Case 1.4 Biolase, Inc.

Course Fundamental of BA
Pranjal Shah
Assignment 1
1.Why is MD&A section of the annual report useful to the financial analyst? What type of information
found in this section?
Ans:
Among other things, the MD&A provides an overview of the previous year of operations and how the
company fared in that time period. Management will usually also touch on the upcoming year,
outlining future goals and approaches to new projects.
The MD&A is a very important section of an annual report, especially for those analyzing the
fundamentals, which include management and management style. Although this section contains useful
information, investors should keep in mind that the section is unaudited.
It is a chance for management to discuss what is not shown on their financial statements, because risks
shape the past and the future. According to the Security and Exchange Commission (SEC) full
disclosure of uncertainties are critical. Equally important, apart from the financial data the analysts
need to know what management knows and what theyre thinking, in order to make clear assumptions
of the companys valuation. In particular, the analyst can expect to find a discussion of the following:
The Companys liquidity, deficiencies, commitments, changes, transactions that look unusual, events
and sales breakdowns
2.Using the excerpts from the MD&A of the Biolase,Inc.2013 Form 10-K,discuss whether each of the
item that should be discussed in an MD&A are, in fact, presented in this section. Give examples to
support your answer.
Ans:
Using the excerpts from the Management Discussion and Analysis (MD&A) of Biolase Technology,
Inc. 20013 Form 10-K, discussed below is whether each of the items that should be discussed in an
MD&A are, in fact, presented in this section along with examples. The following table shows the items
that are required to be discussed in the MD&A and how well they have been dealt with in the case of
Biolase Technology, Inc.
Internal and external
sources of liquidity

The company had explained its liquidity and capital resources such as
revolving bank line of credit with Commercial Bank (external source) and
changes in working capital (internal sources).

Material deficiencies in
liquidity and how they
will be remedied

Deficiencies in liquidity have not been explained with utmost clarity even
though it seems that the company is in a difficult situation carry on
operations beyond the next year. Otherwise the company is hoping to raise
finances through public or private equity route.

Commitments for capital

expenditures the purpose
of such commitments and
expected sources of
financing.

The company has been discrete about its capital expenditures for the years
to come but they have indicated that the level of financing will be decided
by factors such as the growth in manufacturing capacity and any
acquisitions the company may pursue.

Anticipated changes in
mix and cost of financing
resources.

The company has given bleak indications that they might go for debt
financing, although the management isnt clear on the route of financing as
they are uncertain to receive finances on terms favorable to the company.

Unusual or infrequent
transactions that affect
income from continuing
operations.

The management has very faintly indicated of income from sources other
than its core operations, such as profit on sale of assets and gain on foreign
currency transactions.

Events that cause

material changes in
relationship between cost
and revenue.

Not many such events have been explained in detail, although the
company has indicated a rise in engineering and developmental expenses
in future and with the increase in debt financing requirements, interest
expense is expected to increase.

Breakdown of sales
increases into price and
volume of components.

It is clearly stated that the company is in the business of manufacturing,

developing and marketing laser system products to be used for medical
purposes. The company derives its revenues from laser system and nonlaser system sources such consumable products, advanced training
programs, extended service contracts and shipping revenue. The
management has been able to give a vivid picture of the changes in sales
figure for the current financial year.

Also indicated therein is that the company is exposed to a potential threat

of foreign currency fluctuation.

3.Evaluate the overall quality to the information presented by Biolase Inc. in the MD&A.
Ans:
The overall quality of the information presented by Biolase Technology, Inc. in Management
Discussion & Analysis section of the report presented by the company is rather mediocre in its quality.
This is because the management in its Management Discussion and Analysis (MD&A) report has failed
to give an outlook for the future, regarding the companys operations. It has only provided facts about
the current years performance, but has not indicated the future direction of the company. The report is
supposed to indicate managements view of the companys future, but the lack of management in
providing it has resulted in doubt that there will ever be a future. Management should be more detailed
on the financing routes it is hoping to tread for future events
4.Based on this Section only,What is your assessment of the prospects of this company?
Based on the MD&A section only, the assessment of the prospects for the company is that it seems to
be in trouble with their falling revenues and profit margins. In addition, they have the potential for
increase of expenses of administrative and operational nature and a failure to retain a President and
Executive Vice Chairman. Consequently, this situation of the company shows low credit quality and
low credit availability. It may well be concluded that rough times are ahead. They need a new leader
to stand up and hold the reins and guide them in their strategic plans.