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 MARCH 31, 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
- - - - - - - - - - - - - - - - - - - - - - - - - - - -
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 May 11, 1998, there were 4,800,982 shares of Common Stock
outstanding and 2,070,000 Redeemable Common Stock Purchase
Warrants outstanding.
OMEGA ORTHODONTICS, INC.
FORM 10-QSB REPORT INDEX
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets March 31, 1998
(Unaudited) and December 31, 1997
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and March 31, 1997
(Unaudited)
Condensed Consolidated Statement of Stockholders'
Equity March 31, 1998
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and March 31, 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
Omega Orthodontics, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, 1998 December 31, 1997
Assets
Current assets:
Cash and cash equivalents
$3,106,167 5,421,721
Receivable from affiliated
practices 2,098,170 926,271
Notes receivable from
affiliated practice - 50,000
Notes and interest
receivable from related
parties 122,959 120,859
Prepaid expenses 95,598 55,791
Total current assets 5,422,894 6,574,642
Property and equipment, at
cost, net 619,142 503,339
Due from affiliated practices 105,529 53,194
Intangible assets, net 8,359,002 5,099,043
Other assets 47,846 80,303
Total assets $14,554,413 $12,310,521
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Accounts payable $187,276 $155,671
Accrued expenses 297,051 354,513
Patient prepayments 1,514,587 775,699
Current portion of long-
term debt 204,985 76,130
Due to affiliated
practices 279,788 147,955
Due to related parties 170,000 305,000
Total current liabilities 2,653,687 1,814,968
Long-term debt, less current
portion 941,528 468,551
Total liabilities 3,595,215 2,283,519
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
9,500,000 shares authorized -
4,800,982 and 4,338,823
shares issued and outstanding
at March 31, 1998 and
December 31, 1997,
respectively 48,010 43,388
Additional paid-in capital 14,777,449 13,858,851
Accumulated deficit (3,866,261) (3,875,237)
Total stockholders' equity 10,959,198 10,027,002
Total liabilities and
stockholders' equity $14,554,413 $12,310,521
See notes to condensed consolidated financial statements
Omega Orthodontics, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
1998 1997
Revenues:
Service fees $1,619,441 $ -
Consulting fees 17,866 23,226
Total revenues 1,637,307 23,226
Costs and expenses:
Employee costs 779,758 54,231
Other direct costs 249,031 -
General and administrative 532,406 162,410
Depreciation and amortization 97,167 914
Total costs and expenses 1,658,362 217,555
Loss from operations (21,055) (194,329)
Interest expense (19,967) (31,346)
Interest income 49,998 1,428
Net income (loss) $8,976 $(224,247)
Basic net income (loss) per $.00 $(0.13)
share
Diluted net income (loss) per $.00 $(0.13)
share
Basic weighted average shares 4,755,287 1,685,000
outstanding
Diluted weighted average 4,762,038 1,685,000
shares outstanding
See notes to condensed consolidated financial statements.
Omega Orthodontics, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
<TABLE>
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Common Stock Additional Total
Number of $.01 Par Paid-in Accumulated Deferred Stockholders'
Shares Value Capital Deficit Compensation Equity (Deficit)
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
Net income - - - 8,976 - 8,976
Balance, March 31,
1998 4,800,982 $ 43,010 $14,777,449 $(3,866,261) $ - $10,959,198
See notes to condensed consolidated financial statements.
Omega Orthodontics, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
1998 1997
Net Cash used in operating $(458,800) $ 225,034
activities
Cash flows from investing
activities:
Purchases of property and (75,095) -
equipment
Increase in other assets 32,457 (505,935)
Acquisition of management (1,778,353) -
services agreements and
related assets
Net cash used in investing (1,820,991) (505,935)
activities
Cash flows from financing
activities:
Repayment of borrowings (35,763) -
Proceeds from issuance of - 20,000
notes payable
Net cash provided/used by (35,763) 20,000
financing activities
Net decrease in cash and cash (2,315,554) (260,901)
equivalents
Cash and cash equivalents, 5,421,721 321,057
beginning of period
Cash and cash equivalents, $3,106,167 $60,156
end of period
Supplemental disclosure of
cash flow information:
Cash paid during the period $23,142 $31,346
for interest
Supplemental disclosure of
cash flows related to
Affiliations:
Fair value of assets $3,534,488
acquired, excluding cash
Issuance of common stock (923,220)
Issuance of notes payable (553,100)
Cash paid (1,778,353)
Liabilities assumed $279,815
Supplemental disclosure of
non cash items from
investing activities:
Issuance of debt in
connection with
Affiliations: $553,100
Transfer of note receivable $50,000
in connection with
affiliation
See notes to condensed consolidated financial statements.
OMEGA ORTHODONTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet at March 31, 1998, the
condensed consolidated statements of operations for the three
months ended March 31, 1998 and March 31, 1997 and the
condensed consolidated statements of cash flows for the three
months ended March 31, 1998 and March 31, 1997 are unaudited,
but, in the opinion of management, include all adjustments
(consisting of normal recurring adjustments) necessary for a
fair presentation of results for the interim periods. The
results of operations for the three months ended March 31, 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 Affiliate 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 collections. 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 earnings (loss) per share was determined by dividing net
income by the weighted average common shares outstanding during
the period. Diluted earnings per share was determined by
dividing net income by diluted weighted average shares
outstanding. Diluted weighted average shares reflect the
dilutive effect, if any, of common equivalent shares. Common
equivalent shares include common stock options to the extent
their effect is dilutive, based on the treasury stock method.
The calculation of diluted earning per share excludes options
to purchase 350,000 shares of common stock and 2,070,000
warrants, as the effects are antidilutive. Dilutive loss per
share is the same as basic loss per share as there were no
dilutive shares.
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.
Three Months Ended March 31,
1998 1997
Basic weighted average shares outstanding 4,755,287 1,685,000
Weighted average common equivalent shares 6,751 -
Diluted weighted average shares outstanding 4,762,038 1,685,000
Interim Financial Statements
The financial statements have been prepared by the Company
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Pursuant to such
regulations, certain information and footnote disclosures
normally included in financial statements prepared in
accordance with generally accepted accounting principles have
been condensed or omitted. The Company believes the
presentation and disclosures herein are adequate to make the
information not misleading, and the financial statements
reflect all normal adjustments that are necessary for a fair
presentation of the results for the interim period ended March
31, 1998.
Operating results of interim periods are not necessarily
indicative of the results for full years. It is suggested that
these financial statements be read in conjunction with the
financial statements of the Company and related notes thereto,
and management's discussion and analysis of financial condition
and results of operations related thereto, all of which are
included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997.
Intangible Assets
The value assigned to the Management Services Agreement with
the acquisition of the assets and liabilities of the management
services oganization (MSO) and concurrent Management Services
Agreement 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 March 31, 1998 are related to the affiliation 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 March 31, 1998
produced an amortization expense of approximately $60,000 for
the three months ended March 31, 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 March 31, 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.
2. New Affiliated Practices
During the three months ended March 31, 1998, the Company
completed affiliations with five new Affiliated Practices, two
of which merged with existing Affiliated Practices.
Total consideration related to the new Affiliated Practices is
summarized as follows:
Value of common stock issued $ 923,220
Cash paid 1,778,353
Notes payable 553,100
Total $ 3,254,673
The cost of each 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 $3.3 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 3,293,684
Patient receivables and patient prepayments 163,274
Assumed liabilities (279,815)
$ 3,254,673
In addition, during the three months ended March 31, 1998, the
Company entered into an interim management agreement with one
additional practice, pursuant to which the Company provides
management services under essentially the same terms as its
Management Services Agreement, prior to the completion of the
affiliation agreements. During the three months ended March 31,
1998, the Company completed affiliation agreements with two
practices with which it had previously provided management
services under interim management 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 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 speciality 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 March 31, 1998, the Company had completed
fourteen affiliations with an average MSO purchase price of
approximately $655,000, of which the cash portion is
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.
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 January 1998, the Company entered
into Affiliation Agreements with five additional practices (two
of which merged with existing Affiliated Practices). Pursuant
to those collective agreements, the Company acquired the equity
interests in the MSOs of fourteen 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.
In consideration for acquiring the five MSOs in January 1998,
the Company paid the aggregate of approximately $1.8 million in
cash, issued an aggregate of approximately $553,000 in notes
bearing interest at 8.5%, assumed of 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 speciality 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 ended March 31, 1998 compared to the three
months ended March 31, 1997.
Revenues
Total revenues for the three months ended March 31, 1998 were
approximately $1.6 million and consisted of approximately $1.6
million of service fees revenue from twelve Affiliated
Practices and approximately $18,000 of other consulting fee
revenue on a fee for service basis from non-Affiliated
Practices. In addition, during the three months ended March
31, 1998, the Company affiliated with one additional practice
on an interim management agreement basis. Under the terms of
the interim management agreement, the Company receives service
fee revenue for providing management services which are
essentially the same management service fees earned upon
consummation of a formal Management Services Agreement. For
the three months ended March 31, 1997, the Company did not have
any service fee revenue because it had not yet affiliated with
any Affiliated Practices. During that period, the Company
earned approximately $23,000 for consulting services provided
on a fee for service basis.
Cost and Expenses
The Company incurred operating costs and expenses of
approximately $1.7 million for the three months ended March 31,
1998. 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 $218,000 for the three months ended
March 31, 1997 which represented corporate office expense and
the cost of providing certain management consulting services.
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 $20,000 for the three months
ended March 31, 1998 reflected the cost of borrowings under
notes payable to Affiliated Practices issued as part of the
price for affiliating with of those practices. Interest
expense of approximately $31,000 for the three months ended
March 31, 1997 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 $50,000 for the three months
ended March 31, 1998 reflected interest earned on the Company's
net proceeds from the IPO. Interest income of approximately
$1,400 for the three months ended March 31, 1997 reflected
interest earned on the net proceeds of the bridge financing
notes.
Net Income
As a result of the foregoing factors, the Company generated a
net income of approximately $9,000, or $.00 per share, for the
three months ended March 31, 1998, versus a net loss of
approximately $224,000, or $.14 per share, for the three months
ended March 31, 1997.
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.
Omega 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 $3.8 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. At March 31, 1998, the
Company had an accumulated deficit since inception of
approximately $3.9 million.
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 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 three months ended March 31,
1998, the Company issued 462,159 shares of Common Stock in
connection with affiliations with Affiliated Practices.
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 three months ended March 31, 1998, the
Company spent approximately $1.8 million of cash in connection
with affiliations with Affiliated Practices.
Working Capital Management
The Company had $2.8 million of working capital at March 31,
1998, consisting primarily of cash and cash equivalents of
approximately $3.1 million as a result of the net proceeds
remaining from the IPO.
The Company expects to affiliate with additional dental
speciality 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. 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 effort on the Company's business, financial condition
and results of operations.
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 March 31, 1998, the
Company issued an aggregate of 462,159 shares of Common
Stock to five Affiliated Practitioners as partial
consideration for the affiliation with those five
Affiliated Practitioners. 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 IPO was declared effective on September 30,
1997. The IPO commenced on October 1, 1997 and has
since terminated, resulting in (i) the sale by the
Company of 2,070,000 shares of Common Stock on October
6, 1997 (including 270,000 shares of Common Stock sold
pursuant to the exercise of the underwriters' over-
allotment option on the same date) and (ii) the sale by
the Company of 2,070,000 Redeemable Common Stock
Purchase Warrants sold pursuant to the exercise of the
underwriters' over-allotment option on the same date).
The shares of Common Stock and the Redeemable Common
Stock Purchase Warrants sold constituted all the shares
of Common Stock and all the Redeemable Common Stock
Purchase Warrants covered by the Registration Statement
and available for sale to the public in the IPO. The
managing underwriter for the IPO was National
Securities Corporation. The aggregate price to the
public for the shares of Common Stock and the
Redeemable Common Stock Purchase Warrants sold in the
IPO was $12.6 million. The Company incurred total
expenses of $3.1 million, including $1.3 million in
underwriting discount and commissions paid by the
Company and $1.8 million in other expenses. The amount
of other expenses is a reasonable estimate of such
amount. None of such payments was a direct or indirect
payment to directors or officers of the Company or
their associates, to persons owning 10% or more of any
class of equity securities of the Company or to
affiliates of the Company.
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) $2.2 to consummate
affiliations with additional Affiliated Practices; and
(iv) $980,000 for working capital and other corporate
purposes. None of such payments was a direct or
indirect payment to directors or officers of the
Company or their associates, to persons owning 10% or
more of any class of equity securities of the Company
or to affiliates of the Company, except (a) $115,000 of
debt repayments and $65,000 of payments due as a result
of a non-recurring consulting charge taken in 1997,
were paid to Dr. Glovsky, the Chairman of the Board of
the Company; (b) $50,000 of debt repayments were paid
to Dr. Dean C. Bellavia, a director of the Company; (c)
$50,000 of debt repayments were paid to Dr. David T.
Grove, a director of the Company, and $333,567 was paid
to Dr. Grove as partial consideration for acquiring
certain assets of his practice in connection with the
consummation of the affiliation with his Affiliated
Practice; and (d) $100,000 was loaned to Robert J.
Schulhof, the President and Chief Executive Officer of
the Company, to assist him in repaying certain personal
obligations which he incurred during the start up of
the Company.
ITEM 3. Defaults upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
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
The information required by this Item 6(b) is hereby
incorporated by reference to the Company's Current Report of
Form 8-K dated January 14, 1998.
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: May 15, 1998 By: /s/Robert J. Schulhof
Robert J. Schulhof
Chief Executive Officer
Date: May 15, 1998 By:/s/Edward M. Mulherin
Edward M. Mulherin
Chief Financial Officer
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>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,106,167
<SECURITIES> 0
<RECEIVABLES> 2,098,170
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<CURRENT-ASSETS> 5,422,894
<PP&E> 619,142
<DEPRECIATION> 36,822
<TOTAL-ASSETS> 14,554,413
<CURRENT-LIABILITIES> 2,653,687
<BONDS> 0
0
0
<COMMON> 48,010
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,554,413
<SALES> 1,637,307
<TOTAL-REVENUES> 1,637,307
<CGS> 0
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<OTHER-EXPENSES> 1,658,362
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<INCOME-PRETAX> 8,976
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