<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1997
REGISTRATION NO. 333-34397
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STERI-OSS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3843 13-3915553
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
22895 EASTPARK DRIVE
YORBA LINDA, CALIFORNIA 92887
(714) 282-6515
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
KENNETH A. DARIENZO
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
STERI-OSS, INC.
22895 EASTPARK DRIVE
YORBA LINDA, CALIFORNIA 92887
(714) 282-6515
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
FREDERIC A. RANDALL, JR., ESQ. ALISON S. RESSLER, ESQ.
BROBECK, PHLEGER & HARRISON LLP SULLIVAN & CROMWELL
4675 MACARTHUR COURT, SUITE 1000 444 S. FLOWER STREET, SUITE 1200
NEWPORT BEACH, CALIFORNIA 92660 LOS ANGELES, CALIFORNIA 90071
(714) 752-7535 (213) 955-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 7, 1997
PROSPECTUS
, 1997
4,700,000 SHARES
[STERI-OSS LOGO]
COMMON STOCK
All of the 4,700,000 shares of Common Stock, $.0001 par value per share
(the "Common Stock"), offered hereby are being sold by Steri-Oss, Inc.
("Steri-Oss" or the "Company").
Prior to this offering (the "Offering"), there has been no public market
for the Common Stock. It is currently estimated that the initial public offering
price will be between $14.00 and $16.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price.
The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "STRI."
SEE "RISK FACTORS" COMMENCING ON PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE
COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
Per Share......................... $ $ $
Total (3)......................... $ $ $
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses of the Offering estimated at $700,000, which will
be paid by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 705,000 additional shares of Common Stock at the Price
to the Public less Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to the Public, Underwriting Discounts and Commissions and Proceeds to
the Company will be $ , $ and $ , respectively.
See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including the right to reject orders in whole or in
part. It is expected that delivery of certificates representing the shares of
Common Stock will be made against payment in New York, New York on or about
, 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
UBS SECURITIES
FURMAN SELZ
<PAGE> 3
[COLOR PHOTOS CONSIST OF THE COMPANY'S IMPLANTS, CORPORATE HEADQUARTERS, CNC
MACHINES AND OTHER MANUFACTURING EQUIPMENT, A CLEAN ROOM TECHNICIAN AND IN-HOUSE
TRAINING FACILITIES.]
Steri-Oss(R), EZ Steps(R) and Replace(TM) are trademarks of the Company.
This Prospectus also includes trademarks of companies other than the Company.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. THE
UNDERWRITERS ARE NOT REQUIRED TO ENGAGE IN THESE ACTIVITIES, AND MAY END ANY OF
THESE ACTIVITIES AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. Except as otherwise
indicated, the information contained in this Prospectus gives effect to the
50-for-1 stock split to be effected in October 1997 and assumes (i) the
conversion (the "Preferred Stock Conversion") of 17,471 shares of the Company's
Class A 8.8% Cumulative Redeemable Preferred Stock (the "Class A Preferred
Stock") and 2,527 shares of the Company's Class C 8.0% Junior Cumulative
Redeemable Preferred Stock (the "Class C Preferred Stock") into an aggregate of
1,433,547 shares of Common Stock upon consummation of the Offering (assuming an
initial public offering price of $15.00 per share), (ii) the redemption upon
consummation of the Offering of all outstanding shares of Class A Preferred
Stock, Class B 8.0% Cumulative Convertible Preferred Stock (the "Class B
Preferred Stock") and Class C Preferred Stock not converting into Common Stock
in the Preferred Stock Conversion, (iii) the exercise of outstanding warrants to
purchase 4,750,000 shares of Common Stock prior to the consummation of the
Offering, (iv) no exercise of outstanding options to purchase 968,344 shares of
Common Stock and (v) no exercise of the Underwriters' over-allotment option.
Unless otherwise indicated, all references to the "Company" and "Steri-Oss"
refer to Steri-Oss, Inc. and its combined subsidiaries and predecessors. Because
the Company uses a 52/53 week fiscal year, fiscal periods may not end on the
same day as the end of the respective calendar periods. For convenience of
presentation, the consolidated financial data throughout this Prospectus has
been shown as of and for the last day of the applicable period unless otherwise
indicated.
THE COMPANY
Steri-Oss, Inc. is a leading developer, manufacturer and marketer of a
broad line of dental implant systems, which include implants, abutments and
related surgical instruments. A dental implant is a small titanium screw or
cylinder that is surgically placed directly into the jaw and serves as a
foundation for a replacement tooth. An abutment is a small titanium attachment
that is typically screwed into or onto the implant and connects the artificial
tooth to the implant. The Company believes that its dental implant systems are
superior to traditional restorative treatments such as bridges and dentures
because the permanent nature of dental implants permits patients to regain most
of the functionality of their natural teeth. Dental implants also may reduce the
progressive atrophy of the jaw often caused by the absence of teeth. The Company
has demonstrated the safety and reliability of its implants at success rates of
over 96% (representing full integration of the implant with the bone) in seven
years of clinical studies involving more than 1,600 implant patients.
The Company has experienced significant growth over the last several years.
The Company's net sales increased 22.8% to $19.3 million for the six months
ended June 30, 1997 from $15.7 million for the comparable six month period in
1996. Net sales also increased to $32.2 million for 1996 from $12.7 million for
1992. The Company's earnings before interest, taxes, depreciation and
amortization ("EBITDA") decreased 3.4% to $2.8 million for the six months ended
June 30, 1997 from $2.9 million for the comparable six month period in 1996
primarily due to a noncash compensation expense. EBITDA increased to $6.2
million for 1996 from $1.5 million for 1992.
The American Dental Association estimates that 110 million people in the
United States are missing one or more teeth, representing approximately 40% of
the United States population. Traditional restorative alternatives to address
tooth loss have consisted primarily of dentures and bridges. Since the
introduction of the first modern root form implants in 1982, implants have
continued to gain acceptance as an attractive alternative to dentures and
bridges. Medical Data International ("MDI") estimates that dental implant sales
in the United States exceeded $130 million in 1996 and are expected to grow at a
rate of approximately 6% per year. The Company estimates that sales of dental
implants outside the United States were approximately $250 million in 1996 and
are expected to grow at a rate of approximately 10% per year.
The Company markets its products to dental professionals involved in the
implant procedure, including oral surgeons, periodontists and implantologists
who typically perform the implant surgery, as well as general dentists and
prosthodontists who often prepare the crown or other prosthetic device that is
affixed on top of the
3
<PAGE> 5
abutment. The Company currently distributes its products in the United States
and Canada through its direct sales force consisting of more than 40 persons,
which the Company believes is the largest North American direct sales force for
dental implant products. The Company markets its products internationally
(outside the United States and Canada) in more than 35 countries through 26
independent distributors who do not sell competing implant products.
The Company's predecessor sold its first dental implant in 1986 and was
acquired by the Company from Bausch & Lomb Incorporated ("Bausch & Lomb") in
November 1996 (the "Acquisition"). In connection with the Acquisition, the
Company incurred $39.5 million of debt and issued $35.2 million of mandatorily
redeemable Preferred Stock. Upon consummation of the Offering, approximately
$43.0 million of debt will be retired and approximately $15.2 million of
Preferred Stock will be redeemed, together with accrued interest and dividends.
The holders of Class A Preferred Stock and Class C Preferred Stock have agreed
to convert the remaining $20.0 million of their Preferred Stock into Common
Stock upon consummation of the Offering, in lieu of exercising their redemption
rights. Certain directors of the Company own or are affiliated with entities
that own a substantial portion of the Preferred Stock issued in the Acquisition.
Accordingly, such directors or their affiliated entities will receive a portion
of the proceeds of the Offering used to redeem the Preferred Stock or will be
issued a portion of the Common Stock to be issued upon the conversion of the
Preferred Stock. Certain key members of the Company's senior management team,
including its Chief Executive Officer, President and Executive Vice President,
Operations, have operated the Company's business since 1990.
STRATEGY
The Company's objective is to become the leading worldwide developer,
manufacturer and marketer of dental implants and related products, while
increasing its profitability. The Company believes that over the last three
years, it has been one of the fastest growing participants in the United States
implant market. Furthermore, as a result of the Company's acquisition of the
dental business of Interpore International ("Interpore") in May 1997, the
Company believes its implant unit sales, on a combined basis in the United
States in 1995, exceeded those of any of its competitors. The key elements of
the Company's strategy include the following:
- Increase Market Share in the United States and Foreign Markets. Steri-Oss
has established itself as a worldwide leader in the dental implant market. The
Company intends to capitalize on its reputation for quality products and service
to continue to increase its market share both domestically and internationally.
Increased utilization of the Company's implants by dental professionals is
necessary for continued market penetration. Accordingly, Steri-Oss intends to
increase its involvement in sponsoring and providing educational and training
programs for dental professionals and to expand marketing support to its 26
independent international distributors.
- Continue to Develop Innovative Implant Products. The Company intends to
utilize its expertise in dental implant technology and to work closely with
clinicians to continue to develop new and enhanced dental implants and related
products. New and enhanced products have historically constituted a significant
portion of the Company's net sales. The Company was the first to introduce a
variety of innovative products, including precleaned sterile implants,
hydroxylapatite ("HA") coated threaded implants and a tapered, color-coded
implant system. The Company intends to continue to develop enhanced implant
products to meet evolving market needs, incorporate technological advancements
and satisfy clinicians' preferences.
- Expand into Additional Dental Specialty Markets. The Company intends to
take advantage of its broad distribution channels and strong reputation in the
dental industry to market additional dental specialty products to its customers.
The Company plans to focus on products that enhance the professionals' practices
and address the needs of growing markets, particularly the periodontal market.
In furtherance of this strategy, the Company recently commenced marketing two
products owned and manufactured by third parties, a periodontal tissue
monitoring kit and an HA bone filler for periodontal defects. The Company
intends to acquire, license or distribute additional dental specialty products
and to market these products through its existing distribution channels.
4
<PAGE> 6
- Acquire Complementary Dental Implant Businesses, Products and
Technologies. The Company believes that consolidation opportunities exist in the
dental implant market that will enable the Company to increase its penetration
of this market. For example, in May 1997, the Company acquired the dental
operations of Interpore, a manufacturer and distributor of dental implant
products and other periodontal products. The Company intends to continue to
expand its product offerings, distribution channels and market share through
acquisitions in the dental implant market. Potential acquisitions may include
complementary businesses, product lines, distribution rights, technologies or
other assets.
- Continue to Improve Operating Efficiencies. By manufacturing a greater
proportion of its products in-house, the Company has been able to operate more
cost-effectively and benefit from greater economies of scale. Primarily as a
result of actions taken by the Company to reduce manufacturing costs and
increase operating efficiencies, the Company has reduced its cost of sales as a
percentage of net sales to 27.3% for 1996 from 31.7% for 1992. The Company
intends to continue to improve operating efficiencies primarily by expanding and
refining its manufacturing processes.
The Company's principal executive offices are located at 22895 Eastpark
Drive, Yorba Linda, California 92887. The Company's telephone number is (714)
282-6515.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........... 4,700,000 shares
Common Stock to be outstanding after the 10,933,547 shares (1)
Offering....................................
Use of Proceeds............................... The Company intends to use the net proceeds
from the Offering to redeem all outstanding
shares of Class A Preferred Stock, Class B
Preferred Stock and Class C Preferred Stock
that have not converted into Common Stock in
the Preferred Stock Conversion, to repay
indebtedness and for general corporate
purposes, including working capital
requirements. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol........ STRI
</TABLE>
- ---------------
(1) Excludes (i) 400,000 shares of Common Stock reserved for issuance under the
1997 Stock Incentive Issuance Plan (the "1997 Plan"), which includes options
to purchase 235,000 shares of Common Stock that were granted at an exercise
price equal to the initial public offering price in the Offering and (ii)
outstanding options to purchase 733,344 shares of Common Stock granted at a
weighted average exercise price of $0.58 per share. See Note 9 of Notes to
Consolidated Financial Statements.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary historical and pro forma consolidated financial data
for the Company and its predecessors should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's Consolidated Financial Statements and Notes thereto
and the Unaudited Pro Forma Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR(1) -----------------------------------------------------
---------------------------------------------------- SIX MONTHS ENDED JUNE
JANUARY 1 NOVEMBER 16 PRO FORMA 30,
YEAR ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED -----------------------
------------------------------------- NOVEMBER 15, DECEMBER 31, DECEMBER 31, PRO FORMA PRO FORMA
1992 1993 1994 1995 1996 1996 1996(2) 1996(3) 1997(4)
------- ------- ------- ------- ------------ ------------ ------------ ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales........ $12,735 $16,845 $22,168 $27,361 $ 28,108 $ 4,089 $32,197 $15,744 $19,334
Gross profit..... 8,693 11,718 15,502 19,496 20,678 2,733 23,411 11,518 14,186
Selling, general
and
administrative
expense........ 6,164 8,698 11,393 14,241 14,791 1,929 17,221 8,509 10,966
Research and
development
expense........ 1,218 1,618 1,781 2,225 2,116 352 2,468 1,255 1,322
Noncash
compensation
expense........ -- -- -- -- -- -- -- -- 545
Income from
operations..... 1,311 1,402 2,328 3,030 3,771 452 3,722 1,754 1,353
Interest
expense........ 45 50 -- -- -- 1,065 -- -- --
Income before
income taxes... 1,266 1,352 2,328 3,030 3,771 (613) 3,722 1,754 1,353
Net income....... $ 760 $ 516 $ 1,075 $ 1,458 $ 1,919 $ (613) $ 2,233 $ 1,052 $ 812
======= ======= ======= ======= ======== ======== ======= ======= =======
Net income per
share(5)....... $ 0.19 $ 0.09 $ 0.07
Shares ======= ======= =======
outstanding(5)... 11,638,535 11,638,535 11,638,535
CASH FLOW STATEMENT AND OTHER DATA:
EBITDA(6)........ $ 1,492 $ 2,301 $ 3,559 $ 4,566 $ 5,395 $ 795 $ 6,190 $ 2,896 $ 2,797
Depreciation..... 181 161 363 595 712 132 844 352 575
Amortization(7)... -- 738 868 941 912 211 1,624 790 869
Capital
expenditures... 132 560 1,702 1,190 1,957 250 2,207 1,286 1,018
Cash flow
provided by
(used in):
Operating
activities... 2,454 700 1,680 3,313 5,434 82 2,644 1,184
Investing
activities... (132) (560) (1,702) (1,190) (1,957) (58,994) (60,030) (2,755)
Financing
activities... (2,322) (140) 177 (2,158) (3,597) 59,132 58,327 3,373
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-----------------------
PRO
ACTUAL FORMA(8)
---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.... $ 61 $ 2,408
Working
capital........ 4,549 10,668
Total assets..... 83,406 82,645
Total long-term
debt(9)........ 78,859 --
Total
stockholders'
equity
(deficit)...... (1,146) 77,455
</TABLE>
- ---------------
(1) Represents the historical financial data of the Company's predecessor,
Steri-Oss, Inc. ("S-O"), a wholly-owned subsidiary of Bausch & Lomb. For
1992, represents the historical financial data of S-O's predecessor.
(2) Includes the results of operations of S-O subsequent to the Acquisition in
November 1996. The Acquisition was accounted for as a purchase for financial
reporting purposes. The financial data for the period from January 1, 1996
through November 15, 1996 for S-O and from November 16, 1996 through
December 31, 1996 for the Company has been combined and adjusted to give
effect to the Acquisition, the Preferred Stock Conversion, the Offering and
the application of the net proceeds of the Offering, as if each had occurred
on January 1, 1996, to present the pro forma operating results for the year
ended December 31, 1996.
(3) The pro forma statement of operations data for the six months ended June 30,
1996 reflects adjustments as if the Acquisition, the Preferred Stock
Conversion, the Offering and the application of the net proceeds of the
Offering had occurred on January 1, 1996. The pro forma statement of
operations data for the six months ended June 30, 1997 reflects adjustments
as if the Preferred Stock Conversion, the Offering and the application of
the net proceeds of the Offering had occurred on January 1, 1996. Excludes
the effect of the extraordinary charge described in footnote 8 below.
(4) Includes the results of operations of the dental business of Interpore
subsequent to its acquisition in May 1997. This acquisition was accounted
for as a purchase for financial reporting purposes.
(5) Share and per share data are not considered meaningful since S-O operated as
a wholly-owned subsidiary of Bausch & Lomb from 1993 through November 15,
1996. Computed based on weighted average shares outstanding assuming the
Preferred Stock Conversion and the Offering and the application of the net
proceeds therefrom were consummated on January 1, 1996. Also includes the
effect of Common Stock and equivalents issued within one year from the
filing of the Registration Statement of which this Prospectus is a part at
prices per share below the initial public offering price, using the treasury
stock method using an assumed initial public offering price of $15.00 per
share.
(6) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. While EBITDA constitutes a widely accepted financial indicator
to compare the operating performance of companies, EBITDA may not provide an
accurate comparison between companies because it is not necessarily computed
by all companies in an identical manner. The use of such information is
intended only to supplement the conventional income statement presentation
and is not to be considered as an alternative to net income, to represent
cash flows for the periods or funds available for management's discretionary
use or any other indicator of the Company's operating performance which is
presented in accordance with generally accepted accounting principles
("GAAP") above. The computation of EBITDA for each of the respective periods
shown is as follows (in thousands):
6
<PAGE> 8
<TABLE>
<CAPTION>
COMPANY
---------------------------------------------
PREDECESSOR PRO FORMA
------------------------------------------------ SIX MONTHS
JANUARY 1 NOVEMBER 16 PRO FORMA ENDED
YEAR ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED JUNE 30,
--------------------------------- NOVEMBER 15, DECEMBER 31, DECEMBER 31, ---------------
1992 1993 1994 1995 1996 1996 1996 1996 1997
------ ------ ------ ------ ------------ ------------ ------------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income before income
taxes.................. $1,266 $1,352 $2,328 $3,030 $3,771 $ (613) $3,722 $1,754 $1,353
Plus: Interest expense... 45 50 -- -- -- 1,065 -- -- --
Depreciation......... 181 161 363 595 712 132 844 352 575
Amortization......... -- 738 868 941 912 211 1,624 790 869
------ ------ ------ ------ -------- ------ ------ ------ ------
EBITDA................... $1,492 $2,301 $3,559 $4,566 $5,395 $ 795 $6,190 $2,896 $2,797
====== ====== ====== ====== ======== ====== ====== ====== ======
</TABLE>
Pro forma EBITDA for the six months ended June 30, 1997 includes the
effect of a noncash compensation expense in the amount of $545,000.
(7) Pro forma data includes the effect of amortization over a 40 year period of
$59.2 million of tax-deductible goodwill (approximately $1.5 million
annually) recorded in connection with the Acquisition.
(8) The pro forma balance sheet data reflects adjustments as if the Preferred
Stock Conversion and the Offering and the application of the net proceeds
therefrom had occurred on June 30, 1997 and includes the effect of an
extraordinary charge of $7.8 million, net of the related tax benefit,
relating to (i) the elimination of deferred financing costs of $5.3 million
associated with the repayment of the Company's 16% Series A Subordinated
Notes and 14% Series B Subordinated Notes (collectively, the "Subordinated
Notes") and the Company's secured credit facility (the "Bank Facility") with
Union Bank of California, N.A. ("Union Bank") and First Source Financial LLP
and the conversion and/or redemption of all mandatorily redeemable Preferred
Stock, (ii) the charge of $1.5 million related to the Preferred Stock
Conversion and (iii) the prepayment penalties of $1.0 million incurred in
connection with the repayment of the Subordinated Notes. Also includes a
compensation charge of $1.3 million related to options granted below the
fair value per share at the date of grant, which options are either fully
vested or vest immediately upon consummation of the Offering. See "Unaudited
Pro Forma Consolidated Financial Data."
(9) Includes current portion of long-term debt and mandatorily redeemable
Preferred Stock.
7
<PAGE> 9
RISK FACTORS
Prospective purchasers of the Common Stock should consider carefully the
following risk factors, in addition to the other information contained in this
Prospectus, before making an investment in the Common Stock.
HIGHLY COMPETITIVE INDUSTRY
The dental implant industry is characterized by intense competition.
Steri-Oss competes directly with a number of companies offering dental implants
and related products both in the United States and abroad, including Nobel
Biocare AB, Friatec AG, Implant Innovations, Inc. ("3i") and Sulzer Calcitek
Inc., certain of which have substantially greater financial, marketing, sales,
distribution and development resources than the Company. Such competitors may be
able to devote greater resources to the development, promotion, sale and support
of their products than the Company. Certain of the Company's competitors also
have established a greater international presence than the Company. In several
countries, including Germany and Switzerland, the Company competes with
companies that are based in such countries. The competitors' local presence in
such markets may provide them with a competitive advantage over the Company. In
addition, several competitors in foreign markets sell directly in such markets,
which may be more effective than the Company's indirect distribution channels in
such markets. Increased competition or the failure to compete effectively in the
dental implant industry may result in price reductions, reduced profit margins
and loss of market share, all of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's products also compete against alternative restorative
treatments such as bridges and dentures, which are generally less expensive to
the patient, are less invasive and can be implemented more quickly. New
restorative technologies may be developed that are as effective as, or more
effective or easier to use than, those offered by the Company, which could
render the Company's products less competitive or obsolete. See
"Business -- Competition."
EXTENSIVE GOVERNMENT REGULATION OF MEDICAL DEVICES AND CONTINUING COMPLIANCE
REQUIREMENTS
The Company's products are subject to extensive regulation by the United
States Food and Drug Administration (the "FDA") and certain other federal, state
and local governmental authorities and similar regulatory agencies in other
countries. Such regulations cover the testing, manufacture, labelling,
distribution and promotion of medical devices and record-keeping with respect
thereto. The process of obtaining marketing clearances and approvals from the
FDA for new products or enhancements to existing products can be time-consuming
and expensive, and there is no assurance that such clearances will be granted or
that FDA review will not involve delays adversely affecting the marketing and
sale of products by the Company. Since January 1, 1994, the Company has obtained
34 Section 510(k) premarket notifications ("510(k)") covering a broad range of
products. In the future, the FDA may require the submission of a premarket
approval application ("PMA") for certain dental implants, which approval process
is time-consuming, costly and would result in a diversion of management's
efforts. While the Company has been collecting clinical data to support a
potential PMA, there can be no assurance that the Company would receive a PMA
approval, if required, for its dental implant products on a timely basis, if at
all.
Governmental regulation may also prevent or substantially delay the
marketing of the Company's proposed products, cause the Company to undertake
costly procedures and furnish a competitive advantage to certain of the
Company's competitors who have greater financial, administrative and research
and development resources. After approval, the FDA may require post-marketing
approval surveillance programs to monitor the effects of an approved medical
device. FDA approval may be withdrawn for noncompliance with regulatory
standards or the occurrence of unforeseen problems following initial marketing.
In addition, product modifications may require the submission of a new 510(k) or
PMA supplement and future products may require 501(k) clearance or PMA approval.
There can be no assurance that marketing clearances or approvals will be
obtained on a timely basis or at all. Delays in receiving, the failure to
receive or the cost of complying
8
<PAGE> 10
with such clearances or approvals could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is also subject to periodic inspection by the FDA and state
agencies such as the Food and Drug Branch of the California Department of Health
Services to determine whether the Company is in compliance with various
regulations relating to medical device manufacturing, including the FDA's
Quality System Regulations ("QSR"), formerly known as the Good Manufacturing
Practices regulations, which govern manufacturing, testing, quality control and
product labeling of medical devices. In connection with the FDA's inspection of
the Company's facilities in April 1997, the FDA issued a warning letter to the
Company citing the Company's failure to comply with certain provisions of the
current QSR regulations. The warning letter did not prohibit the Company from
obtaining premarket clearance or approval for new products nor did it require
the Company to withdraw or remove any of its products from the market. While the
Company believes that it has taken appropriate corrective actions to address
each of the violations cited in the warning letter, there can be no assurance
that the FDA will issue a compliance letter on a timely basis, if at all. Any
failure by the Company to remedy the citations in the warning letter to the
satisfaction of the FDA could prevent or significantly limit the Company's
ability to market its products in the United States until such citations have
been corrected to the satisfaction of the FDA and result in the recall or
seizure of products, the total or partial suspension of production, civil
penalties, fines or criminal prosecution.
The Company must comply with similar registration requirements of foreign
governments and with import and export regulations when distributing its
products to foreign nations. Each foreign country's regulatory requirements for
product approval and distribution are unique and may require the expenditure of
substantial time, money and effort to obtain and maintain. The regulation of
medical devices in a number of such jurisdictions, particularly in the European
Union, continues to develop and there can be no assurance that new laws or
regulations will not have a material adverse effect on the Company's business,
financial condition and results of operations. Noncompliance with state, local,
federal or foreign regulatory requirements can result in fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, delay or denial or withdrawal of premarket clearance or approval of
devices and criminal prosecution. See "Business -- Government Regulation."
RISKS ASSOCIATED WITH ACQUISITIONS; FUTURE CAPITAL REQUIREMENTS
The Company's business strategy includes the expansion of its product
offerings, distribution channels, and market share through acquisitions.
Acquisitions involve numerous risks, such as difficulties in the assimilation of
the operations, products and personnel of the acquired companies, the ability to
manage effectively geographically remote units, the diversion of management's
attention from other business concerns, risks of entering markets in which the
Company has limited or no direct experience, and the potential loss of key
employees of the acquired companies. In addition, acquisitions may result in
dilutive issuances of equity securities, the incurrence of additional debt,
reduction of existing cash balances, amortization expenses related to goodwill
and other intangible assets and other effects on the Company that may materially
adversely affect the Company's results of operations. Although management
expects to analyze any opportunity carefully before committing the Company's
resources, no assurances can be given as to the effect of any acquisition on the
Company's business, financial condition and results of operations.
The Company expects to continue to expend additional funds to pursue
acquisition opportunities and to expand its operations, particularly its
manufacturing capabilities and marketing efforts. After the net proceeds of the
Offering are applied to repay indebtedness and to redeem all shares of Preferred
Stock not converting into Common Stock, the Company expects that no indebtedness
will remain outstanding on a pro forma basis under the Bank Facility and
additional funds will be available for borrowings under either the existing Bank
Facility or under the Company's proposed bank facility, subject to certain
restrictions and limitations. The Company's future capital requirements and the
adequacy of available funds will depend on numerous factors that are difficult
to predict, including the timing and cost of acquisitions. If cash from
operations and available funds under the Bank Facility are insufficient to meet
the Company's capital needs in the future, the Company will be required to
obtain additional funds through equity or debt financings or through other
sources. The Bank Facility currently limits the Company's ability to incur any
other debt. There can be no assurance that
9
<PAGE> 11
additional funding, if necessary, will be available on acceptable terms, if at
all. If adequate funds are not available, the Company may be required to forego
strategic acquisitions or delay, reduce or eliminate certain aspects of its
operations, which could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and
"Business -- Strategy."
DEPENDENCE ON INDEPENDENT INTERNATIONAL DISTRIBUTORS
In addition to utilizing a direct sales force in North America, the Company
markets and sells its products through 26 independent distributors in more than
35 foreign countries. Approximately 41.2% and 41.1% of the Company's net sales
during 1996 and for the six month period ended June 30, 1997, respectively, were
generated in international markets. The Company anticipates that a significant
percentage of its net sales will come from international markets in the future.
The Company relies on its international distributors to obtain any necessary
regulatory approvals in the foreign countries in which they operate. The Company
does not have any long-term distribution agreements with any of its
distributors, and there can be no assurance that the Company's distributors will
continue to market the Company's products or have the financial stability to
assure their continuing presence in their respective markets. A distributor's
inability or unwillingness to perform its obligations, or a disruption in the
Company's relationship with a distributor, could result in a substantial delay
in the Company's international distribution efforts in the distributor's
applicable territory. There can be no assurance that the Company will be able to
replace any of its current distributors or that any such replacement will be
able to obtain the necessary regulatory approvals to conduct business in the
applicable territory. There can also be no assurance that the Company can retain
qualified distributors in any additional territories targeted by the Company. As
a result, there can be no assurance that the Company will maintain or increase
its market share for dental implants in international markets. See "Business --
Customers, Marketing and Sales."
RISKS RELATING TO INTERNATIONAL OPERATIONS
International operations involve a number of significant risks, including,
but not limited to, governmental regulations, export license requirements,
political instability, trade restrictions, changes in tariffs, difficulties in
managing international operations, import restrictions and fluctuations in
foreign currency exchange rates. Although the Company's international sales are
currently denominated in United States dollars, fluctuations in currency
exchange rates have, from time to time, caused the Company's products to become
relatively more expensive to customers in a particular country, leading to a
reduction in the Company's net sales or profitability in that country.
Furthermore, future international activity may result in foreign currency
denominated sales and, in such event, gains and losses on the conversion to
United States dollars of accounts receivable and accounts payable arising from
international operations may contribute to fluctuations in the Company's results
of operations. There can be no assurance that fluctuations in currency rates
will not adversely impact the Company's business, financial condition and
results of operations in the future. The international nature of the Company's
business subjects it and its distributors to the laws and regulations of the
foreign jurisdictions in which they operate and in which the Company's products
are sold. See "Business -- Government Regulation."
DEPENDENCE ON SIGNIFICANT CUSTOMER
Metaux Precieux Metalor Deutschland GmbH ("Metalor"), a distributor of
dental alloys and instruments, accounted for approximately 8.2% of the Company's
net sales during 1996 and 10.6% during the six month period ended June 30, 1997.
In 1990, the Company entered into an exclusive one year distribution agreement
with Metalor to distribute the Company's products in Germany and the
Netherlands, which agreement automatically renews for successive one year terms
unless either the Company or Metalor gives prior notice of its intention not to
renew the agreement for an additional term. The Company also entered into
similar exclusive distribution agreements with certain affiliates of Metalor who
distribute the Company's products in France, Switzerland and the United Kingdom.
Metalor and its three affiliates collectively
10
<PAGE> 12
accounted for approximately 12.1% of the Company's net sales during 1996 and
13.9% of the Company's net sales during the six months ended June 30, 1997. If
Metalor and its affiliates were to cease marketing the Company's products for
any reason, the Company's business, financial condition and results of
operations would be materially and adversely affected. See
"Business -- Customers, Marketing and Sales."
PRODUCT LIABILITY RISKS
The nature of the Company's business subjects the Company to the risk of
product liability claims that may involve significant defense costs. From time
to time, the Company has been the subject of such claims. Bausch & Lomb has
agreed to indemnify the Company up to an aggregate amount of $28.5 million
against any claims and losses from defects in the design, manufacture or
production of any product sold by S-O prior to the Acquisition. While the
Company currently has one product liability claim pending, Bausch & Lomb is
contractually obligated to indemnify the Company for this claim. There can be no
assurance that product liability claims will not be asserted against the Company
in the future. Although the Company maintains product liability insurance, there
can be no assurance that this coverage will be adequate to protect the Company
against future product liability claims. In addition, product liability
insurance is expensive and there can be no assurance that, in the future,
product liability insurance will be available to the Company in amounts or on
terms satisfactory to the Company, if at all. A successful product liability
claim or series of claims brought against the Company in excess of its insurance
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Product
Liability and Legal Proceedings; Insurance."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced and may in the future continue to experience
significant fluctuations in revenues and operating results from quarter to
quarter as a result of a number of factors including, without limitation,
competition; changes in regulatory requirements or other regulatory issues; the
volume and timing of orders from, and shipments to, international distributors;
market acceptance of the Company's products; changes in pricing policies or
price reductions by the Company or its competitors; variations in the Company's
distribution channels or the mix of product sales; the timing of new product
announcements and product introductions by the Company or its competitors;
product obsolescence resulting from new product introductions or changes in
customer demand; expenses associated with the acquisition of technologies or
businesses and currency fluctuations. While the Company engages in price
discounting from time to time, significant discounts in a particular quarter
could adversely affect the results of operations for such quarter. In addition,
significant and continuing discounts due to competition or other factors could
adversely affect the Company's business, financial condition and results of
operations. The Company has from time to time experienced decreased net sales in
the third quarter of each year when compared to the second quarter due in part
to fewer implant procedures performed during the summer vacation months. The
Company has also experienced flat to slightly decreased net sales in the first
quarter of each year when compared to the prior fourth quarter due in part to
some increases in net sales during the fourth quarter largely as a result of the
Company's increased marketing activities in the latter portion of the year. The
impact of the foregoing factors may cause the Company's operating results to be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock could be materially adversely affected.
Quarterly results are not necessarily indicative of future performance for any
particular period, and there can be no assurance that the Company will attain or
sustain growth in net sales and profitability on a quarterly or annual basis.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNCERTAIN MARKET ACCEPTANCE; LIMITED INSURANCE COVERAGE
Dental implants have historically constituted a small percentage of the
total market for dental restorative products and represent a relatively new form
of dental restorative treatment. The dental implant procedure is invasive and
typically takes three to six months to complete, and may take up to nine months
in certain circumstances. This procedure also involves several consultations
with the patient's dentist and one or more surgical procedures. In addition, in
the United States and most other countries, dental implants and related
11
<PAGE> 13
procedures generally are not covered under private or government sponsored
health care plans, or, if covered, are subject to a cap on coverage that only
covers a portion of the cost to the patient. Many competing products, such as
bridges and dentures, are covered under such plans and are, in general, less
expensive than dental implants. There can be no assurance concerning the extent
to which the Company's implant products will be reimbursed under health care
plans in the future. The absence of insurance coverage and the cost of implants
may adversely impact the market for dental implants. Due to the foregoing
factors, there can be no assurance that the demand for implant products such as
the Company's will continue at current levels or will increase relative to the
demand for alternative restorative products. See "Business -- Industry
Background" and "-- Customers, Marketing and Sales."
RISK OF INTERRUPTION OF MANUFACTURING
The Company's manufacturing facilities include a Class 10,000 clean room
and extensive specialized equipment, and are subject to the current QSR
regulations. The cutting, machining and initial cleaning of the Company's
products take place at leased facilities a short distance from the Company's
headquarters in Yorba Linda, California. Final cleaning, sterilization, assembly
(in certain circumstances), packaging, coating and testing take place at the
Company's headquarters. If a disaster (such as an earthquake or fire) were to
destroy or significantly damage its facilities, the Company would need to repair
its existing facilities or develop a new facility and obtain the necessary
regulatory approvals of the facility, which could take a substantial period of
time. Customer orders would have to be supplied from limited inventory. While
the Company has business interruption insurance to cover a portion of this loss,
such insurance would not compensate the Company for the loss of opportunity and
the potential adverse impact on relations with existing customers created by an
inability to deliver its products. In addition, certain of the leases for the
Company's manufacturing facilities expire in December 1997 or can be terminated
on relatively short notice. The loss of the Company's manufacturing capability
from a disaster or the untimely termination of any of the leases for the
Company's manufacturing facilities would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Manufacturing."
DEPENDENCE ON PROPRIETARY RIGHTS
The Company relies to some extent on proprietary technology, which it
protects primarily through trade secret and other intellectual property laws,
proprietary know-how, licensing arrangements, patents and non-disclosure
agreements. The Company currently holds five United States patents relating to
its products and has applications pending for seven additional United States
patents. In addition, the Company currently licenses a number of patents
relating to the DIA Anatomic Abutment and Bio-Esthetic Abutment systems and the
Immediate Impression Implant. There can be no assurance that any future patents
or licenses will be issued, that any issued patents or other intellectual
property rights of the Company will provide meaningful protection for the
Company's proprietary technology or that the steps taken by the Company to
protect its proprietary technologies will be adequate to prevent
misappropriation by third parties in the United States or abroad. In addition,
there can be no assurances that infringement claims will not be asserted against
the Company in the future. Any such claims, with or without merit, could be
time-consuming, result in costly litigation and a diversion of management's
efforts, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all.
Furthermore, if infringement was established, the Company could be required to
pay damages or be enjoined from making, using or selling the infringing product.
Any of the foregoing could have a material adverse effect upon the Company's
business, financial condition and results of operations. See
"Business -- Proprietary Rights."
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends in significant part upon the continued
service of its key management and marketing personnel, particularly its
executive officers. The Company is dependent on its ability to identify, hire,
train, integrate, retain and motivate high quality personnel. The industry in
which the Company competes is characterized by intense competition for skilled
personnel. The Company's employees may
12
<PAGE> 14
terminate their employment with the Company at any time. Accordingly, there can
be no assurance that any of the Company's current employees will continue to
work for the Company. Loss of services of key employees could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management."
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATED ENTITIES
The Company's directors, executive officers and certain of their affiliates
will, in the aggregate, beneficially own approximately 47.8% of the Company's
outstanding shares of Common Stock following the completion of the Offering. The
1818 Fund II, L.P., which is represented by three members of the Company's Board
of Directors, Messrs. Cowen, Grist and Long, will beneficially own 38.0% of the
Company's outstanding shares of Common Stock following the completion of the
Offering. These stockholders, if acting together, would be able to significantly
influence all matters requiring approval by the stockholders of the Company,
including the election of directors and the approval of mergers or other
business combination transactions. See "Certain Transactions" and "Principal
Stockholders."
BENEFITS OF OFFERING TO AFFILIATES OF CERTAIN UNDERWRITERS AND THE COMPANY
The Offering will provide several significant benefits to affiliates of
certain Underwriters and the Company. In particular, 17,471 shares of Class A
Preferred Stock and 2,527 shares of Class C Preferred Stock will be
automatically converted into an aggregate of 1,433,547 shares of Common Stock
upon consummation of the Offering pursuant to the Preferred Stock Conversion.
The conversion price will be equal to 93% of the initial public offering price
in the Offering. In addition, substantially all of the net proceeds from the
Offering will be used to (i) redeem all shares of Class A Preferred Stock and
Class C Preferred Stock not converting into Common Stock in the Preferred Stock
Conversion and (ii) repay the Company's indebtedness under its Subordinated
Notes and the Bank Facility. The sole holder of the Class A Preferred Stock is
The 1818 Fund II, L.P. Holders of the Class C Preferred Stock include (i)
Anvers, L.P., an affiliate of Furman Selz LLC, one of the Underwriters, (ii)
Richard Gumer, a Managing Director of Furman Selz LLC and (iii) Henry Wendt and
Douglas E. Rogers, directors of the Company and Managing Directors of DLJ
Merchant Banking II, Inc., which is an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), one of the Underwriters. Holders of the
Company's Subordinated Notes include Exeter Equity Partners, L.P., Exeter
Venture Lenders, L.P. and Equitable Life Assurance Society of the United States
("Equitable Life"), a wholly owned subsidiary of The Equitable Companies
Incorporated, which owns approximately 77% of DLJ. See "Use of Proceeds" and
"Certain Transactions."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained for the Common Stock after the Offering or that the market price
of the Common Stock will not decline below the initial public offering price.
The initial public offering price will be determined by negotiations among the
Company and the representatives of the Underwriters. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The stock market has experienced extreme price and volume
fluctuations that have, in the past, particularly affected the market price for
many medical device companies, and that have, on occasion, been unrelated to the
operating performance of these companies. These broad market fluctuations, as
well as other factors, may adversely affect the market price of the Company's
Common Stock. The Company's net sales or results of operations in future
quarters may be below the expectations of public market securities analysts and
investors. In such event, the price of the Company's Common Stock would likely
decline, perhaps substantially. Furthermore, factors such as announcements of
acquisitions; general economic conditions; quarterly fluctuations in financial
results and market conditions for stocks similar to that of the Company; new
products or product enhancements by the Company or its competitors; developments
in patents or other intellectual property rights; changes in the Company's
relationships with distributors and suppliers and other factors could have
significant impact on the market price of the Common Stock.
13
<PAGE> 15
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling and disposal of toxic or other hazardous
substances, chemicals, materials or waste. Small amounts of hazardous substances
are used in the Company's manufacturing process, and the Company contracts with
third parties for the disposal of such waste. Any failure to comply with current
or future regulations could result in civil penalties or criminal fines being
imposed on the Company, or its officers, directors or employees, suspension of
production, alteration of its manufacturing process or cessation of operations.
Such regulations could require the Company to acquire expensive remediation or
abatement equipment or to incur expenses to comply with environmental
regulations. Any failure by the Company to properly manage the use, disposal or
storage of, or adequately restrict the release of, hazardous or toxic substances
could subject the Company to significant liabilities. See
"Business -- Manufacturing."
POTENTIAL ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
The Company's Board of Directors has the authority, without further action
by the stockholders, to issue from time to time up to 5,000,000 shares of
Preferred Stock in one or more classes or series, and to fix the rights and
preferences of such Preferred Stock. The Company's Certificate of Incorporation,
as amended, (the "Certificate") provides for staggered terms for members of the
Board of Directors and does not permit stockholders to act without a meeting.
The Company is also subject to provisions of Delaware corporate law that,
subject to certain exceptions, will prohibit the Company from engaging in any
"business combination" with a person who, together with affiliates and
associates, owns 15% or more of the Company's Common Stock (an "Interested
Stockholder") for a period of three years following the time that such person
became an Interested Stockholder, unless the business combination is approved in
a prescribed manner. In addition, the Company's bylaws, as amended (the
"Bylaws"), establish an advance notice procedure for stockholder proposals and
for nominating candidates for election as directors. These provisions of
Delaware law and of the Company's Certificate and Bylaws may have the effect of
delaying, deterring or preventing a change in control of the Company, may
discourage bids for the Common Stock at a premium over the prevailing market
price and may adversely affect the market price, and the voting and other rights
of the holders, of the Common Stock. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
Offering could adversely affect the market price of the Common Stock and the
ability of the Company to raise additional capital. Upon the completion of the
Offering, the Company will have a total of 10,933,547 shares of Common Stock
outstanding, of which only the 4,700,000 shares offered hereby will be freely
tradeable without restriction under the Securities Act of 1933, as amended (the
"Securities Act"). All of the remaining 6,233,547 shares are "restricted
securities" as defined by Rule 144 promulgated under the Securities Act, of
which 4,800,000 shares will be eligible for sale in the public market in
reliance on Rule 144 (subject to the volume and other applicable restrictions of
Rule 144) commencing 90 days following the date of this Prospectus. The holders
of all of such shares, however, have agreed not to dispose of their shares until
180 days after the date of this Prospectus. Upon the consummation of the
Offering, approximately 968,344 shares will be issuable upon exercise of
outstanding options. Following the Offering, the Company intends to file a
registration statement covering shares of Common Stock reserved for issuance
under outstanding options and under the 1997 Plan. Subject to Rule 144 volume
limitations applicable to affiliates, such shares will be available for sale in
the open market at the time they are exercised by the holder thereof. See
"Management -- Compensation Plans and Arrangements," "Principal Stockholders"
and "Shares Eligible for Future Sale."
RISK OF SUBSTANTIAL DILUTION
Purchasers of the Common Stock in the Offering will suffer an immediate and
substantial dilution of $13.62 per share in the pro forma net tangible book
value of the Common Stock from the initial public offering price. Moreover, to
the extent outstanding options or warrants to purchase the Company's Common
Stock are exercised in the future, there will be further dilution. See
"Dilution."
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
4,700,000 shares of Common Stock offered hereby, after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company, are estimated to be approximately $64.9 million ($74.7 million if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $15.00 per share.
The Company intends to use approximately $4.5 million of the net proceeds
from the Offering to redeem 4,529 shares of Class A Preferred Stock,
approximately $10.0 million to redeem 10,000 shares of Class B Preferred Stock
and approximately $658,000 to redeem 658 shares of Class C Preferred Stock. The
remaining 17,471 shares of Class A Common Stock and 2,527 shares of Class C
Common Stock will convert into Common Stock in the Preferred Stock Conversion
upon consummation of the Offering. The Company also intends to use approximately
$12.8 million of the net proceeds of the Offering to repay the Subordinated
Notes. Assuming the Offering closes on October 31, 1997, the Company estimates
that it will be required to pay approximately $2.9 million of accrued dividends
on the Preferred Stock, approximately $531,000 of accrued interest on the
Subordinated Notes and the Bank Facility and approximately $1.8 million of
prepayment penalties in connection with the early retirement of the Subordinated
Notes. Interest on the Subordinated Notes is payable in quarterly installments
and the outstanding principal amounts are due and payable in May 2003. The
proceeds from the Subordinated Notes were used to fund the Acquisition in
November 1996. See "Certain Transactions."
The Company intends to use any remaining net proceeds of the Offering to
repay the outstanding indebtedness under the Bank Facility, which includes an
$18.3 million revolving credit line, $7.5 million term loan, $5.0 million
working capital line (of which $3.4 million was outstanding at June 30, 1997)
and $3.0 million capital expenditure line (of which 1.3 million was outstanding
at June 30, 1997). To the extent the proceeds of the Offering are insufficient
to repay all outstanding indebtedness, a portion of the working capital line may
remain outstanding after the Offering. Interest accrues on such indebtedness as
follows: (i) the reference rate announced by the First Bank of Chicago as its
base rate (the "Reference Rate") plus 1.5% per annum or the LIBOR rate plus 3.0%
per annum on the revolving credit line, (ii) the Reference Rate plus 2.0% per
annum or the LIBOR rate plus 3.75% per annum on the term loan, (iii) the
Reference Rate plus 1.5% per annum or the LIBOR rate plus 2.75% per annum on the
working capital line and (iv) the Reference Rate plus 1.5% per annum or the
LIBOR rate plus 3.0% per annum on the capital expenditure line. The outstanding
principal amounts on the revolving credit line, term loan, working capital line
and capital expenditure line are due on November 15, 2001, November 15, 2002,
November 15, 1999 and November 15, 2002, respectively. The proceeds from the
capital expenditure line were used to fund the Company's acquisition of certain
manufacturing equipment, including the Computer Numerical Controlled ("CNC")
machines. The proceeds of the working capital line were used for general working
capital purposes, and approximately $1.5 million of the revolving credit line
was used to fund the acquisition of Interpore. Substantially all of the
remaining proceeds of the Bank Facility were used to fund the Acquisition in
November 1996.
Any remaining proceeds from the Offering will be used for working capital
and other general corporate purposes. Pending the uses outlined above, the net
proceeds are expected to be invested in short-term, interest-bearing investment
grade or United States government securities.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock.
The Company currently intends to retain earnings to finance its operations and
future growth and does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The Company's Bank Facility and the
Subordinated Notes prohibit, and the Company's proposed bank facility may limit,
the payment of dividends without the consent of the lenders thereunder.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth the actual and pro forma capitalization of
the Company as of June 30, 1997. See "Use of Proceeds," "Unaudited Pro Forma
Consolidated Financial Data" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------
ACTUAL PRO FORMA(1)
------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................ $ 61 $ 2,408
======= ========
Long-term debt (including current portion)(2):
Bank Facility...................................................... $30,376 --
16% Series A Subordinated Notes.................................... 10,168 --
14% Series B Subordinated Notes.................................... 2,501 --
Class A 8.8% Cumulative Redeemable Preferred Stock, $.0001 par
value, 100,000 shares authorized; 22,000 shares issued and
outstanding actual; and no shares issued and outstanding pro
forma........................................................... 22,161 --
Class B 8.0% Cumulative Convertible Redeemable Preferred Stock,
$.0001 par value, 10,000 shares authorized, issued and
outstanding actual; and no shares issued and outstanding pro
forma........................................................... 10,500 --
Class C 8.0% Junior Cumulative Redeemable Preferred Stock, $.0001
par value, 3,200 shares authorized, 3,185 shares issued and
outstanding actual; and no shares issued and outstanding pro
forma........................................................... 3,153 --
Stockholder's equity (deficit):
Common Stock, $.0001 par value, 35,000,000 shares authorized;
50,000(3) issued and outstanding actual; and 10,933,547(4)
shares issued and outstanding pro forma......................... -- $ 1
Additional paid-in capital......................................... 2,446 90,134
Accumulated deficit............................................. (3,592) (12,679)(5)
------- --------
Total stockholders' equity (deficit)....................... (1,146) 77,455
------- --------
Total capitalization....................................... $77,713 $ 77,455
======= ========
</TABLE>
- ---------------
(1) Gives effect to (i) the conversion of 17,471 shares of Class A Preferred
Stock and 2,527 shares of Class C Preferred Stock into an aggregate of
1,433,547 shares of Common Stock and (ii) the Offering and the application
of the estimated proceeds therefrom. See "Use of Proceeds" and "Unaudited
Pro Forma Consolidated Financial Data."
(2) Net of unamortized debt discount.
(3) Excludes 4,750,000 shares of Common Stock issuable upon the exercise of
outstanding warrants, 733,344 shares of Common Stock issuable upon the
exercise of outstanding options and 1,433,547 shares of Common Stock
issuable in connection with the Preferred Stock Conversion.
(4) Excludes 968,344 shares of Common Stock issuable upon the exercise of
outstanding options.
(5) Includes the effect of an extraordinary charge of $7.8 million, net of
related tax benefit, relating to (i) the elimination of deferred financing
costs of $5.3 million associated with the repayment of the Subordinated
Notes and the Bank Facility and the conversion and/or redemption of all
mandatorily redeemable Preferred Stock, (ii) the charge of $1.5 million
related to the Preferred Stock Conversion, and (iii) the prepayment
penalties of $1.0 million incurred in connection with the repayment of the
Subordinated Notes. Also includes a compensation charge of $1.3 million
related to options granted below the fair value per share at the date of
grant, which options are either fully vested or vest immediately upon
consummation of the Offering.
16
<PAGE> 18
DILUTION
As of June 30, 1997, the net tangible book value (deficit) of the Company
was approximately $(65,913,000), or $(13.73) per share of Common Stock based
upon 4,800,000 shares of Common Stock outstanding. "Net tangible book value" per
share represents the amount of total tangible assets of the Company reduced by
the amount of its total liabilities, divided by the number of shares of Common
Stock outstanding. After giving effect to the conversion of 17,471 shares of
Class A Preferred Stock and 2,527 shares of Class C Preferred Stock having an
aggregate liquidation preference of approximately $20.0 million into 1,433,547
shares of Common Stock, the pro forma net tangible book value (deficit) of the
Company as of June 30, 1997 before the Offering, would have been $(45,913,000),
or $(7.37) per share of Common Stock. After giving effect to the sale of
4,700,000 shares of Common Stock offered by the Company hereby and the receipt
of the net proceeds of $64,900,000 therefrom at an assumed initial public
offering price of $15.00 per share, the pro forma net tangible book value of the
Company as of June 30, 1997 would have been approximately $15,072,000, or $1.38
per share of Common Stock. This represents an immediate increase in net tangible
book value of $15.11 per share to existing stockholders and an immediate
dilution of $13.62 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $15.00
Net tangible book value (deficit) per share before the
Offering..................................................... $(13.73)
Increase per share attributable to conversion of Preferred
Stock........................................................ 6.36
------
Pro forma net tangible book value per share before the Offering... (7.37)
Increase per share attributable to new investors................ 8.75
------
Pro forma net tangible book value per share after the Offering.... 1.38
------
Dilution per share to new investors............................... $13.62
======
</TABLE>
As of June 30, 1997, options to purchase an aggregate of 733,344 shares of
Common Stock were outstanding at a weighted average exercise price of $0.58 per
share. The computations in the foregoing table assume no exercise of these stock
options. To the extent these options or warrants are exercised, there will be
further dilution to new investors. See Note 9 of Notes to Consolidated Financial
Statements.
The following table summarizes, on a pro forma basis as of June 30, 1997,
the differences between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by new investors purchasing shares in the Offering
(assuming an initial public offering price of $15.00 per share and before
deducting underwriting discounts and commissions and estimated offering
expenses).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 6,233,547 57.0% $20,000,960 22.1% $ 3.21
New investors............. 4,700,000 43.0 70,500,000 77.9 15.00
---------- ----- ----------- -----
Total........... 10,933,547 100.0% $90,500,960 100.0%
========== ===== =========== =====
</TABLE>
17
<PAGE> 19
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited condensed consolidated pro forma financial data
(the "Unaudited Pro Forma Financial Data") as of June 30, 1997 and for the six
months ended June 30, 1996 and 1997 is prepared from the application of pro
forma adjustments to data derived from the unaudited historical consolidated
financial statements of the Company. The unaudited condensed consolidated pro
forma financial data for the year ended December 31, 1996 is prepared from the
application of pro forma adjustments to data derived from the audited historical
consolidated financial statements for the period from January 1 through November
15, 1996 of the Company's predecessor, S-O, a wholly-owned subsidiary of Bausch
& Lomb, and the period from November 16, 1996 through December 31, 1996 of the
Company. The unaudited pro forma condensed consolidated statement of operations
for the six months ended June 30, 1996 and the year ended December 31, 1996
gives effect to: (i) the Acquisition, (ii) the Preferred Stock Conversion and
(iii) the Offering and application of the net proceeds therefrom, as if each
transaction had occurred on January 1, 1996. The unaudited pro forma condensed
consolidated statement of operations for the six months ended June 30, 1997
gives effect to (ii) and (iii) as if each had occurred on January 1, 1997. The
unaudited pro forma condensed consolidated balance sheet gives effect to (ii)
and (iii) as if each had occurred on June 30, 1997. The adjustments are
described in the accompanying footnotes. The Unaudited Pro Forma Financial Data
does not purport to represent what the Company's results of operations actually
would have been if those transactions had been consummated on the date or for
the periods indicated, or what such results will be for any future date or for
any future period. The Unaudited Pro Forma Financial Data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Registration Statement.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
JAN. 1, NOV. 16,
1996 1996
THROUGH THROUGH COMBINED
NOV. 15, DEC. 31, YEAR ENDED
1996 1996 DECEMBER 31, ACQUISITION OFFERING
(PREDECESSOR) (COMPANY) 1996 ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- --------- ------------ ----------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $28,108 $ 4,089 $ 32,197 $ $ $ 32,197
Cost of sales.................... 7,430 1,356 8,786 8,786
------- ------- -------- ------- ------- ----------
Gross profit..................... 20,678 2,733 23,411 23,411
Selling, general and
administrative expense......... 14,791 1,929 16,720 501(1) 17,221
Research and development
expense........................ 2,116 352 2,468 2,468
Interest expense................. 1,065 1,065 7,612(2) (8,677)(3) --
------- ------- -------- ------- ------- ----------
Income (loss) before income
taxes.......................... 3,771 (613) 3,158 (8,113) 8,677 3,722
Income taxes..................... 1,852 1,852 (363)(4) 1,489
------- ------- -------- ------- ------- ----------
Net income (loss)(5)............. $ 1,919 $ (613) $ 1,306 $(8,113) $ 9,040 $ 2,233
======= ======= ======== ======= ======= ==========
Net income per share(5)(6)....... $ 0.19
==========
Shares outstanding(6)............ 11,638,535
</TABLE>
- ---------------
(1) Reflects the effect of additional amortization of $59.2 million of
tax-deductible goodwill recorded in connection with the Acquisition, which
amounts to approximately $1.5 million annually, for the period from January
1, 1996 through November 15, 1996.
(2) Reflects the increase in interest expense and amortization of deferred
financing costs related to the Subordinated Notes, the Bank Facility and the
mandatorily redeemable Preferred Stock issued in connection with the
Acquisition assuming the Acquisition occurred on January 1, 1996. The
Subordinated Notes consisted of the following at December 31, 1996 (i) 16%
Series A Subordinated Note with a principal amount of $10.0 million and (ii)
14% Series B Subordinated Notes with an aggregate principal amount of $2.5
million. The Bank Facility consisted of the following at December 31, 1996:
(i) a working capital loan with a principal
18
<PAGE> 20
amount of $1.3 million and a variable interest rate of 9.75%, (ii) a
revolving term loan with a principal amount of $17.0 million and a variable
interest rate of 9.75% and (iii) a term loan with a principal amount of $7.5
million and a variable interest rate of 10.25%. At December 31, 1996, the
mandatorily redeemable Preferred Stock consisted of 22,000 shares of Class A
Preferred Stock, 10,000 shares of Class B Preferred Stock and 3,185 shares
of Class C Preferred Stock, with face amounts of $22.0 million, $10.0
million and $3.2 million, respectively, and dividend rates of 8.8%, 8.0% and
8.0%, respectively. At December 31, 1996, deferred financing costs consisted
of approximately $2.3 million relating to the Subordinated Notes and Bank
Facility and $2.9 million relating to the issuance of mandatorily redeemable
Preferred Stock. To compute the pro forma interest expense adjustment,
composite interest rates of 15.85%, 10.1% and 8.5% were used for the
Subordinated Notes, Bank Facility and mandatorily redeemable Preferred
Stock, respectively.
(3) Reflects the reduction in interest expense by (i) $4.6 million as a result
of the repayment of the Subordinated Notes and Bank Facility, (ii) $3.0
million as a result of the elimination of dividends on the mandatorily
redeemable Preferred Stock as a result of the Preferred Stock Conversion and
(iii) $1.1 million as a result of the elimination of amortization of
deferred financing costs and debt discounts.
(4) Reflects adjustment to increase pro forma income tax expense to result in a
statutory income tax rate of 40%.
(5) Excludes the effect of an extraordinary charge of $7.8 million, net of the
related tax benefit, relating to (i) the elimination of deferred financing
costs of $5.3 million associated with the repayment of the Subordinated
Notes and the Bank Facility and the conversion and/or redemption of all
mandatorily redeemable Preferred Stock, (ii) the charge of $1.5 million
related to the Preferred Stock Conversion, and (iii) the prepayment
penalties of $1.0 million incurred in connection with the repayment of
Subordinated Notes.
(6) Computed based on weighted average shares outstanding assuming the Preferred
Stock Conversion and the Offering and the application of the net proceeds
therefrom were consummated on January 1, 1996. Also includes the effect of
Common Stock and equivalents issued within one year from the filing of the
Registration Statement of which this Prospectus is a part at prices per
share below the initial public offering price, using the treasury stock
method using an assumed initial public offering price of $15.00 per share.
19
<PAGE> 21
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
SIX MONTHS
ENDED OFFERING
JUNE 30, 1997 ADJUSTMENTS PRO FORMA
------------- ----------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................. $19,334 $ $19,334
Cost of sales......................................... 5,148 5,148
-------
--
------- -------
Gross profit.......................................... 14,186 14,186
Selling, general and administrative expense........... 10,966 10,966
Noncash compensation expense.......................... 545 545
Research and development expense...................... 1,322 1,322
Interest expense...................................... 4,332 (4,332)(1)
-------
--
------- -------
Income (loss) before income taxes..................... (2,979) 4,332 1,353
Income taxes.......................................... -- 541(2) 541
-------
--
------- -------
Net income (loss)(3).................................. $(2,979) $ 3,791 $ 812
======= ======= =======
Net income per share(3)(4)............................ $ 0.07
=======
Shares outstanding(4)................................. 11,638,535
</TABLE>
- ---------------
(1) Reflects the reduction in interest expense as a result of the redemption of
all outstanding shares of mandatorily redeemable Preferred Stock not
converting into Common Stock in the Preferred Stock Conversion and the
repayment of the Subordinated Notes and the Bank Facility. Also reflects a
reduction in interest expense due to the elimination of dividends on the
mandatorily redeemable Preferred Stock as a result of the Preferred Stock
Conversion.
(2) Reflects adjustment to increase pro forma income tax expense to result in a
statutory income tax rate of 40%.
(3) Excludes the effect of an extraordinary charge of $7.8 million, net of the
related tax benefit, relating to (i) the elimination of deferred financing
costs of $5.3 million associated with the repayment of the Subordinated
Notes and the Bank Facility and the conversion and/or redemption of all
mandatorily redeemable Preferred Stock, (ii) the charge of $1.5 million
related to the Preferred Stock Conversion, and (iii) the prepayment
penalties of $1.0 million incurred in connection with the repayment of
Subordinated Notes.
(4) Computed based on weighted average shares outstanding assuming the Preferred
Stock Conversion and the Offering and application of the net proceeds
therefrom were consummated on January 1, 1996. Also includes the effect of
Common Stock and equivalents issued within one year from the filing of the
Registration Statement of which this Prospectus is a part at prices per
share below the initial public offering price, using the treasury stock
method using an assumed initial public offering price of $15.00 per share.
20
<PAGE> 22
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
SIX MONTHS
ENDED ACQUISITION OFFERING
JUNE 30, 1996 ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ------------ ------------ ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $15,744 $ $ $15,744
Cost of sales............................... 4,226 4,226
------- -------- -------- -------
--
Gross profit................................ 11,518 11,518
Selling, general and administrative 8,224 285(1) 8,509
expense...................................
Research and development expense............ 1,255 1,255
Interest expense............................ 4,318(2) (4,318)(3) --
------- -------- -------- -------
--
Income (loss) before income taxes........... 2,039 (4,603) 4,318 1,754
Income taxes................................ 1,003 (301)(4) 702
------- -------- -------- -------
--
Net income.................................. $ 1,036 $ (4,603) $ 4,619 $ 1,052
======= ======== ======== =======
Net income per share(5)..................... $ 0.09
=======
Shares outstanding(5)....................... 11,638,535
</TABLE>
- ---------------
(1) Reflects the effect of additional amortization of $59.2 million of
tax-deductible goodwill recorded in connection with the Acquisition, which
amounts to approximately $1.5 million annually, for the period from January
1, 1996 through June 30, 1996.
(2) Reflects the increase in interest expense and amortization of deferred
financing costs related to the Subordinated Notes, the Bank Facility and
mandatorily redeemable Preferred Stock issued in connection with the
Acquisition assuming the Acquisition had occurred on January 1, 1996.
(3) Reflects the reduction in interest expense as a result of the redemption of
all outstanding shares of mandatorily redeemable Preferred Stock not
converting into Common Stock in the Preferred Stock Conversion and the
repayment of the Subordinated Notes and the Bank Facility. Also reflects a
reduction in interest expense due to the elimination of dividends on the
mandatorily redeemable Preferred Stock as a result of the Preferred Stock
Conversion.
(4) Reflects adjustment to increase pro forma income tax expense to result in a
statutory income tax rate of 40%.
(5) Computed based on weighted average shares outstanding assuming the Preferred
Stock Conversion and the Offering and the application of proceeds therefrom
were consummated on January 1, 1996. Also includes the effect of Common
Stock and equivalents issued within one year from the filing of the
Registration Statement of which this Prospectus is a part at prices per
share below the initial public offering price, using the treasury stock
method using an assumed initial public offering price of $15.00 per share.
21
<PAGE> 23
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
JUNE 30, 1997
ASSETS
<TABLE>
<CAPTION>
AT
JUNE PREFERRED STOCK
30, CONVERSION OFFERING
1997 ADJUSTMENTS ADJUSTMENTS PRO FORMA
------- --------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents.................... $ 61 $ $ 2,347(1) $ 2,408
Accounts receivable, net..................... 7,083 7,083
Inventories.................................. 6,062 6,062
Prepaid expenses and other current assets.... 305 305
------- --------- --------- --------
Total current assets....................... 13,511 2,347 15,858
Fixed assets, net.............................. 5,128 5,128
Goodwill, net.................................. 59,352 59,352
Other assets................................... 5,415 (3,108)(2) 2,307
------- --------- --------- --------
Total assets............................... $83,406 $ $ (761) $82,645
======= ========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt............ $ 3,269 $ $ (3,269)(3) $
Accounts payable............................. 2,091 2,091
Accrued liabilities.......................... 3,114 (503)(3) 2,611
Customer advances............................ 488 488
------- --------- --------- --------
Total current liabilities.................. 8,962 (3,772) 5,190
Long-term debt................................. 39,776 (39,776)(3)
Mandatorily redeemable Preferred Stock......... 35,814 (20,000)(4) (15,814)(5)
------- --------- --------- --------
Total liabilities.......................... 84,552 (20,000) (59,362) 5,190
------- --------- --------- --------
Stockholders' equity (deficit)
Common Stock and additional paid-in
capital.................................... 2,446 21,505(4) 66,183(6) 90,134
Accumulated deficit.......................... (3,592) (1,505)(4)(7) (7,582)(7) (12,679)
------- --------- --------- --------
Total stockholders' equity (deficit)....... (1,146) 20,000 58,601 77,455
------- --------- --------- --------
Total liabilities and stockholders'
equity................................... $83,406 $ $ (761) $82,645
======= ========= ========= ========
</TABLE>
- ---------------
(1) Reflects the increase in cash and cash equivalents equal to the net proceeds
from the Offering less the redemption of mandatorily redeemable Preferred
Stock and repayment of the Subordinated Notes and the Bank Facility upon
consummation of the Offering.
(2) Reflects write-off of debt issue costs and Preferred Stock issue costs of
$4.7 million, less deferred income tax asset of $1.6 million recorded for
the extraordinary charge discussed in footnote 7.
(3) Reflects the repayment of the Subordinated Notes and the Bank Facility upon
consummation of the Offering.
(4) Reflects the conversion of 17,471 shares of Class A Preferred Stock and
2,527 shares of Class C Preferred Stock into an aggregate 1,433,547 shares
of Common Stock at 93% of the initial public offering price upon
consummation of the Offering and the related extraordinary charge of $1.5
million.
(5) Reflects the redemption upon consummation of the Offering of all shares of
mandatorily redeemable Preferred Stock not converting into Common Stock in
the Preferred Stock Conversion.
(6) This adjustment is recorded as additional paid-in capital and reflects the
application of the net proceeds of $64.9 million from the Offering.
(7) Reflects an extraordinary charge of $7.8 million, net of the related tax
benefit, relating to (i) the elimination of deferred finance costs of $5.3
million associated with the repayment of the Subordinated Notes and the Bank
Facility and the conversion and/or redemption of all mandatorily redeemable
Preferred Stock, (ii) the charge of $1.5 million related to the Preferred
Stock Conversion, and (iii) the prepayment penalties of $1.0 million
incurred in connection with the repayment of the Subordinated Notes. Also
includes a compensation charge of $1.3 million related to options granted
below the fair value per share at the date of grant, which options are
either fully vested or vest immediately upon consummation of the Offering.
22
<PAGE> 24
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations data for the
years ended December 31, 1994 and 1995, the period January 1, 1996 through
November 15, 1996, the period November 16, 1996 through December 31, 1996, the
six month period ended June 30, 1997 and the selected consolidated balance sheet
data as of December 31, 1995 and 1996 and June 30, 1997 are derived from the
audited Consolidated Financial Statements included elsewhere in this Prospectus.
The selected consolidated statement of operations data for the six months ended
June 30, 1996 and the selected consolidated balance sheet data as of June 30,
1996 are derived from unaudited Consolidated Financial Statements included
elsewhere in this Prospectus. The selected consolidated statement of operations
data for the years ended December 31, 1992 and 1993 and the selected
consolidated balance sheet data as of December 31, 1992 and 1993, are derived
from the unaudited Consolidated Financial Statements not included in this
Prospectus, which Consolidated Financial Statements were prepared by management
of the Company on the same basis as the audited Consolidated Financial
Statements included elsewhere herein and, in the opinion of the Company, include
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the information set forth below. The following selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus. The Company uses a 52/53 week fiscal year ending on the last
Saturday in December. As a result, fiscal periods may not end on the same day as
the end of the respective calendar periods.
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR(1) ------------ PREDECESSOR COMPANY
---------------------------------------------------- NOVEMBER 16, ----------- -----------
JANUARY 1, 1996 SIX MONTHS SIX MONTHS
YEAR ENDED DECEMBER 31, THROUGH THROUGH ENDED ENDED
------------------------------------- NOVEMBER 15, DECEMBER 31, JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996(2)(3) 1996 1997(3)(4)
------- ------- ------- ------- ------------ ------------ ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $12,735 $16,845 $22,168 $27,361 $ 28,108 $ 4,089 $15,744 $19,334
Cost of sales................. 4,042 5,127 6,666 7,865 7,430 1,356 4,226 5,148
------- ------- ------- ------- -------- ------- ------- -------
Gross profit.................. 8,693 11,718 15,502 19,496 20,678 2,733 11,518 14,186
Selling, general and
administrative expense...... 6,164 8,698 11,393 14,241 14,791 1,929 8,224 11,511
Research and development
expense..................... 1,218 1,618 1,781 2,225 2,116 352 1,255 1,322
------- ------- ------- ------- -------- ------- ------- -------
Income from operations........ 1,311 1,402 2,328 3,030 3,771 452 2,039 1,353
Interest expense.............. 45 50 -- -- -- 1,065 -- 4,332
------- ------- ------- ------- -------- ------- ------- -------
Income (loss) before income
taxes....................... 1,266 1,352 2,328 3,030 3,771 (613) 2,039 (2,979)
Income taxes.................. 506 836 1,253 1,572 1,852 -- 1,003 --
------- ------- ------- ------- -------- ------- ------- -------
Net income (loss)............. $ 760 $ 516 $ 1,075 $ 1,458 $ 1,919 $ (613) $ 1,036 $(2,979)
======= ======= ======= ======= ======== ======= ======= =======
Net (loss) per share(5)....... $ (0.05) $ (0.28)
======= =======
Shares outstanding(5)......... 11,638,535 11,638,535
CASH FLOW STATEMENT AND OTHER
DATA:
EBITDA(6)..................... $ 1,492 $ 2,301 $ 3,559 $ 4,566 $ 5,395 $ 795 $ 2,896 $ 2,797
Depreciation.................. 181 161 363 595 712 132 352 575
Amortization.................. -- 738 868 941 912 211 505 869
Capital expenditures.......... 132 560 1,702 1,190 1,957 250 1,286 1,018
Cash flows provided by (used
in):
Operating activities...... 2,454 700 1,680 3,313 5,434 82 2,644 (777)
Investing activities...... (132) (560) (1,702) (1,190) (1,957) (58,994) (1,286) (2,755)
Financing activities...... (2,322) (140) 177 (2,158) (3,597) 59,132 (805) 3,373
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents..... $ -- $ -- $ 155 $ 120 $ 220 $ 61
Working capital............... 502 1,629 4,585 4,706 2,357 4,549
Total assets.................. 4,266 31,796 33,764 35,648 79,627 83,406
Total long-term debt and
mandatorily redeemable
Preferred Stock(7).......... -- -- -- -- 73,642 78,859
Total stockholders' equity
(deficit)/Predecessor
equity...................... 1,058 27,220 30,698 32,588 1,288 (1,146)
</TABLE>
- ---------------
(1) Represents the historical financial data of the Company's predecessor, S-O,
a wholly-owned subsidiary of Bausch & Lomb. For 1992, represents the
historical financial data of S-O's predecessor.
(2) Includes the results of operations and the assets of S-O subsequent to the
Acquisition in November 1996.
(3) Includes the effect of amortization of $59.2 million of goodwill recorded in
connection with the Acquisition, which is being amortized over a 40 year
period and is tax deductible.
(4) Includes the results of operations of the dental business of Interpore
subsequent to its acquisition in May 1997.
(5) Share and per share data are not considered meaningful since S-O operated as
a wholly-owned subsidiary of Bausch & Lomb from 1993 through November 15,
1996.
(6) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. While EBITDA constitutes a widely accepted financial indicator
to compare the operating performance of companies, EBITDA may not provide an
accurate comparison between companies because it is not necessarily computed
by all companies in an identical manner. The use of such information is
intended only to supplement the conventional income statement presentation
and is not to be considered as an alternative to net income, to represent
cash flows for the periods or funds available for management's discretionary
use or any other indicator of the Company's operating performance which is
presented in accordance with GAAP above.
(7) Includes current portion of long-term debt.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. Historical and pro forma results
of operations, percentage relationships and any trends that may be inferred from
the discussion below are not necessarily indicative of the operating results for
any future period.
GENERAL
Steri-Oss develops, manufactures and markets a broad line of dental
implants, abutments and related surgical instruments for distribution in North
America, Europe/the Middle East, Asia and Central and South America. The
Company's products are used by oral surgeons, periodontists and implantologists
who typically perform the implant surgery, as well as general practitioners and
prosthodontists who usually prepare the crown or other prosthetic device that
fits on the abutment. In North America, the Company sells its products through
its direct sales force consisting of over 40 persons. Internationally, the
Company sells its products through 26 independent distributors in more than 35
countries.
The Company's predecessor sold its first dental implant in 1986 and was
acquired by the Company from Bausch & Lomb in November 1996. In May 1997, the
Company acquired the dental operations of Interpore. The Company accounted for
each of its acquisitions as a purchase for financial reporting purposes and, as
a result, the Company's consolidated statement of operations data includes the
operating results of the acquired companies and assets from their respective
dates of acquisition. In connection with the Acquisition, the Company recorded
$59.2 million in goodwill, which is being amortized by the Company over a
40-year period, resulting in tax-deductible amortization of approximately $1.5
million per year.
The Company's products are purchased by dental professionals who bill
patients directly for the implant procedure. In the United States and most other
countries, implants generally are not covered by health insurance and, as a
result, the patient is responsible for payment to the dental professional. While
certain competitive implants are less expensive than the Company's implants, the
Company believes its prices are competitive with other high-quality implant
products. Due in part to the importance of quality and customer service and to
the minor cost of the implant relative to the cost of the implant procedure, the
Company does not believe that price is a major competitive factor. The Company
does, however, provide its customers, particularly its international
distributors, with discounts. The Company uses such discounts to encourage
international distributors to increase their marketing activities and training
programs. The Company has experienced some decline in the average selling price
of its products over the last several years, the effect of which has been
partially offset by a reduction in the Company's cost of goods sold as a
percentage of net sales. While the Company does not anticipate any material
declines in its average selling prices, any such declines could adversely affect
the Company's net sales, results of operations and cash flows.
Approximately 53.2% of the Company's net sales for the six months ended
June 30, 1997 were attributable to dental implants, while abutments and surgical
instrument sales accounted for approximately 30.4% and 16.4% of net sales,
respectively, for the same period. In general, the Company's dental implants
have the highest gross margins of its products, followed by abutments, which
have slightly lower gross margins. The gross margins on surgical instruments are
significantly lower than on dental implants and abutments because the Company
often discounts its surgical instruments to encourage dental professionals using
competitors' products to switch to the Company's implant systems. The Company
generally experiences higher gross margins on new products and the Company seeks
to generate a significant portion of its net sales in any particular year from
recently introduced products.
International sales (sales outside the United States and Canada)
constituted approximately 41.2% and 41.1% of the Company's net sales during 1996
and for the six months ended June 30, 1997, respectively. The Company
anticipates that international sales will continue to constitute a significant
portion of the Company's net sales in the future. Substantially all of the
Company's international net sales are to independent distributors. In
particular, Metalor and its affiliates accounted for approximately 12.1% of the
Company's net sales during 1996 and 13.9% for the six months ended June 30,
1997. Although the Company's international
24
<PAGE> 26
sales are currently denominated in United States dollars, fluctuations in
currency exchange rates have in the past, and could in the future, impact the
Company's net sales or profitability in certain countries.
Prior to 1993, the Company outsourced most of its manufacturing to
independent vendors. In 1993, the Company leased a new manufacturing facility
and purchased equipment for the purpose of bringing its manufacturing in-house.
In addition, the Company undertook other measures designed to reduce
manufacturing costs and increase operating efficiencies. Primarily as a result
of these actions, the Company reduced cost of sales as a percentage of net sales
from 30.1% in 1994 to 26.6% for the six months ended June 30, 1997. Currently,
the Company manufactures substantially all of its implants.
While the Company's annual net sales have increased 152.8% from 1992 to
1996, the Company's net sales and results of operations have experienced
quarterly fluctuations. The Company's sales in the third quarter of each year
have been historically lower than in the prior quarter. The Company believes the
lower third quarter sales are due in part to fewer implant procedures performed
during the summer vacation months. The Company has also experienced some
increases in net sales during the fourth quarter followed by lower to flat first
quarter sales primarily due to the Company's increased marketing activities in
the latter portion of the year.
The Company's results of operations are affected by a variety of factors.
If the Company were to experience pricing pressure, an adverse shift in product
mix, increased cost of sales, increased discounts to distributors, increased
manufacturing costs or adverse changes in governmental regulations, such factors
could adversely affect the Company's financial condition and results of
operations.
RESULTS OF OPERATIONS
Effective November 16, 1996, the Company acquired substantially all of its
assets of its predecessor, S-O. The historical data of S-O and the Company are
not comparable in certain respects. Accounting for the acquisition of S-O and
the Company have resulted in material differences due to a change in the basis
of accounting between S-O and the Company. The Company's results of operations
since November 16, 1996 have been affected by an increase in interest expense,
amortization of goodwill and debt issuance costs, and depreciation of fixed
assets having a new cost basis. The income tax expense shown in the statement of
operations data for the periods prior to the Acquisition is the estimated amount
that the Company's predecessor would have incurred on a stand-alone basis. The
results of operations of the Company's predecessor for the period January 1,
1996 through November 15, 1996 have been combined with the results of operations
of the Company for the period November 16, 1996 through December 31, 1996 to
present the results of operations for the year ended December 31, 1996. See
"Unaudited Pro Forma Consolidated Financial Data."
25
<PAGE> 27
The following table sets forth for the periods indicated certain
consolidated statements of operations data, as a percentage of the Company's net
sales:
<TABLE>
<CAPTION>
PREDECESSOR
------------------------------- COMPANY PREDECESSOR COMPANY
------------ COMBINED ----------- ----------
YEARS ENDED JANUARY 1, NOVEMBER 16, ------------ SIX MONTHS SIX MONTHS
DECEMBER 31, THROUGH THROUGH YEAR ENDED ENDED ENDED
--------------- NOVEMBER 15, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1994 1995 1996 1996 1996 1996 1997
----- ----- ------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 30.1 28.7 26.4 33.2 27.3 26.8 26.6
----- ----- ----- ----- ----- ----- -----
Gross profit....................... 69.9 71.3 73.6 66.8 72.7 73.2 73.4
Selling, general and administrative
expense.......................... 51.4 52.1 7.5 8.6 51.9 52.2 59.6
Research and development expense... 8.0 8.1 52.6 47.2 7.7 8.0 6.8
----- ----- ----- ----- ----- ----- -----
Income from operations............. 10.5 11.1 13.4 11.1 13.1 13.0 7.0
Interest expense................... -- -- -- 26.0 3.3 -- 22.4
Income (loss) before income
taxes............................ 10.5 11.1 13.4 (15.0) 9.8 13.0 (15.4)
Income taxes....................... 5.7 5.8 6.6 -- 5.8 6.4 --
----- ----- ----- ----- ----- ----- -----
Net income (loss).................. 4.8% 5.3% 6.8% (15.0)% 4.0% 6.6% (15.4)%
===== ===== ===== ===== ===== ===== =====
OTHER DATA:
EBITDA............................. 16.1% 16.7% 19.2% 19.4% 19.2% 18.4% 14.5%
Amortization....................... 3.8 3.1 2.8 5.2 3.1 3.2 4.5
Depreciation....................... 1.6 2.2 2.5 3.2 2.6 2.2 3.0
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net Sales. Net sales increased 22.8% from $15.7 million for the six months
ended June 30, 1996 to $19.3 million for the six months ended June 30, 1997,
primarily reflecting increased unit sales of dental implants and abutments.
North American net sales increased by 25.2% for the six month period ended June
30, 1997 as compared to the comparable period in 1996 primarily due to sales of
the Company's Replace Implant System introduced in March 1997 and, to a lesser
extent, net sales attributable to the dental operations acquired from Interpore.
International net sales increased by 19.5% during the six months ended June 30,
1997 as compared to the six months ended June 30, 1996, primarily due to
increased sales in Germany, Korea, Japan and Taiwan.
Gross Profit. Gross profit increased 23.2% from $11.5 million, or 73.2% of
net sales, for the six months ended June 30, 1996 to $14.2 million, or 73.4% of
net sales, for the six months ended June 30, 1997. The increase in gross profit
was primarily due to the increase in sales across all product lines. The
Company's expansion of its manufacturing capacity to include surgical drills and
related products resulted in lower product costs. This margin improvement was
partially offset by increased sales of Interpore products, which generally have
lower margins than certain of the Company's other products.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 40.0% from $8.2 million, or 52.2% of net sales,
for the six months ended June 30, 1996 to $11.5 million, or 59.6% of net sales,
for the six months ended June 30, 1997. This increase was primarily due to the
amortization of tax-deductible goodwill recorded in connection with the
Acquisition, the addition of new sales and marketing personnel, an increase in
marketing, educational, accounting and financial expenses necessary to
accommodate the Company's growth and a noncash compensation charge related to
stock options.
Research and Development Expense. Although research and development expense
remained constant at $1.3 million for each of the six month periods ended June
30, 1996 and 1997, research and development expense decreased as a percentage of
net sales from 8.0% for the six months ended June 30, 1996 to 6.8% for the
comparable six month period in 1997. Research and development expense during the
six month period ended June 30, 1997 primarily consisted of compensation for
engineering and regulatory personnel, project material costs, and clinical
studies and FDA testing related to development activities. The Company expenses
research and development costs when incurred.
26
<PAGE> 28
Interest Expense. Interest expense for the six months ended June 30, 1997
was $4.3 million, of which (i) $2.3 million consisted of interest on
indebtedness under the Company's Bank Facility and Subordinated Notes, (ii) $1.5
million consisted of accrued dividends on mandatorily redeemable Preferred Stock
and (iii) $506,000 consisted of the amortization of deferred financing costs
incurred in connection with the Acquisition. The Company had no interest expense
during the six months ended June 30, 1996.
Income Taxes. Income taxes were $1.0 million for the six months ended June
30, 1996 reflecting the estimated amount the Company's predecessor would have
incurred on a stand-alone basis. Prior to November 16, 1996, the Company's
results of operations were included in the consolidated returns of Bausch &
Lomb. The Company did not incur any income tax expense during the six months
ended June 30, 1997 as a result of the Company's losses in that period. At June
30, 1997, the Company had net operating loss carryforwards of $2.0 million and
$1.0 million for federal and California purposes, respectively, reflecting the
amortization of tax-deductible goodwill recorded in connection with the
Acquisition.
Net Income (Loss). Net loss was $3.0 million, or 15.4% of net sales, for
the six months ended June 30, 1997 compared to net income of $1.0 million, or
6.6% of net sales, for the six months ended June 30, 1996, primarily as a result
of increased interest expense and the amortization of tax-deductible goodwill
recorded in connection with the Acquisition in November 1996.
EBITDA. EBITDA decreased 3.4% from $2.9 million for the six months ended
June 30, 1996 to $2.8 million for the six months ended June 30, 1997 primarily
due to a noncash compensation charge. EBITDA represented 18.4% of the Company's
net sales for the six months ended June 30, 1996 as compared to 14.5% of net
sales for the comparable period in 1997.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales increased 17.7% from $27.4 million for the year ended
December 31, 1995 to $32.2 million for the year ended December 31, 1996. North
American net sales increased by 13.8% for the year ended December 31, 1996 as
compared to the prior year due, in part, to the addition of new sales and
marketing personnel to support new sales regions. International net sales
increased by 23.7% in 1996 over 1995, reflecting growth in each of the Company's
major sales regions. Sales of implant products increased by approximately $2.6
million in 1996 as compared to the prior year largely due to the introduction of
implants coated with titanium plasma spray ("TPS") and increased sales and
marketing support. In addition, the Company's continued marketing efforts
towards improving sales of abutments resulted in an increase of approximately
$2.2 million in net sales for such products.
Gross Profit. Gross profit increased 20.1% from $19.5 million, or 71.3% of
net sales, for the year ended December 31, 1995 to $23.4 million, or 72.7% of
net sales, for the year ended December 31, 1996. The increase in gross margin
was due to a shift in the Company's product mix toward higher margin implants
and abutments. This improvement in gross margin was also due to the Company's
1996 expansion of its manufacturing capacity to increase its production of
implants and abutments, resulting in lower product costs.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 17.4% from $14.2 million, or 52.1% of net
sales, for the year ended December 31, 1995 to $16.7 million, or 51.9% of net
sales, for the year ended December 31, 1996. This increase was primarily the
result of the addition of new personnel in the Company's sales, marketing and
education and accounting departments, increased charges from Bausch & Lomb as
reimbursement for certain increased employee benefits, and increased media and
advertising expenses.
Research and Development Expense. Research and development expense
increased 10.9% from $2.2 million, or 8.1% of net sales, for the year ended
December 31, 1995 to $2.5 million, or 7.7% of net sales, for the year ended
December 31, 1996, reflecting increased compensation for three additional
engineering personnel as well as increased expenses associated with continued
clinical studies and FDA testing.
Interest Expense. Interest expense for the year ended December 31, 1996 was
$1.1 million, reflecting interest on the Company's Bank Facility and
Subordinated Notes and accrued dividends on mandatorily
27
<PAGE> 29
redeemable Preferred Stock, incurred and issued as part of the Acquisition. The
Company had no interest expense prior to November 16, 1996.
Income Taxes. Income taxes were $1.6 million and $1.9 million for the years
ended December 31, 1995 and 1996, respectively, reflecting the amounts the
Company's predecessor would have incurred on a stand-alone basis.
Net Income. Net income decreased 10.4% from $1.5 million, or 5.3% of net
sales, for the year ended December 31, 1995 to $1.3 million, or 4.0% of net
sales, for the year ended December 31, 1996, primarily as a result of increased
interest expense and amortization of tax-deductible goodwill recorded in
connection with the Acquisition in November 1996.
EBITDA. EBITDA increased 35.6% from $4.6 million for the year ended
December 31, 1995 as compared to $6.2 million for the year ended December 31,
1996. This increase reflected increased gross profit commensurate with increased
sales and operating efficiencies.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased 23.4% from $22.2 million for the year ended
December 31, 1994 to $27.4 million for the year ended December 31, 1995. North
American net sales increased by 18.3% for the year ended December 31, 1995 as
compared to the prior year. International net sales improved by 32.4% in 1995 as
compared to 1994. Growth in net sales occurred in each of the Company's major
sales regions, in particular in the Middle East, reflecting the Company's
expansion into Israel in March 1995. Sales of implant products increased by
approximately $2.4 million in 1995 as compared to the prior year primarily due
to the expansion of the Company's product line. In addition, the Company's
strategic focus on improving sales of abutments generated approximately $2.3
million in net sales for such products.
Gross Profit. Gross profit increased 25.8% from $15.5 million, or 69.9% of
net sales, for the year ended December 31, 1994 to $19.5 million, or 71.3% of
net sales, for the year ended December 31, 1995. The increase in gross profit
was primarily due to increased sales of implants and abutments. The improvement
in gross margin was primarily due to the development and expansion of the
Company's implant manufacturing capacities and to a lesser extent due to
increased efficiencies resulting from the implementation of new materials
forecasting and master production scheduling software applications.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 25.0% from $11.4 million, or 51.4% of net
sales, for the year ended December 31, 1994 to $14.2 million, or 52.1% of net
sales, for the year ended December 31, 1995. This increase was primarily the
result of hiring additional personnel in the sales and education, customer
support and information systems departments. The Company also incurred increased
expenses for additional international travel, consulting expenses for marketing
projects and advertising related to the Company's ten year warranty program, the
introduction of the DIA Anatomic Abutment System and the Company's sponsorship
of an international conference in May 1995.
Research and Development Expense. Research and development expense
increased 24.9% from $1.8 million, or 8.0% of net sales, for the year ended
December 31, 1994 to $2.2 million, or 8.1% of net sales, for the year ended
December 31, 1995. This increase was primarily due to increases in clinical
studies and FDA testing relating to new products.
Income Taxes. Income taxes were $1.3 million and $1.6 million for the years
ended December 31, 1994 and 1995, respectively, reflecting the amount the
Company's predecessor would have incurred on a stand-alone basis.
Net Income. Net income increased 35.6% from $1.1 million, or 4.8% of net
sales, for the year ended December 31, 1994 to $1.5 million, or 5.3% of net
sales, for the year ended December 31, 1995.
EBITDA. EBITDA increased 28.3% from $3.6 million for the year ended
December 31, 1994 to $4.6 million for the year ended December 31, 1995. This
increase is commensurate with the increase in sales and operating efficiencies
achieved during 1995.
28
<PAGE> 30
LIQUIDITY AND CAPITAL RESOURCES
The Company's predecessor was a wholly-owned subsidiary of Bausch & Lomb
from 1993 until the Acquisition in November 1996, and during that time financed
working capital from cash generated from operations. In order to finance the
Acquisition, the Company issued Class A Preferred Stock, Class B Preferred
Stock, Class C Preferred Stock and Subordinated Notes, and made an initial draw
down under the Bank Facility. Following the Acquisition, the Company financed
working capital and the acquisition of the dental business of Interpore with
cash generated from operations and borrowings under the Bank Facility.
At June 30, 1997, the Company had outstanding long-term debt of $10.2
million under its 16% Series A Senior Subordinated Note, $2.5 million under its
14% Series B Senior Subordinated Notes, and combined short and long-term
borrowings of $30.4 million under the Bank Facility. The availability of
borrowings under the Bank Facility will be automatically reduced as frequently
as each quarter in increasing amounts until the final maturity in November 2002
when all loans under the Bank Facility must be repaid and no more borrowing can
be made. The Bank Facility is secured by substantially all of the Company's
assets. The Bank Facility requires the Company to maintain certain financial
ratios and limits the Company's ability to incur additional debt, repurchase its
stock and pay dividends. The Company was in compliance with all such financial
ratios and covenants as of June 30, 1997.
The Company also had outstanding $35.2 million of mandatorily redeemable
Preferred Stock, together with accrued dividends of $1.9 million at June 30,
1997. The Company intends to apply a portion of the net proceeds of the Offering
to repay in full the Subordinated Notes and its outstanding indebtedness under
the Bank Facility. In addition, the Company intends to apply a portion of net
proceeds of the Offering to redeem in full all of its outstanding shares of
Class B Preferred Stock and all of its outstanding shares of Class A Preferred
Stock and Class C Preferred Stock not converting into Common Stock in the
Preferred Stock Conversion. Upon consummation of the Offering, the Company will
record an extraordinary charge of $7.8 million, net of the related tax benefit,
resulting from the redemption and conversion of Preferred Stock and the
repayment of the Subordinated Notes and Bank Facility. See "Use of Proceeds."
Following the Offering, the Company will have no outstanding indebtedness.
Subject to the completion of the Offering and certain other conditions,
Union Bank and First Source Financial LLP (collectively, the "Senior Lenders")
have agreed to release the Company from all of its obligations under the Bank
Facility. The Company has also received a commitment letter from Union Bank for
the establishment of a $20.0 million revolving line of credit for working
capital requirements and general corporate purposes and a $15.0 million
acquisition facility to fund future acquisitions. The interest rate on the
revolving line of credit and the acquisition facility will be tied to either
Union Bank's Reference Rate or the LIBOR rate, at the Company's option. Certain
conditions precedent to (i) the Senior Lender's release of the Company from its
obligations under the Bank Facility and (ii) Union Bank's commitment to provide
the revolving line of credit and acquisition facility to the Company include (A)
the completion of an initial public offering of the Company generating gross
proceeds of at least $60.0 million, and the application of the proceeds
therefrom to redeem all shares of outstanding Class A Preferred Stock, Class B
Preferred Stock and Class C Preferred Stock not converting in the Preferred
Stock Conversion and to repay all outstanding indebtedness under the
Subordinated Notes and all prepayment penalties in connection with the early
retirement thereof, (B) the completion of loan documentation satisfactory to
Union Bank, and (C) the perfection of a security interest by Union Bank in
substantially all of the Company's assets. No assurance can be given that the
Union Bank commitment letter will result in a binding line of credit and
acquisition facility. The Company's failure to obtain a binding line of credit
and acquisition facility could have a material adverse effect on the Company's
business and ability to implement its business strategy.
The Company's capital expenditures consist primarily of purchases of fixed
assets relating to its manufacturing operations. Capital expenditures decreased
to $1.0 million for the six months ended June 30, 1997 from $1.3 million for the
comparable period in 1996. Capital expenditures for the years ended December 31,
1994, 1995 and 1996 were $1.7 million, $1.2 million and $2.2 million,
respectively. Capital expenditures increased in 1996 as a result of acquiring
CNC machines and upgrading the Company's information systems.
29
<PAGE> 31
The Company anticipates making capital expenditures of approximately $1.8
million during the next twelve months to expand its manufacturing operations and
bring the TPS-coating capabilities in-house. The Company has also entered into
several agreements with universities to provide financing for research and
development and promotional studies related to the Company's products. The
Company is required to make future minimum payments under such agreements in the
aggregate of approximately $1.2 million through the year ending December 31,
1999. In addition, in January 1998, the Company must make a deferred cash
payment of up to $538,000 to Interpore to fund the balance of the purchase price
for the Company's acquisition of the dental operations of Interpore in May 1997.
The Company believes that anticipated cash flows from operations and
amounts available under the Bank Facility will be sufficient to finance working
capital and meet its anticipated capital expenditures for at least the next
twelve months. There can be no assurance, however, that during this period there
will not be unanticipated acquisition opportunities or capital expenditure
requirements that create the need for additional cash, that the Company will
meet the financial targets under the Bank Facility to enable the Company to
borrow under the facility or that additional funds will be available at
favorable rates, if at all.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS
No. 128 establishes a different method of computing net income per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS No. 128, the Company will be required to present both basic
net income per share and diluted net income per share. Basic net income per
share is expected to be higher than the currently presented net income per share
as the effect of dilutive stock options will not be considered in computing
basic net income per share. The impact on diluted net income per share is not
expected to be material.
The Company plans to adopt SFAS No. 128 in its fiscal quarter ending
December 31, 1997, and at that time all historical net income per share data
presented will be restated to conform to the provisions of SFAS No. 128.
30
<PAGE> 32
BUSINESS
OVERVIEW
Steri-Oss is a leading developer, manufacturer and marketer of a broad line
of dental implant systems, which include implants, abutments and related
surgical instruments. A dental implant is a small titanium screw or cylinder
that is surgically placed directly into the jaw and serves as a foundation for a
replacement tooth. An abutment is a small titanium attachment that is typically
screwed into or onto the implant and connects the artificial tooth to the
implant. The Company believes that its dental implant systems are superior to
traditional restorative treatments such as bridges and dentures because the
permanent nature of dental implants permits patients to regain most of the
functionality of their natural teeth. Dental implants also may reduce the
progressive atrophy of the jaw often caused by the absence of teeth. The Company
has demonstrated the safety and reliability of its implants at success rates of
over 96% (representing full integration of the implant with the bone) in seven
years of clinical studies involving more than 1,600 implant patients.
INDUSTRY BACKGROUND
The American Dental Association estimates that 110 million people in the
United States are missing one or more teeth, representing approximately 40% of
the United States population. Tooth loss is caused by a variety of factors,
including trauma and periodontal disease, which is a leading cause of
destruction of tooth-supporting structures such as bone, gingiva and periodontal
ligament. MDI estimates that 70% to 80% of all adults in the United States have
some form of periodontal disease.
Traditional restorative alternatives to address tooth loss have consisted
primarily of dentures and bridges. Since the introduction of the first modern
root form implants in 1982, dental implants have continued to gain acceptance as
an attractive alternative to dentures and bridges. According to MDI, the number
of implants placed annually by dental professionals in the United States has
more than tripled in less than a decade growing from approximately 120,000
implants placed in 1987 to approximately 415,000 implants placed in 1995. MDI
estimates that an average of 2.5 to 3.0 implants are placed in each implant
procedure. MDI estimates dental implant sales in the United States exceeded $130
million in 1996 and are expected to grow at a rate of approximately 6% per year.
The Company estimates that sales of dental implants outside the United States
were approximately $250 million in 1996 and estimates that the international
dental implant market is growing at a rate of approximately 10% per year.
Utilization of dental implants by dental professionals and patients has
increased over the past few years, and the Company believes that significant
opportunities for growth still exist in the dental implant market because only
2% of patients in the United States who are missing one or more teeth have
undergone the implant procedure. Dental implants offer significant advantages
over other restorative products such as dentures and bridges. Dentures are
artificial teeth that may be attached to the surface of a patient's gum with an
adhesive. The adhesives used to attach dentures generally do not provide
long-term fixation to the gum and must be periodically reapplied. Dentures also
tend to move around in a patient's mouth, which may restrict the wearer's
ability to eat certain foods, and can trap food, which may lead to the
degradation of the adjacent natural teeth. A bridge generally consists of one or
more artificial teeth that are attached to a patient's natural teeth to span a
gap caused by missing teeth. In order to place a bridge into a patient's mouth,
the dental practitioner must grind or cut down the adjacent healthy, natural
teeth to prepare them to accommodate the bridge. Natural teeth that have been
ground down and shaped may deteriorate more rapidly than other healthy teeth.
Wearers of full or partial dentures do not benefit from the essential
stimulation and support that tooth roots provide to the surrounding jaw. This
can result in atrophy of the jaw and, over time, unsightly malformation of the
jaw.
Dental implants, in contrast, serve as permanent replacements for a
patient's missing teeth and reduce the likelihood of bone resorption. Once
dental implants are surgically placed in the jaw, the bone typically fuses to
the implant, creating a secure, permanent anchor for an artificial tooth. The
secure nature of implants permits patients to regain most of the functionality
of their natural teeth. In addition, the implant procedure does not
31
<PAGE> 33
require the destruction of the adjacent healthy teeth. Furthermore, implants
typically stimulate bone growth and allow a patient's jaw to retain its shape
and features.
STRATEGY
The Company's objective is to become the leading worldwide developer,
manufacturer and marketer of dental implants and related products, while
increasing its profitability. The Company believes that over the last three
years, it has been one of the fastest growing participants in the United States
implant market. Furthermore, as a result of the Company's acquisition of the
dental business of Interpore in May 1997, the Company believes its implant unit
sales, on a combined basis in the United States in 1995, exceeded those of any
of its competitors. The key elements of the Company's strategy include the
following:
- Increase Market Share in the United States and Foreign Markets. Steri-Oss
has established itself as a worldwide leader in the dental implant market. The
Company intends to capitalize on its reputation for quality products and service
to continue to increase its market share both domestically and internationally.
Increased utilization of the Company's implants by dental professionals is
necessary for continued market penetration. Accordingly, Steri-Oss intends to
increase its involvement in sponsoring and providing educational and training
programs for dental professionals and to expand marketing support to its 26
independent international distributors.
- Continue to Develop Innovative Implant Products. The Company intends to
utilize its expertise in dental implant technology and to work closely with
clinicians to continue to develop new and enhanced dental implants and related
products. New and enhanced products have historically constituted a significant
portion of the Company's net sales. The Company was the first to introduce a
variety of innovative products, including precleaned sterile implants, HA-coated
threaded implants and a tapered, color-coded implant system. The Company intends
to continue to develop enhanced implant products to meet evolving market needs,
incorporate technological advancements and satisfy clinicians' preferences.
- Expand into Additional Dental Specialty Markets. The Company intends to
take advantage of its broad distribution channels and strong reputation in the
dental industry to market additional dental specialty products to its customers.
The Company plans to focus on products that enhance the professionals' practice
and address the needs of growing markets, particularly the periodontal market.
In furtherance of this strategy, the Company recently commenced marketing two
products owned and manufactured by third parties, a periodontal tissue
monitoring kit and an HA bone filler for periodontal defects. The Company
intends to acquire, license or distribute additional dental specialty products
and to market these products through its existing distribution channels.
- Acquire Complementary Dental Implant Businesses, Products and
Technologies. The Company believes that consolidation opportunities exist in the
dental implant market that will enable the Company to increase its penetration
of this market. For example, in May 1997, the Company acquired the dental
operations of Interpore, a manufacturer and distributor of dental implant
products and other periodontal products. The Company intends to continue to
expand its product offerings, distribution channels and market share through
acquisitions in the dental implant market. Potential acquisitions may include
complementary businesses, product lines, distribution rights, technologies or
other assets.
- Continue to Improve Operating Efficiencies. By manufacturing a greater
proportion of its products in-house, the Company has been able to operate more
cost-effectively and benefit from greater economies of scale. Primarily as a
result of actions taken by the Company to reduce manufacturing costs and
increase operating efficiencies, the Company has reduced its cost of sales as a
percentage of net sales to 27.3% for 1996 from 31.7% for 1992. The Company
intends to continue to improve operating efficiencies primarily by expanding and
refining its manufacturing processes.
THE IMPLANT PROCEDURE
The implant procedure involves a number of steps. During the initial step,
which typically is performed under a local anesthetic, an oral surgeon or
periodontist drills a hole in the patient's jaw and surgically inserts
32
<PAGE> 34
the implant directly into the jaw. The implant typically integrates with the
patient's bone over the three to six months following the initial surgery. Once
the implant has attached itself firmly to the jaw, the general dentist or
prosthodontist then screws an abutment into or onto the implant. The dental
professional makes an impression of the patient's teeth and jaws so that an
artificial tooth can be fabricated for the patient. In the final step of the
implant procedure, the general dentist or the prosthodontist affixes an
artificial tooth, which is usually fabricated at a dental laboratory, onto the
abutment.
PRODUCTS
The Company manufactures and markets a broad line of implant systems, which
include: (i) titanium implants that are surgically placed into the patient's
jaw; (ii) titanium abutments that are attached to the implants to serve as
connectors onto which artificial teeth are attached; and (iii) surgical
instruments that are used to insert and place implants and abutments, including
surgical consoles, drills and dental wrenches. Implants, abutments and surgical
instruments accounted for approximately 55.8%, 32.4% and 11.8%, respectively, of
the Company's net sales in 1996. Steri-Oss believes its product lines,
consisting of over 1,400 products, are sufficiently broad to meet the
requirements of most dental professionals. The Company continues to work closely
with clinicians to enhance its existing product lines and create new product
offerings. See "-- Product Innovations."
Implants
The Company currently manufactures 16 types of implants in various sizes.
All of the Company's implants are manufactured from titanium because it promotes
the best possible integration with surrounding jawbone ("osseointegration"), and
generally will not be rejected by the surrounding tissue due to titanium's
biocompatible nature. The list prices in the United States for the Company's
implants range from approximately $200 to $250 per unit.
The Company's implants are offered in both threaded and cylindrical form in
a variety of diameters, lengths and shapes in order to suit the varying needs of
implant patients and dental professionals. The appropriate size and shape
required for a particular patient will depend on the structure of the patient's
jaw, the location of the implant site in the patient's jaw, the angle of
insertion and the bone density at the implant site. The Company's implants are
also offered uncoated or with one of two different coatings to suit differing
preferences among dental professionals and their patients.
The Company currently makes implants in diameters ranging from 3.25 mm to 6
mm and in lengths ranging from 8 mm to 18 mm in the following categories:
- Threaded Implants. Threaded implants are screwed into the patient's
jawbone. The Company uses a proprietary thread design that enhances
osseointegration by increasing the amount of bone volume between threads by 32%
over traditional V-shaped threads.
- Cylindrical Implants. Cylindrical implants are smooth and have a simpler
surgical implantation protocol than threaded implants. Cylindrical implants
contain an indentation at the bottom of the implant and/or a depression running
length-wise up the implant to promote osseointegration.
- Coated Implants (Threaded or Cylindrical). In addition to uncoated
implants, the Company offers both threaded and cylindrical implants with two
different rough coatings, HA and TPS. The Company was the first to market an
HA-coated threaded implant and has the only HA-coated threaded implant that has
been granted provisional approval by the American Dental Association. HA is a
bio-active ceramic coating commonly used with orthopedic implants that
facilitates osseointegration. Approximately 53% of the Company's implant sales
during 1996 were HA-coated. The Company estimates that the worldwide market for
HA-coated implants is currently 20% of the total implant market, and the Company
believes it is the largest manufacturer of HA-coated implants. TPS was first
introduced by the Company in 1995 and creates a highly textured titanium
surface, which increases the surface area of the implants and the contact with
bone. Approximately 16.4% of the Company's implant sales during 1996 were
TPS-coated.
33
<PAGE> 35
- Replace Implant System. The Replace Implant System was introduced in
March 1997 and incorporates a tapered design that closely resembles the shape of
a tooth root. The tapered implants are particularly beneficial for immediate
extraction sites in the anterior section of the mouth, between converging
implants or roots of adjacent teeth and wherever anatomically limiting
conditions exist. The implant products in the Replace Implant System are
color-coded for simple identification by the various professionals involved in
implant procedure. Replace implants are also offered in various lengths and
diameters, either uncoated or with HA or TPS coatings.
Abutments
Steri-Oss designs, manufactures and markets abutments that are typically
screwed into or onto the implants after the implants have fused with the jaw.
Abutments serve as connectors on which artificial teeth may be placed. The
Company has designed a variety of abutments to meet the requirements and
preferences of surgeons, restorative dentists and patients. In the past few
years, the Company has also commenced marketing two new types of abutments that
the Company licenses from Dental Imaging Associates, Inc. ("DIA"). The DIA
Anatomic Abutment is designed to accommodate the natural tooth diameter, tissue
depth and gingival tissue configurations. The second type of abutment, the
Bio-Esthetic Abutment, is designed to match natural root contours and requires
minimal preparation. The Company believes Bio-Esthetic Abutments typically offer
a superior aesthetic result.
The Company's abutments are designed to provide maximum flexibility and
optimal aesthetic design, which the Company believes are critical to dentists in
developing treatment plans for their patients. The Company has designed its
abutments to be compatible with other companies' implants. The list prices in
the United States for the Company's abutments range from $35 to $160 per unit.
Surgical Instruments
The Company designs and manufactures, or has manufactured for it, surgical
tools and instruments for use with its implants and abutments. These instruments
include: (i) surgical instrument sets, including drills, dental wrenches and
kits for sizing abutments, which are typically packaged in containers for easy
sterilization and are color-coded and labeled for ease of use and storage, and
(ii) surgical consoles and hand tools to perform and monitor drilling and
placement procedures. The Company's instrument sets are designed to be used with
a variety of the Company's implants. While the list prices in the United States
for the Company's instrument sets range from $2,000 to $3,250 per set, the
Company may discount its surgical instruments to encourage practitioners to
switch to the Company's products.
PRODUCT INNOVATIONS
Product innovations in the dental implant market usually consist of
refinements or enhancements of existing dental implant or abutment designs or
related products. Over the past few years, the Company has developed several
innovative new products. For example, Steri-Oss was the first dental implant
manufacturer to introduce precleaned sterile implants, HA-coated threaded
implants and a tapered, color-coded implant system.
The Company's most recent product innovations include: (i) the Replace
Implant System, which consists of tapered implants and corresponding abutments
and instrument kits that are color-coded for simple identification by the
various professionals involved in the implant procedure; (ii) the 6 mm implant,
a wider diameter implant line, enabling the Company to offer expanded treatment
options that allow for improved aesthetics; and (iii) the Immediate Impression
Implant System, a sterile insertion instrument licensed from a third party that
allows the dental professional to take an immediate impression upon implant
insertion, which may reduce the number of patient visits during the implant
process.
The Company derives a significant portion of its net sales each year from
sales of new products. The Company has focused its product development efforts
on both broadening its existing product lines and introducing new products. In
both cases, the objective is to offer enhanced implant solutions to patients and
professionals. The Company's research and development staff consists of five
employees who focus on new
34
<PAGE> 36
product concepts and eight employees who focus on product engineering and the
technical aspects of product design. The Company also provided funding to
several universities to finance research and promotional studies related to the
Company's products.
The Company's development efforts are the result of concepts developed
internally or through the Company's relationships with leading dental
professionals, including customers who provide feedback to the Company on their
preferences and needs. The Company also actively seeks licensing arrangements
with dental professionals or researchers to secure the right to manufacture and
market new product innovations created by such groups. For example, the Company
holds an exclusive license to manufacture and market the DIA Anatomic Abutments
and Bio-Esthetic Abutments under a licensing arrangement with a group of well
known prosthodontists and periodontists. Such licensing arrangements create
important relationships with dentists and academic institutions, thereby
enhancing the Company's reputation and visibility within the dental community.
MANUFACTURING
The Company manufactures substantially all of its implants at its two ISO
9001 certified facilities in Yorba Linda, California. The Company has made a
substantial investment in these facilities, which include a Class 10,000 clean
room (a clean room with fewer than 10,000 particles which are five microns or
larger per cubic foot), precision automated equipment, including CNC machines,
and a robotically controlled coating area for the Company's proprietary HA
coating system.
The Company's facilities are subject to applicable regulatory requirements.
The FDA periodically inspects the Company's manufacturing systems to confirm
continued compliance with the FDA's current QSR regulations. The Company's
facilities are also subject to regulation and periodic inspection by the State
of California. See "-- Government Regulation."
The Company has received certification of conformance to ISO 9001 Standards
and Medical Device Directives, as well as the Commission Europeen (CE) Mark of
Conformity from TUV Product Services of Munich, Germany. These approvals
represent international symbols of quality system assurance and compliance with
applicable European Medical Device Directives, which assist the international
marketing of the Company's products.
The Company has substantially increased its manufacturing capabilities
since 1993 in an effort to enhance profit margins and increase quality. The
Company currently manufactures a substantial portion of its own products and
performs all of the HA-coating for its products, but currently relies on outside
suppliers to coat its TPS-coated implants and to manufacture certain components
including electrical consoles, hand tools, and those short-run products for
which the Company cannot achieve cost efficiencies. The Company plans to bring
TPS-coating capabilities in-house. The Company's manufacturing activities
primarily consist of (i) cutting, machining and initial cleaning, which are
performed at a leased facility close to its headquarters, and (ii) final
cleaning, sterilization, assembly (in certain circumstances), packaging, coating
and testing, which are conducted at the Company's headquarters. The principal
raw materials used in the Company's products, including titanium and HA, are
available from a number of suppliers. The Company does not maintain any
long-term supply contracts with any of its suppliers. The Company currently
operates three shifts per day, five days per week. The Company believes that it
may require additional manufacturing facilities within the next year to
accommodate anticipated growth.
The Company also uses small amounts of hazardous substances in its
manufacturing processes. As a result, the Company is subject to a variety of
governmental regulations relating to the use, storage, discharge, handling and
disposal of toxic or other hazardous substances, chemicals, materials or waste.
The Company has engaged a third party contractor to handle the removal of such
hazardous substances.
Steri-Oss has established a number of quality control procedures to
maintain the quality of its products. All products manufactured by the Company
undergo a series of inspections and tests throughout the manufacturing process
to ensure that each product complies with the Company's product specifications
and aesthetic requirements. For example, each implant manufactured by Steri-Oss
will receive no fewer than nine
35
<PAGE> 37
separate inspections. Any product that does not conform to the Company's visual,
functional and aesthetic requirements will be rejected. In addition, all
products purchased by outside suppliers are inspected by the Company's
personnel. Steri-Oss also conducts periodic self audits to review and ensure its
compliance with the Company's quality controls and QSR and environmental
regulations.
CUSTOMERS, MARKETING AND SALES
Dental Professionals
The Company sells its products directly to dental professionals in the
United States and Canada through its sales representatives and uses independent
distributors to sell its products to dental professionals abroad. Because the
dental implant procedure involves a number of steps and requires the use of
surgical as well as restorative techniques, several professionals are usually
involved in the implant process. Accordingly, the Company's customers include
practitioners from multiple disciplines in dentistry, including oral surgeons,
periodontists, implantologists, prosthodontists and general dentists.
Typically, a general dentist will refer a patient to an oral surgeon or
periodontist to perform the initial implant surgery. After the oral surgeon or
periodontist has inserted the implant, the general dentist will usually perform
all or part of the restorative work (i.e., the final placement of the artificial
tooth) or will refer the patient to a prosthodontist for such work. Less
frequently, a general dentist will perform the entire implant procedure alone.
Such a general dentist is commonly referred to as an implantologist. The actual
artificial tooth used by the general dentist, prosthodontist or implantologist
is usually fabricated at a dental laboratory. In Europe, where specialization is
less common, the general practitioner typically performs most, if not all, of
the implant procedure.
According to the American Dental Association, in 1991, there were
approximately 6,800 oral surgeons, 4,700 periodontists, 2,900 prosthodontists
and 115,000 general dentists in the United States.
Marketing
The Company markets its products to all dental professionals involved in
the implant procedure. Steri-Oss has historically targeted oral surgeons,
periodontists and implantologists as its primary customers because approximately
91% of all oral surgeons and 55% of all periodontists in the United States have
performed a dental implant procedure. The Company has also focused its marketing
efforts on general dentists by encouraging them to participate in and recommend
dental implants to their patients. The Company has chosen to target this market
segment because general dentists usually have the most contact with potential
implant patients and often serve as a referral source for oral surgeons and
periodontists. In addition, the Company believes that a large number of general
dentists have yet to use dental implants on a regular basis and represent a
significant number of potential new customers. Because the Company's customers
have varying experience with dental implants, the Company's marketing efforts
must address the particular needs and requirements of professionals who already
practice implant dentistry as well as general practitioners who may not be
familiar with the implant procedure.
The Company's marketing efforts are directed towards three distinct goals:
(i) encourage dental professionals using competitor's products to switch to the
Company's products, (ii) service existing customers by introducing additional
products and providing training and educational programs to them, and (iii)
introduce implants more broadly to a large population of dental professionals
who have yet to realize the advantages of dental implants. In addition to
utilizing a direct sales force in North America and distributors abroad, the
Company has initiated a variety of different marketing programs to accomplish
each of these goals, including:
- Educational and Training Programs. The Company sponsors several
introductory level educational programs both in the United States and abroad and
holds training seminars and surgery training programs at its own facilities. The
Company also offers a number of advanced courses tailored to the needs of
professionals who regularly perform implant procedures. Although the Company
historically has focused its efforts on providing educational and training
programs to clinicians in North America, it intends to expand its
36
<PAGE> 38
involvement in providing such programs abroad. In 1996, over 18,000 members of
the dental community attended educational programs sponsored by the Company. The
Company works with major dental organizations (American Association of Oral
Maxillofacial Surgeons, American Association of Periodontists and Academy of
Osseointegration), dental schools, key customers, international distributors and
leading clinicians to maximize exposure of the Company's products at continuing
education programs worldwide. In addition, the Company promotes educational
programs at select private practices, which offer the opportunity to witness
live surgical procedures. In 1995, the Company added a training facility and
surgical suite to its Yorba Linda headquarters. The Company has entered into a
consulting agreement with Dr. Jack Hahn, a general dentist and dental implant
specialist, to conduct training programs for the Company and advise the Company
on technical issues. Dr. Hahn is a well renowned worldwide lecturer on dental
implant.
- International Conferences. The Company has sponsored four major
international conferences within the past five years that have attracted many
members of the global dental implant community. In 1997, the Company held a four
day international conference on "Exceeding Patients' Expectations: An Integrated
Surgical, Prosthetic and Marketing Approach to Excellence in Implant Dentistry"
in Orlando, Florida. This conference was attended by more than 600 dental
professionals from 20 countries representing various dental disciplines.
- Strategic Relationships with Vendors and Clinicians. The Company has
formed strategic relationships with key vendors, clinicians, dental publishers,
dental advertising agencies, and dental practice management consulting groups.
The Company believes its strategic relationships enable it to gain and maintain
brand recognition among all types of dental practitioners.
- Printed Advertising Materials and Video Tapes. Using its in-house
graphics department and outside consultants, the Company has developed extensive
training videos and printed promotional materials. The Company distributes such
materials to dental professionals through its sales representatives and
international distributors, as well as through direct mail advertising
campaigns.
- Newsletter. The Company publishes a newsletter three times each year
containing information relating to recent developments in the dental implant
market, the Company's products, training and educational programs on dental
implant procedures and results from clinical studies on dental implants. This
newsletter is distributed to over 20,000 dental professionals in the United
States and Canada. The Company publishes a similar newsletter twice each year
that is translated into German, French, Italian, Spanish, Japanese and Korean
and distributed to approximately 15,000 dental professionals in foreign
countries.
- Journal of Dental Symposia. In order to promote a broad understanding of
the Company's educational efforts, the Company has entered into a collaborative
effort with a publisher to publish the Journal of Dental Symposia, which is
distributed annually to more than 10,000 dental professionals, including
approximately 3,000 members of the Academy of Osseointegration. This journal
includes academic articles relating to topics discussed at seminars and
workshops at the Company's international conferences.
Sales and Distribution
The Company currently employs over 40 sales representatives throughout the
United States and Canada who call directly on oral surgeons, periodontists,
prosthodontists and implantologists, as well as select general dentists and
dental laboratories. The Company believes that its direct sales force is
essential to its ability to maintain brand loyalty among its customers in North
America and to increase its market share. The Company's sales force is currently
organized by geographic regions into five different territories. The Company
plans to increase its direct sales force commensurate with sales increases in
North America.
The Company also markets and sells its products through 26 independent
distributors in more than 35 foreign countries, including Australia, Belgium,
Brazil, France, Germany, Israel, Italy, Japan, Korea, Mexico, the Netherlands,
New Zealand, Portugal, Spain, Switzerland and the United Kingdom.
Metalor, the Company's distributor in Germany and the Netherlands, has
agreed to dedicate 24 members of its sales staff in 1997 to the sale of the
Company's products exclusively. Metalor accounted for approximately 8.2% of the
Company's net sales during 1996 and 10.6% of net sales for the six months ended
37
<PAGE> 39
June 30, 1997. In 1990, the Company entered into an exclusive one year
distribution agreement that automatically renews for successive one year terms
unless either the Company or Metalor gives prior notice of its intention not to
renew the agreement for an additional term. This agreement prohibits Metalor
from selling any competitor's dental implants or related products within
Metalor's territory. The Company also entered into similar one year distribution
agreements with three affiliates of Metalor who distribute the Company's
products in France, Switzerland and the United Kingdom. Metalor and its
affiliates collectively accounted for approximately 12.1% of the Company's net
sales during 1996 and 13.9% of net sales for the six months ended June 30, 1997.
The Company believes that the international dental implant market will
continue to grow at a more rapid rate than North American dental implant market
for the next few years, particularly in Europe where dental implants have a
longer history. In an effort to take advantage of the anticipated growth in
international markets, the Company intends to continue to provide increased
marketing support to its international distributors.
CUSTOMER SERVICE AND SUPPORT
The Company seeks to build upon customer loyalty by providing high quality
customer service and support. In addition to its educational courses and
training seminars, the Company offers to send a technical sales representative
to assist dental professionals with their first implant procedure using
Steri-Oss products. The Company also employs a full-time staff dentist and three
full-time certified dental technicians to respond to customers' technical
questions regarding the Company's products and the implant procedure. In
addition, Steri-Oss employs both domestic and international customer support
representatives to answer general customer inquiries and to assist customers
with order and re-order information. The Company maintains a direct relationship
with its dental community customers by handling all shipping and invoicing
functions through its customer support organization.
The Company offers a ten year warranty on all of its implants and
abutments. If a product fails prior to the expiration of the warranty, the
Company agrees to replace it at no cost and to give the customer a credit
towards the purchase of new products. Since the introduction of this program in
1993, the Company has not experienced any significant warranty expenses.
COMPETITION
The dental implant industry is characterized by intense competition.
Steri-Oss competes directly with a number of companies offering dental implants
and related products both in the United States and abroad, including Nobel
Biocare AB, Friatec AG, 3i and Sulzer Calcitek Inc., certain of which have
substantially greater financial, marketing, sales, distribution and development
resources than the Company. Certain of the Company's competitors also have
established a greater international presence than the Company. In several
countries, including Germany and Switzerland, the Company competes with
companies that are based in such countries. The competitors' local presence in
such markets may provide them with a competitive advantage over the Company. In
addition, several competitors in foreign markets sell directly in such markets,
which may be more effective than the Company's indirect distribution channels in
such markets.
The Company believes the principal competitive factors in the dental
implant market are product performance, breadth of product line, brand name
recognition, customer loyalty, scope of regulatory approvals and clinical
trials, price and sales and marketing capabilities. The Company believes its
prices are competitive with other high quality implant products. Due in part to
the importance of quality and customer service and to the minor cost of the
implant relative to the implant procedure, the Company does not believe that
price is a major competitive factor.
The Company believes that it competes favorably against other dental
implant companies due to the Company's broad range of quality dental implants
and related products and provides extensive training and educational programs
for dental professionals. Increased competition or the failure to compete
effectively in the implant industry may result in price reductions, reduced
gross margins and loss of market share, all of
38
<PAGE> 40
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's products also compete against alternative restorative
treatments such as bridges and dentures, which are generally less expensive to
the patient, are less invasive and can be implemented more quickly. New
restorative technologies may be developed that are as effective as, or more
effective or easier to use than, those offered by the Company, which could
render the Company's products noncompetitive or obsolete.
GOVERNMENT REGULATION
The Company's products are subject to extensive regulation by the FDA and
certain other federal, state and local governmental authorities, as well as
similar regulatory agencies in other countries. Such regulations cover the
preclinical and clinical testing, manufacture, labelling, distribution and
promotion of medical devices and record keeping with respect thereto. The FDA
generally classifies medical devices in commercial distribution into one of
three classes: Class I, Class II or Class III devices, which classifications are
based upon the controls the FDA deems necessary to reasonably ensure the safety
and effectiveness of the medical devices. A new medical device cannot be
commercially distributed until the FDA has accepted for review and cleared a
510(k) or has approved a PMA on such medical device or implant.
The 510(k) process requires a manufacturer to demonstrate that the new
product is substantially equivalent (in terms of safety, efficacy and intended
use) to certain 510(k) Class I, Class II or pre-1976 Class III medical devices
(for which the FDA has not called for a PMA) that are already commercially
available and lawfully being sold on the market. The PMA approval process is
more time-consuming and burdensome than the 510(k) process and generally
requires more detailed preclinical and clinical studies, as well as
manufacturing data and other information.
Class I and Class II devices may be approved pursuant to a 510(k)
notification process as opposed to the lengthy PMA process required for most
post-1976 Class III products. While dental implants are technically classified
as Class III products, to date, the FDA has permitted the manufacturers of
dental implants to use the 510(k) notification to clear the commercial sale of
dental implants. Since January 1, 1994, the Company has obtained 34 510(k)
clearances from the FDA covering a broad range of the Company's products.
In 1990, Congress enacted the Safe Medical Device Act of 1990, which
required the FDA to either down-classify certain Class III devices (including
dental implants) to Class I or II, or publish a date for the call for PMAs for
any remaining Class III devices on the market. The Company expects that at some
future date certain dental implants will be down-classified to Class II, but
others will remain as Class III. There is a possibility that some of the
Company's dental implants may remain Class III and that a PMA will be required
to continue marketing some or all of the Company's dental implant products. The
Company has been collecting clinical data to support a potential PMA. There can
be no assurance that if the FDA calls for a PMA for dental implants, the Company
would receive a PMA approval, if required, for its dental implants on a timely
basis, if at all.
Governmental regulation may also prevent or substantially delay the
marketing of the Company's proposed products, cause the Company to undertake
costly procedures and furnish a competitive advantage to certain of the
Company's competitors who have greater financial, administrative and research
and development resources. After approval, the FDA may require post-marketing
approval surveillance programs to monitor the effects of an approved medical
device. FDA approval may be withdrawn for noncompliance with regulatory
standards or the occurrence of unforeseen problems following initial marketing.
In addition, product modifications may require the submission of a new 510(k)
notification or PMA supplement and future products may require 510(k) clearance
or PMA approval. There can be no assurance that marketing clearances or
approvals will be obtained on a timely basis or at all. Delays in receiving, the
failure to receive or the cost of complying with such clearances could have a
material adverse effect on the Company's business, financial condition and
results of operations.
39
<PAGE> 41
The Company is also registered as a medical device manufacturer with the
FDA and with state agencies such as the Food and Drug Branch of the California
Department of Health Services. The FDA and state agencies inspect the Company
from time to time to determine whether the Company is in compliance with various
regulations relating to medical device manufacturing, including the FDA's QSR
regulations that govern manufacturing, testing, quality control and product
labelling of medical devices. In connection with the FDA's inspection of the
Company's facilities in April 1997, the FDA issued a warning letter to the
Company citing the Company's failure to comply with certain provisions of the
current QSR regulations. The Company believes that it has taken appropriate
corrective actions to address each of the violations cited in the warning
letter. The warning letter did not prohibit the Company from obtaining premarket
clearance or approval for new products nor did it require the Company to
withdraw or remove any of its products from the market.
The Company must also comply with similar registration requirements of
foreign governments and with import and export regulations when distributing its
products to foreign nations. Each foreign country's regulatory requirements for
product approval and distribution are unique and may require the expenditure of
substantial time, money and effort to obtain and maintain.
PROPRIETARY RIGHTS
The Company relies to some extent on proprietary technology, which it
protects primarily through trade secret and other intellectual property laws,
proprietary know-how, licensing arrangements, patents and non-disclosure
agreements. The Company currently holds five United States patents relating to
its products and has applications pending for seven additional United States
patents. The Company's patents expire beginning in August 2006. The Company
believes that although the patents often are necessary to protect its technology
and products, the extensive FDA approval and compliance requirements,
proprietary manufacturing processes, customer loyalty and access to distribution
channels serve as significant barriers to entry into the dental implant market.
The Company licenses certain of its core technology pursuant to exclusive
and semi-exclusive licenses. In April 1994, the Company entered into a five year
exclusive, worldwide license to manufacture and market the DIA Anatomic Abutment
System and the Bio-Esthetic Abutment System and the Immediate Impression Implant
(covered by nine United States patents). The Company pays royalties to DIA based
on a percentage of the Company's net sales of the licensed products, subject to
a certain annual minimum royalties. The Company also licenses two dental
implants (covered by seven United States patents) from VentPlant, pursuant to a
semiexclusive license agreement entered into in September 1991 that provides for
a fixed royalty per unit sold. This agreement terminates upon the expiration of
the licensed patents, subject to earlier termination for cause. In addition, the
Company has entered into a letter of intent with Dr. Axel Kirsch, a world
renowned oral surgeon and the inventor of the IMZ Dental Implant System, to
distribute the IMZ products in the United States. The Company is currently
distributing such products pursuant to an oral agreement that is cancelable by
either party upon 30 days prior notice. If the Company is required to obtain
licenses under patents or proprietary rights of others, there can be no
assurance that any required licenses would be made available on terms acceptable
to the Company, if at all.
There can be no assurance that any future patents or licenses will be
issued, that any issued patents or other intellectual property rights of the
Company will provide meaningful protection for the Company's proprietary
technology or that the steps taken by the Company to protect its proprietary
technologies will be adequate to prevent misappropriation by third parties in
the United States or abroad. In addition, the laws of some foreign countries do
not protect the Company's proprietary rights as fully as do the laws of the
United States. Accordingly, effective protection of intellectual property may be
unavailable or limited in certain foreign countries.
Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to determine the validity and scope of the
proprietary rights of others or to defend the Company against claims of
infringement or invalidity by others. The cost of addressing any intellectual
property litigation claim, both in terms of legal fees and expenses and the
diversion of management's efforts, regardless of whether the claim is valid,
could be significant. An adverse outcome in such litigation or similar
proceedings could subject the
40
<PAGE> 42
Company to significant liabilities to third parties, require disputed rights to
be licensed from others, or require the Company to cease marketing or using
certain products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company requires each of its employees to enter into a proprietary
rights and nondisclosure agreement pursuant to which the employee agrees to
maintain the confidentiality of all of the Company's proprietary information
and, subject to certain exceptions, to assign to the Company all rights in any
proprietary information or technology made or contributed by the employee during
his or her employment. In addition, the Company regularly enters into
nondisclosure agreements with third parties, such as consultants and suppliers.
In spite of these precautions, it may be possible for third parties to copy,
develop or otherwise obtain and use the Company's proprietary technology without
authorization or to develop similar technology independently.
EMPLOYEES
As of September 30, 1997, the Company had 239 full-time employees,
including 13 employees engaged in research and development, 87 engaged in
manufacturing, 22 engaged in regulatory affairs and quality assurance, 67
engaged in sales and marketing, 16 engaged in customer service and support and
34 engaged in general administration and finance activities. None of these
employees is represented by a union, and the Company has never experienced a
work stoppage or strike. The Company considers its employee relations to be
good.
FACILITIES
The Company leases three facilities, which have approximately 35,000 square
feet, 7,100 square feet and 2,000 square feet, respectively, in Yorba Linda,
California, pursuant to four leases that expire in December 1997. These
buildings are used as the Company's headquarters and include administration,
manufacturing, marketing and sales, storage, customer service and distribution
facilities. The Company also leases approximately 1,500 square feet in Toronto,
Canada, which is used for distribution, training and sales. The Company is
negotiating extensions on its leases in Yorba Linda and actively seeking
additional leased space in order to expand its manufacturing capabilities.
PRODUCT LIABILITY AND LEGAL PROCEEDINGS; INSURANCE
The Company is subject to an inherent risk of product liability claims that
may involve significant defense costs. Bausch & Lomb has agreed to indemnify the
Company up to an aggregate amount of $28.5 million against any claims and losses
from defects in the design, manufacture or production of any product sold by S-O
prior to the Acquisition. In August 1995, one implant patient filed an action in
the Superior Court of California, County of Riverside, alleging that a defect in
the manufacturing of the Company's implants caused the implant to fracture.
Bausch & Lomb is contractually obligated to indemnify the Company for this claim
and has assumed the defense of this matter. Although the Company currently has
product liability insurance there can be no assurance that this coverage will be
adequate to protect the Company against future claims. In the event the Company
is held liable for damages in excess of its insurance coverage limits or outside
of its insurance coverage, which damages are not indemnified by Bausch & Lomb,
the Company's business, financial condition and results of operations could be
materially and adversely affected.
41
<PAGE> 43
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Set forth below is certain information regarding the directors and
executive officers of the Company as of August 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- ---- ----------------------------------------------------------
<S> <C> <C>
Kenneth A. Darienzo 58 Chairman of the Board and Chief Executive Officer
Martin J. Dymek 41 President
Kenneth Krueger 51 Executive Vice President, Operations
Bruce D. Nye 53 Vice President, Chief Financial Officer and Corporate
Secretary
Andrew C. Cowen(1)(2) 27 Director
Walter W. Grist(1)(2) 57 Director
T. Michael Long 54 Director
Douglas E. Rogers(2) 43 Director
Frederic M. Seegal(1) 49 Director
Henry Wendt 64 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
KENNETH A. DARIENZO has served as the Chief Executive Officer of the
Company and its predecessors since August 1989 and has been a Director of the
Company since the Acquisition in November 1996. Mr. Darienzo served as the
President of the Company until the appointment of Mr. Dymek in May 1997 and
became the Company's Chairman of the Board in August 1997. From 1988 to 1989,
Mr. Darienzo was the General Manager of Unitek, a global orthodontic company and
a subsidiary of the Minnesota Mining & Manufacturing Co. ("3M"). Mr. Darienzo
also served in a number of management positions with 3M from 1975 to 1988,
including positions as the Marketing Director for its Dental Division and the
National Sales Manager of its orthopedic business.
MARTIN J. DYMEK has been the President of the Company since May 1997, and
prior to that served as the Senior Vice President, Marketing and Sales of the
Company and its predecessor since 1995, as Vice President of Marketing of the
Company's predecessor from 1991 to 1995 and as International Sales Manager of
the Company's predecessor in 1990 and 1991. Mr. Dymek continues to be
responsible for the Company's sales and marketing activities. Prior to joining
S-O, Mr. Dymek held marketing and sales positions with Shofu Dental, a Japanese
dental manufacturing company, from 1982 to 1990. Mr. Dymek is currently a member
of the International Congress of Oral Implantologists and is active in the
Dental Manufacturers of America.
KENNETH KRUEGER has been the Executive Vice President, Operations of the
Company and its predecessors since 1987. Prior to that, Mr. Krueger served in a
number of operational and general management positions at the Company's
predecessor from 1984 to 1987. From 1981 to 1984, Mr. Krueger was the Manager of
the Cardiovascular Research and Development Division of Shiley, Inc., a Pfizer
company, and from 1966 to 1981, he served in management positions in operations,
research and development, production technology and production engineering with
Shiley, Inc. Mr. Krueger is currently a member of the Society for Biomaterials,
the International Congress of Oral Implantologists, the American Society of
Testing Material, the Academy of Implant Dentistry and the International
Association for Dental Research.
BRUCE D. NYE joined the Company in May 1997 as its Vice President, Chief
Financial Officer and Corporate Secretary. Prior to joining the Company, Mr. Nye
was the Senior Vice President of Corporate Development and prior to that Vice
President and Chief Financial Officer of The Cerplex Group, Inc., a company that
provides repair services for electronic equipment, from August 1993 to May 1997.
From 1992 to July 1993, Mr. Nye was Vice President and Chief Financial Officer
for Sparta, Inc. and from 1991 to 1992, he acted as an independent consultant
and principal in an asset acquisition for Aluminum Precision Products. Mr. Nye
was Senior Vice President and Chief Financial Officer for Hadson Defense
Systems, Inc. from 1983 to 1990. Prior to 1983, he was a Senior Audit Manager
with Price Waterhouse LLP.
42
<PAGE> 44
ANDREW C. COWEN has been a member of the Company's Board of Directors since
the Acquisition in November 1996. Mr. Cowen is currently an Assistant Manager of
Brown Brothers Harriman & Co., a private banking and investment management
company ("Brown Brothers"), where he has been employed for the past five years.
Brown Brothers is the general partner of The 1818 Fund II, L.P., a New York
limited partnership. Mr. Cowen is also a director of Computerized Medical
Systems, Inc.
WALTER W. GRIST has been a member of the Board of Directors of the Company
since the Acquisition in November 1996. For more than the past five years, Mr.
Grist has been a Senior Manager of Brown Brothers. Mr. Grist is also a director
of Computerized Medical Systems, Inc. and WellCare Management Group, Inc.
T. MICHAEL LONG has been a member of the Board of Directors of the Company
since the Acquisition in November 1996. Mr. Long is currently a partner of Brown
Brothers, where he has been employed since 1971. He is the co-manager of The
1818 Fund, L.P. and The 1818 Fund II, L.P. Mr. Long is also a director of
Columbia/HCA Healthcare Corp., Computerized Medical Systems, Inc., Ecko Group,
Inc., Gulf Canada Resources, Ltd., Nuevo Energy Company and Sports Holdings
Corporation. Mr. Long is a Trustee of The Hospital Chaplainry, Inc., a nonprofit
agency that trains chaplains from over 50 religious traditions.
DOUGLAS E. ROGERS has served as a member of the Board of Directors of the
Company since the Acquisition in November 1996. Mr. Rogers is currently a
Managing Director of DLJ Merchant Banking II, Inc., an affiliate of DLJ. Since
1992, Mr. Rogers has been engaged in the development, organization and financing
of numerous health care companies. From 1995 to 1997, he was a Managing Director
of Lighthouse Capital Partners and its affiliates, which were involved in
providing financial services and advice to small to medium sized medical product
and dental companies. From 1987 to 1992, he was a Director of Baring Brothers &
Co., Inc. where he was responsible for United States investment banking
activities. From 1983 to 1987, Mr. Rogers was a Senior Vice President at Lehman
Brothers. Prior to that, Mr. Rogers was a Vice President and founder of the
Health Care Group at Kidder, Peabody & Co. Mr. Rogers is also a founder of
several pharmaceutical research companies, including Neurogen Corporation and
Texas Biotechnology Group. Mr. Rogers is also a Director of Wilson Greatbatch
Ltd. and Computerized Medical Systems, Inc. and has served as a Director of Cold
Spring Harbor Laboratory Associates.
FREDERIC M. SEEGAL has been a member of the Company's Board of Directors
since January 1997. Mr. Seegal is currently the President of Wasserstein Perella
Group, Inc., an investment banking firm, where he has been employed for three
years. From 1990 to 1994, Mr. Seegal was a Managing Director of Salomon
Brothers. Prior to that Mr. Seegal was a Managing Director of Lehman Brothers
where he was employed from 1974 to 1990.
HENRY WENDT has served as a member of the Board of Directors of the Company
since the Acquisition in November 1996 and was the Chairman of the Board of the
Company until August 1997. He is currently a Managing Director of DLJ Merchant
Banking II, Inc. From 1995 to 1997, he was a Managing Director of Lighthouse
Capital Partners and its affiliates. Mr. Wendt was Chairman of the Board of
SmithKline Beecham p.l.c., a pharmaceutical company, and its subsidiary,
SmithKline Beecham Corporation, from 1989 until his retirement in 1994. Mr.
Wendt is also a director of Allergan, Inc., Atlantic Richfield Co., Availl,
Inc., The Egypt Investment Company and West Marine Corp. He is a trustee of the
Trilateral Commission and Trustee Emeritus of the American Enterprise Institute.
In 1994 Mr. Wendt was awarded the Order of the Rising Sun Gold and Silver Star
by the Government of Japan, the highest honor given to a foreigner. In 1995, he
was named as Honorary Commander of the British Empire by HRH Queen Elizabeth II.
The Company's Certificate provides for the Board of Directors to be divided
into three classes, with each class to be as nearly equal in number of directors
as possible. At each annual meeting of the stockholders, the successors to the
class of directors whose term expires at the time are elected to hold office for
a term of three years, and until their respective successors are elected and
qualified, so that the term of one class of directors expires at each such
annual meeting. The terms of office of the Company's directors expire as
follows: Messrs. Cowen and Grist in 1998; Messrs. Long and Rogers in 1999; and
Messrs. Darienzo, Seegal and Wendt in 2000. See "Description of Capital
Stock -- Certain Provisions of the Company's Certificate of Incorporation and
Bylaws."
43
<PAGE> 45
The Board of Directors has a Compensation Committee (the "Compensation
Committee"), which is responsible for making recommendations regarding salaries,
bonuses and other compensation matters for the Company's executive officers. The
Compensation Committee serves as the administrator of the 1997 Plan. The members
of the Compensation Committee are Messrs. Cowen, Grist and Rogers. None of these
individuals were at any time during 1996 an officer or employee of the Company.
The Board of Directors also has an Audit Committee (the "Audit Committee"),
which supervises and makes recommendations and decisions with respect to the
periodic audits of the Company's financial results. The members of the Audit
Committee are Messrs. Cowen, Grist and Seegal.
DIRECTOR COMPENSATION
Except as described below, the directors do not receive cash compensation
for services on the Board of Directors or any Committee thereof. All
non-employee Board members are reimbursed for their out-of-pocket expenses
incurred in connection with serving on the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and its three other
most highly compensated executive officers (the "Named Executive Officers")
whose total salary and bonus for 1996 exceeded $100,000 for services rendered to
the Company and its predecessors in all capacities during that year. The Named
Executive Officers are the only executive officers of the Company.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
NAME AND -------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITIONS(S) SALARY BONUS OPTIONS(1) COMPENSATION
- ------------------------------------------ -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Kenneth A. Darienzo....................... $219,615 $56,600(2) -- $ 96,700(3)
Chairman of the Board and
Chief Executive Officer
Martin J. Dymek........................... 131,000 40,000 -- 46,400(4)
President
Kenneth Krueger........................... 136,000 13,776(2) -- 41,400(5)
Executive Vice President, Operations
Bruce D. Nye(6)........................... -- -- -- --
Vice President, Chief Financial Officer
and Corporate Secretary
</TABLE>
- ---------------
(1) While the Company did not make any restricted stock grants or option grants
to any of the Named Executive Officers during the year ended December 31,
1996, the Company granted non-qualified stock options to purchase Common
Stock to each of the Named Executive Officers in January and May 1997, some
of which were fully vested and the remaining options will vest at the
earlier of the consummation of the Offering or in equal annual installments
if the Company attains certain financial criteria in the year. All of the
options were granted at an exercise price of $0.40, and the fully vested
options will terminate in January 2007 and the performance options will
terminate in May 2007. In August 1997, the Company granted incentive stock
options ("ISOs") to the Named Executive Officers at an exercise price equal
to the initial public offering price. These options terminate in August 2007
but will automatically accelerate in the event of the termination of such
holders' employment with the Company within 18 months following a change in
control of the Company. Twenty-five percent of such options vest on the
first anniversary of the grant date and the remaining options vest
thereafter in 36 equal monthly installments. The options granted to the
Named Executive Officers are as follows: Mr. Darienzo (100,000 fully vested
options, 134,411 performance options and 30,000 ISOs), Mr. Dymek (50,000
fully vested options, 53,825 performance options and 21,000 ISOs), Mr.
Krueger (50,000 fully vested options, 53,825 performance options and 16,000
ISOs) and Mr. Nye (16,055 performance options and 10,000 ISOs).
(2) Such amount was earned and accrued in the year ended December 31, 1996 but
was not actually paid until 1997.
44
<PAGE> 46
(3) Consists of (i) cash compensation in the amount of $90,300 for additional
services rendered to the Company's predecessor in connection with the
Acquisition and (ii) a matching contribution in the amount of $6,400 made by
the Company under its Section 401(k) Profit Sharing Plan.
(4) Consists of (i) cash compensation in the amount of $40,000 for additional
services rendered to the Company's predecessor in connection with the
Acquisition and (ii) a matching contribution in the amount of $6,400 made by
the Company under its Section 401(k) Profit Sharing Plan.
(5) Consists of (i) cash compensation in the amount of $35,000 for additional
services rendered to the Company's predecessor in connection with the
Acquisition and (ii) a matching contribution in the amount of $6,400 made by
the Company under its Section 401(k) Profit Sharing Plan.
(6) Mr. Nye joined the Company as its Vice President, Chief Financial Officer
and Corporate Secretary in May 1997. He is currently paid an annual salary
of $160,000. In May 1997, Mr. Nye was granted options to purchase 16,055
shares of Common Stock which will vest at the earlier of the consummation of
the Offering or in equal annual installments if the Company attains certain
financial objectives. All of such options were granted at an exercise price
of $0.40, and such options will terminate in May 2007.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company serves as a member of the Board of
Directors or Compensation Committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee.
COMPENSATION PLANS AND ARRANGEMENTS
Employment Contracts
In November 1996, the Company entered into an employment agreement with
each of Messrs. Darienzo, Dymek and Krueger for a term ending December 31, 1999.
The annual base salaries of Messrs. Darienzo, Dymek and Krueger as of the date
hereof are $300,000, $199,000 and $155,000, respectively. Each of such officers
is also eligible to receive a bonus based upon the Company's attainment of
certain performance criteria, which bonus will not exceed 100% of such officer's
annual base salary. The employment agreements provide that the Board may
increase the annual base salaries and bonuses of such officers as appropriate.
In the event the Company terminates any such agreement other than for cause, the
Company must pay to such officer, in addition to all accrued and unpaid salary
and benefits, his salary and certain benefits for 18 months following the date
of such termination. If the Company terminates such officer's employment for
cause or if such officer terminates his employment for any reason whatsoever,
then the officer will be entitled to receive only accrued but unpaid salary
through the date of such termination.
1997 Stock Incentive Plan
The Company's 1997 Plan is intended to serve as a comprehensive equity
incentive program for the employees, non-employee members of the Company's Board
of Directors (the "Board") or the board of directors of any parent or subsidiary
of the Company, and independent consultants who provide valuable services to the
Company. The 1997 Plan became effective on August 20, 1997 upon adoption by the
Board and was subsequently approved by the stockholders in August 1997. A total
of 400,000 shares of Common Stock has been reserved for issuance under the 1997
Plan. The share reserve will be increased automatically on the first day of
January of each calendar year, beginning in January 1998, by a number of shares
equal to 2% of the number of shares of Common Stock outstanding on the last day
of the immediately preceding calendar year. In no event may any one participant
in the 1997 Plan receive option grants or direct stock issuances for more than
200,000 shares in the aggregate per calendar year.
The 1997 Plan is divided into four separate incentive programs: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers and other employees,
non-employee Board members and independent consultants) may, at the discretion
of the Plan Administrator, be granted options to purchase shares of Common Stock
at an exercise price not less than 85% of their fair market value on the grant
date, (ii) the Stock Issuance Program under which such individuals
45
<PAGE> 47
may, in the Plan Administrator's discretion, be issued shares of Common Stock
directly through the purchase of such shares at a price not less than 100% of
their fair market value at the time of issuance or as a bonus tied to the
performance of services, (iii) the Salary Investment Option Grant Program under
which executive officers and other highly compensated employees may elect to
apply a portion of their base salary to the acquisition of special stock option
grants, and (iv) the Director Fee Option Grant Program pursuant to which the
non-employee Board members may apply a portion of the annual retainer fee
otherwise payable to them in cash each year to the acquisition of special stock
option grants.
The Discretionary Option Grant, Stock Issuance and Salary Investment Option
Grant Programs will be administered by the Compensation Committee. The
Compensation Committee, as Plan Administrator, will have complete discretion to
determine which eligible individuals are to receive option grants or stock
issuances, the time or times when such option grants or stock issuances are to
be made, the number of shares subject to each such grant or issuance, the
vesting schedule to be in effect for the option grants or stock issuances, the
maximum term for which any granted option is to remain outstanding and the
status of any granted option as either an incentive stock option or a
non-statutory stock option under the federal tax laws, except that all options
granted under the Salary Investment Option Grant Program will be non-statutory
stock options. The administration of the Director Fee Option Grant Program will
be self-executing in accordance with the express provisions of that program.
The exercise price for the shares of Common Stock subject to option grants
made under the 1997 Plan may be paid in cash or in shares of Common Stock valued
at fair market value on the exercise date. The option may also be exercised
through a same-day sale program without any cash outlay by the optionee. In
addition, the Plan Administrator may provide financial assistance to one or more
optionees in the exercise of their outstanding options by allowing such
individuals to deliver a full-recourse, interest-bearing promissory note in
payment of the exercise price and any associated withholding taxes incurred in
connection with such exercise.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Stock Issuance Program will immediately vest,
except to the extent the Company's repurchase rights with respect to those
shares are to be assigned to the successor corporation. The Plan Administrator
will have the authority under the Discretionary Option Grant and Stock Issuance
Programs to grant options and to structure repurchase rights so that the shares
subject to those options or repurchase rights will automatically vest in the
event the individual's service is terminated, whether involuntarily or through a
resignation for good reason, within a specified period (not to exceed eighteen
(18) months) following (i) a merger or asset sale in which those options are
assumed or those repurchase rights are assigned or (ii) a change in control of
the Company effected by a successful tender offer for more than 50% of the
outstanding voting stock or by proxy contest for the election of Board members.
The Plan Administrator will also have the discretion to provide for the
automatic acceleration of options and the lapse of any repurchase rights upon
(i) a change in control of the Company effected by a successful tender offer for
more than 50% of the Company's outstanding voting stock or by proxy contest for
the election of Board members or (ii) the termination of the individual's
service, whether involuntarily or through a resignation for good reason, within
a specified period (not to exceed eighteen (18) months) following such a change
in control.
Stock appreciation rights may be issued in tandem with option grants made
under the Discretionary Option Grant Program. The holders of such rights will
have the opportunity to elect between the exercise of their outstanding stock
options for shares of Common Stock or the surrender of those options for an
appreciation distribution from the Company equal to the excess of (i) the fair
market value of the vested shares of Common Stock subject to the surrendered
option over (ii) the aggregate exercise price payable for such shares. Such
appreciation distribution may be made in cash or in shares of Common Stock.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program in return for
the grant of new options for the same or different number of
46
<PAGE> 48
option shares with an exercise price per share based upon the fair market value
of the Common Stock on the new grant date.
In the event the Plan Administrator elects to activate the Salary
Investment Option Grant Program, each executive officer and other highly
compensated employee of the Company selected for participation may elect, prior
to the start of the calendar year, to reduce his or her base salary for that
calendar year by a specified dollar amount not less than $10,000 nor more than
$50,000. If such election is approved by the Plan Administrator, the officer
will be granted, on or before the last trading day in January in the calendar
year for which the salary reduction is to be in effect, a non-statutory option
to purchase that number of shares of Common Stock determined by dividing the
salary reduction amount by two-thirds of the fair market value per share of
Common Stock on the grant date. The option will be exercisable at a price per
share equal to one-third of the fair market value of the option shares on the
grant date. As a result, the total spread on the option shares at the time of
grant will be equal to the amount of salary invested in that option. The option
will vest in a series of twelve (12) equal monthly installments over the
calendar year for which the salary reduction is in effect and will be subject to
full and immediate vesting upon certain changes in the ownership or control of
the Company.
In the event the Director Fee Option Grant Program is activated in the
future, each non-employee Board member would have the opportunity to apply all
or a portion of any annual retainer fee otherwise payable in cash to the
acquisition of a below-market option grant. The option grant would automatically
be made on the first trading day in January in the year for which the retainer
fee would otherwise be payable in cash. The option will have an exercise price
per share equal to one-third of the fair market value of the option shares on
the grant date, and the number of shares subject to the option will be
determined by dividing the amount of the retainer fee applied to the program by
two-thirds of the fair market value per share of Common Stock on the grant date.
As a result, the total spread on the option (the fair market value of the option
shares on the grant date less the aggregate exercise price payable for those
shares) will be equal to the portion of the retainer fee invested in that
option. The option will become exercisable for the option shares in a series of
twelve (12) equal monthly installments over the calendar year for which the
election is in effect. However, the option will become immediately exercisable
for all the option shares upon (i) certain changes in the ownership or control
of the Company or (ii) the death or disability of the optionee while serving as
a Board member.
The Board may amend or modify the 1997 Plan at any time. The 1997 Plan will
terminate on August 19, 2007, unless sooner terminated by the Board.
On August 20, 1997, the Board granted options to purchase an aggregate of
226,000 shares of Common Stock under the 1997 Plan to certain employees of the
Company, including the following executive officers: Kenneth Darienzo - 30,000
options; Martin Dymek - 21,000 options; Kenneth Krueger - 16,000 options and
Bruce Nye - 10,000 options. On September 25, 1997, the Board granted options to
purchase an aggregate of 9,000 shares of Common Stock to three employees of the
Company. All of the options granted under the 1997 Plan vest at the rate of 25%
on the first anniversary of their respective grant dates and thereafter in 36
equal monthly installments. All of such options have an exercise price equal to
the initial public offering price.
401(K) PROFIT SHARING PLAN
The Company has an employee profit sharing plan that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code
(the "401(k) Plan"). The 401(k) Plan allows eligible employees to defer up to
15% of their pretax earnings, subject to the Internal Revenue Service annual
contribution limit. The Company makes matching contributions equal to 100% of
employee contributions up to 4% of the participant's eligible compensation. The
Company's contributions to the 401(k) Plan for 1996 since the Acquisition
totaled $33,000.
47
<PAGE> 49
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate provides that, pursuant to Delaware law, the
Company's directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty of care to the Company and its stockholders. This
provision in the Certificate does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief against the directors will remain available under
Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company or its
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
Under Section 145 of the Delaware General Corporation Law, the Company can
indemnify its directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. The Company's Bylaws
provide that the Company will indemnify its directors and officers to the
fullest extent permitted by law and require the Company to advance litigation
expenses upon receipt by the Company of an undertaking by the director or
officer to repay such advances if it is ultimately determined that the director
or officer is not entitled to indemnification. The Bylaws further provide that
rights conferred under such Bylaws do not exclude any other right such persons
may have or acquire under any bylaw, agreement, vote of the stockholders or
disinterested directors or otherwise.
The Company has entered into agreements to indemnify its executive officers
and all of its directors in addition to the indemnification provided for in the
Bylaws. These agreements will, among other things, indemnify those parties for
certain expenses (including attorneys' fees), judgments, fines and settlement
amounts incurred by such person in any action or proceeding, including any
action by or in the right of the Company, on account of services by such person
as an officer or a director of the Company, or as an officer or a director of
any other company or enterprise to which the person provides services at the
request of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the indemnification agreements or the Company's charter documents,
the Company has been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Company has also obtained directors' and officers' liability insurance
for its directors and executive officers.
48
<PAGE> 50
CERTAIN TRANSACTIONS
ACQUISITION
In November 1996, the Company acquired certain of the assets of its
predecessor, S-O, from Bausch & Lomb. In conjunction with the Acquisition, the
Company entered into a Securities Purchase Agreement with The 1818 Fund II, L.P.
(the "1818 Fund"), pursuant to which the Company sold 22,000 shares of Class A
Preferred Stock and warrants to purchase 2,900,000 shares of Common Stock at a
nominal exercise price to the 1818 Fund for $22.0 million. T. Michael Long,
Walter W. Grist and Andrew C. Cowen, directors of the Company, are a partner,
senior manager and associate manager, respectively, of Brown Brothers, which is
the general partner of the 1818 Fund, and were elected to the Company's Board
pursuant to rights granted to the 1818 Fund in connection with the Acquisition.
The 1818 Fund's right to require the Company to nominate up to three individuals
designated by it as directors terminates upon the consummation of the Offering.
In conjunction with the Acquisition, the Company also sold (i) 3,185 shares
of Class C Preferred Stock and warrants to purchase 477,750 shares of Common
Stock at a nominal exercise price to Exeter Venture Lenders, L.P. and Exeter
Equity Partners, L.P. (collectively, "Exeter") and S-O Acquisition LLC for $3.2
million, and (ii) 50,000 shares of Common Stock and warrants to purchase 745,400
shares of Common Stock to S-O Management LLC at a nominal exercise price for
$1,000. The Company pays S-O Management LLC $250,000 per year pursuant to a
Management Services Agreement that terminates upon consummation of the Offering.
Prior to the consummation of the Offering, each of S-O Acquisition LLC and S-O
Management LLC will distribute the shares of Common Stock and Class C Preferred
Stock held by such entity to the individual members of each such entity (the
"LLC Distribution"). As a result of the LLC Distribution (i) Henry Wendt, a
director of the Company, will own 346,201 shares of Common Stock and
approximately 494 shares of Class C Preferred Stock, (ii) Anvers L.P., one of
the general partners of which is an affiliate of Furman Selz LLC, will own
74,998 shares of Common Stock and approximately 500 shares of Class C Preferred
Stock, (iii) Douglas E. Rogers, a director of the Company, will own 266,975
shares of Common Stock and approximately nine shares of Class C Preferred Stock,
(iv) Richard Gumer, a Managing Director of Furman Selz LLC, will own 151,118
shares of Common Stock and approximately five shares of Class C Preferred Stock
and (iv) Wasserstein Perella Group, Inc. will own 79,540 shares of Common Stock.
Frederic M. Seegal, a director of the Company, is the President of Wasserstein
Perella Group, Inc.
In addition, in connection with the Acquisition, the Company entered into
Note and Warrant Purchase Agreements with Equitable Life and Exeter. Under the
terms of the Note and Warrant Purchase Agreements, the Company sold (i) $10.0
million aggregate principal amount of its 16% Series A Subordinated Note and
warrants to purchase 240,000 shares of Common Stock at a nominal exercise price
to Equitable Life and (ii) $2.5 million aggregate principal amount of its 14%
Series B Subordinated Notes and warrants to purchase 88,000 shares of Common
Stock at a nominal exercise price to Exeter. Equitable Life is a wholly-owned
subsidiary of The Equitable Companies Incorporated, which owns approximately 77%
of DLJ, one of the Underwriters.
Concurrently with the Acquisition, the Company entered into (i) a
registration rights agreement with the 1818 Fund, the S-O Parties, Exeter and
Equitable Life and (ii) a stockholders agreement, which terminates upon
consummation of the Offering, with such parties and Messrs. Wendt, Rogers and
Gumer. See "Description of Capital Stock."
DIRECTOR OPTIONS
In January 1997, the Company granted each member of the Company's Board of
Directors (other than Mr. Darienzo) a stock option to acquire 35,700 shares of
the Company's Common Stock at an exercise price of $1.00 per share.
PREFERRED STOCK CONVERSION
On August 21, 1997, the Company and the holders of Class A Preferred Stock
and Class C Preferred Stock agreed to amend the rights of the Class A Preferred
Stock and Class C Preferred Stock so that 17,471 shares of Class A Preferred
Stock and 2,527 shares of Class C Preferred Stock will automatically
49
<PAGE> 51
convert into an aggregate of 1,433,547 shares of Common Stock upon consummation
of the Offering, in lieu of mandatory redemption. The conversion price will be
equal to 93% of the initial public offering price in this Offering. The
remaining outstanding Class A Preferred Stock and Class C Preferred Stock will
be redeemed out of the proceeds of the Offering. As discussed above, certain
affiliates of the Company are holders of such shares of Class A Preferred Stock
and Class B Preferred Stock.
RELATIONSHIPS BETWEEN THE COMPANY, CERTAIN DIRECTORS AND THE UNDERWRITERS
Each of Messrs. Rogers and Wendt, directors of the Company, is a Managing
Director of DLJ Merchant Banking II, Inc., an affiliate of DLJ. Mr. Rogers
beneficially owns 35,700 shares of Common Stock issuable upon exercise of
fully-vested stock options, and will own 266,975 shares of Common Stock and
approximately nine shares of Class C Preferred Stock following the LLC
Distribution. Approximately seven of such shares of Class C Preferred Stock will
be converted into 528 shares of Common Stock in the Preferred Stock Conversion
and the remaining two shares of Class C Preferred Stock will be redeemed with
net proceeds of the Offering for approximately $2,000 plus accrued dividends.
Mr. Wendt beneficially owns 35,700 shares of Common Stock issuable upon exercise
of fully-vested stock options, and will own 346,201 shares of Common Stock and
approximately 494 shares of Class C Preferred Stock following the LLC
Distribution. Approximately 392 of such shares of Class C Preferred Stock will
be converted into approximately 28,124 shares of Common Stock in the Preferred
Stock Conversion and the remaining 102 shares will be redeemed with net proceeds
of the Offering for approximately $102,000 plus accrued dividends.
Equitable Life beneficially owns (i) Warrants to purchase approximately
240,000 shares of Common Stock and (ii) $10.0 million aggregate principal amount
of 16% Series A Subordinated Note of the Company. The Company intends to use a
portion of the net proceeds of the Offering to repay all outstanding
indebtedness under the 16% Series A Subordinated Note. Equitable Life is a
wholly owned subsidiary of The Equitable Companies Incorporated, which owns
approximately 77% of DLJ.
An affiliate of Furman Selz LLC, one of the Underwriters, is the general
partner of Anvers, L.P., which will beneficially own 74,998 shares of Common
Stock, and 500 shares of Class C Preferred Stock of the Company following the
LLC Distribution. Approximately 397 shares of such Class C Preferred Stock will
be converted into 28,437 shares of Common Stock and the remaining shares will be
redeemed for approximately $103,000 plus accrued dividends.
Mr. Gumer, a Managing Director of Furman Selz LLC, will beneficially own
151,118 shares of Common Stock and approximately five shares of Class C
Preferred Stock following the LLC Distribution. Approximately four of such
shares of Class C Preferred Stock will be converted into approximately 299
shares of Common Stock in the Preferred Stock Conversion and the remaining one
share will be redeemed with net proceeds of the Offering for approximately
$1,000 plus accrued dividends.
The Offering is being made pursuant to Rule 2720 of the Conduct Rules of
the National Association of Securities Dealers, Inc. ("NASD"), because certain
associates of DLJ beneficially own in excess of 10% of the Common Stock of the
Company prior to the Offering and affiliates of DLJ will receive in excess of
10% of the proceeds of the Offering as a result of the redemption of the Class C
Preferred Stock and the repayment of the 16% Series A Subordinated Note of the
Company. Rule 2720 provides that, among other things, when a NASD member
participates in the underwriting of equity securities of a company with which
there exists a conflict of interest, the price at which such equity securities
are to be distributed to the public can be no higher than that recommended by a
"qualified independent underwriter" meeting certain standards ("QIU"). UBS
Securities LLC will assume the responsibilities of acting as the QIU in
connection with the Offering.
50
<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock by (i) each person (or group
of affiliated persons) known by the Company to beneficially own more than five
percent of the outstanding shares of Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, and (iv) all directors
and executive officers of the Company as a group. Except as otherwise indicated,
the Company believes that the beneficial owners listed below have sole
investment and voting power with respect to such shares, subject to community
property laws, where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF
CLASS(1)
NUMBER ---------------------
BENEFICIALLY BEFORE AFTER
OWNED(1) OFFERING OFFERING
------------ -------- --------
<S> <C> <C> <C>
The 1818 Fund II, L.P.(2)...................................... 4,152,401 66.6% 38.0%
c/o Brown Brothers Harriman & Co.
59 Wall Street
New York, NY 10005
Kenneth A. Darienzo(3)......................................... 234,411 3.6 2.1
Martin J. Dymek(4)............................................. 103,825 1.6 *
Kenneth Krueger(5)............................................. 103,825 1.6 *
Bruce D. Nye(6)................................................ 16,055 * *
Andrew C. Cowen(7)............................................. 35,700 * *
Walter W. Grist(8)............................................. 35,700 * *
T. Michael Long(9)............................................. 4,188,101 66.8 38.2
Douglas E. Rogers(10).......................................... 303,203 4.8 2.8
Frederic M. Seegal(11)......................................... 115,240 1.8 1.1
Henry Wendt(12)................................................ 410,025 6.5 3.7
All directors and executive officers as a group (10
persons)(13)................................................. 5,546,085 80.3% 47.8%
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is based on 6,233,547 shares of Common Stock
outstanding as of September 30, 1997 and 10,933,547 shares of Common Stock
outstanding after completion of the Offering. Shares of Common Stock
subject to options that are currently exercisable or exercisable within 60
days of the date of this Prospectus are deemed to be outstanding and
beneficially owned by the person holding such option for the purpose of
computing beneficial ownership of such person, but are not treated as
outstanding for the purposes of computing the percentage ownership of any
other person. As of September 30, 1997, S-O Acquisition LLC was the record
owner of 348,584 shares of Common Stock and S-O Management LLC was the
record owner of 800,573 shares of Common Stock. Each of these entities will
distribute the shares of Common Stock held by it to the individual members
of such entity prior to the consummation of the Offering. This table
assumes that such distributions have been made, and each owner of an equity
interest in S-O Acquisition LLC and S-O Management LLC is presented as the
beneficial owner of a percentage of the shares of Common Stock owned by S-O
Acquisition LLC and S-O Management LLC equal to such owner's proportionate
equity interest in each such entity.
(2) The general partner of the 1818 Fund is Brown Brothers. T. Michael Long, a
director of the Company, is a general partner of Brown Brothers. See
footnote 9.
(3) Mr. Darienzo's shares include (i) 100,000 shares of Common Stock issuable
upon exercise of fully-vested stock options and (ii) 134,411 shares of
Common Stock issuable upon exercise of stock options that will vest upon
consummation of the Offering.
(4) Mr. Dymek's shares include (i) 50,000 shares of Common Stock issuable upon
exercise of fully-vested stock options and (ii) 53,825 shares of Common
Stock issuable upon exercise of stock options that will vest upon
consummation of the Offering.
(5) Mr. Krueger's shares include (i) 50,000 shares of Common Stock issuable
upon exercise of fully-vested stock options and (ii) 53,825 shares of
Common Stock issuable upon exercise of stock options that will vest upon
consummation of the Offering.
(6) Mr. Nye's shares include 16,055 shares of Common Stock issuable upon
exercise of stock options that will vest upon consummation of the Offering.
51
<PAGE> 53
(7) Mr. Cowen's shares include 35,700 shares of Common Stock issuable upon
exercise of fully-vested stock options.
(8) Mr. Grist's shares include 35,700 shares of Common Stock issuable upon
exercise of fully-vested stock options.
(9) Mr. Long's shares include (i) 35,700 shares of Common Stock issuable upon
exercise of fully-vested stock options and (ii) 4,152,401 shares of Common
Stock owned by the 1818 Fund, which Mr. Long may be deemed to beneficially
own because he has voting power of the 1818 Fund's shares of Common Stock.
Mr. Long disclaims beneficial ownership of all shares referenced in (ii)
above.
(10) Mr. Rogers' shares include 35,700 shares of Common Stock issuable upon
exercise of fully-vested stock options.
(11) Mr. Seegal's shares include (i) 35,700 shares of Common Stock issuable upon
exercise of fully-vested stock options and (ii) 79,540 shares of Common
Stock owned by Wasserstein Perella Group, Inc., which Mr. Seegal may be
deemed to beneficially own because he has voting power of such shares of
Common Stock. Mr. Seegal disclaims beneficial ownership of all shares
referenced in (ii) above.
(12) Mr. Wendt's shares include 35,700 shares of Common Stock issuable upon
exercise of fully-vested stock options.
(13) The shares held by the officers and directors as a group include 672,316
shares of Common Stock issuable upon exercise of options exercisable within
60 days of the date of this Prospectus.
52
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offering and the concurrent exercise of all
outstanding warrants to acquire Common Stock, and conversion to Common Stock or
redemption of all outstanding shares of Preferred Stock, the authorized capital
stock of the Company will consist of 35,000,000 shares of Common Stock, $.0001
par value per share, of which 10,933,547 shares will be outstanding, and
5,000,000 shares of Preferred Stock, $.0001 par value per share, none of which
will be outstanding. The following description of the capital stock of the
Company and certain provisions of the Company's Certificate and Bylaws gives
effect to the exercise of all outstanding warrants and the conversion to Common
Stock or redemption of all outstanding shares of Preferred Stock. The
description below is a summary and is qualified in its entirety by the
provisions of the Certificate and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held.
Following the Offering, the holders of Common Stock, voting as a single class,
will be entitled to elect all of the directors of the Company. Holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
would be entitled to share ratably in the Company's assets remaining after the
payment of liabilities and the satisfaction of any liquidation preference
granted to the holders of any outstanding shares of Preferred Stock. Holders of
Common Stock have no preemptive or other subscription rights. The shares of
Common Stock are not convertible into any other security. The outstanding shares
of Common Stock are, and the shares being offered hereby will be, upon issuance
and sale, fully paid and nonassessable.
PREFERRED STOCK
The Certificate authorizes 5,000,000 shares of Preferred Stock that may be
issued in series from time to time with such designations, relative rights,
priorities, preferences, qualifications, limitations and restrictions thereof,
to the extent that such are not fixed in the Company's Certificate, as the Board
of Directors determines. The rights, preferences, limitations and restrictions
of different series of Preferred Stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions and other matters. The Board of
Directors may authorize the issuance of Preferred Stock that ranks senior to the
Common Stock with respect to the payment of dividends and the distribution of
assets on liquidation. In addition, the Board of Directors is authorized to fix
the limitations and restrictions, if any, upon the payment of dividends on
Common Stock to be effective while any shares of Preferred Stock are
outstanding. The Board of Directors, without stockholder approval, can issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. The Company believes that the
Preferred Stock will provide the Company with increased flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs that might arise. Having such authorized shares available for
issuance will allow the Company to issue shares of Preferred Stock without the
expense and delay of a special stockholders' meeting. Although the Company's
Board of Directors has no intention at the present time of doing so, it could
issue a series of Preferred Stock, the terms of which, subject to certain
limitations imposed by the securities laws, could impede the completion of a
merger, tender offer or other takeover attempt. The Company's Board of Directors
will make any determination to issue such shares based on its judgment as to the
best interests of the Company and its stockholders at the time of issuance. The
Company's Board of Directors, in so acting, could issue Preferred Stock having
terms that could discourage an acquisition attempt or other transaction that
some, or a majority, of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock over
the then market price of such stock.
DELAWARE LAW
Upon consummation of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prohibits a publicly held
53
<PAGE> 55
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of a corporation's outstanding
voting stock. This provision may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
Provisions of the Company's Certificate and Bylaws may make more difficult
the acquisition of control of the Company by various means, such as a tender
offer, open market purchases not approved by the Company's Board of Directors, a
proxy contest or otherwise and could thereby deprive the stockholders of
opportunities to realize a premium on their Common Stock. In addition, they may
adversely affect the prevailing market price of the stock. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors of the Company and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions, described below, which may involve an actual or threatened change
in control of the Company. The provisions are also intended to discourage
certain tactics that may be used in proxy fights. These provisions also
encourage persons seeking to acquire control of the Company to consult first
with the Company's Board of Directors to negotiate the terms of any proposed
business combination or offer. The provisions are designed to reduce the
vulnerability of the Company to an unsolicited proposal for a takeover that does
not contemplate the acquisition of all outstanding shares of the Company or that
is otherwise unfair to stockholders of the Company. The Board of Directors
believes that, as a general rule, such takeover proposals would not be in the
best interests of the Company and its stockholders. See "Risk
Factors -- Potential Anti-Takeover Effects of Delaware Law and the Company's
Certificate of Incorporation and Bylaws."
Directors; Classified Board; Removal; Filling Vacancies and Amendment. The
Certificate provides that the number of directors will be fixed from time to
time by resolution adopted by a majority of the directors then in office.
Currently, the number is set at seven. The Certificate provides for the Board of
Directors to be divided into three classes, with each class to be as nearly
equal in number of directors as possible. Further, subject to the rights of the
holders of any series of Preferred Stock then outstanding, the Certificate
authorizes only the Board of Directors to fill vacancies, including newly
created directorships. Accordingly, this provision could prevent a stockholder
from obtaining majority representation on the Board of Directors by enlarging
the Board of Directors and filling the new directorships with its own nominees.
The Certificate also provides that directors of the Company may be removed by
stockholders only for cause and only by the affirmative vote of holders of
two-thirds of the outstanding shares of voting stock.
Special Stockholder Meetings. The Certificate provides that special
meetings of the stockholders, for any purpose or purposes, unless required by
law, shall be called by the President or Secretary pursuant to a request in
writing of the President, a majority of the entire Board of Directors or
stockholders owning not less than 50% of the entire voting stock of the Company
then issued and outstanding. A special meeting may not be held absent such a
written request. The request shall state the purpose or purposes of the proposed
meeting. Such limitation on the right of stockholders to call a special meeting
could make it more difficult for stockholders to initiate action that is opposed
by the Board of Directors. Such action on the part of stockholders could include
the removal of an incumbent director, the election of a stockholder nominee as a
director or the implementation of a rule requiring stockholder ratification of
specific defensive strategies that have been adopted by the Board of Directors
with respect to unsolicited takeover bids. In addition, the limited ability of
the stockholders to call a special meeting of stockholders may make it more
difficult to change the existing Board of Directors and management.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Certificate establishes an advance notice procedure for the
nomination, other than by or at the discretion of the Board of Directors or a
committee thereof, of candidates for election as directors as well as for other
stockholder proposals to be considered at special or annual stockholders'
meetings. Notice of stockholder proposals and
54
<PAGE> 56
director nominations must be timely given in writing to the Secretary of the
Company prior to the meeting at which the matters are to be acted upon or the
directors are to be elected. To be timely, notice must be received in general at
the principal offices of the Company not less than 60 days nor more than 90 days
prior to the meeting of stockholders. The purpose of requiring advance notice is
to afford the Board of Directors an opportunity to consider the qualifications
of the proposed nominees or the merits of other stockholder proposals and, to
the extent deemed necessary or desirable by the Board of Directors, to inform
stockholders about those matters.
Written Consent; Special Meetings of Stockholders. The Certificate
prohibits the taking of stockholder action by written consent without a meeting.
These provisions will make it more difficult for stockholders to take action
opposed by the Board of Directors.
Amendment of Certain Provisions of the Certificate. The Certificate
generally requires the affirmative
vote of the holders of at least two-thirds of the outstanding voting stock in
order to amend any provisions of the Certificate concerning (i) the removal or
appointment of directors, (ii) the authority of stockholders to act by written
consent, (iii) the required vote to amend the Certificate, (iv) calling a
special meeting of stockholders, (v) procedure and content of stockholder
proposals concerning business to be conducted at a meeting of stockholders, and
(vi) director nominations by stockholders. These voting requirements will make
it more difficult for minority stockholders to make changes in the Certificate
that could be designed to facilitate the exercise of control over the Company.
On the other hand, the requirement for approval by at least a two-thirds
stockholder vote will enable the holders of a minority of the voting stock of
the Company to prevent the holders of a majority or more of such securities from
amending such provisions of the Certificate. Following the completion of the
offering, the Company's present directors and executive officers and their
respective affiliates will beneficially own approximately 47.8% of the
outstanding Common Stock, giving them veto power with respect to any stockholder
action or approval requiring a two-thirds vote.
REGISTRATION RIGHTS
After the Offering, pursuant to registration rights agreements (the
"Registration Rights Agreements") entered into in connection with the
Acquisition, holders (the "Holders") of approximately 6,233,547 shares of Common
Stock will be entitled to certain demand and piggy-back registration rights with
respect to such shares. Pursuant to the Registration Rights Agreements, as
modified by certain waivers of rights thereunder that were agreed upon in
connection with the Offering, certain Holders may, after the consummation of the
Offering, request that the Company file a registration statement under the
Securities Act and, upon such request and subject to certain conditions and
restrictions, the Company generally will be required to use its best efforts to
effect one such registration. Additionally, within 24 months following the
consummation of the Offering, the Company is required to file a shelf
registration statement on Form S-3 to register 2,900,000 shares of Common Stock
acquired as a result of the exercise of warrants held by the Class A Preferred
Stock investors and possibly any additional shares of Common Stock held by such
investors; however, such required registration is subject to postponement if it
would interfere with certain material transactions of the Company then under
consideration. In addition, if the Company proposes to register any of its
securities either for its own account or for the account of other stockholders,
the Company is required, with certain exceptions, to notify the Holders and,
subject to certain limitations, include in any underwritten registration all of
the shares of Common Stock requested to be included by the Holders. The Company
is generally obligated to bear the expenses, other than underwriting discounts
and sales commissions, of these registrations. For a period of 180 days after
the date of this Prospectus, the Company has agreed not to file any registration
statement with respect to, and each of its executive officers, directors and
certain stockholders of the Company has agreed not to make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable into
Common Stock, other than a registration statements on Form S-8 covering
securities issuable under the 1997 Plan, without DLJ's prior written consent.
TRANSFER AGENT AND REGISTRATION
The transfer agent and registrar for the Common Stock is U.S. Stock
Transfer Corporation.
55
<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 10,933,547 shares of
Common Stock outstanding. Of these shares, the 4,700,000 shares sold in the
Offering (plus any additional shares sold upon the Underwriters' exercise of
their over-allotment option) will be freely transferable immediately following
the Offering without restriction under the Securities Act. Of the remaining
6,233,547 shares of Common Stock, 4,800,000 will become transferable 90 days
following the date of this Prospectus subject to compliance with the applicable
provisions of Rule 144, assuming the lock-up discussed below is not applicable.
Each of the Company, its executive officers and directors and certain
stockholders of the Company who in the aggregate beneficially own 100% of the
total number of outstanding shares of Common Stock not sold in the Offering, has
agreed (except, in the case of the Company, for the grant of options or issuance
of stock under the 1997 Plan or upon conversion of the Preferred Stock) not to
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any Common Stock (regardless of whether any of the transactions
described in clause (i) or (ii) is to be settled by the delivery of Common
Stock, or such other securities, in cash or otherwise) (the "Lock-Up") for a
period of 180 days (the "Lock-up Period") after the date of this Prospectus
without the prior written consent of DLJ.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this Prospectus a number of shares that does not exceed the greater
of (i) 1% of the then outstanding shares of the Common Stock (approximately
109,335 shares immediately after the Offering) or (ii) the average weekly
trading volume during the four calendar weeks preceding such sale, subject to
the filing of a Form 144 with respect to such sale (the "Volume Limitations"). A
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the 90 days immediately preceding
the sale who has beneficially owned his or her shares for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above. Persons deemed to be affiliates of the Company must
always sell pursuant to the volume limitations under Rule 144, even after the
applicable holding periods have been satisfied.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, since this will depend on the market price for the Common Stock
of the Company, the personal circumstances of the sellers and other factors.
Prior to the Offering, there has been no public market for the Common Stock, and
there can be no assurance that a significant public market for the Common Stock
will develop or be sustained after the Offering. Any future sale of substantial
amounts of Common Stock in the open market may adversely affect the market price
of the Common Stock offered hereby.
Pursuant to the Registration Rights Agreements, holders of 6,233,547 shares
of Common Stock will be entitled to certain demand and piggy-back registration
rights with respect to such shares. See "Certain Transactions -- Acquisition"
and "Description of Capital Stock -- Registration Rights." During the Lock-up
Period, the Company has agreed not to file any registration statement with
respect to, and each of its executive officers, directors and certain
stockholders of the Company has agreed not to make any demand for, or exercise
any right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable into Common Stock,
other than a registration statement on Form S-8 covering shares issuable upon
exercise of stock options, without DLJ's prior written consent.
The Company intends to file registration statements on Form S-8 under the
Securities Act to register shares of Common Stock issuable upon exercise of
options pursuant to outstanding options or grants under the 1997 Plan. However,
all holders of all such options have agreed to the Lock-Up.
56
<PAGE> 58
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement dated
, 1997 (the "Underwriting Agreement"), the Underwriters named below,
who are represented by Donaldson, Lufkin & Jenrette Securities Corporation, UBS
Securities LLC and Furman Selz LLC (the "Representatives"), have severally
agreed to purchase from the Company the respective number of shares of Common
Stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------ ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...............
UBS Securities LLC................................................
Furman Selz LLC...................................................
---------
Total................................................... 4,700,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to certain conditions. The Underwriters are obligated
to purchase and accept delivery of all the shares of Common Stock offered hereby
(other than those shares covered by the over-allotment option described below)
if any are purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the
initial offering of the Common Stock, the public offering price and other
selling terms may be changed by the Representatives at any time without notice.
The Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of 705,000 additional shares of Common
Stock at the initial public offering price less underwriting discounts and
commissions. The Underwriters may exercise such option solely to cover
over-allotments, if any, made in connection with the Offering. To the extent
that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
Each of the Company, its executive officers and directors and certain
stockholders of the Company has agreed (except, in the case of the Company, for
the grant of options or issuance of stock under the Company's 1997 Plan) not to
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any Common Stock (regardless of whether any of the transactions
described in clause (i) or (ii) is to be settled by the delivery of Common
Stock, or such other securities, in cash or otherwise) for a period of 180 days
after the date of this Prospectus
57
<PAGE> 59
without the prior written consent of DLJ. In addition, during such period, the
Company has also agreed not to file any registration statement with respect to,
other than a Registration Statement on Form S-8 covering securities issuable
under the 1997 Plan, and each of its executive officers, directors and certain
stockholders of the Company holding registration rights with respect to the
Company's Common Stock has agreed not to make any demand for, or exercise any
right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
without DLJ's prior written consent.
Prior to the Offering, there has been no established trading market for the
Common Stock. The initial public offering price for the shares of Common Stock
offered hereby will be determined by negotiation among the Company and the
Representatives. The factors to be considered in determining the initial public
offering price include the history of and the prospects for the industry in
which the Company competes, the past and present operations of the Company, the
historical results of operations of the Company, the prospects of future
earnings of the Company, the recent market price of securities of generally
comparable companies and the general condition of the securities markets at the
time of the Offering.
Other than in the United States, no action has been taken by the Company or
the Underwriters that permits a public offering of the shares of Common Stock
offered hereby in any jurisdiction where action for that purpose is required.
The shares of Common Stock offered hereby may not be offered or sold, directly
or indirectly, nor may this Prospectus or any other offering material or
advertisements in connection with the offer and sale of any such shares of
Common Stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons who receive this Prospectus are
advised to inform themselves about and to observe any restrictions relating to
the Offering and the distribution of this Prospectus. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any shares of
Common Stock offered hereby in any jurisdiction in which such an offer or
solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot the Offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed Common Stock in syndicate covering
transactions, in stabilizing transactions or otherwise. These activities may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time.
The Offering is being made pursuant to Rule 2720 of the Conduct Rules of
the NASD because certain associates of DLJ own in excess of 10% of the Common
Stock of the Company prior to the Offering and affiliates of DLJ will receive in
excess of 10% of the proceeds of the Offering as a result of the redemption of
the Class C Preferred Stock and the repayment of the 16% Series A Subordinated
Notes of the Company. Rule 2720 provides that, among other things, when an NASD
member participates in the underwriting of equity securities of a company in
which there exists a conflict of interest, the price at which such equity
securities are to be distributed to the public can be no higher than that
recommended by a "qualified independent underwriter" meeting certain standards.
UBS Securities LLC will assume the responsibilities of acting as the QIU in
connection with the Offering.
58
<PAGE> 60
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Brobeck, Phleger & Harrison LLP, Newport Beach,
California and for the Underwriters by Sullivan & Cromwell, Los Angeles,
California.
EXPERTS
The consolidated financial statements as of December 31, 1995 and 1996 and
June 30, 1997, for the years ended December 31, 1994 and 1995, for the period
January 1, 1996 through November 15, 1996, the period November 16, 1996 through
December 31, 1996 and the six month period ended June 30, 1997 included in this
Prospectus have been so included in reliance on the reports of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act (the
"Registration Statement") with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract of
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each statement being qualified in all
respects by such reference. The Registration Statement, including the exhibits
and schedules thereto, may be inspected without charge at the principal office
of the Commission in Washington, D.C. and copies of all or any part of which may
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at
the Commission's Regional Offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material may be obtained at
prescribed rates by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains an Internet site at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants,
including the Company, that file electronically with the Commission.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available quarterly reports for the first three quarters of each year
following the end of each such quarter.
59
<PAGE> 61
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants -- The Company...................................... F-2
Report of Independent Accountants -- The Predecessor.................................. F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997........ F-4
Consolidated Statements of Operations for the years ended December 31, 1994 and 1995,
the period January 1, 1996 through November 15, 1996, the period November 16, 1996
through December 31, 1996, the six months ended June 30, 1996 (unaudited) and the
six months ended June 30, 1997...................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)/Predecessor Equity for the
years ended December 31, 1994 and 1995, the period January 1, 1996 through November
15, 1996, the period November 16, 1996 through December 31, 1996 and the six months
ended June 30, 1997................................................................. F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995,
the period January 1, 1996 through November 15, 1996, the period November 16, 1996
through December 31, 1996, the six months ended June 30, 1996 (unaudited) and the
six months ended June 30, 1997...................................................... F-7
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE> 62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Steri-Oss, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Steri-Oss, Inc. (the "Company") and its subsidiaries at December 31, 1996 and
June 30, 1997 and the results of their operations and their cash flows for the
period from November 16, 1996 through December 31, 1996 and the six month period
ended June 30, 1997 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the consolidated financial statements, effective
November 16, 1996 the Company acquired certain assets and assumed certain
liabilities of the Predecessor in a transaction accounted for as a purchase. As
a result of the acquisition, the consolidated financial information for the
period after the acquisition is presented on a different cost basis than that
for the periods before the acquisition and is, therefore, not comparable.
PRICE WATERHOUSE LLP
Costa Mesa, California
October 3, 1997
F-2
<PAGE> 63
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Steri-Oss, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, Predecessor equity and of cash flows present fairly, in all
material respects, the financial position of Steri-Oss, a wholly owned
subsidiary of Bausch and Lomb Incorporated, as described in Note 1 (the
"Predecessor") at December 31, 1995, and the results of its operations and its
cash flows for the years ended December 31, 1994 and 1995 and for the period
from January 1, 1996 through November 15, 1996 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Predecessor's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, effective
November 16, 1996 the Company acquired certain assets and assumed certain
liabilities of the Predecessor in a transaction accounted for as a purchase. As
a result of the acquisition, the consolidated financial information for the
period after the acquisition is presented on a different cost basis than that
for the periods before the acquisition and is, therefore, not comparable.
PRICE WATERHOUSE LLP
Costa Mesa, California
October 3, 1997
F-3
<PAGE> 64
STERI-OSS, INC.
CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------ ------------------------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, PRO FORMA
1995 1996 1997 JUNE 30, 1997
------------ ------------ ----------- -------------
(UNAUDITED)
(NOTE 2)
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents.................... $ 120 $ 220 $ 61 $ 61
Accounts receivable, net of allowance for
doubtful accounts of $79, $0 and $237,
respectively.............................. 3,649 5,114 7,083 7,083
Inventories (Note 4)......................... 3,749 4,426 6,062 6,062
Prepaid expenses and other current assets.... 248 314 305 305
-------- -------- ------- -------
Total current assets...................... 7,766 10,074 13,511 13,511
Fixed assets, net (Note 5)..................... 2,857 4,674 5,128 5,128
Goodwill, net of accumulated amortization of
$1,820, $183 and $954, respectively.......... 24,646 58,971 59,352 59,352
Other assets (Notes 6 and 7)................... 379 5,908 5,415 5,415
-------- -------- ------- -------
$ 35,648 $ 79,627 $83,406 $83,406
======== ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)/PREDECESSOR EQUITY
Current liabilities
Current portion of long-term debt (Note 6)... $ $ 3,020 $ 3,269 $ 3,269
Accounts payable............................. 506 712 2,091 2,091
Accrued liabilities.......................... 2,511 2,890 3,114 3,114
Customer advances............................ 43 1,095 488 488
-------- -------- ------- -------
Total current liabilities................. 3,060 7,717 8,962 8,962
Long-term debt (Note 6)........................ 36,396 39,776 39,776
Mandatorily redeemable preferred stock
classified as debt (Notes 7 and 14).......... 34,226 35,814 15,814
-------- -------- ------- -------
Total liabilities.............................. 3,060 78,339 84,552 64,552
-------- -------- ------- -------
Commitments and contingencies (Note 8)
Stockholders' equity (deficit)/predecessor
equity (Notes 1, 2, 9 and 14)
Common stock $0.0001 par value, 35,000,000
shares authorized, 50,000 shares issued
and outstanding at December 31, 1996 and
June 30, 1997, respectively, and 1,483,547
shares issued and outstanding on a pro
forma basis at June 30, 1997..............
Additional paid-in capital................... 1,901 2,446 23,951
Accumulated deficit.......................... (613) (3,592) (5,097)
Predecessor equity........................... 32,588
-------- -------- ------- -------
Total stockholders' equity
(deficit)/predecessor equity............ 32,588 1,288 (1,146) 18,854
-------- -------- ------- -------
$ 35,648 $ 79,627 $83,406 $83,406
======== ======== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 65
STERI-OSS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------- COMPANY PREDECESSOR COMPANY
------------ ---------- ----------
YEAR ENDED JANUARY 1, NOVEMBER 16, SIX MONTHS SIX MONTHS
DECEMBER 31, THROUGH THROUGH ENDED ENDED
----------------- NOVEMBER 15, DECEMBER 31, JUNE 30, JUNE 30,
1994 1995 1996 1996 1996 1997
------- ------- ------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................... $22,168 $27,361 $ 28,108 $ 4,089 $ 15,744 $ 19,334
Cost of sales........................... 6,666 7,865 7,430 1,356 4,226 5,148
------- ------- -------- ---------- -------- ----------
Gross profit.......................... 15,502 19,496 20,678 2,733 11,518 14,186
Selling, general and administrative
expense............................... 11,393 14,241 14,791 1,929 8,224 11,511
Research and development expense........ 1,781 2,225 2,116 352 1,255 1,322
------- ------- -------- ---------- -------- ----------
Income from operations.................. 2,328 3,030 3,771 452 2,039 1,353
Interest expense........................ 1,065 4,332
------- ------- -------- ---------- -------- ----------
Income (loss) before income taxes..... 2,328 3,030 3,771 (613) 2,039 (2,979)
Income taxes............................ 1,253 1,572 1,852 1,003
------- ------- -------- ---------- -------- ----------
Net income (loss)..................... $ 1,075 $ 1,458 $ 1,919 $ (613) $ 1,036 $ (2,979)
======= ======= ======== ========== ======== ==========
Unaudited per share information (Notes 2
and 14)
Pro forma net loss per share.......... $ (0.05) $ (0.28)
========== ==========
Weighted average shares outstanding... 6,938,535 6,938,535
========== ==========
Supplemental net income per share..... $ 0.02 $ 0.07
========== ==========
Weighted average shares outstanding... 11,638,535 11,638,535
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 66
STERI-OSS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)/PREDECESSOR EQUITY
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL
--------------- PAID-IN ACCUMULATED PREDECESSOR
SHARES AMOUNT CAPITAL DEFICIT EQUITY TOTAL
------ ------ ------ ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994..................... $ $ $ $ 27,220 $ 27,220
Net income.................................... 1,075 1,075
Net transfer from Bausch & Lomb............... 2,403 2,403
------ ------ ------ ------- -------- --------
Balances at December 31, 1994................... 30,698 30,698
Net income.................................... 1,458 1,458
Net transfer from Bausch & Lomb............... 432 432
------ ------ ------ ------- -------- --------
Balances at December 31, 1995................... 32,588 32,588
Net income.................................... 1,919 1,919
Net transfer to Bausch & Lomb................. (634) (634)
------ ------ ------ ------- -------- --------
Balances at November 15, 1996................... 33,873 33,873
Change in ownership in connection with the
formation of the Company................... (33,873) (33,873)
Issuance of stock in connection with the
formation of the Company................... 50,000 1 1
Issuance of warrants to purchase common
stock...................................... 1,900 1,900
Net loss...................................... (613) (613)
------ ------ ------ ------- -------- --------
Balances at December 31, 1996................... 50,000 1,901 (613) 1,288
Issuance of options to purchase common
stock...................................... 545 545
Net loss...................................... (2,979) (2,979)
------ ------ ------ ------- -------- --------
Balances at June 30, 1997....................... 50,000 $ $2,446 $(3,592) $ $ (1,146)
====== ====== ====== ======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 67
STERI-OSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------- COMPANY PREDECESSOR COMPANY
------------ ----------- -----------
YEAR ENDED JANUARY 1, NOVEMBER 16, SIX MONTHS SIX MONTHS
DECEMBER 31, THROUGH THROUGH ENDED ENDED
----------------- NOVEMBER 15, DECEMBER 31, JUNE 30, JUNE 30,
1994 1995 1996 1996 1996 1997
------- ------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................ $ 1,075 $ 1,458 $ 1,919 $ (613) $ 1,036 $(2,979)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities
Depreciation and amortization.............. 1,231 1,536 1,624 343 857 1,444
Compensation expense on issuance of stock
options.................................. 545
Dividends and interest on mandatorily
redeemable preferred stock and
subordinated debt........................ 542 2,247
Provision for income taxes of
Predecessor.............................. 1,253 1,572 1,852 1,003
Changes in operating assets and
liabilities, net of acquisitions
Accounts receivable...................... (178) (1,202) (879) (585) (1,085) (1,398)
Inventories.............................. (677) (864) (823) 351 (224) (1,010)
Prepaid expenses and other current
assets................................ (444) (200) (157) (26) (165) 24
Accounts payable......................... (403) 114 974 (472) 40 785
Accrued liabilities...................... 263 856 (522) 936 376 172
Customer advances........................ (440) 43 1,446 (394) 806 (607)
------- ------- -------- -------- ------- -------
Net cash provided by (used in) operating
activities............................... 1,680 3,313 5,434 82 2,644 (777)
Cash flows from investing activities
Payment for purchase of net assets from
Bausch and Lomb............................ (58,744)
Interpore.................................. (1,737)
Purchases of fixed assets, net............. (1,702) (1,190) (1,957) (250) (1,286) (1,018)
------- ------- -------- -------- ------- -------
Net cash used in investing activities...... (1,702) (1,190) (1,957) (58,994) (1,286) (2,755)
Cash flows from financing activities
Proceeds from issuance of mandatorily
redeemable preferred stock................. 22,448
Payment of note payable to Bausch & Lomb..... (714)
Proceeds from issuance of long-term debt..... 38,823 4,087
Payment of issue costs....................... (2,140)
Advances from (to) Bausch & Lomb............. 177 (2,158) (3,597) (805)
Proceeds from issuance of common stock....... 1
------- ------- -------- -------- ------- -------
Net cash provided by (used in) financing
activities............................... 177 (2,158) (3,597) 59,132 (805) 3,373
------- ------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................. 155 (35) (120) 220 553 (159)
Cash and cash equivalents, beginning of
period....................................... 155 120 120 220
------- ------- -------- -------- ------- -------
Cash and cash equivalents, end of period....... $ 155 $ 120 $ $ 220 $ 673 $ 61
======= ======= ======== ======== ======= =======
Supplemental disclosure of cash flow
information
Cash paid for interest....................... $ -- $ -- $ -- $ 122 $ -- $ 1,961
======= ======= ======== ======== ======= =======
</TABLE>
Supplemental schedule of noncash investing and financing activities:
As described in Notes 3 and 7, the Company issued mandatorily redeemable
preferred stock totaling $10,000 directly to Bausch & Lomb as partial
consideration for the purchase of net assets of the Predecessor.
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE> 68
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
1. ORGANIZATION AND BUSINESS
S-O Operating Corp. was incorporated in Delaware on October 17, 1996. S-O
Operating Corp. is a wholly owned subsidiary of S-O Acquisition Corp., which was
incorporated in Delaware on July 11, 1996. On August 22, 1997, S-O Acquisition
Corp. changed its name to Steri-Oss, Inc. (the "Company").
Effective November 16, 1996, the Company acquired the assets and
liabilities of the Steri-Oss subsidiary (the "Predecessor") of Bausch & Lomb
Incorporated ("Bausch & Lomb"). For financial statement purposes the acquisition
was accounted for as a purchase and, accordingly, the results of the Predecessor
are included in the consolidated financial statements of the Company from the
date of acquisition.
Effective May 1, 1997, the Company acquired certain assets and liabilities
relating to the dental operations of Interpore Dental, Inc. ("Interpore"). For
financial statement purposes, the acquisition was accounted for using the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets purchased and the liabilities assumed based upon the
fair values at the date of acquisition. This acquisition was not material to the
results of operations, financial position or customer base of the Company.
The Company manufactures dental implants and related products. The
Company's business activity is largely concentrated directly with dental implant
specialists in North America and with independent distributors in Europe and the
Middle East, Asia, and Central and South America.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
Revenue Recognition
Revenues from the sale of dental implants and related products are
recognized when products are shipped.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash on hand and short-term,
liquid investments with original maturities of three months or less.
Disclosures About Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable and accounts payable
approximate fair value because of the short maturity of these instruments. The
carrying amounts of the Company's senior and subordinated notes payable and
mandatorily redeemable preferred stock approximate fair value based upon the
current rates offered to the Company for obligations of the same remaining
maturities.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost
is determined on the first-in, first-out method.
F-8
<PAGE> 69
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
Fixed Assets
Additions and expenditures which substantially increase the useful lives of
assets are capitalized at cost, while maintenance and repair costs are expensed
as incurred. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, which range from three to eight years.
Goodwill
Goodwill is the excess of the cost of net assets acquired over their fair
value and is amortized on a straight-line basis over the expected periods to be
benefited. It is the Company's policy to periodically evaluate the carrying
value of its operating assets, including goodwill, and to recognize impairments
when the estimated future undiscounted net operating cash flows from the use of
assets are less than their carrying value.
Debt Issuance Costs and Debt Discounts
Debt issuance costs are recorded as deferred charges and are amortized over
the term of the related debt by a charge to interest expense. Debt discounts are
reflected as a deduction in the carrying value of the related note and amortized
using the effective interest method.
Research and Development
Research and development costs incurred by the Company are charged to
operations as incurred.
Income Taxes
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No. 109 ("SFAS No.
109"), "Accounting for Income Taxes." SFAS No. 109 is an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future tax
consequences, SFAS No. 109 generally considers all expected future events
including enactment of changes in tax laws or rates. A valuation allowance is
provided for deferred tax assets when it is more likely than not that such
assets will not be realized through future operations.
Income taxes during the years ended December 31, 1994, 1995 and for the
period from January 1, 1996 through November 15, 1996, were provided on a
separate return basis. The Predecessor was included in the consolidated income
tax returns of Bausch & Lomb.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and related notes to financial statements. Changes in such estimates
may affect amounts reported in future periods.
Unaudited Per Share Information
Unaudited pro forma net loss per share is based on the weighted average
common shares outstanding after retroactively reflecting the 50 for one stock
split (Note 14). In accordance with Staff Accounting Bulletin ("SAB") No. 83
issued by the Securities and Exchange Commission (the "Commission"), all common
stock and common stock equivalents issued within one year of the initial filing
of a registration statement at per share prices below the initial public
offering (the "Offering") price per share are included in the number of shares
outstanding at the beginning of the respective period, using the treasury stock
method of
F-9
<PAGE> 70
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
accounting using an assumed Offering price per share of $15, even though their
effects may be antidilutive. The Company has also included the effects of the
conversion of Class A 8.8% mandatorily redeemable preferred stock totaling
$17,471 and Class C 8.0% mandatorily redeemable preferred stock totaling $2,529,
into 1,433,547 shares of common stock as if the conversion was consummated at
the date of issuance. The assumed conversion of the preferred stock reduced the
Company's net loss by $268 and $1,067 and the net loss per share by $0.06 and
$0.24 for the period from November 16, 1996 through December 31, 1996 and the
six months ended June 30, 1997, respectively. Management does not believe that
historical per share information is meaningful and accordingly, such information
is not presented.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share." SFAS No. 128 simplifies the standards for computing Earnings Per Share
("EPS"), eliminating the presentation of primary EPS (currently required by
Accounting Principles Board Opinion No. 15, "Earnings Per Share") and requiring
dual presentation of basic and diluted EPS on the face of the income statement
for all public corporations with complex capital structures. SFAS No. 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption is not permitted, although pro forma
disclosure is optional. SFAS No. 128 is not expected to have a significant
impact on per share data.
Unaudited Supplemental Data
Unaudited supplemental net income per share adjusts the pro forma net
income per share to give effect to the repayment of approximately $59,900 of
mandatorily redeemable preferred stock and long-term debt using a portion of the
proceeds from the Offering. The assumed repayment of mandatorily redeemable
preferred stock and long-term debt increased the Company's pro forma net income
by $616 and $2,509 for the periods ended December 31, 1996 and June 30, 1997,
respectively.
Unaudited Pro Forma Balance Sheet Data
Unaudited pro forma balance sheet data adjusts the historical June 30, 1997
balance sheet to reflect the conversion of $20,000 of Class A and Class C
mandatorily redeemable preferred stock into 1,433,547 shares of common stock.
Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25 and related interpretations. The
disclosures required by Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," have been included
in Note 9.
Fiscal Periods
The Company uses a fifty-two/fifty-three week fiscal year ending on the
last Saturday in December. Fiscal year 1994 was a fifty-three week year and
fiscal years 1995 and 1996 were fifty-two week years. As a result, fiscal
periods may not end on the same day as the end of the respective calendar
period. Fiscal years 1994, 1995 and 1996 ended on December 31, December 30 and
December 28, respectively. The first six months of 1996 and 1997 ended on June
29 and June 28, respectively. For convenience of presentation, the financial
statements are shown as ending on December 31, and June 30.
Reclassifications
Certain prior period amounts have been reclassified to conform with current
period presentations.
F-10
<PAGE> 71
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
Interim Financial Information
The accompanying interim statements of operations and cash flows for the
six months ended June 30, 1996 are unaudited but include all adjustments,
consisting only of normal recurring adjustments, which management considers
necessary for a fair presentation of results of operations and of cash flows.
The results of operations and cash flows for the six months ended June 30, 1997
are not necessarily indicative of the results of operations and cash flows for
the full year.
3. ACQUISITIONS
Steri-Oss
The aggregate purchase price of $69,000 in connection with the Company's
acquisition of the Predecessor on November 16, 1996 (Note 1) was allocated to
acquired assets based upon their respective fair market values as follows:
<TABLE>
<S> <C>
Current assets..................................... $ 9,800
Fixed assets....................................... 4,500
Goodwill........................................... 59,200
Current liabilities................................ (4,500)
-------
$69,000
=======
</TABLE>
Goodwill is being amortized over 40 years. Amortization for the period
November 16, 1996 to December 31, 1996 and the six month period ended June 30,
1997 amounted to $183 and $741, respectively. The acquisition was financed by
the issuance of mandatorily redeemable preferred stock, subordinated debt and
the Bank Facility (Note 7).
Bausch & Lomb purchased the Predecessor in 1993 for an initial price of
approximately $26,000 subject to an earn-out provision based on profitability.
During the years ended December 31, 1994 and 1995, and for the period from
January 1, 1996 through November 15, 1996, earn-outs of $973, $1,018 and $1,111,
respectively, were incurred and capitalized to goodwill. The aggregate purchase
price paid by Bausch & Lomb, including direct acquisition costs, amounted to
approximately $31,000. Bausch & Lomb allocated the excess cost over fair value
of the net assets acquired to goodwill, which prior to November 15, 1996 was
being amortized over 40 years. Amortization expense for the years ended December
31, 1994 and 1995, and for the period January 1, 1996 through November 15, 1996
amounted to $832, $856 and $798, respectively.
4. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------ ----------------------------
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Raw materials......................... $1,824 $2,036 $ 2,536
Work-in process....................... 507 583 990
Finished goods........................ 1,418 1,807 2,536
------ ------ -------
$3,749 $4,426 $ 6,062
====== ====== =======
</TABLE>
F-11
<PAGE> 72
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
5. FIXED ASSETS:
Fixed assets consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------ ----------------------------
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Leasehold improvements................ $ 230 $ 297 $ 315
Machinery and equipment............... 2,168 2,829 4,447
Office furniture and fixtures......... 1,256 1,439 754
Construction in progress.............. 87 241 324
------ ------ -------
3,741 4,806 5,840
Less: accumulated depreciation........ (884) (132) (712)
------ ------ -------
$2,857 $4,674 $ 5,128
====== ====== =======
</TABLE>
Depreciation expense for the years ended December 31, 1994 and 1995, the
period January 1 through November 15, 1996, the period November 16 through
December 31, 1996, the six months ended June 30, 1996 (unaudited) and six months
ended June 30, 1997 totaled $363, $595, $712, $132, $352 and $575, respectively.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
COMPANY
---------------------------
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
Working Capital Loan which expires on November 15, 1999; variable interest
rate based on a bank's referenced base rate (the "Reference Rate") plus
1.5% per annum (9.75% at June 30, 1997) or LIBOR plus 2.75% per annum.
Maximum borrowing under this loan is $5,000................................ $ 1,323 $ 3,404
Revolving Term Loan due in quarterly installments ranging from $750 to $1,000
through November 15, 2001; interest rate based on the Reference Rate plus
1.5% per annum (9.75% at June 30, 1997) or LIBOR plus 3.0% per annum.
Maximum borrowing under this loan is $17,500 and $18,250, respectively..... 17,500 18,250
Term Loan due in quarterly installments of $19 through January 1, 2001, at
which time such payments increase in the range of $550 to $1,700 through
November 15, 2002; variable interest rate based on the Reference Rate plus
2.0% per annum (10.25% at June 30, 1997) or LIBOR plus 3.75% per annum; net
of unamortized discount of $39 and $35 at December 31, 1996 and June 30,
1997, respectively......................................................... 7,461 7,447
Capital Expenditure Loan which expires on November 15, 2002; variable
interest rate based on the Reference Rate plus 1.5% per annum (9.75% at
June 30, 1997) or LIBOR plus 3.0% per annum. Maximum borrowing under this
loan is $3,000............................................................. 1,275
16% Series A Senior Subordinated Notes due in one lump sum on May 15, 2003,
with an acceleration clause of 25% of outstanding principal upon an initial
public offering, with an effective interest rate of 16.99%; net of
unamortized discount of $103 and $95 at December 31, 1996 and June 30,
1997, respectively......................................................... 9,947 10,168
14% Series B Senior Subordinated Notes due in one lump sum on May 15, 2003,
with an acceleration clause of 25% of outstanding principal upon an initial
public offering, with an effective interest rate of 14.75%; net of
unamortized discount of $35 and $33 at December 31, 1996 and June 30, 1997,
respectively............................................................... 2,471 2,501
10.25% acquisition note payable to Bausch & Lomb, repaid February 14, 1997... 714
-------- -------
Total long-term debt..................................................... 39,416 43,045
Less current portion..................................................... (3,020) (3,269)
-------- -------
Long-term debt........................................................... $ 36,396 $39,776
======== =======
</TABLE>
F-12
<PAGE> 73
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
The Working Capital Loan, Revolving Term Loan, Term Loan and Capital
Expenditure Loan (collectively the "Bank Facility") are senior to all
indebtedness of the Company and are secured by substantially all of the
Company's assets. The Company is obligated to pay a commitment fee of 0.5% per
annum of the unused portion of the Working Capital Loan, Revolving Term Loan and
Capital Expenditure Loan. Under the provisions of the Company's credit
agreements the Company is required to adhere to certain restrictive covenants
including the maintenance of certain financial ratios. Credit agreements also
prohibit, among other things, the payment of dividends without the consent of
the Company's lenders.
The Bank Facility loans and Senior Subordinated Notes were issued with
detachable warrants for the purchase of common stock. The fair value of these
warrants has been recorded as additional paid-in capital of the Company with a
corresponding reduction in the carrying value of the notes. Such reductions have
been treated as debt discount. Debt issue costs aggregating $2,259 and $2,052 at
December 31, 1996 and June 30, 1997, respectively, are included in other assets
in the consolidated balance sheets. Interest accrued on the Bank Facility and
Senior Subordinated Notes aggregated $430 and $503 at December 31, 1996 and June
30, 1997, respectively.
Scheduled future annual maturities of long-term debt as of June 30, 1997
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997................................................ $ 1,667
1998............................................. 3,739
1999............................................. 7,359
2000............................................. 4,308
2001............................................. 6,513
Thereafter....................................... 19,459
-------
$43,045
=======
</TABLE>
7. MANDATORILY REDEEMABLE PREFERRED STOCK
In conjunction with the acquisition of net assets from Bausch & Lomb as
described in Notes 1 and 3, the Company issued cumulative mandatorily redeemable
preferred stock (classified and accounted for as debt) in the aggregate
liquidation amount of $35,200. This consisted of 22,000 shares of Class A,
10,000 shares of Class B and 3,185 shares of Class C mandatorily redeemable
preferred stock ($0.01 par value), with face amounts of $22,000, $10,000 and
$3,185 and dividend rates of 8.8%, 8.0% and 8.0%, respectively. Class B
preferred stock was issued to Bausch & Lomb in the amount of $10,000 as partial
consideration for the purchase price. The Class B preferred stock is
convertible, at the option of the holder, into common stock at the time the
Company first sells shares in an initial public offering. All classes of such
preferred stock are mandatorily redeemable on September 15, 2003 and have voting
rights as a separate class. The Company records accrued dividends on this
redeemable preferred stock to increase the carrying value of the preferred stock
with a corresponding charge to interest expense. At December 31, 1996 and June
30, 1997 accrued interest on mandatorily redeemable preferred stock included in
the carrying value of such preferred stock amounted to $374 and $1,869,
respectively.
The Class A and Class C mandatorily redeemable preferred stock was issued
with detachable warrants for the purchase of the Company's common stock. The
fair value of these warrants has been recorded as additional paid-in capital of
the Company, with a corresponding reduction to the carrying value of such
preferred stock. Such reduction has been treated as a discount that is being
accreted to increase the carrying value to the redemption value of the preferred
stock with a corresponding charge to interest expense. The
F-13
<PAGE> 74
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
Company also incurred costs of approximately $2,900 relating to the issuance of
the preferred stock. These costs have been capitalized as debt issue costs and
included in other assets in the accompanying consolidated balance sheets at
December 31, 1996 and June 30, 1997 and included as interest expense in the
related consolidated statements of operations. The unamortized debt issue costs
related to mandatorily redeemable preferred stock at December 31, 1996 and June
30, 1997 aggregated $2,886 and $2,696, respectively.
8. COMMITMENTS AND CONTINGENCIES
Commitments
The principal operating leases of the Company are for its manufacturing
facility and certain equipment. The facility lease provides that the Company
shall pay for utilities, insurance, taxes and maintenance. The manufacturing
facility lease currently expires on December 31, 1997. Management intends to
renew the lease prior to the termination of the lease. The remaining leases
expire through the year 1999, with renewal options available.
Future annual minimum rental payments required under noncancelable
operating leases that have initial or remaining lease terms in excess of one
year as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997................................................. $ 129
1998.............................................. 7
1999.............................................. 7
----
$ 143
====
</TABLE>
The Company has also entered into several agreements to provide financing
for research and development and promotional studies related to the Company's
products. Future annual minimum payments under these agreements as of June 30,
1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997................................................. $ 239
1998.............................................. 425
1999.............................................. 487
2000.............................................. 327
2001.............................................. 162
Thereafter........................................ 13
------
$1,653
======
</TABLE>
Legal Contingencies
The Company is subject to various claims and actions which arise in the
ordinary course of business. Management is unaware of any claims or actions
which would have a material adverse effect upon the Company's financial
position, results of operations or cash flows. Bausch & Lomb has agreed to
indemnify the Company, subject to certain exceptions, against any claims and
losses from defects in the design, manufacture or production of any product sold
prior to the acquisition of the Predecessor in November 1996.
F-14
<PAGE> 75
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
9. STOCKHOLDERS' EQUITY
Stock Options
On January 8, 1997, the Company issued options to purchase 242,061 shares
of common stock pursuant to Performance Stock Option Agreements at $0.40 per
share. These options vest over a period of six years, which can be accelerated
upon the attainment of certain performance criteria over three years, or vest
immediately upon the consummation of a public offering of the stock of the
Company. Compensation expense aggregating $31 has been charged to operations
during the six months ended June 30, 1997 for such options. These options expire
in 2007.
On January 8, 1997, the Company issued options to purchase 200,000 shares
of common stock to certain officers at $0.40 per share pursuant to Executive
Officer NonQualified Stock Option Agreements. Compensation expense aggregating
$306 has been charged to operations during the six months ended June 30, 1997
for such options. These options immediately vested on the date of grant, January
8, 1997. These options expire in 2007.
On January 8, 1997, the Company granted certain of its Board members
options to purchase 214,200 shares of common stock at $1.00 per share pursuant
to Director Stock Option Agreements. Compensation expense aggregating $199 has
been charged to operations during the six months ended June 30, 1997 for such
options. These options vested immediately on the date of grant.
On May 16, 1997, the Company issued options to purchase 77,083 shares of
common stock pursuant to Performance Stock Option Agreements at $0.40 per share.
These options vest over a period of six years, which can be accelerated upon the
attainment of certain performance criteria over three years, or vest immediately
upon the consummation of a public offering of the stock of the Company.
Compensation expense aggregating $9 has been charged to operations during the
six months ended June 30, 1997 for such options.
The Company accounts for these plans under Accounting Principles Board
Opinion No. 25. Had compensation cost for these plans been determined consistent
with SFAS No. 123, using the Black-Scholes Option Pricing Model with the
following assumptions: 0% expected dividend yield; 6.81% risk free interest
rate; 10 year expected life of options, the Company's net loss and earnings per
share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
JUNE 30,
1997
-----------
<S> <C>
Net loss:
As reported.................................................... $(2,979)
=======
Pro Forma...................................................... $(2,434)
=======
Pro forma net loss per share:
As reported.................................................... $ (0.28)
=======
Pro Forma...................................................... $ (0.21)
=======
Supplemental net income per share:
As reported.................................................... $ 0.07
=======
Pro forma...................................................... $ 0.10
=======
</TABLE>
F-15
<PAGE> 76
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
A summary of activity of the Plan at June 30, 1997 and during the period
then ended is presented in the table below:
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE PER SHARE
------- ---------------
<S> <C> <C>
Outstanding at beginning of period.................. $
Granted............................................. 733,344 0.58
------- -----
Outstanding at end of period........................ 733,344 0.58
------- -----
Exercisable at end of period........................ 414,200 $0.58
------- -----
</TABLE>
The weighted average grant date fair value of options granted during the
six month period ended June 30, 1997 amounted to $0.26.
Stock Warrants
In connection with the issuance of long-term debt (Note 6) and mandatorily
redeemable preferred stock (Note 7), the Company issued warrants to purchase
4,750,000 shares of common stock at $0.0002.
10. INCOME TAXES
The components of income taxes for the periods presented are as follows:
<TABLE>
<CAPTION>
PREDECESSOR
---------------------------------- COMPANY
---------------------------
YEAR ENDED JANUARY 1, NOVEMBER 16, SIX MONTHS
DECEMBER 31, THROUGH THROUGH ENDED
----------------- NOVEMBER 15, DECEMBER 31, JUNE 30,
1994 1995 1996 1996 1997
------ ------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Current:
Federal................... $ 599 $ 670 $1,292
State..................... 246 252 385
Deferred:
Federal................... 378 558 145 $(46) $ (501)
State..................... 30 92 30 6 (92)
------ ------ ------ ---- ------
1,253 1,572 1,852 (40) (593)
Valuation allowance......... 40 593
------ ------ ------ ---- ------
$1,253 $1,572 $1,852 $ -- $ --
====== ====== ====== ==== ======
</TABLE>
The Company has recorded a full valuation allowance for net deferred tax
assets based on future reversal of temporary differences and the uncertainty of
future taxable income.
Income taxes for the six months ended June 30, 1996 (unaudited) and 1997,
are based on the effective income tax rate for the respective year.
F-16
<PAGE> 77
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
The difference between the income taxes computed at the statutory Federal
rate of 34% and the amount in the consolidated statements of operations is
primarily attributable to the following:
<TABLE>
<CAPTION>
PREDECESSOR
---------------------------- COMPANY
-------------------------
YEAR ENDED JANUARY 1, NOVEMBER 16, SIX MONTHS
DECEMBER 31, THROUGH THROUGH ENDED
------------- NOVEMBER 15, DECEMBER 31, JUNE 30,
1994 1995 1996 1996 1997
---- ---- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Federal tax at statutory rate................. 34.0% 34.0% 34.0% (34.0%) (34.0%)
State taxes, net.............................. 7.8 7.5 7.2 0.0 0.0
Amortization of intangibles................... 12.1 9.6 7.2 0.0 0.0
Preferred stock dividends..................... 0.0 0.0 0.0 28.4 17.1
Research and development credit............... (1.5) (0.6) (0.2) 0.0 (1.7)
Increase in valuation allowance............... 0.0 0.0 0.0 6.6 16.8
Other, net.................................... 1.4 1.4 0.9 (1.0) (1.8)
---- ---- ---- ----- -----
Income taxes at the Company's effective
rate........................................ 53.8% 51.9% 49.1% 0.0% 0.0%
==== ==== ==== ===== =====
</TABLE>
Deferred taxes reflect the impact of future tax consequences associated
with temporary differences between the amount of assets and liabilities recorded
for tax and financial accounting purposes. Temporary differences and
carryforwards which give rise to a significant portion of deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------ ---------------------------
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Deferred tax liabilities:
Fixed assets.................................. $ (426) $ (32) $(155)
Goodwill...................................... (118) (615)
------ ------ -----
Total deferred tax liabilities............. (426) (150) (770)
------ ------ -----
Deferred tax assets:
Net operating loss carryforward............... 96 130 735
Reserves and accruals......................... 570 60 577
Research and development credit
carryforward............................... 91
------ ------ -----
Total deferred tax assets.................. 666 190 1,403
------ ------ -----
Valuation allowance............................. (40) (633)
------ ------ -----
Net deferred tax assets.................... $ 240 $ -- $ --
====== ====== =====
</TABLE>
At June 30, 1997, the Company has net operating loss ("NOL") carryforwards
of $1,980 and $990 for Federal and California purposes, respectively. The losses
begin to expire in 2011 and 2001 for Federal and California purposes,
respectively. The Company also has research and development tax credit
carryforwards of $52 and $39 for Federal and California purposes at June 30,
1997, respectively. These credits begin to expire in 2012 for both Federal and
California purposes.
The Internal Revenue Code of 1986, as amended, includes provisions that
limit a company's ability to utilize NOL and tax credit carryforwards when there
is a significant change in ownership. Should such a change in ownership occur,
the amount of NOL and tax credit carryforwards that may be utilized in any given
year will be subject to an annual limitation based on the value of the company
on the date immediately preceding such ownership change.
F-17
<PAGE> 78
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
11. PROFIT SHARING PLAN
The Company has an employee profit sharing plan that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code
(the "401(k) Plan"). The Company makes matching contributions equal to employee
contributions up to 4% of the participant's eligible compensation. The Company's
contributions to the 401(k) Plan for the period November 16, 1996 through
December 31, 1996 and the six months ended June 30, 1997 totaled $33 and $169,
respectively.
12. SEGMENT INFORMATION AND CONCENTRATIONS OF CREDIT RISK
The Company operates in one segment -- dental implants and related
products. Presented below is net sales information on the geographic areas in
which the Company operates:
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------- COMPANY PREDECESSOR COMPANY
------------ ------------ ------------
YEAR ENDED JANUARY 1 NOVEMBER 16, SIX MONTHS SIX MONTHS
DECEMBER 31, THROUGH THROUGH ENDED ENDED
----------------- NOVEMBER 15, DECEMBER 31, JUNE 30, JUNE 30,
1994 1995 1996 1996 1996 1997
------- ------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
United States............... $13,461 $15,702 $ 15,298 $2,072 $ 8,388 $ 10,406
Canada...................... 607 938 1,375 187 702 975
------- ------- -------- ------ -------- --------
North America............... 14,068 16,640 16,673 2,259 9,090 11,381
Europe and the Middle
East...................... 4,686 6,192 6,567 1,100 4,161 4,711
Asia........................ 2,427 3,208 3,325 610 1,727 2,309
Other....................... 987 1,321 1,543 120 766 933
------- ------- -------- ------ -------- --------
$22,168 $27,361 $ 28,108 $4,089 $ 15,744 $ 19,334
======= ======= ======== ====== ======== ========
</TABLE>
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. A
concentration of credit risk may exist with respect to trade receivables as
substantially all customers are affiliated with the dental industry. However,
the Company's customer base is made up of a large number of geographically
diverse worldwide customers, except for one European distributor and its
affiliates which account for 11%, 12%, 12%, 12%, 13% and 14% of sales for the
years ended December 31, 1994 and 1995, the period January 1, 1996 through
November 15, 1996, the period November 16, 1996 through December 31, 1996, and
six months ended June 30, 1996 (unaudited) and 1997, respectively. The Company
controls credit risk through credit approvals, credit limits and monitoring
procedures.
13. RELATED PARTY TRANSACTIONS
Effective November 16, 1996, the Company entered into a five year
management services agreement with S-O Management LLC, the sole stockholder of
the Company. The agreement provides for management and other advisory services
to the Company for an annual fee of $250. Such agreement terminates upon
consummation of an initial public offering of the Company's Common Stock.
Bausch & Lomb provided certain payroll related benefits to the employees of
the Predecessor. Such costs have been charged to the Predecessor by Bausch &
Lomb based on a percentage of payroll and are included in the consolidated
statements of operations as selling, general and administrative expense for the
years ended December 31, 1994 and 1995 and the period January 1 through November
15, 1996 in the amounts of $108, $649 and $1,390, respectively. Management
believes that the method used to charge these expenses reasonably reflects the
actual costs of such benefits provided and that such expenses on a stand-alone
basis would not produce materially different results.
F-18
<PAGE> 79
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
14. SUBSEQUENT EVENTS
In August 1997, the Company amended its Restated and Amended Certificate of
Incorporation to (i) increase the number of authorized shares of Common Stock
from 1,000 to 35,000,000, (ii) decrease the par value per share of the common
stock from $.01 to $.0001, (iii) amend the conversion rights on the Class B
Preferred Stock to delay automatic conversion until the later of the closing of
the Company's initial public offering or March 31, 1998, and (iv) provide for
the automatic conversion of 17,471 shares of Class A mandatorily redeemable
preferred stock and 2,527 shares of Class C mandatorily redeemable preferred
stock.
In August 1997, the Board of Directors declared a 50-for-one split of its
common stock. All share and per share data for the Company have been adjusted to
give retroactive effect for this stock split.
In August 1997, the Board of Directors authorized the filing of a
registration statement for the Offering of the Company's $0.0001 par value
common stock.
In August 1997, stockholders of the Company's Class A and Class C
mandatorily redeemable preferred stock agreed to convert $20,000 into 1,433,547
shares of common stock, upon consummation of the Offering, in lieu of exercising
their redemption rights. The remaining $15,200 of mandatorily redeemable
preferred stock will be redeemed by using the proceeds from the Offering.
In August 1997, the Board of Directors established a stock option plan
("Plan"). The Plan is divided into the following separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board Members and
consultants) may be granted options to purchase shares of common stock at an
exercise price not less than their fair market value on the grant date, (ii) the
Stock Issuance Program under which such individuals may, in the Plan
Administrator's discretion, be issued shares of Common Stock directly through
the purchase of shares at a price not less than 100% of their fair market value
at the time of issuance or as a bonus tied to the performance of services, (iii)
the Stock Investment Option Grant Program under which executive officers and
other highly compensated employees may elect to apply a portion of their base
salary to the acquisition of special stock option grants, and (iv) the Director
Fee Option Grant Program, pursuant to which the non-employee Board members may
apply a portion of the annual retainer fee otherwise payable to them in cash
each year to the acquisition of special stock option grants.
In August 1997, the Board of Directors granted options to purchase an
aggregate of 226,000 shares of common stock under the Plan to certain employees
of the Company. In September 1997, the Board of Directors granted options to
purchase an aggregate of 9,000 shares of common stock under the Plan to three
employees of the Company. All of such options were granted at an exercise price
equal to the Offering price.
In September 1997, the holders of warrants to purchase an aggregate of
4,750,000 shares of common stock irrevocably elected to exercise all of such
warrants immediately prior to the consummation of the Offering.
F-19
<PAGE> 80
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED BY
REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY, THE SHARES BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 8
Use of Proceeds...................... 15
Dividend Policy...................... 15
Capitalization....................... 16
Dilution............................. 17
Unaudited Pro Forma Consolidated
Financial Data..................... 18
Selected Historical Consolidated
Financial Data..................... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 24
Business............................. 31
Management........................... 42
Certain Transactions................. 49
Principal Stockholders............... 51
Description of Capital Stock......... 53
Shares Eligible for Future Sale...... 56
Underwriting......................... 57
Legal Matters........................ 59
Experts.............................. 59
Additional Information............... 59
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
4,700,000 SHARES
[STERI-OSS LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
UBS SECURITIES
FURMAN SELZ
, 1997
======================================================
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission and NASD registration fees. All of
the expenses below will be paid by the Registrant.
<TABLE>
<CAPTION>
ITEM
--------------------------------------------------------------------------
<S> <C>
Registration fee.......................................................... $ 26,204
NASD Filing Fee........................................................... 9,148
Nasdaq National Market listing fee........................................ 31,013
Blue sky fees and expenses................................................ 5,000
Printing and engraving expenses........................................... 150,000
Legal fees and expenses................................................... 250,000
Accounting fees and expenses.............................................. 200,000
Transfer Agent and Registrar fees......................................... 5,000
Miscellaneous............................................................. 23,635
-------
Total........................................................... $700,000
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933. The Registrant's Bylaws (Exhibit 3.3 hereto) provide that the
Registrant shall indemnify its directors and officers to the fullest extent
permitted by Delaware law. The Bylaws require the Registrant, subject to certain
limitations, to advance litigation expenses in the case of stockholder
derivative actions or other actions, against an undertaking by the directors and
officers to repay such advances if it is ultimately determined that the
directors or officers are not entitled to indemnification. The Bylaws further
provide that rights conferred under such Bylaws shall not be deemed to be
exclusive of any other right such persons may have or acquire under any
agreement, vote of stockholders or disinterested directors, or otherwise. The
Registrant believes that indemnification under its Bylaws covers at least
negligence and gross negligence.
In addition, the Registrant's Certificate (Exhibit 3.1 hereto) provides
that the Registrant shall indemnify its directors and officers if such persons
acted (i) in good faith, (ii) in a manner reasonably believed to be in or not
opposed to the best interests of the Registrant, and (iii) with respect to any
criminal action or proceeding, with reasonable cause to believe such conduct was
lawful. The Certificate also provides that, pursuant to Delaware law, its
directors shall not be liable for monetary damages for breach of the directors'
fiduciary duty of care to the Registrant and its stockholders. This provision in
the Certificate does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Registrant for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Certificate further provides that the
Registrant is authorized to indemnify its directors and officers to the fullest
extent permitted by law through the Bylaws, agreement, vote of stockholders or
disinterested directors, or otherwise.
II-1
<PAGE> 82
The Registrant intends to obtain directors' and officers' liability
insurance in connection with the Offering.
In addition, the Registrant has entered or, concurrently with the Offering,
will enter, into agreements to indemnify its directors and certain of its
officers in addition to the indemnification provided for in the Certificate of
Incorporation and Bylaws. These agreements will, among other things, indemnify
the Registrant's directors and certain of its officers for certain expenses
(including attorneys fees), judgments, fines and settlement amounts incurred by
such person in any action or proceeding, including any action by or in the right
of the Registrant, on account of services by that person as a director or
officer of the Registrant or as a director or officer of any subsidiary of the
Registrant, or as a director or officer of any other company or enterprise that
the person provides services to at the request of the Registrant.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the Registrant and its officers and
directors, and by the Registrant of the Underwriters, for certain liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Registrant during the
last three years preceding the date of this Registration Statement involving
sales of the Registrant's securities that were not registered under the
Securities Act:
1. In November 1996 in connection with the Acquisition, the
Registrant issued (i) 22,000 shares of Class A Preferred Stock and warrants
to purchase 2,900,000 shares of Common Stock at an exercise price of
$0.0002 per share to one accredited investor for an aggregate consideration
of $22.0 million; (ii) 10,000 shares of Class B Preferred Stock to Bausch &
Lomb in consideration for the payment of a portion of the purchase price
for the assets of S-O ($10.0 million); (iii) 3,185 shares of Class C
Preferred Stock and warrants to purchase 477,750 shares of Common Stock at
an exercise price of $0.0002 per share to three accredited investors for an
aggregate consideration of $3.2 million, which included the cancellation of
indebtedness in the amount of $10,000; (iv) 50,000 shares of Common Stock
and warrants to purchase 745,400 shares of Common Stock at an exercise
price of $0.0002 per share to one accredited investor for an aggregate
consideration of $1,000; and (v) warrants to purchase an aggregate of
428,000 shares of Common Stock at an exercise price of $0.0002 per share
granted to the Registrant's senior lenders and subordinated lenders in
consideration for making loans to the Registrant and (vi) warrants to
purchase an aggregate of 198,850 shares of Common Stock at an exercise
price of $.0002 per share granted to Larkspur Capital Corporation. The
foregoing issuances were exempt from the registration requirements of the
Securities Act on the basis that such transactions did not involve any
public offering. Larkspur Capital Corporation acted as placement agent for
this transaction.
2. In January 1997, the Registrant granted performance stock options
and executive stock options to certain members of the Company's senior
management team for the purchase of up to an aggregate of 442,061 shares of
Common Stock at an exercise price equal to $0.40 per share. The executive
stock options are fully vested and the performance options will vest in
full upon consummation of the Offering. In January 1997, the Registrant
also granted options to purchase an aggregate of 214,200 shares of Common
Stock to the Directors of the Registrant at an exercise price of $1.00 per
share. Such options are fully-vested. In May 1997, the Registrant granted
performance options to purchase an aggregate of 77,089 shares of Common
Stock at an exercise price of $0.40 per share to certain other employees of
the Registrant. Such options will vest in full upon consummation of the
Offering. In August 1997, the Registrant granted stock options under the
1997 Plan to certain employees of the Registrant at an exercise price per
share equal to the initial public offering price. Such options vest in four
equal annual installments commencing one year following the grant date.
None of the optionees referred to in this Item 2 paid any cash
consideration for these options. The grant of all of such options did not
involve a "sale" of securities and, therefore, no registration was
required. The issuance of Common Stock upon exercise of such options is
exempt by reason of Section 4(2) of the Securities Act and Rule 701
thereunder.
II-2
<PAGE> 83
3. In August 1997, the Registrant amended its Certificate of
Incorporation and Certificates of Designation to (i) reduce the authorized
par value of the Registrant's Common Stock and Preferred Stock from $.01
per share to $0.0001 per share and (ii) provide for the automatic
conversion of a portion of the Registrant's Class A Preferred Stock and
Class C Preferred Stock upon consummation of the Offering. The issuance of
shares of Common Stock upon conversion of the mandatorily redeemable
Preferred Stock in the Preferred Stock Conversion will not be registered
under the Securities Act by reason of the exemption provided by Section
3(a)(9) thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
3.1** Certificate of Amendment of Restated Certificate of Incorporation as
filed with the Delaware Secretary of State on August 25, 1997.
3.2** Amended and Restated Certificate of Incorporation to be filed with the
Delaware Secretary of State upon consummation of the Offering.
3.3** Amended and Restated Bylaws of the Registrant.
4.1 Specimen certificate representing shares of Common Stock of the
Registrant.
4.2** 1997 Stock Incentive Plan, together with form of related Stock Option
Agreement (and related Notice of Grant of Option) and Stock Issuance
Agreement.
4.3** Form of Performance Stock Option.
4.4** Form of Executive Officer Non-Qualified Stock Option Agreement.
4.5** Form of Director Stock Option Agreement.
5.1** Form of Opinion of Brobeck, Phleger & Harrison LLP.
10.1** Form of Indemnification Agreement.
10.2** Securities Purchase Agreement dated November 15, 1996, by and between
the Registrant and The 1818 Fund II, L.P.
10.3** Secured Credit Agreement dated November 15, 1996, by and among the
Registrant, First Source Financial LLP and Union Bank of California,
N.A. (the "Lenders"), together with Security Agreement dated November
15, 1996 by and between the Registrant and First Source Financial LLP,
as Collateral Agent for the Lenders, and Pledge Agreement dated November
15, 1996, by and between the Registrant and First Source Financial LLP,
as Collateral Agent for the Lenders.
10.4** Registration Rights Agreement dated November 15, 1996, by and among the
Registrant, The 1818 Fund II, L.P., S-O Acquisition LLC, S-O Management
LLC, Larkspur Capital Corporation, First Source Financial LLP, Union
Bank of California, N.A., The Equitable Life Assurance Society of the
United States, Exeter Venture Lenders, L.P. and Exeter Equity Partners,
L.P.
10.5** Form of Warrant to Purchase Shares of Common Stock
10.6+** Letter Agreement dated July 19, 1990, by and between the Registrant and
Metaux Precieux Metalor Deutschland Gmbh.
10.7 Intentionally omitted.
10.8+** License Agreement dated April 28, 1994, by and between the Registrant
and Dental Imaging Associates, Inc., together with Addendum thereto
dated April 11, 1995 by and between the Registrant and Dental Imaging
Associates, Inc.
10.9** Employment Agreement dated November 15, 1996, by and between the
Registrant and Kenneth A. Darienzo.
10.10** Employment Agreement dated November 15, 1996, by and between the
Registrant and Martin J. Dymek.
10.11** Employment Agreement dated November 15, 1996, by and between the
Registrant and Kenneth Krueger.
10.12 Sublease dated January 6, 1993, by and between the Registrant and Great
Western Real Estate.
</TABLE>
II-3
<PAGE> 84
<TABLE>
<S> <C>
10.13** Asset Purchase Agreement dated July 22, 1996, by and between the
Registrant, S-O and Bausch & Lomb.
10.14** Distribution Agreement dated April 18, 1997, by and between Registrant
and Interpore Orthopaedics, Inc.
10.15** License Agreement dated April 18, 1997, by and between the Registrant
and Interpore International.
10.16 Commitment Letter Agreement dated September 24, 1997 between Union Bank
and S-O Operating Corp. dated September 24, 1997.
11.1** Statement Regarding Computation of Pro Forma Net Loss Per Share.
11.2** Statement Regarding Computation of Supplemental Net Income Per Share.
21.1 List of Subsidiaries.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2 Consent of Price Waterhouse LLP, Independent Accountants.
23.3 Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit 5.1).
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
(B) FINANCIAL STATEMENT SCHEDULES
(1) Schedule II. Valuation and Qualifying Accounts and Reserves.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus as filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Yorba Linda, State of California, on October 6, 1997.
STERI-OSS, INC.
By: /s/ KENNETH A. DARIENZO
------------------------------------
Kenneth A. Darienzo
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<S> <C> <C>
/s/ KENNETH A. DARIENZO Chairman of the Board and October 6, 1997
- --------------------------------------------- Chief Executive Officer
Kenneth A. Darienzo (Principal Executive
Officer)
* Director October 6, 1997
- ---------------------------------------------
Henry Wendt
* Director October 6, 1997
- ---------------------------------------------
Walter W. Grist
* Director October 6, 1997
- ---------------------------------------------
T. Michael Long
* Director October 6, 1997
- ---------------------------------------------
Douglas E. Rogers
* Director October 6, 1997
- ---------------------------------------------
Andrew C. Cowen
* Director October 6, 1997
- ---------------------------------------------
Fredric M. Seegal
/s/ BRUCE D. NYE Vice President and Chief October 6, 1997
- --------------------------------------------- Financial Officer(Principal
Bruce D. Nye Accounting and Financial
Officer)
</TABLE>
*By: /s/ KENNETH A. DARIENZO
---------------------------------
Kenneth A. Darienzo
(Attorney-in-fact)
II-5
<PAGE> 86
SCHEDULE II
STERI-OSS INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BEGINNING BAD DEBT ENDING
DESCRIPTION BALANCE EXPENSE WRITE-OFFS BALANCE
- ---------------------------------------------------- --------- -------- ---------- -------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended December 31, 1994........................ 55 36 (28) 63
Year ended December 31, 1995........................ 63 27 (11) 79
January 1, 1996 through November 15, 1996........... 79 179 (108) 150
November 16, 1996 through December 31, 1996......... -- -- -- --
Six months ended June 30, 1997...................... -- 237 -- 237
</TABLE>
DEFERRED TAX VALUATION ALLOWANCE
<TABLE>
<CAPTION>
BEGINNING INCOME TAX ENDING
BALANCE EXPENSE BALANCE
--------- ---------- -------
<S> <C> <C> <C>
November 16, 1996 through December 31, 1996.................. -- 40 40
Six months ended June 30, 1997............................... 40 593 633
</TABLE>
<PAGE> 87
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ --------------------------------------------------------------------- ------------
<S> <C> <C>
1.1* Form of Underwriting Agreement.
3.1** Certificate of Amendment of Restated Certificate of Incorporation as
filed with the Delaware Secretary of State on August 25, 1997.
3.2** Amended and Restated Certificate of Incorporation to be filed with
the Delaware Secretary of State upon consummation of the Offering.
3.3** Amended and Restated Bylaws of the Registrant.
4.1 Specimen certificate representing shares of Common Stock of the
Registrant.
4.2** 1997 Stock Incentive Plan, together with form of related Stock Option
Agreement (and related Notice of Grant of Option) and Stock Issuance
Agreement.
4.3** Form of Performance Stock Option.
4.4** Form of Executive Officer Non-Qualified Stock Option Agreement.
4.5** Form of Director Stock Option Agreement.
5.1** Form of Opinion of Brobeck, Phleger & Harrison LLP.
10.1** Form of Indemnification Agreement.
10.2** Securities Purchase Agreement dated November 15, 1996, by and between
the Registrant and The 1818 Fund II, L.P.
10.3** Secured Credit Agreement dated November 15, 1996, by and among the
Registrant, First Source Financial LLP and Union Bank of California,
N.A. (the "Lenders"), together with Security Agreement dated November
15, 1996 by and between the Registrant and First Source Financial
LLP, as Collateral Agent for the Lenders, and Pledge Agreement dated
November 15, 1996, by and between the Registrant and First Source
Financial LLP, as Collateral Agent for the Lenders.
10.4** Registration Rights Agreement dated November 15, 1996, by and among
the Registrant, The 1818 Fund II, L.P., S-O Acquisition LLC, S-O
Management LLC, Larkspur Capital Corporation, First Source Financial
LLP, Union Bank of California, N.A., The Equitable Life Assurance
Society of the United States, Exeter Venture Lenders, L.P. and Exeter
Equity Partners, L.P.
10.5** Form of Warrant to Purchase Shares of Common Stock
10.6+** Letter Agreement dated July 19, 1990, by and between the Registrant
and Metaux Precieux Metalor Deutschland Gmbh.
10.7 Intentionally ommitted.
10.8+** License Agreement dated April 28, 1994, by and between the Registrant
and Dental Imaging Associates, Inc., together with Addendum thereto
dated April 11, 1995 by and between the Registrant and Dental Imaging
Associates, Inc.
10.9** Employment Agreement dated November 15, 1996, by and between the
Registrant and Kenneth A. Darienzo.
10.10** Employment Agreement dated November 15, 1996, by and between the
Registrant and Martin J. Dymek.
10.11** Employment Agreement dated November 15, 1996, by and between the
Registrant and Kenneth Krueger.
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ --------------------------------------------------------------------- ------------
<S> <C> <C>
10.12 Sublease dated January 6, 1993, by and between the Registrant and
Great Western Real Estate.
10.13** Asset Purchase Agreement dated July 22, 1996, by and between the
Registrant, S-O and Bausch & Lomb.
10.14** Distribution Agreement dated April 18, 1997, by and between
Registrant and Interpore Orthopaedics, Inc.
10.15** License Agreement dated April 18, 1997, by and between the Registrant
and Interpore International.
10.16 Commitment Letter Agreement dated September 24, 1997 between Union
Bank and S-O Operating Corp. dated September 24, 1997.
11.1** Statement Regarding Computation of Pro Forma Net Loss Per Share.
11.2** Statement Regarding Computation of Supplemental Net Income Per Share.
21.1 List of Subsidiaries.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2 Consent of Price Waterhouse LLP, Independent Accountants.
23.3 Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit
5.1).
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER SHARES
LU
[STERI-OSS LOGO]
A DENTAL CARE COMPANY
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR
THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 85915E 10 4
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULL PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.0001 PAR VALUE, OF
- ------------------------------- STERI-OSS, INC. --------------------------------
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
STERI-OSS, INC.
/s/ BRUCE D. NYE INCORPORATED /s/ KENNETH A. DARIENZO
SECRETARY JULY 11, 1995 CHAIRMAN AND
DELAWARE CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ....................... Custodian ......................
(Cust) (Minor)
under Uniform Gifts to Minors
Act ....................................................
(State)
UNIF TRF MIN ACT -- ........................... Custodian (until age ......)
(Cust)
................................ under Uniform Transfers
(Minor)
to Minors Act ..........................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
----------------------------------
X
-------------------------------------
X
-------------------------------------
THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
NOTICE: WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
Exhibit 10.12
SUBLEASE
1. PARTIES
-------
This Sublease is entered into as of the 6th day of January 1993, by and
between GREAT WESTERN REAL ESTATE, Sublessor, and STERI-OSS, INC., Sublessee, as
a Sublease under the Master Lease, hereinafter referred to as the Master Lease,
dated July 14, 1987, entered into by and between Koll Yorba Linda Associates and
Patrician Associates as Tenants in Common dba KBC Savi, as Lessor, and Great
Western Real Estate, as Lessee, hereinafter referred to as the Master Lease, a
copy of which is attached hereto marked Exhibit "A," and incorporated herein by
reference.
2. PROVISIONS CONSTITUTING SUBLEASE
--------------------------------
This Sublease shall be of no force and effect unless and until the
Landlord under the Master Lease shall grant its consent in writing thereto and
this Sublease is subject to all of the terms and conditions of the Master Lease
except as specifically exempted herein and Sublessee shall assume and perform
the obligations of Sublessor as Tenant in said Master Lease to the extent said
terms and conditions are applicable to the premises subleased pursuant to this
Sublease. Sublessor shall not commit or permit to be committed on the Subleased
premises any act or omission which shall violate any term or condition of the
Master Lease or interfere with Sublessee's quiet enjoyment of the premises. In
the event of the termination of Sublessor's interest as Tenant under the Master
Lease for any reason outside the reasonable control of Sublessor, then this
Sublease shall terminate coincidentally therewith without any liability of
Sublessor to Sublessee. All of the terms and conditions contained in the Master
Lease are incorporated herein except articles 3.1, 3.4, 4.1, 10, 11, 48.1, 53,
and Exhibits "B," "B-1" &"C," as terms and conditions of this Sublease (with
each reference therein to Landlord and Tenant to be deemed to refer to Sublessor
and Sublessee) and, along with all of the following paragraphs set out in this
Sublease, shall be the complete terms and conditions of this Sublease.
3. PREMISES
--------
Sublessor leases to Sublessee and Sublessee hires from Sublessor, but
not by way of assignment, that certain Premises consisting of approximately
34,972 rentable square feet, which is the building located at 22895 East Park
Drive in Yorba Linda, California (see Exhibit "B").
1
<PAGE> 2
4. SIGNAGE
-------
Notwithstanding the provisions of the Master Lease, and subject to
appropriate city ordinances, Sublessee may install exterior building signage.
Sublessee agrees to present the proposed sign package directly to the Lessor for
their approval. In addition, Sublessee shall have the exclusive right to use the
existing monument sign.
All costs associated with Sublessee's sign, including but not limited
to plans, permits, installation, maintenance, and removal shall be at the sole
cost and expense of Sublessee.
5. TENANT IMPROVEMENT
------------------
Sublessor, using its space planner and contractor, and at their sole
cost and expense, subject to review and approval by Sublessor, shall build-out
the Premises in accordance with the revised drawings dated December 21, 1992
drawn by John Farndale & Associates, and marked Exhibit 'C" & "C-1" and the
itemized cost construction budget prepared by DMK Construction which will be
attached as Exhibit "D" to this Sublease. Sublessor recognizes that minor
changes may be necessary to complete the working drawings and the final working
drawing will be attached to this Sublease as Exhibit "E."
All of such work shall be completed by Sublessor in accordance with
Exhibit "C," "C-1" and "E," in a good and workmanlike manner and to the
standards of tenant improvements in similar buildings, free of defects in
materials or workmanship. Subject only to delays caused by change orders
executed by Sublessee, the improvements shall be completed on or prior to March
1, 1993. In the event the tenant improvements are not substantially completed to
Sublessee's reasonable satisfaction on or prior to that date, rent under this
Sublease shall commence ten (10) days following substantially completion of
tenant improvements.
In the event that Sublessee requires suite development in excess of
work shown in the attached Exhibits 'C," "C-1," "D"& "E," then and in that
event, such cost shall be deemed a "change order' requiring extra cost and
provided Sublessee has requested such additional work in writing or signed a
"change order," payment for such extra cost incurred pursuant to such change
order shall be paid by Sublessee to Sublessor within five (5) business days from
date Sublessor provides the Sublessee an invoice for such additional cost. It is
also agreed that in the event such change order causes a delay in the
substantial completion of the Premises, such delay shall not delay the
commencement date nor shall it extend the rental abatement period as described
in this Addendum.
2
<PAGE> 3
6. TERM
----
a. The term of this Sublease shall be for a period commencing on May 1,
1993 and ending on December 31, 1997.
b. In the event that Sublessor shall permit Sublessee to occupy the
Premises prior to the commencement date of the term, such occupancy shall be
subject to all of the provisions of this Sublease and on a prorata rent basis.
Said early possession shall not advance the termination date of this Sublease.
7. RENT
----
a. Basic Rent - Sublessee shall pay to Sublessor as rent for the
Premises monthly installments in advance, on the first day of each month as
follows:
(A) Month 1 $14,400.00 NNN, per month
(B) Months 2 through 11 $7,500.00 NNN, per month
(C) Month 12 $14,400.00 NNN, per month
(D) Months 13 through 18 $15,000.00 NNN, per month
(E) Months 19 through 24 $17,486.00 NNN, per month
(F) Months 25 through 36 $18,185.44 NNN, per month
(G) Months 37 through 48 $18,884.88 NNN, per month
(H) Months 49 through 56 $19,584.32. NNN, per month
Rent for any period during the term hereof which is for less than one
(1) month shall be a prorata portion of the monthly installment. Rent shall be
payable without notice or demand and without any deduction, offset, or
abatement, in lawful money of the United States of America, to Sublessor at the
address stated heroin or to such other person or at such other places as
Sublessor may designate in writing.
b. Rent Adjustments (Operating Expenses/Taxes) - Sublessor shall be
responsible to Landlord for all additional rent assessed for operating the
property and any other charges property assessed by Landlord under the Master
Lease. Provided that such charges and assessments are not the result of defaults
by
3
<PAGE> 4
Sublessor, Sublessee agrees to reimburse Sublessor for all such assessments
immediately upon demand by Sublessor.
8. SECURITY DEPOSIT
----------------
Sublessee shall deposit with Sublessor upon execution hereof the sum of
Fifteen Thousand Dollars ($15,000.00) as a Security Deposit for Sublessees
faithful performance of Sublessees obligations hereunder. If Sublessee fails to
pay rent or other charges due hereunder or otherwise defaults with respect to
any provision of this Sublease, Sublessor may use, apply or retain all or any
portion of said deposit for the payment of any rent or other charge in default
for the payment of any other sum to which Sublessor may become obligated by
reason of Sublessees default, or to compensate Sublessor for any loss or damage
which Sublessor may suffer thereby. If Sublessor so uses or applies all or any
portion of said deposit, Sublessee shall within ten (10) days after written
demand therefor deposit cash with Sublessor in an amount sufficient to restore
said deposit. Failure to do so shall be breach of this Sublease, and Sublessor
may, at its option, terminate this Sublease. Sublessor shall not be required to
keep said deposit separate from its general accounts. Within ten (10) days after
the expiration of the term hereof, on condition that Sublessee has vacated the
premises, and has fully and faithfully performed every provision of this
Sublease to be performed by it, the Security Deposit or any balance thereof
shall be returned to Sublessee (or, at Sublessors option, to the last assignee,
if any, or Sublessees interest hereunder).
9. PARKING
-------
Sublessor hereby grants to Sublessee for its use all of the existing
parking spaces as provided in the Master Lease.
10. USE
---
The Premises shall be used for general and administrative office, light
manufacturing, sale and distribution of dental and related products, and any
other related legal uses.
11. DEFAULT
-------
In the event of default by Sublessee of the payment of rents or in the
performance of any other terms and conditions of this Sublease, Sublessor shall
have, in addition to whatever other rights and remedies it may have at law or in
equity, the same rights and remedies against Sublessee as the Lessor has against
Sublessor as Lessee under the Master Lease.
4
<PAGE> 5
If Sublessee should default in any of its obligations under this
Sublease, at any time during the Sublease Term, and as a result of such default
Sublessor elects to terminate this Sublease under the provisions of paragraph 20
of the Master Lease, Default, it is agreed that Sublessor, in addition to the
damages which Sublessor may recover from Sublessee in paragraph 20.2 of the
Master Lease, may also recover the sum of $100,124.72 from Sublessee.
12. ASSIGNMENT AND SUBLETTING
-------------------------
Neither Sublessee nor Sublessor shall further assign this Sublease or
any interest therein or further sublet any portion of the premises or any right
or privilege appurtenant thereto without the written consent of the Lessor and
Sublessor first had and obtained, which shall not be unreasonably withheld. In
the event such consent should be requested from Sublessor and Master Lessor,
each shall respond within two (2) weeks of receipt of such request. In the event
the Sublessor or Master Lessor does not respond within a thirty (30) day period,
such lack of response may be deemed an approval of the request.
13. HVAC & ROOF MAINTENANCE
-----------------------
Notwithstanding paragraph 12 of the Master Lease Sublessor shall remain
responsible for any costs associated with replacement of HVAC units and any cost
associated with the maintenance of the roof. During the term of the Sublease, if
it is determined that the roof or HVAC requires replacement rather than repair,
Sublessor and Sublessee shall share in the cost of the replacement on a pro-rata
basis based upon the useful life of the roof or HVAC unit compared to the
remaining term of the Sublease. In other words, if the new roof has a "life" of
ten (10) years and the remaining term is three (3) years, Sublessee shall be
responsible for thirty percent (30%) of the replacement cost. The criteria for
the replacement of the roof and HVAC system shall be determined by having three
(3) roofing/air conditioning contractors inspect the roof/HVAC system, with the
majority opinion prevailing, or in the event there is no majority opinion, the
average of the two (2) closest contractor's bids shall be the cost of
replacement. The cost of replacement shall also be determined by these
contractor's bids. Sublessor shall have the ability to select at least one (1)
roof/HVAC contractor for inspection purposes and the contractor to complete the
job. Sublessee agrees to reimburse Sublessor for all costs associated with this
paragraph immediately upon demand by Sublessor.
14. NOTICES
-------
Any notice required and permitted to be given hereunder must be in
writing and may be given by personal delivery or by mail, and if given by mail
shall be deemed sufficiently given if sent by registered or certified mail to
Sublessee at
5
<PAGE> 6
22895 East Park Drive, Yorba Linda, California, 92686 and to Sublessor at 9200
Oakdale Avenue, Fourth Floor, Chatsworth, California, 91311, ATTN: Lease
Administration. Either party may by written notice to the other specify a
different address for notice purposes except that Sublessor may in any event use
the premises as Sublessee's address for notice purposes.
15. REAL ESTATE BROKERS
-------------------
Sublessee represent and warrants to Sublessor that it has not had
dealings with any broker or finder in connection with this Sublease or the
Project other than Sublessee's broker, Collins Fuller Corporation, and that
Sublessee knows of no other person who is or may claim to be entitled to a
commission, finder's fee or other like payment in connection herewith and
Sublessee shall indemnify, defend by counsel approved by Sublessor and hold
Sublessor harmless from and against any and all claims, liabilities, losses,
costs, damages or expenses (including reasonable attorneys' fees and costs) that
Sublessor may incur should such representation and warranty be incorrect.
Sublessor agrees to indemnify and hold Sublessee harmless from any claims,
liabilities, costs, damages or expenses (including reasonable attorneys' fees
and costs that Sublessee may incur) arising out of or relating to any agreement
by 'Sublessor to pay a brokerage commission, finder's fee or like payment to any
broker or other person relating to the leasing of the Premises; provided,
however, that Sublessor shall not be obligated to Sublessee if any such
obligations arise in connection with any broker or other person whose identity
Sublessee has failed to disclose to Sublessor as required by this paragraph.
16. OBLIGATIONS OF SUBLESSOR
------------------------
Sublessor agrees to duly observe and perform all those obligations
imposed on the Lessee under the master Lease to the extent that such obligations
are not provided in this Sublease to be observed or performed by Sublessee.
Sublessee shall have the right at any time, at the expense of Sublessor, to take
any action required to be taken, but not timely taken, by Sublessor, which may
be necessary to prevent a default under the terms of the Master Lease. Further,
Sublessor agrees not to amend, modify or surrender the Master Lease without the
prior written consent of Sublessee, and any amendment, modification or surrender
made without such consent shall be null and void as to Sublessee. Sublessor
grants to Sublessee all rights and benefits with respect to the premises
described in the Master Lease that are granted to Sublessor under the terms of
the Master Lease. So long as Sublessee is not in default of any provision of
this Sublease, Sublessor shall be obligated to perform all its obligations under
the Master Lease, and during the term of this Sublease Sublessee shall have
quiet and undisturbed possession and enjoyment of the premises. Sublessor
further represents and warrants that the
6
<PAGE> 7
Master Lease is in full force and effect and that there are no defaults on
Sublessor's part under the Master Lease, nor have any events occurred
Address: GREAT WESTERN REAL ESTATE
Great Western Bank SUBLESSOR
ATTN: Lease Administration
9200 Oakdale Avenue, Fourth Floor
Chatsworth, CA 91311
(818) 775-6782
BY:
---------------------
H. Arthur West
Vice President
DATE:
Address: STERI-OSS, INC.
Steri-Oss, Inc. SUBLESSEE
22895 East Park Drive
Yorba Linda, CA 92686
BY:
---------------------
Ken A. Darienzo
President
DATE:
7
<PAGE> 8
FIRST AMENDMENT TO LEASE
That certain lease dated July 14, 1987 by and between Koll Yorba Linda
Associates and Patrician Associates, as Tenant in Common dba KBC Savi, Landlord,
and Great Western Real Estate, Tenant, for the premises located at 22895 East
Park Drive, Yorba Linda, CA 92686, is amended this 22nd day of December, 1992
solely as hereinafter described.
Effective the 6th day of January, 1993 the clauses below are substituted for
like numbered clauses in the Lease agreement.
Landlord and Tenant agree that Exhibit 'C" of the above referenced
lease dated July 14, 1987, referred to as 'Option to Renew" shall be
deleted in its entirety.
All other terms and conditions of said Lease shall remain in full force and
effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the
date first written above.
SUBLESSOR: SUBLESSEE:
Great Western Real Estate Steri-Oss Inc., A California Corp.
BY: BY:
-------------------------------- -------------------------------
H. Arthur West Ken A. Darienzo
Vice President President
Great Western Bank
DATE: DATE:
-------------------------------- -------------------------------
LANDLORD: Koll Yorba Linda Associates
A California General Partnership
By: Koll Company
A California Corporation
By:
-------------------------------
Bob Mulhern, Portfolio Manager
By: Patrician Assoc., A California
Corp.
By:
-------------------------------
By:
-------------------------------
8
<PAGE> 9
SECOND AMENDMENT TO LEASE
This Second Amendment to Lease Agreement is entered into as of this 22nd day of
December, 1992 by and between Great Western Real Estate ('Sublessor"), Steri-Oss
Inc., A California Corporation ('Sublessee") and Koll Yorba Linda Associates, A
California General Partnership ('Landlord").
Renewal Option:
- ---------------
Provided that Sublessee is not in default under the Sublease or the Master
Lease, Sublessee shall have the option to contract under a new Lease for one
period of five (5) years (the "Renewal Term") upon the following terms and
conditions.
1) The following are conditions precedent to the Renewal Option:
a. That Sublessee give Landlord six (6) months prior written notice of
its intention to exercise this option (the "Renewal Notice"). If
Sublessee fails to timely give the Renewal Notice, Sublessee shall have
no further right to extend the term hereunder.
b. That Sublessee provide three (3) years of audited annual financial
statements, three (3) years of tax returns, and its most recent interim
financial statements to Landlord and that Landlord approve same, such
approval to be within the sole discretion of Landlord. Such financial
statements shall be provided at the time of the Renewal Notice.
c. That Landlord and Sublessee enter into a direct Lease Agreement (the
term of the Master Lease having expired)in substantially the form as
the master Lease within sixty (60) days of the Renewal Notice.
2) The renewal is subject to the following terms and conditions:
a. No rent shall be due for the first three (3) months of the Renewal
Term. The rental rate for the Renewal Term shall be an effective rate
of 95% of the then current prevailing market rental rate plus triple
net costs. The rental rate shall be increased by the Consumer Price
Index rate annually, provided, however, that no such annual increase
shall exceed 4.5%.
b. Landlord shall provide a tenant improvement allowance for building
standard paint and building standard carpet for the premises. With the
exception of the paint and carpet, Sublessee agrees to accept the
premises as is at the commencement of the Renewal Term.
9
<PAGE> 10
c. Landlord agrees to pay Collins Fuller a leasing brokerage commission
at the commencement of the Renewal Term in the amount of six percent
(6%) for the first twelve (12) months of the Renewal Term, five percent
(5%) for the second twelve (12) months of the Renewal Term, four
percent (4%) for the third twelve (12) months of the Renewal Term,
three percent (3%) for the fourth twelve (12) months of the Renewal
Term and two percent (2%) for the fifth twelve (12) months of the
Renewal Term. Any other leasing brokerage commission shall be the
responsibility of Sublessee.
3) By its signature hereunder, Sublessor consents to the terms hereof.
SUBLESSOR: SUBLESSEE:
Great Western Real Estate Steri-Oss Inc., A California Corp.
BY: BY:
----------------------------------- -------------------------------
H. Arthur West Ken A. Darienzo
Vice President President
Great Western Bank
DATE: DATE:
----------------------------------- -------------------------------
LANDLORD:
Koll Yorba Linda Associates
A California General Partnership
By: Koll Company
A California Corporation, General Partner
By:
-----------------------------------------
Bob Mulhern, Portfolio Manager
By: Patrician Assoc.,
A California Corporation, General Partner
By:
-----------------------------------------
By:
-----------------------------------------
10
<PAGE> 11
THIRD AMENDMENT TO LEASE
This Third Amendment to Lease Agreement is entered into as of this 7th Day of
January, 1993 by and between Great Western Real Estate (SubLessor) Steri-Oss
Inc., A California Corporation ("Sublessee"; and Koll Yorba Linda Associates, A
California General Partnership ( "Landlord" ).
Default by Great Western Real Estate
1. In the Event of Financial Default by Great Western Real Estate the
Sublessee will have the option to enter into a direct lease agreement
with the landlord. In substantially the form as the master lease and
amendments then in effect between the sublessor and landlord.
2. The rental rate shall be 95% of the then current prevailing market
rental rate plus triple net cost. The rental rate shall be increased by
the consumer price index annually, provided, however, that no such
annual increase shall exceed
3. By its signature hereunder, Sublessor and Landlord consents to the
terms hereof.
SUBLESSOR: SUBLESSEE:
GREAT WESTERN REAL ESTATE STERI-OSS INC.,
A CALIFORNIA CORPORATION
BY: BY:
----------------------------------- --------------------------------
H. Arthur West Ken A. Darienzo
Vice President President
Great Western Bank
LANDLORD:
KOLL YORBA LINDA ASSOCIATES
A California General Partnership
By: Koll Company
A California Corporation, General Partner
By:
--------------------------------------
Bob Mulhern, Portfolio Manager
11
<PAGE> 12
By: Patrician Associates, Inc.
A California Corporation, General Partner
By:
--------------------------------------
By:
--------------------------------------
12
<PAGE> 1
EXHIBIT 10.16
September 24, 1997
Mr. Bruce D. Nye
Chief Financial Officer
S-O Operating Corp.
22895 Eastpark Drive
Yorba Linda, CA 92887
Re: COMMITMENT LETTER
-----------------
Dear Bruce:
We are pleased to advise you that Union Bank of California, N.A.
("Bank") is willing to make available a credit facility (the "Facility") to S-O
Operating Corp., formerly known as Steri-Oss, Inc. ("Steri-Oss" or "Company") in
the aggregate amount of Thirty-Five Million Dollars ($35,000,000) subject to the
terms and conditions set forth in the Summary of Indicative Terms and Conditions
dated September 24, 1997 ("Summary of Terms"), a copy of which is attached
hereto and incorporated herein by reference, and to those contained in such
other loan documents as Bank may require in order to evidence the Facility.
This commitment letter ("Letter") is not meant to be, nor should it be
construed as, an attempt to define all of the terms and conditions of the
Facility. Rather, it is intended only to outline certain major terms around
which the final terms and documentation for the Facility are to be structured.
Further negotiations adding to or modifying the general scope of these major
terms shall not be precluded by the issuance of this Letter and its acceptance
by Company. Bank's commitment to make the Facility available to Company is
subject to the negotiation, execution and delivery of a definitive credit
agreement ("Credit Agreement"), security agreements, and other related
instruments, documents and agreements (together with the Credit Agreement, the
"Credit Documents"), in each case satisfactory to Bank and its counsel, and
reflecting each of the terms and conditions set forth herein and in the Summary
of Terms. The Credit Documents shall also contain representations and warranties
from Company's authorized agents and such other covenants, terms, conditions,
indemnities, representations and warranties, and events of default as may
reasonably be required by Bank.
By accepting this Letter, Company represents and warrants that the
information and data heretofore, now or hereafter provided or made available by
Company or its agents in connection with the transaction outlined hereunder are
complete, timely, accurate and correct
<PAGE> 2
Mr. Bruce D. Nye
September 24, 1997
Page 2
in all material respects. Company agrees to notify Bank promptly in writing
should Company determine or discover that any such information or data is
incomplete, inaccurate or misleading. If, in the course of Bank's review of such
information or data or otherwise, facts are discovered which Bank believes will
or may have a material adverse impact on the financial condition, operations or
prospects of Company, Bank may, in its sole discretion, suggest alternative
financing arrangements or may decline to provide financing to Company.
Subject to satisfaction of the conditions set forth in the Summary of
Terms, Bank shall use its reasonable efforts to cause the financing contemplated
by this Letter to close on or before March 30, 1998 (the "Closing Date").
Notwithstanding the foregoing sentence, in the event that: (i) an event occurs
or a condition develops which Bank believes will or may have a material adverse
impact on the financial condition, operations or prospects of Company; (ii)
prior to the Closing Date, the Credit Documents have not been executed by
Company. Bank and any other person or entity a party thereto, or all of the
conditions set forth therein have not been compiled with to the satisfaction of
Bank and its counsel and the initial funding under the Credit Agreement has not
been made; (iii) any change in any law or regulation affecting Bank's ability to
enter into the Facility shall impose upon Bank any material obligation, fee,
liability, loss, cost, expense or damage which is not contemplated by this
Letter; or (iv) any financial or other information or data submitted by Company
or any representations or warranties of Company are determined to be materially
incomplete, inaccurate or misleading; then Bank may, in its sole discretion,
terminate all of its obligations hereunder. Within ten (10) days of such
termination, Company shall pay to Bank any and all costs and expenses of Bank in
connection herewith as provided below.
The reasonable costs and expenses of Bank including, without
limitation, the reasonable allocated fees and expenses of its counsel (which
counsel may include any local or foreign outside counsel, or in-house counsel),
incident to Bank's due diligence incurred prior to the Closing Date, or arising
in connection with the structuring, negotiation and documentation of the
transactions contemplated by this Letter and the Credit Documents, shall be for
Company's account and shall be paid or reimbursed by Company, whether or not the
Closing Date occurs or the Facility is funded.
Company hereby agrees that the contents of this Letter are confidential
and are provided to Company solely for the purposes described herein. This
Letter may not be relied upon by, and Company shall not deliver, display,
duplicate or otherwise disclose the contents thereof to any third party (except
to the extent required by law) without the prior written consent of Bank. This
commitment is not assignable by Company to any person or entity, is solely for
<PAGE> 3
Mr. Bruce D. Nye
September 24, 1997
Page 3
the benefit of Company, and may not be relied upon by any other person or
entity, except with the written consent of the Bank.
The terms of this Letter may not be waived, amended, modified or
altered except by a writing signed by the parties hereto.
By execution and return of this letter Company agrees as follows:
Company will pay all out-of-pocket fees and expenses which may be
incurred by the Bank and their respective affiliates in connection with this
financing transaction, whether or not the financing transaction contemplated by
this letter is provided, or other financing is arranged.
Company will (i) indemnify and hold harmless the Bank, any lender or
prospective lender and their respective affiliates, officers, directors,
employees and agents (each an "Indemnified Person") against all claims, damages,
liabilities and expenses which may be incurred by or asserted against any of
them in connection with the statements contained in this letter or the
transaction contemplated by this letter, whether or not the financings
contemplated by this letter are provided; (ii) reimburse each Indemnified
Person, upon their demand, for any reasonable legal or other expenses incurred
in connection with investigating, defending or participating in any such loss,
claim, damage, liability or action or other proceeding, whether commenced or
threatened (whether or not any such person is a party to any action or
proceeding out of which any such expenses arise), or in any way relating to the
extension of the financing contemplated by this letter or from any use or
intended use of any of the proceeds thereof except, in the case of any
indemnified Person, to the extent any such loss, claim, damage or liability is
determined by a final judgment of a court of competent jurisdiction to be
attributable solely to the gross negligence or willful misconduct of such
Indemnified Person; and (iii) provide the Bank and its respective affiliates
with all information required for their due diligence analysis, regardless of
when, by whom or for whom prepaid.
Your obligation to indemnify such Indemnified Persons and pay such
expenses shall remain effective regardless of whether a definitive financing
agreement is executed. None of the Bank or any other indemnified Person shall be
responsible or liable to any other party hereto or any person for consequential,
indirect, punitive or exemplary damages which may be alleged as a result of this
letter or the transactions contemplated hereby. The provisions of this paragraph
shall be in addition to any rights that the Bank or any other Indemnified Person
may have at common law or otherwise, including, but not limited to, and right of
contribution.
<PAGE> 4
Mr. Bruce D. Nye
September 24, 1997
Page 4
By its acceptance of this Letter, the Company agrees that this Letter
supersedes any and all discussions, negotiations, understandings or agreements,
written or oral, express or implied, between us.
THIS LETTER MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY ACTUAL OR
ALLEGED PRIOR, CONTEMPORANEOUS OR SUBSEQUENT UNDERSTANDINGS OR AGREEMENTS OF THE
PARTIES, WRITTEN OR ORAL, EXPRESS OR IMPLIED, OTHER THAN A WRITING WHICH
EXPRESSLY AMENDS OR SUPERSEDES THIS LETTER. ALL OTHER WRITINGS, INCLUDING,
WITHOUT LIMITATION, THE LETTER OF INTEREST, ISSUED BY THE BANK TO COMPANY PRIOR
TO THE DATE HEREOF, ARE NULL AND VOID AND OF NO EFFECT. THERE ARE NO UNWRITTEN
ORAL UNDERSTANDINGS OR AGREEMENTS BETWEEN THE PARTIES.
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF CALIFORNIA WITHOUT REFERENCE TO PRINCIPLES OF
CONFLICTS OF LAW.
This Letter may be executed in counterparts, each of which shall be
deemed an original and all of which counterparts shall constitute one and the
same document.
BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL
TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND
EXPERT PERSON AND THE PARTIES WISH APPLICABLE ARBITRATION RULES TO APPLY, THE
PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE OR REFEREE APPLYING
SUCH APPLICABLE RULES. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE
BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO ENFORCE OR
DEFEND ANY RIGHTS OR REMEDIES UNDER THIS LETTER OR ANY OF THE DEFINITIVE
DOCUMENTATION AND CONSENT TO ARBITRATION OF ANY SUCH DISPUTES.
If the terms of this Letter are acceptable to you, we ask that you
return to us an executed copy of this Letter. The Bank's commitment pursuant to
this Letter shall expire at 5:00 p.m. on September 30, 1997, unless this Letter
is accepted by you and delivered to us, prior to such time and date. Upon
execution of this Letter, the Company agrees to pay to the Bank a commitment fee
in the amount of $50,000, as set forth in the Summary of Terms.
<PAGE> 5
Mr. Bruce D. Nye
September 24, 1997
Page 5
Notwithstanding the expiration or termination of the Bank commitment with
respect to providing financing hereunder, the provisions set forth herein shall
survive such expiration or termination.
Very truly yours,
UNION BANK OF CALIFORNIA, N.A.
By: /s/ SEAN M. SPRING
--------------------------------------
Name: Sean M. Spring
Title: Assistant Vice President
THE AFORESAID IS ACCEPTED, ACKNOWLEDGED AND AGREED TO ON THIS _____ DAY OF
SEPTEMBER, 1997.
S-O OPERATING CORP.
By:
-------------------------------------
Name:
---------------------------
Title:
---------------------------
<PAGE> 6
SUMMARY OF INDICATIVE TERMS AND CONDITIONS
$35 MILLION SENIOR SECURED CREDIT FACILITIES
SEPTEMBER 24, 1997
BORROWER: S-O Operating Corp., formerly Steri-Oss, Inc. ("Steri-Oss"
or the "Company").
AGENT: Union Bank of California, N.A. ("Union Bank" or "Bank").
ISSUING BANK: Union Bank.
TYPE AND AMOUNT: The facilities shall consist of a Revolving
Credit Facility and an Acquisition Facility (collectively,
the "Total Credit Facility").
Revolving Credit Facility. The Revolving Credit Facility
will have a final maturity date of March 2002, and be in an
initial amount of up to $15 million under which working
capital loans may be made and under which letters of credit
may be issued up to a Sublimit to be agreed upon; provided
that no letter of credit may extend beyond the final
maturity date of the Revolving Credit Facility. Steri-Oss
would have the option to increase the Revolving Credit
Facility in a $5 million increment to $20 million,
provided:
(1) No Default or Event of Default (as defined in the
definitive documentation) shall have occurred and be
continuing.
(2) Borrower pays to Agent the Revolving Credit Facility
Line Increase Fee (as hereinafter defined).
Acquisition Facility. The Acquisition Facility will have a
final maturity date of March 2002, and be in an initial
amount of up to $15 million. Draws under the Acquisition
Facility would be permitted until March 31, 2000. The
initial minimum draw will be in the amount of $1 million
and increments of $100,000 will be permitted thereunder.
Until March 31, 2000, all loan balances under the
Acquisition Facility will be charged interest only,
thereafter, the amount outstanding will amortize quarterly
as follows:
<TABLE>
<CAPTION>
Payment amount as % of march 31, 2000
Payment Date Acquisition Facility Loan Balance
------------ ---------------------------------
<S> <C>
July 1, 2000 7%
October 1, 2000 7%
January 1, 2001 7%
April 1, 2001 7%
July 1, 2001 10%
October 1, 2001 10%
January 1, 2002 10%
March 31, 2002 42%
</TABLE>
<PAGE> 7
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 2
If the Revolving Credit Facility were terminated, the
Acquisition Facility would immediately be due and payable.
Advances against the Acquisition Facility must meet the
following tests and conditions:
i) Target must have positive EBITDA for the trailing twelve
month period.
ii) The purchase price of any acquisition is not to exceed
$5 million. A maximum of $5 million in the aggregate of the
Acquisition Facility may be used for international
acquisitions.
iii) Target must be in the dental care industry, or be a
medical device company, or be in a closely related line of
business.
iv) Both before and after giving effect to any acquisition,
Steri-Oss must be in compliance with all financial
covenants of the Total Credit Facility on a pro-forma
basis.
v) There shall not exist any material present or future
contingent liabilities.
vi) Steri-Oss is the surviving entity.
vii) The Agent shall have received all applicable legal
documentation.
USE OF PROCEEDS: The initial proceeds of up to $20 million
under the Revolving Credit Facility, together with not less
than $60 million in gross proceeds from an initial public
offering with respect to the Parent ("IPO") shall be used
as follows:
1) with respect to the Parent, to (a) redeem all
outstanding shares of the Class B Preferred Stock; (b) pay
all accrued dividends on Class A Preferred Stock, Class B
Preferred Stock and Class C Preferred Stock; (c) redeem the
balance of Class A Preferred Stock and Class C Preferred
Stock not converting into Common Stock in the Preferred
Stock Conversion as contemplated in the Form S-1 dated
August 26, 1997, upon consummation of the IPO, provided
that no more than $20 million of cash shall be utilized to
redeem the principal amount of the Class A Preferred Stock,
Class B Preferred Stock, and Class C Preferred Stock, in
the aggregate.
<PAGE> 8
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 3
2) to repay the Subordinated Notes, and the accrued
interest and prepayment penalties in connection with the
early retirement of the Subordinated Notes.
3) to pay for fees and expenses that are specifically
associated with the IPO, prepayment of subordinated debt,
and other amounts that are associated with obtaining the
total Credit Facility.
Upon the closing of the Total Credit Facility, the
Revolving Credit Facility would be available to provide for
the working capital requirements and general corporate
purposes of the Company and its subsidiaries and, subject
to a sublimit to be agreed upon, to issue standby letters
of credit.
GUARANTORS: Borrowings are to be guaranteed by Steri-Oss, Inc.
(formerly S-O Acquisition Corp.) ("Parent") and all of the
Parent's and Company's material present and future direct
and indirect subsidiaries.
SECURITY: All extensions of credit to Steri-Oss, and any guaranties
related thereto, will be cross-defaulted,
cross-collateralized, and secured by first priority
perfected security interests in all of the existing and
after-acquired personal and real property of Parent,
Steri-Oss and their subsidiaries, including a pledge of the
stock of Steri-Oss and its subsidiaries, as well as a
pledge of the stock of any future subsidiaries of the
Parent, and all intangibles of parent, Steri-Oss and their
subsidiaries, and any intercompany debt obligations.
To grant liens securing the Total Credit Facility,
Steri-Oss, parent and their subsidiaries shall execute and
deliver to the Agent all pledge agreements, security
agreements, financing statements, deeds of trust, mortgages
and other documents and instruments as are necessary to
grant a first priority perfected security interest in and
lien upon all such property.
INTEREST RATES: All amounts outstanding under the Revolving Credit
Facility and Acquisition Facility shall bear interest, at
Steri-Oss' option, as follows (subject to the second
succeeding paragraph):
A. at the Reference Rate plus the Reference Rate Margin per
annum set forth in the Pricing Grid below; or
B. at the Adjusted London Interbank Offered Rate (LIBOR)
plus the LIBOR Margin per annum set forth in the Pricing
Grid below.
<PAGE> 9
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 4
Notwithstanding the foregoing, during the period from the
Closing Date to the date of delivery of the audited
financial statements of Steri-Oss for the fiscal year
ending December 31, 1997, the Reference Rate Margin shall
be 0.00% and the LIBOR Margin and the Letter of Credit Fees
shall be 1.25%. From and after the delivery of such
financial statements, pricing shall be determined in
accordance with the Pricing Grid below and adjusted on the
basis of the most recent quarterly financial statements
received from time to time by the Agent.
As used herein,
The Union Bank of California, N.A. Reference Rate is
defined as the variable rate of interest, per annum, most
recently announced by Union Bank of California, N.A. at its
Corporate Headquarters as the "Union Bank of California,
N.A. Reference Rate"; with the understanding that the
"Union Bank of California, N.A. Reference Rate" is one of
the Bank's index rates and merely serves as a basis upon
which effective rates of interest are calculated for loans
making reference thereto and may not be the lowest or best
rate at which the Bank calculates interest or extends
credit.
The Adjusted London Interbank Offered Rate (LIBOR) is
defined as the rate determined by Union Bank of California,
N.A. to be the rate per annum (rounded upward, if
necessary, to the nearest 1/100 of 1%) at which dollar
deposits, in immediately available funds and in lawful
money of the United States, would be offered to Union Bank
of California, N.A., outside of the United States, for a
term corresponding to the interest period applicable to
Union Bank of California, N.A.'s advance to Borrower, for
an amount of principal covered by the Borrower's interest
rate election, and adjusted to reflect Union Bank of
California, N.A.'s costs. LIBOR draws must be in minimum
increments of $500,000, with a maturity of one, two, three,
or six months. No more than four LIBOR tranches may be
outstanding at any time.
<PAGE> 10
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 5
REVOLVER CREDIT FACILITY AND ACQUISITION FACILITY PRICING GRID
<TABLE>
<CAPTION>
============================================================================================================================
Pricing Level I: Pricing Level II: Pricing Level III: Pricing Level IV:
---------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Ratio of Funded Debt Equal to or < > 1.00 and = > 1.50 and = Greater than
< <
to DBITDA(1) 1.00 1.50 2.00 2.00
- ----------------------------------------------------------------------------------------------------------------------------
Unused Fee: 0.250% 0.250% 0.375% 0.500%
- ----------------------------------------------------------------------------------------------------------------------------
LIBOR Margin and
Letter of Credit Fees: 1.25 1.50% 1.75% 2.00%
- ----------------------------------------------------------------------------------------------------------------------------
Reference Rate Margin: 0.00% 0.00% 0.25% 0.50%
============================================================================================================================
</TABLE>
(1) Based on a quarterly measurement of Funded Debt, at that point in time, to
EBITDA, as calculated on a rolling four quarter basis.
INTEREST PAYMENTS: Monthly for Reference Rate Loans; on the last day
of selected interest periods (which shall be 1, 2, 3 and 6
months) for LIBOR Loans (and at the end of every three
months, in the case of interest periods of longer than
three months); and in each case upon prepayment.
LETTER OF CREDIT
FEE: The standby letter of credit fee shall be
the applicable Letter of Credit Fee set forth in the
Pricing Grid above, and an additional 0.25% per annum to be
retained by the Issuing Bank issuing any letter of credit
calculated on the face amount of such letter of credit. In
addition, the issuing Bank shall receive usual and
customary letter of credit issuance, amendment and
administration fees.
UNUSED FEE: The Unused Fee shall be the applicable Unused Fee set
forth in the Pricing Grid above times the daily average
unused portion of the Revolving Credit Facility and the
Acquisition Facility, and shall accrue from the Closing
Date. The Unused Fee shall be payable quarterly in arrears
on the unused portion of the Revolving Credit Facility and
the Acquisition Facility and computed on the basis of a 360
day year.
COMMITMENT LETTER
DELIVERY FEE: A fully earned and non-refundable
Commitment Letter Delivery Fee of $50,000 would be due and
payable upon Borrower's acceptance of a commitment letter,
should one be issued.
<PAGE> 11
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 6
CLOSING FEE: A Closing Fee of $162,500, payable on the closing
Date, against which would be credited the Commitment Letter
Delivery Fee. Additionally, should Steri-Oss utilize the
option to increase the Revolving Credit Facility, in a
one-time $5 million increment, to an aggregate Revolving
Credit Facility amount of $20 million, Steri-Oss would pay
to Agent a fee of $12,500 (the "Revolving Credit Facility
Line Increase Fee").
DRAWDOWNS: Drawdowns are at the Borrower's option with same day notice
(by 10:00 a.m. Los Angeles time) for Reference Rate Loans
and three business days' advance notice for LIBOR Loans (by
10:00 a.m. Los Angeles time the day of the LIBOR request).
VOLUNTARY
PREPAYMENTS: Reference Rate Loans may be repaid at any
time. LIBOR Loans may be prepaid at any time with at least
two business days' advance notice, subject to compensating
the Agent for any funding losses, breakage costs, and
related expenses. Prepayments are subject to minimum
amounts of $1 million and integral multiples of $100,000
thereof.
REDUCTION OF THE
REVOLVING CREDIT
FACILITY: The Borrower may irrevocably reduce the Revolving
Credit Facility in amounts of at least $1 million at
any time on thirty business days' notice; provided,
however, that the Revolving Credit Facility will not
be reduced below $10 million.
REDUCTION OF THE
ACQUISITION
FACILITY: The Borrower may irrevocably reduce the Acquisition
Facility in amounts of at least $1 million at any time on
thirty business days' notice; provided, however, that the
Acquisition Facility will not be reduced below $5 million.
Borrowing and re-borrowing of amounts under the Acquisition
Facility will be allowed as follows:
(a) Amounts under the Acquisition Facility may be
borrowed and reborrowed until March 31, 2000;
(b) Provided no Default or Event of Default (as defined
in the definitive documentation) shall have occurred and be
continuing, on March 31, 2000 the Acquisition Facility will
convert to an amortizing
<PAGE> 12
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 7
term debt facility as provided herein. After the conversion
of the Acquisition Facility to an amortizing term loan, no
further borrowings under the Acquisition Facility will be
permitted.
(c) Any principal prepayments of the Acquisition Facility
after it has been converted will be applied to principal
due in the inverse order of maturity.
MANDATORY
PREPAYMENTS: The Borrower shall make the following mandatory prepayments
(subject to certain exceptions and basket amounts to be
negotiated in the definitive Financing Documentation).
Prior to March 31, 2000, Mandatory Prepayments shall be
applied to reduce outstanding loan balances, if any, on the
Revolving Credit Facility. Subsequent to march 31, 2000,
mandatory Prepayments shall be applied first to reduce
amounts outstanding under the Acquisition Facility in the
inverse order of maturity, until reduced to zero, and
thereafter to reduce amounts, if any, outstanding under the
Revolving Credit Facility:
1. Asset Sales - prepayments in an amount equal to 100% of
the net after-tax cash proceeds from the sale or other
disposition of any property or assets (other than inventory
sold in the ordinary course of business) of the Borrower or
its subsidiaries (including casualty insurance proceeds),
payable upon receipt;
2. Debt Financing - prepayments in an amount equal to 100%
of the net cash proceeds received from debt financing of
the Borrower or its subsidiaries, payable upon receipt; and
3. Equity Offerings - prepayments in an amount equal to 50%
of the net cash proceeds received from the issuance of
equity securities of Parent or the Borrower or its
subsidiaries, payable upon receipt.
REPRESENTATIONS
AND WARRANTIES: Customary and appropriate as to Parent, the Borrower and
its subsidiaries, including without limitation, due
organization and authorization, no conflict, financial
condition, no material adverse changes, no contingent
liabilities, title to properties, books and records, liens,
litigation, subsidiaries, payment of taxes, no material
adverse agreements,
<PAGE> 13
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 8
compliance with laws, environmental liabilities, pension
and welfare plans, investment company act and public
utility holding company act, no acquisition of margin
stock, solvency, insurance, labor matters, intellectual
property, and full disclosure.
AFFIRMATIVE
COVENANTS: Usual and customary for a credit agreement of this type as
to Parent, the borrower and its subsidiaries, including but
not limited to the following:
o Financial information.
o Certified balance sheet, dated as of the Closing Date
and after giving effect to the IPO and the financing
contemplated herein, to be delivered within 30 days of
the Closing Date.
o Notice of default, litigation, environmental violation,
disposition of assets, etc.
o Reports to SEC, shareholders and holders of debt.
o Conduct of business; maintenance of existence.
o Maintenance of property; insurance.
o Compliance with laws, including ERISA and environmental
regulations.
o Payment of taxes and obligations.
o Books and records.
o Guaranty and collateral obligations.
NEGATIVE
COVENANTS: Usual and customary for a credit agreement of
this type, as to the Parent, the Borrower and its
subsidiaries, including but not limited to the following:
o Liens.
o Limitations on indebtedness.
o Consolidation, Merger, etc.
o Asset Dispositions.
o Cash Dividends.
o Investments.
o Rental Obligations.
o Other Agreements.
o Business Activities.
o Change of Location or Name.
o Capital expenditure limitations.
<PAGE> 14
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 9
o Transactions with affiliates.
o Employee benefit plans.
o Environmental compliance.
FINANCIAL
REPORTING: o Audit Report. Within ninety (90) days after the end of
each fiscal year deliver: the consolidated
and consolidating audited balance sheet of Borrower and
its subsidiaries as at the end of such fiscal year and
the audited related statements of earnings,
stockholders=equity and cash flow; these audited
financial statements would be prepared by a national
accounting firm acceptable to Agent.
o Quarterly Reports. As soon as available, but in any
event within forty-five (45) days
after the end of each fiscal quarter of the Borrower,
deliver copies of the unaudited consolidated and
consolidating balance sheet as at the end of such fiscal
quarter and the related unaudited statements of
earnings, stockholders' equity and cash flow for such
fiscal quarter and the portion of the fiscal year
through such fiscal quarter, in each case setting forth
in comparative form the figures for the corresponding
periods of the previous fiscal year, prepared in
reasonable detail and in accordance with GAAP (subject
to normal year-end audit adjustments and absence of
footnotes).
o Compliance Certificate. Contemporaneously with the
furnishing of a copy of the Audit Report and the
Quarterly Reports, deliver a duly completed certificate
("Compliance Certificate") signed by the chief financial
officer or other authorized officer of the Borrower.
o Business Plan. As soon as available, but in any event,
within 30 days prior to the beginning of each fiscal
year of the Borrower, deliver a copy of the plan and
forecast (including a projected closing consolidated and
consolidating balance sheet, income statement and funds
flow statement) of the Borrower and its subsidiaries for
such fiscal year.
o Reports to SEC and to Stockholders. Promptly upon the
filing or making thereof, deliver to Agent copies of
each filing and report
<PAGE> 15
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 10
made by the Parent, the borrower or any of its
subsidiaries with or to any securities exchange or the
Securities and Exchange Commission and of each
communication from the borrower or to stockholders
generally.
FINANCIAL
COVENANTS: (Levels to be agreed upon)
I. Maximum Funded Debt to Twelve month trailing EBITDA,
measured quarterly.
II. Minimum Fixed Charge Coverage Ratio, measured
quarterly based on Twelve month trailing EBITDA.
III. Minimum Twelve month trailing EBITDA.
EVENTS OF DEFAULT: Customary and appropriate, including without
limitation, failure to make payments of principal, interest
and fees when due, defaults under other agreements or
instruments of indebtedness, noncompliance with covenants,
breaches of representations and warranties,
bankruptcy/insolvency, judgments in excess of specified
amounts, pension plan defaults, non- compliance with ERISA,
impairment of security interests in collateral, invalidity
of guarantees and "changes of control" (to be defined in a
mutually agreed upon manner), and subject to threshold
amounts and grace periods to be negotiated.
CERTAIN CONDITIONS
PRECEDENT TO INITIAL
FUNDING: Customary and appropriate conditions precedent to the
Closing of the Total Credit Facility will include, without
limitation, the following:
o Satisfactory evidence of the consummation of an initial
public offering of the Parent generating gross proceeds
in an amount not less than $60 million.
o Satisfactory Documentation. The definitive financing
documentation evidencing the facilities shall be
prepared by counsel to the Agent and shall be in form
and substance satisfactory to the Agent.
o Appropriately completed: (a) revolving line of credit
note, and (b) acquisition line note.
<PAGE> 16
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 11
o An executed security agreement.
o A completed officer's certificate of the Borrower and
its subsidiaries.
o Evidence of appropriate insurance coverage as required
in the definitive documentation.
o Borrower shall have paid to the Agent the fees and
expenses provided for herein.
o Evidence of each filing, registration or recordation
(and payment of any necessary fee, tax or expense
relating thereto) with respect to each document
(including, without limitation, any UCC financing
statement) required by the related documents or under
law or reasonably requested by the Agent to be filed,
registered or recorded in order to create, in favor of
the Agent, a perfected first lien on the collateral
(subject to permitted liens).
o No Material Adverse Change. Since the time period in
which the financial statements are dated as required
hereunder, there shall have occurred no material adverse
change in the condition (financial or other), business,
assets, liabilities, properties, results of operations
or prospects of the Company or its subsidiaries. The
Agent shall have been promptly notified of any
conditions or events not previously disclosed to the
Agent and of any new information or additional
developments concerning conditions or events previously
disclosed to the Agent which may have a Material Adverse
Effect.
o Financial Statements. The Agent shall have received: (i)
the unaudited consolidated and consolidating financial
statements of the Company and its subsidiaries for the
most recent quarter and year- to-date period ending
prior to the Closing Date, and (ii) such other financial
statements and information as may be requested by the
Agent.
o After giving effect to the IPO, there will be no other
Funded Debt at closing except for debt secured by
permitted liens or permitted lease obligations (as
defined in the definitive documentation).
o Expenses. All accrued and invoiced fees and expenses of
the Agent, including reasonable legal fees (including
allocated cost of internal and outside counsel) and
related out-of-pocket expenses, shall have been paid.
o Such other information and documents as may reasonably
be required by the Agent and the Agent's counsel.
<PAGE> 17
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 12
BORROWINGS: The conditions to all borrowings will include requirements
relating to prior written notice of borrowing, the accuracy
of representations and warranties, and the absence of any
default or potential event of default, and will otherwise
be customary and appropriate for financings of this type.
ASSIGNMENTS AND
PARTICIPATIONS: The Agent may assign all or, in an amount of not less than
$5 million, any part of the Total Credit Facility to
affiliates or one or more banks or other entities that are
eligible assignees (to be described in the Financing
Documentation) to which the Borrower consents (such consent
not to be unreasonably withheld or delayed), and upon such
assignment, such affiliate, bank or entity shall become a
lender for all purposes of the definitive Financing
Documentation; provided that assignments made to affiliates
and other lenders shall not be subject to the $5 million
minimum assignment requirement. Any new lenders, if any,
will have the right to sell participations, subject to
customary limitations on voting rights and other terms to
be negotiated, in their share of the Total Credit Facility.
REQUIRED LENDERS: Except for certain fundamental matters, to be
determined, lenders holding in the aggregate more than
66.67% of the outstandings under the Total Credit Facility,
or, if there are no outstandings, more than 66.67% of the
commitments under the Total Credit Facility.
RESERVE REQUIREMENTS
& INDEMNITIES: The Financing Documentation will contain
customary provisions for indemnification of Bank entities,
lenders and their respective directors, officers,
employees, agents, attorneys and officers, increased costs
of capital resulting from reserve requirements or
otherwise, other increased costs (including LIBOR breakage
costs), capital adequacy and similar provisions.
GOVERNING LAW
AND JURISDICTION: California.
CLOSING DATE: Within 30 days of an IPO, but in no instance later than
March 31, 1998.
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF
PRO FORMA NET LOSS PER SHARE
Weighted average common shares outstanding
<TABLE>
<S> <C> <C> <C>
Common shares issued................................ 50,000
Warrants issued within one year of filing(1)........ 4,750,000
Options issued within one year of filing............ [a] 733,344
Weighted average exercise price per share......... $ 0.58
--------
Proceeds.......................................... 425,340
Mid range of estimated Offering price per share... $ 15.00
--------
Common shares repurchased......................... [b] 28,356
--------
Common equivalent shares.......................... [a-b] 704,988 704,988
--------
Conversion of Class A and Class C Preferred Stock to
common shares(2).................................. 1,433,547
---------
Total common and common equivalent shares........... 6,938,535
=========
</TABLE>
For the period November 16, 1996 through December 31, 1996 (in thousands,
except per share data)
<TABLE>
<S> <C>
Net loss as reported....................................................... $ (613)
Add - interest on converted preferred stock................................ 268
-------
Pro forma net loss......................................................... (345)
=======
Pro forma net loss per share............................................... $ (0.05)
=======
</TABLE>
For the six months ended June 30, 1997 (in thousands, except per share
data)
<TABLE>
<S> <C>
Net loss as reported....................................................... $(2,979)
Add - interest on converted preferred stock................................ 1,067
-------
Pro forma net loss......................................................... (1,912)
=======
Pro forma net loss per share............................................... $ (0.28)
=======
</TABLE>
- ---------------
(1) Warrants were issued with exercise prices of $0.0002; all deemed outstanding
during periods presented.
(2) Assumed outstanding at the beginning of respective periods.
<PAGE> 1
EXHIBIT 11.2
STATEMENT REGARDING COMPUTATION OF
SUPPLEMENTAL NET INCOME PER SHARE
Weighted average common shares outstanding
<TABLE>
<S> <C> <C> <C>
Common shares issued............................... 50,000
Warrants issued within one year of filing(1)....... 4,750,000
Options issued within one year of filing........... [a] 733,344
Weighted average exercise price per share........ $ 0.58
--------
Proceeds......................................... 425,340
Mid range of estimated Offering price per
share......................................... $ 15.00
--------
Common shares repurchased........................ [b] 28,356
--------
Common equivalent shares......................... [a-b] 704,988 704,988
--------
Conversion of Class A and Class C Preferred Stock
to common shares(2).............................. 1,433,547
Shares issued in conjunction with Offering......... 4,700,000
----------
Total common and common equivalent shares.......... 11,638,535
==========
</TABLE>
For the period November 16 through December 31, 1996 (in thousands, except
per share data)
<TABLE>
<S> <C>
Net loss as reported....................................................... $ (613)
Add - interest on redeemed and converted preferred stock and long-term
debt..................................................................... 1,065
-------
452
Less - tax effect at 40%................................................... 181
-------
Supplemental net income.................................................... $ 271
=======
Supplemental net income per share.......................................... $ 0.02
=======
</TABLE>
For the six months ended June 30, 1997 (in thousands, except per share
data)
<TABLE>
<S> <C>
Net loss as reported....................................................... $(2,979)
Interest on redeemed and converted preferred stock and long-term debt...... 4,332
-------
1,353
Less - tax effect at 40%................................................... 541
-------
Supplemental net income.................................................... $ 812
=======
Supplemental net income per share.......................................... $ 0.07
=======
</TABLE>
- ---------------
(1) Warrants were issued with exercise prices of $0.0002; all deemed outstanding
during periods presented.
(2) Assumed outstanding at the beginning of respective periods.
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
S-O Operating Corp., a Delaware corporation
Steri-Oss International Corp., a Barbados Corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated October 3, 1997, relating
to the consolidated financial statements of Steri-Oss, Inc., which appear in
such Prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the period from November 16, 1996 through
December 31, 1996 and the six month period ended June 30, 1997 listed under Item
16(b) of this Registration Statement when such schedule is read in conjunction
with the consolidated financial statements referred to in our report. The audits
referred to in such report also included this schedule. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Costa Mesa, California
October 6, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated October 3, 1997, relating
to the financial statements of Steri-Oss, Inc., which appear in such Prospectus.
We also consent to the application of such report to the Financial Statement
Schedule for the years ended December 31, 1994 and 1995, and for the period from
January 1, 1996 through November 15, 1996 listed under Item 16(b) of this
Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Costa Mesa, California
October 6, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 DEC-31-1996
<CASH> 61 220
<SECURITIES> 0 0
<RECEIVABLES> 7,083 5,114
<ALLOWANCES> 237 0
<INVENTORY> 6,062 4,426
<CURRENT-ASSETS> 13,511 10,074
<PP&E> 5,128 4,674
<DEPRECIATION> (712) (132)
<TOTAL-ASSETS> 83,406 79,627
<CURRENT-LIABILITIES> 8,962 7,717
<BONDS> 39,776 36,396
35,814 34,226
0 0
<COMMON> 1,909 1,901
<OTHER-SE> (3,055) (613)
<TOTAL-LIABILITY-AND-EQUITY> 83,406 79,627
<SALES> 19,334 0
<TOTAL-REVENUES> 19,334 32,197
<CGS> 5,148 8,786
<TOTAL-COSTS> 5,148 8,786
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,332 2,468
<INCOME-PRETAX> (2,979) 1,065
<INCOME-TAX> 0 1,852
<INCOME-CONTINUING> (2,979) 1,306
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,979) 1,306
<EPS-PRIMARY> (0.28) 0
<EPS-DILUTED> 0 0
</TABLE>
