<PAGE> 1
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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 JUNE 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)
DELAWARE 95-4632134
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 August 11, 2000
----- ------------------------------
<S> <C>
Class A Common Stock, $.001 par value 12,610,235
Class B Common Stock, $.001 par value 249,292
</TABLE>
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<PAGE> 2
ORTHALLIANCE, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION .................................................................... 3
Item 1. Financial Statements...................................................................... 3
Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999......................................................................... 3
Unaudited Condensed Consolidated Statements of Income for the Three Month and Six
Month Periods Ended June 30, 2000 and June 30, 1999....................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Month Periods
Ended June 30, 2000 and June 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......................................................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................................................... 19
Signatures................................................................................ 20
Exhibit Index............................................................................. 21
</TABLE>
<PAGE> 3
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>
JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................... $ 9,958 $ 11,189
Patient receivables, net of allowances of
$1,173 and $563 at June 30, 2000 and December 31,
1999, respectively................................ 12,717 10,520
Unbilled patient receivables, net of
Allowances of $323 and $382 at June 30, 2000 and
December 31, 1999, respectively................... 3,026 3,436
Amounts due from Allied Practices .................. 15,857 10,630
Income taxes receivable ............................ 993 509
Current deferred tax assets ........................ 104 104
Other current assets ............................... 582 2,010
--------- ---------
Total current assets .............................. 43,237 38,398
Property and equipment, net ........................... 7,795 6,333
Notes receivable ...................................... 5,363 4,920
Non-current deferred tax assets ....................... 840 1,486
Intangible assets, net ................................ 119,607 83,620
Other, net ............................................ 1,260 502
--------- ---------
Total assets ...................................... $ 178,102 $ 135,259
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable ................... $ 4,784 $ --
Accounts payable ................................... 1,829 2,549
Accrued liabilities ................................ 4,508 2,299
Patient prepayments ................................ 13,725 6,240
Practice affiliations payable ...................... 1,412 3,610
Current deferred tax liabilities ................... 182 182
Amounts due to Allied Practices .................... 3,592 1,988
--------- ---------
Total current liabilities ......................... 30,032 16,868
Line of credit borrowings ............................. 57,000 47,500
Non-current deferred tax liabilities .................. 932 2,144
Notes payable ......................................... 18,398 935
--------- ---------
Total liabilities ................................. 106,362 67,447
Commitments and Contingencies
Stockholders' equity:
Class A Common Stock, $.001 par value,
70,000,000 shares authorized, 13,197,961 shares
issued and outstanding at June 30, 2000 and
December 31, 1999................................. 13 13
Class B Common Stock, $.001 par value, 250,000
shares authorized, 249,292 shares issued and
outstanding at June 30, 2000 and December 31,
1999, respectively................................ -- --
Additional paid-in capital ............................ 65,700 65,145
Retained earnings ..................................... 10,720 5,457
Treasury stock, at cost, 587,726 shares at June
30, 2000 and 318,726 shares at December 31, 1999.. (4,693) (2,803)
--------- ----------
Total stockholders' equity ........................ 71,740 67,812
--------- ---------
Total liabilities and stockholders' equity ........ $ 178,102 $ 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues ..................................... $ 36,056 $ 23,860 $ 66,201 $ 45,162
-------- -------- -------- --------
Costs and expenses:
Salaries and benefits ............................ 9,858 7,111 18,468 13,867
Orthodontic and dental supplies .................. 3,500 2,241 6,180 4,270
Rent ............................................. 3,048 2,036 5,559 3,770
-------- -------- -------- --------
Total direct expenses ........................ 16,406 11,388 30,207 21,907
General and administrative ....................... 11,289 6,743 20,571 12,570
Depreciation and amortization .................... 1,732 935 3,142 1,733
-------- -------- -------- --------
Total operating expenses ..................... 29,427 19,066 53,920 36,210
Operating income ................................. 6,629 4,794 12,281 8,952
Interest income .................................. 177 105 348 192
Interest expense ................................. (1,994) (546) (3,246) (969)
-------- -------- -------- --------
Income before income taxes ....................... 4,812 4,353 9,383 8,175
Provision for income taxes ....................... 2,109 1,997 4,120 3,685
-------- -------- -------- --------
Net income ....................................... $ 2,703 $ 2,356 $ 5,263 $ 4,490
======== ======== ======== ========
Net income per share- basic and diluted .......... $ 0.21 $ 0.18 $ 0.41 $ 0.34
======== ======== ======== ========
Weighted average number of Common shares
outstanding (in thousands):
Basic ........................................ 12,860 13,348 12,949 13,311
======== ======== ======== ========
Diluted ...................................... 12,868 13,349 12,964 13,332
======== ======== ======== ========
</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>
SIX MONTHS
ENDED JUNE 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 5,263 $ 4,490
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .............................. 3,142 1,810
Deferred taxes ............................................. 623 479
Changes in assets and liabilities, excluding effects of
Acquisitions:
Patient receivables, net .................................. (1,197) (272)
Amounts due from Allied Practices ......................... (1,725) (97)
Other current assets ...................................... 1,556 27
Income taxes receivable ................................... (461) 1,331
Other, net ................................................ 50 (11)
Accounts payable and accrued liabilities .................. (46) 259
Amounts due to Allied Practices ........................... 1,604 585
Patient prepayments ....................................... 2,080 (104)
-------- --------
Net cash provided by operating activities ................... 10,889 8,497
-------- --------
Cash flows from investing activities:
Payments for new practice affiliations .................... (5,760) (16,001)
Payments for acquisition of New Image ..................... (5,500) --
Increase in notes receivable .............................. (1,147) (986)
Principal payments on notes receivables ................... 743 527
Capital expenditures ...................................... (340) (650)
-------- --------
Net cash used in investing activities ....................... (12,004) (17,110)
-------- --------
Cash flows from financing activities:
Decrease in bank overdraft ................................ (807) (417)
Treasury shares purchased ................................. (1,890) (260)
Increase in line of credit borrowings ..................... 67,500 16,500
Line of credit refinancing fees ........................... (810) (473)
Repayment of debt ......................................... (64,108) (2,260)
-------- --------
Net cash (used) provided by financing activities ............ (115) 13,090
-------- --------
Net (decrease) increase in cash and cash equivalents ........ (1,230) 4,477
Cash and cash equivalents at beginning of period ............ 11,189 3,226
-------- --------
Cash and cash equivalents at end of period .................. $ 9,958 $ 7,703
======== ========
Supplemental cash flow information: Cash paid during the
period for:
Interest .................................................. $ 3,885 $ 940
Income taxes .............................................. 3,611 2,354
Non-cash investing and financing activities:
Acquisition of intangible assets:
Fair value of assets acquired ............................. $ 38,308 $ 21,462
Less: Issuance of common stock or stock options ........... (555) (760)
Less: Cash paid ........................................... (9,016) (15,965)
-------- --------
Notes payable or liabilities assumed ...................... $ 28,737 $ 4,737
======== ========
</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, 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
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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 $1.5 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 six month periods ended June 30,
2000 and June 30, 1999. 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 JUNE 30, 1999
------------------------------------------------------
PRO FORMA
ORTHALLIANCE NEW IMAGE ADJUSTMENTS PRO FORMA
------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues .................... $ 23,860 $ 8,171 $ -- $ 32,031
Operating income (loss) ......... 4,794 (197) 930 5,527
Net income (loss) ............... 2,356 (896) 816 2,276
Basic and diluted net income per
share ....................... $ 0.18 $ 0.18
======== ========
Weighted average number of
Common shares outstanding (in
thousands):
Basic ................... 13,348 13,348
======== ========
Diluted ................. 13,349 13,349
======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
-----------------------------------------------------
PRO FORMA
ORTHALLIANCE NEW IMAGE(a) ADJUSTMENTS(a) PRO FORMA
------------ ------------ -------------- ---------
<S> <C> <C> <C> <C>
Net revenues .................... $ 66,201 $ 3,803 $ -- $ 70,004
Operating income (loss) ......... 12,281 (84) 323 12,520
Net income (loss) ............... 5,263 (448) 440 5,255
Basic and diluted net income per
share ....................... $ 0.41 $ 0.41
======== ========
Weighted average number of
Common shares outstanding (in
thousands):
Basic ................... 12,949 12,949
======== ========
Diluted ................. 12,964 12,964
======== ========
</TABLE>
7
<PAGE> 8
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------
PRO FORMA
ORTHALLIANCE NEW IMAGE(a) ADJUSTMENTS(a) PRO FORMA
------------ ------------ -------------- ---------
<S> <C> <C> <C> <C>
Net revenues .................... $ 45,162 $ 16,389 $ -- $ 61,551
Operating income (loss) ......... 8,952 (389) 1,811 10,374
Net income (loss) ............... 4,490 (1,772) 1,477 4,313
Basic and diluted net income per
share ....................... $ 0.34 $ 0.34
======== ========
Weighted average number of
Common shares outstanding (in
thousands):
Basic .................... 13,311 13,311
======== ========
Diluted .................. 13,332 13,332
======== ========
</TABLE>
----------
(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 June 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 $3.7 million. The consideration consisted of $3
million cash and $0.7 million debt. These Allied Practices operate 12 locations
and generated historical patient revenue over the prior 12 months of
approximately $4 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. 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 June 30,
2000 and December 31, 1999, the outstanding borrowings under the Revolving
Credit Facilities were $ 57 million and $ 47.5 million, respectively. As of June
30, 2000 the Company was in compliance with the terms and covenants of the $75
Million Credit Facility.
NOTE 6. 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.
8
<PAGE> 9
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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.
The following is a summary of certain financial data for each of the
segments:
<TABLE>
<CAPTION>
ORTHODONTIC PEDIATRIC
PRACTICE PRACTICE ALL OTHERS TOTAL
------- ------- ------- -------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000:
Net revenues ........................... $32,590 $ 3,466 $-- $36,056
Operating income (loss) ................ 6,290 1,105 (766) 6,629
Depreciation and amortization .......... 1,711 9 12 1,732
THREE MONTHS ENDED JUNE 30, 1999:
Net revenues ........................... $21,729 $ 2,131 $-- $23,860
Operating income (loss) ................ 4,161 668 (35) 4,794
Depreciation and amortization .......... 918 17 -- 935
</TABLE>
<TABLE>
<CAPTION>
ORTHODONTIC PEDIATRIC
PRACTICE PRACTICE ALL OTHERS TOTAL
------- ------- ------- -------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 2000:
Net revenues ........................... $59,511 $ 6,690 $-- $66,201
Operating income (loss) ................ 11,145 1,973 (837) 12,281
Depreciation and amortization .......... 3,063 67 12 3,142
SIX MONTHS ENDED JUNE 30, 1999:
Net revenues ........................... $41,824 $ 3,338 $-- $45,162
Operating income (loss) ................ 8,010 1,036 (94) 8,952
Depreciation and amortization .......... 1,767 43 (77) 1,738
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Segment operating income ...... $ 6,629 $ 4,794 $ 12,281 $ 8,952
Interest income ............... 177 105 348 192
Interest expense .............. (1,994) (546) (3,246) (1,969)
Provision for income taxes (2,109) (1,997) (4,120) (3,685)
------- ------- ------- -------
Net income .................... $ 2,703 $ 2,356 $ 5,263 $4,490
======= ======= ======= =======
</TABLE>
9
<PAGE> 10
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 7. TREASURY STOCK
In February 2000, the Company acquired 270,000 shares of its common
stock at a cost of approximately $1.9 million.
NOTE 8. SUBSEQUENT EVENTS
New Affiliations
In July 2000, the Company entered into an agreement with an Affiliated
Practice to expand such Affiliated Practice through the acquisition of certain
operating assets of a non-affiliated orthodontic practice. The total
consideration paid to the non-affiliated orthodontic practice consisted of
$224,000 cash and a promissory note of $96,000.
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
by reference are 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. 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 six month period
ended June 30, 2000, the Company affiliated with 5 new practices, including
5 practitioners operating out of 12 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 1999
was approximately 16.6% 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ---------------------------------------------
2000 1999 2000 1999
-------------------- ------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues .................... $ 36,056 100.0% $ 23,860 100.0% $66,201 100.0% $ 45,162 100.0%
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Salaries and benefits ........... 9,858 27.3 7,111 29.8 18,468 27.9 13,867 30.7
Orthodontic and dental
supplies ...................... 3,500 9.7 2,241 9.3 6,180 9.3 4,270 9.4
Rent ............................ 3,048 8.4 2,036 8.5 5,559 8.4 3770 8.3
-------- -------- -------- -------- -------- -------- -------- --------
Total direct expenses .... 16,406 45.5 11,388 47.7 30,207 45.6 21,907 48.5
General and administrative ...... 11,289 31.3 6,743 28.2 20,571 31.0 12,570 27.8
Depreciation and amortization ... 1,732 4.8 935 3.9 3,142 4.7 1,733 3.8
-------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses .............. 29,427 81.6 19,066 80.0 53,920 81.4 36,210 80.1
-------- -------- -------- -------- -------- -------- -------- --------
Operating income ................ 6,629 18.3 4,799 20.0 12,281 18.5 8,952 19.8
Interest income ................. 177 0.4 105 0.4 348 0.5 192 0.4
Interest expense ................ (1,994) (5.5) (546) (2.2) (3,246) (4.9) 969 (2.1)
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes ...... 4,812 13.3 4,353 18.2 9,383 14.1 8,175 18.1
Provision for income taxes ...... 2,109 5.8 1,997 8.3 4,120 6.2 3,685 8.1
-------- -------- -------- -------- -------- -------- -------- --------
Net income ...................... $ 2,703 7.5 $ 2,356 9.8 $ 5,263 7.9 $ 4,490 9.9
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Operating Income and Net Income
Operating income for the three months ended June 30, 2000 increased 38%
to $6.6 million from $4.7 million in the comparable 1999 quarter. Operating
income for the six months ended June 30, 2000 increased 37% to $12.3 million
from $8.9 million in the comparable 1999 quarter.
Net income for the three months ended June 30, 2000 increased 15% to
$2.7 million from $2.4 million in the comparable 1999 quarter. Net income for
the six months ended June 30, 2000 increased 17% to $5.3 million from $4.5
million in the comparable 1999 quarter.
Net Revenues
Net revenues for the three months ended June 30, 2000 increased 51% to
$36.1 million from $23.9 million in the comparable 1999 quarter. Similarly, net
revenues for the six months ended June 30, 2000 increased 47% to $66.2 million
from $45.2 million in the comparable 1999 quarter. The increase in net revenues
for the three and six months ended June 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
ten percent for the current period. 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 54% to $29.4 million, or 82% of net
revenues, in the three months ended June 30, 2000 from $19.1 million, or 80%
of net revenues, for the comparable 1999 quarter. Total operating expenses
increased 49% to $53.9 million, or 81% of net revenues, in the six months ended
13
<PAGE> 14
June 30, 2000 from $36.3 million, or 80% of net revenues, for the comparable
1999 quarter.
Direct expenses including salaries and benefits, orthodontic and dental
supplies, and rent increased 44% to $16.4 million, or 45% of net revenues, in
the three months ended June 30, 2000 from $11.4 million, or 48% of net
revenues, for the comparable 1999 quarter. Direct expenses increased 38% to
$30.2 million, or 46% of net revenues, in the six months ended June 30, 2000
from $21.9 million, or 49% of net revenues, for the comparable 1999 quarter.
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 39% to $9.9 million, or 27% of
revenues, in the three months ended June 30, 2000 from $7.1 million, or 30% of
net revenues for the comparable 1999 quarter. Salaries and benefits increased
33% to $18.5 million, or 28% of revenues, in the six months ended June 30,
2000 from $13.9 million, or 31% of net revenues for the comparable 1999
quarter. The decrease in salaries and benefits as a percentage of net revenues
is a result of practice affiliations of which employees remained employees of
the Allied Practice's professional corporations. Accordingly, for these
practices, salary and benefit expenses are not reported by the Company. The
Company expects that in future periods salaries and benefits will increase in
absolute dollars, but may vary as a percentage of net revenues.
General and administrative expenses increased 67% to $11.3 million, or
31% of net revenues, in the three months ended June 30, 2000 from $6.7
million, or 28% of net revenues, for the comparable 1999 quarter. General and
administrative expenses increased 64% to $20.6 million, or 31% of net
revenues, in the six months ended June 30, 2000 from $12.6 million, or 28% of
net revenues, for the comparable 1999 quarter. 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.
Depreciation and amortization expenses increased approximately 85% to
$1.7 million or 5% of net revenues in the three months ended June 30,2000 from
$0.9 million or 4% of net revenues. Depreciation and amortization expenses
increased approximately 81% to $3.1 million or 5% of net revenues in the six
months ended June 30, 2000 from $1.7 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 June 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 June
30, 2000 from $0.5 million in the comparable period in 1999. Interest expense
increased to $3.2 million for the six months ended June 30, 2000 from $0.9
million in 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 $57 million and $47.5 million at June 30, 2000 and
December 31, 1999, total debt was approximately $80.3 million and $49.7 million,
respectively.
Provision for Income Taxes
The provision for income taxes increased 6% to $2.1 million for the
three month period ended June 30, 2000 from $2.0 million for the comparable 1999
period. The provision for income taxes increased 12% to $4.1 million for the
six month period ended June 30, 2000 from $3.7 million for the comparable 1999
period. The Company's effective income tax rates for the periods ended June 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 43.8% and 45.8% for the three
month period ended June 30, 2000 and for the comparable period in 1999,
respectively. The effective tax rate was 43.9% and 45.1% for the six month
period ended June 30, 2000 and for the comparable period in 1999, respectively.
14
<PAGE> 15
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 June 30, 2000 and December 31, 1999 the Company had
a working capital balance of $13.2 million and $21.5 million, respectively. As
of June 30, 2000 the Company's principal sources of liquidity included cash and
short term investments of approximately $10.0 million and the Revolving Credit
Facility, which as of that date had $18 million of available credit, with the
remaining $57 million in outstanding borrowings bearing interest at the prime
interest rate plus a margin or the LIBOR plus a margin. As of June 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 $10.9 million
during the six month period ended June 30, 2000. Net cash used in financing
activities approximated $0.1 million in the six month period ended June 30, 2000
and consisted of borrowings and repayments on the line of credit and treasury
shares purchased. Cash used in investing activities of $12.0 million in the six
month period ended June 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.
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 six months ended June 30, 2000, the Company acquired 0.3
million shares of its common stock at an approximate cost of $1.7 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.
15
<PAGE> 16
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 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
June 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.
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) The 2000 Annual Meeting of stockholders of the Company was held on
Thursday, June 1, 2000. At this meeting, the following matters were voted upon
by the Company's stockholders.
(b) Election of Class II and Class III Directors
Craig L. McKnight was elected to serve as a Class II director of the
Company until the 2001 Annual Meeting of Stockholders or until his
successor is elected and qualified. The vote was as follows:
<TABLE>
<CAPTION>
VOTES CAST IN VOTES CAST AGAINST ABSTENTIONS
NAME FAVOR OR WITHHELD NON VOTES
---------- ---------- ----------
<S> <C> <C> <C>
Craig L. McKnight 11,227,320 141,005 0
</TABLE>
Stephen G. Tracey, D.D.S., M.S., Sam Westover and Larry D. Dormois D.D.S., M.S.
were elected to serve as Class III directors of the Company until the 2003
Annual Meeting of Stockholders or until their successors are elected and
qualified. The vote was as follows:
<TABLE>
<CAPTION>
VOTES CAST IN VOTES CAST AGAINST ABSTENTIONS
NAME FAVOR OR WITHHELD NON VOTES
---------- ---------- ----------
<S> <C> <C> <C>
Stephen G. Tracey, D.D.S., M.S. 11,271,880 96,445 0
Sam Westover 10,681,406 686,919 0
Larry D. Dormois, D.D.S., M.S. 11,272,080 96,245 0
</TABLE>
17
<PAGE> 18
The following directors continued in office following the meeting:
<TABLE>
<CAPTION>
NAME TERM EXPIRES
---- ------------
<S> <C>
Douglas D. Durbin, D.M.D., M.S.D. .. 2001
W. Dennis Summers, Esq. ............ 2001
Randall K. Bennett, D.D.S., M.S. ... 2002
G. Harry Durity .................... 2002
Raymond G.W. Kubisch, D.D.S.,
M.S.D. .......................... 2002
</TABLE>
(c)(i) Approval of Amendment to the 1997 Director Stock Option Plan
The stockholders of the Company approved amendments to the Director Plan
that provided (i) the Compensation Committee shall have authority and discretion
to administer the Director Plan and to grant options to any director who is not
a full-time employee of the Company ("Eligible Directors"), in addition to the
automatic formula grants of options currently permitted in the Director Plan for
Eligible Directors, (ii) the automatic formula grant of options to the Chairman
of the Board, provided that the Chairman is an Eligible Director, was increased
from options to acquire 10,000 shares of Class A Common Stock to options to
acquire 20,000 shares of Class A Common Stock, and (iii) an increase in the
number of shares of Common Stock which may be issued subject to options granted
under the 1997 Employee Stock Option Plan from 200,000 shares to 500,000 subject
to certain anti-dilution provisions set forth in the plan. The vote was as
follows:
<TABLE>
<CAPTION>
VOTES CAST IN VOTES CAST AGAINST ABSTENTIONS
FAVOR OR WITHHELD NON VOTES
---------- ------- ------
<S> <C> <C> <C>
10,426,962 925,075 16,288
</TABLE>
(c)(ii) Selection of Independent Auditors
The stockholders of the Company ratified the appointment of Arthur
Andersen LLP as the Company's independent auditors for the fiscal year ending
December 31, 2000. The vote was as follows:
<TABLE>
<CAPTION>
VOTES CAST IN VOTES CAST AGAINST ABSTENTIONS
FAVOR OR WITHHELD NON VOTES
---------- ------- ------
<S> <C> <C> <C>
11,345,384 17,390 5,551
</TABLE>
(d) None
ITEM 5. OTHER INFORMATION
None
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
10.1 Amendment to Employment Agreement by and between
OrthAlliance, Inc. and Stephen M. Toon, dated as of May 22,
2000 (incorporated by reference to Exhibit 10.14 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998)
27.1 Financial Data Schedule for the six month period ended June
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
On May 15, 2000, the Company filed a Report on Form 8-K/A related to its
acquisition of substantially all of the assets of New Image Orthodontic Group,
Inc.
19
<PAGE> 20
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: August 11, 2000 By: /s/ Sam Westover
-----------------------------------------
Sam Westover,
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 2000 By: /s/ James C. Wilson
-----------------------------------------
James C. Wilson,
Chief Financial Officer
(Principal Financial and Accounting
Officer)
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
10.1 Amendment to Employment Agreement by and between OrthAlliance,
Inc. and Stephen M. Toon, dated as of May 22, 2000 (incorporated
by reference to Exhibit 10.14 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998)
27.1 Financial Data Schedule for the six month period ended June 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>
21
