<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 000-27836
ORTHODONTIX, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0643773
------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
600 Brickell Avenue, Suite 300 M
Miami, Florida 33131
----------------------------------------
(Address of principal executive offices)
(305) 373-1002
---------------------------
(Issuer's Telephone Number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports); and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
On November 12, 1999, the number of shares of Common Stock of the
issuer outstanding was 4,550,020.
Traditional Small Business Disclosure Format (check one): Yes [X] No [ ]
Documents Incorporated By Reference: None.
<PAGE> 2
ORTHODONTIX, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION.................................................1
ITEM 1. FINANCIAL STATEMENTS.......................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION..................................................1
PART II OTHER INFORMATION...................................................4
ITEM 1. LEGAL PROCEEDINGS..........................................4
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................5
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........5
ITEM 5. OTHER INFORMATION..........................................5
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................6
SIGNATURES...................................................................7
FINANCIAL STATEMENTS.......................................................F-1
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited, condensed consolidated financial statements included
herein, commencing at page F-1, have been prepared in accordance with the
requirements of Regulation S-B and, therefore, omit or condense certain
footnotes and other information normally included in financial statements
prepared in accordance with generally accepted accounting principles. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the financial information for
the interim periods reported have been made. Results of operations for the
three and nine months ended September 30, 1999 are not necessarily indicative
of the results of operations expected for the year ending December 31, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are based on current plans and expectations of
Orthodontix, Inc. (the "Company") and involve risks and uncertainties that
could cause actual future activities and results of operations to be materially
different from those set forth in the forward-looking statements. Important
factors that could cause actual results to differ include, among others, risks
related to the terms upon which and the extent to which the Company terminates
its affiliation with the affiliated practices and ceases its orthodontic
practice management operations, the ability of the Company to be repaid certain
cash advances made for the benefit of the affiliated practices and risks
detailed in the Company's filings with the Securities and Exchange Commission.
OVERVIEW
As of November 12, 1999, the Company terminated its affiliation with
seventeen orthodontic practices, has reached agreements in principle to
terminate its affiliation with four additional practices and is in discussions
with the five remaining affiliated practices regarding their affiliation with
the Company. As of November 12, 1999, one affiliated practice was continuing to
receive management services from the Company and the Company was generating
management fee revenue from only this one practice. To the extent the Company
discontinues its orthodontic practice management operations, the Company
presently intends to seek to effect a business combination with an acquired
business or businesses. There can be no assurances that the Company will enter
into arrangements to sell certain practice assets and/or terminate its
affiliation with any affiliated practices on terms favorable to the Company, if
at all.
1
<PAGE> 4
RESULTS OF OPERATIONS (UNAUDITED)
Three Months and Nine Months ended September 30, 1999 compared to Three Months
and Nine Months ended September 30, 1998.
Management Service Fee Revenue
Management service fee revenue reported by the Company is derived by
principally applying the appropriate management fee percentage to the adjusted
accrual based patient revenue, and adding the reimbursement from the affiliated
practices of practice expenses paid by the Company. Management service fee
revenue for the three and nine months ended September 30, 1999 was
approximately $167,000 and $3,511,000 and for the three and nine months ended
September 30, 1998 was $2,900,000 and $5,218,000, respectively. The Company
commenced its practice management operations on April 16, 1998. The decrease in
management fee revenue is primarily due to the decrease in affiliated practices
being managed by the Company.
During the period subsequent to when the Company began operations,
from time to time, the Company advanced funds for the benefit of the affiliated
practices to cover expenses and for working capital purposes of the affiliated
practices (the "Working Capital Advances"). In addition, during the first two
weeks of the Company's operations, certain amounts were collected and disbursed
by the affiliated practices in order to facilitate the transition to the
Company's centralized cash collection and disbursement procedures. To the
extent the net amounts (the difference between the collections and
disbursements during this initial period) have not been remitted by the
affiliated practices to the Company, the Company has recorded such net amounts
as an advance to affiliated practices (the "Transition Advances" and together
with the "Working Capital Advances", the "Advances"). As of September 30, 1999,
the Advances totaled approximately $796,000 from affiliated practices who had
not terminated their affiliation with the Company. Due to the termination of
the Company's affiliation with seventeen affiliated practices and the ongoing
discussions relating to the termination of the Company's affiliation with the
remaining nine affiliated practices, the Company has recorded an allowance
related to the collectability of the Advances (the "Allowance") of $593,000 as
of September 30, 1999 and $800,000 as of December 31, 1998. During the three
and nine months ended September 30, 1999, the Allowance was reduced in
connection with the sales of certain practice assets. For the nine month period
ended September 30, 1999, the Company recorded an additional Allowance related
to the collectability of the Advances of $270,000.
Direct Practice and Corporate Expenses
Direct practice expenses include clinical and other practice expenses.
Corporate expenses include corporate general and administrative expenses. The
Company incurred direct practice expenses of approximately $156,000 and
$2,733,000 for the three and nine months ended September 30, 1999, respectively,
compared to approximately $2,272,000 and $4,083,000 for the three and nine
months ended September 30, 1998, respectively. The decrease in direct practice
2
<PAGE> 5
expenses is primarily due to the decrease in affiliated practices being managed
by the Company. The Company's direct practice expenses consist primarily of
salaries and benefits, orthodontic supplies, rent, advertising and marketing,
general and administrative and depreciation. The Company also incurred
corporate general and administrative expenses of approximately $425,000 and
$1,426,000 for the three and nine months ended September 30, 1999,
respectively, compared to approximately $661,000 and $1,378,000 for the three
and nine months ended September 30, 1998 (which included the Company's
organizational expenses prior to April 16, 1998), respectively. In addition,
for the three and nine months ended September 30, 1999, the Company recorded
non-cash expenses consisting of depreciation of approximately $9,000 and
$27,000, respectively, a provision for losses on Advances to affiliated
practices of $0 and $270,000, respectively and an impairment charge of
approximately $0 and $285,000, respectively, as a result of the sale by the
Company of certain practice assets. For the three and nine months ended
September 30, 1999, the Company recorded a non-cash expense of approximately
$28,000 and $116,000, respectively, related to the issuance of certain stock
options for services provided primarily by affiliated orthodontists.
Interest Income
Interest income represents interest earned on excess cash balances
invested primarily in short-term money market accounts and overnight repurchase
agreements as well as loans to certain of the affiliated orthodontists. For the
three and nine months ended September 30, 1999, the Company's interest income
was approximately $17,000 and $55,000, respectively. For the three and nine
months ended September 30, 1998, the Company's interest income was
approximately $35,000 and $50,000, respectively.
Net Loss
For the three and nine months ended September 30, 1999, the Company
recorded a net loss of approximately $211,000 ($.04 per share) and $621,000
($.11 per share), respectively. Included in the expenses for the three and nine
months ended September 30, 1999 are non-cash expense items of approximately
$37,000 and $698,000, respectively, related to (i) depreciation ($9,000 and
$27,000, respectively); (ii) an impairment charge resulting from the sale of
certain practice assets ($0 and $285,000, respectively); (iii) a provision for
losses on advances to affiliated practices ($0 and $270,000, respectively) and
(iv) compensation expense related to stock options ($28,000 and $116,000,
respectively). During the three months ended September 30, 1999, the Company's
loss, excluding non-cash expense items, was approximately $174,000 ($.04 per
share). During the nine months ended September 30, 1999, the Company's
earnings, excluding non-cash expense items, was approximately $77,000 ($.01 per
share). For the three and nine months ended September 30, 1998, the Company
recorded a net loss of approximately $10,000 ($.01 per share) and $252,000
($.06 per share), respectively.
Earnings excluding non-cash expense items is not presented as an
alternative to operating results or cash flow from operations as determined by
generally accepted accounting principles (GAAP) but rather to provide
additional information related to the ability of the Company to meet its cash
3
<PAGE> 6
flow needs. This information should not be considered in isolation from, or
construed as having greater importance than GAAP operating income/loss or cash
flows from operations as a measure of an entity's performance.
LIQUIDITY AND CAPITAL RESOURCES/PLAN OF OPERATION
The Company anticipates that the primary uses of capital will include
the costs related to the unwinding of the remaining affiliated practices and
funding the working capital needs of the Company.
As of September 30, 1999 and December 31, 1998, the Company had cash
and cash equivalents of approximately $1,275,000 and $1,289,000, respectively.
Substantially all of the Company's cash as of September 30, 1999 results from
the sale of practice assets. As of September 30, 1999 and December 31, 1998,
the Company had total liabilities of approximately $572,000 and $1,418,000,
respectively. The Company's cash is currently invested in money market
accounts, certificates of deposit and overnight repurchase agreements. The
Company believes that its operating funds will be sufficient for its cash
expenses for at least the next twelve months.
YEAR 2000 COMPLIANCE
The Year 2000 ("Year 2000") computer issue is the result of computer
programs using a two-digit format, as opposed to a four-digit format to
indicate the year. Such computer programs will be unable to recognize date
information correctly when the year changes to 2000. The Year 2000 issue poses
risks for the Company's information technology systems, including those used by
the Company in providing its practice management and marketing services to its
affiliated practices.
The Company's information technology systems are based upon software
licenses and software maintenance agreements with third party software
companies. Based upon the Company's internal assessments and communications
with its software vendors, the Company believes the costs involved with causing
the Company's corporate software to become Year 2000 compliant will not be
material. The Company will continue to monitor its Year 2000 readiness.
There is no assurance the affiliated practices' systems, upon which
the Company relies, will be timely converted to be Year 2000 compliant.
Consequently, there is no assurance that a material adverse effect on the
Company's operations and cash flows will not occur to the extent the Company's
orthodontic practice management operations are not terminated.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1999, the Company received from two affiliated
orthodontists written demands for damages arising out of their allegations that
the Company had breached its obligations under lease agreements and service
4
<PAGE> 7
agreements. In June 1999, one of the affiliated orthodontists filed a complaint
against the Company alleging damages in excess of $588,000, which complaint was
subsequently dismissed with prejudice contemporaneous with the Company selling
to this affiliated orthodontist practice assets and terminating its
relationship with the affiliated orthodontist. In November 1999, the other
affiliated orthodontist filed a complaint against the Company alleging
damages in excess of $1.6 million. The Company believes the allegations
contained in the complaint from the affiliated orthodontist are without merit.
To the extent this affiliated orthodontist pursues his alleged claims, the
Company intends to vigorously defend itself.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 1999, the Company
terminated its affiliation with five affiliated practices (consisting of five
affiliated orthodontists) pursuant to which these affiliated orthodontists
terminated their affiliation with the Company and repurchased practice assets
in exchange for an aggregate of $157,602 cash, notes payable to the Company in
the principal amount of $466,857 and 371,786 shares of the Company's Common
Stock. Subsequent to September 30, 1999, the Company terminated its affiliation
with three additional affiliated practices (consisting of three orthodontists)
pursuant to which these affiliated orthodontists terminated their affiliation
with the Company and repurchased practice assets in exchange for an aggregate
of $185,000 cash, notes payable to the Company in the principal amount of
$40,000 and 208,494 shares of the Company's Common Stock. In addition,
subsequent to September 30, 1999, the Company has entered into agreements in
principle to terminate its affiliation with four additional affiliated
practices (consisting of four orthodontists) in which these affiliated
orthodontists will terminate their affiliation with the Company and repurchase
certain practice assets. Upon receipt by the Company of its shares of Common
Stock in connection with these asset sales, the Company retires such shares and
the shares become authorized but unissued shares of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the third quarter ended September 30, 1999, no matters were
submitted to a vote of security holders of the Company through the solicitation
of proxies or otherwise.
ITEM 5. OTHER INFORMATION
As of November 12, 1999, in addition to the seventeen affiliated
practices which have terminated their affiliation with the Company and four
affiliated practices which have entered into agreements in principle to
terminate their affiliation with the Company, the Company has commenced
discussions with the remaining five affiliated practices regarding their
5
<PAGE> 8
affiliation with the Company. As a result of these discussions, to the extent
the Company consummates the sales of the practice assets, the Company will
discontinue its orthodontic practice management operations.
In the event the Company ceases its practice management operations,
the Company may then seek to effect a business combination with an acquired
business. As of the date hereof, there can be no assurances that the Company
will sell the practice assets and terminate its affiliation with the affiliated
practices on terms favorable to the Company, if at all.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
(1) On June 18, 1999, the Company flied a Current Report
on Form 8-K dated June 11, 1999 reporting the sale
of certain assets to two affiliated practices.
(2) On July 26, 1999, the Company filed a Current Report
on Form 8-K dated July 20, 1999 reporting the sale
of certain assets to two affiliated practices.
(3) On October 4, 1999, the Company filed a Current
Report on Form 8-K dated September 28, 1999
reporting the resignation of Ed Strongin as the
acting CFO and the appointment of Jay Weisberg as
the Company's new acting CFO.
(4) On November 5, 1999, the Company filed a Current
Report on Form 8-K dated November 3, 1999 reporting
the sale of certain assets to six affiliated
practices.
6
<PAGE> 9
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ORTHODONTIX, INC.
(Registrant)
Date: November 12, 1999 By: /s/ F.W. Mort Guilford
------------------------------------------
F.W. Mort Guilford
President (Principal Executive Officer)
Date: November 12, 1999 By: /s/Alan Jay Weisberg
------------------------------------------
Alan Jay Weisberg
Acting Chief Financial Officer (Principal
Financial and Accounting Officer)
7
<PAGE> 10
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 1999 (Unaudited)
and December 31, 1998 F-2
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998 (Unaudited) F-3
Condensed Consolidated Statement of Changes in Stockholders' Equity for the
Nine Months Ended September 30, 1999 (Unaudited) F-4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (Unaudited) F-5
Notes to the Condensed Consolidated Financial Statements F-6
</TABLE>
F-1
<PAGE> 11
ORTHODONTIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
------------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,274,932 $ 1,289,481
Patient receivables and unbilled patient receivables, net of
allowance of $62,000 at September 30, 1999 and $267,000 at December 31, 1998 185,226 1,113,254
Assets held for sale 392,130 -
Prepaid expenses and other current assets 275,616 183,736
----------- -----------
Total current assets 2,127,904 2,586,471
Property and equipment, net 264,254 839,193
Advances to Founding Practices, net of allowance of $593,000 at
September 30, 1999 and $800,000 at December 31, 1998 202,933 950,328
Notes and other receivables
183,363 303,040
Deferred tax asset 73,825 73,825
Other assets 10,933 20,094
----------- -----------
Total assets $ 2,863,212 $ 4,772,951
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 373,303 $ 705,525
Amounts payable to Founding Practices 6,260 466,626
Patient prepayments 61,249 108,009
Lease payable - current portion 21,250 16,200
Deferred tax liability 73,825 73,825
----------- -----------
Total current liabilities 535,887 1,370,185
Lease payable 36,583 47,937
----------- -----------
Total liabilities 572,470 1,418,122
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.0001 par value, 100,000,000 shares authorized
at September 30, 1999 and December 31, 1998, no shares issued
and outstanding -- --
Common stock, $.0001 par value, 100,000,000 shares authorized,
4,758,514 and 5,881,721 shares issued and outstanding
at September 30, 1999 and December 31, 1998, respectively 476 588
Additional paid-in capital 4,910,434 5,607,261
Accumulated deficit (2,475,136) (1,854,557)
Less: deferred compensation - stock options (145,032) (398,463)
----------- -----------
Total stockholders' equity 2,290,742 3,354,829
----------- -----------
Total liabilities and stockholders' equity $ 2,863,212 $ 4,772,951
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 12
ORTHODONTIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Management service fee revenue $ 166,750 $2,899,515 $3,511,277 $5,218,152
---------- ---------- ---------- ----------
Direct practice expenses:
Salaries and benefits 56,747 1,066,932 1,274,759 1,907,734
Orthodontic supplies 35,572 452,230 456,953 778,289
Rent 30,324 348,213 501,948 580,217
Depreciation and amortization 3,378 64,581 73,027 121,414
Other 30,091 339,548 426,351 695,493
---------- ---------- ---------- ----------
Total direct practice expenses 156,112 2,271,504 2,733,038 4,083,147
General and administrative 425,420 661,070 1,426,384 1,378,295
Provision for losses on advances to Founding
Practices (Note 5) -- -- 270,000 --
Asset impairment charge (Note 5) -- -- 285,000 --
Gain on the sale of certain assets of Founding
Practices (Note 5) (196,342) -- (555,181) --
Depreciation and amortization 9,009 8,585 26,997 9,269
---------- ---------- ---------- ----------
Total expenses 394,199 2,941,159 4,186,238 5,470,711
---------- ---------- ---------- ----------
Net operating loss (227,449) (41,644) (674,961) (252,559)
---------- ---------- ---------- ----------
Other income (expense):
Interest income 16,660 35,430 55,495 49,878
Interest expense (164) (3,986) (1,113) (49,545)
---------- ---------- ---------- ----------
Total other income 16,496 31,444 54,382 333
---------- ---------- ---------- ----------
Net loss $ (210,953) $ (10,200) $ (620,579) $ (252,226)
========== ========== ========== ==========
Loss per common and common
equivalent share:
Basic $ (0.04) $ (0.01) $ (0.11) $ (0.06)
========== ========== ========== ==========
Diluted $ (0.04) $ (0.01) $ (0.11) $ (0.06)
========== ========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding -
basic and diluted 4,953,475 5,881,721 5,452,734 4,119,521
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 13
ORTHODONTIX, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
for the nine months ended September 30, 1999
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-In Accumulated Deferred
Shares Amounts Capital Deficit Compensation Total
---------- ------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 5,881,721 $ 588 $ 5,607,261 $(1,854,557) $ (398,463) $3,354,829
Shares retired in connection
with sale of assets (Note 5) (1,123,207) (112) (559,594) -- -- (559,706)
Deferred compensation for
stock options issued -- -- 57,817 -- (57,817) --
Amortization of deferred
compensation -- -- -- -- 116,198 116,198
Forfeiture of deferred
compensation (Note 5) -- -- (195,050) -- 195,050 --
Net loss for the period -- -- -- (620,579) -- (620,579)
---------- ------ ----------- ----------- ---------- ----------
Balance, September 30, 1999 4,758,514 $ 476 $ 4,910,434 $(2,475,136) $ (145,032) $2,290,742
========== ====== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 14
ORTHODONTIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (620,579) $ (252,226)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 100,024 130,683
Bad debt expense 116,946 --
Noncash compensation expense 116,198 201,842
Provision for advances to Founding Practices 270,000 --
Asset impairment charge 285,000 --
Gain on sale of certain practice assets (555,181) --
Changes in assets and liabilities (1,030,630) (613,576)
----------- -----------
Net cash used in operating activities (1,318,222) (533,277)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (31,376) (42,020)
Purchase of practice assets -- (3,365,589)
Proceeds from the sale of certain practice assets 984,562 --
Payment of notes receivable 356,791 56,607
Investment in notes receivable -- (406,687)
----------- -----------
Net cash provided by (used in) investing activities 1,309,977 (3,757,689)
----------- -----------
Cash flows from financing activities:
Payment of lease obligation (6,304) (17,068)
Payment of bank line of credit, net -- (496,283)
Proceeds of merger, net of costs -- 6,795,773
Repayments to stockholders, net -- (297,505)
----------- -----------
Net cash (used in) provided by financing activities (6,304) 5,984,917
----------- -----------
Net (decrease) increase in cash and cash equivalents (14,549) 1,693,951
Cash and cash equivalents, beginning of period 1,289,481 84,920
----------- -----------
Cash and cash equivalents, end of period $ 1,274,932 $ 1,778,871
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 15
ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
of Orthodontix, Inc. ("Orthodontix" or the "Company") presented herein
do not include all disclosures required by generally accepted accounting
principles for a complete set of financial statements. In the opinion of
management, these financial statements include all adjustments,
including normal recurring adjustments, necessary for a fair
presentation of the results of interim periods.
The results of operations for the three and nine months ended September
30, 1999 are not necessarily indicative of the results of operations to
be expected for the year ended December 31, 1999. The unaudited
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-KSB as filed
with the Securities and Exchange Commission on April 15, 1999.
2. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
September 30, 1999 December 31,
(Unaudited) 1998
------------------ -------------
Accounts payable $ 245,978 $ 430,027
Accrued salaries and benefits 6,412 188,084
Other accrued expenses 120,913 87,414
------------- ---------
$ 373,303 $ 705,525
============= =========
F-6
<PAGE> 16
ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, Continued
(UNAUDITED)
3. EARNINGS PER SHARE:
Basic earnings per share is calculated by dividing net income or loss by
the weighted average number of common shares outstanding during the
period. Diluted earnings per share is calculated by dividing net income
or loss by the weighted average number of common shares and potential
common equivalent shares outstanding during the period. Potential common
shares consist of the dilutive effect of outstanding options calculated
using the treasury stock method. For the three and nine month periods
ended September 30, 1999 and 1998, the potential common shares were
antidilutive; thus there was no difference in the basic net income per
share and the diluted net income per share.
4. CONTINGENCIES:
During 1999, the Company received written demands for damages from two
Founding Practices arising from their allegations that the Company has
breached its obligations under certain agreements including lease and
service agreements with the orthodontist associated with these Founding
Practices. Pursuant to a demand letter filed by one orthodontist and a
complaint filed by the other orthodontist, these Founding Practices have
alleged damages of approximately, in aggregate, of approximately $2.2
million. During the quarter ended September 30, 1999, the orthodontist
who filed the complaint with alleged damages in excess of $588,000
dismissed the complaint with prejudice contemporaneous with the Company
selling certain practice assets to the orthodontist and terminating his
relationship with the Company. In November 1999, the other orthodontist
filed a complaint against the Company alleging damages in excess of $1.6
million. The Company believes the allegations in the complaint with the
other orthodontist are without merit and intends to vigorously defend
itself. The Company does not believe such matter will have a material
impact on the Company's consolidated financial position, results of
operations, or liquidity.
5. ASSETS HELD FOR SALE AND TERMINATION OF AFFILIATION WITH CERTAIN
FOUNDING PRACTICES
During the nine months ended September 30, 1999, the Company has sold
certain practice assets, consisting principally of accounts receivable
and property and equipment, and certain liabilities to fourteen of the
Founding Practices. As a result of these transactions, the Company
received approximately $1,185,662 in cash, $531,857 in notes receivable
and 1,123,207 shares of the Company's common stock. In addition, such
amounts include amounts repaid to the Company by the Founding Practices
related to amounts outstanding that previously had been classified as
Advances to Founding Practices. The total consideration received in
connection with these transactions was valued at approximately
$2,277,000.
F-7
<PAGE> 17
ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, Continued
(UNAUDITED)
5. ASSETS HELD FOR SALE AND TERMINATION OF AFFILIATION WITH CERTAIN
FOUNDING PRACTICES, CONTINUED:
As a result of these transactions, the Company recorded a net gain on
the disposition of net assets of approximately $196,000 and $555,000 for
the three and nine months ended September 30, 1999, respectively. Such
gain excludes an asset impairment charge related to the assets sold in
these transactions of approximately $285,000 that was recorded by the
Company in the three months period ended March 31, 1999. Such impairment
charge was recorded by the Company in the three month period ended March
31, 1999, in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of". This charge represented the amount
necessary to reduce cost in excess of fair value to reflect the
difference between the carrying value of certain practice assets and the
estimated proceeds from the sale of such assets to these Founding
Practices.
The assets sold or settled as a result of the transactions, described
above, were as follows:
Patient receivables and unbilled patient receivables, net $ 407,581
Property and equipment, net 479,190
Notes receivable 367,706
Advances to Founding Practices, net 562,630
Other assets and liabilities, net 189,937
----------
2,007,044
Less: impairment charge (285,000)
----------
$1,722,044
==========
In addition, in connection with these transactions, certain
orthodontists who were affiliated with the Founding Practices and served
on the Company's Advisory Board resigned such positions and their vested
options were returned to the Company and their unvested options were
cancelled. As a result, the Company recorded a reduction in deferred
compensation of $195,050.
F-8
<PAGE> 18
ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, Continued
(UNAUDITED)
5. ASSETS HELD FOR SALE AND TERMINATION OF AFFILIATION WITH CERTAIN
FOUNDING PRACTICES, CONTINUED:
Subsequent to September 30, 1999, the Company sold certain practice
assets, consisting principally of accounts receivable and property and
equipment, and certain liabilities to three additional Founding
Practices. As a result of these transactions, the Company has classified
such practice assets as assets held for sale at September 30, 1999 as
follows:
Patient receivables and unbilled patient receivables, net $ 442,173
Property and equipment, net 27,101
Other assets and liabilities, net (77,144)
---------
Assets held for sale $ 392,130
=========
As of November 12, 1999, the Company is engaged in discussions with the
remaining Founding Practices regarding their affiliation with the Company
and the repurchase by the respective Founding Practices of certain
practice assets in exchange for cash and shares of the Company's common
stock. The Company has entered into standstill arrangements with eight of
the remaining Founding Practices pending successful negotiation of sale
terms. As of September 30, 1999, one of the Founding Practices was
receiving management services from the Company in exchange for a
management fee.
As of September 30, 1999, in connection with the discussions with the
remaining Founding Practices, as previously described, the Company
recorded an additional allowance in the amount of $270,000 for the nine
months ended September 30, 1999 related to the collectability of the
Advances to Founding Practices at September 30, 1999. The Advances to
Founding Practices represent certain funds that were advanced to the
Founding Practices to cover expenses and for working capital purposes.
In addition, at the time the Company commenced operations, certain
amounts were collected and disbursed by the Founding Practices in
connection with the Company's transition to centralized cash collection
and disbursement procedures.
F-9
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-01-1999
<CASH> 1,274,932
<SECURITIES> 0
<RECEIVABLES> 247,226
<ALLOWANCES> (62,000)
<INVENTORY> 0
<CURRENT-ASSETS> 2,127,904
<PP&E> 368,014
<DEPRECIATION> (103,760)
<TOTAL-ASSETS> 2,863,212
<CURRENT-LIABILITIES> 535,887
<BONDS> 0
0
0
<COMMON> 476
<OTHER-SE> 2,290,266
<TOTAL-LIABILITY-AND-EQUITY> 2,863,212
<SALES> 3,511,277
<TOTAL-REVENUES> 3,511,277
<CGS> 0
<TOTAL-COSTS> 4,186,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (54,382)
<INCOME-PRETAX> (620,579)
<INCOME-TAX> 0
<INCOME-CONTINUING> (620,579)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (620,579)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
