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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 000-22975
----------------
ORTHALLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4632134
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
21535 HAWTHORNE BOULEVARD, SUITE 200
TORRANCE, CALIFORNIA 90503
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(310) 792-1300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT NOVEMBER 10, 2000
----- --------------------------------
<S> <C>
Class A Common Stock, $.001 par value 12,506,337
Class B Common Stock, $.001 par value 246,290
</TABLE>
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<PAGE> 2
ORTHALLIANCE, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION....................................................................... 3
Item 1. Financial Statements........................................................................ 3
Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999........................................................................... 3
Unaudited Condensed Consolidated Statements of Income for the Three Month and Nine
Month Periods Ended September 30, 2000 and September 30, 1999.............................. 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Month Periods
Ended September 30, 2000 and September 30, 1999............................................. 5
Notes to Unaudited Condensed Consolidated Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 16
PART II. OTHER INFORMATION........................................................................... 17
Item 1. Legal Proceedings........................................................................... 17
Item 2. Changes in Securities and Use of Proceeds................................................... 17
Item 3. Defaults Upon Senior Securities............................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders......................................... 17
Item 5. Other Information........................................................................... 17
Item 6. Exhibits and Reports on Form 8-K............................................................ 17
Signatures.................................................................................. 18
Exhibit Index............................................................................... 19
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ORTHALLIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................................... $ 7,431 $ 11,189
Patient receivables, net of allowances of $76 and $563 at September 30, 2000 and
December 31, 1999, respectively ............................................................. 15,471 10,520
Unbilled patient receivables, net of allowances of $113 and $382 at September
30, 2000 and December 31, 1999, respectively ................................................ 3,183 3,436
Amounts due from Allied Practices ........................................................... 18,597 10,630
Income taxes receivable ..................................................................... 371 509
Current deferred tax assets ................................................................. 337 104
Other current assets ........................................................................ 484 2,010
--------- ---------
Total current assets ....................................................................... 45,874 38,398
Property and equipment, net .................................................................... 8,072 6,333
Notes receivable ............................................................................... 5,470 4,920
Non-current deferred tax assets ................................................................ 1,926 1,486
Intangible assets, net ......................................................................... 120,171 83,620
Other, net ..................................................................................... 1,153 502
--------- ---------
Total assets ............................................................................... $ 182,666 $ 135,259
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable ............................................................ $ 5,520 $ --
Accounts payable ............................................................................ 2,094 2,549
Accrued liabilities ......................................................................... 3,746 2,299
Patient prepayments ......................................................................... 17,903 6,240
Practice affiliations payable ............................................................... 1,039 3,610
Current deferred tax liabilities ............................................................ 23 182
Amounts due to Allied Practices ............................................................. 3,657 1,988
--------- ---------
Total current liabilities .................................................................. 33,982 16,868
Line of credit borrowings ...................................................................... 55,000 47,500
Non-current deferred tax liabilities ........................................................... 2,642 935
Notes payable .................................................................................. 16,462 2,144
--------- ---------
Total liabilities .......................................................................... 108,086 67,447
Commitments and Contingencies
Stockholders' equity:
Class A Common Stock, $.001 par value, 70,000,000 shares authorized, 13,198,839
shares issued and outstanding at September 30, 2000 and December 31, 1999 ................. 13 13
Class B Common Stock, $.001 par value, 250,000 shares authorized, 248,414 shares
issued and outstanding at September 30, 2000 and December 31, 1999, respectively ......... -- --
Additional paid-in capital ..................................................................... 65,700 65,145
Retained earnings .............................................................................. 13,560 5,457
Treasury stock, at cost, 587,726 shares at September 30, 2000 and 318,726 shares at
December 31, 1999 ...................................................................... (4,693) (2,803)
--------- ---------
Total stockholders' equity ................................................................. 74,580 67,812
--------- ---------
Total liabilities and stockholders' equity ................................................. $ 182,666 $ 135,259
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
3
<PAGE> 4
ORTHALLIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net revenues ..................................... $ 37,049 $ 24,286 $ 103,250 $ 69,449
-------- -------- --------- --------
Costs and expenses:
Salaries and benefits ............................ 11,554 6,679 30,022 20,545
Orthodontic and dental supplies .................. 3,748 2,423 9,928 6,693
Rent ............................................. 2,981 2,169 8,540 5,939
-------- -------- --------- --------
Total direct expenses ........................ 18,283 11,271 48,490 33,177
General and administrative ....................... 10,054 6,944 30,625 19,525
Depreciation and amortization .................... 1,807 1,022 4,949 2,832
-------- -------- --------- --------
Total operating expenses ..................... 30,144 19,237 84,064 55,534
Operating income ................................. 6,905 5,049 19,186 13,915
Interest income .................................. 167 107 515 299
Interest expense ................................. (2,077) (698) (5,323) (1,580)
-------- -------- --------- --------
Income before income taxes ....................... 4,995 4,458 14,378 12,634
Provision for income taxes ....................... 2,155 1,877 6,275 5,561
-------- -------- --------- --------
Net income ....................................... $ 2,840 $ 2,581 $ 8,103 $ 7,073
======== ======== ========= ========
Net income per share - basic and diluted ......... $ 0.22 $ 0.19 $ O.63 $ 0.53
======== ======== ========= ========
Weighted average number of Common shares
outstanding (in thousands):
Basic ........................................ 12,860 13,318 12,919 13,313
======== ======== ========= ========
Diluted ...................................... 12,884 13,319 12,937 13,334
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 5
ORTHALLIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................... $ 8,103 $ 7,073
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................... 4,950 2,832
Deferred taxes ................................................... 872 479
Changes in assets and liabilities, excluding effects
of Acquisitions:
Patient receivables, net ....................................... (4,110) (845)
Amounts due from Allied Practices .............................. (4,465) (1,075)
Other current assets ........................................... 1,758 (175)
Income taxes receivable ........................................ 144 1,493
Other, net ..................................................... 158 (11)
Accounts payable and accrued liabilities ....................... (194) (144)
Amounts due to Allied Practices ................................ 1,669 264
Patient prepayments ............................................ 6,258 727
-------- --------
Net cash provided by operating activities ........................ 15,143 10,618
-------- --------
Cash flows from investing activities:
Payments for new practice affiliations ......................... (8,166) (24,068)
Payments for acquisition of New Image .......................... (6,841) --
Increase in notes receivable ................................... (1,932) (1,611)
Principal payments on notes receivables ........................ 1,316 924
Capital expenditures ........................................... (1,163) (834)
-------- --------
Net cash used in investing activities ............................ (16,786) (25,589)
-------- --------
Cash flows from financing activities:
Decrease in bank overdraft ..................................... (807) (515)
Treasury shares purchased ...................................... (1,890) (1,278)
Increase in line of credit borrowings .......................... 69,000 27,200
Line of credit refinancing fees ................................ (810) (473)
Repayment of debt .............................................. (67,608) (6,917)
-------- --------
Net cash (used) provided by financing activities ................. (2,115) 18,017
-------- --------
Net (decrease) increase in cash and cash equivalents ............. (3,758) 3,046
Cash and cash equivalents at beginning of period ................. 11,189 3,226
-------- --------
Cash and cash equivalents at end of period ....................... $ 7,431 $ 6,272
======== ========
Supplemental cash flow information: Cash paid during the
period for:
Interest ....................................................... $ 5,962 $ 1,713
Income taxes ................................................... 5,766 4,459
Non-cash investing and financing activities:
Acquisition of intangible assets:
Fair value of assets acquired .................................. $ 40,670 $ 32,040
Less: Issuance of common stock or stock options ................ (555) (760)
Less: Cash paid ................................................ 12,693 (28,689)
-------- --------
Notes payable or liabilities assumed ........................... $ 27,422 $ 2,591
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE> 6
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 1. BUSINESS AND ORGANIZATION
OrthAlliance, Inc. ("OrthAlliance"), a Delaware corporation, was
incorporated on October 21, 1996 and provides practice management and consulting
services to orthodontic and pediatric dental practices throughout the United
States. Effective prior to the closing of the initial public offering of shares
of OrthAlliance's Class A Common Stock (the "Offering" or "IPO"), Premier
Orthodontic Group, Inc. ("Premier") and US Orthodontic Care, Inc. ("USOC")
merged with and into OrthAlliance. In the merger, the outstanding common stock
of USOC and Premier converted into shares of Class A Common Stock ("Common
Stock") and shares of Class B Common Stock ("Class B Common Stock"). On August
26, 1997, OrthAlliance acquired (the "Acquisitions") simultaneously with the
closing of the IPO certain operating assets of or the stock of entities holding
certain tangible and intangible assets and assumed certain liabilities of 55
orthodontic practices in exchange for shares of Common Stock and cash. The
Acquisitions were accounted for in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 48.
OrthAlliance's wholly-owned subsidiaries, incorporated in Delaware,
include the following: PedoAlliance, Inc. ("PedoAlliance") and OrthAlliance
Finance, Inc. ("OA Finance") formed in December 1997, PedoAlliance Properties,
Inc., OrthAlliance Properties and OrthAlliance Services, Inc. formed in April
1999, and OrthAlliance Holdings, Inc. and OrthAlliance New Image, Inc. ("OA New
Image") formed in January 2000. The subsidiaries were formed to provide practice
management, patient financing, consulting and other services (collectively
"Management Services") to allied orthodontic and pediatric dental practices (the
"Allied Practices") or their patients. OA New Image was formed specifically in
connection with the Company's acquisition of substantially all of the assets of
New Image Orthodontic Group, Inc., which was effective March 1, 2000.
OrthAlliance, Inc. and its subsidiaries are collectively referred to as
"OrthAlliance" or the "Company".
NOTE 2. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements of
OrthAlliance are unaudited and reflect all adjustments that, in the opinion of
management, are necessary for a fair presentation of the results for the interim
period in accordance with Securities and Exchange Commission instructions for
Form 10-Q. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. The condensed consolidated statements of income for the current
interim period are not necessarily indicative of results to be expected for the
current year or any other period.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes thereto
as well as other information included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999 and other Company filings with the
Securities and Exchange Commission.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Consolidation
The Company does not consolidate the operations of the Allied Practices
which it manages as the Company's arrangements with its Allied Practices do not
meet the requirements for consolidation as set forth in EITF 97-2.
Reclassifications
Certain prior period reclassifications have been made to conform to
classifications used in the current period.
6
<PAGE> 7
NOTE 3. ACQUISITION OF NEW IMAGE
Effective March 1, 2000, the Company acquired substantially all of the
assets of New Image Orthodontic Group, Inc. ("New Image"), a privately held
Georgia corporation based in Atlanta, Georgia, for a total consideration
(including acquisition costs) of approximately $33.8 million. New Image was
founded in February 1997 and provided business operations, financial, marketing
and administrative services to orthodontic practices in nine states in
accordance with long term service and employment agreements and had practice
management agreements with 36 orthodontists operating in 50 locations.
The acquisition price included a cash payment of $5.5 million, an
estimated $1.1 million in acquisition costs, promissory notes issued of
approximately $12.9 million, the assumption of approximately $13.4 million of
existing debt due to New Image's former orthodontic practices, and the issuance
of approximately 273,000 stock options. The promissory notes issued and assumed
have interest rates ranging from 9%-10% and are repayable over a one to five
year period. The Company will utilize substantially all the acquired assets in
the continued operation of the business. The acquisition has been accounted for
as a purchase. Intangible assets of approximately $33.2 million resulted from
the acquisition. The results of operations of New Image are included with the
results of operations of the Company from March 1, 2000. The Company has
obtained the appropriate consents from its lenders regarding this transaction.
The following pro forma results of operations are presented to
illustrate the effect of the acquisition on the historical operating results of
OrthAlliance and New Image for the three and nine month periods ended and
September 30, 1999 and the nine month period ended September 30, 2000. These pro
forma results of operation gives effect to the acquisition as if it occurred as
of January 1, 2000 and January 1, 1999, respectively. The pro forma results of
operations are based on management's current estimates and may not be indicative
of the results of operations that actually would have occurred if the
transaction had been at the dates indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------
PRO FORMA
ORTHALLIANCE NEW IMAGE ADJUSTMENTS PRO FORMA
------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues ............................................... $24,286 $ 8,703 $ -- $32,989
Operating income (loss) .................................... 5,049 (509) 993 5,533
Net income (loss) .......................................... 2,581 (1,281) 1,208 2,508
Basic and diluted net income per share .................... $ 0.19 $ 0.19
======= =======
Weighted average number of
Common shares outstanding (in thousands):
Basic .............................................. 13,318 13,318
======= =======
Diluted ............................................ 13,319 13,319
======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
-----------------------------------------------------------
PRO FORMA
ORTHALLIANCE NEW IMAGE(a) ADJUSTMENTS(a) PRO FORMA
------------ ----------- ------------- ---------
<S> <C> <C> <C> <C>
Net revenues ................................................ $103,250 $ 3,803 $ -- $107,053
Operating income (loss) ..................................... 19,186 (84) 323 19,425
Net income (loss) ........................................... 8,103 (448) 440 8,095
Basic and diluted net income per share ...................... $ 0.63 $ 0.63
======== ========
Weighted average number of
Common shares outstanding (in thousands):
Basic ............................................... 12,919 12,919
======== ========
Diluted ............................................. 12,937 12,937
======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------
PRO FORMA
ORTHALLIANCE NEW IMAGE ADJUSTMENTS PRO FORMA
------------ ------------ -------------- ---------
<S> <C> <C> <C> <C>
Net revenues ............................................... $69,449 $ 25,092 $ -- $94,541
Operating income (loss) .................................... 13,915 (898) 3,208 16,225
Net income (loss) .......................................... 7,073 (3,053) 3,444 7,464
Basic and diluted net income per share .................... $ 0.53 $ 0.53
======= =======
Weighted average number of
Common shares outstanding (in thousands):
Basic ............................................... 13,313 13,313
======= =======
Diluted ............................................. 13,334 13,334
======= =======
</TABLE>
7
<PAGE> 8
(a) Because the transaction with New Image was effective
March 1, 2000, the results of operations for New
Image and the pro forma adjustments are for the two
months period ended February 29, 2000.
NOTE 4. PRACTICE AFFILIATIONS
During the three months ended September 30, 2000, the Company entered
into practice affiliation agreements with 5 practitioners to provide management
services and acquire certain operating assets for a total consideration
(including acquisition costs) of $2.7 million. The consideration consisted of
$2.4 million cash and $0.3 million notes payable and current liabilities. These
Allied Practices operate 7 locations and generated historical patient revenue
over the prior 12 months of approximately $3.2 million. Prior patient revenue is
not necessarily indicative of the level of revenue that these practices may be
expected to generate in the future.
NOTE 5. PRACTICE AFFILIATIONS PAYABLE
As of September 30, 2000 and December 31, 1999 Practice Affiliate Payables
approximated $1.0 million and $3.6 million, respectively, related to the
acquisition of management agreements executed prior to September 30, 2000 and
December 31, 1999. These respective amounts are unsecured and non-interest
bearing obligations and were paid by the Company in full in October 2000 and
January 2000.
NOTE 6. BANK LINE OF CREDIT
On December 30, 1997, the Company entered into a $25 million Revolving
Credit Facility (the "$25 Million Credit Facility") with First Union N.A., which
had an expiration date of December 30, 2000. The Revolving Credit Facility bears
interest on borrowings at variable rates including the bank's prime lending rate
plus a percentage or LIBOR plus a percentage as determined by certain factors
defined in the Revolving Credit Agreement. Amounts borrowed are secured by the
Company's assets including accounts receivable, management and service
agreements and the capital stock of the Company's wholly owned subsidiaries.
On March 26, 1999, the Company executed an amended Revolving Credit
Facility for borrowings of up to $55 million (the "$55 Million Credit Facility")
with First Union National Bank, US Bank National Association and Union Bank of
California N.A. (due March 2002) under substantially the same terms and
conditions as the $25 Million Revolving Credit Facility which was repaid in full
at the closing.
Effective April 14, 2000, the Company expanded its Revolving Credit
Facility to $75 million (the "$75 Million Credit Facility") with First Union
National Bank, City National Bank, Union Bank of California, U.S. Bank National
Association and Wells Fargo Bank, N.A. (due April 13, 2003) under substantially
the same terms and conditions as the $55 Million Credit Facility. As of
September 30, 2000 and December 31, 1999, the outstanding borrowings under the
Revolving Credit Facilities were $55.0 million and $47.5 million, respectively.
As of September 30, 2000 the Company was in compliance with the terms and
covenants of the $75 Million Credit Facility.
NOTE 7. OPERATING SEGMENTS
The Company adopted Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131") in 1998. This statement establishes standards for the reporting of
information about operating segments and also requires disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS No. 131 did not affect the Company's consolidated financial position or
results of operations. Because the Company did not have any significant segments
in the prior year, the adoption of SFAS No. 131 did not affect previous
disclosures of segment information.
The Company has two reportable segments organized as business units
that provide management or consulting services to the two distinct types of
Allied Practices: "Orthodontic Practices" which include the OrthAlliance Allied
Orthodontists (includes New Image orthodontists) and "Pediatric Practices" which
include the PedoAlliance Allied Dentists. Each business unit provides similar
management and consulting services to the respective Allied Practices and the
Company does not manage the business units separately. The remaining segments
identified as "All Other" derive revenues from interest income and primarily
consist of patient contract financing operations. Management utilizes multiple
views of data to measure segment performance and to allocate resources to the
segments.
8
<PAGE> 9
The following is a summary of certain financial data for each of the segments:
<TABLE>
<CAPTION>
ORTHODONTIC PEDIATRIC
PRACTICES PRACTICES ALL OTHERS TOTAL
----------- --------- ---------- -----
<S> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000:
Net revenues ................................ $33,610 $3,440 $ -- $37,050
Operating income (loss) ..................... 6,506 815 (416) 6,905
Depreciation and amortization ............... 1,757 46 4 1,807
THREE MONTHS ENDED SEPTEMBER 30, 1999:
Net revenues ................................ $21,789 $2,497 $ -- $24,286
Operating income (loss) ..................... 4,564 766 (281) 5,049
Depreciation and amortization ............... 968 48 6 1,022
</TABLE>
<TABLE>
<CAPTION>
ORTHODONTIC PEDIATRIC
PRACTICES PRACTICES ALL OTHERS TOTAL
----------- --------- ---------- -----
<S> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 2000:
Net revenues ................................ $93,121 $10,129 $ -- $103,250
Operating income (loss) ..................... 17,651 2,788 (1,253) 19,186
Depreciation and amortization ............... 4,820 113 16 4,949
NINE MONTHS ENDED SEPTEMBER 30, 1999:
Net revenues ................................ $63,613 $ 5,836 $ -- $ 69,449
Operating income (loss) ..................... 12,574 1,802 (461) 13,915
Depreciation and amortization ............... 2,735 91 6 2,832
</TABLE>
Included in the operating income of the orthodontic practice segment
are certain corporate expenses that are not allocated to the pediatric practice
segment or to the "all others" category. Examples of these expenses are
corporate office salaries, rent, overhead expenses, and amortization expense. A
reconciliation between total segment operating income and consolidated net
income or loss is set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Segment operating income ........... $ 6,905 $ 5,049 $ 19,186 $ 13,915
Interest income .................... 167 107 515 299
Interest expense ................... (2,077) (698) (5,323) (1,580)
Provision for income taxes ......... (2,155) (1,877) (6,275) (5,561)
------- ------- -------- --------
Net income ......................... $ 2,840 $ 2,581 $ 8,103 $ 7,073
======= ======= ======== ========
</TABLE>
NOTE 8. PENDING INTERNAL REVENUE SERVICE EXAMINATION
The Internal Revenue Service (the IRS) is currently examining the Company's
consolidated federal income tax return for the year ended December 31, 1998. At
the present time no proposed adjustments have been made and the Company is not
aware of any issues which may result in a material assessment. Accordingly, no
additional tax provisions or accruals have been recorded.
NOTE 9. SUBSEQUENT EVENTS
Practice Affiliations
Subsequent to September 30, 2000, the Company entered into practice
affiliation agreements with 3 practitioners to provide management services and
acquire certain operating assets for a total cash consideration of $1.7 million.
These Allied Practices operate 3 locations and generated historical patient
revenue over the prior 12 months of approximately $1.7 million. Prior patient
revenue is not necessarily indicative of the level of revenue that these
practices may be expected to generate in the future.
9
<PAGE> 10
Treasury Stock
Subsequent to September 30, 2000 the Company has acquired 106,900
shares of its Common Stock at a cost approximating $402,000.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement
The information contained in this Form 10-Q and documents incorporated
herein by reference is intended to update the information contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 and
presumes that readers have access to, and will have read, the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other information contained in such Form 10-K and other Company filings with the
Securities and Exchange Commission ("SEC").
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934 and such forward-looking statements are
subject to the safe harbors created thereby. For this purpose, any statements
contained in this Form 10-Q except for historical information may be deemed to
be forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "expect," "believe," "anticipate," "intend,"
"could," "estimate" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties, as well as on
certain assumptions 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 other things, risks associated with Allied Practice
affiliations, availability of capital or that the Company will remain in
compliance with its credit facilities, fluctuations in operating results because
of affiliations and variations in stock price, dependence upon revenues
generated by Allied Practices, continued compliance with the listing
requirements for the Nasdaq national market listing, changes in government
regulations, competitive conditions, risks of operations and growth of existing
and newly affiliated practices, ability to staff the Allied Practices with
qualified personnel, the continued availability of adequate insurance, ability
of Allied Practices to attract and retain patients and other risks.
Additional factors that may affect future operating results are
discussed in more detail in Exhibit 99.1 of the Company's Annual Report on Form
10-K and elsewhere in this Form 10-Q. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, the business and
operations of the Company are subject to risks that increase the uncertainty
inherent in the forward-looking statements, and the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved. In
addition, risks, uncertainties and assumptions change as events or circumstances
change. The Company disclaims any obligation to publicly release the results of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances occurring subsequent to the filing of this Form 10-Q
with the SEC or otherwise to revise or update any oral or written
forward-looking statement that may be made from time to time by or on behalf of
the Company.
The information contained in this Form 10-Q is not a complete
description of the Company's business or the risks associated with an investment
in the Company. Readers are urged to carefully review and consider the various
disclosures made by the Company in this Report and in the Company's other
filings with the SEC that attempt to advise interested parties of certain risks,
uncertainties and other factors that may affect the Company's business.
General
The Company began providing practice management services to Allied
Practices in the United States on August 26, 1997. The initial 55 Allied
Practices included 82 practitioners operating 147 offices in 16 states. By the
end of 1997, the Company had affiliated with 11 new practices, including 17
additional practitioners operating out of 31 new locations. In 1998, the Company
affiliated with 36 new practices, including 45 additional orthodontists and
pediatric dentists operating out of 70 locations. In 1999, the Company
affiliated with 36 new practices, including 40 additional orthodontists and
pediatric dentists operating out of 73 locations. During the nine month period
ended September 30, 2000, the Company affiliated with 39 new practices,
including 44 practitioners operating out of 70 locations. The Company
anticipates that future growth will come from new affiliations, satellite
expansion of Allied Practices, and the development of new orthodontic practices,
increased internal growth and improved operating efficiencies.
11
<PAGE> 12
The Company derives net revenues by providing services pursuant to
long-term service agreements or consulting agreements (collectively, "Management
Agreements") with Allied Practices. The Company provides management or
consulting services to each Allied Practice and assumes substantially all
operating expenses except for compensation to the allied orthodontists and
pediatric dentists ("Allied Orthodontists") and other employees that the Company
cannot employ according to applicable state laws. In exchange for assuming these
expenses and providing services, the Company records revenues in amounts equal
to the assumed expenses plus a service fee or consulting fee, as described
below. In general, the Management Agreements provide for the recognition of fees
to the Company based on a negotiated percentage of the "Adjusted Patient
Revenue" of Allied Practices. The timing of the payment of such service fees is
based upon cash collected. Adjusted Patient Revenue is net patient revenue, as
determined under generally accepted accounting principles, including certain
accrual adjustments, including those related to patient prepayments, and
adjustments for contractual allowances and other discounts, plus an adjustment
for uncollectible accounts.
Patient revenue is recognized as services are performed. For
orthodontic services, approximately 20% to 24% of the orthodontic contract
revenues are recognized at the time of initial treatment. The balance of the
contract revenue is realized evenly over the remaining treatment period. The 20%
to 24% estimated revenue at the initial treatment date is based on the estimated
costs incurred by the practice at that time as compared to the total costs of
providing the contracted services and is consistent with industry standards. The
percentage includes the estimated costs of diagnosis and treatment plan
development, initial treatment by orthodontic personnel, orthodontic supplies,
and associated administrative services.
The service fee is earned and paid monthly to the Company by each
Allied Practice using one of several different fee structures set forth in the
Management Agreements:
(i) a designated percentage ranging from 13.5% to 20% of
Adjusted Patient Revenue. The average designated percentage is 17% for
the Allied Practices subject to this fee structure. In some cases, the
Allied Practice must guarantee a minimum level of management fees to be
paid by the Allied Practice for a portion of the agreement ranging from
one to 25 years.
(ii) a designated percentage of Adjusted Patient Revenue,
ranging from 14% to 17%, subject to an annual adjustment based upon
improvements in the Allied Practice's operating margin in the most
recent calendar year as compared with the immediately preceding
calendar year. No annual adjustment will be made which would result in
reducing the designated percentage below the percentage applicable
during the first year of the Management Agreement. Operating margin is
defined as the percentage determined by dividing operating profit by
Adjusted Patient Revenue. Operating profit is equal to Adjusted Patient
Revenue less operating expenses, excluding the management fee and such
expenses associated with the Allied Practices which the Company is
prohibited from incurring, primarily consisting of orthodontist
compensation. The average designated percentage is 16.2% for the Allied
Practices subject to this fee structure.
(iii) a fixed dollar fee with annual fixed dollar increases
for each year of the term of the Management Agreement.
(iv) the Company's management service fee related to the
practices affiliated in connection with the New Image transaction is
generally based on a designated percentage of patient revenues. The fee
is determined by several factors including the dollar amount of patient
revenues during the measurement period and the actual overhead expense
of the practice expressed as a percentage of patient revenues.
Generally, the fee percentage for this group of practice ranges up to
19.5% of patient revenues. In certain cases, the New Image Allied
Practice must guarantee a minimum management fee over the term of the
management agreement. The average management fee percentage during 2000
was approximately 17.1% of patient revenues.
The Company has entered into agreements with certain Allied Practices
to make the payment of service fees after the first two years contingent on
various factors, including practice profitability compared to acquisition
consideration, timely reporting of information, participation in practice
improvement programs and orthodontist hours worked.
Expenses reported by the Company include certain of the expenses to
operate the orthodontic or pediatric dental offices and all of the expenses of
any corporate offices, facilities or functions. Therefore, salaries and benefits
include the wages, benefits, taxes or other employment costs for all employees
of the Company, including practice office staff, business office staff and
management personnel. Rent includes facility expenses for both practice offices
and corporate offices. General and administrative expenses include professional
services, such as legal and accounting, utilities, advertising, marketing,
insurance, telephone, license fees, office supplies and shipping expenses.
Advertising and marketing costs, which are included in general and
administration costs, includes practice activities to attract new patients and
corporate activities to attract new orthodontists or pediatric dentists to
affiliate with the Company. Practice supplies include only those expenses
required by the Allied Orthodontists to provide treatment to patients.
12
<PAGE> 13
RESULTS OF OPERATIONS
The following table sets forth certain selected unaudited condensed
consolidated income statement data for the periods indicated in thousands of
dollars and as a percentage of total net revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
Net revenues ........................... $ 37,049 100.0% $ 24,286 100.0%
-------- ----- -------- -----
Costs and expenses:
Salaries and benefits .................. 11,554 31.2 6,679 27.5
Orthodontic and dental supplies ........ 3,748 10.1 2,423 10.0
Rent ................................... 2,981 8.0 2,169 8.9
-------- ----- -------- -----
Total direct expenses ............. 18,283 49.3 11,271 46.4
General and administrative ............. 10,054 27.1 6,944 28.6
Depreciation and amortization .......... 1,807 4.8 1,022 4.2
-------- ----- -------- -----
Total operating expenses .......... 30,144 81.4 19,237 79.2
-------- ----- -------- -----
Operating income ....................... 6,905 18.6 5,049 20.8
Interest income ........................ 167 0.4 107 0.4
Interest expense ....................... (2,077) (5.6) (698) (2.9)
-------- ----- -------- -----
Income before income taxes ............. 4,995 13.4 4,458 18.4
Provision for income taxes ............. 2,155 5.8 1,877 7.7
-------- ----- -------- -----
Net income ............................. $ 2,840 7.7% $ 2,581 10.6%
======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------
2000 1999
--------------------- --------------------
<S> <C> <C> <C> <C>
Net revenues ........................... $ 103,250 100.0% $ 69,449 100.0%
--------- ----- -------- -----
Costs and expenses:
Salaries and benefits .................. 30,022 29.1 20,545 29.6
Orthodontic and dental supplies ........ 9,928 9.6 6,693 9.6
Rent ................................... 8,540 8.3 5,939 8.6
--------- ----- -------- -----
Total direct expenses ............. 48,490 47.0 33,177 47.8
General and administrative ............. 30,625 29.7 19,525 28.1
Depreciation and amortization .......... 4,949 4.8 2,832 4.1
--------- ----- -------- -----
Total operating expenses .......... 84,064 81.4 55,534 80.0
--------- ----- -------- -----
Operating income ....................... 19,186 18.6 13,915 20.0
Interest income ........................ 515 0.5 299 0.4
Interest expense ....................... (5,323) (5.2) (1,580) (2.3)
--------- ----- -------- -----
Income before income taxes ............. 14,378 13.9 12,634 18.2
Provision for income taxes ............. 6,275 6.1 5,561 8.0
--------- ----- -------- -----
Net income ............................. $ 8,103 7.8% $ 7,073 10.2%
========= ===== ======== =====
</TABLE>
Operating Income and Net Income
Operating income for the three months ended September 30, 2000
increased 37% to $6.9 million from $5.0 million in the comparable 1999 quarter.
Operating income for the nine months ended September 30, 2000 increased 38% to
$19.2 million from $13.9 million in the comparable 1999 period.
Net income for the three months ended September 30, 2000 increased 10%
to $2.8 million from $2.6 million in the comparable 1999 quarter. Net income for
the nine months ended September 30, 2000 increased 15% to $8.1 million from $7.1
million in the comparable 1999 period.
Net Revenues
Net revenues for the three months ended September 30, 2000 increased
53% to $37.0 million from $24.3 million in the comparable 1999 quarter.
Similarly, net revenues for the nine months ended September 30, 2000 increased
49% to $103.3 million from $69.4 million in the comparable 1999 quarter. The
increase in net revenues for the three and nine months ended September 30, 2000
is primarily due to an increase in affiliations of Allied Practices, the New
Image acquisition and an increase in the internal growth of comparative
same-store collections of approximately 7.5 percent for the current period and
9.2 percent year to date. Net revenues as reported by the Company include the
Company's contractual service or consulting fee based in part on patient
revenues, as well as reimbursed expenses of the Allied Practices.
Operating Expenses
Total operating expenses increased 57% to $30.1 million, or 81% of net
revenues, for the three months ended September 30, 2000 from $19.2 million, or
79% of net revenues, for the comparable 1999 quarter. Total operating expenses
increased 51% to $84.1 million, or 81% of net revenues, for the nine months
ended September 30, 2000 from $55.5 million, or 80% of net revenues, for the
comparable 1999 period.
Direct expenses including salaries and benefits, orthodontic and dental
supplies, and rent increased 62% to $18.2 million, or 49% of net revenues, for
the three months ended September 30, 2000 from $11.2 million, or 46% of net
revenues, for the comparable 1999 quarter. Direct expenses increased 46% to
$48.4 million, or 47% of net revenues, for the nine months ended September 30,
2000 from $33.1 million, or 48% of net revenues, for the comparable 1999
period. Direct expenses have increased in absolute dollars as a result of the
acquisition of additional Allied Practices during the periods as well as the
expansion and growth of previously existing Allied Practices.
Salaries and benefits increased 73% to $11.6 million, or 31.2% of
revenues, for the three months ended September 30, 2000 from $6.7 million, or
28% of net revenues for the comparable 1999 quarter. Salaries and benefits
increased 46% to $30.0 million, or 29% of revenues, for the nine months ended
September 30, 2000 from $20.5 million, or 30% of net revenues for the comparable
1999 period. The increase in salaries and benefits, for the nine months period
ended September 30, 2000 compared to the prior year, is attributable to the
acquisition of additional Allied Practices, as well as the expansion and growth
of existing Allied Practices.
13
<PAGE> 14
General and administrative expenses increased 45% to $10.1 million, or
27% of net revenues, for the three months ended September 30, 2000 from $6.9
million, or 29% of net revenues, for the comparable 1999 quarter. General and
administrative expenses increased 57% to $30.6 million, or 30% of net revenues,
for the nine months ended September 30, 2000 from $19.5 million, or 28% of net
revenues, for the comparable 1999 period. General and administrative expenses
have shown an increase in absolute dollars primarily related to the acquisition
of additional Allied Practices during the period as well as the expansion and
growth of previously existing Allied Practices offsetting reductions in
marketing and advertising and other costs. In addition, reductions in the bad
debt provision, to better match historical and industry patterns resulted in a
favorable adjustment to general and administrative expenses for the three
months and nine months periods ended September 30, 2000.
Depreciation and amortization expenses increased approximately 77% to
$1.8 million or 5% of net revenues for the three months ended September 30, 2000
from $1.0 million or 4% of net revenues. Depreciation and amortization expenses
increased approximately 75% to $4.9 million or 5% of net revenues for the nine
months ended September 30, 2000 from $2.8 million or 4% of net revenues. This
increase is attributable to the increase in intangible assets associated with
the affiliations of Allied Practices and the acquisition of New Image.
Intangible assets approximated $120 million and $84 million at September 30,
2000 and December 31, 1999, respectively. Depreciation and amortization expenses
primarily relate to the depreciation of capital assets and the amortization of
excess cost over the fair value of net assets acquired and certain other
intangibles. The Company's policy is to amortize goodwill over the expected
period to be benefited, not to exceed 25 years.
Interest Expense
Interest expense increased to $2 million for the three months ended
September 30, 2000 from $0.7 million for the comparable period in 1999. Interest
expense increased to $5.3 million for the nine months ended September 30, 2000
from $1.6 million for the comparable period in 1999. The increase was primarily
due to increased borrowings under the Company's Revolving Credit Facility in
support of Allied Practices affiliated and certain debt obligations issued and
assumed in connection with New Image acquisition. Company borrowings under the
Revolving Credit Facilities were $55 million and $47.5 million at September 30,
2000 and December 31, 1999, respectively. Total debt was approximately $77.0
million and $49.7 million at September 30, 2000 and December 31, 1999,
respectively.
Provision for Income Taxes
The provision for income taxes increased 15% to $2.2 million for the
three month period ended September 30, 2000 from $1.9 million for the comparable
1999 quarter. The provision for income taxes increased 13% to $6.3 million for
the nine month period ended September 30, 2000 from $5.6 million for the
comparable 1999 period. The Company's effective income tax rates for the periods
ended September 30, 2000 and 1999, respectively, were higher than the statutory
tax rate primarily due to the amortization of certain intangible assets not
being deductible for income tax purposes. The effective tax rate was 43.1% and
42.1% for the three month period ended September 30, 2000 and 1999,
respectively. The effective tax rate was 43.1% and 44.0% for the nine month
period ended September 30, 2000 and for the comparable period in 1999,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through cash
from operations, the Company's line of credit and other available capital
resources. This capital is used for affiliations with new Allied Practices,
development of Allied Practice satellite offices, capital additions and general
working capital needs. As of September 30, 2000 and December 31, 1999 the
Company had a working capital balance of $11.9 million and $21.5 million,
respectively. As of September 30, 2000 the Company's principal sources of
liquidity included cash and short term investments of approximately $7.4 million
and the Revolving Credit Facility, which as of that date had $20 million of
available credit, with the remaining $55 million in outstanding borrowings
bearing interest at the prime interest rate plus a margin or the LIBOR plus a
margin. As of September 30, 2000, the Company was in compliance with all terms
of the Revolving Credit Facility. On April 14, 2000, the Company expanded its
revolving credit facility to $75 million, which expires on April 13, 2003 and
has substantially similar terms to the previous facility.
The Company's operating activities generated cash of $15.1 million
during the nine month period ended September 30, 2000. Net cash used in
financing activities approximated $2.1 million in the nine month period ended
September 30, 2000 and consisted of borrowings and repayments on the line of
credit and treasury shares purchased. Cash used in investing activities of $16.7
million in the nine month period ended September 30, 2000 consisted of payments
in connection with Allied Practices affiliated and capital expenditures,
primarily for office and computer equipment used in Company operations. The
Company does not currently have any material commitments with respect to any
capital expenditures.
14
<PAGE> 15
The Company's capital resources needed to continue acquisition and
development efforts are expected to be funded through a combination of cash
flows provided by ongoing operations, the Company's line of credit, the issuance
of equity and debt securities, as described in the Company's Form S-4
registration statement which became effective on August 6, 1999, and other
sources. Management believes that these sources of capital will be sufficient to
meet the Company's capital requirements for the next twelve months. The Company
may choose to issue debt or equity to meet its future long-term capital needs,
as management deems appropriate. There can be no assurance that the Company will
be able to raise such additional working capital on acceptable terms, if at all.
In the event the Company is unable to raise additional working capital, further
measures would be necessary including, without limitation, the delay, or scale
back of its operations, new Allied Practice affiliations, marketing programs and
other actions. Certain of such measures may require third party consents or
approvals, including the banks under the Revolving Credit Facility, and there
can be no such assurance that such consents or approvals can be obtained.
The Management Agreements provide for short-term advances by the
Company to the Allied Practices for working capital requirements and other
purposes on terms to be mutually agreed upon. These items are advanced and
repaid in a revolving manner. Generally, advances are repaid when Allied
Practices deposit patient revenue into their depository accounts. Advances occur
when the Allied Practice operating expenses paid exceed patient revenue earned.
During the nine months ended September 30, 2000, the Company acquired
0.3 million shares of its common stock at an approximate cost of $1.9 million.
The Company is authorized to repurchase additional shares from time to time.
Payments for such share repurchases come from operating cash flow and/or
borrowings under the Revolving Credit Facility. The timing and the amount of
shares to be purchased will be determined based on the evaluation of working
capital needs and stock market conditions.
ACQUISITION OF NEW IMAGE ORTHODONTIC GROUP, INC.
On March 1, 2000 the Company, through OrthAlliance New Image, Inc., a
wholly owned subsidiary, acquired substantially all the assets of New Image
Orthodontic Group, Inc ("New Image"), a privately held Georgia corporation based
in Atlanta, Georgia.
New Image was founded in February 1997 and provided business
operations, financial and marketing and administrative services to orthodontic
practices in nine states in accordance with long term service agreements. The
transaction was accounted for as a purchase and includes practice management
agreements with 36 orthodontic practitioners operating in 50 locations with over
$33.0 million in annualized revenues. Collectively, the consideration and
transaction costs associated with this transaction totaled approximately $33.8
million. Of this amount, $5.5 million was paid in cash, approximately $13.4
million of debt was assumed and $12.9 million in promissory notes were issued to
the sellers, with interest rates ranging from 9% to 10%.
The Company has to date transitioned the New Image assets into its
business operations. Although management believes that the transition will
continue to be successful, there can be no assurances that certain matters
outside of management's control will not occur, delaying the successful
integration of the New Image business operation, and having an unfavorable
impact on operations and working capital.
CONTINUED LISTING ON THE NASDAQ NATIONAL MARKET
The Company's Common Stock is currently quoted on the Nasdaq National
Market under the symbol "ORAL". Under Nasdaq listing qualifications, the
Company's Common Stock is subject to removal from the Nasdaq National Market if,
among other factors, the Company either (a) fails to maintain stock price of at
least $5.00 per share or (b) does not have at least $4.0 million of net tangible
assets and a stock price of at least $1.00 per share. The Company does not
currently meet either test, as in recent weeks the trading price of the
Company's Common Stock has declined below $5.00 per share and the Company does
not have $4.0 million in net tangible assets. The Company has not received a
notice of removal from the Nasdaq, and the Company expects that if it received
any such notice it would seek an extension of time to comply with the Nasdaq
listing qualifications, request a hearing with the appropriate Nasdaq listing
review board, and/or take appropriate actions to meet the relevant listing
qualifications. If the Company were removed from the Nasdaq National Market, the
Company would probably seek to have its Common Stock quoted on Nasdaq's OTC
Bulletin Board service. Any such removal would likely make it more difficult to
trade in, dispose of, and obtain price quotations for, the Company's Common
Stock, and would likely depress the price of the Company's Common Stock even
further.
YEAR 2000 COMPLIANCE
The Company did not experience any system failures or any material
effects that would impact the Company's financial condition or results of
operations as a result of any Year 2000 issues. Because the Company started
operations in August 1997, most of the corporate office systems were already
Year 2000 compliant. Accordingly, any costs associated with Year 2000 upgrade
were not
15
<PAGE> 16
significant. Currently, the Company has assessed its Year 2000 position and does
not expect future problems relating to any Year 2000 issues that would have a
material impact on the Company's operations or financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued a Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which is
effective for the fiscal years beginning after December 15, 1998. The adoption
of SOP 98-1 did not have a material effect on the Company's financial position
or its results of operations.
In January 1999, the Company implemented Statement of Position 98-5
"Reporting on Costs of Start-up Activities." The SOP 98-5 requires net costs of
start-up activities, including organizational costs, to be expensed as incurred.
In addition, the SOP requires that previously capitalized start-up costs be
expensed upon the effective date. The implementation of SOP-85 did not have a
material effect on the Company's financial position or the results of
operations.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000, as per the issuance of SFAS 137.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that entities recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value.
The Company has adopted Staff Accounting Bulletin Number 101, "Revenue
Recognition Issues," issued December 3, 1999 ("SAB 101"). This pronouncement
states that revenue is generally realized or realizable and earned when all of
the following criteria are met: i) pervasive evidence of an arrangement exists,
ii) delivery has occurred or services rendered, iii) the seller's price to the
buyer is fixed or determinable and iv) collectibility is reasonably assured. The
adoption of SAB 101 did not have a material impact on the Company's financial
position or the results of its operations.
INFLATION
The Company does not believe that inflation has had a material effect
on the results of operations. There can be no assurance that the Company's
business will not be affected by inflation in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not have any derivative financial instruments as of
September 30, 2000. Further, the Company is not exposed to interest rate risk as
the Company's revolving line of credit agreement has a variable interest rate.
Therefore, the fair value of these instruments is not affected by change in
market interest rates. The Company believes that the market risk arising from
not hedging its financial instruments is not material.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in various legal proceedings,
claims and litigation matters arising in the ordinary course of business,
including labor and personnel related issues. In the opinion of management, the
outcome of such routine matters will not have a material adverse effect on the
Company's business, financial condition or results of operations.
While the Company considers its relations with the Allied Practices to
be good, from time to time the Company has been, and can expect to be, involved
in litigation with certain of its Allied Practices. Such litigation has involved
claims that the Company failed to provide required services under the Management
Agreements with the Allied Practices and that certain provisions of the
Management Agreements may be unenforceable, among other claims. The Company
vigorously defends against such claims and believes that such claims are without
merit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None
(b) None
(c) None
(d) None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) None
(b) None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) None
(b) None
(c) None
(d) None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule for the nine month periods
ending September 30, 2000.
99.1 Safe Harbor Compliance Statement (incorporated by
reference to Exhibit 99.1 of the Company's Annual
Report on Form 10-K for fiscal year ended December
31, 1997).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 2000.
17
<PAGE> 18
SIGNATURES
Pursuant to 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.
ORTHALLIANCE, INC. (Registrant)
Date: November 14, 2000 By: /s/ Sam Westover
--------------------------------------------
Sam Westover,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2000 By: /s/ James C. Wilson
--------------------------------------------
James C. Wilson,
Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule for the nine month period ended September
30, 2000.
99.1 Safe Harbor Compliance Statement (incorporated by reference to
Exhibit 99.1 of the Company's Annual Report on Form 10-K for
fiscal year ended December 31, 1997).
</TABLE>
19
