<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, 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 November 10, 1997, there were 44,582,549 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
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996....... 3
Condensed Consolidated Statements of Income -
Nine Months Ended September 30, 1997
and 1996....................................... 4
Condensed Consolidated Statements of Income -
Three Months Ended September 30, 1997
and 1996....................................... 5
Condensed Consolidated Statements of Cash Flow -
Nine Months Ended September 30, 1997 and 1996.. 6
Notes to Condensed Consolidated Financial
Statements - September 30, 1997................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................ 16
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 and liquidity and
capital resources. 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
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Part 1. Financial Information
Item 1. Consolidated Financial Statements
Orthodontic Centers of America, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1997 1996 (1)
------------- ------------
(Unaudited)
(in thousands)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 3,026 $ 11,827
Investments 1,526 12,621
Patient receivables, net 12,385 7,422
Unbilled patient receivables, net 27,149 18,398
Amounts receivable from
orthodontic entities 2,711 2,191
Supplies inventory, prepaid expenses
and other assets 4,627 3,670
-------- --------
Total current assets 51,424 56,129
Property, equipment & improvements, net 32,857 24,201
Investments 5,512 6,482
Amounts receivable from orthodontic
entities, less current portion 4,636 5,369
Intangible assets 78,912 52,682
Other assets 408 236
-------- --------
Total assets $173,749 $145,099
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and other current
liabilities $ 16,846 $ 12,850
Deferred income taxes 278 2,162
Current portion of long-term debt 776 898
-------- --------
Total current liabilities 17,897 15,910
Deferred income taxes 12,360 11,803
Long-term debt, less current portion 1,850 2,499
Stockholders' Equity:
Preferred stock --- ---
Common stock, $.01 par value per share,
100,000,000 shares authorized, 44,582,549
shares outstanding at September 30, 1997 and
43,888,722 shares outstanding
at December 31, 1996 446 439
Additional paid-in capital 103,000 92,294
Retained earnings 38,196 22,154
-------- --------
Total stockholders' equity 141,642 114,887
-------- --------
Total liabilities and
stockholders' equity $173,749 $145,099
======== ========
</TABLE>
- --------------------
(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
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------------------
1997 1996
-------------------------------
(in thousands, except
per share data)
<S> <C> <C>
Net revenue $83,818 $48,117
Direct expenses:
Employee costs 23,987 13,414
Orthodontic supplies 6,240 3,675
Rent 7,283 4,177
Advertising and marketing 7,130 4,475
------- -------
44,640 25,741
General and administrative 9,733 5,851
Depreciation and amortization 3,934 1,833
------- -------
Operating profit 25,513 14,692
Interest expense (203) (305)
Interest income 988 1,876
------- -------
Income before income taxes 26,298 16,263
Provision for income taxes 10,256 6,342
------- -------
Net income $16,042 $ 9,921
======= =======
Earnings per common and
common equivalent share $ 0.36 $ 0.24
======= =======
Earnings per common share -
assuming full dilution $ 0.35 $ 0.23
======= =======
</TABLE>
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
-------------------------------
1997 1996
-------------------------------
(in thousands, except
per share data)
<TABLE>
<CAPTION>
<S> <C> <C>
Net revenue $31,439 $18,881
Direct expenses:
Employee costs 8,819 5,013
Orthodontic supplies 2,417 1,431
Rent 2,662 1,575
Advertising and marketing 2,922 1,784
------- -------
16,820 9,803
General and administrative 3,587 2,120
Depreciation and amortization 1,516 773
------- -------
Operating profit 9,516 6,185
Interest expense (56) (104)
Interest income 209 599
------- -------
Income before income taxes 9,669 6,680
Provision for income taxes 3,771 2,605
------- -------
Net income $ 5,898 $ 4,075
======= =======
Earnings per common and
common equivalent share -
assuming no dilution $ 0.13 $ 0.10
======= =======
Earnings per common share -
dilutive assuming full
dilution $ 0.13 $ 0.09
======= =======
</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>
Nine Months Ended
September 30
<S> <C> <C>
------------------
1997 1996
------------------
(in thousands)
Operating activities:
Net income $ 16,042 $ 9,921
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt expense 1,349 947
Depreciation and amortization 3,934 1,833
Deferred income taxes (542) (2,875)
Changes in operating assets and liabilities
Patient receivables (5,797) (3,372)
Unbilled patient receivables and
patient prepayments (8,197) (4,917)
Supplies inventory, prepaid expenses
and other (1,132) (258)
Amounts receivable from/payable to
orthodontic entities 32 249
Accounts payable and other current
liabilities 4,372 1,204
------------------
Net cash provided by operating activities $ 10,061 $ 2,732
Investing Activities:
Purchase of property, equipment
and improvements (11,197) (8,080)
Net proceeds from
available-for-sale investments 12,065 4,913
Intangible assets acquired (19,709) (3,334)
Advances to orthodontic entities (5,009) (4,279)
Payments from orthodontic entities 5,339 1,307
------------------
Cash used in investing activities (18,511) (9,473)
Financing activities:
Issuance of common stock 420 484
Repayment of long-term debt (771) (968)
------------------
Cash (used in) financing
activities (351) (484)
------------------
(Decrease) in cash
and cash equivalents (8,801) (7,225)
Cash & cash equivalents at
beginning of period 11,827 18,779
------------------
Cash & cash equivalents at
end of period $ 3,026 $11,554
=================
Supplemental cash flow information
Interest paid $ 203 $ 306
=================
Income taxes paid $ 9,560 $ 8,191
=================
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 $ 7,433 $ 1,822
=================
</TABLE>
See notes to condensed consolidated financial statements.
6
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Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 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 333 orthodontic centers
located in 36 states as of September 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 nine month period ended
September 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 Orthodontic Centers of America, Inc.'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 Company's management fee
also includes a $25,000 annual fee paid to the Company for certain free-
standing centers. 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. The weighted average number
of primary and fully diluted outstanding shares for the nine months ended
September 30, 1997 were 43,981,000 and 45,425,000, respectively. The
weighted average number of primary and fully diluted shares outstanding for
the nine months ended September 30, 1996 were 42,498,000 and 42,498,000,
respectively. The weighted average number of primary and fully diluted
outstanding shares for the three months ended September 30, 1997 were
44,296,000 and 45,845,000, respectively. The weighted average number of
primary and fully diluted shares outstanding for the three months ended
September 30, 1996 were 42,497,000. Common stock equivalents were
immaterial for the three months ended September 30, 1996.
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 three-month period 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 February 20, 1996, the Company was served with a complaint filed against
the Company, Dr. Gasper Lazzara, Jr., the Chairman of the Board and Chief
Executive Officer and Mr. Bartholomew Palmisano, Sr., the Chief Financial
Officer of the Company, 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 1985 by Dr. Gasper Lazzara, Jr.
and Bartholomew F. Palmisano, Sr. The Company managed 333 orthodontic centers
(the "Orthodontic Centers") in 36 states at September 30, 1997.
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 1997
----- -------- ------- ------- ----- ----- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 45
Number of centers
acquired during period 5 17 5 1 29 68 59
Number of centers
consolidated during period (1) (6) (1) (3) (3) (19) (18)
-- --- --- --- --- --- ---
Number of centers
at end of period 31 47 55 75 145 247 333
== === === === === === ===
</TABLE>
Of the 333 Orthodontic Centers at September 30, 1997, 186 were developed by
the Company, 196 were existing orthodontic practices whose assets were acquired
by the Company and 49 were consolidated. 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 affiliating with,
existing practices.
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. After 26 months of operations, the Orthodontic Center's growth in
patient base has typically begun to stabilize as the initial patients complete
treatment. At September 30, 1997, 224 Orthodontic Centers had operated for less
than 26 months. An Orthodontic Center can increase the number of patients
treated through improved efficiency of the clinical staff and adding 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 and systems, 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.
The amounts retained by an Affiliated Orthodontist are dependent on his or
her financial performance, based in significant part on a cash basis. Amounts
9
<PAGE>
retained by an Affiliated Orthodontist who operates a newly developed
Orthodontic Center are typically reduced by operating losses on a cash basis
because of start-up expenses. An Affiliated Orthodontist's share of these
operating losses is added to the Company's fee in the period during which the
operating losses are incurred, with such fees aggregating $2.9 million for the
nine months ended September 30, 1997.
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. In a limited number
of states, the Company may only provide consulting services to the orthodontists
and may not manage an 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.
The Company develops and manages the business and marketing aspects of
Orthodontic Centers, including implementing advertising and marketing programs,
preparing budgets, providing staff, purchasing inventory, providing patient
scheduling systems, billing and collecting fees, providing office space and
equipment and maintaining records. Operating expenses of the Orthodontic
Centers are expenses of the Company and are recognized as incurred.
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 on 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
generally implemented a price increase from $89 per month to $98 per month with
an increase in the final payment from $366 to $398.
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,
1997 1996 1997 1996
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Direct expenses
Employee cost 28.6 27.9 28.1 26.5
Orthodontic supplies 7.4 7.6 7.7 7.6
Rent 8.7 8.7 8.5 8.3
Advertising and marketing 8.5 9.3 9.3 9.5
----- ----- ----- -----
Total direct expenses 53.3 53.5 53.3 51.9
General and administrative 11.6 12.2 11.6 11.2
Depreciation and amortization 4.7 3.8 4.7 4.1
----- ----- ----- -----
Operating profit 30.4 30.5 30.4 32.8
Interest (income) expense (1.0) (3.3) (1.0) (2.6)
----- ----- ----- -----
Income before income taxes 31.4 33.8 31.4 35.4
Provision for income taxes 12.2 13.2 12.3 13.8
----- ----- ----- -----
Net income 19.1% 20.6% 19.1% 21.6%
===== ===== ===== =====
</TABLE>
10
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
NET REVENUE. Net revenue increased 74.2% from $48.1 million for the nine
months ended September 30, 1996 to $83.8 million for the nine months ended
September 30, 1997. Approximately $24.4 million of this increase was
attributable to the 198 (net of consolidations) Orthodontic Centers opened since
January 1, 1996, approximately $8.2 million to the growth in net revenue of the
127 Orthodontic Centers open throughout both periods, and approximately $1.1
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 71,000 at
September 30, 1996 to approximately 116,000 at September 30, 1997.
EMPLOYEE COSTS. Employee costs increased 78.8% from $13.4 million for the
nine months ended September 30, 1996 to $24.0 million for the nine months ended
September 30, 1997. As a percentage of net revenue, employee costs increased
from 27.9% for the nine months ended September 30, 1996 to 28.6% for the nine
months ended September 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 69.8% from
$3.7 million for the nine months ended September 30, 1996 to $6.2 million for
the nine months ended September 30, 1997. As a percentage of net revenue,
however, orthodontic supplies decreased from 7.6% for the nine months ended
September 30, 1996 to 7.4% for the nine months ended September 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 74.4% from $4.2 million for the nine months
ended September 30, 1996 to $7.3 million for the nine months ended September 30,
1997. The increase in this expense was attributable to Orthodontic Centers
affiliated, opened or relocated after September 30, 1996. As a percentage of net
revenue, however, rent expense was constant at 8.7%.
ADVERTISING AND MARKETING. Advertising and marketing expense increased
59.3% from $4.5 million for the nine months ended September 30, 1996 to $7.1
million for the nine months ended September 30, 1997. The increase in this
expense resulted primarily from the addition of Orthodontic Centers after
September 30, 1996. As a percentage of net revenue, however, advertising and
marketing expense decreased from 9.3% for the nine months ended September 30,
1996 to 8.5% for the nine months ended September 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
66.4% from $5.9 million for the nine months ended September 30, 1996 to $9.7
million for the nine months ended September 30, 1997. The increase in general
and administrative expense resulted primarily from the addition of Orthodontic
Centers after September 30, 1996. As a percentage of net revenue,
11
<PAGE>
however, general and administrative expense decreased from 12.2% to 11.6%.
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 114.6% from $1.8 million for the nine months ended September 30, 1996
to $3.9 million for the nine months ended September 30, 1997. As a percentage
of net revenue, depreciation and amortization expense increased from 3.8% 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 September 30, 1996.
OPERATING PROFIT. Operating profit increased 73.7% from $14.7 million for
the nine months ended September 30, 1996 to $25.5 million for the nine months
ended September 30, 1997. As a percentage of net revenue, operating profit
decreased from 30.5% to 30.4% for the same periods, respectively, as a result of
the factors discussed above.
INTEREST. Net interest income decreased 50.1% from $1.6 million for the
nine months ended September 30, 1996 to $790,000 for the nine months ended
September 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 61.7%
from $6.3 million for the nine months ended September 30, 1996 to $10.3 million
for the nine months ended September 30, 1997. The Company's effective income tax
rate was 39.0% for both periods.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
NET REVENUE. Net revenue increased 66.5% from $18.9 million for the three
months ended September 30, 1996 to $31.4 million for the nine months ended
September 30, 1997. Approximately $8.1 million of this increase was
attributable to the 170 (net of consolidations) Orthodontic Centers opened
since January 1, 1996, approximately $3.2 million to the growth in net revenue
of the 127 Orthodontic Centers open throughout both periods, and approximately
$400,000 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 71,000 at
September 30, 1996 to approximately 116,000 at September 30, 1997.
EMPLOYEE COSTS. Employee costs increased 75.9% from $5.0 million for the
three months ended September 30, 1996 to $8.8 million for the three months ended
September 30, 1997. As a percentage of net revenue, employee costs increased
from 26.5% for the three months ended September 30, 1996 to 28.1% for the three
months ended September 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.
12
<PAGE>
ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased 68.9% from
$1.4 million for the three months ended September 30, 1996 to $2.4 million for
the three months ended September 30, 1997. As a percentage of net revenue,
orthodontic supplies increased from 7.6% for the three months ended September
30, 1996 to 7.7% for the three months ended September 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 69.0% from $1.6 million for the three months
ended September 30, 1996 to $2.7 million for the three months ended September
30, 1997. As a percentage of net revenue, rent expense increased from 8.3% to
8.5% for the same periods. The increase in this expense was attributable to
Orthodontic Centers affiliated, opened or relocated after September 30, 1996.
ADVERTISING AND MARKETING. Advertising and marketing expense increased
63.8% from $1.8 million for the three months ended September 30, 1996 to $2.9
million for the three months ended September 30, 1997. The increase in this
expense resulted primarily from the addition of Orthodontic Centers after
September 30, 1996. As a percentage of net revenue, however, advertising and
marketing expense decreased from 9.4% for the three months ended September 30,
1996 to 9.3% for the three months ended September 30, 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
63.3% from $2.1 million for the three months ended September 30, 1996 to $3.6
million for the three months ended September 30, 1997. As a percentage of net
revenue, general and administrative expense increased from 11.2% to 11.4%. The
increase in general and administrative expense resulted primarily from the
addition of Orthodontic Centers after September 30, 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 96.1% from $770,000 for the three months ended September 30, 1996 to
$1.5 million for the three months ended September 30, 1997. As a percentage of
net revenue, depreciation and amortization expense increased from 4.1% to 4.8%
for the same periods. 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 September 30, 1996.
OPERATING PROFIT. Operating profit increased 53.9% from $6.2 million for
the three months ended September 30, 1996 to $9.5 million for the three months
ended September 30, 1997. As a percentage of net revenue, operating profit
decreased from 32.8% to 30.3% for the same periods, respectively, as a result of
the factors discussed above.
INTEREST. Net interest income decreased 69.2% from $500,000 for the three
months ended September 30, 1996 to $150,000 for the three months ended September
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 44.7%
from $2.6 million for the three months ended September 30, 1996 to $3.8 million
for the three months ended September 30, 1997. The Company's effective income
tax rate was 39.0% for both periods.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $10.1
million for the nine month period ended September 30, 1997 as compared to $2.8
million in the comparable period of 1996.
In addition, the $16.0 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, 1997 increased
$13.7 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:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
(Increase) decrease in patient receivables:
Orthodontic Centers affiliated over 26 months
- ----------------------------------------------------
Patient receivables $ (1,300) $(1,035)
Unbilled patient receivables and
patient prepayments (648) (1,689)
-------- -------
(1,948) (2,724)
-------- -------
Orthodontic Centers affiliated less than 26 months
- ----------------------------------------------------
Patient receivables (3,663) (2,337)
Unbilled patient receivables and
patient prepayments (8,103) (3,228)
-------- -------
(11,766) (5,565)
-------- -------
Total increase in patient receivables $(13,714) $(8,289)
======== =======
</TABLE>
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 nine month period ended
September 30, 1997, the Company expended $51.5 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 $33.0 million during such period as summarized below. The remainder of
the cash expenditures were financed from the Company's operating cash flow.
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1996
--------- --------------
<S> <C> <C>
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, nine months ended September 30. (20,866) (12,138)
-------- --------
Cash, cash equivalents and available for sale
investments at September 30. $ 10,064 $ 34,543
======== ========
</TABLE>
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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, 1997.
15
<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 13, 1997 /s/ Bartholomew F. Palmisano, Sr.
-------------------------------------
Bartholomew F. Palmisano, Sr.
Chief Financial Officer, Senior Vice President
Treasurer and Secretary
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 3,026 11,827
<SECURITIES> 7,038 19,403
<RECEIVABLES> 39,534 25,820
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 51,424 56,129
<PP&E> 32,857 24,201
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 173,749 145,099
<CURRENT-LIABILITIES> 17,897 15,910
<BONDS> 0 0
0 0
0 0
<COMMON> 446 439
<OTHER-SE> 103,000 92,294
<TOTAL-LIABILITY-AND-EQUITY> 173,749 145,099
<SALES> 0 0
<TOTAL-REVENUES> 83,818 48,117
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 58,305 33,426
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (785) (1,571)
<INCOME-PRETAX> 26,298 16,262
<INCOME-TAX> 10,256 6,342
<INCOME-CONTINUING> 16,042 9,920
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 16,042 9,920
<EPS-PRIMARY> 0.36 0.23
<EPS-DILUTED> 0.35 0.23
</TABLE>
