U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _______________ TO __________________
COMMISSION FILE NUMBER: 0-23055
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OMEGA ORTHODONTICS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS
SPECIFIED IN ITS CHARTER)
DELAWARE 95-4596853
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3621 SILVER SPUR LANE
ACTON, CALIFORNIA 93510
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: 805-269-2841
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Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 1998, there were 4,807,232 shares of Common Stock outstanding and
2,070,000 Redeemable Common Stock Purchase Warrants outstanding.
<PAGE>
OMEGA ORTHODONTICS, INC.
FORM 10-QSB REPORT INDEX
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets June 30, 1998 (Unaudited)
and December 31, 1997
Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 1998 and June 30, 1997
(Unaudited)
Condensed Consolidated Statement of Stockholders' Equity June 30,
1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and June 30, 1997 (Unaudited)
Notes to Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II -- Other Information
Item 1 - Legal Proceedings
Item 2 - Changes in Securities and Use of Proceeds
Item 3 - Defaults upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
Signatures
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
OMEGA ORTHODONTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited) (Audited)
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,406,678 $ 5,421,721
Receivable from affiliated practices, net 2,084,407 926,271
Notes and interest receivable from affiliated practice 25,333 50,000
Notes and interest receivable from related parties 125,058 120,859
Prepaid expenses 88,732 55,791
----------- -----------
Total current assets 4,730,208 6,574,642
Property and equipment, net 738,660 503,339
Due from affiliated practices 172,563 53,194
Intangible assets, net 8,395,554 5,099,043
Other assets 124,688 80,303
----------- -----------
Total Assets $14,161,673 $12,310,521
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 171,908 $ 155,671
Accrued expenses 359,578 354,513
Patient prepayments 1,520,400 775,699
Current portion of long-term debt 232,153 76,130
Due to affiliated practices 180,652 147,955
Due to related parties -- 305,000
----------- -----------
Total current liabilities 2,464,691 1,814,968
Long-term debt, less current portion 902,870 468,551
----------- -----------
Total Liabilities 3,367,561 2,283,519
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value 9,500,000 shares
authorized - 4,807,232 and 4,338,823 shares issued
and outstanding at June 30, 1998 and December 31,
1997, respectively 48,072 43,388
Additional paid-in capital 14,785,824 13,858,851
Accumulated deficit (4,039,784) (3,875,237)
----------- -----------
Total stockholders' equity 10,794,112 10,027,002
----------- -----------
Total Liabilities and Stockholders' Equity $14,161,673 $12,310,521
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
OMEGA ORTHODONTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Service fees $ 1,741,037 $ -- $ 3,360,478 $ --
Consulting fees 3,929 21,345 21,795 44,571
----------- ----------- ----------- -----------
Total revenues 1,744,966 21,345 3,382,273 44,571
----------- ----------- ----------- -----------
Costs and expenses:
Employee costs 879,289 53,347 1,659,047 107,578
Other direct costs 298,357 36,571 547,388 43,856
General and administrative 662,215 122,428 1,194,621 277,553
Depreciation and amortization 86,754 914 183,921 1,828
Non-recurring consulting
expense -- 2,867,400 -- 2,867,400
----------- ----------- ----------- -----------
Total costs and expenses 1,926,615 3,080,660 3,584,977 3,298,215
----------- ----------- ----------- -----------
Loss from operations (181,649) (3,059,315) (202,704) (3,253,644)
Interest expense (26,250) (49,799) (46,217) (81,145)
Interest income 34,376 896 84,374 2,324
----------- ----------- ----------- -----------
Net loss ($ 173,523) ($3,108,218) ($ 164,547) ($3,332,465)
=========== =========== =========== ===========
Basic and diluted net loss per share ($ 0.04) ($ 1.84) ($ 0.03) ($ 1.98)
=========== =========== =========== ===========
Weighted average and diluted
shares outstanding 4,803,318 1,685,000 4,779,401 1,685,000
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
OMEGA ORTHODONTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
NUMBER OF $.01 PAR PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES VALUE CAPITAL DEFICIT EQUITY
------ ----- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1997 4,338,823 $43,388 $13,858,851 ($3,875,237) $ 10,027,002
Issuance of common stock
to new affiliated practices 462,159 4,622 918,598 -- 923,220
Issuance of common stock
to consultant 6,250 62 8,375 -- 8,437
Net loss -- -- -- (164,547) (164,547)
--------- ------- ----------- ----------- ------------
Balance, June 30,
1998 4,807,232 $48,072 $14,785,824 ($4,039,784) $ 10,794,112
========= ======= =========== =========== ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
OMEGA ORTHODONTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
1998 1997
---- ----
<S> <C> <C>
Net Cash used in operating activities ($ 829,072) ($307,203)
Cash flows from investing activities:
Purchases of property and equipment (218,810) (1,425)
Increase in notes receivable from affiliated practice (25,333) --
Increase in other assets (44,385) --
Acquisition of management services agreements
and related assets (1,828,639) --
----------- ---------
Net cash used in investing activities (2,117,167) (1,425)
----------- ---------
Cash flows from financing activities:
Repayment of borrowings (77,241) --
Deferred offering costs -- (296,426)
Debt financing costs -- (18,900)
Proceeds from issuance of notes payable -- 350,000
Issuance of common stock to consultant 8,437 --
----------- ---------
Net cash provided/used by financing activities (68,804) 34,674
----------- ---------
Net decrease in cash and cash equivalents (3,015,043) (273,954)
Cash and cash equivalents, beginning of period (5,421,721) 321,057
----------- ---------
Cash and cash equivalents, end of period ($2,406,678) $ 47,103
=========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 47,413 $ 52,273
=========== =========
Supplemental disclosure of cash flows related to affiliations:
Fair value of assets acquired, excluding cash $ 3,614,774
Issuance of common stock (923,220)
Issuance of notes payable (583,100)
Cash paid (1,828,639)
-----------
Liabilities assumed $ 279,815
===========
Supplemental disclosure of non cash items from investing activities:
Issuance of debt in connection with affiliations $ 583,100
===========
Transfer of note receivable in connection with
affiliation $ 50,000
===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
OMEGA ORTHODONTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet at June 30, 1998, the condensed
consolidated statements of operations for the three months and six months
ended June 30, 1998 and June 30, 1997 and the condensed consolidated
statements of cash flows for the six months ended June 30, 1998 and 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 periods. The results of
operations for the three and six months ended June 30, 1998 are not
necessarily indicative of results to be expected for the entire year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1997.
REVENUE RECOGNITION
The Company's services are provided under management services agreements
(Management Services Agreements) and interim management agreements with
affiliated practices (Affiliated Practices). Net revenue earned by the
Company under the management agreements is equal to approximately 25% of new
patient contract balances in the first month of new patient contracts plus a
portion of existing contract balances recorded by the Affiliated Practices,
less amounts retained by the Affiliated Practices. The Company provides
practice management and marketing services, facilities and non-professional
personnel and receives 65% to 75% of the Affiliated Practices' gross patient
fee collections as a management fee. The Affiliated Practices retain all
revenue not paid to the Company as the management fee. The amounts retained
by the Affiliated Practices are dependent on their financial performance,
based in significant part on their cash receipts and disbursements. If total
expenses of an Affiliated Practice are below prescribed percentages, the
Affiliated Practice is entitled to retain 50% of the difference. Under the
terms of the management agreements, the Affiliated Practices assign their
receivables to the Company in payment of their management fees. The Company
is responsible for collection. The Company also assumes its portion of
patient prepayments, which are deposits from patients for dental care to be
performed in future periods.
INCOME (LOSS) PER SHARE
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER
SHARE. This statement established standards for computing and presenting
earnings per share and applies to entities with publicly traded common stock
or potential common stock. This statement is effective for fiscal years
ending after December 15, 1997. In February 1998, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin No. 98 (SAB 98).
This bulletin revises the SEC's guidance for calculating earnings per share
for fiscal years ending after December 15, 1997.
Basic loss per share was determined by dividing net loss by the weighted
average common shares outstanding during the period. Diluted loss per share
is the same as basic loss per share as the effects of the Company's
potential common stock (options to purchase 508,333 shares of common stock
and 2,070,000 warrants as of June 30, 1998) are antidilutive. During the
period preceding the Company's initial public offering (IPO), the Company
issued 185,000 shares of common stock that have been treated as "nominal
issuances" in accordance with SAB 98.
<PAGE>
OMEGA ORTHODONTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS
The value assigned to the Management Services Agreements with the
acquisition of the assets and liabilities of the management services
organizations (MSO) and concurrent Management Services Agreements with the
Affiliated Practices has been accounted for by the Company in accordance
with the Emerging Issues Task Force ("EITF") Issue 97-2. Substantially all
of the intangible assets on the Company's condensed consolidated balance
sheet as of June 30, 1998 are related to the affiliations with the
Affiliated Practices. The Company evaluates each affiliation and establishes
an appropriate amortization period based on the underlying facts and
circumstances. Currently, the Company uses an amortization period ranging
from 25 to 40 years, consistent with the extended terms of the Management
Services Agreements. For all new affiliations subsequent to the IPO, the
Company used a 25-year amortization period. Subsequent to each affiliation,
the Company reevaluates such facts and circumstances to determine if the
related intangible assets continue to be realizable and if the amortization
period continues to be appropriate.
Amortization of the intangible assets on the Company's condensed
consolidated balance sheet as of June 30, 1998 produced amortization expense
of approximately $120,000 for the six months ended June 30, 1998.
Affiliations with additional Affiliated Practices will result in the
recognition of additional intangible assets and will cause amortization
expense to increase further. Although the net unamortized balance of
intangible assets on the Company's condensed consolidated balance sheet as
of June 30, 1998 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 intangible assets, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
NEW ACCOUNTING STANDARD
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999. The Company does not believe the
adoption of this accounting standard will have any impact on the Company's
financial position or results of operations.
. NEW AFFILIATED PRACTICES
During the six months ended June 30, 1998, the Company completed
affiliations with six new Affiliated Practices, three of which merged with
existing Affiliated Practices.
Total consideration related to the new Affiliated Practices is summarized as
follows:
Value of common stock $ 923,220
Cash paid 1,828,639
Notes payable 583,100
---------------
Total $ 3,334,959
===============
<PAGE>
The cost of the above new Affiliated Practices has been allocated on the
basis of the estimated fair value of the assets acquired and liabilities
assumed, resulting in management contract intangibles of approximately $3.4
million. These allocations may be adjusted to the extent that management
becomes aware of additional information within one reporting year of the
affiliation date which results in a material change in the amount of any
contingency or changes in the estimated fair value of assets acquired and
liabilities assumed.
The allocation of the purchase price of the new Affiliated Practices,
including acquisition costs of approximately $123,000, is as follows:
Property and equipment $ 77,530
Management service contract intangibles 3,373,970
Patient receivables and patient prepayments 163,274
Assumed liabilities ( 279,815)
-----------
$ 3,334,959
============
In addition, during the six months ended June 30, 1998, the Company entered
into an interim management agreement with two additional practices, pursuant
to which the Company provides management services under essentially the same
terms as its Management Services Agreements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS REGARDING THE
PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS INCLUDING PLANS AND
OBJECTIVES RELATING TO THE DEVELOPMENT OF THE AFFILIATED PRACTICES. 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 AFFILIATED PRACTICES 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 THE FOLLOWING WILL
PROVE TO BE ACCURATE. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN
THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN, PARTICULARLY IN VIEW OF THE
<PAGE>
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. THE
FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND
NOTES APPEARING ELSEWHERE IN THIS REPORT AND THE COMPANY'S PRIOR FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION.
GENERAL
-------
Omega was incorporated in Delaware in August 1996. Following its initial
public offering ("IPO") on October 6, 1997, the Company began to offer its
services primarily under an "affiliate" relationship whereby it purchases,
pursuant to an affiliation agreement ("Affiliation Agreement"), the equity
interests of the management services organization ("MSO") that holds certain
assets and is associated with an orthodontic or other dental specialty
practice ("Affiliated Practice") and enters into a long term management
services agreement ("Management Services Agreement") with the Affiliated
Practice of the selling orthodontist or other dental specialist ("Affiliated
Practitioner"). Pursuant to the Management Services Agreement, the Company
receives a monthly management fee for providing all of the Affiliated
Practice'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 Affiliated Practice.
Pursuant to the Affiliation Agreement, the Affiliated Practitioner typically
converts his existing professional corporation into a general corporation
that will function as the MSO and creates a new professional corporation
(the Affiliated Practice) through which the Affiliated Practitioner will
continue to provide orthodontic or other dental specialty care. The MSO
retains certain assets and liabilities which typically include the lease for
the Affiliated Practice's office space, clinical supplies and equipment and
office furniture, supplies and equipment. The Affiliated Practice retains
certain other assets and liabilities (if any) which typically include all
cash and cash equivalents, real property, automobiles, patient records,
related patient information and notes payable unrelated to assets purchased.
The Company generally acquires all of the equity interest of the MSO from
the Affiliated Practitioner, 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. As of June 30, 1998, the Company
had completed 14 affiliations with an average MSO purchase price of
approximately $655,000, of which the cash portion was approximately
$315,000.
The Management Services Agreement provides that the Affiliated Practice 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 is
negotiated based on specific circumstances, the management fees charged
typically range between 65% to 75% of the Affiliated Practice's gross
income, which is expected to be sufficient to pay all of the MSO's expenses
and provide a return on the Company's investment. If the Affiliated
Practice'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 Affiliated
Practice. At the retirement, disability or death of the Affiliated
Practitioner, the Company will identify a replacement Affiliated
Practitioner to purchase the Affiliated Practice and assume the Management
Services Agreement.
<PAGE>
Concurrent with the IPO, the Company executed Affiliation Agreements with
seven initial Affiliated Practices. In addition, between October and
December 31, 1997 the Company entered into Affiliation Agreements with two
additional Affiliated Practices. During the first six months of 1998, the
Company entered into Affiliation Agreements with six additional practices
(three of which merged with existing Affiliated Practices). Pursuant to
those collective agreements, the Company acquired the equity interests in
the MSOs of 14 Affiliated Practices (two of which merged with existing
Affiliated Practices). Each of the Affiliated Practices is typically
operated with one practitioner, who is typically supported by a staff of
three dental assistants and three office personnel. As of June 30, 1998, the
Company had 14 affiliated practices operating with 17 doctors in 10 states;
which includes interim management agreements with two practices under terms
similar to its Affiliation Agreements.
In consideration for acquiring the six MSOs during the six months ended June
30, 1998, the Company paid the aggregate of approximately $1.8 million in
cash, issued an aggregate of approximately $583,000 in notes bearing
interest at 8.5%, assumed approximately $280,000 of liabilities and issued
an aggregate of 462,159 shares of Common Stock.
The Company expects that its future growth will come from implementing its
Omega Exceptional Practice Model with Affiliated Practices and entering into
Affiliation Agreements with new Affiliated Practices. The ability of the
Company to achieve its expansion will depend upon a number of factors,
including (i) the Company's ability to attract orthodontic and other dental
specialists to affiliate with the Company, (ii) the availability of suitable
markets and the Company's ability to obtain suitable locations within those
markets; (iii) 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 (iv) the availability of adequate financing to fund
affiliations with orthodontic and other dental specialty practices. A
shortage of available orthodontists and other dental specialists 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 Affiliated
Practices.
RESULTS OF OPERATIONS
---------------------
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997.
REVENUES
--------
Total revenues for the three months and six months ended June 30, 1998 were
approximately $1.7 million and $3.4 million, respectively, and consisted of
approximately $1.7 million and $3.4 million of service fees revenue from
twelve and fourteen Affiliated Practices, respectively, and approximately
$4,000 and $22,000 of other consulting fee revenue on a fee for service
basis from non-Affiliated Practices, respectively. For the three and six
months ended June 30, 1997, the Company did not have any service fees
revenue because it had not yet affiliated with any Affiliated Practices.
During the three and six months ended June 30, 1997, the Company earned
approximately $21,000 and $45,000, respectively, for consulting services
provided on a fee for service basis.
<PAGE>
COST AND EXPENSES
-----------------
The Company incurred operating costs and expenses of approximately $1.9
million and $3.6 million for the three and six months ended June 30, 1998,
respectively. The Company's costs and expenses consist primarily of salaries
and benefits, orthodontic supplies, rent, advertising and marketing, general
and administrative and depreciation and amortization. The Company incurred
operating costs and expenses of approximately $3.1 million and $3.3 million
for the three and six months ended June 30, 1997, respectively, which
represented corporate office expense, the cost of providing certain
management consulting services and the value ascribed to certain stock
compensation earned by consultants.
The Company's costs and expenses include:
EMPLOYEE COSTS. Includes all salaries, payroll taxes and fringe
benefits of the dental assistants, office staff and corporate office
personnel.
OTHER DIRECT COSTS. Includes dental and office supplies, laboratory
costs, facilities and equipment for the Affiliated Practices and
corporate office.
GENERAL ADMINISTRATIVE. Includes all other operating expenses,
including advertising, repairs and maintenance, computer support,
telephone, utilities, taxes and licenses for the Affiliated Practices
and corporate office, as well as the cost of consultants, professional
fees and travel related to providing support to the Affiliated
Practices and corporate office.
DEPRECIATION AND AMORTIZATION. Includes depreciation of equipment and
leasehold improvements of the Affiliated Practices and amortization of
intangible assets related to the Management Services Agreement.
INTEREST EXPENSE
----------------
Interest expense of approximately $26,000 and $46,000 for the three and six
months ended June 30, 1998, respectively, reflected the cost of borrowings
under notes payable to Affiliated Practices issued as part of the purchase
price for affiliating with those practices. Interest expense of
approximately $50,000 and $81,000 for the three and six months ended June
30, 1997, respectively, reflects the cost of borrowing under bridge
financing outstanding at that time used to finance the cost of operations
and IPO costs. The bridge financing notes were paid in full with a portion
of the proceeds of the IPO.
INTEREST INCOME
---------------
Interest income of approximately $34,000 and $84,000 for the three and six
months ended June 30, 1998, respectively, reflected interest earned on the
Company's net proceeds from the IPO and notes from related parties. Interest
income of approximately $900 and $2,000 for the three and six months ended
June 30, 1997, respectively, reflected interest earned on the net proceeds
of the bridge financing notes.
<PAGE>
NET LOSS
--------
As a result of the foregoing factors, the Company generated a net loss of
approximately $174,000 and $165,000, or $0.04 and $0.03 per share, for three
and six months ended June 30, 1998, respectively, versus a net loss of
approximately $3.1 million and $3.3 million, or $1.84 and $1.98 per share,
for the three and six months ended June 30, 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
FINANCING ACTIVITY
------------------
The Company has financed its capital requirements to date with borrowings
from bridge and interim notes and the issuance of equity securities.
The Company has experienced operating losses, negative cash flows, a deficit
in working capital and an accumulated deficit since its inception. The
Company's accumulated deficit from inception (August 30, 1996) to October 1,
1997 (the Company's IPO) was approximately $3.9 million. The Company
reported a significant loss from operations for the year ended December 31,
1997 due primarily to the value ascribed to certain stock compensation
earned by consultants in April 1997 and has reported a loss from operations
for the six months ended June 30, 1998 of $202,704.
The Company makes routine cash advances from time to time to its Affiliated
Practices under its Management Services Agreements to fund any deficits in
monthly cash flows of the Affiliated Practices. Such advances will generally
be repaid by the Affiliated Practices to the Company without interest as
adequate funds are generated by the Affiliated Practices. The balance of
advances to Affiliated Practices as of June 30, 1998 was $172,563.
The Company's expansion strategy requires substantial capital resources.
Capital is needed not only for the affiliation with future Affiliated
Practices, but also for the effective integration, operation and expansion
of the existing and future Affiliated Practices. In addition, the Affiliated
Practices may from time to time require capital for renovation and expansion
and for the addition of equipment and technology.
The Company anticipates the use of a combination of cash, notes and shares
of its Common Stock to fund additional affiliations. The extent to which the
Company is able or willing to use shares of Common Stock to enter into
future affiliations or provide future financing will depend on the market
value of the Common Stock from time to time and, in the case of
affiliations, the willingness of owners of potential Affiliated Practices to
accept Common Stock as full or partial payment of consideration for their
affiliations. Using shares of Common Stock for these purposes may result in
significant dilution to existing stockholders. During the six months ended
June 30, 1998, the Company issued 462,159 shares of Common Stock in
connection with affiliations with Affiliated Practices and 6,250 shares of
Common Stock to an unaffiliated consultant.
The Company will use cash flows from operations, net proceeds from its IPO
and will seek to raise capital through bank borrowings and public or private
debt or equity issuances. The availability of these capital sources will
depend on prevailing market conditions, interest rates and financial
condition of the Company. During the six months ended June 30, 1998, the
Company spent approximately $1.8 million of cash in connection with
affiliations with Affiliated Practices.
<PAGE>
WORKING CAPITAL MANAGEMENT
--------------------------
The Company had $2.3 million of working capital at June 30, 1998, consisting
primarily of cash and cash equivalents of approximately $2.4 million as a
result of the net proceeds remaining from the IPO.
The Company expects to affiliate with additional dental specialty practices
during 1998 that will involve the use of cash, Common Stock and notes
payable. Management believes that the remaining cash proceeds of the IPO
combined with its cash flow from operations will be sufficient to fund
planned capital expenditures and ongoing operations of the Company through
the end of 1998. The Company is also seeking to establish a revolving bank
credit facility which, when combined with the Company's cash resources, will
be used in the Company's planned affiliation program. In the event
additional financing is not available by the end of 1998, the Company
intends to use its cash reserves to finance ongoing operations and to
postpone further affiliations in 1999 until additional funds can be
obtained. There can be no assurance that the Company will be able to obtain
additional funds when needed on satisfactory terms or at all. Any limitation
on the Company's ability to obtain additional financing could have a
material adverse effect on the Company's business, financial condition and
results of operations.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
(a) Not applicable
(b) Not applicable
(c) During the three months ended June 30, 1998, the Company issued an
aggregate of 6,250 shares of Common Stock to an unaffiliated
consultant as partial consideration for services rendered. The
Company relied on Section 4(2) of the Securities Act of 1993, as
amended (the "Securities Act"), and the rules and regulations
promulgated thereunder, in issuing these securities without
registration under the Securities Act.
(d) The Company's Registration Statement on Form SB-2 (Registration No.
333-27179), as amended, with respect to the offering of shares of
the Common Stock and Redeemable Common Stock Purchase Warrants in
the Company's initial public offering (the "IPO") was declared
effective on September 30, 1997. The net proceeds to the Company
from the IPO were $9.5 million. The Company used such net proceeds
as follows: (i)$1.1 million for the repayment of debt; (ii) $2.1
million to consummate the affiliations with the seven initial
Affiliated Practices (the "Initial Affiliated Practices"); (iii)
$2.3 million to consummate affiliations with additional Affiliated
Practices; and (iv) $1.6 million for working capital and other
corporate purposes.
ITEM 3. Defaults upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on June 10, 1998. Proxies
for the Annual Meeting were solicited pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended. There was no
solicitation of proxies in opposition to management's nominees for
directors as listed in the proxy statement. All of such nominees were
elected as directors at the Annual Meeting.
A total of 3,066,776 shares of Common Stock were represented in person
or by proxy at the Annual Meeting. The shares of Common Stock
represented at the Annual Meeting were voted in the following manner on
the proposals put forth at the Annual Meeting:
<PAGE>
(1) To elect the following to serve as directors of the Company:
FOR AGAINST ABSTAIN
--- ------- -------
Robert J. Schulhof 3,065,576 - 1,200
Dean C. Bellavia 3,065,576 - 1,200
John J. Clarke, Jr. 3,060,576 - 6,200
Floyd V. Elliott 3,065,576 - 1,200
C. Joel Glovsky 3,065,576 - 1,200
David T. Grove 3,065,576 - 1,200
(2) To amend the Company's Incentive Stock Plan to increase from
450,000 to 700,000, the total number of shares of the Company's
Common Stock reserved for issuance thereunder:
FOR AGAINST ABSTAIN NOT VOTED
--- ------- ------- ---------
2,208,492 8,300 23,800 826,184
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit No.
(Reference to Item 601(b)
of Regulation S-B) Description
------------------------- -----------
27 Financial Data Schedule
(furnished to the Securities
and Exchange Commission for
Electronic Data Gathering,
Analysis and Retrieval [EDGAR]
purposes only)
(b) Reports on Form 8-K
-------------------
Not applicable
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OMEGA ORTHODONTICS, INC.
(Registrant)
Date: August 14, 1998 By: /s/ Robert J. Schulhof
---------------------------
Robert J. Schulhof
Chief Executive Officer
Date: August 14, 1998 By:/s/ Edward M. Mulherin
----------------------------
Edward M. Mulherin
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
(furnished to the Securities
and Exchange Commission for
Electronic Data Gathering
Analysis, and Retrieval {EDGAR}
purposes only)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF OMEGA ORTHODONTICS, INC. FOR THE
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,406,678
<SECURITIES> 0
<RECEIVABLES> 2,138,170
<ALLOWANCES> (40,000)
<INVENTORY> 0
<CURRENT-ASSETS> 4,730,208
<PP&E> 738,660
<DEPRECIATION> 63,139
<TOTAL-ASSETS> 14,161,673
<CURRENT-LIABILITIES> 2,464,691
<BONDS> 0
0
0
<COMMON> 48,072
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,161,673
<SALES> 3,382,273
<TOTAL-REVENUES> 3,382,273
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,584,977
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,217
<INCOME-PRETAX> (164,547)
<INCOME-TAX> 0
<INCOME-CONTINUING> (164,547)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (164,547)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
