<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998
REGISTRATION NO. 333-34397
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
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. BARBARA L. BORDEN, ESQ.
BROBECK, PHLEGER & HARRISON LLP COOLEY GODWARD LLP
4675 MACARTHUR COURT, SUITE 1000 4365 EXECUTIVE DRIVE, SUITE 1100
NEWPORT BEACH, CALIFORNIA 92660 SAN DIEGO, CALIFORNIA 92121
(714) 752-7535 (619) 550-6000
</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.
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<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 January 9, 1998
PROSPECTUS
3,000,000 Shares
[STERI-OSS LOGO]
Common Stock
---------------------------
All of the 3,000,000 shares of Common Stock offered hereby (the "Offering")
are being sold by Steri-Oss, Inc. ("Steri-Oss" or the "Company"). Prior to the
Offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$11.00 and $13.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Common
Stock has been approved for quotation on the Nasdaq National Market under the
symbol "STRI."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 6.
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>
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===============================================================================================
Underwriting
Price to Discounts Proceeds to
Public and Commissions(1) Company(2)
- -----------------------------------------------------------------------------------------------
Per Share.......................... $ $ $
- -----------------------------------------------------------------------------------------------
Total(3)........................... $ $ $
===============================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $1,000,000.
(3) The Company has granted to the Underwriters an option, exercisable within
30 days from the date hereof, to purchase up to 450,000 additional shares
of Common Stock, on the same terms as set forth above, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public will be $ , the Underwriting Discounts and
Commissions will be $ and the Proceeds to the Company will be
$ . See "Underwriting."
---------------------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and to certain other
conditions. It is expected that delivery of such shares will be made through the
offices of UBS Securities LLC, 299 Park Avenue, New York, New York, on or about
, 1998.
---------------------------
UBS Securities Furman Selz
, 1998
<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.]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. 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. Steri-Oss, Inc.
currently conducts its business through its wholly-owned subsidiaries.
THE COMPANY
Steri-Oss, Inc. develops, manufactures and markets a broad line of dental
implant systems. Dental implants are small titanium screws or cylinders that are
surgically placed directly into the jaw and are used to replace missing teeth.
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 experienced
significant growth over the last several years. The Company's net sales
increased to $32.2 million for 1996 from $16.8 million for 1993. Net sales also
increased 25.5% to $29.4 million for the nine months ended September 30, 1997
from $23.4 million for the comparable nine month period in 1996.
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 dental 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 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 exclusive independent distributors. 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'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. To achieve its
objective, the Company intends to: (i) increase market share in the United
States and foreign markets; (ii) continue to develop innovative implant
products; (iii) expand into additional dental specialty markets; (iv) acquire
complementary dental implant businesses, products and technologies and (v)
continue to improve operating efficiencies.
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. In addition, $59.2 million of tax-deductible
goodwill was recorded in connection with the Acquisition. Upon consummation of
the Offering, approximately $15.5 million of debt and accrued interest will be
retired and approximately $10.0 million of Class B 8% Cumulative Convertible
Preferred Stock (the "Class B Preferred Stock") will be redeemed, together with
accrued interest and dividends. The holders of Class A 8.8% Cumulative
Redeemable Preferred Stock (the "Class A Preferred Stock") and Class C 8.0%
Junior Cumulative Redeemable Preferred Stock (the "Class C Preferred Stock")
have agreed to convert all of their shares of Preferred Stock into Common Stock
upon consummation of the Offering, in lieu of exercising their redemption
rights.
3
<PAGE> 5
THE OFFERING
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<S> <C>
Common Stock Offered by the Company........... 3,000,000 shares
Common Stock Outstanding after the Offering... 10,056,719 shares (1)
Use of Proceeds............................... The Company intends to use the net proceeds
from the Offering to repay indebtedness, to
redeem all outstanding shares of Class B
Preferred Stock 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 330,000 shares of Common Stock outstanding as of December 15,
1997 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.
------------------------
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. Except as otherwise indicated, the information contained in this
Prospectus gives effect to the 50-for-1 stock split effected in October 1997 and
assumes: (i) the conversion (the "Preferred Stock Conversion") of 22,000 shares
of the Company's Class A Preferred Stock and 3,185 shares of the Company's Class
C Preferred Stock into an aggregate of 2,256,719 shares of Common Stock upon
consummation of the Offering (assuming an initial public offering price of
$12.00 per share), (ii) the redemption upon consummation of the Offering of all
outstanding shares of Class B Preferred Stock, (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 1,063,344
shares of Common Stock and (v) no exercise of the Underwriters' over-allotment
option.
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.
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.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
PRO FORMA SEPTEMBER 30,
YEARS ENDED DECEMBER 31, YEAR ENDED -----------------------
--------------------------- DECEMBER 31, PRO FORMA PRO FORMA
1993 1994 1995 1996(2) 1996(3) 1997(3)(4)
------- ------- ------- ------------ ---------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Net sales........................................... $16,845 $22,168 $27,361 $ 32,197 $ 23,387 $ 29,361
Gross profit........................................ 11,718 15,502 19,496 23,411 17,250 21,343
Selling, general and administrative expense......... 8,698 11,393 14,241 17,219 12,626 16,313
Research and development expense.................... 1,618 1,781 2,225 2,468 1,775 1,942
Noncash compensation expense........................ -- -- -- -- -- 569
Income from operations.............................. 1,402 2,328 3,030 3,724 2,849 2,519
Interest expense.................................... 50 -- -- 2,507 1,858 1,858
Income before income taxes.......................... 1,352 2,328 3,030 1,217 991 661
Net income.......................................... $ 516 $ 1,075 $ 1,458 $ 730 $ 595 $ 397
======= ======= ======= ========== ========== ==========
Net income per share(5)............................. $ 0.07 $ 0.06 $ 0.04
========== ========== ==========
Shares outstanding(5)............................... 10,754,618 10,754,618 10,754,618
OTHER DATA:
Depreciation........................................ $ 161 $ 363 $ 595 $ 844 $ 558 $ 905
Amortization(6)..................................... 738 868 941 1,622 1,209 1,294
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-------------------------
ACTUAL PRO FORMA(7)(8)
------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................................. $ 524 $ 2,524
Working capital....................................................................................... 2,578 5,129
Total assets.......................................................................................... 84,172 83,640
Total long-term debt(9)............................................................................... 77,702 25,689
Total stockholders' equity (deficit).................................................................. (2,171) 49,861
</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 1993
through 1995, combined pro forma financial data of S-O and the Company for
1996 and pro forma financial data of the Company for 1997.
(2) 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. The Acquisition was accounted for as a purchase for financial
reporting purposes.
(3) The pro forma statement of operations data for the nine months ended
September 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 nine months ended September 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
7 below.
(4) The financial data for the nine months ended September 30, 1997 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 $12.00 per
share.
(6) 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.
(7) 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 September 30, 1997 and includes the effect of an
extraordinary charge of $7.5 million, net of the related tax benefit,
relating to (i) the elimination of deferred financing costs of $4.6 million
associated with the repayment of the Company's 16% Series A Subordinated
Note and 14% Series B Subordinated Notes (collectively, the "Subordinated
Notes") and a portion of 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 $1.9 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.
See "Unaudited Pro Forma Consolidated Financial Data."
(8) Includes the effect of 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.
5
<PAGE> 7
RISK FACTORS
Prospective investors in the shares of Common Stock offered hereby should
carefully consider the following risk factors, in addition to the other
information contained in this Prospectus.
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, labeling, 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 FDA clearance of 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 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 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
6
<PAGE> 8
System Regulations ("QSR"), formerly known as the Good Manufacturing Practices
regulations, which govern manufacturing, design, 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
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."
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, particularly for its
surgical instruments, 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 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 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 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
7
<PAGE> 9
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."
High Degree of Leverage; Future Capital Requirements. The Company has
expended, and expects to continue to expend in the future, substantial funds to
pursue product development and acquisition efforts, expand its sales and
marketing activities and expand its manufacturing capabilities. Following the
Offering, the Company will be highly leveraged. After the net proceeds of the
Offering are applied to repay indebtedness under the Company's Subordinated
Notes and a portion of its Bank Facility, the Company expects that it will have
$25.7 million outstanding under the Bank Facility. While the Company has
received a commitment letter from Union Bank for the establishment of a new
revolving line of credit (the "New Facility") to replace the Bank Facility, the
New Facility is subject to certain conditions and there can be no assurance that
the New Facility will be issued. The Company's failure to obtain the New
Facility would have a material adverse effect on the Company's business and
ability to implement its business strategy. The Company's future capital
requirements and the adequacy of available funds will depend on numerous factors
which are difficult to predict, including the timing and cost of acquisitions,
efforts to expand manufacturing and marketing and costs of product development.
If funds available under the Bank Facility or the New Facility and cash flows
from operations are insufficient to meet current or planned operating
requirements, the Company will be required to obtain additional funds through
equity or debt financings or through other sources. The terms of any equity
financings may be dilutive to stockholders and the terms of any debt financings
may contain restrictive covenants which limit the Company's ability to pursue
certain courses of action. In addition, the Bank Facility and the New Facility
limit the Company's ability to incur debt other than pursuant to the facility
and require significant prepayment upon the closing of certain equity
financings. There can be no assurance that additional funding 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, scale-back or
eliminate certain aspects of its operations, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Strategy."
Risks Associated with Acquisitions. 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. The Company is currently in negotiations for the
acquisition of manufacturing operations in Europe and certain license and
distribution rights for related dental implant technologies and products.
Negotiations for this transaction are still at an early stage. If the
transaction is consummated, it could result in cash payments by the Company of
up to $6.5 million, as well as additional royalty payments in the form of cash
and warrants to purchase the Company's Common Stock. However, the proposed
transaction contains several independent components and it is not certain as to
what components, if any, will ultimately be consummated. 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. See
"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 40.0% of the Company's net sales during 1996
and for the
8
<PAGE> 10
nine month period ended September 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 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
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 9.7% during the
nine month period ended September 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 each July for successive one year terms unless the Company and Metalor
cannot agree to purchase terms for the following year. 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 accounted for
approximately 12.1% of the Company's net sales during 1996 and 13.1% of the
Company's net sales during the nine months ended September 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, the Company believes 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
9
<PAGE> 11
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."
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. The loss of the Company's manufacturing capability from a disaster
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 secrets,
licensing arrangements, patents, non-disclosure agreements and other
intellectual property laws. The Company also seeks to protect its brand names
through registered and common law trademarks. 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, the Company has been subject to infringement claims in the past, and
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 and Consultants. 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 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. The Company relies, in part, on
its relationships with consultants in the dental industry to gain and maintain
brand recognition and customer loyalty. Loss of services of key employees or key
consultants 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 58.5% 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 49.0% of the
Company's outstanding shares of Common Stock following the completion of the
Offering. This stockholder would be able to significantly influence all matters
requiring approval by the
10
<PAGE> 12
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 Certain Affiliates and Stockholders of the
Company. The Offering will provide several significant benefits to certain
affiliates and stockholders of the Company. In particular, all of the
outstanding shares of Class A Preferred Stock and Class C Preferred Stock will
be automatically converted into an aggregate of 2,256,719 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. 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) a Managing Director
of Furman Selz LLC and (iii) Henry Wendt and Douglas E. Rogers, directors of the
Company. In addition, the Company plans to use approximately $17.9 million of
the net proceeds from the Offering to repay the Company's indebtedness under its
Subordinated Notes and a portion of the Bank Facility, including accrued
interest and prepayment penalties. Holders of the Company's Subordinated Notes
include Exeter Equity Partners, L.P., Exeter Venture Lenders, L.P. and The
Equitable Life Assurance Society of the United States. Finally, the Company
intends to use approximately $10.0 million of the net proceeds of this Offering
to redeem all of the outstanding shares of Class B Preferred Stock, all of which
shares are held by Bausch & Lomb. 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.
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
11
<PAGE> 13
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
10,056,719 shares of Common Stock outstanding, of which only the 3,000,000
shares offered hereby will be freely tradeable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"). All of the remaining
7,056,719 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 4,750,000 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 1,063,344 shares will be
issuable upon exercise of outstanding options, of which 921,060 shares will be
subject to lock-up agreements. 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 $13.31 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."
Forward-Looking Statements. This Prospectus includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The safe harbor provided in the
Securities Act and Exchange Act for such forward-looking statements does not
apply to initial public offerings. All statements, other than statements of
historical facts, included in this Prospectus which address activities, events
or developments which the Company expects or anticipates will or may occur in
the future, including, among others, the projected growth rate of the dental
implant market, the average selling prices of the Company's products, the
anticipated cash flows from operations, the anticipated growth rate for the
Company's domestic and international sales, and the Company's ability to execute
its business strategies, are forward-looking statements. These statements are
based on certain assumptions and analyses made by the Company in light of its
experience and its perception of historical trends, current conditions and
expected future developments as well as other factors it believes are
appropriate in the circumstances. However, whether actual results and
developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties which could cause actual results
to differ materially from the Company's expectations, including the risk factors
discussed in this Prospectus and other factors, many of which are beyond the
control of the Company. Consequently, all of the forward-looking statements made
in this Prospectus are qualified by these cautionary statements and there can be
no assurance that the actual results or developments anticipated by the Company
will be realized, or, even if substantially realized, that they will have the
expected consequences to or effects on the Company or its business or
operations. The Company assumes no obligation to update publicly any such
forward-looking statements, whether as a result of new information, future
events or otherwise. See "Managements' Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $32.5 million
($37.5 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $12.00 per share after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
As of September 30, 1997, the outstanding balance of the Subordinated Notes
was approximately $12.9 million. In addition, at September 30, 1997, the Company
had $2.6 million of accrued dividends on the Preferred Stock and $551,000 of
accrued interest on the Subordinated Notes and the Bank Facility. Assuming the
Offering closes on February 9, 1998, the Company intends to use approximately
$13.1 million of the net proceeds of the Offering to repay the Subordinated
Notes and estimates that it will be required to pay approximately $3.7 million
of accrued dividends on the Preferred Stock, approximately $464,000 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. The Company also intends to use approximately $10.0 million of
the net proceeds from the Offering to redeem all of the outstanding shares of
Class B Preferred Stock. See "Certain Transactions."
The Company intends to use approximately $2.0 million of the net proceeds
of the Offering to repay the outstanding balance on the working capital line
under the Bank Facility and approximately $600,000 of the net proceeds of the
Offering to repay a portion of the $17.4 million revolving credit line under the
Bank Facility. The Bank Facility also includes a $7.5 million term loan, (of
which $7.4 million was outstanding at September 30, 1997) and a $3.0 million
capital expenditure line (of which $1.4 million was outstanding at September 30,
1997), both of which will remain outstanding following 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 LIBOR plus 3.0% per annum on the revolving credit line, (ii) the
Reference Rate plus 2.0% per annum or LIBOR plus 3.75% per annum on the term
loan, (iii) the Reference Rate plus 1.5% per annum or LIBOR plus 2.75% per annum
on the working capital line and (iv) the Reference Rate plus 1.5% per annum or
LIBOR 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 currently 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. The Company has received a commitment letter from Union Bank for
the establishment of a $40.0 million revolving line of credit to replace the
Bank Facility, which line of credit is subject to the completion of the Offering
and the satisfaction of certain other conditions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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 New Facility may limit, the
payment of dividends without the consent of the lenders thereunder.
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<PAGE> 15
CAPITALIZATION
The following table sets forth (i) actual capitalization of the Company as
of September 30, 1997, (ii) the pro forma capitalization of the Company as of
September 30, 1997, reflecting the Preferred Stock Conversion, and (iii) the pro
forma capitalization of the Company as of September 30, 1997, as adjusted to
give effect to the Offering. 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>
SEPTEMBER 30, 1997
--------------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------- ------------ ---------------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 524 $ 524 $ 2,524
======= ======== ========
Long-term debt (including current portion)(3):
Bank Facility........................................ $28,290 $ 28,290 $ 25,689
16% Series A Subordinated Notes...................... 10,286 10,286 --
14% Series B Subordinated Notes...................... 2,515 2,515 --
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........ 22,686 686 --
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........... 10,700 10,700 --
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........... 3,225 40 --
Stockholder's equity (deficit):
Common Stock, $.0001 par value, 35,000,000 shares
authorized; 50,000(4) issued and outstanding
actual; and 10,056,719(5) shares issued and
outstanding pro forma............................. -- -- 1
Additional paid-in capital........................... 2,470 29,551 62,744
Accumulated deficit............................... (4,641) (6,537) (12,884)(6)(7)
------- -------- --------
Total stockholders' equity (deficit)......... (2,171) 23,014 49,861
------- -------- --------
Total capitalization......................... $75,531 $ 75,531 $ 75,550
======= ======== ========
</TABLE>
- ---------------
(1) Gives effect to the conversion of 22,000 shares of Class A Preferred Stock
and 3,185 shares of Class C Preferred Stock into an aggregate of 2,256,719
shares of Common Stock.
(2) Gives effect to (i) the conversion of 22,000 shares of Class A Preferred
Stock and 3,185 shares of Class C Preferred Stock into an aggregate of
2,256,719 shares of Common Stock and (ii) the Offering and the application
of the estimated proceeds therefrom (assuming an initial public offering
price of $12.00 per share). See "Use of Proceeds" and "Unaudited Pro Forma
Consolidated Financial Data."
(3) Net of unamortized debt discount.
(4) Excludes 4,750,000 shares of Common Stock issuable upon the exercise of
outstanding warrants, 968,344 shares of Common Stock issuable upon the
exercise of outstanding options and 2,256,719 shares of Common Stock
issuable in connection with the Preferred Stock Conversion.
(5) Excludes 968,344 shares of Common Stock issuable upon the exercise of
outstanding options.
(6) Includes the effect of an extraordinary charge of $7.5 million, net of
related tax benefit, relating to (i) the elimination of deferred financing
costs of $4.6 million associated with the repayment of the Subordinated
Notes and a portion of the Bank Facility and the conversion and/or
redemption of all mandatorily redeemable Preferred Stock, (ii) the charge of
$1.9 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.
(7) Includes the effect of 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.
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<PAGE> 16
DILUTION
The net tangible book value (deficit) of the Company as of September 30,
1997 was approximately $(66,625,000), or $(13.88) per share of Common Stock
based upon 4,800,000 shares of Common Stock outstanding. The net tangible book
value per share represents the amount of the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the conversion of 22,000 shares of Class A
Preferred Stock and 3,185 shares of Class C Preferred Stock having an aggregate
liquidation preference of approximately $25,185,000 into 2,256,719 shares of
Common Stock, the pro forma net tangible book value (deficit) of the Company as
of September 30, 1997 before the Offering, would have been $(41,440,000), or
$(5.87) per share of Common Stock. After giving effect to the sale of 3,000,000
shares of Common Stock offered by the Company hereby and the receipt of the net
proceeds of $32,480,000 therefrom at an assumed initial public offering price of
$12.00 per share, the pro forma net tangible book value of the Company as of
September 30, 1997 would have been approximately $(13,193,000), or $(1.31) per
share of Common Stock. This represents an immediate increase in net tangible
book value of $12.57 per share to existing stockholders and an immediate
dilution of $13.31 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $12.00
Net tangible book value (deficit) per share as of September 30,
1997......................................................... $(13.88)
Increase per share attributable to conversion of Preferred
Stock........................................................ 8.01
------
Pro forma net tangible book value (deficit) per share as of
September 30, 1997.............................................. (5.87)
Increase per share attributable to new investors................ 4.56
------
Pro forma net tangible book value (deficit) per share after the
Offering........................................................ (1.31)
------
Dilution per share to new investors............................... $13.31
======
</TABLE>
As of September 30, 1997, options to purchase an aggregate of 968,344
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 as of September 30, 1997, after giving pro
forma effect to the sale of the Shares in the Offering and the Preferred Stock
Conversion, 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 $12.00 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(1)... 7,056,719 70.2% $25,185,000 41.2% $ 3.57
New investors.............. 3,000,000 29.8 36,000,000 58.8 12.00
---------- ----- ----------- -----
Total................. 10,056,719 100.0% $61,185,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) If the over-allotment option is exercised in full, the percentage of the
shares held by existing stockholders and new investors will be 67.2% and
32.8%, respectively, of the total number of shares outstanding after this
Offering.
15
<PAGE> 17
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited condensed consolidated pro forma financial data
(the "Unaudited Pro Forma Financial Data") as of September 30, 1997 and for the
nine months ended September 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
statements of operations for the nine months ended September 30, 1996 and 1997
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 balance sheet gives effect to (ii)
and (iii) as if each had occurred on September 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 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 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 $ 499(1) 17,219
Research and development
expense......................... 2,116 352 2,468 2,468
Interest expense.................. 1,065 1,065 7,552(2) $(6,110)(3) 2,507
------- ------- -------- ------- ------- ----------
Income (loss) before income
taxes........................... 3,771 (613) 3,158 (8,051) 6,110 1,217
Income taxes...................... (1,852) (1,852) 3,220(4) (1,855)(4) 487
------- ------- -------- ------- ------- ----------
Net income (loss)(5).............. $ 1,919 $ (613) $ 1,306 $(4,831) $ 4,255 $ 730
======= ======= ======== ======= ======= ==========
Net income per share(5)(6)........ $ 0.07
==========
Shares outstanding(6)............. 10,754,618
</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 amount of $1.3 million and a
variable interest rate of 9.75%, (ii) a revolving term loan with a principal
amount of $17.5 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
16
<PAGE> 18
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.
(3) Reflects the reduction in interest expense by (i) $2.1 million as a result
of the repayment of the Subordinated Notes and a portion of the 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) $1.0 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 $7.5 million, net of the
related tax benefit, relating to (i) the elimination of deferred financing
costs of $4.6 million associated with the repayment of the Subordinated
Notes and a portion of the Bank Facility and the conversion and/or
redemption of all mandatorily redeemable Preferred Stock, (ii) the charge of
$1.9 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 $12.00 per share.
17
<PAGE> 19
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, OFFERING
1997 ADJUSTMENTS PRO FORMA
------------- ----------- ---------
(in thousands, except share and per share
data)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................. $29,361 $29,361
Cost of sales......................................... 8,018 8,018
------- -------
Gross profit.......................................... 21,343 21,343
Selling, general and administrative expense........... 16,313 16,313
Noncash compensation expense.......................... 569 569
Research and development expense...................... 1,942 1,942
Interest expense...................................... 6,547 $(4,689)(1) 1,858
------- ------- -------
Income (loss) before income taxes..................... (4,028) 4,689 661
Income taxes.......................................... -- (264)(2) (264)
------- ------- -------
Net income (loss)(3).................................. $(4,028) $ 4,425 $ 397
======= ======= =======
Net income per share(3)(4)............................ $ 0.04
=======
Shares outstanding(4)................................. 10,754,618
</TABLE>
- ---------------
(1) Reflects the reduction in interest expense as a result of the redemption of
all outstanding shares of mandatorily redeemable Class B Preferred Stock and
the repayment of the Subordinated Notes and a portion of the Bank Facility.
Also reflects a reduction in interest expense due to the elimination of
dividends on the mandatorily redeemable Class A and Class C 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 $7.5 million, net of the
related tax benefit, relating to (i) the elimination of deferred financing
costs of $4.6 million associated with the repayment of the Subordinated
Notes and a portion of the Bank Facility and the conversion and/or
redemption of all mandatorily redeemable Preferred Stock, (ii) the charge of
$1.9 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 $12.00 per share.
18
<PAGE> 20
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, ACQUISITION OFFERING
1996 ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ------------ ------------ ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $23,387 $23,387
Cost of sales............................... 6,137 6,137
------- --------
Gross profit................................ 17,250 17,250
Selling, general and administrative 12,183 $ 443(1) 12,626
expense...................................
Research and development expense............ 1,775 1,775
Interest expense............................ 6,463(2) $ (4,605)(3) 1,858
------- -------- -------- --------
Income (loss) before income taxes........... 3,292 (6,906) 4,605 991
Income taxes................................ (1,608) 2,762(4) (1,550)(4) (396)
------- -------- -------- --------
Net income.................................. $ 1,684 $ (4,144) $ 3,055 $ 595
======= ======== ======== ========
Net income per share(5)..................... $ 0.06
========
Shares outstanding(5)........................ 10,754,618
</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 September 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 Class B Preferred Stock and the repayment of the
Subordinated Notes and a portion of the Bank Facility. Also reflects a
reduction in interest expense due to the elimination of dividends on the
Class A and Class C 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 $12.00 per share.
19
<PAGE> 21
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<CAPTION>
AT PREFERRED STOCK
SEPTEMBER 30, CONVERSION OFFERING
1997 ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- --------------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents................ $ 524 $ 2,000(1) $ 2,524
Accounts receivable, net................. 7,572 7,572
Inventories.............................. 6,359 6,359
Prepaid expenses and other current
assets................................. 368 368
------- --------- --------
Total current assets................... 14,823 2,000 16,823
Fixed assets, net.......................... 4,895 4,895
Goodwill, net.............................. 58,990 58,990
Other assets............................... 5,464 (2,532)(2) 2,932
------- --------- --------
Total assets........................... $84,172 $ (532) $ 83,640
======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt........ $ 3,604 $ 3,604
Accounts payable......................... 2,258 2,258
Accrued liabilities...................... 3,925 $ (551)(3) 3,374
Customer advances........................ 2,458 2,458
------- --------- --------
Total current liabilities.............. 12,245 (551) 11,694
Long-term debt............................. 37,487 (15,402)(3) 22,085
Mandatorily redeemable Preferred Stock..... 36,611 $ (25,185)(4) (11,426)(5)
------- --------- --------- --------
Total liabilities...................... 86,343 (25,185) (27,379) 33,779
------- --------- --------- --------
Stockholders' equity (deficit)
Common Stock and additional paid-in
capital................................ 2,470 27,081(4) 33,194(6) 62,745
Accumulated deficit...................... (4,641) (1,896)(4)(7) (6,347)(7)(8) (12,884)
------- --------- --------- --------
Total stockholders' equity (deficit)... (2,171) 25,185 26,847 49,861
------- --------- --------- --------
Total liabilities and stockholders'
equity............................... $84,172 $ -- $ (532) $ 83,640
======= ========= ========= ========
</TABLE>
- ---------------
(1) Reflects the increase in cash and cash equivalents equal to the net proceeds
from the Offering less the redemption of the outstanding shares of Class B
Preferred Stock and repayment of the Subordinated Notes and a portion of the
Bank Facility upon consummation of the Offering.
(2) Reflects write-off of debt issue costs and Preferred Stock issue costs of
$3.9 million, less deferred income tax asset of $1.4 million recorded for
the extraordinary charge discussed in footnote 7.
(3) Reflects the repayment of the Subordinated Notes and a portion of the Bank
Facility upon consummation of the Offering.
(4) Reflects the conversion of 22,000 shares of Class A Preferred Stock and
3,185 shares of Class C Preferred Stock into an aggregate 2,256,719 shares
of Common Stock at 93% of the initial public offering price upon
consummation of the Offering and the related extraordinary charge of $1.9
million.
(5) Reflects the redemption upon consummation of the Offering of all shares of
Class B Preferred Stock.
(6) This adjustment is recorded as additional paid-in capital and reflects the
application of the estimated net proceeds of $32.5 million from the Offering
and the effect of stock options discussed in footnote 8.
(7) Reflects an extraordinary charge of $7.5 million, net of the related tax
benefit, relating to (i) the elimination of deferred finance costs of $4.6
million associated with the repayment of the Subordinated Notes and a
portion of the Bank Facility and the conversion and/or redemption of all
mandatorily redeemable Preferred Stock, (ii) the charge of $1.9 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.
(8) Includes the effect of 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.
20
<PAGE> 22
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 and
the selected consolidated balance sheet data as of December 31, 1995 and 1996
are derived from the audited Consolidated Financial Statements included
elsewhere in this Prospectus. The selected consolidated statement of operations
data for the nine months ended September 30, 1996 and 1997 and the selected
consolidated balance sheet data as of September 30, 1997 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 NINE MONTHS NINE MONTHS
YEAR ENDED DECEMBER 31, THROUGH THROUGH ENDED ENDED
------------------------------------- NOVEMBER 15, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 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 $23,387 $29,361
Cost of sales............. 4,042 5,127 6,666 7,865 7,430 1,356 6,137 8,018
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............. 8,693 11,718 15,502 19,496 20,678 2,733 17,250 21,343
Selling, general and
administrative
expense................. 6,164 8,698 11,393 14,241 14,791 1,929 12,183 16,882
Research and development
expense................. 1,218 1,618 1,781 2,225 2,116 352 1,775 1,942
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.... 1,311 1,402 2,328 3,030 3,771 452 3,292 2,519
Interest expense.......... 45 50 -- -- -- 1,065 -- 6,547
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes............ 1,266 1,352 2,328 3,030 3,771 (613) 3,292 (4,028)
Income taxes.............. (506) (836) (1,253) (1,572) (1,852) -- (1,608) --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)......... $ 760 $ 516 $ 1,075 $ 1,458 $ 1,919 $ (613) $ 1,684 $(4,028)
======= ======= ======= ======= ======= ======= ======= =======
Net (loss) per share(5)... $ (0.04) $ (0.31)
======= =======
Shares outstanding(5)..... 7,754,618 7,754,618
OTHER DATA:
Depreciation.............. $ 181 $ 161 $ 363 $ 595 $ 712 $ 132 $ 558 $ 905
Amortization.............. -- 738 868 941 912 211 766 1,294
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash and cash
equivalents............. $ -- $ -- $ 155 $ 120 $ 220 $ 524
Working capital........... 502 1,629 4,585 4,706 2,357 2,578
Total assets.............. 4,266 31,796 33,764 35,648 79,627 84,172
Total long-term debt and
mandatorily redeemable
Preferred Stock(6)...... -- -- -- -- 73,642 77,702
Total stockholders' equity
(deficit)/Predecessor
equity.................. 1,058 27,220 30,698 32,588 1,288 (2,171)
</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) Includes current portion of long-term debt.
21
<PAGE> 23
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 has experienced significant growth over the last several
years. The Company's net sales increased to $32.2 million for 1996 from $16.8
million for 1993. Net sales also increased 25.5% to $29.4 million for the nine
months ended September 30, 1997 from $23.4 million for the comparable nine month
period in 1996.
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 within the
industry. 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 slight declines in the average
selling prices 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 over the next year, any such declines
could adversely affect the Company's net sales, results of operations and cash
flows.
Approximately 52.8% of the Company's net sales for the nine months ended
September 30, 1997 were attributable to dental implants, while abutments and
surgical instrument sales accounted for approximately 31.6% and 15.6% 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 40.0% of the Company's net sales during 1996
and for the nine months ended September 30, 1997, respectively. The Company
anticipates that international sales will continue to constitute a significant
portion
22
<PAGE> 24
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 13.1% for the nine months ended September 30, 1997. Although the
Company's international 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 27.3% for the nine months ended September 30, 1997.
Currently, the Company manufactures substantially all of its implants.
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 the
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."
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<PAGE> 25
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, ------------ NINE MONTHS NINE MONTHS
DECEMBER 31, THROUGH THROUGH YEAR ENDED ENDED ENDED
--------------- NOVEMBER 15, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 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 26.2 27.3
----- ----- ----- ----- ----- ----- -----
Gross profit.................. 69.9 71.3 73.6 66.8 72.7 73.8 72.7
Selling, general and
administrative expense...... 51.4 52.1 52.6 47.1 51.9 52.1 57.5
Research and development
expense..................... 8.0 8.1 7.6 8.6 7.7 7.6 6.6
----- ----- ----- ----- ----- ----- -----
Income from operations........ 10.5 11.1 13.4 11.1 13.1 14.1 8.6
Interest expense.............. -- -- -- 26.0 3.3 -- 22.3
Income (loss) before income
taxes....................... 10.5 11.1 13.4 (15.0) 9.8 14.1 (13.7)
Income taxes.................. 5.7 5.8 6.6 -- 5.8 6.9
----- ----- ----- ----- ----- ----- -----
Net income (loss)............. 4.8% 5.3% 6.8% (15.0)% 4.0% 7.2% (13.7)%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1996 and 1997
Net Sales. Net sales increased 25.5% from $23.4 million for the nine months
ended September 30, 1996 to $29.4 million for the nine months ended September
30, 1997, primarily reflecting increased unit sales of dental implants and
abutments. North American net sales increased by 28.0% for the nine month period
ended September 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 22.1% during the
nine months ended September 30, 1997 as compared to the nine months ended
September 30, 1996, primarily due to increased sales in Germany, Korea and
Taiwan.
Gross Profit. Gross profit increased 23.7% from $17.3 million, or 73.8% of
net sales, for the nine months ended September 30, 1996 to $21.3 million, or
72.7% of net sales, for the nine months ended September 30, 1997. The increase
in gross profit was primarily due to the increase in sales across all product
lines. The decrease in gross margin was primarily due to (i) promotional pricing
on surgical kits and other instruments that are used in conjunction with the
Company's new Replace Implant System, (ii) lower international selling prices
resulting from pricing pressures due to the relative strength of the U.S. dollar
compared to the currencies of the Company's major foreign markets and (iii)
increased sales of Interpore products, which generally have lower margins than
certain of the Company's other products. This decrease was partially offset by
lower product costs resulting from the Company's expansion of its manufacturing
capacity to include surgical drills and related products.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 38.6% from $12.2 million, or 52.1% of net
sales, for the nine months ended September 30, 1996 to $16.9 million, or 57.5%
of net sales, for the nine months ended September 30, 1997. This increase was
primarily due to the amortization of tax-deductible goodwill recorded in
connection with the Acquisition, a non-cash compensation charge related to stock
options, the addition of new sales and marketing personnel and increases in
marketing, educational, accounting and financial expenses necessary to
accommodate the Company's growth.
Research and Development Expense. Research and development expense
increased 9.4% from $1.8 million, or 7.6% of net sales, for the nine months
ended September 30, 1996 to $1.9 million, or 6.6% of net sales, for the nine
months ended September 30, 1997. Research and development expense during the
nine month period ended September 30, 1997 primarily consisted of compensation
for engineering and regulatory personnel, project material costs, and clinical
studies and FDA testing related to development activities.
Interest Expense. Interest expense for the nine months ended September 30,
1997 was $6.5 million, of which (i) $3.5 million consisted of interest on
indebtedness under the Company's Bank Facility and
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<PAGE> 26
Subordinated Notes, (ii) $2.2 million consisted of accrued dividends on
mandatorily redeemable Preferred Stock and (iii) $762,000 consisted of the
amortization of deferred financing costs incurred in connection with the
Acquisition. The Company had no interest expense during the nine months ended
September 30, 1996.
Income Taxes. Income taxes were $1.6 million for the nine months ended
September 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 nine
months ended September 30, 1997 as a result of the Company's losses in that
period. At September 30, 1997, the Company had net operating loss carryforwards
of $3.3 million and $1.6 million for federal and California income tax purposes,
respectively, reflecting the amortization of tax-deductible goodwill recorded in
connection with the Acquisition.
Net Income (Loss). Net loss was $4.0 million, or 13.7% of net sales, for
the nine months ended September 30, 1997 compared to net income of $1.7 million,
or 7.2% of net sales, for the nine months ended September 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.
Years Ended December 31, 1995 and 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 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.
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<PAGE> 27
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.
Years Ended December 31, 1994 and 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 additional 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, marketing 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.
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 September 30, 1997, the Company had outstanding long-term debt of $10.3
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 $28.3 million under the Bank Facility. The availability of
borrowings under the Bank Facility will be automatically reduced as frequently
as each quarter in increasing
26
<PAGE> 28
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
September 30, 1997.
The Company also had outstanding $35.2 million of mandatorily redeemable
Preferred Stock, together with accrued dividends of $2.6 million at September
30, 1997. The Company intends to apply a portion of the net proceeds of the
Offering to repay in full the Subordinated Notes and a portion of 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. Upon consummation of the
Offering, the Company will record an extraordinary charge of $7.5 million, net
of the related tax benefit, resulting from the redemption and conversion of
Preferred Stock and the repayment of the Subordinated Notes and a portion of its
outstanding indebtedness under the Bank Facility. See "Use of Proceeds."
Following the Offering, the Company will have $25.7 million 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 terminate the Bank Facility upon repayment in full. The Company
has received a commitment letter from Union Bank for the establishment of a
$40.0 million revolving line of credit for working capital requirements and
general corporate purposes and to fund future acquisitions. The interest rate on
the New Facility will be tied to either Union Bank's Reference Rate or LIBOR
plus 2.0% - 2.75% (based on the Company's debt to earnings ratio), at the
Company's option. Certain conditions precedent to (i) the Senior Lender's
consent to the Offering and (ii) Union Bank's commitment to provide the New
Facility to the Company include (a) the completion of an initial public offering
of the Company generating gross proceeds of at least $25.0 million, and the
application of the proceeds therefrom to redeem all shares of outstanding Class
B Preferred Stock 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 the New Facility would
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 $1.1 million for the nine months ended September 30, 1997 from $1.7 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.
The Company anticipates making capital expenditures of approximately $2.2
million during the next twelve months to expand its manufacturing operations
into its newly leased facilities 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 $1.3
million through the year ending December 31, 1999. In addition, in January 1998,
the Company must make a deferred cash payment of up to $723,000 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 New 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 the New Facility will be
issued or that during this period there will not be acquisition opportunities or
capital expenditure requirements that create the need for additional cash, that
the Company will meet the financial targets under the New Facility to enable the
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<PAGE> 29
Company to borrow under the New Facility, that additional funds will be
available at favorable rates, if at all, or that the Company will not pursue any
equity or debt offerings in the near future.
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.
28
<PAGE> 30
BUSINESS
OVERVIEW
Steri-Oss develops, manufactures and markets a broad line of dental implant
systems. Dental implants are small titanium screws or cylinders that are
surgically placed directly into the jaw and are used to replace missing teeth.
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 experienced
significant growth over the last several years. The Company's net sales
increased to $32.2 million for 1996 from $16.8 million for 1993. Net sales also
increased 25.5% to $29.4 million for the nine months ended September 30, 1997
from $23.4 million for the comparable nine month period in 1996.
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. Medical Data International ("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
dental 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 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 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.
29
<PAGE> 31
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. To achieve its objective, the Company intends to:
- 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 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. In addition, the Company is currently
in negotiations for the acquisition of certain manufacturing operations in
Europe and certain new product distribution rights. See "Risk Factors -- Risks
Associated with Acquisitions." 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 30.4% for 1993. 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 the
implant directly into the jaw. The implant typically integrates with the
patient's bone over the three to six
30
<PAGE> 32
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,
including: (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
integration with surrounding jawbone ("osseointegration") and generally will not
be rejected by the surrounding tissue due to titanium's biocompatible nature. In
the United States, the list prices for the Company's implants currently range
from approximately $200 to $250 per unit, and the average selling prices have
remained relatively stable over the past three years.
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 titanium plasma spray ("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.
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- 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 dental professionals 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
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product concepts and eight employees who focus on product engineering and the
technical aspects of product design. The Company also provides 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.
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
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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 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 world
renowned lecturer on dental implants.
- 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
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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,
dedicated 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 9.7% of net sales for the nine months ended September
30, 1997. In 1990, the Company entered into an exclusive one year distribution
agreement with Metalor that automatically renews each July for successive one
year terms unless the Company and Metalor cannot agree to purchase terms for the
following year. 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 13.1% of net
sales for the nine months ended September 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.
MANUFACTURING
The Company manufactures substantially all of its implants at its two
facilities in Yorba Linda, California and has received ISO 9001 certification.
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."
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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 National Standards Authority of Ireland. 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 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 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.
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, customer service, 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
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the implant industry may result in price reductions, reduced gross 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 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, labeling, 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 procedure to clear the commercial
sale of dental implants. Since January 1, 1994, the Company has obtained FDA
clearance for 34 510(k)s 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. For those dental implants that
remain in Class III, the FDA will require the submission of a PMA. The Federal
Food, Drug and Cosmetic Act provides that a company must submit a PMA within 90
days from the date that the FDA issues a final regulation calling for the
submission of PMAs. 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. In the event the FDA requires
the submission of a PMA, the Company may be required to cease marketing the
relevant product or products in the United States until an acceptable PMA is
filed or approved. Although the Company has been collecting clinical data in
anticipation of being required to submit PMAs for its dental implants, there can
be no assurance that such data will be adequate to demonstrate that the
Company's dental implants are safe and effective, as required for approval of a
PMA. The FDA's refusal to approve any PMAs that the Company may submit or the
Company's failure to submit required PMAs in a timely fashion could have a
material and adverse effect on the Company's business, financial condition and
results of operations.
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 develop-
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ment 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.
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, design, 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
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 secrets, licensing arrangements, patents,
non-disclosure agreements and other intellectual property laws. The Company also
seeks to protect its brand names through registered and common law trademarks.
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,
they do not serve as significant barriers to entry into the dental implant
market. The Company believes, however, that extensive FDA approval and
compliance requirements, proprietary manufacturing processes, customer loyalty
and access to distribution channels constitute the primary 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
certain annual minimum royalties. The Company also licenses two dental implants
(covered by seven United States patents) from VentPlant, pursuant to a semi-
exclusive 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 is currently distributing the IMZ Dental Implant System in the United
States pursuant to an oral agreement with Dr. Axel Kirsch, a world renowned oral
surgeon and the inventor of such products. 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.
The Company has been subject to infringement claims in the past, and 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
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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 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 November 23, 1997, the Company had 246 full-time employees, including
11 employees engaged in research and development, 91 engaged in manufacturing,
22 engaged in regulatory affairs and quality assurance, 70 engaged in sales and
marketing, 16 engaged in customer service and support and 36 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 two facilities, which have approximately 51,000 square
feet and 35,000 square feet, respectively, in Yorba Linda, California, pursuant
to leases that expire in October 31, 1999 and December 31, 2003, respectively.
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.
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. The
Company believes that Bausch & Lomb is contractually obligated to indemnify the
Company for this claim, and Bausch & Lomb 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.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Set forth below is certain information regarding the directors, executive
officers and key employees of the Company as of December 31, 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 K. Krueger 52 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
Don A. Kennard 50 Vice President, Research and Development
Dennis G. Locke 43 Vice President, Finance
Hugh A. O'Donnell 43 Vice President, International Sales
Phillip E. Ohlsson 59 Vice President, Institutional Accounts
Thomas M. Olsen 40 Vice President, Domestic Sales and Marketing
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Directors and Executive Officers
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 K. 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.
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<PAGE> 42
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.
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. 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., 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.
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<PAGE> 43
Key Employees
Don A. Kennard has served as the Vice President, Research and Development
of the Company since May 1997, the Vice President of Regulatory Affairs of the
Company and its predecessor from 1993 to 1997, and prior to that as the Director
of Regulatory Affairs with its predecessor from 1991 to 1992.
Dennis G. Locke has served as the Vice President, Finance of the Company
and its predecessor since November 1995, and prior to that as its Controller
from 1990 to 1995.
Hugh A. O'Donnell has served as the Vice President, International Sales of
the Company since July 1997, the Vice President, Technical Services and Training
of the Company from January 1997 to July 1997, the Vice President of Prosthetic
Business of the Company and its predecessor from 1995 to 1997, and prior to that
as the Vice President, Business Development of the Company's predecessor from
1993 to 1995. Prior to joining the Company, Mr. O'Donnell served as the General
Manager of the Implant Division of Dentsply -- Canada from 1987 to 1993.
Phillip E. Ohlsson has served as the Vice President, Institutional Accounts
of the Company since May 1997, as the Vice President, Western Region and
National Accounts of the Company and its predecessor from 1995 to 1997, and
prior to that, in various sales positions with the Company's predecessor,
including the Vice President of Sales from 1991 to 1995.
Thomas M. Olsen has served as Vice President of Domestic Sales and
Marketing of the Company since January 1997, as Vice President of Domestic Sales
of the Company's predecessor from 1995 to 1997, and as Director of Domestic
Sales from 1994 to 1995. Prior to joining the Company, Mr. Olsen served as the
Vice President of Sales and Marketing, with Denar Corp. from 1993 to 1994, and
prior to that as the Western Regional Manager of 3M Unitek.
BOARD OF DIRECTORS
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."
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 1997 exceeded $100,000 for services rendered
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<PAGE> 44
to the Company and its predecessors in all capacities during that year. The
Named Executive Officers are the only executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------------
AWARDS
ANNUAL COMPENSATION ------------------
NAME AND -------------------- SECURITIES ALL OTHER
PRINCIPAL POSITION(S) SALARY BONUS(1) UNDERLYING OPTIONS COMPENSATION(2)
- -------------------------------------- -------- ------- ------------------ ------------
<S> <C> <C> <C> <C>
Kenneth A. Darienzo................... $311,553 $75,000 294,411 $6,400
Chairman of the Board and
Chief Executive Officer
Martin J. Dymek....................... 180,690 50,000 149,825 6,400
President
Kenneth K. Krueger.................... 155,477 30,000 139,825 6,400
Executive Vice President, Operations
Bruce D. Nye.......................... 103,346(3) 30,000 46,055 4,374
Vice President, Chief Financial
Officer
and Corporate Secretary
</TABLE>
- ---------------
(1) Represents bonuses earned in 1997 which will be paid in 1998.
(2) Consists of matching contributions made by the Company under its Section
401(k) Profit Sharing Plan.
(3) 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 $160,000.
The following table sets forth for each of the Named Executive Officers,
the number of options granted during the year ended December 31, 1997 and the
potential realizable value of such grants.
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS EMPLOYEES BASE PRICE EXPIRATION -----------------
NAME GRANTED IN 1997 ($/SH)(1) DATE 5% 10%
- ------------------------------ ---------- ------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Kenneth A. Darienzo........... 100,000(3) 9.4% $0.40 01/07/07 $25,156 $63,750
134,411(4) 12.6 0.40 05/15/07 33,812 85,687
30,000(5) 2.8 12.00(6) 08/19/07 226,402 573,747
30,000(5) 2.8 12.00(6) 12/08/07 226,402 573,747
Martin J. Dymek............... 50,000(3) 4.7 0.40 01/07/07 12,578 31,875
53,825(4) 5.1 0.40 05/15/07 13,540 34,313
21,000(5) 2.0 12.00(6) 08/19/07 158,481 401,623
25,000(5) 2.4 12.00(6) 12/08/07 188,668 478,123
Kenneth K. Krueger............ 50,000(3) 4.7 0.40 01/07/07 12,578 31,875
53,825(4) 5.1 0.40 05/15/07 13,540 34,313
16,000(5) 1.5 12.00(6) 08/19/07 120,748 305,999
20,000(5) 1.9 12.00(6) 12/08/07 150,935 382,498
Bruce D. Nye.................. 16,055(4) 1.5 0.40 05/15/07 4,039 10,235
10,000(5) 1.0 12.00(6) 08/19/07 75,467 191,249
20,000(5) 1.9 12.00(6) 12/08/07 150,935 382,498
</TABLE>
- ---------------
(1) These options were granted at exercise prices equal to the fair market value
of the Common Stock on the date of grant as determined by the Board of
Directors of the Company.
(2) The 5% and 10% assumed rates of appreciation are prescribed by the rules and
regulations of the Commission and do not represent the Company's estimate or
projection of future trading prices of the Common Stock.
(3) Represents nonqualified stock options to purchase Common Stock, which were
fully vested on the grant date.
(4) Represents nonqualified stock options to purchase Common Stock, which 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.
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<PAGE> 45
(5) Represents incentive stock options granted under the 1997 Plan. See
"Management -- Compensation Plans and Arrangements -- 1997 Stock Incentive
Plan." Twenty-five percent of such options vest on the first anniversary of
the grant date and the remaining options vest thereafter in 36 equal
installments. Such options will automatically accelerate in the event of the
termination of such holder's employment within 18 months following a change
in control of the Company.
(6) The exercise price of such options is equal to the initial public offering
price. For the purpose of this table, the Company has used an assumed
initial public offering price of $12.00 per share.
The following table sets forth information with respect to each exercise of
stock options during the year ended December 31, 1997, by each of the Named
Executive Officers and the number of options held at year end and the aggregate
value of in-the-money options held at December 31, 1997.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND OPTION VALUES FOR FISCAL
YEAR 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OF SHARES VALUE OPTIONS AT DECEMBER 31, 1997 AT DECEMBER 31, 1997($)(1)
ACQUIRED ON REALIZED ------------------------------- -----------------------------
NAME EXERCISE IN 1997($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth A.
Darienzo........... -- -- 234,411 60,000 $ 2,719,168 $ --
Martin J. Dymek...... -- -- 103,825 46,000 1,204,370 --
Kenneth K. Krueger... -- -- 103,825 36,000 1,204,370 --
Bruce D. Nye......... -- -- 16,055 30,000 186,238 --
</TABLE>
- ---------------
(1) There was no established public trading market for the Common Stock as of
December 31, 1997. Accordingly, these values have been calculated on the
basis of an assumed initial public offering price of $12.00 per share, less
the applicable option exercise price per share.
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 for the remaining term of the agreement (but in no
event an amount less than 18 months salary) and certain benefits for the
remaining term of the agreement. 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
44
<PAGE> 46
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 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.
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<PAGE> 47
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 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 Company 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 Named Executive Officers. On September 25, 1997, the
Company granted options to purchase an aggregate of 9,000 shares of Common Stock
under the 1997 Plan to three employees of the Company. On December 9, 1997, the
Company granted options to purchase an aggregate of 95,000 shares of Common
Stock under the 1997 Plan to the Named Executive Officers. 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 vest 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
46
<PAGE> 48
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 401(k) Plan also includes a profit sharing component which may
result in additional Company contributions. The Company's contributions to the
401(k) Plan for the year ended December 31, 1997 totaled approximately $458,000.
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.
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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 assistant 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
74,999 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) 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 (v)
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.
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.
48
<PAGE> 50
PREFERRED STOCK CONVERSION
In January 1998, the Company amended its Certificate to provide for the
automatic conversion (in lieu of mandatory redemption) of all 22,000 shares of
Class A Preferred Stock and all 3,185 shares of Class C Preferred Stock into an
aggregate of 2,256,719 shares of Common Stock upon consummation of the Offering
(assuming an initial public offering price of $12.00 per share). The conversion
price will be equal to 93% of the initial public offering price (the initial
public offering price less underwriting discounts and commissions). As discussed
above, certain affiliates of the Company are holders of such shares of Class A
Preferred Stock and Class C Preferred Stock.
49
<PAGE> 51
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)..................................... 4,871,326 69.0% 48.4%
c/o Brown Brothers Harriman & Co.
59 Wall Street
New York, NY 10005
Kenneth A. Darienzo(3)........................................ 234,411 3.2 2.3
Martin J. Dymek(4)............................................ 103,825 1.5 1.0
Kenneth Krueger(5)............................................ 103,825 1.5 1.0
Bruce D. Nye(6)............................................... 16,055 * *
Andrew C. Cowen(7)............................................ 35,700 * *
Walter W. Grist(8)............................................ 35,700 * *
T. Michael Long(9)............................................ 4,907,026 69.2 48.6
Douglas E. Rogers(10)......................................... 303,507 4.3 3.0
Frederic M. Seegal(11)........................................ 115,240 1.6 1.1
Henry Wendt(12)............................................... 426,211 6.0 4.2
All directors and executive officers as a group (10
persons)(13)................................................ 6,281,500 81.3% 58.5%
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is based on 7,056,719 shares of Common Stock deemed
outstanding as of December 15, 1997 and 10,056,719 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 December 15, 1997, S-O Acquisition LLC was the
beneficial owner of 403,735 shares of Common Stock and S-O Management LLC
was the record owner of 795,400 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 upon 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.
50
<PAGE> 52
(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.
(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) 4,871,326 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.
51
<PAGE> 53
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 10,056,719 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
52
<PAGE> 54
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 Chief Executive Officer or Secretary pursuant to a
request in writing of the Chief Executive Officer, 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
53
<PAGE> 55
considered at special or annual stockholders' meetings. Notice of stockholder
proposals and 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 51.8% 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 7,056,719 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 registration statements on Form S-8 covering
outstanding options and securities issuable under the 1997 Plan, without UBS
Securities LLC's prior written consent.
TRANSFER AGENT AND REGISTRATION
The transfer agent and registrar for the Common Stock is U.S. Stock
Transfer Corporation.
54
<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 10,056,719 shares of
Common Stock outstanding. Of these shares, the 3,000,000 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
7,056,719 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 approximately
99% 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 UBS Securities LLC.
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
100,567 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. 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 7,056,719 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 UBS Securities LLC'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,
holders of options to purchase an aggregate of 921,060 shares of Common Stock
have entered into lock-up agreements.
55
<PAGE> 57
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters for whom UBS Securities LLC and Furman Selz LLC are acting as
representatives (the "Representatives"), have agreed to purchase from the
Company the following respective number of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------ ---------
<S> <C>
UBS Securities LLC................................................
Furman Selz LLC...................................................
---------
Total................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligations is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased. The Underwriting Agreement contains certain provisions whereby if any
Underwriter defaults in its obligations to purchase shares, and the aggregate
obligations of the Underwriters so defaulting do not exceed ten percent of the
shares offered hereby, the remaining Underwriters, or some of them, must assume
such obligations.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering price
set forth on the cover of this Prospectus, and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may allow
and such dealers may reallow a concession not in excess of $ per share to
certain other dealers. After the public offering of the shares of Common Stock,
the offering price and other selling terms may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date, of this Prospectus, to purchase up to 450,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. To the extent that the Underwriters
exercise this option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the number of shares of
Common Stock to be purchased by it shown in the above table bears to the total
number of shares of Common Stock offered hereby. The Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters.
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. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
Underwriters may reclaim selling concessions from syndicate members in the
Offering if the syndicate repurchases previously distributed Common Stock in
syndicate covering transactions, in stabilization transactions or otherwise. Any
of 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 Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
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<PAGE> 58
The executive officers, directors, employees and certain other stockholders
of the Company who beneficially own or have dispositive power over substantially
all of the shares of Common Stock outstanding prior to this Offering, including
Common Stock to be issued upon the completion of this Offering pursuant to the
Preferred Stock Conversion, have agreed that they will not, without the prior
written consent of UBS Securities LLC, offer, sell or otherwise dispose of any
shares of Common Stock or securities exchangeable for or convertible into shares
of Common Stock owned by them for a period of 180 days after the date of this
Prospectus. The Company has agreed that it will not, without the prior written
consent of UBS Securities LLC, offer, sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus, except
that the Company may grant options under the 1997 Plan and may issue shares
pursuant to other currently outstanding options.
An affiliate of Furman Selz LLC, one of the Underwriters, is the general
partner of Anvers, L.P., which will beneficially own 74,999 shares of Common
Stock, and 500 shares of Class C Preferred Stock of the Company following the
LLC Distribution. Such shares of Class C Preferred Stock will be converted into
44,802 shares of Common Stock.
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. Such shares of Class C Preferred Stock will be
converted into approximately 471 shares of Common Stock in the Preferred Stock
Conversion.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority in excess of five percent of the number of shares of Common Stock
offered hereby.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. The initial public offering price has been determined by
negotiations between the Company and the Representatives and may not be
indicative of the market price at which the Common Stock of the Company will
trade after this Offering. Among the factors considered in such negotiations, in
addition to prevailing market conditions, were certain financial information of
the Company, market valuations of other companies that the Company and the
Representatives believed to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant. The initial public offering price
set forth on the cover page of this Prospectus should not, however, be
considered an indication of the actual value of the Common Stock. Such price is
subject to change as a result of market conditions and other factors. There can
be no assurance that an active trading market will develop for the Common Stock
or that the Common Stock will trade in the public market subsequent to this
Offering at or above the initial offering price.
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. Certain legal matters with respect to the Offering will be passed
upon for the Underwriters by Cooley Godward LLP, San Diego, California.
EXPERTS
The consolidated financial statements as of December 31, 1995 and 1996 and
for the years ended December 31, 1994 and 1995, for the period January 1, 1996
through November 15, 1996, and for the period November 16, 1996 through December
31, 1996 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.
57
<PAGE> 59
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.
58
<PAGE> 60
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 September 30, 1997
(unaudited).......................................................................... 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, and the nine months ended September 30, 1996 (unaudited)
and 1997 (unaudited)................................................................. 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 nine months
ended September 30, 1997 (unaudited)................................................. 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, and the nine months ended September 30, 1996 (unaudited)
and 1997 (unaudited)................................................................. F-7
Notes to Consolidated Financial Statements............................................. F-8
</TABLE>
F-1
<PAGE> 61
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
the results of their operations and their cash flows for the period from
November 16, 1996 through December 31, 1996 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides 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, except for
Notes 8 and 14 as to which
the dates are November 15, 1997
and January 7, 1998,
respectively.
F-2
<PAGE> 62
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> 63
STERI-OSS, INC.
CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
ASSETS
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR --------------------------------------------
------------ PRO FORMA
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
(NOTE 2)
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents.................. $ 120 $ 220 $ 524 $ 524
Accounts receivable, net of allowance for
doubtful accounts of $79, $0 and $227,
respectively............................ 3,649 5,114 7,572 7,572
Inventories (Note 4)....................... 3,749 4,426 6,359 6,359
Prepaid expenses and other current
assets.................................. 248 314 368 368
-------- -------- ------- -------
Total current assets.................... 7,766 10,074 14,823 14,823
Fixed assets, net (Note 5)................... 2,857 4,674 4,895 4,895
Goodwill, net of accumulated amortization of
$1,820, $183 and $1,319, respectively...... 24,646 58,971 58,990 58,990
Other assets (Notes 6 and 7)................. 379 5,908 5,464 5,464
-------- -------- ------- -------
$ 35,648 $ 79,627 $84,172 $84,172
======== ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)/PREDECESSOR EQUITY
Current liabilities
Current portion of long-term debt (Note 6). $ $ 3,020 $ 3,604 $ 3,604
Accounts payable........................... 506 712 2,258 2,258
Accrued liabilities........................ 2,511 2,890 3,925 3,925
Customer advances.......................... 43 1,095 2,458 2,458
-------- -------- ------- -------
Total current liabilities............... 3,060 7,717 12,245 12,245
Long-term debt (Note 6)...................... 36,396 37,487 37,487
Mandatorily redeemable preferred stock
classified as debt (Notes 7 and 14)........ 34,226 36,611 11,426
-------- -------- ------- -------
Total liabilities............................ 3,060 78,339 86,343 61,158
-------- -------- ------- -------
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
September 30, 1997 (unaudited),
respectively, and 2,306,719 shares
issued and outstanding on a pro forma
basis at September 30, 1997.............
Additional paid-in capital................. 1,901 2,470 29,551
Accumulated deficit........................ (613) (4,641) (6,537)
Predecessor equity......................... 32,588
-------- -------- ------- -------
Total stockholders' equity
(deficit)/predecessor equity.......... 32,588 1,288 (2,171) 23,014
-------- -------- ------- -------
$ 35,648 $ 79,627 $84,172 $84,172
======== ======== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 64
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, NINE MONTHS NINE MONTHS
DECEMBER 31, THROUGH THROUGH ENDED ENDED
----------------- NOVEMBER 15, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1996 1997
------- ------- ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $22,168 $27,361 $ 28,108 $ 4,089 $23,387 $ 29,361
Cost of sales........................ 6,666 7,865 7,430 1,356 6,137 8,018
------- ------- -------- ---------- -------- ----------
Gross profit....................... 15,502 19,496 20,678 2,733 17,250 21,343
Selling, general and administrative
expense............................ 11,393 14,241 14,791 1,929 12,183 16,882
Research and development expense..... 1,781 2,225 2,116 352 1,775 1,942
------- ------- -------- ---------- -------- ----------
Income from operations............... 2,328 3,030 3,771 452 3,292 2,519
Interest expense..................... 1,065 6,547
------- ------- -------- ---------- -------- ----------
Income (loss) before income
taxes........................... 2,328 3,030 3,771 (613) 3,292 (4,028)
Income taxes......................... 1,253 1,572 1,852 1,608
------- ------- -------- ---------- -------- ----------
Net income (loss).................. $ 1,075 $ 1,458 $ 1,919 $ (613) $ 1,684 $ (4,028)
======= ======= ======== ========== ======== ==========
Unaudited per share information
(Notes 2 and 14)
Pro forma net loss per share....... $ (0.04) $ (0.31)
========== ==========
Weighted average shares
outstanding..................... 7,754,618 7,754,618
========== ==========
Supplemental net income per
share........................... $ 0.00 $ 0.01
========== ==========
Weighted average shares
outstanding..................... 10,754,618 10,754,618
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 65
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.................................... 569 569
Net loss.................................... (4,028) (4,028)
------ ------ ------ ------- -------- --------
Balances at September 30, 1997 (unaudited).... 50,000 $ $2,470 $(4,641) $ $ (2,171)
====== ====== ====== ======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 66
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, NINE MONTHS NINE MONTHS
DECEMBER 31, THROUGH THROUGH ENDED ENDED
----------------- NOVEMBER 15, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1996 1997
------- ------- ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)......................... $ 1,075 $ 1,458 $ 1,919 $ (613) $ 1,684 $(4,028)
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 1,324 2,199
Compensation expense on issuance of
stock options......................... 569
Dividends and interest on mandatorily
redeemable preferred stock and
subordinated debt..................... 542 3,376
Provision for income taxes of
Predecessor........................... 1,253 1,572 1,852 1,608
Changes in operating assets and
liabilities, net of acquisitions
Accounts receivable................... (178) (1,202) (879) (585) (907) (1,702)
Inventories........................... (677) (864) (823) 351 (569) (1,307)
Prepaid expenses and other current
assets............................. (444) (200) (157) (26) (192) (39)
Accounts payable...................... (403) 114 974 (472) 232 1,180
Accrued liabilities................... 263 856 (522) 936 (214) 260
Customer advances..................... (440) 43 1,446 (394) 1,989 1,363
------- ------- -------- -------- ------- -------
Net cash provided by operating
activities............................ 1,680 3,313 5,434 82 4,955 1,871
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) (1,713) (1,115)
------- ------- -------- -------- ------- -------
Net cash used in investing activities... (1,702) (1,190) (1,957) (58,994) (1,713) (2,852)
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 1,999
Payment of issue costs.................... (2,140)
Advances from (to) Bausch & Lomb.......... 177 (2,158) (3,597) (2,762)
Proceeds from issuance of common stock.... 1
------- ------- -------- -------- ------- -------
Net cash provided by (used in) financing
activities............................ 177 (2,158) (3,597) 59,132 (2,762) 1,285
------- ------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents............................... 155 (35) (120) 220 480 304
Cash and cash equivalents, beginning of
period.................................... 155 120 120 220
------- ------- -------- -------- ------- -------
Cash and cash equivalents, end of period.... $ 155 $ 120 $ $ 220 $ 600 $ 524
======= ======= ======== ======== ======= =======
Supplemental disclosure of cash flow
information
Cash paid for interest.................... $ -- $ -- $ -- $ 122 $ -- $ 2,750
======= ======= ======== ======== ======= =======
</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> 67
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 International, 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> 68
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 accounting
F-9
<PAGE> 69
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
using an assumed Offering price per share of $12, 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 $22,000 and Class C
8.0% mandatorily redeemable preferred stock totaling $3,185, into 2,256,719
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 $274 and $1,643 and the net loss per share by $0.04 and $0.21 for
the period from November 16, 1996 through December 31, 1996 and the nine months
ended September 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 $25,524 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 $379 and $2,540 for the periods ended December 31, 1996 and September 30,
1997, respectively.
Unaudited Pro Forma Balance Sheet Data
Unaudited pro forma balance sheet data adjusts the interim September 30,
1997 balance sheet to reflect the conversion of $25,185 of Class A and Class C
mandatorily redeemable preferred stock into 2,256,719 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 nine months of 1996 and 1997 ended on
September 28 and September 27, respectively. For convenience of presentation,
the financial statements are shown as ending on December 31, and September 30.
Reclassifications
Certain prior period amounts have been reclassified to conform with current
period presentations.
F-10
<PAGE> 70
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
nine months ended September 30, 1996 and 1997 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 nine months ended
September 30, 1996 and 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 nine month period ended September
30, 1997 (unaudited) amounted to $183 and $1,136, 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, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials....................... $1,824 $2,036 $ 2,806
Work-in process..................... 507 583 615
Finished goods...................... 1,418 1,807 2,938
------ ------ -------
$3,749 $4,426 $ 6,359
====== ====== =======
</TABLE>
F-11
<PAGE> 71
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, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements.............. $ 230 $ 297 $ 317
Machinery and equipment............. 2,168 2,829 3,168
Office furniture and fixtures....... 1,256 1,439 2,092
Construction in progress............ 87 241 354
------ ------ -------
3,741 4,806 5,931
Less: accumulated depreciation...... (884) (132) (1,036)
------ ------ -------
$2,857 $4,674 $ 4,895
====== ====== =======
</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 nine months ended September 30, 1996 (unaudited) and 1997
(unaudited) totaled $363, $595, $712, $132, $558 and $905, respectively.
F-12
<PAGE> 72
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
COMPANY
-----------------------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<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 (10.00% at September 30, 1997 (unaudited)) or LIBOR plus
2.75% per annum. Maximum borrowing under this loan is $5,000............. $ 1,323 $ 2,039
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 (10.00% at September 30, 1997 (unaudited)) or
LIBOR plus 3.0% per annum. Maximum borrowing under this loan is $17,500
and $17,436, respectively................................................ 17,500 17,436
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 (10.50% at September 30, 1997 (unaudited)) or LIBOR
plus 3.75% per annum; net of unamortized discount of $39 and $33 at
December 31, 1996 and September 30, 1997 (unaudited), respectively....... 7,461 7,430
Capital Expenditure Loan which expires on November 15, 2002; variable
interest rate based on the Reference Rate plus 1.5% per annum (10.00% at
September 30, 1997 (unaudited)) or LIBOR plus 3.0% per annum. Maximum
borrowing under this loan is $3,000...................................... 1,385
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 $91 at December 31, 1996 and
September 30, 1997 (unaudited), respectively............................. 9,947 10,286
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 $31 at December 31, 1996 and September
30, 1997 (unaudited), respectively....................................... 2,471 2,515
10.25% acquisition note payable to Bausch & Lomb, repaid February 14,
1997..................................................................... 714
-------- -------
Total long-term debt................................................... 39,416 41,091
Less current portion................................................... (3,020) (3,604)
-------- -------
Long-term debt......................................................... $ 36,396 $37,487
======== =======
</TABLE>
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 $1,795 at
December 31, 1996 and September 30, 1997 (unaudited), respectively, are included
in other assets in the consolidated balance sheets. Interest accrued on the Bank
Facility and Senior Subordinated Notes aggregated $430 and $551 at December 31,
1996 and September 30, 1997 (unaudited), respectively.
F-13
<PAGE> 73
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
Scheduled future annual maturities of long-term debt as of September 30,
1997 (unaudited) are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997................................................. $ 833
1998.............................................. 3,740
1999.............................................. 5,994
2000.............................................. 4,308
2001.............................................. 6,513
Thereafter........................................ 19,858
-------
$41,246
=======
</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
September 30, 1997 (unaudited) accrued interest on mandatorily redeemable
preferred stock included in the carrying value of such preferred stock amounted
to $374 and $2,617, 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 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
September 30, 1997 (unaudited) 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 September 30,
1997 (unaudited) aggregated $2,886 and $2,395, respectively.
8. COMMITMENTS AND CONTINGENCIES
Commitments
The principal operating leases of the Company are for its headquarters and
manufacturing facilities and certain equipment. The facility leases provide that
the Company shall pay for utilities, insurance, taxes and maintenance. One of
the facility leases, which was to expire on December 31, 1997, was renewed on
November 15, 1997 prior to its termination. The renewed lease expires on
December 31, 2003. The remaining leases expire through the year 1999 with
renewal options available.
F-14
<PAGE> 74
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
Future annual minimum rental payments required under noncancelable
operating leases that have initial or remaining lease terms in excess of one
year as of September 30, 1997 (unaudited) are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997.................................................. $ 76
1998............................................... 402
1999............................................... 485
2000............................................... 253
2001............................................... 253
Thereafter......................................... 506
------
$1,975
======
</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 September
30, 1997 (unaudited) are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997.................................................. $ 150
1998............................................... 653
1999............................................... 469
2000............................................... 342
2001............................................... 177
Thereafter......................................... 66
------
$1,857
======
</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.
9. STOCKHOLDERS' EQUITY
Stock Options (unaudited)
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 $46 has been charged to operations
during the nine months ended September 30, 1997 (unaudited) for such options
based on a grant date fair value of $1.93 per share. 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 nine months ended September 30,
1997 (unaudited) for such options based on a grant date fair value of $1.93 per
share. These options immediately vested on the date of grant, January 8, 1997.
These options expire in 2007.
F-15
<PAGE> 75
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
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 nine months ended September 30, 1997
(unaudited) for such options based on a grant date fair value of $1.93 per
share. 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 $26 has been charged to operations during the
nine months ended September 30, 1997 (unaudited) for such options based on a
grant date fair value of $5.69 per share.
The Company accounts for these plans under Accounting Principles Board
Opinion No. 25. Compensation expense is calculated based upon the difference
between (i) the grant date fair value of the underlying common stock and (ii)
the exercise price of the options. 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>
SEPTEMBER
30,
1997
-----------
(UNAUDITED)
<S> <C>
Net loss:
As reported..................................................... $(4,028)
=======
Pro Forma....................................................... $(3,453)
=======
Pro forma net loss per share:
As reported..................................................... $ (0.31)
=======
Pro Forma....................................................... $ (0.23)
=======
Supplemental net income per share:
As reported..................................................... $ 0.01
=======
Pro forma....................................................... $ 0.05
=======
</TABLE>
A summary of activity of the Plan at September 30, 1997 (unaudited) and
during the period then ended is presented in the table below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
(UNAUDITED)
---------------------------
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................................. 449,276 $0.58
------- -----
</TABLE>
The weighted average grant date fair value of options granted during the
nine month period ended September 30, 1997 (unaudited) amounted to $2.33.
F-16
<PAGE> 76
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
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. The Company recorded these warrants
at fair value on the date of issuance in the amount of $1,900.
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, NINE MONTHS
DECEMBER 31, THROUGH THROUGH ENDED
----------------- NOVEMBER 15, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1996 1997
------ ------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal................ $ 599 $ 670 $1,292
State.................. 246 252 385
Deferred:
Federal................ 378 558 145 $(46) $(689)
State.................. 30 92 30 6 (63)
------ ------ ------ ---- ------
1,253 1,572 1,852 (40) (752)
Valuation allowance...... 40 752
------ ------ ------ ---- ------
$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 nine months ended September 30, 1996 (unaudited) and
1997 (unaudited), are based on the effective income tax rate for the respective
year.
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, NINE MONTHS
DECEMBER 31, THROUGH THROUGH ENDED
------------- NOVEMBER 15, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1996 1997
---- ---- ------------ ------------ -------------
(UNAUDITED)
<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 18.9
Research and development credit............ (1.5) (0.6) (0.2) 0.0 0.0
Increase in valuation allowance............ 0.0 0.0 0.0 6.6 14.7
Other, net................................. 1.4 1.4 0.9 (1.0) 0.4
---- ---- ---- ----- -----
Income taxes at the Company's effective
rate..................................... 53.8% 51.9% 49.1% 0.0% 0.0%
==== ==== ==== ===== =====
</TABLE>
F-17
<PAGE> 77
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
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, SEPTEMBER
1995 1996 30,
------------ ------------ 1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax liabilities:
Fixed assets.................................. $ (426) $ (32) $ (112)
Goodwill...................................... (118) (860)
------ ------ -----
Total deferred tax liabilities............. (426) (150) (972)
------ ------ -----
Deferred tax assets:
Net operating loss carryforward............... 96 130 1,204
Reserves and accruals......................... 570 60 429
Research and development credit
carryforward............................... 91
------ ------ -----
Total deferred tax assets.................. 666 190 1,724
------ ------ -----
Valuation allowance............................. (40) (752)
------ ------ -----
Net deferred tax assets.................... $ 240 $ -- $ --
====== ====== =====
</TABLE>
At September 30, 1997 (unaudited), the Company has net operating loss
("NOL") carryforwards of $3,255 and $1,628 for Federal and California purposes,
respectively. The losses begin to expire in 2011 and 2001 for Federal and
California purposes, respectively.
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.
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 100% of
employee contributions up to 4% of the participant's eligible compensation. The
401(k) Plan also includes a profit sharing component which may result in
additional Company contributions. The Company's contributions to the 401(k) Plan
for the period November 16, 1996 through December 31, 1996 and the nine months
ended September 30, 1997 (unaudited) totaled $33 and $254, respectively.
F-18
<PAGE> 78
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
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
------------
YEAR ENDED JANUARY 1 NOVEMBER 16, PREDECESSOR COMPANY
DECEMBER 31, THROUGH THROUGH ------------- -------------
----------------- NOVEMBER 15, DECEMBER 31, NINE MONTHS NINE MONTHS
1994 1995 1996 1996 ENDED ENDED
------- ------- ------------ ------------ SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
United States............ $13,461 $15,702 $ 15,298 $2,072 $12,703 $16,180
Canada................... 607 938 1,375 187 1,069 1,442
------- ------- -------- ------ -------- --------
North America............ 14,068 16,640 16,673 2,259 13,772 17,622
Europe and the Middle
East................... 4,686 6,192 6,567 1,100 5,545 6,680
Asia..................... 2,427 3,208 3,325 610 2,894 3,396
Other.................... 987 1,321 1,543 120 1,176 1,663
------- ------- -------- ------ -------- --------
$22,168 $27,361 $ 28,108 $4,089 23,387 29,361
======= ======= ======== ====== ======== ========
</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 13% 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
nine months ended September 30, 1996 (unaudited) and 1997 (unaudited),
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.
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 $20,000 of the outstanding shares
F-19
<PAGE> 79
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
of Class A and Class C mandatorily redeemable preferred stock into an aggregate
of 1,433,537 shares of common stock, upon consummation of the Offering, in lieu
of exercising their redemption rights. On January 7, 1998, the Company further
amended its Certificate of Incorporation to provide for the automatic conversion
of the remaining outstanding shares of Class A and Class C mandatorily
redeemable Preferred Stock totaling $5,185 into an aggregate of 823,182 shares
of common stock upon consummation of the Offering. The remaining $10,000 of
mandatorily redeemable preferred stock will be redeemed by using the proceeds
from the Offering.
In August 1997, the Board of Directors declared a 50-for-one split of its
common stock which was effected in October 1997. 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, the Board of Directors established a stock option plan (the
"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 Company 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 Company granted options to purchase an aggregate
of 9,000 shares of common stock under the Plan to three employees of the
Company. In December 1997, the Company granted options to purchase an aggregate
of 95,000 shares of common stock under the Plan to four officers 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-20
<PAGE> 80
======================================================
No dealer, salesperson or other person has been authorized to give any
information or make any representation not contained in this Prospectus in
connection with the offer made by this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any of the securities offered
hereby by anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date of this
Prospectus or that there has been no change in the affairs of the Company since
such date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 6
Use of Proceeds........................... 13
Dividend Policy........................... 13
Capitalization............................ 14
Dilution.................................. 15
Unaudited Pro Forma Consolidated Financial
Data.................................... 16
Selected Historical Consolidated Financial
Data.................................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 22
Business.................................. 29
Management................................ 40
Certain Transactions...................... 48
Principal Stockholders.................... 50
Description of Capital Stock.............. 52
Shares Eligible for Future Sale........... 55
Underwriting.............................. 56
Legal Matters............................. 57
Experts................................... 57
Additional Information.................... 58
Index to Consolidated Financial
Statements.............................. F-1
</TABLE>
------------------------
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, 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.
======================================================
======================================================
3,000,000 Shares
[STERI-OSS LOGO]
Common Stock
----------------------------
PROSPECTUS
, 1998
----------------------------
UBS Securities
Furman Selz
- ------------------------------------------------------
- ------------------------------------------------------
<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....................................... 20,000
Blue sky fees and expenses............................................... 5,000
Printing and engraving expenses.......................................... 150,000
Legal fees and expenses.................................................. 350,000
Accounting fees and expenses............................................. 350,000
Transfer Agent and Registrar fees........................................ 5,000
Miscellaneous............................................................ 84,648
----------
Total.......................................................... $1,000,000
==========
</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.
The Registrant intends to obtain directors' and officers' liability
insurance in connection with the Offering.
II-1
<PAGE> 82
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. Between August 1997 and December 1997, the Registrant granted
options to purchase an aggregate of 330,000 shares of Common Stock under
the 1997 Plan to certain employees of the Registrant at an exercise price
per share equal to the initial public offering price. 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 vest in 36 equal
monthly installments. 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 a qualifying initial public
offering. In January 1998, the Registrant amended its Certificate of
Incorporation and Certificate of Designation to provide for the automatic
conversion of the remaining outstanding shares 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 of the
Registrant as filed with the Delaware Secretary of State on August 25,
1997.
3.2* Amended and Restated Certificate of Incorporation of the Registrant to
be filed with the Delaware Secretary of State upon consummation of the
Offering.
3.3* Amended and Restated Bylaws of the Registrant.
3.4* Certificate of Amendment of Restated Certificate of Incorporation of the
Registrant as filed with the Delaware Secretary of State on January 7,
1998.
4.1* Specimen certificate representing shares of Common Stock of the
Registrant.
4.2* 1997 Stock Incentive Plan.
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.
4.6 Form of Notice of Grant of Stock Option under the 1997 Stock Incentive
Plan.
4.7 Form of Stock Option Agreement under the 1997 Stock Incentive Plan.
4.8 Form of Stock Issuance Agreement under the 1997 Stock Incentive Plan.
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, between the
Registrant and The 1818 Fund II, L.P.
10.3* Secured Credit Agreement dated November 15, 1996, among the Registrant,
First Source Financial LLP and Union Bank of California, N.A. (the
"Lenders"), together with Security Agreement dated November 15, 1996,
between the Registrant and First Source Financial LLP, as Collateral
Agent for the Lenders, and Pledge Agreement dated November 15, 1996,
between the Registrant and First Source Financial LLP, as Collateral
Agent for the Lenders.
10.4* Registration Rights Agreement dated November 15, 1996, 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, between the Registrant and Metaux
Precieux Metalor Deutschland Gmbh.
</TABLE>
II-3
<PAGE> 84
<TABLE>
<S> <C>
10.7 Intentionally omitted.
10.8+ License Agreement dated April 28, 1994, between the Registrant and
Dental Imaging Associates, Inc., together with Addendum thereto dated
April 11, 1995, between the Registrant and Dental Imaging Associates,
Inc.
10.9* Employment Agreement dated November 15, 1996, between the Registrant and
Kenneth A. Darienzo.
10.10* Employment Agreement dated November 15, 1996, between the Registrant and
Martin J. Dymek.
10.11* Employment Agreement dated November 15, 1996, between the Registrant and
Kenneth K. Krueger.
10.12* Sublease dated January 6, 1993, between the Registrant and Great Western
Real Estate.
10.13* Asset Purchase Agreement dated July 22, 1996, between the Registrant,
S-O and Bausch & Lomb.
10.14* Distribution Agreement dated April 18, 1997, between Registrant and
Interpore Orthopaedics, Inc.
10.15* License Agreement dated April 18, 1997, between the Registrant and
Interpore International.
10.16* Commitment Letter Agreement dated December 24, 1997, between Union Bank
and S-O Operating Corp.
10.17* Sublease Agreement dated September 30, 1997, between the Registrant and
John H. Harland Company, together with Standard Form Lease dated January
31, 1989 between Metropolitan Life Insurance Company and Interchecks,
Incorporated and all amendments thereto.
10.18* Standard Industrial/Commercial Single-Tenant Lease dated November 15,
1997, among the Registrant, Koll Yorba Linda Associates and DK Northwest
Holdings, L.P.
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>
- ---------------
* 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.
II-4
<PAGE> 85
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-5
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 6 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 January 9, 1998.
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. 6 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 January 9, 1998
- --------------------------------------------- Chief Executive Officer
Kenneth A. Darienzo (Principal Executive
Officer)
* Director January 9, 1998
- ---------------------------------------------
Henry Wendt
* Director January 9, 1998
- ---------------------------------------------
Walter W. Grist
* Director January 9, 1998
- ---------------------------------------------
T. Michael Long
* Director January 9, 1998
- ---------------------------------------------
Douglas E. Rogers
* Director January 9, 1998
- ---------------------------------------------
Andrew C. Cowen
* Director January 9, 1998
- ---------------------------------------------
Fredric M. Seegal
/s/ BRUCE D. NYE Vice President and Chief January 9, 1998
- --------------------------------------------- Financial Officer
Bruce D. Nye (Principal Accounting and
Financial Officer)
</TABLE>
*By: /s/ KENNETH A. DARIENZO
---------------------------------
Kenneth A. Darienzo
(Attorney-in-fact)
II-6
<PAGE> 87
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........ -- -- -- --
</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
</TABLE>
<PAGE> 88
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 of
the Registrant as filed with the Delaware Secretary of State on
August 25, 1997.
3.2* Amended and Restated Certificate of Incorporation of the Registrant
to be filed with the Delaware Secretary of State upon consummation of
the Offering.
3.3* Amended and Restated Bylaws of the Registrant.
3.4* Certificate of Amendment of Restated Certificate of Incorporation of
the Registrant as filed with the Delaware Secretary of State on
January 7, 1998.
4.1* Specimen certificate representing shares of Common Stock of the
Registrant.
4.2* 1997 Stock Incentive Plan.
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.
4.6 Form of Notice of Grant of Stock Option under the 1997 Stock
Incentive Plan.
4.7 Form of Stock Option Agreement under the 1997 Stock Incentive Plan.
4.8 Form of Stock Issuance Agreement under the 1997 Stock Incentive Plan.
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, between the
Registrant and The 1818 Fund II, L.P.
10.3* Secured Credit Agreement dated November 15, 1996, among the
Registrant, First Source Financial LLP and Union Bank of California,
N.A. (the "Lenders"), together with Security Agreement dated November
15, 1996, between the Registrant and First Source Financial LLP, as
Collateral Agent for the Lenders, and Pledge Agreement dated November
15, 1996, between the Registrant and First Source Financial LLP, as
Collateral Agent for the Lenders.
10.4* Registration Rights Agreement dated November 15, 1996, 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, between the Registrant and
Metaux Precieux Metalor Deutschland Gmbh.
10.7 Intentionally omitted.
10.8+ License Agreement dated April 28, 1994, between the Registrant and
Dental Imaging Associates, Inc., together with Addendum thereto dated
April 11, 1995, between the Registrant and Dental Imaging Associates,
Inc.
10.9* Employment Agreement dated November 15, 1996, between the Registrant
and Kenneth A. Darienzo.
10.10* Employment Agreement dated November 15, 1996, between the Registrant
and Martin J. Dymek.
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ --------------------------------------------------------------------- ------------
<S> <C> <C>
10.11* Employment Agreement dated November 15, 1996, between the Registrant
and Kenneth K. Krueger.
10.12* Sublease dated January 6, 1993, between the Registrant and Great
Western Real Estate.
10.13* Asset Purchase Agreement dated July 22, 1996, between the Registrant,
S-O and Bausch & Lomb.
10.14* Distribution Agreement dated April 18, 1997, between Registrant and
Interpore Orthopaedics, Inc.
10.15* License Agreement dated April 18, 1997, between the Registrant and
Interpore International.
10.16* Commitment Letter Agreement dated December 24, 1997, between Union
Bank and S-O Operating Corp.
10.17* Sublease Agreement dated September 30, 1997, between the Registrant
and John H. Harland Company, together with Standard Form Lease dated
January 31, 1989 between Metropolitan Life Insurance Company and
Interchecks, Incorporated and all amendments thereto.
10.18* Standard Industrial/Commercial Single-Tenant Lease dated November 15,
1997, among the Registrant, Koll Yorba Linda Associates and DK
Northwest Holdings, L.P.
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>
- ---------------
* 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 4.6
S-0 ACQUISITION CORP.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the "Option") to
purchase shares of the Common Stock of S-O Acquisition Corp. (the
"Corporation"):
Optionee: _____________________________________________________________
Grant Date: ___________________________________________________________
Vesting Commencement Date: ____________________________________________
Exercise Price: $ __________________________________________ per share
Number of Option Shares: _______________________________________ shares
Expiration Date: ______________________________________________________
Type of Option: ______ Incentive Stock Option
______ Non-Statutory Stock Option
Exercise Schedule: The Option shall become exercisable with respect to
twenty five percent (25%) of the Option Shares upon Optionee's
completion of one (1) year of Service measured from the Vesting
Commencement Date and shall become exercisable for the balance of the
Option Shares in thirty-six (36) successive equal monthly installments
upon Optionee's completion of each additional month of Service over the
thirty-six (36) month period measured from the first anniversary of the
Vesting Commencement Date. In no event shall the Option become
exercisable for any additional Option Shares after Optionee's cessation
of Service.
Optionee understands and agrees that the Option is granted subject to
and in accordance with the terms of the S-O Acquisition Corp. 1997 Stock
Incentive Plan (the "Plan"). Optionee further agrees to be bound by the terms of
the Plan and the terms of the Option as set forth in the Stock Option Agreement
attached hereto as Exhibit A. A copy of the Plan is available upon request made
to the Corporate Secretary at the Corporation's principal offices.
<PAGE> 2
No Employment or Service Contract. Nothing in this Notice or in the
attached Stock Option Agreement or in the Plan shall confer upon Optionee any
right to continue in Service for any period of specific duration or interfere
with or otherwise restrict in any way the rights of the Corporation (or any
Parent or Subsidiary employing or retaining Optionee) or of Optionee, which
rights are hereby expressly reserved by each, to terminate Optionee's Service at
any time for any reason, with or without cause.
Definitions. All capitalized terms in this Notice shall have the
meaning assigned to them in this Notice or in the attached Stock Option
Agreement.
DATED: __________________________________ , 199__
S-O ACQUISITION CORP.
By: ____________________________
Title: _________________________
________________________________
OPTIONEE
Address: _______________________
________________________________
ATTACHMENTS
EXHIBIT A - STOCK OPTION AGREEMENT
EXHIBIT B - QUESTION AND ANSWER SUMMARY
2.
<PAGE> 1
EXHIBIT 4.7
S-O ACQUISITION CORP.
STOCK OPTION AGREEMENT
RECITALS
A. The Board has adopted the Plan for the purpose of retaining the
services of selected Employees, non-employee members of the Board or of the
board of directors of any Parent or Subsidiary and consultants and other
independent advisors who provide services to the Corporation (or any Parent or
Subsidiary).
B. Optionee is to render valuable services to the Corporation (or a
Parent or Subsidiary), and this Agreement is executed pursuant to, and is
intended to carry out the purposes of, the Plan in connection with the
Corporation's grant of an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. The Corporation hereby grants to Optionee,
as of the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.
2. OPTION TERM. This option shall have a maximum term of ten
(10) years measured from the Grant Date and shall accordingly expire at the
close of business on the Expiration Date, unless sooner terminated in accordance
with Paragraph 5 or 6.
3. LIMITED TRANSFERABILITY. This option shall be neither
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee. However, if this option is designated a
Non-Statutory Option in the Grant Notice, then this option may, in connection
with the Optionee's estate plan, be assigned in whole or in part during
Optionee's lifetime to one or more members of the Optionee's immediate family or
to a trust established for the exclusive benefit of one or more such family
members. The assigned portion shall be exercisable only by the person or persons
who acquire a proprietary interest in the option pursuant to such assignment.
The terms applicable to the assigned portion shall be the same as those in
effect for this option immediately prior to such assignment and shall be set
forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
<PAGE> 2
4. DATES OF EXERCISE. This option shall become exercisable for
the Option Shares in one or more installments as specified in the Grant Notice.
As the option becomes exercisable for such installments, those installments
shall accumulate and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.
5. CESSATION OF SERVICE. The option term specified in
Paragraph 2 shall terminate (and this option shall cease to be outstanding)
prior to the Expiration Date should any of the following provisions become
applicable:
(a) Should Optionee cease to remain in Service for any
reason (other than death, Permanent Disability or Misconduct) while
this option is outstanding, then Optionee shall have a period of three
(3) months (commencing with the date of such cessation of Service)
during which to exercise this option, but in no event shall this option
be exercisable at any time after the Expiration Date.
(b) Should Optionee die while holding this option, then the
personal representative of Optionee's estate or the person or persons
to whom the option is transferred pursuant to Optionee's will or in
accordance with the laws of inheritance shall have the right to
exercise this option. Such right shall lapse, and this option shall
cease to be outstanding, upon the earlier of (i) the expiration of the
twelve (12)-month period measured from the date of Optionee's death or
(ii) the Expiration Date.
(c) Should Optionee cease Service by reason of Permanent
Disability while this option is outstanding, then Optionee shall have a
period of twelve (12) months (commencing with the date of such
cessation of Service) during which to exercise this option. In no event
shall this option be exercisable at any time after the Expiration Date.
(d) During the limited period of post-Service
exercisability, this option may not be exercised in the aggregate for
more than the number of vested Option Shares for which the option is
exercisable at the time of Optionee's cessation of Service. Upon the
expiration of such limited exercise period or (if earlier) upon the
Expiration Date, this option shall terminate and cease to be
outstanding for any vested Option Shares for which the option has not
been exercised. However, this option shall, immediately upon Optionee's
cessation of Service for any reason, terminate and cease to be
outstanding with respect to any Option Shares in which Optionee is not
otherwise at that time vested or for which this option is not otherwise
at that time exercisable.
2.
<PAGE> 3
(e) Should Optionee's Service be terminated for Misconduct,
then this option shall terminate immediately and cease to remain
outstanding.
6. SPECIAL ACCELERATION OF OPTION.
(a) In the event of a Corporate Transaction, this option to
the extent outstanding at that time, but not otherwise fully
exercisable, shall automatically accelerate so that this option shall,
immediately prior to the effective date of the Corporate Transaction,
become exercisable for all of the Option Shares at the time subject to
this option and may be exercised for any or all of those Option Shares
as fully-vested shares of Common Stock. No such acceleration of this
option shall occur, however, if and to the extent: (i) this option is,
in connection with the Corporate Transaction, to be assumed by the
successor corporation (or parent thereof) or to be replaced with a
comparable option to purchase shares of the capital stock of the
successor corporation (or parent thereof) or (ii) this option is to be
replaced with a cash incentive program of the successor corporation
which preserves the spread existing at the time of the Corporate
Transaction on the Option Shares for which this option is not otherwise
at that time exercisable (the excess of the Fair Market Value of those
Option Shares over the aggregate Exercise Price payable for such
shares) and provides for subsequent pay-out in accordance with the same
option exercise/vesting schedule set forth in the Grant Notice. The
determination of option comparability under clause (i) shall be made by
the Plan Administrator, and such determination shall be final, binding
and conclusive.
(b) Immediately following the Corporate Transaction, this
option shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation (or parent thereof) in
connection with the Corporate Transaction.
(c) If this option is assumed in connection with a
Corporate Transaction, then this option shall be appropriately
adjusted, immediately after such Corporate Transaction, to apply to the
number and class of securities which would have been issuable to
Optionee in consummation of such Corporate Transaction had the option
been exercised immediately prior to such Corporate Transaction, and
appropriate adjustments shall also be made to the Exercise Price,
provided the aggregate Exercise Price shall remain the same.
(d) This Agreement shall not in any way affect the right of
the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or
assets.
7. ADJUSTMENT IN OPTION SHARES. Should any change be made to
the Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class
3.
<PAGE> 4
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the total number and/or class of securities subject to this
option and (ii) the Exercise Price in order to reflect such change and thereby
preclude a dilution or enlargement of benefits hereunder.
8. STOCKHOLDER RIGHTS. The holder of this option shall not
have any stockholder rights with respect to the Option Shares until such person
shall have exercised the option, paid the Exercise Price and become a holder of
record of the purchased shares.
9. MANNER OF EXERCISING OPTION.
(a) In order to exercise this option with respect to all or
any part of the Option Shares for which this option is at the time
exercisable, Optionee (or any other person or persons exercising the
option) must take the following actions:
(i) Execute and deliver to the Corporation a Notice of
Exercise for the Option Shares for which the option is
exercised.
(ii) Pay the aggregate Exercise Price for the purchased
shares in one or more of the following forms:
(A) cash or check made payable to the Corporation;
(B) a promissory note payable to the Corporation,
but only to the extent authorized by the Plan Administrator
in accordance with Paragraph 13;
(C) shares of Common Stock held by Optionee (or
any other person or persons exercising the option) for the
requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and
valued at Fair Market Value on the Exercise Date; or
(D) to the extent the option is exercised for
vested Option Shares, through a special sale and remittance
procedure pursuant to which Optionee (or any other person or
persons exercising the option) shall concurrently provide
irrevocable instructions (I) to a Corporation-designated
brokerage firm to effect the immediate sale of the purchased
shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds
to cover the aggregate Exercise Price payable for the
purchased shares plus all applicable Federal, state and
local
4.
<PAGE> 5
income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (II) to the
Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete
the sale.
Except to the extent the sale and remittance
procedure is utilized in connection with the option
exercise, payment of the Exercise Price must accompany the
Notice of Exercise delivered to the Corporation in
connection with the option exercise.
(iii) Furnish to the Corporation appropriate documentation
that the person or persons exercising the option (if other than
Optionee) have the right to exercise this option.
(iv) Make appropriate arrangements with the Corporation (or
Parent or Subsidiary employing or retaining Optionee) for the
satisfaction of all Federal, state and local income and
employment tax withholding requirements applicable to the option
exercise.
(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other
person or persons exercising this option) a certificate for the
purchased Option Shares, with the appropriate legends affixed thereto.
(c) In no event may this option be exercised for any
fractional shares.
10. COMPLIANCE WITH LAWS AND REGULATIONS.
(a) The exercise of this option and the issuance of the
Option Shares upon such exercise shall be subject to compliance by the
Corporation and Optionee with all applicable requirements of law
relating thereto and with all applicable regulations of any stock
exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock may be listed for trading at the time of such exercise and
issuance.
(b) The inability of the Corporation to obtain approval
from any regulatory body having authority deemed by the Corporation to
be necessary to the lawful issuance and sale of any Common Stock
pursuant to this option shall relieve the Corporation of any liability
with respect to the non-issuance or sale of the Common Stock as to
which such approval shall not have been obtained. The Corporation,
however, shall use its best efforts to obtain all such approvals.
11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise
provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionee's assigns and the legal representatives, heirs
and legatees of Optionee's estate.
5.
<PAGE> 6
12. NOTICES. Any notice required to be given or delivered to
the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation at its principal corporate offices. Any notice
required to be given or delivered to Optionee shall be in writing and addressed
to Optionee at the address indicated below Optionee's signature line on the
Grant Notice. All notices shall be deemed effective upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.
13. FINANCING. The Plan Administrator may, in its absolute
discretion and without any obligation to do so, permit Optionee to pay the
Exercise Price for the purchased Option Shares by delivering a full-recourse
promissory note payable to the Corporation. The terms of any such promissory
note (including the interest rate, the requirements for collateral and the terms
of repayment) shall be established by the Plan Administrator in its sole
discretion.
14. CONSTRUCTION. This Agreement and the option evidenced
hereby are made and granted pursuant to the Plan and are in all respects limited
by and subject to the terms of the Plan. All decisions of the Plan Administrator
with respect to any question or issue arising under the Plan or this Agreement
shall be conclusive and binding on all persons having an interest in this
option.
15. GOVERNING LAW. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.
16. EXCESS SHARES. If the Option Shares covered by this
Agreement exceed, as of the Grant Date, the number of shares of Common Stock
which may without stockholder approval be issued under the Plan, then this
option shall be void with respect to those excess shares, unless stockholder
approval of an amendment sufficiently increasing the number of shares of Common
Stock issuable under the Plan is obtained in accordance with the provisions of
the Plan.
17. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION. In the
event this option is designated an Incentive Option in the Grant Notice, the
following terms and conditions shall also apply to the grant:
(a) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is
exercised for one or more Option Shares: (A) more than three (3) months
after the date Optionee ceases to be an Employee for any reason other
than death or Permanent Disability or (B) more than twelve (12) months
after the date Optionee ceases to be an Employee by reason of Permanent
Disability.
6.
<PAGE> 7
(b) No installment under this option shall qualify for
favorable tax treatment as an Incentive Option if (and to the extent)
the aggregate Fair Market Value (determined at the Grant Date) of the
Common Stock for which such installment first becomes exercisable
hereunder would, when added to the aggregate value (determined as of
the respective date or dates of grant) of the Common Stock or other
securities for which this option or any other Incentive Options granted
to Optionee prior to the Grant Date (whether under the Plan or any
other option plan of the Corporation or any Parent or Subsidiary) first
become exercisable during the same calendar year, exceed One Hundred
Thousand Dollars ($100,000) in the aggregate. Should such One Hundred
Thousand Dollar ($100,000) limitation be exceeded in any calendar year,
this option shall nevertheless become exercisable for the excess shares
in such calendar year as a Non-Statutory Option.
(c) Should the exercisability of this option be accelerated
upon a Corporate Transaction, then this option shall qualify for
favorable tax treatment as an Incentive Option only to the extent the
aggregate Fair Market Value (determined at the Grant Date) of the
Common Stock for which this option first becomes exercisable in the
calendar year in which the Corporate Transaction occurs does not, when
added to the aggregate value (determined as of the respective date or
dates of grant) of the Common Stock or other securities for which this
option or one or more other Incentive Options granted to Optionee prior
to the Grant Date (whether under the Plan or any other option plan of
the Corporation or any Parent or Subsidiary) first become exercisable
during the same calendar year, exceed One Hundred Thousand Dollars
($100,000) in the aggregate. Should the applicable One Hundred Thousand
Dollar ($100,000) limitation be exceeded in the calendar year of such
Corporate Transaction, the option may nevertheless be exercised for the
excess shares in such calendar year as a Non-Statutory Option.
(d) Should Optionee hold, in addition to this option, one
or more other options to purchase Common Stock which become exercisable
for the first time in the same calendar year as this option, then the
foregoing limitations on the exercisability of such options as
Incentive Options shall be applied on the basis of the order in which
such options are granted.
18. LEAVE OF ABSENCE. The following provisions shall apply
upon the Optionee's commencement of an authorized leave of absence:
(a) The exercise schedule in effect under the Grant Notice
shall be frozen as of the first day of the authorized leave, and this
option shall not become exercisable for any additional installments of
the Option Shares during the period Optionee remains on such leave.
7.
<PAGE> 8
(b) Should Optionee resume active Employee status within
sixty (60) days after the start date of the authorized leave, Optionee
shall, for purposes of the exercise schedule set forth in the Grant
Notice, receive Service credit for the entire period of such leave. If
Optionee does not resume active Employee status within such sixty
(60)-day period, then no Service credit shall be given for the period
of such leave.
(c) If the option is designated as an Incentive Option in
the Grant Notice, then the following additional provision shall apply:
If the leave of absence continues for more than ninety (90)
days, then this option shall automatically convert to a
Non-Statutory Option under the Federal tax laws at the end of the
three (3)- month period measured from the ninety-first (91st) day
of such leave, unless the Optionee's reemployment rights are
guaranteed by statute or by written agreement. Following any such
conversion of the option, all subsequent exercises of such option,
whether effected before or after Optionee's return to active
Employee status, shall result in an immediate taxable event, and
the Corporation shall be required to collect from Optionee the
Federal, state and local income and employment withholding taxes
applicable to such exercise.
(d) In no event shall this option become exercisable for
any additional Option Shares or otherwise remain outstanding if
Optionee does not resume Employee status prior to the Expiration Date
of the option term.
8.
<PAGE> 9
EXHIBIT I
NOTICE OF EXERCISE
I hereby notify S-O Acquisition Corp. (the "Corporation") that I elect
to purchase ___________ shares of the Corporation's Common Stock (the "Purchased
Shares") at the option exercise price of $____________ per share (the "Exercise
Price") pursuant to that certain option (the "Option") granted to me under the
Corporation's 1997 Stock Incentive Plan on _______________________, 199_.
Concurrently with the delivery of this Exercise Notice to the
Corporation, I shall hereby pay to the Corporation the Exercise Price for the
Purchased Shares in accordance with the provisions of my agreement with the
Corporation (or other documents) evidencing the Option and shall deliver
whatever additional documents may be required by such agreement as a condition
for exercise. Alternatively, I may utilize the special broker-dealer sale and
remittance procedure specified in my agreement to effect payment of the Exercise
Price.
____________________________________, 199_
Date
_____________________________________
Optionee
Address: ____________________________
_____________________________________
Print name in exact manner
it is to appear on the
stock certificate: _____________________________________
Address to which certificate
is to be sent, if different
from address above: _____________________________________
Social Security Number: _____________________________________
Employee Number: _____________________________________
<PAGE> 10
APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Option Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
F. CORPORATION shall mean S-O Acquisition Corp., a Delaware
corporation.
G. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
H. EXERCISE DATE shall mean the date on which the option shall have
been exercised in accordance with Paragraph 9 of the Agreement.
I. EXERCISE PRICE shall mean the exercise price per Option Share as
specified in the Grant Notice.
J. EXPIRATION DATE shall mean the date on which the option expires as
specified in the Grant Notice.
K. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as the
price is reported by the National
A-1.
<PAGE> 11
Association of Securities Dealers on the Nasdaq National Market or any
successor system. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such
quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no closing selling price
for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
L. GRANT DATE shall mean the date of grant of the option as specified
in the Grant Notice.
M. GRANT NOTICE shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.
N. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
O. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by
Optionee of confidential information or trade secrets of the Corporation (or any
Parent or Subsidiary), or any other intentional misconduct by Optionee adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
Optionee or any other individual in the Service of the Corporation (or any
Parent or Subsidiary).
P. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
Q. NOTICE OF EXERCISE shall mean the notice of exercise in the form
attached hereto as Exhibit I.
R. OPTION SHARES shall mean the number of shares of Common Stock
subject to the option as specified in the Grant Notice.
S. OPTIONEE shall mean the person to whom the option is granted as
specified in the Grant Notice.
A-2.
<PAGE> 12
T. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
U. PERMANENT DISABILITY shall mean the inability of Optionee to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which is expected to result in death or has lasted
or can be expected to last for a continuous period of twelve (12) months or
more.
V. PLAN shall mean the Corporation's 1997 Stock Incentive Plan.
W. PLAN ADMINISTRATOR shall mean either the Board or a committee of the
Board acting in its capacity as administrator of the Plan.
X. SERVICE shall mean the Optionee's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor.
Y. STOCK EXCHANGE shall mean the American Stock Exchange or the New
York Stock Exchange.
Z. SUBSIDIARY shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
A-3.
<PAGE> 1
EXHIBIT 4.8
S-O ACQUISITION CORP.
STOCK ISSUANCE AGREEMENT
AGREEMENT made this ___ day of ________ 19__, by and between S-O
Acquisition Corp., a Delaware corporation, and ______________________________, a
Participant in the Corporation's 1997 Stock Incentive Plan.
All capitalized terms in this Agreement shall have the meaning assigned
to them in this Agreement or in the attached Appendix.
A. PURCHASE OF SHARES
1. PURCHASE. Participant hereby purchases _________ shares of Common
Stock (the "Purchased Shares") pursuant to the provisions of the Stock Issuance
Program at the purchase price of $______ per share (the "Purchase Price").
2. PAYMENT. Concurrently with the delivery of this Agreement to the
Corporation, Participant shall pay the Purchase Price for the Purchased Shares
in cash or check payable to the Corporation and shall deliver a duly-executed
blank Assignment Separate from Certificate (in the form attached hereto as
Exhibit I) with respect to the Purchased Shares.
3. STOCKHOLDER RIGHTS. Until such time as the Corporation exercises the
Repurchase Right, Participant (or any successor in interest) shall have all the
rights of a stockholder (including voting, dividend and liquidation rights) with
respect to the Purchased Shares, subject, however, to the transfer restrictions
of this Agreement.
4. ESCROW. The Corporation shall have the right to hold the Purchased
Shares in escrow until those shares have vested in accordance with the Vesting
Schedule.
5. COMPLIANCE WITH LAW. Under no circumstances shall shares of Common
Stock or other assets be issued or delivered to Participant pursuant to the
provisions of this Agreement unless, in the opinion of counsel for the
Corporation or its successors, there shall have been compliance with all
applicable requirements of Federal and state securities laws, all applicable
listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock is at the time listed for trading and all
other requirements of law or of any regulatory bodies having jurisdiction over
such issuance and delivery.
B. TRANSFER RESTRICTIONS
1. RESTRICTION ON TRANSFER. Except for any Permitted Transfer,
Participant shall not transfer, assign, encumber or otherwise dispose of any of
the Purchased Shares which are subject to the Repurchase Right.
<PAGE> 2
2. RESTRICTIVE LEGEND. The stock certificate for the Purchased Shares
shall be endorsed with the following restrictive legend:
"The shares represented by this certificate are
unvested and subject to certain repurchase rights granted to the
Corporation and accordingly may not be sold, assigned, transferred,
encumbered, or in any manner disposed of except in conformity with the
terms of a written agreement dated , 199 between the Corporation and
the registered holder of the shares (or the predecessor in interest to
the shares). A copy of such agreement is maintained at the
Corporation's principal corporate offices."
3. TRANSFEREE OBLIGATIONS. Each person (other than the Corporation) to
whom the Purchased Shares are transferred by means of a Permitted Transfer must,
as a condition precedent to the validity of such transfer, acknowledge in
writing to the Corporation that such person is bound by the provisions of this
Agreement and that the transferred shares are subject to the Repurchase Right to
the same extent such shares would be so subject if retained by Participant.
C. REPURCHASE RIGHT
1. GRANT. The Corporation is hereby granted the right (the "Repurchase
Right"), exercisable at any time during the ninety (90)-day period following the
date Participant ceases for any reason to remain in Service, to repurchase at
the Purchase Price all or any portion of the Purchased Shares in which
Participant is not, at the time of his or her cessation of Service, vested in
accordance with the Vesting Schedule or the provisions of Paragraph C.5 of this
Agreement (such shares to be hereinafter referred to as the "Unvested Shares").
2. EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be
exercisable by written notice delivered to each Owner of the Unvested Shares
prior to the expiration of the ninety (90)-day exercise period. The notice shall
indicate the number of Unvested Shares to be repurchased and the date on which
the repurchase is to be effected, such date to be not more than thirty (30) days
after the date of such notice. The certificates representing the Unvested Shares
to be repurchased shall be delivered to the Corporation on or before the close
of business on the date specified for the repurchase. Concurrently with the
receipt of such stock certificates, the Corporation shall pay to Owner, in cash
or cash equivalent (including the cancellation of any purchase-money
indebtedness), an amount equal to the Purchase Price previously paid for the
Unvested Shares to be repurchased from Owner.
3. TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall
terminate with respect to any Unvested Shares for which it is not timely
exercised under Paragraph C.2. In addition, the Repurchase Right shall terminate
and cease to be exercisable with respect to any and all Purchased Shares in
which Participant vests in accordance with the following Vesting Schedule:
2.
<PAGE> 3
(i) Upon Participant's completion of one (1) year of Service
measured from ______________, 199__, Participant shall acquire a vested
interest in, and the Repurchase Right shall lapse with respect to,
twenty-five percent (25%) of the Purchased Shares.
(ii) Participant shall acquire a vested interest in, and the
Repurchase Right shall lapse with respect to, the remaining Purchased
Shares in a series of thirty six (36) successive equal monthly
installments upon Participant's completion of each additional month of
Service over the thirty-six (36)-month period measured from the initial
vesting date under subparagraph (i) above.
4. RECAPITALIZATION. Any new, substituted or additional securities or
other property (including cash paid other than as a regular cash dividend) which
is by reason of any Recapitalization distributed with respect to the Purchased
Shares shall be immediately subject to the Repurchase Right and any escrow
requirements hereunder, but only to the extent the Purchased Shares are at the
time covered by such right or escrow requirements. Appropriate adjustments to
reflect such distribution shall be made to the number and/or class of securities
subject to this Agreement and to the price per share to be paid upon the
exercise of the Repurchase Right in order to reflect the effect of any such
Recapitalization upon the Corporation's capital structure; provided, however,
that the aggregate purchase price shall remain the same.
5. CORPORATE TRANSACTION.
(a) Immediately prior to the consummation of any Corporate
Transaction, the Repurchase Right shall automatically lapse in its entirety and
the Purchased Shares shall vest in full, except to the extent the Repurchase
Right is to be assigned to the successor corporation (or parent thereof) in
connection with the Corporate Transaction.
(b) To the extent the Repurchase Right remains in effect following a
Corporate Transaction, such right shall apply to the new capital stock or other
property (including any cash payments) received in exchange for the Purchased
Shares in consummation of the Corporate Transaction, but only to the extent the
Purchased Shares are at the time covered by such right. Appropriate adjustments
shall be made to the price per share payable upon exercise of the Repurchase
Right to reflect the effect of the Corporate Transaction upon the Corporation's
capital structure; provided, however, that the aggregate purchase price shall
remain the same. The new securities or other property (including cash payments)
issued or distributed with respect to the Purchased Shares in consummation of
the Corporate Transaction shall immediately be deposited in escrow with the
Corporation (or the successor entity) and shall not be released from escrow
until Participant vests in such securities or other property in accordance with
the same Vesting Schedule in effect for the Purchased Shares.
3.
<PAGE> 4
(c) The Repurchase Right may also be subject to termination in whole
or in part on an accelerated basis, and the Purchased Shares subject to
immediate vesting, in accordance with the terms of any special Addendum attached
to this Agreement.
D. SPECIAL TAX ELECTION
1. SECTION 83(b) ELECTION . Under Code Section 83, the excess of the
fair market value of the Purchased Shares on the date any forfeiture
restrictions applicable to such shares lapse over the Purchase Price paid for
such shares will be reportable as ordinary income on the lapse date. For this
purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right.
Participant may elect under Code Section 83(b) to be taxed at the time the
Purchased Shares are acquired, rather than when and as such Purchased Shares
cease to be subject to such forfeiture restrictions. Such election must be filed
with the Internal Revenue Service within thirty (30) days after the date of this
Agreement. Even if the fair market value of the Purchased Shares on the date of
this Agreement equals the Purchase Price paid (and thus no tax is payable), the
election must be made to avoid adverse tax consequences in the future. THE FORM
FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT II HERETO. PARTICIPANT
UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30)-
DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME AS THE FORFEITURE
RESTRICTIONS LAPSE.
2. FILING RESPONSIBILITY. PARTICIPANT ACKNOWLEDGES THAT IT IS
PARTICIPANT'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY
ELECTION UNDER CODE SECTION 83(b), EVEN IF PARTICIPANT REQUESTS THE CORPORATION
OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.
E. GENERAL PROVISIONS
1. ASSIGNMENT. The Corporation may assign the Repurchase Right to any
person or entity selected by the Board, including (without limitation) one or
more stockholders of the Corporation.
2. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in
the Plan shall confer upon Participant any right to continue in Service for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Parent or Subsidiary employing or
retaining Participant) or of Participant, which rights are hereby expressly
reserved by each, to terminate Participant's Service at any time for any reason,
with or without cause.
3. NOTICES. Any notice required to be given under this Agreement shall
be in writing and shall be deemed effective upon personal delivery or upon
deposit in the U.S. mail, registered or certified, postage prepaid and properly
addressed to the party entitled to such notice
4.
<PAGE> 5
at the address indicated below such party's signature line on this Agreement or
at such other address as such party may designate by ten (10) days advance
written notice under this paragraph to all other parties to this Agreement.
4. NO WAIVER. The failure of the Corporation in any instance to
exercise the Repurchase Right shall not constitute a waiver of any other
repurchase rights that may subsequently arise under the provisions of this
Agreement or any other agreement between the Corporation and Participant. No
waiver of any breach or condition of this Agreement shall be deemed to be a
waiver of any other or subsequent breach or condition, whether of like or
different nature.
5. CANCELLATION OF SHARES. If the Corporation shall make available, at
the time and place and in the amount and form provided in this Agreement, the
consideration for the Purchased Shares to be repurchased in accordance with the
provisions of this Agreement, then from and after such time, the person from
whom such shares are to be repurchased shall no longer have any rights as a
holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement). Such shares shall be deemed
purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.
6. PARTICIPANT UNDERTAKING. Participant hereby agrees to take whatever
additional action and execute whatever additional documents the Corporation may
deem necessary or advisable in order to carry out or effect one or more of the
obligations or restrictions imposed on either Participant or the Purchased
Shares pursuant to the provisions of this Agreement.
7. AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the entire
contract between the parties hereto with regard to the subject matter hereof.
This Agreement is made pursuant to the provisions of the Plan and shall in all
respects be construed in conformity with the terms of the Plan.
8. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California without resort to that
State's conflict-of-laws rules.
9. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
10. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
inure to the benefit of, and be binding upon, the Corporation and its successors
and assigns and upon Participant, Participant's assigns and the legal
representatives, heirs and legatees of Participant's estate, whether or not any
such person shall have become a party to this Agreement and have agreed in
writing to join herein and be bound by the terms hereof.
5.
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first indicated above.
S-O ACQUISITION CORP.
By: ________________________________
Title: _____________________________
Address: ___________________________
____________________________________
PARTICIPANT
Address: ___________________________
____________________________________
6.
<PAGE> 7
SPOUSAL ACKNOWLEDGMENT
The undersigned spouse of the Participant has read and hereby approves
the foregoing Stock Issuance Agreement. In consideration of the Corporation's
granting the Participant the right to acquire the Purchased Shares in accordance
with the terms of such Agreement, the undersigned hereby agrees to be
irrevocably bound by all the terms of such Agreement, including (without
limitation) the right of the Corporation (or its assigns) to purchase any
Purchased Shares in which the Participant is not vested at the time of his or
her termination of Service.
_________________________________
PARTICIPANT'S SPOUSE
Address: ________________________
_________________________________
7.
<PAGE> 8
EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED ______________________ hereby sell(s), assign(s) and
transfer(s) unto S-O Acquisition Corp. (the "Corporation"), __________(___)
shares of the Common Stock of the Corporation standing in his or her name on the
books of the Corporation represented by Certificate No.________ herewith and
do(es) hereby irrevocably constitute and appoint _____________________ Attorney
to transfer the said stock on the books of the Corporation with full power of
substitution in the premises.
Dated: ____________, 199__ .
Signature _________________________
INSTRUCTION: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this assignment is to enable the Corporation to
exercise the Repurchase Right without requiring additional signatures on the
part of Participant.
<PAGE> 9
EXHIBIT II
SECTION 83(b) TAX ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.
(1) The taxpayer who performed the services is:
Name: ________________________________________
Address: _____________________________________
Taxpayer Ident. No.: _________________________
(2) The property with respect to which the election is being made is ________
shares of the common stock of S-O Acquisition Corp.
(3) The property was issued on ______________, 199_.
(4) The taxable year in which the election is being made is the calendar year
199_.
(5) The property is subject to a repurchase right pursuant to which the
issuer has the right to acquire the property at the original purchase
price if for any reason taxpayer's employment with the issuer is
terminated. The issuer's repurchase right lapses in a series of annual
and monthly installments over a four (4)-year period ending on ___________.
(6) The fair market value at the time of transfer (determined without
regard to any restriction other than a restriction which by its terms
will never lapse) is $___________ per share.
(7) The amount paid for such property is $________________ per share.
(8) A copy of this statement was furnished to S-O Acquisition Corp. for whom
taxpayer rendered the services underlying the transfer of property.
(9) This statement is executed on ________________________, 199__.
_________________________________ _________________________________________
Spouse (if any) Taxpayer
This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Issuance Agreement. This
filing should be made by registered or certified mail, return receipt requested.
Participant must retain two (2) copies of the completed form for filing with his
or her Federal and state tax returns for the current tax year and an additional
copy for his or her records.
<PAGE> 10
APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Issuance Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
F. CORPORATION shall mean S-O Acquisition Corp., a Delaware
corporation.
G. OWNER shall mean Participant and all subsequent holders of the
Purchased Shares who derive their chain of ownership through a Permitted
Transfer from Participant.
H. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
I. PARTICIPANT shall mean the person to whom the Purchased Shares are
issued under the Stock Issuance Program.
A-1.
<PAGE> 11
J. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the
Purchased Shares, provided and only if Participant obtains the Corporation's
prior written consent to such transfer, (ii) a transfer of title to the
Purchased Shares effected pursuant to Participant's will or the laws of
intestate succession following Participant's death or (iii) a transfer to the
Corporation in pledge as security for any purchase-money indebtedness incurred
by Participant in connection with the acquisition of the Purchased Shares.
K. PLAN shall mean the Corporation's 1997 Stock Incentive Plan.
L. PLAN ADMINISTRATOR shall mean either the Board or a committee of the
Board acting in its administrative capacity under the Plan.
M. PURCHASE PRICE shall have the meaning assigned to such term in
Paragraph A.1.
N. PURCHASED SHARES shall have the meaning assigned to such term in
Paragraph A.1.
O. RECAPITALIZATION shall mean any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the Corporation's outstanding Common Stock as a class without the
Corporation's receipt of consideration.
P. REPURCHASE RIGHT shall mean the right granted to the Corporation in
accordance with Article C.
Q. SERVICE shall mean the Participant's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an employee,
subject to the control and direction of the employer entity as to both the work
to be performed and the manner and method of performance, a non-employee member
of the board of directors or a consultant.
R. STOCK ISSUANCE PROGRAM shall mean the Stock Issuance Program under
the Plan.
S. SUBSIDIARY shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
T. VESTING SCHEDULE shall mean the vesting schedule specified in
Paragraph C.3, subject to the acceleration provisions of Paragraph C.5.
U. UNVESTED SHARES shall have the meaning assigned to such term in
Paragraph C.1.
A-2.
<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, except
as to Notes 8 and 14 which are as of November 15, 1997 and January 7, 1998,
respectively, relating to the consolidated financial statements of Steri-Oss,
Inc., which appears 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 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 audit 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
January 9, 1998
<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 consolidated financial statements of Steri-Oss, Inc., which appears 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
January 9, 1998
