= =====================
See notes to condensed consolidated financial statements
3
BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(unaudited)
($ in thousands, except share data)
March 29, 2003 December 28, 2002
----------------------- ---------------------
CURRENT LIABILITIES:
Accounts payable................................................. $ 4,856 $ 4,793
Accrued expenses ................................................ 2,750 4,403
Deferred revenue ................................................ 968 819
Note payable to related party.................................... 500 500
Accrual for store closure........................................ 201 201
Subordinated convertible debenture, net of discount.............. 755 749
Capital lease obligations with related parties - current portion. 701 701
----------------------- ---------------------
Total current liabilities.............................. 10,731 12,166
----------------------- ---------------------
Note payable to related party, less current portion.............. 1,025 1,083
Line of credit borrowings........................................ 4,190 4,714
Capital lease obligations with related parties - less current portion 1,717 1,885
Accrual for store closure........................................ 988 1,035
Accrued variable rent payable to EVL.............................. 2,625 2,150
Convertible 2% debenture.......................................... 3,500 3,500
Other long-term liabilities...................................... 766 767
----------------------- ---------------------
Total long-term liabilities...................... 14,811 15,134
----------------------- ---------------------
Total liabilities................................ 25,542 27,300
----------------------- ---------------------
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized;
2,428,464 shares issued and outstanding.......................... 36 36
Additional paid-in capital....................................... 139,420 139,418
Accumulated deficit.............................................. (138,157) (135,655)
----------------------- ---------------------
Total shareholders' equity ............................ 1,299 3,799
----------------------- ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $ 26,841 $ 31,099
======================= =====================
See notes to condensed consolidated financial statements.
4
BRITESMILE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
($ in thousands except share data)
13 Weeks Ended 13 Weeks Ended
March 29, 2003 March 30, 2002
------------------- -------------------
REVENUES:
Center whitening fees, net................................... $ 3,151 $ 3,065
Associated Center whitening fees, net........................ 4,906 5,196
Product sales................................................ 919 1,072
------------------- -------------------
Total revenues, net....................................... 8,976 9,333
------------------- -------------------
OPERATING COSTS AND EXPENSES:
Operating and occupancy costs................................ 3,494 3,619
Selling, general and administrative expenses................. 6,046 7,867
Research and development expenses............................ 239 111
Depreciation and amortization................................ 1,586 1,483
------------------- -------------------
Total operating costs and expenses........................ 11,365 13,080
------------------- -------------------
Loss from operations................................... (2,389) (3,747)
------------------- -------------------
OTHER INCOME (EXPENSE), net:
Interest expense............................................. (116) (393)
Interest income.............................................. 4 26
------------------- -------------------
Total other expense, net.................................. (112) (367)
------------------- -------------------
Loss before income tax provision....................... (2,501) (4,114)
INCOME TAX PROVISION............................................. 1 18
------------------- -------------------
Net loss .............................................. $ (2,502) $ (4,132)
=================== ===================
BASIC AND DILUTED NET LOSS PER SHARE............................. $ (1.03) $ (1.70)
=================== ===================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED...................... 2,428,464 2,424,809
=================== ===================
See notes to condensed consolidated financial statements.
5
BRITESMILE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
($ in thousands, except share data)
13 Weeks Ended 13 Weeks Ended
March 29, 2003 March 30, 2002
----------------------- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $ (2,502) $ (4,132)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................ 1,586 1,483
Store closure accrual........................................ - (219)
Cost for issuance of stock warrants and stock options............ 48- 289
Change in assets and liabilities, net. ............................. 77 (1,697)
----------------------- -----------------------
Net cash used in operating activities................ (791) (4,276)
----------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................................... (715) (673)
----------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit borrowing ............................... - 118
Payments on capital lease ............................................ (168) (55)
Payments on EVL center loan .......................................... (58) -
Payments on line of credit borrowing ................................. (524) -
Proceeds from exercise of stock options .............................. - 399
----------------------- -----------------------
Net cash provided by financing activities............ (750) 462
----------------------- -----------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,256) (4,487)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD...................................................... 3,527 7,162
----------------------- -----------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD......................... $ 1,271 $ 2,675
======================= =======================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................. $ 143 $ 238
Cash paid for income taxes......................................... $ 21 $ 72
See notes to condensed consolidated financial statementS.
6
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 29, 2003
1. Description of Business and Nature of Operations
BriteSmile, Inc., a Utah corporation ("BriteSmile" or the "Company"), and its
affiliates develop and sell advanced teeth whitening products, services and
technology. Unless specified to the contrary herein, references to BriteSmile or
to the Company refer to the Company and its subsidiaries on a consolidated
basis. The Company's operations include the development of technologically
advanced teeth whitening processes that are distributed in professional salon
settings known as BriteSmile Professional Teeth Whitening Centers ("Centers").
The Company also offers its products and technologies through arrangements with
existing independent dental offices known as BriteSmile Professional Teeth
Whitening Associated Centers ("Associated Centers"). As of March 29, 2003, the
Company had 14 Centers and 4,682 Associated Centers in operation.
2. Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions in Form 10-Q and Article 10 of Regulations S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for annual financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the 13 weeks ended March 29, 2003 are not
necessarily indicative of the results that may be expected for the remainder of
the fiscal year ending December 27, 2003.
The Company uses the intrinsic value method to account for its stock based
compensation plans. Had compensation cost for the Company's stock-based
compensation plans been determined using fair value at the grant award dates
using the Black-Scholes option pricing valuation model, the Company's reported
net loss applicable to common shareholders and basic and diluted net loss per
share would have been increased to the pro forma amounts indicated below (in
thousands, except per share data):
13 Weeks Ended 13 Weeks Ended
March 29, March 30,
2003 2002
----------------- ----------------
Loss as reported................... $ 2,502 $ 4,132
Compensation expense reported under
APB25.............................. $ - $ -
Compensation expense computed using
fair value method..................... $ 910 $ 242
----------------- -----------------
Pro forma loss..................... $ 3,412 $ 4,374
================= =================
Pro forma basic and diluted
loss per share.................. $ (1.41) $ (1.80)
================= =================
7
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 29, 2003
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
52 weeks ended December 28, 2002.
3. Loss Per Common Share
The Company computes loss per common share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." In accordance with
FAS 128, basic net loss per share is calculated as net loss divided by the
weighted-average number of common shares outstanding, less shares subject to
repurchase. Diluted net loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding and dilutive common stock
equivalents outstanding during the period. Common equivalent shares from stock
options totaling 464,175 shares and warrants totaling 138,132 shares (using the
treasury stock method) and convertible notes payable have been excluded from the
calculation of net loss per share as their effect is anti-dilutive.
4. Impact of Recently Issued Accounting Standards and Accounting Bulletins
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses accounting for restructuring and
similar costs. SFAS 146 supersedes previous accounting guidance, principally
Emerging Issues Task Force Issue No. 94-3. The Company adopted the provisions of
SFAS 146 effective December 28, 2002 and adoption did not have an impact on the
consolidated financial statements. SFAS 146 requires that the liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost was
recognized at the date of the Company's commitment to an exit plan. SFAS 146
also establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized.
5. Commitments and Contingencies
BriteSmile, Inc. v. Discus Dental, Inc. and Salim Nathoo, filed in the United
States District Court for the Northern District of California. The Company filed
an initial complaint against Discus Dental, Inc. ("Discus"), Culver City,
California, on July 8, 2002, asserting claims of infringement of the Company's
U.S. Patents No. 6,343,933 and U.S. Patent No. 6,361,320. On February 28, 2003,
the Company amended its existing lawsuit against Discus by adding Salim Nathoo
("Nathoo") as a defendant. The complaint, as amended, further alleges
misappropriation of the Company's trade secrets, civil conspiracy, and unfair
competition and business practices by Discuss and Nathoo; breach of contract and
breach of fiduciary duty by Mr. Nathoo, and tortious interference with contract
by Discus. The complaint alleges that Nathoo and Discus conspired to
misappropriate BriteSmile's trade secrets in violation of Nathoo's contractual
obligations to the Company. The amended lawsuit alleges that, as BriteSmile's
Medical Director, Nathoo had and continues to have, an obligation to keep
BriteSmile's trade secrets confidential. The lawsuit alleges that beginning in
2001, Discus Dental and Nathoo entered into an agreement whereby Discus Dental
paid Nathoo at least $2.5 million over a less than two year period for Nathoo's
"consulting" services, which included paying Nathoo to share with Discus certain
of the Company's trade secrets. The lawsuit alleges further that in, December
2002, a third party informed BriteSmile of Nathoo's activities, and that when
confronted by BriteSmile, Nathoo admitted to receiving $2.5 million from Discus.
The Company seeks a permanent injunction against both Discus and Nathoo to
prevent further infringement of its patents and improper disclosure of the
Company's trade secrets, lost profits, treble damages and attorneys fees for
willful patent infringement, punitive damages, and other relief.
8
On March 25, 2003, Discus filed its Answer to the Amended Complaint and
Counterclaims. In its Answer, Discus denies any liability for BriteSmile's
claims. Discus also raises affirmative defenses, including claims that its
products and processes do not infringe BriteSmile's patents, and that
BriteSmile's patents are invalid and unenforceable. Discus asserts counterclaims
against BriteSmile, seeking (i) judicial declarations that BriteSmile's patents
are invalid, unenforceable, and have not been infringed, (ii) tortious
interference with prospective economic advantage and economic business
relations, and (iii) unfair competition. Discus asks for declarations that its
products and processes do not violate BriteSmile's patents, that BriteSmile's
patents are unenforceable, that BriteSmile has no protectable trade secrets,
that BriteSmile's contracts with dentists which contain contractual restrictions
on the purchase and use of competitive systems are unenforceable and should be
enjoined, lost profits, treble damages and attorneys fees. The Company has
commenced discovery concerning the claims and defenses asserted in the lawsuit.
Salim Nathoo v. BriteSmile Leasing. On March 6, 2003, Nathoo filed a lawsuit
against BriteSmile Leasing, a subsidiary of the Company in the New Jersey state
court. In this action, Nathoo alleges that the Company breached its agreement to
pay Nathoo money, and that such failure should result in the reversion of
certain patent rights, which were previously assigned by Nathoo to the Company,
back to Nathoo. Nathoo also seeks the payment of profits derived from the patent
rights. The Company has filed an answer the to complaint, together with
countercliams alleging the same causes of action as in the Company's California
litigation against Nathoo. The Company has also removed Nathoo's New Jersey
action to federal court, and has filed a motion to transfer it to California,
and consolidate it with the California lawsuit.
Smile Inc. Asia Pte. Ltd. v. BriteSmile. On April 23, 2002, Smile Inc. Asia Pte.
Ltd. ("Smile") sued the Company and BriteSmile Management, Inc., a wholly owned
subsidiary of the Company, in the Third Judicial District Court in Salt Lake
City, Utah. The Complaint alleges that BriteSmile Management breached its 1998
distributor agreement with Smile by failing to fill orders placed and to perform
other obligations under the agreement. The Complaint also alleges that
BriteSmile Management and the Company fraudulently induced Smile to enter into
the distributor agreement, and includes claims for damages based on alleged
unjust enrichment, civil conspiracy, breach of the duty of good faith and fair
dealing, interference with contractual and economic relations, and fraudulent
transfer. The Company believes that the claims asserted by Smile are entirely
without merit and will vigorously defend the lawsuit. The Company has commenced
discovery with regard to Smile's claims.
BriteSmile v. Discus Dental, filed in Contra Costa County Superior Court,
California. On May 31, 2002, the Company filed a complaint against Discus
Dental, Inc. in Contra Costa County Superior Court, California, alleging causes
of action for intentional interference with contractual relationship, negligent
interference with contractual relationship, violation of Unfair Business
Practice Act - Loss Leader, violation of Unfair Business Practice Act, trade
libel and injunctive relief. The complaint alleges that Discus Dental and other
defendants yet to be identified wrongfully interfered with the Company's
contractual relationships with its Associated Center dentists, in part by
writing letters with the purpose of inducing certain of the Company's Associated
Dentists to terminate their contracts with the Company and switch to Discus'
Zoom! system, and by making false and disparaging statements concerning the
Company's teeth whitening system. The Complaint seeks damages for loss of
business, punitive damages, injunctive relief, and costs of suit. On June 27,
2002, Discus filed a demurrer to the Company's complaint, challenging the legal
sufficiency of the complaint. On June 30, 2002, the court ruled that the Company
will be able to pursue its claims as alleged in the complaint except for the
second cause of action alleging negligent interference with contractual
relationship. This case was stayed on March 11, 2003 and will remain stayed
until a status conference scheduled for September 2003.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking Statements and Risk Factors
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements may be deemed to include
information that is not historical. The statements contained in this Report that
are not purely historical are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act. These statements relate to the Company's expectations,
hopes, beliefs, anticipations, commitments, intentions and strategies regarding
the future. They may be identified by the use of words or phrases such as
"believes," "expects," "anticipates," "should," "plans," "estimates," and
"potential," among others. Forward-looking statements include, but are not
limited to, statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations regarding the Company's financial
performance, revenue and expense levels in the future, and the sufficiency of
its existing assets to fund future operations and capital spending needs. Actual
results could differ materially from the anticipated results or other
expectations expressed in such forward-looking statements. The Company believes
that many of the risks set forth here and in the Company's 10-K Annual Reports
filed with the SEC are part of doing business in the industry in which the
Company operates, and will likely be present in all periods reported. The
forward-looking statements contained in this Report are made as of the date of
this Report and the Company assumes no obligation to update them or to update
the reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations of the Company include:
o Government regulation of the Company's products and teeth whitening
procedures, including: (i) current restrictions or controls on the
practice of dentistry by general business corporations, and (ii)
future, unknown enactments or interpretations of current regulations
which could, in the future, affect the Company's operational structure
and relationships with licensed dentists.
o Failure of the Company to generate, sustain or manage growth, including
failure to develop new products and expand Center and Associated Center
locations and revenues;
o The loss of product market share to competitors and/or development of
new or superior technologies by competitors;
o Ongoing operating losses associated with the development, marketing and
implementation of new, light-activated teeth whitening technologies;
o Failure of the Company to secure additional financing to complete its
aggressive plan for the rollout of a broad base of Associated Centers;
o Unproven market for the Company's new whitening products, whitening
process, and "Whitening Center" and "Associated Center" concepts, in
light of competition from traditional take-home whitening products and
bleaching tray methods;
o Failure to develop marketing strategies and delivery methods to
penetrate non-U.S. markets; and
o Lack of product diversity.
Critical Accounting Policies And Estimates
General
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
10
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to customer programs and incentives, bad
debts, inventories, income taxes, warranty obligations, financing operations,
restructuring, and contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue Recognition
BriteSmile recognizes revenue related to retail products at the time such
products are sold to customers.
BriteSmile recognizes revenue at Company operated Centers at the time a
whitening procedure is performed.
BriteSmile records deferred revenue at the time of sale of key cards and access
codes to Associated Centers. Revenue is subsequently recognized over the period
that the whitening procedures, which can be performed via the key cards and
access codes, are performed, currently estimated at 25 days from the date of
shipment. A material change to the estimated time period over which the key
cards and access codes are used could have a significant impact on BriteSmile's
revenue in the period of change as well as future periods.
BriteSmile's policy is not to accept any return of key cards or access codes
during the course of the agreement with an Associated Center; however, it does
provide credits to the ultimate whitening customer for a "whitening guarantee."
BriteSmile recognizes those credits by reducing its revenue.
Bad Debt
BriteSmile maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. A
considerable amount of judgment is required in assessing the ultimate
realization of accounts receivable including the current credit-worthiness of
each customer. If the financial condition of BriteSmile's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Inventory
BriteSmile is required to state its inventories at the lower of cost or market.
BriteSmile writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions, as well as for damaged goods. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
Property and Equipment
BriteSmile evaluates its property, equipment and improvements for impairment
whenever indicators of impairment exist. No impairment charge was recorded
during the first quarter of 2003 or 2002.
Store Closures
BriteSmile recorded significant reserves in connection with store closures made
in prior years. These reserves include estimates pertaining to employee
separation costs and the settlements of contractual obligations, primarily
11
property leases. Although the Company does not anticipate significant changes,
the actual costs related to the closures may differ from these estimates.
Legal Contingencies
BriteSmile is currently a party to certain legal action. Management does not
believe that current pending litigation will have a material adverse effect on
BriteSmile's consolidated financial position. This conclusion has been developed
in consultation with outside counsel handling BriteSmile's defense in the
matter. It is possible, however, that future results of operations for any
particular quarterly or annual period could be materially affected by changes in
management's assumptions and the effectiveness of BriteSmile's strategies
related to these legal actions.
BriteSmile recognizes the costs of legal services in the periods incurred.
Overview
Operating and occupancy costs are composed primarily of three main groups: 1)
the cost of goods for both the Center and Associated Center whitening procedure
kits and retail products; 2) the financing costs for the devices in the
Associated Centers; and 3) the operating and occupancy costs for the Centers.
Selling, general and administrative expenses are composed of expenses associated
with all corporate and administrative functions that support existing operations
and provide an infrastructure to support future growth, including management and
staff salaries, employee benefits, travel, information systems, operating costs
of the Call Center, training, field support, and marketing and advertising.
Expenses of recruiting and training sales, market support, and training staff
are also included in general and administrative expenses.
The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q and in the Company's Annual Report on Form 10-K for the fiscal year
ended December 28, 2002.
The following table sets forth unaudited operating results for the thirteen week
period ended March 29, 2003 and March 30, 2002, as a percentage of sales in each
of these periods. This data has been derived from the unaudited financial
statements.
Thirteen Weeks Thirteen Weeks
ended ended
----- -----
March 29, March 30,
2003 2002
Income Statement Data:
Revenues:
Center whitening fees, net 35.1% 32.8%
Associated Center whitening fees, net 54.9% 55.8%
Product sales 10.0% 11.4%
----- -----
Total revenues, net 100.0% 100.0%
------ ------
Operating Costs and Expenses:
Operating and occupancy costs 38.9% 38.7%
Selling, general and administrative expenses 67.4% 84.3%
Research and development expenses 2.7% 1.2%
Depreciation and amortization 17.7% 15.9%
----- -----
Total operating costs and expenses 126.6% 140.1%
------ ------
Loss from operations -26.6% -40.1%
------ ------
12
Interest expense, net -1.2% -3.9%
----- -----
Loss before income tax provision -27.9% -44.0%
Provision for income taxes 0.0% 0.2%
---- ----
Net Loss -27.9% -44.2%
============================
The following are explanations of significant period-to-period changes for the
13 weeks ended March 29, 2003 and March 30, 2002:
Revenues
Total Revenues, net. Total revenues, net decreased by $357,000, or 3.8%, to $9.0
million for the 13 weeks ended March 29, 2003, from $9.3 million for the 13
weeks ended March 30, 2002.
Center Whitening Fees, net. Center whitening fees increased by $100,000 or 2.8%
to $3.2 million for the 13 weeks ended March 29, 2003 from the 13 weeks ended
March 30, 2002. The number of procedures performed in the Centers decreased 1.5%
to 6,747 in the first quarter of 2003, compared to 6,850 in the same quarter of
2002. The increase in revenue can be attributed to a decrease in discounting at
the Centers as well as an increase in the base price of the procedure from $550
to $600.
Associated Center Whitening Fees, net. Associated Center whitening fees, net
decreased by $290,000, or 5.6%, to $4.9 million for the 13 weeks ended March 29,
2003, from $5.2 million for the 13 weeks ended March 30, 2002. The decrease was
primarily due to the reduction in procedures during the first quarter of 2003.
The number of procedures in the Associated Centers decreased 11.8% to 28,240
procedures in the first quarter of 2003 compared to 32,025 procedures in the
same quarter of 2002.
Product Sales. Product sales decreased by 15.7% to $899,000 for the 13 weeks
ended March 29, 2003, from $1.1 million for the 13 weeks ended March 30, 2002.
Product sales represent the Company's toothpaste, mouthwash, whitening gum, and
the Sonicare toothbrush products sold at Centers and Associated Centers.
Operating Costs and Expenses
Operating and Occupancy Costs. Operating and occupancy costs as a percentage of
revenues was 38.9% for the thirteen weeks ended March 29, 2003, compared to
38.7% in the thirteen weeks ended March 30, 2002. The $125,000 decrease was the
result of lower Center operating expenses during the first quarter of 2003
compared to the same period in 2002. On a percentage basis, the 1.0% increase is
a result of lower revenue.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased significantly as a percentage of sales to
67.4% for the first quarter of 2003 compared to 84.3% in the corresponding
period in 2002. The $1.8 million decrease was in line with the expense
restructuring instituted in late fiscal 2001. The Company expects that savings
as a result of the new infrastructure will continue to be achieved throughout
Fiscal 2003.
Research and Development Expenses. Research and development expenses increased
as a percentage of sales to 2.7% for the first of 2003 compared to 1.2% in the
corresponding period in 2002. The $239,000 expense incurred in the first quarter
of 2003 was primarily related to the development of new products to expand the
Company's leadership position in the teeth-whitening industry.
Depreciation and Amortization. Depreciation and amortization increased as a
percentage of sales to 17.7% for the first quarter of 2003 compared to 15.9% in
the corresponding period in 2002. The increase of $103,000 in depreciation and
13
amortization expense to $1.6 million for the first quarter of 2003 is the result
of a greater number of BS3000 and BS3000PB devices in operation as a result of
the increase in the number of active Associated Centers.
Interest Expense, net. Interest expense, net decreased to $112,000 for the first
quarter of 2003 compared to interest expense, net of $367,000 in the
corresponding quarter of 2002. Interest expense decreased primarily as a result
of recognizing $158,000 in non-cash interest expense for warrants issued to a
lender during the first quarter of 2002.
Liquidity and Capital Resources
To date, the Company has yet to achieve profitability. The Company does not
expect to be profitable in 2003. The Company has implemented initiatives to
increase sales and decrease expenses to assure its viability for the next 12
months. The Company also has developed a contingency plan in anticipation of
prolonged negative business impact resulting from the stagnant economy.
To date, the Company's principal sources of liquidity have been proceeds from
issuance of common stock and debt. At March 29, 2003, the Company had $1.3
million in cash and borrowing capacity under lines of credit totaling $2.3
million.
The Company obtained the following additional borrowing availability:
o $500,000 convertible notes received in the second quarter of 2003.
o $1.5 million increase, effective January 2003, in the Credit Agreements
with CAP Advisers. The increase is specifically for international
capital expenditures.
o $2.5 million Center Loan with CAP America Trust. This credit facility
is for general working capital needs ($800,000) and capital
expenditures and specific revenue generating initiatives ($1.7
million).
The Company believes that cash on hand along with available borrowing capacity
discussed above will be sufficient to sustain operations for the next twelve
months.
Cash flows used in operations improved by $3.5 million to $(790,000) for the
first quarter of 2003 from $(4.3 million) during the first quarter of 2002,
primarily due to the decrease in the net loss and changes in working capital.
Net cash used in financing activities was $(751,000) for the first quarter of
2003, compared to cash provided by financing activities of $462,000 for the same
period in 2002. During the first quarter of 2003, the Company repaid debt, where
as during the first quarter of 2002, the Company received proceeds from the
exercise of stock options of approximately $400,000. Capital expenditures were
$715,000 for the first quarter of 2003, compared to $673,000 for the same period
in 2002. The capital expenditures in the first quarter of 2003 were primarily
related to the purchase of BS3000PB systems for new international Associated
Centers.
Inflation
In general, the Company does not believe that inflation has had a material
effect on its results of operations in recent years. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
Seasonality
Although the Company does not believe that its business follows seasonal trends,
it has recognized that at various times during the months of July and August and
again during December and January, a substantial number of Associated Centers
(both domestic and international) shut down for vacation. As a result, the
frequency of key card purchases by Associated Centers during these months
declines as well. Additionally, the Company's Centers have recognized some
seasonality during the same months because of customer vacations.
14
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
We believe there has been no material change in our exposure to Market Risk from
that discussed in our 2002 Annual Report on Form 10-K
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing date of
this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rule
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
are effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
BriteSmile, Inc. v. Discus Dental, Inc. and Salim Nathoo, filed in the United
States District Court (the "Discuss Patent Litigation") for the Northern
District of California. The Company filed an initial complaint against Discus
Dental, Inc. ("Discus"), Culver City, California, on July 8, 2002, asserting
claims of infringement of the Company's U.S. Patents No. 6,343,933, and U.S.
Patent No. 6,361,320. On February 28, 2003, the Company amended the Discus
Patent Litigation by adding Salim Nathoo ("Nathoo") as a defendant. The
complaint, as amended, further alleges misappropriation of the Company's trade
secrets, civil conspiracy, and unfair competition and business practices by
Discuss and Nathoo; breach of contract and breach of fiduciary duty by Mr.
Nathoo, and tortious interference with contract by Discus. The complaint alleges
that Nathoo and Discus conspired to misappropriate BriteSmile's trade secrets in
violation of Nathoo's contractual obligations to the Company. The amended
lawsuit alleges that, as BriteSmile's Medical Director, Nathoo had and continues
to have, an obligation to keep BriteSmile's trade secrets confidential. The
lawsuit alleges that beginning in 2001, Discus Dental and Nathoo entered into an
agreement whereby Discus Dental paid Nathoo at least $2.5 million over a less
than two year period for Nathoo's "consulting" services, which included paying
Nathoo to share with Discus certain of the Company's trade secrets. The lawsuit
alleges further that in, December 2002, a third party informed BriteSmile of
Nathoo's activities, and that when confronted by BriteSmile, Nathoo admitted to
receiving $2.5 million from Discus. The Company seeks a permanent injunction
against both Discus and Nathoo to prevent further infringement of its patents
and improper disclosure of the Company's trade secrets, lost profits, treble
damages and attorneys fees for willful patent infringement, punitive damages,
and other relief.
On March 25, 2003, Discus filed its Answer to the Amended Complaint and
Counterclaims. In its Answer, Discus denies any liability for BriteSmile's
claims. Discus also raises affirmative defenses, including claims that its
products and processes do not infringe BriteSmile's patents, and that
BriteSmile's patents are invalid and unenforceable. Discus asserts counterclaims
against BriteSmile, seeking (i) judicial declarations that BriteSmile's patents
are invalid, unenforceable, and have not been infringed, (ii) tortious
interference with prospective economic advantage and economic business
relations, and (iii) unfair competition. Discus also asks for declarations that
its products and processes do not violate BriteSmile's patents, that
BriteSmile's patents are unenforceable, that BriteSmile has no protectable trade
secrets, that BriteSmile's contracts with dentists which contain contractual
restrictions on the purchase and use of competitive systems are unenforceable
and should be enjoined, lost profits, treble damages and attorneys fees. The
Company has commenced discovery concerning the claims and defenses asserted in
the Discus Patent Litigation.
Salim Nathoo v. BriteSmile Leasing. On March 6, 2003, Nathoo filed a lawsuit
against BriteSmile Leasing, a subsidiary of the Company in the New Jersey state
court. In this action, Nathoo alleges that the Company breached its agreement to
pay Nathoo money, and that such failure should result in the reversion of
certain patent rights, which were previously assigned by Nathoo to the Company,
back to Nathoo. Nathoo also seeks the payment of profits derived from the patent
rights. The Company has filed an answer the to complaint, together with
countercliams alleging the same causes of action as in the Company's California
litigation against Nathoo. The Company has also removed Nathoo's New Jersey
action to federal court, and has filed a motion to transfer it to California,
and consolidate it with the California lawsuit.
Smile Inc. Asia Pte. Ltd. v. BriteSmile. On April 23, 2002, Smile Inc. Asia Pte.
Ltd. ("Smile") sued the Company and BriteSmile Management, Inc., a wholly owned
subsidiary of the Company, in the Third Judicial District Court in Salt Lake
City, Utah. The Complaint alleges that BriteSmile Management breached its 1998
distributor agreement with Smile by failing to fill orders placed and to perform
other obligations under the agreement. The Complaint also alleges that
BriteSmile Management and the Company fraudulently induced Smile to enter into
the distributor agreement, and includes claims for damages based on alleged
unjust enrichment, civil conspiracy, breach of the duty of good faith and fair
dealing, interference with contractual and economic relations, and fraudulent
transfer. The Company believes that the claims asserted by Smile are entirely
without merit and will vigorously defend the lawsuit. The Company has commenced
discovery with regard to Smile's claims.
BriteSmile v. Discus Dental, filed in Contra Costa County Superior Court,
California. On May 31, 2002, the Company filed a complaint against Discus
Dental, Inc. in Contra Costa County Superior Court, California, alleging causes
of action for intentional interference with contractual relationship, negligent
interference with contractual relationship,
16
violation of Unfair Business Practice Act - Loss Leader, violation of Unfair
Business Practice Act, trade libel and injunctive relief. The complaint alleges
that Discus Dental and other defendants yet to be identified wrongfully
interfered with the Company's contractual relationships with its Associated
Center dentists, in part by writing letters with the purpose of inducing certain
of the Company's Associated Dentists to terminate their contracts with the
Company and switch to Discus' Zoom! system, and by making false and disparaging
statements concerning the Company's teeth whitening system. The Complaint seeks
damages for loss of business, punitive damages, injunctive relief, and costs of
suit. On June 27, 2002, Discus filed a demurrer to the Company's complaint,
challenging the legal sufficiency of the complaint. On June 30, 2002, the court
ruled that the Company will be able to pursue its claims as alleged in the
complaint except for the second cause of action alleging negligent interference
with contractual relationship. This case was stayed on March 11, 2003 and will
remain stayed until a status conference scheduled for September 2003.
ITEM 2. CHANGES IN SECURITIES.
On December 24, 2002, the Company asked shareholders of approximately 62% of the
common stock of the Company to sign written consents to effect a reverse stock
split for the Company's common stock, which they did. The result was that
fifteen shares of common stock before the effective date of the reverse split
would become one share after the effective date. Because more than a majority of
the shareholders approved this transaction, a vote of all of the shareholders
was not necessary under Utah law. Pursuant to the consents signed by certain
shareholders, the split became effective January 27, 2003. The Company paid the
costs of soliciting certain shareholders for their consent and for printing and
mailing information statements associated therewith.
In September 2002, the Company completed a voluntary stock option exchange offer
for its eligible employees. Participating employees had the opportunity to
cancel previously granted options in exchange for an equal number of new options
granted on March 24, 2003, that date which was six months and one day following
the date on which the Company canceled the old options. As a result of this
program, 150,021 options were canceled. Effective March 24, 2003, the Company
granted to the employee participants in the exchange program new options under
the Company's 1997 Stock Option and Incentive Plan for 150,134 aggregate shares,
at an exercise price of $10.77 per share, the fair market value of the Company's
common stock on that date.
In addition to the option grants on March 24, 2003 described above, during the
period December 29, 2002 to March 29, 2003, the Company granted to key employees
under its 1997 Plan non-qualified options to purchase an aggregate of 968 shares
of the Company's common stock, at exercise prices ranging from $5.53 to $8.00
per share. The options vest over a period of time following their respective
dates of grant.
For all option grants, the Company claimed exemption from registration under the
Securities Act of 1933 in that the Company believes such grants were not "sales"
within the meaning of the Act. Shares issuable upon exercise of the options have
been or will be registered with the SEC pursuant to Registration Statements on
Form S-8.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
CAP America Trust Center Loan
On May 7, 2003, the Company and CAP America Trust entered into a Loan Agreement
for $2.5 million to be used for capital expenditures and other specific revenue
generating initiatives to be agreed and defined by BriteSmile and CAP America.
The Company may make drawings on account of the loan from time to time during
the draw down period beginning on May 7, 2003 and ending on May 10, 2006. Up to
17
$1,700,000 of loan proceeds may be used for the specific revenue generating
initiatives, and up to $800,000 for general working capital. Interest is fixed
at 6%, payable monthly, with CAP America having the right to reset the interest
rate to 200bps over the 1 year London Interbank Offered Rate ("libor") after
giving the Company 30 days notice. A variable fee payment based on the number of
teeth whitening procedure performed at the Centers will commence on May 11,
2006, and continue until May 10, 2011. Variable fees will be payable 40 days
after the end of the month in which the procedures are performed, except for
fees due for April/May 2011, which will become payable on the maturity date. To
date, no loan proceeds have been drawn by the Company under this loan.
LCO Investments Limited ("LCO") is the Company's major shareholder. LCO is a
wholly owned subsidiary of the ERSE Trust. CAP Advisers Limited is a co-trustee
of the ERSE Trust. Mr. Anthony Pilaro, a director and co-CEO of the Company, is
also Chairman of CAP Advisers Limited. CAP America Limited is a co-trustee of
CAP America Trust, the lender under the Center Loan described above. CAP America
Limited is owned and controlled by LCO.
Acquisition Of Certain Human Oral Care Intellectual Property
On May 9, 2003, the Company and its wholly-owned subsidiary, BriteSmile
Development, Inc. ("BDI"), entered into a binding memorandum of understanding
(the "MOU") with R. Eric Montgomery ("Montgomery") and certain entities owned
and controlled by him (collectively, the "REM Group"). Pursuant to the MOU, BDI
agreed to acquire certain United States and foreign patents, patent
applications, continuations, continuations-in-part, trade secrets, technologies,
know-how, trademarks and trade names relating to human oral care ("HOC") for a
purchase price equal to $6,000,000 plus a 50% participation interest in
royalties and infringement recoveries relating to the HOC intellectual property
to be acquired from the REM Group. In addition, the REM Group agreed to convey
certain other United States and foreign patents, patent application,
continuations, continuations-in-part, inventions, trade secrets, technologies,
know-how, trademarks and trade names which are implicated by certain agreements
between the Company, the REM Group and a third party to a new entity to be owned
and controlled by REM.
BDI agreed to pay the $6.0 million portion of the purchase price to the REM
Group as follows:
(i) $750,000 upon signing of the MOU and delivery to BDI of a
license from the REM Group to certain patents for a static mixer
device used in teeth whitening. The REM Group signed the MOU and
delivered the license for the static mixer device and BDI paid
the REM Group $750,000 on May 9, 2003;
(ii) $1,000,000 upon closing of the definitive agreements for the
transition;
(iii) $1,000,000 when certain contigencies are satisfied by the REM
Gorup; and
(iv) $3,250,000 paid quarterly in amounts equal to the aggregate of 5%
of net revenues from sales of whitening crayon or pen products
sold by the Company and 1% of net revenues from light activated
teeth whitening or other in-office or chair side whitening
procedures. If these payments do not equal $3,250,000 within five
years of the date of the definitive agreements, BDI will owe the
REM Group the unpaid amount at that time. At the option of BDI,
up to 50% of these quarterly payments may be paid in common stock
of the Company so long as the Company's common stock is publicly
traded on a major stock exchange at a price of at least $1.00.
The MOU also provides that Montgomery will enter into a consulting agreement
with BDI (the "BDI Consulting Agreement") for a five year term at a rate of
$180,000 per year. Under the BDI Consulting Agreement, Montgomery agreed to
consult exclusively for BDI and the Company in the HOC field. BDI will own all
new HOC intellectual property arising from work under the BDI Consulting
Agreement subject to payment to the REM Group of 5% of net retail and 3% of net
wholesale revenues for each new product for a term of ten years from the date of
first commercial sale or, in cases where at least one patent claim issues that
covers the new product, until the applicable patent expires.
At the end of the term of the BDI Consulting Agreement, BDI shall have a
perpetual right of first disclosure as to all new HOC products invented by the
REM Group and their successors and the right of first refusal to purchase or
license such products. Should BDI elect to acquire such new HOC intellectual
property, BDI will be required to fund certain portions of the research and
18
development costs and to pay the REM Group 3% of net revenues for those products
for ten years if there is no patent issued for those products or for the term of
any patent which covers the products.
If during the term of the BDI Consulting Agreement, BDI and the REM Group create
new products, BDI will own all new HOC intellectual property arising from such
joint products and BDI will fund the third party intellectual property
prosecution costs and third party clinical trials related to such new products.
However, the REM Group will fund a portion of the research and development costs
for the new product. BDI will also pay the REM Group an amount equal to 5% of
the net retail and 3% of the net wholesale revenues for each new product arising
from any of these development programs. Such amounts will be payable for each
product for a period of ten years from the date of first commercial sale of that
product or, in cases where at least one patent claim issues that covers that
product, until the applicable patent expires.
With respect to third party infringement and/or licensing activities, BDI will
pay the REM Group 50% of such recoveries after payment of legal fees incurred in
prosecution of third party claims, all patent prosecution and maintenance costs,
and certain other amounts.
The parties must negotiate the terms of definitive agreements in order to close
the transaction. There can be no assurance that the parties will be able to
agree upon the terms and conditions of the required definitive agreements.
However, the terms of the MOU shall automatically be extended month-to-month
until a closing occurs.
Montgomery is a member of the board of directors of the Company. Also, one of
the members of the REM Group is a party to a consulting agreement with the
Company under which the Company pays $25,000 per month for teeth whitening
consulting services. The existing consulting agreement will terminate when the
BDI Consulting Agreement is signed.
Financing Arrangements for the MOU
On April 29, 2003 the Company, BDI, LCO and Montgomery entered into a letter
agreement pursuant to which LCO and Montgomery agreed to loan a total of
$3,000,000 to BDI to fund implementation of the MOU, including $2,750,000 for
payments to Montgomery, and $250,000 for BDI working capital.
LCO is the Company's major shareholder. LCO is a wholly owned subsidiary of the
ERSE Trust. CAP Advisers Limited is a co-trustee of the ERSE Trust. Mr. Pilaro,
a director and co-CEO of the Company, is Chairman of CAP Advisers Lmited. Cap
America Limited is owned and controlled by LCO.
Pursuant to the letter agreement, LCO loaned its initial installment of
$1,000,000 to BDI on May 9, 2003. BDI delivered a promissory note to LCO, with
interest and principal due on May 9, 2008 (5 years from the date of the note).
Interest accrues at 200 basis points above Libor as quoted by the Bank of Nova
Scotia. The interest rate on the note is reset every thirty days at 200 basis
points above then current Libor.
Pursuant to the letter agreement and related documents, LCO will lend to BDI an
additional $1,000,000 on similar terms upon closing of the definitive agreements
for the MOU transaction, and Montgomery will lend BDI $1,000,000 on similar
terms at the time certain other conditions specified in the MOU are met.
The notes issued and to be issued to LCO and Montgomery by BDI will be
guaranteed by the Company. For their loans to BDI, LCO received 66,666 warrants
to purchase Common Stock of the Company effective April 29, 2003, and will
receive 66,667 warrants to purchase Common Stock upon closing of the definitive
agreements for the MOU transaction. For his loan to BDI, Montgomery received
3,000 warrants to purchase Common Stock of the Company effective April 29, 2003,
and will receive 66,667 warrants to purchase Common Stock at the time certain
other conditions specified in the MOU are met. All warrants granted or to be
granted to LCO and Montgomery will be exercisable at $15.00 per share. The
shares of Common Stock underlying the warrants will be subject to certain
limited "piggyback" registration rights in the event of future registered public
offerings of Common Stock sold by the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
10.1 Loan Agreement between CAP America Trust and BriteSmile, Inc.
dated May 7, 2003 (filed herewith).
19
99.1 Certifications of John L. Reed, CEO, and John C. Dong, CFO,
pursuant to Section 906 of The Sarbanes-Oxley Act Of
2002 (filed herewith).
99.2 Earnings Release of BriteSmile, Inc. dated May 13, 2003 for
the 13 week period ended March 29, 2003 (filed herewith).
99.3 Press Release of BriteSmile, Inc. dated May 9, 2003 (filed
herewith).
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the period for which this
report is filed.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRITESMILE, INC.
/s/ John L. Reed May 13, 2003
-------------------------------------- ------------
John L. Reed Date
Chief Executive Officer
/s/ John C. Dong May 13, 2003
-------------------------------------- -------------
John C. Dong Date
Chief Financial Officer
21
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, John L. Reed, Chief Executive Officer of BriteSmile, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of BriteSmile, Inc.
(the "Registrant");
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this Quarterly Report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003
/s/ John L. Reed
------------------------------
John L. Reed
Chief Executive Officer
(Principal Executive Officer)
22
CHIEF FINANCIAL OFFICER CERTIFICATION
I, John C. Dong, Chief Financial Officer of BriteSmile, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of BriteSmile, Inc.
(the "Registrant");
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this Quarterly Report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003
/s/ John C. Dong
--------------------------
John C. Dong
Chief Financial Officer
(Principal Financial and Accounting Officer)
23