<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 SEPTEMBER 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
- -------------------------------------------------------------------------------
(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 November 5, 1996, there were 42,597,091 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>
<S> <C> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited) PAGE
September 30, 1996 and December 31, 1995 ............................................... 3
Condensed Consolidated Statements of Income -
Nine Months Ended September 30, 1996
and 1995 ............................................................................ 4
Condensed Consolidated Statements of Income -
Three Months Ended September 30, 1996
and 1995 ............................................................................ 5
Condensed Consolidated Statements of Cash Flow -
Nine Months Ended September 30, 1996 and 1995 ....................................... 6
Notes to Condensed Consolidated Financial
Statements - September 30, 1996 ..................................................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ....................................... 10
Part II. Other Information
Item 6. Exits and Reports on Form 8-K ....................................................... 17
</TABLE>
2
<PAGE>
Part 1. Financial Information
Item 1. Consolidated Financial Statements
Orthodontic Centers of America, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
September 30 December 31
1996 1995 (1)
----------------- ---------------
(Unaudited)
(in thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 11,554 $ 18,779
Investments 13,559 14,804
Patient receivables, net 6,552 3,860
Unbilled patient receivables, net 16,914 12,265
Amounts receivable from
orthodontic entities 2,466 2,260
Supplies inventory, prepaid expenses
and other assets 3,001 2,476
-------- --------
Total current assets 54,046 54,444
Property, equipment & improvements, net 20,614 14,014
Investments 9,421 13,089
Amounts receivable from orthodontic
entities, less current portion 7,670 4,903
Intangible assets 16,343 5,928
Other assets 1,411 195
-------- --------
Total assets $109,505 $92,573
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and other current liabilities $ 10,091 $ 7,056
Deferred income taxes 1,923 2,468
Current portion of long-term debt 1,038 1,142
-------- --------
Total current liabilities 13,052 10,666
Deferred income taxes --- 1,246
Long-term debt, less current portion 2,604 3,348
Stockholders' Equity:
Preferred stock --- ---
Common stock, $.01 par value per share,
30,000,000 shares authorized, 42,563,227
shares outstanding at September 30, 1996 and
20,889,764 shares outstanding at December 31, 1995 426 209
Additional paid-in capital 75,750 69,352
Retained earnings 17,673 7,752
-------- --------
Total stockholders' equity 93,849 77,313
-------- --------
Total liabilities and stockholders' equity $109,505 $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)
Nine Months Ended
September 30
------------------------
1996 1995
------------------------
(in thousands, except
per share data)
Net revenue $48,117 $29,191
Direct expenses:
Employee costs 13,414 8,323
Orthodontic supplies 3,675 2,283
Rent 4,177 2,376
Advertising and marketing 4,475 3,079
------- -------
25,741 16,061
General and administrative 5,851 3,538
Depreciation and amortization 1,833 979
------- -------
Operating profit 14,692 8,613
Interest expense (305) (362)
Interest income 1,876 1,535
------- -------
Income before income taxes 16,263 9,786
Provision for income taxes 6,342 3,719
------- -------
Net income $ 9,921 $ 6,067
======= =======
Earnings per common and dilutive
common equivalent share
Assuming no dilution $ 0.24 $ 0.16
======= =======
Assuming full dilution $ 0.23 $ 0.16
======= =======
See notes to condensed consolidated financial statements.
4
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
September 30
---------------------------
1996 1995
---------------------------
(in thousands, except
per share data)
Net revenue $ 18,881 $ 11,490
Direct expenses:
Employee costs 5,013 3,271
Orthodontic supplies 1,431 879
Rent 1,575 969
Advertising and marketing 1,784 1,294
-------- --------
9,803 6,413
General and administrative 2,120 1,367
Depreciation and amortization 773 392
-------- --------
Operating profit 6,185 3,318
Interest expense (104) (115)
Interest income 599 885
-------- --------
Income before income taxes 6,680 4,088
Provision for income taxes 2,605 1,553
-------- --------
Net income $ 4,075 $ 2,543
======== ========
Earnings per common and dilutive
common equivalent share
Assuming no dilution $ 0.10 $ 0.06
======== ========
Assuming full dilution $ 0.09 $ 0.06
======== ========
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>
<S> <C> <C>
Nine Months Ended
September 30
---------------------------------
1996 1995
---------------------------------
(in thousands)
Operating activities:
Net income $ 9,921 $ 6,067
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt expense 947 586
Depreciation and amortization 1,833 979
Deferred income taxes, timing differences (702) 1,567
Changes in operating assets and liabilities
Patient receivables, centers affiliated over
26 months (1,035) (644)
Unbilled patient receivables and
patient prepayments, centers affiliated
over 26 months (1,689) (492)
Supplies inventory, prepaid expenses
and other (258) (354)
Accounts payable and other current
liabilities 1,204 (281)
-------- --------
Net cash provided by operating activities $ 10,221 $ 7,428
Investing Activities:
Patient receivables, centers affiliated less
than 26 months (2,337) (1,330)
Unbilled patient receivables and
patient prepayments, centers affiliated
less than 26 months (3,228) (1,696)
Purchase of property, equipment
and improvements (8,080) (6,478)
Net proceeds from
available-for-sale investments 4,913 ---
Intangible assets acquired (3,334) (3,557)
-------- --------
Cash used in investing activities (12,066) (13,061)
Financing activities:
Issuance of common stock 484 41,366
Change in deferred income taxes resulting from
tax payments attributable to change from cash to
accrual basis for tax purposes (2,173) 0
Amounts receivable from/payable to
orthodontic entities (2,723) (4,230)
Repayment of long-term debt (968) (1,002)
-------- --------
Cash provided by (used in)
financing activities (5,380) 36,134
-------- --------
Increase (decrease) in cash
and cash equivalents (7,225) 30,501
Cash & cash equivalents at
beginning of period 18,779 17,108
-------- --------
Cash & cash equivalents at
end of period $ 11,554 $ 47,609
======== ========
Supplemental cash flow information Interest paid $ 306 $ 115
======== ========
Income taxes paid $ 8,191 $ 2,269
======== ========
</TABLE>
6
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited) (Continued)
Nine Months Ended
September 30
------------------------
1996 1995
------------------------
Supplemental disclosures of
non-cash investing and financing
activities:
Long term debt and common stock
issued to acquire intangible and
other assets $ 7,433 $ 1,822
======== ========
Cash, cash equivalents and
available for sale
investments at July 1, 1996
and 1995 respectively $ 38,763 $53,068
Decrease in cash, cash
equivalents and available
for sale investments,
3 months ended September 30,
1996 and 1995, respectively (4,229) (5,459)
Cash, cash equivalents and
available for sale
investments at September 30,
1996 and 1995 respectively $34,534 $47,609
======= =======
See notes to condensed consolidated financial statements.
7
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Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 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 189 orthodontic centers
located in 26 states as of September 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 nine
month periods ended September 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.
2. REVENUE RECOGNITION
The Company's services are provided under service, management and
consulting agreements with the orthodontic entities ("management
agreements"). These management agreements are for terms of 20 years. The
practicing orthodontists own the orthodontic entity.
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
8
<PAGE>
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 two 2-for-1 stock
splits, each effected in the form of a 100% stock dividend, effective
December, 1995 and September, 1996. The weighted average shares outstanding
for the three months ended September 30, 1996 was 42,497,657. Common stock
equivalents were immaterial for the three months ended September 30, 1996.
The weighted average number of primary and fully diluted shares for the
nine months ended September 30, 1996 were 42,172,195 and 43,507,135,
respectively. The weighted average shares outstanding for the three and
nine months ended September 30, 1995 were 41,749,312 and 37,020,640,
respectively. Common stock equivalents were immaterial for the three and
nine months ended September 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 certain rights to recruit
orthodontists to affiliate with the Company. The complaint further alleges
that the Company interfered with the plaintiff's business advantage by
entering into direct negotiations with unnamed orthodontists, and that the
Company breached a duty to the plaintiff of good faith and fair dealing.
Although the complaint seeks monetary damages, a specific amount was not
sought in the complaint. The Company filed an answer to the complaint
generally denying the allegations therein. 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.
9
<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 189 orthodontic centers
(the "Orthodontic Centers") in 26 states at September 30, 1996.
The following table sets forth certain information relating to the growth
in the number of Orthodontic Centers for the periods shown:
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 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 36
Number of centers
acquired during period 5 17 5 1 29 23
Number of centers
consolidated during period (1) (6) (1) (3) (3) (15)
---- ---- ---- ---- ---- ----
Number of centers
at end of period 31 47 55 75 145 189
==== ==== ==== ==== ==== ====
</TABLE>
- -----------------------------
*
At November 6, 1996, six Orthodontic Centers, including five 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 six 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 189 Orthodontic Centers at September 30, 1996, 119 were developed by
the Company and 70 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 makes advances of approximately $20,000 to
new Affiliated Orthodontic Entities during the first year of an Orthodontic
Center's operations which bear no interest and are typically repaid during the
second year of the Orthodontic Center's operations.
10
<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
Center becomes increasingly more productive and profitable as more new patients
are added and existing patients return 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. An Orthodontic Center can increase 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 in the Combination Transaction.
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 vary depending upon the regulatory
requirements of the particular state in which an Orthodontic Center is located.
Generally, in those states, 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, 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.
11
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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>
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Direct expenses
Employee cost 27.9 28.5 26.5 28.5
Orthodontic supplies 7.6 7.8 7.6 7.7
Rent 8.7 8.1 8.3 8.4
Advertising and marketing 9.3 10.5 9.4 11.3
----- ----- ----- -----
Total direct expenses 53.5 55.0 51.9 55.8
General and administrative 12.2 12.1 11.2 11.9
Depreciation and amortization 3.8 3.4 4.1 3.4
----- ----- ----- -----
Operating profit 30.5 29.5 32.8 28.9
Interest (income) expense (3.3) (4.0) (2.6) (6.7)
----- ----- ----- -----
Income before income taxes 33.8 33.5 35.4 35.6
Provision for income taxes 13.2 12.7 13.8 13.5
----- ----- ----- -----
Net income 20.6% 20.8% 21.6% 22.1%
===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
NET REVENUE. Net revenue increased 64.8% from $29.2 million for the nine
months ended September 30, 1995 to $48.1 million for the nine months ended
September 30, 1996. Approximately $9.9 million of this increase was
attributable to the 114 (net of consolidations) Orthodontic Centers opened since
January 1, 1995, approximately $7.2 million to the growth in net revenue of the
75 Orthodontic Centers open throughout both periods, and approximately $1.8
million 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
46,000 at September 30, 1995 to approximately 71,000 at September 30, 1996.
EMPLOYEE COSTS. Employee costs increased 61.2% from $8.3 million for the
nine months ended September 30, 1995 to $13.4 million for the nine months ended
September 30, 1996. This increase was caused by an increase in the number of
patient contracts which required additional employee time to treat these
patients. As a percentage of net revenue, however, employee costs decreased
from 28.5% for the nine months ended September 30, 1995 to 27.9% for the nine
months ended September 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.
12
<PAGE>
ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased 61.0% from
$2.3 million for the nine months ended September 30, 1995 to $3.7 million for
the nine months ended September 30, 1996. As a percentage of net revenue,
however, orthodontic supplies decreased from 7.8% for the nine months ended
September 30, 1995 to 7.6% for the nine months ended September 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 75.8% from $2.4 million for the nine months
ended September 30, 1995 to $4.2 million for the nine months ended September 30,
1996. As a percentage of net revenue, rent expense increased from 8.1% to 8.7%.
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
45.3% from $3.1 million for the nine months ended September 30, 1995 to $4.5
million for the nine months ended September 30, 1996. The increase in this
expense resulted primarily from the addition of Orthodontic Centers after
September 30, 1995. As a percentage of net revenue, however, advertising and
marketing expense decreased from 10.5% for the nine months ended September 30,
1995 to 9.3% for the nine months ended September 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
65.4% from $3.5 million for the nine months ended September 30, 1995 to $5.9
million for the nine months ended September 30, 1996. The increase in general
and administrative expense resulted primarily from the addition of Orthodontic
Centers after September 30, 1995. As a percentage of net revenue, however,
general and administrative expense decreased from 12.2% to 12.1%.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 87.2% from $980,000 for the nine months ended September 30, 1995 to
$1.8 million for the nine months ended September 30, 1996. As a percentage of
net revenue, depreciation and amortization expense increased from 3.4% to 3.8%.
The increase in this expense is a result of the fixed assets acquired for
Orthodontic Centers developed or relocated after September 30, 1995.
OPERATING PROFIT. Operating profit increased 70.6% from $8.6 million for
the nine months ended September 30, 1995 to $14.7 million for the nine months
ended September 30, 1996. As a percentage of net revenue, operating profit
increased from 29.5% to 30.5% for the same periods, respectively, as a result of
the factors discussed above.
INTEREST. Net interest income increased 33.9% from $1.2 million for the
nine months ended September 30, 1995 to $1.6 million for the nine months ended
September 30, 1996. The increase in interest income resulted from the
investment of the unexpended proceeds from the Company's June 23, 1995 public
offering.
PROVISION FOR INCOME TAXES. Provision for income taxes increased 70.5%
from $3.7 million for the nine months ended September 30, 1995 to $6.3 million
13
<PAGE>
for the nine months ended September 30, 1996. 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.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
NET REVENUE. Net revenue increased 64.3% from $11.5 million for the three
months ended September 30, 1995 to $18.9 million for the three months ended
September 30, 1996. Approximately $2.9 million of this increase was
attributable to the 94 (net of consolidations) Orthodontic Centers opened since
July 1, 1995, approximately $3.8 million to the growth in net revenue of the 95
Orthodontic Centers open throughout both periods, and approximately $700,000
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 46,000 at September
30, 1995 to approximately 71,000 at September 30, 1996.
EMPLOYEE COSTS. Employee costs increased 53.3% from $3.3 million for the
three months ended September 30, 1995 to $5.0 million for the three months ended
September 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
28.5% for the three months ended September 30, 1995 to 26.5% for the three
months ended September 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 62.7% from
$880,000 for the three months ended September 30, 1995 to $1.4 million for the
three months ended September 30, 1996. As a percentage of net revenue, however,
orthodontic supplies decreased from 7.7% for the three months ended September
30, 1995 to 7.6% for the three months ended September 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 62.6% from $970,000 for the three months
ended September 30, 1995 to $1.6 million for the three months ended September
30, 1996. The increase in this expense was attributable to Orthodontic Centers
opened or relocated after September 30, 1995. As a percentage of net revenue,
however, rent expense decreased from 8.4% to 8.3%.
ADVERTISING AND MARKETING. Advertising and marketing expense increased
37.9% from $1.3 million for the three months ended September 30, 1995 to $1.8
million for the three months ended September 30, 1996. The increase in this
expense resulted primarily from the addition of Orthodontic Centers after
September 30, 1995. As a percentage of net revenue, advertising and marketing
expense decreased from 11.3% for the three months ended September 30, 1995 to
9.4% for the three months ended September 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
14
<PAGE>
55.1% from $1.4 million for the three months ended September 30, 1995 to $2.1
million for the three months ended September 30, 1996. As a percentage of net
revenue, however, general and administrative expense decreased from 11.9% to
11.2%. General and administrative expense decreased as a percentage of net
revenue as a result of decreased startup costs for Orthodontic Centers opened or
relocated during the third quarter of 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 97.0% from $390,000 for the three months ended September 30, 1995 to
$770,000 for the three months ended September 30, 1996. As a percentage of net
revenue, depreciation and amortization expense increased from 3.4% to 4.1%. The
increase in this expense is a result of the fixed assets acquired for
Orthodontic Centers developed or relocated after September 30, 1995.
OPERATING PROFIT. Operating profit increased 86.4% from $3.3 million for
the three months ended September 30, 1995 to $6.2 million for the three months
ended September 30, 1996. As a percentage of net revenue, operating profit
increased from 28.9% to 32.8% for the same periods, respectively, as a result of
the factors discussed above.
INTEREST. Net interest income decreased 35.6% from $770,000 for the three
months ended September 30, 1995 to $496,000 for the three months ended September
30, 1996. The decrease in interest income resulted from the decrease in
outstanding cash and investments resulting from the investment of unexpended
proceeds from the Company's June 23, 1995 public offering.
PROVISION FOR INCOME TAXES. Provision for income taxes increased 67.7%
from $1.6 million for the three months ended September 30, 1995 to $2.6 million
for the three months ended September 30, 1996. 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.
15
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL. Cash provided by operations was $2.5
million for the nine month period ended September 30, 1996 as compared to the
cash provided by operations of $4.4 million in the comparable period for 1995.
Included in net cash used by operations for the nine months ended September 30,
1996, were estimated tax payments of $7.4 million which exceeded the current tax
provision by $1.1 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 $9.9 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 September 30, 1996 increased $8.3 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.
16
<PAGE>
PART II. OTHER INFORMATION
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
September 30, 1996.
17
<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: November 12, 1996 /s/ Bartholomew F. Palmisano, Sr.
-------------------------------------
Bartholomew F. Palmisano, Sr.
Chief Financial Officer, Senior Vice President
Treasurer and Secretary
18
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