<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITION REPORT UNDER 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.
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(Exact name of small business issuer 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
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(Address of principal executive offices)
(305) 373-1002
--------------------------------
(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
---------------------- ------------------------------------------------------
<S> <C>
Common Stock, par value $.0001 per share OTC Electronic Bulletin Board
</TABLE>
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[X]
State issuer's revenues for its most recent fiscal year: $3,554,663.
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Company based on the closing sales price of $.219 of such
common stock, as of March 20, 2000, is $534,238 based upon 2,442,229 shares of
the Company's common stock outstanding as of March 20, 2000 held by
non-affiliates. For purposes of this computation, all executive officers,
directors and 5% beneficial owners of the common stock of the registrant have
been deemed to be affiliates. Such determination should not be deemed to be an
admission that such directors, officers or 5% beneficial owners are, in fact,
affiliates of the registrant.
As of March 20, 2000, the Company had a total of 4,181,665 shares of common
stock, par value $.0001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
<PAGE> 2
ORTHODONTIX, INC.
FORM 10-KSB
FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I..........................................................................................................-1-
Item 1. Description of Business.......................................................................-1-
Item 2. Description of Property.......................................................................-2-
Item 3. Legal Proceedings.............................................................................-2-
Item 4. Submission of Matters to a Vote of Security Holders...........................................-2-
PART II.........................................................................................................-2-
Item 5. Market for Common Equity and Related Stockholder Matters......................................-2-
Item 6. Management's Discussion and Analysis or Plan of Operation.....................................-4-
Item 7. Financial Statements..........................................................................-6-
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure....................................................................................-6-
PART III........................................................................................................-6-
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange Act.............................................................-6-
Item 10. Executive Compensation.......................................................................-10-
Item 11. Security Ownership of Certain Beneficial Owners and Management...............................-13-
Item 12. Certain Relationships and Related Transactions...............................................-14-
Item 13. Exhibits And Reports on Form 8-K.............................................................-14-
SIGNATURES.....................................................................................................-16-
EXHIBIT INDEX..................................................................................................-17-
LIST OF EXHIBITS...............................................................................................-18-
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Embassy Acquisition Corp. (now known as Orthodontix, Inc. (the "Company")
was formed in November 1995 to seek to effect a business combination with an
acquired business. On April 16, 1998, the Company consummated a merger with
Orthodontix Subsidiary, Inc. (formerly known as Orthodontix, Inc. ("Ortho Sub"),
resulting in Ortho Sub becoming a wholly owned subsidiary corporation of the
Company (the "Merger"). Ortho Sub was an orthodontic practice management company
formed to affiliate with orthodontic practices and manage the business aspects
of such practices, including billing, collections, cash management and payroll
processing, in exchange for a management fee. Under the terms of the Merger, the
Company, among other things, issued a total of 3,341,721 shares of its common
stock, par value $.0001 (the "Common Stock") (representing approximately 56.8%
of its Common Stock subsequent to the Merger) in exchange for all of the
outstanding shares of Common Stock of Ortho Sub, the acquisition of certain
assets and the assumption of certain liabilities of 26 orthodontic practices
(the "Founding Practices" or the "Affiliated Practices") and the entering into
of long-term administrative services agreements. In connection with the closing
of the Merger, the Company changed its name to Orthodontix, Inc. and began
providing practice management services to the Founding Practices. The Merger
resulted in both a change in the majority equity ownership and management of the
Company and the cessation of the Company's business operations as previously
conducted. The Merger was accounted for as a capital transaction equivalent to
the issuance of stock for the net monetary assets of the Company accompanied by
a recapitalization of Ortho Sub. As further discussed in Note 1 to the Company's
Consolidated Financial Statements, the acquisition of certain assets and the
assumption of certain liabilities of the Founding Practices was accounted for in
accordance with Securities and Exchange Commission's Staff Accounting Bulletin
No. 48, "Transfers of Nonmonetary Assets by Promoters or Shareholders." The
Founding Practices included 26 orthodontists operating 46 offices in 11 states.
No further practice affiliations occurred.
CESSATION OF THE ORTHODONTIC PRACTICE MANAGEMENT BUSINESS OF THE
COMPANY
As of March 31, 2000, the Company has terminated its affiliation with 23
of the Founding Practices and has reached an agreement in principle to terminate
its affiliation with one additional Founding Practice and is in discussions with
the two remaining Founding Practices regarding its affiliation with the Company.
The Company is not providing any management services currently and accordingly
generating no fee revenue. In connection with the termination of its affiliation
with the 23 orthodontic practices, the Company sold orthodontic practice assets
back to the Founding Practices, terminated its management relationship with such
practices and received in the aggregate $1,306,285 in cash, $691,300 in notes
receivable and 1,815,804 shares of the Company's Common Stock.
To the extent the Company terminates its affiliation with the remaining
affiliated practices (the
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"Remaining Practices"), the Company presently intends to seek to effect a
business combination with an acquired business. There can be no assurances that
the Company will enter into arrangements to terminate its affiliations with the
Remaining Practices on terms favorable to the Company, if at all.
EMPLOYEES
The Company employs one full-time employee and one part-time employee.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases, on a month to month basis, approximately 400
square feet of office space in Miami, Florida from an unaffiliated third party
for a monthly rental amount of approximately $1,100.
ITEM 3. LEGAL PROCEEDINGS
In December 1999 and February 2000, the Company received two separate
demand letters to satisfy outstanding previously invoiced amounts of
approximately $48,000 and $67,000 in favor of two separate firms who had leased
equipment to the Company and provided consulting services to the Company,
respectively. The Company is currently in discussions with these firms to settle
the amounts owed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1999, no
matters were submitted to a vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From April 2, 1996, when the Common Stock commenced trading, through May
28, 1998, the Common Stock was quoted for trading in the over-the-counter
electronic bulletin board market (the "OTC Bulletin Board") under the symbol
"MBCA." From May 29, 1998 through November 16, 1999, the Company's Common Stock
was listed on The Nasdaq SmallCap Market and was traded under the symbol "OTIX."
On November 17, 1999, the Company's Common Stock was delisted from the Nasdaq
Small Cap Market and commenced being quoted for trading on the OTC Bulletin
Board under the symbol "OTIX." The following table shows the (i) reported high
and low bid quotations for the Common Stock obtained from the OTC Bulletin Board
(for quotes from January 1, 1997 through May 28, 1998 and for quotes from
November 17, 1999 through March 20, 2000); and (ii) reported high and low sales
prices on The Nasdaq SmallCap Market (for quotes from May 29, 1998 through
November 16, 1999). The high and low bid prices for the periods indicated are
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interdealer prices, without retail mark-up, mark-down or commissions and may not
represent actual transactions.
<TABLE>
<CAPTION>
OTC BULLETIN BOARD LOW BID HIGH BID
- ------------------ ------- --------
<S> <C> <C>
1998
First Quarter................................................... $8.000 $9.000
Second Quarter (thru May 28).................................... $8.500 $10.25
1999
Fourth Quarter (from November 17, 1999)......................... $.0625 $.2500
2000
First Quarter (thru March 20)................................... $.0625 $.1250
NASDAQ SMALLCAP MARKET LOW HIGH
- ---------------------- --- ----
1998
1998
Second Quarter (from May 29)...................................... $6.250 $7.875
Third Quarter..................................................... $2.500 $6.125
Fourth Quarter.................................................... $1.000 $2.750
1999
First Quarter..................................................... $1.000 $2.625
Second Quarter.................................................... $.1250 $1.000
Third Quarter..................................................... $.2500 $1.125
Fourth Quarter (thru November 17, 1999)........................... $1.000 $1.125
</TABLE>
The approximate number of holders of record of the Company's Common Stock,
as of March 20, 2000, amounts to 62, inclusive of those brokerage firms and/or
clearing houses holding the Company's shares of Common Stock for their clientele
(with each such brokerage house and/or clearing house being considered as one
holder).
The Company has not paid or declared any dividends upon its Common Stock
since its inception and, by reason of its present financial status and its
contemplated financial requirements, does not contemplate or anticipate paying
any dividends upon its Common Stock in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the financial condition or plan of operation
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Report.
Results of operations for the period from January 1 through April 16, 1998, the
date of the Merger, (the "1998 Administrative Period") reflect the
organizational efforts of the Company prior to the date of the Merger and
therefore, in the Company's opinion, are not comparable to the corresponding
period in the current year.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998.
MANAGEMENT SERVICE FEE REVENUE. For the fiscal years ended December 31,
1999 and December 31, 1998, management service fee revenue reported by the
Company was 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 years ended December 31, 1999
and December 31, 1998, which 1998 amounts related only to amounts earned during
the period from April 17, 1998 through December 31, 1998 (the "1998 Operational
Period") was approximately $3.55 and $8.04 million, respectively. The decrease
in management fee revenue is primarily due to the decrease in Affiliated
Practices being managed by the Company as a result of practice affiliation
terminations.
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 $2.8 million and $6.3 million for the years ended
December 31, 1999 and December 31, 1998, respectively, which 1998 amounts
related only to amounts incurred during the 1998 Operational Period. 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, which included provisions for losses on advances to
Founding Practices, an asset impairment charge and the gain on the sale of
certain assets and liabilities of Founding Practices, of approximately $1.9
million for the year ended December 31, 1999 and approximately $2.9 million for
the year ended December 31, 1998. The corporate general and administrative
expenses of approximately $2.9 million for the year ended December 31, 1998
consisted of $2.7 million during the 1998 Operational Period and $200,000 during
the 1998 Administrative Period.
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 amounts payable from certain formerly
affiliated orthodontists.
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NET LOSS. For the years ended December 31, 1999 and 1998, the Company
recorded a net loss of approximately $998,000 and $1.15 million, respectively,
or approximately $.19 per share, and $.25 per share, respectively.
Included in the expenses for the year ended December 31, 1999 are non cash
expenses of approximately (i) $154,000 related principally to the issuance by
the Company to a non-employee director of stock options (which director resigned
in March 2000 and accordingly forfeited all of his stock options) and options
issued to members of the Company's Advisory Board, (ii) $163,000 of
depreciation, (iii) $370,000 related to an allowance on advances to Founding
Practices (the "Allowance"); and (iv) $315,000 related to an asset impairment
charge. During the year ended December 31, 1999, the Company's net loss
excluding non-cash expense items (other than the allowance and asset impairment
charge) was approximately $681,000. Included in the expenses for the year ended
December 31, 1998 are expenses of approximately $200,000 incurred during the
1998 Administrative Period, non-cash expense items of approximately $398,000
principally related to the issuance of stock options to employees and affiliated
orthodontists and depreciation and $800,000 related to the Allowance. During the
1998 Operational Period, the Company's net loss, excluding non-cash expense
items (other than the Allowance), was approximately $502,000. Net loss 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 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
As of December 31, 1999, the Company had a working capital balance of
approximately $1,184,000. The Company continues to anticipate the primary uses
of capital will include general and administrative costs and costs related to
the termination of its affiliation with the Remaining Practices and if the
terminations occur, expenses associated with seeking to effect a business
combination.
As of December 31, 1999 and December 31, 1998, the Company had cash and
cash equivalents of $407,474 and $1,289,481, respectively. As of December 31,
1999 and December 31, 1998, the Company had total liabilities of $459,361 and
$1,418,122, respectively. The Company's cash is currently invested in money
market accounts and overnight repurchase agreements. In addition, as of December
31, 1999, the Company had short-term investments of $1,061,709 which consist of
certificates of deposits. The Company believes that its operating funds will be
sufficient for its cash expenses for at least the next twelve months.
FORWARD LOOKING INFORMATION MAY PROVE INACCURATE
This Annual Report on Form 10-KSB 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 the
Company and involve risks and uncertainties that could cause actual future
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<PAGE> 8
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, the Company's inability to
terminate its affiliation with the Remaining Practices, and the timing and
ability of the Company to decrease its administrative expenses and satisfy
amounts owed to its trade creditors.
OUTLOOK AND UNCERTAINTIES
The Company's financial condition and results are subject to substantial
risks and uncertainties, certain of which are summarized below:
The termination of affiliations with the Remaining Practices as well as
the sale back of practice assets is contingent upon the negotiation of
definitive agreements between the Company and the Remaining Practices. No
assurances can be given that the Company will be able to consummate the
terminations of its affiliations with the Remaining Practices, or that such
terminations will take place in a timely manner. If the Company is not able to
timely and successfully terminate affiliations with the Remaining Practices as
well as satisfactorily resolve certain disputes with certain trade creditors,
its financial condition, cash flows and results of operations will be materially
and adversely affected. In the event the Company terminates its affiliation with
the Remaining Practices, there can be no assurances that it will effect a
business combination with an acquired business on terms satisfactory to the
Company, if at all.
ITEM 7. FINANCIAL STATEMENTS
The financial statements included herein, commencing at page F-1, have
been prepared in accordance with the requirements of Regulation S-B.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
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DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
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<S> <C> <C>
Stephen Grussmark, DDS, MSD 59 Chief Executive Officer and Chief
Clinical Officer, Director
F.W. Mort Guilford 72 President, Chief Operating Officer,
Secretary, Treasurer, Director
Alan Jay Weisberg 54 Acting Chief Financial Officer
Stephen J. Dresnick, MD 49 Chairman of the Board of Directors
Glenn L. Halpryn 39 Director
William Thompson, DDS 67 Director
</TABLE>
Stephen Grussmark, DDS, MSD became the Chief Executive Officer and Chief
Clinical Officer and a director of the Company in April 1998 upon the closing of
the Merger. From August 1996 until the Merger, Dr. Grussmark was Chief Executive
Officer, Chief Clinical Officer and a director of Ortho Sub. Since 1968, Dr.
Grussmark has been a practicing orthodontist in the Miami, Florida area. Since
1990, Dr. Grussmark has been an Assistant Clinical Professor of Graduate
Orthodontics at the University of Florida Dental School and has been a staff
member at Miami Children's Hospital since 1969. Dr. Grussmark is a member of the
Dade County Dental Research Group, the American Dental Association, the American
Association of Orthodontists, the Southern Association of Orthodontists, and is
Past President of both the Florida Cleft Palate Association and the South
Florida Academy of Orthodontists.
F.W. Mort Guilford became the President, Chief Operating Officer and a
director of the Company in April 1998 upon the closing of the Merger. From
August 1996 until the Merger, Mr. Guilford was President, Chief Operating
Officer and a director of Ortho Sub. Since 1956, Mr. Guilford has practiced
business, real estate and land use law in the Miami, Florida area and has been
an investor in numerous business ventures, including real estate, banking and
food franchises. Since 1984, Mr. Guilford has served as Chairman of The Alma
Jennings Foundation, a charitable foundation, and from 1989 through 1994, he
served on the Florida Public Service Nominating Committee, which makes
recommendations to the Governor of Florida for appointees to the Florida Public
Service Commission. In addition, Mr. Guilford has served on the State of Florida
Finance and Bond Council, was a member of the University of Miami Board of
Trustees, and was Chairman of the Economic Development Committee and Code
Enforcement Board for the City of Coral Gables, Florida. Since 1995, Mr.
Guilford has been a member of the Coral Gables Foundation.
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<PAGE> 10
Stephen J. Dresnick, MD has been a member of the Board of Directors of the
Company since its inception and the Chairman of the Board of Directors since the
closing of the Merger. From March 1998 through July 1999, Dr. Dresnick was the
Chief Executive Officer, President and Chairman of the Board of Directors of FPA
Medical Management, Inc. , a publicly traded physician practice management
company ("FPA"). From November 1996 through February 1998, Dr. Dresnick served
as the Vice Chairman of the Board of FPA. In July 1998, FPA and 89 of its
subsidiaries and affiliates (collectively, the "Debtors") filed for protection
under Chapter 11 in the United States District Court for the District of
Delaware (the "Bankruptcy Court"). The cases were consolidated for the purpose
of joint administration under the consolidated caption: In re FPA Medical
Management, Inc., et. al., Debtors, Case Nos. 98-1596 through 98-1685. FPA's
plan of reorganization was confirmed by the U.S. Bankruptcy Court for the
District of Delaware in May 1999. From 1987 through March 1998, Dr. Dresnick
served as President, Chief Executive Officer and Chairman of the Board of
Directors of Sterling Healthcare Group, Inc. ("Sterling"), a publicly traded
company engaged in providing physician practice management to hospital-based
emergency departments. Sterling was acquired by FPA in October 1996. Dr.
Dresnick is a Diplomate of the National Board of Medical Examiners and is
certified by the American Board of Emergency Medicine. Dr. Dresnick is licensed
to practice medicine in 12 states. Dr. Dresnick currently holds an appointment
as Assistant Professor at University of Miami, School of Nursing; is on the
Dean's Advisory Committee at University of Miami, School of Business; is an
Advisory Board Member at the Center for the Advancement of Service Management,
University of Florida, College of Business Administration; is a Clinical
Associate Professor for the Department of Surgery, University of Florida, School
of Medicine; and is a member of the Board of Trustees of Florida International
University.
Glenn L. Halpryn has been a member of the Board of Directors since its
inception, and was President of the Company from inception through the closing
of the Merger. Since 1985, Mr. Halpryn has been engaged in real estate
investment and development activities, including the management, finance and
leasing of commercial real estate. From April 1988 through June 1998, Mr.
Halpryn was Vice Chairman of Central Bank, a Florida state-chartered bank. Since
June 1987, Mr. Halpryn has been the President of and beneficial holder of stock
of United Security Corporation, a broker-dealer registered with the NASD. From
June 1992 through May 1994, Mr. Halpryn served as the Vice President,
Secretary-Treasurer of Frost Hanna Halpryn Capital Group, Inc., a "blank check"
company whose business combination was effected in May 1994 with Sterling
Healthcare Group, Inc. From June 1995 through October 1996, Mr. Halpryn served
as a member of the Board of Directors of Sterling Healthcare Group, Inc.
William Thompson, DDS became a director of the Company upon the closing of
the Merger. Dr. Thompson had been a consultant to Ortho Sub since its inception.
Since 1960, Dr. Thompson has been a practicing orthodontist in the Bradenton,
Florida area. He is a member of the Council on Orthodontic Education of the
American Association of Orthodontics. From 1985 through 1992, Dr. Thompson was a
Director and from 1991 through 1992 was the President of the American Board of
Orthodontics. Dr. Thompson has received numerous professional appointments as
well as published numerous articles concerning orthodontics. Dr. Thompson has
been a member of the Board of Directors of the First National Bank of Manatee
since 1989.
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Alan Jay Weisberg became the Company's Acting Chief Financial Officer in
September 1999. Since July 1986, Mr. Weisberg has been a partner in the
accounting firm of Weisberg Brause & Co., Miami, Florida.
Stephen Bittel served as a member of the Board of Directors until his
resignation in March 2000. Gary Gerson served as a member of the Board of
Directors until his resignation in April 2000.
Each director serves until the next annual meeting of shareholders and
until his successor is elected and qualified. Each officer is appointed to serve
until the next annual meeting of the Board of Directors and until his successor
has been appointed and qualified.
BOARD COMMITTEES
The Board currently has four committees: an Executive Committee, a
Nominating Committee, an Audit Committee, and a Compensation and Stock Option
Committee. Mr. Halpryn and Dr. Dresnick serve on the Executive Committee.
Messrs. Guilford and Halpryn and Dr. Grussmark serve on the Nominating
Committee. As a result of the resignations of Messrs. Gerson and Bittel, the
Board is considering appointments of members of the Board to serve on the Audit
Committee. Dr. Dresnick serves on the Compensation and Stock Option Committee.
Dr. Thompson served on the Executive Committee until his resignation from it in
April 1999. Until his resignation from the Board in March 2000, Mr. Bittel
served as a member of the Executive Committee and Audit Committee. Until his
resignation from the Board in April 2000, Mr. Gerson served as a member of the
Audit Committee and the Compensation and Stock Option Committee. The Executive
Committee is authorized by the Board of Directors to review and advise senior
management of the Company regarding issues concerning strategic planning,
significant transactions, policies and procedures and to make recommendations to
senior management generally on issues such as budgetary items and to otherwise
take all other action which may be delegated by the Board of Directors under the
Florida Business Corporation Act. Pursuant to instruction from the Board of
Directors, the Executive Committee, during 1999 was principally involved with
the termination of the Company's affiliation with orthodontic practices. The
Nominating Committee recommends candidates for election to the Company's Board
of Directors, examines the performance of incumbent Directors and makes
recommendations concerning the retention of such Directors. The Audit Committee
recommends the annual appointment of the Company's auditors, with whom the Audit
Committee reviews the scope of audit and non-audit assignments and related fees,
accounting principles used by the Company in financial reporting and the
adequacy of the Company's internal control procedures. The Compensation and
Stock Option Committee administers the 1997 Orthodontix, Inc. Stock Option Plan
(the "Stock Option Plan"). The Compensation and Stock Option Committee also has
the responsibility for reviewing and approving salaries, bonuses, and other
compensation and benefits of executive officers, and advising management
regarding benefits and other terms and conditions of compensation.
SIGNIFICANT EMPLOYEES
None.
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<PAGE> 12
FAMILY RELATIONSHIPS
None.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
To the Company's knowledge based on information received from each officer
and director, other than Dr. Dresnick who was Chief Executive Officer and
Chairman of the Board of Directors of FPA , a company which was reorganized
under the Bankruptcy Act, there have been no events under any bankruptcy act, no
criminal proceedings and no judgments or injunctions material to the evaluation
of the ability and integrity of any executive officer during the past five
years.
COMPLIANCE WITH SECTION 16(a)
To the Company's knowledge, based solely upon the Company's review of
Forms 3, 4 and 5 furnished to the Company, for the fiscal year ended December
31, 1999, and for the period ended March 20, 2000, no person who was a director,
officer or beneficial owner of more than ten percent of the Company's
outstanding Common Stock or any other person subject to Section 16 of the
Securities Exchange Act of 1934 (the "Exchange Act") failed to file on a timely
basis, reports required by Section 16(a) of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
From the Merger through March 1999, non-employee directors of Orthodontix
received $500 for each Board meeting attended as well as accountable
reimbursement for any reasonable business expenses incurred in connection with
their activities on behalf of Orthodontix. In addition, they are entitled to
receive stock options under the 1997 Orthodontix, Inc. Stock Option Plan. As of
March 1999, the Company granted to each non-employee director of the Company,
other than Mr. Bittel, the option for a period of two years to acquire 20,000
shares of the Company's Common Stock at a purchase price of $1.75 per share in
lieu of any future cash payments to be made to such persons for attendance at
Board meetings. As of March 1999, the Company granted to Mr. Bittel, the option
for a period of two years to acquire 100,000 shares of the Company's Common
Stock at a purchase price of $1.75 per share. In March 2000, Mr. Bittel resigned
from the Board of Directors and his options were forfeited. In April 2000, Mr.
Gerson resigned from the Board of Directors and the options granted to him in
March 1999 were forfeited.
EXECUTIVE COMPENSATION
No executive officer of the Company earned more than $100,000 during the
fiscal year ended December 31, 1999. The following table sets forth the
compensation earned for services rendered to the Company in all capacities for
the fiscal years ended December 31, 1999, 1998 and 1997 by the Company's Chief
Executive Officer and President (the "Named Executive Officers"):
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
- -------------------------- ------------------------------------------------------------ ------------------------------------------
Securities
Name and Principal Other Annual Underlying All Other
Position (1) Year Salary Bonus Compensation(2) Options/SARs Compensation
- -------------------------- ---------- ----------- ----------- ------------------------ ---------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Stephen Grussmark, 1999 $0 $0 $0 0 $0
DDS, MSD, Chief
Executive Officer, 1998 $0 $0 $0 0 $0
Chief Clinical
Officer and director 1997 -- -- -- -- --
since April 1998
F.W. Mort Guilford, 1999 $0 $0 $0 $0
President, Chief
Operating Officer 1998 $0 $0 $9,440 150,000 $0
and director since
April 1998 1997 -- -- -- -- --
</TABLE>
(1) Edward Strongin, CPA, the Company's Acting Chief Financial Officer through
August 1999, is a partner of Pinchasik Strongin Muskat Stein & Co., which
firm was paid $172,206 by the Company during the year ended December 31,
1999. Alan Jay Weisberg, CPA, the Company's Acting Chief Financial
Officer, is a partner of Weisberg Brause, which firm was paid $6,688 by
the Company during the year ended December 31, 1999.
(2) Other Annual Compensation represents an automobile allowance for Mr.
Guilford.
STOCK OPTION GRANTS IN FISCAL YEAR 1999
No stock options were granted to Dr. Grussmark or Mr. Guilford during the
fiscal year ended December 31, 1999. No exercised or unexercised options to
purchase the Company's Common Stock were held by Dr. Grussmark as of December
31, 1999. Options to acquire 150,000 shares of the Company's Common Stock at any
time and from time to time for a period of five years, commencing April 16, 1998
at a per share purchase price of $9.11 were granted to Mr. Guilford in
connection with the closing of the Merger (the "Guilford Options"). The Guilford
Options remained unexercised and outstanding as of December 31, 1999.
-11-
<PAGE> 14
<TABLE>
<CAPTION>
Number of
Securities Percent of Total Market
Underlying Options Granted to Price on
Options Employees In Date of Exercise or
Name Granted Fiscal Year Grant(s) Base Price Expiration Date
- ------------------------- ------------------ ------------------------ ---------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
Stephen Grussmark, DDS -- -- -- -- --
F.W. Mort Guilford -- -- -- -- --
</TABLE>
STOCK OPTION EXERCISES IN FISCAL YEAR 1999
AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase the Company's Common Stock as of
December 31, 1999 held by Dr. Grussmark and Mr. Guilford. Neither Dr. Grussmark
nor Mr. Guilford exercised any options during the year ended December 31, 1999.
<TABLE>
<CAPTION>
Shares Value of Unexercisable In-
Acquired Number of Unexercised the-money Options at FY-
on Value Options at FY-end end Exercisable /
Name Exercise Realized(1) Exercisable/Unexercisable Unexercisable (2)(3)
- ---------------------------- -------------- ----------------- -------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Stephen Grussmark, DDS -- -- 0 / 0 $0 / $0
- ---------------------------- -------------- ----------------- -------------------------------- ----------------------------------
F.W. Mort Guilford -- -- 150,000 / 0 $0 / $0
- ---------------------------- -------------- ----------------- -------------------------------- ----------------------------------
</TABLE>
(1) The difference between the average of the high and low bid prices per
share of the Common Stock as reported on the OTC Bulletin Board on the
date of exercise, and the exercise or base price.
(2) The difference between the average of the high and low bid prices per
share of the Common Stock as quoted on the OTC Bulletin Board on December
31, 1999, $.875, and the exercise or base price.
(3) As of December 31, 1999, Mr. Guilford held options to purchase 150,000
shares of Common Stock at $9.11 per share, all of which are currently
exercisable.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
Dr. Grussmark, an affiliated orthodontist and the orthodontist of one of
the Remaining Practices, has no employment agreement with the Company and does
not receive a salary in his capacity as the Company's Chief Executive Officer
and Chief Clinical Officer. Dr. Grussmark's
-12-
<PAGE> 15
responsibilities included business development and acting as a liaison between
the Company and the Affiliated Practices. Mr. Guilford has no employment
agreement with the Company and does not receive a salary in his capacity as
President and Chief Operating Officer, but received an automobile allowance of
$1,180 monthly through August 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to the Company with
respect to the beneficial ownership of its Common Stock as of March 28, 2000 by
(i) each stockholder known by the Company to own beneficially more than 5% of
the outstanding Common Stock, (ii) each of Mr. Guilford and Dr. Grussmark, the
only persons named in the Summary Compensation Table, (iii) each director of the
Company, and (iv) all directors and executive officers as a group. As of March
20, 2000, there were 4,181,665 shares of Common Stock outstanding.
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES OF COMMON STOCK PERCENT
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OWNED
- ------------------- --------------------- -----
<S> <C> <C>
Stephen Grussmark, DDS, MSD 896,956 (2) 21.4%
2222 Ponce de Leon Blvd., 3rd Floor
Coral Gables, FL 33134
F.W. Mort Guilford 500,180 (4) 12.0%
2222 Ponce de Leon Blvd., 3rd Floor
Coral Gables, FL 33134
Stephen J. Dresnick 380,000 (3)(4) 9.1%
2222 Ponce de Leon Blvd., 3rd Floor
Coral Gables, FL 33134
Glenn L. Halpryn 387,100 (4) 9.3%
2222 Ponce de Leon Blvd., 3rd Floor
Coral Gables, FL 33134
William Thompson, DDS 69,500 (4)(5) 1.7%
2222 Ponce de Leon Blvd., 3rd Floor
Coral Gables, FL 33134
Gary Gerson 20,000 (4) .5%
2222 Ponce de Leon Blvd., 3rd Floor
Coral Gables, FL 33134
All Officers and Directors
as a Group 2,257,937 (6) 54.0%
Total Shares Outstanding
as of March 20, 2000 4,181,665
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the
-13-
<PAGE> 16
percentage ownership of that person, shares of Common Stock subject to
options or warrants held by that person that are currently exercisable or
will become exercisable within 60 days after March 20, 2000 are deemed
outstanding, while such shares are not deemed outstanding for purposes of
computing percentage ownership of any other person. Unless otherwise
indicated in the footnotes below, the persons and entities named in the
table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
(2) Includes 891,956 shares of Common Stock held in various trusts for which
Dr. Grussmark or his spouse is the sole trustee and the beneficiaries of
which are Dr. Grussmark, his spouse or his children.
(3) Includes 160,000 shares of Common Stock held by a limited partnership of
which Dr. Dresnick is both a limited partner and the owner of the
corporate general partner.
(4) Includes shares of Common Stock issuable upon the exercise by Mr. Guilford
(150,000), Dr. Dresnick (220,000), Dr. Thompson (60,000), Mr. Halpryn
(20,000), and Mr. Gerson (20,000) of currently exercisable stock options.
As of April 4, 2000, Mr. Gerson resigned from the Board and as of such
date his options were forfeited.
(5) Includes 2,000 shares of Common Stock held in a trust for which Dr.
Thompson's spouse is the sole trustee and beneficiary.
(6) Includes 4,201 shares of Common Stock held by Alan Jay Weisberg, the
Company's Acting Chief Financial Officer.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Edward Strongin, CPA, the Company's Acting Chief Financial Officer through
August 1999, is a partner of Pinchasik Strongin Muskat Stein & Co., which firm
was paid $172,206 by the Company during the fiscal year ended December 31, 1999.
Alan Jay Weisberg, CPA, the Company's Acting Chief Financial Officer since
September 1999, is a partner of Weisberg Brause, which firm was paid $6,688
during the fiscal year ended December 31, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
1. Financial Statements
See page F-1.
2. Exhibits:
See Exhibit Index. The Exhibits listed in the accompanying
Exhibits Index are filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K:
-14-
<PAGE> 17
(a) On October 4, 1999, the Company filed a Current
Report on Form 8-K dated September 28, 1999
announcing the resignation of the Company's acting
Chief Financial Officer and announcing the
appointment of the Company's new acting Chief
Financial Officer.
(b) 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.
-15-
<PAGE> 18
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
By: /s/ F.W. Mort Guilford
--------------------------------------
F.W. Mort Guilford, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ STEPHEN GRUSSMARK, DDS, MSD Chief Executive Officer, April 13, 2000
- -------------------------------
Stephen Grussmark, DDS, MSD Chief Clinical Officer,
Director
/s/ F.W. MORT GUILFORD President, Chief Operating April 13, 2000
- ------------------------------- Officer, Secretary,
F.W. Mort Guilford Treasurer, Director
/s/ ALAN JAY WEISBERG Acting Chief Financial April 13, 2000
- ------------------------------- Officer, Chief Accounting
Alan Jay Weisberg Officer
/s/ STEPHEN J. DRESNICK, MD Director April 13, 2000
- -------------------------------
Stephen J. Dresnick, MD
/s/ GLENN L. HALPRYN Director April 13, 2000
- -------------------------------
Glen L. Halpryn
/s/ WILLIAM THOMPSON, DDS Director April 13, 2000
- -------------------------------
William Thompson, DDS
</TABLE>
-16-
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- --------------------
<S> <C>
2.1* Agreement and Plan of Merger and Reorganization, dated October 30, 1997,
between Embassy Acquisition Corp. (now known as Orthodontix, Inc. (the
"Company")) and Orthodontix, Inc. (now known as Orthodontix Subsidiary,
Inc.).
3.1* Amended and Restated Articles of Incorporation of the Company.
3.2* Bylaws of the Company as amended.
4.1* Form of certificate representing shares of Common Stock of the Company.
10.1* 1997 Orthodontix, Inc. Stock Option Plan
10.2* Form of Administrative Services Agreement of the Company.
10.3* Forms of Services Agreement of the Company.
10.4* Form of Agreement and Plan of Reorganization of the Company.
10.5* Forms of Lock-Up Agreement.
21.1+ Subsidiaries of the Company.
27.1+ Financial Data Schedule for the Company as of and for the year ended
December 31, 1999.
</TABLE>
- ------------
* Incorporated by reference to the Company's Registration Statement on Form
S-4 declared effective on March 26, 1998 by the Securities and Exchange
Commission, SEC File No. 333-48677.
+ Filed herewith.
-17-
<PAGE> 20
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
<S> <C>
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule for the Company as of and for the Year Ended
December 31, 1999.
</TABLE>
-18-
<PAGE> 21
INDEX TO FINANCIAL STATEMENTS
PAGES
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998 F-4
Consolidated Statements of Stockholders' (Deficiency) Equity
for the years ended December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998 F-6
Notes to the Consolidated Financial Statements F-7
F-1
<PAGE> 22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Orthodontix, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' (deficiency) equity and
of cash flows present fairly, in all material respects, the financial position
of Orthodontix, Inc. (the "Company") at December 31, 1999 and 1998, and the
results of their operations and their cash flows for the two years then ended,
in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
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 audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 1, the Company terminated its affiliation with twenty-one
Founding Practices during 1999. Additionally, subsequent to year-end, the
Company has terminated its affiliation with two additional Founding Practices,
has reached an agreement in principle to terminate its affiliation with one
additional Founding Practice, and is in discussion with the two remaining
Founding Practices. To the extent the Company terminates its affiliation with
the remaining Founding Practices, the Company may then seek to effect a business
combination.
PricewaterhouseCoopers LLP
Miami, Florida
March 28, 2000
F-2
<PAGE> 23
ORTHODONTIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 407,474 $ 1,289,481
Investments 1,061,709 --
Billed and unbilled patient receivables, net
of allowance of $267,000 at December 31, 1998 -- 1,113,254
Prepaid expenses and other current assets 174,604 183,736
----------- -----------
Total current assets 1,643,787 2,586,471
Property and equipment, net -- 839,193
Advances to Founding Practices, net of allowance of $528,000 and
$800,000 at December 31, 1999 and 1998, respectively 14,929 950,328
Assets held for sale, net 65,597 --
Notes receivable and other assets 249,972 323,134
Deferred tax asset 73,825 73,825
----------- -----------
Total assets $ 2,048,110 $ 4,772,951
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 327,703 $ 705,525
Amounts payable to Founding Practices -- 466,626
Patient prepayments -- 108,009
Lease payable - current portion 57,833 16,200
Deferred tax liability 73,825 73,825
----------- -----------
Total current liabilities 459,361 1,370,185
Lease payable -- 47,937
----------- -----------
Total liabilities 459,361 1,418,122
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.0001 par value, 100,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $.0001 par value, 100,000,000 shares authorized,
4,200,849 and 5,881,721 shares issued and outstanding at
December 31, 1999 and 1998, respectively 420 588
Additional paid-in capital 4,527,496 5,607,261
Accumulated deficit (2,852,423) (1,854,557)
Less: deferred compensation - stock options (86,744) (398,463)
----------- -----------
Total stockholders' equity 1,588,749 3,354,829
----------- -----------
Total liabilities and stockholders' equity $ 2,048,110 $ 4,772,951
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-3
<PAGE> 24
ORTHODONTIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
Management service fee revenue $ 3,554,663 $ 8,035,839
----------- -----------
Direct practice expenses:
Salaries and benefits 1,283,253 2,861,318
Orthodontic supplies 461,518 1,169,323
Rent 502,187 1,051,671
Depreciation and amortization 73,027 184,278
Other 436,546 1,039,066
----------- -----------
Total direct practice expenses 2,756,531 6,305,656
General and administrative 1,524,172 2,086,328
Provision for losses on advances to Founding
Practices (Note 5) 370,000 800,000
Asset impairment charge (Note 5) 315,000 --
Gain on the sale of certain assets and liabilities
of Founding Practices (Note 5) (430,523) --
Depreciation and amortization 90,173 17,927
----------- -----------
Total expenses 4,625,353 9,209,911
----------- -----------
Net operating loss (1,070,690) (1,174,072)
----------- -----------
Other income (expense):
Interest income 73,937 78,836
Interest expense (1,113) (51,566)
----------- -----------
Total other income 72,824 27,270
----------- -----------
Net loss $ (997,866) $(1,146,802)
=========== ===========
Loss per common and common
equivalent share:
Basic $ (0.19) $ (0.25)
=========== ===========
Diluted $ (0.19) $ (0.25)
=========== ===========
Weighted average number of common and
common equivalent shares outstanding -
basic and diluted 5,217,264 4,563,691
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-4
<PAGE> 25
ORTHODONTIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-in Accumulated
Shares Amount Capital Deficit Subtotal
------ ------ ----------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,300,000 $ 130 $ -- $ (707,755) $ (707,625)
Issuance of stock to public stockholders
in connection with the Merger and
to Founding Practices 4,581,721 458 5,607,261 -- 5,607,719
Net loss for the year ended December 31, 1998 -- -- -- (1,146,802) (1,146,802)
Deferred compensation for stock options -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
--------- ----------- ---------- ----------- -----------
Balance, December 31, 1998 5,881,721 588 5,607,261 (1,854,557) 3,753,292
Shares retired in connection with sale of assets (1,680,872) (168) (922,502) -- (922,670)
Net loss for the year ended December 31, 1999 -- -- -- (997,866) (977,866)
Deferred compensation for stock options issued -- -- 57,817 -- 57,817
Amortization of deferred compensation -- -- -- -- --
Forfeiture of deferred compensation -- -- (215,080) -- (215,080)
--------- ----------- ---------- ----------- -----------
Balance, December 31, 1999 4,200,849 $ 420 $4,527,496 $(2,852,423) $ 1,675,493
========= =========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Deferred
Compensation Total
------------ -----
<S> <C> <C>
Balance, December 31, 1997 -- $ (707,625)
Issuance of stock to public stockholders
in connection with the Merger and
to Founding Practices -- 5,607,719
Net loss for the year ended December 31, 1998 -- (1,146,802)
Deferred compensation for stock options (521,625) (521,625)
Amortization of deferred compensation 123,162 123,162
--------- -----------
Balance, December 31, 1998 (398,463) 3,354,829
Shares retired in connection with sale of assets -- (922,670)
Net loss for the year ended December 31, 1999 -- (997,866)
Deferred compensation for stock options issued (57,817) --
Amortization of deferred compensation 154,456 154,456
Forfeiture of deferred compensation 215,080 --
--------- -----------
Balance, December 31, 1999 $ (86,744) $ 1,588,749
========= ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-5
<PAGE> 26
ORTHODONTIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (997,866) $(1,146,802)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 163,200 202,205
Bad debt expense 99,431 237,187
Noncash compensation expense 154,456 195,312
Provision for advances to Founding Practices 370,000 800,000
Asset impairment charge 315,000 --
Gain on sale of certain practice assets (430,523) --
Changes in assets and liabilities (net of practice assets acquired/sold):
Billed and unbilled patient receivables (20,347) (568,393)
Advances to Founding Practices (155,267) (1,750,328)
Prepaid expenses and other current assets (20,470) (86,483)
Other assets (14,434) (14,879)
Accounts payable and accrued liabilities (389,952) 648,023
Amounts payable to Founding Practices (353,889) 466,626
Patient prepayments (127,476) 108,009
----------- -----------
Net cash used in operating activities (1,408,137) (909,523)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (29,304) (139,987)
Purchase of practice assets -- (3,362,593)
Proceeds from the sale of certain practice assets 1,105,185 --
Purchase of investments (1,061,709) --
Payment of notes receivable 518,262 59,393
Investment in notes receivable -- (409,556)
----------- -----------
Net cash provided by (used in) investing activities 532,434 (3,852,743)
----------- -----------
Cash flows from financing activities:
Payment of lease obligation (6,304) (20,745)
Repayment of bank line of credit -- (496,283)
Proceeds from merger, net of costs -- 6,781,360
Repayment of advances from stockholders -- (297,505)
----------- -----------
Net cash (used in) provided by financing activities (6,304) 5,966,827
----------- -----------
Net (decrease) increase in cash and cash equivalents (882,007) 1,204,561
Cash and cash equivalents, beginning of year 1,289,481 84,920
----------- -----------
Cash and cash equivalents, end of year $ 407,474 $ 1,289,481
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 1,113 $ 51,566
=========== ===========
Supplemental Disclosure of Non-Cash Items from Investing Activities:
Assets acquired under lease agreement $ -- $ 84,882
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-6
<PAGE> 27
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
On April 16, 1998, Orthodontix, Inc. and subsidiaries ("Orthodontix" or
the "Company") consummated a merger ("Merger") with Embassy Acquisition
Corp. ("Embassy"), a publicly held Florida corporation. As a result of
the Merger, each outstanding share of common stock of Orthodontix
converted into one share of Embassy common stock. Embassy's outstanding
common stock and Embassy's articles of incorporation were amended to
change Embassy's name to Orthodontix. Additionally, the Company
authorized a class of Preferred Stock consisting of 100,000,000 shares,
par value $.0001. The Merger has been treated as a capital transaction
equivalent to the issuance of 2,540,000 shares of common stock by the
Company for the net monetary assets of Embassy of approximately $7.4
million at the closing accompanied by a recapitalization of Orthodontix.
The Company incurred merger costs of approximately $649,000 in connection
with the Merger.
On April 16, 1998, the Company acquired, simultaneously with the closing
of the Merger, certain assets and assumed certain liabilities of 26
orthodontic practices (the "Founding Practices") (collectively referred
to as the "Affiliated Acquisitions"), with the net book value of
approximately $1.3 million, in exchange for 2,041,721 shares of common
stock and approximately $3.4 million in cash. The Company does not employ
orthodontists or control the practice of orthodontics by the
orthodontists employed by professional corporations (collectively
referred to as the "Affiliated Practices"). The Company executed
Administrative Service Agreements with separately formed professional
associations (the "PCs") and does not hold any equity ownership interest
in the PCs, therefore, the Affiliated Acquisitions were not deemed to be
business combinations. Because each of the owners of the Founding
Practices was a Promoter of the transaction, in accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin No. 48,
"Transfers of Nonmonetary Assets by Promoters or Shareholders",
transferred nonmonetary assets and assumed liabilities are accounted for
at the historical cost basis of the Founding Practices and any monetary
assets assumed and any monetary liabilities included in the Affiliated
Acquisitions were recorded at fair value. The cash consideration paid in
excess of net assets transferred is reflected as a dividend paid by the
Company.
Under the Administrative Services Agreement, the Company provided
management services which include consultation and other activities
regarding the suitability of facilities and equipment, nonprofessional
staffing, regulatory compliance, productivity improvements, inventory and
supplies management, information systems management, and, subject to
applicable law, other services as the Company deemed necessary to meet
the day-to-day requirements of the Founding Practices. The Company was
paid a management fee for its services under the Administrative Service
Agreements which had
F-7
<PAGE> 28
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. DESCRIPTION OF BUSINESS, CONTINUED:
terms of 40 years and was subject to renegotiations at the end of such
terms. As of December 31, 1998, the Company managed 46 offices in 11
states. As of December 31, 1999, the Company currently is not providing
any management services to the Founding Practices.
During the year ended December 31, 1999, the Company terminated its
affiliation with twenty-one Founding Practices. In connection with the
termination of its affiliation with the Founding Practices, the Company
has sold certain practice assets, consisting principally of accounts
receivable and property and equipment, and certain liabilities to the
Founding Practices in exchange for cash and shares of the Company's
common stock. Additionally, subsequent to year-end, the Company
terminated its affiliation with two additional Founding Practices, has
reached an agreement in principle to terminate its affiliation with one
additional Founding Practice, and is in discussions to terminate its
affiliation with the two remaining Founding Practices.
The Company has incurred net losses of $997,866 and $1,146,802 for the
years ended December 31, 1999 and 1998, respectively, and has an
accumulated deficit of $2,852,423 at December 31, 1999. To the extent the
Company terminates its affiliation with the remaining Founding Practices,
the Company may then seek to effect a business combination with an
acquired business. There can be no assurances that the Company will enter
into arrangements to terminate its affiliations with the remaining
Founding Practices on terms favorable to the Company or the effort to
effect a business combination will be successful.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Orthodontix and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated in the preparation of the
consolidated financial statements.
The consolidated financial statements are prepared in accordance with the
consensus reached by the Financial Accounting Standards Board's Emerging
Issues Task Force with respect to physician practice management
companies. The Company does not meet the conditions and, therefore, does
not consolidate the results of operations of the Founding Practices into
its consolidated statements of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
F-8
<PAGE> 29
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments with
maturities of 90 days or less at the date of purchase to be cash
equivalents.
The Company maintains its cash and cash equivalents, which consist
principally of demand deposit accounts, money market accounts and
overnight repurchase agreements with financial institutions. The balance
in demand deposit accounts, at times, may exceed FDIC insurance limits.
INVESTMENTS
The Company's investments consist of certificates of deposit with what
management believes to be high quality financial institutions, and thus,
limits its credit exposure. At times, balances in a certificate of
deposit with a financial institution may be in excess of the federally
insured limit of $100,000. The investments are carried at cost plus
accrued interest, which approximates the fair value.
BILLED AND UNBILLED PATIENT RECEIVABLES
After the Affiliated Acquisitions by the Company, the Company continued
to purchase patient account receivables generated by the Founding
Practices and recorded these receivables on the balance sheet of the
Company. The receivables were recorded at net realizable value on the
date of purchase. Any subsequent uncollectible account was written off by
the Company and the Founding Practice revenue was reduced accordingly.
Unbilled patient receivables represented the earned revenue in excess of
billings to patients as of the end of each period. Patient prepayments
represented collections from patients or their insurance companies, which
were received in advance of the performance of the related services.
Concentration of credit risk relating to patient receivables was limited
by the number, diversity and geographic dispersion of the business units
managed by the Company, as well as by the large number of patients and
payors.
At December 31, 1999, billed and unbilled patient receivables and patient
prepayments are recorded as assets held for sale (see Note 5).
F-9
<PAGE> 30
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
ADVANCES TO/AMOUNTS PAYABLE TO FOUNDING PRACTICES
From time to time, certain funds were advanced to the Founding Practices
to cover expenses and for working capital purposes. In addition at the
time of the Merger, certain amounts were collected and disbursed by the
Founding Practices in connection with the Company's transition to
centralized cash collection and disbursement procedures. To the extent
the net amounts (the difference between collections and disbursements
during this initial period) had not been remitted by the Founding
Practices, such amounts were recorded as advances to Founding Practices.
Such amounts were due to the Company on demand. As of December 31, 1998,
the Company was negotiating repayment terms with the orthodontists and
although the Company anticipated collection of certain amounts in 1999,
such amounts were not determinable. Therefore, the balance of advances to
Founding Practices was classified as a long-term asset at December 31,
1998. The Company recorded an allowance related to the collectability of
such amounts of $800,000 at December 31, 1998.
During the year ended December 31, 1999, the Company recorded an
additional allowance related to the collectability of such amounts of
$370,000 principally related to the value of the stock returned to the
Company in connection with the termination of its affiliation with the
Founding Practices. In connection with the Company's termination of its
affiliation with the Founding Practices, such advances to/amounts payable
to the Founding Practices were settled.
PROPERTY AND EQUIPMENT, NET
Property and equipment is stated at historical cost. Depreciation of
property and equipment is calculated using the straight-line method over
the estimated useful lives of the assets of three to five years. Upon the
sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the respective accounts and
the resulting gain or loss is included in earnings. Routine maintenance
and repairs are charged to expense as incurred, while costs of
betterments and renewals are capitalized.
MANAGEMENT FEE REVENUE
Revenue from managing the practices was recognized on a monthly basis as
the services were provided. The revenue of the Company consisted of the
sum of the management service fees and such amounts equal to the
operating expenses of orthodontic practices incurred by the Company under
such Administrative Service Agreements.
F-10
<PAGE> 31
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
MANAGEMENT FEE REVENUE, CONTINUED
In general, the Administrative Service Agreements provided for the
payment of fees to the Company based on a negotiated percentage of the
accrued patient revenue of each Founding Practice. Patient revenue was
recognized by the Founding Practices as orthodontic services were
performed. If the patient entered into a long-term orthodontic contract,
approximately 24% of the contract value was recognized at the initial
treatment date and the remaining amounts was recognized on an estimated
average contract period of 24 months. The 24% estimated revenue was based
on the estimated costs incurred by each Founding Practice at that time as
compared to the total costs of providing the contracted services and was
consistent with industry standards. The percentage included the estimated
costs of diagnosis and treatment plan development, initial treatment by
orthodontic personnel, orthodontic supplies, and associated
administrative services. Expenses not required to be paid by the Company
pursuant to the Administrative Service Agreements primarily consisted of
professional expenses of the orthodontists.
As of December 31, 1999, the Company is not providing management services
to any Founding Practices and, accordingly, is not generating any
management service fee revenue (see Note 1).
ADVERTISING COSTS
The Company expenses all advertising costs the first time the advertising
takes place. For the years ended December 31, 1999 and 1998, the Company
expensed advertising costs of approximately $29,000 and $239,000,
respectively.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
The liability method requires recognition of deferred tax assets and
liabilities based on the differences between the financial statement and
the tax bases of assets and liabilities using enacted tax rates and laws
in effect in the years in which the differences are expected to reverse.
Deferred tax assets are also established for the future tax benefits of
loss and credit carryovers.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the net income or loss
by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is calculated by dividing the net
income or loss by the weighted average number of common 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. Potential common shares for 1999 and
1998 are antidilutive and, thus, are excluded from the calculation of
earnings per share.
F-11
<PAGE> 32
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
STOCK OPTIONS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock
options and other equity instruments based on fair value accounting
rules. The Company has chosen not to apply the fair value accounting
rules in the statements of operations for employee stock-based
compensation. But such treatment is required for non-employee stock-based
compensation, including options granted to the orthodontists. The Company
has chosen the SFAS No. 123 alternative to disclose pro forma net income
and earnings per share as if the fair value based method was used.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the
current year presentation.
F-12
<PAGE> 33
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 1999 and
1998:
1999 1998
---- ----
Furniture and fixtures $ -- $ 347,364
Dental and office equipment 108,100 542,335
Leasehold improvement -- 152,076
----------- -----------
108,100 1,041,775
Less accumulated depreciation
and amortization (108,100) (202,582)
----------- -----------
$ -- $ 839,193
=========== ===========
The Company leases certain equipment under a capital lease. Included in
the above amounts at December 31, 1998 is certain leased equipment and
accumulated amortization of $84,882 and $15,458, respectively. At
December 31, 1999, the Company accelerated the depreciation on all of its
remaining property and equipment due to the Company's termination of its
affiliation with the Founding Practices. At December 31, 1999, certain
property and equipment used by the remaining Founding Practices has been
reclassified as assets held for sale (see Note 5).
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consists of the following at
December 31, 1999 and 1998:
1999 1998
---- ----
Accounts payable $312,304 $430,027
Accrued salaries and benefits -- 188,084
Other accrued expenses 15,399 87,414
-------- --------
$327,703 $705,525
======== ========
F-13
<PAGE> 34
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. ASSETS HELD FOR SALE AND TERMINATION OF AFFILIATION WITH CERTAIN
FOUNDING PRACTICES
During the year ended December 31, 1999, the Company sold certain
practice assets, consisting principally of accounts receivable and
property and equipment, and certain liabilities to twenty-one Founding
Practices. As a result of these transactions, the Company received
$1,306,285 in cash, $691,300 in notes receivable and 1,680,872 shares of
the Company's common stock. In addition, such amount include amounts
repaid to or settled with 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 $2,920,000.
In connection with these transactions, at December 31, 1999, the
outstanding balance of the notes receivable received by the Company from
Founding Practices was $390,361, of which $142,590 is included in prepaid
expenses and other current assets as such amounts are expected to be
repaid in 2000. The interest rates on these notes range from 6.5% to 8%
per annum and have aggregate maturities of $142,590, $233,561 and $14,210
for the years ended December 31, 2000, 2001 and 2002, respectively.
As a result of these transactions, the Company recorded a net gain on the
disposition of net assets of approximately $431,000 for the year ended
December 31, 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 during the quarter ended March 31, 1999 and
an additional asset impairment charge of $30,000 that was recorded by the
Company during the quarter ended December 31, 1999. Such impairment
charges were recorded by the Company in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of". These charges represent the amount necessary to
reduce the 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:
Billed and unbilled patient receivables, net $ 920,234
Property and equipment, net 670,841
Notes receivable 367,706
Advances to Founding Practices, net 720,666
Other assets and liabilities, net 95,286
-----------
2,774,733
Less: impairment charge (285,000)
-----------
$ 2,489,733
===========
F-14
<PAGE> 35
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. ASSETS HELD FOR SALE AND TERMINATION OF AFFILIATION WITH CERTAIN FOUNDING
PRACTICES, CONTINUED:
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
$215,080.
In connection with the discussions to terminate the affiliation with the
remaining Founding Practices, the Company has entered into standstill
arrangements at December 31, 1999 with the five remaining Founding
Practices. Therefore, at December 31, 1999, the Company has classified
certain practice assets and liabilities as assets held for sale as
follows:
Billed and unbilled patient receivables, net $ 113,938
Property and equipment, net 34,456
Other assets and liabilities, net (52,797)
---------
95,597
Less: asset impairment charge (30,000)
---------
Assets held for sale, net $ 65,597
=========
Subsequent to December 31, 1999, the Company sold certain practice assets
and liabilities to two additional Founding Practices. In connection with
these transactions, the Company received 134,932 shares of the Company's
common stock. The Company continues discussions with the remaining
Founding Practices.
6. COMMITMENTS AND CONTINGENCIES:
At December 31, 1998, the Company leased certain orthodontic centers and
furniture and equipment for the use of Founding Practices under
noncancelable operating leases which expire at various dates. In
connection with the termination of the affiliation of the Founding
Practices, the leases for the orthodontic centers and the furniture and
fixture used by the Founding Practices were transferred to the affiliated
orthodontists of the Founding Practices. In connection with the
standstill arrangements with the remaining Founding Practices, the
affiliated orthodontists have assumed all obligations under noncancelable
operating leases until such time of the termination of their affiliation
with the Company. Accordingly, as of December 31, 1999, the Company does
not anticipate any future commitments in connection with these
noncancelable operating leases.
In addition, the Company has a month-to-month operating lease for its
corporate office space. The Company also leases equipment under a capital
lease, which expires in 2002. At December 31, 1999, the Company is
delinquent on payment of its obligation under the capital lease.
Therefore, due to the default on the obligation of the Company, the
outstanding capital lease obligation of approximately $58,000 at December
31, 1999 has been classified as a current liability.
F-15
<PAGE> 36
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. COMMITMENTS AND CONTINGENCIES, CONTINUED:
The Company incurred rental expense for noncancelable operating leases
and month-to-month leases of approximately $547,000 and $953,000 for the
years ended December 31, 1999 and 1998, respectively. Certain of the
leases for orthodontic centers were with the orthodontists associated
with the Founding Practices. Included in the rental expense incurred by
the Company is $142,000 and $364,000 paid to such parties for the years
ended December 31, 1999 and 1998, respectively.
The Company is exposed to various asserted and unasserted claims in its
normal course of business. In the opinion of management, the resolution
of these matters will not have a material effect on the Company's
financial position, results of operations or cash flows.
7. RELATED PARTY TRANSACTIONS:
In addition to transactions with related parties described elsewhere, the
Company had the following additional related party transactions:
During 1998, the Company advanced approximately $410,000 to stockholders
of the Company who were associated with the Founding Practices. At
December 31, 1998, the outstanding balance on such notes receivable,
including accrued interest, was approximately $405,000, of which
approximately $102,000 was included in prepaid expenses and other current
assets as these amounts were expected to be repaid in 1999. The interest
rate for these notes was 6% per annum. In connection with the sale of
certain practice assets and certain liabilities to the Founding
Practices, the outstanding balances of notes receivable were repaid or
settled during the year ended December 31, 1999 (see Note 5).
Neither the individual who serves as the Company's Chief Executive
Officer and Chief Clinical Officer nor the individual who serves as the
Company's President and Chief Operating Officer have an employment
agreement with the Company. These individuals receive no compensation
except for an automobile allowance in 1998 and during a part of 1999 paid
to the Company's President and Chief Operating Officer.
During 1998 and a part of 1999, the Company shared office space and
several support employees with the Company's President and Chief
Operating Officer. Such amounts charged to the Company for its pro rata
share of such costs amounted to approximately $49,200 and $104,700 for
the years ended December 31, 1999 and 1998, respectively, and have been
included in general and administrative expenses in the accompanying
statements of operations.
Two of the Company's stockholders funded expenses of the Company from the
date of inception to the date of the Merger. In addition, prior to the
Merger, the Company advanced $50,000 to an orthodontist associated with
one of the Founding Practices. Such amounts were all repaid at the time
of the Merger.
F-16
<PAGE> 37
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES:
The components of the income tax expense is as follows for the years
ended December 31, 1999 and 1998:
1999 1998
---- ----
Current:
Federal $ -- $ (9,541)
State -- (1,633)
--------- ---------
-- (11,174)
--------- ---------
Deferred:
Federal (290,538) (607,822)
State (54,807) (104,047)
Change in valuation allowance 345,345 723,043
--------- ---------
-- 11,174
--------- ---------
Total $ -- $ --
========= =========
The differences between the effective rate, which was 0% at December 31,
1999 and 1998, and the U.S. federal income tax statutory rates are as
follows for the years ended December 31, 1999 and 1998:
1999 1998
---- ----
Tax at statutory rate $(339,275) $(389,913)
State income tax, net of federal benefit (36,172) (41,191)
Change in valuation allowance 345,345 427,743
Other, net 30,102 3,361
--------- ---------
Total $ -- $ --
========= =========
F-17
<PAGE> 38
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES, CONTINUED:
The significant components of deferred income tax assets and liabilities
are as follows at December 31, 1999 and 1998:
1999 1998
---- ----
Deferred tax assets:
Start-up expenses $ 202,915 $ 187,313
Net operating loss carryforward 384,009 37,740
Allowance for receivables and advances 209,975 327,001
Nonqualified stock options 61,562 73,496
Other, net 2,118 4,612
--------- ---------
860,579 630,162
Valuation allowance (712,929) (399,279)
--------- ---------
$ 147,650 $ 230,883
========= =========
Deferred tax liabilities:
Accounts receivable $ 147,650 $ 221,475
Other -- 9,408
--------- ---------
Total $ 147,650 $ 230,883
========= =========
The long-term deferred tax asset of $147,650 at December 31, 1999 is
shown net of the long-term deferred tax liability of $73,825. The
long-term deferred tax asset of $230,883 at December 31, 1998 is shown
net of the long-term deferred tax liability of $157,058.
The Company has recorded a valuation allowance at December 31, 1999 and
1998 with respect to the deferred tax assets to the extent that
management has determined that it is more likely than not that the
benefit of such amounts will not be realized.
The Company has net operating loss carryforwards for federal and state
tax purposes of approximately $1,012,000 and $1,099,000, respectively, at
December 31, 1999. Such net operating loss carryforwards expire
commencing in 2019.
F-18
<PAGE> 39
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCK OPTION PLAN:
In conjunction with the Merger, the Company adopted an option plan (the
"Option Plan") that provides for granting up to 500,000 shares of common
stock by November 18, 2007. The Option Plan provides for the issuance of
incentive stock options and non-qualified stock options. Under the Option
Plan, options may be granted at not less than the fair market value of
the stock on the date of the grant. The term of each option generally may
not exceed ten years. At December 31, 1999, options to acquire 180,000 of
the Company's common stock have been granted under the Option Plan.
In March 1999, the Company granted to each non-employee director, an
option for a period of two years to acquire 20,000 shares (100,000 shares
in total) of the Company's common stock at an option price of $1.75 per
share. In addition, the Company granted one of the non-employee directors
an additional option to acquire 80,000 shares of the Company's common
stock under the same terms. These options vested immediately and are
forfeited if the non-employee director is no longer a director for the
Company. The additional option was to compensate the director for other
services which the director has and will provide to the Company over a
period of two years. The Company determined the fair value of this option
to be approximately $58,000 based on the Black-Scholes option-pricing
model (the "Model"). Such amount was recorded as unearned compensation
and is being amortized over the two-year period which the director will
provide other services to the Company. The fair value of this additional
option granted to the non-employee director was estimated on the date of
grant, using the Model, with the following assumptions used: no dividend
yield; expected volatility of the underlying stock of 128%; risk-free
interest rate of 5%; and expected life of the option of two years.
In connection with the Merger, certain directors, officers, employees and
non-employees of the Company were awarded options to acquire 956,303
shares of the Company's common stock outside the Option Plan at exercise
prices ranging from $7.29 to $9.11 per share. The options generally vest
over varying periods of time.
In addition, underwriter options, originally issued by Embassy in
connection with their initial public offering, to purchase 120,000 shares
of common stock at an exercise price of $7.80 per share, are outstanding.
Such options are exercisable for a period of five years commencing April
2, 1996.
F-19
<PAGE> 40
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCK OPTION PLAN, CONTINUED:
As part of the options granted to acquire 956,303 shares of the Company's
common stock, the Company recognized compensation expense of
approximately $72,000 for the year ended December 31, 1998 related to
options granted to employees to acquire 185,000 shares of the Company's
common stock for which the fair value of the stock on the date granted
exceeded the exercise price. In addition, the Company determined the fair
value of the options to acquire 97,500 shares of the Company's common
stock granted to members of the Company's Advisory Board, who were
non-employees, to be approximately $522,000 based on the Model. Such
amount was recorded as unearned compensation and was being amortized over
the three-year period that these options vest. The fair value of each
option granted to such non-employee Advisory Board member was estimated
on the date of grant using the Model and the following assumptions: no
dividend yield; expected volatility of the underlying stock of 70%;
risk-free interest rate of 5.57% covering the related option periods; and
expected lives of the options of 2 to 5 years based on the related option
periods.
As part of the options to acquire 956,303 shares of the Company's common
stock options, options to purchase up to 291,303 shares of common stock
were granted to certain orthodontists. Such options were not exercisable
until the orthodontists' practices reached certain revenue levels over a
five-year period. Additional compensation expense would have been
recorded, if any, to the extent the performance criteria were attained
based on the Model on the date such performance criteria were attained.
In connection with the termination of its affiliation with the Founding
Practices, the options granted to certain orthodontists were cancelled in
1999.
The compensation expense related to the non-employee directors and
members of the Company's Advisory Board was $154,456 and $123,162 for the
years ended December 31, 1999 and 1998, respectively. At December 31,
1999 and 1998, the unamortized deferred compensation, which is included
as a separate component of stockholder's equity, was $86,744 and
$398,463, respectively.
F-20
<PAGE> 41
ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCK OPTION PLAN, CONTINUED:
A summary of the Company's stock option activity and related information
is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OPTION PRICE AVERAGE EXPIRATION
OF SHARES PER SHARE EXERCISE PRICE DATE
------------ -------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1997 -- -- -- --
Granted 785,000 $7.29 - $9.11 $8.49 2001 - 2004
Exercised -- -- -- --
Forfeited 35,000 9.11 9.11 2001 - 2003
------------ ---------------- -----------
Outstanding at December 31, 1998 750,000 7.29 - 9.11 8.46 2001 - 2004
Granted 180,000 1.75 1.75 2001
Exercised -- -- -- --
Forfeited 107,500 7.29 - 9.11 8.77 2001 - 2004
------------ ---------------- -----------
Outstanding at December 31, 1999 822,500 $1.75 - $9.11 $6.95 2001 - 2004
============ ================ ===========
Exercisable at December 31, 1999 680,000 $1.75 - $9.11 $7.10 2001 - 2003
============ ================ ===========
Exercisable at December 31, 1998 652,500 $7.29 - $9.11 $8.36 2001 - 2003
============ ================ ===========
</TABLE>
The options expire at varying times through April 2004. The exercise
price of the options ranged from $1.75 to $9.11. The weighted-average
remaining contractual life of options outstanding at December 31, 1999 is
approximately two years.
The Company has chosen to disclose pro forma net income and earnings per
share as if the fair value based method was used. Had compensation
expense been determined based on fair value consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per share
- basic and diluted for the year ended December 31, 1999 would have been
$1,070,866 and $0.21, respectively. The Company's net loss and net loss
per share - basic and diluted for the year ended December 31, 1998 would
have been $2,102,152 and $0.46, respectively. The fair value of options
granted in 1999 was estimated on the date of grant using the Model and
the following assumptions: no dividend yield; expected volatility of the
underlying stock of 128%; risk-free interest rate of 5%; and expected
weighted average life of the options of two years. The fair value of
options granted in 1998 was estimated on the date of grant using the
Model and the following assumptions: no dividend yield; expected
volatility of the underlying stock of 70%; risk-free interest rate
ranging from 5.38% to 5.57% covering the related option periods; and
expected weighted average life of the options of 4.15 years based on the
related option periods.
F-21
<PAGE> 1
EX- 21.1
LIST OF SUBSIDIARIES
1. Orthodontix Subsidiary, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 407,474
<SECURITIES> 1,061,709
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,643,787
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,048,110
<CURRENT-LIABILITIES> 459,361
<BONDS> 0
0
0
<COMMON> 420
<OTHER-SE> 1,588,329
<TOTAL-LIABILITY-AND-EQUITY> 2,048,110
<SALES> 3,554,663
<TOTAL-REVENUES> 3,554,663
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,625,353
<LOSS-PROVISION> (1,070,690)
<INTEREST-EXPENSE> (1,113)
<INCOME-PRETAX> (997,866)
<INCOME-TAX> 0
<INCOME-CONTINUING> (997,866)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (997,866)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
