<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, 1997, 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)
5000 Sawgrass Village, Suite 25
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 August 10, 1997, there were 43,999,804 outstanding shares of the Registrant's
Common Stock, $.01 par value per share.
<PAGE>
ORTHODONTIC CENTERS OF AMERICA, INC.
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996........................... 3
Condensed Consolidated Statements of Income -
Six Months Ended June 30, 1997 and 1996....................... 4
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 1997 and 1996..................... 5
Condensed Consolidated Statements of Cash Flow -
Six Months Ended June 30, 1997 and 1996....................... 6
Notes to Condensed Consolidated Financial
Statements - June 30, 1997.................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 10
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.......... 17
Item 6. Exhibits and Reports on Form 8-K............................. 18
FORWARD-LOOKING STATEMENTS
Statements contained in this Report which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include the
statements regarding litigation filed against the Company, locating Orthodontic
Centers in locations not shared with a general dentist and funding of the
Company's developments, acquisitions and operations. Such forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from anticipated results. These risks and
uncertainties include regulatory constraints, changes in laws regulating the
practice of dentistry or the interpretation of such laws, competition from other
orthodontists and practice management companies, failure to consummate proposed
developments or acquisitions, the ability of the Company to effectively manage
an increasing number of Orthodontic Centers, the general economy of the United
States and the specific markets in which the Orthodontic Centers are or are
proposed to be located, and other factors as may be identified from time to time
in the Company's filings with the Securities and Exchange Commission or in other
public announcements by the Company.
2
<PAGE>
Part 1. Financial Information
Item 1. Consolidated Financial Statements
Orthodontic Centers of America, Inc.
Condensed Consolidated Balance Sheets
June 30 December 31
1997 1996 (1)
----------- -----------
(Unaudited)
(in thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 2,849 $ 11,827
Investments 2,552 12,621
Patient receivables, net 10,265 7,422
Unbilled patient receivables, net 23,674 18,398
Amounts receivable from
orthodontic entities 2,499 2,191
Supplies inventory, prepaid expenses
and other assets 4,299 3,670
-------- --------
Total current assets 46,138 56,129
Property, equipment & improvements, net 30,083 24,201
Investments 8,486 6,482
Amounts receivable from orthodontic
entities, less current portion 4,862 5,369
Intangible assets 63,438 52,682
Other assets 351 236
-------- --------
Total assets $153,358 $145,099
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and other current
liabilities $ 13,129 $ 12,850
Deferred income taxes 277 2,162
Current portion of long-term debt 816 898
-------- --------
Total current liabilities 14,222 15,910
Deferred income taxes 11,374 11,803
Long-term debt, less current portion 1,999 2,499
Stockholders' Equity:
Preferred stock --- ---
Common stock, $.01 par value per share,
80,000,000 shares authorized, 43,999,804
shares outstanding at June 30, 1997 and
43,888,722 shares outstanding
at December 31, 1996 440 439
Additional paid-in capital 93,025 92,294
Retained earnings 32,298 22,154
-------- --------
Total stockholders' equity 125,763 114,887
-------- --------
Total liabilities and
stockholders' equity $153,358 $145,099
======== ========
(1) The consolidated balance sheet at December 31, 1996 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
<PAGE>
Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
Six Months Ended
June 30
---------------------------
1997 1996
---------------------------
(in thousands, except
per share data)
Net revenue $52,379 $29,236
Direct expenses:
Employee costs 15,168 8,402
Orthodontic supplies 3,823 2,244
Rent 4,621 2,602
Advertising and marketing 4,206 2,691
------- -------
27,817 15,939
General and administrative 6,147 3,730
Depreciation and amortization 2,418 1,060
------- -------
Operating profit 15,997 8,507
Interest expense (147) (202)
Interest income 779 1,277
------- -------
Income before income taxes 16,629 9,582
Provision for income taxes 6,485 3,737
------- -------
Net income $10,144 $ 5,845
======= =======
Earnings per common and
common equivalent share $ 0.23 $ 0.14
======= =======
Earnings per common share -
assuming full dilution $ 0.22 $ 0.13
======= =======
See notes to condensed consolidated financial statements.
4
<PAGE>
Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended
June 30
---------------------------
1997 1996
---------------------------
(in thousands, except
per share data)
Net revenue $27,480 $15,517
Direct expenses:
Employee costs 7,698 4,418
Orthodontic supplies 2,048 1,145
Rent 2,279 1,411
Advertising and marketing 2,372 1,389
------- -------
14,397 8,363
General and administrative 3,249 1,990
Depreciation and amortization 1,304 572
------- -------
Operating profit 8,530 4,592
Interest expense (69) (98)
Interest income 343 606
------- -------
Income before income taxes 8,804 5,100
Provision for income taxes 3,434 1,989
------- -------
Net income $ 5,370 $ 3,111
======= =======
Earnings per common and
common equivalent share $ 0.12 $ 0.07
======= =======
Earnings per common share -
assuming full dilution $ 0.12 $ 0.07
======= =======
See notes to condensed consolidated financial statements.
5
<PAGE>
Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30
----------------------
1997 1996
----------------------
(in thousands)
Operating activities:
Net income $ 10,144 $ 5,845
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for bad debt expense 785 661
Depreciation and amortization 2,418 1,060
Deferred income taxes (1,529) (3,077)
Changes in operating assets and liabilities
Patient receivables (3,276) (1,773)
Unbilled patient receivables and
patient prepayments (4,939) (3,520)
Supplies inventory, prepaid expenses
and other (744) 33
Amounts receivable from/payable to
orthodontic entities 299 (1,319)
Accounts payable and other current
liabilities 1,084 (333)
-------- -------
Net cash provided by (used in) operating activities $ 4,242 $(2,423)
Investing Activities:
Purchase of property, equipment
and improvements (7,480) (4,550)
Net proceeds from
available-for-sale investments 8,065 214
Intangible assets acquired (13,168) (497)
-------- -------
Cash used in investing activities (12,887) (4,833)
Financing activities:
Issuance of common stock 249 506
Repayment of long-term debt (588) (765)
-------- -------
Cash provided by (used in)
financing activities (333) (259)
-------- -------
Net change in cash
and cash equivalents (8,978) (7,515)
Cash & cash equivalents at
beginning of period 11,827 18,779
-------- -------
Cash & cash equivalents at
end of period $ 2,849 $11,264
======== =======
Supplemental cash flow information
Interest paid $ 147 $ 202
======== =======
Income taxes paid $ 9,560 $ 7,027
======== =======
Supplemental disclosures of
non-cash investing and financing
activities:
Long term debt and common stock
issued (net of returns) in acquisition of
intangible and other assets $ (348) $ 295
======== =======
See notes to condensed consolidated financial statements.
6
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1997
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 297 orthodontic centers
located in 34 states as of June 30, 1997.
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 period ended June
30, 1997 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1996.
2. REVENUE RECOGNITION
The Company's services are provided under service and consulting agreements
with affiliated orthodontists' orthodontic entities ("management
agreements"). These management agreements are for terms of 20-40 years.
Net revenue earned by the Company under the management agreements 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 affiliated orthodontists. The affiliated orthodontists
retain all orthodontic center revenue not paid to the Company as the
management fee. The amounts retained by the affiliated orthodontists are
dependent on their financial performance, based in significant part on their
cash
7
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
2. REVENUE RECOGNITION (CONTINUED)
receipts and disbursements. Under the terms of the management agreements,
the affiliated orthodontists 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, effective September, 1996. The
weighted average number of primary and fully diluted outstanding shares for
the six months ended June 30, 1997 were 43,821,000 and 45,212,000,
respectively. The weighted average number of primary and fully diluted
shares outstanding for the six months ended June 30, 1996 were 42,009,000
and 43,376,000, respectively. The weighted average number of primary and
fully diluted outstanding shares for the three months ended June 30, 1997
were 43,852,000 and 45,331,000, respectively. The weighted average number of
primary and fully diluted shares outstanding for the three months ended June
30, 1996 were 42,216,000 and 42,216,000, respectively.
In February, 1997, the Financial Accounting Standards Board issued Statement
no. 128, Earnings Per Share, which the Company will be required to adopt
during the year ending December 31, 1997. The adoption of this Statement is
not expected to have a material effect on the calculation of earnings per
share.
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.
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 297 orthodontic centers
(the "Orthodontic Centers") in 34 states at June 30, 1997.
The following table sets forth certain information relating to the growth
in the number of Orthodontic Centers for the periods shown:
Six months
ended
Year ended December 31, June 30,
1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ----
Number of centers at
beginning of period 18 31 47 55 75 145 247
Number of centers
developed during period 9 5 4 22 44 53 30
Number of centers
acquired during period 5 17 5 1 29 68 31
Number of centers
consolidated during period (1) (6) (1) (3) (3) (19) (11)
---- ---- ---- ---- ---- ---- ----
Number of centers
at end of period 31 47 55 75 145 247 297
==== ==== ==== ==== ==== ==== ====
At June 30, 1997, three Orthodontic Centers were located in a general
dentist's office. The Company intends to relocate these three 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 have been able to increase available operating
days and thereby enhance their revenue producing capability.
Of the 297 Orthodontic Centers at June 30, 1997, 164 were developed by the
Company and 133 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. The costs of developing a new Orthodontic Center are
shared by the Company and the particular Affiliated Orthodontist. The Company
assists Affiliated Orthodontists in obtaining financing of their share of such
costs through the Company's primary lender. For new developments, the Company
has discontinued financing Affiliated Orthodontists' share of losses associated
with the initial operations of the Orthodontic Center, which were historically
financed by the Company as an unsecured advance repayable by the Affiliated
Orthodontist over a 5-year period and bearing interest at 1.5% per annum above
the prime rate, with repayment beginning upon the attainment of positive cash
flow by the Orthodontic Center (which generally occurs approximately 12 months
after an Orthodontic Center commences operations). The Company intends,
however, to make advances of approximately $20,000 to newly-affiliated
Affiliated Orthodontists during the first year of an Orthodontic Center's
operations, which advances bear no interest and typically are repaid during the
second year of the Orthodontic Center's operations. The Company is assisting
Affiliated Orthodontists in obtaining financing from the Company's primary
lender to replace the Company's financing of such Affiliated Orthodontists'
share of the costs of previously completed developments.
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 have typically become 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 or 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 or consulting
agreements entered into with Affiliated Orthodontists. Pursuant to the service
agreements, Affiliated Orthodontists pay a fee to the Company equal to
approximately 24% of new patient contract balances of the Affiliated
Orthodontists in the first month of treatment plus the balance ratably over the
remainder of the patient contract, less amounts retained by the Affiliated
Orthodontists. 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 its October 1994 combination transaction.
The amounts retained by an Affiliated Orthodontist are dependent on his or
her financial performance, based in significant part on his or her profitability
on a cash basis, as provided in the service 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 agreements and vary depending upon the regulatory requirements of the
particular state in which an Orthodontic Center is located. Currently, in one
state, 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
implemented a price increase recommended by the Company from $89 per month with
a final payment of $356 to $98 per month with a final payment of $392.
10
<PAGE>
SEASONALITY
The Orthodontic Centers have experienced their 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, Orthodontic Centers have
experienced higher revenue during the first and third quarters of the year as a
result of increased patient starts. During the Thanksgiving and Christmas
seasons, the Orthodontic Centers have experienced reduced volume and fourth
quarter revenue for Orthodontic Centers has been 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.
Six Months Ended Three Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Net revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Direct expenses
Employee cost 29.0 28.7 28.0 28.5
Orthodontic supplies 7.3 7.7 7.5 7.4
Rent 8.8 8.9 8.3 9.1
Advertising and marketing 8.0 9.2 8.6 9.0
---- ---- ---- ----
Total direct expenses 53.1 54.5 52.4 54.0
General and administrative 11.7 12.8 11.8 12.8
Depreciation and amortization 4.6 3.6 4.7 3.7
---- ---- ---- ----
Operating profit 30.6 29.1 31.1 29.5
Interest (income) expense (1.2) (3.7) (1.0) (3.3)
---- ---- ---- ----
Income before income taxes 31.8 32.8 32.1 32.8
Provision for income taxes 12.4 12.8 12.5 12.8
---- ---- ---- ----
Net income 19.4% 20.0% 19.6% 20.0%
==== ==== ==== ====
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
NET REVENUE. Net revenue increased 79.2% from $29.2 million for the six
months ended June 30, 1996 to $52.4 million for the six months ended June 30,
1997. Approximately $15.2 million of this increase was attributable to the 170
(net of consolidations) Orthodontic Centers opened since January 1, 1996,
approximately $6.5 million to the growth in net revenue of the 127 Orthodontic
Centers open throughout both periods, and approximately $1.5 million related to
the Affiliated Orthodontists' 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 62,000 at June 30, 1996 to
approximately 99,000 at June 30, 1997.
EMPLOYEE COSTS. Employee costs increased 80.5% from $8.4 million for the
six months ended June 30, 1996 to $15.2 million for the six months ended June
30, 1997. As a percentage of net revenue, employee costs increased from 28.7%
for the six months ended June 30, 1996 to 29.0% for the six months ended June
30, 1997. 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 and the recent
increase in affiliations with existing orthodontic practices. These orthodontic
practices have tended to have higher employee cost percentages than a typical
Orthodontic Center and have taken approximately one year to completely convert
to the Company's operating systems.
ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased 70.3% from
11
<PAGE>
$2.2 million for the six months ended June 30, 1996 to $3.8 million for the six
months ended June 30, 1997. As a percentage of net revenue, however,
orthodontic supplies decreased from 7.7% for the six months ended June 30, 1996
to 7.3% for the six months ended June 30, 1997. Cost improvements attained
through bulk purchasing were offset by 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 77.6% from $2.6 million for the six months
ended June 30, 1996 to $4.6 million for the six months ended June 30, 1997. The
increase in this expense was attributable to Orthodontic Centers affiliated,
opened or relocated after June 30, 1996. As a percentage of net revenue,
however, rent expense decreased from 8.9% to 8.8%.
ADVERTISING AND MARKETING. Advertising and marketing expense increased
56.3% from $2.7 million for the six months ended June 30, 1996 to $4.2 million
for the six months ended June 30, 1997. The increase in this expense resulted
primarily from the addition of Orthodontic Centers after June 30, 1996. As a
percentage of net revenue, however, advertising and marketing expense decreased
from 9.2% for the six months ended June 30, 1996 to 8.0% for the six months
ended June 30, 1997. 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
64.8% from $3.7 million for the six months ended June 30, 1996 to $6.1 million
for the six months ended June 30, 1997. The increase in general and
administrative expense resulted primarily from the addition of Orthodontic
Centers after June 30, 1996. As a percentage of net revenue, however, general
and administrative expense decreased from 12.8% to 11.7%. 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
second quarter of 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 128.1% from $1.1 million for the six months ended June 30, 1996 to
$2.4 million for the six months ended June 30, 1997. The increase in this
expense is a result of the fixed assets acquired and management agreements
entered into for Orthodontic Centers developed, acquired or relocated after June
30, 1996.
OPERATING PROFIT. Operating profit increased 88.1% from $8.5 million for
the six months ended June 30, 1996 to $16.0 million for the six months ended
June 30, 1997. As a percentage of net revenue, operating profit increased from
29.1% to 30.6% for the same periods, respectively, as a result of the factors
discussed above.
INTEREST. Net interest income decreased 41.2% from $1.1 million for the
six months ended June 30, 1996 to $600,000 for the six months ended June 30,
1997. The decrease in interest income resulted from a decrease in the Company's
average investment balance resulting from the investment of unexpended proceeds
from the Company's June 1995 public offering.
PROVISION FOR INCOME TAXES. Provision for income taxes increased 73.6%
from $3.7 million for the six months ended June 30, 1996 to $6.5 million for the
six months ended June 30, 1997. The Company's effective income tax rate was
39.0% for both periods.
12
<PAGE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
NET REVENUE. Net revenue increased 77.1% from $15.5 million for the three
months ended June 30, 1996 to $27.5 million for the three months ended June 30,
1997. Approximately $6.8 million of this increase was attributable to the 170
(net of consolidations) Orthodontic Centers opened since March 31, 1996,
approximately $4.4 million to the growth in net revenue of the 127 Orthodontic
Centers open throughout both periods, and approximately $800,000 related to the
Affiliated Orthodontists' 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 62,000 at June 30, 1996 to
approximately 99,000 at June 30, 1997.
EMPLOYEE COSTS. Employee costs increased 74.2% from $4.4 million for the
three months ended June 30, 1996 to $7.7 million for the three months ended June
30, 1997. This increase was caused primarily by an increased number patient
treatment days, associated with the opening of additional Orthodontic Centers,
the recent increase in affiliations with existing orthodontic practices and the
growth in the number of active patients. As a percentage of net revenue,
however, employee costs decreased from 28.5% for the three months ended June 30,
1996 to 28.0% for the three months ended June 30, 1997. The percentage
decreased as a result of improved staff scheduling in recently affiliated
Orthodontic Centers.
ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased 78.9% from
$1.1 million for the three months ended June 30, 1996 to $2.0 million for the
three months ended June 30, 1997. As a percentage of net revenue, orthodontic
supplies increased from 7.4% for the three months ended June 30, 1996 to 7.5%
for the three months ended June 30, 1997. Cost improvements attained through
bulk purchasing were offset by 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 61.5% from $1.4 million for the three months
ended June 30, 1996 to $2.3 million for the three months ended June 30, 1997.
The increase in this expense was attributable to Orthodontic Centers affiliated,
opened or relocated after June 30, 1996. As a percentage of net revenue,
however, rent expense decreased from 9.1% to 8.3%. The renegotiation of lease
arrangements in certain affiliated Orthodontic Centers resulted in a decreased
quarterly rent expense for these centers.
ADVERTISING AND MARKETING. Advertising and marketing expense increased
70.7% from $1.4 million for the three months ended June 30, 1996 to $2.4 million
for the three months ended June 30, 1997. The increase in this expense resulted
primarily from the addition of Orthodontic Centers after June 30, 1996. As a
percentage of net revenue, however, advertising and marketing expense decreased
from 9.0% for the three months ended June 30, 1996 to 8.6% for the three months
ended June 30, 1997. 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
13
<PAGE>
increased 63.3% from $2.0 million for the three months ended June 30, 1996 to
$3.2 million for the three months ended June 30, 1997. The increase in general
and administrative expense resulted primarily from the addition of Orthodontic
Centers after June 30, 1996. As a percentage of net revenue, however, general
and administrative expense decreased from 12.8% to 11.8%. 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
second quarter of 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 128.0% from $570,000 for the three months ended June 30, 1996 to $1.3
million for the three months ended June 30, 1997. As a percentage of net
revenue, depreciation and amortization expense increased from 3.7% to 4.7%. The
increase in this expense is a result of the fixed assets acquired and management
agreements entered into for Orthodontic Centers developed, acquired or relocated
after June 30, 1996.
OPERATING PROFIT. Operating profit increased 85.7% from $4.6 million for
the three months ended June 30, 1996 to $8.5 million for the three months ended
June 30, 1997. As a percentage of net revenue, operating profit increased from
29.5% to 31.1% for the same periods, respectively, as a result of the factors
discussed above.
INTEREST. Net interest income decreased 46.0% from $510,000 for the three
months ended June 30, 1996 to $270,000 for the three months ended June 30, 1997.
The decrease in interest income resulted from a decrease in the Company's
average investment balance resulting from the investment of unexpended proceeds
from the Company's June 1995 public offering.
PROVISION FOR INCOME TAXES. Provision for income taxes increased 72.6%
from $2.0 million for the three months ended June 30, 1996 to $3.4 million for
the three months ended June 30, 1997. The Company's effective income tax rate
was 39.0% for both periods.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $4.2
million for the six month period ended June 30, 1997 as compared to cash used by
operations of $2.4 million in the comparable period of 1996. Included in net
cash used by operations for the six months ended June 30, 1997, were estimated
tax payments of $9.6 million which exceeded the current quarterly tax provision
by $3.1 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 ended 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. As a result, the Company estimates that its
cash outlays for income taxes will exceed its provision for income taxes through
the remainder of 1997 by approximately $1.5 million.
In addition, the $10.1 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, 1997 increased $8.1
million over December 31, 1996 levels as a result of the increase in the number
of patients. The following represents information with regard to the Company's
Orthodontic Centers open less than 26 months and those open greater than 26
months:
14
<PAGE>
Six months ended
June 30,
1997 1996
---- ----
(Increase) decrease in patient receivables:
Orthodontic Centers affiliated over 26 months
Patient receivables (863) (599)
Unbilled patient receivables and
patient prepayments (366) (1,269)
------ ------
(1,229) (1,868)
Orthodontic Centers affiliated less than 26 months
Patient receivables (2,413) (1,174)
Unbilled patient receivables and
patient prepayments (4,573) (2,251)
------ ------
(6,986) (3,425)
------ ------
Total increase in patient receivables (8,215) (5,293)
====== ======
The Company expects that available cash, cash equivalents, available for sale
investments and existing short-term lines of credit will be sufficient to meet
its normal operating requirements, including acquisitions of management and
consulting contracts, over the near term. During the 12 month period ended,
June 30, 1997, the Company expended $44.1 million of cash for fixed assets,
intangible assets, repayment of long-term debt and income taxes. However, the
Company's cash, cash equivalents and available for sale investments were reduced
by only $25.0 million as summarized below. The remainder of the cash
expenditures were financed from the Company's operating cash flow.
Six months ended
June 30,
1997 1996
---- ----
Cash, cash equivalents and available for sale
investments at January 1. $ 30,930 $ 46,672
Decrease in cash, cash equivalents and available
for sale investments, 6 months ended June 30. (17,043) (7,729)
-------- --------
Cash, cash equivalents and available for sale
investments at June 30. $ 13,887 $ 38,943
======== ========
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
19, 1997. At this meeting, the following matters were voted upon by the
Company's stockholders.
(a) Elector of Class III Directors
Gasper Lazzara, D.D.S. and Bartholomew F. Palmisano, Sr. were elected to
serve as Class III directors of the Company until the annual meeting of
stockholders in 2000 or until their successors are elected and qualified. The
vote was as follows:
Votes Cast Votes Cast Abstentions
Name In Favor Against or Withheld Non Votes
- ---- ---------- ------------------- -----------
Gasper Lazzara, DDS 30,740,977 500 13,147,245
Bartholomew Palmisano 30,740,707 770 13,147,245
The following directors continued in office following the meeting:
Name Term Expires
- ---- ------------
Geoffrey Faux 1998
A. Gordon Tunstall 1998
Michael C. Johnsen 1999
Edward J. Walters 1999
Ashton J. Ryan, Jr. 1999
(b) Approval of increase in number of authorized shares of common stock
Security holders approved an increase in the number of authorized shares of
common stock from 80,000,000 shares to 100,000,000 shares. The vote was as
follows:
Votes Cast Votes Cast Abstentions
In Favor Against or Withheld Non Votes
---------- ------------------- -----------
30,710,244 29,349 13,149,129
(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,
1997 by the following vote:
Votes Cast Votes Cast Abstentions
In Favor Against or Withheld Non Votes
---------- ------------------- -----------
30,737,932 2,091 13,148,699
16
<PAGE>
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, 1997.
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: August 13, 1997 /s/ Bartholomew F. Palmisano, Sr.
-------------------------------------
Bartholomew F. Palmisano, Sr.
Chief Financial Officer, Senior Vice President
Treasurer and Secretary
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 2,849 11,827
<SECURITIES> 11,032 19,103
<RECEIVABLES> 33,940 25,820
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 46,138 56,129
<PP&E> 36,102 28,622
<DEPRECIATION> (6,019) (4,421)
<TOTAL-ASSETS> 153,358 145,099
<CURRENT-LIABILITIES> 11,384 15,910
<BONDS> 0 0
0 0
0 0
<COMMON> 440 439
<OTHER-SE> 93,025 92,294
<TOTAL-LIABILITY-AND-EQUITY> 153,358 145,099
<SALES> 0 0
<TOTAL-REVENUES> 52,379 29,236
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 36,382 20,729
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (632) (1,075)
<INCOME-PRETAX> 16,629 9,582
<INCOME-TAX> 6,485 3,737
<INCOME-CONTINUING> 10,144 5,845
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,144 5,845
<EPS-PRIMARY> 0.23 0.14
<EPS-DILUTED> 0.22 0.13
</TABLE>
