APPLE ORTHODONTIX INC, S-1/A, 1997-11-20

APPLE ORTHODONTIX INC
S-1/A, 1997-11-20
HEALTH SERVICES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1997
REGISTRATION NO. 333-38817

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

AMENDMENT NO. 2
TO
FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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APPLE ORTHODONTIX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8021 74-2795193
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)

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APPLE ORTHODONTIX, INC. MICHAEL W. HARLAN
2777 ALLEN PARKWAY, SUITE 700 APPLE ORTHODONTIX, INC.
HOUSTON, TEXAS 77019 2777 ALLEN PARKWAY, SUITE 700
(713) 852-2500 HOUSTON, TEXAS 77019
(ADDRESS, INCLUDING ZIP CODE, AND (713) 852-2504
TELEPHONE NUMBER, (NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
INCLUDING AREA CODE, OF REGISTRANT'S NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
------------------------

COPIES TO:
LOUISE A. SHEARER ALAN J. BOGDANOW
BAKER & BOTTS, L.L.P. HUGHES & LUCE, L.L.P.
ONE SHELL PLAZA 1717 MAIN STREET
910 LOUISIANA SUITE 2800
HOUSTON, TEXAS 77002 DALLAS, TEXAS 75201

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.

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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************

SUBJECT TO COMPLETION, DATED NOVEMBER 20, 1997

PROSPECTUS

1,674,986 SHARES

[LOGO] APPLE ORTHODONTIX

CLASS A COMMON STOCK

------------------------

Of the 1,674,986 shares of Class A Common Stock ("Common Stock") offered
hereby (the "Offering"), 1,250,000 are being offered by Apple Orthodontix,
Inc. ("Apple" or the "Company") and 424,986 are being sold for the account
of certain selling stockholders (the "Selling Stockholders"). The Common Stock
is entitled to one vote per share while the Company's Class B Common Stock (the
"Class B Stock") is entitled to three-tenths (3/10ths) of a vote per share.

The Common Stock is listed on the American Stock Exchange under the symbol
"AOI." On November 19, 1997, the last reported sales price for the Common
Stock as reported on the American Stock Exchange was $11 7/16 per share. See
"Price Range of Common Stock."

------------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.

------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
Per Share............................ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)............................. $ $ $ $
==================================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses payable by the Company, estimated at $750,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 251,247 additional shares of Common Stock, on the same terms and
conditions as set forth above, to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ ,
respectively. See "Underwriting."

------------------------

The shares of Common Stock are being offered severally by the Underwriters,
subject to prior sale, when, as and if accepted by the Underwriters and subject
to conditions, including their right to reject orders, in whole or in part. It
is expected that delivery of the shares will be made at the offices of Bear,
Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, on or about
, 1997.
------------------------

BEAR, STEARNS & CO. INC.
COWEN & COMPANY
EQUITABLE SECURITIES CORPORATION

The date of this Prospectus is , 1997.
<PAGE>
[MAP]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING."

2
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PROSPECTUS SUMMARY

UNLESS OTHERWISE INDICATED BY THE CONTEXT, REFERENCES HEREIN TO (i)
"APPLE" OR THE "COMPANY" MEAN APPLE ORTHODONTIX, INC., (ii) "AFFILIATED
PRACTICES" MEAN THE ORTHODONTIC PRACTICES WITH WHICH THE COMPANY HAS AFFILIATED
AND THOSE, IF ANY, WITH WHICH THE COMPANY AFFILIATES IN THE FUTURE, (iii) "NEW
CASE STARTS" MEAN THE NUMBER OF NEW PATIENTS BEGINNING TREATMENT DURING A
PERIOD OF TIME AND (iv) "CASE ACCEPTANCE RATE" MEAN, FOR ANY SPECIFIED PERIOD
OF TIME, THE PERCENTAGE OF POTENTIAL PATIENTS WHO UNDERGO AN INITIAL EXAMINATION
AT AN ORTHODONTIC PRACTICE WHO IN FACT ELECT TO BEGIN TREATMENT WITH SUCH
EXAMINING ORTHODONTIST.

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT
EXERCISED. AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK, AND INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
FORTH UNDER THE HEADING "RISK FACTORS."

THE COMPANY

Apple is a leading provider of practice management services (which exclude
the management and delivery of orthodontic services) to orthodontic practices in
the United States and Canada. The Company offers its Affiliated Practices a full
range of such services designed to facilitate the delivery of high-quality,
affordable orthodontic treatment to consumers. The Company's Affiliated
Practices benefit from a sophisticated, Company-developed practice operating
approach designed to (i) stimulate demand in their local markets by increasing
consumer awareness of the benefits, availability and affordability of
orthodontic treatment, (ii) improve the productivity and profitability of their
practices and (iii) leverage the benefits of orthodontist affiliation by
providing basic services that include clinical and financial information
management, access to capital and sophisticated technology, group purchasing and
comprehensive marketing techniques.

The Company seeks to grow through affiliations with additional orthodontic
practices and the development of new offices that complement geographic areas
served by Affiliated Practices. The Company earns revenue by providing
management, administrative, development and other services to its Affiliated
Practices. As of October 24, 1997, the Company provided management services to
48 orthodontic practices representing 61 orthodontists operating in 14 states in
the United States and 3 provinces in Canada.

The orthodontic services industry is highly fragmented, with over 90% of
the approximately 9,000 orthodontists in the United States operating as sole
practitioners and approximately 3% being affiliated with public orthodontic
practice management companies. The industry currently generates approximately
$3.5 billion in annual gross revenues, which have grown steadily at an average
rate of 7.5% per year in recent years. Seventy percent of orthodontic services
are performed on a private pay, fee-for-service basis, 25% are covered by
traditional dental insurance (generally with a 50% or greater copayment by the
patient) and less than 5% are reimbursed from managed care payor sources because
of the elective nature of the service. Management believes that the potential
market for orthodontic services could be significantly increased based on
growing acceptance among adult consumers and industry data that indicate that
only one out of five children who could benefit from orthodontics receives
treatment. According to the most recent statistics available from studies by the
Journal of Clinical Orthodontists, the median orthodontic practice in the United
States generated $518,800 in revenues and started 180 new cases in 1996 and
experienced a case acceptance rate of 60% in 1994. The traditional orthodontic
practice relies primarily on referrals from general dentists and less than 8% of
practices utilize sophisticated marketing techniques such as commercial
advertising.

Through its practice operating approach, the Company seeks to stimulate
productivity and internal growth within its Affiliated Practices. To accomplish
this objective, the Company has developed an operating approach consisting
primarily of (i) implementing practice-building and external marketing

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<PAGE>
programs designed to generate new case starts through increased referrals from
existing and former patients and the use of multimedia advertising to stimulate
demand for treatment services, (ii) offering more affordable payment plans to
patients to broaden the market for orthodontic services, (iii) increasing the
operating efficiency of the Affiliated Practices by relieving the orthodontists
from various time-consuming administrative responsibilities and realizing
economies of scale, (iv) providing a systems-oriented approach to training and
education of clinic personnel to improve communications with patients and
prospective patients and increase productivity, (v) developing new offices to
expand the scope of the geographic markets served by Affiliated Practices and
(vi) utilizing a customized management information system to provide detailed
financial and operating data and related analyses to Affiliated Practices and
management. The Company believes that its approach has resulted in local market
expansion, increased new case starts and practice profitability, greater
orthodontist productivity and heightened patient satisfaction within its
existing Affiliated Practices.

The Company is pursuing an aggressive expansion program designed to
strengthen its position in its current markets and expand its network of
Affiliated Practices into markets it does not currently serve. The Company
intends to expand its network of Affiliated Practices through future
affiliations and new office development. Management believes that, because of
the highly fragmented nature of the industry, there are numerous orthodontic
practices that are attractive candidates to become Affiliated Practices. The
Company focuses on candidates that have favorable reputations in their local
markets and the desire to implement the Company's practice operating approach.
The Company seeks to build upon the reputations and relationships of the
orthodontists associated with the existing Affiliated Practices to identify and
develop candidates to become future Affiliated Practices. Many of these
orthodontists hold, or have previously held, leadership roles in various state,
regional and national associations or are affiliated with or teach at graduate
orthodontic programs at dental schools. The Company believes the visibility and
reputation of these individuals, combined with the acquisition experience of
management, provides the Company with advantages in identifying, negotiating and
consummating future affiliations.

RECENT DEVELOPMENTS

In connection with its initial public offering (the "IPO") in May 1997,
the Company acquired substantially all the tangible and intangible assets and
assumed certain liabilities of, and entered into agreements to provide long-term
management services to, 31 orthodontists operating in 58 offices located in 13
states in the United States and in Alberta, Canada (the "Founding Affiliated
Practices"). From the date of the IPO through October 24, 1997, the Company has
affiliated with an additional 17 practices and 30 orthodontists operating in 30
offices, increasing the total number of existing Affiliated Practices to 48.
These additional practices had combined historical gross patient revenues of
$18.7 million for their most recently completed fiscal year, and expand the
Company's geographic base into Georgia, as well as Ontario and British Columbia,
Canada. In addition to these affiliations, the Company is negotiating and will
continue to negotiate to affiliate with additional orthodontic practices;
however, although the Company intends to aggressively pursue these and other
affiliations, there can be no assurance that any of such affiliations will be
consummated.

4
<PAGE>
THE OFFERING

Common Stock
Offered by the Company............. 1,250,000 shares
Offered by the Selling
Stockholders..................... 424,986 shares(1)

Common Stock outstanding after the
Offering.............................. 9,510,692 shares(2)(3)

Class B Stock outstanding after the
Offering.............................. 3,176,774 shares

Voting Rights........................... Holders of Common Stock are entitled
to one vote per share and the
holders of Class B Stock are
entitled to three-tenths (3/10ths)
of a vote per share. In addition,
holders of the Class B Stock are
currently entitled to elect as a
class one member of the Board of
Directors, and the holders of the
Common Stock are entitled to elect
as a class all other members of the
Board of Directors. The Common Stock
and the Class B Stock possess
ordinary voting rights and vote
together as a single class in
respect of other corporate matters.
The Class B Stock is convertible
into Common Stock in certain
circumstances. See "Description of
Capital Stock."

Use of Proceeds......................... Net proceeds to the Company from the
Offering will be used to repay bank
debt and for future affiliations,
the development of new offices,
future capital expenditures and
general corporate purposes. See "Use
of Proceeds."

American Stock Exchange Symbol.......... AOI
- ------------
(1) Of such shares, 170,310 are currently shares of Class B Stock. Such shares
will automatically convert into an equal number of shares of Common Stock
upon their sale in the Offering.

(2) Includes 1,027,354 shares of Common Stock issuable in connection with
certain Canadian affiliations. See "Shares Eligible for Future Sale."

(3) Excludes (i) an aggregate of approximately 839,350 shares of Common Stock
issuable upon exercise of stock options outstanding at a weighted average
exercise price of $7.18 per share under Apple's 1997 Stock Compensation Plan
(the "1997 Stock Compensation Plan"), (ii) approximately 513,996 shares
available for future awards under the 1997 Stock Compensation Plan and (iii)
180,000 shares of Common Stock issuable upon the exercise of a warrant
issued to an affiliate of TriCap Funding I, L.L.C. ("TriCap"), with an
exercise price per share of $7.00, which warrant was subsequently
distributed to three investors in such affiliate, including William
Sherrill, a director of the Company. See "Management -- 1997 Stock
Compensation Plan" and "Certain Transactions."

EXCEPT WHERE OTHERWISE SPECIFIED, INDUSTRY INFORMATION USED IN THIS
PROSPECTUS IS DERIVED FROM THE 1995 JOURNAL OF CLINICAL ORTHODONTISTS
ORTHODONTIC PRACTICE STUDY ("1995 JCO STUDY"), A BIENNIAL STUDY, AND RELATES
TO 1994 UNLESS OTHERWISE INDICATED. PARTS I AND II OF THE 1997 JOURNAL OF
CLINICAL ORTHODONTISTS ORTHODONTIC PRACTICE STUDY (THE "1997 JCO STUDY"),
WHICH CONTAINS CERTAIN COMPARABLE INFORMATION FOR 1995 AND 1996, HAVE RECENTLY
BECOME AVAILABLE AND ARE CITED HEREIN AS APPROPRIATE. THE REMAINDER OF THE 1997
JCO STUDY IS NOT EXPECTED TO BE AVAILABLE UNTIL LATE 1997. THE INFORMATION
COMPILED IN THE 1995 JCO STUDY AND THE 1997 JCO STUDY RELATES TO ORTHODONTISTS
WHO HAVE COMPLETED ACCREDITED GRADUATE ORTHODONTIC TRAINING PROGRAMS AND NEITHER
THAT INFORMATION NOR ANY OTHER INDUSTRY INFORMATION SET FORTH IN THIS PROSPECTUS
RELATES TO GENERAL AND SPECIALTY DENTISTS WHO ALSO PERFORM ORTHODONTIC SERVICES.

5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following information is derived from the financial statements of Apple
included elsewhere in this Prospectus. Comparative results have not been
presented as the Company was effectively not in operation in 1996. For certain
additional information concerning the existing Affiliated Practices, see Note 6
of Notes to the Audited Financial Statements and Notes 3 and 6 of Notes to the
Unaudited Financial Statements.

PERIOD FROM
INCEPTION
(JULY 15, 1996)
THROUGH THREE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Service fee revenues................... $-- $ 7,480(1)
Costs and expenses(2):
Salaries and benefits............. 627 3,094
Orthodontic supplies.............. -- 998
Rent.............................. 20 786
Advertising and marketing......... -- 146
General and administrative........ 232 1,241
Depreciation and amortization..... 5 341
Compensation expense related to
issuance
of stock(3)..................... 13,812 --
Consulting expense related to
issuance of stock(3)............ 9,613 --
----------------- ------------------
Total costs and expenses.......... 24,309 6,606
----------------- ------------------
Operating income (loss)................ (24,309) 874
Interest expense....................... -- 141
Interest and other income.............. -- (94)
----------------- ------------------
Income (loss) before income taxes...... (24,309) 827
Provision for income taxes............. -- 314
----------------- ------------------
Net income (loss)...................... $ (24,309) $ 513
================= ==================
Weighted average shares outstanding.... 3,359 11,205
Earnings per share..................... $ (7.24) $ 0.05

SEPTEMBER 30, 1997
--------------------------------
ACTUAL AS ADJUSTED(4)
-------------- --------------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital........................ $ 693 $ 4,236
Total assets........................... 40,783 44,326
Long-term debt and capital lease
obligations, net of current portion.. 9,410 210
Stockholders' equity................... 16,132 28,875

- ------------
(1) Reflects service fees for the Founding Affiliated Practices for the entire
three-month period and for affiliations during the three-month period, from
the date of such affiliation.

(2) Corporate office expenses are included for all periods presented.

(3) Reflects non-recurring charges related to shares issued to management and
advisors of the Company in October and December 1996, at $7.00 per share.
See Note 1 of the Notes to the Audited Financial Statements included
elsewhere in this Prospectus.

(4) Adjusted to give effect to the sale of the 1,250,000 shares of Common Stock
offered by the Company in the Offering and the application of the estimated
net proceeds therefrom. See "Use of Proceeds."

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RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN EVALUATING THE
COMPANY AND ITS BUSINESS BEFORE PURCHASING ANY OF THE SHARES OF THE COMMON STOCK
OFFERED HEREBY. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE STATEMENTS ARE BASED ON CERTAIN ASSUMPTIONS AND ANALYSES MADE BY THE
COMPANY IN LIGHT OF ITS EXPERIENCE AND ITS PERCEPTION OF HISTORICAL TRENDS,
CURRENT CONDITIONS, EXPECTED FUTURE DEVELOPMENTS AND OTHER FACTORS THE COMPANY
BELIEVES ARE IMPORTANT UNDER THE CIRCUMSTANCES. SUCH STATEMENTS ARE SUBJECT TO A
NUMBER OF ASSUMPTIONS, RISKS, AND UNCERTAINTIES THAT COULD CAUSE ACTUAL FUTURE
ACTIVITIES AND RESULTS OF OPERATIONS TO BE MATERIALLY DIFFERENT FROM THOSE SET
FORTH IN THE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL ACTIVITIES AND RESULTS TO DIFFER INCLUDE, WITHOUT LIMITATION, THOSE SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS, MANY OF WHICH ARE BEYOND THE
CONTROL OF THE COMPANY.

LIMITED COMBINED OPERATING HISTORY

The Company was incorporated in July 1996 and conducted no operations
before its IPO in May 1997 other than in connection with the IPO and affiliation
with the Founding Affiliated Practices. Although each of the existing Affiliated
Practices operated independently before affiliation with the Company, the
Company has a limited combined operating history. As a result, there can be no
assurance that the process of integrating the management and administrative
functions of the Affiliated Practices will be successful or that the Company's
management will be able to effectively or profitably manage these operations or
successfully implement the Company's operating or expansion strategies. Failure
by the Company to successfully implement its operating or expansion strategies
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Service
Agreements."

RELIANCE ON AFFILIATED PRACTICES AND ORTHODONTISTS

The Company receives fees for services provided to the Affiliated Practices
under long-term service agreements (the "Service Agreements"). It does not
employ orthodontists or control the practice of orthodontics by the
orthodontists employed by the Affiliated Practices, and its services revenue
generally depends on revenue generated by the Affiliated Practices. In some
cases, the fees are based on the costs and expenses the Company incurs in
connection with providing services. The profitability of the Affiliated
Practices, as well as the performance of the individual orthodontists employed
by the Affiliated Practices, affect the Company's profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Service Agreements."

The revenues of the Affiliated Practices (and, therefore, the success of
the Company) are dependent on fees generated by the orthodontists employed by
the Affiliated Practices. In connection with the Service Agreements, each
orthodontist affiliated with an Affiliated Practice enters into an employment
agreement, generally with a term ranging from five to seven years, with the
professional corporation or association in which that orthodontist owns an
equity interest (and which is a party to a Service Agreement). A substantial
reduction in the number of orthodontists employed by or associated with the
Affiliated Practices could have a material adverse effect on the financial
performance of the Company. The ability of the Affiliated Practices to replace
existing orthodontists by attracting new orthodontists may be constrained by the
limited number of new orthodontists completing post-graduate orthodontic
programs each year. In addition, a shortage of available orthodontists with the
skills and experience sought by the Company would have a material adverse effect
on the Company's expansion opportunities. Failure by the Affiliated Practices to
employ a sufficient number of orthodontists (whether by renewals of existing
employment agreements or otherwise) would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Industry" and "-- Orthodontist Employment Agreements."

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<PAGE>
RISKS ASSOCIATED WITH EXPANSION STRATEGY

The success of the Company's expansion strategy depends on a number of
factors, including the Company's ability to (i) identify attractive candidates
to become Affiliated Practices, (ii) affiliate with Affiliated Practices on
favorable terms, (iii) adapt the Company's structure to comply with present or
future legal requirements affecting the Company's arrangements with Affiliated
Practices and comply with regulatory and licensing requirements applicable to
orthodontists and facilities operated and services offered by orthodontists,
(iv) expand the Company's infrastructure and management to accommodate expansion
and (v) obtain suitable financing to facilitate its expansion program.
Identifying candidates to become Affiliated Practices and proposing, negotiating
and implementing advantageous affiliations with such groups can be a lengthy,
complex and costly process. There can be no assurance that the Company's
expansion strategy will be successful, that modifications to the Company's
strategy will not be required, that the Company will be able to provide services
effectively and enhance the profitability of additional Affiliated Practices or
that the Company will be able to obtain adequate financing on reasonable terms
to support its expansion program. Furthermore, using shares of Common Stock as
consideration for (or in order to provide financing for) future affiliations
could result in significant dilution to then-existing stockholders. In addition,
future affiliations accounted for as purchases may result in substantial noncash
amortization charges for intangible assets in the Company's statements of
operations. See "-- Competition," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview" and
"Business -- Strategy."

COMPETITION

The Company faces substantial competition from other companies to establish
affiliations with additional orthodontic practices. The Company is aware of a
number of other public and private practice management companies focused on
orthodontics, as well as several companies pursuing similar strategies in
dentistry and other segments of the health care industry. The Company is aware
that general dental practice management companies have, or intend to, provide
orthodontic services and seek to affiliate with or employ orthodontists. Certain
of these competitors have greater financial and other resources than the
Company. Additional companies with similar objectives may enter the Company's
markets and compete with the Company. In addition, the business of providing
orthodontic services is highly competitive in each market in which the Company
operates. The Affiliated Practices face local competition from other
orthodontists, general dentists and pedodontists (dentists specializing in the
care of children's teeth), some of whom have more established practices.
Dentists are not restricted by law or any governmental authority from providing
orthodontic services. Management believes the increase in recent years in
dentists providing orthodontic services has limited the growth of patient case
starts performed by orthodontists. There can be no assurance that the Company or
the Affiliated Practices will be able to compete effectively, that additional
competitors will not enter their markets or that additional competition will not
have a material adverse effect on the Company. See "Business -- Competition."

GOVERNMENT REGULATION

Various U.S. federal and state laws as well as Canadian laws prohibit
business corporations such as the Company from engaging in the practice of
orthodontics or employing orthodontists to practice orthodontics and prohibit
orthodontists from splitting fees with non-orthodontists, as well as certain
other activities. The specific restrictions against the corporate practice of
orthodontics, as well as the interpretation of those restrictions by state
regulatory authorities, vary from jurisdiction to jurisdiction. The restrictions
are generally designed to prohibit an entity not wholly owned by orthodontists
(such as the Company) from controlling the professional assets of an orthodontic
practice (such as patient records and payor contracts), employing orthodontists
to practice orthodontics (or, in certain states, employing dental hygienists or
orthodontic assistants), or controlling the content of an orthodontist's
advertising or professional practice. Apple does not acquire any professional
assets or employ any orthodontists who provide orthodontic services at any of
the Affiliated Practices' locations. The laws of many jurisdictions also
prohibit orthodontists from sharing professional fees with non-orthodontic
entities. Dental boards do not generally interpret these prohibitions as
preventing a non-orthodontic entity from owning non-professional assets used

8
<PAGE>
by an orthodontist in an orthodontic practice or providing management services
to an orthodontist for a fee, provided certain conditions are met. There can be
no assurance that a review of the Company's business relationships by courts or
regulatory authorities will not result in determinations that could prohibit or
otherwise adversely affect the operations of the Company or that the regulatory
environment will not change, requiring the Company to reorganize or restrict its
existing or future operations. The laws regarding fee-splitting and the
corporate practice of orthodontics and their interpretation are enforced by
regulatory authorities that have broad discretion. There can be no assurance
that the legality of the Company's business or its relationship with the
Affiliated Practices will not be successfully challenged or that the
enforceability of the provisions of any Service Agreement will not be limited.
See "Business -- Government Regulation."

EXTENT OF PROTECTION OF PROPRIETARY RIGHTS

Apple relies in part on trademark, service mark, trade dress, trade secret,
unfair competition and copyright laws to protect its intellectual property
rights. There can be no assurance that actions taken by the Company will be
adequate to protect its intellectual property rights from misappropriation by
others, that the Company's proprietary information will not become known to
competitors, that others will not independently develop substantially equivalent
or better intellectual properties that do not infringe on the Company's
intellectual property rights or that others will not assert rights in, and
ownership of, proprietary rights of the Company. Furthermore, the Company's
rights to its "APPLE ORTHODONTIX" common law service mark may be limited in
market areas where a similar trademark or service mark may already be in use.
The Company has not applied for or obtained any registrations of its trademarks
or service marks. The Company is aware of several other businesses that utilize
an "APPLE" service mark in connection with the provision of general dental
services, some of which have obtained federal or state trademark registrations.
The Company is aware of one other orthodontic practice in the United States that
utilizes a service mark similar to the Company's, which practice is not located
in a market where any of the existing Affiliated Practices' offices are located.

CONTROL BY EXISTING MANAGEMENT AND DIRECTORS

Following completion of the Offering, John G. Vondrak, D.D.S., the
Company's Chairman and Chief Executive Officer, and the other executive officers
and directors of the Company as a group will beneficially own approximately
40.7% and 17.2%, respectively, of the outstanding shares of Class B Stock (or an
aggregate of approximately 57.9%) and 3.6% and 2.4%, respectively, of the
outstanding shares of Common Stock (or an aggregate of approximately 6.0%).
These persons, if acting in concert, would be able to exercise significant
influence over the Company's affairs. See "Security Ownership of Certain
Beneficial Owners and Management" and "Description of Capital Stock."

DEPENDENCE ON KEY PERSONNEL

The Company's future performance depends in significant part on the
continued service of its senior management, including Dr. Vondrak and other key
personnel. There can be no assurance that Dr. Vondrak, the Company's senior
management and other key employees will continue to work for the Company. Loss
of services of those employees could have a material adverse effect on the
Company's business, results of operations and financial condition. The success
of the Company's growth strategy also depends on the Company's ability to
attract and retain additional high-quality personnel. See
"Business -- Employees" and "Management."

LITIGATION WITH ORTHODONTIC CENTERS OF AMERICA

In December 1996, Orthodontic Centers of America, Inc. ("OCA") filed a
complaint in the United States District Court for the Eastern District of
Louisiana against Apple, Dr. Vondrak, John G. Vondrak, P.C. and John G. Vondrak
Apple Orthodontix, Inc. ("JGVAOI") alleging, among other things,
misappropriation of trade secrets and certain breaches of a confidentiality
agreement executed by Dr. Vondrak, on behalf of John G. Vondrak, P.C., in favor
of OCA. While Apple is not a party to the confidentiality agreement, OCA alleged
that Apple should be bound by its terms as a result of the relationship between

9
<PAGE>
Dr. Vondrak and Apple (specifically, OCA alleged that Dr. Vondrak and Apple are
alter egos and, alternatively, that Dr. Vondrak was acting as Apple's agent when
he executed the confidentiality agreement). In August 1997, the court dismissed
OCA's claims without prejudice on the grounds that the court lacked
jurisdiction. There can be no assurance that OCA will not seek to overturn the
court's decision or file a similar suit in another jurisdiction.

In August 1997, Apple filed a declaratory judgment action in the District
Court of Harris County, Texas (164th Judicial District) seeking a finding by the
court that neither Apple nor Dr. Vondrak has violated the terms of the
confidentiality agreement, otherwise used confidential information supplied by
OCA or unfairly competed against OCA. In October 1997, OCA filed an answer
generally denying Apple's allegations, as well as asserting a counterclaim
against Apple, JGVAOI, Apple Orthodontix of Texas, Inc., Apple Acquisition of
Texas, Inc., Dr. Vondrak, John G. Vondrak, P.C., one of the Founding Affiliated
Practices and the orthodontist associated with such practice. OCA's counterclaim
alleges, among other things, unfair competition, misappropriation of trade
secrets, tortious interference with prospective contractual arrangements and
certain breaches of confidentiality agreements executed by each of Dr. Vondrak,
on behalf of John G. Vondrak, P.C., and the affiliated orthodontist, on behalf
of the Founding Affiliated Practice referred to above, in favor of OCA. While
Apple is not a party to these confidentiality agreements, OCA alleged that Apple
should be bound by their terms as a result of the relationships between Dr.
Vondrak, the affiliated orthodontist and Apple (specifically, OCA alleged that
Dr. Vondrak and Apple are alter egos and that Apple aided and abetted or
conspired with Dr. Vondrak and the affiliated orthodontist in their wrongful
conduct). OCA's complaint states that it is seeking monetary damages in excess
of the minimum jurisdictional limits of the court, punitive damages, injunctive
relief, prejudgment interest and attorneys' fees. The Company intends to
vigorously defend the claims made by OCA, which the Company believes are without
merit. This lawsuit is still pending, and Apple cannot predict whether it will
succeed in obtaining the declarations sought from the court or, if it is not
successful, what effect this may have on Apple. See "Business -- Litigation and
Insurance."

In November 1997, the Company received notice that an acquaintance of Dr.
Vondrak was threatening to sue the Company, JGVAOI, Dr. Vondrak and John G.
Vondrak, P.C., alleging, among other things, certain breaches of an alleged oral
agreement with Dr. Vondrak pursuant to which Dr. Vondrak was to award the
acquaintance 10% of any stock issued to Dr. Vondrak in the IPO in exchange for
this person's effort to obtain venture capital for the Company. While Apple was
not a party to the alleged oral agreement, the person maintains that Apple
should be bound by its terms as a result of the relationship between Dr. Vondrak
and Apple. Although the Company believes that these allegations are without
merit, there can be no assurance that a lawsuit will not be filed and, if filed,
that Apple will obtain a successful outcome. See "Business -- Litigation and
Insurance."

RISK OF PROVIDING ORTHODONTIC SERVICES; ADEQUACY OF INSURANCE COVERAGE

The Affiliated Practices provide orthodontic services to the public and are
exposed to the risks of professional liability and other claims. Such claims, if
successful, could result in substantial damage awards to the claimants that may
exceed the limits of any applicable insurance coverage. Although the Company
does not control the practice of orthodontics by the Affiliated Practices, it
could be asserted that the Company should be held liable for malpractice of an
orthodontist employed by an Affiliated Practice. Each Affiliated Practice has
undertaken to comply with all applicable regulations and legal requirements, and
the Company maintains liability insurance for itself and is named as an
additional insured party on the liability insurance policies of the Affiliated
Practices. The existing Affiliated Practices maintain comprehensive professional
liability insurance, generally with limits of not less than $1.0 million per
claim and with aggregate policy limits of not less than $3.0 million per
orthodontist. The Company expects that it will require future Affiliated
Practices to maintain comparable insurance coverage. In the event an Affiliated
Practice employs more than one orthodontist, that practice will maintain
insurance with a separate limit for claims against that practice in an amount
acceptable to Apple. There can be no assurance that a future claim or claims
will not be successful or, if successful, will not exceed the limits of
available insurance coverage

10
<PAGE>
or that such coverage will continue to be available at acceptable costs. See
"Business -- Litigation and Insurance."

POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK

The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of the Common Stock in the public
market. The shares being sold in the Offering will be freely tradable unless
acquired by affiliates of the Company.

Concurrently with the closing of its IPO in May 1997, the orthodontist
owners of the Founding Affiliated Practices received, in the aggregate,
3,682,554 shares of Common Stock as a portion of the consideration for the
purchase by the Company of the assets of their practices, of which 225,146 are
being sold by certain of the Selling Stockholders in this Offering. As of
October 24, 1997, certain other stockholders of the Company held, in the
aggregate, an additional 3,347,084 shares of Class B Stock, of which 170,310 are
being converted into Common Stock and offered by certain of the Selling
Stockholders in this Offering. None of those 7,029,638 shares was acquired in a
transaction registered under the Securities Act of 1933, as amended (the
"Securities Act"), and, accordingly, such shares may not be sold except in
transactions registered under the Securities Act or pursuant to an exemption
from registration. In addition, the orthodontist owners of the Founding
Affiliated Practices have agreed not to sell any shares of Common Stock owned by
them until May 1998 (one year following the IPO), subject to their right to
exercise certain registration rights. After the expiration of such restricted
period, all of those shares may be sold in accordance with Rule 144 under the
Securities Act, subject to the applicable volume limitations, holding period and
other requirements of Rule 144. Substantially all of the outstanding Class B
Stock became eligible for resale pursuant to Rule 144 on October 11, 1997,
although 888,991 of such shares (which number excludes shares of Class B Stock
being converted and sold by certain of the Selling Stockholders in this
Offering), and 188,005 shares of Common Stock, will be subject to resale
restrictions for 90 days after the effective date of the Registration Statement
of which this Prospectus is a part pursuant to registration rights agreements,
or for 90 days from the date of this Prospectus (the "90-Day Lockup Period")
pursuant to agreements with Bear, Stearns & Co. Inc. An additional 1,672,723
shares of Class B Stock are held by management and are subject to resale
restrictions during the 90-Day Lockup Period pursuant to agreements with Bear,
Stearns & Co. Inc.

In June 1997, the Company registered 2,000,000 shares of Common Stock for
use by the Company as all or a portion of the consideration to be paid in future
affiliation transactions. As of October 24, 1997, approximately 674,000 of these
shares had been issued to the orthodontist owners of the Company's new
Affiliated Practices. These shares are, and the remaining approximately
1,326,000 of these shares will be, generally freely tradeable upon issuance;
however, each party that has received these shares of Common Stock has
contractually agreed with the Company not to sell any of such shares for a
period of one year from receipt. The Company anticipates that the agreements
entered into the connection with future affiliations will contractually restrict
the resale of all or a portion of the shares issued in these transactions for
varying periods of time.

Between July 25, 1997 and October 24, 1997, the Company affiliated with
several practices in Canada. For Canadian legal reasons, the stock issued to the
owners of those practices (which was not registered under the Securities Act)
was of a Canadian subsidiary of the Company, rather than of the Company itself.
The subsidiary stock is exchangeable by the holders for an aggregate of
1,027,354 shares of Common Stock, which are contractually restricted for one
year from the date of issuance of the subsidiary stock. Such shares of Common
Stock would not be permitted to be sold without registration under the
Securities Act or an applicable exemption therefrom; however, in connection with
each such affiliation, the Company has agreed that it will file a shelf
registration statement for the resale of such shares of Common Stock and use its
best efforts to cause such registration statement to become effective no later
than one year after the date of such affiliation. Pursuant to the shelf
registration statement, the holders would be permitted to sell such shares of
Common Stock without restriction.

11
<PAGE>
The Company, its directors and executive officers and the Selling
Stockholders have agreed not to offer or sell any shares of Common Stock for the
90-Day Lockup Period without the prior written consent of Bear, Stearns & Co.
Inc., except that the Company may issue, subject to certain conditions, Common
Stock in connection with future affiliations and may grant awards under the 1997
Stock Compensation Plan. These restrictions will be applicable to any shares
acquired by any of those persons in the Offering or otherwise during the 90-Day
Lockup Period.

As of September 30, 1997, the Company had outstanding under the 1997 Stock
Compensation Plan options to purchase approximately 839,350 shares of Common
Stock. In October 1997, the Company filed a registration statement on Form S-8
to register the 980,000 shares issuable in connection with Awards under the 1997
Stock Compensation Plan. See "Management -- 1997 Stock Compensation Plan" and
"Shares Eligible for Future Sale."

NEED FOR ADDITIONAL FINANCING

The Company's expansion strategy requires substantial capital resources.
Capital is needed not only for the affiliation with future Affiliated Practices,
but for the effective integration, operation and expansion of the existing and
future Affiliated Practices. In addition, the Affiliated Practices may from time
to time require capital for renovation and expansion and for the addition of
equipment and technology. The Service Agreements provide for loans by the
Company to Affiliated Practices under various circumstances. Such loans
generally bear interest at prime plus one percent and are to be repaid over
varying periods of time not to exceed five years. The extent to which the
Company is able or willing to use shares of Common Stock to enter into future
affiliations or provide future financing will depend on the market value of the
Common Stock from time to time and, in the case of affiliations, the willingness
of owners of potential Affiliated Practices to accept Common Stock as full or
partial payment of consideration for affiliations. Using shares of Common Stock
for these purposes may result in significant dilution to then-existing
stockholders. The Company will require additional capital from outside financing
sources in order to continue its expansion program. There can be no assurance
that the Company will be able to obtain additional funds when needed on
satisfactory terms or at all. Any limitation on the Company's ability to obtain
additional financing could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

FLUCTUATIONS IN OPERATING RESULTS

The Company's results of operations may fluctuate significantly from
quarter to quarter or year to year. Results may fluctuate due to a number of
factors, including the timing of future affiliations and new office openings,
seasonal fluctuations in the demand for orthodontic services and competitive
factors. Accordingly, quarterly comparisons of the Company's revenues and
operating results should not be relied on as an indication of future
performance, and the results of any quarterly period may not be indicative of
results to be expected for a full year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

POSSIBLE VOLATILITY OF STOCK PRICE

The securities markets have, from time to time, experienced significant
price and volume fluctuations that may be unrelated to the operating performance
of particular companies. These fluctuations often substantially affect the
market price of a company's common stock. The market prices for securities of
physician practice management companies have been, and can in the future be
expected to be, particularly volatile. The market price of the Common Stock may
be subject to volatility from quarter to quarter depending on announcements
regarding the Affiliated Practices and the Company's ability to open new
offices, affiliations by the Company or its competitors, government relations,
developments or disputes concerning proprietary rights, changes in health care
policy in the United States and Canada, the issuance of stock market analyst
reports and recommendations, and economic and other external factors beyond the

12
<PAGE>
control of the Company, as well as operating results of the Company and
fluctuations in the Company's financial results. See "-- Fluctuations in
Operating Results" and "Price Range of Common Stock."

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Restated Certificate of Incorporation
(the "Restated Certificate of Incorporation") and Bylaws and of Delaware
corporation law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of the Company or limit the
price that certain investors might be willing to pay in the future for shares of
Common Stock. The Restated Certificate of Incorporation provides for "blank
check" preferred stock, which may be issued without stockholder approval,
provides for a "staggered" Board of Directors and provides that stockholders
may act only at an annual or special meeting of stockholders and may not act by
written consent. In addition, certain provisions of the Company's Bylaws
restrict the right of the stockholders to call a special meeting of
stockholders, to nominate directors, to submit proposals to be considered at
stockholders' meetings and to adopt amendments to the Bylaws. The Company also
is subject to Section 203 of the Delaware General Corporation Law, which,
subject to certain exceptions, prohibits a Delaware corporation from engaging in
any of a broad range of business acquisitions with an "interested stockholder"
for a period of three years following the date such stockholder became an
interested stockholder. See "Description of Capital Stock."

ABSENCE OF DIVIDENDS

The Company has never paid any cash dividends and does not anticipate
paying cash dividends on its Common Stock or Class B Stock in the foreseeable
future. In addition, the Company's existing credit facility prohibits the
payment of dividends. See "Dividend Policy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

THE COMPANY

The Company's principal executive offices are located at 2777 Allen
Parkway, Suite 700, Houston, Texas 77019, and its telephone number is (713)
852-2500.

RECENT DEVELOPMENTS

In connection with its IPO in May 1997, the Company acquired substantially
all the tangible and intangible assets and assumed certain liabilities of, and
entered into agreements to provide long-term services to, the Founding
Affiliated Practices, comprised of 31 orthodontists operating in 58 offices
located in 13 states in the United States and in Calgary, Alberta. Since the
date of the IPO through October 24, 1997, the Company has affiliated with an
additional 17 practices and 30 orthodontists operating in 30 offices, increasing
the total number of existing Affiliated Practices to 48. These additional
practices have combined historical gross patient revenues of $18.7 million for
their most recently completed fiscal year. These affiliations have expanded the
Company's geographic base into Georgia, as well as Ontario and British Columbia,
Canada. In addition to these affiliations, the Company is negotiating and will
continue to negotiate to affiliate with additional orthodontic practices;
however, although the Company intends to aggressively pursue these and other
affiliations, there can be no assurance that any of such affiliations will be
consummated.

13
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby (after deducting the underwriting discounts and commissions and
estimated Offering expenses) are estimated to be approximately $12.7 million
(approximately $15.5 million if the Underwriters' over-allotment option is
exercised in full). The Company will not receive any of the proceeds from the
sale of the 424,986 shares of Common Stock by the Selling Stockholders in the
Offering.

The Company intends to use these proceeds to repay bank debt and for future
affiliations, the development of new offices, future capital expenditures and
general corporate purposes. The Company is negotiating and will continue to
negotiate to affiliate with additional orthodontic practices; however, although
the Company intends to aggressively pursue these and other affiliations, there
can be no assurance that any of such affiliations will be consummated. Pending
such uses, the net proceeds will be invested in short-term, interest-bearing,
investment grade securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Liquidity and Capital
Resources."

The Company intends to use approximately $10.7 million of the net proceeds
of the Offering to repay outstanding indebtedness under its revolving credit
facility (the "TCB Facility") with Texas Commerce Bank, National Association
("TCB"), which the Company entered into in July 1997. The proceeds of this
facility were used to finance affiliations and capital expenditures and for
general corporate purposes. At September 30, 1997, $9.2 million was outstanding
under the TCB Facility, bearing interest at the rate of 8.5% per annum. An
additional $3.0 million has been borrowed under the TCB Facility subsequent to
September 30, 1997.

PRICE RANGE OF COMMON STOCK

The following table sets forth the range of the high and low sale prices
for the Common Stock on the American Stock Exchange for the periods indicated:

HIGH LOW
--------- -------
Year Ending December 31, 1997
Second Quarter (commencing May
23)........................... $11 11/16 $ 7 5/8
Third Quarter................... 16 1/4 9
Fourth Quarter (through November
19)........................... 16 1/8 11 1/8

The closing sale price of the Common Stock on November 19, 1997, as
reported on the American Stock Exchange, was $11 7/16 per share. As of October
21, 1997, there were approximately 82 holders of record of the Common Stock, as
shown on the records of the transfer agent and registrar for the Common Stock.
The number of record holders does not bear any relationship to the number of
beneficial owners of the Common Stock.

DIVIDEND POLICY

The Company has never paid any cash dividends and does not anticipate
paying cash dividends on its Common Stock or Class B Stock in the foreseeable
future. The Company currently intends to retain earnings to support operations
and finance expansion. In addition, the Company's existing credit facility
prohibits the payment of dividends.

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<PAGE>
CAPITALIZATION

The following table sets forth the short-term debt and the capitalization
of the Company at September 30, 1997 and as adjusted to reflect the sale of the
shares of Common Stock offered hereby and the application of the estimated net
proceeds to the Company therefrom. See "Use of Proceeds." This table should be
read in conjunction with the Unaudited Financial Statements of the Company and
the related Notes thereto included elsewhere in this Prospectus.

SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED
--------- ------------
(IN THOUSANDS, UNAUDITED)
Short-term debt and capital lease
obligations:
Current portion of long-term
debt and capital lease
obligations.................... $ 122 $ 122
--------- ------------
Total short-term debt and
capital lease
obligations............. $ 122 $ 122
========= ============
Long-term debt and capital lease
obligations:
Long-term debt and capital lease
obligations, net of current
portion........................ $ 9,410 $ 210
Stockholders' equity:
Class A Common Stock, $0.001 par
value, 25,000,000 shares
authorized; 7,930,799 shares
issued and outstanding (actual)
and 9,351,109 shares issued and
outstanding (as
adjusted)(1)(2)(3)............. 8 9
Class B Common Stock, $0.001 par
value, 4,106,852 shares
authorized, 3,347,084 shares
issued and outstanding (actual)
and 3,176,774 shares issued and
outstanding (as adjusted)(3)... 3 3
Warrant......................... 777 777
Additional paid-in capital...... 39,809 52,551
Retained deficit................ (24,465) (24,465)
--------- ------------
Total stockholders'
equity................... 16,132 28,875
--------- ------------
Total capitalization....... $ 25,542 $ 29,085
========= ============

- ------------
(1) Includes 1,027,354 shares of Common Stock issuable in connection with
certain Canadian affiliations. See "Shares Eligible for Future Sale."

(2) Excludes (i) an aggregate of approximately 839,350 shares of Common Stock
issuable upon exercise of stock options granted pursuant to the 1997 Stock
Compensation Plan, (ii) approximately 513,996 shares available for future
awards under the 1997 Stock Compensation Plan and (iii) 180,000 shares of
Common Stock issuable upon the exercise of a warrant issued to TriCap
Partners, with an exercise price per share of $7.00, which warrant was
subsequently distributed to three investors of TriCap Partners, including
William Sherrill, a director of the Company. See "Management -- 1997 Stock
Compensation Plan" and "Certain Transactions."

(3) Of the shares being offered by the Selling Stockholders, 170,310 are
currently shares of Class B Stock. Such shares will automatically convert
into an equal number of shares of Common Stock upon their sale in the
Offering.

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<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following information is derived from the financial statements of Apple
included elsewhere in this Prospectus. The Company believes that comparisons of
results for 1997 periods to those for 1996 periods are not meaningful as the
Company was effectively not in operation in 1996. For certain additional
information concerning the existing Affiliated Practices, see Note 6 of Notes to
the Audited Financial Statements and Notes 3 and 6 of Notes to the Unaudited
Financial Statements.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 15, NINE MONTHS THREE MONTHS
1996) ENDED ENDED
THROUGH SEPTEMBER 30, SEPTEMBER 30,
DECEMBER 31, -------------------- --------------------
1996 1997 1996 1997 1996
------------ --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service fee revenues................. $ -- $ 9,166(1) $ -- $ 7,480(1) $ --
Costs and expenses(2):
Salaries and benefits........... 627 4,544 161 3,094 161
Orthodontic supplies............ -- 1,198 -- 998 --
Rent............................ 20 1,214 -- 786 --
Advertising and marketing....... -- 153 -- 146 --
General and administrative
expenses...................... 232 1,856 9 1,241 9
Depreciation and amortization... 5 412 2 341 2
Compensation expense related to
issuance of stock(3).......... 13,812 -- -- -- --
Consulting expense related to
issuance of stock(3).......... 9,613 -- -- -- --
------------ --------- --------- --------- ---------
Total costs and expenses........ 24,309 9,377 172 6,606 172
------------ --------- --------- --------- ---------
Operating income (loss).............. (24,309) (211) (172) 874 (172)
Interest expense..................... -- 148 -- 141 --
Interest and other income............ -- (108) -- (94) --
------------ --------- --------- --------- ---------
Income (loss) before income taxes.... (24,309) (251) (172) 827 (172)
Provision for income taxes -- (95) -- 314 --
------------ --------- --------- --------- ---------
Net income (loss).................... $(24,309) $ (156) $ (172) $ 513 $ (172)
============ ========= ========= ========= =========
Weighted average shares
outstanding........................ 3,359 6,965 3,347 11,205 3,347
Earnings per share................... $ (7.24) $ (0.02) $ (0.05) $ 0.05 $ (0.05)
</TABLE>

SEPTEMBER 30, 1997
--------------------------------
ACTUAL AS ADJUSTED(4)
-------------- --------------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital...................... $ 693 $ 4,236
Total assets......................... 40,783 44,326
Long-term debt and capital lease
obligations, net of current
portion............................ 9,410 210
Stockholders' equity................. 16,132 28,875

- ------------
(1) The nine months ended September 30, 1997 reflects service fees for the
Founding Affiliated Practices since June 1, 1997. Service fees related to
affiliations subsequent to the IPO, are included from the date of such
affiliation.
(2) Corporate office expenses are included for all periods presented.
(3) Reflects non-recurring charges related to shares issued to management and
advisors of the Company in October and December 1996, at $7.00 per share.
See Note 1 of the Notes to the Audited Financial Statements included
elsewhere in this Prospectus.

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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN STATEMENTS OF A
FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL
PERFORMANCE OF THE COMPANY. SUCH STATEMENTS ARE ONLY PREDICTIONS AND THE ACTUAL
EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE
HISTORICAL RESULTS SET FORTH IN THIS DISCUSSION AND ANALYSIS ARE NOT INDICATIVE
OF TRENDS WITH RESPECT TO ANY ACTUAL OR PROJECTED FUTURE FINANCIAL PERFORMANCE
OF THE COMPANY. THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE FINANCIAL STATEMENTS OF THE COMPANY AND THE RELATED NOTES THERETO INCLUDED
ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

The Company conducted no significant operations before its IPO in May 1997
when the Company acquired the tangible and intangible assets and liabilities of,
and entered into Service Agreements with, the 31 Founding Affiliated Practices.
Since that time, through October 24, 1997, the Company has affiliated with an
additional 17 practices and 30 orthodontists operating in 30 offices. The
Company expects that its future growth will come from (i) implementing a
comprehensive practice operating approach designed to drive internal growth of
the Affiliated Practices, (ii) entering into Service Agreements with new
Affiliated Practices and (iii) developing new orthodontic centers, including
satellite offices (branch locations of existing Affiliated Practices), with
existing and future Affiliated Practices.

Through its Service Agreements, the Company provides a full complement of
practice management services to Affiliated Practices in return for service fees.
The service fees earned by the Company are in accordance with three general
types of Service Agreements -- the standard form of the Service Agreement (the
"Standard Contract"), the alternative form of the Service Agreement (the
"Alternative Contract") and a Service Agreement based upon a flat fee (the
"Flat Fee Contract"). The Standard Contract calls for a calculation of the
monthly service fee based on the total patient revenues earned by the Affiliated
Practice, which is defined by the agreement to represent 24% of the total
contract value in the initial month of a patient's treatment, with the remainder
of the contract balance earned evenly over the balance of the contract term.
From total patient revenues, the practices retain a percentage of the Affiliated
Practices' cash collections.

The Alternative Contract is used in certain jurisdictions where use of the
Standard Contract is not permitted. It is a cost-plus fee arrangement, whereby
the service fee includes the reimbursement of defined expenses incurred by Apple
in the course of providing services to the Affiliated Practice plus a percentage
of revenues. The Flat Fee Contract is based on a flat fee that is subject to
adjustment on an annual basis. It is used when local jurisdictions do not allow
use of the Standard Contract or the Alternative Contract. The Company believes
the fees generated by each of these formulas reflect the fair market value of
the services provided and are comparable to the fees earned by other practice
management service companies in the respective jurisdictions where these
arrangements exist. See "Business -- Service Agreements."

The expenses incurred by the Company in fulfilling its obligations under
the Service Agreements are generally of the same nature as the operating costs
and expenses that would have otherwise been incurred by the Affiliated
Practices, including salaries, wages and benefits of practice personnel
(excluding orthodontists and, in some cases, orthodontic assistants and other
professional personnel), orthodontic supplies and office supplies used in
administering their clinic practices, the office (general and administrative)
expenses of the practices and depreciation and amortization of assets acquired
from the existing Affiliated Practices. In addition to the operating costs and
expenses discussed above, the Company incurs personnel and administrative
expenses in connection with establishing and maintaining a corporate office,
which provides management, administrative, marketing and business development
services.

In accordance with Staff Accounting Bulletin ("SAB") No. 48, "Transfers
of Nonmonetary Assets by Promoters or Shareholders," published by the
Securities and Exchange Commission (the "Commission"),

17
<PAGE>
the acquisition of the assets and assumption of certain liabilities for all of
the Founding Affiliated Practices has been accounted for by the Company at the
transferors' historical cost basis, with the shares of Common Stock issued in
those transactions being valued at the historical cost of the nonmonetary assets
acquired net of liabilities assumed. The cash consideration paid at closing on
May 29, 1997 is reflected as a dividend by Apple to the owners of the Founding
Affiliated Practices in the quarter ended June 30, 1997. SAB No. 48 is not
applicable to affiliations made by the Company subsequent to the IPO. The
Company's subsequent acquisitions of certain of the assets and liabilities of
Affiliated Practices has resulted and will continue to result in substantial
noncash amortization charges for intangible assets in the Company's statements
of operations.

RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)

SERVICE FEE REVENUES

The Company generated service fee revenues of $7.5 million and $9.2 million
for the three- and nine-month periods ended September 30, 1997, respectively.
The Company conducted no significant operations through the date of the IPO.
Following completion of the IPO and the affiliations with the Founding
Affiliated Practices on May 29, 1997, the Company began operations effective
June 1, 1997. Therefore, service fee revenues reflect only four months of
operations during the nine months ended September 30, 1997 and there were no
service fee revenues during the nine months ended September 30, 1996.

COSTS AND EXPENSES

The Company incurred costs and expenses of $6.6 million (88.3% of service
fee revenues) and $9.4 million (102.3% of service fee revenues) for the three-
and nine-month periods ended September 30, 1997, respectively. The Company's
costs and expenses consisted primarily of salaries and benefits, orthodontic
supplies, rent, advertising and marketing, general and administrative and
depreciation and amortization. Costs and expenses of $172,395 for each of the
three- and nine-month periods ended September 30, 1996 represented corporate
office expenses for the period from inception (July 15, 1996) through September
30, 1996.

OPERATING INCOME

The Company generated operating income (loss) of $873,995 and $(210,848)
for the three- and nine-month periods ended September 30, 1997, respectively.
These operating income (loss) amounts comprised 11.7% and (2.3)%, respectively,
of service fee revenues for such periods. The Company generated an operating
loss of $172,395 for each of the three- and nine-month periods ended September
30, 1996. As stated above, these results reflect the impact of the Company's
Service Agreements only for the period from June 1, 1997 through September 30,
1997 (I.E., the period subsequent to the IPO) for the Founding Affiliated
Practices and from the date of affiliation through September 30, 1997 for all
subsequent affiliations. General and administrative expenses were incurred
during the entire period from inception (July 15, 1996) through May 29, 1997 in
connection with the IPO and the affiliation with the Founding Affiliated
Practices.

INTEREST EXPENSE

Interest expense of $141,312 and $147,995 for the three- and nine-month
periods ended September 30, 1997, respectively, reflected the cost of borrowings
under the Company's revolving credit facility entered into on July 28, 1997,
certain indebtedness of the Founding Affiliated Practices that was assumed by
the Company and certain capital lease obligations for computer and office
equipment. There was no interest expense incurred during the nine months ended
September 30, 1996.

INTEREST AND OTHER INCOME

Interest income of $91,252 and $104,844 for the three-and nine-month
periods ended September 30, 1997, respectively, reflected interest earned on the
Company's net proceeds from the IPO and on notes receivable from certain of the
Founding Affiliated Practices. There was no interest income generated during the
nine months ended September 30, 1996.

18
<PAGE>
INCOME TAXES

The Company generated an income tax provision (benefit) of $314,274 and
$(95,320) for the three-and nine-month periods ended September 30, 1997,
respectively. The income tax benefit for the nine-month period resulted from net
operating losses generated by the Company during the period from January 1, 1997
through May 29, 1997. The Company incurred no income taxes for the nine months
ended September 30, 1996.

NET INCOME (LOSS)

As a result of the foregoing factors, the Company generated net income
(loss) of $512,763 and $(155,521) for the three- and nine-month periods ended
September 30, 1997, respectively, or earnings (loss) per share of $0.05 and
$(0.02), respectively. These net income (loss) amounts comprised 6.9% and
(1.7)%, respectively, of service fee revenues for such periods.

RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996

The Company conducted no significant operations during 1996. The Company's
retained deficit at December 31, 1996 was primarily attributable to compensation
and consulting charges totaling $23.4 million related to valuing stock issued to
management and advisors of the Company, in October and December of 1996, at the
IPO price of $7.00 per share. The overall impact of these charges was to
increase additional paid-in capital by a total of $23.4 million and to increase
the retained deficit by $23.4 million. There was no net effect on stockholders'
equity. The Company also incurred various legal, accounting, travel, personnel
and marketing costs during the period from inception (July 15, 1996) through
December 31, 1996 in connection with the IPO and the affiliations with the
Founding Affiliated Practices.

LIQUIDITY AND CAPITAL RESOURCES

FINANCING ACTIVITIES

The Company has financed its capital requirements to date with borrowings
from banks and issuances of equity securities. To date, the Company has been
able to obtain satisfactory financing for its operations and believes that it
will be able to obtain such financing as required in the future. On July 28,
1997, the Company entered into a three-year, $15.0 million revolving credit
facility with TCB. Availability under the TCB Facility is tied to the Company's
cash flow and liquidity. Advances under the TCB Facility bear interest, at the
Company's option, at prime rate or LIBOR, in each case plus a margin which is
calculated based upon the Company's ratio of indebtedness to cash flow. At
September 30, 1997, the Company had $9.2 million drawn under this facility,
bearing interest at the rate of 8.5% per annum.

Total long-term debt increased from zero at December 31, 1996, to $9.4
million at September 30, 1997. The increase is attributable to borrowings for
affiliations with new orthodontic practices, the purchase of property and
equipment and general working capital needs. The Company's weighted average cost
of indebtedness was 8.7% per annum for the third quarter of 1997.

WORKING CAPITAL MANAGEMENT

The Company's strategy in managing its working capital is to maintain
sufficient availability under its bank credit facility to finance short-term
capital needs in excess of internally generated funds and minimize excess cash
on its balance sheet.

The cash and cash equivalents balance of $3.3 million at September 30, 1997
primarily consisted of borrowings under the Company's revolving credit facility
for use as consideration for certain new affiliations completed during the third
quarter of 1997. These funds were placed into escrow pending the completion of
certain post-closing amendments to the definitive agreements for these
transactions. These amendments had not been completed as of September 30, 1997.
The Company expects these amendments to be completed and the funds disbursed
from the escrow account to the sellers during the fourth quarter of 1997.

19
<PAGE>
The restricted cash balance of $2.1 million at September 30, 1997 consisted
of borrowings under the Company's revolving credit facility which were placed
into escrow pending the resolution of certain post-closing contingencies related
to a new affiliation completed during the third quarter of 1997. A favorable
resolution of these post-closing contingencies would result in payment of the
$2.1 million to the sellers in January 1999. The Company has the right to post a
letter of credit in order to have the $2.1 million released from escrow to the
Company prior to January 1999. The Company expects to post the letter of credit
during the fourth quarter of 1997.

CAPITAL EXPENDITURES

The Company anticipates making capital expenditures for the Affiliated
Practices during the remainder of 1997 of approximately $1.0 million to fund,
among other things, the development of new offices. The average cost of
developing a new office (which may vary by geographic market) is estimated to be
approximately $250,000 to $400,000, including initial working capital
requirements. The Service Agreements provide for advances by the Company to the
Affiliated Practices for working capital requirements (including any deficits in
cash flows of Affiliated Practices resulting from, among other things,
development of satellite offices) and other purposes. Such loans bear interest
at prime plus one percent and are repayable over varying periods of time not to
exceed five years. Total notes receivable from Affiliated Practices were $1.4
million at September 30, 1997. It is anticipated that capital expenditures will
be funded from the Company's cash flow from operations, the net proceeds from
this Offering and borrowings under the TCB Facility.

BUSINESS DEVELOPMENT

The Company's business development program also requires significant
amounts of capital. The amount of cash to be used in attracting the affiliation
of new Affiliated Practices, particularly the amount to be used in any given
period, depends on a number of factors, many of which are beyond the Company's
control. The Company anticipates the use of a combination of cash, notes and
shares of its Common Stock to fund the cost of additional affiliations. In order
to fund such additional affiliations, the Company will use cash flow from
operations, net proceeds from this Offering and borrowings under the TCB
Facility, and will seek to raise capital through additional bank borrowings and
public or private debt or equity issuances. The availability of these capital
sources will depend upon prevailing market conditions, interest rates and the
then existing financial condition of the Company. During the quarter ended
September 30, 1997, the Company spent $8.5 million of cash (including $2.7
million in deferred payments and $2.1 million that has been placed in escrow)
and issued 1,541,459 shares of Common Stock in connection with affiliations with
new Affiliated Practices.

AFFORDABLE PAYMENT PLANS

A part of the Company's business strategy is to encourage Affiliated
Practices to offer more affordable payment plans to patients. The Company does
not expect the affordable payment plans, or any potential increase in bad debt
expense resulting from these plans, to have any significant negative impact on
the working capital or liquidity of the Affiliated Practices. Existing
Affiliated Practices using such payment plans have experienced an initial
decrease in working capital; however, the Company believes that the decrease in
working capital generally will be offset by an increase in the number of
patients receiving orthodontic treatment because of the combined effect of
advertising, offering more affordable payment plans and the use of the Company's
practice-building program. Moreover, the Company believes the existing
Affiliated Practices have the financial wherewithal to sustain any negative
impact that may result from these payment plans. Therefore, Apple does not
anticipate that the offering by the Affiliated Practices of more affordable
payment plans will impair the Company's ability to collect service fees from the
Affiliated Practices.

20
<PAGE>
BUSINESS
OVERVIEW

Effective May 29, 1997, the Company acquired substantially all the tangible
and intangible assets and assumed certain liabilities of, and began providing
long-term management services to, the Founding Affiliated Practices. The
aggregate consideration paid by Apple in connection with such affiliations
consisted of (i) approximately $6.5 million in cash and (ii) 3,682,554 shares of
Common Stock. Since that time, the Company has affiliated with an additional 17
practices with aggregate historical gross patient revenues of $18.7 million for
their most recently completed fiscal year. As of October 24, 1997, the Company
provided services to 48 orthodontic practices representing 61 orthodontists
operating in 14 states in the United States and 3 provinces in Canada.

Affiliated Practices are selected based on a variety of factors, including
the competitive and financial strengths and historical growth of their practices
and the potential for future growth in their markets. Apple also considers the
local and national reputations of the Affiliated Practices within the
orthodontic services industry, their ability to manage multi-location practices
providing high levels of quality care and their desire to grow and improve the
operating efficiency of their respective practices. The Company selects its
Affiliated Practices based on the recommendations of its affiliated
orthodontists and management's extensive experience with orthodontic practices
in the United States and Canada.

INDUSTRY

OVERVIEW. The orthodontic services industry is highly fragmented, with
over 90% of the approximately 9,000 orthodontists in the United States operating
as sole practitioners and approximately 3% being affiliated with public
orthodontic practice management companies. The industry currently generates
approximately $3.5 billion in annual gross revenues, which have grown steadily
at an average rate of 7.5% per year in recent years. Seventy percent of
orthodontic services are performed on a private pay, fee-for-service basis, 25%
are covered by traditional dental insurance (generally with a 50% or greater
copayment by the patient) and less than 5% are reimbursed from managed care
payor sources due to the elective nature of the service. Management believes
that the potential market for orthodontic services could be significantly
increased based on growing acceptance among adult consumers and industry data
that indicate that only one out of five children who could benefit from
orthodontics receives treatment. Most orthodontic practices (including all of
the existing Affiliated Practices) do not accept payment by Medicare or
Medicaid. According to the most recent statistics available from studies by the
Journal of Clinical Orthodontists, the median orthodontic practice in the United
States generated $518,800 in revenues and started 180 new cases in 1996 and
experienced a case acceptance rate of 60% in 1994.

Orthodontic treatments are principally provided by orthodontists who have
completed two years of post-graduate studies following graduation from dental
school. The number of orthodontists in the United States has grown slowly since
1990, which management believes can be attributed to the limited number of
schools offering post-graduate orthodontic programs and the small class size at
each of those schools. In

21
<PAGE>
addition to orthodontists, a number of dentists provide various orthodontic
services. The industry information set forth in this Prospectus does not include
orthodontic treatments provided by dentists.

The table below summarizes certain information from the 1995 JCO Study (the
most recent available with respect to average fee per case) concerning the
United States orthodontic services industry for each of the years presented:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Number of orthodontists................. 8,720 8,760 8,856 8,958 9,060
Number of new cases..................... 1,308,000 1,314,000 1,416,690 1,478,070 1,540,200
Average fee per case.................... $ 3,050 $ 3,221 $ 3,401 $ 3,447 $ 3,492
</TABLE>
Based on a 1994 study performed by the Department of Orthodontics,
University of Florida College of Dentistry (the "University of Florida
Study"), and management's experience, the Company believes the need for
orthodontics significantly exceeds the current demand. The University of Florida
Study, which was funded by a grant from the National Institute of Dental
Research and involved a statistical sample of approximately 3,700 children in
Florida, concluded that only approximately one out of every five children who
need orthodontics receives treatment. The University of Florida Study also
indicated that cost was a barrier to orthodontics. Children in higher
socioeconomic groups received treatment approximately six times more often than
children in lower groups despite no measurable difference in need among the
groups. The University of Florida Study did not address the market potential for
adult patients, which the Company believes is significant. The Company believes
there is significant opportunity to expand the orthodontic treatment population
through improved public awareness of the benefits, availability and
affordability of orthodontic treatment.

THE TRADITIONAL ORTHODONTIC PRACTICE. The traditional orthodontic practice
typically involves a single orthodontist, practicing at one primary location or
with an average of less than one satellite office, with a small number of
orthodontic assistants and business office personnel and, in some cases, an
orthodontic associate. On an individual practice basis, the 1997 JCO Study
reported median annual revenues of $518,800 and median operating income of
$224,000 in 1996. Median overhead as a percentage of revenues was 55%, resulting
in a 42% median operating margin before orthodontist compensation, interest and
taxes. Median down payments were equal to approximately 25% of the total
treatment cost. Median case starts and active treatment cases in 1996 were 180
and 400 per practice, respectively, and, according to the 1995 JCO Study, the
median case acceptance rate in 1994 was 60%. In the traditional practice, the
orthodontist manages all business aspects of the practice; the use of
third-party management services is not typical.

The 1997 JCO Study reports that individual practices, on average, generated
over one-half of their referrals from dentists and less than 8% of the practices
utilized commercial advertising (and 1.8% utilized television advertising).
According to the 1995 JCO Study, orthodontists believed they had the ability to
increase case starts by 30%, yet the median case starts have not increased
significantly since 1981, the first year of data presented in the study.

THE APPLE ORTHODONTIX APPROACH

The Company believes the traditional orthodontic practice is inefficient
and administratively burdensome to orthodontists and can be financially
burdensome to patients, who traditionally pay approximately 25% of the total
contract amount as a down payment ($875 when applied to the average fee per case
in 1994, according to the 1995 JCO Study). The Company has developed a
comprehensive operating strategy designed to improve efficiency, increase the
number of new case starts and active cases handled by each orthodontist and
relieve orthodontists associated with Affiliated Practices of time-consuming
administrative responsibilities. As part of its practice operating approach, the
Company assists its Affiliated Practices in developing and implementing payment
programs designed to make orthodontic services more affordable to prospective
patients, thereby making their services available to a larger segment of the
population in their respective markets. The Company also assists the Affiliated
Practices in developing satellite offices to expand the scope of the geographic
areas they serve.

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<PAGE>
The Company believes its approach provides unique benefits to orthodontists
who choose to affiliate with it by providing opportunities to: (i) drive
internal growth by implementing the Company's operating strategy; (ii) share in
the increased profitability resulting from internal growth; (iii) lower costs
through economies of scale; (iv) participate in a cost-effective national
advertising program; (v) focus on patient care; and (vi) enhance liquidity and
diversification.

OPERATING STRATEGY

Through its practice operating approach, the Company seeks to stimulate
increased productivity and internal growth within its Affiliated Practices. To
accomplish this objective, the Company has developed an operating approach
consisting primarily of (i) implementing practice-building and external
marketing programs designed to generate new case starts through increased
referrals from existing and former patients and the use of multimedia
advertising to stimulate demand for treatment services, (ii) offering more
affordable payment plans to patients to broaden the market for orthodontic
services, (iii) increasing the operating efficiency of the Affiliated Practices
by relieving the orthodontists from various time-consuming administrative
responsibilities and realizing economies of scale, (iv) providing a
systems-oriented approach to training and education of clinic personnel to
improve communications with patients and prospective patients and increase
productivity, (v) developing satellite offices to expand the geographic markets
served by Affiliated Practices and (vi) utilizing customized management
information systems to provide detailed financial and operating data and related
analyses to Affiliated Practices and management. The Company believes that its
approach has resulted in local market expansion, increased new case starts and
practice profitability, increased orthodontist productivity and heightened
patient satisfaction within its existing Affiliated Practices.

Over time, the Company plans to implement a regional management structure
aligned with the locations of its Affiliated Practices. Management believes a
regional structure will allow it to respond to the management and operational
issues within a particular region in a more timely and focused manner. In
addition, a regional structure will allow management to compare the operating
results of its Affiliated Practices to regularly published regional industry
statistics.

EXPANSION STRATEGY

The Company is pursuing an aggressive expansion strategy designed to
strengthen its position in its current markets and expand its network of
existing Affiliated Practices into markets it does not currently serve. The
Company believes that, because of the highly fragmented nature of the industry,
there are numerous orthodontic practices that are attractive candidates to
become Affiliated Practices. The Company focuses on candidates that have
favorable reputations in their local markets and the desire to implement the
Company's practice operating approach. The Company leverages the reputations and
relationships of the orthodontists associated with the existing Affiliated
Practices to identify and develop candidates to become future Affiliated
Practices. Many of these orthodontists hold, or have previously held, leadership
roles in various state, regional and national associations or are affiliated
with or teach at graduate orthodontic programs at dental schools. The Company
believes the visibility and reputation of these individuals, combined with the
acquisition experience of management, provides the Company with certain
advantages in identifying, negotiating and consummating future affiliations. As
consideration for future affiliations, the Company intends to use various
combinations of its Common Stock, cash and notes. The Company anticipates that
the agreements entered into in connection with its future affiliations will
contractually restrict the resale of all or a portion of the shares issued in
those transactions for varying periods of time.

The Company is developing new offices within selected markets served by the
existing Affiliated Practices. The Company believes that the new offices will
increase the geographic area served by the existing Affiliated Practices,
thereby increasing the potential market and leveraging the advertising budget of
the existing Affiliated Practices. The Company expects that these offices
generally will be located in high traffic areas.

Satellite offices (branch locations of existing Affiliated Practices)
developed by the Company generally will be staffed on a part-time basis by an
orthodontist from an Affiliated Practice. The Company's other

23
<PAGE>
new offices generally will be staffed on a full-time basis by a newly recruited
orthodontist. The average cost of developing a new office varies by geographic
market and the square footage of the office and is estimated to range from
$250,000 to $400,000, including initial working capital requirements. The
Company provides management services and capital to develop these new offices.
The Company is responsible for selecting the site, negotiating the lease,
designing the office layout and furnishing the new office. The Company also
assists the Affiliated Practices in recruiting orthodontists and support staff
for these new offices, which generally will be open full-time.

SERVICES AND OPERATIONS

The Company generally provides services with respect to all aspects of the
operations of its Affiliated Practices other than the provision of orthodontic
treatment. Except in Canada, the Company employs all business personnel at the
offices of the Affiliated Practices and, where permitted by applicable law and
governmental regulations, also employs the orthodontic assistants.

ADMINISTRATIVE. The Company earns revenue by providing services to the
Affiliated Practices, including staffing, education and training, billing and
collections, cash management, group purchasing, inventory management, payroll
processing, employee benefits administration, advertising production and other
marketing support, patient scheduling, financial reporting and analysis,
productivity reporting and analysis, associate recruiting and support for
acquisitions, new site development and other capital requirements. The Company
believes the orthodontists at the Affiliated Practices benefit from the support
provided by Apple and that these services substantially reduce the amount of
time the orthodontists are required to spend on administrative matters, thereby
enabling them to dedicate more time to the growth of their professional
practices. Through economies of scale, the Company is able to provide these
services at a lower cost than could be obtained by any of the Affiliated
Practices individually. In addition, because of its size and purchasing power,
the Company has been able to negotiate discounts on, among other things,
orthodontic and office supplies, health and malpractice insurance and equipment.

PRACTICE-BUILDING PROGRAM. Management believes patient satisfaction
levels, practice productivity and profitability can be substantially enhanced
through a consistent training program emphasizing practice-building techniques.
The Company implements programs designed to generate growth in case starts by
increasing (i) referrals from existing and former patients and (ii) case
acceptance rates. These programs include a full complement of training,
operating and monitoring techniques emphasizing improvements in communications
with patients and patient satisfaction levels in all facets of operations,
including initial telephone contacts with prospective patients, initial
consultations and case presentations and written or telephonic follow-ups after
office visits. The Company's programs are designed to result in clear, concise
and consistent communications between the patient and the orthodontist and his
or her staff. Management believes that these programs have a positive effect on
the patients' experience and therefore positively affect the number of patient
referrals and case acceptance rates of Affiliated Practices.

EXTERNAL MARKETING. The Company and its Affiliated Practices utilize
multimedia advertising in certain local markets to stimulate demand for
orthodontic treatment and promote name recognition for Apple and the Affiliated
Practices. The general public traditionally has had little information about the
availability of orthodontic services or orthodontic fees prior to an initial
consultation with an orthodontist. The advertisements address the two primary
barriers to receiving orthodontic treatment, availability and affordability, by
focusing on the availability of orthodontic services and the more affordable
payment plans offered by the Affiliated Practices. The advertisements also
stress the quality of care available at the Affiliated Practices and the
advantages of receiving orthodontic treatment from a professionally trained
orthodontist as opposed to a general dentist. The advertisements also promote a
toll-free number for ease of scheduling an appointment with the local Affiliated
Practice. As of October 24, 1997, the Company advertised in 7 markets covering
19 practicing orthodontists.

Generally, it is anticipated that an Affiliated Practice will spend an
amount equal to between 5% and 7% of its net revenues for advertising and
marketing, which management believes is significantly higher

24
<PAGE>
than the industry average for traditional orthodontic practices. The Company is
responsible for subcontracting the production of all broadcast advertising,
which is tailored to meet local requirements. The frequency and airing times for
any television advertisements are determined by regional media consultants
retained by Apple and the Affiliated Practice in order to optimize penetration
to target market segments.

AFFORDABLE PAYMENT PLANS. Orthodontic services primarily involve private
pay, fee-for-service treatments. As part of its overall marketing strategy for
the Affiliated Practices, the Company encourages the Affiliated Practices to
make orthodontic services available to a larger portion of the population in
their respective markets by offering more affordable payment plans. Many of the
existing Affiliated Practices have historically received a down payment equal to
25% of the total cost of services, with the remaining amount paid equally over
the term of treatment. The typical payment plan recommended by the Company
consists of a modest initial down payment and monthly payments thereafter for
the duration of the treatment period, generally between 26 and 34 months.
Existing Affiliated Practices using such payment plans have experienced an
initial decrease in working capital; however, the Company believes that the
decrease in working capital generally will be offset by an increase in the
number of patients receiving orthodontic treatment because of the combined
effect of advertising, offering more affordable payment plans and the use of the
Company's practice-building program. The Company believes that offering more
affordable payment plans combined with the use of advertising has resulted in an
increase in the number of patients inquiring about orthodontic treatment. The
Company also believes that this increase, combined with the use of its internal
marketing programs, has resulted in an increase in the number of patients
receiving orthodontic treatment at the existing Affiliated Practices.

TRAINING AND EDUCATION. Staff and practice development programs are an
integral part of the Company's operating strategy. Management believes its
programs (i) increase the motivation and overall performance of the staff, (ii)
improve the level of patient satisfaction achieved by the Affiliated Practices
and (iii) improve the Company's ability to attract and retain qualified
personnel, which collectively result in increased referrals from existing and
former patients and increased case acceptance rates for the Affiliated
Practices. The Company provides each Affiliated Practice with consulting and
educational services. These services include a full training program covering
all non-orthodontic aspects of the practice and specific training designed for
the efficient and effective use of the Company's management information system.

Specifically, the Company's training program provides each member of the
Affiliated Practice, from the receptionist to the orthodontist, with guidelines
for addressing questions and concerns of prospective and existing patients,
techniques for explaining treatment procedures and length of treatment,
parameters for establishing appropriate financial arrangements with each patient
and a systematic approach to monitoring the success of each area of training.
Training is conducted both at individual clinics and in group sessions and
includes proprietary manuals, tapes and role playing activities. As of October
24, 1997, 25 of the existing Affiliated Practices had undergone the Company's
training program and an additional 16 of the existing Affiliated Practices were
scheduled to be trained during the fourth quarter of 1997.

MANAGEMENT INFORMATION SYSTEM. Management believes that access to
accurate, relevant and timely financial and operating information is a key
element to providing practice management services to orthodontic practices. The
Company offers a fully integrated financial reporting, productivity measurement
and patient management system to each existing Affiliated Practice. This system
is designed to increase the productivity of the Affiliated Practices by enabling
the Company and the Affiliated Practices to cost-effectively monitor the
productivity of the Affiliated Practices, identify problem areas and
opportunities for improvement and take corrective action in a timely manner.
Productivity measures that are monitored include case acceptance rates,
treatment times and case starts. In addition, the management information system
facilitates optimization of the orthodontists' time through computerized
scheduling and diagnostic and treatment recordkeeping systems. The Company
believes this system has improved the productivity of the existing Affiliated
Practices that have implemented it through benchmarking programs that identify
and help to establish the most efficient operational procedures. As of October
24, 1997, 32 of the existing Affiliated Practices (including 30 of the Founding
Affiliated Practices) had implemented such system and the Company was in the
process of converting the remaining existing Affiliated Practices.

25
<PAGE>
LOCATIONS

As of October 24, 1997, the Company provides management services in the
following locations:

NUMBER OF
-------------------------------------
STATE/PROVINCE PRACTICES OFFICES ORTHODONTISTS
- ------------------------------------- --------- ------- -------------
Alberta.............................. 5 6 5
Arizona.............................. 2 6 2
British Columbia..................... 2 4 2
California........................... 11 15 11
Colorado............................. 5 10 5
Connecticut.......................... 4 6 5
Georgia.............................. 1 1 1
Illinois............................. 1 3 1
Montana.............................. 1 3 1
Nevada............................... 1 1 2
New Mexico........................... 1 2 1
New York............................. 1 2 1
Ontario.............................. 3 4 6
Pennsylvania......................... 2 4 2
Texas................................ 6 18 12
Utah................................. 1 1 1
Virginia............................. 1 2 3
-- ------- --
Totals.......................... 48 88 61
== ======= ==

SERVICE AGREEMENTS

The Company enters into a Service Agreement with each Affiliated Practice
and such practice's orthodontist employees under which the Company is the
exclusive administrator of non-orthodontic services relating to the operation of
the Affiliated Practice. The following is intended to be a brief summary of the
typical form of Service Agreement the Company has entered into and expects to
enter into with Affiliated Practices. The actual terms of the various Service
Agreements may vary from the description below on a case-by-case basis,
depending on negotiations with the individual Affiliated Practices and the
requirements of applicable law and governmental regulations.

The service fees payable to the Company by the Affiliated Practices under
the Service Agreements are calculated in accordance with the Company's three
general types of Service Agreements, the Standard Contract, the Alternative
Contract and the Flat Fee Contract. The Standard Contract calls for a
calculation of the monthly service fee based on the total revenues earned by the
Affiliated Practices, which is defined by the agreement to represent 24% of the
total contract value in the initial month of a patient's treatment, with the
remainder of the contract balance earned evenly over the balance of the contract
term. From total revenues, the Company retains a percentage of the Affiliated
Practices' cash collections. The Alternative Contract is used in certain
jurisdictions where use of the Standard Contract is not permitted. It is a
cost-plus fee arrangement, whereby the service fee includes the reimbursement of
defined expenses incurred by Apple in the course of providing services to the
Affiliated Practice plus a percentage of revenues. The Flat Fee Contract is
based on a flat fee that is subject to adjustment on an annual basis. It is used
when local jurisdictions do not allow use of the Standard Contract or the
Alternative Contract. The Company believes the fees generated by each of these
formulas are reflective of the fair market value of the service provided and are
comparable to the fees earned by other management service companies in the
respective jurisdictions where these arrangements exist. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."

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<PAGE>
Pursuant to each Service Agreement, the Company, among other things, (i)
acts as the exclusive manager and administrator of non-orthodontist services
relating to the operation of the Affiliated Practice, subject to matters
reserved to the Affiliated Practice, (ii) administers the billing of patients,
insurance companies and other third-party payors and collects on behalf of the
Affiliated Practice the fees for professional orthodontic and other services and
products rendered or sold by the Affiliated Practice, (iii) provides, as
necessary, clerical, accounting, payroll, legal, bookkeeping and computer
services and personnel, information management, tax return information,
printing, postage and duplication services and transcribing services, (iv)
supervises and maintains custody of substantially all files and records, (v)
provides facilities, equipment and furnishings for the Affiliated Practice, (vi)
prepares, in consultation with the Affiliated Practice, all annual capital and
operating budgets, (vii) orders and purchases inventory and supplies as
reasonably requested by the Affiliated Practice and (viii) implements, in
consultation with the Affiliated Practice, advertising programs.

Under each Service Agreement, the applicable Affiliated Practice retains
the responsibility for, among other things, (i) hiring, compensating and
supervising orthodontist employees and other licensed dental professionals, (ii)
ensuring that orthodontists have the required licenses, credentials, approvals
and other certifications appropriate to the performance of their duties and
(iii) complying with federal and state laws, regulations and ethical standards
applicable to the practice of orthodontics. In addition, the Affiliated
Practices are exclusively in control of all aspects of the practice of
orthodontics and the provision of orthodontic services.

During the term of the Service Agreement (generally 20 to 40 years) and,
subject to certain exceptions and limitations, for a period of two years
thereafter, the existing Affiliated Practices have agreed not to compete with
the Company or the other Affiliated Practices within a specified geographic
area. In addition, each orthodontist employee has agreed, subject to certain
exceptions and limitations, not to compete with the Company or the other
Affiliated Practices within a specified geographic area until the later of (i)
the fifth anniversary date of the Service Agreement or (ii) five years from the
date the employee becomes a stockholder of the Affiliated Practice, and for a
period of two years after the earlier of his termination of employment with the
Affiliated Practice or termination of the applicable Service Agreement. The
existing Affiliated Practices also have agreed not to disclose certain
confidential and proprietary information relating to the Company and the
Affiliated Practices.

Each Affiliated Practice is responsible for obtaining professional
liability insurance for the employees of the Affiliated Practice (which names
the Company as an additional insured).

ORTHODONTIST EMPLOYMENT AGREEMENTS

Each Affiliated Practice is a party to an employment agreement with each
orthodontist associated with its practice (the "Orthodontist Employment
Agreements"). The Orthodontist Employment Agreements are generally for an
initial term ranging from five to seven years, and continue thereafter on a
year-to-year basis until terminated under the terms of the agreements. The
Orthodontist Employment Agreements generally provide that the orthodontist will
not compete with the Company within a specified geographic area for a period of
two years following termination of the agreement. The Company does not employ
orthodontists and, where prohibited by applicable law, does not employ
orthodontic hygienists or orthodontic assistants.

COMPETITION

27
<PAGE>
competition from other orthodontists, general dentists and pedodontists
(dentists specializing in the care of children's teeth), some of whom have more
established practices. Dentists are not restricted by law or any governmental
authority from providing orthodontic services. Management believes the increase
in recent years in dentists providing orthodontic services has limited the
growth of patient case starts performed by orthodontists. There can be no
assurance that the Company or the Affiliated Practices will be able to compete
effectively, that additional competitors will not enter their markets or that
additional competition will not have a material adverse effect on the Company.

EMPLOYEES

As of September 30, 1997, the Company employed 423 employees, of which 30
are employed at the Company's headquarters and 393 are employed at the locations
of the existing Affiliated Practices. None of the Company's employees is
represented by collective bargaining agreements. The Company has not experienced
any work stoppages as a result of labor disputes and the Company considers its
employee relations to be good.

LITIGATION AND INSURANCE

The Affiliated Practices provide orthodontic services to the public and are
exposed to the risks of professional liability and other claims. Such claims, if
successful, could result in substantial damage awards to the claimants that may
exceed the limits of any applicable insurance coverage. Although the Company
does not control the practice of orthodontics by the Affiliated Practices, it
could be asserted that the Company should be held liable for malpractice of an
orthodontist employed by an Affiliated Practice. Each of the existing Affiliated
Practices has undertaken to comply with all applicable regulations and legal
requirements, and the Company maintains liability insurance for itself and is
named as an additional insured party on the liability insurance policies of the
existing Affiliated Practices. The existing Affiliated Practices maintain
comprehensive professional liability insurance, generally with limits of not
less than $1.0 million per claim and with aggregate policy limits of not less
than $3.0 million per orthodontist. The Company expects that it will require
future Affiliated Practices to maintain comparable insurance coverage. In the
event an Affiliated Practice employs more than one orthodontist, that practice
will maintain insurance with a separate limit for claims against that practice
in an amount acceptable to Apple. There can be no assurance that a future claim
or claims will not be successful or, if successful, will not exceed the limits
of available insurance coverage or that such coverage will continue to be
available at acceptable costs.

On December 10, 1996, Orthodontic Centers of America, Inc. ("OCA") filed
a complaint in the United States District Court for the Eastern District of
Louisiana against Apple, Dr. Vondrak, John G. Vondrak, P.C. and JGVAOI,
alleging, among other things, misappropriation of trade secrets and certain
breaches of a confidentiality agreement executed by Dr. Vondrak, on behalf of
John G. Vondrak, P.C., in favor of OCA. While Apple is not a party to the
confidentiality agreement, OCA alleged that the Company should be bound by its
terms as a result of the relationship between Dr. Vondrak and Apple
(specifically, OCA alleged that Dr. Vondrak and Apple are alter egos and,
alternatively, that Dr. Vondrak was acting as Apple's agent when he executed the
confidentiality agreement). OCA's complaint stated that OCA was seeking monetary
damages in excess of $75,000. In August 1997, the court dismissed OCA's claims
without prejudice on the grounds that the court lacked jurisdiction. There can
be no assurance that OCA will not seek to overturn the court's decision or file
a similar suit in another jurisdiction.

28
<PAGE>

behalf of John G. Vondrak, P.C., and the affiliated orthodonitst, on behalf of
the Founding Affiliated Practice referred to above, in favor of OCA. While Apple
is not a party to these confidentiality agreements, OCA alleged that Apple
should be bound by their terms as a result of the relationships between Dr.
Vondrak, the affiliated orthodontist and Apple (specifically, OCA alleged that
Dr. Vondrak and Apple are alter egos and that Apple aided and abetted or
conspired with Dr. Vondrak and the affiliated orthodontist in their wrongful
conduct). OCA's complaint states that it is seeking monetary damages in excess
of the minimum jurisdictional limits of the court, punitive damages, injunctive
relief, prejudgment interest and attorneys' fees. The Company intends to
vigorously defend the claims made by OCA, which the Company believes are without
merit. This lawsuit is still pending, and Apple cannot predict whether it will
succeed in obtaining the declarations sought from the court or, if it is not
successful, what effect this may have on Apple.

In November 1997, the Company received notice that an acquaintance of Dr.
Vondrak was threatening to sue the Company, JGVAOI, Dr. Vondrak and John G.
Vondrak, P.C. alleging, among other things, certain breaches of an alleged oral
agreement with Dr. Vondrak pursuant to which Dr. Vondrak was to award the
acquaintance 10% of any stock issued to Dr. Vondrak in the IPO in exchange for
this person's effort to obtain venture capital for the Company. While Apple was
not a party to the alleged oral agreement, the person maintains that Apple
should be bound by its terms as a result of the relationship between Dr. Vondrak
and Apple. Although the Company believes that these allegations are without
merit, there can be no assurance that a lawsuit will not be filed and, if filed,
that Apple will obtain a successful outcome.

The Company is not currently a party to any other claims, suits or
complaints relating to services and products provided by the Company or the
existing Affiliated Practices, although there can be no assurance that such
claims will not be asserted against the Company in the future. The Company is
subject to certain pending claims as a result of successor liability in
connection with its affiliations with existing Affiliated Practices; however,
management believes that the ultimate resolution of those claims will not have a
material adverse effect on the financial position or operating results of the
Company.

The Company and the existing Affiliated Practices maintain professional
liability insurance coverage on a claims-made basis. Such insurance provides
coverage for claims asserted when the policy is in effect regardless of when the
events that caused the claim occurred.

GOVERNMENT REGULATION

The orthodontic services industry in the U.S. and Canada is regulated
extensively at both the state, provincial and federal levels. Regulatory
oversight includes, but is not limited to, considerations of fee-splitting,
corporate practice of orthodontics and state insurance regulation.

CORPORATE PRACTICE OF ORTHODONTICS; FEE-SPLITTING.

The laws of many states in the U.S. and provinces of Canada prohibit
business corporations such as the Company from engaging in the practice of
orthodontics or employing orthodontists to practice orthodontics. The specific
restrictions against the corporate practice of orthodontics, as well as the
interpretation of those restrictions by state regulatory authorities, vary from
jurisdiction to jurisdiction. The restrictions are generally designed to
prohibit an entity not wholly owned by orthodontists (such as the Company) from
controlling the professional assets of an orthodontic practice (such as patient
records and payor contracts), employing orthodontists to practice orthodontics
(or, in certain jurisdictions, employing dental hygienists or orthodontic
assistants), or controlling the content of an orthodontist's advertising or
professional practice. The Company does not acquire any professional assets and,
as provided in the Service Agreements, does not control the practice of
orthodontics or employ orthodontists to practice orthodontics. Moreover, in
jurisdictions in which it is prohibited, the Company does not employ orthodontic
hygienists or orthodontic assistants. The Company provides management services
to the Affiliated Practices, and believes that the fees the Company charges for
those services are consistent with the laws and regulations of the jurisdictions
in which it operates. Therefore, the Company believes it would not be regarded
as "owner," "operator" or "manager" of the Affiliated Practices within the
meaning of those terms under applicable orthodontic practice acts and believes
that its operations comply with the above-described laws to which it is subject.

29
<PAGE>
The laws of many jurisdictions also prohibit orthodontists from sharing
professional fees with non-orthodontic entities.

Dental boards do not generally interpret these prohibitions as preventing a
non-orthodontic entity from owning non-professional assets used by an
orthodontist in an orthodontic practice or providing management services to an
orthodontist for a fee provided that the following conditions are met: (i) a
licensed dentist or orthodontist has complete control and custody over the
professional assets; (ii) the non-orthodontic entity does not employ or control
the orthodontists (or, in some states, orthodontic hygienists or orthodontic
assistants); (iii) all orthodontic services are provided by a licensed dentist
or orthodontist; and (iv) licensed dentists or orthodontists have control over
the manner in which orthodontic care is provided and all decisions affecting the
provision of orthodontic care. Applicable laws generally require that the amount
of a management fee be reflective of the fair market value of the services
provided by the management company and in certain states require that any
management fee be a flat fee or cost-plus fee based on the cost of services
performed by the Company. In general, the orthodontic practice acts do not
address or provide any restrictions concerning the manner in which companies
account for revenues from an orthodontic practice, subject to the above-noted
restrictions relating to control over the professional activities of the
orthodontic practice, ownership of the professional assets of an orthodontic
practice and payments for management services.

There can be no assurance that a review of the Company's business
relationships by courts or regulatory authorities will not result in
determinations that could prohibit or otherwise adversely affect the operations
of the Company or that the regulatory environment will not change, requiring the
Company to reorganize or restrict its existing or future operations. The laws
regarding fee-splitting and the corporate practice of orthodontics and their
interpretation are enforced by regulatory authorities with broad discretion.
There can be no assurance that the legality of the Company's business or its
relationship with the Affiliated Practices will not be successfully challenged
or that the enforceability of the provisions of any Service Agreement will not
be limited. See "Risk Factors -- Government Regulation."

STATE INSURANCE REGULATION.

Although the Company does not anticipate entering into managed care
contracts, there are certain regulatory risks associated with the Company's role
in negotiating and administering managed care contracts. The application of
state insurance laws to other than various types of fee-for-service arrangements
is an unsettled area of law and is subject to interpretation by regulators with
broad discretion. As the Company or the Affiliated Practices contract with
third-party payors, including self-insured plans, for certain
non-fee-for-service basis arrangements, the Company may become subject to state
insurance laws. Specifically, in some states, state insurance regulators may
determine that the Company or an Affiliated Practice is engaged in the business
of insurance because some of the managed care contracts to which an Affiliated
Practice may become a party may contain capitation features. In the event that
the Company or an Affiliated Practice is determined to be engaged in the
business of insurance, it could be required either to seek licensure as an
insurance company or to change the form of the relationships with third-party
payors and, as a result, the Company's revenues may be adversely affected.

HEALTH CARE REFORM PROPOSALS.

The U.S. Congress has considered various types of health care reform,
including comprehensive revisions to the current health care system. It is
uncertain what, if any, legislative proposals will be adopted in the future or
what actions federal or state legislatures or third-party payors may take in
anticipation of or in response to any health care reform proposals or
legislation. Health care reform legislation could have a material adverse effect
on the operations of the Company, and changes in the health care industry, such
as the growth of managed care organizations and provider networks, may result in
lower payment levels for the services of orthodontic practitioners and lower
profitability for Affiliated Practices, which would reduce the service fees
payable to the Company.

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EXTENT OF PROTECTION OF PROPRIETARY RIGHTS

31
<PAGE>
MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth certain information concerning the Company's
directors, the executive officers and key employees of the Company (ages are as
of September 30, 1997):
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- ----------------------------------------------------------
<S> <C>
John G. Vondrak, D.D.S.................. 57 Chairman of the Board and Chief Executive Officer
Robert J. Syverson...................... 48 President and Chief Operating Officer
Michael W. Harlan....................... 36 Vice President and Chief Financial Officer
H. Steven Walton........................ 40 Vice President of Business Development and General Counsel
W. Daniel Cook.......................... 42 Chief Administrative Officer and a Director
William W. Sherrill(1).................. 70 Director
Rod L. Crosby, Jr....................... 59 Director
Clyde C. Waddell, Jr.................... 55 Director
LeeAnn Peniche(2)....................... 36 Vice President of Training and Marketing
</TABLE>
- ------------
(1) Elected by holders of the Class B Stock.

(2) Key Employee.

The executive officers of the Company are elected annually by the Board of
Directors of the Company and serve at the discretion of the Board.

JOHN G. VONDRAK, D.D.S. is the founder of the Company and has been Chairman
of the Board of Directors and Chief Executive Officer of the Company since
October 1996 and has served as a director of the Company since July 1996. Dr.
Vondrak has been the President and sole shareholder of JGVAOI, one of the
Founding Affiliated Practices, for more than the past five years. Dr. Vondrak is
a licensed dentist, a graduate of an American Dental Association accredited
orthodontic program and has maintained a private orthodontic practice for over
24 years. He is a member of the American Association of Orthodontists and the
Southwest Society of Orthodontists and has served as President of the New Mexico
Orthodontic Society (1979).

ROBERT J. SYVERSON has been President of the Company since November 1996
and Chief Operating Officer of the Company since October 1996. From July 1996
through October 1996, Mr. Syverson served as a consultant to the Company on
operational and financial matters. From February 1979 through April 1996, Mr.
Syverson held various executive positions in the finance operations and sales
departments of "A" Company Orthodontics, a manufacturer and supplier of
orthodontic materials. Positions included Vice President of Finance, Vice
President of Operations, Vice President of International Sales and, most
recently, Executive Vice President of Sales. "A" Company Orthodontics was an
affiliate of Johnson & Johnson from April 1982 through June 1994. Prior thereto,
Mr. Syverson held various positions with Coopers & Lybrand as a certified public
accountant, where he was a manager from July 1977 through January 1979.

MICHAEL W. HARLAN has been Vice President and Chief Financial Officer of
the Company since March 1997. From December 1996 to February 1997, Mr. Harlan
served as a consultant to the Company on financial and accounting matters. From
April 1991 through December 1996, Mr. Harlan held various positions in the
finance and acquisition departments of Sanifill, Inc., an international
environmental services company that was acquired by USA Waste Services, Inc. in
1996. He served as the Treasurer of Sanifill, Inc. beginning in September 1993.
While at Sanifill, Inc., Mr. Harlan participated in numerous acquisitions and
was actively involved in raising public and private capital. From May 1982
through April 1991, Mr. Harlan held various positions in the tax and corporate
financial consulting services division of Arthur Andersen LLP, where he had been
a manager since July 1986. Mr. Harlan is a certified public accountant.

H. STEVEN WALTON has served as Vice President of Business Development and
General Counsel since June 1997 and served as Vice President of Acquisitions
from March 1997 to June 1997. From June 1994 to February 1997, Mr. Walton served
as Vice President -- Government Affairs and General Counsel of

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<PAGE>
Sanifill, Inc., which was acquired by USA Waste Services, Inc. in 1996, and then
as Vice President of Business Development of USA Waste Services, Inc. Before
joining Sanifill, Mr. Walton was Senior Vice President and General Counsel of
Catalyst Energy Corporation, an independent power company, and then Of Counsel
to the law firm Blackwell, Sanders, Matheny, Weary & Lombardi, Kansas City,
Missouri. While at Sanifill, USA Waste Services, Inc. and Catalyst Energy
Corporation, Mr. Walton negotiated and closed numerous acquisitions.

W. DANIEL COOK has served as a director of the Company since October 1996
and as Chief Administrative Officer since February 1997. From December 1996 to
January 1997, Mr. Cook served as a consultant to the Company on various legal
matters. Prior thereto he was a partner at the law firm of Breard, Raines &
Cook, P.L.L.C. (1996 to 1997) and was associated with the law firm of Page,
Mannio, Peresich, Dickinson & McDermott, P.L.L.C. (1991 to 1995).

WILLIAM W. SHERRILL has served as a director of the Company since October
1996. He is an Executive Professor at the University of Houston College of
Business Administration and is the Director for the University of Houston's Conn
Center for Entrepreneurship & Innovation. Mr. Sherrill was formerly the
principal of William W. Sherrill, Financial Consultants from 1974 to 1981. From
1971 to 1974, Mr. Sherrill served as the President of Associates Corporation of
North America and was a director of Gulf and Western Industries, Inc. Before
joining Associates Corporation, he was appointed by the President of the United
States in 1967 to fill an unexpired term as Governor of the Federal Reserve
Board in Washington, D.C. Mr. Sherrill was reappointed to a full 14-year term on
the Board of Governors. Prior to his Federal Reserve appointment, he was the
Director of the Federal Deposit Insurance Corporation. Mr. Sherrill was
appointed to the Company's Board of Directors pursuant to the provisions of a
funding agreement between Apple and TriCap. This funding agreement terminated
pursuant to its terms upon completion of the IPO. See "Certain Transactions."
Mr. Sherrill also serves as a director of ImmuDyne Inc., a biotechnology
company.

ROD L. CROSBY, JR. has served as a director of the Company since July 1997.
Mr. Crosby has served as the Senior Vice President of Business Development of
Corporate Express, a supplier of office products and services, since 1995. From
1994 to 1995, Mr. Crosby served as a director of U.S. Delivery Systems, Inc., a
delivery service company formed as a result of a combination in November 1993 of
a number of delivery companies, including ViaNet, Inc., a company founded by Mr.
Crosby. Prior to that time, Mr. Crosby served as Chairman and Chief Executive
Officer of ViaNet, Inc. from 1986 until 1993. Mr. Crosby serves on the board of
directors of e-CommLink, a software company serving the banking and medical
industries.

CLYDE C. WADDELL, JR. has served as a director of the Company since July
1997. Mr. Waddell is the owner, President and Chief Executive Officer of
Hester's Office Center, Inc., an office supply company, and has served in such
capacity for more than the past five years. Mr. Waddell is a certified public
accountant.

LEEANN PENICHE has been Vice President of Training and Marketing since June
1997. Prior to that time, she served as Director of Training of the Company
beginning in March 1997. From September 1996 to February 1997, Ms. Peniche
served as a consultant to the Company on various practice development matters.
In July 1989, Ms. Peniche founded Peniche & Associates, Inc., a consulting firm
specializing in the development and implementation of practice development
techniques for orthodontic practices throughout North America, where she has
served as its President from inception to the date of the IPO. From January 1985
until September 1991, Ms. Peniche was on the faculty of Paradigm Practice
Management Company, where she specialized in training orthodontists and their
staff in practice development activities. Ms. Peniche is a frequent lecturer
with the American Association of Orthodontics, the Pacific Coast Orthodontic
Society and numerous other private orthodontic societies. Ms. Peniche is a
Registered Dental Assistant, specializing in orthodontics. Ms. Peniche has
entered into a three-year employment agreement with the Company.

BOARD OF DIRECTORS

The Board of Directors of the Company currently consists of five directors.
The Board of Directors is divided into three classes with two directors in each
class, with the term of one class expiring at the annual

33
<PAGE>
meeting of stockholders in each year, commencing in 1998. At each annual meeting
of stockholders, directors of the class the term of which then expires will be
elected by the holders of the Common Stock or, in the case of the Class B
director, by the holders of the Class B Stock, to succeed those directors whose
terms are expiring. The term of Mr. Crosby expires in 1998, the terms of Messrs.
Cook and Sherrill expire in 1999 and the terms of Dr. Vondrak and Mr. Waddell
expire in 2000.

Currently, there are three committees of the Board: Audit (comprised of
Messrs. Crosby, Sherrill and Waddell (chairman)), Compensation (comprised of
Messrs. Crosby, Waddell and Sherrill (chairman)) and Acquisitions (comprised of
Messrs. Cook and Sherrill and Dr. Vondrak (chairman)). The members of the Audit
and Compensation Committees may not be employees of the Company.

Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company receives a fee of $2,000 for attendance at each Board of Directors
meeting and $1,000 for each committee meeting (unless held on the same day as a
Board of Directors meeting) and received an initial grant of nonqualified
options to purchase 12,500 shares of Common Stock. See " -- 1997 Stock
Compensation Plan." All directors of the Company are reimbursed for
out-of-pocket expenses incurred in attending meetings of the Board of Directors
or committees thereof, and for other expenses incurred in their capacity as
directors of the Company.

EXECUTIVE COMPENSATION

The following table sets forth the total compensation paid by the Company
during the fiscal year 1996 for its Chairman of the Board and Chief Executive
Officer.

ANNUAL
COMPENSATION
NAME SALARY
- ---------------------------------------- ------------
John G. Vondrak, D.D.S.................. $ 75,000(1)
- ------------
(1) Dr. Vondrak received no cash bonus or other form of annual compensation
other than salary during 1996.

The Company anticipates that for 1997, its most highly compensated
executive officers will be Dr. Vondrak and Messrs. Syverson, Harlan, Walton and
Cook (the "Named Executive Officers"), each of whom has entered into an
employment agreement with the Company providing for an annual salary of
$180,000, $150,000, $130,000, $130,000 and $120,000, respectively, and providing
that they be full-time employees of Apple. See " -- Employment Agreements."

In addition to base salary, the Named Executive Officers through their
employment agreements are eligible for bonuses based on earnings performance of
the Company, and Mr. Walton is entitled to receive certain commissions upon the
consummation of future affiliations.

In December 1996, the Company granted options to purchase 90,000 shares of
Common Stock to Mr. Harlan. In April 1997, the Company granted options to
purchase 135,000 shares, 100,000 shares, 161,850 shares and 70,000 shares of
Common Stock to Dr. Vondrak, Mr. Syverson, Mr. Walton and Mr. Cook,
respectively, under the Company's 1997 Stock Compensation Plan, exercisable at
the IPO price of $7.00 per share. Such options expire in April 2007 and vested,
with respect to all but options to acquire 90,000 and 76,850 shares granted to
Mr. Harlan and Mr. Walton, respectively, as to 25% of the underlying shares on
the date of the IPO and will vest with respect to the remaining underlying
shares on the next three anniversaries of such date in 25% increments. With
respect to the option to acquire 90,000 shares granted to Mr. Harlan, such
option vested 25% on the date of the IPO and will vest as to 25% of the
underlying shares, on the next three anniversaries of the date of grant in 25%
increments. With respect to the option to acquire 76,850 shares granted to Mr.
Walton, such option vested as to 50% of the underlying shares on the date the
IPO was consummated and will vest as to the remaining underlying shares on May
22, 1998, the first anniversary of such date. See " -- 1997 Stock Compensation
Plan."

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with Dr. Vondrak and
Messrs. Syverson, Harlan, Walton and Cook. The following summary of these
agreements does not purport to be complete and

34
<PAGE>
is qualified by reference to such agreements and any amendments thereto, copies
of which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. Each of these agreements provides for an annual base
salary in an amount not less than the initial specified amount and entitles the
employee to participate in all the Company's compensation plans (as defined) in
which other executive officers of the Company participate. Each of these
agreements also has a continuous three-year term, subject to the right of the
Company and the employee to terminate the employee's employment at any time. If
the employee's employment is terminated by the Company without cause (as
defined) or by the employee with good reason (as defined), the employee will be
entitled, during each of the years in the three-year period beginning on the
termination date, to (i) periodic payments equal to his average annual cash
compensation (as defined) from the Company, including bonuses, if any, during
the two years (or the period of employment, if shorter) preceding the
termination date, and (ii) continued participation in all the Company's
compensation plans (other than the granting of new awards under the 1997 Stock
Compensation Plan or any other performance-based plan). Except in the case of a
termination for cause, any stock options previously granted to the employee
under the 1997 Stock Compensation Plan that have not been exercised and are
outstanding as of the time immediately prior to the date of his termination will
remain outstanding (and continue to become exercisable pursuant to their
respective terms) until exercised or the expiration of their term, whichever is
earlier. If a change of control (as defined) of the Company occurs, the employee
will be entitled to terminate his employment at any time during the 365-day
period following that change of control and receive a lump-sum payment equal to
three times his highest annual base salary under the agreement (plus such
amounts as may be necessary to hold the employee harmless from the consequences
of any resulting excise or other similar purpose tax relating to "parachute
payments" under the Internal Revenue Code of 1986, as amended). Each employment
agreement contains a covenant limiting the employee's right to compete against
the Company for a period of one year following termination of employment.

In addition, the Company has entered into an employment agreement with Ms.
Peniche. The agreement provides for an annual salary of $120,000 and terminates
in May 2000. Pursuant to the agreement, Ms. Peniche was granted an option to
purchase 60,000 shares of Common Stock at the IPO price of $7.00 per share. Such
option vests over three years. If Ms. Peniche's employment is terminated by the
Company other than for cause (as defined), she is entitled to (i) the greater of
her salary for the remainder of the term of the agreement or $60,000 and (ii)
the continuation of all employee benefits for a period of one year from the date
of such termination.

Each Affiliated Practice enters into an employment agreement with its
orthodontist employees. See "Business -- Orthodontist Employment Agreements."

1997 STOCK COMPENSATION PLAN

In December 1996, the Board of Directors adopted, and the stockholders of
the Company approved, the 1996 Stock Option Plan. In September 1997, the 1996
Stock Option Plan was amended and restated by the Board of Directors and renamed
the 1997 Stock Compensation Plan. The purpose of the 1997 Stock Compensation
Plan is to promote the growth and general prosperity of the Company by enabling
the Company to grant to employees, non-employee directors, advisors and
orthodontists associated with Affiliated Practices shares of Common Stock and
options to purchase Common Stock, and to help the Company attract and retain
superior personnel and to provide such persons with additional incentives to
contribute to the success of the Company. The number of shares of Common Stock
that may be issued under the 1997 Stock Compensation Plan is the greater of
1,000,000 shares of Common Stock or 12% of the number of shares of Common Stock
outstanding on the last day of the preceding calendar quarter (which includes
839,350 shares subject to options previously granted).

The 1997 Stock Compensation Plan provides for the grant of incentive stock
options ("ISOs"), as defined in Section 422 of the Code, nonqualified stock
options and restricted stock (collectively, "Awards"). Since the date of the
IPO, the 1997 Stock Compensation Plan has been administered by the Compensation
Committee of the Board of Directors, which is comprised of three non-employee
members of the Board of Directors (the "Committee"). Prior to the consummation
of the IPO, the 1997 Stock Compensation Plan was administered by the Company's
full Board of Directors. The Committee has,

35
<PAGE>
subject to the terms of the 1997 Stock Compensation Plan, the sole authority to
grant Awards under the 1997 Stock Compensation Plan, to interpret the 1997 Stock
Compensation Plan and to make all other determinations necessary or advisable
for the administration of the 1997 Stock Compensation Plan.

All of the Company's employees, non-employee directors, advisors and
orthodontists associated with Affiliated Practices are eligible to receive
Awards under the 1997 Stock Compensation Plan, but only employees of the Company
are eligible to receive ISOs. Awards will be exercisable during the period
specified in each option agreement and will generally be exercisable in
installments pursuant to a vesting schedule to be designated by the Committee.
Notwithstanding the provisions of any option agreement, options will become
immediately exercisable in the event of certain events, including certain merger
or consolidation transactions and changes in control of the Company. No option
will remain exercisable later than ten years after the date of grant (or five
years from the date of grant in the case of ISOs granted to holders of more than
10% of Common Stock).

The exercise price for ISOs granted under the 1997 Stock Compensation Plan
may be no less than the fair market value of the Common Stock on the date of
grant (or 110% of the fair market value in the case of ISOs granted to employees
owning more than 10% of the Common Stock). The per share exercise price for
nonqualified options granted under the 1997 Stock Compensation Plan will be in
the discretion of the Committee, but may not be less than the fair market value
of a share of Common Stock on the date of grant.

There are generally no federal income tax consequences upon the grant of an
option under the 1997 Stock Compensation Plan. Upon exercise of a nonqualified
option, the optionee generally will recognize ordinary income in the amount
equal to the difference between the fair market value of the option shares at
the time of exercise and the exercise price, and the Company is generally
entitled to a corresponding tax deduction. When an optionee sells shares issued
upon the exercise of a nonqualified stock option, the optionee realizes
short-term or long-term capital gain or loss, depending on the length of the
holding period, but the Company is not entitled to any tax deduction in
connection with such sale.

An optionee will not be subject to federal income taxation upon the
exercise of ISOs granted under the 1997 Stock Compensation Plan, and the Company
will not be entitled to a federal income tax deduction by reason of such
exercise. A sale of shares of Common Stock acquired upon exercise of an ISO that
does not occur within one year after the date of exercise or within two years
after the date of grant of the option generally will result in the recognition
of long-term capital gain or loss by the optionee in an amount equal to the
difference between the amount realized on the sale and the exercise price, and
the Company is not entitled to any tax deduction in connection therewith. If a
sale of shares of Common Stock acquired upon exercise of an ISO occurs within
one year from the date of exercise of the option or within two years from the
date of the option grant (a "disqualifying disposition"), the optionee
generally will recognize ordinary income equal to the lesser of (i) the excess
of the fair market value of the shares on the date of exercise of the options
over the exercise price or (ii) the excess of the amount realized on the sale of
the shares over the exercise price. Any amount realized on a disqualifying
disposition in excess of the amount treated as ordinary income will be long-term
or short-term capital gain, depending upon the length of time the shares were
held. The Company generally will be entitled to a tax deduction on a
disqualifying disposition corresponding to the amount of ordinary income
recognized by the optionee.

Upon consummation of the Offering, the Company will have (i) outstanding
options to purchase a total of approximately 839,350 shares of Common Stock
under the 1997 Stock Compensation Plan and (ii) 513,996 additional shares
available for future Awards under the 1997 Stock Compensation Plan.

On the date of the IPO, each nonemployee director was granted nonqualified
stock options ("NSOs") to purchase 10,000 shares of Common Stock. In addition,
on the first business day of the month following the date on which each annual
meeting of the Company's stockholders is held, each non-employee director
automatically will be granted NSOs to purchase an additional 5,000 shares of
Common Stock. Any person who first becomes a nonemployee director after the date
of the IPO otherwise than by election at an annual meeting of stockholders,
including Messrs. Crosby and Waddell, automatically is granted, on the date of
his or her election, NSOs to purchase 10,000 shares of Common Stock.

36
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Before its IPO, the Company did not have a Compensation Committee, and
executive compensation was set by the Company's Board of Directors. In September
1997, the Company established a Compensation Committee comprised of Messrs.
Crosby, Waddell and Sherrill (chairman), each of whom is an independent
director, to make recommendations to the Company's Board of Directors with
respect to salaries and bonuses to be paid to officers and other employees of
the Company.

37
<PAGE>
CERTAIN TRANSACTIONS

ORGANIZATION OF THE COMPANY

The following table provides certain information concerning the issuance of
the outstanding shares of Class B Stock, which the Company issued on October 11
and December 9, 1996:

DATE OF NUMBER OF PURCHASE PRICE
NAME ISSUANCE SHARES PER SHARE
- ------------------------------------- -------- --------- --------------
John G. Vondrak, D.D.S............... 10-11-96 1,358,782 $ .001
TriCap Funding I, L.L.C.............. 10-11-96 1,373,498 $ .001
Robert J. Syverson................... 10-11-96 130,809 $ .001
W. Daniel Cook....................... 10-11-96 171,687 $ .001
Michael W. Harlan.................... 12-09-96 76,850 $ .001

The number of shares of Class B Stock issued on October 11, 1996 to each of
the founding stockholders shown in the table was determined by negotiations
among those founding stockholders. The number of shares of Class B Stock issued
to Michael W. Harlan on December 9, 1996 was determined by negotiations between
the Board of Directors and Mr. Harlan.

All outstanding shares of Class B Stock are convertible into shares of
Common Stock under certain circumstances. See "Description of Capital
Stock -- Common Stock and Class B Stock." The purchase prices paid for the
foregoing shares of capital stock were the fair market value on the date of
issuance as determined by the Board of Directors.

Apple entered into agreements with Messrs. Syverson, Harlan and Cook
pursuant to which the Company sold to such officers 130,809 shares, 76,850
shares and 171,687 shares of Class B Stock, respectively, at the purchase price
per share set forth in the foregoing table. Each holder of such shares is
entitled to all rights of ownership of Class B Stock, including the right to
vote and receive dividends, subject to certain restrictions set forth in a
subscription agreement entered into by the Company and each such holder (each a
"Subscription Agreement"). Each Subscription Agreement provides that, until
the restrictions affecting such shares lapse, the holder may not sell, transfer,
pledge or otherwise dispose of the shares subject to the agreement. Each
Subscription Agreement also provides that, in the event of the termination of
the employment of such holder (other than as a result of termination without
cause, death, disability or a change in control of the Company), the Company
shall have the right to repurchase any shares with respect to which the
restrictions imposed by the Subscription Agreement have not lapsed at the price
per share paid by the executive officer.

With respect to Messrs. Syverson and Harlan, the Subscription Agreements
provide that the restrictions lapsed with respect to 50% of each holder's shares
upon consummation of the IPO and that the restrictions on such holder's
remaining shares will lapse on the first anniversary of the consummation date of
the IPO. The Subscription Agreement between Apple and Mr. Cook provides that the
restrictions lapsed immediately upon issuance with respect to approximately 24%
of his shares and upon consummation of the IPO with respect to an additional 38%
of his shares, and will lapse on the first anniversary of the consummation date
of the IPO with respect to the remainder of his shares.

In connection with the acquisition of JGVAOI, one of the Founding
Affiliated Practices, Dr. Vondrak received approximately 259,981 shares of
Common Stock and $455,000, and entered into a Service Agreement providing for
service fee payments to the Company. In July 1997, Dr. Vondrak transferred his
practice to another orthodontist affiliated with the Company. As a result, Dr.
Vondrak is no longer a party to a Service Agreement with the Company, and paid
no fees to the Company pursuant to his Service Agreement. Organizational
expenses of Apple incurred by JGVAOI on behalf of the Company were reimbursed to
JGVAOI from certain funds received from TriCap and the proceeds of the IPO. See
"Risk Factors -- Control by Existing Management and Directors."

TriCap Partners, an affiliate of TriCap that is co-owned by Mr. Sherrill,
was the exclusive financial advisor to Apple pursuant to a consulting agreement
that expired May 29, 1997. Pursuant to the consulting agreement, Apple paid to
TriCap Partners (i) $500,000 upon consummation of the IPO and (ii) a warrant to

38
<PAGE>
purchase 180,000 shares of Common Stock with an exercise price per share of
$7.00. In connection with the warrant, the Company granted TriCap Partners
certain demand and piggyback registration rights. TriCap Partners subsequently
distributed this warrant to its investors, including Mr. Sherrill. See
"Security Ownership of Certain Beneficial Owners and Management" and "Shares
Eligible for Future Sale."

Pursuant to a funding agreement between TriCap and Apple, TriCap advanced
to Apple approximately $2.6 million to fund transaction costs in connection with
the affiliation with the Founding Affiliated Practices and the IPO. These
advances, together with expenses of approximately $400,000 incurred by TriCap on
behalf of the Company, were repaid with interest with proceeds from the IPO. The
funding agreement terminated pursuant to its terms on May 29, 1997. In
connection with the funding agreement, Apple granted TriCap and Dr. Vondrak
certain piggyback registration rights. See "Shares Eligible for Future Sale."

TriCap purchased 400,000 shares of Common Stock in the IPO. TriCap
subsequently distributed all of the shares of the Company held by it, including
these shares, to its investors. See "Security Ownership of Certain Beneficial
Owners and Management."

COMPANY POLICY

It is anticipated that future transactions with affiliates of the Company
will be minimal, will be approved by a majority of the disinterested members of
the Board of Directors and will be made on terms no less favorable to the
Company than could be obtained from unaffiliated third parties. The Company does
not intend to incur any further indebtedness to, or make any loans to, any of
its executive officers, directors or other affiliates.

CONSULTING SERVICES

The Company paid Mr. Syverson consulting fees of $65,750 for the fiscal
year ended December 31, 1996.

39
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table shows, as of October 24, 1997, information respecting
the then "beneficial owners" (as defined by the Commission) of more than 5% of
the Common Stock and Class B Stock, each executive officer, each director and
all executive officers and directors of the Company as a group:
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY OWNED(1)
---------------------------------------------------------
PERCENT PERCENT COMBINED
COMMON OF CLASS B OF VOTING
STOCK CLASS STOCK CLASS POWER
------- ------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
John G. Vondrak, D.D.S.(2).............. 343,731(3)(4) 4.2% 1,293,377 38.6% 8.0%
Robert J. Syverson(2)................... 25,000(4) * 130,809 3.9% *
Michael W. Harlan(2).................... 45,000(4) * 76,850(5) 2.3% *
H. Steven Walton(2)..................... 61,175(4) * -- -- *
W. Daniel Cook(2)....................... 17,698(4) * 171,687 5.1% *
William W. Sherrill(2).................. 63,125(4)(6) * 137,350 4.1% 1.1%
Rod L. Crosby, Jr.(2)................... 16,406 * 28,167 * *
Clyde C. Waddell, Jr.(2)................ -- -- -- -- --
All executive officers and directors as
a group (8 persons)................... 572,135(3)(4) 7.1% 1,838,240 54.9% 12.4%
</TABLE>
- ------------
* less than 1%.

(1) Shares shown in the above table do not include shares that could be acquired
upon exercise of currently outstanding stock options which do not become
exercisable within 60 days of October 24, 1997.

(2) The address of such person is 2777 Allen Parkway, Suite 700, Houston, Texas
77019.

(3) Includes 259,981 shares issued in connection with the acquisition of JGVAOI.

(4) Includes shares that may be acquired pursuant to outstanding options within
60 days of October 24, 1997: 33,750 shares in the case of Dr. Vondrak;
17,500 shares in the case of Mr. Cook; 25,000 shares in the case of Mr.
Syverson; 45,000 shares in the case of Mr. Harlan; 3,125 shares in the case
of Mr. Sherrill; 59,675 shares in the case of Mr. Walton; and 161,550 shares
in the case of all executive officers and directors as a group.

(5) Includes 16,350 shares held of record by the Michael and Bonnie Harlan 1996
Family Trust. Mr. Harlan disclaims beneficial ownership of such shares.

(6) Includes 60,000 shares that may be acquired by Mr. Sherrill pursuant to an
outstanding warrant within 60 days of October 24, 1997. The warrant was
initially issued to TriCap Partners and subsequently distributed to its
investors, including Mr. Sherrill.

40
<PAGE>
SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
shares of Common Stock beneficially owned by the Selling Stockholders as of
October 24, 1997. Each Selling Stockholder has sole voting and investment power
with respect to the shares of Common Stock held by such Selling Stockholder.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF
OF COMMON STOCK SHARES OF
NUMBER OF AFTER OFFERING CLASS B SHARES OF
SHARES OF ------------------------- STOCK CLASS B STOCK
COMMON STOCK SHARES OF NUMBER PERCENT OF OWNED TO BE
NAME OF OWNED BEFORE COMMON STOCK OF SHARES OUTSTANDING BEFORE CONVERTED
SELLING STOCKHOLDER OFFERING TO BE SOLD OWNED SHARES OFFERING AND SOLD
- ---------------------------------------- ------------- ------------ ---------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
Julius A. Binetti....................... 7,562 6,562 1,000 * % 11,267 5,634
Paul E. Bonham.......................... 147,856 14,500 133,356 1.4 -- --
Stanley D. Crawford..................... 104,373 14,000 90,373 * -- --
Tom C. Davis............................ 13,125 -- 13,125 * 22,534 17,500
Anthony Deluke.......................... 113,121(1) 20,000(1) 93,121 * -- --
Robert J. Dennington.................... 36,868 7,374 29,494 * -- --
David L. Dennis......................... 9,844 -- 9,844 * 16,900 8,500
Jess H. Dickinson....................... -- -- -- -- 27,469 27,469
Robert S. Fields........................ 124,252 20,000 104,252 1.1 -- --
Andrew K. Girardot...................... 131,158 20,000 111,158 1.2 -- --
W. Patrick McMullen, III................ 9,844 -- 9,844 * 16,900 10,000
Mark Mills.............................. 184,202 17,610 166,592 1.8 -- --
John E. Myers........................... 10,662 -- 10,662 * 14,872 14,872
Carlos F. Navarro....................... 52,343 2,500 49,843 * -- --
Michael R. and Jane L. Nicolais......... 13,125 -- 13,125 * 22,534 10,000
Gary Pezza.............................. 6,562 6,562 -- -- 11,267 5,634
Paul Rigali............................. 166,833 16,683 150,150 1.6 -- --
Budd Rubin.............................. 117,944 5,000 112,944 1.2 -- --
John Dell Sauter........................ 88,462 17,692 70,770 * -- --
Don Schmitz............................. 116,817 1,168 115,649 1.2 -- --
Charles L. Schnibben.................... 165,943 33,000 132,943 1.4 -- --
Ronald N. Spiegel....................... 64,261 6,176 58,085 * -- --
Donald Steen............................ 13,125 -- 13,125 * 22,534 22,534
Thomas A. Tiller........................ 85,370 17,000 68,370 * -- --
Calvin Don Tyner........................ -- -- -- -- 247,230 20,000
Jack Utley.............................. 124,430 12,443 111,987 1.2 -- --
Western Indemnity Insurance............. 16,406 16,406 -- -- 28,167 28,167
------------- ------------ ---------- --- ---------- --------------
Total................................ 1,924,488 254,676 1,669,812 17.5% 441,674 170,310
============= ============ ========== === ========== ==============
</TABLE>
BENEFICIAL OWNERSHIP
OF CLASS B STOCK
AFTER OFFERING
-------------------------
NUMBER PERCENT OF TOTAL
NAME OF OF SHARES OUTSTANDING SHARES TO
SELLING STOCKHOLDER OWNED SHARES BE SOLD
- ------------------------------------- ---------- ------------ -----------
Julius A. Binetti.................... 5,633 * % 12,196
Paul E. Bonham....................... -- -- 14,500
Stanley D. Crawford.................. -- -- 14,000
Tom C. Davis......................... 5,034 * 17,500
Anthony Deluke....................... -- -- 20,000(1)
Robert J. Dennington................. -- -- 7,374
David L. Dennis...................... 8,400 * 8,500
Jess H. Dickinson.................... -- -- 27,469
Robert S. Fields..................... -- -- 20,000
Andrew K. Girardot................... -- -- 20,000
W. Patrick McMullen, III............. 6,900 * 10,000
Mark Mills........................... -- -- 17,610
John E. Myers........................ -- -- 14,872
Carlos F. Navarro.................... -- -- 2,500
Michael R. and Jane L. Nicolais...... 12,534 * 10,000
Gary Pezza........................... 5,633 * 12,196
Paul Rigali.......................... -- -- 16,683
Budd Rubin........................... -- -- 5,000
John Dell Sauter..................... -- -- 17,692
Don Schmitz.......................... -- -- 1,168
Charles L. Schnibben................. -- -- 33,000
Ronald N. Spiegel.................... -- -- 6,176
Donald Steen......................... -- -- 22,534
Thomas A. Tiller..................... -- -- 17,000
Calvin Don Tyner..................... 227,230 7.2 20,000
Jack Utley........................... -- -- 12,443
Western Indemnity Insurance.......... -- -- 44,573
---------- --- -----------
Total............................. 271,364 8.5% 424,986
========== === ===========

- ------------
* Less than 1%.

(1) Includes an aggregate 3,900 shares of Common Stock that were given by Dr.
Deluke to, and are being sold by, three of Dr. Deluke's minor children.

The Company will pay certain expenses of registering the shares of Common
Stock to be offered by the Selling Stockholders under the Securities Act,
including registration and filing fees, printing expenses and the fees and
disbursements of the counsel and accountants for the Company. The Selling
Stockholders will pay all fees and disbursements of their own counsel and all
brokerage fees, commissions and expenses, if any, applicable to the shares of
Common Stock being sold by them. The Company will indemnify each of the Selling
Stockholders against certain civil liabilities, including liabilities under the
Securities Act, or contribute to payments the Selling Stockholders may be
required to make in respect thereof. Each of the Selling Stockholders has agreed
to indemnify the Company against certain liabilities, including liabilities
under the Securities Act, with respect to information provided by that Selling
Stockholder in connection with the Offering.

Certain of the Selling Stockholders are the orthodontist owners of the
Founding Affiliated Practices who received the shares of Common Stock held by
them as a portion of the consideration for the purchase by the Company of the
assets of their practices. The remaining Selling Stockholders are investors in
TriCap, who received the shares of Common Stock and Class B Stock held by them
in July 1997, when TriCap distributed its shares to its investors. None of the
Selling Stockholders is an officer or director of the Company.

41
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, par value $0.001 per share, 4,106,852 shares of Class B Stock, par
value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.001 per share (the "Preferred Stock"). As of October 24, 1997, 8,090,382
shares of Common Stock were issued and outstanding, 3,347,084 shares of Class B
Stock were issued and outstanding and no shares of Preferred Stock of the
Company were issued and outstanding. The following summary is qualified in its
entirety by reference to the Restated Certificate of Incorporation, which is
included as an exhibit to the Registration Statement of which this Prospectus is
a part.

COMMON STOCK AND CLASS B STOCK

Holders of the Class B Stock have the ability to elect as a class one
member of the Board of Directors and holders of the Common Stock have the
ability to elect as a class all other members of the Board of Directors. In the
event of a change in the number of directors, holders of Common Stock have the
ability to elect at least 80% of the Board of Directors (rounded up to the
nearest whole number) elected by the holders of Common Stock and, subject to the
rights of the holders of any series of preferred stock, the holders of the Class
B Stock will have the right to elect the remaining directors. The Common Stock
and Class B Stock possess ordinary voting rights and vote together as a single
class in respect of all other corporate matters, and, in connection therewith,
holders of shares of Common Stock are entitled to one vote per share and holders
of shares of Class B Stock are entitled to three-tenths ( 3/10ths) of a vote per
share. The Common Stock and Class B Stock afford no cumulative voting rights,
and the holders of a majority of the shares of the Common Stock or the Class B
Stock, as applicable, voting for the election of directors can elect all the
directors to be elected by the holders of such stock if they choose to do so.
The Common Stock and Class B Stock carry no preemptive rights and are not
redeemable, assessable or entitled to the benefits of any sinking fund. The
holders of Common Stock and Class B Stock are entitled to dividends in such
amounts and at such times as may be declared by the Board of Directors out of
funds legally available therefor. The Company intends that all future dividends,
if any, declared on, or distributions with respect to, its shares of Common
Stock and Class B Stock will be paid on a pro rata basis to the holders of such
shares. See "Dividend Policy" for information regarding the Company's dividend
policy.

Directors may be removed, with cause, by the holders of the class or
classes of stock that elected them. Directors may be removed by the Board of
Directors only for cause. Vacancies in a directorship may be filled by the vote
of the class or classes of shares that had previously filled that vacancy, or by
the remaining directors or director elected by such class or classes; however,
if there are no such directors, the vacancy may be filled by the other
directors.

Each share of Class B Stock will automatically convert to Common Stock on a
share-for-share basis (i) in the event of a disposition of such share of Class B
Stock by the holder thereof (excluding dispositions to such holder's
affiliates), (ii) in the event any person not affiliated with Apple acquires
beneficial ownership of 15% or more of the outstanding shares of capital stock
of the Company, (iii) in the event any person not affiliated with Apple offers
to acquire beneficial ownership of 15% or more of the outstanding shares of
capital stock of the Company, (iv) in the event the holder of such share elects
to so convert at any time after the second anniversary of the date of the IPO,
(v) on the fifth anniversary of the date of the IPO or (vi) in the event the
holders of a majority of the outstanding shares of Common Stock approve such
conversion. In addition, the Company may elect to convert any outstanding shares
of Class B Stock into shares of Common Stock in the event 80% or more of the
outstanding shares of Class B Stock as of the date of the IPO have previously
been converted into shares of Common Stock.

PREFERRED STOCK

The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Restated Certificate of Incorporation and limitations prescribed by law,
the Board of Directors is expressly authorized to adopt resolutions to issue the
shares, to fix the number of shares and to change the number of shares
constituting any series and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other special

42
<PAGE>
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of the Preferred Stock, in each case without any further action or vote
by the holders of Common Stock.

Although the Company has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For example, the issuance of a series of Preferred Stock might impede
a business combination by including class voting rights that would enable the
holders to block such a transaction. On the other hand, such issuance might
facilitate a business combination by including voting rights that would provide
a required percentage vote of the stockholders. In addition, under certain
circumstances, the issuance of Preferred Stock could adversely affect the voting
power of the holders of the Common Stock. Although the Board of Directors is
required to make any determination to issue such stock based on its judgment as
to the best interests of the stockholders of the Company, the Board of Directors
could act in a manner that would discourage an acquisition attempt or other
transaction that some or a majority of the stockholders might believe to be in
their best interests or in which stockholders might receive a premium for their
stock over the then-market price of such stock. The Board of Directors does not
at present intend to seek stockholder approval prior to any issuance of
currently authorized stock, unless otherwise required by law or the rules of any
market on which the Company's securities are traded.

STATUTORY BUSINESS COMBINATION PROVISION

The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined) with a Delaware corporation for three
years following the time such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination, (ii) upon
consummation of the transaction that resulted in the stockholder's becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
rights to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer) or (iii) following the transaction in
which such person became an interested stockholder, the business combination was
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of two-thirds of
the outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203, the restrictions described above also do not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of one of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person's becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.

OTHER MATTERS

Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of a director's fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by Delaware law, directors
are accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Delaware law

43
<PAGE>
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Restated Certificate of Incorporation limits the
liability of directors of the Company to the Company or its stockholders to the
fullest extent permitted by Delaware law. Specifically, directors of the Company
will not be personally liable for monetary damages for breach of a director's
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the DGCL or (iv) for
any transaction from which the director derived an improper personal benefit.

The inclusion of this provision in the Restated Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
the Company and its stockholders. The Company's Bylaws provide indemnification
to the Company's officers and directors and certain other persons with respect
to certain matters, and the Company has entered into agreements with each of its
directors and executive officers providing for indemnification with respect to
certain matters.

The Restated Certificate of Incorporation provides that stockholders may
act only at an annual or special meeting of stockholders and may not act by
written consent. The Restated Certificate of Incorporation and Bylaws provide
that special meetings of the stockholders can be called only by the Chairman of
the Board, the President or a majority of the Board of Directors.

The Restated Certificate of Incorporation provides that the Board of
Directors shall consist of three classes of directors serving for staggered
terms. As a result, it is currently contemplated that approximately one-third of
the Company's Board of Directors will be elected each year. The classified board
provision could prevent a party who acquires control of a majority of the
outstanding voting stock of the Company from obtaining control of the Board of
Directors until the second annual stockholders' meeting following the date the
acquiror obtains the controlling interest. In addition, the provisions of the
Restated Certificate of Incorporation relating to the election of certain
directors by the holders of the Class B Stock will prevent persons controlling a
majority of the outstanding Common Stock from replacing such directors. See
"Management -- Directors, Executive Officers and Key Employees."

The Restated Certificate of Incorporation provides that the number of
directors shall be as determined by the Board of Directors from time to time,
but shall not be less than three. It also provides that a director may be
removed only for cause, and then only by the affirmative vote of the holders of
at least a majority of all outstanding shares of the class entitled to vote with
respect to the election of such director. This provision, in conjunction with
the provisions of the Restated Certificate of Incorporation authorizing the
Board of Directors to fill vacant directorships, will prevent stockholders from
removing incumbent directors without cause and filling the resulting vacancies
with their own nominees.

STOCKHOLDER PROPOSALS

The Company's Bylaws contain provisions (i) requiring that advance notice
be delivered to the Company of any business to be brought by a stockholder
before an annual meeting of stockholders and (ii) establishing certain
procedures to be followed by stockholders in nominating persons for election to
the Board of Directors. Generally, such advance notice provisions provide that
written notice must be given to the Secretary of the Company by a stockholder
(i) in the event of business to be brought by a stockholder before an annual
meeting, not less than 90 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders (with certain exceptions if the date of
the annual meeting is different by more than specified amounts from the
anniversary date), and (ii) in the event of nominations of persons for election
to the Board of Directors by any stockholder, (a) with respect to an election to
be held at the annual meeting of stockholders, not less than 90 days prior to
the anniversary date of the immediately preceding annual meeting of stockholders
(with certain exceptions if the date of the annual meeting is different by more
than specified amounts from the anniversary date) and (b) with respect to an
election to be held at a special meeting of stockholders for the election of
directors, not later than the close of business on the

44
<PAGE>
seventh day following the day on which notice of the date of the special meeting
was mailed to stockholders or public disclosure of the date of the special
meeting was made, whichever first occurs. Such notice must set forth specific
information regarding such stockholder and such business or director nominee, as
described in the Company's Bylaws. The foregoing summary is qualified in its
entirety by reference to the Company's Bylaws, which are included as an exhibit
to the Registration Statement of which this Prospectus is a part.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.

45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the Offering, the Company will have outstanding (i)
9,510,692 shares of Common Stock (9,761,939 if the Underwriters' over-allotment
option is exercised in full) and (ii) 3,176,774 shares of Class B Stock. Of
these shares, 1,834,682 shares of Common Stock and 2,549,214 shares of Class B
Stock are subject to resale restriction either for the 90-Day Lockup Period
pursuant to an agreement with Bear, Stearns & Co. Inc. or for a 90-day period
following the effective date of the Registration Statement of which this
Prospectus is a part pursuant to registration rights agreements. In addition,
3,434,894 shares of the Common Stock (including 1,608,677 of the shares subject
to the 90-day contractual restrictions), which shares were issued in the
affiliations with the Founding Affiliated Practices, are deemed "restricted
securities" under Rule 144 as they were originally issued and sold by the
Company in private transactions in reliance upon exemptions under the Securities
Act. These restricted securities may be publicly sold only if registered under
the Securities Act or sold in accordance with an applicable exemption from
registration, such as those provided by Rule 144 promulgated under the
Securities Act as described below. The applicable holding period with respect to
such restricted shares of Common Stock will expire in May 1998. In addition, the
holders of the shares of Common Stock acquired in connection with the
affiliations with the Founding Affiliated Practices have agreed with the Company
that they generally will not sell, transfer or otherwise dispose of any of their
shares for one year following the closing of the IPO. Approximately 674,000
shares of Common Stock issued in affiliations subsequent to the IPO, which
shares were registered on the Registration Statement on Form S-4 described
below, are contractually restricted for one year from the date of issuance. In
addition, approximately 1,027,000 shares of a Canadian subsidiary were issued in
July through October 1997 in connection with affiliations with several practices
in Canada. The subsidiary stock is exchangable into 1,027,000 shares of Common
Stock, which shares are also contractually restricted for one year from the date
of issuance of the subsidiary shares. Such shares would not be permitted to be
sold without registration under the Securities Act or an applicable exemption.
The Company has agreed to file a shelf registration statement for the resale of
such shares and use its best efforts to cause such registration statement to
become effective no later than one year after the date of such affiliation.
Pursuant to the shelf registration statement, the holders would be permitted to
sell such shares of Common Stock without restriction. The remaining 5,411,250
shares of Common Stock are freely tradeable without restriction or further
registration under the Securities Act.

In general, under Rule 144, as amended effective April 29, 1997, if a
minimum of one year has elapsed since the later of the date of acquisition of
restricted securities from the issuer or from an affiliate of the issuer, the
acquiror or subsequent holder would be entitled to sell within any three-month
period a number of those shares that does not exceed the greater of 1% of the
number of shares of such class of stock then outstanding or the average weekly
trading volume of the shares of such class of stock during the four calendar
weeks preceding the filing of a Form 144 with respect to such sale. Sales under
Rule 144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
issuer. In addition, if a period of at least two years has elapsed since the
later of the date of acquisition of restricted securities from the issuer or
from any affiliate of the issuer, and the acquiror or subsequent holder thereof
is deemed not to have been an affiliate of the issuer of such restricted
securities at any time during the 90 days preceding a sale, such person would be
entitled to sell such restricted securities under Rule 144(k) without regard to
the requirements described above. Rule 144 does not require the same person to
have held the securities for the applicable periods. The foregoing summary of
Rule 144 is not intended to be a complete description thereof. The Commission
has proposed certain amendments to Rule 144 that would, among other things,
eliminate the manner of sale requirements and revise the notice provisions of
that rule. The Commission has also solicited comments on other possible changes
to Rule 144, including possible revisions to the one- and two-year holding
periods and the volume limitations referred to above.

As of October 24, 1997, options to purchase an aggregate of approximately
839,350 shares of Common Stock were outstanding under the Company's 1997 Stock
Compensation Plan. See "Management -- 1997 Stock Compensation Plan." In
general, pursuant to Rule 701 under the Securities Act, any employee, officer or
director of, or consultant to, the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permit non-affiliates to sell such shares
without compliance with the public information, holding period, volume
limitation or notice provisions of Rule 144, and permit affiliates to sell such
shares without compliance with

46
<PAGE>
the holding period provisions of Rule 144, in each case commencing 90 days after
May 22, 1997, the date on which the Company became subject to the reporting
requirements of the Exchange Act. A total of 839,350 shares of Common Stock are
eligible for resale pursuant to Rule 701 (upon exercise of options) (although
certain of the holders of those options have agreed not to offer or sell any of
those shares during the 90-Day Lockup Period). In addition, the Company has
filed a registration statement on Form S-8 covering the 980,000 additional
shares underlying Awards under the 1997 Stock Compensation Plan. As a result,
such shares generally are freely tradable by non-affiliates in the public market
without restriction under the Securities Act.

In June 1997, the Company filed a Registration Statement on Form S-4 to
register 2,000,000 shares of Common Stock for use by the Company as all or a
portion of the consideration to be paid in future affiliation transactions. As
of October 24, 1997, approximately 674,000 of these shares had been issued in
connection with affiliations subsequent to the IPO. These shares, as well as the
remaining shares available for issuance under such Registration Statement, are
generally freely tradeable after their issuance. However, each party who has
received shares of Common Stock has contractually agreed with the Company not to
sell any of such shares for a period of one year from receipt. The Company
anticipates that the agreements entered into in connection with its future
affiliations will contractually restrict the resale of all or a portion of the
shares issued in those transactions for varying periods of time.

The Company, its executive officers and directors and the Selling
Stockholders have agreed not to offer, sell, contract to sell, grant any option
or other right for the sale of, or otherwise dispose of any shares of Common
Stock or any securities, indebtedness or other rights exercisable for or
convertible or exchangeable into Common Stock owned or acquired in the future in
any manner prior to the expiration of 90 days after the date of this Prospectus
(the "90-Day Lockup Period") without the prior written consent of Bear,
Stearns & Co. Inc., except that the Company may issue, subject to certain
conditions, Common Stock in connection with affiliations and may grant Awards
(or Common Stock upon exercise of Awards) under the 1997 Stock Compensation
Plan. These restrictions will be applicable to any shares acquired by any of
those persons in the Offering or otherwise during the 90-Day Lockup Period.

In connection with the affiliations with the Founding Affiliated Practices,
the Company entered into a registration rights agreement with former
stockholders of the Founding Affiliated Practices (the "Registration Rights
Agreement"), which provides certain registration rights with respect to the
Common Stock issued to such stockholders in connection with such affiliations.
The Registration Rights Agreement provides the holders of Common Stock subject
to the agreement with the right in the event the Company proposes to register
under the Securities Act any Common Stock for its own account or for the account
of others at any time through November 2001, subject to certain exceptions, to
require the Company to include shares owned by them in the registration. Of the
3,682,554 shares of Common Stock covered by such Registration Rights Agreement,
225,146 are included in this Offering. In addition, pursuant to separate
registration rights agreements with TriCap, Dr. Vondrak and TriCap Partners,
certain of these parties and certain of their transferees have the right, in the
event the Company proposes to register under the Securities Act any Common Stock
for its own account or for the account of others at any time through November
2001, subject to certain exceptions, to require the Company to include shares
owned by them in the registration. Of the 2,468,570 shares of Common Stock or
Class B Stock convertible into Common Stock covered by such registration rights
agreements, 199,840 are included in this Offering. Furthermore, the registration
rights agreement to which TriCap Partners is a party provides for a single
demand registration right pursuant to which Apple will file a registration
statement under the Securities Act to register the sale of the shares issuable
on exercise of the warrant described under "Certain Transactions." The demand
request may be made at any time before May 31, 2002, subject to certain
conditions and limitations.

In the case of each registration rights agreement described, the Company is
generally required to pay the costs associated with such an offering other than
fees and disbursements of counsel for the selling stockholders, any brokerage
fees and expenses applicable to shares of Common Stock being sold by them,
underwriting discounts and commissions and transfer taxes attributable to the
shares sold on behalf of the selling stockholders. Each registration rights
agreement provides that the number of shares of Common Stock that must be
registered on behalf of the selling stockholders is subject to limitation if the
managing underwriter determines that market conditions require a limitation.
Under each agreement, the Company will indemnify the selling stockholders
thereunder, and such stockholders will indemnify the Company,

47
<PAGE>
against certain liabilities in respect of any registration statement or offering
covered by the registration rights agreement.

No prediction can be made of the effect, if any, that sales of shares under
Rule 144, or otherwise, or the availability of shares for sale will have on the
market price of the Common Stock prevailing from time to time after the
Offering. The Company is unable to estimate the number of shares that may be
sold in the public market under Rule 144, or otherwise, because such amount will
depend on the trading volume in, and market price for, the Common Stock and
other factors. Nevertheless, sales of substantial amounts of shares in the
public market, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock of the Company. See
"Underwriting."

48
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement among the
Company, Bear, Stearns & Co. Inc., Cowen & Company and Equitable Securities
Corporation as the Representatives of the Underwriters, each of the Underwriters
named below has severally agreed to purchase from the Company, and the Company
has agreed to sell to the Underwriters, the respective number of shares of
Common Stock set forth opposite its name below.

NUMBER OF
UNDERWRITERS SHARES
- ---------------------------------------- ---------
Bear, Stearns & Co. Inc.................
Cowen & Company.........................
Equitable Securities Corporation........

Total..............................
---------
1,674,986
=========

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to approval of
certain legal matters by counsel and to certain other conditions precedent. If
any of the shares of Common Stock are purchased by the Underwriters pursuant to
the Underwriting Agreement, all such shares of Common Stock (other than shares
of Common Stock covered by the over-allotment option described below) must be so
purchased.

The Underwriters propose to offer the shares of Common Stock directly to
the public at the public offering price set forth on the cover page of this
Prospectus, and at such price less a concession not in excess of $ per
share of Common Stock to certain other dealers who are members of the National
Association of Securities Dealers, Inc. The Underwriters may allow, and such
dealers may reallow, concessions not in excess of $ per share to certain
other dealers. After the public offering, the offering price and other selling
terms may be changed by the Underwriters. The Common Stock is listed on the
American Stock Exchange.

The Underwriters have been granted a 30-day over-allotment option to
purchase from the Company up to 251,247 additional shares of Common Stock at the
public offering price less the underwriting discount. If the Underwriters
exercise such over-allotment option, then each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof as the number of shares of Common Stock to be purchased
by it as shown in the above table bears to the 1,674,986 shares of Common Stock
offered hereby. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares of Common Stock
offered hereby.

The officers and directors of the Company, the Selling Stockholders and
certain holders of the Common Stock have agreed not to offer, sell, transfer,
assign or otherwise dispose of any shares of Common Stock owned by them for a
period of 90 days after the date of the final Prospectus relating to the
Offering without the prior written consent of Bear, Stearns & Co. Inc. These
restrictions will be applicable to any shares acquired by any of those persons
in the Offering or otherwise during the 90-Day Lockup Period.

The Company has agreed that it will not issue, sell or grant options to
purchase or otherwise dispose of any shares of its Common Stock or securities
convertible into or exchangeable for its Common Stock, except with respect to
future affiliations (subject to certain conditions) or pursuant to the 1997
Stock Compensation Plan, for a period of 90 days after the date of the final
prospectus relating to the Offering without the prior written consent of Bear,
Stearns & Co. Inc.

49
<PAGE>
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain civil liabilities,
including liabilities under the Securities Act, or will contribute to payments
that the Underwriters or any such controlling persons may be required to make in
respect thereof.

In order to facilitate the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the Common Stock during and after the Offering. Specifically, the
Underwriters may over-allot or otherwise create a short position in the Common
Stock for their own account by selling more shares of Common Stock than have
been sold to them by the Company and the Selling Stockholders. The Underwriters
may elect to cover any such short position by purchasing shares of Common Stock
in the open market or by exercising the over-allotment option granted to the
Underwriters. In addition, such persons may stabilize or maintain the price of
the Common Stock by bidding for or purchasing shares of Common Stock in the open
market and may impose penalty bids, under which selling concessions allowed to
syndicate members or other broker-dealers participating in the Offering are
reclaimed if shares of Common Stock previously distributed in the Offering are
repurchased in connection with stabilizing transactions or otherwise. The effect
of these transactions may be to stabilize or maintain the market price of the
Common Stock at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the price of the Common
Stock to the extent that it discourages resales thereof. No representation is
made as to the magnitude or effect of any such stabilization or other
transactions. Such transactions may be effected on the American Stock Exchange
and, if commenced, may be discontinued at any time.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Baker & Botts, L.L.P., Houston, Texas. Certain legal
matters in connection with the sale of the Common Stock offered hereby will be
passed upon for the Underwriters by Hughes & Luce, L.L.P., Dallas, Texas.

EXPERTS

The financial statements of Apple Orthodontix, Inc. as of December 31, 1996
and for the period from inception, July 15, 1996, through December 31, 1996
included in this Prospectus and appearing elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, which is
included herein in reliance upon the authority of said firm as experts in giving
said report.

ADDITIONAL INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information may be inspected without charge at the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the following regional offices of the
Commission: Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies can also be obtained from the Commission at prescribed rates. The
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The Common Stock is listed on the
American Stock Exchange. The Company's reports, proxy statements and other
information are available for inspection at the offices of the American Stock
Exchange, Inc., 86 Trinity Place, New York, New York 10006-1881.

The Company has filed with the Commission a Registration Statement on Form
S-1 with respect to the Common Stock offered hereby. This Prospectus, filed as
part of the Registration Statement, does not contain all the information
contained in the Registration Statement, certain portions of which have been
omitted in accordance with the rules and regulations of the Commission. For
further information with

50
<PAGE>
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement, including the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the Registration Statement are qualified
in their entirety by reference to such exhibits for complete statements of their
provisions. All of these documents may be inspected without charge at the
Commission's offices or copied at prescribed rates.

<PAGE>
INDEX TO FINANCIAL STATEMENTS

PAGE
----
AUDITED FINANCIAL STATEMENTS OF APPLE
ORTHODONTIX, INC.
Report of Independent Public
Accountants.................... F-2
Balance Sheet -- December 31,
1996........................... F-3
Statement of Operations For the
Period From Inception, July 15,
1996, Through
December 31, 1996............. F-4
Statement of Changes in
Stockholders' Equity (Deficit)
For the Period From Inception,
July 15, 1996, Through
December 31, 1996.............. F-5
Statement of Cash Flows For the
Period From Inception, July 15,
1996, Through
December 31, 1996............. F-6
Notes to Financial Statements... F-7
Condensed Consolidated Balance
Sheets -- September 30, 1997
(Unaudited) and
December 31, 1996............. F-14
Condensed Consolidated
Statements of Operations For
the Nine and Three Month
Periods Ended September 30,
1997 and 1996 (Unaudited)...... F-15
Condensed Consolidated Statement
of Changes in Stockholders'
Equity (Deficit) For the Nine
Month Period Ended September
30, 1997 (Unaudited)........... F-16
Condensed Consolidated
Statements of Cash Flows For
the Nine Month Periods Ended
September 30, 1997 and 1996
(Unaudited).................... F-17
Notes to Unaudited Condensed
Consolidated Financial
Statements..................... F-18

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Apple Orthodontix, Inc.:

We have audited the accompanying balance sheet of Apple Orthodontix, Inc.,
a Delaware corporation, as of December 31, 1996, and the related statements of
operations, changes in stockholders' equity (deficit) and cash flows for the
period from inception, July 15, 1996, through December 31, 1996, as restated.
See Note 1. 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 audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Apple Orthodontix, Inc., as
of December 31, 1996, and the results of its operations and its cash flows for
the period from inception, July 15, 1996, through December 31, 1996, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 28, 1997

(except as discussed in Notes 1 and 2,
as to which the date is May 22, 1997)

F-2
<PAGE>
APPLE ORTHODONTIX, INC.
BALANCE SHEET -- DECEMBER 31, 1996

ASSETS
Cash and cash equivalents............... $ 21,254
Long-term assets:
Deferred issuance costs............ 1,395,350
Organization costs, net of
accumulated amortization of
$4,510............................ 44,687
---------------
Total long-term assets............. 1,440,037
---------------
Total assets....................... $ 1,461,291
===============

LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable........................ $ 1,439,565
Accrued bonuses......................... 325,000
Other accrued liabilities............... 35,000
Amounts due to a founding affiliated
practice.............................. 30,444
Amounts due to venture capital
investors............................. 515,000
---------------
Total current liabilities............... 2,345,009
Stockholders' equity (deficit):
Class A Common Stock, $.001 par
value, no shares authorized,
issued and outstanding............ --
Class B Common Stock, $.001 par
value, 4,106,852 shares
authorized, 3,347,084 shares
issued and outstanding............ 3,347
Additional paid-in capital.............. 23,422,313
Retained deficit........................ (24,309,378)
---------------
Total stockholders' equity
(deficit)......................... (883,718)
---------------
Total liabilities and stockholders'
equity (deficit).................. $ 1,461,291
===============

The accompanying notes are an integral part of this financial statement.

F-3
<PAGE>
APPLE ORTHODONTIX, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION, JULY 15, 1996,
THROUGH DECEMBER 31, 1996

REVENUES............................. $ --
COSTS AND EXPENSES:
Salaries and benefits........... 627,476
Rent............................ 19,676
Amortization of organization
costs.......................... 4,510
General and administrative...... 232,232
Special compensation expense
related to issuance of stock... 13,812,681
Special consulting expense
related to issuance of stock... 9,612,803
---------------
Total costs and expenses... 24,309,378
PROVISION FOR INCOME TAXES........... --
---------------
NET LOSS............................. $ (24,309,378)
===============
NET LOSS PER SHARE................... $ (7.24)
===============
NUMBER OF SHARES USED IN CALCULATING
NET LOSS PER SHARE................. 3,358,513
===============

The accompanying notes are an integral part of this financial statement.

F-4
<PAGE>
APPLE ORTHODONTIX, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION, JULY 15, 1996,
THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK
SUBJECT TO A
PUT OPTION ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
----------- --------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, July 15, 1996............... -- $ $ -- $ -- $ --
Issuance of stock............... 3,347,084 3,347 23,422,313 -- 23,425,660
Net loss........................ -- -- -- (24,309,378) (24,309,378)
----------- --------- -------------- --------------- ---------------
BALANCE, December 31, 1996........... 3,347,084 $ 3,347 $ 23,422,313 $ (24,309,378) $ (883,718)
=========== ========= ============== =============== ===============
</TABLE>
The accompanying notes are an integral part of this financial statement.

F-5
<PAGE>
APPLE ORTHODONTIX, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION, JULY 15, 1996,
THROUGH DECEMBER 31, 1996

CASH FLOWS USED IN OPERATING
ACTIVITIES:
Net loss........................ $ (24,309,378)
Amortization of organization
costs ......................... 4,510
Special compensation and
consulting expense paid in
stock.......................... 23,425,484
Increase in accounts payable and

accrued liabilities not related
to issuance costs.............. 404,215
---------------
Net cash used in operating
activities................ (475,169)
---------------
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES:
Cash paid for organization
costs.......................... (49,197)
Advances from a related party... 515,000
Advances from a founding
practice....................... 283,744
Repayment of advances from a
founding practice.............. (253,300)
Proceeds from issuance of common
stock.......................... 176
---------------
Net cash provided by
financing activities...... 496,423
---------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ $ 21,254
===============

The accompanying notes are an integral part of this financial statement.

F-6
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Apple Orthodontix, Inc. ("Apple" or the "Company"), was established as
a Delaware corporation on July 15, 1996, for the purpose of creating an
orthodontic practice management company which will own the assets of and provide
management services to orthodontic practices (see Note 6). The Company's
operations to date have consisted primarily of seeking affiliations with
orthodontists, negotiating to acquire the assets of those professionals'
practices and negotiating agreements to provide management services to those
practices ("Affiliations"). Apple plans to complete an initial public offering
of its Class A common stock (the "IPO") and simultaneously exchange cash and
shares of its Class A common stock for selected assets and liabilities
associated with 31 orthodontic practices (the "Founding Affiliated
Practices"). The completion of the Affiliations, public offering and entry by
Apple into service agreements with the owners of the orthodontic practices will
mark the beginning of Apple's operations. The financial statements have been
prepared on the basis that the proposed transactions will occur although no
assurance can be made that the proposed transactions will be completed. For
further discussion of the various risks associated with Apple's operations and
the proposed transactions, including the absence of a combined operating
history, reliance on Affiliated Practices and orthodontists, the need for
additional financing, government regulation, dependence on key personnel,
competition, and other risks, please refer to the discussion of risk factors in
the Company's registration statement.

RESTATEMENT

In connection with the IPO process, the Company restated its previous
financial statements as of December 31, 1996 and for the period from inception,
July 15, 1996, through December 31, 1996. The restatement involves valuing stock
issued to founders, management and advisors of the Company, in October and
December 1996, at the IPO price. The impact of this adjustment is to increase
special compensation expense related to issuance of stock by $13,812,681 and to
increase special consulting expense related to issuance of stock by $9,612,803.
The overall impact of the restatement on the Company's Balance Sheet as of
December 31, 1996 was to increase the Class A and B Stock and related additional
paid-in capital by a total of $23,422,132 and, after giving effect to previously
recorded negative paid-in-capital of $3,350, to increase the retained deficit by
$23,422,132. There was no net effect on stockholders' equity (deficit).

Further revisions and restatements were made to reflect (i) a reverse stock
split which reduced the effective split from 4,013-for-one to 3,270-for-one;
(ii) the cancellation of a warrant previously issued to TriCap Partners, which
was valued at $1,700,000 with the number of shares to be determined based on the
final offering price to the public utilizing the Black-Scholes option-pricing
model, and the issuance of a new warrant for the purchase of 180,000 shares at
$7.00 per share, which has been valued at $777,106; and (iii) the actual
offering price to the public of $7.00 per share.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

DEFERRED ISSUANCE COSTS

Salaries and general and administrative expenses and other internal costs
associated with seeking and negotiating with orthodontists to enter into the
transaction have been expensed. Various external costs resulting from the
provision of legal, accounting and other professional services and other costs
incurred for the transactions are a requirement of the IPO and accordingly have
been recorded as deferred issuance costs. All deferred issuance costs will be
charged against the proceeds of the IPO upon its successful completion. As of
December 31, 1996, no deferred issuance costs associated with the IPO have been
paid.

ORGANIZATION COSTS

Organization costs incurred in the formation of the Company are amortized
on a straight-line basis over a five-year period.

F-7
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

STOCKHOLDERS' EQUITY (DEFICIT)

On October 11, 1996, 3,165,586 shares of Class B common stock were issued
at a total price of $9.68. On December 9, 1996, 181,498 additional shares were
issued in exchange for $166 of consideration. The shares issued through December
31, 1996 have been restated to reflect the effect of an aggregate 3,270-for-one
stock split approved on May 18, 1997. After considering the effects of the stock
split, the effective per share consideration paid was $.000003 per share on
October 11, 1996 and $.0009 per share on December 9, 1996. In conjunction with
the stock split approved on April 24, 1997, additional amounts were contributed
to bring the aggregate purchase price per share up to the par value of $.001 per
share. The Class B common stock will be entitled to three-tenths ( 3/10ths) of a
vote per share. The Class B common stock automatically converts to one vote per
share in the event of the disposition of the stock by the stockholder (excluding
dispositions to the holder's affiliates), any person offers to or acquires 15%
or more of the outstanding capital stock of the Company, any person acquires
beneficial ownership of 15% or more of the outstanding shares of capital stock
of the Company, the stockholder elects to convert at any time after the second
anniversary of the effective date of the IPO, the holders of that number of
shares of Class A common stock and Class B common stock, voting together as a
single class, with a majority of the outstanding voting power approve
conversion, or on the fifth anniversary of the effective date of the IPO. In the
event that 80% or more of the currently outstanding shares of Class B common
stock have been converted into shares of Class A common stock, the Company may
elect to convert the remaining outstanding shares of Class B common shares into
shares of Class A common stock. The Class A common stock to be issued to the
Founding Affiliated Practices and in the IPO will be entitled to one vote per
share. As discussed in Note 1, the shares issued on October 11, 1996 and
December 9, 1996 have been valued at the assumed offering price. Special
compensation and consulting expense related to issuance of stock has been
recorded for the difference between the amount paid for the stock and the
offering price of $7.00 per share.

Approximately 724,267 of the issued and outstanding shares were subject to
subscription agreements that include a put option provision in the event of a
change in control of the Company. On May 15, 1997, the parties to the
subscription agreements irrevocably waived the provision effective December 31,
1996.

The shares used in calculating net loss per share include all shares of
capital stock outstanding as of May 22, 1997 and the additional shares that
would be outstanding if all options that were issued prior to the Offering were
exercised and the proceeds used to repurchase shares at the offering price of
$7.00 per share.

STOCK OPTION PLAN

In December 1996, the board of directors of the Company adopted the 1996
Stock Option Plan ("Plan"). Employees, non-employee directors and advisors are
eligible to receive awards under the Plan; only employees of the Company are
eligible to receive incentive stock options. The aggregate number of options to
purchase shares of common stock that may be granted under the Plan is the
greater of 1,000,000, or 12%, of the number of shares of Class A common stock
outstanding on the last day of the preceding calendar quarter. The Company
anticipates that upon or shortly after the consummation of the IPO, it will
grant options to purchase approximately 743,000 shares of common stock under the
Plan. All of these options will be at the IPO price except for 20,000 options
that were granted in January 1997 at $3.00 per option, which equaled the fair
value of the common stock of the Company at that date. The Company will account
for options issued to employees and non-employee directors under the Plan in
accordance with APB Opinion No. 25, and, accordingly, no compensation cost will
be recognized. The Company will provide the pro forma disclosure of net earnings
per share in the notes to the financial statements as if the fair value-based
method of accounting had been applied to awards as required by Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation."

F-8
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

As reflected in the accompanying statement of operations, the Company
incurred a loss from operations during the period from inception, July 15, 1996,
through December 31, 1996. Due to the limited operations of the Company since
its inception and the pending IPO, a valuation allowance has been recorded to
fully reserve for the deferred tax benefits generated by these net operating
losses. There is no significant difference in the tax and book bases of the
Company's assets or liabilities that would give rise to deferred tax balances.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.

3. FINANCING PROVIDED BY VENTURE CAPITAL INVESTORS:

On November 14, 1996, the Company entered into an agreement with TriCap
Funding I, L.L.C. ("TriCap"), whereby TriCap agreed to provide $3,000,000 to
finance costs related to the Offering. As of December 31, 1996, the Company had
borrowed $515,000 under this agreement. The $3,000,000, to the extent expended,
will be repaid out of proceeds from the IPO, including interest at a rate of
prime plus .25 percent. The Company also entered into an agreement on such date
with TriCap Partners, L.L.C. ("TriCap Partners") that extends through the date
of the consummation of the first public offering of Common Stock (or a security
convertible or exchangeable for Common Stock) by the Company following the IPO.
This agreement provides for (a) the payment by Apple to TriCap Partners of
approximately $500,000 upon consummation of the IPO and (b) the issuance to
TriCap Partners of a warrant with an estimated value of $777,106 to purchase
180,000 shares of Common Stock, with an exercise price per share of $7.00. The
$777,106 value of the warrant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: (i) expected
dividend yield -- 0.0%; (ii) expected stock price volatility -- 67.5%; (iii)
risk-free interest -- 6.2%; and (iv) expected life of the warrant -- five years.

4. RELATED PARTY:

The practice of a founding stockholder of the Company, John G. Vondrak,
D.D.S., has paid for certain costs and expenses on behalf of the Company. Such
payments, net of reimbursement in conjunction with the financing, have been
reflected as amounts due to a Founding Affiliated Practice in the accompanying
balance sheet and will be repaid with proceeds from the planned IPO.

5. LITIGATION:

On December 10, 1996, Orthodontic Centers of America ("OCA") filed a
complaint against Apple, Dr. Vondrak and his practice, alleging misappropriation
of trade secrets and breach of a confidentiality agreement executed by Dr.
Vondrak with OCA. The Company plans to vigorously defend itself in this matter
and does not believe that the results of these proceedings will have a material
adverse effect on the Company's operating results or financial position.

6. PLANNED ACQUISITIONS OF FOUNDING AFFILIATED PRACTICES:

Apple plans to complete, through a series of mergers and asset transfers,
the acquisition of certain assets and assumption of certain liabilities of the
Founding Affiliated Practices concurrently with an IPO of shares of its Class A
common stock. The Founding Affiliated Practices will receive Class A common
stock and cash as consideration in the Affiliations. In connection with the
Affiliations, the selling orthodontists will create new professional
corporations, professional associations or other entities (collectively, the
"New

F-9
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

PCS") that will enter into 20-year service agreements with Apple. Additionally,
those orthodontists will enter into employment and noncompete agreements with
the New PCS.

The Company will not employ orthodontists or control the practice of
orthodontics by the orthodontists employed by the New PCS. As Apple will not be
acquiring the future patient revenues earned by the New PCS, the Affiliations
are not deemed to be business combinations. In accordance with the Securities
and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 48,
"Transfers of Nonmonetary Assets by Promoters or Shareholders," the
transferred nonmonetary assets and assumed liabilities will be accounted for at
the historical cost basis of the Founding Affiliated Practices. Each of the
Founding Affiliated Practices is a promoter of the IPO. Any monetary assets
included in the Affiliations will be recorded at fair value. The resulting value
of the net assets acquired by Apple will be recorded as the value of the stock
consideration tendered. Cash consideration paid to selling orthodontists in
conjunction with the Affiliations will be reflected as a dividend paid by Apple.

The selling orthodontists will generally retain the long-term debt
obligations of their respective practices. Capital lease obligations will be
assumed by the Company. In certain cases, Apple has agreed to refinance debt
retained by the selling orthodontists.

The combined detail of the Founding Affiliated Practices' assets to be
transferred and liabilities to be assumed is as follows:

COMBINED PRESENTATION OF ASSETS TO BE TRANSFERRED AND LIABILITIES ASSUMED FROM
THE FOUNDING AFFILIATED PRACTICES AS OF DECEMBER 31, 1996

Cash and cash equivalents............... $ 1,177,000
Patient receivables, net of allowances
and patient prepayments............... 866,000
Prepaid expenses and other current
assets................................ 137,000
Property, equipment and improvements,
net................................... 2,087,000
Intangible and other long-term assets,
net................................... 431,000
--------------
Assets transferred...................... 4,698,000
Accounts payable and accrued
liabilities........................... (1,627,000)
Current portion of capital lease
obligations........................... (121,000)
Long-term portion of capital lease
obligations........................... (312,000)
--------------
Assets transferred, net of liabilities
assumed............................... $ 2,638,000
==============

The service fees that will be earned by Apple subsequent to the
Affiliations and execution of the service agreements are based on various
arrangements. In general, the resulting fee will be substantially based on the
patient revenues and cash collections of the New PCS and the operating expenses
assumed by Apple. Apple's standard form of service agreement (the "Standard
Contract") will be applied to all practices operating in locations where it is
not prohibited by law or governmental regulation. In those instances where the
standard contract may not be permitted, an alternative form of agreement (the
"Alternative Contract") will be used. In addition, with respect to two of the
New PCS, the service fees are based on flat fees that are subject to adjustment
on an annual basis.

F-10
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

COMBINED OPERATING DATA OF THE FOUNDING AFFILIATED PRACTICES FOR THE
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
OPERATING
PATIENT REVENUES CASH COLLECTIONS EXPENSES
---------------- ---------------- --------------
<S> <C> <C> <C>
Practices participating under the
Standard Contract..................... $ 17,490,000 $ 17,521,000 $ 10,809,000
Practices participating under the
Alternative Contract.................. 5,358,000 5,519,000 2,935,000
Practices participating under flat fee
agreements............................ 2,209,000 2,365,000 1,226,000
---------------- ---------------- --------------
Totals for Founding Affiliated
Practices........................ $ 25,057,000 $ 25,405,000 $ 14,970,000
================ ================ ==============
</TABLE>
Patient revenues are derived from orthodontic care provided to patients
under contract terms agreed to by the patient or other responsible parties. The
contracts vary by practice and by patient, and service often extends over an
18-month to six-year period. Revenue is recognized based on the estimated costs
incurred as compared to the total estimated treatment cost, with approximately
24% being recognized at the time of initial treatment which is related to the
costs incurred at the time of initial treatment. The balance of the contract
revenue is realized pro rata each month over the remaining contract period. The
24% estimated cost at the initial treatment date is consistent with industry
standards and includes the estimated costs of diagnosis, treatment plan
development, initial treatment by orthodontic personnel, orthodontic supplies
and associated administrative services.

The difference in the timing of the recognition of patient revenues and
cash collections results in (i) unbilled receivables in instances where
recognition of revenues precedes the patient's payment plan and (ii) patient
prepayments when payments are made on a more accelerated basis than revenues are
earned. The following table presents the combined uncollected patient
receivables, unbilled patient receivables, and patient prepayments of the
Founding Affiliated Practices. These amounts are not receivables of the Company,
but the net position of these receivables will be acquired as part of the
Affiliations and in future periods each New PC will provide the Company with a
security interest in the receivables of the New PC.

COMBINED PATIENT RECEIVABLES, NET, OF THE FOUNDING AFFILIATED PRACTICES
AS OF DECEMBER 31, 1996

Patient receivables, net of allowances
of $631,000........................... $ 918,000
Unbilled patient receivables, net of
allowances of $70,000................. 3,361,000
Patient prepayments..................... (3,413,000)
--------------
Patient receivables net of
allowances and prepayments........ $ 866,000
==============

Subsequent to the Acquisitions, the operating expenses of the Founding
Affiliated Practices will be the responsibility of Apple. The Company will have
discretion to control the level of those expenses in conjunction with providing
the related services to the New PCS. The combined historical expenses of the
Founding Affiliated Practices for the year ended December 31, 1996 that will be
assumed by the Company in the future were:

F-11
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

COMBINED DETAIL OF THE FOUNDING AFFILIATED PRACTICES' EXPENSES FOR THE
YEAR ENDED DECEMBER 31, 1996

Salaries, wages and benefits of
employees, excluding the
orthodontists......................... $ 6,381,000
Orthodontic supplies.................... 2,548,000
Rent.................................... 1,923,000
Advertising and marketing............... 438,000
General and administrative expenses..... 3,680,000
--------------
Total operating expenses........... 14,970,000
Depreciation and amortization on
acquired assets....................... 864,000
--------------
Total expenses to be assumed....... $ 15,834,000
==============

The combined historical financial information of the Founding Affiliated
Practices presented herein is not related to the financial position or results
of operations of Apple. This information is presented solely for the purpose of
providing disclosures to potential investors regarding the group of entities
with which Apple will be contracting to provide future services due to the
significant relationships between Apple and the Founding Affiliated Practices.
The Founding Affiliated Practices were not operated under common control or
management during the fiscal year ended December 31, 1996.

UNAUDITED PRO FORMA SERVICE FEES

Except with respect to service agreements providing for the payment of flat
fees, the service fees earned by the Company will be in accordance with two
general types of service agreements -- the standard form of the service
agreement ("Standard Contract") and the alternative form of the service
agreement (the "Alternative Contract"). The determination of which service
agreement will be used for a practice has been based on (i) the historical
arrangements utilized by medical and dental professionals in that jurisdiction
to contract for management services and (ii) the laws relating to the corporate
practice of dentistry and fee splitting in the state or states in which that
practice operates. The Standard Contract calls for a calculation of the monthly
service fee based on the total revenues earned by the New PCS, which is defined
by the agreement to represent 24% of the total contract value in the initial
month of a patient's treatment with the remainder of the contract balance earned
evenly over the balance of the contract term. From total revenues, the
orthodontists retain 31.5% of the New PC's cash collections. There are
adjustments to the service fee designed to both provide incentives for the
orthodontists to provide efficient patient treatment and to increase the number
of patients treated, as well as to ensure that the orthodontists retain a
minimum amount for payment of their compensation from their respective New PCS
on a monthly basis. The Alternative Contract is currently offered in California.
It is a cost-plus-fee arrangement, whereby the service fee includes the
reimbursement of defined expenses incurred by Apple in the course of providing
services to the New PC plus 13.5% of revenues. The Company believes the fees to
be generated by each of these formulas will be reflective of the fair market
value of the services provided, and will be comparable to the fees earned by
other management service companies in the respective jurisdictions where these
arrangements will exist. In addition, with respect to two of the New PCS, the
service fees are based on flat fees that are subject to adjustment on an annual
basis.

The pro forma service fee for practices that have agreed to the Standard
Contract is based on the accrual basis revenues of the Founding Affiliated
Practices ($17,490,000) less 31.5% of the cash collections of the practices
($5,519,000) appropriately adjusted for various provisions of the service fee
agreement (taken together, a net increase of $926,000). The resulting pro forma
service fee for the year ended December 31, 1996 is $12,897,000.

F-12
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The pro forma service fee for practices that have agreed to the Alternative
Contract represents 13.5% of revenues ($724,000) and reimbursement of the
operating expenses of those practices ($2,935,000). The total pro forma
management service revenues would have been:

Practices participating under the
Standard Contract..................... $ 12,897,000
Practices participating under the
Alternative Contract.................. 3,659,000
Practices participating under flat fee
agreements............................ 1,582,000
--------------
Total pro forma management service
revenues.......................... $ 18,138,000
==============

Apple will be managed on a regional basis. The following information on the
pro forma service fee is provided on a regional basis as supplemental
information.

HISTORICAL
PATIENT PRO FORMA
REGION REVENUES SERVICE FEES
- ---------------------------------------- ----------- -------------
California.............................. $ 5,358,000 $ 3,659,000
Western................................. 10,709,000 7,640,000
East Coast.............................. 5,392,000 4,094,000
Central................................. 3,598,000 2,745,000
----------- -------------
Total.............................. $25,057,000 $ 18,138,000
=========== =============

F-13

<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....... $ 3,321,583 $ 21,254
Restricted cash................. 2,134,002
Receivable from orthodontic
practices, net of allowances of
$34,111 and $0, respectively... 993,269 --
Prepaid expenses................ 200,048 --
Deferred income taxes........... 409,594 --
Other current assets............ 60,859 --
------------- ------------
Total current assets....... 7,119,355 21,254
Property and equipment, net of
accumulated depreciation of
$252,163 and $0, respectively...... 4,817,500 --
Receivable from orthodontic
practices, net of current
portion............................ 1,357,040 --
Deferred issuance costs.............. 22,868 1,395,350
Intangibles assets, net of
accumulated amortization of
$164,135 and $4,510,
respectively....................... 26,714,562 44,687
Other assets......................... 751,447 --
------------- ------------
Total assets............... $ 40,782,772 $ 1,461,291
============= ============

LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term
debt........................... $ 122,157 $ --
Accounts payable and accrued
expenses....................... 3,008,456 1,830,009
Payable to orthodontic
practices...................... 583,266 --
Payable to owners of new
affiliated practices........... 2,712,184 --
Amounts due to venture capital
investors...................... -- 515,000
------------- ------------
Total current
liabilities............ 6,426,063 2,345,009
------------- ------------
Long-term debt, net of current
maturities......................... 9,410,482 --
Deferred income taxes................ 8,805,227 --
Other long-term obligations.......... 9,229 --
------------- ------------
Total liabilities.......... 24,651,001 2,345,009
------------- ------------
Stockholders' equity (deficit)
Class A common stock, $0.001 par
value, 25,000,000 shares
authorized, 7,930,799 and 0
shares issued and
outstanding.................... 7,931 --
Class B common stock, $0.001 par
value, 4,106,852 shares
authorized, 3,347,084 and
3,347,084 shares issued and
outstanding.................... 3,347 3,347
Additional paid-in capital...... 39,808,286 23,422,313
Warrants........................ 777,106 --
Retained deficit................ (24,464,899) (24,309,378)
------------- ------------
Total stockholders' equity
(deficit).............. 16,131,771 (883,718)
------------- ------------
Total liabilities and
stockholders' equity
(deficit).............. $ 40,782,772 $ 1,461,291
============= ============

The accompanying notes are an integral part of these financial statements.

F-14
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Service fee revenues................. $ 9,165,610 $ -- $ 7,479,653 $ --
Costs and expenses:
Salaries and benefits........... 4,543,875 160,566 3,093,490 160,566
Orthodontic supplies............ 1,197,506 -- 997,513 --
Rent............................ 1,213,714 -- 786,418 --
Advertising and marketing....... 153,421 -- 145,716 --
General and administrative...... 1,856,154 9,319 1,241,039 9,319
Depreciation and amortization... 411,788 2,510 341,482 2,510
------------ ------------ ------------- ------------
Total costs and expenses... 9,376,458 172,395 6,605,658 172,395
------------ ------------ ------------- ------------
Operating income (loss).... (210,848) (172,395) 873,995 (172,395)
Interest expense..................... 147,995 -- 141,312 --
Interest income...................... (104,844) -- (91,252) --
Other expense (income), net.......... (3,158) -- (3,102) --
------------ ------------ ------------- ------------
Income (loss) before income
taxes.................... (250,841) (172,395) 827,037 (172,395)
Income tax (benefit)................. (95,320) -- 314,274 --
------------ ------------ ------------- ------------
Net income (loss).......... $ (155,521) $ (172,395) $ 512,763 $ (172,395)
============ ============ ============= ============
Net income (loss) per common and
common equivalent share............ $ (0.02) $ (0.05) $ 0.05 $ (0.05)
============ ============ ============= ============
Number of shares used in calculating
net loss per common and common
equivalent share................... 6,965,078 3,347,084 11,205,045 3,347,084
============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-15
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A AND B TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------------ PAID-IN RETAINED EQUITY
SHARES AMOUNT CAPITAL WARRANTS DEFICIT (DEFICIT)
------------- --------- ------------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996........... 3,347,084 $ 3,347 $ 23,422,313 $ -- $ (24,309,378) $ (883,718)
Issuance of common stock to
public........................ 2,702,500 2,703 12,304,756 -- -- 12,307,459
Transfers of certain assets and
liabilities by founders....... 3,682,554 3,683 476,134 -- 479,817
Special dividend to founders.... -- -- (6,544,424) -- -- (6,544,424)
Issuance of warrant............. -- -- (777,106) 777,106 -- --
Issuance of stock to new
affiliated practices.......... 1,541,459 1,541 10,691,717 -- -- 10,693,258
Issuances of options to non-
employees..................... -- -- 204,899 -- -- 204,899
Net loss........................ -- -- -- -- (155,521) (155,521)
Other........................... 4,286 4 29,997 -- -- 30,001
------------- --------- ------------- ---------- -------------- -------------
BALANCE, September 30, 1997.......... 11,277,883 $ 11,278 $ 39,808,286 $ 777,106 $ (24,464,899) $ 16,131,771
============= ========= ============= ========== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-16
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
1997 1996
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................ $ (155,521) $ (172,395)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............. 411,788 2,510
Deferred income tax
benefit.................. (95,320) --
Provision for doubtful
accounts................. 34,111 --
Changes in assets and
liabilities, excluding effects
of affiliations:
Receivable from orthodontic
practices................ (930,584) --
Prepaid expenses........... (190,061) --
Other assets............... 70,469 --
Payables and other accrued
liabilities.............. (1,183,120) 84,370
------------- -----------
Net cash used in
operating
activities......... (2,038,238) (85,515)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment...................... (2,327,047) --
Payments for new affiliated
practices...................... (3,689,055) --
Payment into escrow for a new
affiliated practice............ (2,134,002) --
Advances to affiliates.......... (1,493,793) --
Repayment of advances by
affiliates..................... 48,985 --
------------- -----------
Net cash used in
investing
activities......... (9,594,912) --
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of
common stock................... 17,623,276 --
Cash paid related to common
stock issuance costs........... (4,951,928) (94,903)
Special dividend to founders.... (6,544,424) --
Proceeds from borrowings........ 11,434,130 180,418
Repayments of borrowings........ (2,627,575) --
------------- -----------
Net cash provided by
financing
activities......... 14,933,479 85,515
------------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 3,300,329 --
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 21,254 --
------------- -----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 3,321,583 $ --
============= ===========

The accompanying notes are an integral part of these financial statements.

F-17
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Apple Orthodontix, Inc. ("Apple" or the "Company") was founded in July
1996 to provide practice management services to orthodontic practices in the
United States and Canada. On May 29, 1997, Apple acquired simultaneously with
the closing of its initial public offering (the "IPO") of its class A common
stock, par value $.001 per share (the "Common Stock"), substantially all of
the tangible and intangible assets, and assumed the liabilities, of 31
orthodontic practices (collectively, the "Founding Affiliated Practices") in
exchange for 3,682,554 shares of Common Stock and $6.5 million in cash. The net
proceeds of the 2,702,500 shares of Common Stock issued in the IPO (after
deducting the underwriting discounts and commissions) were $17.6 million. Total
related offering costs were $5.3 million. The acquisitions of the Founding
Affiliated Practices have been accounted for in accordance with the Securities
and Exchange Commission's Staff Accounting Bulletin No. 48. Accordingly, the
assets acquired and liabilities assumed were recorded at their historical
values.

Apple has subsequently acquired the assets and assumed the liabilities of
additional practices (the "New Orthodontist Affiliations"). The New
Orthodontist Affiliations together with the Founding Affiliated Practices are
collectively referred to as the "Affiliated Practices." The acquisitions of
assets and liabilities of the New Orthodontist Affiliations are accounted for by
allocating the value of the consideration paid by Apple to the assets acquired,
net of liabilities assumed, including intangible assets. As a result of this
allocation process, the Company records a significant portion of the
consideration as a service fee intangible.

The condensed consolidated financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Pursuant to such
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the presentation
and disclosures herein are adequate to make the information not misleading. The
financial statements reflect all elimination entries and normal adjustments that
are necessary for a fair presentation of the results for the interim period
ended September 30, 1997.

Operating results for interim periods are not necessarily indicative of the
results for full years. Operating results for the nine- and three-month periods
ended September 30, 1996 represent results for the period from inception (July
15, 1996) through September 30, 1996. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements of
Apple and management's discussion and analysis related thereto.

2. SIGNIFICANT ACCOUNTING POLICIES

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Equipment under capital leases is
stated at the net present value of the future minimum lease payments at the
inception of the related leases. Depreciation of property and equipment is
calculated using the straight-line method over the estimated useful lives of the
assets. Routine maintenance and repairs are charged to expense as incurred,
while costs of betterment and renewals are capitalized.

INTANGIBLE ASSETS, NET

Intangible assets consist primarily of service fee intangibles which are
amortized over the life of the service agreement (ranging from 20 to 40 years)
with the respective Affiliated Practice. The Company's management periodically
evaluates the realizability of the intangible assets on a practice by practice
basis considering such factors as profitability and net cash flow. Should this
evaluation result in an assessment

F-18
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

that the value of the intangible asset is overstated, an adjustment will be made
in the period that the adjustment is identified. If it is determined that the
estimated remaining service period requires revision, that revision will be made
on a prospective basis.

REVENUE RECOGNITION

The service fees (the "Service Fees") payable to the Company by the
Founding Affiliated Practices under their Service Agreements with the Company
(the "Service Agreements") vary based on the fair market value, as determined
in arm's-length negotiations, for the nature and amount of services provided.
Except with respect to Service Agreements providing for the payment of flat
fees, the Service Fees earned by the Company are in accordance with the
Company's two general types of Service Agreements. The Standard Contract calls
for a calculation of the monthly Service Fee based on the total revenues earned
by the Founding Affiliated Practices, which is defined by the agreement to
represent 24% of the total contract value in the initial month of a patient's
treatment with the remainder of the contract balance earned evenly over the
balance of the contract term. From total revenues, the practices retain a
percentage of the Founding Affiliated Practices' cash collections. There are
adjustments to the service fee designed to both provide incentives for the
orthodontists to provide efficient patient treatment and to increase the number
of patients treated, as well as to ensure that the orthodontists retain a
minimum amount for payment of their compensation from their respective practices
on a monthly basis. The Alternative Contract is used in California. It is a cost
plus fee arrangement, whereby the service fee includes the reimbursement of
defined expenses incurred by Apple in the course of providing services to the
Founding Affiliated Practice plus a percentage of revenues.

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes,"which requires recognition of deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statement carrying amounts and the tax bases of assets and liabilities using
enacted tax rates and laws in effect in the years in which the differences are
expected to reverse. The deferred tax asset at September 30, 1997 related to net
operating losses of the Company for the nine months ended September 30, 1997.

NEW ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." This statement establishes new standards for
computing and presenting earnings per share requiring the presentation of
"basic" and "diluted" earnings per share as compared to "primary" and
"fully diluted" earnings per share. The Company is required to adopt SFAS No.
128 for all fiscal periods ending after December 15, 1997. Earlier adoption is
not permitted and restatement of all prior period earnings per share data is
required.

F-19
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. NEW ORTHODONTIST AFFILIATIONS

During the period from commencement of operations (June 1, 1997) through
September 30, 1997, the Company completed New Orthodontist Affiliations with 12
practices representing 18 orthodontists and 23 office locations. In addition,
four orthodontists joined existing Affiliated Practices.

Total consideration related to the New Orthodontist Affiliations is
summarized as follows:

Cash................................. $ 3,689,055
Deferred payments.................... 2,712,184
Common stock......................... 10,693,258
-------------
Total consideration............. $ 17,094,497
=============

In addition to the above consideration, the Company placed $2.1 million
into an escrow account pending the resolution of certain contingencies related
to one of the New Orthodontist Affiliations closed during the third quarter of
1997. A favorable resolution of these post-closing contingencies would result in
payment of the $2.1 million to the sellers in January 1999. The Company has the
right to post a letter of credit in order to have the $2.1 million refunded from
escrow to the Company prior to January 1999. The Company expects to post the
letter of credit during the fourth quarter of 1997. Upon resolution of these
contingencies beyond a reasonable doubt, the Company will record a liability for
the consideration and allocate the consideration to the assets to be acquired,
primarily intangibles.

The cost of each of the above New Orthodontist Affiliations has been
allocated on the basis of the estimated fair market value of the assets acquired
and liabilities assumed, resulting in service fee intangibles of $26.2 million.
These allocations may be adjusted to the extent that management becomes aware of
additional information within one reporting year of the affiliation date which
results in a material change in the amount of any contingency or changes in the
estimated fair market value of assets acquired and liabilities assumed.

Financial data for the year ended December 31, 1996 or their most recently
completed fiscal year related to the New Orthodontist Affiliations are
summarized as follows:

PATIENT CASH OPERATING
REVENUES COLLECTIONS EXPENSES
---------- ------------ ----------
Practices participating under the
Standard Contract................. $ 4,805,000 $ 4,000,000 $ 3,313,000
Practices participating under the
Alternative Contract.............. 6,882,000 6,757,000 4,160,000
Practices participating under the
flat fee agreements............... 4,612,000 4,612,000 2,592,000
----------- ----------- -----------
$16,299,000 $15,369,000 $10,065,000
=========== =========== ===========

F-20
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. LONG-TERM DEBT

Long-term debt consisted of the following at September 30, 1997 and
December 31, 1996:

SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
Unsecured revolving credit
facility........................... $9,200,000 $ --
Note payable, maturing in June 1999,
with interest at 9.25%............. 135,106 --
Capitalized lease obligations, due in
monthly installments through April
2001, with interest ranging from
11.8% to 24.7%..................... 197,533 --
------------- ------------
9,532,639 --
------------- ------------
Less: current maturities........ 122,157 --
------------- ------------
Long-term debt, net of current
maturities...................... $9,410,482 $ --
============= ============

On July 28, 1997, the Company entered into a three-year, $15.0 million
revolving credit facility with Texas Commerce Bank. Advances under this facility
bear interest, at the Company's option, at prime rate or LIBOR, in each case
plus a margin which is calculated based upon the Company's ratio of indebtedness
to cashflow.

The notes payable relate to debts of the Affiliated Practices that were
assumed by the Company.

5. STOCK OPTION PLAN

As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for awards under its 1997 Stock Compensation Plan under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized for stock options issued with exercise prices greater than or
equal to the fair market value at the date of grant. Had compensation cost for
these plans been determined consistent with SFAS No. 123, the Company's net loss
and loss per share would have been reduced to the following pro forma amounts:

NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1997
------------- -------------
Net income (loss)
As reported..................... $(155,521) $ 512,763
============= =============
Pro forma....................... $(249,336) $ 481,491
============= =============
Income (loss) per share
As reported..................... $ (0.02) $ 0.05
============= =============
Pro forma....................... $ (0.04) $ 0.04
============= =============

6. COMBINED PATIENT DATA

Combined operating data for the Affiliated Practices for the period from
commencement of operations (June 1, 1997) through September 30, 1997 is as
follows:

PATIENT CASH
REVENUES COLLECTIONS
---------- -------------
Practices participating under the
Standard Contract.................... $ 7,806,542 $ 7,058,368
Practices participating under the
Alternative Contract................. 3,412,403 3,093,277
Practices participating under flat
fee agreements....................... 1,552,348 1,552,348
----------- -------------
$12,771,293 $ 11,703,993
=========== =============

F-21
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Combined patient receivables of the Affiliated Practices as of September
30, 1997 is as follows:

Patient receivables.................. $ 3,099,449
Unbilled patient receivables......... 9,897,645
Patient prepayments.................. (3,720,262)
-------------
Patient receivables, net of
prepayments................. $ 9,276,832
=============

7. PRO FORMA SERVICE FEES

The pro forma Service Fees for the Company for the twelve months ended
December 31, 1996, assuming the service agreements with all Affiliated Practices
(including the Founding Affiliated Practices and New Orthodontist Affiliations)
had been consummated as of January 1, 1996, are summarized as follows:

Practices participating under the
Standard Contract.................... $ 16,295,000
Practices participating under the
Alternative Contract................. 8,901,000
Practices participating under flat
fee agreements....................... 5,123,000
-------------
Total pro forma Service
Fees......................... $ 30,319,000
=============

The following information on the pro forma Service Fees for the year ended
December 31, 1996 is provided on a regional basis as supplemental information:

HISTORICAL PRO FORMA
PATIENT SERVICE
REGION REVENUES FEES
- ------------------------------------- ------------ -----------
California........................... $ 6,200,000 $ 4,382,000
Western.............................. 9,174,000 6,735,000
East Coast........................... 5,392,000 4,094,000
Central.............................. 8,403,000 6,143,000
Canada............................... 12,187,000 8,965,000
------------ -----------
$41,356,000 $30,319,000
============ ===========

8. SUBSEQUENT EVENTS

NEW ORTHODONTIST AFFILIATIONS

Since September 30, 1997 through October 24, 1997, eight additional
orthodontists affiliated with the Company. Five of these orthodontists had
established practices, and three agreed to join existing Affiliated Practices.
The additional orthodontists in established practices operate seven locations
and generated historical patient revenue over the prior twelve months of
approximately $2.4 million. Prior patient revenue is not necessarily indicative
of the level of revenue that these practices may be expected to generate in the
future. Historical patient revenue for the Founding Affiliated Practices was
$25.1 million for the twelve months ended December 31, 1996. Total consideration
to these new orthodontists consisted of approximately $1.8 million of common
stock and $901,769 of cash, assumed debt and deferred purchase price.

STOCK OFFERING

On November 20, 1997, the Company filed an amended registration statement
with the SEC for a public offering of 1,926,233 shares (including 251,247 shares
issuable upon exercise of the Underwriter's over-allotment option) of its Common
Stock. Of the total offering, 1,501,247 shares (including the shares subject to
the over-allotment option) are being sold by the Company and 424,986 are being
sold by certain selling stockholders of the Company ("Selling Stockholders").
The number of shares being offered was revised from that announced on October
27, 1997. The net proceeds to the Company from the offering will be used to
repay bank debt, for future affiliations, the development of new offices, future
capital expenditures and general corporate purposes. The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholders.

F-22
<PAGE>
================================================================================
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OF ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

PAGE
-----
Prospectus Summary................... 3
Risk Factors......................... 7
The Company.......................... 13
Recent Developments.................. 13
Use of Proceeds...................... 14
Price Range of Common Stock.......... 14
Dividend Policy...................... 14
Capitalization....................... 15
Selected Financial Data.............. 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 17
Business............................. 21
Management........................... 32
Certain Transactions................. 38
Security Ownership of Certain
Beneficial Owners and Management... 40
Selling Stockholders................. 41
Description of Capital Stock......... 42
Shares Eligible for Future Sale...... 46
Underwriting......................... 49
Legal Matters........................ 50
Experts.............................. 50
Additional Information............... 50
Index to Financial Statements........ F-1

1,674,986 SHARES

[LOGO] APPLE ORTHODONTIXS

COMMON STOCK

------------------------
PROSPECTUS
------------------------

BEAR, STEARNS & CO. INC.

COWEN & COMPANY

EQUITABLE SECURITIES CORPORATION

, 1997

================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses to be paid by the Company
(other than underwriting compensation expected to be incurred) in connection
with the offering described in this Registration Statement. All amounts are
estimates, except the SEC Registration Fee, the NASD Filing Fee and the American
Stock Exchange Additional Listing Fee.

SEC Registration Fee................. $ 15,280
NASD Filing Fee...................... 5,542
American Stock Exchange Additional
Listing Fee.......................... 17,500
Blue Sky Fees and Expenses........... 15,000
Printing Costs....................... 80,000
Legal Fees and Expenses.............. 120,000
Accounting Fees and Expenses......... 450,000
Transfer Agent and Registrar Fees and
Expenses............................. 5,000
Miscellaneous........................ 41,678
----------
Total........................... $ 750,000
==========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

DELAWARE GENERAL CORPORATION LAW

Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgements, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding, if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO
CONTENDERE or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that such person's conduct was unlawful.

Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and

II-1
<PAGE>
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.

Section 145(c) of the DGCL provides that to the extent that a present or
former director or officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.

Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because such person has met the applicable
standard of conduct set forth in subsections (a) and (b). Such determination
shall be made with respect to a person who is a director or officer at the time
of such determination, (1) by the board of directors by a majority vote of the
directors who were not parties to such action, suit or proceeding, even though
less than a quorum, or (2) by a committee of such directors, even though less
than a quorum, or (3) if such a quorum is not obtainable, or, even if
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (4) by the stockholders.

Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as authorized in
Section 145. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon such
terms and conditions, if any, as the operator deems appropriate.

Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in such person's official capacity and as to action in another
capacity while holding such office.

Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the corporation would have the power to indemnify such person against such
liability under the provisions of Section 145.

Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent, and shall inure to the
benefit of the heirs, executors and administrators of such a person.

RESTATED CERTIFICATE OF INCORPORATION

The Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. If the DGCL is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent

II-2
<PAGE>
permitted by the amended DGCL. Further, any repeal or modification of such
provision of the Restated Certificate of Incorporation by the stockholders of
the Company shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Company existing at
the time of such repeal or modification.

BYLAWS

The Bylaws of the Company provide that the Company will indemnify and hold
harmless any director or officer of the Company to the fullest extent permitted
by applicable law, as in effect as of the date of the adoption of the Bylaws or
to such greater extent as applicable law may thereafter permit, from and against
all losses, liabilities, claims, damages, judgments, penalties, fines, amounts
paid in settlement and expenses (including attorneys' fees) whatsoever arising
out of any event or occurrence related to the fact that such person is or was a
director or officer of the Company, and further provide that the Company may,
but is not required to, indemnify and hold harmless any employee or agent of the
Company or a director, officer, employee or agent of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise who
is or was serving in such capacity at the written request of the Company;
provided, however, that the Company is only required to indemnify persons
serving as directors, officers, employees or agents of the Company for the
expenses incurred in a proceeding if such person is a party to and is
successful, on the merits or otherwise, in such proceeding, or if unsuccessful
in the proceeding, but successful as to a matter in such proceeding, the
expenses attributable to such matter; and provided further, that the Company
may, but is not required to, indemnify such persons who are serving as a
director, officer, employee or agent of any other corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise at the written
request of the Company for the expenses incurred in a proceeding if such person
is a party to and is successful, on the merits or otherwise, in such proceeding.
The Bylaws further provide that, in the event of any threatened, or pending
action, suit or proceeding in which any of the persons referred to above is a
party or is involved and that may give rise to a right of indemnification under
the Bylaws, following written request by such person, the Company will promptly
pay to such person amounts to cover expenses reasonably incurred by such person
in such proceeding in advance of its final disposition upon the receipt by the
Company of (i) a written undertaking executed by or on behalf of such person,
providing that such person will repay the advance if it is ultimately determined
that such person is not entitled to be indemnified by the Company as provided in
the Bylaws and (ii) satisfactory evidence as to the amount of such expenses.

UNDERWRITING AGREEMENT

The Underwriting Agreement provides for the indemnification of the
directors and officers of the Company in certain circumstances.

INSURANCE

The Company maintains liability insurance for the benefit of its directors
and officers.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

The following information relates to securities of the Company issued or
sold within the past three years which were not registered under the Securities
Act:

On October 11, 1996, the Company issued 420, 415.5, 52.5, 40, 10, 10, 10, 5
and 5 shares of Common Stock to TriCap Funding I, L.L.C., John G. Vondrak,
D.D.S., W. Daniel Cook, Robert J. Syverson, Roxanne Robertson, Wm. Randol
Womack, D.D.S., Duncan Y. Brown, D.D.S., Wanda Rose and Stephen DeOrlow,
Trustee, respectively, the founders of the Company, for $0.01 per share. On
December 9, 1996, the Company issued 23.5, 24.5, 5 and 2.5 shares of Common
Stock to Michael W. Harlan, LeeAnn Peniche, Orthodontic Investors of Texas II,
Inc. and Allan Benson, respectively, for $3.00 per share. Such issuances were
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof as transactions not involving any public offering.

In April 1997, each outstanding share of Common Stock was reclassified into
4,012.5569 shares of Class B Stock (the "Stock Split"), which was subsequently
readjusted in May 1997 with the net effect of a

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<PAGE>
3,270-for-one split. The Stock Split and adjustment were exempt from the
registration requirements of the Securities Act as they did not involve a
"sale," as defined in Section 2(3) of the Securities Act.

Simultaneously with the completion of its IPO, the Company issued 3,025,621
shares of Common Stock in connection with the acquisitions of the Founding
Affiliated Practices. Such issuances were exempt from the registration
requirements of Section 4(2) thereof as transactions not involving any public
offering.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

EXHIBIT
NUMBER DESCRIPTION
------ -----------
*1.1 -- Form of Underwriting Agreement

*3.1 -- Restated Certificate of Incorporation (Incorporated by reference
from the Company's Registration Statement on Form S-1 (Registration
No. 333-22785)).

*3.2 -- Bylaws (Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-22785)).

*4.1 -- Form of certificate evidencing ownership of Common Stock of Apple
Orthodontix, Inc. (Incorporated by reference from the Company's
Registration Statement on Form S-1 (Registration No. 333-22785)).

*4.2 -- Form of Registration Rights Agreement (Incorporated by reference
from the Company's Registration Statement on Form S-1 (Registration
No. 333-22785)).

*4.3 -- Registration Rights Agreement among Apple Orthodontix, Inc., John
G. Vondrak, D.D.S. and TriCap Funding I, L.L.C. (Incorporated by
reference from the Company's Registration Statement on Form S-1
(Registration No. 333-22785)).

*4.4 -- Registration Rights Agreement between TriCap Partners, L.L.C. and
Apple Orthodontix, Inc. (Incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration No.
333-22785)).

*5.1 -- Opinion of Baker & Botts, L.L.P.

*10.1 -- Revolving Credit Facility with Texas Commerce Bank, National
Association

*10.2 -- Apple Orthodontix, Inc. 1997 Stock Compensation Plan

*10.3 -- Form of Option Agreement

*10.4 -- Employment Agreement between Apple Orthodontix, Inc. and John G.
Vondrak, D.D.S. (Incorporated by reference from the Company's
Registration Statement on Form S-1 (Registration No. 333-22785)).

*10.5 -- Employment Agreement between Apple Orthodontix, Inc. and Robert
J. Syverson (Incorporated by reference from the Company's
Registration Statement on Form S-1 (Registration No. 333-22785)).

*10.6 -- Employment Agreement between Apple Orthodontix, Inc. and Michael
W. Harlan (Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-22785)).

*10.7 -- Employment Agreement between Apple Orthodontix, Inc. and W.
Daniel Cook (Incorporated by reference from the Company's
Registration Statement on Form S-1 (Registration No. 333-22785)).

*10.8 -- Employment Agreement of H. Steven Walton (Incorporated by
reference from the Company's Registration Statement on Form S-1
(Registration No. 333-22785)).

*10.9 -- Amendment to Employment Agreement of H. Steven Walton

*10.10 -- Form of Service Agreement for Founding Affiliated Practices
(Incorporated by reference from the Company's Registration Statement
on Form S-1 (Registration No. 333-22785)).

*10.11 -- Form of Alternative Service Agreement for Founding Affiliated
Practices (Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-22785)).

*10.12 -- Form of Flat Fee Service Agreement for Founding Affiliated
Practices (Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-22785)).

II-4

<PAGE>

*21.1 -- Subsidiaries of the Registrant

+23.1 -- Consent of Arthur Andersen LLP

*23.2 -- Consent of Baker & Botts, L.L.P. (contained in Exhibit 5.1)

*24.1 -- Power of Attorney (contained on the signature page of this
Registration Statement)
- ------------
* Previously filed.

+ Filed herewith.

(b) Financial Statement Schedules.

All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes as follows:

(1) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described in Item 14,
or otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payments
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

(2) That, for the purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.

(3) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-5
<PAGE>
SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
APPLE ORTHODONTIX, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
HOUSTON, STATE OF TEXAS, ON NOVEMBER 20, 1997.

APPLE ORTHODONTIX, INC.

By: /s/ JOHN G. VONDRAK,
D.D.S. JOHN G. VONDRAK, D.D.S.
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER

POWER OF ATTORNEY

EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY APPOINTS MICHAEL W. HARLAN
AND H. STEVEN WALTON AND EACH OF THEM, ANY OF WHOM MAY ACT WITHOUT THE JOINDER
OF THE OTHER, AS HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL
POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND
STEAD, IN ANY AND ALL CAPACITIES TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-
EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY REGISTRATION
STATEMENT FOR THE SAME OFFERING FILED PURSUANT TO RULE 462 UNDER THE SECURITIES
ACT OF 1993, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO AND ALL OTHER
DOCUMENTS IN CONNECTION THEREWITH, WITH THE COMMISSION, GRANTING UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND
EVERY ACT AND THING APPROPRIATE OR NECESSARY TO BE DONE, AS FULLY AND FOR ALL
INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND
CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR THEIR SUBSTITUTE OR
SUBSTITUTES MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON NOVEMBER 20, 1997.

SIGNATURES TITLE
---------- -----
/s/JOHN G. VONDRAK, D.D.S. Chairman of the Board and Chief Executive Officer
JOHN G. VONDRAK, D.D.S. (Principal Executive Officer)

/s/MICHAEL W. HARLAN Vice President and Chief Financial Officer
MICHAEL W. HARLAN (Principal Financial and Accounting Officer)

_________________________ Director
W. DANIEL COOK

/s/WILLIAM W. SHERRILL Director
WILLIAM W. SHERRILL

/s/ROD L. CROSBY, JR. Director
ROD L. CROSBY, JR.

/s/CLYDE C. WADDELL, JR. Director
CLYDE C. WADDELL, JR.

II-6

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report (and to all references to our firm) included in or made a part of
Registration Statement No. 333-38817.

ARTHUR ANDERSEN LLP
November 20, 1997