PROSPECTUS
Filed Pursuant to Rule 424(b)(4)
File No. 333-27179
OMEGA ORTHODONTICS, INC.
1,800,000 Shares of Common Stock and
1,800,000 Redeemable Common Stock Purchase Warrants
(as units, each consisting of one share of Common Stock and one
Redeemable Common Stock Purchase Warrant)
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") initially as units, each consisting of one Share and one Warrant, 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 $6.60 per share, at any time during the
period commencing April 1, 1998 and terminating September 30, 2002. The Warrant
exercise price is subject to adjustment under certain circumstances. Commencing
April 1, 1999, 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 $12.00 per share 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."
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. 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." The Shares and the Warrants have been
approved for quotation on the Nasdaq Small Cap Market under the symbols "ORTH"
and "ORTHW," respectively.
-----------------------
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>
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Price to Underwriting Proceeds to
Public Discount (1) Company (2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit (comprised of) ......... $6.10 $0.61 $5.49
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Per Share .................... $6.00 $0.60 $5.40
- -------------------------------------------------------------------------------
Per Warrant ................. $0.10 $0.01 $0.09
- -------------------------------------------------------------------------------
Total (3) ....................... $10,980,000 $1,098,000 $9,882,000
- -------------------------------------------------------------------------------
</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 $1,170,000 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 $12,627,000,
$1,262,700 and $11,364,300, 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
October 6, 1997.
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is October 1, 1997
<PAGE>
TO NEW JERSEY RESIDENTS:
The Common Stock and Redeemable Common Stock Purchase Warrants of the
Company may only be offered and sold to persons who come within any of the
following categories, or who the Company reasonably believes comes within any
of the following categories, at the time of the sale of the Securities to that
person:
(1) Any bank as defined in section 3(a)(2) of the Securities Act of 1933,
as amended (the "Act"), or any savings and loan association or other
institution as defined in section 3(a)(5)(A) of the Act whether acting in its
individual or fiduciary capacity; any broker or dealer registered pursuant to
section 15 of the Securities Exchange Act of 1934, as amended; any insurance
company as defined in section 2(13) of the Act; any investment company
registered under the Investment Company Act of 1940 or a business development
company as defined in section 2(a)(48) of that act; Small Business Investment
Company licensed by the U.S. Small Business Administration under section 301(c)
or (d) of the Small Business Investment Act of 1958; any plan established and
maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivisions for the benefit of its
employees, if such plan has total assets in excess of $5,000,000; employee
benefit plan within the meaning of the Employee Retirement Income Security Act
of 1974 if the investment decision is made by a plan fiduciary, as defined in
section 3(21) of such act, which is either a bank, savings and loan
association, insurance company, or registered investment adviser, or if the
employee benefit plan has total assets in excess of $5,000,000 or, if a self-
directed plan, with investment decisions made solely by persons that are
accredited investors;
(2) Any private business development company as defined in section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer of
the securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with that person's spouse
in excess of $300,000 in each of those years and has a reasonable expectation
of reaching the same income level in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Rule 230.506(b)(2)(ii); and
(8) Any entity in which all of the equity owners are accredited investors.
TO CALIFORNIA RESIDENTS ONLY:
The Common Stock and Redeemable Common Stock Purchase Warrants of the
Company may only be offered and sold to (i) persons with a net worth,
individually or jointly with his or her spouse, of at least $250,000 (exclusive
of home, home furnishings and automobiles) and an annual income of at least
$65,000 or (ii) persons with a net worth, individually or jointly with his or
her spouse, of at least $500,000 (exclusive of home, home furnishings and
automobiles).
The Common Stock and Redeemable Common Stock Purchase Warrants offered
hereby have been registered by a limited qualification and cannot be offered for
resale or resold in the State of California unless registered for sale.
Furthermore, the exemption afforded by Section 25104(h) of the California
Securities Law shall be withheld by the Commissioner of Corporations and the
Company is not permitted to apply for the exemption afforded by 25101(b) until
after 90 days from the date the Securities and Exchange Commission declares the
offering of the Common Stock and Redeemable Common Stock Purchase Warrants
effective.
--------------------------
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
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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.
4
<PAGE>
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 April 1, 1998 until September 30, 2002, one share of
Common Stock at an initial exercise price of $6.60 per share, subject to
adjustment. Commencing April 1, 1999, 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 $12.00 per share, 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) ............ 3,950,314 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."
Nasdaq Small Cap Market Symbols:
Common Stock ..................... "ORTH"
Warrants ........................ "ORTHW"
</TABLE>
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(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 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 465,314 shares of Common Stock which the
Company has agreed to issue to six Affiliated Orthodontists as partial
consideration for the Acquisitions (including 129,721 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."
5
<PAGE>
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.
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Pro Forma (1)
August 30, 1996 Pro Forma (1) Six Months Six Months
(Inception) to Year Ended Ended Ended
December 31, 1996 December 31, 1996 June 30, 1997 June 30, 1997
----------------- ----------------- ------------- -------------
Statement of Operations Data:
<S> <C> <C> <C> <C>
Practice revenue ...................... $ -- $4,615,677 $ -- $ 2,174,276
Orthodontists' compensation .......... -- 1,281,735 -- 581,101
--------- ----------- ----------- -----------
Net management revenue ................ -- 3,333,942 -- 1,593,175
Direct practice expenses ............. -- 2,588,761 -- 1,311,745
--------- ----------- ----------- -----------
Income (loss) from operations before
management expenses ................ -- 745,181 -- 281,430
Management expenses ................... 248,018 657,655(2) 3,298,215 3,197,480(2)
--------- ----------- ----------- -----------
Income (loss) from operations ....... (248,018) 87,526 (3,298,215) (2,916,050)
Other income (expense) ................ 15,906 8,444 (34,250) 15,734
--------- ----------- ----------- -----------
Income (loss) before income taxes .... (232,112) 95,970 (3,332,465) (2,900,316)
Provision for income taxes ............. -- 75,245 -- --
--------- ----------- ----------- -----------
Net income (loss) ................... $(232,112) $ 20,725 $(3,332,465) $(2,900,316)
========= =========== =========== ===========
Pro forma net income (loss) per
share (3) ............................ $ .01 $ (1.24)
=========== ===========
Shares used to compute pro forma
net income (loss) per share (3) .... 2,331,147 2,331,147
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------
Pro Forma
Actual Pro Forma (1) As Adjusted (1)(4)
------------ ------------ ------------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) .............................. $(1,964,249) $(4,520,336) $ 3,862,264
Total assets ............................................. 942,275 7,511,066 12,696,869
Total liabilities ....................................... 2,469,502 6,246,409 3,049,612
Stockholders' equity (deficit) ........................... (1,527,227) 1,264,657 9,647,257
</TABLE>
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(1) The pro forma statement of operations data for the fiscal year ended
December 31, 1996 and the six months ended June 30, 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 June 30,
1997 and certain subsequent events had occurred prior to June 30, 1997.
See Note 5 to the Unaudited Pro Forma Balance Sheet Adjustments.
(2) Includes $128,945 and $65,724 of goodwill amortization for the year ended
December 31, 1996 and the six months ended June 30, 1997, respectively. See
Note 6 to the Unaudited Pro Forma Statement of Operations Adjustments. The
pro forma statement of operations data for the six months ended June 30,
1997 includes the non-recurring consulting expense of $2,867,400 that the
Company recognized in April 1997. See Note 5 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 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 June 30, 1997, Omega had an
accumulated deficit of $3,564,577, a stockholders' deficit of $1,527,227 and a
working capital deficiency of $1,964,249. For the period from August 30, 1996
(inception) through July 31, 1997, Omega generated aggregate consulting revenues
of $98,256. The Company incurred an operating loss in the six month period ended
June 30, 1997 of $3,332,465, in part due to a non-recurring charge for
compensation paid to certain consultants of $2,867,400, 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
"--Operating Loss in Six Month Period Ended June 30, 1997" and "Management's
Plan of Operation."
Operating Loss in Six Month Period Ended June 30, 1997. The Company
reported a significant loss from operations for the six month period ended 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 recognized a non-recurring
consulting expense reflecting delivery of such shares and these payment
obligations in April 1997 of approximately $2.9 million. This expense is
comprised of approximately $2.1 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 $142,500 to two 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
$85,000 and $25,000 of the Company's Interim Notes held by Dr. Glovsky and Dr.
Grove, respectively, and (c) pay $333,567 to Dr. Grove, as partial
consideration for acquiring certain assets of his practice in connection with
the Acquisitions. The Company has issued Interim Notes in the aggregate
principal amount of $210,000 and is authorized to issue up to an additional
$40,000 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 61.8% 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 $85,000 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 36.3% 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 $5.09 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 3,950,314 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
2,150,314 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 2,150,314 of
such shares of Common Stock may be sold in accordance with Rule 144. The Company
and the Representative have agreed that they will not consent to such a
transaction involving shares of Common Stock obtained in connection with the
Bridge Notes prior to 12 months following the effective date of the Registration
Statement.
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 $9.90 per share and $0.165 per Warrant. 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 $9.90 per share. 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 April 1, 1998, holders of the Warrants may exercise their right to
acquire Common Stock and pay an exercise price of $6.60 per share, subject to
adjustment upon the occurrence of certain dilutive events, until September 30,
2002, after which date any unexercised Warrants will expire and have no further
value. 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
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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 April 1,
1999, 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
$12.00 per share 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 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."
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
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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 net tangible assets of $4,000,000; that the minimum
bid price for the listed securities be $4.00 per share; that the minimum market
value of the public float (the shares held by non-insiders) be at least
$5,000,000; 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 net tangible assets of at least $2,000,000; 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. 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 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.
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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 $9,815,500
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)................................ $1,085,000 13.0%
Payments due upon consummation of the
Acquisitions (3)................................. 2,111,800 25.2
Funds available for additional affiliations (4)... 4,840,000 57.7
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 Company has obtained
agreements from the holders of Bridge Notes in the aggregate principal
amount of $730,000 to extend the maturity date thereof to the earlier of the
closing of this Offering or October 31, 1997. The Bridge Notes provide for a
15 calendar day "cure" period for any failure to pay amounts due under the
Bridge Notes. As noted in the table above, the Company intends to repay all
of the Bridge Notes with the proceeds of this Offering. 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 and in August 1997 increased the authorization to
$250,000. As of the date of this Prospectus, Interim Notes in the aggregate
principal amount of $210,000 have been issued. 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 $110,000 in payment of the Interim Notes that
they purchased from the Company. See "Certain Transactions." The Company is
authorized to issue up to an additional $40,000 of Interim Notes, and
15
<PAGE>
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 two sole
proprietorships where it will acquire certain assets of such
proprietorships). 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 $142,500, (iii) 465,314 shares of
Common Stock of the Company and (iv) an option to acquire 83,333 shares of
Common Stock 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 $333,567 of the net proceeds of this
Offering and 129,721 shares of Common Stock of the Company. 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 approximately $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,
16
<PAGE>
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.
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 June 30, 1997 the capitalization of
the Company (i) on an actual basis, (ii) on a pro forma basis to reflect (a)
the issuance of Interim Notes in the aggregate principal amount of $160,000
since June 30, 1997 and (b) 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>
June 30, 1997
-----------------------------------------------------
Actual Pro Forma Pro Forma As Adjusted
------------ ------------ ---------------------
<S> <C> <C> <C>
Bridge Notes and Interim Notes ............... $ 925,000 $ 1,085,000 $ --
=========== =========== ===========
Notes payable (1) .............................. $ -- $ 158,180 $ 158,180
Due to related party ........................... 437,400 437,400 437,400
Stockholders' equity:
Common Stock, $.01 par value per share;
10,000,000 shares authorized; 1,685,000 shares
outstanding; 2,150,314 shares outstanding, pro
forma; 3,950,314 shares outstanding, pro forma,
as adjusted (2) .............................. 16,850 21,503 39,503
Additional paid-in capital .................. 2,020,500 4,807,731 13,172,331
Accumulated deficit ........................ (3,564,577) (3,564,577) (3,564,577)
----------- ----------- -----------
Total stockholders' equity (deficit) ......... (1,527,227) 1,264,657 9,647,257
----------- ----------- -----------
Total capitalization ........................ $(1,089,827) $ 1,860,237 $10,242,837
=========== =========== ===========
</TABLE>
- ----------------
(1) Comprised of notes payable to Orthodontic Affiliates and the long-term
portion of notes payable.
(2) 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 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."
17
<PAGE>
DILUTION
At June 30, 1997, after giving effect to (a) the issuance of Interim Notes
in the aggregate principal amount of $160,000 since June 30, 1997 and (b) the
assumed consummation of the Acquisitions, the pro forma negative net tangible
book value of the Company was ($4,802,201), or $(2.23) 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 June 30, 1997
would have been $3,580,399, or $.91 per share. This represents an immediate
increase in pro forma net tangible book value of $3.14 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$5.09 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>
<CAPTION>
<S> <C> <C>
Initial public offering price .................................................... $6.00
Pro forma negative net tangible book value prior to this Offering ......... $(2.23)
Increase attributable to new investors .................................... 3.14
-----
Pro forma net tangible book value after this Offering ............................ .91
------
Dilution in pro forma net tangible book value to new investors ................... $5.09
======
</TABLE>
In the event the Over-allotment Option is exercised in full, the pro forma
net tangible book value as of June 30, 1997 would be $5,013,289, or $1.19 per
share of Common Stock, which would result in immediate dilution in net tangible
book value to new investors of approximately $4.81 per share.
The following table sets forth, at June 30, 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 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)... 1,685,000 42.7% $ 2,037,350 13.0% $1.21
New investors .............. 1,800,000 45.5% 10,800,000 69.1% $6.00(2)
Affiliated Orthodontists ... 465,314 11.8% 2,791,884 17.9% $6.00
--------- ---- ----------- ----
Total (1)................... 3,950,314 100% $15,629,234 100%
========= ==== =========== ====
</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
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) Attributes no value to the Warrants.
18
<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) Six Months Six Months
(Inception) to Year Ended Percentage Ended Ended Percentage
December 31, December 31, of Practice June 30, June 30, 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% $ -- $ 2,174,276 100.0%
Orthodontists' compensation ....... -- 1,281,735 27.8 -- 581,101 26.7
--------- ----------- ----- ----------- ----------- -----
Net management revenue ............ -- 3,333,942 72.2 -- 1,593,175 73.3
Direct practice expenses .......... -- 2,588,761 56.1 -- 1,311,745 60.3
--------- ----------- ----- ----------- ----------- -----
Income (loss) from operations
before management expenses ....... -- 745,181 16.1 -- 281,430 13.0
Management expenses ............... 248,018 657,655(2) 14.2 3,298,215 3,197,480(2) 147.1
--------- ----------- ----- ----------- ----------- -----
Income (loss) from operations ..... (248,018) 87,526 1.9% (3,298,215) (2,916,050) (134.1)%
Other income (expense) ............ 15,906 8,444 ===== (34,250) 15,734 =====
--------- ----------- ----------- -----------
Income (loss) before
income taxes ..................... (232,112) 95,970 (3,332,465) (2,900,316)
Provision for income taxes ........ -- 75,245 -- --
--------- ----------- ----------- -----------
Net income (loss) ................. $(232,112) $ 20,725 $(3,332,465) $(2,900,316)
========= =========== =========== ==========
Pro forma net income (loss)
per share (3) .................... $ .01 $ (1.24)
=========== ==========
Shares used to compute
pro forma net income
(loss) per share (3) ............. 2,331,147 2,331,147
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------------------
Pro Forma
Actual Pro Forma (1) As Adjusted (1) (4)
------------- --------------- ------------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) ......................................... $(1,964,249) $(4,520,336) $ 3,862,264
Total assets ........................................................ 942,275 7,511,066 12,696,869
Total liabilities .................................................. 2,469,502 6,246,409 3,049,612
Stockholders' equity (deficit) ..................................... (1,527,227) 1,264,657 9,647,257
</TABLE>
- ----------------
(1) The pro forma statement of operations data for the fiscal year ended
December 31, 1996 and the six months ended June 30, 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 June 30,
1997 and certain subsequent events had occurred prior to June 30, 1997.
See Note 5 to the Unaudited Pro Forma Balance Sheet Adjustments.
(2) Includes $128,945 and $65,724 of goodwill amortization for the year ended
December 31, 1996 and the six months ended June 30, 1997, respectively. See
Note 6 to the Unaudited Pro Forma Statement of Operations Adjustments. The
pro forma statement of operations data for the six months ended June 30,
1997 includes the non-recurring consulting expense of $2,867,400 that the
Company recognized in April 1997. See Note 5 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 and
the initial application of the net proceeds therefrom. See "Use of
Proceeds."
19
<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 frovide 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 $842,400 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."
20
<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 nine 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 $142,500 in notes bearing interest at 8.5%, issue an aggregate of
465,314 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 at an
exercise price equal to the initial public offering price per share.
The Company reported a significant loss from operations for the six month
period ended 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 recognized a non-recurring consulting
expense reflecting delivery of such shares and these payment obligations in
April 1997 of approximately $2.9 million. This expense is comprised of
approximately $2.1 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.
21
<PAGE>
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 June 30, 1997, the Company's total pro forma assets were
approximately $7.5 million, of which approximately $6.1 million, or 81%, 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 June 30, 1997 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 June 30, 1997 will produce an annual amortization expense of
approximately $131,000. 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 June 30, 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 Six Months Ended June 30, 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 six months ended
June 30, 1997, assuming the Affiliation Agreements and Management Service
Agreements had been entered into on January 1, 1996. The pro forma revenue of
approximately $4.6 million for the year ended December 31, 1996 and
approximately $2.2 million for the six months ended June 30, 1997 is based on
the accrued gross revenue of the Initial Orthodontic Affiliates for the year
ended December 31, 1996 and for the six months ended June 30, 1997,
respectively. The revenue for the six months ended June 30, 1997 is slightly
more than 47% 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 six months ended June 30, 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 six months ended June 30, 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 six months ended June 30, 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
include the non-recurring consulting expense of approximately $2.9 million that
the Company recognized 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 June 30, 1997, Omega incurred a net loss of
$3,564,577. 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 reported a significant loss from operations for
the six month period ended June 30, 1997 due primarily to compensation earned
by two consultants in April 1997. See "--Plan of Operation." At June 30, 1997,
the Company had an accumulated deficit since inception of $3,564,577 and a
working capital deficit of $1,964,249.
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. The Company has obtained agreements from
the holders of Bridge Notes in the aggregate principal amount of $730,000 to
extend the maturity date thereof to the earlier of the closing of this Offering
or October 31, 1997. The Bridge Notes provide for a 15 calendar day "cure"
period for any failure to pay amounts due under the Bridge Notes. The Company
intends to repay all of the Bridge Notes with the proceeds of this Offering. See
"Use of Proceeds." 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
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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 $250,000 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, July and August 1997, Omega sold Interim Notes in a private
offering in the aggregate principal amount of $210,000, including Interim Notes
sold to Dr. Glovsky and Dr. Grove in the aggregate principal amount of $110,000,
both of whom are directors of Omega. The Company is authorized to issue up to an
additional $40,000 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 $142,500
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
465,314 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 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 $4.8
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 $302,000 in cash and issue approximately 66,000
shares of the Common Stock if valued at the initial public offering price per
share of the Common Stock and, in two cases, issue five year notes bearing
interest at 8.5% and averaging approximately $71,000. 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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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
29
<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 three publicly-traded
companies, Orthodontic Centers of America, Inc., Apple Orthodontix, Inc. and
OrthAlliance, Inc., actively competing in the orthodontic practice management
market and that there are several other companies participating in the market.
These three competitors and the other companies are significantly larger and
have greater financial, marketing and other resources than the Company. The
Company will compete with these three companies and 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 these three competitors 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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<PAGE>
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 June 30, 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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<PAGE>
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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<PAGE>
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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<PAGE>
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
35
<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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<PAGE>
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, and Dr. Glovsky subsequently purchased an additional $60,000 of Interim
Notes, all of 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 and 129,721 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 August 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% 26.6%
Robert J. Schulhof (4)
3621 Silver Spur Lane
Acton, CA 93510 ........................... 1,050,000 62.3% 26.6%
C. Joel Glovsky (5)
44 Grey Lane
Lynnfield, MA 01940 ........................ 231,000 13.7% 5.8%
The Mayflower Group Ltd
393 Commonwealth Ave.
Boston, MA 02115 ........................... 225,000 13.4% 5.7%
David T. Grove (6)
581 12th Street
Elko, NV 89801 .............................. 134,721 8.0% 3.4%
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) 1,435,721 85.2% 36.3%
</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 August 31, 1997 and 3,950,314 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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<PAGE>
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. In connection with the Underwriting Agreement
(see "Underwriting"), Mr. Schulhof has agreed in his individual capacity
and not as an officer or director of the Company, that for a period of two
years after the date of the Underwriting Agreement, in any stockholder
vote other than the election of the directors of the Company, or security
holder proposals presented for the vote of stockholders in accordance with
Rule 14a-8 under the Exchange Act, he will vote all shares of Common Stock
beneficially owned by him individually or in his capacity as the sole
manager of OMEGA, LLC with authority to vote shares of the Common Stock of
the Company held by such entity, but no other affiliates, in accordance
with the vote of a majority of the holders of Common Stock of the Company
which has been registered under the Securities Act, except if such action,
in the opinion of legal counsel, would not be consistent with his
fiduciary duties as a director or officer or principal stockholder of the
Company.
(5) Includes 5,000 shares held of record by Dr. Glovsky's Individual
Retirement Account.
(6) Includes 129,721 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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<PAGE>
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 August 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 3,950,314 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 April 1, 1998 until September 30,
2002, one share of Common Stock at a price of $6.60 per share, 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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<PAGE>
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 April 1, 1999, 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
$12.00 per share 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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<PAGE>
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
3,950,314 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 2,150,314 shares (including the 465,314 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. The Company and the Representative have agreed that they will
not consent to such a transaction involving shares of Common Stock obtained in
connection with the Bridge Notes prior to 12 months following the effective
date of the Registration Statement.
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 2,150,314 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 39,500 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.
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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 ......... 960,000 960,000
Dirks & Company, Inc. ..................... 250,000 250,000
Cohig & Associates, Inc. .................. 125,000 125,000
First Colonial Securities Group, Inc. ..... 125,000 125,000
Kashner Davidson Securities Corporation ... 125,000 125,000
Suncoast Capital Corp. .................... 125,000 125,000
Carroll & Koster NV ....................... 90,000 90,000
--------- ---------
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 $0.36 per Share and
$0.006 per Warrant. Such dealers may reallow a concession not in excess of $0.15
per Share and $0.003 per Warrant to certain other dealers. After the initial
public offering, the offering prices, concessions and reallowances to dealers
may be changed by the Representative. No such change, however, shall change the
amount of proceeds to be received by the Company as set forth on the cover page
of this Prospectus.
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 $9.90 per share of Common Stock and $0.165 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
47
<PAGE>
Statement. The Representative does not currently intend to exercise this right.
In the event the Representative elects 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. The Company and the
Representative have agreed that they will not consent to such a transaction
involving shares of Common Stock obtained in connection with the Bridge Notes
prior to 12 months following the effective date of the Registration Statement.
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
48
<PAGE>
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. 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."
49
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
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 Income 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
-----
<S> <C>
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., P.C.
Report of Independent Auditors ......... F-50
Balance Sheets ........................... F-51
Statements of Operations 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
</TABLE>
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 465,314 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 initial
public offering price of $6.00 per share. The estimated aggregate amounts to be
allocated to the net assets acquired consist of:
<TABLE>
<S> <C>
Common stock ........................................ $2,791,884
Cash ................................................. 2,111,797
Notes payable ........................................ 142,535
-----------
$5,046,216
===========
</TABLE>
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 .................................... $ 902,640
Intangible assets ................................. 5,202,787
Property, equipment and improvements ............... 303,364
Liabilities .......................................... (1,362,575)
-----------
$ 5,046,216
===========
</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 June 30, 1997 gives effect to the
Acquisitions as if such transactions had occurred on June 30, 1997 and reflects
the issuance of Interim Notes in the aggregate principal amount of $160,000
occurring subsequent to June 30, 1997. The pro forma statements of operations
for the year ended December 31, 1996 and six months ended June 30, 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. 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
June 30, 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 ....................... $ 47,103 $ 127,647 $ (127,647) 1 $ 207,103
160,000 5
Patient receivables, net ........................ 6,700 894,189 900,889
Other current assets ........................... 3,200 13,105 (4,654) 1 11,651
Due from selling orthodontists .................. 10,850 285,737 (285,737) 1 10,850
-------- ----------- ----------- ------------
Total current assets ........................... 67,853 1,320,678 (258,038) 1,130,493
Property, equipment and improvements, net ........ 10,351 560,717 (257,353) 1 313,715
Intangible assets ................................ 864,071 5,532 5,197,255 3 6,066,858
Other assets .................................... 0 82,098 (82,098) 1 0
-------- ----------- ----------- ------------
Total assets .................................. $942,275 $1,969,025 $4,599,766 $ 7,511,066
======== =========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and other current
liabilities ................................... $ 583,689 $ 479,425 $ (276,909) 1 $ 786,205
Deferred revenue ................................ 1,165,143 (325,335) 2 839,808
Current portion of notes payable ................ 242,603 (185,920) 1 56,683
Due to orthodontic affiliates ................... 247,923 2 2,359,720
Due to related party ............................ 2,111,797 3
Loans payable ................................... 523,413 0 523,413
925,000 0 160,000 5 1,085,000
Total current liabilities ..................... ----------- ----------- ----------- ------------
Notes payable to orthodontic affiliates ......... 2,032,102 1,887,171 1,731,556 5,650,829
Notes payable, less current portion ............ 0 0 142,535 3 142,535
Due to related party ........................... 0 190,021 (174,376) 1 15,645
Stockholders' equity (deficit): 437,400 437,400
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; 1,685,000
shares outstanding; 2,150,314 shares
outstanding pro forma ........................ 16,850 0 4,653 3 21,503
Additional paid-in capital ..................... 2,020,500 0 2,787,231 3 4,807,731
Accumulated deficit ........................... (3,564,577) 0 (3,564,577)
----------- ----------- ----------- ------------
Total stockholders' equity (deficit) ......... (1,527,227) 0 2,791,884 1,264,657
Owner's equity (deficit) ........................ -- (108,167) 108,167 4 0
----------- ----------- ----------- ------------
Total liabilities and stockholders' equity ... $ 942,275 $1,969,025 $4,599,766 $ 7,511,066
=========== =========== =========== ============
</TABLE>
F-3
<PAGE>
Omega Orthodontics, Inc.
Unaudited Pro Forma Statement of Operations
for the Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Omega Initial
Orthodontics Orthodontic Pro Forma
Inc. Affiliates Adjustments # Pro Forma
-------------- ------------- -------------- ---- ------------
<S> <C> <C> <C> <C> <C>
Practice revenue ...................... $ 0 $2,174,276 $ 0 $ 2,174,276
Orthodontists' compensation ............ 0 361,331 219,770 1 581,101
------------ ----------- ------------ -----------
Net management revenue ................ 0 1,812,945 (219,770) 1,593,175
Direct practice expenses:
Employee costs ...................... 0 560,752 560,752
Other direct costs ................... 0 591,150 (36,959) 2 554,191
General and administrative ............ 0 307,228 (162,881) 2 144,347
Bad debt expense ...................... 0 0 0
Depreciation and amortization ......... 0 69,229 (16,774) 4 52,455
------------ ----------- ------------ -----------
Total direct practice expenses ....... 0 1,528,359 (216,614) 1,311,745
------------ ----------- ------------ -----------
Income from operations before
management expenses ................... 0 284,586 (3,156) 281,430
Management expenses:
Employee and consulting costs ......... 107,578 0 33,172 5 140,750
Non-recurring consulting expense ...... 2,867,400 0 2,867,400
General and administrative ............ 323,237 0 (199,631) 5 123,606
Amortization of goodwill .............. 0 65,724 6 65,724
------------ ------------ -----------
Total management expenses ............ 3,298,215 0 (100,735) 3,197,480
------------ ----------- ------------ -----------
Income (loss) from operations .......... (3,298,215) 284,586 97,579 (2,916,050)
| 14,536 7
Interest expense, net .................. (78,821) (17,834) |-- 81,145 8 (7,032)
| (6,058) 9
Other consulting revenue ............... 44,571 0 (21,805) 10 22,766
------------ ----------- ------------ -----------
Income (loss) before income taxes ...... (3,332,465) 266,752 165,397 (2,900,316)
Provision for income taxes ............. 0 3,326 (3,326) 11 0
------------ ----------- ------------ -----------
Net income (loss) ..................... $(3,332,465) $ 263,426 $ 168,723 $(2,900,316)
============ =========== ============ ===========
Pro forma net loss per share .......... $ (1.98) $ (1.24)
============ ===========
Shares used to compute net loss per
share ................................. 1,685,000 646,147 12 2,331,147
============ ============ ===========
</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 0 128,945 6 128,945
---------- ----------- ---------- ----------
Total management expenses .............. 248,018 0 409,637 657,655
---------- ----------- ---------- ----------
Income (loss) from operations ............ (248,018) 538,814 (203,270) 87,526
| 26,764 7
Interest expense, net .................... (27,172) (29,773) |- 29,635 8 (12,662)
| (12,116) 9
Other consulting revenue ................. 43,078 0 (21,972) 10 21,106
---------- ----------- ---------- ----------
Income (loss) before income taxes ........ (232,112) 509,041 (180,959) 95,970
Provision (benefit) for income taxes ..... 0 (32,297) 107,542 11 75,245
---------- ----------- ---------- ----------
Net income (loss)........................ $ (232,112) $ 541,338 $ (288,501) $ 20,725
========== =========== ========== ==========
Pro forma net income (loss) per
share .................................. $ (0.14) $ .01
========== ==========
Shares used to compute net income
(loss) per share ........................ 1,685,000 646,147 12 2,331,147
========== ========== ==========
</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 June 30, 1997 and the pro forma
results of its operations for the year ended December 31, 1996 and the six
months ended June 30, 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 June 30, 1997 and results of
operations for the year ended December 31, 1996 and the six months ended June
30, 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 the issuance of Interim Notes in the aggregate principal amount
of $160,000 occurring subsequent to June 30, 1997.
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)
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 adjust management expenses to reflect an estimate of operations and
management of only the seven Initial Orthodontic Affiliates, including
the non-recurring consulting expense of $2,867,400 that the Company
recognized in April 1997 for past services rendered by two consultants.
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. Represents the elimination of other consulting fees earned from the Initial
Orthodontic Affiliates. The historical statement of operations of Omega
represents operating results from August 30, 1996 (inception) to December
31, 1996 and for the six months ended June 30, 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 assumed issuance of 180,833 shares of Common Stock to
repay $1,085,000 of outstanding Bridge and Interim Notes and (ii) the
issuance of 465,314 shares of Common Stock at the 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 June 30, 1997
----------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
- -------
Current assets:
Cash and cash equivalents ................................ $ 321,057 $ 47,103
Accounts receivable net of allowance for doubtful accounts
of $5,700:
Trade ................................................... 8,900 6,700
Related parties ......................................... 9,396 10,850
--------- ------------
18,296 17,550
Prepaid expenses and other assets ........................ 4,000 3,200
--------- ------------
Total current assets ...................................... 343,353 67,853
Equipment, net ............................................ 10,096 10,351
Other assets, net ......................................... 137,474 864,071
--------- ------------
Total assets .............................................. $ 490,923 $ 942,275
========= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Accounts payable ......................................... $ 21,234 $ 55,720
Due to related parties ................................... 27,036 523,413
Accrued expenses ......................................... 88,115 527,969
Notes payable ............................................ 575,000 925,000
--------- ------------
Total current liabilities ................................. 711,385 2,032,102
Due to related parties, less current portion .............. -- 437,400
Commitments and contingencies
Stockholders' deficit:
Common stock, $.01 par value, 10,000,000 shares
authorized, 1,615,000 and 1,685,000 shares issued and
outstanding at December 31, 1996 and June 30, 1997,
respectively ............................................ 16,150 16,850
Additional paid-in capital ............................... -- 2,020,500
Accumulated deficit ...................................... (232,112) (3,564,577)
Deferred compensation .................................... (4,500) --
--------- ------------
Total stockholders' deficit ............................... (220,462) (1,527,227)
--------- ------------
Total liabilities and stockholders' deficit ............... $ 490,923 $ 942,275
========= ============
</TABLE>
See accompanying notes.
F-9
<PAGE>
Omega Orthodontics, Inc.
Statements of Operations
<TABLE>
<CAPTION>
For the period from
August 30, 1996 Six Months Three Months
(inception) ended ended
to December 31, 1996 June 30, 1997 June 30, 1997
-------------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Revenue:
Management consulting fees ................ $ 43,078 $ 44,571 $ 21,345
Direct expenses:
Employee costs ............................. 90,554 107,578 53,347
Other costs ................................ 11,678 43,856 36,571
---------- ----------- ------------
Total direct expenses ....................... 102,232 151,434 89,918
Non-recurring consulting expense ............ -- 2,867,400 2,867,400
General and administrative .................. 144,670 277,553 122,428
Depreciation ................................ 1,116 1,828 914
---------- ----------- ------------
Operating loss .............................. (204,940) (3,253,644) (3,059,315)
Interest income ............................. 2,463 2,324 896
Interest expense ............................ (29,635) (81,145) (49,799)
---------- ----------- ------------
Net loss .................................... $ (232,112) $(3,332,465) $(3,108,218)
========== =========== ============
Net loss per share .......................... $ (0.14) $ (1.98) $ (1.84)
========== =========== ============
Shares used to compute net loss per share ... 1,685,000 1,685,000 1,685,000
========== =========== ============
</TABLE>
See accompanying notes.
F-10
<PAGE>
Omega Orthodontics, Inc.
Statement of Stockholders' Deficit
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Deferred Stockholders'
Shares Amount Capital Deficit Compensation Deficit
----------- --------- ------------ -------------- ------------ --------------
<S> <C> <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) ........... 60,000 600 -- -- 600
Release from escrow of
common stock previously
issued to Advisors
(unaudited) .................... -- -- $2,020,500 4,500 2,025,000
Issuance of common stock in
connection with
Consultant's agreement
(unaudited) .................... 10,000 100 -- -- -- 100
Net loss for the period
(unaudited) .................... -- -- -- (3,332,465) -- (3,332,465)
---------- -------- ----------- ----------- ------- ------------
Balance at June 30, 1997
(unaudited) .................... 1,685,000 $16,850 $2,020,500 $(3,564,577) $ -- $(1,527,227)
========== ======== =========== =========== ======= ============
</TABLE>
See accompanying notes.
F-11
<PAGE>
Omega Orthodontics, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the period from
August 30, 1996 Six Months
(inception) ended
to December 31, 1996 June 30, 1997
-------------------- -------------
(unaudited)
<S> <C> <C>
Operating activities
Net loss ......................................................... $(232,112) $(3,332,465)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortized debt financing costs .................................. 9,500 28,872
Provision for bad debts ......................................... 5,700 --
Depreciation ................................................... 2,430 1,828
Stock compensation ............................................. -- 2,867,400
Changes in operating assets and liabilities:
Accounts receivable ............................................ (23,996) 746
Prepaid expenses and other assets .............................. (4,000) 800
Accounts payable ............................................... 21,234 34,486
Due to related parties ......................................... 27,036 91,377
Accrued expenses ............................................... 88,115 (247)
--------- -----------
Net cash used in operating activities ............................. (106,093) (307,203)
Investing activities
Purchases of equipment ............................................ (7,284) (1,425)
Other assets ...................................................... (1,644) --
--------- -----------
Net cash used in investing activities ............................. (8,928) (1,425)
Financing activities
Deferred offering costs ........................................... (101,228) (296,426)
Debt financing costs .............................................. (37,694) (18,900)
Proceeds from issuance of notes payable ........................... 575,000 350,000
--------- -----------
Net cash provided by financing activities ......................... 436,078 34,674
--------- -----------
Net increase (decrease) in cash and cash equivalents .............. 321,057 (273,954)
Cash and cash equivalents at beginning of period .................. -- 321,057
--------- -----------
Cash and cash equivalents at end of period ........................ $ 321,057 $ 47,103
========= ===========
Supplemental disclosures:
Interest paid .................................................... $ 20,135 $ 52,273
========= ===========
</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 June 30, 1997, the statements of operations for the
three months and six months ended June 30, 1997, the statements of cash flows
for the six months ended June 30, 1997 and the statement of stockholders'
deficit for the six months ended June 30, 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 six months ended June 30, 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:
<TABLE>
<S> <C>
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
=========
</TABLE>
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:
<TABLE>
<S> <C>
Net operating loss carryforwards .................... $ 92,845
Valuation allowance ................................. (92,845)
--------
Net deferred tax asset .............................. $ 0
========
</TABLE>
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, $5,046,000, will be paid
through a combination of cash of approximately $2,112,000, five-year term notes
totaling $142,000 and shares of common stock of the Company with a fair value
at the date of issue of approximately $2,792,000.
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
approximately $842,000 will result in a charge to operating results of the
Company of approximately $2,900,000 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 June 30, 1997
---------- --------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash ...................................................... $ 2,418 $ -- $ 3,086
Patient receivables, less allowance of $24,000 and $22,000
at December 31, 1996 and 1995, respectively, and
$24,000 at June 30, 1997 ................................. 139,215 107,861 198,859
Prepaid expenses and other assets ......................... 7,417 4,959 3,797
--------- --------- ---------
Total current assets ....................................... 149,050 112,820 205,742
Equipment and improvements, net ............................ 117,082 122,385 119,081
Intangible assets, net ..................................... 16,594 38,719 5,532
Note receivable, stockholder ............................... 109,746 175,854 122,947
--------- --------- ---------
Total assets ............................................... $ 392,472 $ 449,778 $ 453,302
========= ========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
- -------------------------------------
Current liabilities:
Accounts payable .......................................... $ 62,193 $ 34,776 $ 40,044
Bank overdraft ............................................ -- 8,472 --
Accrued expenses .......................................... -- 19,457 5,227
Patient prepayments ....................................... 280,608 243,227 366,292
Income taxes payable ...................................... 6,000 -- 9,000
Current portion of notes payable .......................... 65,231 169,924 56,706
--------- --------- ---------
Total current liabilities .................................. 414,032 475,856 477,269
Notes payable, less current portion ........................ 152,952 218,184 131,430
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) (249,108)
--------- --------- ---------
Total stockholder's deficit ................................ (174,512) (244,262) (155,397)
--------- --------- ---------
Total liabilities and stockholder's deficit ................ $ 392,472 $ 449,778 $ 453,302
========= ========= =========
</TABLE>
See accompanying notes.
F-18
<PAGE>
Michael G. Churosh, D.D.S., M.S., Ltd.
Statements of Income and Accumulated Deficit
<TABLE>
<CAPTION>
Six Months ended Three Months ended
Year ended December 31, June 30, June 30,
1996 1995 1997 1996 1997 1996
---------- --------- --------- --------- --------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Patient revenue ................. $ 974,680 $ 766,311 $ 498,063 $ 470,334 $ 256,863 $ 250,434
Direct expenses:
Employee costs ................... 385,031 350,867 201,351 192,516 105,634 96,258
Other costs ...................... 235,852 205,176 157,637 117,556 83,189 58,778
--------- --------- --------- --------- --------- ---------
Total direct expenses ............. 620,883 556,043 358,988 310,072 188,823 155,036
General and administrative ........ 211,146 137,273 81,048 105,942 40,197 52,971
Depreciation and
amortization ..................... 47,486 38,970 24,758 23,744 12,415 11,872
--------- --------- --------- --------- --------- ---------
Operating income .................. 95,165 34,025 33,269 30,576 15,428 30,555
Interest income, stockholder
note ............................. 10,189 13,559 3,846 5,094 2,018 2,547
Interest expense .................. (29,604) (46,499) (14,674) (14,802) (7,019) (7,401)
--------- --------- --------- --------- --------- ---------
Income before income tax
expense .......................... 75,750 1,085 22,441 20,868 10,427 25,701
Income tax expense ................ (6,000) -- (3,326) (3,000) (326) (1,500)
--------- --------- --------- --------- --------- ---------
Net income ........................ 69,750 1,085 19,115 17,868 10,101 24,201
Accumulated deficit at
beginning of period .............. (337,973) (339,058) (268,223) (337,973) (259,209) (344,306)
--------- --------- --------- --------- --------- ---------
Accumulated deficit at end
of period ........................ $(268,223) $(337,973) $(249,108) $(320,105) $(249,108) $(320,105)
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-19
<PAGE>
Michael G. Churosh, D.D.S., M.S., Ltd.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months ended
Year ended December 31, June 30,
1996 1995 1997 1996
--------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income .................................... $ 69,750 $ 1,085 $ 19,115 $ 17,868
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............... 47,486 38,970 24,758 23,743
Provision for bad debts ..................... 24,000 22,000 -- 12,000
Changes in operating assets and
liabilities:
Patient receivables ......................... (55,354) (56,361) (59,644) (19,332)
Patient prepayments ......................... 37,381 76,074 85,684 13,181
Prepaid expenses and other assets ........... (2,458) (3,135) 3,620 --
Accounts payable ............................ 27,417 (4,719) (22,149) 42,448
Income taxes payable ........................ 6,000 -- 3,000 --
Accrued expenses ............................ (19,457) (1,327) 5,227 20,226
--------- -------- -------- --------
Net cash provided by operating activities 134,765 72,587 59,611 110,134
Investing activities
Purchases of equipment and improvements ........ (20,058) (35,944) (15,695) (10,029)
Notes receivable, stockholder .................. 66,108 49,896 (13,201) --
--------- -------- -------- --------
Net cash provided by (used in) investing
activities .................................... 46,050 13,952 (28,896) (10,029)
Financing activity
Repayment of notes payable ..................... (169,925) (95,149) (30,047) (84,962)
--------- -------- -------- --------
Net cash used in financing activity ............ (169,925) (95,149) (30,047) (84,962)
--------- -------- -------- --------
Net increase (decrease) in cash ................ 10,890 (8,610) 668 15,143
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) $ 3,086 $ 6,671
========= ======== ======== ========
</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 June 30, 1997, the statements of income and
accumulated deficit for the three months and six months ended June 30, 1997 and
1996 and the statements of cash flows for the six months ended June 30, 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 six months ended June 30, 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
income and accumulated deficit for the three month and six month periods ended
June 30, 1996 and statements of cash flows for the six month period ended June
30, 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:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
3. Intangible Assets
Intangible assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
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:
<TABLE>
<S> <C>
Year ending December 31:
1997 ......................................................... $ 65,231
1998 ......................................................... 72,226
1999 ......................................................... 58,981
2000 ......................................................... 18,937
2001 ......................................................... 2,808
---------
$218,183
=========
</TABLE>
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:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 ....................................................... $44,371
1998 ....................................................... 5,625
--------
$49,996
========
</TABLE>
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:
<TABLE>
<S> <C>
Federal .................................................. $3,500
State ...................................................... 2,500
-------
$6,000
=======
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
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 June 30, 1997
--------- -------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash ...................................................... $ 21,075 $ 25,270 $ 14,884
Patient receivables, less allowance of $4,300
and $4,500 at December 31, 1996 and 1995,
respectively, and $4,300 at June 30, 1997 ................. 117,168 126,904 144,327
Prepaid expenses and other assets .......................... 1,307 1,289 2,157
-------- -------- --------
Total current assets ........................................ 139,550 153,463 161,368
Equipment, net .............................................. 3,573 4,593 3,063
-------- -------- --------
Total assets ................................................ $143,123 $158,056 $164,431
======== ======== ========
LIABILITIES AND PROPRIETOR'S CAPITAL (DEFICIT)
- ----------------------------------------------
Current liabilities:
Accounts payable ........................................... $ 4,240 $ 4,875 $ 5,190
Accrued expenses ........................................... 1,300 1,300 3,602
Patient prepayments ........................................ 133,071 115,135 157,351
-------- -------- --------
Total current liabilities ................................... 138,611 121,310 166,143
Commitments and contingencies
Proprietor's capital (deficit) .............................. 4,512 36,746 (1,712)
-------- -------- --------
Total liabilities and proprietor's capital (deficit) ........ $143,123 $158,056 $164,431
======== ======== ========
</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>
Six Months ended Three Months ended
Year ended December 31, June 30, June 30,
1996 1995 1997 1996 1997 1996
---------- --------- --------- --------- -------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Patient revenue ................. $ 436,241 $ 439,505 $ 214,111 $ 198,835 $115,871 $104,692
Direct expenses:
Employee costs ................... 93,521 99,620 51,097 46,760 28,583 23,380
Other costs ...................... 93,727 114,419 58,071 46,864 29,859 23,432
--------- --------- --------- --------- -------- --------
Total direct expenses ............. 187,248 214,039 109,168 93,624 58,442 46,812
General and administrative ........ 29,645 33,761 9,706 14,822 4,342 7,411
Depreciation ..................... 1,020 510 510 510 255 255
--------- --------- --------- --------- -------- --------
Operating income .................. 218,328 191,195 94,727 89,879 52,832 50,214
Interest income ................... 352 391 101 176 101 176
--------- --------- --------- --------- -------- --------
Net income ........................ 218,680 191,586 94,828 90,055 52,933 50,390
Proprietor's capital (deficit)
at beginning of period ........... 36,746 (11,987) 4,512 36,746 24,173 13,683
Proprietor's withdrawals .......... (250,914) (142,853) (101,052) (125,458) (78,818) (62,730)
--------- --------- --------- --------- -------- --------
Proprietor's capital (deficit)
at end of period ................. $ 4,512 $ 36,746 $ (1,712) $ 1,343 $ (1,712) $ 1,343
========= ========= ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-28
<PAGE>
Dr. Scott E. Feldman D.D.S., M.S.
(a Proprietorship)
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months ended
Year ended December 31, June 30,
1996 1995 1997 1996
--------- --------- --------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income .................................... $ 218,680 $ 191,586 $ 94,828 $ 90,055
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ................................. 1,020 510 510 510
Provision for bad debts ..................... 4,300 4,500 -- 2,150
Changes in operating assets and
liabilities:
Patient receivables ........................... 5,436 (49,993) (27,159) 61,642
Patient prepayments .......................... 17,936 25,026 24,280 (55,894)
Prepaid expenses and other assets ............. (18) 289 (850) --
Accounts payable ............................. (635) (4,416) 950 44,723
Accrued expenses ............................. -- (456) 2,302 10,761
--------- --------- --------- ---------
Net cash provided by operating activities ........ 246,719 167,046 94,861 153,947
Investing activity
Purchases of equipment ........................... -- (5,103) -- --
--------- --------- --------- ---------
Net cash used in investing activity .............. -- (5,103) -- --
Financing activity
Proprietor's withdrawals ......................... (250,914) (142,853) (101,052) (125,458)
--------- --------- --------- ---------
Net cash used in financing activity .............. (250,914) (142,853) (101,052) (125,458)
--------- --------- --------- ---------
Net increase (decrease) in cash .................. (4,195) 19,090 (6,191) 28,489
Cash at beginning of period ...................... 25,270 6,180 21,075 25,270
--------- --------- --------- ---------
Cash at end of period ............................ $ 21,075 $ 25,270 $ 14,884 $ 53,759
========= ========= ========= =========
</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 June 30, 1997 the statements of income and
proprietor's capital for the three months and six months ended June 30, 1997
and 1996 and the statements of cash flows for the six months ended June 30,
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 six months ended June 30, 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 for the three month and six month
periods ended June 30, 1996 and statement of cash flows for the six month
period ended June 30, 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:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Equipment .......................................... $23,909 $23,909
Less accumulated depreciation ..................... 20,336 19,316
------- -------
Equipment, net .................................... $ 3,573 4,593
======= =======
</TABLE>
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 June 30, 1997
---------- ---------- --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents ........................... $ 87,244 $ 93,362 $ 58,907
Patient receivables, less allowance of $8,300
and $7,000 at December 31, 1996 and 1995,
respectively, and $8,300 at June 30, 1997 ......... 44,369 43,770 36,432
Prepaid expenses and other assets .................. 3,977 3,655 4,654
--------- --------- ---------
Total current assets ................................. 135,590 140,787 99,993
Property, equipment and improvements, net ............ 350,487 317,205 324,553
--------- --------- ---------
Total assets ....................................... $486,077 $457,992 $424,546
========= ========= =========
LIABILITIES AND PROPRIETOR'S CAPITAL
- ------------------------------------
Current liabilities:
Accounts payable .................................... $ 11,704 $ 10,378 $ 10,377
Accrued expenses .................................... 6,273 18,525 3,880
Patient prepayments ................................. 142,849 133,797 155,135
Current portion of capital lease obligation ......... 16,819 15,434 17,684
--------- --------- ---------
Total current liabilities ........................... 177,645 178,134 187,076
Capital lease obligation, less current portion ...... 24,797 41,617 15,645
Commitments and contingencies
Proprietor's capital ................................. 283,635 238,241 221,825
--------- --------- ---------
Total liabilities and proprietor's capital ......... $486,077 $457,992 $424,546
========= ========= =========
</TABLE>
See accompanying notes.
F-34
<PAGE>
David T. Grove, D.M.D.
(a Proprietorship)
Statements of Income and Proprietor's Capital
<TABLE>
<CAPTION>
Six Months ended Three Months ended
Year ended December 31, June 30, June 30,
1996 1995 1997 1996 1997 1996
--------- --------- --------- --------- --------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Patient revenue ............... $ 842,361 $ 860,458 $ 407,061 $ 399,118 $ 198,842 $200,123
Direct expenses:
Employee costs .................. 177,286 180,150 88,098 88,644 47,168 44,322
Other costs ..................... 147,249 115,889 73,153 73,624 30,688 36,812
--------- --------- --------- --------- --------- --------
Total direct expenses ............ 324,535 296,039 161,251 162,268 77,856 81,134
General and administrative ...... 103,019 113,707 46,685 51,510 19,777 25,755
Depreciation ..................... 40,045 32,094 19,092 20,022 9,562 10,011
--------- --------- --------- --------- --------- --------
Operating income ............... 374,762 418,618 180,033 165,318 91,647 83,223
Interest income .................. 1,983 1,950 1,255 992 511 496
Interest expense ............... (4,210) (5,490) (1,589) (2,106) (750) (1,053)
--------- --------- --------- --------- --------- --------
Net income ..................... 372,535 415,078 179,699 164,204 91,408 82,666
Proprietor's capital at
beginning of period ............ 238,241 223,943 283,635 238,241 239,588 237,994
Proprietor's withdrawals ......... (327,141) (400,780) (241,509) (163,571) (109,171) (81,786)
--------- --------- --------- --------- --------- --------
Proprietor's capital at end of
period ........................ $ 283,635 $ 238,241 $ 221,825 $ 238,874 $ 221,825 $238,874
========= ========= ========= ========= ========= ========
</TABLE>
See accompanying notes.
F-35
<PAGE>
David T. Grove, D.M.D.
(a Proprietorship)
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months ended
Year ended December 31, June 30,
1996 1995 1997 1996
---------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income ....................................... $ 372,535 $ 415,078 $ 179,699 $ 164,204
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ................................... 40,045 32,094 19,093 20,022
Provision for bad debts ......................... 8,300 7,000 -- 4,150
Loss on disposal of property .................... 3,208 -- 8,849 1,604
Changes in operating assets and
liabilities:
Patient receivable ............................. (8,899) (15,372) 7,937 6,042
Prepaid expenses and other assets .............. (322) 229 (677) --
Accounts payable ............................... 1,326 (938) (1,327) (7,253)
Accrued expenses ............................... (12,252) 7,800 (2,393) (22,711)
Patient prepayments ............................ 9,052 1,418 12,286 (26,859)
--------- --------- --------- ---------
Net cash provided by operating activities ......... 412,993 447,309 223,467 139,199
Investing activity
Purchases of property, equipment and
improvements ..................................... (76,535) (12,057) (2,008) (36,023)
--------- --------- --------- ---------
Net cash used in investing activity ............... (76,535) (12,057) (2,008) (36,023)
Financing activities
Proprietor's withdrawals .......................... (327,141) (400,780) (241,509) (163,571)
Principal payments on notes payable ............... (15,435) (14,162) (8,287) (7,718)
--------- --------- --------- ---------
Net cash used in financing activities ............. (342,576) (414,942) (249,796) (171,289)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ...................................... (6,118) 20,310 (28,337) (68,113)
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 $ 58,907 $ 25,249
========= ========= ========= =========
</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 June 30, 1997, the statements of income and
proprietor's capital for the three months and six months ended June 30, 1997
and 1996 and the statements of cash flows for the six months ended June 30,
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 six months ended June 30, 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 for the three month and six month
periods ended June 30, 1996 and statement of cash flows for the six month
period ended June 30, 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:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
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
======== =========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Computer system ....................................... $89,830 $89,830
Less accumulated amortization ..................... 35,290 22,458
------- -------
$54,540 $67,372
======= =======
</TABLE>
The future minimum annual rental commitments under the capital lease
agreement is as follows at December 31, 1996:
<TABLE>
<S> <C>
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
========
</TABLE>
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 $1,111,893, consisting of cash of $333,567 and shares
of common stock of Omega with a fair value at the date of issue of $778,326.
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 June 30, 1997
-------- --------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash ................................................... $ 3,510 $ 150 $ 9,479
Patient receivable, less allowance of $10,000 and
$16,000 at December 31, 1996 and 1995, respectively,
and $10,000 at June 30, 1997 ........................... 264,496 134,145 280,010
Income taxes receivable ................................. 81,408 -- --
Prepaid expenses and other assets ..................... -- 1,057 --
--------- --------- ---------
Total current assets .................................... 349,414 135,352 289,489
Equipment and improvements, net ........................ 36,773 62,264 30,529
Deferred income taxes .................................... 82,098 59,612 82,098
Note receivable, stockholder ........................... -- 311,836 86,543
--------- --------- ---------
Total assets ............................................. $468,285 $569,064 $488,659
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
Current liabilities:
Accounts payable ....................................... $ 29,225 $ 51,002 $ 55,971
Accrued expenses ....................................... 24,161 9,755 36,152
Patient prepayments .................................... 124,263 83,324 119,399
Income taxes payable .................................... -- 51,269 --
Deferred income taxes .................................... 114,330 69,144 114,330
Current portion of long-term debt ..................... 5,274 4,341 5,452
--------- --------- ---------
Total current liabilities .............................. 297,253 268,835 331,304
Long-term debt, less current portion ..................... 18,717 23,609 16,592
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 ....................................... 150,357 274,662 138,805
--------- --------- ---------
Total stockholder's equity .............................. 152,315 276,620 140,763
--------- --------- ---------
Total liabilities and stockholder's equity ............... $468,285 $569,064 $488,659
========= ========= =========
</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>
Six Months ended Three Months ended
Year ended December 31, June 30, June 30,
1996 1995 1997 1996 1997 1996
---------- --------- -------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Patient revenue ............... $ 748,502 $594,116 $324,004 $355,254 $175,116 $175,211
Direct expenses:
Employee costs .................. 591,834 180,691 179,175 154,918 77,504 77,459
Other costs ..................... 169,742 159,654 104,088 84,866 23,994 42,433
--------- -------- -------- -------- -------- --------
Total direct expenses ............ 761,576 340,345 283,263 239,784 101,498 119,892
General and administrative ...... 135,759 153,164 46,487 67,622 22,152 33,811
Depreciation ..................... 25,596 24,780 6,244 12,798 3,121 6,399
--------- -------- -------- -------- -------- --------
Operating income (loss) ......... (174,429) 75,827 (11,990) 35,050 48,345 15,109
Interest income .................. 40 14,930 -- -- -- --
Other income ..................... -- 34,000 2,300 -- 402 --
Interest expense ............... (2,916) (10) (1,862) (1,458) (982) (729)
--------- -------- -------- -------- -------- --------
Income (loss) before income
taxes ........................... (177,305) 124,747 (11,552) 33,592 47,765 14,380
Income tax provision
(benefit) ..................... (53,000) 42,000 -- 11,400 5,000 5,700
--------- -------- -------- -------- -------- --------
Net income (loss) ............... (124,305) 82,747 (11,552) 22,192 42,765 8,680
Retained earnings at
beginning of period ............ 274,662 191,915 150,357 274,662 96,040 288,174
--------- -------- -------- -------- -------- --------
Retained earnings at
end of period .................. $ 150,357 $274,662 $138,805 $296,854 $138,805 $296,854
========= ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-43
<PAGE>
Theodore G. Saydyk, Jr., D.D.S., M.S., P.C.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months ended
Year ended December 31, June 30,
1996 1995 1997 1996
---------- --------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) ........................... $(124,305) $ 82,747 $(11,552) $ 22,192
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation .............................. 25,596 24,780 6,244 12,798
Provision for bad debts ..................... 10,000 16,000 -- 5,000
Deferred income taxes ..................... 22,700 (7,000) -- --
Forgiveness of stockholder note included
in employee costs ........................ 282,000 -- -- --
Changes in operating assets and
liabilities:
Patient receivables ........................ (140,351) (122,082) (15,514) (73,588)
Prepaid expenses and other assets ......... 1,057 59,714 -- --
Accounts payable ........................... (21,777) 31,219 26,746 (11,174)
Accrued expenses ........................... 14,406 (1,961) 11,991 28,139
Patient prepayments ........................ 40,939 67,394 (4,864) 38,064
Income taxes .............................. (132,677) (57,446) 81,408 --
--------- ---------- -------- --------
Net cash provided by (used in) operating
activities ................................. (22,412) 93,365 94,459 21,431
Investing activities
Purchases of equipment and improvements ...... (105) (27,950) -- --
Note receivable, stockholder .................. 29,836 (96,683) (86,543) --
--------- ---------- -------- --------
Net cash provided by (used in) investing
activities ................................. 29,731 (124,633) (86,543) --
Financing activities
Net proceeds from notes payable ............... -- 27,950 -- --
Repayment of notes payable .................. (3,959) -- (1,947) (1,980)
--------- ---------- -------- --------
Net cash provided by (used in) financing
activities ................................. (3,959) 27,950 (1,947) (1,980)
--------- ---------- -------- --------
Net increase (decrease) in cash ............... 3,360 (3,318) 5,969 19,451
Cash at beginning of period .................. 150 3,468 3,510 150
--------- ---------- -------- --------
Cash at end of period ........................ $ 3,510 $ 150 $ 9,479 $ 19,601
========= ========== ======== ========
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 June 30, 1997, the statements of operations and
retained earnings for the three months and six months ended June 30, 1997 and
1996 and the statements of cash flows for the six months ended June 30, 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 six months ended June 30, 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 for the three month and six month periods
ended June 30, 1996 and statement of cash flows for the six month period ended
June 30, 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:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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:
<TABLE>
<S> <C>
Year ending December 31:
1997 .................................................. $ 5,274
1998 .................................................. 5,511
1999 .................................................. 6,210
2000 .................................................. 6,996
-------
$23,991
=======
</TABLE>
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:
<TABLE>
<S> <C>
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
========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
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)
========= ========
</TABLE>
The provision for income taxes (benefit) consisted of the following:
<TABLE>
<CAPTION>
1996 1995
--------- -------
<S> <C> <C>
Current ...................................... $(75,700) $49,000
Deferred ...................................... 22,700 (7,000)
-------- -------
Total ......................................... $(53,000) $42,000
======== =======
</TABLE>
The reconciliation of income tax computed at the federal statutory rates to
income tax expense (benefit) is:
<TABLE>
<CAPTION>
1996 1995
--------- -------
<S> <C> <C>
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
======== =======
</TABLE>
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 $715,668,
consisting of cash of $226,716 and shares of common stock of Omega with a fair
value at the date of issue of $488,950.
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 June 30, 1997
---------- ---------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash ............................................. $ 2,126 $ 1,103 $ 8,786
Patient receivables, less allowance of $5,900 and
$5,400 at December 31, 1996 and 1995, respectively,
and $5,900 at June 30, 1997 ........................ 74,663 62,377 85,740
Prepaid expenses and other assets .................. 1,190 2,845 1,797
--------- --------- ---------
Total current assets .............................. 77,979 66,325 96,323
Equipment and improvements, net ..................... 39,190 58,077 30,646
Note receivable, stockholder ........................ 64,703 57,944 64,703
--------- --------- ---------
Total assets ....................................... $ 181,872 $ 182,346 $ 191,672
========= ========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
- -------------------------------------
Current liabilities:
Accounts payable ................................. $ 6,647 $ 15,388 $ 8,635
Accrued expenses ................................. 15,736 39,537 9,289
Patient prepayments .............................. 149,284 141,607 172,166
Current portion of notes payable .................. 148,160 16,012 107,587
--------- --------- ---------
Total current liabilities ........................... 319,827 212,544 297,677
Notes payable, less current portion ............... 15,012 148,172 11,042
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) (124,047)
--------- --------- ---------
Total stockholder's deficit ........................ (152,967) (178,370) (117,047)
--------- --------- ---------
Total liabilities and stockholder's deficit ......... $ 181,872 $ 182,346 $ 191,672
========= ========= =========
</TABLE>
See accompanying notes.
F-51
<PAGE>
Robert R. Schmisseur, D.D.S., P.C.
Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
Six Months ended Three Months ended
Year ended December 31, June 30, June 30,
1996 1995 1997 1996 1997 1996
--------- --------- --------- ---------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Patient revenue ............... $ 595,535 $ 543,977 $ 306,980 $ 297,140 $ 150,193 $ 140,938
Direct expenses:
Employee costs .................. 350,595 280,007 162,363 175,298 86,957 87,649
Other costs ..................... 106,720 126,649 59,733 53,360 37,803 26,680
--------- --------- --------- --------- --------- ---------
Total direct expenses ............ 457,315 406,656 222,096 228,658 124,760 114,329
General and administrative ...... 82,836 90,705 36,197 41,418 19,079 20,709
Depreciation ..................... 21,056 19,699 9,133 10,528 4,577 5,264
--------- --------- --------- --------- --------- ---------
Operating income ............... 34,328 26,917 39,554 16,536 1,777 636
Interest income .................. 4,473 3,279 1,532 2,238 286 1,119
Interest expense ............... (13,398) (14,571) (5,166) (6,700) (2,473) (3,350)
--------- --------- --------- --------- --------- ---------
Net income (loss) ............... 25,403 15,625 35,920 12,074 (410) (1,595)
Accumulated deficit at
beginning of period ............ (185,370) (200,995) (159,967) (185,370) (123,637) (171,701)
--------- --------- --------- --------- --------- ---------
Accumulated deficit at end
of period ..................... $(159,967) $(185,370) $(124,047) $(173,296) $(124,047) $(173,296)
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-52
<PAGE>
Robert R. Schmisseur, D.D.S., P.C.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months ended
Year ended December 31, June 30,
1996 1995 1997 1996
--------- --------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income .................................... $ 25,403 $ 15,625 $ 35,920 $ 12,074
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debts ..................... 5,900 5,400 -- 2,950
Depreciation ................................. 21,056 19,699 9,133 10,528
Changes in operating assets and
liabilities:
Patient receivables ........................ (18,186) (24,666) (11,077) (33,559)
Prepaid expenses and other assets ............ 1,655 (635) (607) --
Accounts payable ........................... (8,741) (8,761) 1,988 (9,362)
Accrued expenses ........................... (23,801) 23,485 (6,447) (31,166)
Patient prepayments ........................ 7,677 489 22,882 63,879
-------- -------- -------- --------
Net cash provided by operating activities ...... 10,963 30,636 51,792 15,344
Investing activities
Purchases of equipment and improvements ......... (2,169) (15,827) (589) --
Note receivable, stockholder .................. (6,759) (11,278) -- --
-------- -------- -------- --------
Net cash used in investing activities ......... (8,928) (27,105) (589) --
Financing activities
Proceeds from notes payable ..................... 15,000 -- -- --
Repayment of notes payable ..................... (16,012) (13,026) (44,543) (8,006)
-------- -------- -------- --------
Net cash used in financing activities ......... (1,012) (13,026) (44,543) (8,006)
-------- -------- -------- --------
Net increase (decrease) in cash ............... 1,023 (9,495) 6,660 7,338
Cash at beginning of period ..................... 1,103 10,598 2,126 1,103
-------- -------- -------- --------
Cash at end of period ........................... $ 2,126 $ 1,103 $ 8,786 $ 8,441
======== ======== ======== ========
Supplemental disclosures:
Interest paid ................................. $ 14,077 $ 13,167 $ 5,040 $ 6,700
======== ======== ======== ========
</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 June 30, 1997, the statements of operations and
accumulated deficit for the three months and six months ended June 30, 1997 and
1996 and the statements of cash flows for the six months ended June 30, 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 six months ended June 30, 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
operations and accumulated deficit for the three month and six month periods
ended June 30, 1996 and statement of cash flows for the six month period ended
June 30, 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:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
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
======== =======
</TABLE>
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)
<TABLE>
<S> <C>
Year ending December 31:
1997 ............................................. $148,160
1998 ............................................. 7,453
1999 ............................................. 7,559
---------
$163,172
=========
</TABLE>
5. Income Taxes
Significant components of the deferred tax liabilities and assets were as
follows at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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:
<TABLE>
<S> <C>
Year ending December 31:
1997 ............................................... $28,290
1998 ............................................... 28,438
1999 ............................................... 28,438
2000 ............................................... 4,740
--------
$89,906
========
</TABLE>
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 $726,806, consisting of cash of $218,042 and shares of
common stock of Omega with a fair value at the date of issue of $508,764.
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 June 30, 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 June 30, 1997 ........................ $ 94,059 $103,784 $ 93,992
Prepaid expenses and other assets .................. 550 -- 700
-------- -------- ---------
Total current assets ................................. 94,609 103,784 94,692
Equipment and improvements, net ..................... 16,960 14,762 14,332
-------- -------- ---------
Total assets .......................................... $111,569 $118,546 $ 109,024
======== ======== =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
- -------------------------------------
Current liabilities:
Bank overdraft ....................................... $ 9,622 $ 7,847 $ 5,748
Accounts payable .................................... 55,811 24,016 84,089
Accrued expenses .................................... 31,022 7,894 23,863
Patient prepayments ................................. 67,240 82,696 80,094
Demand note payable ................................. 15,000 10,000 48,657
Current portion of notes payable ..................... 6,976 1,983 6,517
-------- -------- ---------
Total current liabilities ........................... 185,671 134,436 248,968
Notes payable, less current portion .................. 17,041 22,331 15,312
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) (156,256)
-------- -------- ---------
Total stockholder's deficit ........................... (91,143) (38,221) (155,256)
-------- -------- ---------
Total liabilities and stockholder's deficit ......... $111,569 $118,546 $ 109,024
======== ======== =========
</TABLE>
See accompanying notes.
F-60
<PAGE>
Clark E. Schneekluth, D.D.S., M.D., Inc.
Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
Six Months ended Three Months ended
Year ended December 31, June 30, June 30,
1996 1995 1997 1996 1997 1996
------------- ------------- ------------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Patient revenue ............... $ 394,301 $ 387,187 $ 172,888 $ 196,225 $ 78,203 $ 110,137
Direct expenses:
Employee costs .................. 178,697 171,584 89,010 89,348 43,120 44,674
Other costs ..................... 122,182 105,515 69,094 60,676 31,980 30,338
--------- --------- ---------- --------- ---------- ---------
Total direct expenses ............ 300,879 277,099 158,104 150,024 75,100 75,012
General and administrative ...... 91,858 77,883 45,688 46,344 28,295 23,172
Depreciation ..................... 6,271 7,212 3,178 3,136 1,610 1,568
--------- --------- ---------- --------- ---------- ---------
Operating income (loss) ......... (4,707) 24,993 (34,082) (3,279) (26,802) 10,385
Interest expense ............... 745 1,072 3,601 372 1,973 186
--------- --------- ---------- --------- ---------- ---------
Net income (loss) ............... (5,452) 23,921 (37,683) (3,651) (28,775) 10,199
Accumulated deficit at
beginning of period ............ (39,221) (23,656) (92,143) (39,221) (112,965) (64,939)
Distributions to stockholder . (47,470) (39,486) (26,430) (23,736) (14,516) (11,868)
--------- --------- ---------- --------- ---------- ---------
Accumulated deficit at end
of period ..................... $ (92,143) $ (39,221) $ (156,256) $ (66,608) $ (156,256) $ (66,608)
========= ========= ========== ========= ========== =========
</TABLE>
See accompanying notes.
F-61
<PAGE>
Clark E. Schneekluth, D.D.S., M.D., Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months ended
Year ended December 31, June 30,
1996 1995 1997 1996
--------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) ........................... $ (5,452) $ 23,921 $(37,683) $ (3,651)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation .............................. 6,271 7,212 3,178 3,136
Provision for bad debts ..................... (29,556) (32,774) -- 14,778
Changes in operating assets and
liabilities:
Patient receivables ........................ 39,281 37,301 67 (47,746)
Prepaid expenses and other assets ......... (550) 1,350 (150) --
Accounts payable ........................... 31,795 (5,740) 28,278 30,883
Accrued expenses ........................... 23,128 1,080 (7,159) 27,441
Patient prepayments ........................ (15,456) 8,215 12,854 19,962
-------- -------- -------- --------
Net cash provided by (used in) operating
activities ................................. 49,461 40,565 (615) 44,803
Investing activity
Purchases of equipment and improvements ...... (8,469) (1,800) (550) (4,235)
-------- -------- -------- --------
Net cash used in investing activity ......... (8,469) (1,800) (550) (4,235)
Financing activities
Proceeds from notes payable .................. 12,500 10,000 33,657 2,500
Repayment of notes payable .................. (7,797) (17,138) (2,188) (149)
Distributions to stockholder .................. (47,470) (39,486) (26,430) (23,736)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities ................................. (42,767) (46,624) 5,039 (21,385)
-------- -------- -------- --------
Net increase (decrease) in cash ............... (1,775) (7,859) 3,874 19,183
Cash (bank overdraft) at beginning of period . (7,847) 12 (9,622) (7,847)
-------- -------- -------- --------
Cash (bank overdraft) at end of period ...... $ (9,622) $ (7,847) $ (5,748) $ 11,336
======== ======== ======== ========
</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 June 30, 1997, the statements of operations and
accumulated deficit for the three months and six months ended June 30, 1997 and
1996 and the statements of cash flows for the six months ended June 30, 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 six months ended June 30, 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 for the three month and six month periods
ended June 30, 1996 and statement of cash flows for the six month period ended
June 30, 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:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Equipment and improvements ........................ $70,270 $61,801
Less accumulated depreciation ..................... 53,310 47,039
------- -------
Equipment and improvements, net .................. $16,960 $14,762
======= =======
</TABLE>
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:
<TABLE>
<S> <C>
Year ending December 31:
1997 .................................................. $ 6,976
1998 .................................................. 4,506
1999 .................................................. 4,032
2000 .................................................. 2,838
2001--thereafter ...................................... 5,665
--------
$24,017
========
</TABLE>
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 June 30, 1997
--------- -------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- -------
Current assets:
Cash ................................................... $ 18,156 $ 14,283 $ 32,505
Patient receivables, less allowance of $10,000
and $3,000 at December 31, 1996 and 1995,
respectively, and $10,000 at June 30, 1997 ............ 50,308 50,263 54,829
-------- -------- --------
Total current assets .................................... 68,464 64,546 87,334
Equipment and improvements, net ........................ 36,011 22,701 38,513
Note receivable, stockholder ........................... 36,044 43,329 11,544
-------- -------- --------
Total assets .......................................... $140,519 $130,576 $137,391
======== ======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
- -------------------------------------
Current liabilities:
Accounts payable ....................................... $ 20,712 $ 4,478 $ 4,323
Accrued expenses ....................................... 32,052 31,825 50,502
Patient prepayments .................................... 97,494 76,221 114,706
Notes payable .......................................... -- 9,317 --
Income taxes payable ................................. 14,703 17,904 9,203
-------- -------- --------
Total current liabilities .............................. 164,961 139,745 178,734
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) (42,343)
-------- -------- --------
Total stockholder's deficit ........................... (24,442) (9,169) (41,343)
-------- -------- --------
Total liabilities and stockholder's deficit ............ $140,519 $130,576 $137,391
======== ======== ========
</TABLE>
See accompanying notes.
F-68
<PAGE>
Jeff S. Zapalac, D.D.S., M.S., Inc.
Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
Six Months ended Three Months ended
Year ended December 31, June 30, June 30,
1996 1995 1997 1996 1997 1996
------------- ------------- ------------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Patient revenue ............... $ 624,057 $ 563,520 $ 251,169 $ 313,084 $ 129,883 $ 152,701
Direct expenses:
Employee costs .................. 286,661 231,740 150,989 143,330 69,995 67,713
Other costs ..................... 159,849 112,296 69,374 74,590 34,531 37,295
--------- --------- --------- ---------- --------- ---------
Total direct expenses ............ 446,510 344,036 220,363 217,920 104,526 105,008
General and administrative ...... 170,556 107,197 41,417 82,672 20,452 41,336
Depreciation ..................... 11,624 10,897 6,314 5,812 3,408 2,906
--------- --------- --------- ---------- --------- ---------
Operating income (loss) ......... (4,633) 101,390 (16,925) 6,680 1,497 3,451
Interest income .................. 4,332 84 48 2,130 20 1,065
Interest expense ............... (269) (1,991) (24) (134) -- (67)
--------- --------- --------- ---------- --------- ---------
Income (loss) before income
taxes ........................... (570) 99,483 (16,901) 8,676 1,517 4,449
Provision for income taxes ...... 14,703 17,597 -- 7,353 -- 3,677
--------- --------- --------- ---------- --------- ---------
Net income (loss) ............... (15,273) 81,886 (16,901) 1,323 1,517 772
Accumulated deficit at
beginning of period ............ (10,169) (92,055) (25,442) (10,169) (43,860) (9,618)
--------- --------- --------- ---------- --------- ---------
Accumulated deficit at end
of period ..................... $ (25,442) $ (10,169) $ (42,343) $ (8,846) $ (42,343) $ (8,846)
========= ========= ========= ========== ========= =========
</TABLE>
See accompanying notes.
F-69
<PAGE>
Jeff S. Zapalac, D.D.S., M.S., Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months ended
Year ended December 31, June 30,
1996 1995 1997 1996
--------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income (loss)............................... $(15,273) $ 81,886 $(16,901) $ 1,323
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Provision for bad debt expense .............. 10,000 3,000 -- 5,000
Depreciation .............................. 11,624 10,897 6,313 5,813
Changes in operating assets and
liabilities:
Patient receivables ....................... (10,045) (29,375) (4,521) (33,953)
Patient prepayments ....................... 21,273 (20,724) 17,212 24,322
Accounts payable .......................... 16,234 (11,744) (16,389) 8,938
Accrued expenses .......................... 227 16,746 18,450 20,066
Income taxes payable ....................... (3,201) 12,026 (5,500) (16,000)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities ................................... 30,839 62,712 (1,336) 15,509
Investing activities
Note receivable, stockholder ................... 7,285 (35,434) 24,500 --
Purchases of equipment and improvements ........ (24,934) (2,156) (8,815) (12,469)
-------- -------- -------- --------
Net cash provided by (used in) investing
activity ...................................... (17,649) (37,590) 15,685 (12,469)
Financing activity
Repayment of notes payable ..................... (9,317) (17,342) -- (4,659)
-------- -------- -------- --------
Net cash used in financing activity ............ (9,317) (17,342) -- (4,659)
-------- -------- -------- --------
Net increase (decrease) in cash ................ 3,873 7,780 14,349 (1,619)
Cash at beginning of period .................... 14,283 6,503 18,156 14,283
-------- -------- -------- --------
Cash at end of period .......................... $ 18,156 $ 14,283 $ 32,505 $ 12,664
======== ======== ======== ========
Supplemental disclosures:
Taxes paid .................................... $ 17,904 $ 5,571 $ 5,500 $ 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
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)
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.
Interim Financial Statements
The balance sheet at June 30, 1997, the statements of operations and
accumulated deficit for the three months and six months ended June 30, 1997 and
1996 and the statements of cash flows for the six months ended June 30, 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 six months ended June 30, 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 for the three month and six month periods
ended June 30, 1996 and statement of cash flows for the six month period ended
June 30, 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:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
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
======== =======
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
The reconciliation of income tax computed at the federal statutory rates
to income tax expense is:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
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
======= ========
</TABLE>
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>
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<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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 ............................................... 15
Use of Proceeds ......................................... 15
Dividend Policy ......................................... 17
Capitalization ............................................ 17
Dilution .................................................. 18
Selected Financial Data ................................... 19
Management's Plan of Operation .......................... 20
Business .................................................. 25
Management ............................................... 33
Certain Transactions ...................................... 39
Principal Stockholders ................................... 41
Description of Securities ................................ 43
Shares Eligible for Future Sale .......................... 46
Underwriting ............................................ 47
Legal Matters ............................................ 49
Experts .................................................. 49
Additional Information ................................... 49
Index to Financial Statements ............................. F-1
</TABLE>
--------------------------
Until October 26, 1997, 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
(as units, each consisting of one share of
Common Stock and one Redeemable
Common Stock Purchase Warrant)
-----------
PROSPECTUS
-----------
NATIONAL SECURITIES
CORPORATION
October 1, 1997
================================================================================
