<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
+-+ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
+-+ SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1998, 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 4, 1998, there were 47,740,963 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, 1998 and December 31, 1997......................... 4
Condensed Consolidated Statements of Income -
Six Months Ended June 30, 1998
and 1997.................................................... 5
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 1998
and 1997.................................................... 6
Condensed Consolidated Statements of Cash Flow -
Six Months Ended June 30, 1998 and 1997..................... 7
Notes to Condensed Consolidated Financial
Statements June 30, 1998................................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................. 17
Part II. Other Information
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 the Company's future growth 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
2
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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.
3
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Part 1. Financial Information
Item 1. Consolidated Financial Statements
Orthodontic Centers of America, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30 December 31
1998 1997 (1)
-------------- ------------
<S> <C> <C>
(Unaudited)
(in thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 259 $ 9,865
Investments --- 18,790
Patient receivables, net 17,118 13,865
Unbilled patient receivables, net 37,796 32,018
Amounts receivable from
orthodontic entities 4,572 3,213
Deferred income tax asset 2,317 2,080
Supplies inventory, prepaid expenses
and other assets 6,674 5,066
-------- --------
Total current assets 68,736 84,897
Property, equipment & improvements, net 42,948 35,604
Investments --- 2,071
Amounts receivable from orthodontic
entities, less current portion 6,924 5,881
Intangible assets 132,963 100,121
Other assets 598 401
-------- --------
Total assets $252,169 $228,975
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and other current
liabilities $ 10,163 $ 12,753
Current portion of long-term debt 4,522 3,901
-------- --------
Total current liabilities 14,685 16,654
Long-term debt, less current portion 11,021 6,492
Deferred income taxes 16,762 15,089
Stockholders' Equity:
Preferred stock --- ---
Common stock, $.01 par value per share,
100,000,000 shares authorized, 47,740,963
shares outstanding at June 30, 1998 and
47,372,733 shares outstanding
at December 31, 1997 477 474
Additional paid-in capital 156,483 153,334
Due from key employees (5,236) (5,236)
Capital contrib. rec. from s/h (2,618) (2,618)
Retained earnings 60,595 44,786
-------- --------
Total stockholders' equity 209,701 190,740
-------- --------
Total liabilities and
stockholders' equity $252,169 $228,975
======== ========
</TABLE>
(1) The consolidated balance sheet at December 31, 1997 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.
4
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-------------------------------
1998 1997
-------------------------------
(in thousands, except
per share data)
<S> <C> <C>
Net revenue $79,221 $52,379
Direct expenses:
Employee costs 21,732 15,168
Orthodontic supplies 6,230 3,823
Rent 6,548 4,621
Marketing and advertising 6,826 4,206
-------------------------------
41,336 27,817
General and administrative 8,395 6,147
Depreciation and amortization 4,188 2,418
-------------------------------
Operating profit 25,302 15,997
Interest expense (82) (147)
Interest income 425 779
-------------------------------
Income before income taxes 25,645 16,629
Provision for income taxes 9,836 6,485
-------------------------------
Net income $15,809 $10,144
===============================
Net income per share:
Basic $ 0.33 $ 0.23
======= =======
Diluted $ 0.33 $ 0.23
======= =======
Average shares outstanding
Basic 47,577 42,388
======= =======
Diluted 48,572 43,187
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30
-------------------------------
1998 1997
-------------------------------
(in thousands, except
per share data)
<S> <C> <C>
Net revenue $41,527 $27,480
Direct expenses:
Employee costs 11,324 7,698
Orthodontic supplies 3,219 2,048
Rent 3,414 2,279
Marketing and advertising 3,757 2,372
-------------------------------
21,714 14,397
General and administrative 4,378 3,249
Depreciation and amortization 2,192 1,304
-------------------------------
Operating profit 13,243 8,530
Interest expense (74) (69)
Interest income 110 343
-------------------------------
Income before income taxes 13,279 8,804
Provision for income taxes 5,013 3,434
-------------------------------
Net income $ 8,266 $ 5,370
===============================
Net income per share:
Basic $ 0.17 $ 0.12
======= =======
Diluted $ 0.17 $ 0.12
======= =======
Average shares outstanding
Basic 47,720 43,852
======= =======
Diluted 48,834 44,651
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
6
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------
1998 1997
--------------------
(in thousands)
<S> <C> <C>
Operating activities:
Net income $ 15,809 $ 10,144
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt expense 1,133 785
Depreciation and amortization 4,188 2,418
Deferred income taxes 1,436 (1,529)
Changes in operating assets and liabilities
Patient receivables (4,067) (3,276)
Unbilled patient receivables and
patient prepayments (5,995) (4,939)
Supplies inventory, prepaid expenses
and other (1,805) (744)
Amounts receivable from/payable to
orthodontic entities (221) (18)
Accounts payable and other current
liabilities (2,692) 1,084
--------------------
Net cash provided by operating activities 7,786 3,925
Investing Activities:
Purchase of property, equipment
and improvements (9,521) (7,480)
Net proceeds from
available-for-sale investments 20,861 8,065
Advances to orthodontic entities (3,091) 3,257
Payments from orthodontic entities 908 3,574
Intangible assets acquired (25,572) (13,472)
--------------------
Net Cash provided by (used in) investing activities (16,415) (12,570)
Financing activities:
Issuance of common stock (104) 249
Proceeds from long term debt 3,000 ---
Repayment of long-term debt (3,873) (582)
--------------------
Cash used in financing activities (977) (333)
--------------------
Change in cash
and cash equivalents (9,606) (8,978)
Cash & cash equivalents at
beginning of period 9,865 11,827
--------------------
Cash & cash equivalents at
end of period $ 259 $ 2,849
====================
Supplemental cash flow information
Interest paid $ 82 $ 147
====================
Income taxes paid $ 14,385 $ 9,560
====================
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 $ 9,279 $ (348)
====================
</TABLE>
See notes to condensed consolidated financial statements.
7
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Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1998
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 413 orthodontic centers
located in 41 states as of June 30, 1998.
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 six month period ended June
30, 1998 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1998. 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, 1997.
2. REVENUE RECOGNITION
The Company provides business operations, financial, marketing and
administrative services to the orthodontic entities. These services are
provided under service, management and consulting agreements with the
orthodontist and their wholly-owned orthodontic entities (hereafter
referred to as "mangement agreements"). These management agreements are
generally for a term of 20-40 years. The practicing orthodontists own the
orthodontic entities.
Revenue is earned by the Company under the management agreements with
orthodontic entities equal to approximately 24% of new patient contract
balances in the first month of new patient contracts plus a portion of
existing contract balances, less amounts retained by the orthodontic
entities. The orthodontic entities retain all orthodontic center revenue
not paid to the Company as management fees. The amounts retained by the
orthodontic entities are dependent on their financial performance, based in
significant part on the orthodontic entities' cash receipts and
8
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Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
2. REVENUE RECOGNITION (CONTINUED)
disbursements. Under the terms of the management agreements, the
orthodontic entities assign their receivables to the Company in payment of
their management fees. The Company is responsible for collection.
3. EARNINGS PER COMMON SHARE
Basic and 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.
4. RECENTLY ISSUED AUTHORITATIVE PRONOUNCEMENT
In April 1998 the AICPA's Accounting Standards Executive Committee issued
SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 requires
entities to charge to expense start-up costs, including organizational
costs, as incurred. Upon adoption the SOP requires the write-off as the
cumulative effect of a change in accounting principle any previously
capitalized start-up or organization costs. The SOP is effective for
fiscal years beginning after December 15, 1998. At June 30, 1998, the
Company had deferred pre-opening costs of $160,000 and unamortized
organizational costs of $890,000.
9
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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 413 orthodontic centers
(the "Orthodontic Centers") in 41 states at June 30, 1998.
The following table sets forth certain information relating to the growth
in the number of Orthodontic Centers for the periods shown:
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
1992 1993 1994 1995 1996 1997 1998
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Number of centers at
beginning of period 31 47 55 75 145 247 360
Number of centers
developed during period 5 4 22 44 53 58 31
Number of centers
acquired during period 17 5 1 29 68 78 28
Number of centers
consolidated during period (6) (1) (3) (3) (19) (23) (6)
---- ---- ---- ---- ---- ---- ----
Number of centers
at end of period 47 55 75 145 247 360 413
==== ==== ==== ==== ==== ==== ====
</TABLE>
Of the 413 Orthodontic Centers at June 30, 1998, 230 were developed by the
Company, 245 were existing orthodontic practices the assets of which were
acquired by the Company and 62 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.
Generally, 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 generally 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 June 30, 1998, 279 of the Orthodontic Centers had operated for
less than 26 months. An Orthodontic Center can increase the number of patients
treated by improving the efficiency of its clinical staff and by adding
operating days or orthodontists. The Orthodontic Centers may also increase
revenue by implementing periodic price increases. 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, during each month during the term of the service agreement, the
Company earns a fee equal to approximately 24% of the aggregate amount of all
new patient contracts entered into during that particular month, plus the
aggregate of the allocated monthly balance amount of all patient contracts
entered into in prior months, less amounts retained by the Affiliated
Orthodontists. The remaining contract balances are allocated equally over the
remaining months
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during the terms of the patient contracts, which average 26 months. Since 1991,
approximately 1.3% of the Company's annual net revenue has been uncollectible.
The amounts retained by an Affiliated Orthodontist are dependent on his or
her financial performance, based in significant part on profitability on a cash
basis. Amounts 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 $1.9 million for the
six months ended June 30, 1998. 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.
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 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 compensation for
the specific 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 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
generally implemented a price increase recommended by the Company from $89 per
month to $98 per month with an increase in the final payment from $366 to $398.
11
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RESULTS OF OPERATIONS
The following table sets forth the percentages of net revenue represented
by certain items in the Company's condensed consolidated statements of income.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Direct expenses
Employee cost 27.4 29.0 27.3 28.0
Orthodontic supplies 7.9 7.3 7.8 7.5
Rent 8.3 8.8 8.2 8.3
Advertising and marketing 8.6 8.0 9.0 8.6
----- ----- ----- -----
Total direct expenses 52.2 53.1 52.3 52.4
General and administrative 10.6 11.7 10.5 11.8
Depreciation and amortization 5.3 4.6 5.3 4.7
----- ----- ----- -----
Operating profit 31.9 30.6 31.9 31.1
Interest (income) expense (0.5) (1.2) (0.1) (1.0)
----- ----- ----- -----
Income before income taxes 32.4 31.8 32.0 32.1
Provision for income taxes 12.4 12.4 12.1 12.5
----- ----- ----- -----
Net income 20.0% 19.4% 19.9% 19.6%
===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
NET REVENUE. Net revenue increased $26.8 million, or 51.2% to $79.2 million for
the six months ended June 30, 1998 from $52.4 million for the six months ended
June 30, 1997. Approximately, $16.8 million of this increase was attributable
to the 182 (net of consolidations) Orthodontic Centers opened since January 1,
1997, approximately $9.5 million to the growth in net revenue of the 231
Orthodontic Centers open throughout both periods, with the remainder due to
increases in other management fees, primarily the Affiliated Orthodontists'
share of the operating losses of newly developed Orthodontic Centers. The
number of patient contracts increased to approximately 156,000 at June 30, 1998
from approximately 99,000 at June 30, 1997.
EMPLOYEE COSTS. Employee costs increased $6.5 million or 43.3% to $21.7 million
for the six months ended June 30, 1998 from $15.2 million for the six months
ended June 30, 1997. As a percentage of net revenue, however, employee costs
decreased to 27.4% for the six months ended June 30, 1998 from 29.0% for the six
months ended June 30, 1997. The percentage decreased as a result of
efficiencies achieved through a general change in treatment schedules by the
Affiliated Orthodontists to seeing patients every six weeks instead of every
four weeks.
ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased $2.4 million or
63.0% to $6.2 million for the six months ended June 30, 1998 from $3.8 million
for the six months ended June 30, 1997. As a percentage of net revenue,
orthodontic supplies expense increased to 7.9% for the six months ended June 30,
1998 from 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 $1.9 million or 41.7% to $6.5 million for the six
months ended June 30, 1998 from $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, 1997. As a percentage of net
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revenue, however, rent expense decreased to 8.3% for the six months ended June
30, 1998 from 8.8% for the six months ended June 30, 1997. The decrease in the
percentage was attributable to the decrease in average rent per center.
MARKETING AND ADVERTISING. Marketing and advertising expense increased $2.6
million or 62.3% to $6.8 million for the six months ended June 30, 1998 from
$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, 1997. As a percentage of net revenue, marketing and advertising expense
increased to 8.6% for the six months ended June 30, 1998 from 8.0% for the six
months ended June 30, 1997. The increase in this expense as a percentage of net
revenue is attributable to the initiation of marketing in larger media markets
after June 30, 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased $2.3
million or 36.6% to $8.4 million for the six months ended June 30, 1998 from
$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, 1997. As a percentage of net revenue, however, general
and administrative expense decreased to 10.6% for the six months ended June 30,
1998 from 11.7% for the six months ended June 30, 1997. General and
administrative expense decreased as a percentage of net revenue as a result of
decreased startup costs for 64 Orthodontic Centers developed after June 30,
1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$1.8 million or 73.2% to $4.2 million for the six months ended June 30, 1998
from $2.4 million for the six months ended June 30, 1997. As a percentage of
net revenue, depreciation and amortization expense increased to 5.3% for the six
months ended June 30, 1998 from 4.6% for the six months ended June 30, 1997.
The increase in this expense is a result of the fixed assets acquired and
service agreements entered into for Orthodontic Centers developed, acquired or
relocated after June 30, 1997.
OPERATING PROFIT. Operating profit increased $9.3 million or 58.2% to $25.3
million for the six months ended June 30, 1998 from $16.0 million for the six
months ended June 30, 1997. As a percentage of net revenue, operating profit
increased to 31.9% for the six months ended June 30, 1998 from 30.6% for the six
months ended June 30, 1997 as a result of the factors discussed above.
INTEREST. Net interest income decreased $290,000 or 45.0% to $340,000 for the
six months ended June 30, 1998 from $630,000 for the six months ended June 30,
1997. The decrease in net interest income resulted from a decrease in the
Company's average investment balance.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $3.3 million or
51.7% to $9.8 million for the six months ended June 30, 1998 from $6.5 million
for the six months ended June 30, 1997. As a result of certain state tax
planning strategies, the Company's effective income tax rate decreased to 38.4%
for the six months ended June 30, 1998 compared to 39.0% for the six months
ended June 30, 1997.
NET INCOME. Net income increased $5.7 million or 55.9% to $15.8 million for the
six months ended June 30, 1998 from $10.1 million for the six months ended June
30, 1997. As a percentage of net revenue, net income increased to 20.0% for the
six months ended June 30, 1998 from 19.4% for the six months ended June 30, 1997
as a result of the factors discussed above.
13
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THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
NET REVENUE. Net revenue increased $14.0 million or 51.1% to $41.5 million for
the three months ended June 30, 1998 from $27.5 million for the three months
ended June 30, 1997. Approximately $8.7 million of this increase was
attributable to the 157 (net of consolidations) Orthodontic Centers opened since
January 1, 1997, approximately $5.1 million to the growth in net revenue of the
256 Orthodontic Centers open throughout both periods, with the remainder due to
increases in other management fees, primarily the Affiliated Orthodontists'
share of the operating losses of newly developed Orthodontic Centers. The
number of patient contracts increased to approximately 156,000 at June 30, 1998
from approximately 99,000 at June 30, 1997.
EMPLOYEE COSTS. Employee costs increased $3.6 million or 47.1% to $11.3 million
for the three months ended June 30, 1998 from $7.7 million for the three months
ended June 30, 1997. As a percentage of net revenue, however, employee costs
decreased to 27.3% for the three months ended June 30, 1998 from 28.0% for the
three months ended June 30, 1997. The percentage decreased as a result of
efficiencies achieved through a general change in treatment schedules by the
Affiliated Orthodontists to seeing patients every six weeks instead of every
four weeks.
ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased $1.2 million or
57.2% to $3.2 million for the three months ended June 30, 1998 from $2.0 million
for the three months ended June 30, 1997. As a percentage of net revenue,
orthodontic supplies expense increased to 7.8% for the three months ended June
30, 1998 from 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 $1.1 million or 49.8% to $3.4 million for the three
months ended June 30, 1998 from $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, 1997. As a percentage of net
revenue, however, rent expense decreased to 8.2% for the three months ended June
30, 1998 from 8.3% for the three months ended June 30, 1997. The decrease in
the percentage was attributable to the decrease in average rent per center.
MARKETING AND ADVERTISING. Marketing and advertising expense increased $1.4
million or 58.4% to $3.8 million for the three months ended June 30, 1998 from
$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, 1997. As a percentage of net revenue, marketing and advertising expense
increased to 9.0% for the three months ended June 30, 1998 from 8.6% for the
three months ended June 30, 1997. The increase in this expense as a percentage
of net revenue is attributable to the initiation of marketing in larger media
markets after June 30, 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased $1.2
million or 34.8% to $4.4 million for the three months ended June 30, 1998 from
$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, 1997. As a percentage of net revenue,
14
<PAGE>
however, general and administrative expense decreased to 10.5% for the three
months ended June 30, 1998 from 11.8% for the three months ended June 30, 1997.
General and administrative expense decreased as a percentage of net revenue
primarily as a result of decreased startup costs for 64 Orthodontic Centers
developed after June 30, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$900,000 or 68.1% to $2.2 million for the three months ended June 30, 1998 from
$1.3 million for the three months ended June 30, 1997. As a percentage of net
revenue, depreciation and amortization expense increased to 5.3% for the three
months ended June 30, 1998 from 4.7% for the three months ended June 30, 1997.
The increase in this expense is a result of the fixed assets acquired and
service agreements entered into for Orthodontic Centers developed, acquired or
relocated after June 30, 1997.
OPERATING PROFIT. Operating profit increased $4.7 million or 55.3% to $13.2
million for the three months ended June 30, 1998 from $8.5 million for the three
months ended June 30, 1997. As a percentage of net revenue, operating profit
increased to 31.9% for the three months ended June 30, 1998 from 31.1% for the
three months ended June 30, 1997 as a result of the factors discussed above.
INTEREST. Net interest income decreased $240,000 or 86.9% to $40,000 for the
three months ended June 30, 1998 from $280,000 for the three months ended June
30, 1997. The decrease in net interest income resulted from a decrease in the
Company's average investment balance.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $1.6 million or
46.0% to $5.0 million for the three months ended June 30, 1998 from $3.4 million
for the three months ended June 30, 1997. As a result of certain state tax
planning strategies, the Company's effective income tax rate decreased to 37.8%
for the three months ended June 30, 1998 compared to 39.0% for the three months
ended June 30, 1997.
NET INCOME. Net income increased $2.9 million or 53.9% to $8.3 million for the
three months ended June 30, 1998 from $5.4 million for the three months ended
June 30, 1997. As a percentage of net revenue, net income increased to 19.9%
for the three months ended June 30, 1998 from 19.6% for the three months ended
June 30, 1997 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $7.8 million
for the six month period ended June 30, 1998 as compared to $3.9 million in the
comparable period of 1997. Included in net cash used by operations for the six
months ended June 30, 1998, were estimated tax payments of $14.4 million which
exceeded the current quarterly tax provision by $4.6 million. In addition, the
$8.3 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, 1998 increased $10.1 million over December 31,
1997 levels as a result of the increase in the number of patients treated in the
Orthodontic Centers. The following represents information with regard to the
Company's Orthodontic Centers open less than 26 months and those open greater
than 26 months:
15
<PAGE>
Six months ended
June 30,
1998 1997
--------- --------
(Increase) decrease in patient receivables:
Orthodontic Centers affiliated over 26 months
- ---------------------------------------------
Patient receivables $ (695) $ (933)
Unbilled patient receivables and
patient prepayments (971) (366)
--------- --------
(1,666) (1,299)
Orthodontic Centers affiliated less than 26 months
- ---------------------------------------------------
Patient receivables (3,372) (2,413)
Unbilled patient receivables and
patient prepayments (5,024) (4,573)
------- -------
(8,396) (6,986)
--------- --------
Total increase in patient receivables $(10,062) $(8,285)
========= ========
16
<PAGE>
The Company expects that available cash, cash equivalents, and 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. The Company has existing lines of credit and is negotiating additional
lines of credit as may be required for general working capital needs. During
the 12 month period ended June 30, 1998, the Company expended $83.5 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 $30.7 million as summarized below. The
remainder of the cash expenditures were financed from the Company's operating
cash flow and the Company's November 1997 common stock offering.
Six months ended
June 30,
1998 1997
-------- --------
Cash, cash equivalents and available for sale
investments at January 1. $ 30,726 $ 30,930
Decrease in cash, cash equivalents and available
for sale investments, six months ended June 30. (30,467) (17,403)
-------- --------
Cash, cash equivalents and available for sale
investments at June 30. $ 259 $ 13,887
======== ========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
17
<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 Tuesday,
May 12, 1998. At this meeting, the following matters were voted upon by the
Company's stockholders.
(a) Elector of Class III Directors
Geoffrey L. Faux and A. Gordon Tunstall were elected to serve as Class III
directors of the Company until the annual meeting of stockholders in 2001 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
- ---- ---------- ------------------- -----------
Geoffrey L. Faux 44,206,160 0 439,621
A. Gordon Tunstall 44,529,800 0 115,981
The following directors continued in office following the meeting:
Name Term Expires
- ---- ------------
Michael C. Johnsen 1999
Edward J. Walters 1999
Ashton J. Ryan, Jr. 1999
Gasper Lazzara, Jr., DDS 2000
Bartholomew F. Palmisano, Sr. 2000
(b) 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,
1998 by the following vote:
Votes Cast Votes Cast Abstentions
In Favor Against or Withheld Non Votes
---------- ------------------- -----------
44,632,361 2,115 11,305
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, 1998.
18
<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 11, 1998 /s/ Bartholomew F. Palmisano, Sr.
------------------------------------
Bartholomew F. Palmisano, Sr.
Chief Financial Officer, Senior Vice President
Treasurer and Secretary
19
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<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
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<COMMON> 477 474
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