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, 1999
[ ] 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 May 11, 1998, there were 5,052,584 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 March 31, 1999 and
December 31, 1998 (Unaudited)
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and March 31, 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and March 31, 1998 (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
(Unaudited)
March 31, December 31,
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 797,933 $ 982,157
Receivable from affiliated practices 2,515,975 2,485,991
Notes receivable from affiliated practice 73,180 74,824
Notes and interest receivable from related parties 131,358 129,259
Prepaid expenses and other current assets 42,541 109,464
------ -------
Total current assets 3,560,987 3,781,695
Property and equipment, at cost, net 984,390 908,484
Intangible assets, net 9,766,140 9,721,133
Other assets 36,673 42,985
Total assets $ 14,348,190 $ 14,454,297
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 367,513 $ 366,585
Demand line of credit 149,772 149,772
Accounts payable 190,903 158,537
Accrued expenses 259,249 229,602
Patient prepayments 2,052,652 1,813,433
--------- ---------
Total current liabilities 3,020,089 2,717,929
Long-term debt, less current portion 969,877 1,055,206
------- ---------
Total liabilities 3,989,966 3,773,135
--------- ---------
Stockholders' equity:
Common stock, $.01 par value 9,500,000 shares
authorized - 5,052,584 shares issued and
outstanding 50,526 50,526
Additional paid-in capital 15,031,372 15,031,372
Accumulated deficit ( 4,723,674) ( 4,400,736)
---------- ----------
Total stockholders' equity 10,358,224 10,681,162
---------- ----------
Total liabilities and stockholders' equity $ 14,348,190 $ 14,454,297
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
OMEGA ORTHODONTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31
------------------
1999 1998
Revenues:
Service fees $ 1,935,257 $ 1,619,441
Consulting fees 6,777 17,866
----- ------
Total revenues 1,942,034 1,637,307
--------- ---------
Costs and expenses:
Employee costs 1,049,156 779,758
General and administrative 738,408 532,406
Other direct costs 324,570 249,031
Depreciation and amortization 131,895 97,167
------- ------
Total costs and expenses 2,244,029 1,658,362
--------- ---------
Loss from operations ( 301,995) ( 21,055)
Interest expense ( 36,196) ( 19,967)
Interest income 15,253 49,998
------ ------
Net (loss) income ($ 322,938) $ 8,976
Basic and diluted net (loss) income per share ($ 0.06) $ 0.00
============ ===========
Basic weighted average number of common
shares outstanding 5,052,584 4,755,287
========= =========
Diluted weighted average number of common
shares outstanding 5,052,584 4,762,038
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
OMEGA ORTHODONTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31, 1999 1998
-------------------------
Net cash used in operating activities $ 17,031 ($ 458,800)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment ( 122,711) ( 75,095)
Decreases in other assets 6,312 32,457
Acquisition of management services
agreements and related assets - ( 1,778,353)
Increase in notes receivable ( 455) -
----------- -----------
Net cash used in investing activities ( 116,854) ( 1,820,991)
----------- -----------
Cash flows from financing activities:
Repayment of borrowings ( 84,401) ( 35,763)
----------- -----------
Net decrease in cash and cash equivalents ( 184,224) ( 2,315,554)
Cash and cash equivalents, beginning of period 982,157 5,421,721
----------- -----------
Cash and cash equivalents, end of period $ 797,933 $ 3,106,167
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 36,196 $ 23,142
=========== ===========
Supplemental disclosure of cash flows related to
affiliations:
Fair value of assets acquired, excluding cash $ 3,534,488
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 in connection with
affiliation $ 50,000
===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet at March 31, 1999, the condensed
consolidated statements of operations for the three months ended March 31,
1999 and March 31, 1998 and the condensed consolidated statements of cash
flows for the three months ended March 31, 1999 and March 31, 1998 of Omega
Orthodontics, Inc. and its subsidiaries ("Omega" or "the Company") 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, 1999 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, 1998.
Income (Loss) Per Share
Basic loss per share was determined by dividing net loss by the weighted
average common shares outstanding during the period. A reconciliation of
basic and diluted shares is as follows:
3 months ended March 31
1999 1998
---- ----
Weighted average shares outstanding 5,052,584 4,755,287
Dilutive stock options pursuant to
the treasury stock method -- 6,751
--------- ---------
Diluted shares outstanding 5,052,084 4,762,038
Diluted shares outstanding does not include options and warrants to purchase
2,423,333 shares and 2,303,333 shares for the three months ended March 31,
1999 and 1998 respectively, as their effect would be antidilutive.
<PAGE>
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 March 31, 1999 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 uses 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 expense was approximately $85,100 for the three months ended
March 31, 1999. 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, 1999 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.
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 BUSINESS
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, 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.
The Company provides management and marketing services primarily to
Orthodontic and other specialty dental practices in the United States. Since
inception in August 1996, the Company has provided these services on a fee
for services basis. Following its initial public offering on October 1, 1997,
the Company has typically offered its services under an affiliate
relationship with each practice. Under this arrangement, the Company
purchases the equity interest in a management services organization ("MSO")
that holds certain assets of and is associated with an affiliate of the
Company ("Affiliated Practices" or "Orthodontic Affiliate(s)") and enters
into a long-term management services agreement ("Management Services
Agreement") with the Orthodontic Affiliate.
As of March 31, 1999, the Company had 15 operating Orthodontic Affiliates,
consisting of 18 doctors in 10 states. Of the 15 Orthodontic Affiliates, one
is based on an interim management agreement with the practice under terms
similar to the Company's standard Affiliation Agreements.
Recent Developments
On March 15, 1999, the Company executed a certain Agreement and Plan of
Merger among Pentegra Dental Group, Inc., a Delaware corporation
("Pentegra"), Omega Acquisition Corporation, a Delaware corporation, certain
substantial stockholders of the Company and the Company (the "Merger
Agreement"). Pursuant to the terms of the Merger Agreement, each share of the
common stock of the Company ("Company Common Stock") shall be converted into
the right to receive such number of shares of issued, fully paid and
nonassessable common stock of Pentegra which is equal to 1.8 million divided
by the number of issued and outstanding shares of Company Common Stock.
Management believes that the Merger will significantly enhance shareholder
value by enabling the combined assets of Pentegra and the Company to produce
a higher return on capital than the Company could achieve on a stand alone
basis. The Company believes that the Merger will enable the combined company
to be an effective competitor in an industry that is becoming more and more
competitive.
The Merger is subject to shareholder approval of both Pentegra and the
Company as well as other customary conditions. The companies expect to
provide details of the Merger to their shareholders prior to seeking their
approval at a special meeting of the shareholders called for such purpose.
General
The Company 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 of 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 participating 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, 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 anticipated future return on investment. The
MSO typically is acquired for a combination of cash, five year promissory
notes and unregistered Common Stock or stock options. As of March 31, 1999,
the Company had completed 17 affiliations, three of which merged with
existing Affiliated Practices, with an average MSO purchase price of
approximately $567,000, of which the cash portion was approximately $292,000.
The Management Services Agreement provides that the Affiliated Practice will
utilize the leased 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. Upon
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>
Results of Operations
For the three months ended March 31, 1999 compared to the three months ended
March 31, 1998.
Revenues
Net revenues increased approximately $305,000 to approximately $1,942,000 for
the three months ended March, 1999, compared to revenues of approximately
$1,637,000 for the three months ended March, 1998. This growth was
attributable to a full quarter of operations for the 12 practices affiliated
with during the three months ended March 31, 1998 and the addition of 4
affiliations, one of which merged with an existing Affiliated Practice, in
1998 subsequent to March 31, 1998.
Costs and Expenses
Costs and expenses increased approximately $586,000 for the three months
ended March 31, 1999. The increase in costs and expenses for the three months
ended March 31, 1999 was attributable to a full quarter of operation for the
12 practices affiliated with during the three months ended March 31, 1998 and
the addition of 4 affiliations, one of which merged with an Affiliated
Practice, in 1998 subsequent to March 31, 1998.
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 and
increased approximately $269,000 to approximately $1,049,000 for the three
months ended March 31, 1999 from approximately $780,000 for the three
months ended March 31, 1998.
Other Direct Costs. Includes dental and office supplies, laboratory costs,
facilities and equipment for the Affiliated Practices and corporate office
and increased approximately $76,000 to approximately $325,000 for the
three months ended March 31, 1999 from approximately $249,000 for the
three months ended March 31, 1998.
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 and increased approximately $206,000 to approximately $738,000 for
the three months ended March 31, 1999 from approximately $532,000 for the
three months ended March 31, 1998.
<PAGE>
Depreciation and Amortization. Includes depreciation of equipment and
leasehold improvements of the Affiliated Practices and amortization of
intangible assets related to the Omega Management Services Agreements and
increased approximately $35,000 to approximately $132,000 for the three
months ended March 31, 1999 from approximately $97,000 for the three
months ended March 31, 1998.
Interest Expense
Interest expense of approximately $36,000 for the three months ended March
31, 1999 and $20,000 for the three months ended March 31, 1998, reflects the
cost of borrowings under notes payable to Affiliated Practices issued as part
of the purchase price for affiliating with those practices.
Interest Income
Interest income was approximately $15,000 for the three months ended March
31, 1999 and $50,000 for the three months ended March 31, 1998, and reflects
interest earned on the Company's net proceeds from the IPO and notes from
related parties. The Company's cash position decreased from 1999 to 1998,
thereby decreasing interest income.
Net Loss
As a result of the foregoing factors, Omega generated a net loss of
approximately $323,000 or $0.06 per share, for the three months ended March
31,1999 compared to a net income of approximately $9,000, or $0.00 per share,
for the three months ended March 31, 1998. 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, 1998 and has reported a loss from
operations for the three months ended March 31, 1999 of $301,995. 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 March 31, 1999 was $205,518.
Due to the prospective merger outlined in the Recent Developments section,
the Company does not anticipate concluding any further affiliations prior to
consummating the transaction contemplated in the Merger Agreement.
Year 2000
Like many other companies, the Year 2000 computer issue creates risk for the
Company. If both information technology systems and embedded technology do
not correctly recognize date information when the year changes to 2000, it
could have an adverse impact on the Company's operations. The Company is
currently confirming that its software and programming logic properly
interprets dates on and subsequent to January 1, 2000 and will review any
embedded technology in its software and hardware to determine whether the
technology is compliant. The Company believes that all of its software and
hardware is currently compliant. Also, the Company does not anticipate
difficulty in resolving issues relating to software or embedded technology in
any programs or equipment provided by third-party vendors. In addition, the
Company believes that certain software employed by the Affiliated Practices
is not Year 2000 compliant. The Company is currently working with the
Affiliated Practices to repair any non-compliant software. It is unknown what
costs the Company will incur to correct any non-compliant software.
Based on the Company's work to date and assuming that the software updating
projects can be implemented as planned, the Company believes that it will be
Year 2000 compliant on a timely basis and that future costs relating to the
Year 2000 issue will not have a material impact on the Company's financial
position, results of operations or cash flows.
Once the Year 2000 remediation process is substantially complete the Company
intends to formulate a comprehensive contingency plan to address remaining
material risks, if any. Forward-looking statements in this report, including
without limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions and adequacy of resources, are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995.
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
business combination 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 competitive and market conditions are difficult or impossible to
predict accurately and many underlie the reasonableness of the
forward-looking statements. Any of the assumptions could prove inaccurate
and, therefore, there can be no assurance that the forward-looking statements
included in this Annual report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, 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 discussion identifies certain important factors that could
affect the Company's actual results and actions and could cause results and
actions to differ materially from any forward-looking statement made by or on
behalf of the Company related to such results and actions. Other factors,
which are not identified herein, could also have such an effect.
Continued History of Losses; No Assurance of Profitability
Although the Company successfully completed its IPO in October 1997 and has
consummated affiliations with 15 Affiliated Practices, the Company has not
yet achieved a profitable level of operations. As a result, the Company
remains subject to many 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 profits. At December 31, 1998, the Company had an
accumulated deficit of $4,400,736. The Company incurred an operating loss in
the three months ended March 31, 1999, of approximately $302,000 and will
incur operating losses for the foreseeable future. There can be no assurance
that the Company will ever be profitable.
Doubt About Ability to Continue as a Going Concern
The report of the Company's independent public accountants relating to the
Company's financial statements of and for the year ended December 31, 1998
indicates that there is substantial doubt about the Company's ability to
continue as a going concern.
Risks Associated with Expansion
The Company has consummated Affiliation Agreements with 15 Orthodontic
Affiliates. The success of the Company's business 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 additional adequate financing to
affiliate with orthodontic practices, and (iv) regulatory constraints. There
can be no assurance that the Company's business strategy will be successful,
that additional 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.
Need for Additional Financing and Other Strategic Opportunities
The Company's success will require substantial capital resources, in addition
to those currently available to the Company. The Company expects that its
capital needs over the next several years will substantially exceed capital
generated from operations. To finance its future capital needs, the Company
has entered into the Merger Agreement (see, Recent Developments). With
respect to additional financing, if the Merger is not consummated, 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. If adequate financing is not available
when needed or on terms acceptable to the Company, the Company's business
strategy may be materially adversely affected.
Dependence on Orthodontic Affiliates
The Company receives fees for management services provided to Orthodontic
Affiliates under Management Services Agreements but does not employ
orthodontists or control 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 any of the individual Orthodontic Affiliates or the
Orthodontic Affiliates in the aggregate, would have a material adverse effect
on the Company.
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 require the Orthodontic Affiliates to
maintain, at their own 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 has undertaken to comply with all applicable
regulations and requirements, and the Company is indemnified under the
Management Services Agreements for claims against the Company arising in
connection with actions by the Orthodontic Affiliates. The Company has
general liability insurance for itself and requires 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 Affiliates 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 acceptable costs.
A successful claim against the Company or an Orthodontic Affiliate in excess
of the applicable 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 Regulations
As noted above, federal and state laws extensively regulate the relationship
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 of 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 or 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 prohibitions 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.
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 and are enforced by the courts and by regulatory authorities with broad
discretion. Expansion of 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 conducted are in material compliance with existing applicable laws,
there can be no assurance that a 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, the prospective Merger or its expansion.
State Laws Regarding Prohibition of Corporate Practice of Orthodontics
The Orthodontic Affiliates are 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. Currently, the Company
performs only non-orthodontic administrative services and does not represent
to the public that it offers orthodontic services. Nor does the Company
exercise influence or control over the practice of orthodontics by the
practitioners with whom it contracts. Expansion of the operations of the
Company or any successor to the Company to certain jurisdictions may require
structural and organizations modifications to 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 conducted are 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
on the Company.
Competition
The business of providing orthodontic services is highly competitive in each
market in which the Company operates or 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 an other resources than the
Orthodontic Affiliates. At this time, the Company believes there are several
other companies actively involved in consolidating and management 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 market and financial and other resources than the
Company. There can be assurance that the Company will be able to compete
effectively.
Absence of Dividends
The Company 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.
No Assurance of NASDAQ Small Cap Market Listing; Risk of Low-Price
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.
The Company was notified by NASDAQ that its common stock was delisted on
April 21, 1999 for failure to maintain the minimum bid price. Because the
Company's securities were delisted for the NASDAQ Small Cap Market, it may
adversely affect the prices of such securities and the ability of holders to
sell them, and the Company will be required to comply with the initial
listing requirements to be delisted on the NASDAQ Small Cap Market. The
Company's common stock now trades on OTC Bulletin Board.
If the Company is unable to overturn NASDAQ's delisting determination because
of the Company's inability to satisfy maintenance requirements, the Company's
securities could 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 further reducing the
level of trading activity in the secondary market for a stock that becomes
subject to the penny stock. As a result of the common stock becoming subject
to the penny stock rules, stockholders may find it more difficult to sell
their shares.
<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) Not applicable
(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 Warrant in the
Company's initial public offering ("the IPO") was declared effective
on March 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) $3.2 million
to consummate affiliations with additional Affiliated Practices; and
(iv) $2.0 million for working capital, equipment, leasehold
improvements and other corporate purposes.
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.
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: May 14, 1999 By: /s/Robert J. Schulhoff
------------------------------------
Robert J. Schulhof
Chief Executive Officer
Date: May 14, 1999 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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 797,932
<SECURITIES> 0
<RECEIVABLES> 2,405,992
<ALLOWANCES> (121,583)
<INVENTORY> 0
<CURRENT-ASSETS> 3,560,987
<PP&E> 984,390
<DEPRECIATION> 46,806
<TOTAL-ASSETS> 14,348,190
<CURRENT-LIABILITIES> 3,020,089
<BONDS> 0
0
0
<COMMON> 50,526
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,348,190
<SALES> 1,942,034
<TOTAL-REVENUES> 1,942,034
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,244,029
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,196
<INCOME-PRETAX> (322,938)
<INCOME-TAX> 0
<INCOME-CONTINUING> (322,938)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (322,938)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
