<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 June 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)
2222 Ponce de Leon Blvd., 3rd Floor
Coral Gables, Florida 33134
----------------------------------------
(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 August 13, 1999, the number of shares of Common Stock of the issuer
outstanding was 5,059,025.
Traditional Small Business Disclosure Format (check one) Yes [X] No [ ]
Documents Incorporated By Reference None
<PAGE> 2
ORTHODONTIX, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
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
INDEX TO FINANCIAL STATEMENTS...................................................................................... F-1
</TABLE>
<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 (including all 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 six months ended June 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 August 13, 1999, the Company terminated its affiliation with
eleven orthodontic practices, has reached an agreement in principle to terminate
its affiliation with one additional practice and is in discussions with the
fourteen remaining affiliated practices regarding their affiliation with the
Company. As of August 13, 1999, of the remaining fourteen affiliated practices,
three were continuing to receive management services from the Company in
exchange for a management fee. In the event the Company terminates its
affiliation with the remaining fourteen affiliated practices, the Company's
orthodontic practice management operations will cease. 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)
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 six months ended June 30, 1999 was approximately $1.18
million and $3.34 million, respectively. For the three months ended June 30,
1998, during which time the Company began operations, the Company had management
service fee revenue of approximately $2.32 million. 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 June 30, 1999, the Advances totaled
approximately $1.12 million from affiliated practices who had not terminated
their affiliation with the Company. Due to the termination of the Company's
affiliation with eleven affiliated practices and the ongoing discussions
relating to the termination of the Company's affiliation with the remaining
fourteen affiliated practices, the Company has recorded an allowance related to
the collectability of the Advances (the "Allowance") of $770,000 as of June 30,
1999, and $800,000 as of December 31, 1998. During the three month period ended
June 30, 1999 the Allowance was reduced in connection with the sales of certain
practice assets. For the three and six month periods ended June 30, 1999, the
Company recorded an additional Allowance related to the collectability of the
Advances of $230,000 and $270,000, respectively.
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 $915,000 and $2.58
million for the three and six months ended June 30, 1999, respectively, compared
to approximately $1.81 million for the three and six months ended June 30, 1998.
The decrease in direct practice 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 $446,000 and $1.02 million for the three and six months ended June
30, 1999, respectively, compared to approximately $535,000 and $718,000 for the
three and six months ended
2
<PAGE> 5
June 30, 1998 (which included three months of corporate organizational costs),
respectively. In addition, for the three and six months ended June 30, 1999, the
Company recorded non-cash expenses consisting of depreciation of approximately
$8,900 and $18,000, respectively, a provision for losses on Advances to
affiliated practices of $230,000 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 six months ended
June 30, 1998, the Company recorded a non-cash expense of $44,332 and $87,801,
respectively, related to the issuance of certain stock options for services
provided primarily by affiliated orthodontists.
OTHER 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 six months ended June 30, 1999, the Company's interest income was
approximately $13,000 and $39,000, respectively. For the three and six months
ended June 30, 1998, the Company's interest income was approximately $14,000.
NET LOSS
For the three and six months ended June 30, 1999, the Company recorded
a net loss of approximately $38,000 ($.01 per share) and $410,000 ($.07 per
share), respectively. Included in the expenses for the three and six months
ended June 30, 1999 are non-cash expense items of approximately $283,200 and
$660,800, respectively, related to (i) depreciation ($8,900 and $18,000,
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 ($230,000 and $270,000, respectively) and (iv)
compensation expense related to stock options ($44,300 and $87,800,
respectively). During the three and six months ended June 30, 1999, the
Company's earnings, excluding non-cash expense items, were approximately
$245,200 and $250,800, respectively. For the three and six months ended June 30,
1998, the Company recorded a net loss of approximately $46,000 ($.01 per share)
and $242,000 ($.07 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 flow needs.
This information should not be considered in isolation form, 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
As of June 30, 1999, the Company had a working capital balance of
approximately $1.73 million. The Company anticipates that the primary uses of
capital will include the costs related to the unwinding of the affiliated
practices and funding the working capital needs of the Company.
As of June 30, 1999 and December 31, 1998, the Company had cash and
cash equivalents of approximately $989,000 and $1,289,000, respectively.
Substantially all of the Company's cash as of
3
<PAGE> 6
June 30, 1999 results from the sale of practice assets. As of June 30, 1999 and
December 31, 1998, the Company had total liabilities of approximately $723,000
and $1,418,000, respectively. The Company's cash is currently invested in money
market accounts 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.
Each of the affiliated practices has its own information technology
systems (including systems for billing and collecting patient fees) based on
third party software licenses and maintenance agreements with various vendors.
The Company believes that a significant number of its affiliated practices'
information technology systems currently are not Year 2000 compliant and the
costs which may be incurred to cause the systems at the affiliated practices to
become Year 2000 Compliant may be material to the Company, provided, however,
over time the Company believes it will recover such costs from the affiliated
practices.
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 has breached its obligations under lease agreements and service
agreements. One affiliated orthodontist has alleged damages in the amount of
$1,655,324.86 and the other affiliated orthodontist filed a complaint in July
1999 alleging damages in the amount of $588,993.52. The Company believes the
allegations contained in the written demands and complaint from these affiliated
orthodontists are without merit. To the extent either of these
4
<PAGE> 7
affiliated orthodontists pursue their alleged claims, the Company intends to
vigorously defend itself.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 1999, the Company terminated its
affiliation with nine affiliated practices (consisting of ten affiliated
orthodontists) pursuant to which these affiliated orthodontists terminated their
affiliation with the Company and repurchased practice assets in exchange for an
aggregate of $1,028,060 cash (which cash amounts included amounts paid to the
Company in full satisfaction of notes payable from two of the affiliated
orthodontists), notes payable to the Company in the principal amount of $65,000
and 751,421 shares of the Company's Common Stock. Subsequent to June 30, 1999,
the Company terminated its affiliation with two additional affiliated practices
and entered into an agreement in principle to terminate its affiliation with one
additional affiliated practice (which collectively consist of three affiliated
orthodontists) pursuant to which these affiliated orthodontists have (in the
case of the closed transactions) and will (in the case of the agreement in
principle) terminate their affiliation with the Company and repurchase practice
assets in exchange for an aggregate of $220,000 cash, notes payable to the
Company in the principal amount of $261,000 and 278,262 shares of the Company's
Common Stock. Upon receipt by the Company of its shares of Common Stock in
connection with these asset sales, the Company retired such shares and the
shares became 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 second quarter ended June 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 August 13, 1999, in addition to the eleven affiliated practices
which terminated their affiliation with the Company and one affiliated practice
which has entered into an agreement in principle to terminate its affiliation
with the Company, the Company has commenced discussions with the remaining
fourteen affiliated practices regarding their 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.
5
<PAGE> 8
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 filed 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.
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: August 13, 1999 By: /s/ F.W. MORT GUILFORD
---------------------------------------
F.W. Mort Guilford
President (Principal Executive Officer)
Date: August 13, 1999 By: /s/ EDWARD STRONGIN
---------------------------------------
Edward Strongin
Acting Chief Financial Officer
(Principal Financial and Accounting
Officer)
7
<PAGE> 10
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
<S> <C>
Condensed Consolidated Balance Sheets as of June 30, 1999 (Unaudited)
and December 31, 1998 F-2
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1999 and 1998 (Unaudited) F-3
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1999 (Unaudited) F-4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 (Unaudited) F-5
Notes to the Condensed Consolidated Financial Statements F-6
</TABLE>
<PAGE> 11
ORTHODONTIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 989,082 $ 1,289,481
Patient receivables and unbilled patient receivables, net of allowance
of $117,000 at June 30, 1999 and $267,000 at December 31, 1998 667,442 1,113,254
Assets held for sale 312,682 --
Prepaid expenses and other current assets 442,145 183,736
----------- -----------
Total current assets 2,411,351 2,586,471
Property and equipment, net 352,934 839,193
Advances to Founding Practices, net of allowance of $770,000 at 346,995 950,328
June 30, 1999 and $800,000 at December 31, 1998
Notes and other receivables 191,281 303,040
Deferred tax asset 73,825 73,825
Other assets 10,935 20,094
----------- -----------
Total assets $ 3,387,321 $ 4,772,951
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 398,203 $ 705,525
Amounts payable to Founding Practices 72,641 466,626
Patient prepayments 120,411 108,009
Lease payable - current portion 17,000 16,200
Deferred tax liability 73,825 73,825
----------- -----------
Total current liabilities 682,080 1,370,185
Lease payable 40,833 47,937
----------- -----------
Total liabilities 722,913 1,418,122
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.0001 par value, 100,000,000 shares authorized
at June 30, 1999 and December 31, 1998, no shares issued
and outstanding -- --
Common stock, $.0001 par value, 100,000,000 shares authorized,
5,130,300 and 5,881,721 shares issued and outstanding
at June 30, 1999 and December 31, 1998, respectively 513 588
Additional paid-in capital 5,168,942 5,607,261
Accumulated deficit (2,264,183) (1,854,557)
Less: deferred compensation - stock options (240,864) (398,463)
----------- -----------
Total stockholders' equity 2,664,408 3,354,829
----------- -----------
Total liabilities and stockholders' equity $ 3,387,321 $ 4,772,951
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-2
<PAGE> 12
ORTHODONTIX, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Management service fee revenue $ 1,181,799 $ 2,318,637 $ 3,344,527 $ 2,318,637
----------- ----------- ----------- -----------
Direct practice expenses:
Salaries and benefits 418,086 840,802 1,218,012 840,802
Orthodontic supplies 146,561 324,750 421,381 326,059
Rent 189,026 232,004 471,624 232,004
Depreciation and amortization 18,409 56,833 69,649 56,833
Other 142,950 353,390 396,260 355,945
----------- ----------- ----------- -----------
Total direct practice expenses 915,032 1,807,779 2,576,926 1,811,643
General and administrative 436,781 534,449 1,000,964 717,225
Provision for losses on advances to Founding
Practices (Note 5) 230,000 -- 270,000 --
Asset impairment charge (Note 5) -- -- 285,000 --
Gain on the sale of certain assets of Founding
Practices (Note 5) (358,839) -- (358,839) --
Depreciation and amortization 8,929 495 17,988 684
----------- ----------- ----------- -----------
Total expenses 1,231,903 2,342,723 3,792,039 2,529,552
----------- ----------- ----------- -----------
Net operating loss (50,104) (24,086) (447,512) (210,915)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 13,013 14,434 38,835 14,448
Interest expense (476) (36,188) (949) (45,559)
----------- ----------- ----------- -----------
Total other income (expense) 12,537 (21,754) 37,886 (31,111)
----------- ----------- ----------- -----------
Net loss $ (37,567) $ (45,840) $ (409,626) $ (242,026)
=========== =========== =========== ===========
Loss per common and common
equivalent share:
Basic ($ 0.01) ($ 0.01) ($ 0.07) ($ 0.07)
=========== =========== =========== ===========
Diluted ($ 0.01) ($ 0.01) ($ 0.07) ($ 0.07)
=========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding -
basic and diluted 5,533,207 5,153,983 5,706,501 3,237,638
=========== =========== =========== ===========
</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 six months ended June 30, 1999
<TABLE>
<CAPTION>
Additional
Common Stock 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) (751,421) (75) (368,521) 0 0 (368,596)
Deferred compensation for
stock options issued 0 0 57,817 0 (57,817) 0
Amortization of deferred
compensation 0 0 0 0 87,801 87,801
Forfeiture of deferred
compensation (Note 5) 0 0 (127,615) 0 127,615 0
Net loss for the period 0 0 0 (409,626) 0 (409,626)
--------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1999 5,130,300 $ 513 $ 5,168,942 ($2,264,183) $ (240,864) $ 2,664,408
========= =========== =========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-4
<PAGE> 14
ORTHODONTIX, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (409,626) $ (242,026)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 87,637 57,517
Bad debt expense 116,946 --
Noncash compensation expense 87,801 108,374
Provision for losses on advances to Founding Practices 270,000 --
Asset impairment charge 285,000 --
Gain on disposal of certain practice assets (358,839) --
Changes in assets and liabilities (1,002,801) 400,974
----------- -----------
Net cash (used in) provided by operating activities (923,882) 324,839
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (31,376) (10,074)
Purchase of practice assets -- (3,365,589)
Proceeds from the sales of certain practice assets 494,713 0
Payment of notes receivable 166,450 52,532
Investment in notes receivable -- (230,000)
----------- -----------
Net cash provided by (used in) investing activities 629,787 (3,553,131)
----------- -----------
Cash flows from financing activities:
Payment of lease obligation (6,304) (12,500)
Proceeds from bank line of credit, net -- (496,283)
Payment of merger costs -- 6,795,773
Advances from stockholders, net -- (297,505)
----------- -----------
Net cash (used in) provided by financing activities (6,304) 5,989,485
----------- -----------
Net (decrease) increase in cash and cash equivalents (300,399) 2,761,193
Cash and cash equivalents, beginning of period 1,289,481 84,920
----------- -----------
Cash and cash equivalents, end of period $ 989,082 $ 2,846,113
=========== ===========
</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
JUNE 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 six months ended June 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:
June 30, December 31,
1999 1998
(Unaudited)
----------- ------------
Accounts payable $238,927 $430,027
Accrued salaries and benefits 7,719 188,084
Other accrued expenses 151,557 87,414
-------- --------
$398,203 $705,525
======== ========
F-6
<PAGE> 16
ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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 six month periods
ended June 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 shares.
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 orthodontists 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, in aggregate, of approximately $2.2 million. The Company
believes such matters are without merit and intends to vigorously defend
itself. The Company does not believe such matters 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 six months ended June 30, 1999, the Company has sold certain
practice assets consisting principally of accounts receivable and
property and equipment to nine of the Founding Practices. As a result of
these transactions, the Company received approximately $1,028,060 in cash
($332,000 was received subsequent to June 30, 1999 and, therefore, is
included in prepaid expenses and other current assets in the accompanying
balance sheet), $65,000 in notes receivable and 751,421 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 $1,461,656.
F-7
<PAGE> 17
ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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 assets of approximately $359,000 for the three and six
months ended June 30, 1999. 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 month 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:
Accounts receivable, net $ 315,192
Property and equipment, net 387,238
Notes receivable 225,747
Advances to Founding Practices, net 340,503
Other 119,137
-----------
1,387,817
Less: impairment charge (285,000)
-----------
$ 1,102,817
===========
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
approximately $128,000.
F-8
<PAGE> 18
ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
5. ASSETS HELD FOR SALE AND TERMINATION OF AFFILIATION WITH CERTAIN FOUNDING
PRACTICES, CONTINUED:
Subsequent to June 30, 1999, the Company sold certain practice assets
consisting principally of accounts receivable and property and equipment
to two additional Founding Practices. In addition, the Company has
substantially negotiated with one other Founding Practice the terms of
the sale of certain practice assets. As a result of these transactions,
the Company has classified such practice assets as assets held for sale
at June 30, 1999 as follows:
Patient receivables and unbilled patient receivables, net $ 254,321
Property and equipment, net 42,760
Prepaid expenses and other current assets 15,601
---------
$ 312,682
=========
As of August 13, 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 signed standstill agreements with nine of the
remaining Founding Practices pending successful negotiation of sale
terms. As of June 30, 1999, five of the Founding Practices were receiving
management services from the Company in exchange for a management fee.
As of June 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 $230,000 for the three
months ended June 30, 1999 and $270,000 for the six months ended June 30,
1999 related to the collectability of the Advances from Founding
Practices at June 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF
ORTHODONTIX, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 989,082
<SECURITIES> 0
<RECEIVABLES> 784,442
<ALLOWANCES> (117,000)
<INVENTORY> 0
<CURRENT-ASSETS> 2,411,351
<PP&E> 493,433
<DEPRECIATION> (140,499)
<TOTAL-ASSETS> 3,387,321
<CURRENT-LIABILITIES> 682,080
<BONDS> 0
0
0
<COMMON> 513
<OTHER-SE> 2,663,895
<TOTAL-LIABILITY-AND-EQUITY> 3,387,321
<SALES> 3,344,527
<TOTAL-REVENUES> 3,344,527
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,792,039
<LOSS-PROVISION> (447,512)
<INTEREST-EXPENSE> (949)
<INCOME-PRETAX> (409,626)
<INCOME-TAX> 0
<INCOME-CONTINUING> (409,626)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (409,626)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
