As filed with the Securities and Exchange Commission on July 9, 1997
Registration No. 333-27179
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
OMEGA ORTHODONTICS, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 8741 95-4596853
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
3621 Silver Spur Lane
Acton, California 93510
(805) 269-2841
(805) 269-2854 (fax)
(Address and Telephone Number
of Principal Executive Offices)
ROBERT J. SCHULHOF
Omega Orthodontics, Inc.
3621 Silver Spur Lane
Acton, California 93510
(805) 269-2841
(805) 269-2854 (fax)
(Name, Address and Telephone Number
of Agent for Service)
----------------
Copies to:
DAVID A. GARBUS, ESQUIRE LAWRENCE B. FISHER, ESQUIRE
Robinson & Cole LLP Orrick, Herrington & Sutcliffe LLP
One Boston Place 666 Fifth Avenue
Boston, Massachusetts 02108 New York, NY 10103
(617) 557-5900 (212) 506-5000
(617) 557-5999 (fax) (212) 506-5151 (fax)
----------------
Approximate Date of Proposed Sale to the Public: As soon as practicable
after the effective date of this Registration Statement.
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. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum Maximum
Title of Each Class of Amount to Be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered (1) Per Security (2) Price (2) Registration Fee
- -------------------------------------------- ---------------- ------------------ -------------------- --------------------
<S> <C> <C> <C> <C>
Units comprised of Common Stock, $.01 par
value per share, and Reedemable Common
Stock Purchase Warrants, each exercisable
for one share of Common Stock (3) ...... 2,070,000 $ 6.10 $12,627,000 $ 3,826.37
Common Stock, $.01 par value per share (4) 2,070,000 $ -- $ -- $ 0
Redeemable Common Stock Purchase
Warrants (5) 2,070,000 $ -- $ -- $ 0
Common Stock, par value $.01 per share,
issuable on exercise of Redeemable Common
Stock Purchase Warrants 2,070,000 $ 6.60 $13,662,000 $ 4,140.00
Representative's Warrants (6) 180,000 $0.0001 $ 18 $ --
Common Stock, par value $.01 per share,
issuable upon exercise of Representative's
Warrants 180,000 $ 7.20 $ 1,296,000 $ 392.73
Redeemable Common Stock Purchase Warrants
issuable upon exercise of Representative's
Warrants 180,000 $ 0.12 $ 21,600 $ 6.55
Common Stock, par value $.01 per share,
issuable upon exercise of Redeemable
Common Stock Purchase Warrants issuable
upon exercise of Representative's Warrants 180,000 $ 6.60 $ 1,188,000 $ 360.00
- ------------------------------------------- ---------- -------- ------------ ---------------
Totals $28,794,618 $ 8,725.65(7)
</TABLE>
(1) Pursuant to Rule 416, there are also being registered such additional
securities as may become issuable pursuant to the antidilution provisions
of the Redeemable Common Stock Purchase Warrants (the "Warrants"), the
Representative's Warrants and the Warrants underlying the Representative's
Warrants.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a).
(3) Includes 270,000 units which the Underwriters have the option to purchase
to cover over-allotments, if any.
(4) Includes 270,000 shares of Common Stock which the Underwriters have the
option to purchase to cover over-allotments, if any.
(5) Includes 270,000 Warrants which the Underwriters have the option to
purchase to cover over-allotments, if any.
(6) In connection with the Registrant's sale of the Securities offered hereby,
the Registrant is granting to the Representative warrants (the
"Representative's Warrants") to purchase 180,000 shares of Common Stock
and/or 180,000 Warrants.
(7) Previously paid.
---------------
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 Section 8(a), may
determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION--DATED JULY 9, 1997
PROSPECTUS
OMEGA ORTHODONTICS, Inc.
1,800,000 Shares of Common Stock and
1,800,000 Redeemable Common Stock Purchase Warrants
This Prospectus relates to the offering (the "Offering") of 1,800,000
shares (the "Shares") of common stock, $.01 par value per share (the "Common
Stock"), and 1,800,000 Redeemable Common Stock Purchase Warrants (the
"Warrants") of Omega Orthodontics, Inc., a Delaware corporation (the
"Company"). The Shares and Warrants are sometimes hereinafter collectively
referred to as the "Securities." Until the completion of this Offering, the
Shares and the Warrants may only be purchased together on the basis of one
Share and one Warrant, but will be transferable separately immediately
following completion of this Offering. Each Warrant entitles the registered
holder thereof to purchase one share of Common Stock at an initial exercise
price of $ per share [110% of the initial public offering price per
share of Common Stock], at any time during the period commencing ,
1997 [six months after the date of this Prospectus] and terminating ,
2002 [five (5) years from the date of this Prospectus.] The Warrant exercise
price is subject to adjustment under certain circumstances. Commencing
, 1998 [eighteen (18) months after the date of this Prospectus], the
Company may redeem the Warrants, in whole but not in part, at $.10 per Warrant
on thirty (30) days' prior written notice to the warrantholders, provided that
the average closing bid price of the Common Stock as reported on the Nasdaq
Small Cap market (the "Nasdaq Small Cap Market") equals or exceeds $
per share [200% of the initial public offering price per share of the Common
Stock] for any twenty (20) trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. See "Description Securities."
Prior to this Offering, there has been no public market for the Common
Stock or the Warrants, and there can be no assurance that such a market will
develop after the completion of this Offering or, if developed, that it will be
sustained. It is currently anticipated that the initial public offering prices
of the Common Stock and the Warrants will be $6.00 per share and $.10 per
Warrant, respectively. For information regarding the factors considered in
determining the initial public offering prices of the Securities and the terms
of the Warrants, see "Risk Factors" and "Underwriting." Application has been
made to include the Shares and the Warrants for quotation on the Nasdaq Small
Cap Market and for listing on the Boston Stock Exchange (the "BSE") under the
symbols "ORTH" and "ORTHW," respectively, on the Nasdaq Small Cap Market, and
"OMA" and "OMAW," respectively, on the BSE.
----------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 7 AND
"DILUTION."
----------------
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>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
---------- -------------- ------------
<S> <C> <C> <C>
Per Share ......... $ $ $
- -------------------- -- -- --
Per Warrant ...... $ $ $
- -------------------- -- -- --
Total (3) ......... $ $ $
</TABLE>
(1) Does not include additional compensation payable to National Securities
Corporation, the representative (the "Representative") of the several
underwriters (the "Underwriters"), in the form of a non-accountable
expense allowance. In addition, see "Underwriting" for information
concerning indemnification and contribution arrangements with the
Underwriters and other compensation payable to the Representative.
(2) Before deducting estimated expenses of $ payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters an option, exercisable within
45 days after the date of this Prospectus, to purchase up to an aggregate
of 270,000 additional shares of Common Stock and/or 270,000 additional
Warrants upon the same terms and conditions as set forth above, solely to
cover over-allotments, if any (the "Over-allotment Option"). If such
Over-allotment Option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
The Securities are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of the Securities offered hereby will be made against payment at the
offices of National Securities Corporation, Seattle, Washington on or about
, 1997.
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is , 1997
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.
<PAGE>
--------------------------
The Company intends to furnish its security holders with annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports for the first three fiscal quarters of
each fiscal year containing unaudited interim financial information.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS, INCLUDING PURCHASES OF THE COMMON STOCK AND/OR WARRANTS TO STABILIZE
THEIR RESPECTIVE MARKET PRICES, PURCHASES OF THE COMMON STOCK AND/ OR WARRANTS
TO COVER SOME OR ALL OF A SHORT POSITION MAINTAINED BY THE UNDERWRITERS IN THE
COMMON STOCK AND/OR WARRANTS, RESPECTIVELY, AND THE IMPOSITION OF PENALTY BIDS.
FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
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. Upon consummation of this Offering, Omega
Orthodontics, Inc. will acquire (the "Acquisitions") the equity interests in
the management services organizations that hold certain assets of and are
associated with seven orthodontic practices (except in the case of two sole
proprietorships where it will acquire certain assets of such proprietorships)
(such practices are referred to collectively as the "Initial Orthodontic
Affiliates" and such management services organizations are referred to
collectively as the "Initial MSOs"). Unless otherwise indicated, all references
herein to "Omega" shall mean Omega Orthodontics, Inc. prior to the consummation
of the Acquisitions, and references herein to the "Company" shall mean Omega
after consummation of the Acquisitions. Except as otherwise indicated, the
information in this Prospectus assumes that (i) the Over-allotment Option is
not exercised and (ii) the Warrants and the warrants to purchase 180,000 shares
of Common Stock and/or 180,000 Warrants issued to the Representative in
connection with this Offering (the "Representative's Warrants") are not
exercised. See "Underwriting."
This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in those forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
The Company
The Company provides management and marketing services to orthodontic
practices in the United States. Since its inception in August 1996, Omega has
provided these services on a fee for services basis to nine orthodontic
practices, including four of the Initial Orthodontic Affiliates. Following this
Offering, the Company intends to offer its services primarily under an
affiliate relationship whereby it purchases the equity interests in the
management services organization (individually, an "MSO" and collectively with
the Initial MSOs, the "MSOs") that holds certain assets of and is associated
with an orthodontic practice and enters into a long term management services
agreement (the "Management Services Agreement") with the practice
(individually, an "Orthodontic Affiliate" and collectively with the Initial
Orthodontic Affiliates, the "Orthodontic Affiliates") of the selling
orthodontist (the "Affiliated Orthodontist"). The Company has signed
affiliation agreements (each, an "Affiliation Agreement") with the seven
Initial Orthodontic Affiliates.
Upon consummation of the Acquisitions, the Company will enter into
Management Services Agreements with the Initial Orthodontic Affiliates.
Pursuant to these Management Services Agreements, the Company will provide
facilities, support staff and supplies to the Initial Orthodontic Affiliates
and will institute a program of systems, methods and procedures the Company
refers to as the Omega Exceptional Practice Model (the "Model"). The Model is
designed to increase the Orthodontic Affiliate's profitability by focusing on
and improving customer service while simultaneously reducing costs and
increasing operating efficiency.
Omega seeks to affiliate with established orthodontic practices that Omega
believes have the potential for significant growth utilizing the Model. Omega
considers financial and operational factors that include the practice's gross
income, cost structure, existing treatment contracts, fee schedules, referral
rates and sources, health maintenance organization relationships, case starts,
appointments per day and average treatment times. Omega also evaluates
demographic factors that include the practice's location with respect to the
average income levels and concentrations of families with children in the area.
Omega believes that the annual market for orthodontic treatment and
services is approximately $3.6 billion. Based on U.S. census data that
indicates that the number of children between the ages of five and 19 will
increase by approximately 10.4 million by the year 2000, the Company expects
that the growth in this population group will result in increased demand for
orthodontic services. The orthodontic marketplace is highly fragmented and
consists of approximately 9,000 practicing orthodontists, a significant
majority of whom are sole practitioners. Omega believes that many orthodontists
in practice today have excess patient capacity and lack the training and
resources in management and marketing techniques to fill that capacity
effectively. It is Omega's belief that less than two percent of the orthodontic
practices in the United States are presently managed by independent,
professional management services organizations and that an opportunity exists
for the Company to market and sell its services to the orthodontic practices
that are not currently managed by such organizations.
3
<PAGE>
The Company's strategy is to (i) enter into Affiliation Agreements and
Management Services Agreements with established orthodontic practices that meet
the Company's criteria and (ii) achieve operating efficiencies and increased
profitability at each such practice through the implementation of the Model.
The Model is designed to permit the practice to meet or exceed patient
expectations by (a) offering flexible payment plans, (b) scheduling convenient
appointment times, (c) ensuring that treatment is delivered on time, (d)
updating patients and their referring dentists regularly on treatment programs
and (e) training staff to anticipate and address patient needs.
The Company will focus its initial marketing efforts on the practices of
the approximately 4,500 orthodontists over the age of 47 who the Company
believes are planning their transition to retirement. The Company believes it
can generally place a higher value on a mature practice than other potential
buyers, many of whom are recent orthodontic graduates. The Company believes
that this higher valuation, combined with consideration in the form of a
combination of cash, notes and the Company's Common Stock and the opportunity
to delegate managerial and marketing responsibilities to an experienced
management team, generally makes the Company an attractive alternative for
orthodontists planning their transition to retirement. The Company will also
target younger orthodontists who may want to merge their practices with the
practice of an orthodontist in transition or take over such a practice.
The Offering
<TABLE>
<S> <C>
Securities Offered ............... 1,800,000 shares of Common Stock and 1,800,000 Warrants. The Shares and
the Warrants will be separately transferable immediately following
completion of this Offering. See "Description of Securities."
Terms of Warrants .................. Each Warrant entitles the registered holder thereof to purchase, at any time
commencing , 1997 [six (6) months after the date of this Prospectus]
until , 2002 [five (5) years after the date of this Prospectus], one
share of Common Stock at an initial exercise price of $ per share [110%
of the initial public offering price per share of Common Stock], subject to
adjustment. Commencing , 1998 [eighteen (18) months after the
date of this Prospectus], the Warrants are subject to redemption by the
Company, in whole but not in part, at $.10 per Warrant on thirty (30) days'
prior written notice to the warrantholders, provided that the average closing
bid price of the Common Stock as reported on the Nasdaq Small Cap Market equals
or exceeds $ per share [200% of the initial public offering price], subject to
adjustment, for any twenty (20) trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. See "Description of Securities--Warrants."
Common Stock Outstanding
Prior to the Offering(1)(2) ...... 1,685,000 shares of Common Stock
Securities to Be Outstanding
after the Offering (1) ............ 3,804,055 shares of Common Stock and 1,800,000 Warrants
Use of Proceeds .................. To repay the promissory notes issued in connection with Omega's bridge
financing (the "Bridge Notes") and its interim financing (the "Interim
Notes"); to finance in part the Acquisitions; to finance in part future
affiliations with additional Orthodontic Affiliates; to develop or acquire
certain software for use by the Orthodontic Affiliates; and for working
capital and other general corporate purposes. See "Use of Proceeds."
Risk Factors ..................... An investment in the shares of the Common Stock and the Warrants offered
hereby involves a high degree of risk and immediate and substantial dilution
and should be considered only by persons who can afford the loss of their
entire investment. See "Risk Factors" and "Dilution."
Proposed Nasdaq Small Cap Market
Symbols:
Common Stock ..................... "ORTH"
Warrants ........................ "ORTHW"
Proposed BSE Symbols:
Common Stock ..................... "OMA"
Warrants ........................ "OMAW"
</TABLE>
4
<PAGE>
- ----------------
(1) Does not include (i) 100,000 shares of Common Stock reserved for issuance
pursuant to grants that may be made under the Company's Incentive Stock
Plan (the "Stock Option Plan"), (ii) 350,000 shares of Common Stock in the
aggregate reserved for issuance upon exercise of options granted to two
officers and an affiliate of a third officer of the Company under the
Stock Option Plan at an exercise price equal to the initial public
offering price of the Common Stock and (iii) 83,333 shares of Common Stock
(assuming an initial public offering price per share of $6.00) reserved
for issuance upon exercise of an option to be granted upon consummation of
the Acquisitions to an Affiliated Orthodontist at an exercise price equal
to the initial public offering price of the Common Stock. See
"Management--Incentive Stock Plan."
(2) Does not include an aggregate of 319,055 shares of Common Stock (assuming
an initial public offering price per share of $6.00) which the Company has
agreed to issue to six Affiliated Orthodontists as partial consideration
for the Acquisitions (including 55,595 shares to be issued as partial
consideration for acquiring certain assets of the practice of one of the
directors of the Company). See "Certain Transactions."
Summary Financial Data
The following summary financial data should be read in conjunction with
the financial statements and pro forma financial statements of the Company and
related notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Pro Forma (1)
August 30, 1996 Pro Forma (1) Three Months Three Months
(Inception) to Year Ended Ended Ended
December 31, 1996 December 31, 1996 March 31, 1997 March 31, 1997
------------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Practice revenue ........................ $ -- $ 4,615,677 $ -- $ 1,069,305
Orthodontists' compensation ............ -- 1,281,735 -- 293,596
---------- -------------- ---------- -------------
Net management revenue .................. -- 3,333,942 -- 775,709
Direct practice expenses ............... -- 2,588,761 -- 672,707
---------- -------------- ---------- -------------
Income (loss) from operations before
management expenses .................. -- 745,181 -- 103,002
Management expenses ..................... 248,018 652,170 (2) 217,555 163,946(2)
---------- -------------- ---------- -------------
Income (loss) from operations ......... (248,018) 93,011 (217,555) (60,944)
Other income (expense) .................. 15,906 (12,206) (6,692) (5,306)
---------- -------------- ---------- -------------
Income (loss) before income taxes ...... (232,112) 80,805 (224,247) (66,250)
Provision (benefit) for income taxes ..... -- 68,097 -- --
---------- -------------- ---------- -------------
Net income (loss) ..................... $ (232,112) $ 12,708 $ (224,247) $ (66,250)
========== ============== ========== =============
Pro forma net income (loss) per
share (3) .............................. $ .01 $ (.03)
============== =============
Shares used to compute pro forma
net income (loss) per share (3) ...... 2,158,222 2,158,222
</TABLE>
<TABLE>
<CAPTION>
March 31, 1997
----------------------------------------------------------
Pro Forma
Actual Pro Forma (1) As Adjusted (1) (4)
----------------- --------------- --------------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) ......... $ (1,099,014) $(3,694,212) $ 4,688,388
Total assets ........................ 745,356 7,309,707 12,655,510
Total liabilities .................. 1,190,025 6,681,386 3,644,589
Stockholders' equity (deficit) ...... (444,669) 628,321 9,010,921
</TABLE>
- ----------------
(1) The pro forma statement of operations data for the fiscal year ended
December 31, 1996 and the three months ended March 31, 1997 is presented
as if the Acquisitions had occurred on January 1, 1996. The pro forma
balance sheet data is presented as if the Acquisitions had occurred on
March 31, 1997 and certain subsequent events had occurred prior to March
31, 1997. See Note 5 to the Unaudited Pro Forma Balance Sheet Adjustments.
5
<PAGE>
(2) Includes $123,460 and $31,768 of goodwill amortization for the year ended
December 31, 1996 and the three months ended March 31, 1997, respectively.
See Note 6 to the Unaudited Pro Forma Statement of Operations Adjustments.
(3) See Note 12 to the Unaudited Pro Forma Statement of Operations Adjustments.
(4) Adjusted to give effect to the sale of the Securities offered hereby (at
the assumed initial public offering price of $6.00 per Share and $.10 per
Warrant) and the initial application of the net proceeds therefrom. See
"Use of Proceeds."
6
<PAGE>
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk. In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Securities offered hereby. Prospective
investors should be in a position to risk the loss of their entire investment.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.
No Significant Operating History; Early Stage Company; History of Losses;
No Assurance of Profitability. Omega was incorporated in August 1996 and has no
significant operating history upon which prospective investors can judge its
performance and prospects. Omega is at an early stage and is subject to all of
the business risks associated with a new enterprise, including constraints on
its financial and personnel resources, lack of established business
relationships and uncertainties regarding affiliations and future revenues.
Omega has generated limited revenues to date, and will not generate any
meaningful revenues until after it consummates a significant number of
affiliations with orthodontic practices. At March 31, 1997, Omega had an
accumulated deficit of $456,359, a stockholders' deficit of $444,669 and a
working capital deficiency of $1,099,014. For the period from August 30, 1996
(inception) through May 31, 1997, Omega generated aggregate consulting revenues
of $81,386. The Company anticipates that it will incur operating losses in the
six month period ending June 30, 1997 in connection with a non-recurring charge
for compensation paid to certain consultants and may incur operating losses for
the foreseeable future thereafter. See "Certain Transactions." There can be no
assurances as to whether the Company will ever be profitable. See "--Expected
Operating Loss in Six Month Period Ending June 30, 1997" and "Management's Plan
of Operation."
Expected Operating Loss in Six Month Period Ending June 30, 1997. The
Company expects to show a significant loss from operations for the six month
period ending June 30, 1997 due primarily to compensation paid to two
consultants. On April 28, 1997, each of Dr. Glovsky, the Chairman of the Board
of the Company, and The Mayflower Group, Ltd., a private banking firm
headquartered in Boston, Massachusetts ("Mayflower," and together with Dr.
Glovsky, the "Consultants"), received 225,000 shares of Common Stock for
consulting services to Omega and will receive approximately $421,000 of cash
payments over three years beginning in January 1998. See "Certain
Transactions." No officer or director of the Company is affiliated with
Mayflower. The Company will recognize a non-recurring compensation expense
reflecting delivery of such shares and these payment obligations in April 1997
of approximately $2.2 million. This expense is comprised of approximately $1.4
million attributable to the Common Stock and an aggregate of approximately
$842,000 attributable to the payment obligation. See "Management's Plan of
Operation--Plan of Operation."
Going Concern Report. Omega's independent auditors have stated in their
report on Omega's financial statements as of December 31, 1996 that Omega's
accumulated deficit and working capital deficiency raise substantial doubt
about Omega's ability to continue as a going concern. See "Management's Plan of
Operation" and "Financial Statements."
Risks Associated with Expansion. Omega has signed Affiliation Agreements
with the seven Initial Orthodontic Affiliates and expects to consummate the
Acquisitions concurrently with the closing of this Offering. At the end of the
12 months following this Offering, the Company intends to manage approximately
31 Orthodontic Affiliates. The success of the Company's expansion strategy will
depend on a number of factors, including (i) the Company's ability to attract
orthodontists to affiliate with the Company, the availability of suitable
markets and the Company's ability to obtain good locations within those
markets; (ii) the Company's ability to locate existing practices for
affiliation, affiliate with such practices on favorable terms and successfully
integrate the affiliated operations into the Company's existing operations;
(iii) the availability of adequate financing to affiliate with orthodontic
practices; and (iv) regulatory constraints. A shortage of available
orthodontists with the skills and experience required by the Company would have
a material adverse effect on the Company's expansion plans. 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 or that the
Company will be able to manage effectively and enhance the profitability of its
Orthodontic Affiliates. See "Business--Business Strategy."
Possible Need for Additional Financing. The Company's expansion strategy
will require substantial capital resources. Although the Company believes that
the net proceeds of this Offering, together with cash from operations, will be
sufficient to satisfy its cash requirements for at least 12 months following
the date of this Prospectus, there
7
<PAGE>
can be no assurance that additional funds will not be needed. The Company
expects that its capital needs over the next several years will substantially
exceed capital generated from operations and the net proceeds of this Offering.
To finance its future capital needs, the Company plans to issue, from time to
time, additional debt or equity securities, including notes and Common Stock in
connection with its planned affiliations. There can be no assurance that the
Company will be able to raise additional funds when needed on satisfactory
terms to the Company or at all. If additional funds are raised through the
issuance of equity securities, dilution to the Company's stockholders may
result, and if additional funds are raised through the incurrence of debt, the
Company likely would become subject to financial covenants and restrictions on
its operations and finances. If adequate financing is not available when needed
or on terms acceptable to the Company, the Company's expansion strategy may be
materially adversely affected. See "Management's Plan of Operation."
Additional Debt to Finance Affiliations. In connection with the
Acquisitions, the Company expects to issue five year, 8.5% notes aggregating
approximately $800,700 to five Affiliated Orthodontists. During the 12 months
following the consummation of the Acquisitions, the Company intends to
affiliate with and manage an additional 24 Orthodontic Affiliates. In
connection with such additional affiliations, the Company expects that it may
issue notes aggregating approximately $4.8 million to new Affiliated
Orthodontists. The Company believes that it will be able to issue these notes
on substantially similar terms to the terms of the notes to be issued in
connection with the Acquisitions. There can be no assurance, however, that the
Company will be able to issue notes in connection with future affiliations in
amounts and on terms acceptable to the Company. If the Company is unable to
issue notes in connection with future affiliations in amounts and on terms
acceptable to the Company, the Company's expansion strategy may be materially
adversely affected. See "Management's Plan of Operation."
Dependence on Orthodontic Affiliates. The Company will receive fees for
management services provided to Orthodontic Affiliates under Management
Services Agreements, but will not employ orthodontists or control the practices
of its Orthodontic Affiliates. The Company's revenue is dependent on revenue
generated by the Company's Orthodontic Affiliates and, therefore, the
performance and professional reputation of Affiliated Orthodontists (those
orthodontists who practice through the Orthodontic Affiliates) and Orthodontic
Affiliates are essential to the Company's success. The Management Services
Agreements with the Orthodontic Affiliates are for terms of 20 years and are
renewable at the election of the Company for two additional 10 year periods.
The Management Services Agreements may only be terminated by either party for
"cause," which includes a material default by or bankruptcy of the other party.
Any material loss of revenue by the Orthodontic Affiliates would have a
material adverse effect on the Company. See "Business--Agreements with
Affiliated Orthodontists."
Portion of Offering Proceeds Benefiting Management. Net proceeds to the
Company from the sale of the Securities offered hereby will be used to (a)
repay $30,000, $50,000 and $25,000 of the Company's Bridge Notes held by Dr.
Glovsky, the Chairman of the Board of the Company, Dr. Bellavia, a director of
the Company, and Dr. Grove, a director of the Company, respectively, (b) repay
$25,000 and $25,000 of the Company's Interim Notes held by Dr. Glovsky and Dr.
Grove, respectively, and (c) pay approximately $333,600 to Dr. Grove, as
partial consideration for acquiring certain assets of his practice in
connection with the Acquisitions. The Company is authorized to issue up to an
additional $100,000 of Interim Notes, and purchasers of such additional Interim
Notes (if any are issued prior to the closing of this Offering) may include Dr.
Glovsky and one or more other persons or entities affiliated with the Company.
See "Use of Proceeds" and "Certain Transactions."
Discretion in Use of Proceeds. Approximately 63.8% of the estimated net
proceeds of this Offering have been allocated to future affiliations,
development or acquisition of software for use by Orthodontic Affiliates and
working capital and general corporate purposes. Accordingly, management will
have broad discretion as to the specific application of a significant portion
of the net proceeds. See "Use of Proceeds."
Composition of Board of Directors; Potential Conflicts of Interest. The
Board of Directors of the Company is composed of six members, five of whom have
some additional relationship to the Company. Mr. Schulhof is a party to an
employment agreement pursuant to which he serves as the President and Chief
Executive Officer of the Company and is also the sole manager and principal
point holder of OMEGA, LLC, the Company's principal stockholder. Dr. Bellavia
is also a party to an employment agreement with the Company, is a point holder
of OMEGA, LLC, is the holder of $50,000 of Bridge Notes and operates his own
orthodontic management consulting firm. Mr. Elliott is also a party to an
employment agreement with the Company, a point holder of OMEGA, LLC and the
president of a consulting firm serving the orthodontic industry. Dr. Glovsky,
the Chairman of the Board of Directors, is a consultant to the Company, is a
point holder of OMEGA, LLC and is the holder of $30,000 of
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Bridge Notes and $25,000 of Interim Notes. Dr. Grove is a party to an
Affiliation Agreement with the Company and, upon consummation of the
Acquisitions, will be the sole stockholder of one of the Initial Orthodontic
Affiliates. He is also a point holder of OMEGA, LLC and is the holder of
$25,000 of Bridge Notes and $25,000 of Interim Notes. See
"Management--Employment Agreements," "Management--Consultants," "Certain
Transactions" and "Principal Stockholders." To the extent that one of the
directors is also an employee of or consultant to the Company, a holder of the
Company's Bridge Notes or Interim Notes or an equity holder of OMEGA, LLC, the
Company's principal stockholder, such director may have personal interests in
certain matters affecting the Company which may conflict with the Company's
interests.
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, seasonal fluctuations in the demand for orthodontic services and
future economic, competitive and market conditions. Accordingly, quarterly
comparisons of the Company's revenues and operating results should not be
relied upon 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.
Risk of Providing Orthodontic Services; Adequacy of Insurance. The
Orthodontic Affiliates provide orthodontic services to the public and are
exposed to the risk of professional liability and other claims. The Company
does not control the practice of orthodontics by its Orthodontic Affiliates or
the compliance with regulatory and other requirements directly applicable to
the orthodontists and their practices. The Company might nevertheless be held
liable for negligence on their part.
The Management Services Agreements will require the Orthodontic Affiliates
to maintain, at their expense, professional liability insurance for themselves
and each orthodontist employed by or otherwise providing orthodontic services
for the Orthodontic Affiliate in the minimum amount of $500,000 per occurrence
and $1,000,000 in the aggregate. In addition, each Orthodontic Affiliate will
undertake to comply with all applicable regulations and requirements, and the
Company will be indemnified under the Management Services Agreements for claims
against the Company arising in connection with actions by the Orthodontic
Affiliates. The Company has applied for general liability insurance for itself
and will require that it be named as an additional insured party on the
professional liability insurance policies of the Orthodontic Affiliates
pursuant to the Management Services Agreement. The Company does not maintain
professional liability insurance for itself.
There can be no assurance that the Company, its employees, the Orthodontic
Affiliates or the licensed orthodontists employed by or associated with the
Orthodontic Affiliate will not be subject to claims in amounts that exceed the
coverage limits or that such coverage will be available when needed. Further,
there can be no assurance that professional liability or other insurance will
continue to be available to the Orthodontic Affiliates in the future at
adequate levels or at an acceptable cost. A successful claim against the
Company or an Orthodontic Affiliate in excess of the relevant insurance
coverage could have a material adverse effect upon the Company. Claims against
the Company, regardless of the merits or eventual outcomes, may also have a
material adverse effect on the Company.
Government Regulation. Federal and state laws extensively regulate the
relationships among providers of health care services, physicians and other
clinicians. These laws include federal fraud and abuse provisions that prohibit
the solicitation, receipt, payment, or offering of any direct or indirect
remuneration for the referral of patients for which reimbursement is made under
any federal or state funded health care program or for the recommending,
leasing, arranging, ordering or providing of services covered by such programs.
States have similar laws that apply to patients covered by private and
government programs. Federal fraud and abuse laws also impose restrictions on
physicians' referrals for designated health services covered under a federal or
state funded health care program to entities with which they have financial
relationships. Various states have adopted similar laws that cover patients in
private programs as well as government programs. There can be no assurance that
the federal and state governments will not consider additional prohibitions on
physician ownership, directly or indirectly, of facilities to which they refer
patients, which could adversely affect the Company. Violations of these laws
may result in substantial civil or criminal penalties for individuals or
entities, including large civil money penalties and exclusion from
participation in federal or state health care programs. See
"Business--Government Regulation."
Moreover, the laws of many states prohibit physicians from sharing
professional fees, or "splitting fees," with anyone other than a member of the
same profession. These laws and their interpretations vary from state to state
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and are enforced by the courts and by regulatory authorities with broad
discretion. Expansion of the operations of the Company to certain jurisdictions
may require structural and organizational modifications of the Company's form
of relationship with Orthodontic Affiliates, which could have an adverse effect
on the Company. Although the Company believes its operations as currently
expected to be conducted are in material compliance with existing applicable
laws, there can be no assurance that review of the Company's business by courts
or regulatory authorities will not result in a determination that could
adversely affect the operations of the Company or that the health care
regulatory environment will not change so as to restrict the Company's existing
operations or its expansion.
State Laws Regarding Prohibition of Corporate Practice of Orthodontics.
The Orthodontic Affiliates are expected to be formed as professional
corporations owned by one or more orthodontists licensed to practice dentistry
under applicable state law in states that prohibit the corporate practice of
dentistry. Corporations such as the Company are not permitted under certain
state laws to practice dentistry or exercise control over the dental judgments
or decisions of practitioners. Corporate practice of dentistry laws and their
interpretations vary from state to state and are enforced by the courts and by
regulatory authorities with broad discretion. The Company anticipates that it
will perform only non-orthodontic administrative services, will not represent
to the public that it offers orthodontic services and will not exercise
influence or control over the practice of orthodontics by the practitioners
with whom it contracts. Expansion of the operations of the Company to certain
jurisdictions may require structural and organizational modifications of the
Company's form of relationship with Orthodontic Affiliates in order to comply
with the dental practice laws, which could have an adverse effect on the
Company. Although the Company believes its operations as currently expected to
be conducted will be in material compliance with existing applicable laws,
there can be no assurance that the Company's structure will not be challenged
as constituting the unlicensed practice of dentistry or that the enforceability
of the agreements underlying this structure will not be limited. If such a
challenge were made successfully in any state, the Company could be subject to
civil and criminal penalties under such state's laws and could be required to
restructure its contractual arrangements in that state. Such results or the
inability to restructure its contractual arrangements could have a material
adverse effect upon the Company.
Dependence on Key Personnel. The success of the Company is dependent upon
the continued services of the Company's senior management, particularly upon
its Chief Executive Officer and President, Mr. Robert J. Schulhof, and its
Director of Affiliate Programs, Dr. Dean C. Bellavia. Both Mr. Schulhof and Dr.
Bellavia have entered into three year employment agreements with the Company,
but there can be no assurance that either of them will continue in the employ
of the Company for the full term of his employment agreement. The Company has
obtained a "key-man" life insurance policy on the life of Mr. Schulhof
providing benefits to the Company of $1 million upon the death of Mr. Schulhof.
The loss of the services of Mr. Schulhof or Dr. Bellavia, or the inability to
attract other qualified employees, could have a material adverse effect on the
Company. See "Management--Employment Agreements."
Competition. The business of providing orthodontic services is highly
competitive in each market in which the Company intends to operate. Each of the
Orthodontic Affiliates faces competition from other orthodontists or general
dentists in the communities served, many of whom may have more established
practices in the market or greater financial and other resources than the
Orthodontic Affiliate. At this time, the Company believes there are several
other companies actively involved in consolidating and managing orthodontic
practices throughout the United States. These companies have greater financial,
marketing and other resources than the Company. In addition, there are
companies pursuing similar strategies with respect to dental specialties,
including orthodontics, and additional companies with similar objectives may
enter the Company's markets and compete with the Company. Many of the Company's
competitors may have substantially greater financial and other resources than
the Company. There can no be assurance that the Company will be able to compete
effectively. See "Business--Competition."
Changes in Regulation of the Delivery of and Payment for Health Care
Services. Although Congress failed to pass comprehensive health care reform
legislation in 1996, the Company anticipates that Congress and state
legislatures will continue to review and assess alternative health care
delivery and payment systems and may in the future propose and adopt
legislation effecting fundamental changes in the health care delivery system.
The Company cannot predict the ultimate timing, scope or effect of any
legislation concerning health care reform. Any proposed federal legislation, if
adopted, could result in significant changes in the availability, delivery,
pricing and payment for health care services and products. Various states
agencies also have undertaken or are considering significant health care reform
initiatives. Although it is not possible to predict whether any health care
reform legislation will be adopted or, if adopted, the exact manner and the
extent to which the Company will be affected,
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it is likely that the Company will be affected in some fashion, and there can
be no assurance that any health care reform legislature, if and when adopted,
will not have a material adverse effect on the Company.
Dependence on Third Party Reimbursement. A significant portion of the
revenue of the Orthodontic Affiliates on which the Company's revenue will
depend comes from commercial dental insurance and preferred provider plans.
These providers and programs are regulated at the state or federal level. There
are increasing and significant public sector pressures to contain health care
costs and to restrict reimbursement rates for dental services. Changes in the
level of support by federal and state governments of health care services, the
methods by which such services may be delivered, and the prices of such
services may all have a material impact on revenue of the Orthodontic
Affiliates, which in turn could have a material adverse effect on the Company.
Control by Officers and Directors. Upon consummation of this Offering,
directors and executive officers of the Company will own beneficially in the
aggregate approximately 35.8% of the outstanding shares of Common Stock.
Accordingly, the Company's executive officers and directors will have the
ability to elect a majority of the Company's directors and otherwise control
the Company. In addition, the Company has only one director who is not
otherwise employed by, a consultant to or an Affiliated Orthodontist of the
Company. See "Principal Stockholders" and "Management."
Immediate Substantial Dilution; Disparity of Consideration. The purchasers
of the shares of Common Stock in this Offering will experience immediate and
substantial dilution in the net tangible book value of the shares of Common
Stock from the initial public offering price in the amount of $5.12 per share,
or approximately 85% per share. Additional dilution to future net tangible book
value per share may occur upon the exercise of the Warrants, the
Representative's Warrants and options that are outstanding or to be issued
under the Company's Incentive Stock Plan. The current stockholders of Omega,
including the directors and persons or entities affiliated with them, acquired
their shares of Common Stock for nominal consideration. As a result, new
investors will bear substantially all of the risks inherent in an investment in
the Company. See "Capitalization," "Dilution" and "Certain Transactions."
Absence of Dividends. Omega has never declared or paid dividends on its
Common Stock and does not anticipate paying any dividends in the foreseeable
future. The Company expects that future earnings, if any, will be retained for
the growth and development of the Company's business and, accordingly, the
Company does not anticipate that any dividends will be declared or paid on the
Common Stock for the foreseeable future. See "Dividend Policy."
Certain Anti-takeover Provisions; Preferred Stock. Certain provisions of
the Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), and By-Laws and Delaware law could have the effect of delaying
or preventing a change in the control of the Company, even if a change in
control were in the stockholders' interest. The Company's Certificate of
Incorporation allows the Board to determine the terms of the preferred stock
which may be issued by the Company without approval of the holders of the
Common Stock. Such preferred stock could have voting and conversion rights that
adversely affect the voting power of the holders of Common Stock, or could
result in one or more classes of outstanding securities that would have
dividend, liquidation or other rights superior to those of the Common Stock.
Issuance of such preferred stock may have an adverse effect on the then
prevailing market price of the Common Stock and Warrants and could enable the
Board to prevent changes in the management and control of the Company.
Additionally, the Company is subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law which prohibits the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. Section 203 could have the effect of delaying or
preventing a change of control of the Company. See "Description of
Securities--Anti-takeover Provisions."
Shares Eligible for Future Sale. Of the 3,804,055 shares of Common Stock
and 1,800,000 Warrants to be outstanding upon completion of this Offering, the
1,800,000 shares of Common Stock and the 1,800,000 Warrants (2,070,000 shares
of Common Stock and 2,070,000 Warrants if the Over-allotment Option is
exercised in full) will be immediately freely tradeable without restriction
under the Securities Act of 1933, as amended (the "Securities Act"), except for
any securities purchased by an "affiliate" of the Company (as that term is
defined in the Securities Act), which securities will be subject to the resale
limitations of Rule 144 under the Securities Act. All of the remaining
2,004,055 shares of Common Stock outstanding are "restricted securities," as
that term is defined in
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Rule 144 under the Securities Act and may, under certain circumstances, be sold
without registration under the Securities Act. The sale, or availability for
sale, of substantial amounts of Common Stock in the public market subsequent to
this Offering pursuant to Rule 144 or otherwise could materially adversely
affect the market price of the Common Stock and could impair the Company's
ability to raise additional capital through the sale of its equity securities
or debt financing.
Notwithstanding the foregoing, each officer and director of Omega and all
current holders of the shares of Common Stock and options to acquire shares of
Common Stock have agreed not to, directly or indirectly, offer, sell, transfer,
pledge, assign, hypothecate or otherwise encumber or dispose of any of the
Company's securities, whether or not presently owned, for a period of 24 months
after the date of this Prospectus without the prior written consent of the
Company and the Representative. After such 24 month period, all 2,004,055 of
such shares of Common Stock may be sold in accordance with Rule 144.
No Prior Public Market for the Securities; Arbitrary Determination of
Offering Price; Price Volatility. Prior to this Offering, there has been no
public market for the Securities, and there can be no assurance that an active
trading market for any of the Securities will develop or, if developed, be
sustained after the Offering. See "Underwriting." The initial public offering
prices of the Securities and the exercise price and terms of the Warrants have
been determined arbitrarily by negotiations between Omega and the
Representative. Factors considered in such negotiations, in addition to
prevailing market conditions, included the history of and prospects for the
industry in which Omega competes, an assessment of Omega's management, the
prospects of the Company, its capital structure and the market for initial
public offerings. Therefore, the public offering prices of the Securities and
the exercise prices and terms of the Warrants do not necessarily bear any
relationship to Omega's assets, book value, results of operations or any other
established valuation criteria and may not be indicative of prices that may
prevail at any time or from time to time in the public market for the
Securities. See "Underwriting." Omega did not consider the price assigned to
shares of its Common Stock issued in connection with the Bridge Notes as
relevant to the negotiation of the initial public offering prices of the
Securities. The Bridge Notes were issued at face value and the accompanying
shares of Common Stock were included for no additional consideration in order
to attract purchasers of the Bridge Notes. 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. In addition,
the market prices of the common stock of many publicly traded health care
companies have in the past been, and can in the future be expected to be,
especially volatile. Announcements of regulatory developments on both the
federal and state level and economic and other external factors, as well as
period-to-period fluctuations in the Company's financial results, may have a
significant impact on the market prices of the Securities.
Potential Adverse Effect of Representative's Warrants. At the consummation
of the Offering, the Company will sell to the Representative and/or its
designees, for nominal consideration, warrants to purchase up to 180,000 shares
of Common Stock and/or 180,000 Warrants (the "Representative's Warrants"). The
Representative's Warrants will be exercisable for a period of four years
commencing one year after the effective date of this Offering, at an exercise
price of $ per share [120% of the public offering price of the Common
Stock] and $ per Warrant [120% of the public offering price of the
Warrants]. The Warrants obtained upon exercise of the Representative's Warrants
will be exercisable for a period of four years commencing one year after the
effective date of this Offering, at an exercise price of $ per share [110%
of the initial public offering price of the Common Stock]. For the term of the
Representative's Warrants, the holders thereof will have, at nominal cost, the
opportunity to profit from a rise in the market price of the Securities without
assuming the risk of ownership, with a resulting dilution in the interest of
other security holders. As long as the Representative's Warrants remain
unexercised, the Company's ability to obtain additional capital might be
adversely affected. Moreover, the Representative may be expected to exercise
the Representative's Warrants at a time when the Company would, in all
likelihood, be able to obtain any needed capital through a new offering of its
securities on terms more favorable than those provided by the Representative's
Warrants. See "Underwriting."
Speculative Nature of the Warrants. The Warrants do not confer any rights
of Common Stock ownership on their holders, such as voting rights or the right
to receive dividends, but rather merely represent the right to acquire shares
of Common Stock at a fixed price for a limited period of time. Specifically,
commencing , 1997 [six months after the date of this Prospectus],
holders of the Warrants may exercise their right to acquire Common Stock and
pay an exercise price of $ per share [110% of the initial public offering
price per share of Common Stock], subject to adjustment upon the occurrence of
certain dilutive events, until , 2002 [five years after the date of this
Prospectus], after which date any unexercised Warrants will expire and have no
further value.
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Moreover, following the completion of this Offering, the market value of the
Warrants will be uncertain and there can be no assurance that the market value
of the Warrants will equal or exceed their initial public offering price. There
can be no assurance that the market price of the Common Stock will ever equal
or exceed the exercise price of the Warrants and, consequently, whether it will
ever be profitable for holders of the Warrants to exercise the Warrants.
Potential Adverse Effect of Redemption of Warrants. Commencing ,
1998 [18 months after the date of this Prospectus], the Warrants are subject to
redemption by the Company at $0.10 per Warrant on thirty days' prior written
notice to the warrantholders if the average closing bid price of the Common
Stock as reported on Nasdaq equals or exceeds $ per share [200% of the
initial public offering price of the Common Stock] of Common Stock for any 20
trading days within a period of thirty (30) consecutive trading days ending on
the fifth trading day prior to the date of the notice of redemption. If the
Warrants are redeemed, holders of the Warrants will lose their rights to
exercise the Warrants after the expiration of the 30-day notice of redemption
period. Upon receipt of a notice of redemption, holders would be required to:
(i) exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so, (ii) sell the Warrants at the current market
price, if any, when they might otherwise wish to hold the Warrants or (iii)
accept the redemption price which is likely to be substantially less than the
market value of the Warrants at the time of redemption. See "Description of
Securities--Warrants."
Potential Adverse Effect of Substantial Shares of Common Stock Reserved.
The Company has reserved a total of 2,693,333 shares of Common Stock for
issuance as follows: (i) 1,800,000 shares for issuance upon exercise of the
1,800,000 Warrants; (ii) 180,000 shares for issuance upon exercise of the
Representative's Warrants; (iii) 180,000 shares for issuance upon exercise of
the Warrants issuable upon exercise of the Representative's Warrants; (iv)
83,333 shares (assuming an initial public offering price per share of $6.00)
for issuance upon exercise of options to be granted upon consummation of the
Acquisitions to an Affiliated Orthodontist; (v) 350,000 shares in the aggregate
for issuance upon exercise of options granted to two officers and one affiliate
of a third officer of the Company pursuant to the Stock Option Plan; and (vi)
100,000 shares for issuance pursuant to grants that may be made under the Stock
Option Plan. The existence of the Warrants, the Representative's Warrants and
any other options or warrants may adversely affect the Company's ability to
consummate future equity financings. Further, the holders of such warrants and
options may exercise them at a time when the Company would otherwise be able to
obtain additional equity capital on terms more favorable to the Company. See
"Shares Eligible for Future Sale."
Legal Restrictions on Sales of Shares Underlying the Warrants. The
Warrants are not exercisable unless, at the time of the exercise, the Company
has a current prospectus covering the shares of Common Stock issuable upon
exercise of the Warrants, and such shares have been registered, qualified or
deemed to be exempt under the securities laws of the state of residence of the
exercising holder of the Warrants. Although the Company has agreed to use its
best efforts to keep a registration statement covering the shares of Common
Stock issuable upon the exercise of the Warrants effective for the term of the
Warrants, if it fails to do so for any reason, the Warrants may be deprived of
value.
The Shares and Warrants are separately transferable immediately upon
issuance. Purchasers may buy Warrants in the aftermarket in, or may move to,
jurisdictions in which the shares underlying the Warrants are not so registered
or qualified during the period that the Warrants are exercisable. In this
event, the Company would be unable to issue shares to those persons desiring to
exercise their Warrants, and holders of Warrants would have no choice but to
attempt to sell the Warrants in a jurisdiction where such sale is permissible
or allow them to expire unexercised. See "Description of Securities."
Limitations on Liability and Indemnification Matters. As permitted by the
Delaware General Corporation Law, the Company has included in its Certificate
of Incorporation a provision to eliminate the personal liability of its
directors for monetary damages for breach or alleged breach of their fiduciary
duties as directors, except in connection with the breach of the duty of
loyalty, for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, for dividend payments or stock
repurchases illegal under Delaware law or for any transaction in which a
director has derived an improper personal benefit. In addition, the By-Laws of
the Company provide that the Company is required to indemnify its officers and
directors under certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary and the Company is required to
advance expenses to its officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. See "Description of
Securities--Limitations on Liability of Officers and Directors."
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Representative's Potential Influence on the Market and the Company. A
significant amount of the Securities offered hereby may be sold to customers of
the Representative. Such customers subsequently may engage in transactions for
the sale or purchase of such Securities through or with the Representative. If
it participates in the market, as a market maker or otherwise, the
Representative may exert a dominating influence on the market, if one develops,
for the Securities described in this Prospectus. Such market making activity may
be discontinued at any time. The price and liquidity of the Common Stock and the
Warrants may be significantly affected by the degree, if any, of the
Representative's participation in such market. In addition, the Representative
may have a continuing influence on the Company through exercise of the
Representative's Warrants and its right to designate for election one person to
the Company's Board of Directors for a period of five (5) years from the
effective date. See "Underwriting."
No Assurance of Nasdaq Small Cap Market Listing; Risk of Low-Priced
Securities; Risk of Application of Penny Stock Rules. The Board of Governors of
the National Association of Securities Dealers, Inc. has established certain
standards for the initial listing and continued listing of a security on the
Nasdaq Small Cap Market. The standards for initial listing require, among other
things, that an issuer have total assets of $4,000,000 and capital and surplus
of at least $2,000,000; that the minimum bid price for the listed securities be
$3.00 per share; that the minimum market value of the public float (the shares
held by non-insiders) be at least $2,000,000; and that there be at least two
market makers for the issuer's securities. The maintenance standards require,
among other things, that an issuer have total assets of at least $2,000,000 and
capital and surplus of at least $1,000,000; that the minimum bid price for the
listed securities be $1.00 per share; that the minimum market value of the
"public float" be at least $1,000,000; and that there be at least two market
makers for the issuer's securities. A deficiency in either the market value of
the public float or the bid price maintenance standard will be deemed to exist
if the issuer fails the individual stated requirement for ten consecutive
trading days. If an issuer falls below the bid price maintenance standard, it
may remain on the Nasdaq Small Cap Market if the market value of the public
float is at least $1,000,000 and the issuer has $2,000,000 in equity. The
Nasdaq Small Cap Market has recently proposed new maintenance criteria which,
if implemented, would eliminate the exception to the $1.00 per share minimum
bid price and require, among other things, $2,000,000 net tangible assets,
$1,000,000 market value of the public float and adherence to certain corporate
governance provisions There can be no assurance that the Company will continue
to satisfy the requirements for maintaining a Nasdaq Small Cap Market listing.
If the Company's securities were to be excluded from the Nasdaq Small Cap
Market, it would adversely affect the prices of such securities and the ability
of holders to sell them, and the Company would be required to comply with the
initial listing requirements to be relisted on the Nasdaq Small Cap Market.
If the Company is unable to satisfy maintenance requirements and the price
per share were to drop below $5.00, then unless the Company satisfied certain
net asset tests, the Company's securities would become subject to certain penny
stock rules promulgated by the Securities and Exchange Commission (the
"Commission"). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the Commission that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction and monthly account statements showing
the market value of each penny stock held in the customer's account. In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from such rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to
the penny stock. If the Common Stock becomes subject to the penny stock rules,
investors in the Offering may find it more difficult to sell their shares.
Risks Associated with Forward-Looking Statements Included in this
Prospectus. This Prospectus contains certain forward-looking statements,
including, without limitation, the unaudited pro forma financial statements of
Omega, regarding the plans and objectives of management for future operations
including plans and objectives relating to the development of the Orthodontic
Affiliates. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based on a successful execution of the Company's expansion
strategy and assumptions that the Orthodontic Affiliates will be profitable,
that the orthodontic industry will not change materially or adversely, and that
there will be no unanticipated material adverse change in the Company's
operations or business. Assumptions relating
14
<PAGE>
to the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that its
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, particularly in view of the
Company's early stage of operations, the inclusion of such information should
not be regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
15
<PAGE>
THE COMPANY
Omega was incorporated in Delaware in August 1996. It was founded by
Robert J. Schulhof, the President and Chief Executive Officer of Omega, Dr.
Glovsky and Dr. Bellavia. Mr. Schulhof and Dr. Bellavia were the founders of
The Orthodontic Management Effectiveness Group of America, LLC ("OMEGA, LLC"),
a California-based orthodontic practice management and consulting firm. Omega
subsequently acquired OMEGA, LLC's orthodontic practice management business and
certain related assets in exchange for 1,050,000 shares of Omega's Common
Stock. See "Certain Transactions." OMEGA, LLC continues to provide certain
computer hardware and software consulting services to orthodontic practices,
including certain of the Initial Orthodontic Affiliates.
The Company's principal executive offices are located at 3621 Silver Spur
Lane, Acton, California 93510, and its telephone number is (805) 269-2841.
USE OF PROCEEDS
The net proceeds to the Company from the sale of Securities offered
hereby, after deduction of underwriting discounts and other estimated offering
expenses are estimated to be approximately $8,382,600 (approximately $9,815,490
if the Over-allotment Option is exercised in full). The Company intends to
utilize such net proceeds as follows:
<TABLE>
<CAPTION>
Approximate Approximate
Dollar Amount (1) Percentage
------------------- ------------
<S> <C> <C>
Repayment of the Bridge Notes and the Interim Notes (2) ...... $925,000 11.0%
Payments due upon consummation of the Acquisitions (3) ...... 2,111,800 25.2
Funds available for additional affiliations (4) ............... 5,000,000 59.7
Development or acquisition of software for use by Orthodontic
Affiliates (5) ............................................. 200,000 2.4
Working capital and general corporate purposes (6) ............ 145,800 1.7
----------- -------
TOTAL ...................................................... $8,382,600 100.0%
=========== =======
</TABLE>
- ----------------
(1) The amount set forth with respect to each purpose represents the Company's
current estimate of the approximate amount of the net proceeds that will
be used for such purpose. The Company reserves the right, however, to
change the amount of such net proceeds that will be used for any purpose
to the extent that management determines that such change is advisable.
Consequently, management of the Company will have broad discretion in
determining the manner in which the net proceeds of this Offering are
applied.
(2) The Bridge Notes are in the aggregate principal amount of $875,000, bear
interest at the rate of 15% per annum and are payable upon the earlier of
the closing of this Offering or September 30, 1997. The net proceeds from
the sale of the Bridge Notes were used for working capital and general
corporate purposes and to pay that portion of the accounting, legal and
printing expenses of this Offering due and payable prior to the
effectiveness of the Registration Statement. A portion of the net proceeds
from the sale of the Bridge Notes in the amount of $25,452 was paid to
Leonard, Mulherin & Greene, P.C. ("LMG"), a public accounting firm that
provides accounting services to Omega pursuant to a consulting agreement.
See "Management's Plan of Operation--Liquidity and Capital Resources" and
"Management--Consultants." Dr. Glovsky, Dr. Bellavia and Dr. Grove, each a
director of the Company, will receive an aggregate of $105,000 in payment
of the Bridge Notes that they purchased from the Company. See "Certain
Transactions."
In June 1997, the Omega Board of Directors authorized the issuance of up to
$150,000 of Interim Notes to finance, in part, Omega's operations pending
closing of this Offering. As of the date of this Prospectus, Interim Notes
in the aggregate principal amount of $50,000 have been issued to Dr.
Glovsky and Dr. Grove. See "Certain Transactions." The Interim Notes bear
interest at the rate of 16% per annum and are payable upon the earlier of
the closing of this Offering or June 30, 1998. Dr. Glovsky and Dr. Grove
will receive an aggregate of $50,000 in payment of the Interim Notes that
they purchased from the Company. The Company is authorized to issue up to
an additional $100,000 of Interim Notes, and purchasers of such additional
Interim Notes (if any are issued prior to the closing of this Offering) may
include Dr. Glovsky and one or more other persons or entities affiliated
with the Company.
(3) The Company plans to consummate the Acquisitions concurrently with the
closing of this Offering. In connection with the Acquisitions, the Company
will acquire the equity interests in the Initial MSOs associated with the
seven Initial Orthodontic Affiliates (except in the case of one sole
proprietorship where it will acquire
16
<PAGE>
certain assets of such proprietorship). The costs of the Acquisitions will
be paid through a combination of (i) cash aggregating approximately
$2,111,800, (ii) five year 8.5% notes aggregating approximately $800,700,
(iii) 319,055 shares of Common Stock of the Company (assuming an initial
public offering price per share of $6.00) and (iv) an option to acquire
83,333 shares of Common Stock (assuming an initial public offering price
per share of $6.00) at an exercise price equal to the initial public
offering price per share. See "Management's Plan of Operation." Dr. Grove,
one of the Company's directors, has agreed to sell substantially all of the
assets of his practice (which will include leasehold improvements,
fixtures, furniture, furnishings, equipment, inventory, supplies and
intangibles) to the Company concurrently with the closing of this Offering
and, in partial consideration therefor, will receive approximately $333,600
of the net proceeds of this Offering, a five year 8.5% note in the amount
of approximately $333,600 and 55,595 shares of Common Stock of the Company
(assuming an initial public offering price per share of $6.00). See
"Certain Transactions."
(4) The Company plans to enter into Affiliation Agreements and Management
Service Agreements with up to an additional 24 Orthodontic Affiliates
during the 12 months following the closing of this Offering. Pursuant to
the Affiliation Agreement, the Affiliated Orthodontist will typically
convert his existing professional corporation into a general corporation
that will function as the MSO and create a new professional corporation
(the Orthodontic Affiliate) through which the Affiliated Orthodontist will
continue to provide orthodontic care. The MSO will retain certain assets
and liabilities which will typically include the lease for the Orthodontic
Affiliate's office space, clinical supplies and equipment and office
furniture, supplies and equipment. The Orthodontic Affiliate will retain
certain other assets and liabilities (if any) which will typically include
all cash and cash equivalents, real property, automobiles, patient
records, related patient information and notes payable unrelated to assets
purchased. The Company will generally acquire all of the equity interests
of the MSO from the Affiliated Orthodontist, the purchase price for which
is determined through an assessment of immediate and future return on
investment. The MSO typically is acquired for a combination of cash, five
year notes and unregistered Common Stock or stock options. The average MSO
purchase price is expected to be approximately $600,000, of which the cash
portion is expected to be approximately $200,000. See "Management's Plan
of Operation."
(5) The Company plans to develop or acquire certain software for use by
Orthodontic Affiliates in implementing the Model and estimates that
development or acquisition costs will be approximately $200,000.
(6) The remaining portion of the net proceeds will be allocated to working
capital and will be used by the Company to fund operations as required,
including amounts required to pay non-affiliated consultant and
professional fees, office-related expenses and other corporate expenses,
including the leasing of office space in Massachusetts where the Company
intends to locate its financial operations and staff. See "Management's
Plan of Operation--Plan of Operation" and "Business--Facilities." The
additional net proceeds received from the exercise of the Over-allotment
Option, if any, will be used for working capital and general corporate
purposes.
The Company anticipates, based on current plans and assumptions relating
to its operations, that the net proceeds of this Offering, together with net
cash from operations, should be sufficient to satisfy the Company's cash
requirements for at least the 12 months after the date of this Prospectus. The
Company's future liquidity and capital funding requirements will depend on
numerous factors, including the availability of orthodontic practices meeting
the Company's affiliation criteria, the extent to which the Orthodontic
Affiliates gain market acceptance, marketing activities and competition. There
can be no assurance that additional capital, if needed, will be available on
terms acceptable to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to stockholders, and debt financing, if available,
will likely include restrictive covenants and provide for security interests in
the Company's assets. The failure of the Company to raise capital on acceptable
terms when needed could have a material adverse effect on the Company. The
Company is obligated to pay each of the Consultants $421,000 over a period of
three years beginning in January 1998. The Company believes that it will have
sufficient cash flow from its operations to pay such amounts, however, there
can be no assurance that the Company's cash flow will be sufficient to pay such
amounts. If its cash flow is insufficient to pay such amounts, the Company will
have to seek alternative financing sources which are not now available. See
"Risk Factors--Possible Need for Additional Financing" and "Risk Factors--Risks
Associated with Expansion." Pending the aforementioned uses, the net proceeds
of this Offering will be invested in interest-bearing government securities or
short-term, investment grade securities.
17
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid dividends on its Common Stock. The
Company expects that future earnings, if any, will be retained for the growth
and development of the Company's business and, accordingly, the Company does
not anticipate that any dividends will be declared or paid on the Common Stock
for the foreseeable future. The declaration, payment and amount of future
dividends, if any, will depend upon the future earnings, results of operations,
financial position and capital requirements of the Company, among other
factors.
CAPITALIZATION
The following table sets forth as of March 31, 1997 the capitalization of
the Company (i) on an actual basis, (ii) on a pro forma basis to reflect (a)
the issuance of 10,000 shares of Common Stock as compensation for past services
to LMG, (b) the issuance of Bridge Notes in the aggregate principal amount of
$280,000, and 56,000 shares of Common Stock issued in connection therewith,
since March 31, 1997, (c) the issuance of Interim Notes in the aggregate
principal amount of $50,000 since March 31, 1997, (d) a non-recurring
compensation expense of approximately $2.2 million paid to two consultants,
which expense is comprised of approximately $1.4 million attributable to the
release of 450,000 shares of Common Stock and an aggregate of approximately
$842,000 in cash payments to be paid over three years beginning in January 1998
and (e) the assumed consummation of the Acquisitions and (iii) on a pro forma
as adjusted basis to give effect to the transactions described in clause (ii)
and the sale of the 1,800,000 shares of Common Stock and the 1,800,000 Warrants
offered hereby and the initial application of the net proceeds therefrom. See
"Management's Plan of Operation -- Plan of Operation" and
"Management--Consultants." This table should be read in conjunction with
"Management's Plan of Operation" and the financial statements and pro forma
financial statements and the notes thereto which are included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
March 31, 1997
----------------------------------------------------------
Actual Pro Forma Pro Forma As Adjusted
-------------- ---------------- ----------------------
<S> <C> <C> <C>
Bridge Notes and Interim Notes ............... $ 595,000 $ 925,000 $ --
========== ============= =============
Notes payable ................................. -- $ 877,218 $ 877,218
Due to related party ........................... -- 842,000 842,000
Stockholders' equity:
Common Stock, $.01 par value per share;
10,000,000 shares authorized; 1,619,000 shares
outstanding; 2,004,055 shares outstanding, pro
forma; 3,804,055 shares outstanding, pro forma,
as adjusted (1) .............................. 16,190 20,041 38,041
Additional paid-in capital .................. -- 3,256,639 11,621,239
Accumulated deficit ........................ (456,359) (2,648,359) (2,648,359)
Deferred compensation ........................ 4,500 -- --
---------- ------------- -------------
Total stockholders' equity (deficit) ......... (444,669) 628,321 9,010,921
---------- ------------- -------------
Total capitalization ........................ $ (444,669) $ 2,347,539 $ 10,730,139
========== ============= =============
</TABLE>
- ----------------
(1) Does not include (i) 100,000 shares of Common Stock reserved for issuance
pursuant to grants that may be made under the Stock Option Plan, (ii)
350,000 shares of Common Stock in the aggregate reserved for issuance upon
exercise of options granted to two officers and an affiliate of a third
officer of the Company under the Stock Option Plan at an exercise price
equal to the initial public offering price of the Common Stock and (iii)
83,333 shares of Common Stock (assuming an initial public offering price
per share of $6.00) reserved for issuance upon exercise of an option to be
granted upon consummation of the Acquisitions to an Affiliated
Orthodontist at an exercise price equal to the initial public offering
price of the Common Stock. See "Management--Incentive Stock Plan."
18
<PAGE>
DILUTION
At March 31, 1997, after giving effect to (a) the issuance of 10,000
shares of Common Stock as compensation for past services to LMG, (b) the
issuance of Bridge Notes in the aggregate principal amount of $280,000, and
56,000 shares of Common Stock issued in connection therewith, since March 31,
1997, (c) the issuance of Interim Notes in the aggregate principal amount of
$50,000 since March 31, 1997, (d) a non-recurring compensation expense of
approximately $2.2 million paid to two consultants, which expense is comprised
of approximately $1.4 million attributable to the release of 450,000 shares of
Common Stock and an aggregate of approximately $842,000 in cash payments to be
paid over three years beginning in January 1998 and (e) the assumed
consummation of the Acquisitions, the pro forma negative net tangible book
value of the Company was ($5,042,722), or $(2.52) per share. "Pro forma net
tangible book value per share" is determined by dividing the Company's pro
forma net tangible book value (total pro forma tangible assets less total pro
forma liabilities) by the pro forma number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of the Securities
offered hereby and the initial application of the net proceeds therefrom, the
adjusted pro forma net tangible book value of the Company at March 31, 1997
would have been $3,339,878, or $.88 per share. This represents an immediate
increase in pro forma net tangible book value of $3.40 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$5.12 per share (or approximately 85%) to new investors purchasing the shares
of Common Stock in this Offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price ............................................. $6.00
Pro forma negative net tangible book value prior to this Offering ...... $(2.52)
Increase attributable to new investors ........................... 3.40
--------
Pro forma net tangible book value after this Offering ........................ .88
-------
Dilution in pro forma net tangible book value to new investors ............... $5.12
=======
</TABLE>
In the event the Over-allotment Option is exercised in full, the pro forma
net tangible book value as of March 31, 1997 would be $4,772,768, or $1.17 per
share of Common Stock, which would result in immediate dilution in net tangible
book value to new investors of approximately $4.83 per share.
The following table sets forth, at March 31, 1997, after giving pro forma
effect to the issuance of shares to the Affiliated Orthodontists as partial
consideration for the consummation of the Acquisitions at the assumed initial
public offering price of the Common Stock, the total consideration paid and the
average price paid per share of Common Stock by existing stockholders, new
investors in this Offering and the Affiliated Orthodontists:
<TABLE>
<CAPTION>
Shares Issued Total Consideration
----------------------- ------------------------- Average
Price Per
Number Percent Amount Percent Share
----------- --------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1) (2) ...... 1,685,000 44.3% $ 1,362,350 9.7% $ .81
New investors ..................... 1,800,000 47.3% 10,800,000 76.7% $ 6.00(3)
Affiliated Orthodontists ............ 319,055 8.4% 1,914,330 13.6% $ 6.00
---------- ----- ------------ ----- ----------
Total (1) ........................... 3,804,055 100% $14,076,680 100%
========== ===== ============ =====
</TABLE>
- ----------------
(1) Does not include (i) 350,000 shares issuable upon exercise of outstanding
options under the Stock Option Plan and 100,000 shares reserved and
available for grants under the Stock Option Plan; and (ii) 83,333 shares
(assuming an initial public offering prior per share of $6.00) reserved
for issuance upon exercise of an option to be granted upon consummation of
the Acquisitions to an Affiliated Orthodontist. See "Management --
Incentive Stock Plan."
(2) Includes 10,000 shares issued as compensation for past services to LMG,
56,000 shares issued in connection with $280,000 aggregate principal
amount of Bridge Notes issued subsequent to March 31, 1997 and the value
attributed to 450,000 shares released to Dr. Glovsky, the Chairman of the
Board of the Company, and Mayflower, a private banking firm, in connection
with consulting services rendered. See "Management's Plan of
Operation--Plan of Operation."
(3) Attributes no value to the Warrants.
19
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data, both actual and
pro forma, of the Company. The selected financial data in the table are derived
from the financial statements and pro forma financial statements of Omega and
the Initial Orthodontic Affiliates. The selected financial data set forth below
are qualified in their entirety by, and should be read in conjunction with,
"Management's Plan of Operation" and the financial statements and pro forma
financial statements, related notes, and other financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Pro Forma (1)
August 30, 1996 Pro Forma (1) Three Months Three Months
(Inception) to Year Ended Percentage Ended Ended Percentage
December 31, December 31, of Practice March 31, March 31, of Practice
1996 1996 Revenue 1997 1997 Revenue
----------------- ------------------ ------------- -------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Practice revenue ......... $ -- $ 4,615,677 100.0% $ -- $ 1,069,305 100.0%
Orthodontists'
compensation ............ -- 1,281,735 27.8 -- 293,596 27.5
---------- ------------- ------ ---------- ------------- ---------
Net management revenue . -- 3,333,942 72.2 -- 775,709 72.5
Direct practice expenses . -- 2,588,761 56.1 -- 672,707 62.9
---------- ------------- ------ ---------- ------------- ---------
Income (loss) from
operations before
management expenses . -- 745,181 16.1 -- 103,002 9.6
Management expenses ...... 248,018 652,170(2) 14.1 217,555 163,946(2) 15.3
---------- ------------- ------ ---------- ------------- ---------
Income (loss) from
operations ............... (248,018) 93,011 2.0% (217,555) (60,944) (5.7)%
====== =========
Other income (expense) ... 15,906 (12,206) (6,692) (5,306)
---------- ------------- ---------- -------------
Income (loss) before
income taxes ............ (232,112) 80,805 (224,247) (66,250)
Provision (benefit) for
income taxes ............ -- 68,097 -- --
---------- ------------- ---------- -------------
Net income (loss) ......... $ (232,112) $ 12,708 $ (224,247) $ (66,250)
========== ============= ========== =============
Pro forma net income
(loss) per share (3) ...... $ .01 $ (.03)
============= =============
Shares used to compute
pro forma net income
(loss) per share (3) ...... 2,158,222 2,158,222
</TABLE>
<TABLE>
<CAPTION>
March 31, 1997
----------------------------------------------------------
Pro Forma
Actual Pro Forma (1) As Adjusted (1) (4)
----------------- --------------- --------------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) ......... $ (1,099,014) $(3,694,212) $ 4,688,388
Total assets ........................ 745,356 7,309,707 12,655,510
Total liabilities .................. 1,190,025 6,681,386 3,644,589
Stockholders equity (deficit) ...... (444,669) 628,321 9,010,921
</TABLE>
- ----------------
(1) The pro forma statement of operations data for the fiscal year ended
December 31, 1996 and the three months ended March 31, 1997 is presented
as if the Acquisitions had occurred on January 1, 1996. The pro forma
balance sheet data is presented as if the Acquisitions had occurred on
March 31, 1997 and certain subsequent events had occurred prior to March
31, 1997. See Note 5 to the Unaudited Pro Forma Balance Sheet Adjustments.
(2) Includes $123,460 and $31,768 of goodwill amortization for the year ended
December 31, 1996 and the three months ended March 31, 1997, respectively.
See Note 6 to the Unaudited Pro Forma Statement of Operations Adjustments.
(3) See Note 12 to the Unaudited Pro Forma Statement of Operations Adjustments.
(4) Adjusted to give effect to the sale of the Securities offered hereby (at
the assumed initial public offering price of $6.00 per Share and $.10 per
Warrant) and the initial application of the net proceeds therefrom. See
"Use of Proceeds."
20
<PAGE>
MANAGEMENT'S PLAN OF OPERATION
This Prospectus contains forward-looking statements which involve risks
and uncertainties. See "Risk Factors--Risks Associated with Forward-Looking
Statements Included in this Prospectus." Actual events or results may differ
materially from those discussed in forward-looking statements as a result of
various factors, including, but not limited to, those discussed in "Risk
Factors."
General
Omega was incorporated in Delaware in August 1996. It was founded by Mr.
Schulhof, Dr. Glovsky and Dr. Bellavia. Following this Offering, the Company
intends to offer its services primarily under an affiliate relationship whereby
it will purchase the equity interests in the orthodontic practice's MSO
pursuant to an Affiliation Agreement and enter into a long term Management
Services Agreement with the Affiliated Orthodontist's Orthodontic Affiliate.
Pursuant to the Management Services Agreement, the Company will receive a
monthly management fee for providing all of the Orthodontic Affiliate's
practice needs, including facilities, support staff and supplies, as well as a
program of systems, methods and procedures designed to enhance the growth,
efficiency and profitability of the Orthodontic Affiliate.
Pursuant to the Affiliation Agreement, the Affiliated Orthodontist will
typically convert his existing professional corporation into a general
corporation that will function as the MSO and create a new professional
corporation (the Orthodontic Affiliate) through which the Affiliated
Orthodontist will continue to provide orthodontic care. The MSO will retain
certain assets and liabilities which will typically include the lease for the
Orthodontic Affiliate's office space, clinical supplies and equipment and
office furniture, supplies and equipment. The Orthodontic Affiliate will retain
certain other assets and liabilities (if any) which will typically include all
cash and cash equivalents, real property, automobiles, patient records, related
patient information and notes payable unrelated to assets purchased. The
Company will generally acquire all of the equity interests of the MSO from the
Affiliated Orthodontist, the purchase price for which is determined through an
assessment of immediate and future return on investment. The MSO typically is
acquired for a combination of cash, five year notes and unregistered Common
Stock or stock options. The average MSO purchase price is expected to be
approximately $600,000, of which the cash portion is expected to be
approximately $200,000.
The Management Services Agreement provides that the Orthodontic Affiliate
will utilize the facility and the Company's services for a period of 20 years,
with two ten year extensions. While each Management Services Agreement will be
negotiated based on specific circumstances, the management fees charged will
typically be 65% to 75% of the Orthodontic Affiliate's gross income, which is
expected to be sufficient to pay all of the MSO's expenses and provide a return
on the Company's investment. If the Orthodontic Affiliate's expenses payable by
the MSO are less than an agreed target amount of expenses, the difference
between the target amount and the actual expenses will typically be shared
equally by the MSO and the Orthodontic Affiliate. At the retirement, disability
or death of the Affiliated Orthodontist, the Company will locate a replacement
Affiliated Orthodontist to purchase the Orthodontic Affiliate and assume the
Management Services Agreement.
The Company has entered into three consulting agreements and has
undertaken certain compensation commitments in connection therewith. Under the
first consulting agreement, which is with Dr. Glovsky and Mayflower, all of the
services required to be performed by Dr. Glovsky and Mayflower have been
performed, but the Company continues to have an obligation to make cash
payments under the agreement aggregating $842,000 over three years, beginning
in January 1998. See "Certain Transactions."
Second, under a separate consulting agreement with Dr. Glovsky which
becomes effective upon the closing of this Offering, Dr. Glovsky is required to
provide consulting services to the Company over a three year period in
connection with identifying orthodontic practices with potential to become
Orthodontic Affiliates and negotiating and closing Affiliation Agreements with
such practices. Dr. Glovsky will be paid $2,500 for each orthodontic practice
that becomes an Orthodontic Affiliate until the Company has an aggregate of 15
Orthodontic Affiliates (including the Initial Orthodontic Affiliates), at which
time he will receive $5,000 per month, up to a maximum of $60,000 in the first
12 months after his agreement becomes effective. See "Management--Consultants."
21
<PAGE>
The Company has a third consulting agreement which is with LMG which
became effective May 1, 1997. This agreement provides that LMG shall provide
accounting and financial consulting services to the Company and shall make Mr.
Mulherin, a principal stockholder of LMG, available to serve as the Company's
Chief Financial Officer. The initial term of the LMG agreement is three years.
LMG will be paid a monthly fee of $5,000 until the later of November 1, 1997 or
the first month after the Company has an aggregate of 15 Orthodontic Affiliates
and a monthly fee of $10,000 thereafter for the term of the Agreement. See
"Management--Consultants."
Plan of Operation
Omega's financial results for the period from August 30, 1996 (inception)
to December 31, 1996 relate to its initial organization and establishment of
infrastructure. During this period, Omega provided management consulting
services to 10 orthodontic practices on a fee for services basis. The revenue
and expenses are associated with the management consulting services provided by
Omega during that period.
Omega's independent auditors have stated in their report on Omega's
financial statements as of December 31, 1996 that Omega's accumulated deficit
and working capital deficiency raised substantial doubt about Omega's ability
to continue as a going concern. Omega is seeking to raise capital through this
Offering and intends to utilize the net proceeds of this Offering, in part, to
consummate the Acquisitions and to affiliate with up to 24 additional
Orthodontic Affiliates during the 12 months following this Offering. If this
Offering is not successful, Omega will need to scale back its affiliation plans
and seek alternative financing sources which are not now available.
Omega has executed Affiliation Agreements with the seven Initial
Orthodontic Affiliates. Pursuant to those agreements, Omega will acquire the
equity interests in the MSOs of the seven Initial Orthodontic Affiliates
(except in the case of two sole proprietorships where it will acquire certain
assets of such proprietorships) concurrently with the closing of this Offering.
Each of the Initial Orthodontic Affiliates is operated with one orthodontist,
who is typically supported by a staff of three dental assistants and three
office personnel. The seven Initial Orthodontic Affiliates generated gross
revenues for the year ended December 31, 1996 of approximately $4.6 million.
Gross revenues for each Initial Orthodontic Affiliate for that year ranged from
a low of approximately $390,000 to a high of approximately $975,000.
In consideration for acquiring the Initial MSOs, the Company will pay the
aggregate of approximately $2.1 million in cash, issue an aggregate of
approximately $800,700 in notes bearing interest at 8.5%, issue an aggregate of
319,055 shares of Common Stock valued at the initial public offering price per
share and grant an option to acquire 83,333 shares of Common Stock (assuming an
initial public offering price per share of $6.00) at an exercise price equal to
the initial public offering price per share.
The Company expects to show a significant loss from operations for the six
month period ending June 30, 1997 due primarily to compensation paid to two
consultants. On April 28, 1997, each of Dr. Glovsky, the Chairman of the Board
of the Company, and Mayflower, a private banking firm, received 225,000 shares
of Common Stock for consulting services to Omega and will receive approximately
$421,000 of cash payments over three years beginning in January 1998. See
"Certain Transactions." The Company will recognize a non-recurring compensation
expense reflecting delivery of such shares and these payment obligations in
April 1997 of approximately $2.2 million. This expense is comprised of
approximately $1.4 million attributable to the Common Stock and an aggregate of
approximately $842,000 attributable to the payment obligation.
At the end of the 12 months following this Offering, the Company intends
to be affiliated with approximately 31 Orthodontic Affiliates. The ability of
the Company to achieve its expansion plans will depend upon a number of
factors, including (i) the Company's ability to attract orthodontists to
affiliate with the Company, the availability of suitable markets and the
Company's ability to obtain suitable locations within those markets; (ii) the
Company's ability to locate existing practices for affiliation, affiliate with
such practices on favorable terms and successfully integrate the affiliated
operations into the Company's existing operations; and (iii) the availability
of adequate financing to affiliate with orthodontic practices. A shortage of
available orthodontists with the skills and experience required by the Company
would have a material adverse effect on the Company's expansion plans. 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 or that the
Company will be able to manage effectively and enhance the profitability of its
Orthodontic Affiliates. The accompanying pro forma financial statements do not
include costs anticipated to be incurred in connection with this expansion
strategy.
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The acquisition of the equity interests in the Initial MSOs (and certain
assets of two sole proprietorships) will be accounted for by the Company using
the purchase method of accounting, which records as goodwill the excess of
purchase price over the fair market value of the net assets of the acquired
businesses. As of December 31, 1996, the Company's total pro forma assets were
approximately $6.7 million, of which approximately $4.8 million, or 71%, was
goodwill. Goodwill will be amortized on a straight-line basis over a 40 year
period.
Substantially all of the goodwill on the Company's pro forma adjusted
balance sheet as of December 31, 1996 is related to acquiring the Initial MSOs.
The Company evaluates each acquisition and establishes an appropriate
amortization period based on the underlying facts and circumstances. Currently,
the Company uses 40 years consistent with the extended terms of the Management
Services Agreements. Subsequent to each acquisition, the Company will
reevaluate such facts and circumstances to determine if the related goodwill
continues to be realizable and if the amortization period continues to be
appropriate.
Amortization of the goodwill on the Company's pro forma adjusted balance
sheet as of March 31, 1997 will produce an annual amortization expense of
approximately $123,460. Affiliations with additional Orthodontic Affiliates
which result in the recognition of additional goodwill would cause amortization
expense to increase further. Although the net unamortized balance of goodwill
on the Company's unaudited pro forma balance sheet as of March 31, 1997 was not
considered to be impaired, any future determination that a significant
impairment has occurred would require the write-off of the impaired portion of
unamortized goodwill, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
Unaudited Pro Forma Results of Operations
Year Ended December 31, 1996 and Three Months Ended March 31, 1997
The following discussion of the unaudited pro forma results of operations
of the Company and of the combined results of operations of the Initial
Orthodontic Affiliates should be read in conjunction with the Unaudited Pro
Forma Financial Statements and Notes thereto and the financial statements of
Omega and each of the Initial Orthodontic Affiliates included elsewhere in this
Prospectus.
Practice Revenue. The pro forma revenue of the Company consists almost
exclusively of amounts to be earned under the Management Services Agreements.
The revenue included in the pro forma financial statements is that which would
have been earned based on the operating results of the Initial Orthodontic
Affiliates for the year ended December 31, 1996 and for the three months ended
March 31, 1997, assuming the Affiliation Agreements and Management Service
Agreements had been entered into on January 1, 1996. The pro forma revenue of
$4.6 million for the year ended December 31, 1996 and $1.1 million for the
three months ended March 31, 1997 is based on the accrued gross revenue of the
Initial Orthodontic Affiliates for the year ended December 31, 1996 and for the
three months ended March 31, 1997, respectively. The revenue for the three
months ended March 31, 1997 is slightly less than 25% of the annual revenue for
1996. The Company believes that patient volume is affected by seasonal
fluctuations in demand for orthodontic services. See "Risk
Factors--Fluctuations in Operating Results."
Orthodontists' Compensation. Pursuant to the Management Services
Agreements, the Orthodontic Affiliates retain the difference between the
patient revenue of the Orthodontic Affiliate and the management fee payable to
the Company. The Orthodontic Affiliates are responsible for paying certain
expenses directly, including salaries and benefits of the Affiliated
Orthodontist and any other practice providers, physician licensing fees, board
certification fees, professional liability insurance, certain professional
education and legal and professional fees. In addition, the Orthodontic
Affiliate is entitled to a portion of the profits, if any, exceeding an agreed
upon profit target.
Direct Practice Expenses. The pro forma direct practice expenses for the
year ended December 31, 1996 and for the three months ended March 31, 1997
reflect the direct practice expenses of the Initial Orthodontic Affiliates
which would have been payable by the Company under the Management Services
Agreement. The Company expects that direct practice expenses will increase as
the Company affiliates with additional Orthodontic Affiliates but that direct
practice expenses as a percentage of practice revenue will decrease as the
Company implements the Model at additional Orthodontic Affiliates. Direct
practice expenses include:
Employee Costs. Includes all salaries, payroll taxes and fringe
benefits of the dental assistants and office staff.
Other Direct Costs. Includes dental and office supplies, laboratory
costs, facilities and equipment.
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General and Administrative. All other operating expenses including
advertising, repairs and maintenance, computer support, telephone,
utilities, taxes and licenses.
Bad Debt Expense. Reflects an allowance for possible uncollectible
practice revenue.
Depreciation and Amortization. Includes depreciation of leasehold
improvements and equipment.
Direct practice expenses increased as a percentage of practice revenue for
the three months ended March 31, 1997 due in part to an increase in purchasing
orthodontic supplies during the period coupled with a lower practice revenue
base as compared to the prior year.
Management Expenses. The pro forma management expenses for the year ended
December 31, 1996 and for the three months ended March 31, 1997 reflect an
estimate of a complete year of expenses or a portion thereof, that may be
incurred with the management of the seven Initial Orthodontic Affiliates and
the provision of limited management consulting services to non-affiliated
orthodontic practices. The pro forma expenses include certain costs associated
with operating as a publicly-traded company following this Offering. Pro forma
management expenses do not include the non-recurring compensation expense of
$2.2 million that the Company will recognize in April 1997. See "--Plan of
Operation." Also, pro forma management expenses do not include any costs for
travel, consulting or professional fees associated with the identification,
evaluation and integration of additional Orthodontic Affiliates which the
Company will incur in connection with the planned affiliation with up to 24
additional Orthodontic Affiliates. These costs may be substantial and may cause
the Company to incur operating losses. Moreover, pro forma management expenses
do not include the anticipated incremental costs of managing such additional
Orthodontic Affiliates as the related management fees are not included in the
pro forma revenues. Such costs may also be substantial and may vary according
to the operations of each new Orthodontic Affiliate. Management expenses
include the following:
Employee and Consulting Costs. Includes the salaries of the President,
the part-time Chief Financial Officer, and the part-time administrative
assistant, fees for a full time practice consultant and the travel and
incremental costs associated with the ongoing support of the seven
Initial Orthodontic Affiliates.
General and Administrative. Includes legal, auditing, insurance, rent,
telephones and marketing costs.
Income Taxes. Pro forma income taxes assume that the Company had operated
as a tax paying entity, subject to an effective combined statutory tax rate for
federal and state income taxes of 40%, increased by the non-deductible portion
of goodwill amortization.
Liquidity and Capital Resources
Omega has experienced net losses, negative cash flow, a deficit in working
capital and an accumulated deficit since its inception. For the period from
August 30, 1996 (inception) to March 31, 1997, Omega incurred a net loss of
$456,359. Omega has generated limited revenues to date, and will not generate
sufficient revenues to cover expenses without consummation of this Offering and
the Acquisitions. The Company expects to show a significant loss from
operations for the six month period ending June 30, 1997 due primarily to
compensation earned by two consultants in April 1997. See "--Plan of
Operation." At March 31, 1997, the Company had an accumulated deficit since
inception of $456,359 and a working capital deficit of $1,099,014.
Omega has financed its operations to date from the sale of the Bridge
Notes and the Interim Notes. The Bridge Notes, which bear interest at the rate
of 15% per annum payable currently, are payable on the earlier of the closing
of this Offering or September 30, 1997. Omega sold the Bridge Notes in a
private offering to a limited number of persons meeting the definition of
"accredited investor" under the Securities Act. The Bridge Notes were offered
in principal amounts of $50,000 (subject to reduction at the discretion of
Omega) and included a right to receive, without additional consideration,
10,000 shares of Common Stock (subject to a corresponding reduction) upon
issuance of the Bridge Notes. During September, October and November 1996 and
February and April 1997, Omega sold Bridge Notes in the aggregate principal
amount of $875,000 and issued 175,000 shares of Common Stock in connection
therewith. The Company plans to repay the entire amount of principal and
interest outstanding on the Bridge Notes with a portion of the net proceeds of
this Offering. See "Use of Proceeds."
Omega is authorized to issue up to $150,000 of Interim Notes, which bear
interest at the rate of 16% per annum, payable quarterly beginning September
30, 1997, and are payable on the earlier of the closing of this Offering or
June 30, 1998. In June 1997, Omega sold Interim Notes in a private offering to
Dr. Glovsky and Dr. Grove in the
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aggregate principal amount of $50,000, both of whom are directors of Omega. The
Company is authorized to issue up to an additional $100,000 of Interim Notes,
and purchasers of such additional Interim Notes (if any are issued prior to the
closing of this Offering) may include Dr. Glovsky and one or more other persons
or entities affiliated with the Company. The Company plans to repay the entire
amount of principal and interest outstanding on the Interim Notes with a
portion of the net proceeds of this Offering. See "Use of Proceeds" and
"Certain Transactions."
In connection with the Affiliation Agreements, the Company has committed,
contingent upon this Offering, to acquire the Initial MSOs. The Company will
pay approximately $2.1 million in cash, issue an aggregate of approximately
$800,700 in notes bearing interest at 8.5% with interest only payable the first
year and the principal to be amortized over the next four years, issue an
aggregate of 319,055 shares of Common Stock valued at the initial public
offering price per share and grant an option to acquire 83,333 shares of Common
Stock (assuming an initial public offering price per share of $6.00) at an
exercise price equal to the initial public offering price per share.
The Company intends to affiliate with up to an additional 24 Orthodontic
Affiliates during the 12 months following the closing of this Offering. The
purchase price of each MSO is anticipated to average $600,000, with the cash
portion of the purchase price expected to average approximately $200,000. The
Company expects to finance this expansion through the use of approximately $5.0
million of the net proceeds from this Offering. See "Use of Proceeds."
The Company will typically purchase the equity interests in the MSO that
holds certain assets of and is associated with an Orthodontic Affiliate with a
combination of cash, notes payable and Common Stock of the Company. The
purchase price and terms are determined by the Company on a case by case basis
after due diligence has been performed.
The Company anticipates making routine advances from time to time to its
Orthodontic Affiliates under its Management Services Agreements to fund any
deficits in monthly cash flows of the Orthodontic Affiliates and the associated
MSO's. Such advances will generally be repaid by the Orthodontic Affiliates to
the Company without interest as adequate funds are generated by the Orthodontic
Affiliates. See "Business--Agreements with Affiliated Orthodontists."
The Company anticipates that capital expenditures during 1997 will relate
primarily to affiliations with additional Orthodontic Affiliates. It is
anticipated that funding for these purposes will be derived from the proceeds
of this Offering and cash flow from operations. Management believes that such
sources will be sufficient to fund the Company's cash requirements for at least
12 months following completion of this Offering. In the future, the Company
will seek to raise additional funds through borrowings or the issuance of debt
or equity securities. There can be no assurance that sufficient funds will be
available on terms acceptable to the Company, if at all.
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BUSINESS
The Company provides management and marketing services to orthodontic
practices in the United States. Since its inception in August 1996, Omega has
provided these services on a fee for services basis to nine orthodontic
practices, including four of the Initial Orthodontic Affiliates. Following this
Offering, the Company intends to offer its services primarily under an
affiliate relationship whereby it purchases the equity interests in the MSO
that holds certain assets of and is associated with an Orthodontic Affiliate
and enters into a long term Management Services Agreement with the Orthodontic
Affiliate. The Company has signed Affiliation Agreements with the seven Initial
Orthodontic Affiliates.
Upon consummation of the Acquisitions, the Company will enter into
Management Services Agreements with the Initial Orthodontic Affiliates.
Pursuant to these Management Services Agreements, the Company will provide
facilities, support staff and supplies to the Initial Orthodontic Affiliates
and will institute a program of systems, methods and procedures the Company
refers to as the Omega Exceptional Practice Model. The Model is designed to
increase the Orthodontic Affiliate's profitability by focusing on and improving
customer service while simultaneously reducing costs and increasing operating
efficiency.
Omega seeks to affiliate with established orthodontic practices that Omega
believes have the potential for significant growth utilizing the Model. Omega
considers financial and operational factors that include the practice's gross
income, cost structure, existing treatment contracts, fee schedules, referral
rates and sources, health maintenance organization relationships, case starts,
appointments per day and average treatment times. Omega also evaluates
demographic factors that include the practice's location with respect to and
the average income levels and concentrations of families with children in the
area.
The Company's strategy is to (i) enter into Affiliation Agreements and
Management Services Agreements with established orthodontic practices that meet
the Company's criteria and (ii) achieve operating efficiencies and increased
profitability for each such practice through the implementation of the Model.
The Model is designed to permit the practice to meet or exceed patient
expectations (a) offering flexible payment plans, (b) scheduling convenient
appointment times, (c) ensuring that treatment is delivered on time, (d)
updating patients and their referring dentists regularly on treatment programs
and (e) training staff to anticipate and address patient needs.
The Company will focus its initial marketing efforts on the practices of
the approximately 4,500 orthodontists over the age of 47 who the Company
believes are planning their transition to retirement. The Company believes it
can generally place a higher value on a mature practice than other potential
buyers, many of whom are recent orthodontic graduates. The Company believes
that this higher valuation, combined with consideration in the form of a
combination of cash, notes and the Company's Common Stock and the opportunity
to delegate managerial and marketing responsibilities to an experienced
management team, generally makes the Company an attractive alternative for
orthodontists planning their transition to retirement. The Company will also
target younger orthodontists who may want to merge their practices with the
practice of an orthodontist in transition or take over such a practice.
The Orthodontic Industry
General. Omega believes that the annual market for orthodontic treatment
and services is approximately $3.6 billion. Based on U.S. census data that
indicates that the number of children between the ages of five and 19 will
increase by approximately 10.4 million by the year 2000, the Company expects
that the growth in this population group will result in increased demand for
orthodontic services. The orthodontic marketplace is highly fragmented and
consists of approximately 9,000 practicing orthodontists, a significant
majority of whom are sole practitioners. Omega believes that many of the
orthodontists in practice today have excess patient capacity and lack the
training and resources in management and marketing techniques to fill that
capacity effectively. It is Omega's belief that less than two percent of the
orthodontic practices in the United States are presently managed by
independent, professional management service organizations and that an
opportunity exists for the Company to market and sell its services to the
orthodontic practices that are not currently managed by such organizations.
The projected growth of the orthodontics market derives from several
demographic and economic factors. Omega believes that the number of patients of
prime orthodontic treatment age (12 years old) will likely remain at a level
that is 15% higher in the ten years ending in 2002 than in the prior ten year
period. Also, although orthodontic treatment has been historically viewed as an
expensive elective, advances in practice methods and technologies have made it
relatively more affordable. As a result, orthodontic treatment is being sought
by a broadening segment of American society.
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Orthodontic Practice Dynamics. Although there exists a large and growing
demand for orthodontic services in the United States, the Company believes that
the orthodontic industry is presently ill-prepared to meet that demand.
Orthodontists, the vast majority of whom are sole practitioners, are often
highly skilled clinicians but generally are not trained in marketing themselves
as professional service providers. Most rely on referrals from other dentists
and from current or past patients. Accordingly, the Company believes that
achieving sustainable growth through referrals requires both clinical
excellence and a patient focus that emphasizes value, flexibility and
efficiency.
In order to increase profitability, the Company believes that
orthodontists must improve their management and marketing techniques. Unlike
many other medical and dental specialties, orthodontics involves treatment
delivered over a period of two to three years for a fixed fee. Much of the
treatment can be provided efficiently by the orthodontist delegating certain
clinical and communications tasks to trained assistants. The Company believes
that creative management and effective delegation would allow the orthodontist
to reduce treatment costs per patient. In addition, the Company believes that
the well managed orthodontic practice would also be able to handle a larger
patient base, and, with a patient centered emphasis on the quality and
efficiency of the services it offers, should be able to build that base through
professional and patient referrals. As a result, the Company believes that an
orthodontic practice with a qualified and capable orthodontist operating under
a well-designed efficient schedule and utilizing professional management and
marketing practices is capable of enhancing its profitability.
Market for Orthodontic Practices. The value of orthodontic practices in
the United States has fallen for the past several years. The number of
potential sellers, generally orthodontists approaching retirement age, is
relatively large compared to the potential purchasers. This downward pressure
on prices for orthodontic practices results primarily from the fact that
approximately 4,500, or 50%, of the practicing orthodontists in the United
States are over the age of 47. The Company believes that many are looking to
make a transition out of active practice while realizing as much value as
possible from the goodwill they have built up over their years in practice.
State laws governing the practice of dentistry and its specialties and the
shrinking number of orthodontic graduates intending to practice in the United
States have combined to limit the number of potential purchasers of orthodontic
practices. State dental practice statutes and professional codes generally
provide that only orthodontists may own, operate or control an orthodontic
practice. These restrictions have functioned to depress the market for
orthodontic practices and have inhibited the development of professional
management in the industry.
Another major factor in limiting the value of orthodontic practices is the
historic oversupply of orthodontists in the United States which has reduced the
number of recent orthodontic graduates. In addition, many of the more recent
graduates are foreign students who plan to return to their own countries. The
orthodontic graduates who seek to buy a practice generally have student loans
and limited financial resources. As a result, Omega believes that the average
purchase price for an orthodontic practice has fallen from roughly one year's
gross revenues to approximately 70% of that number. In addition, the selling
orthodontists often must finance the purchase by accepting a note for a
significant part of the purchase price and, in order to ensure that the
practice performs well enough to service the debt, often must stay involved in
the management and marketing of the practice.
Business Strategy
The Company's strategy has two principal components. First, the Company
identifies established orthodontic practices that it believes have potential
for significant growth utilizing the Model and offers to affiliate with and
manage those practices. Second, once an affiliate relationship is established,
the Company and the Affiliated Orthodontist (who may or may not be the selling
orthodontist) and the orthodontist's staff implement the Model in order to
achieve operating efficiencies and increase profitability for the practice.
Identifying Potential Affiliations. The Company's success will largely
depend upon the quality and quantity of orthodontic practices that it can
attract to affiliate with the Company. The Company selects practices to
consider affiliating with which are operated by orthodontists who are qualified
members of the American Association of Orthodontists. Management believes that
the Company has the resources to identify a significant number of potential
affiliates that meet the Company's criteria for affiliation. Although the
Company has been in operation for less than a year, the members of the senior
management team responsible for operations, Messrs. Schulhof, Bellavia and
Elliott, each has been involved in the orthodontic industry for 12 or more
years. Through their extensive presentations at orthodontic seminars and active
consulting practices to the orthodontic industry, the Company's senior
management team has relationships with practicing orthodontists throughout the
country. The Company has
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also established a program of regular trade journal advertising, and Mr.
Schulhof, in conjunction with Messrs. Bellavia and Elliott, has written a
series of articles for orthodontic trade journals that outline the Model and
its benefits for the practicing orthodontist.
Once the Company identifies a potential affiliate, the Company conducts a
comprehensive analysis of the practice, including a thorough financial and
operational review and evaluation of staff, facilities, equipment and systems.
Initially, an estimate of the current value of the practice is calculated based
on the practice's gross income, net profit and new treatment contracts written
during the prior twelve months. The Company evaluates the practice's capacity
for improvement under the Model by analyzing (i) the number of new patient
exams, treatment starts, patients in active treatment and patients seen per
day, (ii) the fees charged for different treatments, (iii) the costs incurred
by the practice for employees, facilities, supplies and laboratory work and
(iv) the number of treatment chairs and dental and clinical assistants and the
square footage of office space employed by the practice. Also, current staff
are interviewed to determine their suitability for and commitment to the
practice, and facilities and equipment are reviewed to ensure that they will
support a larger and growing practice without significant additional cost.
Finally, the practice's current systems for starting new patients, reviewing
treatment programs, scheduling, communicating with patients and referral
sources, marketing and controlling expenses, and the cost of upgrading or
replacing the systems, are analyzed.
The Company seeks practices that have the capacity to increase their
profitability initially through improved performance on existing patient bases
rather than through immediately increasing new patient exams. The Company
generally requires that practices demonstrate the potential to grow
approximately 40% with a relatively small increase in new patient exams.
Practices that have developed strong professional referral relationships and
have attractive locations and facilities are preferred over those that rely on
mass marketing techniques and health maintenance organization relationships to
grow.
The Company also evaluates demographic factors affecting the practice.
Practices located where there are significant concentrations of families with
young children are attractive, particularly when the families have higher
incomes than the national average and these populations are stable or growing.
To date, the Company has focused its efforts on locating practices in the South
or far West of the United States. The seven Initial Orthodontic Affiliates
maintain an aggregate of eight offices, and such offices are situated in the
following locales: Goodyear and Bullhead City, Arizona; Huntington Beach and
Woodland Hills, California; Colorado Springs, Colorado; Champaign, Illinois;
Elko, Nevada and Austin, Texas.
If the practice satisfies the Company's criteria for an affiliation, an
offer is made for the practice to affiliate with the Company. The Company
outlines proposed financial terms of the affiliation, including the Company's
valuation of the practice and the amount of cash, notes and shares of the
Company's Common Stock that the Company proposes to pay to acquire the equity
interests in the MSO associated with the practice. Once the basic business
terms of the affiliation are agreed to, the parties proceed to execute an
Affiliation Agreement and the related Management Services Agreement. The
Company will pay, on average for each of the Initial Orthodontic Affiliates, a
combination of approximately $300,000 in cash and $115,000 in five year notes
bearing interest at 8.5% and issue approximately 45,000 shares of the Common
Stock if valued at the initial public offering price per share of the Common
Stock. The Company plans to enter into Affiliation Agreements and Management
Services Agreements with up to an additional 24 Orthodontic Affiliates during
the 12 months following the closing of this Offering.
Implementing the Omega Exceptional Practice Model. The Model is patient
centered and designed to promote customer service and increase the
orthodontist's productivity while permitting the orthodontist to deliver
quality orthodontic treatment. The Model focuses the orthodontic team on
understanding patient expectations and provides the orthodontic team with the
training, systems and other tools necessary to meet or exceed those
expectations. The Model will generally be implemented in a practice over a
period of 12 months and involve the active participation of the Company's
professional staff, the Affiliated Orthodontist and his or her staff and a
practice facilitator assigned by the Company to oversee the entire
installation, monitor its progress and provide follow-up support.
Customer service permeates all aspects of the Model. The Company intends
to provide a scheduling system that offers patients a wide choice of
appointment times, including night and weekend appointments. The system will
also carefully plan the Affiliated Orthodontist's time so that the patient is
seen on schedule and the work performed within the allotted appointment time.
The Company intends to offer flexible payment plans that meet
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the varying financial situations of the patients and plans to review insurance
benefits and credit issues with the patient in advance so that patients coming
to a first exam will have sufficient information at the end of that exam to
commit to the proposed plan of treatment.
The Company believes that good communication between patients and the
orthodontic team is essential to building successful relationships and
developing customer satisfaction. The Company will train the Affiliated
Orthodontist and his or her staff in interpersonal skills and communication
techniques and will carefully plan and script patient interactions so that the
orthodontic team is attuned to patient needs and can handle their questions
accurately and efficiently. The staff will be instructed to make courtesy calls
to patients after long or particularly difficult appointments to inquire about
patient comfort and answer questions. In addition, the Company will use
computerized analysis and video imaging to provide the patient with a clear
understanding of the proposed treatment, including all planned tooth and jaw
movements, and its intended results.
In order to enhance the total dental care the patient receives and to
improve the Orthodontic Affiliate's professional referral sources, the Model
also encourages frequent communication between the orthodontic team and the
referring dentist. Automated diagnostic letters that include a treatment status
report and video images of the patient will be periodically delivered to the
referring dentist. Brief seminars on current orthodontic developments are
planned from time to time at the Orthodontic Affiliate's office in order to
keep referring dentists and their staffs informed and to promote opportunities
for professional and staff interaction. By encouraging the close integration of
orthodontic and general dental services, the Model promotes improved overall
dental care for the patient and fosters strong relationships with the general
dentists for future referrals.
The Company believes that a more productive practice also serves the
interest of the orthodontic patients. In order to increase the Orthodontic
Affiliate's productivity, the Model requires the orthodontic team to establish
operational goals, such as increasing the number of treatment starts,
percentage of patients seen on time and the dollars generated per minute of
chair time and reducing the chair time required to treat different types of
cases. The orthodontic team also sets financial and quality goals for the
practice. In order to assist the orthodontic team in accomplishing these goals,
the Company will produce written policies and procedures for the orthodontic
team to adopt and follow and will either upgrade the practice's present systems
or install a new, computerized operational and financial reporting system so
that progress can be measured regularly.
The Company believes that implementation of the Model generally should be
accomplished over a 12 month period. The program will be overseen by one of the
Company's experienced practice facilitators who coordinates the efforts of the
orthodontic team and the Company. The practice facilitator will visit the
Orthodontic Affiliate monthly during this period to train the orthodontic team,
install systems and programs and audit and debug their performance. By the end
of the first 12 months, the Orthodontic Affiliate generally will have completed
the following tasks: (i) established a new staff organizational structure; (ii)
installed a communication and marketing system; (iii) installed a sophisticated
scheduling system to increase treatment productivity; (iv) instituted a new,
flexible fee and payment program; (v) installed a new or upgraded financial and
operational reporting system; (vi) conducted staff relationship training; (vii)
conducted initial and final patient surveys; and (viii) installed a patient
communication and treatment completion review program.
Agreements with Affiliated Orthodontists
The Company plans to affiliate with orthodontic practices through a series
of contractual arrangements. Initially, the Company and an Affiliated
Orthodontist will enter into an Affiliation Agreement through which the Company
will acquire the equity interests in the MSO associated with the Affiliated
Orthodontist's practice. (The Company may cause a wholly-owned subsidiary to
acquire the equity interests in the MSO to reduce adverse tax consequences in
certain cases.) The Affiliated Orthodontist, who generally practices through
and holds the practice assets in a professional corporation, will convert that
entity into a general corporation (the MSO) and create a new professional
corporation through which the Affiliated Orthodontist will continue to provide
orthodontic care (the Orthodontic Affiliate). The Company acquires the equity
interests in the MSO, and the Affiliated Orthodontist causes the Orthodontic
Affiliate to enter into a long-term Management Services Agreement with the
Company.
Through the Management Services Agreement, the Company provides practice
management and marketing services, facilities and non-professional personnel to
the Orthodontic Affiliate for a monthly fee. In order to provide for an orderly
transition in the event that the Management Services Agreement is terminated or
expires or the Affiliated Orthodontist ceases practice with the Orthodontic
Affiliate, the parties enter into a Stock Put/Call Option
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<PAGE>
and Successor Designation Agreement (the "Put/Call Agreement"). This agreement
creates for the Affiliated Orthodontist certain rights and obligations to
repurchase the practice assets held by the Company in the event that the
Management Services Agreement is terminated and grants the Company certain
rights to designate a successor orthodontist to purchase the stock of the
Orthodontic Affiliate when the Affiliated Orthodontist ceases practice through
retirement, death, disability or in other enumerated cases.
Affiliation Agreement. The Affiliation Agreement is the mechanism through
which the Company acquires the equity interests in the MSO of the Orthodontic
Affiliate, typically in exchange for a combination of cash, a promissory note
and shares of Common Stock of the Company. The completion of the acquisition
under the Affiliation Agreement is subject to certain conditions, including,
without limitation, that there has been no material adverse change to the
Orthodontic Affiliate between the time the Affiliation Agreement is signed and
the transaction is closed and that the Orthodontic Affiliate and the Company
have entered into the Management Services Agreement and the Put/Call Agreement.
The closing of the Acquisitions is further conditioned on the completion of
this Offering.
Management Services Agreement. Pursuant to the Management Services
Agreement, the Company will provide the Orthodontic Affiliate with
comprehensive management, financial and marketing services and facilities,
equipment (in the control of the Orthodontic Affiliate, where required by
statute) and support personnel required by the Orthodontic Affiliate to operate
its clinical orthodontic practice. The Company intends to maintain existing
orthodontic equipment at the offices of the Orthodontic Affiliate at the
Company's expense and, after consultation with the Affiliated Orthodontist and
agreement upon the equipment needs of the Orthodontic Affiliate, purchase new
equipment for use by the Orthodontic Affiliate. The Company is appointed the
sole and exclusive business manager of the Orthodontic Affiliate. In addition
to providing facilities, equipment (in the control of the Orthodontic
Affiliate, where required by statute) and support services, the Company
undertakes all purchasing, payment, billing, collection and payroll functions
for the Orthodontic Affiliate and facilitates the implementation of the Model.
The Orthodontic Affiliate is solely responsible for and has complete
control and supervision over the professional aspects of its practice, as well
as the provision of all professional services, including, without limitation,
the selection of course of treatment for a patient, procedures or materials to
be used as part of such treatment and the manner in which such treatment is
carried out. The Orthodontic Affiliate has sole authority to direct the
business, professional and ethical aspects of its practice. It makes all
professional hiring decisions, renders patient care, and keeps all patient
dental records. The Orthodontic Affiliate is also responsible for entering into
an employment agreement, including non-competition provisions, with each
orthodontist engaged by it, including the Affiliated Orthodontist, and paying
all salaries for dental professionals, professional licensure and board
certification fees and professional liability insurance premiums.
The Management Services Agreement has an initial term of twenty (20) years
and is renewable for two, successive ten (10) year periods. During the initial
term and any renewal term, the Management Services Agreement may be terminated
by the Company or the Orthodontic Affiliate only for "cause," which includes
the bankruptcy of or a material default by the other party. In exchange for the
performance of its duties and obligations under the Management Services
Agreement, the Company receives a monthly management fee. The fee, which varies
somewhat from practice to practice, is generally 65% to 75% of the Orthodontic
Affiliate's gross collections for the period. From the monthly fee, the Company
pays all of its expenses in providing services to the Orthodontic Affiliate,
including, without limitation, the salaries and benefits of the Company's
employees, the costs of any consultants, corporate overhead, lease obligations
and taxes. In the event that the gross collections of an Orthodontic Affiliate
in a given month are not sufficient to pay the entire amount of salaries,
benefits and other direct costs payable by the Orthodontic Affiliate and the
Company's monthly fee for such month, the Company anticipates making routine
advances to the Orthodontic Affiliate to fund any shortfalls for such month.
Such advances will generally be repaid by the Orthodontic Affiliate to the
Company without interest as adequate funds are generated by the Orthodontic
Affiliate in subsequent months.
Put/Call Agreement. The Put/Call Agreement governs the dissolution of the
affiliation between the Orthodontic Affiliate and the Company, whether caused
by a termination or expiration of the Management Services Agreement or as a
result of the cessation of practice by the Affiliated Orthodontist. In the case
of a termination or expiration of the Management Services Agreement, the
Orthodontic Affiliate may be required to repurchase the assets of the MSO
utilized in the practice of the Affiliated Orthodontist as set forth on the
MSO's balance sheet as at the end of the month immediately preceding the date
of such termination (when the termination is initiated by the Company) or may
have the right to repurchase such assets (when the termination is initiated by
the
30
<PAGE>
Orthodontic Affiliate). Such assets typically will include leasehold
improvements, fixtures, furniture, furnishings, equipment, inventory, supplies
and intangibles. In the event that the Company initiates the termination, the
Orthodontic Affiliate is required to pay book value for the assets as shown on
the MSO's balance sheet, and, in the event the Orthodontic Affiliate initiates
the termination, the Company is required to pay an amount equal to the sum of
(a) the amount of cash paid to the Affiliated Orthodontist by the Company under
the Affiliation Agreement, (b) the original principal amount of the Promissory
Note (if any) issued by the Company to the Affiliated Orthodontist under the
Affiliation Agreement and (c) the value of that number of shares of Common
Stock issued to the Affiliated Orthodontist under the Affiliation Agreement,
such value to be determined by multiplying such number of shares by the average
last sales (or closing) price for the Company's Common Stock on the Nasdaq
Small Cap Market for each of the 60 trading days immediately preceding the date
the notice of the Orthodontic Affiliate's determination to repurchase such
assets is delivered to the Company. When the Affiliated Orthodontist ceases
practicing with the Orthodontic Affiliate, whether as a result of retirement,
death, disability or other reason, the Company typically has the option to
designate a successor orthodontist to purchase the Orthodontic Affiliate from
the Affiliated Orthodontist in order to ensure that the Orthodontic Affiliate
continues to operate and to perform its obligations under the Management
Services Agreement. The Company may choose not to exercise this option where
the Affiliated Orthodontist proposes to sell the Orthodontic Affiliate to
another orthodontist previously approved by the Company to be the Affiliated
Orthodontist's successor in the ownership of the Orthodontic Affiliate.
Competition
The business of providing orthodontic services is highly competitive in
each of the markets in which the Company operates. Each of the Company's
Orthodontic Affiliates faces competition from orthodontists who maintain single
offices or operate a single satellite office, as well as from orthodontists
that maintain group practices or operate in multiple offices. The Orthodontic
Affiliates also compete with dentists who provide certain orthodontic services.
The provision of orthodontic services by such dentists has increased in recent
years.
At this time, the Company believes that there are two publicly-traded
companies, Orthodontic Centers of America, Inc. ("OCA") and Apple Orthodontix,
Inc. ("AOI"), actively competing in the orthodontic practice management market
and that there are several other companies participating in the market. OCA,
AOI and the other companies are significantly larger and have greater
financial, marketing and other resources than the Company. The Company will
compete with OCA, AOI and these other companies both for expansion into new
affiliate practices and for patients. Management, however, believes the Company
appeals to that segment of the orthodontic market that relies primarily on
traditional patient and general dentist referrals to generate new business
while OCA, AOI and the other companies appeal to that segment of the
orthodontic market that relies primarily on advertising and low fees to attract
patients who would not otherwise seek orthodontic treatment.
In addition, there are several companies pursuing strategies similar to
the Company in other segments of the health care industry and additional
companies with similar objectives may enter the Company's markets and compete
with the Company. If a great number of competitors enter the orthodontic
practice management market, it could drive up the purchase price of orthodontic
practices adversely and affect the Company's expansion strategy. There can be
no assurance that the Company will be able to compete effectively.
Government Regulation
The field of orthodontics is highly regulated, and there can be no
assurance that the regulatory environment in which the Company operates will
not change significantly in the future. In general, regulation of health care
companies is increasing.
Every state imposes licensing requirements on orthodontists and on
facilities and services operated by orthodontists. In addition, federal and
state laws regulate health maintenance organizations and other managed care
organizations for which orthodontists may be providers. In connection with the
entry into new markets, the Company and its Affiliated Orthodontists may become
subject to compliance with additional regulations.
The operations of Orthodontic Affiliates must meet federal, state and
local regulatory standards in the areas of safety and health. Based on its
familiarity with the operations of the Initial Orthodontic Affiliates and the
activities of the Affiliated Orthodontists, management believes that the
Initial Orthodontic Affiliates are in compliance in all material respects with
all applicable federal, state and local laws and regulations.
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The laws of many states prohibit orthodontists from splitting fees with
non-orthodontists and prohibit non-orthodontic entities (such as the Company)
from practicing dentistry, including orthodontics, and from employing
orthodontists or, in certain circumstances, orthodontic assistants. The laws of
some states prohibit advertising of orthodontic services under a trade or
corporate name and require that all advertising be in the name of the
orthodontist. A number of states also regulate the content of advertisement of
orthodontic services and the use of promotional gift items. A number of states
limit the ability of a non-licensed dentist or non-orthodontist to own
equipment or offices used in an orthodontic practice. Some of these states
allow leasing of equipment and office space to an orthodontic practice, under a
bona-fide lease, if the equipment and office remain in the complete care and
custody of the orthodontist. Management believes, based on its familiarity with
the operations of the Orthodontic Affiliates, the activities of the Company's
Affiliated Orthodontists and applicable regulations, that the Company's current
and planned activities do not constitute the prohibited practices contemplated
by these statutes and regulations. There can be no assurance, however, that
future interpretations of such laws, or the enactment of more stringent laws,
will not require structural and organizational modifications of the Company's
existing relationships with its Affiliated Orthodontists or the operation of
the Orthodontic Affiliates. In addition, statutes in some states could restrict
expansion of Company operations in those jurisdictions.
The Company regularly monitors developments in laws and regulations
relating to dentistry. The Company may be required to modify its agreements,
operations and marketing from time to time in response to changes in the
business and regulatory environment. The Company plans to structure all of its
agreements, operations and marketing in accordance with applicable law,
although there can be no assurance that its arrangements will not be
successfully challenged or that required changes may not affect operations or
profitability.
Employees
At March 31, 1997, the Company had five employees and utilized ten
independent contractors to assist with certain corporate functions and to
provide consulting services to orthodontic practices. After consummation of the
Acquisitions, the Company expects to employ approximately 45 employees,
approximately evenly split between clinical and clerical employees. None of the
Company's employees are represented by a collective bargaining agreement. The
Company considers its relationship with its employees to be satisfactory.
Facilities
The Company does not hold any leases for corporate facilities. In
connection with consummating the Acquisitions, the Company expects to lease an
average of 1,800 square feet of office space for each of the seven Initial
Orthodontic Affiliates. The Company expects that the typical lease for office
space will be for a term of approximately five years and generally provides for
renewal options for additional years.
Following completion of this Offering, the Company intends to establish
and staff an office in Massachusetts for its financial operations. The Company
expects to lease office space and maintain its financial records in
Massachusetts.
Insurance
The provision of orthodontic services entails an inherent risk of
professional malpractice and other similar claims. Although the Company does
not influence or control the practice of dentistry by the Affiliated
Orthodontists or have responsibility for compliance with certain regulatory and
other requirements directly applicable to Orthodontic Affiliates, the
contractual relationship between the Company and the Orthodontic Affiliates may
subject the Company to medical malpractice actions. There can be no assurance
that claims, suits or complaints relating to services and products provided by
Orthodontic Affiliates will not be asserted against the Company in the future.
The availability and cost of professional liability insurance has been affected
by various factors, many of which are beyond the control of the Company. The
cost of such insurance to the Orthodontic Affiliates may have an adverse effect
on the Company's operations.
The Management Services Agreements will require the Orthodontic Affiliates
to maintain, at their expense, professional liability insurance for themselves
and each orthodontist employed by or otherwise providing orthodontic services
for the Orthodontic Affiliate in the minimum amount of $500,000 per occurrence
and $1,000,000 in the aggregate. In addition, each Orthodontic Affiliate will
undertake to comply with all applicable regulations and requirements, and the
Company will be indemnified under the Management Services Agreements
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for claims against the Company arising in connection with actions by the
Orthodontic Affiliates. The Company has applied for general liability insurance
for itself and will require that it be named as an additional insured party on
the professional liability insurance policies of the Orthodontic Affiliates
pursuant to the Management Services Agreement. The Company does not maintain
professional liability insurance for itself.
The Company maintains other insurance coverages including property,
workers' compensation and directors and officers liability insurance which
Management considers to be adequate for the size of the Company and the nature
of its business.
Litigation
The Company does not have pending any litigation that, separately or in
the aggregate, if adversely determined, would have a material adverse effect on
the Company. The Company and its Orthodontic Affiliates may, from time to time,
be party to litigation or administrative proceedings which arise in the normal
course of business.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to
directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ----------------------------- ----- -----------------------------------------------------------
<S> <C> <C>
Robert J. Schulhof ......... 55 President, Chief Executive Officer, Treasurer and Director
Dr. Dean C. Bellavia ...... 53 Director of Affiliate Programs (1) and Director
Edward M. Mulherin ......... 37 Chief Financial Officer
Floyd V. Elliott ......... 54 Director of Professional Relations and Staff
Development (1) and Director
Dr. C. Joel Glovsky ...... 64 Chairman of the Board of Directors and Secretary
John J. Clarke, Jr. ...... 54 Director
Dr. David T. Grove ......... 56 Director
</TABLE>
- ----------------
(1) Dr. Bellavia and Mr. Elliott will assume their respective positions as
employees of the Company upon the closing of this Offering. See
"--Employment Agreements."
The Company's Board of Directors is comprised of six members, each of whom
serves for one year. Each year the stockholders will elect Directors to serve
for the following year. The Executive Officers are elected annually and serve
at the discretion of the Board of Directors.
Robert J. Schulhof, the Company's founder, has been the President and
Chief Executive Officer of the Company since its formation in August 1996. In
1995, Mr. Schulhof founded OMEGA, LLC, a principal stockholder of the Company,
and is the sole manager of OMEGA, LLC. From 1990 to 1994, Mr. Schulhof was the
Chief Executive Officer of Solutions Providers, a California general
partnership and a firm that offered integrated computer technology and practice
management consulting services to the orthodontic industry, and from 1994 until
he founded OMEGA LLC in 1995, Mr. Schulhof was an officer, director and
principal stockholder of Integrated Management Systems, Inc., a firm providing
software and consulting services to the orthodontic industry. Mr. Schulhof has
been involved in the orthodontic industry for over twenty five years. He held
senior management positions with Rocky Mountain Data Systems and its
subsidiary, The Millennium Society, from 1970 to 1981. These entities were
early entrants in computerized diagnostics and practice management for the
orthodontic industry. Mr. Schulhof has authored or co-authored over 35 articles
on orthodontic diagnosis, treatment and management. He holds a masters degree
in Mathematical Statistics and Probability from the University of California at
Los Angeles.
Dean C. Bellavia, a co-founder of the Company, has been the Director of
Affiliate Programs since its formation in August 1996. Dr. Bellavia operates
his own orthodontic management consulting firm which he founded in 1974 and
which he will continue to operate to the extent it does not adversely affect
his duties for the Company. Dr. Bellavia has published numerous articles and
three books in the orthodontic field. He holds a Ph.D in Bio-Engineering from
Carnegie Mellon University.
Edward M. Mulherin has provided consulting services as the part-time Chief
Financial Officer of the Company since October 1996. Such services have been
provided through LMG, a firm in which Mr. Mulherin is a principal stockholder
and with which he has been associated since 1991. Mr. Mulherin is a certified
public accountant and holds a B.S. in Accounting from Boston College and a J.D.
from Suffolk University Law School.
Floyd V. ("Sonny") Elliott joined the Company's Board of Directors in
December 1996 and will become the Company's Director of Professional Relations
and Staff Development upon the closing of this Offering. Mr. Elliott is the
President of Elliott Enterprises, a consulting firm serving the orthodontic
industry which he founded in 1991 and which he will continue to operate to the
extent it does not adversely affect his duties for the Company. Prior to
founding Elliott Enterprises, Mr. Elliott was president of Paradigm Practice
Management, a management consulting firm working primarily with orthodontic
practices.
C. Joel Glovsky, a co-founder of the Company, has served as the Chairman
of the Board of Directors and Secretary of the Company since its formation in
August 1996. Dr. Glovsky has been engaged in the private practice
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of orthodontics since 1961. He is a graduate of the dental school of Tufts
University and served as Assistant Clinical Professor there for 15 years. Dr.
Glovsky is a diplomat of the American Board of Orthodontics. In October 1989,
Dr. Glovsky co-founded The Standish Care Company, an assisted living company,
and he served on the Board of Directors of Standish from 1989 to 1994.
John J. Clarke, Jr. was elected to the Board of Directors of the Company
in March 1997. Since 1971, Mr. Clarke has been a principal in Baldwin & Clarke
Companies, a diversified financial services organization that provides
investment banking and other financial advisory services. He is a director of
Centerpoint Bank, a wholly-owned subsidiary of Community Bankshares, Inc., a
bank holding company in Concord, New Hampshire. Mr. Clarke holds a B.A. from
Northeastern University.
David T. Grove has served on the Board of Directors of the Company since
its inception in August 1996. Dr. Grove has been in the private practice of
orthodontics in Nevada since 1971. Dr. Grove holds a dental degree from the
University of Louisville, a Masters degree in Orthodontics from St. Louis
University and a Masters degree in education from the University of Southern
California. He served as Clinic Director for two years in the Orthodontics
Department at the University of California at San Francisco. He is the Chairman
of the Company's Clinical Advisory Board.
Board Committees
The Board of Directors has established an Audit Committee and a
Compensation Committee.
Audit Committee. The Audit Committee has the responsibility for reviewing
and supervising the financial controls of the Company. The Audit Committee
makes recommendations to the Board of Directors of the Company with respect to
the Company's financial statements and the appointment of independent auditors,
reviews significant audit and accounting policies and practices, meets with the
Company's auditors concerning, among other things, the scope of audits and
reports, and reviews the performance of overall accounting and financial
controls of the Company. The Audit Committee consists of Dr. Glovsky and Mr.
Clarke.
Compensation Committee. The Compensation Committee has the responsibility
for reviewing the performance of the officers of the Company and recommending
to the Board of Directors of the Company salary and bonus amounts for all
officers of the Company, subject to the terms of existing employment
agreements. The Compensation Committee also has the responsibility for
oversight and administration of the Company's stock and other compensatory
plans. The Compensation Committee consists of Dr. Glovsky, Dr. Grove and Mr.
Clarke.
Director Compensation
Members of the Board will receive a fee of $500 for each Board meeting
attended, and members of the Committees will receive a fee of $250 for each
committee meeting attended. Board members are reimbursed for their
out-of-pocket expenses for each meeting attended.
Clinical Advisory Board
Following this Offering, the Company will establish a Clinical Advisory
Board that will consist of one orthodontist from each Orthodontic Affiliate as
well as experts in the orthodontic field. On an individual basis, members of
the Clinical Advisory Board will advise the Company's management and employees
on matters relating to policies affecting clinical practice issues. In
addition, the Company's entire Clinical Advisory Board plans to meet at least
twice a year to review and discuss the Company's progress.
Dr. Grove will be the initial Chairman of the Clinical Advisory Board.
Other members of the Clinical Advisory Board are expected to be: Dr. Michael
Churosh, Dr. Scott E. Feldman, Dr. J. Keith Hilliard, Dr. Robert M. Ricketts,
Dr. Theodore G. Saydyk, Jr., Dr. Robert R. Schmisseur, Dr. Clark E. Schneekluth
and Dr. Jeff S. Zapalac.
Consultants
Omega has entered into a consulting agreement with Dr. Glovsky, the
Chairman of the Board of Directors of the Company, which will become effective
upon the closing of this Offering. The initial term of the agreement is three
years, and such term will be extended automatically on the third anniversary
date of effectiveness and each anniversary date thereafter for an additional
year, unless either party gives notice of termination prior to such extension.
Dr. Glovsky will provide part-time consulting services to the Company in
connection with identifying orthodontic practices with potential to become
Orthodontic Affiliates and negotiating and closing Affiliation
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Agreements with such practices. He will be paid monthly according to the
following fee schedule: a one time fee of $2,500 for each orthodontic practice
that becomes an Orthodontic Affiliate (other than the Initial Orthodontic
Affiliates) in that month and, beginning in the first month after the Company
has an aggregate of 15 Orthodontic Affiliates (including the Initial
Orthodontic Affiliates), $5,000 per month, up to a maximum fee of $60,000 in
the first 12 months after the agreement becomes effective. At the end of the
first 12 months, the Company will review the workload of Dr. Glovsky under the
agreement and propose a revised fee schedule for the remainder of the term of
the agreement. If the parties cannot agree on a revised fee schedule, Dr.
Glovsky shall continue to receive fees based upon the initial fee schedule.
Omega has also entered into a consulting agreement with LMG which became
effective on May 1, 1997 and provides that LMG shall render accounting and
financial consulting services to the Company and shall make Mr. Mulherin, a
principal stockholder of LMG, available to serve full-time as the Company's
Chief Financial Officer. The initial term of the agreement is three years, and
such term will be extended automatically on May 1, 2000 and on each May 1
thereafter for an additional year, unless either party gives notice of
termination prior to such extension. LMG will be paid a monthly fee of $5,000
until the later of November 1, 1997 or the first month after the Company has an
aggregate of 15 Orthodontic Affiliates (including the Initial Orthodontic
Affiliates) and a monthly fee of $10,000 thereafter for the term of the
agreement. In addition, the Company has granted LMG a non-qualified stock
option under the Stock Option Plan to acquire 150,000 shares of the Company's
Common Stock at an exercise price equal to the initial public offering price
per share of the Common Stock. The Company has also agreed to indemnify LMG
against certain liabilities that may arise in connection with the services to
be rendered by LMG under the agreement.
Executive Compensation
The following table sets forth compensation awarded to, earned by or paid
to Robert J. Schulhof, the Company's Chief Executive Officer. No other
executive officer or director earned a salary and bonus of more than $100,000
during the period from August 30, 1996 (inception) to December 31, 1996. The
Company entered into an employment agreement with Mr. Schulhof effective
January 1, 1997. See "--Employment Agreements." The Company did not grant any
restricted stock awards, options or stock appreciation rights or make any
long-term incentive plan payouts during such period, nor did any of the
executive officers own options or stock appreciation rights during the period.
The Company has no defined benefit or actuarial plans covering its employees.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Fiscal Compensation All Other
Name of Principal Position Year Salary ($) Awards/Options ($) Compensation ($)
- ----------------------------------------------- -------- ------------ -------------------- -----------------
<S> <C> <C> <C> <C>
Robert J. Schulhof
President and Chief Executive Officer ...... 1996 $49,200 -- --
</TABLE>
The Company has obtained key man life insurance providing coverage for the
Company on the life of Mr. Schulhof in the amount of $1.0 million.
Employment Agreements
Omega has entered into employment agreements (individually, an "Employment
Agreement" and collectively, the "Employment Agreements") with each of Mr.
Schulhof, Dr. Bellavia and Mr. Elliott (collectively, the "Executives"). Mr.
Schulhof's Employment Agreement became effective January 1, 1997 and provides
that he is employed as the President and Chief Executive Officer of the
Company. The initial term of Mr. Schulhof's Employment Agreement is three
years, and such term will be extended automatically on January 1, 2000 and on
each January 1 thereafter for an additional year, unless Mr. Schulhof receives
notice of termination prior to such extension. Mr. Schulhof is paid an annual
base salary of $120,000, which amount is subject to annual review, and bonuses,
the amounts of which are determined by the Compensation Committee. Mr. Schulhof
also has the use of a company car or, at his election, will be paid an
automobile allowance of $700 per month.
Dr. Bellavia's Employment Agreement will become effective upon the closing
of this Offering and provides that he will be employed as the Director of
Affiliate Programs of the Company. The initial term of Dr. Bellavia's
Employment Agreement is three years, and such term will be extended
automatically on the third anniversary date
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<PAGE>
of the effectiveness and on each anniversary date thereafter for an additional
year, unless either party receives notice of termination prior to such
extension. Dr. Bellavia initially will be paid monthly according to the
following fee schedule: (i) a one time fee of $7,500 for each Orthodontic
Affiliate (other than the Initial Orthodontic Affiliates) in which he initiates
the implementation of the Model in that month and (ii) a fee of $208.33 for
each Orthodontic Affiliate operating under the Model in that month. He will
receive a monthly advance against these fees of $10,000, which advance will be
reviewed quarterly by the Company and, to the extent it exceeds the fees earned
for that quarter, the advance amount for the next quarter will be reduced by an
equal amount. Beginning in the first month after the Company has 15 Orthodontic
Affiliates (including the Initial Orthodontic Affiliates), the Company shall
cease paying Dr. Bellavia according to this fee schedule. Thereafter, Dr.
Bellavia's Employment Agreement provides for a base salary of $10,000 per
month, which amount is subject to annual review, and bonuses, the amounts of
which are determined by the Compensation Committee.
Mr. Elliott's Employment Agreement will become effective upon the closing
of this Offering and provides that he will be employed as the Director of
Professional Relations and Staff Development of the Company. The initial term
of Mr. Elliott's Employment Agreement is three years, and such term will be
extended automatically on the third anniversary date of the effectiveness and
on each anniversary date thereafter for an additional year, unless either party
receives notice of termination prior to such extension. Mr. Elliott initially
will be paid monthly according to the following fee schedule: (i) a one time
fee of $2,500 for each orthodontic practice that becomes an Orthodontic
Affiliate (other than the Initial Orthodontic Affiliates) in that month, (ii) a
fee of $1,250 per day per seminar conducted by Mr. Elliott for an Orthodontic
Affiliate in that month and (iii) a fee of $300 for each Orthodontic Affiliate
to which Mr. Elliott provides consulting services in that month. He will
receive a monthly advance against these fees of $10,000, which advance will be
reviewed quarterly by the Company and, to the extent it exceeds the fees earned
for that quarter, the advance amount for the next quarter will be reduced by an
equal amount. Beginning in the first month after the Company has an aggregate
of 15 Orthodontic Affiliates (including the Initial Orthodontic Affiliates),
the Company shall cease paying Mr. Elliott according to this fee schedule.
Thereafter, Mr. Elliott's Employment Agreement provides for a base salary of
$10,000 per month, which amount is subject to annual review, and bonuses, the
amounts of which are determined by the Compensation Committee.
The Employment Agreements may be terminated by the Company or the
respective Executives without cause with 90 days' prior written notice.
Pursuant to the terms of the Employment Agreements, each of the Executives has
agreed not to disclose the Company's confidential information and not to
compete against the Company during the term of his Employment Agreement and for
a period of one year thereafter, with certain exceptions. Agreements not to
compete are not favored in the law and will generally only be enforced to the
extent necessary to protect the employer's legitimate business interests.
Accordingly, a court determining whether to enforce the not to compete clauses
in the Employment Agreements may enforce the clauses as drafted or to a lesser
extent than provided for in the Employment Agreements or may deny enforcement
altogether.
If the Executive suffers a "termination other than for cause" (as defined
in the Employment Agreements), including such a termination within 24 months
after a "change in control" (as defined in the Employment Agreements), the
Executive is entitled to receive his accrued salary, earned bonus compensation,
vested deferred compensation (other than plan benefits which will be payable in
accordance with the applicable plan) and other benefits through the date of
termination and severance payments of salary (at the rate payable at the time
of such termination) for the longer of 12 months or the remaining term of the
Employment Agreement. Each of the Executives may elect to receive from the
Company a lump sum severance payment equal to the present value of the flow of
cash from the severance payments of salary. In addition, each Executive is
entitled to an accelerated vesting of any awards granted to the Executive under
the Stock Option Plan. Notwithstanding the foregoing, the Company is not
required to pay any amount which is not deductible for federal income tax
purposes.
If the Executive is terminated for "cause" (as defined in the Employment
Agreements), he is entitled to receive his accrued salary, earned bonus
compensation, vested deferred compensation (other than plan benefits which will
be payable in accordance with the applicable plan) and other benefits through
the date of termination, but shall receive no other severance benefits. Each of
the Executives may also be terminated if he dies or becomes disabled for a
period of 12 consecutive months. In the event of termination due to death or
disability, the Executive (or his estate) shall receive the same payments, but
no additional severance, except that, if the Executive becomes disabled, the
Company will maintain his insurance benefits for the remaining term of his
Employment Agreement.
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Incentive Stock Plan
Effective as of January 31, 1997, the Company adopted the Omega
Orthodontics Incentive Stock Plan (the "Stock Option Plan"). The Company had
reserved 300,000 of the authorized shares of Common Stock for issuance under
the Stock Option Plan. On April 28, 1997, the Stock Option Plan was amended to
increase the number of shares of Common Stock authorized for issuance under the
Stock Option Plan to 450,000. Unless terminated earlier, the Stock Option Plan
will terminate on January 30, 2007.
Plan Administration; Eligibility. The Stock Option Plan is administered by
a committee consisting solely of two or more non-employee Directors (the
"Committee").
The Committee has full power to select from among the persons eligible for
awards the individuals to whom awards will be granted, to make any combination
of awards to participants and to determine the specific terms of each award,
subject to the provisions of the Stock Option Plan. Persons eligible to
participate in the Stock Option Plan generally will be those employees and
directors of the Company and consultants to the Company who are responsible for
or contribute to the management, growth or profitability of the Company, as
selected from time to time by the Committee.
Stock Options Granted to Employees. The Stock Option Plan permits the
granting of both incentive stock options ("Incentive Options") and
non-qualified stock options ("Non-Qualified Options") to Company employees. The
exercise price of each option shall be determined by the Committee but shall
not be less than 100% of the fair market value for the shares on the date of
grant. The term of each option shall be fixed by the Committee and may not
exceed 10 years from the date of grant. The Committee shall determine at what
time or times each option may be exercised and, subject to the provisions of
the Stock Option Plan, the period of time, if any, after death, disability or
termination of employment during which options may be exercised. Options may
also be made exercisable in installments. Upon exercise of options, the option
exercise price must be paid in full (i) in cash or by certified or bank check
or postal or express money order, (ii) by delivery of shares of Common Stock
valued at their fair market value on the exercise date or (iii) partially in
cash and partially in stock. To qualify as Incentive Options, options must meet
additional Federal tax requirements, including limits on the value of shares
subject to Incentive Options which first become exercisable in any one year,
and a shorter term and higher minimum exercise price in the case of certain
large stockholders.
Stock Options Granted to Non-Employee Directors and Consultants. The Stock
Option Plan permits the granting of Non-Qualified Options to non-employee
Directors of the Company and to consultants to the Company. The exercise price
of such Non-Qualified Options shall be determined by the Committee and shall
not be less than the fair market value of the Common Stock on the date of
grant. The term of each option shall be fixed by the Committee and may not
exceed 10 years from the date of grant. The Committee shall determine at what
time or times each option may be exercised and, subject to the provisions of
the Stock Option Plan, the period of time, if any, after death, disability or
termination of employment during which options may be exercised. Options may
also be made exercisable in installments. Upon exercise of options, the option
exercise price must be paid in full (i) in cash or by certified or bank check
or postal or express money order, (ii) by delivery of shares of Common Stock
valued at their fair market value on the exercise date or (iii) partially in
cash and partially in stock.
Option Reloads. At the discretion of the Committee, options granted under
the Stock Option Plan to employees, directors or consultants may include a
so-called "reload" feature pursuant to which a participant exercising an option
by delivery of shares of Common Stock may be automatically granted an
additional option to purchase that number of shares equal to the number
delivered to exercise the original option.
Stock Appreciation Rights. At the discretion of the Committee, options
granted under the Stock Option Plan to employees, directors or consultants may
include stock appreciation rights. Such stock appreciation rights are only
exercisable with their related stock options. Upon exercise of a stock
appreciation right a grantee shall be entitled to receive in cash or stock the
difference between the current fair market value of Common Stock and the
original exercise price of the underlying stock option. Stock appreciation
rights not exercised with the exercise of the underlying option will
automatically terminate.
Restricted Stock and Unrestricted Stock. The Committee may also award
shares of Common Stock subject to such conditions and restrictions as the
Committee may determine ("Restricted Stock"). The purchase price, if any, of
shares of Restricted Stock shall be determined by the Committee. Recipients of
Restricted Stock must enter into a Restricted Stock award agreement with the
Company, in such form as the Committee determines, setting
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<PAGE>
forth the restrictions to which the shares are subject and the date on which
the restrictions will lapse and the shares become vested. The Committee may at
any time waive such restrictions or accelerate such dates. If a participant who
holds shares of Restricted Stock terminates the relationship with the Company
for any reason (including death) prior to the vesting of such Restricted Stock,
the Company shall have the right to require the forfeiture of such Restricted
Stock in exchange for the amount, if any, which the participant paid for them.
Prior to the vesting of Restricted Stock, the participant will have all rights
of a stockholder with respect to the shares, including voting and dividend
rights, subject only to the conditions and restrictions set forth in the Stock
Option Plan or in the Restricted Stock award agreement.
The Committee may also grant shares (at no cost or for a purchase price
determined by the Committee) which are free from any restrictions under the
Stock Option Plan ("Unrestricted Stock"). Unrestricted Stock may be issued in
recognition of past services or other valid consideration.
Performance Share Awards. The Committee may also grant awards
("Performance Shares") entitling the recipient to receive shares of Common
Stock upon the achievement of individual or Company performance goals and such
other conditions as the Committee shall determine. A recipient of a Performance
Share award must enter into an agreement setting forth the applicable
conditions, as determined by the Committee. Performance Shares may be awarded
independently or in connection with stock options or other awards under the
Stock Option Plan.
Adjustments for Stock Dividends, Mergers, Etc. The Committee shall make
appropriate adjustments in connection with outstanding awards to reflect stock
dividends, stock splits and similar events. In the event of a merger,
liquidation or similar event, the Committee in its discretion may provide for
substitution or adjustments.
Amendments and Termination. The Board of Directors may at any time amend
or discontinue the Stock Option Plan. Moreover, no such amendment, unless
approved by the stockholders of the Company, shall be effective if it would
cause the Stock Option Plan to fail to satisfy any then applicable incentive
stock option rules under Federal tax law or applicable requirements of Rule
16b-3 under the Securities and Exchange Act of 1934, as amended. Currently, the
incentive stock option regulations would require stockholder approval for an
increase in the maximum number of shares issuable pursuant to Incentive Options
under the Stock Option Plan, a modification in eligibility requirements under
the Stock Option Plan, a material increase in the benefits accruing to
participants under the Stock Option Plan or a material modification of the
eligibility requirements under the Stock Option Plan.
At April 28, 1997, options with respect to 350,000 shares of Common Stock
have been granted to Dr. Bellavia, Mr. Elliott and LMG in the amounts of
50,000, 150,000 and 150,000 shares, respectively, at an exercise price equal to
the initial public offering price for the shares and 100,000 shares of Common
Stock were reserved for issuance pursuant to future grants under the Stock
Option Plan. The options granted to Mr. Elliott and LMG vest in three equal
installments on each of the first three anniversaries of the date of grant, and
the options granted to Dr. Bellavia vest fully on the first anniversary of the
date of grant. See "Certain Transactions."
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<PAGE>
CERTAIN TRANSACTIONS
On August 31, 1996, Omega acquired OMEGA, LLC's orthodontic practice
management business and certain related assets, management contracts and
practice affiliation agreements in exchange for 1,050,000 shares of Omega's
Common Stock. The related assets, contracts and agreements included certain
computer and other office equipment; non-binding letters of intent with
orthodontic practices to affiliate with OMEGA, LLC, four of which have been
superseded by Affiliation Agreements; consulting services agreements which have
provided limited revenues to Omega pending the consummation of the
Acquisitions; consulting agreements with Dr. Bellavia and Mr. Elliott, both of
which have been superseded by Employment Agreements; and the consulting
agreement (which is described below) with Dr. Glovsky and Mayflower. Messrs.
Schulhof, Glovsky, Grove and Bellavia, all of the then directors of Omega, held
330 (27.7%), 75 (6.3%), 150 (12.6%) and 100 (8.4%) of the membership points of
OMEGA, LLC, respectively, at the time of the transaction, and Mr. Schulhof was
the sole manager of OMEGA, LLC.
In connection with the acquisition by Omega of OMEGA, LLC's orthodontic
practice management business, Omega assumed OMEGA, LLC's rights and obligations
under an agreement with Dr. Glovsky, the Chairman of the Board of the Company,
and Mayflower, a private banking firm, whereby Dr. Glovsky and Mayflower (the
Consultants) agreed to provide certain consulting services to Omega regarding
Omega's business plan, initial capital structure and private financing and
orthodontic practice affiliation transactions and the identification and
retention of Omega's Board of Directors, senior management team and
professional advisors. Under the terms of the agreement, as amended and
restated, 225,000 shares of Omega's Common Stock were issued to each of the
Consultants to be held in escrow pending fulfillment of their consulting
obligations to Omega. Following completion of the consulting services, all of
such shares were released from the escrow on April 28, 1997 and delivered to
the Consultants. In addition, Omega agreed to make cash payments to the
Consultants aggregating $842,000 over three years beginning in January 1998.
The Company is obligated to make quarterly payments to each of Dr. Glovsky and
Mayflower on January 1, April 1, June 1 and September 1, 1998, 1999 and 2000 of
$67,500, $27,000 and $10,800, respectively. Mayflower is a stockholder of the
Company and holds 75 membership points of OMEGA, LLC, the Company's principal
stockholder. See "Principal Stockholders" and "Underwriting."
Omega has entered into a new consulting agreement with Dr. Glovsky which
will become effective upon the closing of this Offering. The initial term of
the agreement is three years, and Dr. Glovsky will provide consulting services
to the Company in connection with identifying orthodontic practices with
potential to become Orthodontic Affiliates and negotiating and closing
Affiliation Agreements with such practices. He will be paid monthly according
to the following fee schedule: a one time fee of $2,500 for each orthodontic
practice that becomes an Orthodontic Affiliate (other than the Initial
Orthodontic Affiliates) in that month and, beginning in the first month after
the Company has an aggregate of 15 Orthodontic Affiliates (including the
Initial Orthodontic Affiliates), $5,000 per month up to a maximum fee of
$60,000 in the first 12 months after the agreement becomes effective. See
"Management--Consultants."
Omega has also entered into a consulting agreement with LMG which became
effective on May 1, 1997 and provides that LMG shall render accounting and
financial consulting services to the Company and shall make Mr. Mulherin, a
principal stockholder of LMG, available to serve as the Company's Chief
Financial Officer for no additional consideration. The initial term of the
agreement is three years. LMG will be paid a monthly fee of $5,000 until the
later of November 1, 1997 or the first month after the Company has an aggregate
of 15 Orthodontic Affiliates (including the Initial Orthodontic Affiliates) and
a monthly fee of $10,000 thereafter for the term of the agreement. In addition,
the Company has granted LMG a non-qualified stock option under the Stock Option
Plan to acquire 150,000 shares of the Company's Common Stock at an exercise
price equal to the initial public offering price per share of the Common Stock.
The Company has also agreed to indemnify LMG against certain liabilities that
may arise in connection with the services to be rendered by LMG under the
agreement. See "Management--Consultants."
During September 1996, Drs. Glovsky and Bellavia, both directors of the
Company and more than 5% owners of OMEGA, LLC, the Company's principal
stockholder, purchased $25,000 and $50,000, respectively, of the Bridge Notes
and received 5,000 and 10,000 shares, respectively, of the Company's Common
Stock in connection therewith. In April, 1997, Dr. Glovsky and Dr. Grove, also
a director of the Company, purchased an additional $5,000 and $25,000 of Bridge
Notes, respectively, and received an additional 1,000 and 5,000 shares of the
Common Stock,
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respectively, in connection therewith. The Company expects to repay all of its
Bridge Notes from the net proceeds of this Offering, including the Bridge Notes
held by Drs. Glovsky, Bellavia and Grove. See "Use of Proceeds."
In June 1997, Dr. Glovksy and Dr. Grove purchased $25,000 each of Interim
Notes, which bear interest at the rate of 16% per annum and are payable upon
the earlier of closing of this Offering or June 30, 1998. The Company intends
to repay all of its Interim Notes from the net proceeds of this Offering,
including the Interim Notes held by Dr. Glovsky and Dr. Grove. See "Use of
Proceeds."
The Company has entered into an Affiliation Agreement with Dr. Grove which
the Company expects to close concurrently with the closing of this Offering.
Pursuant to its agreement with Dr. Grove, a director of the Company, the
Company will acquire certain assets of Dr. Grove's orthodontic practice in
exchange for a cash payment of $333,567, a five year note in the original
principal amount of $333,567 bearing interest at 8.5% per year and amortizing
over the last four years of the term and 55,595 shares of the Company's Common
Stock.
The Company believes that all prior transactions and loans between the
Company and its officers, directors and 5% or greater stockholders have been on
terms no less favorable than could be obtained by the Company from unaffiliated
third parties. In connection with this Offering, the Company has adopted a
policy to the effect that any future transactions between it and its officers,
directors, principal stockholders and the affiliates of the foregoing persons
be on terms no less favorable to the Company than could reasonably be obtained
in arms-length transactions with independent third parties, and that any such
transactions also be approved by a majority of the Company's outside
independent directors disinterested in the transaction.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of May 31, 1997 and as
adjusted to reflect the consummation of this Offering and the Acquisitions, by
(i) each person (or group of affiliated persons) who is known by the Company to
be the beneficial owner of more than 5% of the outstanding shares of the Common
Stock, (ii) each of the Directors and Executive Officers of the Company and
(iii) all Directors and Executive Officers of the Company as a group. The
beneficial ownership information described and set forth below is based on
information furnished by the specified persons and is determined in accordance
with Rule 13d-3 promulgated under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act").
<TABLE>
<CAPTION>
Percentage of Shares Beneficially Owned
(2)
------------------------------------------
Number of Shares
Name and Address of Beneficially Before After
Beneficial Owner (1) Owned Offering Offering
- ----------------------------------------------- ----------------- ---------- ---------
<S> <C> <C> <C>
The Orthodontic Management
Effectiveness Group of America, LLC (3)
3621 Silver Spur Lane
Acton, CA 93510 ........................... 1,050,000 62.3% 27.6%
Robert J. Schulhof (4)
3621 Silver Spur Lane
Acton, CA 93510 ........................... 1,050,000 62.3% 27.6%
C. Joel Glovsky (5)
44 Grey Lane
Lynnfield, MA 01940 ........................ 231,000 13.7% 6.1%
The Mayflower Group Ltd
393 Commonwealth Ave.
Boston, MA 02115 ........................... 225,000 13.4% 5.9%
David T. Grove (6)
581 12th Street
Elko, NV 89801 .............................. 60,595 3.6% 1.6%
Dean C. Bellavia
44 Capen Boulevard
Buffalo, NY 14214 ........................... 10,000 * *
Edward M. Mulherin
63 Chatham Street
Boston, MA 02109 ........................... 10,000 * *
Floyd V. Elliot
2415 Eagle Rock
Houston, TX 77080 ........................... -- -- --
John J. Clarke, Jr.
116B South River Road
Bedford, NH 03110 ........................... -- -- --
All directors and executive officers as a group
(7 persons) (7) 1,361,595 80.8% 35.8%
</TABLE>
- ----------------
* Represents less than 1%.
(1) Except as otherwise indicated, the Company believes that the persons named
in the table above, based upon information furnished by such persons, have
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them, subject to community property
laws where applicable.
(2) The percentages shown are based on 1,685,000 shares of Common Stock
outstanding as of May 31, 1997 and 3,804,055 shares of Common Stock
expected to be outstanding upon completion of the Offering and
consummation of the Acquisitions.
(3) OMEGA, LLC is the record and beneficial owner of 1,050,000 shares of
Common Stock which it acquired from Omega on August 31, 1996 in exchange
for OMEGA, LLC's orthodontic practice management business
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and certain related assets and agreements. See "Certain Transactions." Mr.
Schulhof holds 330 membership points in OMEGA, LLC, or 27.7% of the voting
power of OMEGA, LLC, and is the sole manager of OMEGA, LLC with authority
to vote and dispose of shares of the Common Stock of the Company held by
OMEGA, LLC. Each of the following other officers and directors of Omega
holds more than five percent of the membership points of OMEGA, LLC, and
the amount of such holdings is as set forth in the parenthetical following
the holder's name: C. Joel Glovsky (75 points or 6.3%); David T. Grove
(150 points or 12.6%); Dean C. Bellavia (100 points or 8.4%); and Floyd V.
Elliott (20 points or 1.7%).
(4) Includes the 1,050,000 shares held by OMEGA, LLC which Mr. Schulhof may be
deemed to beneficially own as the principal membership pointholder and the
sole manager of OMEGA, LLC.
(5) Includes 5,000 shares held of record by Dr. Glovsky's Individual
Retirement Account.
(6) Includes 55,595 shares of Common Stock which Dr. Grove will receive
concurrently with the closing of this Offering in connection with the
consummation of the Acquisitions. See "Certain Transactions."
(7) See Notes 4, 5 and 6.
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DESCRIPTION OF SECURITIES
General
The Company is authorized to issue 9,500,000 shares of Common Stock, $.01
par value per share, and 500,000 shares of preferred stock, $.01 par value per
share (the "Preferred Stock"). As of May 31, 1997, 1,685,000 shares of Common
Stock were issued and outstanding and held of record by 27 holders, and no
shares of Preferred Stock were outstanding. Upon consummation of this Offering,
an aggregate of 3,804,055 shares of Common Stock will be outstanding and no
shares of Preferred Stock will be outstanding.
Common Stock
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. Stockholders have no right to cumulate
their votes in the election of directors. Accordingly, holders of a majority of
the shares of Common Stock entitled to vote in any election of directors may
elect all of the directors standing for election. Holders of Common Stock are
entitled to receive dividends and other distributions when, as and if declared
from time to time by the Board of Directors out of funds legally available
therefor. In the event of a voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, including all
distributions to holders of Preferred Stock having a liquidation preference
over the Common Stock.
Preferred Stock
The Board of Directors has the authority, without any further vote or
action of the stockholders of the Company, to issue shares of the Preferred
Stock in one or more series and to determine the relative rights and
preferences of any such shares, including dividend rights, conversion rights,
voting rights, terms of redemption, liquidation preferences, sinking fund terms
and the number of shares constituting any series or the designation of such
series without any further vote or action by the stockholders. The issuance of
Preferred Stock could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue any shares of Preferred Stock.
Warrants
The following summary description of certain provisions of the Warrants is
believed to reflect the material provisions of the Warrants but is not
necessarily complete and is qualified in all respects by reference to the
actual text of the Warrant Agreement between the Company and Continental Stock
Transfer & Trust Company (the "Warrant Agent"), a copy of which has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
See "Additional Information."
Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase, at any time commencing , 1997 [six (6)
months after the date of this Prospectus] until , 2002 [five years
after the date of this Prospectus], one share of Common Stock at a price of
$ per share [110% of the initial public offering price per share of
Common Stock], subject to adjustment in accordance with the anti-dilution and
other provisions referred to below. The holder of any Warrant may exercise such
Warrant by surrendering the certificate representing the Warrant to the Warrant
Agent, with the subscription form thereon properly completed and executed,
together with payment of the exercise price. No fractional shares will be
issued upon the exercise of the Warrants. The exercise price of the Warrants
bears no relationship to any objective criteria of value and should in no event
be regarded as an indication of any future market price of the Securities
offered hereby.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon
the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock or the sale by the
Company of its Common Stock or other securities convertible into Common Stock
at a price below the exercise price of the Warrants. Additionally, an
adjustment would be made in the case of a reclassification or exchange of
Common Stock, consolidation or merger of the Company with or into another
corporation (other than a consolidation or merger in which the Company is the
surviving corporation) or sale of all or substantially all of the assets of the
Company, in order to enable warrantholders to acquire the kind and number of
shares of stock or other securities or property receivable in such
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event by a holder of the number of shares of Common Stock that might otherwise
have been purchased upon the exercise of the Warrant.
Redemption Provisions. Commencing , 1998 [eighteen (18)
months after the date of this Prospectus], the Warrants are subject to
redemption by the Company, in whole but not in part, at $.10 per Warrant on
thirty (30) days' prior written notice to the warrantholders, if the average
closing bid price of the Common Stock as reported on Nasdaq equals or exceeds
$ per share [200% of the initial public offering price per share of
Common Stock] for any twenty (20) trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. In the event the Company exercises the right to
redeem the Warrants, such Warrants will be exercisable until the close of
business on the business day immediately preceding the date for redemption
fixed in such notice. If any Warrant called for redemption is not exercised by
such time, it will cease to be exercisable and the holder will be entitled only
to the redemption price.
Transfer, Exchange and Exercise. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date five (5) years from the date of this
Prospectus, at which time the Warrants will become wholly void and of no value.
If a market for the Warrants develops, the holder may sell the Warrants instead
of exercising them. There can be no assurance, however, that a market for the
Warrants will develop or continue.
Warrantholder Not a Stockholder. The Warrants do not confer upon holders
thereof any voting, dividend, or other rights as stockholders of the Company.
Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than thirty (30) days on not less than thirty (30) days' prior written
notice to the warrantholders and the Representative. Modification of the number
of securities purchasable upon the exercise of any Warrant, the exercise price
(other than as provided in the preceding sentence) and the expiration date with
respect to any Warrant requires the consent of two-thirds of the
warrantholders.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities or "blue sky" laws of the state of
residence of the exercising holder of the Warrants. Although the Company has
undertaken to use its best efforts to have all of the shares of Common Stock
issuable upon exercise of the Warrants registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, there can be no assurance that it will be able to
do so.
The Warrants are separately transferable immediately upon issuance.
Although the Securities will not be knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise qualified
for sale, investors in such jurisdictions may purchase Warrants in the
secondary market or investors may move to jurisdictions in which the shares
underlying the Warrants are not so registered or qualified during the period
that the Warrants are exercisable. In such event, the Company would be unable
to issue shares to those persons desiring to exercise their Warrants, and
holders of Warrants would have no choice but to attempt to sell the Warrants in
a jurisdiction where such sale is permissible or allow them to expire
unexercised.
Limitations on Liability of Officers and Directors
The Company's Certificate of Incorporation provides for indemnification of
the officers and directors of the Company to the fullest extent permitted by
Delaware law, including some instances in which indemnification is otherwise
discretionary under Delaware law. The Certificate of Incorporation contains
provisions that eliminate the personal liability of the Company's directors for
monetary damages resulting from breaches of their fiduciary duty (other than
liability for breaches of the director's duty of loyalty to the Company or its
stockholders), for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, violations under Section
174 of the Delaware General Corporation Law, or for any transaction from which
the director derived an improper personal benefit. The Company believes that
these provisions are essential to attracting and retaining qualified persons as
officers and directors.
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Presently there is no pending litigation or proceeding involving a
director or officer of the Company as to which indemnification is being sought,
nor is the Company aware of any threatened litigation that may result in claims
for indemnification by any officer or director.
Registration Rights
The holders of the 175,000 shares of Common Stock issued in connection
with the sale of the Bridge Notes are entitled to certain rights with respect
to the registration of such shares under the Securities Act. In the event that
the Company proposes to register any of its securities under the Securities
Act, except in connection with this Offering or pursuant to a registration
statement on Forms S-4 or S-8, or similar or successor forms, such holders are
entitled to include such shares of Common Stock in such registration, subject
to the right of the underwriters of any such offering to limit the number of
shares included in such registration. The holders of at least 25% of such
shares have the additional right to require the Company to prepare and file a
registration statement under the Securities Act on Form S-3, or any successor
form relating to secondary offerings, at any time after the Company becomes
eligible to file a registration statement on Form S-3. The Company is not
currently eligible to file a registration statement on Form S-3 and will not be
so eligible until it has a security registered under Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and has
timely filed all reports and proxy material required to be filed pursuant to
Sections 13, 14 and 15(d) of the Exchange Act for at least the 12 calendar
months preceding the filing of such registration statement on Form S-3. The
Company is required to use its best efforts to effect the registrations
described above and is generally required to bear the expenses of all such
registrations.
Anti-takeover Provisions
Section 203 of the Delaware General Corporation Law prevents an
"interested stockholder" (defined in Section 203, generally, as a person owning
15% or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined in Section 203) with a publicly-held
Delaware corporation for three years following the date 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 interested stockholder's becoming an interested
stockholder, the interested stockholder owns at last 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 right 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 is approved
by the board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of 66 2/3% of the
outstanding voting stock of the corporation not owned by the interested
stockholder.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock and the
Warrant Agent for the Warrants is Continental Stock Transfer & Trust Company.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock or
the Warrants of the Company, and no prediction can be made of the effect, if
any, that market sales of shares or the availability of shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock and the Warrants of the Company in the
public market could adversely affect prevailing market prices for the Common
Stock and the Warrants and the ability of the Company to raise equity capital
in the future.
Upon completion of this Offering, the Company will have outstanding
3,804,055 shares of Common Stock and 1,800,000 Warrants. Of these securities,
the 1,800,000 Shares and 1,800,000 Warrants sold in this Offering will be
available for immediate sale in the public market without restriction under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act.
The remaining 2,004,055 shares (including the 319,055 shares to be issued
in connection with the consummation of the Acquisitions, which shares do not
carry any registration rights) held by existing stockholders will be restricted
securities as that term is defined in Rule 144 under the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered under the Securities Act or if they qualify for an exemption from
registration under Rules 144 or 701 promulgated under the Securities Act. Sales
of the Restricted Shares in the public market, or the availability of such
shares for sale, could adversely affect the market prices of the Common Stock
and Warrants.
In connection with the Company's plan to be affiliated with approximately
31 Orthodontic Affiliates by the end of the 12 months following this Offering,
the Company expects to issue shares of its Common Stock to new Orthodontic
Affiliates. The Company currently plans to issue such shares of its Common
Stock without registration under the Securities Act and does not currently plan
to offer registration rights with respect to such shares. Accordingly, the
Company anticipates that the shares of its Common Stock issued in connection
with affiliations subsequent to the Acquisitions will be Restricted Shares.
All officers, directors and current stockholders of the Company have
agreed not to, directly or indirectly, offer, agree or offer to sell, sell,
transfer, pledge, assign, encumber, grant an option for the purchase or sale
of, hypothecate or otherwise dispose of any beneficial interest in such
securities for a period of 24 months following the effective date of the
Registration Statement without the prior written consent of the Company and the
Representative.
As a result of these contractual restrictions, shares subject to lock-up
agreements will not be saleable until the agreements expire. Upon expiration of
the lock-up period, no shares of Common Stock will be eligible for sale
pursuant to Rule 701 and 2,004,055 shares will be eligible for sale under Rule
144.
In general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least one year
(including the holding period of any prior owner except an affiliate) would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of (i) one percent of the number of shares of Common Stock
then outstanding (approximately 38,000 shares immediately after this Offering),
or (ii) the average weekly trading volume of the Common 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 Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years (including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
47
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation is acting as representative (in such capacity, the
"Representative"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement (the "Underwriting Agreement") to purchase from
the Company and the Company has agreed to sell to the Underwriters on a firm
commitment basis, the respective number of Shares and Warrants set forth
opposite their names:
<TABLE>
<CAPTION>
Underwriter Number of Shares Number of Warrants
- ---------------------------------------- ------------------ -------------------
<S> <C> <C>
National Securities Corporation ......
---------- ----------
Total .............................. 1,800,000 1,800,000
========== ==========
</TABLE>
The Underwriters are committed to purchase all the Shares of Common
Stock and Warrants offered hereby, if any of such securities are purchased. The
Underwriting Agreement provides that the obligations of the several Underwriters
are subject to conditions precedent specified therein.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Securities to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers at such prices less concessions not in excess of $ per Share and
$ per Warrant. Such dealers may reallow a concession not in excess of $
per Share and $ per Warrant to certain other dealers. After the
commencement of the Offering, the public offering prices, concession and
reallowance may be changed by the Representative.
The Representative has informed the Company that it does not expect sales
to discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make. The Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. The Company has also agreed to pay to the
Representative a non-accountable expense allowance equal to 3% of the gross
proceeds derived from the sale of the Securities underwritten, of which $50,000
has been paid to date.
The Company has granted to the Underwriters an over-allotment option,
exercisable during the forty-five (45) day period from the date of this
Prospectus, to purchase up to an additional 270,000 shares of Common Stock
and/or 270,000 Warrants at the initial public offering price per Share and
Warrant, respectively, offered hereby, less underwriting discounts and the
non-accountable expense allowance. Such option may be exercised only for the
purpose of covering over-allotments, if any, incurred in the sale of the
Securities offered hereby. To the extent such option is exercised in whole or
in part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of the additional Securities proportionate
to its initial commitment.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase from the
Company up to 180,000 shares of Common Stock and/or 180,000 Warrants (the
"Representative's Warrants"). The Representative's Warrants are initially
exercisable at a price of $ per share of Common Stock [120% of the initial
public offering price per share of Common Stock] and $ per Warrant [120%
of the initial public offering price per Warrant] for a period of four (4)
years, commencing at the beginning of the second year after their issuance and
sale and are restricted from sale, transfer, assignment or hypothecation for a
period of twelve (12) months from the date hereof, except to officers of the
Representative. The Representative's Warrants provide for adjustment in the
number of shares of Common Stock and Warrants issuable upon the exercise
thereof and in the exercise price of the Representative's Warrants as a result
of certain events, including subdivisions and combinations of the Common Stock.
The Representative's Warrants grant to the holders thereof certain rights of
registration for the securities issuable upon exercise thereof.
The Underwriting Agreement further provides that the Representative may
designate for election one person to the Company's Board of Directors for a
period of five (5) years from the effective date of the Registration Statement.
The Representative does not currently intend to exercise this right. In the
event the Representative elects
48
<PAGE>
not to exercise this right, the Representative may designate one person to
attend meetings of the Company's Board of Directors. Such designee will be
entitled to attend all meetings of the Company's Board of Directors and to
receive all notices and other correspondence and communications sent by the
Company to members of its Board of Directors. The Company will reimburse the
designee of the Representative for his out-of-pocket expenses incurred in
connection with attendance at meetings of the Company's Board of Directors.
From time to time, Mayflower, a party to a consulting agreement with the
Company, has acted as a consultant to the Representative in connection with
other public offerings. Mayflower is not acting as a consultant to the
Representative in connection with this Offering. See "Certain Transactions."
All officers and directors and current stockholders of the Company have
agreed not to, directly or indirectly, offer, agree or offer to sell, sell,
transfer, pledge, assign, encumber, grant an option for the purchase or sale
of, hypothecate or otherwise dispose of any beneficial interest in such
securities for a period of 24 months following the effective date of the
Registration Statement without the prior written consent of the Company and the
Representative. An appropriate legend will be marked on the face of
certificates representing all such securities.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market prices of the Securities.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase the Common Stock and/or Warrants for the purpose of stabilizing their
respective market prices. The Underwriters also may create a short position for
the account of the Underwriters by selling more Securities in connection with
the Offering than they are committed to purchase from the Company, and in such
case may purchase Securities in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position, up to 270,000 shares of
Common Stock and/or 270,000 Warrants, by exercising the over-allotment option
referred to above. In addition, the Representative may impose "penalty bids"
under contractual arrangements with the Underwriters whereby it may reclaim
from an Underwriter (or dealer participating in the Offering) for the account
of other Underwriters, the selling concession with respect to the Securities
that are distributed in the Offering but subsequently purchased for the account
of the Underwriters in the open market. Any of the transactions described in
this paragraph may result in the maintenance of the prices of the Securities at
a level above which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
Prior to this Offering, there has been no public market for the Common
Stock or the Warrants. Consequently, the initial public offering prices of the
Securities have been determined arbitrarily by negotiations between Omega and
the Representative and do not necessarily bear any relationship to the Omega's
asset value, net worth, or other established criteria of value. The factors
considered in such negotiations, in addition to prevailing market conditions,
included the history of and prospects for the industry in which the Company
competes, an assessment of the Company's management, the prospects of the
Company, its capital structure and the market for initial public offerings.
Upon the exercise of any Warrants more than one year after the date of
this Prospectus, which exercise was solicited by the Representative, and to the
extent not inconsistent with the guidelines of the National Association of
Securities Dealers, Inc. and the Rules and Regulations of the Commission, the
Company has agreed to pay the Representative a commission of 5% of the
aggregate exercise price of such Warrants. However, no compensation will be
paid to the Representative in connection with the exercise of the Warrants if
(a) the market price of the Common Stock is lower than the exercise price, (b)
the Warrants are held in a discretionary account, or (c) the Warrants are
exercised in an unsolicited transaction where the holder of the Warrant has not
stated in writing that the transaction was solicited and has not designated in
writing the Representative as soliciting agent. Unless granted an exemption by
the Commission from its Rule 101 under Regulation M promulgated under the
Securities Act, the Representative and any soliciting broker-dealers will be
prohibited from engaging in any market-making activities or solicited brokerage
activities with regard to the Company's securities for the period from five
business days (or such applicable periods as Rule 101 under Regulation M may
provide) prior to any solicitation of the exercise of the Warrants until the
later of the termination of such solicitation activity or the termination (by
waiver or otherwise) of any right the Representative may have to receive a fee
for the exercise of the Warrants following such solicitation. As a result, the
Representative and any soliciting broker-dealers may be unable to continue to
provide a market for the Common Stock or Warrants during certain periods while
the Warrants are exercisable.
49
<PAGE>
If the Representative has engaged in any of the activities prohibited by Rule
101 under Regulation M during the periods described above, the Representative
has undertaken to waive unconditionally its rights to receive a commission on
the exercise of such Warrants.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a
copy of each such agreement which are filed as exhibits to the Registration
Statement of which this Prospectus is a part for a more complete description
thereof. See "Additional Information."
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock and the Warrants are being passed upon for the Company by Robinson & Cole
LLP, Boston, Massachusetts, special counsel to the Company. Orrick, Herrington
& Sutcliffe LLP, New York, New York, has acted as counsel to the Underwriters
in connection with this Offering.
EXPERTS
The financial statements of Omega Orthodontics, Inc. at December 31, 1996,
and for the period from the date of August 30, 1996 (inception) through
December 31, 1996, and the financial statements of Michael G. Churosh, D.D.S.,
M.S., Ltd., Dr. Scott E. Feldman, D.D.S., M.S., David T. Grove, D.M.D.,
Theodore G. Saydyk, Jr., D.D.S., M.S., P.C., Robert R. Schmisseur, D.D.S.,
M.S., P.C., Clark E. Schneekluth, D.D.S., M.D., Inc. and Jeff S. Zapalac,
D.D.S., M.S., Inc. at December 31, 1996 and 1995, and for each of the two years
in the period ended December 31, 1996, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
Prior to this Offering, the Company has not been a reporting company under
the Securities Exchange Act of 1934, as amended. The Company has filed with the
Commission the Registration Statement under the Securities Act with respect to
the Common Stock and Warrants offered hereby. This Prospectus, which is a part
of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock and
Warrants, reference is hereby made to the Registration Statement and the
exhibits and schedules filed as a part thereof. This Prospectus contains
descriptions or summaries, as indicated in the relevant context, of any
contract, agreement or other document which is required by the Securities Act
to be described in the Prospectus or filed as an exhibit to the Registration
Statement of which this Prospectus is a part. Statements contained in this
Prospectus concerning the provisions or contents of any contract, agreement or
any other document referred to herein are not necessarily complete. With
respect to each such contract, agreement or document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matters involved, and each statement shall be deemed
qualified in its entirety by such reference to the copy of the applicable
document filed with the Commission. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of
the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New
York, New York 10048; and Chicago Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of the Registration Statement and
the exhibits and schedules thereto can be obtained from the Public Reference
Section of the Commission upon payment of the prescribed fee. The Registration
Statement may also be accessed on the World Wide Web through the Commission's
Internet address at "http://www.sec.gov."
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
-----
Unaudited Pro Forma Financial
Statements of Omega
Orthodontics, Inc.
Basis of Presentation .................. F-2
Unaudited Pro Forma Balance Sheet ...... F-3
Unaudited Pro Forma Statements of
Operations ........................... F-4
Notes to Unaudited Pro Forma
Financial Statements .................. F-6
Omega Orthodontics, Inc.
Report of Independent Auditors ......... F-8
Balance Sheets ........................... F-9
Statements of Operations ............... F-10
Statement of Stockholders' Deficit ...... F-11
Statements of Cash Flows ............... F-12
Notes to Financial Statements ............ F-13
Michael G. Churosh, D.D.S., M.S.,
Ltd.
Report of Independent Auditors ......... F-17
Balance Sheets ........................... F-18
Statements of Operations and
Accumulated Deficit .................. F-19
Statements of Cash Flows ............... F-20
Notes to Financial Statements ............ F-21
Dr. Scott E. Feldman, D.D.S., M.S.
Report of Independent Auditors ......... F-26
Balance Sheets ........................... F-27
Statements of Income and
Proprietor's Capital .................. F-28
Statements of Cash Flows ............... F-29
Notes to Financial Statements ............ F-30
David T. Grove, D.M.D.
Report of Independent Auditors ......... F-33
Balance Sheets ........................... F-34
Page
-----
Statements of Income and
Proprietor's Capital .................. F-35
Statements of Cash Flows ............... F-36
Notes to Financial Statements ............ F-37
Theodore G. Saydyk, Jr., D.D.S.,
M.S., P.C.
Report of Independent Auditors ......... F-41
Balance Sheets ........................... F-42
Statements of Operations and
Retained Earnings ..................... F-43
Statements of Cash Flows ............... F-44
Notes to Financial Statements ............ F-45
Robert R. Schmisseur, D.D.S.,
M.S., P.C.
Report of Independent Auditors ......... F-50
Balance Sheets ........................... F-51
Statements of Income and
Accumulated Deficit .................. F-52
Statements of Cash Flows ............... F-53
Notes to Financial Statements ............ F-54
Clark E. Schneekluth, D.D.S.,
M.D., Inc.
Report of Independent Auditors ......... F-59
Balance Sheets ........................... F-60
Statements of Operations and
Accumulated Deficit .................. F-61
Statements of Cash Flows ............... F-62
Notes to Financial Statements ............ F-63
Jeff S. Zapalac, D.D.S., M.S., Inc.
Report of Independent Auditors ......... F-67
Balance Sheets ........................... F-68
Statements of Operations and
Accumulated Deficit .................. F-69
Statements of Cash Flows ............... F-70
Notes to Financial Statements ............ F-71
F-1
<PAGE>
OMEGA ORTHODONTICS, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma financial statements (i) give effect to
the Acquisitions pursuant to which the Company will acquire substantially all
of the equity interests of the Initial MSOs that hold certain assets of and are
associated with the seven Initial Orthodontic Affiliates (except in the case of
two sole proprietorships where it will acquire certain assets of such
proprietorships) in exchange for 319,055 shares of the Company's Common Stock,
cash, notes payable, stock options and the assumption of certain liabilities
and (ii) reflect the effects of the provisions of the Affiliation Agreements
and Management Services Agreements between the Company and each of the Initial
Orthodontic Affiliates. For purposes of developing the unaudited pro forma
balance sheet, the value of the Company's Common Stock is based upon the
assumed initial public offering price of $6.00 per share. The estimated
aggregate amounts to be allocated to the net assets acquired consist of:
Common stock ...... $1,914,330
Cash ............... 2,111,797
Notes payable ...... 800,701
-----------
$4,826,828
===========
The allocation is based upon preliminary estimates in accordance with
generally accepted accounting principles. The actual allocation will be based
on the estimated fair market value of the tangible and intangible assets and
liabilities of such Initial MSOs (and the proprietorships) as of the date of
the Acquisitions. For purposes of the pro forma financial statements, such
allocation has been estimated as follows:
<TABLE>
<S> <C>
Current assets ........................... $ 898,665
Intangible assets ........................ 5,027,634
Property, equipment and improvements ...... 307,392
Liabilities ................................. (1,406,863)
-------------
$ 4,826,828
=============
</TABLE>
The unaudited pro forma financial statements have been prepared by the
Company based upon the historical financial statements of Omega and the Initial
Orthodontic Affiliates included elsewhere in this Prospectus and certain
preliminary estimates and assumptions deemed appropriate by management of the
Company. The pro forma balance sheet as of March 31, 1997 gives effect to the
Acquisitions as if such transactions had occurred on March 31, 1997 and
reflects certain transactions occurring subsequent to March 31, 1997 including
(i) the issuance of $280,000 of additional notes payable and related 56,000
shares of Common Stock for no additional consideration, (ii) the issuance of
10,000 shares of Common Stock under a previous agreement with the Chief
Financial Officer, (iii) the release from escrow of 450,000 shares of Common
Stock previously issued to the Chairman of the Board of Directors and a private
bank upon completion of certain financial advisory services and the additional
obligation of approximately $842,000 for such services to be paid over three
years beginning January 1, 1998 and (iv) the issuance of Interim Notes in the
aggregate principal amount of $50,000. The pro forma statements of operations
for the year ended December 31, 1996 and three months ended March 31, 1997
assumes the Acquisitions were completed on January 1, 1996. These pro forma
financial statements may not be indicative of actual results as if the
transactions had occurred on the dates indicated or which may be realized in
the future. Neither expected benefits nor cost efficiencies anticipated by the
Company following consummation of the Acquisitions have been reflected in such
pro forma financial statements; however, cost reductions as contractually
agreed per the Management Services Agreements have been reflected in the pro
forma financial statements. Moreover, the pro forma financial statements do not
include the non-recurring compensation expense of $2.2 million that the Company
will recognize during the quarter ending June 30, 1997. Also the pro forma
financial statements do not include any costs for travel, consulting or
professional fees associated with the identification, evaluation and
integration of additional Orthodontic Affiliates, which costs include
substantially all of the compensation of two executives of the Company. These
costs may be substantial and may cause the Company to incur operating losses.
Moreover, pro forma management expenses do not include the anticipated
incremental costs of managing such additional Orthodontic Affiliates as the
related management fees are not included in the pro forma revenues. Such costs
may also be substantial and may vary according to the operations of each new
Orthodontic Affiliate.
The pro forma financial statements should be read in conjunction with the
historical financial statements of Omega and each of the Initial Orthodontic
Affiliates, including the related notes thereto, and "Management's Plan of
Operation" that appear elsewhere in this Prospectus.
F-2
<PAGE>
Omega Orthodontics, Inc.
Unaudited Pro Forma Balance Sheet
March 31, 1997
<TABLE>
<CAPTION>
Initial
Omega Orthodontic Pro Forma
Orthodontics, Inc. Affiliates Adjustments # Pro Forma
-------------------- ------------- -------------- --- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents ..................... $ 60,156 $ 231,978 $ (231,978) 1 $ 390,156
330,000 5
Patient receivables, net ..................... 11,156 889,533 900,689
Other current assets ........................... 10,500 12,688 (3,556) 1 19,632
Due from selling orthodontists ............... 9,199 255,904 (255,904) 1 9,199
----------- ----------- ------------ -------------
Total current assets ........................ 91,011 1,390,103 (161,438) 1,319,676
Property, equipment and improvements, net ...... 10,936 564,745 (257,353) 1 318,328
Intangible assets .............................. 643,409 11,063 5,016,571 3 5,671,703
660 5
Other assets .................................... 0 82,098 (82,098) 1 0
----------- ----------- ------------ -------------
Total assets ................................. $ 745,356 $ 2,048,009 $ 4,516,342 $ 7,309,707
=========== =========== ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and other current
liabilities ................................. $ 588,626 $ 525,497 $ (269,982) 1 $ 844,141
Deferred revenue .............................. 1,148,857 (319,575) 2 829,282
Current portion of notes payable ............... 232,434 (180,714) 1 51,720
Due to orthodontic affiliates .................. 245,549 2 2,357,346
2,111,797 3
Due to related party ........................... 6,399 0 6,399
Loans payable ................................. 595,000 0 330,000 5 925,000
----------- ----------- ------------ -------------
Total current liabilities ..................... 1,190,025 1,906,788 1,917,075 5,013,888
Notes payable to orthodontic affiliates ......... 0 0 800,701 3 800,701
Notes payable, less current portion ............ 0 216,422 (191,625) 1 24,797
Due to related party ........................... 842,000 5 842,000
Stockholders' equity (deficit):
Preferred stock, $.01 par value per share;
500,000 shares authorized; no shares
outstanding ................................. 0 0 0 0
Common stock, $.01 par value per share;
9,500,000 shares authorized; 1,619,000
shares outstanding; 2,004,055 shares
outstanding pro forma ........................ 16,190 0 3,191 3 20,041
660 5
Additional paid-in capital ..................... 0 0 1,911,139 3 3,256,639
1,345,500 5
Accumulated deficit ........................... (456,359) 0 (2,192,000) 5 (2,648,359)
Deferred compensation ........................ (4,500) 0 4,500 5 0
----------- ----------- ------------ -------------
Total stockholders' equity (deficit) ......... (444,669) 0 1,072,990 628,321
Owner's equity (deficit) ........................ -- (75,201) 75,201 4 0
----------- ----------- ------------ -------------
Total liabilities and stockholders' equity ... $ 745,356 $ 2,048,009 $ 4,516,342 $ 7,309,707
=========== =========== ============ =============
</TABLE>
F-3
<PAGE>
Omega Orthodontics, Inc.
Unaudited Pro Forma Statement of Operations
for the Three Months Ended March 31, 1997
<TABLE>
<CAPTION>
Omega Initial
Orthodontics Orthodontic Pro Forma
Inc. Affiliates Adjustments # Pro Forma
-------------- ------------- -------------------- ---- ---------------
<S> <C> <C> <C> <C> <C>
Practice revenue ........................ $ 0 $1,069,305 $ 0 $ 1,069,305
Orthodontists' compensation ............ 0 176,588 117,008 1 293,596
---------- ---------- ----------- -----------
Net management revenue .................. 0 892,717 (117,008) 775,709
Direct practice expenses:
Employee costs ........................ 0 286,534 286,534
Other direct costs ..................... 0 319,106 (23,539) 2 295,567
General and administrative ............ 0 157,386 (92,674) 2 64,712
Bad debt expense ..................... 0 0 0
Depreciation and amortization ......... 0 34,281 (8,387) 4 25,894
---------- ---------- ----------- -----------
Total direct practice expenses ...... 0 797,307 (124,600) 672,707
---------- ---------- ----------- -----------
Income from operations before
management expenses .................. 0 95,410 7,592 103,002
Management expenses:
Employee and consulting costs ......... 54,231 0 16,144 5 70,375
General and administrative ............ 163,324 0 (101,521) 5 61,803
Amortization of goodwill ............... 31,768 6 31,768
---------- ---------- -----------
Total management expenses ............ 217,555 0 (53,609) 163,946
---------- ---------- -----------
Income (loss) from operations ............ (217,555) 95,410 61,201 (60,944)
| 1,777 7
Interest expense, net .................. (29,918) (3,523)---------| 31,346 8 (17,333)
|(17,015) 9
Other consulting revenue ............... 23,226 0 (11,199) 10 12,027
---------- ---------- ----------- -----------
Income (loss) before income taxes ...... (224,247) 91,887 66,110 (66,250)
Provision (benefit) for income taxes . -- (2,000) 2,000 11 0
---------- ---------- ----------- -----------
Net income (loss) ..................... $ (224,247) $ 93,887 $ 64,110 $ (66,250)
========== ========== =========== ===========
Pro forma net loss per share ......... $ (0.14) $ (0.03)
========== ===========
Shares used to compute net loss per
share ................................. 1,629,000 529,222 12 2,158,222
========== ===========
</TABLE>
F-4
<PAGE>
Omega Orthodontics, Inc.
Unaudited Pro Forma Statement of Operations
for the Year Ended December 31, 1996
<TABLE>
<CAPTION>
August 30, 1996 Initial
(Inception) to Orthodontic Pro Forma
December 31, 1996 Affiliates Adjustments # Pro Forma
------------------- ------------- --------------------- ---- ---------------
<S> <C> <C> <C> <C> <C>
Practice revenue ........................ $ 0 $4,615,677 $ 0 $ 4,615,677
Orthodontists' compensation ............ 0 1,014,584 267,151 1 1,281,735
---------- ----------- ------------ -----------
Net management revenue .................. 0 3,601,093 (267,151) 3,333,942
Direct practice expenses:
Employee costs ........................ 0 1,049,041 1,049,041
Other direct costs ..................... 0 1,035,321 36,678 2 1,071,999
General and administrative ............ 0 735,763 (452,753) 2 283,010
Bad debt expense ..................... 0 89,056 (23,894) 3 65,162
Depreciation and amortization ......... 0 153,098 (33,549) 4 119,549
---------- ----------- ------------ -----------
Total direct practice expenses ...... 0 3,062,279 (473,518) 2,588,761
---------- ----------- ------------ -----------
Income from operations before
management expenses .................. 0 538,814 206,367 745,181
Management expenses:
Employee and consulting costs ......... 90,554 0 190,946 5 281,500
General and administrative ............ 157,464 0 89,746 5 247,210
Amortization of goodwill ............... 0 0 123,460 6 123,460
---------- ----------- ------------ -----------
Total management expenses ............ 248,018 0 404,152 652,170
---------- ----------- ------------ -----------
Income (loss) from operations ............ (248,018) 538,814 (197,785) 93,011
| 26,764 7
Interest expense, net .................. (27,172) (29,773)-------| 29,635 8 (68,606)
|(68,060) 9
Other consulting revenue ............... 43,078 0 13,322 10 56,400
---------- ----------- ------------ -----------
Income (loss) before income taxes ...... (232,112) 509,041 (196,124) 80,805
Provision (benefit) for income taxes . 0 (32,297) 100,394 11 68,097
---------- ----------- ------------ -----------
Net income (loss) ..................... $ (232,112) $ 541,338 $ (296,518) $ 12,708
========== =========== ============ ===========
Pro forma net income (loss) per
share ................................. $ (0.14) $ 0.01
========== ===========
Shares used to compute net income
(loss) per share ..................... 1,629,000 533,222 12 2,158,222
========== ===========
</TABLE>
F-5
<PAGE>
Omega Orthodontics, Inc.
Notes to Unaudited Pro Forma
Financial Statements
The accompanying unaudited pro forma financial statements present the pro
forma financial position of the Company as of March 31, 1997 and the pro forma
results of its operations for the year ended December 31, 1996 and the three
months ended March 31, 1997. The Company was incorporated in August 1996.
The unaudited pro forma financial statements also include the historical
financial position at December 31, 1996 and March 31, 1997 and results of
operations for the year ended December 31, 1996 and the three months ending
March 31, 1997, of all of the following entities which comprise the Initial
Orthodontic Affiliates:
Michael G. Churosh, D.D.S., M.S., Ltd.
Dr. Scott E. Feldman, D.D.S., M.S.
Theodore G. Saydyk, Jr., D.D.S., M.S., P.C.
Robert R. Schmisseur, D.D.S., M.S., P.C.
Clark E. Schneekluth, D.D.S., M.D., Inc.
Jeff S. Zapalac, D.D.S., M.S., Inc.
David T. Grove, D.M.D.
Unaudited Pro Forma Balance Sheet Adjustments:
1. Historical assets and liabilities of the Initial Orthodontic Affiliates are
included in the pro forma balance sheet pursuant to the terms and
conditions of the underlying Affiliation Agreements. The pro forma balance
sheet reflects excluded assets and liabilities that are not to be acquired
or assumed as part of the Affiliation Agreements, including all cash and
cash equivalents, notes receivable and payable to the Initial Orthodontic
Affiliates and any amounts owed by the Initial Orthodontic Affiliates which
are unrelated to the assets acquired.
2. Represents the adjustment of due to orthodontic affiliates and deferred
revenue (patient prepayments) to reflect the portion of gross patient
receivables and practice revenue retained by the Affiliated Orthodontists.
3. Represents the allocation of the purchase price to the assets and
liabilities at their estimated fair market values at the date of
consummation of the Acquisitions. Upon consummation of this Offering, the
Company will pay the $2,111,797 included in the unaudited pro forma balance
sheet as due to Orthodontic Affiliates and issue Common Stock and stock
options as outlined in the Affiliation Agreements.
4. Represents the elimination of historical owners' equity (deficit) of the
Initial Orthodontic Affiliates.
5. To reflect certain transactions occurring subsequent to March 31, 1997
including (a) the issuance of 10,000 shares of Common Stock for past
services to the Chief Financial Officer, (b) the issuance of Bridge Notes
in the aggregate principal amount of $280,000, and 56,000 shares of Common
Stock issued in connection therewith, (c) a non-recurring consulting
expense of approximately $2,200,000 comprised of approximately $1,400,000
attributable to the release from escrow of 450,000 shares of Common Stock
and the obligation for approximately $842,000 of cash payments beginning in
January 1998 and (d) the issuance of Interim Notes in the aggregate
principal amount of $50,000.
Unaudited Pro Forma Statement of Operations Adjustments:
1. To reclass equity distributions made by certain Initial Orthodontic
Affiliates that practice as sole proprietors to orthodontists' compensation
and to adjust the Affiliated Orthodontists' compensation to agree with the
Management Services Agreements. The Initial Orthodontic Affiliates retain
the difference between practice revenue and the management fee earned by
the Company. The Initial Orthodontic Affiliates typically earn 25% to 35%
of practice revenue. In addition, a portion of the profits, if any,
exceeding an agreed upon profit target will generally be shared with the
Orthodontic Affiliate.
2. To adjust direct practice expenses of the Initial Orthodontic Affiliates to
reflect the expenses that would have been payable under the Management
Services Agreements. Excluded expenses represent those costs that the
F-6
<PAGE>
Omega Orthodontics, Inc.
Notes to Unaudited Pro Forma
Financial Statements (Continued)
(Continued)
Initial Orthodontic Affiliates are responsible for paying directly,
including salaries and benefits of the Affiliated Orthodontist and any
other practice providers, physician licensing fees, board certification
fees, professional liability insurance premiums, certain professional
education expenses and legal and professional fees.
3. To adjust bad debt expense to reflect only the portion related to the
Company's net management revenue and related patient receivables.
4. To adjust depreciation and amortization expense to reflect the exclusion of
certain fixed assets from the historical assets purchased in accordance
with the Affiliation Agreements.
5. To increase management expenses to reflect an estimate of operations and
management of only the seven Initial Orthodontic Affiliates but does not
include the non-recurring compensation expense of $2,200,000 that the
Company will recognize in April 1997 for payments made to two consultants
for past services rendered. Moreover, costs that will be incurred related
to identifying, evaluating and integrating additional Orthodontic
Affiliates have not been included. Such costs could be substantial and may
cause the Company to incur operating losses.
6. Represents the amortization of intangible assets over 40 years.
7. Represents elimination of interest expense associated with the liabilities
excluded from the historical liabilities assumed in accordance with the
Affiliation Agreements. Also represents the elimination of interest income
earned on cash excluded from the historical assets purchased in accordance
with the Affiliation Agreements.
8. Represents the elimination of interest expense incurred in connection with
the Bridge Notes and the Interim Notes (loans payable) that is assumed to
be paid off from the proceeds of this Offering.
9. To adjust interest expense to reflect the amount incurred in connection
with the issuance of debt in connection with the Acquisitions.
10. To increase other consulting fees to reflect consulting fees earned from
non-affiliated orthodontic practices. The historical statement of
operations of Omega represents operating results from August 30, 1996 and
for the three months ended March 31, 1997.
11. To reflect federal and state income taxes assuming a 40% statutory income
tax rate, increased by the non-deductible portion of goodwill amortization.
12. Based upon the historical shares used to compute net income per share
increased by (i) the issuance of 56,000 shares of Common Stock in
connection with additional Bridge Notes issued subsequent to March 31,
1997, (ii) the assumed issuance of 154,167 shares of Common Stock to repay
$925,000 of outstanding Bridge and Interim Notes and (iii) the issuance of
319,055 shares of Common Stock at the assumed initial public offering price
of $6.00 per share in connection with the assumed affiliation with the
seven Initial Orthodontic Affiliates.
F-7
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders
Omega Orthodontics, Inc.
We have audited the accompanying balance sheet of Omega Orthodontics, Inc.
(the Company) as of December 31, 1996 and the related statements of operations,
stockholders' deficit, and cash flows for the period from August 30, 1996
(inception) to December 31, 1996. 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 Omega Orthodontics, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
the initial period then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has an accumulated deficit of $232,112, and a working capital deficiency of
$368,032 at December 31, 1996. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Boston, Massachusetts
March 7, 1997, except for Note 8,
as to which the date is May 12, 1997
F-8
<PAGE>
Omega Orthodontics, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1997
------------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
- -------
Current assets:
Cash and cash equivalents .............................. $ 321,057 $ 60,156
Accounts receivable net of allowance for doubtful accounts
of $5,700
Trade ................................................ 8,900 11,156
Related parties ....................................... 9,396 9,199
----------- -----------
18,296 20,355
Prepaid expenses and other assets ........................ 4,000 10,500
----------- -----------
Total current assets .................................... 343,353 91,011
Equipment, net .......................................... 10,096 10,936
Other assets, net ....................................... 137,474 643,409
----------- -----------
Total assets ............................................. $ 490,923 $ 745,356
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Accounts payable ....................................... $ 21,234 $ 120,418
Due to related parties ................................. 27,036 6,399
Accrued expenses ....................................... 88,115 468,208
Notes payable .......................................... 575,000 595,000
----------- -----------
Total current liabilities .............................. 711,385 1,190,025
Commitments and contingencies
Stockholders' deficit:
Common stock, $.01 par value, 10,000,000 shares
authorized, 1,615,000 and 1,619,000 shares issued and
outstanding at December 31, 1996 and March 31, 1997,
respectively .......................................... 16,150 16,190
Accumulated deficit .................................... (232,112) (456,359)
Deferred compensation ................................. (4,500) (4,500)
----------- -----------
Total stockholders' deficit .............................. (220,462) (444,669)
----------- -----------
Total liabilities and stockholders' deficit ............ $ 490,923 $ 745,356
=========== ===========
</TABLE>
See accompanying notes.
F-9
<PAGE>
Omega Orthodontics, Inc.
Statements of Operations
<TABLE>
<CAPTION>
For the period from
August 30, 1996 Three Months
(inception) ended
to December 31, 1996 March 31, 1997
---------------------- ---------------
(unaudited)
<S> <C> <C>
Revenue:
Management consulting fees ..................... $ 43,078 $ 23,226
Direct expenses:
Employee costs ................................. 90,554 54,231
Other costs .................................... 11,678 7,285
---------- ----------
Total direct expenses ........................... 102,232 61,516
General and administrative ..................... 144,670 155,125
Depreciation .................................... 1,116 914
---------- ----------
Operating loss ................................. (204,940) (194,329)
Interest income ................................. 2,463 1,428
Interest expense .............................. (29,635) (31,346)
---------- ----------
Net loss ....................................... $ (232,112) $ (224,247)
========== ==========
Net loss per share .............................. $ (0.14) $ (0.14)
========== ==========
Shares used to compute net loss per share ...... 1,629,000 $1,629,000
========== ==========
</TABLE>
See accompanying notes.
F-10
<PAGE>
Omega Orthodontics, Inc.
Statement of Stockholders' Deficit
<TABLE>
<CAPTION>
Total
Common Stock Retained Deferred Stockholders'
Shares Amount Deficit Compensation Deficit
----------- --------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock in
connection with asset acquisition ...... 1,050,000 $10,500 $ 10,500
Issuance of common stock in
connection with debt offering ............ 115,000 1,150 1,150
Issuance of common stock in
connection with the Advisor's
agreement .............................. 450,000 4,500 $ (4,500) --
Net loss for the period .................. -- -- $ (232,112) -- (232,112)
---------- -------- ----------- --------- ----------
Balance at December 31, 1996 ............ 1,615,000 16,150 (232,112) (4,500) (220,462)
Issuance of common stock in
connection with debt offering
(unaudited) .............................. 4,000 40 -- -- 40
Net loss for the period (unaudited) ...... -- -- (224,247) -- (224,247)
---------- -------- ----------- --------- ----------
Balance at March 31, 1997
(unaudited) .............................. 1,619,000 $16,190 $ (456,359) $ (4,500) $ (444,669)
========== ======== =========== ========= ==========
</TABLE>
See accompanying notes.
F-11
<PAGE>
Omega Orthodontics, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the period from
August 30, 1996 Three Months
(inception) ended
to December 31, 1996 March 31, 1997
---------------------- ---------------
(unaudited)
<S> <C> <C>
Operating activities
Net loss ................................................... $ (232,112) $ (224,247)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortized debt financing costs ........................... 9,500 12,208
Provision for bad debts ................................. 5,700 --
Depreciation ............................................. 2,430 914
Changes in operating assets and liabilities:
Accounts receivable .................................... (23,996) (2,059)
Prepaid expenses and other assets ..................... (4,000) (6,500)
Accounts payable ....................................... 21,234 99,184
Due to related parties ................................. 27,036 (20,637)
Accrued expenses ....................................... 88,115 (69,457)
----------- -----------
Net cash used in operating activities ..................... (106,093) (210,594)
Investing activities
Purchases of equipment .................................... (7,284) (1,754)
Other assets ............................................. (1,644) (1,079)
----------- -----------
Net cash used in investing activities ..................... (8,928) (2,833)
Financing activities
Deferred offering costs .................................... (101,228) (87,128)
Debt financing costs ....................................... (37,694) 19,654
Proceeds from issuance of notes payable .................. 575,000 20,000
----------- -----------
Net cash provided by (used in) financing activities ...... 436,078 (47,474)
----------- -----------
Net increase (decrease) in cash and cash equivalents ...... 321,057 (260,901)
Cash and cash equivalents at beginning of period ......... -- 321,057
----------- -----------
Cash and cash equivalents at end of period ............... $ 321,057 $ 60,156
=========== ===========
Supplemental disclosures:
Interest paid ............................................. $ 20,135 $ 31,346
=========== ===========
</TABLE>
See accompanying notes.
F-12
<PAGE>
Omega Orthodontics, Inc.
Notes to Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
The Company
Omega Orthodontics, Inc., (the Company) was incorporated in Delaware in
August 1996 and subsequently acquired the assets and certain consulting
contracts held by The Orthodontic Management Effectiveness Group of America,
LLC (Omega, LLC), a California-based orthodontic practice management and
consulting firm, in exchange for 1,050,000 shares of the Company's common
stock.
The Company will provide management and marketing services to orthodontic
practices in the United States. The Company offers its services primarily under
an "affiliate" relationship whereby it purchases the equity interests of the
management services organization that holds certain assets of and is associated
with an orthodontic practice and enters into a long term management services
agreement with the practice of the selling orthodontist. Pursuant to that
agreement, the Company receives a monthly management fee for providing all of
the orthodontist's practice needs, including facility, staff and supplies, as
well as a program of systems, methods and procedures designed to enhance the
growth, efficiency and profitability of the practice.
Going Concern
The Company has no significant operating history and has an accumulated
deficit of $232,112, and a working capital deficiency of $368,032 at December
31, 1996. In order to continue operations, the Company is seeking to raise
capital through the initial public offering as contemplated in this Prospectus.
If such offering is not successful, the Company would need to scale back
operations, seek alternative financing sources which are not now available, or
both.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amount of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of its cash flow statement, the Company considers all highly
liquid investments with original maturities of three month or less when
purchased to be cash and cash equivalents.
Equipment
Equipment is stated at cost. Depreciation expense is provided using the
straight-line method over the estimated useful lives of the assets, which is
five years. Equipment cost amounted to $11,212 and accumulated depreciation
amounted to $1,116 at December 31, 1996.
Intangible assets
Intangible assets, consisting primarily of goodwill and organizational
costs, are amortized on a straight line basis over useful lives of five to
forty years.
Revenue Recognition
The Company provides management consulting services to orthodontic
practices under consulting agreements. Revenue is recognized as the services
are provided.
F-13
<PAGE>
Omega Orthodontics, Inc.
Notes to Financial Statements (Continued)
December 31, 1996
1. Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company provides for income taxes under the liability method
prescribed by Statement of Financial Accounting, Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. SFAS No. 109
requires that the Company record a valuation allowance when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Due to the uncertainty of the Company's ability to realize the
benefit of the deferred tax assets, a full valuation allowance has been applied
against the deferred tax assets at December 31, 1996. The Company prepares its
tax return on the cash basis.
Net Loss Per Share
Net loss per share is computed using the weighted average number of
outstanding shares of common stock and common stock equivalents, and the
exercise of stock options (using the treasury stock method). Common stock
equivalent shares are excluded from the computation if their effect is
anti-dilutive; however, pursuant to the requirements of the Securities and
Exchange Commission, common shares and common equivalent shares relating to
stock options (using the treasury stock method and the initial public offering
price) issued during the twelve months prior to the filing of an initial public
offering are considered outstanding for all periods presented whether or not
they are anti-dilutive.
Interim Financial Statements
The balance sheet at March 31, 1997, the statements of operations and cash
flows for the three months ended March 31, 1997 and the statement of
stockholders' deficit for the three months ended March 31, 1997 are unaudited,
but, in the opinion of management, include all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of results for
the interim period. The results of operations for the three months ended March
31, 1997 are not necessarily indicative of results to be expected for the
entire year.
2. Other Assets
Other assets are comprised of the following at December 31, 1996:
Deferred offering costs ............ $101,228
Debt financing costs ............... 38,844
Intangible assets .................. 8,216
---------
148,288
Less accumulated amortization ...... 10,814
---------
Other assets, net .................. $137,474
=========
Deferred offering costs include all expenses incurred in connection with
the preparation of the initial public offering as contemplated in this
Prospectus, but does not include any costs contingent upon consummation of the
offering (see Note 4). Debt financing costs incurred in connection with the
issuance of $575,000 of notes payable are being amortized over the term of the
debt (see Note 3).
3. Notes Payable
During 1996, the Company issued a series of notes in the aggregate
principal amount of $575,000. The notes bear interest at 15% per annum and are
due on the earlier of September 30, 1997 or upon consummation of an initial
public offering as contemplated in this Prospectus. In consideration for the
purchase of the notes, the Company issued to the noteholders 115,000 shares of
common stock for no additional payment (see Note 8).
F-14
<PAGE>
Omega Orthodontics, Inc.
Notes to Financial Statements (Continued)
December 31, 1996
4. Stockholders' Deficit
The Board of Directors voted to amend the Certificate of Incorporation and
revise the number of authorized shares of common stock to 9,500,000 and
authorize 500,000 shares of preferred stock, $.01 par value, effective February
12, 1997. The preferred stock shares will be issuable in one or more series,
each such series to have such rights and preferences, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by the Board of Directors.
The Company adopted a Stock Incentive Plan (the Plan) effective January
31, 1997. Plan awards in the form of stock options, stock appreciation rights,
restricted stock, and stock grants may be issued to employees, consultants and
advisers of the Company at prices to be determined by the Board of Directors.
The Plan will terminate on January 30, 2007. A total of 300,000 shares of
common stock were initially reserved for issuance under the Plan and no grants
were made as of December 31, 1996 (see Note 8 for subsequent revisions).
The Company has an agreement with a private bank and the Chairman of the
Board of Directors (the Consultants), whereby the Consultants have agreed to
provide certain consulting services to the Company. As consideration for such
services, the Company contingently issued 450,000 shares of common stock to the
Consultants at no additional cost and simultaneously placed such shares in
escrow. As of December 31, 1996, the 450,000 shares are included in outstanding
common stock at their nominal fair value at the date of issuance with a
corresponding deferred charge. These shares were subsequently released from
escrow upon completion of such services (see Note 8).
The Company has agreed to issue 10,000 shares of common stock for nominal
consideration to the chief financial officer of the Company in return for
assistance in the preparation of financial information and performance of the
related duties. These shares were subsequently issued upon completion of
services (see Note 8).
5. Income Taxes
Since the Company has incurred only losses since inception, and due to the
degree of uncertainty related to the use of the loss carryforwards, the Company
has fully reserved this benefit. At December 31, 1996, the Company had tax net
operating loss carryforwards of approximately $232,112 available to offset
federal and state taxable income which expire in 2011. In accordance with
Section 382 of the Internal Revenue Code, the use of the above carryforwards
may be subject to annual limitations based upon ownership changes of the
Company's stock which have occurred.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets as of December 31, 1996 are as follows:
Net operating loss carryforwards ...... $ 92,845
Valuation allowance .................. (92,845)
----------
Net deferred tax asset ............... $ 0
==========
6. Related Party Transactions
Two Directors of the Company purchased an aggregate of $75,000 of the
notes payable and received 15,000 shares of the Company's common stock in
connection therewith. (See Note 8 for subsequent issuances). In addition, three
Directors performed consulting services for the Company for which they were
compensated an aggregate of approximately $90,000 in 1996.
F-15
<PAGE>
Omega Orthodontics, Inc.
Notes to Financial Statements (Continued)
December 31, 1996
7. Commitments and Contingencies
Since its inception in August 1996, the Company has undertaken to enter
into certain affiliate agreements with seven orthodontic practices (affiliate
orthodontists) in the United States. In the event of a successful public
offering of the Company's common stock, these agreements provide for the
purchase by the Company of the equity interests in a management services
organization (MSO) to be formed by the selling orthodontist for consideration
ranging from $342,000 to $1,082,000 for each such MSO. The estimated aggregate
purchase price of the seven practices under agreement, $4,787,000, will be paid
through a combination of cash of approximately $2,098,000, five-year term notes
totaling $794,000 and shares of common stock of the Company with a fair value
at the date of issue of approximately $1,894,000.
Concurrent with the acquisition of the MSO, the Company and the MSO enter
into a 20-year management services agreement, renewable for an additional 20
years, with each affiliate orthodontist. The agreement will stipulate that the
MSO provide practice management and marketing services, facilities and
non-clinical personnel to the affiliate orthodontic for a monthly fee,
generally equal to 65% to 75% of the affiliate orthodontist's gross patient fee
collections. Conversely, the affiliate orthodontist will have sole authority to
direct the business, professional and ethical aspects of the practice, make all
professional hiring decisions, render patient care, and keep all patient dental
records. The affiliate orthodontist will also be responsible for entering into
an employment agreement, including non-competition provisions, with each
orthodontist employed and paying all salaries for dental professionals,
professional licensure and board certification fees and professional liability
insurance premiums.
The affiliate orthodontist will have certain rights and obligations to
repurchase, and the MSO will have the right to require the affiliate
orthodontist to repurchase, the non-clinical practice assets held by the MSO in
the event that the management services agreement is terminated. Such purchases
will generally require payment of the book value of the net assets of the MSO.
The MSO will also have certain rights to designate a successor orthodontist to
acquire the practice of the affiliate orthodontist when the orthodontist ceases
practice.
The acquisitions are anticipated to result in substantial goodwill which
will be amortized over the term of the management services agreement. All
acquisitions and related management services agreements are contingent upon the
consummation of the initial public offering as contemplated in this Prospectus.
8. Subsequent Events
On April 28, 1997 and May 12, 1997, the Board of Directors took the
following actions: (i) voted to increase the number of shares of common stock
authorized for issuance under the Stock Incentive Plan (the Plan) to 450,000
shares (see Note 4), which increase was approved by the stockholders, (ii)
authorized the issuance of additional notes payable in the aggregate principal
amount of $300,000, (iii) authorized the Company to enter into various
employment and consulting agreements, which included the granting of stock
options under the Company's Plan for an aggregate of 350,000 shares of common
stock, vesting ratably over periods of one to three years, at an exercise price
equal to the initial public offering price of the Company's common stock and,
(iv) authorized the release from escrow of 450,000 shares of common stock
previously issued to the Chairman of the Board of Directors and a private bank
upon completion of certain consulting services (see Note 4) and agreed to
additional consideration of approximately $842,000 for such services to be paid
over three years beginning January 1, 1998.
In consideration for the purchase of the notes, the Company issued to the
noteholders 60,000 shares of common stock for no additional payment (see Note
3). Included in the $300,000 notes payable and 60,000 shares of common stock
were $30,000 and 6,000 shares, respectively, issued to directors of the Company
(see Note 6). The issuance of the 450,000 shares and related consideration of
$842,000 will result in a charge to operating results of the Company of
approximately $2,200,000 in the second quarter of 1997.
F-16
<PAGE>
Audited Financial Statements
Report of Independent Auditors
To the Board of Directors
Omega Orthodontics, Inc.
We have audited the accompanying balance sheets of Michael G. Churosh,
D.D.S., M.S., Ltd. (the Company) as of December 31, 1996 and 1995, and the
related statements of operations and accumulated deficit, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide 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 Michael G. Churosh, D.D.S.,
M.S., Ltd. as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has a stockholder's deficit of $174,512, and a working capital deficit of
$264,982 at December 31, 1996. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Boston, Massachusetts
February 28, 1997
F-17
<PAGE>
Michael G. Churosh, D.D.S., M.S., Ltd.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995 March 31, 1997
-------------- -------------- ---------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash ................................................... $ 2,418 $ -- $ 6,452
Patient receivables, less allowance of $24,000 and $22,000
at December 31, 1996 and 1995, respectively, and
$24,000 at March 31, 1997 .............................. 139,215 107,861 223,586
Prepaid expenses and other assets ........................ 7,417 4,959 5,607
----------- ----------- -----------
Total current assets .................................... 149,050 112,820 235,645
Equipment and improvements, net ........................... 117,082 122,385 110,270
Intangible assets, net .................................... 16,594 38,719 11,063
Note receivable, stockholder .............................. 109,746 175,854 121,815
----------- ----------- -----------
Total assets ............................................. $ 392,472 $ 449,778 $ 478,793
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
- -------------------------------------
Current liabilities:
Accounts payable ....................................... $ 62,193 $ 34,776 $ 46,095
Bank overdraft .......................................... -- 8,472 --
Accrued expenses ....................................... -- 19,457 15,089
Patient prepayments .................................... 280,608 243,227 370,020
Income taxes payable .................................... 6,000 -- 9,000
Current portion of notes payable ........................ 65,231 169,924 56,706
----------- ----------- -----------
Total current liabilities ................................. 414,032 475,856 496,910
Notes payable, less current portion ..................... 152,952 218,184 147,381
Commitments and contingencies
Stockholder's deficit:
Common stock, $10 par value, 30,000 shares authorized,
2,500 shares issued and outstanding ..................... 25,000 25,000 25,000
Additional paid-in capital .............................. 68,711 68,711 68,711
Accumulated deficit .................................... (268,223) (337,973) (259,209)
----------- ----------- -----------
Total stockholder's deficit .............................. (174,512) (244,262) (165,498)
----------- ----------- -----------
Total liabilities and stockholder's deficit ............... $ 392,472 $ 449,778 $ 478,793
=========== =========== ===========
</TABLE>
See accompanying notes.
F-18
<PAGE>
Michael G. Churosh, D.D.S., M.S., Ltd.
Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
-------------- -------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
Patient revenue ................................. $ 974,680 $ 766,311 $ 241,200 $ 219,900
Direct expenses:
Employee costs ................................. 385,031 350,867 95,717 96,258
Other costs .................................... 235,852 205,176 74,448 58,778
---------- ---------- ---------- ----------
Total direct expenses ........................... 620,883 556,043 170,165 155,036
General and administrative ..................... 211,146 137,273 40,851 52,971
Depreciation and amortization .................. 47,486 38,970 12,343 11,872
---------- ---------- ---------- ----------
Operating income ................................. 95,165 34,025 17,841 21
Interest income, stockholder note ............... 10,189 13,559 1,828 2,547
Interest expense ................................. (29,604) (46,499) (7,655) (7,401)
---------- ---------- ---------- ----------
Income (loss) before income tax expense ......... 75,750 1,085 12,014 (4,833)
Income tax expense .............................. (6,000) -- (3,000) (1,500)
---------- ---------- ---------- ----------
Net income (loss) .............................. 69,750 1,085 9,014 (6,333)
Accumulated deficit at beginning of period ...... (337,973) (339,058) (268,223) (337,973)
---------- ---------- ---------- ----------
Accumulated deficit at end of period ............ $ (268,223) $ (337,973) $ (259,209) $ (344,306)
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-19
<PAGE>
Michael G. Churosh, D.D.S., M.S., Ltd.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) ........................... $ 69,750 $ 1,085 $ 9,014 $ (6,333)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization ............... 47,486 38,970 12,343 11,872
Provision for bad debts ..................... 24,000 22,000 -- 6,000
Changes in operating assets and
liabilities:
Patient receivables ........................ (55,354) (56,361) (84,371) (21,844)
Patient prepayments ........................ 37,381 76,074 89,412 29,682
Prepaid expenses and other assets ......... (2,458) (3,135) 1,810 --
Accounts payable ........................... 27,417 (4,719) (16,098) 53,555
Income taxes payable ..................... 6,000 -- 3,000 1,500
Accrued expenses ........................... (19,457) (1,327) 15,089 8,595
---------- ---------- ---------- ----------
Net cash provided by operating activities 134,765 72,587 30,199 83,027
Investing activities
Purchases of equipment and improvements ...... (20,058) (35,944) -- (5,015)
Notes receivable, stockholder ............... 66,108 49,896 (12,069) --
---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities ................................. 46,050 13,952 (12,069) (5,015)
Financing activity
Repayment of notes payable .................. (169,925) (95,149) (14,096) (42,481)
---------- ---------- ---------- ----------
Net cash used in financing activity ......... (169,925) (95,149) (14,096) (42,481)
---------- ---------- ---------- ----------
Net increase (decrease) in cash ............... 10,890 (8,610) 4,034 35,531
Cash (bank overdraft) at beginning of period . (8,472) 138 2,418 (8,472)
---------- ---------- ---------- ----------
Cash (bank overdraft) at end of period ...... $ 2,418 $ (8,472) $ 6,452 $ 27,059
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-20
<PAGE>
Michael G. Churosh, D.D.S., M.S., Ltd.
Notes to Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
Nature of Business
The dental practice of Michael G. Churosh, D.D.S., M.S., Ltd. (the
Company) is a professional corporation which was incorporated August 31, 1970
in Phoenix, Arizona for the primary purpose of practicing dentistry. The
Company currently maintains offices in Goodyear and Bullhead City, Arizona.
Basis of Presentation
The Company's financial statements have been presented on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. At December 31, 1996, the Company
has a stockholder's deficit of $174,512 and a working capital deficit of
$264,982. Included in total assets is amounts due from stockholder of $109,746
at December 31, 1996.
These conditions indicate that the Company's ability to continue as a
going concern will be dependent upon its ability to generate sufficient cash
flow to meet its liabilities as they become due, including obtaining financing
from outside sources. Management expects to obtain adequate capital from its
contemplated transaction with Omega Orthodontics, Inc. (Omega) (see Note 9).
Should the transaction with Omega not be consummated, management will seek
financing through other sources, however, there can be no assurance that such
sources of capital will be available, on terms and conditions acceptable to the
Company, and that the pending transaction with Omega will be completed. The
financial statements do not include any adjustments to reflect the possibility
of future effects on the classification and recoverability of assets or the
liabilities that might result if the Company were not able to continue as a
going concern in its present form.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation expense is
provided using the straight-line method over the estimated useful lives of the
assets, which range from five to seven years. Amortization of leasehold
improvements is provided over the term of the lease or their estimated useful
life, whichever is shorter.
Orthodontic Supplies and Materials
Orthodontic supplies and materials are expensed as incurred.
Revenue Recognition
Revenue is recognized in accordance with the proportional performance
method of accounting for service contracts. Under this method, revenue is
recognized as services are performed and the costs associated therewith are
incurred, under the terms of contractual agreements with each patient. A
significant portion, approximately 25%, of the services are performed in the
initial month of the contract. Billings under each contract, which vary in
duration from 12 to 24 months, are made throughout the term of the contract.
Provisions are made currently for all known or anticipated losses from patient
receivables and for loss contracts. Such deductions totaled $24,000 and $22,000
in 1996 and 1995, respectively. Patient prepayments represent collections from
patients or their insurance companies which are received in advance of the
performance of the related services.
Risks and Uncertainties
Concentration of Credit Risk
Financial instruments which subject the Company to credit risk consist
primarily of patient receivables. The risk with respect to patient receivables
is minimized due to the fact that patients remit a substantial portion of their
contract fee in advance. The Company generally does not require collateral, and
credit losses consistently have been within management's expectations.
F-21
<PAGE>
Michael G. Churosh, D.D.S., M.S., Ltd.
Notes to Financial Statements (Continued)
December 31, 1996
1. Summary of Significant Accounting Policies (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amount of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121 "Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of". SFAS No. 121 requires recognition of impairment losses on
long-lived assets when indicators of impairment losses on long-lived assets are
present and future undiscounted cash flows are insufficient to support the
assets' recovery. Adoption of SFAS No. 121 had no material impact on the
Company's financial statements.
Interim Financial Statements
The balance sheet at March 31, 1997, the statements of operations and
accumulated deficit and statements of cash flows for the three months ended
March 31, 1997 and 1996 are unaudited, but, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of results for these interim periods. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of results to be expected for the entire year.
Prior to the preparation of the financial statements of the Company for
the years ended December 31, 1996 and 1995 for purposes of this Prospectus, the
Company maintained accounting records on the cash basis of accounting.
Accordingly, revenues were recorded when received and expenses were recorded
when paid. Although the statements of operations and accumulated deficit and
cash flows for the year ended December 31, 1996 were prepared on the accrual
basis of accounting, accrual basis interim financial statements for 1996 are
not readily available. As a result, the accompanying interim statements of
operations and accumulated deficit and cash flows for the three month period
ended March 31, 1996 have been prepared based upon management estimates of the
revenue and expenses incurred for that period on a comparable basis to the same
amounts for the year ended December 31, 1996.
Income Taxes
The Company provides for income taxes under the liability method
prescribed by Statement of Financial Accounting, Standards (SFAS) No. 109,
"Accounting for Income Taxes". Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. SFAS No. 109
requires that the Company record a valuation allowance when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Due to the uncertainty of the Company's ability to realize the
benefit of the deferred tax assets, a full valuation allowance has been applied
against the net deferred tax assets in 1996 and 1995. The Company prepares its
tax returns on the cash basis.
Intangible Assets
Intangible assets consist of goodwill and a five-year covenant not to
compete associated with the purchase of the Bullhead City office. These costs
are being amortized on a straight-line basis over a five-year period.
Professional Liability Insurance
The Company has obtained professional liability coverage through
commercial insurance carriers on a claims-made basis. Management believes that
there are no claims that may result in a loss in excess of amounts covered by
its existing insurance.
F-22
<PAGE>
Michael G. Churosh, D.D.S., M.S., Ltd.
Notes to Financial Statements (Continued)
December 31, 1996
2. Equipment and Improvements
Equipment and improvements consisted of the following at December 31:
1996 1995
---------- ---------
Equipment ............................................ $105,271 $ 91,832
Leasehold improvements ............................. 83,096 77,684
Furniture and fixtures ............................. 12,826 11,619
--------- ---------
201,193 181,135
Less accumulated depreciation and amortization ..... 84,111 58,750
--------- ---------
Equipment and improvements, net .................... $117,082 $122,385
========= =========
3. Intangible Assets
Intangible assets consisted of the following at December 31:
1996 1995
---------- ---------
Covenant not to compete ............... $ 95,875 95,875
Goodwill ........................... 14,750 14,750
--------- ---------
110,625 110,625
Less accumulated amortization ...... 94,031 71,906
--------- ---------
Intangibles, net .................. $ 16,594 38,719
========= =========
4. Notes Payable
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Note payable to a finance corporation bearing interest at 10.33% per
annum, payable in monthly installments of $7,062, including
interest through March 2001 ....................................... $218,183 $284,608
Note payable to a bank bearing interest at 10%, repaid in 1996 ......
-- 103,500
--------- ---------
218,183 388,108
Less current portion ................................................ 65,231 169,924
--------- ---------
$152,952 $218,184
========= =========
</TABLE>
The notes are secured by substantially all the assets of the Company. The
carrying value of the Company's debt approximates fair value. The aggregate
amounts of required principal payments on the Company's notes payable at
December 31, 1996 are as follows:
Year ending December 31:
1997 .................. $ 65,231
1998 .................. 72,226
1999 .................. 58,981
2000 .................. 18,937
2001 .................. 2,808
---------
$218,183
=========
Interest paid for the year ended December 31, 1996 and 1995 approximates
interest expense.
F-23
<PAGE>
Michael G. Churosh, D.D.S., M.S., Ltd.
Notes to Financial Statements (Continued)
December 31, 1996
5. Related-Party Transactions
The note receivable from the sole stockholder accrues interest at 8% per
annum and is due on demand. The sole stockholder received approximately
$146,000 and $110,000 of compensation from the Company in 1996 and 1995,
respectively, which is included in employee costs. In addition, the stockholder
is the principal owner of the building in which the Company leases its Goodyear
office space. No rent was charged to the Company for the Goodyear facility
prior to April 1996.
6. Leases
The Company's Bullhead City office space is rented under an operating
lease which expires in April 1998. The Goodyear office space is rented under a
tenant at will agreement ($2,500 per month). In addition, the Company leases
certain equipment under lease agreements which have been accounted for as
operating leases. The lease agreements expire at various times through 1998.
The future minimum annual rental commitments under these long-
term noncancellable leases are as follow:
Year ending December 31:
1997 ..................... $44,371
1998 .................. 5,625
--------
$49,996
========
Total rent expense for the years ended December 31, 1996 and 1995 amounted
to $65,748 and $36,846, respectively.
7. Profit-Sharing Plan
Employees of the Company who have completed twelve months of service and
who have reached the age of 21 are eligible to participate in the Company's
profit-sharing plan (the Plan). The Plan does not permit nor require employee
contributions. The only source of contributions to the Plan is the annual
employer contributions which are made at the discretion of the board of
directors, and may not exceed 25% of an employee's annual compensation. There
were no employer contributions in 1996 or 1995.
8. Income Taxes
Significant components of the current provision for income taxes are as
follows at December 31, 1996:
Federal ...... $3,500
State ......... 2,500
-------
$6,000
=======
F-24
<PAGE>
Michael G. Churosh, D.D.S., M.S., Ltd.
Notes to Financial Statements (Continued)
December 31, 1996
8. Income Taxes (Continued)
Significant components of the deferred tax liabilities and assets at
December 31 were as follows:
1996 1995
----------- -----------
Deferred tax liabilities:
Patient receivables ........................ $ (56,000) $ (43,000)
Prepaid expenses ........................... (3,000) (2,000)
--------- ---------
Total deferred tax liabilities ............... (59,000) (45,000)
Deferred tax assets:
Patient prepayments ........................ 112,000 97,000
Accounts payable and accrued expenses ...... 25,000 22,000
Depreciation .............................. 7,000 7,000
Other ....................................... 18,000 18,000
Net operating loss carryforward ............ -- 41,000
--------- ---------
162,000 185,000
Valuation allowance ........................ (103,000) (140,000)
--------- ---------
Total deferred tax assets .................. 59,000 45,000
--------- ---------
Net deferred liabilities ..................... $ 0 $ 0
========= =========
The effective tax rate for 1996 (7.9%) and 1995 (0%) differed from the
statutory tax rate (34%) due to the utilization of net operating loss
carryforwards.
9. Contingent Practice Acquisition
The Company has entered into an agreement with Omega, a company recently
organized to provide management and marketing services to orthodontic practices
in the United States. In the event of a successful public offering of Omega's
common stock, this agreement provides for the purchase by Omega of the equity
interests in a management services organization (MSO) to be formed by the
Company's sole stockholder converting the Company into a general corporation
which will hold certain assets of the Company. The agreement provides for the
payment by Omega of $1,082,058, consisting of cash of $530,208 and shares of
common stock of Omega with a fair value at the date of issue of $551,850.
Concurrent with the acquisition of the equity interests in the MSO, the
sole stockholder of the Company will organize a new company (the orthodontic
practice) that will enter into a 20-year management services agreement with
Omega (or a wholly-owned subsidiary of Omega) renewable for an additional 20
years. The agreement will stipulate that Omega (or a wholly-owned subsidiary of
Omega) provide practice management and marketing services, facilities and
non-clinical personnel to the orthodontic practice for a monthly fee equal to
70% of the orthodontic practice's gross patient fee collections.
The acquisition and related management services agreement are entirely
contingent upon the consummation of an initial public offering by Omega.
F-25
<PAGE>
Report of Independent Auditors
To the Board of Directors
Omega Orthodontics, Inc.
We have audited the accompanying balance sheets of the practice of Dr. Scott
E. Feldman, D.D.S., M.S. (a Proprietorship) as of December 31, 1996 and 1995
and the related statements of income and proprietor's capital and cash flows
for the years then ended. These financial statements are the responsibility of
the Proprietorship's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide 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 the practice of Dr. Scott E.
Feldman, D.D.S., M.S. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
March 7, 1997
F-26
<PAGE>
Dr. Scott E. Feldman D.D.S., M.S.
(a Proprietorship)
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995 March 31, 1997
---------- ---------- ---------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- -------
Current assets:
Cash ............................................. $ 21,075 $ 25,270 $ 46,215
Patient receivables, less allowance of $4,300
and $4,500 at December 31, 1996 and 1995,
respectively, and $4,300 at March 31, 1997 ...... 117,168 126,904 119,868
Prepaid expenses and other assets ............... 1,307 1,289 1,857
--------- --------- ---------
Total current assets .............................. 139,550 153,463 167,940
Equipment, net .................................... 3,573 4,593 3,318
--------- --------- ---------
Total assets .................................... $143,123 $158,056 $171,258
========= ========= =========
LIABILITIES AND PROPRIETOR'S CAPITAL
- ------------------------------------
Current liabilities:
Accounts payable ................................. $ 4,240 $ 4,875 $ 4,790
Accrued expenses ................................. 1,300 1,300 3,702
Patient prepayments .............................. 133,071 115,135 138,593
--------- --------- ---------
Total current liabilities ........................ 138,611 121,310 147,085
Commitments and contingencies
Proprietor's capital .............................. 4,512 36,746 24,173
--------- --------- ---------
Total liabilities and proprietor's capital ...... $143,123 $158,056 $171,258
========= ========= =========
</TABLE>
See accompanying notes.
F-27
<PAGE>
Dr. Scott E. Feldman D.D.S., M.S.
(a Proprietorship)
Statements of Income and Proprietor's Capital
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
-------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
Patient revenue ........................... $ 436,241 $ 439,505 $ 98,240 $ 94,143
Direct expenses:
Employee costs ........................... 93,521 99,620 22,514 23,380
Other costs .............................. 93,727 114,419 28,212 23,432
----------- ---------- ---------- ----------
Total direct expenses ..................... 187,248 214,039 50,726 46,812
General and administrative .................. 29,645 33,761 5,364 7,411
Depreciation .............................. 1,020 510 255 255
----------- ---------- ---------- ----------
Operating income ........................... 218,328 191,195 41,895 39,665
Interest income ........................... 352 391 -- --
----------- ---------- ---------- ----------
Net income ................................. 218,680 191,586 41,895 39,665
Proprietor's capital (deficit) at beginning of
period .................................... 36,746 (11,987) 4,512 36,746
Proprietor's withdrawals .................. (250,914) (142,853) (22,234) (62,728)
----------- ---------- ---------- ----------
Proprietor's capital at end of period ...... $ 4,512 $ 36,746 $ 24,173 $ 13,683
=========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-28
<PAGE>
Dr. Scott E. Feldman D.D.S., M.S.
(a Proprietorship)
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
------------- ------------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income .................................... $ 218,680 $ 191,586 $ 41,895 $ 39,665
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ................................. 1,020 510 255 255
Provision for bad debts ..................... 4,300 4,500 -- 1,075
Changes in operating assets and liabilities:
Patient receivables ........................ 5,436 (49,993) (2,700) 54,697
Patient prepayments ........................ 17,936 25,026 5,522 (48,867)
Prepaid expenses and other assets ............ (18) 289 (550) --
Accounts payable ........................... (635) (4,416) 550 18,963
Accrued expenses ........................... -- (456) 2,402 3,355
---------- ---------- --------- ----------
Net cash provided by operating activities ...... 246,719 167,046 47,374 69,143
Investing activity
Purchases of equipment ........................ -- (5,103) -- --
---------- ---------- --------- ----------
Net cash used in investing activity ............ -- (5,103) -- --
Financing activity
Proprietor's withdrawals ........................ (250,914) (142,853) (22,234) (62,728)
---------- ---------- --------- ----------
Net cash used in financing activity ............ (250,914) (142,853) (22,234) (62,728)
---------- ---------- --------- ----------
Net increase (decrease) in cash ............... (4,195) 19,090 25,140 6,415
Cash at beginning of period ..................... 25,270 6,180 21,075 25,270
---------- ---------- --------- ----------
Cash at end of period ........................... $ 21,075 $ 25,270 $ 46,215 $ 31,685
========== ========== ========= ==========
</TABLE>
See accompanying notes.
F-29
<PAGE>
Dr. Scott E. Feldman, D.D.S., M.S.
(a Proprietorship)
Notes to Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
Nature of Business
The dental practice of Dr. Scott E. Feldman, D.D.S., M.S., was established
as a sole proprietorship (the Proprietorship) in Woodland Hills, California for
the primary purpose of practicing dentistry.
Revenue Recognition
Revenue is recognized in accordance with the proportional performance
method of accounting for service contracts. Under this method, revenue is
recognized as services are performed and the costs associated therewith are
incurred, under the terms of contractual agreements with each patient. A
significant portion, approximately 25%, of the services are performed in the
initial month of the contract. Billings under each contract, which vary in
duration from 12 to 24 months, are made throughout the term of the contract.
Provisions are made currently for all known or anticipated losses from patient
receivables and for loss contracts. Such deductions totaled $4,300 and $4,500
in 1996 and 1995, respectively. Patient prepayments represent collections from
patients or their insurance companies which are received in advance of the
performance of the related services.
Risks and Uncertainties
Concentration of Credit Risk
Financial instruments which subject the Proprietorship to credit risk
consists primarily of patient receivables. The risk with respect to patient
receivables is minimized due to the fact that patients remit a substantial
portion of their contract fee in advance. The Proprietorship does not require
collateral, and credit losses consistently have been within management's
expectations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amount of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Orthodontic Supplies and Materials
Orthodontic supplies and materials are expensed as incurred.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation expense is
provided using the straight-line method over the estimated useful lives of the
assets, which range from five to seven years. Amortization of leasehold
improvements is provided over the term of the lease or their estimated useful
life, whichever is shorter.
Income Taxes
Income from the Proprietorship is reported in the proprietor's federal and
state income tax return. Accordingly, no income taxes have been recorded in the
Proprietorship's financial statements.
Impairment of Long-Lived Assets
In 1996, the Proprietorship adopted Statement of Financial Accounting
Standards ("SFAS") No. 121 "Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of". SFAS No. 121 requires recognition of impairment
losses on long-lived assets when indicators of impairment losses on long-lived
assets are present and future undiscounted cash flows are insufficient to
support the assets' recovery. Adoption of SFAS No. 121 had no material impact
on the Proprietorship's financial statements.
F-30
<PAGE>
Dr. Scott E. Feldman, D.D.S., M.S.
(a Proprietorship)
Notes to Financial Statements (Continued)
December 31, 1996
1. Summary of Significant Accounting Policies (Continued)
Interim Financial Statements
The balance sheet at March 31, 1997 the statements of income and
proprietor's capital and statements of cash flows for the three months ended
March 31, 1997 and 1996 are unaudited, but, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of results for these interim periods. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of results to be expected for the entire year.
Prior to the preparation of the financial statements of the Proprietorship
for the years ended December 31, 1996 and 1995 for purposes of this Prospectus,
the Proprietorship maintained accounting records on the cash basis of
accounting. Accordingly, revenues were recorded when received and expenses were
recorded when paid. Although the statements of income and proprietor's capital
and cash flows for the year ended December 31, 1996 were prepared on the
accrual basis of accounting, accrual basis interim financial statements for
1996 are not readily available. As a result, the accompanying interim
statements of income and proprietor's capital and cash flows for the three
month period ended March 31, 1996 have been prepared based upon management
estimates of the revenue and expenses incurred for that period on a comparable
basis to the same amounts for the year ended December 31, 1996.
2. Equipment
Equipment consisted of the following at December 31:
1996 1995
--------- --------
Equipment ........................... $23,909 $23,909
Less accumulated depreciation ...... 20,336 19,316
-------- --------
Equipment, net ..................... $ 3,573 4,593
======== ========
3. Operating Leases
The Proprietorship's office space is rented under a tenant at will
agreement. Rent expense amounted to $28,783 and $27,754 in 1996 and 1995
respectively.
4. Related Party Transactions
As a sole proprietorship, the accompanying statements of income and
proprietor's capital do not include any compensation for services rendered by
the sole proprietor. Proprietor's withdrawals amounted to $250,914 and $142,853
in 1996 and 1995, respectively.
5. Contingent Practice Acquisition
The Proprietorship has entered into an agreement with Omega Orthodontics,
Inc. (Omega), a company recently organized to provide management and marketing
services to orthodontic practices in the United States. In the event of a
successful public offering of Omega's common stock, this agreement provides for
the purchase by Omega (or a wholly-owned subsidiary of Omega) of certain assets
of the Proprietorship for $567,743, consisting of cash of $189,248, a five-year
term 8.5% annual interest bearing note totaling $88,947 and shares of common
stock of Omega with a fair value at the date of issue of $289,548.
Concurrent with the acquisition of the Proprietorship's assets, the
Proprietor will organize a new company (the orthodontic practice) to enter into
a 20-year management services agreement with Omega (or a wholly-owned
subsidiary of Omega) renewable for an additional 20 years. The agreement will
stipulate that Omega (or a wholly-owned subsidiary of Omega) provide practice
management and marketing services, facilities and non-clinical
F-31
<PAGE>
Dr. Scott E. Feldman, D.D.S., M.S.
(a Proprietorship)
Notes to Financial Statements (Continued)
December 31, 1996
5. Contingent Practice Acquisition (Continued)
personnel to the orthodontic practice for a monthly fee equal to 65% of the
orthodontic practice's gross patient fee collections.
The acquisition and related management services agreement are entirely
contingent upon the consummation of an initial public offering by Omega.
F-32
<PAGE>
Report of Independent Auditors
To the Board of Directors
Omega Orthodontics, Inc.
We have audited the accompanying balance sheets of the practice of David T.
Grove, D.M.D. (a Proprietorship) as of December 31, 1996 and 1995 and the
related statements of income, proprietor's capital, and cash flows for the
years then ended. These financial statements are the responsibility of the
Proprietorship's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide 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 the practice of David T.
Grove, D.M.D. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 10, 1997
F-33
<PAGE>
David T. Grove, D.M.D.
(a Proprietorship)
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995 March 31, 1997
---------- ---------- ---------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- -------
Current assets:
Cash and cash equivalents ........................... $ 87,244 $ 93,362 $ 56,779
Patient receivables, less allowance of $8,300
and $7,000 at December 31, 1996 and 1995,
respectively, and $8,300 at March 31, 1997 ......... 44,369 43,770 46,862
Prepaid expenses and other assets .................. 3,977 3,655 3,556
--------- --------- ---------
Total current assets ................................. 135,590 140,787 107,197
Property, equipment and improvements, net ............ 350,487 317,205 332,863
--------- --------- ---------
Total assets ....................................... $486,077 $457,992 $440,060
========= ========= =========
LIABILITIES AND PROPRIETOR'S CAPITAL
- ------------------------------------
Current liabilities:
Accounts payable .................................... $ 11,704 $ 10,378 $ 12,282
Accrued expenses .................................... 6,273 18,525 3,892
Patient prepayments ................................. 142,849 133,797 146,781
Current portion of capital lease obligation ......... 16,819 15,434 15,110
--------- --------- ---------
Total current liabilities ........................... 177,645 178,134 178,065
Capital lease obligation, less current portion ...... 24,797 41,617 22,407
Commitments and contingencies
Proprietor's capital ................................. 283,635 238,241 239,588
--------- --------- ---------
Total liabilities and proprietor's capital ......... $486,077 $457,992 $440,060
========= ========= =========
</TABLE>
See accompanying notes.
F-34
<PAGE>
David T. Grove, D.M.D.
(a Proprietorship)
Statements of Income and Proprietor's Capital
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
Patient revenue ................................. $ 842,361 $ 860,458 $ 208,219 $ 198,995
Direct expenses:
Employee costs ................................. 177,286 180,150 40,930 44,322
Other costs .................................... 147,249 115,889 42,465 36,812
---------- ---------- ---------- ----------
Total direct expenses ........................... 324,535 296,039 83,395 81,134
General and administrative ........................ 103,019 113,707 26,908 25,755
Depreciation .................................... 40,045 32,094 9,530 10,011
---------- ---------- ---------- ----------
Operating income ................................. 374,762 418,618 88,386 82,095
Interest income ................................. 1,983 1,950 744 496
Interest expense ................................. (4,210) (5,490) (839) (1,053)
---------- ---------- ---------- ----------
Net income ....................................... 372,535 415,078 88,291 81,538
Proprietor's capital at beginning of period ...... 238,241 223,943 283,635 238,241
Proprietor's withdrawals ........................ (327,141) (400,780) (132,338) (81,785)
---------- ---------- ---------- ----------
Proprietor's capital at end of period ............ $ 283,635 $ 238,241 $ 239,588 $ 237,994
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-35
<PAGE>
David T. Grove, D.M.D.
(a Proprietorship)
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
------------- ------------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income ....................................... $ 372,535 $ 415,078 $ 88,291 $ 81,538
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ................................. 40,045 32,094 9,530 10,011
Provision for bad debts ........................ 8,300 7,000 -- 2,075
Loss on disposal of property .................. 3,208 -- 8,849 802
Changes in operating assets and liabilities:
Patient receivable ........................... (8,899) (15,372) (2,493) 9,624
Prepaid expenses and other assets ............ (322) 229 421 --
Accounts payable .............................. 1,326 (938) 578 (13,424)
Accrued expenses .............................. (12,252) 7,800 (2,381) 25,702
Patient prepayments ........................... 9,052 1,418 3,932 (30,831)
---------- ---------- ---------- ----------
Net cash provided by operating activities ...... 412,993 447,309 106,727 85,497
Investing activity
Purchases of property, equipment and
improvements .................................... (76,535) (12,057) (755) (18,011)
---------- ---------- ---------- ----------
Net cash used in investing activity ............ (76,535) (12,057) (755) (18,011)
Financing activities
Proprietor's withdrawals ........................ (327,141) (400,780) (132,338) (81,785)
Principal payments on notes payable ............ (15,435) (14,162) (4,099) (3,860)
---------- ---------- ---------- ----------
Net cash used in financing activities ............ (342,576) (414,942) (136,437) (85,645)
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents .................................... (6,118) 20,310 (30,465) (18,159)
Cash and cash equivalents at beginning of
period .......................................... 93,362 73,052 87,244 93,362
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period ...... $ 87,244 $ 93,362 $ 56,779 $ 75,203
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-36
<PAGE>
David T. Grove, D.M.D.
(a Proprietorship)
Notes to Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
Nature of Business
The dental practice of Dr. David T. Grove (the Proprietorship) was
established in 1986 as a sole proprietorship in Elko, Nevada for the primary
purpose of practicing dentistry.
Revenue Recognition
Revenue is recognized in accordance with the proportional performance
method of accounting for service contracts. Under this method, revenue is
recognized as services are performed and the costs associated therewith are
incurred, under the terms of contractual agreements with each patient. A
significant portion, approximately 25%, of the services are performed in the
initial month of the contract. Billings under each contract, which vary in
duration from 12 to 24 months, are made throughout the term of the contract.
Provisions are made currently for all known or anticipated losses from patient
receivables and for loss contracts. Such deductions totaled $8,300 and $7,000
in 1996 and 1995, respectively. Patient prepayments represent collections from
patients or their insurance companies which are received in advance of the
performance of the related services.
Orthodontic Supplies and Materials
Orthodontic supplies and materials are expensed as incurred.
Cash and Cash Equivalents
The Proprietorship considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
Income Taxes
The Proprietorship is organized as a sole proprietorship. Income from the
Proprietorship is reported in the proprietor's federal income tax return.
Accordingly, no income taxes have been recorded in the Proprietorship's
financial statements.
Risks and Uncertainties
Concentration of Credit Risk
Financial instruments which subject the Proprietorship to credit risk
consist primarily of accounts receivable. The risk with respect to accounts
receivable is minimized due to the fact that patients remit a substantial
portion of their contract fee in advance. The Proprietorship generally does not
require collateral, and credit losses consistently have been within
management's expectations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost. Depreciation
expense is provided using the straight-line method over the estimates useful
lives of the assets, which range from five to forty years. Amortization of
assets under capital lease is provided over the term of the lease or their
estimated useful life, whichever is shorter, and is included with depreciation
expense.
F-37
<PAGE>
David T. Grove, D.M.D.
(a Proprietorship)
Notes to Financial Statements (Continued)
December 31, 1996
1. Summary of Significant Accounting Policies (Continued)
Impairment of Long-Lived Assets
In 1996, the Proprietorship adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of". SFAS No. 121 requires recognition of impairment
losses on long-lived assets when indicators of impairment losses are present
and future undiscounted cash flows are insufficient to support the assets'
recovery. Adoption of SFAS No. 121 had no material impact on the
Proprietorship's financial statements.
Professional Liability Insurance
The Proprietorship has obtained professional liability coverage through
commercial insurance carriers on a claims-made basis. Management believes that
there are no claims that may result in a loss in excess of amounts covered by
its existing insurance.
Interim Financial Statements
The balance sheet at March 31, 1997, the statements of income and
proprietor's capital and statements of cash flows for the three months ended
March 31, 1997 and 1996 are unaudited, but, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of results for these interim periods. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of results to be expected for the entire year.
Prior to the preparation of the financial statements of the Proprietorship
for the years ended December 31, 1996 and 1995 for purposes of this Prospectus,
the Proprietorship maintained accounting records on the cash basis of
accounting. Accordingly, revenues were recorded when received and expenses were
recorded when paid. Although the statements of income and proprietor's capital
and cash flows for the year ended December 31, 1996 were prepared on the
accrual basis of accounting, accrual basis interim financial statements for
1996 are not readily available. As a result, the accompanying interim
statements of income and proprietor's capital and cash flows for the three
month period ended March 31, 1996 have been prepared based upon management
estimates of the revenue and expenses incurred for that period on a comparable
basis to the same amounts for the year ended December 31, 1996.
2. Property, Equipment and Improvements
Property, equipment and improvements consisted of the following at
December 31:
1996 1995
-------- ---------
Building and improvements .............................. $236,832 $220,530
Furniture and equipment .............................. 311,596 275,303
Vehicles ............................................. 23,940 7,700
-------- ---------
572,368 503,533
Less accumulated depreciation and amortization ...... 230,381 194,828
-------- ---------
341,987 308,705
Land ................................................ 8,500 8,500
-------- ---------
Property, equipment and improvements, net ............ $350,487 $317,205
======== =========
F-38
<PAGE>
David T. Grove, D.M.D.
(a Proprietorship)
Notes to Financial Statements (Continued)
December 31, 1996
3. Related Party Transactions
As a sole proprietorship, the accompanying statements of income and
proprietor's capital do not include any compensation for services rendered by
the sole proprietor. Proprietor's withdrawals amounted to $327,141 and $400,780
in 1996 and 1995, respectively.
Included in employee costs is $2,000 of compensation for a related party
employee in 1996 and 1995.
4. Capital Leases
The Proprietorship leases its computer system under a capital lease
expiring in 1999. The economic substance of the lease, which contains a bargain
purchase option at the end of the lease term, is that the Proprietorship is
financing the acquisition of the assets through the lease and, accordingly, it
is recorded in the Proprietorship's assets and liabilities.
Assets and related accumulated amortization recorded under capital leases
included in the furniture and fixtures category of property, equipment and
improvements are as follows at December 31:
1996 1995
--------- --------
Computer system ..................... $89,830 $89,830
Less accumulated amortization ...... 35,290 22,458
-------- --------
$54,540 $67,372
======== ========
The future minimum annual rental commitments under the capital lease
agreement is as follows at December 31, 1996:
Year ending December 31:
1997 ................................................ $19,755
1998 ................................................ 19,755
1999 ................................................ 6,583
--------
46,093
Less amount representing interest ..................... 4,477
--------
Present value of minimum lease payments ............... 41,616
Less current portion of capital lease obligation ...... 16,819
--------
Capital lease obligation, less current portion ......... $24,797
========
5. Contingent Practice Acquisition
The Proprietorship has entered into an agreement with Omega Orthodontics,
Inc. (Omega), a company recently organized to provide management and marketing
services to orthodontic practices in the United States. In the event of a
successful public offering of Omega's common stock, this agreement provides for
the purchase by Omega (or a wholly-owned subsidiary of Omega) of certain assets
of the Proprietorship for $1,000,704, consisting of cash of $333,567, a
five-year term 8.5% annual interest bearing note totaling $333,567 and shares
of common stock of Omega with a fair value at the date of issue of $333,570.
Concurrent with the acquisition of certain of the Proprietorship's assets,
the Proprietor will organize a new company (the orthodontic practice) to enter
into a 20-year management services agreement with Omega (or a wholly-owned
subsidiary of Omega), renewable for an additional 20 years. The agreement will
stipulate that Omega (or a wholly-owned subsidiary of Omega) provide practice
management and marketing services, facilities and non-clinical personnel to the
orthodontic practice for a monthly fee equal to 75% of the orthodontic
practice's gross patient fee collections.
F-39
<PAGE>
David T. Grove, D.M.D.
(a Proprietorship)
Notes to Financial Statements (Continued)
December 31, 1996
5. Contingent Practice Acquisition (Continued)
The acquisition and related management services agreement are entirely
contingent upon the consummation of an initial public offering by Omega.
F-40
<PAGE>
Report of Independent Auditors
To the Board of Directors
Omega Orthodontics, Inc.
We have audited the accompanying balance sheets of Theodore G. Saydyk, Jr.,
D.D.S., M.S., P.C. (the Company) as of December 31, 1996 and 1995 and the
related statements of operations and retained earnings and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide 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 Theodore G. Saydyk, Jr.,
D.D.S., M.S., P.C. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 28, 1997
F-41
<PAGE>
Theodore G. Saydyk, Jr., D.D.S., M.S., P.C.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995 March 31, 1997
---------- ---------- ---------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash ................................................... $ 3,510 $ 150 $ 89,466
Patient receivable, less allowance of $10,000 and
$16,000 at December 31, 1996 and 1995, respectively,
and $10,000 at March 31, 1997 ........................... 264,496 134,145 268,921
Income taxes receivable ................................. 81,408 -- --
Prepaid expenses and other assets ..................... -- 1,057 --
--------- --------- ---------
Total current assets .................................... 349,414 135,352 358,387
Equipment and improvements, net ........................ 36,773 62,264 33,650
Deferred income taxes .................................... 82,098 59,612 82,098
Note receivable, stockholder ........................... -- 311,836 3,298
--------- --------- ---------
Total assets ............................................. $468,285 $569,064 $477,433
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
Current liabilities:
Accounts payable ....................................... $ 29,225 $ 51,002 $ 63,718
Accrued expenses ....................................... 24,161 9,755 40,492
Patient prepayments .................................... 124,263 83,324 142,286
Income taxes payable .................................... -- 51,269 --
Deferred income taxes .................................... 114,330 69,144 109,330
Current portion of long-term debt ..................... 5,274 4,341 6,719
--------- --------- ---------
Total current liabilities .............................. 297,253 268,835 362,545
Long-term debt, less current portion ..................... 18,717 23,609 16,890
Commitments and contingencies
Stockholder's equity:
Common stock, $.01 par value, 100,000 shares
authorized, 10,000 shares issued and outstanding ...... 100 100 100
Additional paid in capital .............................. 1,858 1,858 1,858
Retained earnings ....................................... 150,357 274,662 96,040
--------- --------- ---------
Total stockholder's equity .............................. 152,315 276,620 97,998
--------- --------- ---------
Total liabilities and stockholder's equity ............... $468,285 $569,064 $477,433
========= ========= =========
</TABLE>
See accompanying notes.
F-42
<PAGE>
Theodore G. Saydyk, Jr., D.D.S., M.S., P.C.
Statements of Operations and Retained Earnings
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
-------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
Patient revenue .............................. $ 748,502 $ 594,116 $ 148,888 $ 180,043
Direct expenses:
Employee costs .............................. 591,834 180,691 101,671 77,459
Other costs ................................. 169,742 159,654 80,094 42,433
----------- --------- ---------- ---------
Total direct expenses ........................ 761,576 340,345 181,765 119,892
General and administrative ..................... 135,759 153,164 24,335 33,811
Depreciation ................................. 25,596 24,780 3,123 6,399
----------- --------- ---------- ---------
Operating income (loss) ........................ (174,429) 75,827 (60,335) 19,941
Interest income .............................. 40 14,930 -- --
Other income ................................. -- 34,000 1,898 --
Interest expense .............................. (2,916) (10) (880) (729)
----------- --------- ---------- ---------
Income (loss) before income taxes ............ (177,305) 124,747 (59,317) 19,212
Income tax provision (benefit) ............... (53,000) 42,000 (5,000) 5,700
----------- --------- ---------- ---------
Net income (loss) .............................. (124,305) 82,747 (54,317) 13,512
Retained earnings at beginning of period ...... 274,662 191,915 150,357 274,662
----------- --------- ---------- ---------
Retained earnings at end of period ............ $ 150,357 $ 274,662 $ 96,040 $ 288,174
=========== ========= ========== =========
</TABLE>
See accompanying notes.
F-43
<PAGE>
Theodore G. Saydyk, Jr., D.D.S., M.S., P.C.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
--------------- ------------ -------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) ........................... $ (124,305) $ 82,747 $ (54,317) $ (3,941)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation .............................. 25,596 24,780 3,123 6,399
Provision for bad debts ..................... 10,000 16,000 -- 2,500
Deferred income taxes ..................... 22,700 (7,000) (5,000) (1,690)
Forgiveness of stockholder note included
in employee costs ........................ 282,000 -- -- --
Changes in operating assets and liabilities:
Patient receivables ........................ (140,351) (122,082) (4,425) (16,809)
Prepaid expenses and other assets ......... 1,057 59,714 -- --
Accounts payable ........................... (21,777) 31,219 34,493 (8,928)
Accrued expenses ........................... 14,406 (1,961) 16,331 12,640
Patient prepayments ........................ 40,939 67,394 18,023 18,817
Income taxes .............................. (132,677) (57,446) 81,408 --
----------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities ................................. (22,412) 93,365 89,636 8,988
Investing activities
Purchases of equipment and improvements ...... (105) (27,950) -- --
Note receivable, stockholder .................. 29,836 (96,683) (3,298) --
----------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities ................................. 29,731 (124,633) (3,298) --
Financing activities
Net proceeds from notes payable ............... -- 27,950 -- --
Repayment of notes payable .................. (3,959) -- (382) (990)
----------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities ................................. (3,959) 27,950 (382) (990)
----------- ---------- ---------- ----------
Net increase (decrease) in cash ............... 3,360 (3,318) 85,956 7,998
Cash at beginning of period .................. 150 3,468 3,510 150
----------- ---------- ---------- ----------
Cash at end of period ........................ $ 3,510 $ 150 $ 89,466 $ 8,148
=========== ========== ========== ==========
Supplemental disclosures:
Income taxes paid ........................... $ 57,500 $ 106,391 $ 0 $ 53,438
=========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-44
<PAGE>
Theodore G. Saydyk, Jr., D.D.S., M.S., P.C.
Notes to Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
Nature of Business
The dental practice of Theodore G. Saydyk, Jr. D.D.S., M.S., P.C. (the
Company) was incorporated December 1, 1987 in Colorado for the primary purpose
of practicing dentistry.
Revenue Recognition
Revenue is recognized in accordance with the proportional performance
method of accounting for service contracts. Under this method, revenue is
recognized as services are performed and the costs associated therewith are
incurred, under the terms of contractual agreements with each patient. A
significant portion, approximately 25%, of the services are performed in the
initial month of the contract. Billings under each contract, which vary in
duration from 12 to 24 months, are made throughout the term of the contract.
Provisions are made currently for all known or anticipated losses from patient
receivables and for loss contracts. Such deductions totaled $10,000 and $16,000
in 1996 and 1995, respectively. Patient prepayments represent collections from
patients or their insurance companies which are received in advance of the
performance of the related services.
Risks and Uncertainties
Concentration of Credit Risk
Financial instruments which subject the Company to credit risk consist
primarily of patient receivables. The risk with respect to patient receivables
is minimized due to the fact that patients remit a substantial portion of their
contract fee in advance. The Company generally does not require collateral, and
credit losses consistently have been within management's expectations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amount of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Orthodontic Supplies and Materials
Orthodontic supplies and materials are expensed as incurred.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation expense is
provided using the straight-line method over the estimated useful lives of the
assets, which range from five to eleven years. Amortization of leasehold
improvements is provided over the term of the lease or their estimated useful
life, whichever is shorter.
Income Taxes
The Company provides for income taxes under the liability method
prescribed by Statement of Financial Accounting, Standards (SFAS) No. 109,
"Accounting for Income Taxes". Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. SFAS No. 109
requires that the Company record a valuation allowance when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. The Company did not require a valuation allowance in 1996 or 1995.
The Company prepares its tax returns on the cash basis.
F-45
<PAGE>
Theodore G. Saydyk, Jr., D.D.S., M.S., P.C.
Notes to Financial Statements (Continued)
December 31, 1996
1. Summary of Significant Accounting Policies (Continued)
Impairment of Long-Lived Assets
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, `Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of ". SFAS No. 121 requires recognition of impairment losses on
long-lived assets when indicators of impairment are present and future
undiscounted cash flows are insufficient to support the assets' recovery.
Adoption of SFAS No. 121 had no material impact on the Company's financial
statements.
Professional Liability Insurance
The Company has obtained professional liability coverage through
commercial insurance carriers on a claims made basis. Management believes that
there are no claims that may result in a loss in excess of amounts covered by
its existing insurance.
Interim Financial Statements
The balance sheet at March 31, 1997, the statements of operations and
retained earnings and statements of cash flows for the three months ended March
31, 1997 and 1996 are unaudited, but, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of results for these interim periods. The results of operations
for the three months ended March 31, 1997 are not necessarily indicative of
results to be expected for the entire year.
Prior to the preparation of the financial statements of the Company for
the years ended December 31, 1996 and 1995 for purposes of this Prospectus, the
Company maintained accounting records on the cash basis of accounting.
Accordingly, revenues were recorded when received and expenses were recorded
when paid. Although the statements of operations and retained earnings and cash
flows for the year ended December 31, 1996 were prepared on the accrual basis
of accounting, accrual basis interim financial statements for 1996 are not
readily available. As a result, the accompanying interim statements of
operations and retained earnings and cash flows for the three month period
ended March 31, 1996 have been prepared based upon management estimates of the
revenue and expenses incurred for that period on a comparable basis to the same
amounts for the year ended December 31, 1996.
2. Equipment and Improvements
Equipment and improvements consisted of the following at December 31:
1996 1995
-------- ---------
Leasehold improvements .............................. $114,840 $114,840
Furniture and equipment ............................. 181,698 181,593
-------- ---------
296,538 296,433
Less accumulated depreciation and amortization ..... 259,765 234,169
-------- ---------
Equipment and improvements, net .................... $ 36,773 $ 62,264
======== =========
3. Related Party Transactions
At December 31, 1995, the sole stockholder owed the Company $311,836
related to an outstanding note payable. Interest income was accrued at the
applicable federal rate for short term notes on the outstanding balance and
amounted to $40 and $14,930 for the years ended December 31, 1996 and 1995,
respectively. The outstanding balance of the note, $282,000, was forgiven in
full during 1996.
The sole stockholder earned approximately $376,000 (including $282,000
forgiveness of debt) of compensation in 1996, which is included in employees
costs for 1996. In 1995, no compensation was earned.
F-46
<PAGE>
Theodore G. Saydyk, Jr., D.D.S., M.S., P.C.
Notes to Financial Statements (Continued)
December 31, 1996
4. Long-Term Debt
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
12% installment sales contract to a corporation, payable in monthly
installments of $622, including interest, through December 2000 ...
$23,991 $27,950
Less current portion ................................................ 5,274 4,341
-------- --------
$18,717 $23,609
======== ========
</TABLE>
The carrying value of the Company's debt approximates fair value. The
aggregate amounts of required principal payments on the Company's long-term
debt at December 31, 1996 are as follows:
Year ending December 31:
1997 ............... $ 5,274
1998 ............... 5,511
1999 ............... 6,210
2000 ............... 6,996
--------
$23,991
========
Interest paid approximated interest expense in 1996 and 1995.
5. Leases
The Company leases office space under a noncancelable operating lease
agreement expiring in 2008. In addition, various equipment is under lease
agreements that have also been accounted for as operating leases. The equipment
leases expire at various times through 1998. The future minimum annual rental
commitments under these long-term noncancelable leases are as follows:
Year ending September 30:
1997 .............................. $ 42,778
1998 .............................. 25,208
1999 .............................. 23,750
2000 .............................. 24,700
2001 .............................. 25,650
Thereafter ........................ 173,850
---------
Total minimum lease payments ...... $315,936
=========
Rental expense, including rentals under leases with terms of less than one
year, for the years ended December 31, 1996 and 1995 amounted to $54,359 and
$55,550, respectively.
F-47
<PAGE>
Theodore G. Saydyk, Jr., D.D.S., M.S., P.C.
Notes to Financial Statements (Continued)
December 31, 1996
6. Income Taxes
Significant components of the deferred tax liabilities and assets were as
follows at December 31:
1996 1995
--------------- --------------
Deferred tax liabilities:
Patient receivables ............... $ (105,798) $ (53,658)
Depreciation ........................ (8,532) (15,486)
----------- ----------
Total deferred tax liabilities ...... (114,330) (69,144)
Deferred tax assets:
Patient prepayments ............... 49,705 33,330
Other .............................. 32,393 26,282
----------- ----------
Total deferred tax assets ............ 82,098 59,612
----------- ----------
Net deferred liabilities ............ $ (32,232) $ (9,532)
=========== ==========
The provision for income taxes (benefit) consisted of the following:
1996 1995
-------------- ------------
Current ......... $ (75,700) $ 49,000
Deferred ...... 22,700 (7,000)
---------- ---------
Total ......... $ (53,000) $ 42,000
========== =========
The reconciliation of income tax computed at the federal statutory rates to
income tax expense (benefit) is:
1996 1995
--------- -------
Tax at statutory rates ............................. $(61,874) $43,661
State income taxes, net of federal tax benefit .... -- 2,200
Utilization of disabled access credit ............. -- (5,000)
Valuation allowance on state net operating loss .... 8,839 --
Other .............................................. 35 1,139
-------- -------
$(53,000) $42,000
======== =======
7. Employee Benefit Plan
The Company has a money purchase plan and a profit sharing plan
(collectively, the Plans). All employees who have reached the age of 21 and
have completed two years of service are eligible for the Plans. The Company
makes annual contributions to the money purchase plan based on 5% of employees'
eligible compensation. The Company makes discretionary contributions to the
profit sharing plan which are allocated to the employees based on their
percentage of compensation to the total of all employees' compensation. Plan
expense for the years ended December 31, 1996 and 1995 was $7,374 and $5,011,
respectively.
F-48
<PAGE>
Theodore G. Saydyk, Jr., D.D.S., M.S., P.C.
Notes to Financial Statements (Continued)
December 31, 1996
8. Contingent Practice Acquisition
The Company has entered into an agreement with Omega Orthodontics Inc.
(Omega), a company recently organized to provide management and marketing
services to orthodontic practices in the United States. In the event of a
successful public offering of Omega's common stock, this agreement provides for
the purchase by Omega of the equity interests in a management services
organization (MSO) to be formed by the Company's sole stockholder converting
the Company into a general corporation which will hold certain assets of the
Company. The agreement provides for the payment by Omega of $680,151,
consisting of cash of $226,716, a five-year term 8.5% annual interest bearing
note totaling $106,557 and shares of common stock of Omega with a fair value at
the date of issue of $346,878.
Concurrent with the acquisition of the equity interests in the MSO, the
sole stockholder of the Company will organize a new company (the orthodontic
practice) that will enter into a 20-year management services agreement with
Omega (or a wholly-owned subsidiary of Omega) renewable for an additional 20
years. The agreement will stipulate that Omega (or a wholly-owned subsidiary of
Omega) provide practice management and marketing services, facilities and
non-clinical personnel to the orthodontic practice for a monthly fee equal to
75% of the orthodontic practice's gross patient fee collections.
The acquisition and related management services agreement are entirely
contingent upon the consummation of an initial public offering by Omega.
In addition to the above transaction, the Company paid Omega consulting
fees in the amount of $6,000 for the year ended December 31, 1996.
F-49
<PAGE>
Report of Independent Auditors
To the Board of Directors
Omega Orthodontics, Inc.
We have audited the accompanying balance sheets of Robert R. Schmisseur,
D.D.S., P.C. (the Company) as of December 31, 1996 and 1995 and the related
statements of income and accumulated deficit and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide 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 Robert R. Schmisseur, D.D.S.,
P.C. as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 1, the Company a
stockholder's deficit of $152,967, and a working capital deficit of $241,848 at
December 31, 1996. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Boston, Massachusetts
February 10, 1997
F-50
<PAGE>
Robert R. Schmisseur, D.D.S., P.C.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995 March 31, 1997
-------------- -------------- ---------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash ............................................. $ 2,126 $ 1,103 $ 33,066
Patient receivables, less allowance of $5,900 and
$5,400 at December 31, 1996 and 1995, respectively,
and $5,900 at March 31, 1997 ..................... 74,663 62,377 84,024
Prepaid expenses and other assets .................. 1,190 2,845 1,318
----------- ----------- -----------
Total current assets .............................. 77,979 66,325 118,408
Equipment and improvements, net ..................... 39,190 58,077 34,634
Note receivable, stockholder ........................ 64,703 57,944 64,703
----------- ----------- -----------
Total assets ....................................... $ 181,872 $ 182,346 $ 217,745
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
- -------------------------------------
Current liabilities:
Accounts payable ................................. $ 6,647 $ 15,388 $ 2,888
Accrued expenses ................................. 15,736 39,537 23,062
Patient prepayments .............................. 149,284 141,607 175,128
Current portion of notes payable .................. 148,160 16,012 119,432
----------- ----------- -----------
Total current liabilities ........................... 319,827 212,544 320,510
Notes payable, less current portion ............... 15,012 148,172 13,872
Commitments and contingencies
Stockholder's deficit:
Common stock, no par value, 500 shares authorized,
100 shares issued and outstanding ............... 7,000 7,000 7,000
Accumulated deficit .............................. (159,967) (185,370) (123,637)
----------- ----------- -----------
Total stockholder's deficit ........................ (152,967) (178,370) (116,637)
----------- ----------- -----------
Total liabilities and stockholder's deficit ......... $ 181,872 $ 182,346 $ 217,745
=========== =========== ===========
</TABLE>
See accompanying notes.
F-51
<PAGE>
Robert R. Schmisseur, D.D.S., P.C.
Statements of Income and Accumulated Deficit
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
-------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
Patient revenue ................................. $ 595,535 $ 543,977 $ 156,787 $ 156,202
Direct expenses:
Employee costs ................................. 350,595 280,007 75,406 87,649
Other costs .................................... 106,720 126,649 21,930 26,680
---------- ---------- ---------- ----------
Total direct expenses ........................... 457,315 406,656 97,336 114,329
General and administrative ..................... 82,836 90,705 17,118 20,709
Depreciation .................................... 21,056 19,699 4,556 5,264
---------- ---------- ---------- ----------
Operating income ................................. 34,328 26,917 37,777 15,900
Interest income ................................. 4,473 3,279 1,246 1,119
Interest expense ................................. (13,398) (14,571) (2,693) (3,350)
---------- ---------- ---------- ----------
Net income ....................................... 25,403 15,625 36,330 13,669
Accumulated deficit at beginning of period ...... (185,370) (200,995) (159,967) (185,370)
---------- ---------- ---------- ----------
Accumulated deficit at end of period ............ $ (159,967) $ (185,370) $ (123,637) $ (171,701)
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-52
<PAGE>
Robert R. Schmisseur, D.D.S., P.C.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
------------- ------------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income .................................... $ 25,403 $ 15,625 $ 36,330 $ 13,669
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debts ..................... 5,900 5,400 -- 1,475
Depreciation ................................. 21,056 19,699 4,556 5,264
Changes in operating assets and liabilities:
Patient receivables ........................ (18,186) (24,666) (9,361) (23,452)
Prepaid expenses and other assets ............ 1,655 (635) (128) --
Accounts payable ........................... (8,741) (8,761) (3,759) 20,050
Accrued expenses ........................... (23,801) 23,485 7,326 (30,649)
Patient prepayments ........................ 7,677 489 25,844 45,865
---------- ---------- --------- ----------
Net cash provided by operating activities ...... 10,963 30,636 60,808 32,222
Investing activities
Purchases of equipment and improvements ......... (2,169) (15,827) -- --
Note receivable, stockholder .................. (6,759) (11,278) -- --
---------- ---------- --------- ----------
Net cash used in investing activities ......... (8,928) (27,105) -- --
Financing activities
Proceeds from notes payable ..................... 15,000 -- -- --
Repayment of notes payable ..................... (16,012) (13,026) (29,868) (253)
---------- ---------- --------- ----------
Net cash used in financing activities ......... (1,012) (13,026) (29,868) (253)
---------- ---------- --------- ----------
Net increase (decrease) in cash ............... 1,023 (9,495) 30,940 31,969
Cash at beginning of period ..................... 1,103 10,598 2,126 1,103
---------- ---------- --------- ----------
Cash at end of period ........................... $ 2,126 $ 1,103 $ 33,066 $ 33,072
========== ========== ========= ==========
Supplemental disclosures:
Interest paid ................................. $ 14,077 $ 13,167 $ 2,693 $ 3,350
========== ========== ========= ==========
</TABLE>
See accompanying notes.
F-53
<PAGE>
Robert R. Schmisseur, D.D.S., P.C.
Notes to Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
Nature of Business
The dental practice of Robert R. Schmisseur, D.D.S., P.C. (the Company) is
a professional corporation which was incorporated February 14, 1985 in
Champaign, Illinois for the primary purpose of practicing dentistry.
Basis of Presentation
The Company's financial statements have been presented on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. At December 31, 1996, the Company
had a stockholder's deficit of $152,967 and a working capital deficit of
$241,848. Included in total assets is amounts due from stockholder of $64,703
at December 31, 1996.
These conditions indicate that the Company's ability to continue as a
going concern will be dependent upon its ability to generate sufficient cash
flow to meet its liabilities as they become due, including obtaining financing
from outside sources. Management expects to obtain adequate capital from its
contemplated transaction with Omega Orthodontics, Inc. (Omega) (see Note 8).
Should the transaction with Omega not be consummated, management will seek
financing through other sources, however, there can be no assurance that such
sources of capital will be available, on terms and conditions acceptable to the
Company, and that the pending transaction with Omega will be completed. The
financial statements do not include any adjustments to reflect the possibility
of future effects on the classification and recoverability of assets or the
liabilities that might result if the Company were not able to continue as a
going concern in its present form.
Interim Financial Statements
The balance sheet at March 31, 1997, the statements of income and
accumulated deficit and statements of cash flows for the three months ended
March 31, 1997 and 1996 are unaudited, but, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of results for these interim periods. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of results to be expected for the entire year.
Prior to the preparation of the financial statements of the Company for
the years ended December 31, 1996 and 1995 for purposes of this Prospectus, the
Company maintained accounting records on the cash basis of accounting.
Accordingly, revenues were recorded when received and expenses were recorded
when paid. Although the statements of income and accumulated deficit and cash
flows for the year ended December 31, 1996 were prepared on the accrual basis
of accounting, accrual basis interim financial statements for 1996 are not
readily available. As a result, the accompanying interim statements of income
and accumulated deficit and cash flows for the three month period ended March
31, 1996 have been prepared based upon management estimates of the revenue and
expenses incurred for that period on a comparable basis to the same amounts for
the year ended December 31, 1996.
Revenue Recognition
Revenue is recognized in accordance with the proportional performance
method of accounting for service contracts. Under this method, revenue is
recognized as services are performed and the costs associated therewith are
incurred, under the terms of contractual agreements with each patient. A
significant portion, approximately 25%, of the services are performed in the
initial month of the contract. Billings under each contract, which vary in
duration from 12 to 24 months, are made throughout the term of the contract.
Provisions are made currently for all known or anticipated losses from patient
receivables and for loss contracts. Such deductions totaled $5,900 and $5,400
in 1996 and 1995, respectively. Patient prepayments represent collections from
patients or their insurance companies which are received in advance of the
performance of the related services.
F-54
<PAGE>
Robert R. Schmisseur, D.D.S., P.C.
Notes to Financial Statements (Continued)
December 31, 1996
1. Summary of Significant Accounting Policies (Continued)
Risks and Uncertainties
Concentration of Credit Risk
Financial instruments which subject the Company to credit risk consists
primarily of patient receivables. The risk with respect to patient receivable
is minimized due to the fact that patients remit a substantial portion of their
contract fee in advance. The Company generally does not require collateral, and
credit losses consistently have been within management's expectations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amount of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Orthodontic Supplies and Materials
Orthodontic supplies and materials are expensed as incurred.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation expense is
provided using the straight-line method over the estimated useful lives of the
assets, which range from five to seven years. Amortization of leasehold
improvements is provided over the term of the lease or their estimated useful
life, whichever is shorter.
Income Taxes
The Company provides for income taxes under the liability method
prescribed by Statement of Financial Accounting, Standards (SFAS) No. 109,
"Accounting for Income Taxes". Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. SFAS No. 109
requires that the Company record a valuation allowance when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Due to the uncertainty of the Company's ability to realize the
benefit of the deferred tax assets, a full valuation allowance has been applied
against the net deferred tax assets in 1996 and 1995. The Company prepares its
tax returns on the cash basis.
Impairment of Long-Lived Assets
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121 "Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of". SFAS No. 121 requires recognition of impairment losses on
long-lived assets when indicators of impairment losses on long-lived assets are
present and future undiscounted cash flows are insufficient to support the
assets' recovery. Adoption of SFAS No. 121 had no material impact on the
Company's financial statements.
Professional Liability Insurance
The Company has obtained professional liability coverage through
commercial insurance carriers on an occurrence basis. Management believes that
there are no claims that may result in a loss in excess of amounts covered by
its existing insurance.
F-55
<PAGE>
Robert R. Schmisseur, D.D.S., P.C.
Notes to Financial Statements (Continued)
December 31, 1996
2. Equipment and Improvements
Equipment and improvements consisted of the following at December 31:
1996 1995
-------- --------
Leasehold improvements ............................... $ 49,231 49,231
Furniture and fixtures .............................. 33,646 33,646
Equipment .......................................... 202,035 199,866
Vehicles ............................................. 28,911 28,911
-------- --------
313,823 311,654
Less accumulated depreciation and amortization ...... 274,633 253,577
-------- --------
Equipment and improvements, net ..................... $ 39,190 58,077
======== ========
3. Related-Party Transactions
At December 31, 1996 and 1995, the Company was owed $64,703 and $57,944,
respectively, from the Company's sole stockholder. Interest income is accrued
at 6% on the outstanding balance and amounted to $4,473 and $3,279 for the
years ended December 31, 1996 and 1995, respectively.
Effective February 22, 1989 the Company signed an employment contract with
the sole stockholder. The contract can be terminated by either party without
cause upon giving 90 days written notice. The contract can be terminated
immediately upon the occurrence of certain events, as defined in the contract.
Under the terms of the contract the stockholder is entitled to a salary which
is adjusted annually. Total salary amounted to $110,000 and $70,000 for the
years ended December 31, 1996 and 1995, respectively, which is included in
employee costs.
4. Notes Payable
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Revolving line of credit payable to a bank, bearing interest at 8%,
payable in monthly installments of $5,000 including interest to
November 1997, with a final principal payment of $70,000 due
December 1997. ...................................................... $126,380 $135,808
Committed line of credit payable to a bank, in monthly installments of
$716 including interest at prime rate plus 1% (9.25% at December
31, 1996) to December 1999. The note is secured by the assets of
the Company and the personal guarantee of the sole stockholder. ... 21,792 28,376
Note payable to bank bearing interest at 9.25%, principal and accrued
interest due on March 11, 1997. .................................... 15,000 --
--------- ---------
163,172 164,184
Less current portion ................................................ 148,160 16,012
--------- ---------
$ 15,012 $148,172
========= =========
</TABLE>
Notes payable to bank are secured by substantially all the assets of the
Company. The carrying value of the Company's debt approximates fair value. The
aggregate amounts of required principal payments on the Company's notes payable
at December 31, 1996 are as follows:
F-56
<PAGE>
Robert R. Schmisseur, D.D.S., P.C.
Notes to Financial Statements (Continued)
December 31, 1996
4. Notes Payable (Continued)
Year ending December 31:
1997 ............... $148,160
1998 ............... 7,453
1999 ............... 7,559
---------
$163,172
=========
5. Income Taxes
Significant components of the deferred tax liabilities and assets were as
follows at December 31:
1996 1995
------------ -------------
Deferred tax liabilities:
Patient receivables ........................ $ (32,500) $ (25,000)
Other ....................................... (500) (1,000)
---------- ----------
Total deferred tax liabilities ............... (33,000) (26,000)
Deferred tax assets:
Patient prepayments ........................ 60,000 56,500
Accounts payable and accrued expenses ...... 9,000 22,000
Depreciation .............................. 24,000 20,500
Net operating loss carryforward ............ 15,000 16,500
---------- ----------
108,000 115,500
Valuation allowance ........................ (75,000) (89,500)
---------- ----------
Total deferred tax assets .................. 33,000 26,000
---------- ----------
Net deferred liabilities ..................... $ 0 $ 0
========== ==========
The effective tax rate for 1996 and 1995 (0%) differed from the statutory tax
rate (34%) due to the decrease in the valuation allowance. The Company had net
operating loss carryforwards of approximately $37,500 at December 31, 1996,
which expire in the year 1999.
6. Leases
The Company's office space is rented under a three year operating lease
which expires on February 28, 1997. The lease contains a renewal option which
allows the Company to renew the lease three times, each for a period of three
years, resulting in a maximum expiration date of February 2006. On February 7,
1997, the Company exercised its renewal option effective March 1, 1997
extending the lease through February 28, 2000.
Total rent expense for the years ended December 31, 1996 and 1995 amounted
to $27,556 and $25,472, respectively. Future minimum lease payments are as
follows:
Year ending December 31:
1997 ............... $28,290
1998 ............... 28,438
1999 ............... 28,438
2000 ............... 4,740
--------
$89,906
========
F-57
<PAGE>
Robert R. Schmisseur, D.D.S., P.C.
Notes to Financial Statements (Continued)
December 31, 1996
7. Defined Contribution Plan
The Company's defined contribution plan (the Plan) covers employees that
meet the Plan's eligibility requirements. The Plan provides for employee
contributions. The Company may also make contributions to the Plan at the
discretion of the Board of Directors. The Company made matching contributions
of $21,314 in 1995. Effective January 1, 1996, the Plan was terminated.
Although the Company has filed for termination of the Plan with the appropriate
regulatory agencies, no formal termination approval has been received.
8. Contingent Practice Acquisition
The Company has entered into an agreement with Omega, a company recently
organized to provide management and marketing services to orthodontic practices
in the United States. In the event of a successful public offering of Omega's
common stock, this agreement provides for the purchase by Omega of the equity
interests in a management services organization (MSO) to be formed by the
Company's sole stockholder converting the Company into a general corporation
which will hold certain assets of the Company. The agreement provides for the
payment by Omega of $654,124, consisting of cash of $218,042, a five-year term
8.5% annual interest bearing note totaling $218,042 and shares of common stock
of Omega with a fair value at the date of issue of $218,040.
Concurrent with the acquisition of the equity interests in the MSO, the
sole stockholder of the Company will organize a new company (the orthodontic
practice) that will enter into a 20-year management services agreement with
Omega (or a wholly-owned subsidiary of Omega), renewable for an additional 20
years. The agreement will stipulate that Omega (or a wholly-owned subsidiary of
Omega) provide practice management and marketing services, facilities and
non-clinical personnel to the orthodontic practice for a monthly fee equal to
75% of the orthodontic practice's gross patient fee collections.
The acquisition and related management services agreement are entirely
contingent upon the consummation of an initial public offering by Omega.
F-58
<PAGE>
Report of Independent Auditors
To the Board of Directors
Omega Orthodontics, Inc.
We have audited the accompanying balance sheets of Clark E. Schneekluth,
D.D.S., M.D., Inc. (the Company) as of December 31, 1996 and 1995 and the
related statements of operations and accumulated deficit and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide 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 Clark E. Schneekluth, D.D.S.,
M.D., Inc. as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
had a net loss of $5,452 for the year ended December 31, 1996, a stockholder's
deficit of $91,143, and a working capital deficit of $91,062 at December 31,
1996. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Boston, Massachusetts
March 7, 1997
F-59
<PAGE>
Clark E. Schneekluth, D.D.S., M.D., Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995 March 31, 1997
------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Patient receivable, less allowance of $29,556 and
$32,774 at December 31, 1996 and 1995, respectively,
and $29,556 at March 31, 1997........................ $ 94,059 $ 103,784 $ 87,622
Prepaid expenses and other assets .................. 550 -- 350
---------- ---------- -----------
Total current assets ................................. 94,609 103,784 87,972
Equipment and improvements, net ..................... 16,960 14,762 15,692
---------- ---------- -----------
Total assets .......................................... $ 111,569 $ 118,546 $ 103,664
========== ========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
- -------------------------------------
Current liabilities:
Bank overdraft ....................................... $ 9,622 $ 7,847 $ 16,987
Accounts payable .................................... 55,811 24,016 66,424
Accrued expenses .................................... 31,022 7,894 12,460
Patient prepayments ................................. 67,240 82,696 69,419
Demand note payable ................................. 15,000 10,000 27,950
Current portion of notes payable ..................... 6,976 1,983 6,517
---------- ---------- -----------
Total current liabilities ........................... 185,671 134,436 199,757
Notes payable, less current portion .................. 17,041 22,331 15,872
Commitments and contingencies
Stockholder's deficit:
Common stock, $1 par value, 1,000 shares
authorized, issued and outstanding .................. 1,000 1,000 1,000
Accumulated deficit ................................. (92,143) (39,221) (112,965)
---------- ---------- -----------
Total stockholder's deficit ........................... (91,143) (38,221) (111,965)
---------- ---------- -----------
Total liabilities and stockholder's deficit ......... $ 111,569 $ 118,546 $ 103,664
========== ========== ===========
</TABLE>
See accompanying notes.
F-60
<PAGE>
Clark E. Schneekluth, D.D.S., M.D., Inc.
Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
------------- ------------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
Patient revenue ................................. $ 394,301 $ 387,187 $ 94,685 $ 86,088
Direct expenses:
Employee costs ................................. 178,697 171,584 45,890 44,674
Other costs .................................... 122,182 105,515 37,114 30,338
--------- --------- ---------- ---------
Total direct expenses ........................... 300,879 277,099 83,004 75,012
General and administrative ..................... 91,858 77,883 17,393 23,172
Depreciation .................................... 6,271 7,212 1,568 1,568
--------- --------- ---------- ---------
Operating income (loss) ........................ (4,707) 24,993 (7,280) (13,664)
Interest expense ................................. 745 1,072 1,628 186
--------- --------- ---------- ---------
Net income (loss) .............................. (5,452) 23,921 (8,908) (13,850)
Accumulated deficit at beginning of period ...... (39,221) (23,656) (92,143) (39,221)
Distributions to stockholder ..................... (47,470) (39,486) (11,914) (11,868)
--------- --------- ---------- ---------
Accumulated deficit at end of period ............ $ (92,143) $ (39,221) $(112,965) $ (64,939)
========= ========= ========== =========
</TABLE>
See accompanying notes.
F-61
<PAGE>
Clark E. Schneekluth, D.D.S., M.D., Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
------------- ------------- ------------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) ........................... $ (5,452) $ 23,921 $ (8,908) $ (13,850)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation .............................. 6,271 7,212 1,568 1,568
Provision for bad debts ..................... (29,556) (32,774) -- 7,389
Changes in operating assets and
liabilities:
Patient receivables ........................ 39,281 37,301 6,437 6,452
Prepaid expenses and other assets ......... (550) 1,350 200 --
Accounts payable ........................... 31,795 (5,740) 10,613 17,751
Accrued expenses ........................... 23,128 1,080 (18,562) 7,557
Patient prepayments ........................ (15,456) 8,215 2,179 (8,381)
---------- ---------- --------- ----------
Net cash provided by (used in) operating
activities ................................. 49,461 40,565 (6,473) 18,486
Investing activity ...........................
Purchases of equipment and improvements ...... (8,469) (1,800) (300) (2,117)
---------- ---------- --------- ----------
Net cash used in investing activity ......... (8,469) (1,800) (300) (2,117)
Financing activities
Proceeds from notes payable .................. 12,500 10,000 12,950 1,250
Repayment of notes payable .................. (7,797) (17,138) (1,628) (74)
Distributions to stockholder .................. (47,470) (39,486) (11,914) (11,868)
---------- ---------- --------- ----------
Net cash used in financing activities ......... (42,767) (46,624) (592) (10,692)
---------- ---------- --------- ----------
Net increase (decrease) in cash ............... (1,775) (7,859) (7,365) 5,677
Cash (bank overdraft) at beginning of period . (7,847) 12 (9,622) (7,847)
---------- ---------- --------- ----------
Bank overdraft at end of period ............... $ (9,622) $ (7,847) $ (16,987) $ (2,170)
========== ========== ========= ==========
</TABLE>
See accompanying notes.
F-62
<PAGE>
Clark E. Schneekluth, D.D.S., M.D., Inc.
Notes to Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
Nature of Business
The dental practice of Clark E. Schneekluth D.D.S., M.D., Inc. (the
Company) is a professional corporation which was incorporated October 15, 1985
in the state of California for the primary purpose of practicing dentistry.
Basis of Presentation
The Company's financial statements have been presented on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. For the year ended December 31,
1996 the Company incurred a net loss of $5,452. At December 31, 1996, the
Company had a stockholder's deficit of $91,143 and a working capital deficit of
$91,062.
These conditions indicate that the Company's ability to continue as a
going concern will be dependent upon its ability to generate sufficient cash
flow to meet its liabilities as they become due, including obtaining financing
from outside sources. Management expects to obtain adequate capital from its
contemplated transaction with Omega Orthodontics, Inc. (Omega) (see Note 6).
Should the transaction with Omega not be consummated, management will seek
financing through other sources, however, there can be no assurance that such
sources of capital will be available, on terms and conditions acceptable to the
Company, and that the pending transaction with Omega will be completed. The
financial statements do not include any adjustments to reflect the possibility
of future effects on the classification and recoverability of assets or the
liabilities that might result if the Company were not able to continue as a
going concern in its present form.
Interim Financial Statements
The balance sheet at March 31, 1997, the statements of operations and
accumulated deficit and statements of cash flows for the three months ended
March 31, 1997 and 1996 are unaudited, but, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of results for these interim periods. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of results to be expected for the entire year.
Prior to the preparation of the financial statements of the Company for
the years ended December 31, 1996 and 1995 for purposes of this Prospectus, the
Company maintained accounting records on the cash basis of accounting.
Accordingly, revenues were recorded when received and expenses were recorded
when paid. Although the statements of operations and accumulated deficit and
cash flows for the year ended December 31, 1996 were prepared on the accrual
basis of accounting, accrual basis interim financial statements for 1996 are
not readily available. As a result, the accompanying interim statements of
operations and accumulated deficit and cash flows for the three month period
ended March 31, 1996 have been prepared based upon management estimates of the
revenue and expenses incurred for that period on a comparable basis to the same
amounts for the year ended December 31, 1996.
Revenue Recognition
Revenue is recognized in accordance with the proportional performance
method of accounting for service contracts. Under this method, revenue is
recognized as services are performed and the costs associated therewith are
incurred, under the terms of contractual agreements with each patient. A
significant portion, approximately 25%, of the services are performed in the
initial month of the contract. Billings under each contract, which vary in
duration from 12 to 24 months, are made throughout the term of the contract.
Provisions are made currently for all known or anticipated losses from patient
receivables and for loss contracts. Such deductions totaled $29,556 and $32,774
in 1996 and 1995, respectively. Patient prepayments represent collections from
patients or their insurance companies which are received in advance of the
performance of the related services.
F-63
<PAGE>
Clark E. Schneekluth, D.D.S., M.D., Inc.
Notes to Financial Statements (Continued)
December 31, 1996
1. Summary of Significant Accounting Policies (Continued)
Risks and Uncertainties
Concentration of Credit Risk
Financial instruments which subject the Company to credit risk consist
primarily of patients receivable. The risk with respect to patients receivable
is minimized due to the fact that patients remit a substantial portion of their
contract fee in advance. The Company generally does not require collateral, and
credit losses consistently have been within management's expectations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amount of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Orthodontic Supplies and Materials
Orthodontic supplies and materials are expensed as incurred.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation expense is
provided using the straight-line method over the estimated useful lives of the
assets, which range from five to seven years. Amortization of leasehold
improvements is provided over the term of the lease or their estimated useful
life, whichever is shorter.
Income Taxes
The Company has elected to be taxed under the provision of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
federal corporate income taxes on its taxable income. Instead, the stockholder
is liable for individual federal income taxes on the corporate income.
Accordingly, no provision has been made for federal income tax in the
accompanying financial statements. The Company prepares its tax returns on the
cash basis.
Impairment of Long-Lived Assets
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of". SFAS No. 121 requires recognition of impairment losses on
long-lived assets when indicators of impairment are present and future
undiscounted cash flows are insufficient to support the assets' recovery.
Adoption of SFAS No. 121 had no material impact on the Company's financial
statements.
Professional Liability Insurance
The Company has obtained professional liability coverage through
commercial insurance carriers on a claims-made basis. Management believes that
there are no claims that may result in a loss in excess of amounts covered by
its existing insurance.
F-64
<PAGE>
Clark E. Schneekluth, D.D.S., M.D., Inc.
Notes to Financial Statements (Continued)
December 31, 1996
2. Equipment and Improvements
Equipment and improvements consisted of the following at December 31:
1996 1995
--------- --------
Equipment and improvements .......... $70,270 $61,801
Less accumulated depreciation ......... 53,310 47,039
-------- --------
Equipment and improvements, net ...... $16,960 $14,762
======== ========
3. Related Party Transaction
The sole stockholder received approximately $39,000 and $40,000 of
compensation from the Company in 1996 and 1995, respectively, which is included
in employee costs. Stockholder's distribution amounted to $47,470 and $39,486
in 1996 and 1995, respectively. Additionally, the Company has a non-interest
bearing note payable, due on demand, amounting to $15,000 and $10,000 at
December 31, 1996 and 1995, respectively, with PRO Inc., a related party.
In January and February, 1997, the Company incurred additional borrowings
totaling $10,950 from PRO Inc. Borrowings bear interest at 10% per annum and
are due within 180 days from date of issuance.
4. Notes Payable
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Note payable with an individual bearing interest at 5% per annum,
payable in monthly installments of $500, including interest through
February 1997. ................................................... $ 1,764 $ 7,738
Corporate credit card issued through a bank bearing variable interest
rate (17.44% at December 31, 1996), payable in installments of
2.2% of the outstanding balance. ................................. 16,359 16,576
Note payable with a bank bearing interest at 12.99% per annum,
payable in monthly installments of $172, including interest through
March 2000. ...................................................... 5,894 --
-------- --------
24,017 24,314
Less current portion ................................................ 6,976 1,983
-------- --------
$17,041 $22,331
======== ========
</TABLE>
These notes are unsecured. The carrying value of the Company's debt
approximates fair value. Interest paid for the years ended December 31, 1996
and 1995 approximates interest expense. The aggregate amounts of required
principal payments on the Company's notes payable at December 31, 1996 are as
follows:
Year ending December 31:
1997 .................. $ 6,976
1998 .................. 4,506
1999 .................. 4,032
2000 .................. 2,838
2001--thereafter ...... 5,665
--------
$24,017
========
F-65
<PAGE>
Clark E. Schneekluth, D.D.S., M.D., Inc.
Notes to Financial Statements (Continued)
December 31, 1996
5. Leases
The Company's office space is rented under a six-month renewable operating
lease expiring in February,1997. In addition, the Company leases certain
equipment under lease agreements which have been accounted for as operating
leases.
Total rent expense for the years ended December 31, 1996 and 1995 amounted
to $28,662 and $17,121, respectively.
6. Contingent Practice Acquisition
The Company has entered into an agreement with Omega, a company recently
organized to provide management and marketing services to orthodontic practices
in the United States. In the event of a successful public offering of Omega's
common stock, this agreement provides for the purchase by Omega of the equity
interests in a management services organization (MSO) to be formed by the
Company's sole stockholder converting the Company into a general corporation
which will hold certain assets of the Company. The agreement provides for the
payment by Omega of $342,048, consisting of cash of $114,016, a five-year term
8.5% annual interest bearing note totaling $53,588 and shares of common stock
of Omega with a fair value at the date of issue of $174,444.
Concurrent with the acquisition of the equity interests in the MSO, the
sole stockholder of the Company will organize a new company (the orthodontic
practice) that will enter into a 20-year management services agreement with
Omega (or a wholly-owned subsidiary of Omega) renewable for an additional 20
years. The agreement will stipulate that Omega (or a wholly-owned subsidiary of
Omega) provide practice management and marketing services, facilities and
non-clinical personnel to the orthodontic practice for a monthly fee equal to
75% of the orthodontic practice's gross patient fee collections.
The acquisition and related management services agreement are entirely
contingent upon the consummation of an initial public offering by Omega.
F-66
<PAGE>
Report of Independent Auditors
To the Board of Directors
Omega Orthodontics, Inc.
We have audited the accompanying balance sheets of Jeff S. Zapalac, D.D.S.,
M.S., Inc. (the Company) as of December 31, 1996 and 1995 and the related
statements of operations and accumulated deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide 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 Jeff S. Zapalac, D.D.S., M.S.,
Inc. as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 25, 1997
F-67
<PAGE>
Jeff S. Zapalac, D.D.S., M.S., Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995 March 31, 1997
------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash ................................................... $ 18,156 $ 14,283
Patient receivables, less allowance of $10,000
and $3,000 at December 31, 1996 and 1995,
respectively, and $10,000 at March 31, 1997 ............ 50,308 50,263 $ 58,650
---------- ---------- ----------
Total current assets .................................... 68,464 64,546 58,650
Equipment and improvements, net ........................ 36,011 22,701 34,318
Note receivable, stockholder ........................... 36,044 43,329 66,088
---------- ---------- ----------
Total assets .......................................... $ 140,519 $ 130,576 $ 159,056
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
- -------------------------------------
Current liabilities:
Accounts payable ....................................... $ 20,712 $ 4,478 $ 27,099
Bank overdraft ....................................... -- -- 220
Accrued expenses ....................................... 32,052 31,825 53,264
Patient prepayments .................................... 97,494 76,221 106,630
Notes payable .......................................... -- 9,317 --
Income taxes payable ................................. 14,703 17,904 14,703
---------- ---------- ----------
Total current liabilities .............................. 164,961 139,745 201,916
Commitments and contingencies
Stockholder's deficit:
Common stock, $1 par value, 2,000 shares
authorized, 1,000 shares issued and outstanding ...... 1,000 1,000 1,000
Accumulated deficit .................................... (25,442) (10,169) (43,860)
---------- ---------- ----------
Total stockholder's deficit ........................... (24,442) (9,169) (42,860)
---------- ---------- ----------
Total liabilities and stockholder's deficit ............ $ 140,519 $ 130,576 $ 159,056
========== ========== ==========
</TABLE>
See accompanying notes.
F-68
<PAGE>
Jeff S. Zapalac, D.D.S., M.S., Inc.
Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Patient revenue ................................. $ 624,057 $ 563,520 $ 121,286 $ 160,383
Direct expenses:
Employee costs ................................. 286,661 231,740 80,994 75,617
Other costs .................................... 159,849 112,296 34,843 37,295
--------- --------- --------- ----------
Total direct expenses ........................... 446,510 344,036 115,837 112,912
General and administrative ..................... 170,556 107,197 25,417 41,336
Depreciation .................................... 11,624 10,897 2,906 2,906
--------- --------- --------- ----------
Operating income (loss) ........................ (4,633) 101,390 (22,874) 3,229
Interest income ................................. 4,332 84 4,500 1,065
Interest expense ................................. (269) (1,991) (44) (67)
--------- --------- --------- ----------
Income (loss) before income taxes ............... (570) 99,483 (18,418) 4,227
Provision for income taxes ..................... 14,703 17,597 0 3,676
--------- --------- --------- ----------
Net income (loss) .............................. (15,273) 81,886 (18,418) 551
Accumulated deficit at beginning of period ...... (10,169) (92,055) (25,442) (10,169)
--------- --------- --------- ----------
Accumulated deficit at end of period ............ $ (25,442) $ (10,169) $ (43,860) $ (9,618)
========= ========= ========= ==========
</TABLE>
See accompanying notes.
F-69
<PAGE>
Jeff S. Zapalac, D.D.S., M.S., Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
1996 1995 1997 1996
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) .............................. $ (15,273) $ 81,886 $ (18,418) $ 551
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Provision for bad debt expense ............... 10,000 3,000 -- 2,500
Depreciation ................................. 11,624 10,897 2,906 2,906
Changes in operating assets and liabilities:
Patient receivables ........................ (10,045) (29,375) (8,342) (34,802)
Patient prepayments ........................ 21,273 (20,724) 9,136 47,303
Accounts payable ........................... 16,234 (11,744) 6,387 9,653
Accrued expenses ........................... 227 16,746 21,212 54,697
Income taxes payable ........................ (3,201) 12,026 -- (16,000)
---------- ---------- ---------- ----------
Net cash provided by operating activities ...... 30,839 62,712 12,881 66,808
Investing activities
Note receivable, stockholder .................. 7,285 (35,434) (30,044) --
Purchases of equipment and improvements ......... (24,934) (2,156) (1,213) (6,234)
---------- ---------- ---------- ----------
Net cash used in investing activity ............ (17,649) (37,590) (31,257) (6,234)
Financing activity
Repayment of notes payable ..................... (9,317) (17,342) -- (2,329)
---------- ---------- ---------- ----------
Net cash used in financing activity ............ (9,317) (17,342) -- (2,329)
---------- ---------- ---------- ----------
Net increase (decrease) in cash ............... 3,873 7,780 (18,376) 58,245
Cash at beginning of period ..................... 14,283 6,503 18,156 14,283
---------- ---------- ---------- ----------
Cash (bank overdraft) at end of period ......... $ 18,156 $ 14,283 $ (220) 72,528
========== ========== ========== ==========
Supplemental disclosures:
Taxes paid .................................... $ 17,904 $ 5,571 $ 0 $ 16,000
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-70
<PAGE>
Jeff S. Zapalac, D.D.S., M.S., Inc.
Notes to Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
Nature of Business
The dental practice of Jeff S. Zapalac, D.D.S., M.S., Inc. (the Company)
is a professional corporation which was incorporated September 9, 1981 in
Austin, Texas for the primary purpose of practicing dentistry.
Revenue Recognition
Revenue is recognized in accordance with the proportional performance
method of accounting for service contracts. Under this method, revenue is
recognized as services are performed and the costs associated therewith are
incurred, under the terms of contractual agreements with each patient. A
significant portion, approximately 25%, of the services are performed in the
initial month of the contract. Billings under each contract, which vary in
duration from 12 to 24 months, are made throughout the term of the contract.
Provisions are made currently for all known or anticipated losses from patient
receivables and for loss contracts. Such deductions totaled $10,000 and $3,000
in 1996 and 1995, respectively. Patient prepayments represent collections from
patients or their insurance companies which are received in advance of the
performance of the related services.
Risks and Uncertainties
Concentration of Credit Risk
Financial instruments which subject the Company to credit risk consists
primarily of patient receivables. The risk with respect to patient receivables
is minimized due to the fact that patients remit a substantial portion of their
contract fee in advance. The Company performs periodic credit evaluations of
its patients' financial condition and generally does not require collateral.
Credit losses consistently have been within management's expectations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amount of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Orthodontic Supplies and Materials
Orthodontic supplies and materials are expensed as incurred.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation expense is
provided using the straight-line method over the estimated useful lives of the
assets. Amortization of leasehold improvements is provided over the term of the
lease or their estimated useful life, whichever is shorter.
Professional Liability Insurance
The Company has obtained professional liability coverage through
commercial insurance carriers on an occurrence basis. Management believes that
there are no claims that may result in a loss in excess of amounts covered by
its existing insurance.
Income Taxes
The Company provides for income taxes under the liability method
prescribed by Statement of Financial Accounting, Standards (SFAS) No. 109,
"Accounting for Income Taxes". Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. SFAS No. 109
requires that the Company record a valuation allowance when it is more likely
than not that some portion or
F-71
<PAGE>
Jeff S. Zapalac, D.D.S., M.S., Inc.
Notes to Financial Statements (Continued)
December 31, 1996
1. Summary of Significant Accounting Policies (Continued)
all of the deferred tax assets will not be realized. Due to the uncertainty of
the Company's ability to realize the benefit of the deferred tax assets, a full
valuation allowance has been applied against the net deferred tax assets in
1996 and 1995. The Company prepares its tax returns on the cash basis.
Impairment of Long-Lived Assets
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of". SFAS No. 121 requires recognition of impairment losses on
long-lived assets when indicators of impairment losses on long-lived assets are
present and future undiscounted cash flows are insufficient to support the
assets' recovery. Adoption of SFAS No. 121 had no material impact on the
Company's financial statements.
Interim Financial Statements
The balance sheet at March 31, 1997, the statements of operations and
accumulated deficit and statements of cash flows for the three months ended
March 31, 1997 and 1996 are unaudited, but, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of results for these interim periods. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of results to be expected for the entire year.
Prior to the preparation of the financial statements of the Company for
the years ended December 31, 1996 and 1995 for purposes of this Prospectus, the
Company maintained accounting records on the cash basis of accounting.
Accordingly, revenues were recorded when received and expenses were recorded
when paid. Although the statements of operations and accumulated deficit and
cash flows for the year ended December 31, 1996 were prepared on the accrual
basis of accounting, accrual basis interim financial statements for 1996 are
not readily available. As a result, the accompanying interim statements of
operations and accumulated deficit and cash flows for the three month period
ended March 31, 1996 have been prepared based upon management estimates of the
revenue and expenses incurred for that period on a comparable basis to the same
amounts for the year ended December 31, 1996.
2. Equipment and Improvements
Equipment and improvements consisted of the following at December 31:
1996 1995
---------- ---------
Leasehold improvements ............................ $ 18,496 8,122
Furniture and fixtures ........................... 149,374 144,595
Office equipment ................................. 54,223 48,370
Dental equipment ................................. 12,720 8,792
--------- ---------
234,813 209,879
Less accumulated depreciation and amortization ... 198,802 187,178
--------- ---------
Equipment and improvements, net .................. $ 36,011 22,701
========= =========
3. Related Party Transactions
The note receivable, stockholder is a 10% unsecured note, including
accrued interest, with no fixed repayment schedule. Interest income accrued on
the outstanding balance was approximately $4,000 for the year ended December
31, 1996. The sole stockholder received approximately $148,000 and $90,500 of
compensation in 1996 and 1995, respectively, which is included in employee
costs. In addition, the Company leases office space from the sole stockholder.
(See also Note 5.)
F-72
<PAGE>
Jeff S. Zapalac, D.D.S., M.S., Inc.
Notes to Financial Statements (Continued)
December 31, 1996
4. Notes Payable
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Note payable to bank, due in monthly installments of $1,132, plus
interest at the bank's prime rate plus 1% (9.5% at December 31,
1995), paid in full July, 1996. .............................. $ -- $9,317
------ -------
$ -- $9,317
====== =======
</TABLE>
Interest paid approximated interest expense in 1996 and 1995.
5. Leases
The Company rents office space from a stockholder under a four year
operating lease which expires in December 1998. Annual rent expense for the
years ended December 31, 1996 and 1995 amounted to $84,000. Future minimum
lease payments are $84,000 per annum for the years ended December 31, 1997 and
1998.
6. Income Taxes
Significant components of the deferred tax liabilities and assets were as
follows at December 31:
1996 1995
--------- --------
Deferred tax liabilities:
Patient receivables, net .................. $(20,100) $(20,100)
Depreciation .............................. (4,200) (6,300)
-------- --------
Total deferred tax liabilities ............... (24,300) (26,400)
Deferred tax assets:
Accounts payable and accrued expenses ...... 21,100 14,500
Patient prepayments ........................ 39,000 30,500
-------- --------
60,100 45,000
Valuation allowance ........................ (35,800) (18,600)
-------- --------
Total deferred tax assets .................. 24,300 26,400
-------- --------
Net deferred tax liabilities ............... $ 0 $ 0
======== ========
The reconciliation of income tax computed at the federal statutory rates
to income tax expense is:
1996 1995
----------- -------------
Tax at statutory rates ............. $ (200) $ 34,819
Change in valuation allowance ...... 17,200 (15,265)
Other .............................. (2,297) (1,957)
-------- ----------
Total .............................. $ 14,703 $ 17,597
======== ==========
Since the Company prepares its tax return on a cash basis, the effective tax
rate differs from the statutory tax rate due to the timing of cash receipts and
disbursements.
7. Profit Sharing Plan
The Company has a profit sharing plan (the Plan) that covers all employees
meeting defined eligibility requirements. Contributions are at the discretion
of management. Total contributions to the Plan charged to operations were
approximately $27,000 and $26,000 in 1996 and 1995, respectively.
F-73
<PAGE>
Jeff S. Zapalac, D.D.S., M.S., Inc.
Notes to Financial Statements (Continued)
December 31, 1996
8. Contingent Practice Acquisition
The Company has entered into an agreement with Omega Orthodontics, Inc.
(Omega), a company recently organized to provide management and marketing
services to orthodontic practices in the United States. In the event of a
successful public offering of Omega's common stock, this agreement provides for
the purchase of by Omega of the equity interests in a management services
organization (MSO) to be formed by the Company's sole stockholder converting
the Company into a general corporation which will hold certain assets of the
Company. The agreement provides for the payment by Omega of $500,000 which will
be paid in cash. In addition, the sole stockholder of the Company will receive
an option to purchase $500,000 of shares of common stock of Omega at the fair
value at the date of issuance.
Concurrent with the acquisition of the equity interests in the MSO, the
sole stockholder of the Company will organize a new company (the orthodontic
practice) that will enter into a 20-year management services agreement with
Omega (or a wholly-owned subsidiary of Omega) renewable for an additional 20
years. The agreement will stipulate that Omega (or a wholly-owned subsidiary of
Omega) provide practice management and marketing services, facilities and
non-clinical personnel to the orthodontic practice for a monthly fee equal to
75% of the orthodontic practice's gross patient fee collections.
The acquisition and related management services agreement are entirely
contingent upon the consummation of an initial public offering by Omega.
F-74
<PAGE>
===============================================================================
No Underwriter, dealer, salesperson or any other person has been authorized to
give any information or to make any representations 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. 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. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to
whom it is unlawful to make such offer or solicitation.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary .............................. 3
Risk Factors .................................... 7
The Company ....................................... 16
Use of Proceeds ................................. 16
Dividend Policy ................................. 18
Capitalization .................................... 18
Dilution .......................................... 19
Selected Financial Data ........................... 20
Management's Plan of Operation .................. 21
Business .......................................... 26
Management ....................................... 34
Certain Transactions .............................. 40
Principal Stockholders ........................... 42
Description of Securities ........................ 44
Shares Eligible for Future Sale .................. 47
Underwriting .................................... 48
Legal Matters .................................... 50
Experts .......................................... 50
Additional Information ........................... 50
Index to Financial Statements ..................... F-1
</TABLE>
--------------------------
Until , 1997, (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
OMEGA
ORTHODONTICS, INC.
1,800,000 Shares of Common Stock
and
1,800,000 Redeemable Common Stock
Purchase Warrants
----------------------------
P R O S P E C T U S
----------------------------
NATIONAL SECURITIES
CORPORATION
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Company is a Delaware corporation. Reference is made to Section 145 of
the Delaware General Corporation Law, as amended, which provides that a
corporation may indemnify any person who was or is a party to 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), judgments, 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 proceedings, had no reasonable cause to
believe such person's conduct was unlawful. Section 145 further provides that a
corporation similarly 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 to 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 Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite an adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Article Sixth of the Company's Certificate of Incorporation, as amended,
eliminates the personal liability of directors to the Company or its
stockholders for monetary damages for breach of fiduciary duty to the full
extent permitted by Delaware law. Article VII of the Company's By-Laws provides
that the Company shall indemnify its officers and directors to the full extent
permitted by the Delaware General Corporation Law. Under the Company's By-Laws,
a director or officer will not receive indemnification if such director or
officer is found not to have acted in good faith and in a manner such director
or officer reasonably believed to be in or not opposed to the best interests of
the Company.
The Company maintains an indemnification insurance policy covering all
directors and officers of the Company and its subsidiaries.
Item 25. Other Expenses of Issuance and Distribution
The following table itemizes the expenses incurred by the Company in
connection with the Offering. All amounts are estimated, except for the
Registration Fee and NASD Filing Fee.
<TABLE>
<S> <C>
Registration Fee ........................ $ 8,726
NASD Filing Fee ........................ $ 3,379
Nasdaq Listing Fee ..................... $ 15,000
Boston Stock Exchange Listing Fee ...... $ 15,000
Printing and Engraving Expenses ......... $ 130,000
Legal Fees and Expenses ............... $ 350,000
Accounting Fees and Expenses ............ $ 550,000
Blue Sky Fees and Expenses ............ $ 35,000
Transfer and Warrant Agent Fee ......... $ 10,000
Miscellaneous ........................... $ 52,895
-----------
TOTAL ................................. $1,170,000
===========
</TABLE>
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
The securities issued in the following transactions were not registered
under the Securities Act in reliance upon the exemptions from registration set
forth in Section 4(2) of the Securities Act and the rules and regulation
promulgated thereunder.
On August 31, 1996, Omega issued, in a private transaction, 1,050,000
shares of its Common Stock to The Orthodontic Management Effectiveness Group of
America, LLC ("OMEGA, LLC") in exchange for OMEGA, LLC's orthodontic practice
management business and certain related assets and agreements. Messrs.
Schulhof, Glovsky, Grove and Bellavia, all of the then directors of Omega, held
in the aggregate, at the time of the issuance, in excess of 50% of the
membership points of OMEGA, LLC. In addition, Mr. Schulhof is the sole manager
of OMEGA, LLC with sole authority to make investment decisions on behalf of
OMEGA, LLC. Accordingly, OMEGA, LLC, through its principal point holders and
its sole manager, had access to information on Omega necessary to make an
informed investment decision. Omega relied on Section 4(2) of the Securities
Act and the rules and regulations promulgated thereunder in issuing these
securities without registration under the Securities Act.
Pursuant to an agreement among Omega, Dr. Glovsky, the Chairman of the
Board, and The Mayflower Group, Ltd., a private banking firm and a holder of in
excess of five percent of the membership points of OMEGA, LLC ("Mayflower"), as
amended and restated, Omega issued 225,000 shares of its Common Stock to each
of Dr. Glovsky and Mayflower in partial consideration of certain consulting
services rendered by Dr. Glovsky and Mayflower to Omega. Such consulting
services had a deemed value of $2.2 million. Dr. Glovsky, as the Chairman of
the Board of Omega, and Mayflower, as a principal point holder of OMEGA, LLC,
the principal stockholder of Omega, had access to information on Omega
necessary to make an informed investment decision. Omega relied on Section 4(2)
of the Securities Act and the rules and regulations promulgated thereunder in
issuing these securities without registration under the Securities Act.
During September, October and November 1996 and February and April 1997,
Omega privately placed $875,000 of its 15% Senior Notes due September 30, 1997
(the "Bridge Notes") along with 175,000 shares of its Common Stock with a group
of "accredited investors," as that term is defined in Rule 501 promulgated
under the Securities Act. The total consideration received by Omega for these
securities was $875,000. Omega relied on Section 4(2) of the Securities Act and
the rules and regulations promulgated thereunder in issuing these securities
without registration under the Securities Act.
In April 1997, Omega issued 10,000 shares of its Common Stock to Leonard,
Mulherin & Greene, P.C., a public accounting firm ("LMG"), in partial
consideration for $50,000 worth of consulting services provided by LMG to
Omega. Omega's Chief Financial Officer is a principal stockholder of LMG.
Accordingly, LMG, through one of its principal stockholders, had access to
information on Omega necessary to make an informed investment decision. Omega
relied on Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder in issuing these securities without registration under
the Securities Act.
In June 1997, Omega privately placed $50,000 of its 16% Promissory Notes
due June 30, 1998 (the "Interim Notes") with Dr. Glovsky and Dr. Grove, both
members of its Board of Directors. Omega relied on Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder in issuing
the securities without registration under the Securities Act.
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
- ------------- ---------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement(1)
2.1 Asset Purchase Agreement dated as of August 31, 1996 by and between Omega
Orthodontics, Inc. and The Orthodontic Management Effectiveness Group of America,
LLC(1)
2.2 Form of Affiliation Agreement and Stock Purchase Agreement by and between Omega
Orthodontics, Inc. and Robert R. Schmisseur, D.D.S.+
2.3 Affiliation Agreement and Agreement and Plan of Merger by and among Omega
Orthodontics, Inc., Theodore G. Saydyk, Jr., D.D.S. and Theodore G. Saydyk, Jr.,
D.D.S.,
P.C.(1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
- ------------- --------------------------------------------------------------------------------------------
<S> <C>
2.4 Form of Affiliation Agreement and Asset Purchase Agreement by and between Omega
Orthodontics, Inc. and Scott E. Feldman, D.D.S.+
2.5 Form of Affiliation Agreement and Stock Purchase Agreement by and between Omega
Orthodontics, Inc. and Jeff S. Zapalac, D.D.S. +
2.6 Form of Affiliation Agreement and Asset Purchase Agreement by and between Omega
Orthodontics, Inc. and David T. Grove, D.M.D. +
2.7 Affiliation Agreement and Agreement and Plan of Merger by and among Omega
Orthodontics, Inc., Michael G. Churosh, D.D.S. and Michael G. Churosh, D.D.S., M.S.,
LTD.(1)
2.8 Affiliation Agreement and Agreement and Plan of Merger by and among Omega
Orthodontics, Inc., Clark E. Schneekluth, D.D.S. and Clark E. Schneekluth, D.D.S.,
P.C.(1)
3.1 Certificate of Incorporation of Omega Orthodontics, Inc.(1)
3.2 Certificate of Amendment of Certificate of Incorporation of Omega Orthodontics, Inc. filed
February 12, 1997(1)
3.3 By-Laws of Omega Orthodontics, Inc.(1)
4.1 Specimen Certificate for Common Stock*
4.2 Form of Subscription Agreement for private placement of 15% Senior Notes due
September 30, 1997 (including rights to receive shares of Common Stock)(1)
4.3 Form of 15% Senior Notes due September 30, 1997(1)
4.4 Warrant Agreement by and between Omega Orthodontics, Inc. and Continental Stock
Transfer & Trust Company, including form of Warrant(1)
4.5 Representative's Warrant Agreement by and between National Securities Corporation and
Omega Orthodontics, Inc., including form of Representative's Warrant(1)
4.6 Form of 16% Promissory Notes due June 30, 1998+
5.1 Legal Opinion of Robinson & Cole LLP*
10.1 Form of Management Services Agreement by and among a professional corporation to be
formed by Dr. Schmisseur, Omega Orthodontics of Champaign, Inc. and OMEGA
Orthodontics, Inc.(1)
10.2 Form of Management Services Agreement by and among a professional corporation to be
formed by Dr. Saydyk, Omega Orthodontics of Colorado Springs, Inc. and OMEGA
Orthodontics, Inc.(1)
10.3 Form of Management Services Agreement by and among a professional corporation to be
formed by Dr. Feldman, Omega Orthodontics of Woodland Hills, Inc. and OMEGA
Orthodontics, Inc.(1)
10.4 Form of Management Services Agreement by and among a professional corporation to be formed
by Dr. Zapalac, Omega Orthodontics of Austin, Inc. and OMEGA Orthodontics, Inc.(1)
10.5 Form of Management Services Agreement by and among a professional corporation to be formed
by Dr. Grove, Omega Orthodontics of Elko, Inc. and OMEGA Orthodontics, Inc.(1)
10.6 Form of Management Services Agreement by and among a professional corporation to be formed
by Dr. Churosh, Omega Orthodontics of Goodyear, Inc. and OMEGA Orthodontics, Inc.(1)
10.7 Form of Management Services Agreement by and among a professional corporation to be
formed by Dr. Schneekluth, Omega Orthodontics of Huntington Beach, Inc. and OMEGA
Orthodontics, Inc.(1)
10.8 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Schmisseur, Robert R. Schmisseur, D.D.S.,
Omega Orthodontics, Inc. and Omega Orthodontics of Champaign, Inc.(1)
10.9 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Saydyk, Theodore G. Saydyk, Jr., D.D.S.,
Omega Orthodontics, Inc. and Omega Orthodontics of Colorado Springs, Inc.(1)
10.10 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Feldman, Scott E. Feldman, D.D.S., Omega
Orthodontics Inc., and Omega Orthodontics of Woodland Hills, Inc.(1)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
- ------------- -----------------------------------------------------------------------------------------
<S> <C>
10.11 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Zapalac, Jeff S. Zapalac, D.D.S., Inc.,
Omega Orthodontics, Inc. and Omega Orthodontics of Austin, Inc.(1)
10.12 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Grove, David T. Grove, D.M.D., Omega
Orthodontics, Inc. and Omega Orthodontics of Elko, Inc.(1)
10.13 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Churosh, Michael G. Churosh, D.D.S.,
Omega Orthodontics, Inc. and Omega Orthodontics of Goodyear, Inc.(1)
10.14 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Schneekluth, Clark E. Schneekluth, D.D.S.,
Omega Orthodontics, Inc. and Omega Orthodontics of Huntington Beach, Inc.(1)
10.15 Form of Non-negotiable Promissory Note from Omega Orthodontics, Inc. payable to
Robert R. Schmisseur (1)
10.16 Form of Non-negotiable Promissory Note from Omega Orthodontics, Inc. payable to
Theodore G. Saydyk, Jr.(1)
10.17 Form of Non-negotiable Promissory Note from Omega Orthodontics, Inc. payable to
Scott E. Feldman+
10.18 Form of Non-negotiable Promissory Note from Omega Orthodontics, Inc. payable to
David T. Grove(1)
10.19 Form of Non-negotiable Promissory Note from Omega Orthodontics, Inc. payable to
Clark E. Schneekluth(1)
10.20 General Assignment and Assumption Agreement dated as of August 31, 1997 by and
between The Orthodontic Management Effectiveness Group of America, LLC and Omega
Orthodontics, Inc.(1)
10.21 Employment Agreement by and between Robert J. Schulhof and Omega Orthodontics, Inc.(1)
10.22 Employment Agreement by and between Dean C. Bellavia and Omega Orthodontics, Inc.(1)
10.23 Employment Agreement by and between F. V. Elliott and Omega Orthodontics, Inc.(1)
10.24 Omega Orthodontics Incentive Stock Plan, as amended(1)
10.25 Subscription Agreements dated as of September 9, 1996 and April 28, 1997 by and between
Omega Orthodontics, Inc. and C. Joel Glovsky Rollover IRA(1)
10.26 Subscription Agreement dated as of September 25, 1996 by and between Omega
Orthodontics, Inc. and Dean C. Bellavia(1)
10.27 Amended and Restated Consulting Agreement by and among Omega Orthodontics, Inc., The
Mayflower Group, Ltd. and C. Joel Glovsky, as amended(1)
10.28 Agreement dated as of October 23, 1996 by and between Leonard, Mulherin & Greene, P.C.
and Omega Orthodontics, Inc.(1)
10.29 Consulting Agreement by and between C. Joel Glovsky and Omega Orthodontics, Inc.(1)
10.30 Consulting Agreement by and between Leonard, Mulherin & Greene, P.C. and Omega
Orthodontics, Inc.(1)
10.31 Subscription Agreement dated as of April 28, 1997 by and between Omega Orthodontics,
Inc. and David T. Grove(1)
11 Computation of Pro Forma Earnings Per Share+
21.1 List of Subsidiaries of Omega Orthodontics, Inc.*
23.1 Consent of Robinson & Cole LLP (included in their opinion filed as Exhibit 5.1)
23.2 Consents of Ernst & Young LLP, independent auditors+
24.1 Powers of Attorney(1)
27.1 Financial Data Schedule+
</TABLE>
- ----------------
* To be filed by amendment
+ Filed herewith
(1) Previously filed
II-4
<PAGE>
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer 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 small business issuer 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 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.
The small business issuer will:
(1) For determining any liability under the Securities Act, treat 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 small business issuer under Rule 424(b)(1), or (4), or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that the offering of the securities at that time as the initial
bona fide offering of those securities.
The small business issuer will provide to the underwriter at the closing
specified in the underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
The small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any fact or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this Amendment
No. 1 to its Registration Statement to be signed on its behalf by the
undersigned in the city of Boston, Commonwealth of Massachusetts, on July ,
1997.
OMEGA ORTHODONTICS, INC.
By: /s/ Robert J. Schulhof
---------------------------------
Robert J. Schulhof,
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates stated:
Signature Title Date
- -------------------------- --------------------------------- --------------
/s/ Robert J. Schulhof Director, President and Chief July , 1997
- -------------------------- Executive Officer (Principal
Robert J. Schulhof Executive Officer)
* Chief Financial Officer (Principal July , 1997
- -------------------------- Financial and Accounting Officer)
Edward M. Mulherin
* Director July , 1997
- --------------------------
Dean C. Bellavia
* Director July , 1997
- --------------------------
John J. Clarke, Jr.
* Director July , 1997
- --------------------------
Floyd V. Elliott
* Director July , 1997
- --------------------------
C. Joel Glovsky
* Director July , 1997
- --------------------------
David T. Grove
- ------------
* The undersigned, by signing his name hereto, does sign and execute this
Amendment No. 1 to the Registration Statement of Omega Orthodontics, Inc.
pursuant to Powers of Attorney executed on behalf of the above-named
officers and directors and previously filed with the Securities and Exchange
Commission.
/s/ Robert J. Schulhof
--------------------------------
Robert J. Schulhof,
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description Page
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<S> <C> <C>
1.1 Form of Underwriting Agreement(1)
2.1 Asset Purchase Agreement dated as of August 31, 1996 by and between Omega Orthodontics,
Inc. and The Orthodontic Management Effectiveness Group of America, LLC(1)
2.2 Form of Affiliation Agreement and Stock Purchase Agreement by and between Omega
Orthodontics, Inc. and Robert R. Schmisseur, D.D.S. +
2.3 Affiliation Agreement and Agreement and Plan of Merger by and among Omega Orthodontics,
Inc., Theodore G. Saydyk, Jr., D.D.S. and Theodore G. Saydyk, Jr., D.D.S., P.C.(1)
2.4 Form of Affiliation Agreement and Asset Purchase Agreement by and between Omega
Orthodontics, Inc. and Scott E. Feldman, D.D.S.+
2.5 Form of Affiliation Agreement and Stock Purchase Agreement by and between Omega
Orthodontics, Inc. and Jeff S. Zapalac, D.D.S.+
2.6 Form of Affiliation Agreement and Asset Purchase Agreement by and between Omega
Orthodontics, Inc. and David T. Grove, D.M.D. +
2.7 Affiliation Agreement and Agreement and Plan of Merger by and among Omega Orthodontics,
Inc., Michael G. Churosh, D.D.S. and Michael G. Churosh, D.D.S., M.S., LTD.(1)
2.8 Affiliation Agreement and Agreement and Plan of Merger by and among Omega Orthodontics,
Inc., Clark E. Schneekluth, D.D.S. and Clark E. Schneekluth, D.D.S., P.C.(1)
3.1 Certificate of Incorporation of Omega Orthodontics, Inc.(1)
3.2 Certificate of Amendment of Certificate of Incorporation of Omega Orthodontics, Inc. filed
February 12, 1997(1)
3.3 By-Laws of Omega Orthodontics, Inc.(1)
4.1 Specimen Certificate for Common Stock*
4.2 Form of Subscription Agreement for private placement of 15% Senior Notes due
September 30, 1997 (including rights to receive shares of Common Stock)(1)
4.3 Form of 15% Senior Notes due September 30, 1997(1)
4.4 Warrant Agreement by and between Omega Orthodontics, Inc. and Continental Stock Transfer
& Trust Company, including form of Warrant(1)
4.5 Representative's Warrant Agreement by and between National Securities Corporation and
Omega Orthodontics, Inc., including form of Representative's Warrant(1)
4.6 Form of 16% Promissory Notes due June 30, 1998+
5.1 Legal Opinion of Robinson & Cole LLP*
10.1 Form of Management Services Agreement by and among a professional corporation to be
formed by Dr. Schmisseur, Omega Orthodontics of Champaign, Inc. and OMEGA
Orthodontics, Inc.(1)
10.2 Form of Management Services Agreement by and among a professional corporation to be
formed by Dr. Saydyk, Omega Orthodontics of Colorado Springs, Inc. and OMEGA
Orthodontics, Inc.(1)
10.3 Form of Management Services Agreement by and among a professional corporation to be
formed by Dr. Feldman, Omega Orthodontics of Woodland Hills, Inc. and OMEGA
Orthodontics, Inc.(1)
10.4 Form of Management Services Agreement by and among a professional corporation to be formed
by Dr. Zapalac, Omega Orthodontics of Austin, Inc. and OMEGA Orthodontics, Inc.(1)
10.5 Form of Management Services Agreement by and among a professional corporation to be
formed by Dr. Grove, Omega Orthodontics of Elko, Inc. and OMEGA Orthodontics, Inc.(1)
10.6 Form of Management Services Agreement by and among a professional corporation to be formed
by Dr. Churosh, Omega Orthodontics of Goodyear, Inc. and OMEGA Orthodontics, Inc.(1)
10.7 Form of Management Services Agreement by and among a professional corporation to be
formed by Dr. Schneekluth, Omega Orthodontics of Huntington Beach, Inc. and OMEGA
Orthodontics, Inc.(1)
10.8 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Schmisseur, Robert R. Schmisseur, D.D.S.,
Omega Orthodontics, Inc. and Omega Orthodontics of Champaign, Inc.(1)
10.9 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Saydyk, Theodore G. Saydyk, Jr., D.D.S.,
Omega Orthodontics, Inc. and Omega Orthodontics of Colorado Springs, Inc.(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description Page
- ------------- ------------------------------------------------------------------------------------------- -----
<S> <C> <C>
10.10 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Feldman, Scott E. Feldman, D.D.S., Omega
Orthodontics Inc., and Omega Orthodontics of Woodland Hills, Inc.(1)
10.11 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Zapalac, Jeff S. Zapalac, D.D.S., Inc., Omega
Orthodontics, Inc. and Omega Orthodontics of Austin, Inc.(1)
10.12 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Grove, David T. Grove, D.M.D., Omega
Orthodontics, Inc. and Omega Orthodontics of Elko, Inc.(1)
10.13 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Churosh, Michael G. Churosh, D.D.S., Omega
Orthodontics, Inc. and Omega Orthodontics of Goodyear, Inc.(1)
10.14 Form of Stock Put/Call Option and Successor Designation Agreement by and among a
professional corporation to be formed by Dr. Schneekluth, Clark E. Schneekluth, D.D.S.,
Omega Orthodontics, Inc. and Omega Orthodontics of Huntington Beach, Inc.(1)
10.15 Form of Non-negotiable Promissory Note from Omega Orthodontics, Inc. payable to
Robert R. Schmisseur(1)
10.16 Form of Non-negotiable Promissory Note from Omega Orthodontics, Inc. payable to
Theodore G. Saydyk, Jr.(1)
10.17 Form of Non-negotiable Promissory Note from Omega Orthodontics, Inc. payable to
Scott E. Feldman+
10.18 Form of Non-negotiable Promissory Note from Omega Orthodontics, Inc. payable to
David T. Grove(1)
10.19 Form of Non-negotiable Promissory Note from Omega Orthodontics, Inc. payable to
Clark E. Schneekluth(1)
10.20 General Assignment and Assumption Agreement dated as of August 31, 1997 by and between
The Orthodontic Management Effectiveness Group of America, LLC and Omega
Orthodontics, Inc.(1)
10.21 Employment Agreement by and between Robert J. Schulhof and Omega Orthodontics, Inc.(1)
10.22 Employment Agreement by and between Dean C. Bellavia and Omega Orthodontics, Inc.(1)
10.23 Employment Agreement by and between F. V. Elliott and Omega Orthodontics, Inc.(1)
10.24 Omega Orthodontics Incentive Stock Plan, as amended(1)
10.25 Subscription Agreement dated as of September 9, 1996 and April 28, 1997 by and between
Omega Orthodontics, Inc. and C. Joel Glovsky Rollover IRA(1)
10.26 Subscription Agreement dated as of September 25, 1996 by and between Omega Orthodontics,
Inc. and Dean C. Bellavia(1)
10.27 Amended and Restated Consulting Agreement by and among Omega Orthodontics, Inc., The
Mayflower Group, Ltd. and C. Joel Glovsky, as amended(1)
10.28 Agreement dated as of October 23, 1996 by and between Leonard, Mulherin & Greene, P.C.
and Omega Orthodontics, Inc.(1)
10.29 Consulting Agreement by and between C. Joel Glovsky and Omega Orthodontics, Inc.(1)
10.30 Consulting Agreement by and between Leonard, Mulherin & Greene, P.C. and Omega
Orthodontics, Inc.(1)
10.31 Subscription Agreement dated as of April 28, 1997 by and between Omega Orthodontics, Inc.
and David T. Grove(1)
11 Computation of Pro Forma Earnings Per Share+
21.1 List of Subsidiaries of Omega Orthodontics, Inc.*
23.1 Consent of Robinson & Cole LLP (included in their opinion filed as Exhibit 5.1)*
23.2 Consents of Ernst & Young LLP, independent auditors+
24.1 Powers of Attorney(1)
27.1 Financial Data Schedule+
</TABLE>
- ----------------
* To be filed by amendment
+ Filed herewith
(1) Previously filed
Exhibit 2.2
- --------------------------------------------------------------------------------
AFFILIATION AGREEMENT
AND STOCK PURCHASE AGREEMENT
This AFFILIATION AGREEMENT AND STOCK PURCHASE AGREEMENT (this
"Agreement") is entered into as of the 10th of March, 1997, by and between Omega
Orthodontics, Inc., a Delaware corporation ("OMEGA") and Robert R. Schmisseur,
D.D.S. ("Dr. Schmisseur"), who is duly licensed to practice orthodontics in the
state of Illinois (the "State").
RECITALS
A. OMEGA provides professional management and marketing services to
orthodontic practices in the United States, which services include providing
practice management systems, office space, equipment, furnishings and active
administrative personnel necessary for the operation of orthodontic practices,
and which services are provided directly or indirectly through management
service organizations.
B. Robert R. Schmisseur, D.D.S., P.C., an Illinois professional
corporation (the "Orthodontic Entity") owns and operates an orthodontic practice
with offices located at 1701 South Prospect, Champaign, Illinois 61820 (the
"Orthodontic Offices") and furnishes orthodontic care to the general public
through the services of Dr. Schmisseur affiliated with the Orthodontic Entity.
C. Dr. Schmisseur presently holds and owns 100% of the issued and
outstanding capital stock of the Orthodontic Entity (the issued and outstanding
capital stock is hereafter referred to herein as the "Interests"), represented
by the certificates as follows:
No. Shares Stock Certificate No.
---------- ---------------------
----- --------
D. Dr. Schmisseur desires to sell and OMEGA desires to buy the
Interests upon the terms and conditions set forth in this Agreement.
E. Prior to selling the Interests, Dr. Schmisseur desires to convert
the status of the Orthodontic Entity from a professional entity to a general
purpose entity and to form a new professional corporation or entity to continue
his orthodontic practice at the Orthodontic Offices.
F. Simultaneously with its acquisition of the Interests, OMEGA shall
change the name of the Orthodontic Entity to Omega Orthodontics of Champaign,
Inc., an Illinois corporation.
<PAGE>
G. OMEGA has conducted a review of the Orthodontic Entity, and has
reviewed the Orthodontic Entity's audited financial statement (the "Financial
Statement"), a copy of which is attached hereto as Exhibit A . Based on its
review of the Orthodontic Entity and the Financial Statement, OMEGA has issued
the report (the "Report"), a copy of which has been furnished to the Orthodontic
Entity. The Orthodontic Entity and Dr. Schmisseur have reviewed the Report and
OMEGA's literature, and agree with the Report and the concepts of OMEGA's
Exceptional Practice.
H. Subject to the terms and conditions of this Agreement, OMEGA and Dr.
Schmisseur have determined that it is in the best interests of each to effect a
sale and purchase of the Interests of the Orthodontic Entity as provided in
Section 2.1 hereof (the "Stock Purchase").
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged to the full
satisfaction of the parties hereto, the parties hereto agree as follows:
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<PAGE>
ARTICLE I. ENTITY FORMATION AND CONVERSION
1.1 At the Closing (as defined in Section 2.3 hereof), Dr. Schmisseur
shall cause the Orthodontic Entity's charter ("Charter") to be amended to
convert the Orthodontic Entity into a general purpose entity under the laws of
the State.
1.2 Dr. Schmisseur shall sell the Interests to OMEGA for the
consideration set forth in Article II.
1.3 Dr. Schmisseur shall form a new professional entity (the "New PC")
under the laws of the State and, in accordance with the terms of this Agreement,
commence the practice of orthodontics through the New PC.
1.4 OMEGA shall change the name of the Orthodontic Entity to Omega
Orthodontics of Champaign, Inc. (the "MSO").
ARTICLE II. STOCK PURCHASE AND CONSIDERATION
2.1. Stock Purchase; Consideration and Payment. At the Effective Time
(as defined below), OMEGA hereby agrees to purchase and Dr. Schmisseur hereby
agrees to sell the Interests of the Orthodontic Entity for the Consideration (as
defined below) and upon the terms and conditions set forth in this Agreement, by
surrendering to OMEGA the certificates therefor, duly endorsed and transferable,
free and clear of any liens, encumbrances, restrictions or claims of any kind
(other than those liens, encumbrances, restrictions and claims expressly
disclosed to OMEGA and affirmatively accepted by OMEGA prior to the Effective
Time. The Stock Purchase shall become effective upon the transferring of the
Certificates representing the Interests (the "Effective Time") to OMEGA and the
payment to Dr. Schmisseur of the aggregate consideration (the "Consideration")
of:
(i) Two Hundred Eighteen Thousand, Forty Two Dollars
($218,042.00) in cash (the "Cash Component");
(ii) Two Hundred Eighteen Thousand, Forty Two Dollars
($218,042.00) to be represented by a promissory note (the "Purchase
Note") payable to Dr. Schmisseur (the "Note Component") in the form
attached hereto as Exhibit B; and
(iii) Two Hundred Eighteen Thousand, Forty Dollars
($218,040.00) to be represented by issuance to Dr. Schmisseur of shares
of OMEGA common stock ("OMEGA Stock") based on a value per share equal
to 100% of the IPO Price (as defined below in Section 2.3) (the "Stock
Component"), which shall thereupon be issued to Dr. Schmisseur, fully
paid and nonassessable.
-3-
<PAGE>
2.2 Adjustment and Audit.
(a) The Consideration is based on the value of the Interests as
determined by OMEGA from the information set forth in the Financial Statement.
(b) The Consideration shall be subject to adjustments at Closing for:
(i) prepaid and underpaid rent and other lease obligations, if the leases are to
be continued after Closing, as well as for other agreed normal and customary
prepaid and underpaid expenses; (ii) any accrued but unpaid salaries, bonuses
and other compensation, fringe and health insurance benefits, employment or
payroll taxes and related employment obligations; (iii) any accounts payable of
the Orthodontic Entity which have accrued prior to the Effective Time and which
remain unpaid as of such time (the "Accounts Payable") in excess of an amount
equal to one-half (1/2) of one "Average" month of gross income from the
Orthodontic Entity; (iv) and any other material adverse changes in the financial
condition or prospects of the Orthodontic Entity from the information provided
in the Financial Statement. As used herein, Average shall mean an average of the
Accounts Payable of the Orthodontic Entity using the last twelve months prior to
the end of the month immediately preceding the Effective Time.
(c) The adjustments to the Consideration, if any, shall be applied in
the following order of priority; first to the Cash Component, second, to the
Note Component, and the balance, if any, to the Stock Component.
2.3 Time and Place of Closing. The closing of the transactions
contemplated hereby (herein called the "Closing") shall be held immediately
before the Effective Time at the offices of Robinson & Cole, One Boston Place,
Boston, Massachusetts 02108 on the date of the closing of OMEGA's initial public
offering of its securities (the "IPO Closing") pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act") ("IPO"), or at such other place, date or time as may be fixed
by mutual agreement of the parties; provided, however, that in no event shall
the Closing date be extended beyond six (6) months of this Agreement. On or
before the IPO Closing, OMEGA will notify the Orthodontic Entity of the
projected IPO Closing Date determined by OMEGA, in its sole discretion. As used
herein "IPO Price" shall mean the initial offering price to the public of OMEGA
Stock as reflected on the cover page of its Prospectus under the Securities Act
for the IPO.
2.4 Certificates; Resignations, Filing Certificate of Name Change.
Contemporaneous with the Closing, Dr. Schmisseur shall deliver to OMEGA the
certificates evidencing the Interests, duly endorsed for transfer and otherwise
as provided in Section 2.1, and written resignations from all officers and
directors of the Orthodontic Entity. OMEGA shall prepare the duly executed
Certificate(s) of Name Change reflecting the name change of the Orthodontic
Entity to be filed with the State Secretary of State.
2.5 Delivery of Records, Contracts, Interests. At the Closing Dr.
Schmisseur shall deliver or cause to be delivered to OMEGA:
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<PAGE>
(a) all of the Orthodontic Entity's minute books, stock records and
other Orthodontic Entity books and records and the Orthodontic Entity's leases,
contracts, employment agreements, non-compete agreements, commitments and
rights, with such consents to the Stock Purchase as are necessary to assure
OMEGA of the full benefit of the same.
(b) Evidence of malpractice insurance coverage for the current and five
(5) prior years, and if applicable, evidence of so-called "tail" insurance for
such period naming the Orthodontic Entity, and the MSO as a co-insured or
otherwise assigning to the Orthodontic Entity the full benefits thereof.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
The Representations and Warranties of Dr. Schmisseur in the attached
Schedule 1 are hereby incorporated as if fully set forth herein. The
Representations and Warranties of OMEGA in the attached Schedule 2 are hereby
incorporated as if fully set forth herein. Capitalized words and expressions
used in this Agreement and which are defined in said Schedules 1 and 2 shall
have the same meaning as they are given therein.
ARTICLE IV. COVENANTS OF DR. SCHMISSEUR
Dr. Schmisseur hereby covenants and agrees with OMEGA as follows:
4.1 Conduct of Business. Between the date of this Agreement and the
Closing, he will do the following unless OMEGA shall otherwise consent in
writing:
(a) conduct the Orthodontic Entity business only in the
ordinary course, and refrain from changing or introducing any method of
management or operations except in the ordinary course of business and
consistent with prior practices;
(b) refrain from making any purchase, sale or disposition of
any asset or property other than in the ordinary course of business, from
purchasing any capital asset costing more than $1,000 and from mortgaging,
pledging, subjecting to a lien or otherwise encumbering any of the Interests,
the Property or other assets of the Orthodontic Entity;
(c) refrain from incurring any contingent or fixed obligations
or liabilities except those that are usual and normal in the ordinary course of
business;
(d) refrain from making any change or incurring any obligation
to make a change in its Charter or By-laws (certified copies of which are
attached hereto as Exhibit D) or authorized or issued capital stock, except as
contemplated by this Agreement;
-5-
<PAGE>
(e) refrain from declaring, setting aside or paying any
dividend or making any other distribution in respect of capital stock, or making
any direct or indirect redemption, purchase or other acquisition of capital
stock, of the Orthodontic Entity;
(f) use his best efforts to keep intact its business
organization, to keep available its present officers, agents and employees and
to preserve the goodwill of all patients, suppliers, and others having business
relations with it;
(g) not commit or fail to commit any act which would cause Dr.
Schmisseur or the Orthodontic Entity to suffer the revocation, suspension or
limitation of Dr. Schmisseur's or the Orthodontic Entity's license.
(h) permit OMEGA and its authorized representatives to have
full access to all its properties, assets, records, tax returns, Orthodontic
Entity records, contracts and documents and furnish to OMEGA or its authorized
representatives such financial and other Information with respect to its
business or properties as OMEGA may from time to time reasonably request.
4.2 Authorization from Others. Prior to the Closing, he will have
obtained all assignments, authorizations, consents and permits of others
required to permit the consummation by Dr. Schmisseur and the Orthodontic Entity
of the transactions contemplated by this Agreement.
4.3 Breach of Representations and Warranties. Promptly upon becoming
aware of the actual, impending or threatened occurrence of any event which would
cause or constitute a breach, or would have caused or constituted a breach had
such event occurred or been known to them prior to the date hereof, of any of
their representations and warranties contained in or referred to in this
Agreement, he shall give detailed written notice thereof to OMEGA and shall use
his best efforts to prevent or promptly remedy the same.
4.4 Consummation of Agreement. He shall use his best efforts to perform
and fulfill all conditions and obligations on his part to be performed and
fulfilled under this Agreement, to the end that the transactions contemplated by
this Agreement shall be fully carried out.
ARTICLE V. COVENANTS OF OMEGA
OMEGA hereby covenants and agrees with Dr. Schmisseur as follows:
5.1 Authorization from Others. Prior to the Closing, it will have
obtained all authorizations, consents and permits of others required to permit
the consummation by it of the transactions contemplated by this Agreement.
5.2 Consummation of Agreement. It shall use its best efforts to perform
and fulfill all conditions and obligations on its part to be performed or
fulfilled under this Agreement, to the end
-6-
<PAGE>
that the transactions contemplated by this Agreement shall be fully carried out.
ARTICLE VI. CONDITIONS TO OBLIGATIONS OF OMEGA
The obligations of OMEGA to consummate this Agreement and the
transactions contemplated hereby are subject to the condition that on or before
the Closing the actions required by this Article 6 will have been accomplished.
6.1 Representations; Warranties; Covenants. Each of the representations
and warranties of Dr. Schmisseur contained in Schedule 1 shall be true and
correct as though made on and as of the Closing, and Dr. Schmisseur shall have
performed all of his obligations hereunder which by the terms hereof are to be
performed on or before the Closing.
6.2 New PC. Dr. Schmisseur shall have formed the New PC under the laws
of the State in order to commence the practice of orthodontics through the New
PC. Dr. Schmisseur shall have furnished (i) a certificate of the State Secretary
of State as to the legal existence and professional corporation good standing of
New PC; and (ii) a copy of the resolutions adopted by the board of directors and
stockholders of New PC authorizing and approving the Management Services
Agreement and the Stock Put/Call Option and Successor Designation Agreement.
6.3 Other Agreements. Dr. Schmisseur shall have executed and delivered,
or shall have caused the New PC to execute and deliver, to the MSO a Management
Services Agreement and a Stock Put/Call Option and Successor Designation
Agreement, each having substantially the terms and conditions of the forms
hereof collectively attached hereto as Exhibit E .
6.4 Initial Public Offering. OMEGA shall have completed the IPO.
6.5 Absence of Certain Litigation. There shall not be any injunction,
restraining order or order of any nature issued by any court of competent
jurisdiction which directs that this Agreement or any material transaction
contemplated hereby shall not be consummated as herein provided, or suit, action
or other proceeding which in the reasonable opinion of counsel for OMEGA is
likely to result in the restraint or prohibition of the consummation of any
material transaction contemplated hereby.
6.6 Notices. Dr. Schmisseur shall cause the Orthodontic Entity, at
OMEGA's expense, notify all patients and obligors of accounts receivable, and
third party payors and others designated by OMEGA of the Stock Purchase and the
other transactions contemplated hereunder pursuant to notices substantially in
the form collectively attached hereto as Exhibit C.
6.7 Financial Condition. The financial condition of the Orthodontic
Entity shall not be materially adversely different from the Financial Statement,
as determined by OMEGA. During the period from the date of the Financial
Statement to the Closing, there shall not have been any
-7-
<PAGE>
material adverse change in the financial condition, results of operations,
business or prospects of the Orthodontic Entity, nor any material loss or damage
to its assets, whether or not insured, which materially affects the ability of
Orthodontic Entity to conduct its business. Dr. Schmisseur shall cause the
Orthodontic Entity shall have delivered to OMEGA a certificate, dated the date
of Closing, to the foregoing effect, and further to the effect that there are no
Accounts Payable or other liabilities as of the date of Closing that are not
reflected on the Financial Statement other than those which have been disclosed
in writing to and accepted in writing by OMEGA and which incurred since the date
of the Financial Statement in the ordinary course of business.
ARTICLE VII. CONDITIONS TO OBLIGATIONS OF DR. SCHMISSEUR
The obligations of Dr. Schmisseur to consummate this Agreement and the
transactions contemplated hereby are subject to the condition that on or before
the Closing the actions required by this Article 7 will have been accomplished.
7.1 Representations; Warranties; Covenants. The representations and
warranties of OMEGA contained in Schedule 2 shall be true and correct as though
made on and as of the Closing and OMEGA shall have performed all of its
obligations hereunder which by the terms hereof are to be performed on or before
the Closing.
7.2 Intentionally Omitted.
7.3 Other Agreements. OMEGA shall have executed and delivered to Dr.
Schmisseur and New PC a Management Services Agreement and a Stock Put/Call
Option and Successor Designation Agreement, each having substantially the terms
and conditions of the forms hereof collectively attached hereto as Exhibit E.
7.4 Initial Public Offering. OMEGA shall have completed the IPO.
7.5 Absence of Certain Litigation. There shall not be any injunction,
restraining order or order of any nature issued by any court of competent
jurisdiction which directs that this Agreement or any material transaction
contemplated hereby shall not be consummated as herein provided, or suit, action
or other proceeding which in the reasonable opinion of counsel for Dr.
Schmisseur is likely to result in the restraint or prohibition of the
consummation of any material transaction contemplated hereby.
ARTICLE VIII. OBLIGATIONS AFTER CLOSING.
8.1 OMEGA Exceptional Practice and the Report Suggestions. On and after
the Closing, Dr. Schmisseur agrees to cause the New PC to implement the
suggestions in the Report and the concepts of OMEGA's Exceptional Practice.
-8-
<PAGE>
8.2 Books and Records. OMEGA shall permit Dr. Schmisseur, his
accountants and attorneys, reasonable access to such books and records for the
purpose of preparing such tax returns of Dr. Schmisseur as may be required after
the Closing and for other proper purposes approved by OMEGA.
8.3 License. Dr. Schmisseur shall maintain all licenses necessary to
practice orthodontics in the State. Dr. Schmisseur shall not commit or fail to
commit any act which would cause Dr. Schmisseur or the New PC to suffer the
revocation, suspension or limitation of Dr. Schmisseur's or the New PC's
license.
ARTICLE IX. INDEMNIFICATION.
9.1 Indemnification By Dr. Schmisseur. Subject to the limitations set
forth in Section 9.3, Dr. Schmisseur agrees to defend, indemnify and hold each
of OMEGA harmless from and against any damages, liabilities, losses and expenses
(including reasonable counsel fees) of any kind or nature whatsoever which may
be sustained or suffered by OMEGA based upon a breach of any representation,
warranty or covenant made by Dr. Schmisseur in this Agreement or in any exhibit,
certificate, schedule or financial statement delivered hereunder, or by reason
of any claim, action or proceeding asserted or instituted growing out of any
matter or thing covered by such representations, warranties or covenants. OMEGA
may at its option recover such indemnification claims by OMEGA by set-off
against amounts of principal and interest due under the Purchase Note, but shall
not be required to recover said claims in such manner and may proceed against
Dr. Schmisseur and his transferees in liquidation at any time or times for
recovery of indemnification claims.
9.2 Indemnification By OMEGA. Subject to the limitations set forth in
Section 9.3, OMEGA agrees to defend, indemnify and hold Dr. Schmisseur harmless
from and against any damages, liabilities, losses and expenses (including
reasonable counsel fees) of any kind or nature whatsoever which may be sustained
or suffered by Dr. Schmisseur based upon a breach of any representation,
warranty or covenant made by OMEGA in this Agreement or in any exhibit,
certificate, schedule or financial statement delivered hereunder, or by reason
of any claim, action or proceeding asserted or instituted growing out of any
matter or thing covered by such representations, warranties or covenants.
9.3 Exclusions. Notwithstanding Sections 9.1 and 9.2:
(a) no indemnification shall be payable to the extent any
claim is covered by insurance; and
(b) no indemnification shall be payable with respect to claims
asserted more than five (5) years after the Closing.
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<PAGE>
9.4 Notice: Defense of Claims. Prompt written notice of each claim for
indemnification hereunder shall be given to the other party, specifying the
amount and nature of the claim, and of any matter which in the opinion of the
claimant is likely to give rise to an indemnification claim. The indemnifying
party shall have the right to participate at its own expense in the defense of
any such matter or its settlement. If, in the opinion of the indemnified party,
its financial condition or business would not be impaired thereby, such party
may authorize the indemnifying party to take over the defense of such matter so
long as such defense is expeditious. Failure to give notice of a matter which
may give rise to an indemnification claim shall not affect the rights of any
party to collect such claim from the other party or its transferees in
liquidation.
9.5 Payment of Claims; Alternative Dispute Resolution. Indemnification
claims by OMEGA may be paid or otherwise satisfied as an offset against the
Purchase Note as set forth under Section 9.1, and, in the alternative or after
any such offset, the indemnification claims (or any balance thereof) shall be
paid or otherwise satisfied by Dr. Schmisseur, or Dr. Schmisseur's transferees
in liquidation, within 30 days after notice thereof is given by OMEGA. In the
event an indemnification claim is made by any party and the indemnifying party
disputes the nature or amount of the claim, such dispute shall be referred to
the American Arbitration Association to be settled by alternative dispute
resolution in accordance with the commercial alternative dispute resolution
rules of said Association, with the fees and expenses thereof to be borne 50% by
OMEGA and 50% by the New PC and Dr. Schmisseur. If the indemnifying party is New
PC or Dr. Schmisseur, the arbitration shall be held in Boston, Massachusetts,
and if the indemnifying party is OMEGA, the arbitration shall be held in
Chicago, Illinois.
ARTICLE X. MISCELLANEOUS.
10.1 Termination.
(a) At any time prior to the Closing, this Agreement may be terminated
(i) by mutual consent of the parties with the approval of their respective board
of directors or members, (ii) by either if there has been a material
misrepresentation, breach of warranty or breach of covenant by the other party
in its representations, warranties and covenants set forth herein, (iii) by
OMEGA if the conditions stated in Article VI have not been satisfied at or prior
to the Closing, or (iv) by Dr. Schmisseur if the conditions stated in Article
VII have not been satisfied at or prior to the Closing.
(b) If the IPO is not successfully completed within six (6) months of
this Agreement, this Agreement may be terminated by OMEGA or Dr. Schmisseur upon
written notice to the other party, and if so terminated, all obligations of the
parties hereunder shall terminate without any further liability of either party
to the other, except that each party shall remain obligated in respect of the
provisions of Section 10.3 and 10.7 which shall survive any such termination.
10.2 Survival of Warranties and Other Obligations. All representations,
warranties, agreements, covenants and obligations herein or in any schedule,
exhibit, certificate or financial
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<PAGE>
statement delivered by either party to the other party incident to the
transactions contemplated hereby are material, shall be deemed to have been
relied upon by the other party and shall survive the Closing regardless of any
investigation and shall not merge in the performance of any obligation by either
party hereto.
10.3 Fees and Expenses. Each of the parties will bear its or his own
expenses in connection with the negotiation and the consummation of the
transactions contemplated by this Agreement.
10.4 Notices. Any notice or other communication in connection with this
Agreement shall be deemed to be delivered if in writing (or in the form of a
telegram or facsimile transmission) addressed as provided below and if either
(a) actually delivered at said address, or (b) in the case of a letter, three
business days shall have elapsed after the same shall have been deposited in the
United States mail, postage prepaid and registered or certified, return receipt
requested, or sent by reputable overnight courier:
If to Dr. Schmisseur, to:
Robert R. Schmisseur, D.D.S.
1701 South Prospect
Champaign, Illinois 61820
If to the OMEGA, to:
Omega Orthodontics, Inc.
3621 Silver Spur Lane
Acton, California 93510
Attn.: Robert Schulhof
and in any case at such other address as the addressee shall have specified by
written notice. All periods of notice shall be measured from the date of
delivery thereof.
10.5 Entire Agreement. This Agreement (including all exhibits or
schedules appended to this Agreement and all documents delivered pursuant to the
provisions of this Agreement, all of which are hereby incorporated herein by
reference) together with the Management Services Agreement and the Stock
Put/Call Option and Successor Designation Agreement (including all exhibits and
schedules thereto), taken together, constitute the entire agreement between the
parties, and all promises, representations, understandings, warranties and
agreements with reference to the subject matter hereof and inducements to the
making of this Agreement relied upon by my party hereto, have been expressed
herein or therein.
10.6 Binding Agreement, Successors. This Agreement shall be binding
upon, and shall be enforceable by and inure to the benefit of, the parties named
herein and their respective successors and assigns; provided, however, that this
Agreement may not be assigned by any of the parties without the prior written
consent of all the other parties.
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<PAGE>
10.7 Confidentiality. As used herein, "Confidential Information" means
any information or data that a party has acquired from another party that is
confidential or not otherwise available to the public, whether oral or written,
including without limitation any analyses, computations, studies or other
documents prepared from such information or data by or for the directors,
officers, employees, agents or representatives of such party (collectively, the
"Representatives"), but excluding information or data which (i) became available
to the public other than as a result of such party's violation of this
Agreement, (ii) became available to such party from a source other than the
other party if that source was not bound by a confidentiality agreement with
such other party and such source lawfully obtained such information or data, or
(iii) is required to be disclosed by applicable law, provided that promptly
after being compelled to disclose any such information or data, the party being
so compelled shall provide prompt notice thereof to the other party so that such
other party may seek a protective order or other appropriate remedy. Each party
covenants and agrees that it and its Representatives shall keep confidential and
shall not disclose all Confidential Information, except to its Representatives
and lenders who need to know such information and agree to keep it confidential.
Each party shall be responsible for any breach of this provision by its
Representatives. In the event that the Closing does not occur, each party will
promptly return to the other all copies of such other party's Confidential
Information.
10.8 Governing Law; Severability. This Agreement shall be deemed a
contract made under the laws of the State of Delaware and, together with the
rights and obligations of the parties hereunder, shall be construed under and
governed by the laws of such state. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision hereof.
10.9 Referrals. Nothing in this Agreement shall be construed as an
offer or payment to the other party or any affiliate of the other party of any
cash or other remuneration whether directly or indirectly, overtly or covertly,
specifically for patient referrals or for recommending or arranging the
purchase, lease or order of any item or service. The Consideration to be
received upon consummation of the Stock Purchase represents the fair market
value of the Interests of the Orthodontic Entity and is not in any way related
to or dependent upon referrals by and between OMEGA and Dr. Schmisseur.
10.10 Further Assurances. Following the execution of this Agreement,
Dr. Schmisseur and OMEGA each agrees:
(a) to deliver such other instruments of title, certificates, consents,
endorsements, assignments, assumptions and other documents or instruments, in
form reasonably acceptable to the party requesting the same and its counsel, as
may be reasonably necessary to carry out and/or to comply with the terms of this
Agreement, and the transactions contemplated herein;
(b) to confer on a regular basis with the other, report on material
operational matters and promptly advise the other orally or in writing of any
change or event resulting in or which,
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<PAGE>
insofar as can reasonably be foreseen could result in, a material adverse effect
on such party or which would cause or constitute a material breach of any of the
representations, warranties or covenants of such party contained herein; and
(c) to provide the other (or its counsel) promptly with copies of all
filings made by such party with any state or federal governmental entity in
connection with this Agreement or the transactions contemplated hereby.
10.11 Termination of Prior Agreement. OMEGA, Dr. Schmisseur, the
Orthodontic Entity; and Omega Orthodontics of Champaign, Inc., a Delaware
corporation to be formed and to become a wholly owned subsidiary of OMEGA
("Acquisition") entered into an Affiliation Agreement and Agreement and Plan of
Merger (the "Original Agreement") dated March 20, 1997. Subsequent to executing
the Original Agreement, the parties thereto desired to modify the structure of
the transaction from a merger to a stock purchase. Acquisition was never formed,
and thus is not a party to this Agreement. The Orthodontic Entity is a party to
this Agreement only for purposes of this Section 10.11. OMEGA, Dr. Schmisseur
and the Orthodontic Entity agree that the Original Agreement is hereby
terminated.
10.12 Counterparts; Section Headings; Gender. This Agreement may be
executed, accepted and delivered in any number of counterparts, but all
counterparts shall together constitute but one and the same instrument. The
underlined section headings are inserted for convenience of reference only and
are not to be construed as part of this Agreement. The use of the masculine or
neuter gender includes each of the other genders.
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<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the date set forth above by their duly authorized
representatives.
D.D.S.
---------------------------
Printed Name: Robert R. Schmisseur, D.D.S.
Robert R. Schmisseur, D.D.S., P.C.
(for purposes of Section 10.11 only)
By:
------------------------
Printed Name: Robert R. Schmisseur, D.D.S.
Its
------------------------------
Duly Authorized
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<PAGE>
OMEGA ORTHODONTICS, INC.
By:
------------------------
Printed Name: Robert J. Schulhof
Its President and Chief Executive Officer
Duly Authorized
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<PAGE>
Exhibit A
---------
Financial Statement
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<PAGE>
Exhibit B
---------
Purchase Note
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<PAGE>
Exhibit C
---------
Notices
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<PAGE>
Exhibit D
---------
Orthodontic Entity's Charter and
By-Laws
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<PAGE>
Exhibit E
---------
Draft Management Services Agreement and
Stock Put/Call Option and Successor Designation Agreement
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<PAGE>
Schedule 1
----------
Representations and Warranties of
Dr. Schmisseur to OMEGA
Dr. Schmisseur hereby represents and warrants to OMEGA as follows:
1. Organization and Qualification of the Orthodontic Entity. The
Orthodontic Entity is a duly formed and organized professional corporation under
the laws of the State. The Orthodontic Entity is a legally existing professional
corporation under the State Professional Corporation Act (the "Act") and no
event has occurred which alone or after the passage of time would result in the
dissolution of the Orthodontic Entity. The Orthodontic Entity has the full power
to conduct business as currently conducted by the Orthodontic Entity and to own
and lease the property it purports to own. The copies of any articles of
organization or incorporation and by-laws, as defined in the Act, of the
Orthodontic Entity which are currently in effect, and all amendments thereto
(collectively, the "Charter and By-Laws"), certified by Dr. Schmisseur, attached
hereto as Exhibit D are complete and correct.
2. Authorization of Transaction. All necessary action, Orthodontic
Entity or otherwise, has been taken to authorize the execution of the Agreement
by Dr. Schmisseur, and the delivery and performance of this Agreement and the
transactions contemplated hereby, and the Agreement is the valid and binding
obligation of Dr. Schmisseur, enforceable against Dr. Schmisseur in accordance
with its terms.
3. Present Compliance with Obligations and Laws. Except as disclosed on
Exhibit X attached to this Schedule, there is not: (a) any violation of the
Charter or By-Laws; (b) a default in the performance of any obligation,
agreement or condition of any debt instrument from Dr. Schmisseur or the
Orthodontic Entity which (with or without the passage of time or the giving of
notice) affords to any person the right to accelerate any material indebtedness
or terminate any right; (c) a default of or breach of (with or without the
passage of time or the giving of notice) any other contract to which Dr.
Schmisseur or the Orthodontic Entity is a party or by which their assets are
bound; or (d) any violation of any law, regulation, administrative order or
judicial order applicable to Dr. Schmisseur or the Orthodontic Entity, or their
business or assets.
4. No Conflict of Transaction With Obligations and Laws.
(a) Neither the execution, delivery and performance of this Agreement,
nor the performance of the transactions contemplated hereby, will: (i)
constitute a breach or violation of Orthodontic Entity's Charter or By-Laws;
(ii) conflict with or constitute (with or without the passage of time or the
giving of notice) a breach of, or default under, any debt instrument to which
Dr. Schmisseur or the Orthodontic Entity is a party, or give any person the
right to accelerate any indebtedness or terminate any right; (iii) constitute
(with or without the passage of time or giving of notice) a default under or
breach of any other agreement, instrument or obligation to which the Orthodontic
Entity or Dr. Schmisseur is a party or by which their assets
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<PAGE>
are bound; or (iv) result in a violation of any law, regulation, administrative
order or judicial order applicable to the Orthodontic Entity, Dr. Schmisseur,
their business or assets.
(b) Except as disclosed on the attached Exhibit X to this Schedule, the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby do not require the consent, waiver, approval, authorization,
exemption of or giving of notice to any governmental authority.
5. Investigations and Licenses.
(a) The Orthodontic Entity and Dr. Schmisseur have all necessary
licenses to practice orthodontics in the State.
(b) Neither the Orthodontic Entity nor Dr. Schmisseur is subject to any
investigation, whether threatened, current or pending, under which the
Orthodontic Entity or Dr. Schmisseur may be required to forfeit or suffer the
revocation, suspension or limitation of Dr. Schmisseur's or the Orthodontic
Entity's license to practice orthodontics and neither the Orthodontic Entity nor
Dr. Schmisseur is subject to any investigation, whether threatened, current or
pending by a commercial third-party payor.
6. Financial Statement. Attached as Exhibit A to the Agreement is the
Financial Statement of the Orthodontic Entity. To the best knowledge of Dr.
Schmisseur, the Financial Statement is complete and correct and fairly presents
in all material respects the financial position of the Orthodontic Entity as at
the date of such statement and the results of its operations for the period then
ended, in accordance with generally accepted accounting principles consistently
applied throughout the periods covered thereby for the periods covered thereby.
7. Capitalization and the Interests. The authorized capital of the
Orthodontic Entity consists of the Interests. All of the Interests have been
validly issued and are fully paid and non-assessable. There are no options,
warrants, rights or other agreements or commitments obligating the Orthodontic
Entity or Dr. Schmisseur to issue or sell the Interests and there are no
pre-emptive rights with respect to any Interests. Dr. Schmisseur is the
beneficial and record owner of the Interests. Dr. Schmisseur has good title to
the Interests, free and clear of any liens, encumbrances or restrictions of any
kind. The Interests are not subject to any voting or similar agreement.
8. Property; Liens; Condition.
(a) Except as set forth on Exhibit X to this Schedule, the Orthodontic
Entity has good and marketable title in fee simple to all of its owned real and
personal property, including without limitation, all machinery and equipment
used or owned by the Orthodontic Entity (the "Equipment") free of liens and
encumbrances (the "Property"). All the Property owned or leased by the
Orthodontic Entity is in good repair, has been well maintained, substantially
conforms with all applicable ordinances, regulations and zoning or other laws.
The Equipment is in good working order.
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<PAGE>
(b) No other entity or person owns any of the assets necessary for the
operation of the Orthodontic Entity. The Orthodontic Entity does not operate any
of its practice through any other entities or persons.
9. Payment of Taxes. The Orthodontic Entity has filed all federal,
state and local income, excise or franchise tax returns, real estate and
personal property tax returns, sales and use tax returns and other tax returns
required to be filed and has paid all taxes owing except taxes which have not
yet accrued or otherwise become due for which adequate provision has been made
in the Financial Statement. All transfer, excise or other taxes payable by
reason of the Stock Purchase pursuant to the Agreement shall be paid or provided
for by Dr. Schmisseur after the Closing out of the Consideration to be received
upon consummation of the Stock Purchase.
10. Absence of Undisclosed Liabilities and Changes.
(a) As of the date of the Financial Statement, the Orthodontic Entity
had no liabilities of any nature, whether accrued, absolute, contingent or
otherwise (including without limitation liabilities as guarantor or otherwise
with respect to obligations of others, or liabilities for taxes due or then
accrued or to become due), except (i) liabilities stated or adequately reserved
against on the Financial Statement, (ii) liabilities not in excess of $5,000
arising in the ordinary course of business since the date of the Financial
Statement, and (iii) liabilities disclosed in Exhibit X to this Schedule. There
is no fact which materially adversely affects, or may in the future (so far as
can now be reasonably foreseen) materially adversely affect, the business,
properties, operations or condition of the Orthodontic Entity which has not been
specifically disclosed herein or in Exhibit X to this Schedule.
(b) Except as disclosed in Exhibit X to this Schedule, since the date
of the Financial Statement there has not been:
(i) any change in the financial condition, properties, assets,
liabilities, business or operations of the Orthodontic Entity, which change by
itself or in conjunction with all other such changes, whether or not arising in
the ordinary course of business, has been materially adverse with respect to the
Orthodontic Entity;
(ii) any mortgage, encumbrance or lien placed on any of the
Interests or the Property, or the property subject to any lease, or which
remains in existence on the date hereof or at the time of Closing; or
(iii) any obligation or liability incurred by the Orthodontic
Entity other than obligations and liabilities incurred in the ordinary course of
business and disclosed on Exhibit X attached to this Schedule.
11. Litigation. Except for matters described on Exhibit X to this
Schedule, there is no
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<PAGE>
action, suit, claim, proceeding or investigation pending or, to the knowledge of
the Orthodontic Entity or Dr. Schmisseur, threatened against the Orthodontic
Entity or Dr. Schmisseur, at law or in equity, or before or by any Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality or governmental inquiry pending or, to the knowledge
of the Orthodontic Entity or Dr. Schmisseur, threatened against or involving Dr.
Schmisseur or the Orthodontic Entity, and there is no basis for any of the
foregoing, and there are no outstanding court orders, court decrees, or court
stipulations to which the Orthodontic Entity or Dr. Schmisseur is a party which
question this Agreement or affect the transactions contemplated hereby, or which
will result in any materially adverse change in the business, properties,
operations, prospects, assets or in the condition, financial or otherwise, of
Dr. Schmisseur or the Orthodontic Entity.
12. Insurance. The Orthodontic Entity has possessed adequate occurrence
Professional liability coverage for the five (5) years prior to the date of this
Agreement protecting the Orthodontic Entity and Dr. Schmisseur from any
professional malpractice liability that might arise because of the Orthodontic
Entity's or Dr. Schmisseur's practice activities over the preceding five (5)
years. Prior to the Closing, the New PC shall have obtained and shall continue
to maintain, at its cost, Occurrence Medical Malpractice Liability Insurance for
Dr. Schmisseur and the New PC. The Orthodontic Entity possesses adequate
insurance coverage for its Property.
13. Taxes. The Orthodontic Entity has filed all tax returns, federal,
state, county and local, required to be filed by it, and the Orthodontic Entity
has paid all taxes shown to be due by such returns as well as all other taxes,
assessments and governmental charges which have become due or payable, including
without limitation all taxes which the Orthodontic Entity is obligated to
withhold from amounts owing to employees, creditors and third parties. The
Orthodontic Entity has established adequate reserves for all taxes accrued but
not yet payable. All tax elections have been made by the Orthodontic Entity in
accordance with generally accepted practice. The federal income tax returns of
the Orthodontic Entity have never been audited by the Internal Revenue Service.
No deficiency assessment with respect to or proposed adjustment of the
Orthodontic Entity's federal, state, county or local taxes is pending or
threatened. There is no tax lien, whether imposed by any federal, state, county
or local taxing authority, outstanding against the assets, properties or
business of the Orthodontic Entity. Neither the Orthodontic Entity nor any of
its present or former stockholders has ever filed an election pursuant to
Section 1362 of the Internal Revenue Code of 1986, as amended (the "Code"), that
the Orthodontic Entity be taxed as an S corporation. The Orthodontic Entity's
net operating losses for federal income tax purposes, as set forth in the
financial statements referred to in Section 2.05, are not subject to any
limitations imposed by Section 382 of the Code and the full amount of such net
operating losses are available to offset the taxable income of the Orthodontic
Entity for the current fiscal year and, to the extent not so used, succeeding
fiscal years. Consummation of the transactions contemplated by this Agreement or
by any other agreement, understanding or commitment (contingent or otherwise) to
which the Orthodontic Entity is a party or by which it is otherwise bound will
not have the effect of limiting the Orthodontic Entity's ability to use such net
operating losses in full to offset such taxable income.
14. Assumptions, Guaranties, Etc. of Indebtedness of Other Persons.
Except as set forth in Schedule X, The Orthodontic Entity has not assumed,
guaranteed, endorsed or otherwise become
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<PAGE>
directly or contingently liable on any indebtedness of any other person
(including, without limitation, liability by way of agreement, contingent or
otherwise, to purchase, to provide funds for payment, to supply funds to or
otherwise invest in the debtor, or otherwise to assure the creditor against
loss), except for guaranties by endorsement of negotiable instruments for
deposit or collection in the ordinary course of business.
15. Compliance with ERISA. Except as set forth in Schedule X, the
Orthodontic Entity has not established, maintained, made or been required to
make any contributions to, or terminated, nor does it have any liabilities with
respect to, any employee benefit plan within the meaning of, and which is
subject to, Section 3 of the Employee Retirement Income Security Act of 1974, as
amended.
16. Disclosures. Neither this Agreement nor any exhibit or schedule
hereto, nor any report, certificate or instrument furnished to the Purchasers or
their counsel in connection with the transaction contemplated by this Agreement,
when read together, contains or will contain any material misstatement of fact
or omits or will omit to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading. The Seller knows of no information or fact which has or
would have a material adverse effect on the financial condition, business or
prospects of the Orthodontic Entity which has not been disclosed to the
Purchasers.
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<PAGE>
EXHIBIT X
---------
Exceptions to Representations and
Warranties of Dr. Schmisseur to OMEGA
Exceptions to Section 8A of Schedule 1: All business assets including inventory,
equipment, accounts and general intangibles have been pledged to Central
Illinois Bank to secure two (2) separate loans made by Central Illinois Bank to
the Orthodontic Entity. The first such loan was dated December 31, 1993, was in
the original principal amount of $200,000.00 and has a current principal balance
of $122,254.98. The second such loan was dated December 11, 1996, was in the
original principal amount of $15,000.00 and has a current principal balance of
$5,000.
Exceptions to Paragraph 10B(i) of Schedule 1: Effective December 5, 1996, the
Orthodontic Entity entered into a Termination Agreement with Amardeep S. Khara,
who had been employed by the Corporation as an Orthodontist since June 23, 1995.
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<PAGE>
Schedule 2
----------
Representations and Warranties of
OMEGA to Dr. Schmisseur
OMEGA hereby represents and warrants to Dr. Schmisseur as follows:
1. Organization of OMEGA. That it is a corporation duly organized,
validly existing and in good standing under the laws of Delaware with full
corporate power to own or lease its properties and to conduct its business in
the manner and in the places where such properties are owned or leased or such
business is conducted by it.
2. Authorization of Transaction. All necessary action, corporate or
otherwise, has been taken by it to authorize the execution, delivery and
performance of this Agreement, and this Agreement is a valid and binding
obligation of it enforceable against it in accordance with its terms, subject to
laws of general application affecting creditor's rights generally.
3. Litigation. There is no litigation pending or, to its knowledge,
threatened against it which would prevent or hinder the consummation of the
transactions contemplated by this Agreement.
4. Securities Not Registered. It understands that the Interests to be
purchased have not been registered under the Securities Act of 1933, as amended,
or under the securities laws of any state and that neither the Securities and
Exchange Commission nor any state securities commission has approved or
disapproved of the securities.
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Exhibit 2.4
-----------
AFFILIATION AGREEMENT AND ASSET PURCHASE AGREEMENT
THIS AFFILIATION AGREEMENT AND ASSET PURCHASE AGREEMENT is entered into
as of the 31st day of March 1997, by and among Omega Orthodontics, Inc., a
Delaware corporation ("OMEGA" or "Surviving Entity"); Scott E. Feldman, D.D.S.
("Dr. Feldman"), who is duly licensed to practice orthodontics in the state of
California (the "State").
RECITALS
A. OMEGA provides professional management and marketing services to
orthodontic practices in the United States, which services include providing
practice management systems, office space, equipment, furnishings and active
administrative personnel necessary for the operation of orthodontic practices,
and which services are provided directly or indirectly through management
service organizations.
B. Dr. Feldman owns and operates an orthodontic practice (the
"Orthodontic Practice") with offices located at offices located at 6325 Topanga
Canyon Boulevard, No. 424, Woodland Hills, California 91367 (the "Orthodontic
Offices") and furnishes orthodontic care to the general public. As the owner and
operator of the Orthodontic Practice, Dr. Feldman is the owner of a leasehold
interest in a lease of the Orthodontic Offices, the owner of certain personal
property located at the Orthodontic Offices, a party to certain contracts
relating to the Orthodontic Practice and the beneficiary of other rights related
to the Orthodontic Practice.
C. OMEGA has conducted a review of the Orthodontic Practice, and has
reviewed the Orthodontic Practice's audited financial statement (the "Financial
Statement"), a copy of which is attached hereto as Exhibit A . Based on its
review of the Orthodontic Practice and the Financial Statement, OMEGA has issued
the report (the "Report"), a copy of which has been furnished to Dr. Feldman.
Dr. Feldman have reviewed the Report and OMEGA's literature, and agree with the
Report and the concepts of OMEGA's Exceptional Practice.
D. Subject to the terms and conditions of this Agreement, OMEGA and Dr.
Feldman have determined that it is in the best interests of each to for OMEGA to
purchase from Dr. Feldman certain of the assets comprising the Orthodontic
Practice as provided in Section 1.1 hereof.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged to the full
satisfaction of the parties hereto, the parties hereto agree as follows:
<PAGE>
ARTICLE I. ASSET PURCHASE
1.1 Purchase; Consideration and Payment.
(a) At the Effective Time (as hereinafter defined) and subject to the
terms and conditions hereinafter set forth, Dr. Feldman agrees to sell,
transfer, convey, assign and deliver to OMEGA, and OMEGA agrees to purchase and
acquire from Dr. Feldman and take delivery of, for the consideration hereinafter
provided, all of Dr. Feldman's right, title and interest in and to all of the
assets of the Orthodontic Practice, wheresoever situated and whether or not
specifically referred to herein or in any instrument of conveyance delivered
pursuant hereto (such assets and rights of Dr. Feldman are collectively referred
to as the "Assets"), excepting therefrom the assets listed on Schedule I to the
Bill of Sale and Assignment (the "Bill of Sale") attached hereto as Exhibit D
(the "Excluded Assets"), and including without limitation the following Assets:
(1) a lease of the Orthodontic Offices, including all rights and
remedies (the "Lease");
(2) all books, records, machinery and equipment used or owned by the
Orthodontic Practice and all other tangible and intangible personal property at
or related to the Orthodontic Office, whether or not located at the Orthodontic
Office, or to the Orthodontic Practice conducted therein, whether or not located
at the Orthodontic Office;
(3) all Contracts (as defined below in Section 2.1);
(4) all prepaid claims, prepaid taxes and other prepaid expense items
and deferred charges, credits, advance payments, security and other deposits
made by Dr. Feldman to any other person relating to Orthodontic Practice; or.
(5) Any rights of Dr. Feldman pertaining to any counterclaims, set-offs
or defenses he may have with respect to any of the liabilities assumed by OMEGA;
and
(6) any other rights related in any way whatsoever to the Orthodontic
Practice or the Orthodontic Office.
free and clear of any liens, encumbrances, restrictions or claims of any kind
(other than those liens, encumbrances, restrictions and claims expressly
disclosed to OMEGA and affirmatively accepted by OMEGA prior to the Effective
Time), without any further action on the part of any holder thereof, for an
aggregate consideration (the "Consideration") of:
(i) One Hundred Eighty Nine Thousand, Two Hundred Forty Eight
Dollars ($189,248) in cash (the "Cash Component");
(ii) Eighty Eight Thousand Nine Hundred Forty Seven Dollars
($88,947) to be represented by a promissory note (the "Purchase Note")
payable to Dr. Feldman (the "Note Component") in the form attached
hereto as Exhibit B; and
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<PAGE>
(iii) Two Hundred Eighty Nine Thousand, Five Hundred Forty
Eight ($289,548) Dollars to be represented by issuance to Dr. Feldman
of shares of OMEGA common stock ("OMEGA Stock") based on a value per
share equal to 100% of the IPO Price (as defined below in Section 1.3)
(the "Stock Component"), which shall thereupon be issued to Dr.
Feldman, fully paid and nonassessable.
1.2 Adjustment; Allocation.
(a) The Consideration is based on the value of the Assets as determined
by OMEGA from the information set forth in the Financial Statement.
(b) The Consideration shall be subject to adjustments at Closing for:
(i) prepaid and underpaid rent and other lease obligations, if the leases are to
be continued after Closing, as well as for other agreed normal and customary
prepaid and underpaid expenses; (ii) any accrued but unpaid salaries, bonuses
and other compensation, fringe and health insurance benefits, employment or
payroll taxes and related employment obligations and (iii) any accounts payable
of the Orthodontic Practice which have accrued prior to the Effective Time and
which remain unpaid as of such time (the "Accounts Payable") in excess of an
amount equal to one-half (1/2) of one "Average" month of gross income from the
Orthodontic Practice. As used herein, Average shall mean an average of the
Accounts Payable of the Orthodontic Practice using the last twelve months prior
to the end of the month immediately preceding the Effective Time.
(c) The adjustments to the Consideration, if any, shall be applied in
the following order of priority; first to the Cash Component, second, to the
Note Component, and the balance, if any, to the Stock Component.
(d) The parties hereby agree to allocate the Consideration among the
Assets in accordance with Section 1060 of the Code on the basis of the fair
market value of the Assets as of the Closing, which allocation shall be reduced
to writing and acknowledged by the parties hereto within thirty (30) days
following the Closing. The parties agree to file timely any information that may
be required to be filed pursuant to regulations promulgated under Section
1060(b) of the Code. The parties further agree that they shall report the
federal, state, municipal, foreign and local and other tax consequences of the
purchase and sale hereunder in a manner consistent with the allocation
determined pursuant to this section, and that they shall not take any position
inconsistent therewith in connection with any tax return, refund claim,
litigation or otherwise.
1.3 Time and Place of Closing. The closing of the transactions
contemplated hereby (herein called the "Closing") shall be held immediately
before the Effective Time at the offices of Robinson & Cole, One Boston Place,
Boston, Massachusetts 02108 on the date of the closing of OMEGA's initial public
offering of its securities (the "IPO Closing") pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act") ("IPO"), or at such other place, date or time as may be fixed
by mutual agreement of the parties; provided, however, that in no event shall
the Closing date be extended beyond six months from
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the date of this Agreement. On or before the IPO Closing, OMEGA will notify the
Orthodontic Practice of the projected IPO Closing Date determined by OMEGA, in
its sole discretion. As used herein "IPO Price" shall mean the initial offering
price to the public of OMEGA Stock as reflected on the cover page of its
Prospectus under the Securities Act for the IPO.
1.5 Delivery of Records, Contracts; Transfer of Accounts. At the
Closing Dr. Feldman shall deliver or cause to be delivered to OMEGA:
(a) all of the Assets, including without limitation, books, records,
leases, contracts, employment agreements, non-compete agreements, commitments
and rights relating to the Orthodontic Practice, with such rights of transfer so
as to allow OMEGA of the full benefit of the same.
(b) Evidence of malpractice insurance coverage for the current and five
(5) prior years, and if applicable, evidence of so-called "tail" insurance for
such period naming Dr. Feldman (and any successor) as a co-insured or otherwise
assigning to OMEGA and its successor the full benefits thereof.
(c) any documentation necessary for the transfer of any of the Assets,
including the Bill of Sale, together with any warranty or other documentation.
Dr. Feldman shall cooperate with OMEGA in the transfer of any utility accounts
for the Orthodontic Offices.
ARTICLE II. ASSUMED LIABILITIES
2.1 Contracts For purposes of this Article II the term "Contracts"
shall only mean only those leases, licenses, permits, contracts, leases,
subleases, permits, registrations, authorizations, commitments, purchase orders,
contracts to purchase materials, contracts to perform or receive services
(including work in process) and supplies, and all other agreements (whether
written or oral) that relate to the Orthodontic Practice and are set forth on
Exhibit Y attached hereto.
2.2 Transfer. At the Closing, Dr. Feldman shall assign and transfer to
OMEGA all of Dr. Feldman's right, title and interest in and to the Contracts and
OMEGA shall assume and agree to perform all obligations and liabilities on the
part of Dr. Feldman under the Contracts accruing on and after the Effective
Time; provided that to the extent that the assignment of any Contract is not
permitted without the consent of the other party or parties to such Contract,
this Agreement shall not constitute an agreement to assign such Contract if such
consent is not given; and provided further that Dr. Feldman and OMEGA, as
appropriate, shall use all reasonable efforts to obtain such consents, it being
understood that such reasonable efforts shall not include any requirement to
offer or grant financial accommodations to any third party.
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2.3 Assumption of Liabilities by OMEGA. At the Closing, Dr. Feldman
shall assign to OMEGA, and OMEGA shall assume and pay, perform and discharge,
and indemnify and hold Dr. Feldman harmless from and against, the following
obligations and liabilities of Dr. Feldman, and none other (collectively, the
"Assumed Liabilities"): all obligations and liabilities on the part of Dr.
Feldman under the Contracts arising on and after the Effective Time.
2.4 No Enlargement. The assumption by OMEGA of the Assumed Liabilities
shall not enlarge any rights or remedies of any third party under any Contract
with Dr. Feldman. OMEGA agrees to indemnify, defend and hold Dr. Feldman and his
employees, harmless from and against any and all liability, loss, cost, damage
and/or expense (including, without limitation, reasonable attorneys' fees and
costs) pertaining to the Assumed Liabilities.
2.5 No Other Liabilities Assumed. OMEGA and Dr. Feldman intend that
OMEGA shall not assume or be obligated to pay, perform or discharge any of Dr.
Feldman's obligations other than the Assumed Liabilities specified in Section
2.4. Except for the Assumed Liabilities specified in Section 2.4, OMEGA and Dr.
Feldman expressly agree OMEGA is acquiring the Assets free and clear of all
liens, claims and encumbrances.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
The Representations and Warranties of Dr. Feldman in the attached
Schedule 1 are hereby incorporated as if fully set forth herein. The
Representations and Warranties of OMEGA in the attached Schedule 2 are hereby
incorporated as if fully set forth herein. Capitalized words and expressions
used in this Agreement and which are defined in said Schedules 1 and 2 shall
have the same meaning as they are given therein.
ARTICLE IV. COVENANTS OF DR. FELDMAN
AND THE ORTHODONTIC PRACTICE
Dr. Feldman hereby covenants and agrees with OMEGA as follows:
4.1 Conduct of Business. Between the date of this Agreement and the
Closing, he will do the following unless OMEGA shall otherwise consent in
writing:
(a) conduct his business only in the ordinary course, and
refrain from changing or introducing any method of management or operations
except in the ordinary course of business and consistent with prior practices;
(b) refrain from making any purchase, sale or disposition of
any asset or property other than in the ordinary course of business, from
purchasing any capital asset costing more than $1,000 and from mortgaging,
pledging, subjecting to a lien or otherwise encumbering any of the Assets;
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(c) refrain from incurring any contingent or fixed obligations
or liabilities except those that are usual and normal in the ordinary course of
business;
(d) use his best efforts to keep available his present
employees and to preserve the goodwill of all patients, suppliers, and others
having business relations with him;
(e) not commit or fail to commit any act which would cause
Dr. Feldman to suffer the revocation, suspension or limitation of Dr. Feldman's
license.
(f) permit OMEGA and its authorized representatives to have
full access to all his properties, assets, records, tax returns, records,
contracts and documents and furnish to OMEGA or its authorized representatives
such financial and other information with respect to his business or properties
as OMEGA may from time to time reasonably request.
4.2 Authorization from Others. Prior to the Closing, he will have
obtained all assignments, authorizations, consents and permits of others
required to permit the consummation by Dr. Feldman of the transactions
contemplated by this Agreement.
4.3 Breach of Representations and Warranties. Promptly upon becoming
aware of the actual, impending or threatened occurrence of any event which would
cause or constitute a breach, or would have caused or constituted a breach had
such event occurred or been known to them prior to the date hereof, of any of
their representations and warranties contained in or referred to in this
Agreement, he shall give detailed written notice thereof to and shall use his
best efforts to prevent or promptly remedy the same.
4.4 Consummation of Agreement. He shall use his best efforts to perform
and fulfill all conditions and obligations on his or its part to be performed
and fulfilled under this Agreement, to the end that the transactions
contemplated by this Agreement shall be fully carried out.
ARTICLE V. COVENANTS OF OMEGA.
OMEGA hereby covenants and agrees with Dr. Feldman as follows:
5.1 Authorization from Others. Prior to the Closing, it will have
obtained all authorizations, consents and permits of others required to permit
the consummation by it of the transactions contemplated by this Agreement.
5.2 Consummation of Agreement. It shall use its best efforts to perform
and fulfill all conditions and obligations on its part to be performed or
fulfilled under this Agreement, to the end that the transactions contemplated by
this Agreement shall be fully carried out.
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ARTICLE VI. CONDITIONS TO OBLIGATIONS OF OMEGA
The obligations of OMEGA to consummate this Agreement and the
transactions contemplated hereby are subject to the condition that on or before
the Closing the actions required by this Article 6 will have been accomplished.
6.1 Representations; Warranties; Covenants. Each of the representations
and warranties of Dr. Feldman contained in Schedule 1 shall be true and correct
as though made on and as of the Closing, and Dr. Feldman shall have performed
all of his obligations hereunder which by the terms hereof are to be performed
on or before the Closing.
6.2 New PC. Dr. Feldman shall have formed the New PC under the laws of
the State in order to commence the practice of orthodontics through the New PC.
Dr. Feldman shall have furnished (i) a certificate of the State Secretary of
State as to the legal existence and professional corporation good standing of
New PC; and (ii) a copy of the resolutions adopted by the board of directors and
stockholders of New PC authorizing and approving the Management Services
Agreement and the Stock Put/Call Option and Successor Designation Agreement.
6.3 Other Agreements. Dr. Feldman shall have executed and delivered, or
shall have caused the New PC to execute and deliver, to OMEGA a Management
Services Agreement and a Stock Put/Call Option and Successor Designation
Agreement, each having substantially the terms and conditions of the forms
hereof collectively attached hereto as Exhibit E .
6.4 Initial Public Offering. OMEGA shall have completed the IPO.
6.5 Absence of Certain Litigation. There shall not be any injunction,
restraining order or order of any nature issued by any court of competent
jurisdiction which directs that this Agreement or any material transaction
contemplated hereby shall not be consummated as herein provided, or suit, action
or other proceeding which in the reasonable opinion of counsel for OMEGA is
likely to result in the restraint or prohibition of the consummation of any
material transaction contemplated hereby.
6.6 Notices. Dr. Feldman shall, at OMEGA's expense, notify all patients
and obligors of accounts receivable, and third party payors and others
designated by OMEGA of the Asset purchase and the other transactions
contemplated hereunder pursuant to notices substantially in the form
collectively attached hereto as Exhibit C.
6.7 Financial Condition. The financial condition of the Orthodontic
Practice shall not be materially adversely different from the Financial
Statement, as determined by OMEGA. During the period from the date of the
Financial Statement to the Closing, there shall not have been any material
adverse change in the financial condition, results of operations, business or
prospects of the Orthodontic Practice, nor any material loss or damage to the
Assets, whether or not insured, which materially affects the ability of the
Orthodontic Practice to conduct its business. Dr. Feldman shall have delivered
to OMEGA a certificate, dated the date of Closing, to
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the foregoing effect, and further to the effect that there are no Accounts
Payable or other liabilities as of the date of Closing that are not reflected on
the Financial Statement other than those which have been disclosed in writing to
and accepted in writing by OMEGA and which incurred since the date of the
Financial Statement in the ordinary course of business.
6.8 Due Diligence. OMEGA, acting in good faith and in its sole
discretion, shall be reasonably satisfied with the results of its "Due
Diligence" on Dr. Feldman as not reflecting any data or information which
individually or in the aggregate, if previously disclosed, would have indicated
that there was a material adverse change in the business of the Orthodontic
Practice or in the condition or prospects (financial or otherwise) of the Assets
from the information provided prior to the date hereof. As used herein, Due
Diligence shall mean, without limitation, the results of the any matters
(financial or otherwise) related to, or otherwise deemed material by OMEGA,
regarding Dr. Feldman, including location of the Orthodontic Offices and its
demographics, the leases, the Equipment, insurance, licensing, malpractice
issues, liabilities, compliance with laws and regulations and health surveys.
ARTICLE VII. CONDITIONS TO OBLIGATIONS OF DR. FELDMAN
The obligations of Dr. Feldman to consummate this Agreement and the
transactions contemplated hereby are subject to the condition that on or before
the Closing the actions required by this Article 7 will have been accomplished.
7.1 Representations; Warranties; Covenants. Each of the representations
and warranties of OMEGA contained in Schedule 2 shall be true and correct as
though made on and as of the Closing and each of OMEGA shall have performed all
of its obligations hereunder which by the terms hereof are to be performed on or
before the Closing.
7.2 Intentionally Omitted.
7.3 Other Agreements. OMEGA shall have executed and delivered to Dr.
Feldman and New PC a Management Services Agreement and a Stock Put/Call Option
and Successor Designation Agreement, each having substantially the terms and
conditions of the forms hereof collectively attached hereto as Exhibit E.
7.4 Initial Public Offering. OMEGA shall have completed the IPO.
7.5 Absence of Certain Litigation. There shall not be any injunction,
restraining order or order of any nature issued by any court of competent
jurisdiction which directs that this Agreement or any material transaction
contemplated hereby shall not be consummated as herein provided, or suit, action
or other proceeding which in the reasonable opinion of counsel for Dr. Feldman
is likely to result in the restraint or prohibition of the consummation of any
material transaction contemplated hereby.
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ARTICLE VIII. OBLIGATIONS AFTER CLOSING.
8.1 OMEGA Exceptional Practice and the Report Suggestions. On and after
the Closing, Dr. Feldman agrees to cause the New PC to implement the suggestions
in the Report and the concepts of OMEGA's Exceptional Practice.
8.2 Books and Records. OMEGA shall permit Dr. Feldman, his accountants
and attorneys, reasonable access to such books and records for the purpose of
preparing such tax returns of Dr. Feldman as may be required after the Closing
and for other proper purposes approved by OMEGA.
8.3 License. Dr. Feldman shall maintain all licenses necessary to
practice orthodontics in the State. Dr. Feldman shall not commit or fail to
commit any act which would cause Dr. Feldman or the New PC to suffer the
revocation, suspension or limitation of Dr. Feldman's or the New PC's license.
ARTICLE IX. INDEMNIFICATION.
9.1 Indemnification By Dr. Feldman. Subject to the limitations set
forth in Section 9.3, Dr. Feldman agrees to defend, indemnify and hold each of
OMEGA harmless from and against any damages, liabilities, losses and expenses
(including reasonable counsel fees) of any kind or nature whatsoever which may
be sustained or suffered by OMEGA based upon a breach of any representation,
warranty or covenant made by Dr. Feldman in this Agreement or in any exhibit,
certificate, schedule or financial statement delivered hereunder, or by reason
of any claim, action or proceeding asserted or instituted growing out of any
matter or thing covered by such representations, warranties or covenants. OMEGA
may at their option recover such indemnification claims by OMEGA by set-off
against amounts of principal and interest due under the Purchase Note, but shall
not be required to recover said claims in such manner and may proceed against
Dr. Feldman and his transferees in liquidation at any time or times for recovery
of indemnification claims.
9.2 Indemnification By OMEGA. Subject to the limitations set forth in
Section 9.3, OMEGA, jointly and severally, each agrees to defend, indemnify and
hold Dr. Feldman harmless from and against any damages, liabilities, losses and
expenses (including reasonable counsel fees) of any kind or nature whatsoever
which may be sustained or suffered by Dr. Feldman based upon a breach of any
representation, warranty or covenant made by OMEGA in this Agreement or in any
exhibit, certificate, schedule or financial statement delivered hereunder, or by
reason of any claim, action or proceeding asserted or instituted growing out of
any matter or thing covered by such representations, warranties or covenants.
9.3 Exclusions. Notwithstanding Sections 9.1 and 9.2:
(a) no indemnification shall be payable to the extent any
claim is covered by insurance; and
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(b) no indemnification shall be payable with respect to claims
asserted more than five (5) years after the Closing.
9.4 Notice: Defense of Claims. Prompt written notice of each claim for
indemnification hereunder shall be given to the other party, specifying the
amount and nature of the claim, and of any matter which in the opinion of the
claimant is likely to give rise to an indemnification claim. The indemnifying
party shall have the right to participate at its own expense in the defense of
any such matter or its settlement. If, in the opinion of the indemnified party,
its financial condition or business would not be impaired thereby, such party
may authorize the indemnifying party to take over the defense of such matter so
long as such defense is expeditious. Failure to give notice of a matter which
may give rise to an indemnification claim shall not affect the rights of any
party to collect such claim from the other party or its transferees in
liquidation.
9.5 Payment of Claims; Alternative Dispute Resolution. Indemnification
claims by OMEGA may be paid or otherwise satisfied as an offset against the
Purchase Note as set forth under Section 9.1, and, in the alternative or after
any such offset, the indemnification claims (or any balance thereof) shall be
paid or otherwise satisfied by Dr. Feldman, or Dr. Feldman's transferees in
liquidation, within 30 days after notice thereof is given by OMEGA. In the event
Dr. Feldman indicates in a writing delivered to OMEGA that he disputes the
nature or amount of the claim, in which event the dispute upon the election of
any party hereto after said 30-day period shall be referred to the American
Arbitration Association to be settled by alternative dispute resolution in
Boston, Massachusetts in accordance with the commercial alternative dispute
resolution rules of said Association, with the fees and expenses thereof to be
borne 50% by OMEGA and 50% by the New PC and Dr. Feldman.
ARTICLE X. MISCELLANEOUS.
10.1 Termination.
(a) At any time prior to the Closing, this Agreement may be terminated
(i) by mutual consent of the parties with the approval of their respective board
of directors or members, (ii) by either if there has been a material
misrepresentation, breach of warranty or breach of covenant by the other party
in its representations, warranties and covenants set forth herein, (iii) by
OMEGA if the conditions stated in Article VI have not been satisfied at or prior
to the Closing, or (iv) by Dr. Feldman if the conditions stated in Article VII
have not been satisfied at or prior to the Closing.
(b) If the IPO is not successfully completed within six (6) months of
this Agreement, this Agreement may be terminated by OMEGA or Dr. Feldman upon
written notice to the other party, and if so terminated, all obligations of the
parties hereunder shall terminate without any further liability of either party
to the other, except that each party shall remain obligated in respect of the
provisions of Section 10.3 and 10.7 which shall survive any such termination.
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10.2 Survival of Warranties and Other Obligations. All representations,
warranties, agreements, covenants and obligations herein or in any schedule,
exhibit, certificate or financial statement delivered by either party to the
other party incident to the transactions contemplated hereby are material, shall
be deemed to have been relied upon by the other party and shall survive the
Closing regardless of any investigation and shall not merge in the performance
of any obligation by either party hereto.
10.3 Fees and Expenses. Each of the parties will bear its or his own
expenses in connection with the negotiation and the consummation of the
transactions contemplated by this Agreement.
10.4 Notices. Any notice or other communication in connection with this
Agreement shall be deemed to be delivered if in writing (or in the form of a
telegram or facsimile transmission) addressed as provided below and if either
(a) actually delivered at said address, or (b) in the case of a letter, three
business days shall have elapsed after the same shall have been deposited in the
United States mail, postage prepaid and registered or certified, return receipt
requested, or sent by reputable overnight courier:
If to Dr. Feldman, to:
Scott E. Feldman, D.D.S.
6325 Topanga Canyon Boulevard, No. 424
Woodland Hills, California 91367
If to the OMEGA, to:
Omega Orthodontics, Inc.
3621 Silver Spur Lane
Acton, California 93510
Attn: Robert Schulhof
and in any case at such other address as the addressee shall have specified by
written notice. All periods of notice shall be measured from the date of
delivery thereof.
10.5 Entire Agreement. This Agreement (including all exhibits or
schedules appended to this Agreement and all documents delivered pursuant to the
provisions of this Agreement, all of which are hereby incorporated herein by
reference) together with the Management Services Agreement and the Stock
Put/Call Option and Successor Designation Agreement (including all exhibits and
schedules thereto), taken together, constitute the entire agreement between the
parties, and all promises, representations, understandings, warranties and
agreements with reference to the subject matter hereof and inducements to the
making of this Agreement relied upon by my party hereto, have been expressed
herein or therein.
10.6 Binding Agreement, Successors. This Agreement shall be binding
upon, and shall be
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enforceable by and inure to the benefit of, the parties named herein and their
respective successors and assigns; provided, however, that this Agreement may
not be assigned by any of the parties without the prior written consent of all
the other parties.
10.7 Confidentiality. As used herein, "Confidential Information" means
any information or data that a party has acquired from another party that is
confidential or not otherwise available to the public, whether oral or written,
including without limitation any analyses, computations, studies or other
documents prepared from such information or data by or for the directors,
officers, employees, agents or representatives of such party (collectively, the
"Representatives"), but excluding information or data which (i) became available
to the public other than as a result of such party's violation of this
Agreement, (ii) became available to such party from a source other than the
other party if that source was not bound by a confidentiality agreement with
such other party and such source lawfully obtained such information or data, or
(iii) is required to be disclosed by applicable law, provided that promptly
after being compelled to disclose any such information or data, the party being
so compelled shall provide prompt notice thereof to the other party so that such
other party may seek a protective order or other appropriate remedy. Each party
covenants and agrees that it and its Representatives shall keep confidential and
shall not disclose all Confidential Information, except to its Representatives
and lenders who need to know such information and agree to keep it confidential.
Each party shall be responsible for any breach of this provision by its
Representatives. In the event that the Closing does not occur, each party will
promptly return to the other all copies of such other party's Confidential
Information.
10.8 Governing Law; Severability. This Agreement shall be deemed a
contract made under the laws of the State of Delaware and, together with the
rights and obligations of the parties hereunder, shall be construed under and
governed by the laws of such state. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision hereof.
10.9 Referrals. Nothing in this Agreement shall be construed as an
offer or payment to the other party or any affiliate of the other party of any
cash or other remuneration whether directly or indirectly, overtly or covertly,
specifically for patient referrals or for recommending or arranging the
purchase, lease or order of any item or service. The Consideration to be
received upon consummation of the Merger represents the fair market value of the
Orthodontic Practice and is not in any way related to or dependent upon
referrals by and between OMEGA and Dr. Feldman.
10.10 Further Assurances. Following the execution of this Agreement,
Dr. Feldman and OMEGA each agrees:
(a) to deliver such other instruments of title, certificates, consents,
endorsements, assignments, assumptions and other documents or instruments, in
form reasonably acceptable to the party requesting the same and its counsel, as
may be reasonably necessary to carry out and/or to comply with the terms of this
Agreement, and the transactions contemplated herein;
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(b) to confer on a regular basis with the other, report on material
operational matters and promptly advise the other orally or in writing of any
change or event resulting in or which, insofar as can reasonably be foreseen
could result in, a material adverse effect on such party or which would cause or
constitute a material breach of any of the representations, warranties or
covenants of such party contained herein; and
(c) to provide the other (or its counsel) promptly with copies of all
filings made by such party with any state or federal governmental Practice in
connection with this Agreement or the transactions contemplated hereby.
10.11 Termination of Prior Agreement. OMEGA, Dr. Feldman, Dr. Scott E.
Feldman D.D.S., M.S. Inc., a California professional corporation (the
"Orthodontic Entity"); and Omega Orthodontics of Woodland Hills, Inc., a
Delaware corporation to be formed and to become a wholly owned subsidiary of
OMEGA ("Acquisition") entered into an Affiliation Agreement and Agreement and
Plan of Merger (the "Original Agreement") dated as of March 31, 1997. Subsequent
to executing the Original Agreement, the parties thereto desired to modify the
structure of the transaction from a merger to an asset purchase agreement.
Neither the Orthodontic Entity or Acquisition was formed for purposes of this
Agreement, and thus neither is a party to this Agreement. OMEGA and Dr. Feldman
hereby agree that the Original Agreement is hereby terminated.
10.12 Counterparts; Section Headings; Gender. This Agreement may be
executed, accepted and delivered in any number of counterparts, but all
counterparts shall together constitute but one and the same instrument. The
underlined section headings are inserted for convenience of reference only and
are not to be construed as part of this Agreement. The use of the masculine or
neuter gender includes each of the other genders.
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IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the date set forth above by their duly authorized
representatives.
D.D.S.
--------------------------------------
Printed Name: Scott E. Feldman, D.D.S.
OMEGA ORTHODONTICS, INC.
By:
-----------------------------------
Printed Name: Robert J. Schulhof
Its President and Chief Executive Officer
Duly Authorized
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Exhibit A
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Financial Statement
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Exhibit B
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Purchase Note
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Exhibit C
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Notices
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Exhibit D
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BILL OF SALE AND ASSIGNMENT
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BILL OF SALE AND ASSIGNMENT
The undersigned, Dr. Scott E. Feldman, (the "Dr. Feldman") for good and
valuable consideration the receipt of which is hereby acknowledged, hereby
sells, assigns, transfers, delivers and conveys to OMEGA Orthodontics, a
Delaware corporation, having a usual place of business in Acton, California (the
"OMEGA"), all of his right, title and interest in and to the assets of the
Orthodontic Practice operated by Dr. Feldman at 6325 Topanga Canyon Boulevard,
No. 424, Woodland Hills, California 91367, wheresoever situated and whether or
not specifically referred to herein (such assets and rights of Dr. Feldman are
collectively referred to as the "Assets"), excepting therefrom the assets listed
on Schedule I (the "Excluded Assets"), attached hereto and made a part hereof,
and including without limitation, the following Assets:
(a) a lease at 6325 Topanga Canyon Boulevard, No. 424, Woodland Hills,
California 91367, including all rights and remedies (the "Orthodontic Offices");
(b) all machinery and equipment ("Equipment"), books and records used
or owned by the Orthodontic Practice and all other tangible and intangible
personal property at or related to the Orthodontic Office, whether or not
located at the Orthodontic Office, or to the Orthodontic Practice conducted
therein, whether or not located at the Orthodontic Office;
(c) all contracts, licenses, permits, registrations, authorizations,
leases, subleases, commitments, purchase orders, contracts to purchase
materials, contracts to perform or receive services (including work in process)
and supplies, and all other agreements (whether written or oral) relating to the
Orthodontic Practice listed on the attached Exhibit Y (the "Contracts");
(d) all prepaid claims, prepaid taxes and other prepaid expense items
and deferred charges, credits, advance payments, security and other deposits
made by Dr. Feldman to any other person relating to Orthodontic Practice; or.
(e) Any rights of Dr. Feldman pertaining to any counterclaims, set-offs
or defenses he may have with respect to any of the liabilities assumed by OMEGA;
and
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(f) any other rights related in any way whatsoever to the Orthodontic
Practice or the Orthodontic Office.
Dr. Feldman represents that he has good and marketable title in fee
simple to all of the Assets, free of liens and encumbrances. All of the Assets
are in good repair, have been well maintained, substantially conform with all
applicable ordinances, regulations and zoning or other laws. The Equipment is in
good working order.
OMEGA assumes and agrees to pay, perform and discharge, and indemnify
and hold Dr. Feldman harmless from and against, the following obligations and
liabilities of Dr. Feldman, and none other: (a) obligations and liabilities
under the Lease and the Contracts arising on and after the Effective Time and
Any and all claims, liabilities, losses, costs, damages or expenses (including
reasonable attorneys' fees and expenses) resulting from or arising out of
ownership of the Assets or the operation and maintenance of the Orthodontic
Practice, or caused by or occurring upon the Assets, on and after the Effective
Time (the "Assumed Liabilities").
The assumption by OMEGA of the Assumed Liabilities shall not enlarge
any rights or remedies of any third party under any Contract with Dr. Feldman.
OMEGA agrees to indemnify, defend and hold Dr. Feldman and his employees,
harmless from and against any and all liability, loss, cost, damage and/or
expense (including, without limitation, reasonable attorneys' fees and costs)
pertaining to the Assumed Liabilities.
OMEGA and Dr. Feldman intend that OMEGA shall not assume or be
obligated to pay, perform or discharge any of Dr. Feldman's obligations other
than the Assumed Liabilities. Except for the Assumed Liabilities, OMEGA and Dr.
Feldman expressly agree OMEGA is acquiring the Assets free and clear of all
liens, claims and encumbrances.
This Bill of Sale and Assignment is executed and delivered in
connection with an Amended and Restated Affiliation Agreement entered into by
and between the Dr. Feldman and OMEGA dated June __, 1997.
WITNESS the execution under seal this _____ day of ____, 1997.
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<PAGE>
Schedule I
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Excluded Assets
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<PAGE>
Exhibit Y
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List of Contracts
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<PAGE>
Exhibit E
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Draft Management Services Agreement and
Stock Put/Call Option and Successor Designation Agreement
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<PAGE>
Schedule 1
----------
Representations and Warranties of
Dr. Feldman to OMEGA
Dr. Feldman hereby represents and warrants to OMEGA as follows:
1. The Orthodontic Practice. The Assets of Orthodontic Practice are
owned 100% by Dr. Feldman. Dr. Feldman has the full power to conduct business as
currently conducted by the Orthodontic Practice and to own and lease the
property he purports to own.
2. Authorization of Transaction. All necessary action has been taken by
Dr. Feldman to authorize the execution of the Agreement by Dr. Feldman, and the
delivery and performance of this Agreement and the transactions contemplated
hereby, and the Agreement is the valid and binding obligation of Dr. Feldman,
enforceable against Dr. Feldman in accordance with its terms.
3. Present Compliance with Obligations and Laws. Except as disclosed on
Exhibit X attached to this Schedule, there is not: (a) a default in the
performance of any obligation, agreement or condition of any debt instrument
from Dr. Feldman which (with or without the passage of time or the giving of
notice) affords to any person the right to accelerate any material indebtedness
or terminate any right; (b) a default of or breach of (with or without the
passage of time or the giving of notice) any other contract to which Dr. Feldman
is a party or by which he assets are bound; or (d) any violation of any law,
regulation, administrative order or judicial order applicable to Dr. Feldman, or
his business or assets.
4. No Conflict of Transaction With Obligations and Laws.
(a) Neither the execution, delivery and performance of this Agreement,
nor the performance of the transactions contemplated hereby, will: (i) conflict
with or constitute (with or without the passage of time or the giving of notice)
a breach of, or default under, any debt instrument to which Dr. Feldman is a
party, or give any person the right to accelerate any indebtedness or terminate
any right; (ii) constitute (with or without the passage of time or giving of
notice) a default under or breach of any other agreement, instrument or
obligation to which Dr. Feldman is a party or by which his assets are bound; or
(iv) result in a violation of any law, regulation,
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administrative order or judicial order applicable to Dr. Feldman, his business
or assets.
(b) Except as disclosed on the attached Exhibit X to this Schedule, the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby by Dr. Feldman do not require the consent, waiver, approval,
authorization, exemption of or giving of notice to any governmental authority.
5. Investigations and Licenses.
(a) Dr. Feldman has all necessary licenses to practice orthodontics in
the State.
(b) Dr. Feldman is not subject to any investigation, whether
threatened, current or pending, under which Dr. Feldman may be required to
forfeit or suffer the revocation, suspension or limitation of Dr. Feldman's
license to practice orthodontics and Dr. Feldman is not subject to any
investigation, whether threatened, current or pending by a commercial
third-party payor.
6. Financial Statement. Attached as Exhibit A to the Agreement is the
Financial Statement of the Orthodontic Practice. To the best knowledge of Dr.
Feldman, the Financial Statement is complete and correct and fairly presents in
all material respects the financial position of the Orthodontic Practice as at
the date of such statements and the results of its operations for the period
then ended, in accordance with generally accepted accounting principles
consistently applied throughout the periods covered thereby for the periods
covered thereby.
7. Property; Liens; Condition.
(a) Except as set forth on Exhibit X to this Schedule, Dr. Feldman has
good and marketable title in fee simple to all of the Assets, including without
limitation, all real and personal property, machinery and equipment used or
owned by the Orthodontic Practice (the "Equipment"), free of liens and
encumbrances (the "Property"). All the Property owned or leased by Dr. Feldman
is in good repair, has been well maintained, substantially conforms with all
applicable ordinances, regulations and zoning or other laws. The Equipment is in
good working order.
(b) No other Practice or person owns any of the assets necessary for
the
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<PAGE>
operation of the Orthodontic Practice. The Orthodontic Practice does not operate
any of its practice through any other entities or persons.
9. Payment of Taxes. Dr. Feldman has filed all federal, state and local
income, excise or franchise tax returns, real estate and personal property tax
returns, sales and use tax returns and other tax returns required to be filed
and has paid all taxes owing except taxes which have not yet accrued or
otherwise become due for which adequate provision has been made in the Financial
Statement. All transfer, excise or other taxes payable by reason of the Asset
purchased pursuant to the Affiliation Agreement shall be paid or provided for by
Dr. Feldman after the Closing out of the Consideration to be received upon
consummation of the Affiliation Agreement.
10. Absence of Undisclosed Liabilities and Changes.
(a) As of the date of the Financial Statement, Dr. Feldman had no
liabilities of any nature, whether accrued, absolute, contingent or otherwise
(including without limitation liabilities as guarantor or otherwise with respect
to obligations of others, or liabilities for taxes due or then accrued or to
become due) relating to the Orthodontic Practice, except (i) liabilities stated
or adequately reserved against on the Financial Statement, (ii) liabilities not
in excess of $5,000 arising in the ordinary course of business since the date of
the Financial Statement, and (iii) liabilities disclosed in Exhibit X to this
Schedule. There is no fact which materially adversely affects, or may in the
future (so far as can now be reasonably foreseen) materially adversely affect,
the business, properties, operations or condition of the Orthodontic Practice
which has not been specifically disclosed herein or in Exhibit X to this
Schedule.
(b) Except as disclosed in Exhibit X to this Schedule, since the date
of the Financial Statement there has not been:
(i) any change in the financial condition, properties, assets,
liabilities, business or operations of Dr. Feldman or the Orthodontic Practice,
which change by itself or in conjunction with all other such changes, whether or
not arising in the ordinary course of business, has been materially adverse with
respect to Dr. Feldman or the Orthodontic Practice;
(ii) any mortgage, encumbrance or lien placed on any of the
Property,
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or the property subject to any lease, or which remains in existence on the date
hereof or at the time of Closing; or
(iii) any obligation or liability incurred by Dr. Feldman
relating to the Orthodontic Practice other than obligations and liabilities
incurred in the ordinary course of business and disclosed on Exhibit X attached
to this Schedule.
11. Litigation. Except for matters described on Exhibit X to this
Schedule, there is no action, suit, claim, proceeding or investigation pending
or, to the knowledge of Dr. Feldman, threatened against the Orthodontic Practice
or Dr. Feldman, at law or in equity, or before or by any Federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality or governmental inquiry pending or, to the knowledge of Dr.
Feldman, threatened against or involving Dr. Feldman or the Orthodontic
Practice, and there is no basis for any of the foregoing, and there are no
outstanding court orders, court decrees, or court stipulations to which the
Orthodontic Practice or Dr. Feldman is a party which question this Agreement or
affect the transactions contemplated hereby, or which will result in any
materially adverse change in the business, properties, operations, prospects,
assets or in the condition, financial or otherwise, of Dr. Feldman or the
Orthodontic Practice.
12. Insurance. Dr. Feldman has possessed adequate occurrence
Professional liability coverage for the five (5) years prior to the date of this
Agreement protecting the Orthodontic Practice and Dr. Feldman from any
professional malpractice liability that might arise because of the Orthodontic
Practice's or Dr. Feldman's practice activities over the preceding five (5)
years. Prior to the Closing, the New PC shall have obtained and shall continue
to maintain, at its cost, Occurrence Medical Malpractice Liability Insurance for
Dr. Feldman and the New PC. The Orthodontic Practice possesses adequate
insurance coverage for its Property.
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<PAGE>
EXHIBIT X
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Exceptions to Representations and
Warranties of Dr. Feldman and
Orthodontic Practice to OMEGA
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<PAGE>
Schedule 2
----------
Representations and Warranties of
OMEGA to Dr. Feldman
OMEGA hereby represents and warrants to Dr. Feldman as follows:
1. Organization of OMEGA. That it is a corporation duly organized,
validly existing and in good standing under the laws of Delaware with full
corporate power to own or lease its properties and to conduct its business in
the manner and in the places where such properties are owned or leased or such
business is conducted by it.
2. Authorization of Transaction. All necessary action, corporate or
otherwise, has been taken by it to authorize the execution, delivery and
performance of this Agreement, and this Agreement is a valid and binding
obligation of it enforceable against it in accordance with its terms, subject to
laws of general application affecting creditor's rights generally.
3. Litigation. There is no litigation pending or, to its knowledge,
threatened against it which would prevent or hinder the consummation of the
transactions contemplated by this Agreement.
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Exhibit 2.5
-----------
AFFILIATION AGREEMENT AND
STOCK PURCHASE AGREEMENT
THIS AFFILIATION AGREEMENT AND STOCK PURCHASE AGREEMENT is entered into
as of the 29th day of March 1997, by and between Omega Orthodontics, Inc., a
Delaware corporation ("OMEGA") and Jeff S. Zapalac, D.D.S. ("Dr. Zapalac"), who
is duly licensed to practice orthodontics in the state of Texas (the "State").
RECITALS
A. OMEGA provides professional management and marketing services to
orthodontic practices in the United States, which services include providing
practice management systems, office space, equipment, furnishings and active
administrative personnel necessary for the operation of orthodontic practices,
and which services are provided directly or indirectly through management
service organizations.
B. Jeff S. Zapalac, D.D.S., M.S., Inc., a Texas professional
corporation (the "Orthodontic Entity") owns and operates an orthodontic practice
with offices located at 8430 Spicewood Springs Road, Austin, Texas 78759 (the
"Orthodontic Offices") and furnishes orthodontic care to the general public
through the services of Dr. Zapalac affiliated with the Orthodontic Entity.
C. Dr. Zapalac presently holds and owns 100% of the issued and
outstanding capital stock of the Orthodontic Entity (the issued and outstanding
capital stock is hereafter referred to herein as the "Interests"), represented
by the certificates as follows:
No. Shares Stock Certificate No.
----- --------
D. Dr. Zapalac desires to sell and OMEGA desires to buy the Interests
upon the terms and conditions set forth in this Agreement.
E. Prior to selling the Interests, Dr. Zapalac desires to convert the
status of the Orthodontic Entity from a professional entity to a general purpose
entity and to form a new professional corporation or entity to continue his
orthodontic practice at the Orthodontic Offices.
F. Simultaneously with its acquisition of the Interests, OMEGA shall
change the name of the Orthodontic Entity to Omega Orthodontics of Austin, Inc.,
a Texas corporation.
G. OMEGA has conducted a review of the Orthodontic Entity, and has
reviewed the Orthodontic Entity's audited financial statement (the "Financial
Statement"), a copy of which is
<PAGE>
attached hereto as Exhibit A. Based on its review of the Orthodontic Entity and
the Financial Statement, OMEGA has issued the report (the "Report"), a copy of
which has been furnished to the Orthodontic Entity. The Orthodontic Entity and
Dr. Zapalac have reviewed the Report and OMEGA's literature, and agree with the
Report and the concepts of OMEGA's Exceptional Practice.
H. Subject to the terms and conditions of this Agreement, OMEGA and Dr.
Zapalac have determined that it is in the best interests of each to effect a
sale and purchase of the Interests of Orthodontic Entity (the "Stock Purchase")
as provided in Section 2.1 hereof.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged to the full
satisfaction of the parties hereto, the parties hereto agree as follows:
ARTICLE I. ENTITY FORMATION AND CONVERSION
1.1 At the Closing (as defined in Section 2.3 hereof), Dr. Zapalac
shall cause the Orthodontic Entity's charter ("Charter") to be amended to
convert the Orthodontic Entity into a general purpose entity under the laws of
the State.
1.2 Dr. Zapalac shall sell the Interests to OMEGA for the consideration
set forth in Article II.
1.3 Dr. Zapalac shall form a new professional entity (the "New PC")
under the laws of the State and, in accordance with the terms of this Agreement,
commence the practice of orthodontics through the New PC.
ARTICLE II. STOCK PURCHASE AND CONSIDERATION
2.1 Stock; Consideration and Payment.
(a) At the Effective Time (as hereinafter defined) and subject to the
terms and conditions hereinafter set forth, OMEGA hereby agrees to purchase and
Dr. Zapalac hereby agrees to sell the Interests to the Orthodontic Entity for
the Consideration (as defined below) and upon the terms and conditions set forth
in the Agreement by surrendering to OMEGA the certificates therefor, duly
endorsed and transferable, free and clear of any liens, encumbrances,
restrictions, or claims of any kind (other than those liens, encumbrances,
restrictions and claims expressly disclosed to OMEGA and affirmatively accepted
by OMEGA prior to the Effective Time). The Stock Purchase shall become effective
upon the transferring of the certificates representing the Interests (the
"Effective Time") to OMEGA and the payment to Dr. Zapalac of the aggregate
consideration (the "Consideration") of:
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(i) Five Hundred Thousand Dollars ($500,000.00) in cash (the
"Cash Component"); and
(iii) Five Hundred Thousand Dollars ($500,000.00) to be
represented by issuance to Dr. Zapalac of an option to purchase shares
of OMEGA common stock ("OMEGA Stock") at any time within five years of
the IPO Closing (as defined below in Section 2.3), based on a value per
share equal to 100% of the IPO Price (as defined below in Section 2.3)
(the "Option Component"), if the option is exercised, the OMEGA Stock
shall thereupon be issued to Dr. Zapalac, fully paid and nonassessable.
2.2 Adjustment and Audit.
(a) The Consideration is based on the value of the Interests as
determined by OMEGA from the information set forth in the Financial Statement.
(b) The Consideration shall be subject to adjustments at Closing for:
(i) prepaid and underpaid rent and other lease obligations, if the leases are to
be continued after Closing, as well as for other agreed normal and customary
prepaid and underpaid expenses; (ii) any accrued but unpaid salaries, bonuses
and other compensation, fringe and health insurance benefits, employment or
payroll taxes and related employment obligations and (iii) any accounts payable
of the Orthodontic Entity which have accrued prior to the Effective Time and
which remain unpaid as of such time (the "Accounts Payable") in excess of an
amount equal to one-half (1/2) of one "Average" month of gross income from the
Orthodontic Entity. As used herein, Average shall mean an average of the
Accounts Payable of the Orthodontic Entity using the last twelve months prior to
the end of the month immediately preceding the Effective Time.
(c) The adjustments to the Consideration, if any, shall be applied in
the following order of priority; first to the Cash Component, and the balance,
if any, to the Option Component.
2.3 Time and Place of Closing. The closing of the transactions
contemplated hereby (herein called the "Closing") shall be held immediately
before the Effective Time at the offices of Robinson & Cole, One Boston Place,
Boston, Massachusetts 02108 on the date of the closing of OMEGA's initial public
offering of its securities (the "IPO Closing") pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act") ("IPO"), or at such other place, date or time as may be fixed
by mutual agreement of the parties; provided, however, that in no event shall
the Closing date be extended beyond sixth months from the date of this
Agreement. On or before the IPO Closing, OMEGA will notify the Orthodontic
Entity of the projected IPO Closing Date determined by OMEGA, in its sole
discretion. As used herein "IPO Price" shall mean the initial offering price to
the public of OMEGA Stock as reflected on the cover page of its Prospectus under
the Securities Act for the IPO.
2.4 Certificates; Resignations, Filing Certificate of Name Change.
Contemporaneous
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with the Closing, Dr. Zapalac shall deliver to OMEGA the certificates evidencing
the Interests, duly endorsed for transfer and otherwise as provided in Section
2.1, and written resignations from all officers and directors of the Orthodontic
Entity. OMEGA shall prepare the duly executed Certificate(s) of Name Change
reflecting the name change of the Orthodontic Entity to be filed with the State
Secretary of State.
2.5 Delivery of Records, Contracts, Interests. At the Closing Dr.
Zapalac shall deliver or cause to be delivered to OMEGA:
(a) all of the Orthodontic Entity's minute books, stock records and
other books and records and the Orthodontic Entity's leases, contracts,
employment agreements, non-compete agreements, commitments and rights, with such
consents to the Stock Purchase as are necessary to assure OMEGA of the full
benefit of the same.
(b) Evidence of malpractice insurance coverage for the current and five
(5) prior years, and if applicable, evidence of so-called "tail" insurance for
such period naming the Orthodontic Entity as a co-insured or otherwise assigning
to the Orthodontic Entity, its successor and assigns the full benefits thereof.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
The Representations and Warranties of Dr. Zapalac in the attached
Schedule 1 are hereby incorporated as if fully set forth herein. The
Representations and Warranties of OMEGA in the attached Schedule 2 are hereby
incorporated as if fully set forth herein. Capitalized words and expressions
used in this Agreement and which are defined in said Schedules 1 and 2 shall
have the same meaning as they are given therein.
ARTICLE IV. COVENANTS OF DR. ZAPALAC
Dr. Zapalac hereby covenants and agrees with OMEGA as follows:
4.1 Conduct of Business. Between the date of this Agreement and the
Closing, he will do the following unless OMEGA shall otherwise consent in
writing:
(a) conduct the Orthodontic Entity business only in the
ordinary course, and refrain from changing or introducing any method of
management or operations except in the ordinary course of business and
consistent with prior practices;
(b) refrain from making any purchase, sale or disposition of
any asset or property other than in the ordinary course of business, from
purchasing any capital asset costing more than $1,000 and from mortgaging,
pledging, subjecting to a lien or otherwise encumbering any of the Interests,
the Property or other assets of the Orthodontic Entity;
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(c) refrain from incurring any contingent or fixed obligations
or liabilities except those that are usual and normal in the ordinary course of
business;
(d) refrain from making any change or incurring any obligation
to make a change in its Charter or By-laws (certified copies of which are
attached hereto as Exhibit C) or authorized or issued capital stock, except as
contemplated by this Agreement;
(e) refrain from declaring, setting aside or paying any
dividend or making any other distribution in respect of capital stock, or making
any direct or indirect redemption, purchase or other acquisition of capital
stock, of the Orthodontic Entity;
(f) use his best efforts to keep intact its business
organization, to keep available its present officers, agents and employees and
to preserve the goodwill of all patients, suppliers, and others having business
relations with it;
(g) not commit or fail to commit any act which would cause Dr.
Zapalac or the Orthodontic Entity to suffer the revocation, suspension or
limitation of Dr. Zapalac's or the Orthodontic Entity's license.
(h) permit OMEGA and its authorized representatives to have
full access to all its properties, assets, records, tax returns, Orthodontic
Entity records, contracts and documents and furnish to OMEGA or its authorized
representatives such financial and other Information with respect to its
business or properties as OMEGA may from time to time reasonably request.
4.2 Authorization from Others. Prior to the Closing, he will have
obtained all assignments, authorizations, consents and permits of others
required to permit the consummation by Dr. Zapalac of the transactions
contemplated by this Agreement.
4.3 Breach of Representations and Warranties. Promptly upon becoming
aware of the actual, impending or threatened occurrence of any event which would
cause or constitute a breach, or would have caused or constituted a breach had
such event occurred or been known to them prior to the date hereof, of any of
their representations and warranties contained in or referred to in this
Agreement, he shall give detailed written notice thereof to OMEGA and shall use
his best efforts to prevent or promptly remedy the same.
4.4 Consummation of Agreement. Each shall use his best efforts to
perform and fulfill all conditions and obligations on his part to be performed
and fulfilled under this Agreement, to the end that the transactions
contemplated by this Agreement shall be fully carried out.
ARTICLE V. COVENANTS OF OMEGA.
OMEGA hereby covenants and agrees with Dr. Zapalac as follows:
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5.1 Authorization from Others. Prior to the Closing, it will have
obtained all authorizations, consents and permits of others required to permit
the consummation by it of the transactions contemplated by this Agreement.
5.2 Consummation of Agreement. It shall use its best efforts to perform
and fulfill all conditions and obligations on its part to be performed or
fulfilled under this Agreement, to the end that the transactions contemplated by
this Agreement shall be fully carried out.
ARTICLE VI. CONDITIONS TO OBLIGATIONS OF OMEGA
The obligations of OMEGA to consummate this Agreement and the
transactions contemplated hereby are subject to the condition that on or before
the Closing the actions required by this Article 6 will have been accomplished.
6.1 Representations; Warranties; Covenants. Each of the representations
and warranties of Dr. Zapalac contained in Schedule 1 shall be true and correct
as though made on and as of the Closing, and Dr. Zapalac shall have performed
all of his obligations hereunder which by the terms hereof are to be performed
on or before the Closing.
6.2 New PC. Dr. Zapalac shall have formed the New PC under the laws of
the State in order to commence the practice of orthodontics through the New PC.
Dr. Zapalac shall have furnished (i) a certificate of the State Secretary of
State as to the legal existence and professional corporation good standing of
New PC; and (ii) a copy of the resolutions adopted by the board of directors and
stockholders of New PC authorizing and approving the Management Services
Agreement and the Stock Put/Call Option and Successor Designation Agreement.
6.3 Other Agreements. Dr. Zapalac shall have executed and delivered, or
shall have caused the New PC to execute and deliver, to OMEGA a Management
Services Agreement and a Stock Put/Call Option and Successor Designation
Agreement, each having substantially the terms and conditions of the forms
hereof collectively attached hereto as Exhibit D.
6.4 Initial Public Offering. OMEGA shall have completed the IPO.
6.5 Absence of Certain Litigation. There shall not be any injunction,
restraining order or order of any nature issued by any court of competent
jurisdiction which directs that this Agreement or any material transaction
contemplated hereby shall not be consummated as herein provided, or suit, action
or other proceeding which in the reasonable opinion of counsel for OMEGA is
likely to result in the restraint or prohibition of the consummation of any
material transaction contemplated hereby.
6.6 Notices. The Orthodontic Entity shall, at OMEGA's expense, notify
all patients and obligors of accounts receivable, and third party payors and
others designated by OMEGA of the
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Stock Purchase and the other transactions contemplated hereunder pursuant to
notices substantially in the form collectively attached hereto as Exhibit B.
6.7 Financial Condition. The financial condition of the Orthodontic
Entity shall not be materially adversely different from the Financial Statement,
as determined by OMEGA. During the period from the date of the Financial
Statement to the Closing, there shall not have been any material adverse change
in the financial condition, results of operations, business or prospects of the
Orthodontic Entity, nor any material loss or damage to its assets, whether or
not insured, which materially affects the ability of Orthodontic Entity to
conduct its business. Dr. Zapalac shall cause the Orthodontic Entity to deliver
to OMEGA a certificate, dated the date of Closing, to the foregoing effect, and
further to the effect that there are no Accounts Payable or other liabilities as
of the date of Closing that are not reflected on the Financial Statement other
than those which have been disclosed in writing to and accepted in writing by
OMEGA and which incurred since the date of the Financial Statement in the
ordinary course of business.
6.8 Due Diligence. OMEGA, acting in good faith and in its sole
discretion, shall be reasonably satisfied with the results of its "Due
Diligence" on Dr. Zapalac and the Orthodontic Entity as not reflecting any data
or information which individually or in the aggregate, if previously disclosed,
would have indicated that there was a material adverse change in the business of
the Orthodontic Entity or in the condition or prospects (financial or otherwise)
of the assets, properties, operations, patients, employees or equipment of the
business of the Orthodontic Entity from the information provided prior to the
date hereof. As used herein, Due Diligence shall mean, without limitation, the
results of the Audit of the Financial Statement and of all other matters
(financial or otherwise) related to, or otherwise deemed material by OMEGA,
regarding Dr. Zapalac and the Orthodontic Entity, including location of the
Orthodontic Offices and its demographics, the leases, the Equipment, insurance,
licensing, malpractice issues, liabilities, compliance with laws and regulations
and health surveys.
ARTICLE VII. CONDITIONS TO OBLIGATIONS OF DR. ZAPALAC
The obligations of Dr. Zapalac to consummate this Agreement and the
transactions contemplated hereby are subject to the condition that on or before
the Closing the actions required by this Article 7 will have been accomplished.
7.1 Representations; Warranties; Covenants. Each of the representations
and warranties of OMEGA contained in Schedule 2 shall be true and correct as
though made on and as of the Closing and each of OMEGA shall have performed all
of its obligations hereunder which by the terms hereof are to be performed on or
before the Closing.
7.2 Intentionally Omitted.
7.3 Other Agreements. OMEGA shall have executed and delivered to Dr.
Zapalac and New PC a Management Services Agreement and a Stock Put/Call Option
and Successor
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Designation Agreement, each having substantially the terms and conditions of the
forms hereof collectively attached hereto as Exhibit D.
7.4 Initial Public Offering. OMEGA shall have completed the IPO.
7.5 Absence of Certain Litigation. There shall not be any injunction,
restraining order or order of any nature issued by any court of competent
jurisdiction which directs that this Agreement or any material transaction
contemplated hereby shall not be consummated as herein provided, or suit, action
or other proceeding which in the reasonable opinion of counsel for Dr. Zapalac
is likely to result in the restraint or prohibition of the consummation of any
material transaction contemplated hereby.
ARTICLE VIII. OBLIGATIONS AFTER CLOSING.
8.1 OMEGA Exceptional Practice and the Report Suggestions. On and after
the Closing, Dr. Zapalac agrees to cause the New PC to implement the suggestions
in the Report and the concepts of OMEGA's Exceptional Practice.
8.2 Books and Records. OMEGA shall permit Dr. Zapalac, his accountants
and attorneys, reasonable access to such books and records for the purpose of
preparing such tax returns of Dr. Zapalac as may be required after the Closing
and for other proper purposes approved by OMEGA.
8.3 License. Dr. Zapalac shall maintain all licenses necessary to
practice orthodontics in the State. Dr. Zapalac shall not commit or fail to
commit any act which would cause Dr. Zapalac or the New PC to suffer the
revocation, suspension or limitation of Dr. Zapalac's or the New PC's license.
ARTICLE IX. INDEMNIFICATION.
9.1 Indemnification By Dr. Zapalac. Subject to the limitations set
forth in Section 9.3, Dr. Zapalac agrees to defend, indemnify and hold each of
OMEGA harmless from and against any damages, liabilities, losses and expenses
(including reasonable counsel fees) of any kind or nature whatsoever which may
be sustained or suffered by OMEGA based upon a breach of any representation,
warranty or covenant made by Dr. Zapalac in this Agreement or in any exhibit,
certificate, schedule or financial statement delivered hereunder, or by reason
of any claim, action or proceeding asserted or instituted growing out of any
matter or thing covered by such representations, warranties or covenants.
9.2 Indemnification By OMEGA. Subject to the limitations set forth in
Section 9.3, OMEGA agrees to defend, indemnify and hold Dr. Zapalac harmless
from and against any damages, liabilities, losses and expenses (including
reasonable counsel fees) of any kind or nature whatsoever which may be sustained
or suffered by Dr. Zapalac based upon a breach of any
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representation, warranty or covenant made by OMEGA in this Agreement or in any
exhibit, certificate, schedule or financial statement delivered hereunder, or by
reason of any claim, action or proceeding asserted or instituted growing out of
any matter or thing covered by such representations, warranties or covenants.
9.3 Exclusions. Notwithstanding Sections 9.1 and 9.2:
(a) no indemnification shall be payable to the extent any
claim is covered by insurance; and
(b) no indemnification shall be payable with respect to claims
asserted more than five (5) years after the Closing.
9.4 Notice: Defense of Claims. Prompt written notice of each claim for
indemnification hereunder shall be given to the other party, specifying the
amount and nature of the claim, and of any matter which in the opinion of the
claimant is likely to give rise to an indemnification claim. The indemnifying
party shall have the right to participate at its own expense in the defense of
any such matter or its settlement. If, in the opinion of the indemnified party,
its financial condition or business would not be impaired thereby, such party
may authorize the indemnifying party to take over the defense of such matter so
long as such defense is expeditious. Failure to give notice of a matter which
may give rise to an indemnification claim shall not affect the rights of any
party to collect such claim from the other party or its transferees in
liquidation.
9.5 Payment of Claims; Alternative Dispute Resolution. (a) Any
indemnification claims shall be paid or otherwise satisfied by Dr. Zapalac, or
Dr. Zapalac's transferees in liquidation, within 30 days after notice thereof is
given by OMEGA. In the event Dr. Zapalac indicates in a writing delivered to
OMEGA that he disputes the nature or amount of the claim, in which event the
dispute upon the election of any party hereto after said 30-day period shall be
handled in accordance with this Section.
(b) If a dispute arises under this Agreement which cannot be resolved
informally by the parties, any party may invoke the procedures set forth in
Exhibit D hereto and the parties agree to use these procedures, except paragraph
(c) of this Section 9.5, prior to any party pursuing other available remedies.
The parties will meet and attempt in good faith to resolve any controversy or
claim arising out of or relating to this Agreement.
(c) Notwithstanding anything in this Section 9.5 to the contrary,
nothing in this Section 9.5 shall preclude any party from seeking a preliminary
injunction or other provisional relief, either prior to or during the proceeding
provided for in this section, if in its judgment such action is necessary to
avoid irreparable damage or to preserve the status quo.
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ARTICLE X. MISCELLANEOUS.
10.1 Termination.
(a) At any time prior to the Closing, this Agreement may be terminated
(i) by mutual consent of the parties with the approval of their respective board
of directors or members, (ii) by either if there has been a material
misrepresentation, breach of warranty or breach of covenant by the other party
in its representations, warranties and covenants set forth herein, (iii) by
OMEGA if the conditions stated in Article VI have not been satisfied at or prior
to the Closing, or (iv) by Dr. Zapalac if the conditions stated in Article VII
have not been satisfied at or prior to the Closing.
(b) If the IPO is not successfully completed within six (6) months of
this Agreement, this Agreement may be terminated by OMEGA or Dr. Zapalac upon
written notice to the other party, and if so terminated, all obligations of the
parties hereunder shall terminate without any further liability of either party
to the other, except that each party shall remain obligated in respect of the
provisions of Section 10.3 and 10.7 which shall survive any such termination.
10.2 Survival of Warranties and Other Obligations. All representations,
warranties, agreements, covenants and obligations herein or in any schedule,
exhibit, certificate or financial statement delivered by either party to the
other party incident to the transactions contemplated hereby are material, shall
be deemed to have been relied upon by the other party and shall survive the
Closing regardless of any investigation and shall not merge in the performance
of any obligation by either party hereto.
10.3 Fees and Expenses. Each of the parties will bear its or his own
expenses in connection with the negotiation and the consummation of the
transactions contemplated by this Agreement.
10.4 Notices. Any notice or other communication in connection with this
Agreement shall be deemed to be delivered if in writing (or in the form of a
telegram or facsimile transmission) addressed as provided below and if either
(a) actually delivered at said address, or (b) in the case of a letter, three
business days shall have elapsed after the same shall have been deposited in the
United States mail, postage prepaid and registered or certified, return receipt
requested, or sent by reputable overnight courier:
If to Dr. Zapalac, to:
Jeff S. Zapalac, D.D.S.
8430 Spicewood Springs Road
Austin, Texas 78759
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If to the OMEGA, to:
Omega Orthodontics, Inc.
3621 Silver Spur Lane
Acton, CA 93510
Attn: Robert Schulhof
and in any case at such other address as the addressee shall have specified by
written notice. All periods of notice shall be measured from the date of
delivery thereof.
10.5 Entire Agreement. This Agreement (including all exhibits or
schedules appended to this Agreement and all documents delivered pursuant to the
provisions of this Agreement, all of which are hereby incorporated herein by
reference) together with the Management Services Agreement and the Stock
Put/Call Option and Successor Designation Agreement (including all exhibits and
schedules thereto), taken together, constitute the entire agreement between the
parties, and all promises, representations, understandings, warranties and
agreements with reference to the subject matter hereof and inducements to the
making of this Agreement relied upon by my party hereto, have been expressed
herein or therein.
10.6 Binding Agreement, Successors. This Agreement shall be binding
upon, and shall be enforceable by and inure to the benefit of, the parties named
herein and their respective successors and assigns; provided, however, that this
Agreement may not be assigned by any of the parties without the prior written
consent of all the other parties.
10.7 Confidentiality. As used herein, "Confidential Information" means
any information or data that a party has acquired from another party that is
confidential or not otherwise available to the public, whether oral or written,
including without limitation any analyses, computations, studies or other
documents prepared from such information or data by or for the directors,
officers, employees, agents or representatives of such party (collectively, the
"Representatives"), but excluding information or data which (i) became available
to the public other than as a result of such party's violation of this
Agreement, (ii) became available to such party from a source other than the
other party if that source was not bound by a confidentiality agreement with
such other party and such source lawfully obtained such information or data, or
(iii) is required to be disclosed by applicable law, provided that promptly
after being compelled to disclose any such information or data, the party being
so compelled shall provide prompt notice thereof to the other party so that such
other party may seek a protective order or other appropriate remedy. Each party
covenants and agrees that it and its Representatives shall keep confidential and
shall not disclose all Confidential Information, except to its Representatives
and lenders who need to know such information and agree to keep it confidential.
Each party shall be responsible for any breach of this provision by its
Representatives. In the event that the Closing does not occur, each party will
promptly return to the other all copies of such other party's Confidential
Information.
10.8 Governing Law; Severability. This Agreement shall be deemed a
contract made under the laws of the State of Delaware and, together with the
rights and obligations of the parties hereunder, shall be construed under and
governed by the laws of such state. The invalidity or
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unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision hereof.
10.9 Referrals. Nothing in this Agreement shall be construed as an
offer or payment to the other party or any affiliate of the other party of any
cash or other remuneration whether directly or indirectly, overtly or covertly,
specifically for patient referrals or for recommending or arranging the
purchase, lease or order of any item or service. The Consideration to be
received upon consummation of the Stock Purchase represents the fair market
value of the Orthodontic Entity and is not in any way related to or dependent
upon referrals by and between OMEGA and Dr. Zapalac.
10.10 Further Assurances. Following the execution of this Agreement,
Dr. Zapalac and OMEGA each agrees:
(a) to deliver such other instruments of title, certificates, consents,
endorsements, assignments, assumptions and other documents or instruments, in
form reasonably acceptable to the party requesting the same and its counsel, as
may be reasonably necessary to carry out and/or to comply with the terms of this
Agreement, and the transactions contemplated herein;
(b) to confer on a regular basis with the other, report on material
operational matters and promptly advise the other orally or in writing of any
change or event resulting in or which, insofar as can reasonably be foreseen
could result in, a material adverse effect on such party or which would cause or
constitute a material breach of any of the representations, warranties or
covenants of such party contained herein; and
(c) to provide the other (or its counsel) promptly with copies of all
filings made by such party with any state or federal governmental entity in
connection with this Agreement or the transactions contemplated hereby.
10.11 Termination of Prior Agreement. OMEGA, Dr. Zapalac, the
Orthodontic Entity; and Omega Orthodontics of Austin, Inc., a Delaware
corporation to be formed and to become a wholly owned subsidiary of OMEGA
("Acquisition") entered into an Affiliation Agreement and Agreement and Plan of
Merger (the "Original Agreement") dated March 20, 1997. Subsequent to executing
the Original Agreement, the parties thereto desired to modify the structure of
the transaction from a merger to a stock purchase. Acquisition was never formed,
and thus is not a party to this Agreement. The Orthodontic Entity is a party to
this Agreement only for purposes of this Section 10.11. OMEGA, Dr. Zapalac and
the Orthodontic Entity agree that the Original Agreement is hereby terminated.
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10.12 Counterparts; Section Headings; Gender. This Agreement may be
executed, accepted and delivered in any number of counterparts, but all
counterparts shall together constitute but one and the same instrument. The
underlined section headings are inserted for convenience of reference only and
are not to be construed as part of this Agreement. The use of the masculine or
neuter gender includes each of the other genders.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the date set forth above by their duly authorized
representatives.
D.D.S.
-------------------------------------
Printed Name: Jeff S. Zapalac, D.D.S.
Jeff S. Zapalac, D.D.S., M.S., Inc.
(As to Section 10.11 Only)
By:
-----------------------------------
Jeff S. Zapalac, D.D.S.
Its
-------------------------------
Duly Authorized
OMEGA ORTHODONTICS, INC.
By:
----------------------------------
Printed Name: Robert J. Schulhof
Its President and Chief Executive Officer
Duly Authorized
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Exhibit A
---------
Financial Statement
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Exhibit B
---------
Notices
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Exhibit C
---------
Orthodontic Entity's Charter and
By-Laws
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Exhibit D
---------
Draft Management Services Agreement and
Stock Put/Call Option and Successor Designation Agreement
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Exhibit E
---------
ALTERNATIVE DISPUTE RESOLUTION PROCEDURES
A. Method of Invoking ADR Procedures
1. These procedures may be invoked by any party to an agreement which
incorporates these procedures by giving written notice to the other of the
dispute and designating a person with decision-making authority (the
"representative") to act on behalf of the disputing party regarding the dispute.
The other party shall be required to respond to the disputing party's notice
within five (5) business days by designating in writing its own representative.
A party may choose more than one person to represent it. If a party appoints
only one representative, one or more of its officers may nonetheless attend such
meetings.
2. The parties, each acting through its representative, shall meet at a
mutually acceptable time and place within five business days after the
non-disputing party designates its representative to the other. At that meeting,
the parties shall attempt in good faith to negotiate a resolution of the
dispute, or failing that, to agree on a method for resolving the claim or
dispute.
3. If, within ten (10) business days after the first meeting or within
such longer period of time as the parties may mutually agree, the parties have
not succeeded in negotiating a resolution of the claim or dispute or agreeing on
a dispute resolution mechanism, they shall submit the dispute to mediation in
accordance with the procedures set forth herein.
4. The parties will jointly appoint a mutually acceptable mediator to
mediate the dispute. If the parties are unable to agree on a mutually acceptable
mediator within five (5) days after the conclusion of the negotiations described
in paragraph 3 above, then the parties shall select a neutral third party from
either the Center for Public Resources, New York, New York ("CPR") Panels of
Neutrals, the American Arbitration Association ("AAA") or the Association of
Attorney Mediators ("AAM"), with the assistance of such organization, unless the
parties agree otherwise in finding a mutually acceptable mediator.
5. OMEGA shall bear 50% and the New PC and Dr. Zapalac shall bear 50%
of the fees and costs of the mediator and any fees and costs of CPR, AAA or AAM.
6. The parties agree to participate in good faith in the mediation and
negotiations related thereto for a period of thirty (30) days from appointment
of a mediator by any of the parties or the CPR, AAA or AAM.
B. Mediation procedures
1. The mediator shall be neutral and impartial.
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2. The mediator shall control the procedural aspects of the mediation.
The parties will cooperate fully with the mediator.
(a) The mediator is free to meet and communicate separately with
each party.
(b) The mediator will decide when to hold joint meetings with the
parties and when to hold separate meetings. There shall be no
stenographic record of any meeting. Formal rules of evidence
will not apply.
(c) The mediator may request that there be no direct communication
between the parties or between their attorneys without the
concurrence of the mediator.
3. Each party may be represented by more than one person, e.g., one or
more of its officers and an attorney. Each party will have a representative
fully authorized to negotiate a settlement of the dispute present.
4. The process will be conducted expeditiously.
5. The mediator will not transmit information received from any party
to another party or any third person unless authorized to do so by the party
transmitting the information.
6. The entire process is confidential. The parties and the mediator
will not disclose information regarding the process, including settlement terms,
to third persons, unless the parties otherwise agree. The process shall be
treated as a compromise negotiation for purposes of the Federal Rules of
Evidence and state rules of evidence.
7. The parties will refrain from pursuing administrative and/or
judicial remedies during the mediation process, except as otherwise expressly
provided in the agreement which incorporates these procedures.
8. Unless all parties and the mediator otherwise agree in writing,
(a) The mediator will be disqualified as a witness, consultant or
expert in any pending or future investigation, action or
proceeding relating to the subject matter of the mediation
(including any investigation, action or proceeding which
involves persons not party to this mediation); and
(b) The mediator and any documents and information in the
mediator's possession will not be subpoenaed in any such
investigation, action or proceeding, and all parties will
oppose any effort to have the mediator and documents
subpoenaed.
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9. If the dispute goes into arbitration, the mediator shall not serve
as an arbitrator, unless the parties and the mediator otherwise agree in
writing.
10. The mediator, if a lawyer, may freely express views to the parties
on the legal issues of the dispute.
11. The mediator shall not be liable for any act or omission in
connection with the mediation.
12. The mediator may withdraw at any time by written notice to the
parties (i) for overriding personal reasons, (ii) if the mediator believes that
a party is not acting in good faith, or (iii) if the mediator concludes that
further mediation efforts would not be useful.
C. Binding Arbitration
If the parties do not resolve the dispute through mediation within the
period provided in Part A above, the parties shall submit the matter to binding
arbitration before AAA, AAM or CPR, to a qualified sole arbitrator in accordance
with the then current CPR Rules for Non-Administered Arbitration of Business
Disputes or comparable AAA or AAM rules. The sole arbitrator shall be agreed
upon by the parties within twenty (20) days after either party elects to submit
any issue to arbitration or, failing that, shall be selected by the organization
to whom the parties selected for arbitration. A qualified arbitrator is one who
is familiar with the principal subject matter of the issues to be arbitrated
such as by way of example, healthcare services industry matters, management
consulting services generally or business law/corporate matters generally.
Judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction. The arbitrator shall not have the authority to award
multiple, punitive or consequential damages under any circumstances. If the
party initially raising the dispute to be resolved is New PC or Dr. Zapalac, the
arbitration shall be held in Boston, Massachusetts, and if the party initially
raising the dispute to be resolved is the MSO or OMEGA, the arbitration shall be
held in Austin, Texas.
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Schedule 1
----------
Representations and Warranties of
Dr. Zapalac to OMEGA
Dr. Zapalac hereby represents and warrants to OMEGA as follows:
1. Organization and Qualification of the Orthodontic Entity. The
Orthodontic Entity is a duly formed and organized professional corporation under
the laws of the State. The Orthodontic Entity is a legally existing professional
corporation under the State Professional Corporation Act (the "Act") and no
event has occurred which alone or after the passage of time would result in the
dissolution of the Orthodontic Entity. The Orthodontic Entity has the full power
to conduct business as currently conducted by the Orthodontic Entity and to own
and lease the property it purports to own. The copies of any articles of
organization or incorporation and by-laws, as defined in the Act, of the
Orthodontic Entity which are currently in effect, and all amendments thereto
(collectively, the "Charter and By-Laws"), certified by Dr. Zapalac, attached
hereto as Exhibit C are complete and correct.
2. Authorization of Transaction. All necessary action, Orthodontic
Entity or otherwise, has been taken to authorize the execution of the Agreement
by Dr. Zapalac, and the delivery and performance of this Agreement and the
transactions contemplated hereby, and the Agreement is the valid and binding
obligation of Dr. Zapalac, enforceable against Dr. Zapalac in accordance with
its terms.
3. Present Compliance with Obligations and Laws. Except as disclosed on
Exhibit X attached to this Schedule, there is not: (a) any violation of the
Charter or By-Laws; (b) a default in the performance of any obligation,
agreement or condition of any debt instrument from Dr. Zapalac or the
Orthodontic Entity which (with or without the passage of time or the giving of
notice) affords to any person the right to accelerate any material indebtedness
or terminate any right; (c) a default of or breach of (with or without the
passage of time or the giving of notice) any other contract to which Dr. Zapalac
or the Orthodontic Entity is a party or by which their assets are bound; or (d)
any violation of any law, regulation, administrative order or judicial order
applicable to Dr. Zapalac or the Orthodontic Entity, or their business or
assets.
4. No Conflict of Transaction With Obligations and Laws.
(a) Neither the execution, delivery and performance of this Agreement,
nor the performance of the transactions contemplated hereby, will: (i)
constitute a breach or violation of Orthodontic Entity's Charter or By-Laws;
(ii) conflict with or constitute (with or without the passage of time or the
giving of notice) a breach of, or default under, any debt instrument to which
Dr. Zapalac or the Orthodontic Entity is a party, or give any person the right
to accelerate any indebtedness or terminate any right; (iii) constitute (with or
without the passage of time or giving of notice) a default under or breach of
any other agreement, instrument or obligation to which the Orthodontic Entity or
Dr. Zapalac is a party or by which their assets are bound; or (iv)
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result in a violation of any law, regulation, administrative order or judicial
order applicable to the Orthodontic Entity, Dr. Zapalac, their business or
assets.
(b) Except as disclosed on the attached Exhibit X to this Schedule, the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby by the Orthodontic Entity do not require the consent,
waiver, approval, authorization, exemption of or giving of notice to any
governmental authority.
5. Investigations and Licenses.
(a) The Orthodontic Entity and Dr. Zapalac have all necessary licenses
to practice orthodontics in the State.
(b) Neither the Orthodontic Entity nor Dr. Zapalac is subject to any
investigation, whether threatened, current or pending, under which the
Orthodontic Entity or Dr. Zapalac may be required to forfeit or suffer the
revocation, suspension or limitation of Dr. Zapalac's or the Orthodontic
Entity's license to practice orthodontics and neither the Orthodontic Entity nor
Dr. Zapalac is subject to any investigation, whether threatened, current or
pending by a commercial third-party payor.
6. Financial Statement. Attached as Exhibit A to the Agreement is the
Financial Statement of the Orthodontic Entity. To the best knowledge of Dr.
Zapalac, the Financial Statement is complete and correct and fairly presents in
all material respects the financial position of the Orthodontic Entity as at the
date of such statement and the results of its operations for the period then
ended, in accordance with generally accepted accounting principles consistently
applied throughout the periods covered thereby for the periods covered thereby.
7. Capitalization and the Interests. The authorized capital of the
Orthodontic Entity consists of the Interests. All of the Interests have been
validly issued and are fully paid and non-assessable. There are no options,
warrants, rights or other agreements or commitments obligating the Orthodontic
Entity or Dr. Zapalac to issue or sell the Interests and there are no
pre-emptive rights with respect to any Interests. Dr. Zapalac is the beneficial
and record owner of the Interests. Dr. Zapalac has good title to the Interests,
free and clear of any liens, encumbrances or restrictions of any kind. The
Interests are not subject to any voting or similar agreement.
8. Property; Liens; Condition.
(a) Except as set forth on Exhibit X to this Schedule, the Orthodontic
Entity has good and marketable title in fee simple to all of its owned real and
personal property, including without limitation, all machinery and equipment
used or owned by the Orthodontic Entity (the "Equipment") free of liens and
encumbrances (the "Property"). All the Property owned or leased by the
Orthodontic Entity is in good repair, has been well maintained, substantially
conforms with all applicable ordinances, regulations and zoning or other laws.
The Equipment is in good working order.
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(b) No other entity or person owns any of the assets necessary for the
operation of the Orthodontic Entity. The Orthodontic Entity does not operate any
of its practice through any other entities or persons.
9. Payment of Taxes. The Orthodontic Entity has filed all federal,
state and local income, excise or franchise tax returns, real estate and
personal property tax returns, sales and use tax returns and other tax returns
required to be filed and has paid all taxes owing except taxes which have not
yet accrued or otherwise become due for which adequate provision has been made
in the Financial Statement. All transfer, excise or other taxes payable by
reason of the Stock Purchase pursuant to the Agreement shall be paid or provided
for by the Dr. Zapalac after the Closing out of the Consideration to be received
upon consummation of the Stock Purchase.
10. Absence of Undisclosed Liabilities and Changes.
(a) As of the date of the Financial Statement, the Orthodontic Entity
had no liabilities of any nature, whether accrued, absolute, contingent or
otherwise (including without limitation liabilities as guarantor or otherwise
with respect to obligations of others, or liabilities for taxes due or then
accrued or to become due), except (i) liabilities stated or adequately reserved
against on the Financial Statement, (ii) liabilities not in excess of $5,000
arising in the ordinary course of business since the date of the Financial
Statement, and (iii) liabilities disclosed in Exhibit X to this Schedule. There
is no fact which materially adversely affects, or may in the future (so far as
can now be reasonably foreseen) materially adversely affect, the business,
properties, operations or condition of the Orthodontic Entity which has not been
specifically disclosed herein or in Exhibit X to this Schedule.
(b) Except as disclosed in Exhibit X to this Schedule, since the date
of the Financial Statement there has not been:
(i) any change in the financial condition, properties, assets,
liabilities, business or operations of the Orthodontic Entity, which change by
itself or in conjunction with all other such changes, whether or not arising in
the ordinary course of business, has been materially adverse with respect to the
Orthodontic Entity;
(ii) any mortgage, encumbrance or lien placed on any of the
Interests or the Property, or the property subject to any lease, or which
remains in existence on the date hereof or at the time of Closing; or
(iii) any obligation or liability incurred by the Orthodontic
Entity other than obligations and liabilities incurred in the ordinary course of
business and disclosed on Exhibit X attached to this Schedule.
11. Litigation. Except for matters described on Exhibit X to this
Schedule, there is no action, suit, claim, proceeding or investigation pending
or, to the knowledge of the Orthodontic
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Entity or Dr. Zapalac, threatened against the Orthodontic Entity or Dr. Zapalac,
at law or in equity, or before or by any Federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality or
governmental inquiry pending or, to the knowledge of the Orthodontic Entity or
Dr. Zapalac, threatened against or involving Dr. Zapalac or the Orthodontic
Entity, and there is no basis for any of the foregoing, and there are no
outstanding court orders, court decrees, or court stipulations to which the
Orthodontic Entity or Dr. Zapalac is a party which question this Agreement or
affect the transactions contemplated hereby, or which will result in any
materially adverse change in the business, properties, operations, prospects,
assets or in the condition, financial or otherwise, of Dr. Zapalac or the
Orthodontic Entity.
12. Insurance. The Orthodontic Entity has possessed adequate occurrence
Professional liability coverage for the five (5) years prior to the date of this
Agreement protecting the Orthodontic Entity and Dr. Zapalac from any
professional malpractice liability that might arise because of the Orthodontic
Entity's or Dr. Zapalac's practice activities over the preceding five (5) years.
Prior to the Closing, the New PC shall have obtained and shall continue to
maintain, at its cost, Occurrence Medical Malpractice Liability Insurance for
Dr. Zapalac and the New PC. The Orthodontic Entity possesses adequate insurance
coverage for its Property.
13. Taxes. The Orthodontic Entity has filed all tax returns, federal,
state, county and local, required to be filed by it, and the Orthodontic Entity
has paid all taxes shown to be due by such returns as well as all other taxes,
assessments and governmental charges which have become due or payable, including
without limitation all taxes which the Orthodontic Entity is obligated to
withhold from amounts owing to employees, creditors and third parties. The
Orthodontic Entity has established adequate reserves for all taxes accrued but
not yet payable. All tax elections have been made by the Orthodontic Entity in
accordance with generally accepted practice. The federal income tax returns of
the Orthodontic Entity have never been audited by the Internal Revenue Service.
No deficiency assessment with respect to or proposed adjustment of the
Orthodontic Entity's federal, state, county or local taxes is pending or
threatened. There is no tax lien, whether imposed by any federal, state, county
or local taxing authority, outstanding against the assets, properties or
business of the Orthodontic Entity. Neither the Orthodontic Entity nor any of
its present or former stockholders has ever filed an election pursuant to
Section 1362 of the Internal Revenue Code of 1986, as amended (the "Code"), that
the Orthodontic Entity be taxed as an S corporation. The Orthodontic Entity's
net operating losses for federal income tax purposes, as set forth in the
financial statements referred to in Section 2.05, are not subject to any
limitations imposed by Section 382 of the Code and the full amount of such net
operating losses are available to offset the taxable income of the Orthodontic
Entity for the current fiscal year and, to the extent not so used, succeeding
fiscal years. Consummation of the transactions contemplated by this Agreement or
by any other agreement, understanding or commitment (contingent or otherwise) to
which the Orthodontic Entity is a party or by which it is otherwise bound will
not have the effect of limiting the Orthodontic Entity's ability to use such net
operating losses in full to offset such taxable income.
14. Assumptions, Guaranties, Etc. of Indebtedness of Other Persons.
Except as set forth in Schedule X, The Orthodontic Entity has not assumed,
guaranteed, endorsed or otherwise become directly or contingently liable on any
indebtedness of any other person (including, without limitation,
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liability by way of agreement, contingent or otherwise, to purchase, to provide
funds for payment, to supply funds to or otherwise invest in the debtor, or
otherwise to assure the creditor against loss), except for guaranties by
endorsement of negotiable instruments for deposit or collection in the ordinary
course of business.
15. Compliance with ERISA. Except as set forth in Schedule X, the
Orthodontic Entity has not established, maintained, made or been required to
make any contributions to, or terminated, nor does it have any liabilities with
respect to, any employee benefit plan within the meaning of, and which is
subject to, Section 3 of the Employee Retirement Income Security Act of 1974, as
amended.
16. Disclosures. Neither this Agreement nor any exhibit or schedule
hereto, nor any report, certificate or instrument furnished to the Purchasers or
their counsel in connection with the transaction contemplated by this Agreement,
when read together, contains or will contain any material misstatement of fact
or omits or will omit to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading. The Seller knows of no information or fact which has or
would have a material adverse effect on the financial condition, business or
prospects of the Orthodontic Entity which has not been disclosed to the
Purchasers.
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<PAGE>
EXHIBIT X
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Exceptions to Representations and
Warranties of Dr. Zapalac to OMEGA
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<PAGE>
Schedule 2
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Representations and Warranties of
OMEGA to Dr. Zapalac
OMEGA hereby represents and warrants to Dr. Zapalac as follows:
1. Organization. That it is a corporation duly organized, validly
existing and in good standing under the laws of Delaware with full corporate
power to own or lease its properties and to conduct its business in the manner
and in the places where such properties are owned or leased or such business is
conducted by it.
2. Authorization of Transaction. All necessary action, corporate or
otherwise, has been taken by it to authorize the execution, delivery and
performance of this Agreement, and this Agreement is a valid and binding
obligation of it enforceable against it in accordance with its terms, subject to
laws of general application affecting creditor's rights generally.
3. Litigation. There is no litigation pending or, to its knowledge,
threatened against it which would prevent or hinder the consummation of the
transactions contemplated by this Agreement.
4. Securities Not Registered. It understands that the Interests to be
purchased have not been registered under the Securities Act of 1933, as amended,
or under the securities laws of any state and that neither the Securities and
Exchange Commission nor any state securities commission has approved or
disapproved of the securities.
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Exhibit 2.6
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AFFILIATION AGREEMENT AND ASSET PURCHASE AGREEMENT
THIS AFFILIATION AGREEMENT AND ASSET PURCHASE AGREEMENT is entered into
as of the 25TH day of February, 1997, by and between Omega Orthodontics, Inc., a
Delaware corporation ("OMEGA") and David T. Grove, D.M.D., M.S. ("Dr. Grove"),
who is duly licensed to practice orthodontics in the state of Nevada (the
"State").
RECITALS
A. OMEGA provides professional management and marketing services to
orthodontic practices in the United States, which services include providing
practice management systems, office space, equipment, furnishings and active
administrative personnel necessary for the operation of orthodontic practices,
and which services are provided directly or indirectly through management
service organizations.
B. Dr. Grove owns and operates an orthodontic practice (the
"Orthodontic Practice") with offices located at 581 12th Street, Elko, Nevada
(the "Orthodontic Offices") and furnishes orthodontic care to the general
public. As the owner and operator of the Orthodontic Practice, Dr. Grove is the
owner of a leasehold interest in a lease of the Orthodontic Offices, the owner
of certain personal property located at the Orthodontic Offices, a party to
certain contracts relating to the Orthodontic Practice and the beneficiary of
other rights related to the Orthodontic Practice.
C. OMEGA has conducted a review of the Orthodontic Practice, and has
reviewed the Orthodontic Practice's audited financial statement (the "Financial
Statement"), a copy of which is attached hereto as Exhibit A . Based on its
review of the Orthodontic Practice and the Financial Statement, OMEGA has issued
the report (the "Report"), a copy of which has been furnished to Dr. Grove. Dr.
Grove have reviewed the Report and OMEGA's literature, and agree with the Report
and the concepts of OMEGA's Exceptional Practice.
D. Subject to the terms and conditions of this Agreement, OMEGA and Dr.
Grove have determined that it is in the best interests of each to for OMEGA to
purchase from Dr. Grove certain of the assets comprising the Orthodontic
Practice as provided in Section 1.1 hereof.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged to the full
satisfaction of the parties hereto, the parties hereto agree as follows:
<PAGE>
ARTICLE I. ASSET PURCHASE
1.1 Purchase; Consideration and Payment.
(a) At the Effective Time (as hereinafter defined) and subject to the
terms and conditions hereinafter set forth, Dr. Grove agrees to sell, transfer,
convey, assign and deliver to OMEGA, and OMEGA agrees to purchase and acquire
from Dr. Grove and take delivery of, for the consideration hereinafter provided,
all of Dr. Grove's right, title and interest in and to all of the assets of the
Orthodontic Practice, wheresoever situated and whether or not specifically
referred to herein or in any instrument of conveyance delivered pursuant hereto
(such assets and rights of Dr. Grove are collectively referred to as the
"Assets"), excepting therefrom the assets listed on Schedule I to the Bill of
Sale and Assignment (the "Bill of Sale") attached hereto as Exhibit D (the
"Excluded Assets"), and including without limitation the following Assets:
(1) a lease of the Orthodontic Offices, including all rights and
remedies (the "Lease");
(2) all books, records, machinery and equipment used or owned by the
Orthodontic Practice and all other tangible and intangible personal property at
or related to the Orthodontic Office, whether or not located at the Orthodontic
Office, or to the Orthodontic Practice conducted therein, whether or not located
at the Orthodontic Office;
(3) all Contracts (as defined below in Section 2.1);
(4) all prepaid claims, prepaid taxes and other prepaid expense items
and deferred charges, credits, advance payments, security and other deposits
made by Dr. Grove to any other person relating to Orthodontic Practice; or.
(5) Any rights of Dr. Grove pertaining to any counterclaims, set-offs
or defenses he may have with respect to any of the liabilities assumed by OMEGA;
and
(6) any other rights related in any way whatsoever to the Orthodontic
Practice or the Orthodontic Office.
free and clear of any liens, encumbrances, restrictions or claims of any kind
(other than those liens, encumbrances, restrictions and claims expressly
disclosed to OMEGA and affirmatively accepted by OMEGA prior to the Effective
Time), without any further action on the part of any holder thereof, for an
aggregate consideration (the "Consideration") of:
(i) Three Hundred Thirty Three Thousand, Five Hundred Sixty
Seven Dollars ($333,567) in cash (the "Cash Component");
(ii) Three Hundred Thirty Three Thousand, Five Hundred Sixty
Seven Dollars ($333,567) to be represented by a promissory note (the
"Purchase Note") payable to Dr. Grove (the "Note Component") in the
form attached hereto as Exhibit B; and
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(iii) Three Hundred Thirty Three Thousand, Five Hundred
Seventy ($333,570) Dollars to be represented by issuance to Dr. Grove
of shares of OMEGA common stock ("OMEGA Stock") based on a value per
share equal to 100% of the IPO Price (as defined below in Section 1.3)
(the "Stock Component"), which shall thereupon be issued to Dr. Grove,
fully paid and nonassessable.
1.2 Adjustment; Allocation.
(a) The Consideration is based on the value of the Assets as determined
by OMEGA from the information set forth in the Financial Statement.
(b) The Consideration shall be subject to adjustments at Closing for:
(i) prepaid and underpaid rent and other lease obligations, if the leases are to
be continued after Closing, as well as for other agreed normal and customary
prepaid and underpaid expenses; (ii) any accrued but unpaid salaries, bonuses
and other compensation, fringe and health insurance benefits, employment or
payroll taxes and related employment obligations and (iii) any accounts payable
of the Orthodontic Practice which have accrued prior to the Effective Time and
which remain unpaid as of such time (the "Accounts Payable") in excess of an
amount equal to one-half (1/2) of one "Average" month of gross income from the
Orthodontic Practice. As used herein, Average shall mean an average of the
Accounts Payable of the Orthodontic Practice using the last twelve months prior
to the end of the month immediately preceding the Effective Time.
(c) The adjustments to the Consideration, if any, shall be applied in
the following order of priority; first to the Cash Component, second, to the
Note Component, and the balance, if any, to the Stock Component.
(d) The parties hereby agree to allocate the Consideration among the
Assets in accordance with Section 1060 of the Code on the basis of the fair
market value of the Assets as of the Closing, which allocation shall be reduced
to writing and acknowledged by the parties hereto within thirty (30) days
following the Closing. The parties agree to file timely any information that may
be required to be filed pursuant to regulations promulgated under Section
1060(b) of the Code. The parties further agree that they shall report the
federal, state, municipal, foreign and local and other tax consequences of the
purchase and sale hereunder in a manner consistent with the allocation
determined pursuant to this section, and that they shall not take any position
inconsistent therewith in connection with any tax return, refund claim,
litigation or otherwise.
1.3 Time and Place of Closing. The closing of the transactions
contemplated hereby (herein called the "Closing") shall be held immediately
before the Effective Time at the offices of Robinson & Cole, One Boston Place,
Boston, Massachusetts 02108 on the date of the closing of OMEGA's initial public
offering of its securities (the "IPO Closing") pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act")
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<PAGE>
("IPO"), or at such other place, date or time as may be fixed by mutual
agreement of the parties; provided, however, that in no event shall the Closing
date be extended beyond six months from the date of this Agreement. On or before
the IPO Closing, OMEGA will notify the Orthodontic Practice of the projected IPO
Closing Date determined by OMEGA, in its sole discretion. As used herein "IPO
Price" shall mean the initial offering price to the public of OMEGA Stock as
reflected on the cover page of its Prospectus under the Securities Act for the
IPO.
1.5 Delivery of Records, Contracts; Transfer of Accounts. At the
Closing Dr. Grove shall deliver or cause to be delivered to OMEGA:
(a) all of the Assets, including without limitation, books, records,
leases, contracts, employment agreements, non-compete agreements, commitments
and rights relating to the Orthodontic Practice, with such rights of transfer so
as to allow OMEGA of the full benefit of the same.
(b) Evidence of malpractice insurance coverage for the current and five
(5) prior years, and if applicable, evidence of so-called "tail" insurance for
such period naming Dr. Grove (and any successor) as a co-insured or otherwise
assigning to OMEGA and its successor the full benefits thereof.
(c) any documentation necessary for the transfer of any of the Assets,
including the Bill of Sale, together with any warranty or other documentation.
Dr. Grove shall cooperate with OMEGA in the transfer of any utility accounts for
the Orthodontic Offices.
ARTICLE II. ASSUMED LIABILITIES
2.1 Contracts For purposes of this Article II the term "Contracts"
shall only mean only those leases, licenses, permits, contracts, leases,
subleases, permits, registrations, authorizations, commitments, purchase orders,
contracts to purchase materials, contracts to perform or receive services
(including work in process) and supplies, and all other agreements (whether
written or oral) that relate to the Orthodontic Practice and are set forth on
Exhibit Y attached hereto.
2.2 Transfer. At the Closing, Dr. Grove shall assign and transfer to
OMEGA all of Dr. Grove's right, title and interest in and to the Contracts and
OMEGA shall assume and agree to perform all obligations and liabilities on the
part of Dr. Grove under the Contracts accruing on and after the Effective Time;
provided that to the extent that the assignment of any Contract is not permitted
without the consent of the other party or parties to such Contract, this
Agreement shall not constitute an agreement to assign such Contract if such
consent is not given; and provided further that Dr. Grove and OMEGA, as
appropriate, shall use all reasonable efforts to obtain such consents, it being
understood that such reasonable efforts shall not include any requirement to
offer or grant financial accommodations to any third party.
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<PAGE>
2.3 Assumption of Liabilities by OMEGA. At the Closing, Dr. Grove shall
assign to OMEGA, and OMEGA shall assume and pay, perform and discharge, and
indemnify and hold Dr. Grove harmless from and against, the following
obligations and liabilities of Dr. Grove, and none other (collectively, the
"Assumed Liabilities"): all obligations and liabilities on the part of Dr. Grove
under the Contracts arising on and after the Effective Time.
2.4 No Enlargement. The assumption by OMEGA of the Assumed Liabilities
shall not enlarge any rights or remedies of any third party under any Contract
with Dr. Grove. OMEGA agrees to indemnify, defend and hold Dr. Grove and his
employees, harmless from and against any and all liability, loss, cost, damage
and/or expense (including, without limitation, reasonable attorneys' fees and
costs) pertaining to the Assumed Liabilities.
2.5 No Other Liabilities Assumed. OMEGA and Dr. Grove intend that OMEGA
shall not assume or be obligated to pay, perform or discharge any of Dr. Grove's
obligations other than the Assumed Liabilities specified in Section 2.4. Except
for the Assumed Liabilities specified in Section 2.4, OMEGA and Dr. Grove
expressly agree OMEGA is acquiring the Assets free and clear of all liens,
claims and encumbrances.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
The Representations and Warranties of Dr. Grove in the attached
Schedule 1 are hereby incorporated as if fully set forth herein. The
Representations and Warranties of OMEGA in the attached Schedule 2 are hereby
incorporated as if fully set forth herein. Capitalized words and expressions
used in this Agreement and which are defined in said Schedules 1 and 2 shall
have the same meaning as they are given therein.
ARTICLE IV. COVENANTS OF DR. GROVE
AND THE ORTHODONTIC PRACTICE
Dr. Grove hereby covenants and agrees with OMEGA as follows:
4.1 Conduct of Business. Between the date of this Agreement and the
Closing, he will do the following unless OMEGA shall otherwise consent in
writing:
(a) conduct his business only in the ordinary course, and
refrain from changing or introducing any method of management or operations
except in the ordinary course of business and consistent with prior practices;
(b) refrain from making any purchase, sale or disposition of
any asset or property other than in the ordinary course of business, from
purchasing any capital asset costing more than
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<PAGE>
$1,000 and from mortgaging, pledging, subjecting to a lien or otherwise
encumbering any of the Assets;
(c) refrain from incurring any contingent or fixed obligations
or liabilities except those that are usual and normal in the ordinary course of
business;
(d) use his best efforts to keep available his present
employees and to preserve the goodwill of all patients, suppliers, and others
having business relations with him;
(e) not commit or fail to commit any act which would cause
Dr. Grove to suffer the revocation, suspension or limitation of Dr. Grove's
license.
(f) permit OMEGA and its authorized representatives to have
full access to all his properties, assets, records, tax returns, records,
contracts and documents and furnish to OMEGA or its authorized representatives
such financial and other information with respect to his business or properties
as OMEGA may from time to time reasonably request.
4.2 Authorization from Others. Prior to the Closing, he will have
obtained all assignments, authorizations, consents and permits of others
required to permit the consummation by Dr. Grove of the transactions
contemplated by this Agreement.
4.3 Breach of Representations and Warranties. Promptly upon becoming
aware of the actual, impending or threatened occurrence of any event which would
cause or constitute a breach, or would have caused or constituted a breach had
such event occurred or been known to them prior to the date hereof, of any of
their representations and warranties contained in or referred to in this
Agreement, he shall give detailed written notice thereof to and shall use his
best efforts to prevent or promptly remedy the same.
4.4 Consummation of Agreement. He shall use his best efforts to perform
and fulfill all conditions and obligations on his or its part to be performed
and fulfilled under this Agreement, to the end that the transactions
contemplated by this Agreement shall be fully carried out.
ARTICLE V. COVENANTS OF OMEGA.
OMEGA hereby covenants and agrees with Dr. Grove as follows:
5.1 Authorization from Others. Prior to the Closing, it will have
obtained all authorizations, consents and permits of others required to permit
the consummation by it of the transactions contemplated by this Agreement.
5.2 Consummation of Agreement. It shall use its best efforts to perform
and fulfill all conditions and obligations on its part to be performed or
fulfilled under this Agreement, to the end that the transactions contemplated by
this Agreement shall be fully carried out.
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<PAGE>
ARTICLE VI. CONDITIONS TO OBLIGATIONS OF OMEGA
The obligations of OMEGA to consummate this Agreement and the
transactions contemplated hereby are subject to the condition that on or before
the Closing the actions required by this Article 6 will have been accomplished.
6.1 Representations; Warranties; Covenants. Each of the representations
and warranties of Dr. Grove contained in Schedule 1 shall be true and correct as
though made on and as of the Closing, and Dr. Grove shall have performed all of
his obligations hereunder which by the terms hereof are to be performed on or
before the Closing.
6.2 New PC. Dr. Grove shall have formed the New PC under the laws of
the State in order to commence the practice of orthodontics through the New PC.
Dr. Grove shall have furnished (i) a certificate of the State Secretary of State
as to the legal existence and professional corporation good standing of New PC;
and (ii) a copy of the resolutions adopted by the board of directors and
stockholders of New PC authorizing and approving the Management Services
Agreement and the Stock Put/Call Option and Successor Designation Agreement.
6.3 Other Agreements. Dr. Grove shall have executed and delivered, or
shall have caused the New PC to execute and deliver, to OMEGA a Management
Services Agreement and a Stock Put/Call Option and Successor Designation
Agreement, each having substantially the terms and conditions of the forms
hereof collectively attached hereto as Exhibit E .
6.4 Initial Public Offering. OMEGA shall have completed the IPO.
6.5 Absence of Certain Litigation. There shall not be any injunction,
restraining order or order of any nature issued by any court of competent
jurisdiction which directs that this Agreement or any material transaction
contemplated hereby shall not be consummated as herein provided, or suit, action
or other proceeding which in the reasonable opinion of counsel for OMEGA is
likely to result in the restraint or prohibition of the consummation of any
material transaction contemplated hereby.
6.6 Notices. Dr. Grove shall, at OMEGA's expense, notify all patients
and obligors of accounts receivable, and third party payors and others
designated by OMEGA of the Asset purchase and the other transactions
contemplated hereunder pursuant to notices substantially in the form
collectively attached hereto as Exhibit C.
6.7 Financial Condition. The financial condition of the Orthodontic
Practice shall not be materially adversely different from the Financial
Statement, as determined by OMEGA. During the period from the date of the
Financial Statement to the Closing, there shall not have
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<PAGE>
been any material adverse change in the financial condition, results of
operations, business or prospects of the Orthodontic Practice, nor any material
loss or damage to the Assets, whether or not insured, which materially affects
the ability of the Orthodontic Practice to conduct its business. Dr. Grove shall
have delivered to OMEGA a certificate, dated the date of Closing, to the
foregoing effect, and further to the effect that there are no Accounts Payable
or other liabilities as of the date of Closing that are not reflected on the
Financial Statement other than those which have been disclosed in writing to and
accepted in writing by OMEGA and which incurred since the date of the Financial
Statement in the ordinary course of business.
6.8 Due Diligence. OMEGA, acting in good faith and in its sole
discretion, shall be reasonably satisfied with the results of its "Due
Diligence" on Dr. Grove as not reflecting any data or information which
individually or in the aggregate, if previously disclosed, would have indicated
that there was a material adverse change in the business of the Orthodontic
Practice or in the condition or prospects (financial or otherwise) of the Assets
from the information provided prior to the date hereof. As used herein, Due
Diligence shall mean, without limitation, the results of the any matters
(financial or otherwise) related to, or otherwise deemed material by OMEGA,
regarding Dr. Grove, including location of the Orthodontic Offices and its
demographics, the leases, the Equipment, insurance, licensing, malpractice
issues, liabilities, compliance with laws and regulations and health surveys.
ARTICLE VII. CONDITIONS TO OBLIGATIONS OF DR. GROVE
The obligations of Dr. Grove to consummate this Agreement and the
transactions contemplated hereby are subject to the condition that on or before
the Closing the actions required by this Article 7 will have been accomplished.
7.1 Representations; Warranties; Covenants. Each of the representations
and warranties of OMEGA contained in Schedule 2 shall be true and correct as
though made on and as of the Closing and each of OMEGA shall have performed all
of its obligations hereunder which by the terms hereof are to be performed on or
before the Closing.
7.2 Intentionally Omitted.
7.3 Other Agreements. OMEGA shall have executed and delivered to Dr.
Grove and New PC a Management Services Agreement and a Stock Put/Call Option and
Successor Designation Agreement, each having substantially the terms and
conditions of the forms hereof collectively attached hereto as Exhibit E.
7.4 Initial Public Offering. OMEGA shall have completed the IPO.
7.5 Absence of Certain Litigation. There shall not be any injunction,
restraining order or order of any nature issued by any court of competent
jurisdiction which directs that this Agreement or any material transaction
contemplated hereby shall not be consummated as herein
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<PAGE>
provided, or suit, action or other proceeding which in the reasonable opinion of
counsel for Dr. Grove is likely to result in the restraint or prohibition of the
consummation of any material transaction contemplated hereby.
ARTICLE VIII. OBLIGATIONS AFTER CLOSING.
8.1 OMEGA Exceptional Practice and the Report Suggestions. On and after
the Closing, Dr. Grove agrees to cause the New PC to implement the suggestions
in the Report and the concepts of OMEGA's Exceptional Practice.
8.2 Books and Records. OMEGA shall permit Dr. Grove, his accountants
and attorneys, reasonable access to such books and records for the purpose of
preparing such tax returns of Dr. Grove as may be required after the Closing and
for other proper purposes approved by OMEGA.
8.3 License. Dr. Grove shall maintain all licenses necessary to
practice orthodontics in the State. Dr. Grove shall not commit or fail to commit
any act which would cause Dr. Grove or the New PC to suffer the revocation,
suspension or limitation of Dr. Grove's or the New PC's license.
ARTICLE IX. INDEMNIFICATION.
9.1 Indemnification By Dr. Grove. Subject to the limitations set forth
in Section 9.3, Dr. Grove agrees to defend, indemnify and hold each of OMEGA
harmless from and against any damages, liabilities, losses and expenses
(including reasonable counsel fees) of any kind or nature whatsoever which may
be sustained or suffered by OMEGA based upon a breach of any representation,
warranty or covenant made by Dr. Grove in this Agreement or in any exhibit,
certificate, schedule or financial statement delivered hereunder, or by reason
of any claim, action or proceeding asserted or instituted growing out of any
matter or thing covered by such representations, warranties or covenants. OMEGA
may at their option recover such indemnification claims by OMEGA by set-off
against amounts of principal and interest due under the Purchase Note, but shall
not be required to recover said claims in such manner and may proceed against
Dr. Grove and his transferees in liquidation at any time or times for recovery
of indemnification claims.
9.2 Indemnification By OMEGA. Subject to the limitations set forth in
Section 9.3, OMEGA, jointly and severally, each agrees to defend, indemnify and
hold Dr. Grove harmless from and against any damages, liabilities, losses and
expenses (including reasonable counsel fees) of any kind or nature whatsoever
which may be sustained or suffered by Dr. Grove based upon a breach of any
representation, warranty or covenant made by OMEGA in this Agreement or in any
exhibit, certificate, schedule or financial statement delivered hereunder, or by
reason of any claim, action or proceeding asserted or instituted growing out of
any matter or thing covered by such representations, warranties or covenants.
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9.3 Exclusions. Notwithstanding Sections 9.1 and 9.2:
(a) no indemnification shall be payable to the extent any
claim is covered by insurance; and
(b) no indemnification shall be payable with respect to claims
asserted more than five (5) years after the Closing.
9.4 Notice: Defense of Claims. Prompt written notice of each claim for
indemnification hereunder shall be given to the other party, specifying the
amount and nature of the claim, and of any matter which in the opinion of the
claimant is likely to give rise to an indemnification claim. The indemnifying
party shall have the right to participate at its own expense in the defense of
any such matter or its settlement. If, in the opinion of the indemnified party,
its financial condition or business would not be impaired thereby, such party
may authorize the indemnifying party to take over the defense of such matter so
long as such defense is expeditious. Failure to give notice of a matter which
may give rise to an indemnification claim shall not affect the rights of any
party to collect such claim from the other party or its transferees in
liquidation.
9.5 Payment of Claims; Alternative Dispute Resolution. Indemnification
claims by OMEGA may be paid or otherwise satisfied as an offset against the
Purchase Note as set forth under Section 9.1, and, in the alternative or after
any such offset, the indemnification claims (or any balance thereof) shall be
paid or otherwise satisfied by Dr. Grove, or Dr. Grove's transferees in
liquidation, within 30 days after notice thereof is given by OMEGA. In the event
Dr. Grove indicates in a writing delivered to OMEGA that he disputes the nature
or amount of the claim, in which event the dispute upon the election of any
party hereto after said 30-day period shall be referred to the American
Arbitration Association to be settled by alternative dispute resolution in
Boston, Massachusetts in accordance with the commercial alternative dispute
resolution rules of said Association, with the fees and expenses thereof to be
borne 50% by OMEGA and 50% by the New PC and Dr. Grove.
ARTICLE X. MISCELLANEOUS.
10.1 Termination.
(a) At any time prior to the Closing, this Agreement may be terminated
(i) by mutual consent of the parties with the approval of their respective board
of directors or members, (ii) by either if there has been a material
misrepresentation, breach of warranty or breach of covenant by the other party
in its representations, warranties and covenants set forth herein, (iii) by
OMEGA if the conditions stated in Article VI have not been satisfied at or prior
to the Closing, or (iv) by Dr. Grove if the conditions stated in Article VII
have not been satisfied at or prior to the Closing.
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(b) If the IPO is not successfully completed within six (6) months of
this Agreement, this Agreement may be terminated by OMEGA or Dr. Grove upon
written notice to the other party, and if so terminated, all obligations of the
parties hereunder shall terminate without any further liability of either party
to the other, except that each party shall remain obligated in respect of the
provisions of Section 10.3 and 10.7 which shall survive any such termination.
10.2 Survival of Warranties and Other Obligations. All representations,
warranties, agreements, covenants and obligations herein or in any schedule,
exhibit, certificate or financial statement delivered by either party to the
other party incident to the transactions contemplated hereby are material, shall
be deemed to have been relied upon by the other party and shall survive the
Closing regardless of any investigation and shall not merge in the performance
of any obligation by either party hereto.
10.3 Fees and Expenses. Each of the parties will bear its or his own
expenses in connection with the negotiation and the consummation of the
transactions contemplated by this Agreement.
10.4 Notices. Any notice or other communication in connection with this
Agreement shall be deemed to be delivered if in writing (or in the form of a
telegram or facsimile transmission) addressed as provided below and if either
(a) actually delivered at said address, or (b) in the case of a letter, three
business days shall have elapsed after the same shall have been deposited in the
United States mail, postage prepaid and registered or certified, return receipt
requested, or sent by reputable overnight courier:
If to Dr. Grove, to:
David T. Grove, D.M.D., M.S.
581 12th Street
Elko, Nevada 89801
If to the OMEGA, to:
Omega Orthodontics, Inc.
3621 Silver Spur Lane
Acton, California 93510
Attn: Robert Schulhof
and in any case at such other address as the addressee shall have specified by
written notice. All periods of notice shall be measured from the date of
delivery thereof.
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10.5 Entire Agreement. This Agreement (including all exhibits or
schedules appended to this Agreement and all documents delivered pursuant to the
provisions of this Agreement, all of which are hereby incorporated herein by
reference) together with the Management Services Agreement and the Stock
Put/Call Option and Successor Designation Agreement (including all exhibits and
schedules thereto), taken together, constitute the entire agreement between the
parties, and all promises, representations, understandings, warranties and
agreements with reference to the subject matter hereof and inducements to the
making of this Agreement relied upon by my party hereto, have been expressed
herein or therein.
10.6 Binding Agreement, Successors. This Agreement shall be binding
upon, and shall be enforceable by and inure to the benefit of, the parties named
herein and their respective successors and assigns; provided, however, that this
Agreement may not be assigned by any of the parties without the prior written
consent of all the other parties.
10.7 Confidentiality. As used herein, "Confidential Information" means
any information or data that a party has acquired from another party that is
confidential or not otherwise available to the public, whether oral or written,
including without limitation any analyses, computations, studies or other
documents prepared from such information or data by or for the directors,
officers, employees, agents or representatives of such party (collectively, the
"Representatives"), but excluding information or data which (i) became available
to the public other than as a result of such party's violation of this
Agreement, (ii) became available to such party from a source other than the
other party if that source was not bound by a confidentiality agreement with
such other party and such source lawfully obtained such information or data, or
(iii) is required to be disclosed by applicable law, provided that promptly
after being compelled to disclose any such information or data, the party being
so compelled shall provide prompt notice thereof to the other party so that such
other party may seek a protective order or other appropriate remedy. Each party
covenants and agrees that it and its Representatives shall keep confidential and
shall not disclose all Confidential Information, except to its Representatives
and lenders who need to know such information and agree to keep it confidential.
Each party shall be responsible for any breach of this provision by its
Representatives. In the event that the Closing does not occur, each party will
promptly return to the other all copies of such other party's Confidential
Information.
10.8 Governing Law; Severability. This Agreement shall be deemed a
contract made under the laws of the State of Delaware and, together with the
rights and obligations of the parties hereunder, shall be construed under and
governed by the laws of such state. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision hereof.
10.9 Referrals. Nothing in this Agreement shall be construed as an
offer or payment to the other party or any affiliate of the other party of any
cash or other remuneration whether directly or indirectly, overtly or covertly,
specifically for patient referrals or for recommending or arranging the
purchase, lease or order of any item or service. The Consideration to be
received upon consummation of the Merger represents the fair market value of the
Orthodontic Practice and is not in any way related to or dependent upon
referrals by and between OMEGA and Dr. Grove.
-12-
<PAGE>
10.10 Further Assurances. Following the execution of this Agreement,
Dr. Grove and OMEGA each agrees:
(a) to deliver such other instruments of title, certificates, consents,
endorsements, assignments, assumptions and other documents or instruments, in
form reasonably acceptable to the party requesting the same and its counsel, as
may be reasonably necessary to carry out and/or to comply with the terms of this
Agreement, and the transactions contemplated herein;
(b) to confer on a regular basis with the other, report on material
operational matters and promptly advise the other orally or in writing of any
change or event resulting in or which, insofar as can reasonably be foreseen
could result in, a material adverse effect on such party or which would cause or
constitute a material breach of any of the representations, warranties or
covenants of such party contained herein; and
(c) to provide the other (or its counsel) promptly with copies of all
filings made by such party with any state or federal governmental Practice in
connection with this Agreement or the transactions contemplated hereby.
10.11 Termination of Prior Agreement. OMEGA, Dr. Grove, Dr. David T.
Grove, LLC, a Nevada limited liability company (the "Orthodontic Entity"); and
Omega Orthodontics of Elko, Inc., a Delaware corporation to be formed and to
become a wholly owned subsidiary of OMEGA ("Acquisition") entered into an
Affiliation Agreement and Agreement and Plan of Merger (the "Original
Agreement") dated as of February 25, 1997. Subsequent to executing the Original
Agreement, the parties thereto desired to modify the structure of the
transaction from a merger to an asset purchase. Neither the Orthodontic Entity
or Acquisition was formed, and thus neither is a party to this Agreement. OMEGA
and Dr. Grove hereby agree that the Original Agreement is hereby terminated.
10.12 Counterparts; Section Headings; Gender. This Agreement may be
executed, accepted and delivered in any number of counterparts, but all
counterparts shall together constitute but one and the same instrument. The
underlined section headings are inserted for convenience of reference only and
are not to be construed as part of this Agreement. The use of the masculine or
neuter gender includes each of the other genders.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the date set forth above by their duly authorized
representatives.
D.M.D., M.S.
-------------------------------
David T. Grove, D.M.D., M.S.
-13-
<PAGE>
OMEGA ORTHODONTICS, INC.
By:
-----------------------------------------
Robert J. Schulhof
Its President and Chief Executive Officer
Duly Authorized
-14-
<PAGE>
Exhibit A
---------
Financial Statement
-15-
<PAGE>
Exhibit B
---------
Purchase Note
-16-
<PAGE>
Exhibit C
---------
Notices
-17-
<PAGE>
Exhibit D
---------
BILL OF SALE AND ASSIGNMENT
-18-
<PAGE>
BILL OF SALE AND ASSIGNMENT
The undersigned, Dr. David T. Grove, (the "Dr. Grove") for good and
valuable consideration the receipt of which is hereby acknowledged, hereby
sells, assigns, transfers, delivers and conveys to OMEGA Orthodontics, a
Delaware corporation, having a usual place of business in Acton, California (the
"OMEGA"), all of his right, title and interest in and to the assets of the
Orthodontic Practice operated by Dr. Grove at 581 12th Street, Elko, Nevada,
wheresoever situated and whether or not specifically referred to herein (such
assets and rights of Dr. Grove are collectively referred to as the "Assets"),
excepting therefrom the assets listed on Schedule I (the "Excluded Assets"),
attached hereto and made a part hereof, and including without limitation, the
following Assets:
(a) a lease at 581 12th Street, Elko, Nevada, including all rights and
remedies (the "Orthodontic Offices");
(b) all machinery and equipment ("Equipment"), books and records used
or owned by the Orthodontic Practice and all other tangible and intangible
personal property at or related to the Orthodontic Office, whether or not
located at the Orthodontic Office, or to the Orthodontic Practice conducted
therein, whether or not located at the Orthodontic Office;
(c) all contracts, licenses, permits, registrations, authorizations,
leases, subleases, commitments, purchase orders, contracts to purchase
materials, contracts to perform or receive services (including work in process)
and supplies, and all other agreements (whether written or oral) relating to the
Orthodontic Practice listed on the attached Exhibit Y (the "Contracts");
(d) all prepaid claims, prepaid taxes and other prepaid expense items
and deferred charges, credits, advance payments, security and other deposits
made by Dr. Grove to any other person relating to Orthodontic Practice; or.
(e) Any rights of Dr. Grove pertaining to any counterclaims, set-offs
or defenses he may have with respect to any of the liabilities assumed by OMEGA;
and
(f) any other rights related in any way whatsoever to the Orthodontic
Practice or the Orthodontic Office.
Dr. Grove represents that he has good and marketable title in fee
simple to all of the Assets, free of liens and encumbrances. All of the Assets
are in good repair, have been well maintained, substantially conform with all
applicable ordinances, regulations and zoning or other laws. The Equipment is in
good working order.
OMEGA assumes and agrees to pay, perform and discharge, and indemnify
and hold Dr. Grove harmless from and against, the following obligations and
liabilities of Dr. Grove, and none
-19-
<PAGE>
other: (a) obligations and liabilities under the Lease and the Contracts arising
on and after the Effective Time and Any and all claims, liabilities, losses,
costs, damages or expenses (including reasonable attorneys' fees and expenses)
resulting from or arising out of ownership of the Assets or the operation and
maintenance of the Orthodontic Practice, or caused by or occurring upon the
Assets, on and after the Effective Time (the "Assumed Liabilities").
The assumption by OMEGA of the Assumed Liabilities shall not enlarge
any rights or remedies of any third party under any Contract with Dr. Grove.
OMEGA agrees to indemnify, defend and hold Dr. Grove and his employees, harmless
from and against any and all liability, loss, cost, damage and/or expense
(including, without limitation, reasonable attorneys' fees and costs) pertaining
to the Assumed Liabilities.
OMEGA and Dr. Grove intend that OMEGA shall not assume or be obligated
to pay, perform or discharge any of Dr. Grove's obligations other than the
Assumed Liabilities. Except for the Assumed Liabilities, OMEGA and Dr. Grove
expressly agree OMEGA is acquiring the Assets free and clear of all liens,
claims and encumbrances.
This Bill of Sale and Assignment is executed and delivered in
connection with an Amended and Restated Affiliation Agreement entered into by
and between the Dr. Grove and OMEGA dated June __, 1997.
WITNESS the execution under seal this _____ day of ____, 1997.
-20-
<PAGE>
Schedule I
----------
Excluded Assets
-21-
<PAGE>
Exhibit Y
---------
List of Contracts
-22-
<PAGE>
Exhibit E
---------
Draft Management Services Agreement and
Stock Put/Call Option and Successor Designation Agreement
-23-
<PAGE>
Schedule 1
----------
Representations and Warranties of
Dr. Grove to OMEGA
Dr. Grove hereby represents and warrants to OMEGA as follows:
1. The Orthodontic Practice. The Assets of Orthodontic Practice are
owned 100% by Dr. Grove. Dr. Grove has the full power to conduct business as
currently conducted by the Orthodontic Practice and to own and lease the
property he purports to own.
2. Authorization of Transaction. All necessary action has been taken by
Dr. Grove to authorize the execution of the Agreement by Dr. Grove, and the
delivery and performance of this Agreement and the transactions contemplated
hereby, and the Agreement is the valid and binding obligation of Dr. Grove,
enforceable against Dr. Grove in accordance with its terms.
3. Present Compliance with Obligations and Laws. Except as disclosed on
Exhibit X attached to this Schedule, there is not: (a) a default in the
performance of any obligation, agreement or condition of any debt instrument
from Dr. Grove which (with or without the passage of time or the giving of
notice) affords to any person the right to accelerate any material indebtedness
or terminate any right; (b) a default of or breach of (with or without the
passage of time or the giving of notice) any other contract to which Dr. Grove
is a party or by which he assets are bound; or (d) any violation of any law,
regulation, administrative order or judicial order applicable to Dr. Grove, or
his business or assets.
4. No Conflict of Transaction With Obligations and Laws.
(a) Neither the execution, delivery and performance of this Agreement,
nor the performance of the transactions contemplated hereby, will: (i) conflict
with or constitute (with or without the passage of time or the giving of notice)
a breach of, or default under, any debt instrument to which Dr. Grove is a
party, or give any person the right to accelerate any indebtedness or terminate
any right; (ii) constitute (with or without the passage of time or giving of
notice) a default under or breach of any other agreement, instrument or
obligation to which Dr. Grove is a party or by which his assets are bound; or
(iv) result in a violation of any law, regulation, administrative order or
judicial order applicable to Dr. Grove, his business or assets.
(b) Except as disclosed on the attached Exhibit X to this Schedule, the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby by Dr. Grove do not require the consent, waiver, approval,
authorization, exemption of or giving of notice to any governmental authority.
-24-
<PAGE>
5. Investigations and Licenses.
(a) Dr. Grove has all necessary licenses to practice orthodontics in
the State.
(b) Dr. Grove is not subject to any investigation, whether threatened,
current or pending, under which Dr. Grove may be required to forfeit or suffer
the revocation, suspension or limitation of Dr. Grove's license to practice
orthodontics and Dr. Grove is not subject to any investigation, whether
threatened, current or pending by a commercial third-party payor.
6. Financial Statement. Attached as Exhibit A to the Agreement is the
Financial Statement of the Orthodontic Practice. To the best knowledge of Dr.
Grove, the Financial Statement is complete and correct and fairly presents in
all material respects the financial position of the Orthodontic Practice as at
the date of such statements and the results of its operations for the period
then ended, in accordance with generally accepted accounting principles
consistently applied throughout the periods covered thereby for the periods
covered thereby.
7. Property; Liens; Condition.
(a) Except as set forth on Exhibit X to this Schedule, Dr. Grove has
good and marketable title in fee simple to all of the Assets, including without
limitation, all real and personal property, machinery and equipment used or
owned by the Orthodontic Practice (the "Equipment"), free of liens and
encumbrances (the "Property"). All the Property owned or leased by Dr. Grove is
in good repair, has been well maintained, substantially conforms with all
applicable ordinances, regulations and zoning or other laws. The Equipment is in
good working order.
(b) No other Practice or person owns any of the assets necessary for
the operation of the Orthodontic Practice. The Orthodontic Practice does not
operate any of its practice through any other entities or persons.
9. Payment of Taxes. Dr. Grove has filed all federal, state and local
income, excise or franchise tax returns, real estate and personal property tax
returns, sales and use tax returns and other tax returns required to be filed
and has paid all taxes owing except taxes which have not yet accrued or
otherwise become due for which adequate provision has been made in the Financial
Statement. All transfer, excise or other taxes payable by reason of the Asset
purchased pursuant to the Affiliation Agreement shall be paid or provided for by
Dr. Grove after the Closing out of the Consideration to be received upon
consummation of the Affiliation Agreement.
10. Absence of Undisclosed Liabilities and Changes.
(a) As of the date of the Financial Statement, Dr. Grove had no
liabilities of any nature, whether accrued, absolute, contingent or otherwise
(including without limitation liabilities as guarantor or otherwise with respect
to obligations of others, or liabilities for taxes due or then accrued or to
become due) relating to the Orthodontic Practice, except (i) liabilities stated
or adequately reserved against on the Financial Statement, (ii) liabilities not
in excess of $5,000 arising in the ordinary course of business since the date of
the Financial Statement, and (iii)
-25-
<PAGE>
liabilities disclosed in Exhibit X to this Schedule. There is no fact which
materially adversely affects, or may in the future (so far as can now be
reasonably foreseen) materially adversely affect, the business, properties,
operations or condition of the Orthodontic Practice which has not been
specifically disclosed herein or in Exhibit X to this Schedule.
(b) Except as disclosed in Exhibit X to this Schedule, since the date
of the Financial Statement there has not been:
(i) any change in the financial condition, properties, assets,
liabilities, business or operations of Dr. Grove or the Orthodontic Practice,
which change by itself or in conjunction with all other such changes, whether or
not arising in the ordinary course of business, has been materially adverse with
respect to Dr. Grove or the Orthodontic Practice;
(ii) any mortgage, encumbrance or lien placed on any of the
Property, or the property subject to any lease, or which remains in existence on
the date hereof or at the time of Closing; or
(iii) any obligation or liability incurred by Dr. Grove
relating to the Orthodontic Practice other than obligations and liabilities
incurred in the ordinary course of business and disclosed on Exhibit X attached
to this Schedule.
11. Litigation. Except for matters described on Exhibit X to this
Schedule, there is no action, suit, claim, proceeding or investigation pending
or, to the knowledge of Dr. Grove, threatened against the Orthodontic Practice
or Dr. Grove, at law or in equity, or before or by any Federal, state, municipal
or other governmental department, commission, board, bureau, agency or
instrumentality or governmental inquiry pending or, to the knowledge of Dr.
Grove, threatened against or involving Dr. Grove or the Orthodontic Practice,
and there is no basis for any of the foregoing, and there are no outstanding
court orders, court decrees, or court stipulations to which the Orthodontic
Practice or Dr. Grove is a party which question this Agreement or affect the
transactions contemplated hereby, or which will result in any materially adverse
change in the business, properties, operations, prospects, assets or in the
condition, financial or otherwise, of Dr. Grove or the Orthodontic Practice.
12. Insurance. Dr. Grove has possessed adequate occurrence Professional
liability coverage for the five (5) years prior to the date of this Agreement
protecting the Orthodontic Practice and Dr. Grove from any professional
malpractice liability that might arise because of the Orthodontic Practice's or
Dr. Grove's practice activities over the preceding five (5) years. Prior to the
Closing, the New PC shall have obtained and shall continue to maintain, at its
cost, Occurrence Medical Malpractice Liability Insurance for Dr. Grove and the
New PC. The Orthodontic Practice possesses adequate insurance coverage for its
Property.
-26-
<PAGE>
EXHIBIT X
---------
Exceptions to Representations and
Warranties of Dr. Grove and
Orthodontic Practice to OMEGA
-27-
<PAGE>
Schedule 2
----------
Representations and Warranties of
OMEGA to Dr. Grove
OMEGA hereby represents and warrants to Dr. Grove as follows:
1. Organization of OMEGA. That it is a corporation duly organized,
validly existing and in good standing under the laws of Delaware with full
corporate power to own or lease its properties and to conduct its business in
the manner and in the places where such properties are owned or leased or such
business is conducted by it.
2. Authorization of Transaction. All necessary action, corporate or
otherwise, has been taken by it to authorize the execution, delivery and
performance of this Agreement, and this Agreement is a valid and binding
obligation of it enforceable against it in accordance with its terms, subject to
laws of general application affecting creditor's rights generally.
3. Litigation. There is no litigation pending or, to its knowledge,
threatened against it which would prevent or hinder the consummation of the
transactions contemplated by this Agreement.
-28-
Exhibit 4.6
-----------
PROMISSORY NOTE
Acton, California
$ , 1997
FOR VALUE RECEIVED, the undersigned, Omega Orthodontics, Inc., a
Delaware corporation having offices at 3621 Silver Spur Lane, Acton, California
(the "Maker"), promises to pay to the order of ___________________, an
individual residing at __________________, ____________, ____________ _____ (the
"Payee") on June 30, 1998, subject to mandatory prepayment as provided below,
the principal sum of _____________________ Dollars ($_______.00), or, if less,
the aggregate unpaid principal amount of the advances shown on the schedule
attached hereto (and any continuation thereof), representing the aggregate
principal amount of advances made by the Payee to the Maker.
The unpaid principal amount of this promissory note (this "Note") from
time to time outstanding shall bear interest at a rate equal to sixteen percent
(16%), which the Maker represents to be a lawful and commercially reasonable
rate, payable quarterly on September 30, 1997, December 31, 1997, March 31, 1998
and June 30, 1998. Interest hereunder shall accrue in arrears and shall be
computed on a 360-day basis (i.e., interest for each day during which any of the
principal balance is outstanding shall be computed at the interest rate stated
above divided by 360.) Payments shall be applied, in order, to costs of
collection, late charges, interest and then principal, and all payments of
principal of and interest on this Note shall be payable in lawful currency of
the United States of America. All such payments shall be made by the Maker to an
account established by the Payee at such bank or other financial institution
specified in writing by the Payee from time to time, and shall be recorded on
the grid attached hereto by the holder hereof.
1. Mandatory Prepayment. The Maker intends to use the proceeds of the sale of
the Note to pay for a portion of the legal, accounting and printing expenses the
Maker expects to incur in preparing and consummating an initial public offering
("IPO") of Common Stock and Redeemable Common Stock Purchase Warrants of the
Maker. Within five days after consummation of the IPO, if it is consummated, the
Maker shall prepay the entire principal balance of this Note, together with any
accrued but unpaid interest thereon.
2. Acceleration/Events of Default. At the option of the Payee, the entire unpaid
principal balance hereunder with interest then outstanding shall become
immediately due and payable upon the occurrence of any of the following events
of default (hereinafter "Events of Default") which are not cured in accordance
with the provisions of Section 3: (i) failure to pay principal when due on this
Note; (ii) failure to pay any interest on this Note 30 days after payment is
due; (iii) failure to perform any other covenant of the Maker under this Note,
and such failure continues for 60 days after written notice by the holder;
<PAGE>
and (iv) the making of an assignment for the benefit of creditors, trust
mortgage or composition with creditors or other arrangement of similar import
by, or the commencement of any proceedings under any bankruptcy or insolvency
law, now or hereafter enacted by or against, the Maker, or any endorser.
If an Event of Default shall occur and be continuing, other than an
event of bankruptcy or insolvency of the Maker, the holder of the Note may
accelerate maturity upon 10 business days after notice of such acceleration is
received by the Maker. If an Event of Default shall occur and be continuing
which is a bankruptcy or insolvency of the Maker, the maturity of the Note shall
immediately accelerate without any act on the part of any holder. After
acceleration upon the Event of Default, but before a judgment or decree based on
acceleration, the holder of the Note may rescind and annul such acceleration if,
among other things, all Events of Default, other than the non-payment of
accelerated principal, have been cured or waived as provided in this Note.
3. Maker's Right to Cure. Notwithstanding the foregoing, the Maker shall at
minimum have the right: (i) to cure monetary defaults hereunder or under any
instrument, document or undertaking given or entered in connection herewith
within 15 calendar days after the Event of Default; and (ii) to cure
non-monetary defaults hereunder or under any such instrument, document or
undertaking within 30 calendar days after the Event of Default, in which event,
this Note and the loan evidenced hereby shall be reinstated. The time periods
provided herein for cure shall be concurrent with and not consecutive to any
other grace periods which may be provided in or with respect to any obligation
having the benefit of this provision.
4. Voluntary Prepayment. The Maker may prepay this Note in whole or in part at
any time without penalty or premium, upon written notice to the Payee.
5. Expenses. The Maker agrees to pay all expenses, including reasonable
attorney's fees, which the Payee may incur in effecting collection of this Note,
upon default or at maturity.
6. Delays. The Payee shall not, by any act, delay, omission or otherwise be
deemed to have waived any of his rights or remedies hereunder unless such waiver
be in writing and signed by the Payee. A delay, omission or waiver on one
occasion shall not be deemed a waiver or bar on any future occasion of the same
or any other right.
7. Certain Waivers. The Maker hereby (i) waives presentment, demand, notice,
protest and all other demands and notices in connection with the delivery,
acceptance, performance, default or enforcement of this Note, except as
specifically provided herein with respect to notices of non-monetary default;
(ii) waives all suretyship defenses; and (iii) assents to any extension or
postponement of the time of payment or any other indulgence or forbearance and
to the addition or release of any other party primarily or secondarily liable.
2
<PAGE>
8. Remedies. The Maker hereby acknowledges and agrees that no remedy of the
Payee under this Note is intended to be exclusive of any other remedy, and each
and every remedy given hereunder or now or hereafter existing at law or in
equity by statute or other provision of law may be exercised in any order or
manner without waiving rights and may be exercised cumulatively.
9. Notices. Notices to the Maker shall be deemed given when delivered in hand to
the Maker, or one (1) day after being sent by receipted commercial, overnight
courier or five (5) business days after being mailed by certified mail, postage
prepaid, return receipt requested, at the address described above or at such
other address of which the Maker shall have notified the Payee in writing.
10. Governing Law. This Note shall be deemed to be a California instrument, and
all rights and obligations hereunder shall be governed by the laws of the State
of California.
This instrument has been duly executed by an officer of the Maker duly
authorized, and shall take effect upon the date and year first above written.
WITNESS: OMEGA ORTHODONTICS, INC.
By:
- ---------------------------- -----------------------------
Name: Robert J. Schulhof
Title: President
3
<PAGE>
GRID
Advances made by _____________________ to Omega Orthodontics, Inc., and
payments of principal and interest of such advances.
- --------------------------------------------------------------------------------
Amount of
Amount of Principal Outstanding Notation Made
Date Advance Payment Principal By
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4
Exhibit 10.17
-------------
NON-NEGOTIABLE PROMISSORY NOTE
$88,947.00 Acton, California
_____________, 1997
FOR VALUE RECEIVED, Omega Orthodontics, Inc., a Delaware corporation
("Omega"), promises to pay to Dr. Scott E. Feldman ("Dr. Feldman") at 6325
Topanga Canyon Boulevard, No. 424, Woodland Hills, California 91367 or other
location specified by Dr. Feldman in writing, Eighty-Eight Thousand Nine Hundred
Forty Seven Dollars ($88,947.00) together with interest on any and all principal
amounts, such interest to be at the rate of 8.5% per annum and payable monthly
on the first day of each month, beginning within the first month following the
date of this Note.
1. Payments. Payments of principal under this Note shall be due and
payable in 48 equal monthly installments, beginning on the first day of the 13th
month following the date of this Note. In any event, the balance of principal
remaining unpaid shall be due and payable on the first day of the 60th month
following the date of this Note.
Payments of interest on the outstanding principal balance of this Note
shall be due and payable on the first day of each of the first 60 months
following the date of this Note. Interest shall accrue in arrears and shall be
computed on the basis of a 360-day year and a 30-day month.
Both principal and interest are payable in lawful money of the United
States of America.
2. Acceleration/Events of Default. At the option of Dr. Feldman, the
entire unpaid principal balance hereunder with interest then outstanding shall
become immediately due and payable upon the occurrence of any of the following
events of default (hereinafter "Events of Default") which are not cured in
accordance with the provisions of Section 3: (i) failure to pay principal when
due on this Note; (ii) failure to pay any interest on this Note 30 days after
payment is due; (iii) failure to perform any other covenant of Omega under this
Note, and such failure continues for 60 days after written notice by the holder;
and (iv) the making of an assignment for the benefit of creditors, trust
mortgage or composition with creditors or other arrangement of similar import by
or the commencement of any proceedings under any bankruptcy or
insolvency law, now or hereafter enacted, by or against, Omega or any endorser.
<PAGE>
3. Omega's Right to Cure. Notwithstanding the foregoing, Omega shall at
minimum have the right: (i) to cure monetary defaults hereunder or under any
instrument, document or undertaking given or entered into in connection herewith
within 15 calendar days after the Event of Default; and (ii) to cure
non-monetary defaults hereunder or under any such instrument, document or
undertaking within 30 calendar days after the Event of Default, in which event,
this Note and the loan evidenced hereby shall be reinstated. The time periods
provided herein for cure shall be concurrent with and not consecutive to any
other grace periods which may be provided in or with respect to any obligation
having the benefit of this provision.
4. Voluntary Prepayment. Omega may prepay this Note in whole or in part
at any time without penalty or premium, upon written notice to Dr. Feldman.
5. Expenses. Omega agrees to pay all expenses, including reasonable
attorney's fees, which Dr. Feldman may incur in effecting collection of this
Note upon default or at maturity.
6. Delays. Dr. Feldman shall not, by any act, delay, omission or
otherwise, be deemed to have waived any of his rights or remedies hereunder
unless such waiver be in writing and signed by Dr. Feldman. A delay, omission or
waiver on one occasion shall not be deemed a waiver or bar on any future
occasion of the same or any other right.
7. Certain Waivers. Omega hereby (i) waives presentment, demand,
notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note, except
as specifically provided herein with respect to notices of non-monetary default;
(ii) waives all suretyship defenses; and (iii) assents to any extension or
postponement of the time of payment or any other indulgence or forbearance and
to the addition or release of any other party primarily or secondarily liable.
8. Remedies. Omega hereby acknowledges and agrees that no remedy of Dr.
Feldman under this Note is intended to be exclusive of any other remedy, and
each and every remedy given hereunder now or hereafter existing at law or in
equity by statute or other provision of law may be exercised in any order or
manner without waiving rights and may be exercised cumulatively.
-2-
<PAGE>
9. Notices. Notices to Omega shall be deemed given when delivered in
hand to Omega, or one (1) day after being sent by receipted commercial,
overnight courier or five (5) days after being mailed by certified mail, postage
prepaid, return receipt requested, to Omega at 3621 Silver Spur Lane, Acton,
California 93510 or other address of which Omega shall have notified Dr. Feldman
in writing.
10. Governing Law. This Note shall be deemed to be a California
instrument, and all rights and obligations hereunder shall be governed by the
laws of the State of California.
-3-
<PAGE>
This instrument has been duly executed by an officer of Omega duly
authorized, and shall take effect upon the date and year first above written.
WITNESS: OMEGA ORTHODONTICS, INC.
By:
- -------------------------- ------------------------
Robert J. Schulhof,
President
-4-
Exhibit 11
Omega Orthodontics, Inc.
Statement RE Computation of Pro Forma Net Income (Loss) per Share
<TABLE>
<CAPTION>
Year ended Three months ended
December 31, March 31,
1996 1997
----------- -------------------
<S> <C> <C>
Common shares issued upon incorporation 1,050,000 1,050,000
Common shares and common share equivalents
issued within 12 months of initial public
offering filing at less than initial public
offering price per share 635,000 635,000
Common shares assumed issued in connection with
Affiliate acquisitions 319,055 319,055
Common shares assumed issued in connection with
repayment of $925,000 of loans payable 154,167 154,167
---------- ----------
Shares used to compute pro forma net income
(loss) per share 2,158,222 2,158,222
========== ==========
Pro forma net income (loss) to common stockholders $ 12,708 $ (66,250)
========== ===========
Pro forma net income (loss) per share $0.01 $ (0.03)
========== ===========
</TABLE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts", and to the
use of our reports dated February 10, 1997, with respect to the financial
statements of David T. Grove, D.M.D. and Robert R. Schmisseur, D.D.S., M.S.,
P.C., included in Amendment No. 1 to the Registration Statement (Form SB-2,
File No. 333-27179) and related Prospectus of Omega Orthodontics, Inc.
Ernst & Young LLP
Boston, Massachusetts
July 8, 1997
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts", and to the
use of our reports dated February 28, 1997, with respect to the financial
statements of Michael G. Churosh, D.D.S., M.S., Ltd. and Theodore G. Saydyk,
Jr., D.D.S., M.S., P.C., included in Amendment No. 1 to the Registration
Statement (Form SB-2, File No. 333-27179) and related Prospectus of Omega
Orthodontics, Inc.
Ernst & Young LLP
Boston, Massachusetts
July 8, 1997
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts", and to the
use of our reports dated February 25, 1997, with respect to the financial
statements of Jeff S. Zapalac, D.D.S., M.S., Inc., included in Amendment No. 1
to the Registration Statement (Form SB-2, File No. 333-27179) and related
Prospectus of Omega Orthodontics, Inc.
Ernst & Young LLP
Boston, Massachusetts
July 8, 1997
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts", and to the
use of our reports dated March 7, 1997, with respect to the financial
statements of Clark E. Schneekluth, D.D.S., M.D., Inc. and Dr. Scott E. Feldman
D.D.S., M.S., included in Amendment No. 1 to the Registration Statement (Form
SB-2, File No. 333-27179) and related Prospectus of Omega Orthodontics, Inc.
Ernst & Young LLP
Boston, Massachusetts
July 8, 1997
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts", and to the
use of our report dated March 7, 1997, except for Note 8, as to which the date
is May 12, 1997, with respect to the financial statements of Omega Orthodontics,
Inc. included in Amendment No. 1 to the Registration Statement (Form SB-2, File
No. 333-27179) and related Prospectus of Omega Orthodontics, Inc.
Ernst & Young LLP
Boston, Massachusetts
July 8, 1997
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