<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1996, 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 No.: 0-25256
ORTHODONTIC CENTERS OF AMERICA, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 72-1278948
- ------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
13000 Sawgrass Village, Suite 41
Ponte Vedra Beach, Florida 32082
- --------------------------------- ----------------------------
(Address of principal executive (Zip Code)
offices)
(904) 273-0004
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
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
--- ---
At August 5, 1996, there were 21,119,198 outstanding shares of the Registrant's
Common Stock, $.01 par value per share.
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ORTHODONTIC CENTERS OF AMERICA, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995............... 3
Condensed Consolidated Statements of Income -
Six Months Ended June 30, 1996
and 1995.......................................... 4
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 1996
and 1995.......................................... 5
Condensed Consolidated Statements of Cash Flow -
Six Months Ended June 30, 1996 and 1995........... 6
Notes to Condensed Consolidated Financial
Statements - June 30, 1996........................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..... 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.................. 16
</TABLE>
2
<PAGE>
Part 1. Financial Information
Item 1. Consolidated Financial Statements
Orthodontic Centers of America, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30 December 31
1996 1995 (1)
------- ------------
<S> <C> <C>
(Unaudited)
(in thousands)
ASSETS:
Current assets:
Cash and cash equivalents $11,264 $ 18,779
Investments 13,708 14,804
Patient receivables, net 5,157 3,860
Unbilled patient receivables, net 15,295 12,265
Amounts receivable from
orthodontic entities 2,100 2,260
Supplies inventory, prepaid expenses
and other assets 4,409 2,476
------- --------
Total current assets 51,934 54,444
Property, equipment & improvements, net 17,645 14,014
Investments 13,971 13,089
Amounts receivable from orthodontic
entities, less current portion 6,582 4,903
Intangible assets 6,580 5,928
Other assets 229 195
------- --------
Total assets $96,941 $ 92,573
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and other current
liabilities $ 5,449 $ 7,056
Deferred income taxes 2,272 2,468
Current portion of long-term debt 1,108 1,142
------- --------
Total current liabilities 8,829 10,666
Deferred income taxes --- 1,246
Long-term debt, less current portion 2,737 3,348
Stockholders' Equity:
Preferred stock --- ---
Common stock, $.01 par value per share,
30,000,000 shares authorized, 21,119,198
shares outstanding at June 30, 1996 and
20,889,764 shares outstanding
at December 31, 1995 211 209
Additional paid-in capital 71,567 69,352
Retained earnings 13,597 7,752
------- --------
Total stockholders' equity 85,375 77,313
------- --------
Total liabilities and
stockholders' equity $96,941 $ 92,573
======= ========
</TABLE>
(1) The consolidated balance sheet at December 31, 1995 has been derived from
the audited consolidated financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
3
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------------
1996 1995
-----------------------
(in thousands, except
per share data)
<S> <C> <C>
Net revenue $29,236 $17,701
Direct expenses:
Employee costs 8,402 5,052
Orthodontic supplies 2,244 1,404
Rent 2,602 1,407
Advertising and marketing 2,691 1,785
------- -------
15,939 9,648
General and administrative 3,730 2,171
Depreciation and amortization 1,060 587
------- -------
Operating profit 8,507 5,295
Interest expense (202) (247)
Interest income 1,277 650
------- -------
Income before income taxes 9,582 5,698
Provision for income taxes 3,737 2,165
------- -------
Net income $ 5,845 $ 3,533
======= =======
Earnings per common and dilutive
common equivalent share
Assuming no dilution $ 0.28 $ 0.20
======= =======
Assuming full dilution $ 0.27 $ 0.20
======= =======
</TABLE>
See notes to consolidated financial statements.
4
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30
---------------------
1996 1995
---------------------
(in thousands, except
per share data)
<S> <C> <C>
Net revenue $15,517 $9,236
Direct expenses:
Employee costs 4,418 2,711
Orthodontic supplies 1,145 798
Rent 1,411 768
Advertising and marketing 1,389 984
------- -------
8,363 5,261
General and administrative 1,990 1,091
Depreciation and amortization 572 307
------- -------
Operating profit 4,592 2,577
Interest expense (98) (132)
Interest income 606 366
------- -------
Income before income taxes 5,100 2,811
Provision for income taxes 1,989 1,068
------- -------
Net income $ 3,111 $ 1,743
======= =======
Earnings per common and dilutive
common equivalent share
Assuming no dilution $ 0.15 $ 0.10
======= =======
Assuming full dilution $ 0.14 $ 0.10
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------
1996 1995
-----------------
(in thousands)
<S> <C> <C>
Cash used in operations $(2,423) $ (353)
Investing Activities:
Purchase of property, equipment
and improvements (4,550) (4,046)
Net proceeds from
available-for-sale investments 214 ---
Intangible assets acquired (497) (476)
------- -------
Cash used in investing activities (4,833) (4,522)
Financing activities:
Issuance of common stock 506 41,593
Repayment of long-term debt (765) (758)
------- -------
Cash provided by (used in)
financing activities (259) 40,835
------- -------
Increase (decrease) in cash
and cash equivalents (7,515) 35,960
Cash & cash equivalents at
beginning of period 18,779 17,108
------- -------
Cash & cash equivalents at
end of period $11,264 $53,068
======= =======
Supplemental cash flow information
Interest paid $ 202 $ 132
======= =======
Income taxes paid $ 7,027 $ 2,165
======= =======
Supplemental disclosures of
non-cash investing and financing
activities:
Long term debt and common stock
issued to acquire intangible and
other assets $ 295 $ 1,822
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1996
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Orthodontic Centers of America, Inc. (the "Company") manages orthodontic centers
on a national basis. The Company managed 162 orthodontic centers located in 25
states as of June 30, 1996.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and adjustments necessary to convert the Company's
cash basis accounting records to the accrual basis) considered necessary for a
fair presentation have been included. Operating results for the three and six
month periods ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in Orthodontic Centers of America, Inc.'s annual report on Form
10-K for the year ended December 31, 1995.
During the three month period ended March 31, 1996, the Company adopted FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The adoption of the Statements had no
effect on the Company's financial statements.
2. REVENUE RECOGNITION
The Company's services are provided under service, management and consulting
agreements with orthodontic entities ("management agreements"). These
management agreements are for terms of generally at least 20 years. The
practicing orthodontists affiliated with the Company own these orthodontic
entities.
Net revenue earned by the Company under the management agreements with
orthodontic entities is equal to approximately 24% of new patient contract
balances in the first month of new contracts plus a portion of existing contract
balances, less amounts retained by the orthodontic entities. The Company's
management fee also includes a $25,000 annual fee paid to the Company for
certain free-standing centers. The orthodontic entities retain all orthodontic
center revenue not paid to the Company as the management fee. The amounts
retained by the orthodontic entities are dependent on their financial
performance, based
7
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Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
2. REVENUE RECOGNITION (CONTINUED)
in significant part on the orthodontic entities' cash receipts and
disbursements. Under the terms of the management agreements, the orthodontic
entities assign their receivables (billed and unbilled) to the Company in
payment of their management fees. The Company is responsible for collections.
3. EARNINGS PER COMMON SHARE
Primary and fully diluted earnings per share are based on the weighted average
number of shares of common stock and common equivalent shares (stock options)
outstanding during the period. All earnings per share numbers reported have been
adjusted for the Company's 2-for-1 stock split, effected in the form of a 100%
stock dividend in December 1995. The weighted average shares outstanding for
the three months ended June 30, 1996 was 21,107,802. Common stock equivalents
were immaterial for the three months ended June 30, 1996. The weighted average
number of primary and fully diluted shares for the six months ended June 30,
1996 were 21,004,388 and 21,687,816, respectively. The weighted average shares
outstanding for the three and six months ended June 30, 1995 were 17,591,140 and
17,321,494, respectively. Common stock equivalents were immaterial for the three
and six months ended June 30, 1995.
4. CONTINGENCIES
On March 4, 1996, the Company was served with a complaint filed against the
Company, Dr. Lazzara and Mr. Palmisano on February 20, 1996 in the United States
District Court for the Southern District of California. The complaint alleges
that the Company breached the terms of an agreement with the plaintiff whereby
the plaintiff was granted the right to recruit orthodontists to affiliate with
the Company in the states of California, Nevada and Utah. The complaint further
alleges that the Company interfered with the plaintiff's business advantage by
entering into direct negotiations with orthodontists in those states, and that
the Company breached a duty to the plaintiff of good faith and fair dealing. A
specific amount of damages was not indicated in the complaint. Due to the recent
filing of the complaint, the Company, as of June 30, 1996, had not yet filed an
answer in response; however, management believes that the action lacks merit and
that the Company has fully performed its obligations under the agreement to
date, including the payment of all fees required thereunder. Further, management
believes that the Company has meritorious claims that it may assert against the
plaintiff. Management intends to defend the action vigorously and does not
believe that this action will have a material adverse effect on the Company's
results of operations or financial condition.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's business was established in 1989 by Dr. Gasper Lazzara, Jr.
and Bartholomew F. Palmisano, Sr. The Company managed 180 orthodontic centers
(the "Orthodontic Centers") in 25 states at August 5, 1996.
The following table sets forth certain information relating to the growth
in the number of Orthodontic Centers for the periods shown:
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
1991 1992 1993 1994 1995 1996
----- ------ ----- ----- ----- -----------------
<S> <C> <C> <C> <C> <C> <C>
Number of centers at
beginning of period 18 31 47 55 75 145
Number of centers
developed during period 9 5 4 22 44 15
Number of centers
acquired during period 5 17 5 1 29 7
Number of centers
consolidated during period (1) (6) (1) (3) (3) (5)
---- ---- ---- ---- ---- ----
Number of centers
at end of period 31 47 55 75 145 162
==== ==== ==== ==== ==== ====
</TABLE>
- ------------------
* Since June 30, 1996, the Company had developed 14 additional Orthodontic
Centers and acquired three management agreements for four Orthodontic
Centers, resulting in a total of 180 Orthodontic Centers at August 5, 1996.
At August 5, 1996, 16 Orthodontic Centers, including 14 Orthodontic
Centers added in August 1995 in connection with the affiliation of an existing
practice with the Company, were located in a general dentist's office. The
company intends to relocate these 16 Orthodontic Centers to free-standing
locations as soon as practicable. In developing additional Orthodontic Centers,
the Company intends to locate the Orthodontic Centers only in free-standing
locations. By locating in free-standing locations, Orthodontic Centers are able
to increase available operating days and thereby enhance their revenue producing
capability.
Of the 180 Orthodontic Centers at August 5, 1996, 115 were developed
by the Company and 65 were existing orthodontic practices whose assets were
acquired by the Company. The Company expects that future growth in Orthodontic
Centers will come from both developing Orthodontic Centers with existing and
newly recruited orthodontists affiliated with the Company ("Affiliated
Orthodontists") and acquiring the assets of, and entering into long-term
agreements with, existing practices. The average cost of developing a new
Orthodontic Center is approximately $230,000, including the cost of equipment,
leasehold improvements, working capital and funding of losses associated with
the initial operations of the Orthodontic Center. Of this amount, approximately
$45,000 is financed by the Company to fund the Affiliated Orthodontist's
professional entities' ("Affiliated Orthodontic Entities") share of operating
losses as an unsecured advance repayable over a five-year period with interest
at 1.5% per annum above the prime rate. Repayment commences upon the Orthodontic
Center realizing positive cash flow from operations, which generally occurs
approximately 12 months after the Orthodontic Center has begun operations. In
addition, the Company advances approximately $20,000 to new Affiliated
Orthodontic Entities during the first year of an Orthodontic Center's
operations, which advances bear no interest and are typically repaid during the
second year of the Orthodontic Center's operations.
9
<PAGE>
Typically, when the Company develops a new Orthodontic Center, all
patients treated at the Orthodontic Center are new patients and, in the first
several months after commencing operations, the Orthodontic Center is open only
for a limited number of days each month as new patients are added. The
Orthodontic Centers typically have become increasingly more productive and
profitable as more new patients have been added and existing patients have
returned for monthly follow-up visits. The Company's experience has generally
been that after 26 months of operations, the Orthodontic Center's growth in
patient base begins to stabilize as patients complete treatment. The Orthodontic
Centers have increased the number of patients treated through improved
efficiency of the clinical staff and additional operating days for the
Affiliated Orthodontists. Established practices whose assets were acquired by
the Company have typically increased their revenue by applying the Company's
operating strategies, including increased advertising and efficient patient
scheduling.
The Company earns its revenue from long-term service, management or
consulting agreements entered into with Affiliated Orthodontic Entities.
Pursuant to the service and management agreements, Affiliated Orthodontic
Entities pay a fee to the Company equal to approximately 24% of new patient
contract balances of the Affiliated Orthodontic Entities in the first month of
treatment plus the balance ratably over the remainder of the patient contract,
less amounts retained by the Affiliated Orthodontic Entity. In addition, a
$25,000 annual fee is earned by the Company for 42 free-standing Orthodontic
Centers with respect to which long-term agreements were entered into with the
Company prior to its initial public offering.
The amounts retained by an Affiliated Orthodontic Entity are dependent
on its financial performance, based in significant part on its profitability on
a cash basis, as provided in the service and management agreements. In
exchange for its fee, the Company provides capital for the development and
growth of Orthodontic Centers and manages the business and marketing aspects of
Orthodontic Centers, including implementing advertising and marketing programs,
preparing budgets, purchasing inventory, providing patient scheduling systems,
billing and collecting fees and maintaining records. Operating expenses of the
Orthodontic Centers are expenses of the Company and are recognized as incurred.
The terms of consulting agreements differ significantly from the terms
of service and management agreements and are used in the limited number of
states in which the Company may only provide consulting services to the
orthodontists and may not manage the orthodontist's practice. The consulting fee
payable to the Company is determined at the time of affiliation, is limited to
the consulting services performed and is based on criteria such as the number of
hours of operations of the applicable Orthodontic Centers.
Employee costs consist of wages, salaries and benefits paid to all
employees of the Company, including orthodontic assistants, business staff and
management personnel. General and administrative expenses consist of provision
for losses of patient contracts and receivables, accounting, legal and other
professional service fees, maintenance and utility costs, office supply expense,
telephone expense, taxes, license fees, and printing and shipping expense.
Patient contracts are for terms averaging 26 months and are payable in
equal monthly installments throughout the term of treatment, except for the last
month when a final payment is made. During 1996, the Orthodontic Centers have
begun to implement a price increase from $89 per month with a final payment of
$356 to $98 per month with a final payment of $398.
10
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SEASONALITY
An Orthodontic Center experiences its highest volume of new cases in
the summer and certain other periods when schools are not typically in session.
During these periods, children have a greater opportunity to visit an
orthodontist to commence treatment. Consequently, an Orthodontic Center
experiences higher revenue during the first and third quarters of the year as a
result of increased patient starts. During the Thanksgiving and Christmas
seasons, an Orthodontic Center experiences reduced volume and fourth quarter
revenue for an Orthodontic Center is generally lower as compared to other
periods. Seasonality in recent periods has been mitigated by the impact of
additional Orthodontic Centers.
RESULTS OF OPERATIONS
The following table sets forth the percentages of net revenue
represented by certain items in the Company's condensed consolidated statements
of income.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Direct expenses
Employee cost 28.7 28.5 28.5 29.4
Orthodontic supplies 7.7 7.9 7.4 8.6
Rent 8.9 7.9 9.1 8.3
Advertising and marketing 9.2 10.1 9.0 10.7
----- ----- ----- -----
Total direct expenses 54.5 54.5 54.0 57.0
General and administrative 12.8 12.3 12.8 11.8
Depreciation and amortization 3.6 3.3 3.7 3.3
----- ----- ----- -----
Operating profit 29.1 29.9 29.5 27.9
Interest (income) expense (3.7) (2.3) (3.3) (2.5)
----- ----- ----- -----
Income before income taxes 32.8 32.2 32.8 30.4
Provision for income taxes 12.8 12.2 12.8 11.6
----- ----- ----- -----
Net income 20.0% 20.0% 20.0% 18.9%
===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
NET REVENUE. Net revenue increased 65.2% from $17.7 million for the six
months ended June 30, 1995 to $29.2 million for the six months ended June 30,
1996. Approximately $7.0 million of this increase was attributable to the 87
(net of consolidations) Orthodontic Centers opened since January 1, 1995,
approximately $3.2 million to the growth in net revenue of the 75 Orthodontic
Centers open throughout both periods, and approximately $970,000 related to the
Affiliated Orthodontic Entities' share of the operating losses of newly-
developed Orthodontic Centers, which amounts were advanced by the Company. The
number of patient contracts increased from approximately 39,000 at June 30, 1995
to approximately 62,000 at June 30, 1996.
EMPLOYEE COSTS. Employee costs increased 66.3% from $5.1 million for the
six months ended June 30, 1995 to $8.4 million for the six months ended June 30,
1996. As a percentage of net revenue, employee costs increased from 28.5% for
the six months ended June 30, 1995 to 28.7% for the six months ended June 30,
1996. This increase was caused primarily by an increased percentage of new
patient treatment days, which require additional staff time per patient,
associated with the opening of additional Orthodontic Centers.
ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased 59.8% from
$1.4 million for the six months ended June 30, 1995 to $2.2 million for the six
months ended June 30, 1996. As a percentage of net revenue, however,
orthodontic supplies decreased from 7.9% for the six months ended June 30, 1995
to 7.7% for the six months ended June 30, 1996. Cost improvements
11
<PAGE>
attained through bulk purchasing offset the increased expense associated with an
increased percentage of new patient treatment days, which require greater
orthodontic supplies per patient, associated with the opening of additional
Orthodontic Centers.
RENT. Rent expense increased 84.9% from $1.4 million for the six months
ended June 30, 1995 to $2.6 million for the six months ended June 30, 1996. As
a percentage of net revenue, rent expense increased from 7.9% to 8.9%. The
increase in this expense as a percentage of net revenue was attributable to the
relatively fixed nature of the expense in conjunction with the opening of
additional Orthodontic Centers, which typically generate less net revenue during
their initial operations.
ADVERTISING AND MARKETING. Advertising and marketing expense increased
50.8% from $1.8 million for the six months ended June 30, 1995 to $2.7 million
for the six months ended June 30, 1996. The increase in this expense resulted
primarily from the addition of Orthodontic Centers after June 30, 1995. As a
percentage of net revenue, advertising and marketing expense decreased from
10.1% for the six months ended June 30, 1995 to 9.2% for the six months ended
June 30, 1996. The decrease in this expense as a percentage of net revenue is
the result of cost improvements achieved through bulk media and production
purchases.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
71.8% from $2.2 million for the six months ended June 30, 1995 to $3.7 million
for the six months ended June 30, 1996. As a percentage of net revenue general
and administrative expense decreased from 12.3% to 12.8%. The increase in
general and administrative expense resulted primarily from the addition of
Orthodontic Centers after June 30, 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 80.6% from $590,000 for the six months ended June 30, 1995 to $1.1
million for the six months ended June 30, 1996. As a percentage of net revenue,
depreciation and amortization expense increased from 3.3% to 3.6%. The increase
in this expense is a result of the fixed assets acquired for Orthodontic Centers
developed or relocated after June 30, 1995.
OPERATING PROFIT. Operating profit increased 60.7% from $5.3 million for
the six months ended June 30, 1995 to $8.5 million for the six months ended June
30, 1996. As a percentage of net revenue, however, operating profit decreased
from 29.9% to 29.1% for the same periods, respectively, as a result of the
factors discussed above.
INTEREST. Net interest income increased 166.1% from $400,000 for the six
months ended June 30, 1995 to $1.1 million for the six months ended June 30,
1996. The increase in interest income resulted from the investment of the
unexpended proceeds from the Company's public offering after the June 23, 1995
offering date.
PROVISION FOR INCOME TAXES. Provision for income taxes increased 72.6%
from $2.2 million for the six months ended June 30, 1995 to $3.7 million for the
six months ended June 30, 1996. As a percentage of net revenue, provision for
income taxes increased from 12.2% to 12.8%. In 1996, the Company's effective
income tax rate increased from 38.0% to 39.0% as a result of higher pretax
income which increased the Company's effective federal income tax rate.
12
<PAGE>
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
NET REVENUE. Net revenue increased 68.0% from $9.2 million for the three
months ended June 30, 1995 to $15.5 million for the three months ended June 30,
1996. Approximately $3.2 million of this increase was attributable to the 72
(net of consolidations) Orthodontic Centers opened since April 1, 1995,
approximately $2.3 million to the growth in net revenue of the 90 Orthodontic
Centers open throughout both periods, and approximately $500,000 related to the
Affiliated Orthodontic Entities' share of the operating losses of newly-
developed Orthodontic Centers, which amounts were advanced by the Company.
Approximately $120,000 of the remaining increase resulted from the sale of
ownership interests in Orthodontic Centers obtained by the Company in its
combination transaction. The number of patient contracts increased from
approximately 39,000 at June 30, 1995 to approximately 62,000 at June 30, 1996.
EMPLOYEE COSTS. Employee costs increased 63.0% from $2.7 million for the
three months ended June 30, 1995 to $4.4 million for the three months ended June
30, 1996. The increase in this expense was caused primarily by an increased
percentage of new patient treatment days, which require additional staff time
per patient, associated with the opening of additional Orthodontic Centers. As a
percentage of net revenue, however, employee costs decreased from 29.4% for the
three months ended June 30, 1995 to 28.5% for the three months ended June 30,
1996. The decrease in employee costs as a percentage of net revenue resulted
from increased efficiency in scheduling and monitoring employee productivity for
all patient days.
ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased 43.5% from
$800,000 for the three months ended June 30, 1995 to $1.1 million for the three
months ended June 30, 1996. As a percentage of net revenue, however,
orthodontic supplies decreased from 8.6% for the three months ended June 30,
1995 to 7.4% for the three months ended June 30, 1996. Cost improvements
attained through bulk purchasing offset the increased expense associated with an
increased percentage of new patient treatment days, which require greater
orthodontic supplies per patient, associated with the opening of additional
Orthodontic Centers.
RENT. Rent expense increased 83.7% from $770,000 for the three months
ended June 30, 1995 to $1.4 million for the three months ended June 30, 1996.
As a percentage of net revenue, rent expense increased from 8.3% to 9.1%. The
increase in this expense as a percentage of net revenue was attributable to the
relatively fixed nature of the expense in conjunction with the opening of
additional Orthodontic Centers, which typically generate less net revenue during
their initial operations.
ADVERTISING AND MARKETING. Advertising and marketing expense increased
41.2% from $980,000 for the three months ended June 30, 1995 to $1.4 million for
the three months ended June 30, 1996. The increase in this expense resulted
primarily from the addition of Orthodontic Centers after June 30, 1995. As a
percentage of net revenue, advertising and marketing expense decreased from
10.7% for the three months ended June 30, 1995 to 9.0% for the three months
ended June 30, 1996. The decrease in this expense as a percentage of net
revenue is the result of cost improvements achieved through bulk media and
production purchases.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
82.4% from $1.1 million for the three months ended June 30, 1995 to $2.0
13
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million for the three months ended June 30, 1996. As a percentage of net
revenue, general and administrative expense increased from 11.8% to 12.8%. The
increase in general and administrative expense resulted primarily from the
addition of Orthodontic Centers after June 30, 1995. The increase in this
expense as a percentage of net revenue was attributable to the relatively fixed
nature of the startup general and administrative costs in conjunction with the
opening of additional Orthodontic Centers, which typically generate less net
revenue during their initial operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 86.3% from $310,000 for the three months ended June 30, 1995 to
$570,000 for the three months ended June 30, 1996. As a percentage of net
revenue, depreciation and amortization expense increased from 3.3% to 3.7%. The
increase in this expense is a result of the fixed assets acquired for
Orthodontic Centers developed or relocated after June 30, 1995.
OPERATING PROFIT. Operating profit increased 78.2% from $2.6 million for
the three months ended June 30, 1995 to $4.6 million for the three months ended
June 30, 1996. As a percentage of net revenue, operating profit increased from
27.9% to 29.5% for the same periods, respectively, as a result of the factors
discussed above.
INTEREST. Net interest income increased 117.1% from $230,000 for the three
months ended June 30, 1995 to $510,000 for the three months ended June 30, 1996.
The increase in interest income resulted from the investment of the unexpended
proceeds from the Company's public offering after its June 23, 1995 offering
date.
PROVISION FOR INCOME TAXES. Provision for income taxes increased 86.2%
from $1.1 million for the three months ended June 30, 1995 to $2.0 million for
the three months ended June 30, 1996. As a percentage of net revenue, provision
for income taxes decreased from 11.6% to 12.8%. In 1996, the Company's effective
income tax rate increased from 38.0% to 39.0% as a result of higher net income
which increased the Company's effective federal income tax rate.
14
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL. Cash used by operations was $2.4 million
for the six month period ended June 30, 1996 as compared to $350,000 in the
comparable period for 1995. Included in net cash used by operations for the six
months ended June 30, 1996, were estimated tax payments of $7.0 million, which
exceeded the current tax provision by $3.3 million. The Company was able to use
the cash basis of accounting for income tax purposes through its tax year ended
September 30, 1995. Beginning with the tax year ending September 30, 1996, the
Company is required to use the accrual basis of accounting for income tax
purposes. All deferred tax liabilities and assets related to differences between
the cash and accrual basis of accounting which existed on October 1, 1995 will
reverse over the two year period ending September 30, 1997. This change in
income tax accounting method is partially offset by a deduction which will be
taken by the Company during 1996 for the benefit received by certain employees
in connection with the exercise of non qualified stock options in April 1996. As
a result, the Company estimates that its cash outlays for income taxes will
exceed its provision for income taxes in 1996 and 1997 by approximately $5.0
million. In addition, the $5.8 million in net income for the period was offset
by increases in working capital accounts required to fund the Company's growth.
Net billed and unbilled patient receivables at June 30, 1996 increased $4.3
million over December 31, 1995 levels as a result of the increase in the number
of patients. The Company expects that available cash and existing short-term
lines of credit will be sufficient to meet its normal operating requirements,
including acquisitions of management and service agreements, over the near term.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders of the Company was held on Monday, May
20, 1996. At this meeting, the following matters were voted upon by the
Company's stockholders.
(a) Elector of Class II Directors
Michael C. Johnsen and Edward J. Walters, Jr. were elected to serve as
Class II directors of the Company until the annual meeting of stockholders in
1999 or until their successors are elected and qualified. The vote was as
follows:
<TABLE>
<CAPTION>
VOTES CAST VOTES CAST ABSTENTIONS
NAME IN FAVOR AGAINST OR WITHHELD NON VOTES
- ---- ---------- ------------------- -----------
<S> <C> <C> <C>
Michael C. Johnsen 17,106,326 0 3,817,438
Edward J. Walters 17,106,326 0 3,817,438
</TABLE>
The following directors continued in office following the meeting:
NAME TERM EXPIRES
- ---- ------------
Dr. Gasper Lazzara, Jr. 1997
Bartholomew F. Palmisano, Sr. 1997
Gordon Tunstall 1997
(b) Approval of 1996 Employee Stock Purchase Plan
The 1996 Employee Stock Purchase Plan was approved by security holders. The
vote was as follows:
VOTES CAST VOTES CAST ABSTENTIONS
IN FAVOR AGAINST OR WITHHELD NON VOTES
---------- -------------------- -----------
17,107,126 30,300 3,786,338
(c) Selection of Independent Auditors
The stockholders of the Company ratified the appointment of Ernst & Young,
LLP as the Company's independent auditors for the fiscal year ended December 31,
1996 by the following vote:
VOTES CAST VOTES CAST ABSTENTIONS
IN FAVOR AGAINST OR WITHHELD NON VOTES
---------- -------------------- -----------
17,138,006 0 3,785,758
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit number Description
-------------- -----------
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K for the three months ended June
30, 1996.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Orthodontic Centers of America, Inc.
------------------------------------
(Registrant)
Date: August 12, 1996 /s/ Bartholomew F. Palmisano, Sr.
-------------------------------------
Bartholomew F. Palmisano, Sr.
Chief Financial Officer, Senior Vice President
Treasurer and Secretary
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 JUN-30-1995
<CASH> 11,264 18,779
<SECURITIES> 27,679 27,893
<RECEIVABLES> 22,864 17,927
<ALLOWANCES> (2,412) (1,802)
<INVENTORY> 0 0
<CURRENT-ASSETS> 51,934 54,444
<PP&E> 20,853 16,303
<DEPRECIATION> (3,209) (2,289)
<TOTAL-ASSETS> 96,941 92,573
<CURRENT-LIABILITIES> 8,829 10,666
<BONDS> 0 0
0 0
0 0
<COMMON> 211 209
<OTHER-SE> 85,164 77,104
<TOTAL-LIABILITY-AND-EQUITY> 96,941 77,313
<SALES> 0 0
<TOTAL-REVENUES> 29,236 17,701
<CGS> 0 0
<TOTAL-COSTS> 20,729 12,406
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (1,075) (403)
<INCOME-PRETAX> 9,582 5,698
<INCOME-TAX> 3,737 2,165
<INCOME-CONTINUING> 5,845 3,533
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,845 3,533
<EPS-PRIMARY> 0.28 0.20
<EPS-DILUTED> 0.27 0.20
</TABLE>
