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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 MARCH 31, 1999
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
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ORTHALLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4632134
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
21535 HAWTHORNE BOULEVARD, SUITE 200
TORRANCE, CALIFORNIA 90503
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (310) 792-1300
----------------
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 [ ]
The number of shares of Class A Common Stock and Class B Common Stock of
the Registrant outstanding at March 31, 1999 was 13,197,961 and 249,292,
respectively.
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ORTHALLIANCE, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
PAGE
----
PART I FINANCIAL INFORMATION....................................................................... 3
Item 1 Financial Statements and General Information................................................ 3
Condensed Consolidated Balance Sheets as of March 31, 1999 (unaudited) and
December 31, 1998............................................................ 3
Condensed Consolidated Statement of Income for the Three Months Ended
March 31, 1999 (unaudited) and March 31, 1998 (unaudited).................... 4
Condensed Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 1999 (unaudited) and March 31, 1998 (unaudited).................... 5
Notes to Condensed Consolidated Financial Statements........................................ 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 7
Item 3 Quantitative and Qualitative Disclosure about Market Risk................................... 11
PART II OTHER INFORMATION........................................................................... 11
Item 1 Legal Proceedings........................................................................... 11
Item 2 Changes in Securities and Use of Proceeds................................................... 11
Item 3 Defaults Upon Senior Securities............................................................. 11
Item 4 Submission of Matters to a Vote of Security Holders......................................... 11
Item 5 Other Information........................................................................... 12
Item 6 Exhibits and Reports on Form 8-K............................................................ 12
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PART I
ITEM I. FINANCIAL STATEMENTS
ORTHALLIANCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AS OF AS OF
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 6,945,000 $ 3,226,000
Patient receivables, net of allowances of $417,000 and $435,000 at
March 31, 1999 and December 31, 1998, respectively ................. 7,751,000 7,765,000
Unbilled patient receivables, net of
allowances of $415,000 and $385,000 at March 31, 1999 and
December 31, 1998, respectively .................................... 3,732,000 3,462,000
Amounts due from Allied Practices .................................... 8,695,000 9,880,000
Income taxes receivable .............................................. 171,000 1,102,000
Current deferred tax assets .......................................... 242,000 578,000
Other current assets ................................................. 343,000 331,000
------------- -------------
Total current assets ................................................ 27,879,000 26,344,000
Property and equipment, net ............................................. 5,233,000 4,585,000
Notes receivable ........................................................ 3,883,000 3,607,000
Non-current deferred tax assets ......................................... 2,595,000 2,918,000
Intangible assets, net .................................................. 60,431,000 50,912,000
Other, net .............................................................. 656,000 214,000
------------- -------------
Total assets ........................................................ $ 100,677,000 $ 88,580,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 1,737,000 $ 2,417,000
Accrued liabilities .................................................. 2,433,000 2,368,000
Patient prepayments .................................................. 4,810,000 4,777,000
Notes payables to Allied Practices ................................... -- 1,760,000
Amounts due to Allied Practices ...................................... 3,089,000 1,787,000
------------- -------------
Total current liabilities ........................................... 12,069,000 13,109,000
------------- -------------
Line of credit borrowings ............................................... 26,000,000 15,500,000
Non-current deferred tax liabilities .................................... 719,000 715,000
------------- -------------
Total liabilities ................................................... 38,788,000 29,324,000
------------- -------------
Commitments and Contingencies
Stockholders' equity:
Class A Common Stock, $.001 par value, 70,000,000
Shares authorized, 13,197,961 and 13,197,961
shares issued and outstanding at March 31, 1999
and December 31, 1998, respectively ................................. 13,000 13,000
Class B Common Stock, $.001 par value, 250,000 shares
authorized, 249,292 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively ................ -- --
Additional paid-in capital .............................................. 65,187,000 65,188,000
Accumulated deficit ..................................................... (1,992,000) (3,597,000)
Treasury stock, at cost, 98,940 shares at March 31, 1999 and
170,024 shares at December 31, 1998, respectively ................... (1,319,000) (2,348,000)
------------- -------------
Total stockholders' equity .......................................... 61,889,000 59,256,000
------------- -------------
Total liabilities and stockholders' equity .......................... $ 100,677,000 $ 88,580,000
============= =============
The accompanying notes are an integral part
of these condensed consolidated balance sheets.
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ORTHALLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------ ------------------
Net revenues .................. $ 21,302,000 $ 14,650,000
------------ ------------
Direct expenses:
Salaries and benefits ......... 6,755,000 4,495,000
Orthodontic and dental supplies 2,029,000 1,334,000
Rent .......................... 1,734,000 1,312,000
------------ ------------
10,518,000 7,141,000
General and administrative .... 5,834,000 4,228,000
Depreciation and amortization . 822,000 486,000
------------ ------------
Total expenses ................ 17,174,000 11,855,000
------------ ------------
Net operating income .......... 4,128,000 2,795,000
Interest expense .............. (394,000) (7,000)
Interest income ............... 87,000 104,000
------------ ------------
Income before income taxes .... 3,821,000 2,892,000
Provision for income taxes .... 1,687,000 1,271,000
------------ ------------
Net income .................... $ 2,134,000 $ 1,621,000
============ ============
Basic and diluted net
income per share .............. $ 0.16 $ 0.13
============ ============
Number of shares used in
calculating basic net
income per share ............ 13,273,002 12,472,525
============ ============
Number of shares used in
calculating diluted net
income per share ............ 13,279,964 12,482,450
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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ORTHALLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------ ------------------
Cash flows from operating activities:
Net income ............................................ $ 2,134,000 $ 1,621,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 822,000 486,000
Deferred tax expense ................................. 479,000 --
Changes in assets and liabilities, excluding effects of
acquisitions:
Decrease in patient receivables ...................... 368,000 95,000
Decrease (increase) in due from Allied Practices ..... 1,185,000 (1,553,000)
Increase in other current assets ..................... (12,000) (231,000)
Decrease in taxes receivable ......................... 931,000 --
Increase in other, net ............................... 19,000 --
Increase (decrease) in accounts payable
and accrued liabilities .......................... 247,000 (321,000)
Increase in due to Allied Practices .................. 1,302,000 786,000
(Decrease) increase in patient prepayments ........... (130,000) 203,000
Decrease in income taxes payable ..................... -- (766,000)
------------ ------------
Net cash provided by operating activities ............. 7,345,000 320,000
------------ ------------
Cash flows from investing activities:
Payment for new practice affiliations ................ (10,095,000) (8,868,000)
Increase in notes receivable ......................... (499,000) (417,000)
Principal payments on notes receivables .............. 223,000 73,000
Capital expenditures ................................. (400,000) (293,000)
------------ ------------
Net cash used in investing activities ................ (10,771,000) (9,505,000)
------------ ------------
Cash flows from financing activities:
Reduction in bank overdraft .......................... (862,000) (648,000)
Treasury shares purchased ............................ (260,000) --
Increase in line of credit borrowings ................ 11,000,000 2,000,000
Line of credit refinancing fees ...................... (473,000) --
Repayment of debt .................................... (2,260,000) (907,000)
------------ ------------
Net cash provided by financing activities ............ 7,145,000 445,000
------------ ------------
Net decrease in cash and cash equivalents ............ 3,719,000 (8,740,000)
Cash and cash equivalents at beginning of period ...... 3,226,000 12,647,000
------------ ------------
Cash and cash equivalents at end of period ............ $ 6,945,000 $ 3,907,000
============ ============
Supplemental cash flow information:
Interest paid ........................................ $ 436,000 $ 7,000
Income taxes paid .................................... 756,000 2,037,000
Non-cash investing and financing activities
Acquisition of intangible assets:
Fair value of assets acquired ....................... $ 10,854,000 $ 19,695,000
Less: Issuance of common stock ...................... (759,000) (10,047,000)
Less: Cash paid ..................................... (10,095,000) (8,868,000)
------------ ------------
Notes payable and liabilities assumed ............... $ -- $ 780,000
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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ORTHALLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION
Organization
OrthAlliance, Inc. ("OrthAlliance" or the "Company"), a Delaware
corporation, was founded in October, 1996 to provide practice management and
consulting services (collectively "management services") to orthodontic
practices in the United States. Effective prior to the closing of the initial
public offering (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 of its
Class A Common Stock certain operating assets of or the stock of entities
holding certain tangible and intangible assets and assumed certain liabilities
of 55 orthodontic practices (collectively, the "Founding Practices") in exchange
for shares of Common Stock and cash. The Acquisitions have been accounted for in
accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 48.
OrthAlliance has two wholly-owned subsidiaries, PedoAlliance, Inc.
("PedoAlliance") and OrthAlliance Finance, Inc. ("OA Finance"). PedoAlliance was
formed in December 1997 to provide practice management or consulting services to
pediatric dental practices. Unless otherwise indicated, certain references
herein to "Orthodontists" also include Allied Dentists. The Founding Practices
and any practice that affiliated with OrthAlliance or PedoAlliance subsequent to
the Company's IPO, shall be referred to collectively as "Allied Practices." OA
Finance was formed in October 1997 to offer financing alternatives to the
patients of the Allied Practices. OrthAlliance, PedoAlliance and OA Finance are
sometimes collectively referred to as the "Company."
Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Pursuant to such
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the presentation
and disclosure herein are adequate to make the information not misleading. The
financial statements reflect all elimination entries and normal adjustments that
are necessary for a fair presentation of the results for the interim period
ended March 31, 1999.
Operating results for interim periods are not necessarily indicative of the
results for full years. These condensed consolidated financial statements should
be read in conjunction with the Financial Statements of OrthAlliance and related
notes thereto, and management's discussion and analysis related thereto, all of
which are included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, No. 000-22975 (the "Annual Report").
In the opinion of Company management, the accompanying consolidated
financial statements include the accounts of the Company and all adjustments
necessary to present fairly the Company's financial position at March 31, 1999
and December 31, 1998, and its results of operations and cash flows for the
three months ended March 31, 1999 and March 31, 1998.
The Company currently does not consolidate the operations of the Allied
Practices that it manages because the Company's arrangement with its Allied
Practices do not meet the requirements for consolidation as set forth in
EITF 97-2.
Prior year reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
2. NEW ORTHODONTIST AFFILIATIONS
From January 1, 1999 to March 31, 1999, the Company entered into agreements
with 11 Allied Practices which included six orthodontists and seven pediatric
dentists to provide management services and acquire certain operating assets for
a total
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consideration (including acquisition costs) of $10.9 million. This consideration
consisted of 93,584 shares of Common Stock with an aggregated value at various
acquisition costs of $0.8 million and a cash payment of $10.1 million. These
Allied Practices operate 23 locations and generated patient revenue of
approximately $10.0 million during a 12-month period prior to the date of
affiliation. Prior patient revenue is not necessarily indicative of the level of
revenue these practices may be expected to generate in the future.
3. SUBSEQUENT EVENTS
New Orthodontic Affiliations
Subsequent to March 31, 1999, three practices affiliated with the Company,
which included one orthodontist and three pediatric dentists. The Company
entered into agreements with these practices to provide management services and
to acquire certain operating assets for a total consideration (including
acquisition costs) of $2.2 million, paid in cash. The Allied Practices that
affiliated with the Company since March 31, 1999 operate four locations and
generated historical patient revenue over the prior 12 months of approximately
$2.0 million. Prior patient revenue is not necessarily indicative of the level
of revenue that these practices may be expected to generate in the future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are based on current plans and expectations of the
Company and involve risks and uncertainties that could cause actual future
activities and results of operations to be materially different from those set
forth in the forward-looking statements. Important factors that could cause
actual results to differ include, among others, risks associated with
affiliations, fluctuations in operating results because of affiliations and
variations in stock price, changes in government regulations, competition, risks
of operations and growth of existing and newly affiliated orthodontic practices,
and risks detailed in the Company's SEC filings.
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 Allied Orthodontists 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 the first quarter of
1999, the Company affiliated with 11 new practices, including 13 additional
orthodontists and pediatric dentists operating out of 23 locations. The Company
anticipates that future growth will come from new affiliations, satellite
expansion of Allied Practices, the development of new orthodontic practices and
through improved operating efficiencies.
The Company earns revenue 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 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 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% of the orthodontic contract revenue is recognized at the time of initial
treatment. The balance of the contract revenue is realized evenly over the
remaining treatment period. The 20% 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 three different fee structures set forth in the Management
Agreements:
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(i) a designated percentage of Adjusted Patient Revenue, ranging from
13.5% to 20%, 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
shall 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 16.9% for
the Allied Practices subject to this fee structure.
(ii) a designated percentage ranging from 13.5% to 20% of Adjusted
Patient Revenue with a potential annual adjustment of 25% of the increase
in operating margin (as defined in subparagraph (i) above) in a calendar
year as compared to the preceding calendar year multiplied by the Adjusted
Patient Revenue for the current calendar year. The supplemental fee for
improvement in operating margin, if applicable, is paid in a lump sum
payment upon final determination of the Allied Practice's operating margin
for the calendar year. The average designated percentage is 16.7% for the
Allied Practices subject to this fee structure. In some cases, the Allied
Orthodontist 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.
(iii) a fixed dollar fee with annual fixed dollar increases for each
year of the term of the Management Agreement.
The Company has entered into agreements with certain Allied Practices to
make the payment of management 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 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.
Advertising and marketing includes practice activities to attract new patients
and corporate activities to attract new orthodontists to join the Company.
General and administrative expenses include professional services, such as legal
and accounting, utilities, advertising, marketing, insurance, telephone, license
fees, office supplies and shipping expenses. Practice supplies include only
those expenses required by the Allied Orthodontist to provide treatment to
patients.
RESULTS OF OPERATIONS
The following table sets forth the percentage of certain items in relation to
net revenues.
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
Net Revenue ....................... 100.0% 100.0%
Direct Expenses:
Salaries & Benefits ........... 31.7 30.7
Orthodontic and dental supplies 9.5 9.1
Rent .......................... 8.1 9.0
General and administrative .... 27.4 28.9
Depreciation and amortization . 3.9 3.3
----- -----
Total operating expenses ...... 80.6 81.0
----- -----
Net operating income .............. 19.4 19.0
Interest (expense) income, net .... (1.5) 0.6
----- -----
Income before income taxes ........ 17.9 19.6
Provision for income taxes ........ 7.9 8.7
----- -----
Net income ........................ 10.0% 10.9%
===== =====
Net Revenue. Net revenue for the three-month period ended March 31, 1999
was $21.3 million, an increase of 45.4% over the same period in 1998. This was
attributable to the new affiliations of Allied Practices and an increase in
internal growth of the existing
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Allied Practices. Net Revenue reported by the Company generally includes the
Company's management fee plus reimbursed operating expenses of the Allied
Practices.
Operating Expenses. Total operating expenses, as a percentage of net
revenue, remained at a consistent percentage of net revenue. The operating
expense categories are consistent with management's expectations.
Depreciation and Amortization. Depreciation and amortization expense
increased approximately $336,000 or 69.1% for the three months ended March 31,
1999 as compared to the same period in 1998. This increase was attributable to
the increase in intangible assets associated with the affiliations of Allied
Practices. Intangible assets, net, increased $9.5 million from $50.9 million to
$60.4 million from December 31, 1998 to March 31, 1999. Depreciation and
amortization expense primarily relates 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 the term of the Management
Agreements or other related agreements. For the three months ended March 31,
1999 and 1998, depreciation and amortization were $822,000 and $486,000,
respectively.
Interest Expense. For the three months ended March 31, 1999 and 1998,
interest expense was $394,000 and $7,000, respectively. This increase is due to
a greater average outstanding principal balance on the Company's revolving line
of credit, for the three months ending March 31, 1999 compared to the three
months ending March 31, 1998. The outstanding balance of this line of credit was
$26.0 million and $15.5 million at March 31, 1999 and December 31, 1998,
respectively. See further discussion in the Liquidity and Capital Resources
section below.
Provision for Income Taxes. For the three months ended March 31, 1999 and
1998, the provision for income taxes was $1.7 million and $1.3 million,
respectively. The Company's effective income tax rates for the three months
ended March 31, 1999 and 1998, were higher than the statutory tax rate due to
the non-deductibility of the amortization of certain intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999 and December 31, 1998, the Company had a working
capital balance of approximately $15.8 million and $13.2 million, respectively.
The Company anticipates the primary uses of capital will include additional
affiliations with orthodontic and pediatric dental practices, certain costs
related to the development of satellite offices, and funding the working capital
needs of the Company and Allied Practices.
On December 30, 1997, the Company entered into a credit agreement with
First Union National Bank to provide a $25 million revolving line of credit.
Management expanded the credit facility on March 26, 1999 from $25 million to
$55 million. The agreement terminates on March 26, 2002. The interest on
borrowings accrues at either the bank's prime rate or LIBOR, plus a margin.
Amounts borrowed are secured by security interests in the Company's assets,
which include accounts receivable, Management Agreements and the capital stock
of the Company's wholly-owned subsidiaries. As of March 31, 1999 and December
31, 1998, the outstanding balance under this credit facility was $26.0 million
and $15.5 million, respectively. As of March 31, 1999, the Company was in
compliance with all applicable covenants.
The working capital requirements and capital resources needed to continue
acquisition and development efforts will be funded through a combination of cash
flows provided by ongoing operations and from the Company's revolving line of
credit. Management believes that these sources of capital will be sufficient to
meet the Company's funding 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.
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 exceeded patient revenue earned.
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STOCK REPURCHASE PLAN
On October 22, 1998 the Company announced that the Board of Directors approved
the repurchase of shares of its Common Stock up to $5 million. The Company is
authorized to purchase shares over a 12-month period on Nasdaq Stock Market's
National Market at prices prevailing on that market. As of March 31, 1999, the
Company repurchased 22,500 shares under this Stock Repurchase Plan.
YEAR 2000 COMPLIANCE
The Year 2000 issue arose as a result of certain computer hardware and
software using two digits rather than four digits to define the applicable year.
As a result, some of the Company's hardware and software systems have
date-sensitive software or embedded chips which may incorrectly recognize a date
using "00" rather than the year 2000 or not recognize the year at all. This
could result in system failures or miscalculations leading to disruptions in the
Company's activities and operations.
Corporate Office
The Company has performed a comprehensive Year 2000 evaluation of the
hardware and software systems utilized by the corporate office in all areas of
office automation, including payroll, payables, general ledger and data
management. As far as can be determined, all computer network systems are in
full compliance. Necessary certificates of compliance have been obtained from
hardware and software vendors.
In the event the Company fails to identify all of the systems at risk for
possible failure due to the Year 2000 issue, the Company plans to retain a
complete backup of the systems and data in use prior to December 31, 1999. If,
after the Company begins operations in the Year 2000, it is determined that a
system has failed, the Company can reset all system clocks to a date prior to
January 1, 2000 and restore the affected systems from the copy. This will
provide the Company with more time to repair the affected systems.
The Company has requested Year 2000 compliance certificates from its
material third parties. The Company received compliance certificates from
approximately 60% of such requests. The Company will verify the status of the
remaining material third parties through follow-up requests. The Company is
uncertain whether the risks of non-Year 2000 compliance by material third
parties will materially affect the Company's operations or financial position.
The Company has determined it is not substantially reliant on any one vendor and
expects to use alternate resources in order to continue daily operations. There
can be no assurance that material third parties will not suffer a Year 2000
business disruption which could have an adverse effect on the Company's results
of operations or financial position.
The corporate office does not have any "Non-IT" systems that might be
affected by the Year 2000 issue. As an example, the Company does not own any
automated machinery, elevators, telephone switches, or other equipment that
might contain micro-controllers. Therefore, the Company does not believe that it
is at risk from any failure associated with these kinds of devices.
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 upgrades, including fiscal year 1998 and
year-to-date as of May 14, 1999 have not been significant. Additionally, the
Company does not expect to incur any significant costs in the future.
Allied Practice Locations
The Company has completed a survey of all practice hardware and software to
identify non-compliant systems and to make the necessary recommendations for
achieving compliance. The Company is currently advising the Allied Practices to
install upgrades and replace hardware and software as necessary. The Allied
Practices are contractually responsible to reimburse the Company for any costs
the Company incurs to upgrade its hardware and software, whether owned by
themselves or the Company.
The Company believes that the significant systems that may impact the
Allied Practice's operations are the practice management and billing system and
the accounts payable system. In the event that the Allied Practices have not
upgraded or replaced their hardware, software or non-IT devices, the Company
believes that the impact on Allied Practice operations would be minimal.
In the event that these systems are not Year 2000 compliant, certain
procedures can be utilized to minimize the affect on practice operations. These
procedures may include the following: manual billings, manual posting of
payments to patient records and manual preparation of vendor payments. Although
additional staffing may be necessary to perform these tasks without the benefit
of the affected automated systems, these functions are not critical to providing
orthodontic or pediatric dental services.
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Additionally, the Company plans to advise the Allied Practice to have a
contingency plan, including a complete backup of all systems and data prior to
December 31, 1999. If the Allied Practices determine that a system has failed
after operations commence in the year 2000, they can reset all system clocks to
a date prior to January 1, 2000 and restore the affected systems from the
backup. This will provide the Allied Practice with more time to repair the
affected systems.
The Company has advised the Allied Practices to request Year 2000
compliance certificates from their key material third parties. The Company is
uncertain whether the risks of non-Year 2000 compliance by third parties of the
Allied Practices will materially affect the Company's operations or financial
position. The Company has determined that the Allied Practices are not
substantially reliant on any individual third party and expects them to use
alternate resources if necessary to continue daily operations.
The Company may own some "Non-IT" systems in practice offices that might be
affected by the Year 2000 issue. The Company has not yet determined which
offices may contain such devices. The Company has advised each Allied Practice
to evaluate all equipment to determine if any such devices exist. In the event
that some of the Allied Practices have not upgraded their significant non-IT
systems, such as x-ray and imaging machines, the Allied Practices can outsource
the procedures in order to continue its daily operations. The Allied Practices
are contractually responsible to reimburse the Company for any costs the Company
incurs to repair or replace any non-compliant devices, whether owned by
themselves or the Company.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income." This statement establishes disclosure requirements
related to the reporting of comprehensive income and its components. The
Company did not have any comprehensive income for the year ended December 31,
1998 and for the three months ended March 31, 1999.
Effective January 1, 1998, the Company implemented SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information." This standard
established disclosure requirements related to the reporting of the Company's
operating segments. As of March 31, 1999, the Company does not have any
reportable segments.
The Emerging Issues Task Force of the Financial Accounting Standards Board
issued its Consensus Opinion 97-2 ("EITF 97-2"), which addresses certain
specific matters pertaining to the physician, dentistry and veterinary practice
management industries. EITF 97-2 became effective for the Company for its year
ending December 31, 1998. EITF 97-2 addresses the ability of certain practice
management companies to consolidate the results of certain practices with which
it has an existing contractual relationship. The Company currently does not
consolidate the operations of the practices that it manages. The guidance in
EITF 97-2 did not change the Company's accounting method because the Company's
arrangements with its Allied Practices do not meet the requirements for
consolidation as set forth in EITF 97-2.
Effective January 1, 1999, the Company implemented SOP 98-5 "Reporting on
Costs of Start-up Activities." The SOP requires net costs of start-up
activities, including organizational costs, to be expenses as incurred. In
addition, the SOP requires that previously capitalized start-up costs be
expenses upon the effective date. The Company does not have any start-up costs
capitalized as of March 31, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
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
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(d) None
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Credit Agreement dated as of March 26, 1999 among
OrthAlliance, Inc., First Union National Bank, U.S. National
Association Union National Bank N.A., and First Union
National Bank, as agent for lenders.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
March 31, 1999.
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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: May 14, 1999 By: /s/ Sam Westover
-------------------------------------
Sam Westover,
President, Chief Executive Officer
and Chief Financial Officer
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