<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, 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 November 4, 1998, there were 47,792,329 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, 1998 and December 31, 1997................ 3
Condensed Consolidated Statements of Income -
Nine months ended September 30, 1998
and 1997................................................ 4
Condensed Consolidated Statements of Income -
Three months ended September 30, 1998
and 1997................................................ 5
Condensed Consolidated Statements of Cash Flow -
Nine months ended September 30, 1998 and 1997........... 6
Notes to Condensed Consolidated Financial
Statements September 30, 1998.......................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................ 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K....................... 15
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 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
1998 1997 (1)
-------------- ------------
<S> <C> <C>
(Unaudited)
(in thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 497 $ 9,865
Investments --- 18,790
Patient receivables, net 18,480 13,865
Unbilled patient receivables, net 42,128 32,018
Deferred income tax asset 2,317 2,080
Amounts receivable from
orthodontic entities 5,253 3,213
Supplies inventory, prepaid expenses
and other assets 6,885 5,066
-------- --------
Total current assets 75,560 84,897
Property, equipment & improvements, net 46,535 35,604
Investments --- 2,071
Amounts receivable from orthodontic
entities, less current portion 7,570 5,881
Intangible assets 140,825 100,121
Other assets 401 401
-------- --------
Total assets $270,891 $228,975
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and other current
liabilities $ 10,451 $ 12,753
Current portion of long-term debt 3,981 3,901
-------- --------
Total current liabilities 14,432 16,654
Deferred income taxes 17,172 15,089
Long-term debt, less current portion 19,939 6,492
Stockholders' Equity:
Preferred stock --- ---
Common stock, $.01 par value per share,
100,000,000 shares authorized, 47,792,329
shares outstanding at September 30, 1998 and
47,372,733 shares outstanding
at December 31, 1997 478 474
Additional paid-in capital 157,428 153,334
Due from key employees (5,236) (5,236)
Capital contrib. rec. from s/h (2,618) (2,618)
Retained earnings 69,296 44,786
-------- --------
Total stockholders' equity 219,348 190,740
-------- --------
Total liabilities and
stockholders' equity $270,891 $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.
3
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
Nine months ended
September 30
---------------------
1998 1997
------ -------
(in thousands, except
per share data)
Net revenue $123,918 $83,817
Direct expenses:
Employee costs 34,040 23,987
Orthodontic supplies 9,664 6,240
Rent 10,211 7,283
Marketing and advertising 11,145 7,127
-------- -------
65,060 44,637
General and administrative 13,029 9,733
Depreciation and amortization 6,605 3,934
-------- -------
Operating profit 39,224 25,513
Interest expense (139) (203)
Interest income 538 988
-------- -------
Income before income taxes 39,623 26,298
Provision for income taxes 15,112 10,256
-------- -------
Net income $24,511 $16,042
======= =======
Net income per share:
Basic $ 0.51 $ 0.36
======= =======
Diluted $ 0.50 $ 0.36
======= =======
Average shares outstanding
Basic 47,641 43,981
======= =======
Diluted 48,593 44,805
======= =======
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
---------------------
1998 1997
---------------------
(in thousands, except
per share data)
Net revenue $44,697 $31,439
Direct expenses:
Employee costs 12,308 8,819
Orthodontic supplies 3,434 2,417
Rent 3,663 2,662
Marketing and advertising 4,319 2,922
------- -------
23,724 16,820
General and administrative 4,634 3,587
Depreciation and amortization 2,417 1,516
------- -------
Operating profit 13,922 9,516
Interest expense (57) (56)
Interest income 113 209
------- -------
Income before income taxes 13,978 9,669
Provision for income taxes 5,277 3,771
------- -------
Net income $ 8,701 $ 5,898
======= =======
Net income per share:
Basic $ 0.18 $ 0.13
======= =======
Diluted $ 0.18 $ 0.13
======= =======
Average shares outstanding
Basic 47,768 44,296
======= =======
Diluted 48,634 45,169
======= =======
See notes to condensed consolidated financial statements.
5
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended
September 30
--------------------
1998 1997
------- ---------
(in thousands)
Operating activities:
Net income $ 24,511 $ 16,042
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt expense 1,796 1,349
Depreciation and amortization 6,605 3,934
Deferred income taxes 1,436 (542)
Changes in operating assets and liabilities
Patient receivables (5,848) (5,797)
Unbilled patient receivables and
patient prepayments (10,259) (8,197)
Supplies inventory, prepaid expenses
and other (1,819) (1,132)
Amounts receivable from/payable to
orthodontic entities (622) 32
Accounts payable and other current
liabilities (2,701) 4,372
-------- --------
Net cash provided by operating activities 13,098 10,061
Investing Activities:
Purchase of property, equipment
and improvements (14,409) (11,197)
Net proceeds from
available-for-sale investments 20,861 12,065
Advances to orthodontic entities (4,739) (5,009)
Payments from orthodontic entities 1,708 5,339
Intangible assets acquired (32,667) (19,709)
-------- --------
Net cash provided by (used in) investing activities (29,246) (18,511)
Financing activities:
Issuance of common stock 250 420
Proceeds from long term debt 12,022 ---
Repayment of long-term debt (5,492) (771)
-------- --------
Net cash provided by
(used in) financing activities 6,780 (351)
-------- --------
Change in cash
and cash equivalents (9,368) (8,801)
Cash & cash equivalents at
beginning of period 9,865 11,827
-------- --------
Cash & cash equivalents at
end of period $ 497 $ 3,026
======== ========
Supplemental cash flow information
Interest paid $ 139 $ 203
======== ========
Income taxes paid $ 19,792 $ 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 $ 11,757 $ 7,433
======== ========
See notes to condensed consolidated financial statements.
6
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 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 438 orthodontic centers
located in 41 states as of September 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 three and nine month periods
ended September 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 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 "management agreements"). These management agreements are
generally for a term of 20-40 years, with most being 20-25 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 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
7
<PAGE>
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 September 30, 1998, the
Company had deferred pre-opening costs of $160,000 and unamortized
organizational costs of $1,020,000.
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 438 orthodontic centers
(the "Orthodontic Centers") in 41 states at September 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>
Nine months ended
Year ended December 31, September 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 43
Number of centers
acquired during period 17 5 1 29 68 78 46
Number of centers
consolidated during period (6) (1) (3) (3) (19) (23) (11)
---- ---- ---- ---- ---- ---- ----
Number of centers
at end of period 47 55 75 145 247 360 438
==== ==== ==== ==== ==== ==== ====
</TABLE>
Of the 438 Orthodontic Centers at September 30, 1998, 242 were developed by
the Company, 263 were existing orthodontic practices the assets of which were
acquired by the Company and 67 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 September 30, 1998, 271 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 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.
9
<PAGE>
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 $3.0 million for the
nine months ended September 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.
10
<PAGE>
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.
Nine months ended Three Months Ended
September 30, September 30,
----------------- ------------------
1998 1997 1998 1997
------ ----- ---- ----
Net revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Direct expenses
Employee cost 27.5 28.6 27.5 28.1
Orthodontic supplies 7.8 7.4 7.7 7.7
Rent 8.2 8.7 8.2 8.5
Marketing and advertising 9.0 8.5 9.7 9.3
----- ----- ----- -----
Total direct expenses 52.5 53.3 53.1 53.6
General and administrative 10.5 11.6 10.4 11.4
Depreciation and amortization 5.3 4.7 5.4 4.7
----- ----- ----- -----
Operating profit 31.7 30.4 31.1 30.3
Interest (income) expense (0.3) (1.0) (0.2) (0.5)
----- ----- ----- -----
Income before income taxes 32.0 31.4 31.3 30.8
Provision for income taxes 12.2 12.3 11.8 12.0
----- ----- ----- -----
Net income 19.8% 19.1% 19.5% 18.8%
===== ===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
NET REVENUE. Net revenue increased $40.1 million, or 47.8%, to $123.9 million
for the nine months ended September 30, 1998 from $83.8 million for the nine
months ended September 30, 1997. Approximately, $25.1 million of this increase
was attributable to the 207 (net of consolidations) Orthodontic Centers opened
since January 1, 1997, approximately $14.7 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 178,000 at
September 30, 1998 from approximately 116,000 at September 30, 1997.
EMPLOYEE COSTS. Employee costs increased $10.1 million, or 41.9%, to $34.0
million for the nine months ended September 30, 1998 from $24.0 million for the
nine months ended September 30, 1997. As a percentage of net revenue, however,
employee costs decreased to 27.5% for the nine months ended September 30, 1998
from 28.6% for the nine months ended September 30, 1997. The percentage
decrease primarily reflects capacity efficiencies achieved through general
changes to patient treatment schedules by the Affiliated Orthodontists.
ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased $3.5 million, or
54.9%, to $9.7 million for the nine months ended September 30, 1998 from $6.2
million for the nine months ended September 30, 1997. As a percentage of net
revenue, orthodontic supplies expense increased to 7.8% for the nine months
ended September 30, 1998 from 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 $2.9 million, or 40.2%, to $10.2 million for the
nine months ended September 30, 1998 from $7.3 million for the nine months
11
<PAGE>
ended September 30, 1997. The increase in this expense was attributable to
Orthodontic Centers affiliated, opened or relocated after September 30, 1997. As
a percentage of net revenue, however, rent expense decreased to 8.2% for the
nine months ended September 30, 1998 from 8.7% for the nine months ended
September 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 $4.0
million, or 56.4%, to $11.1 million for the nine months ended September 30, 1998
from $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
1997. As a percentage of net revenue, marketing and advertising expense
increased to 8.5% for the nine months ended September 30, 1998 from 9.0% for the
nine months ended September 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 September 30, 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased $3.3
million, or 33.9%, to $13.0 million for the nine months ended September 30, 1998
from $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, 1997. As a percentage of net revenue,
however, general and administrative expense decreased to 10.5% for the nine
months ended September 30, 1998 from 11.6% for the nine months ended September
30, 1997. General and administrative expense decreased as a percentage of net
revenue as a result of lower average startup costs for Orthodontic Centers
developed after September 30, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$2.7 million, or 67.8%, to $6.6 million for the nine months ended September 30,
1998 from $3.9 million for the nine months ended September 30, 1997. As a
percentage of net revenue, depreciation and amortization expense increased to
5.3% for the nine months ended September 30, 1998 from 4.7% for the nine months
ended September 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 September 30, 1997.
OPERATING PROFIT. Operating profit increased $13.7 million, or 53.7%, to $39.2
million for the nine months ended September 30, 1998 from $25.5 million for the
nine months ended September 30, 1997. As a percentage of net revenue, operating
profit increased to 31.7% for the nine months ended September 30, 1998 from
30.4% for the nine months ended September 30, 1997 as a result of the factors
discussed above.
INTEREST. Net interest income decreased $390,000, or 49.1%, to $400,000 for the
nine months ended September 30, 1998 from $784,000 for the nine months ended
September 30, 1997. The decrease in net 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 and November 1997
public offerings.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $4.9 million,
or 47.3%, to $15.1 million for the nine months ended September 30, 1998 from
$10.3 million for the nine months ended September 30, 1997. The Company's
effective income tax rate was 38.1% for the nine months ended September 30, 1998
and 39.0% for the nine months ended September 30, 1997.
12
<PAGE>
NET INCOME. Net income increased $8.5 million, or 52.8%, to $24.5 million for
the nine months ended September 30, 1998 from $16.0 million for the nine months
ended September 30, 1997. As a percentage of net revenue, net income increased
to 19.8% for the nine months ended September 30, 1998 from 19.1% for the nine
months ended September 30, 1997 as a result of the factors discussed above.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
NET REVENUE. Net revenue increased $13.3 million, or 42.2%, to $44.7 million for
the three months ended September 30, 1998 from $31.4 million for the three
months ended September 30, 1997. Approximately, $7.0 million of this increase
was attributable to the 146 (net of consolidations) Orthodontic Centers opened
since October 1, 1997, approximately $6.3 million to the growth in net revenue
of the 292 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 178,000 at
September 30, 1998 from approximately 116,000 at September 30, 1997.
EMPLOYEE COSTS. Employee costs increased $3.5 million, or 39.6%, to $12.3
million for the three months ended September 30, 1998 from $8.8 million for the
three months ended September 30, 1997. As a percentage of net revenue, however,
employee costs decreased to 27.5% for the three months ended September 30, 1998
from 28.1% for the three months ended September 30, 1997. The percentage
decrease primarily reflects capacity efficiencies achieved through general
changes to patient treatment schedules by the Affiliated Orthodontists.
ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased $1.0 million, or
42.1%, to $3.4 million for the three months ended September 30, 1998 from $2.4
million for the three months ended September 30, 1997. As a percentage of net
revenue, orthodontic supplies expense remained constant at 7.7% for the three
months ended September 30, 1998 and 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 $1.0 million, or 37.6%, to $3.7 million for the
three months ended September 30, 1998 from $2.7 million for the three months
ended September 30, 1997. The increase in this expense was attributable to
Orthodontic Centers affiliated, opened or relocated after September 30, 1997.
As a percentage of net revenue, however, rent expense decreased to 8.2% for the
three months ended September 30, 1998 from 8.5% for the three months ended
September 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 47.8%, to $4.3 million for the three months ended September 30, 1998
from $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
1997. As a percentage of net revenue, marketing and advertising expense
increased to 9.7% for the three months ended September 30, 1998 from 9.3% for
the three months ended September 30, 1997. The increase in this
13
<PAGE>
expense as a percentage of net revenue is attributable to the initiation of
marketing in larger media markets after September 30, 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased $1.0
million, or 29.2%, to $4.6 million for the three months ended September 30, 1998
from $3.6 million for the three months ended September 30, 1997. The increase
in general and administrative expense resulted primarily from the addition of
Orthodontic Centers after September 30, 1997. As a percentage of net revenue,
however, general and administrative expense decreased to 10.4% for the three
months ended September 30, 1998 from 11.4% for the three months ended September
30, 1997. General and administrative expense decreased as a percentage of net
revenue primarily as a result of lower average startup costs for Orthodontic
Centers developed after September 30, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$900,000, or 59.4%, to $2.4 million for the three months ended September 30,
1998 from $1.5 million for the three months ended September 30, 1997. As a
percentage of net revenue, depreciation and amortization expense increased to
5.4% for the three months ended September 30, 1998 from 4.7% for the three
months ended September 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 September 30, 1997.
OPERATING PROFIT. Operating profit increased $4.4 million, or 46.3%, to $13.9
million for the three months ended September 30, 1998 from $9.5 million for the
three months ended September 30, 1997. As a percentage of net revenue,
operating profit increased to 31.1% for the three months ended September 30,
1998 from 30.3% for the three months ended September 30, 1997 as a result of the
factors discussed above.
INTEREST. Net interest income decreased $90,000, or 86.9%, to $60,000 for the
three months ended September 30, 1998 from $150,000 for the three months ended
September 30, 1997. The decrease in net 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 and November 1997
public offerings.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $1.5 million,
or 40.0%, to $5.3 million for the three months ended September 30, 1998 from
$3.7 million for the three months ended September 30, 1997. The Company's
effective income tax rate was 37.8% for the three months ended September 30,
1998 and 39.0% for the three months ended September 30, 1997.
NET INCOME. Net income increased $2.8 million, or 47.5%, to $8.7 million for
the three months ended September 30, 1998 from $5.9 million for the three months
ended September 30, 1997. As a percentage of net revenue, net income increased
to 19.5% for the three months ended September 30, 1998 from 18.8% for the three
months ended September 30, 1997 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $13.1 million
for the nine month period ended September 30, 1998 as compared to $10.1 million
in the comparable period of 1997. Included in net cash used by operations for
the nine months ended September 30, 1998 were estimated tax payments of $19.8
million, which exceeded the current quarterly tax provision by $4.7 million. In
addition, the $24.5 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
14
<PAGE>
September 30, 1998 increased $16.1 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:
Nine months ended
September 30,
-----------------------
1998 1997
------- ------
(Increase) decrease in patient receivables:
Orthodontic Centers affiliated over
26 months
- -----------------------------------
Patient receivables $ (768) $ (1,300)
Unbilled patient receivables and
patient prepayments (1,947) (648)
-------- --------
(2,715) (1,948)
Orthodontic Centers affiliated less than
26 months
- ----------------------------------------
Patient receivables (5,080) (3,663)
Unbilled patient receivables and
patient prepayments (8,312) (8,103)
-------- --------
(13,392) (11,766)
-------- --------
Total increase in patient receivables $(16,107) $(13,714)
======== ========
15
<PAGE>
The Company expects that available cash, cash equivalents, 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. The Company has an existing $100 million line of credit for
expansion and general working capital needs. During the 12 month period ended
September 30, 1998, the Company expended $91.0 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 $30.2 million as summarized below. The remainder of the cash
expenditures were financed from the Company's operating cash flow, the Company's
November 1997 common stock offering and the Company's line of credit.
Nine months ended
September 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, nine months ended September 30. (30,229) (20,866)
-------- --------
Cash, cash equivalents and available for sale
investments at September 30. $ 497 $ 10,064
======== ========
YEAR 2000
Many software applications and operational programs written in the past
were not designed to recognize calendar dates beginning in the year 2000. The
failure of such applications or programs to properly recognize the dates
beginning in the year 2000 could result in miscalculations or system failures.
The Company's business depends in part upon its ability to store, retrieve,
process and manage significant databases, and periodically to expand and upgrade
its information processing capabilities. The Company recently upgraded its
computer system in anticipation of growth in the number of Affiliated
Orthodontists and Orthodontic Centers. The Company also conducted an analysis of
its computer system to identify areas that could be affected by the "year 2000"
issue, and believes that this computer system upgrade will adequately address
issues relating to the year 2000. The expenses of the year 2000 project are not
expected to have a material effect on the Company's financial position or
results of operations. The year 2000 issue may affect the systems of various
entities with which the Company interacts, including the Company's suppliers,
and the Company is coordinating its efforts to address the year 2000 issue with
those entities. There can be no assurance, however, that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have material adverse effect on the
Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Pursuant to recent amendments to Rule 14a-4(c) under the Securities
Exchange Act of 1934, as amended, discretionary voting authority conferred in
proxies solicited by the Company's Board of Directors in connection with the
Company's 1999 annual meeting of stockholders may be exercised with respect to
any matter raised at the annual meeting, if the Company does not receive notice
of the matter on or prior to February 24, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit number Description
-------------- -----------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K for the three months ended
September 30, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Orthodontic Centers of America, Inc.
------------------------------------
(Registrant)
Date: November 13, 1998 /s/ Bartholomew F. Palmisano, Sr.
--------------------------------------------------
Bartholomew F. Palmisano, Sr.
Co-Chief Executive Officer, Senior Vice President
Treasurer and Secretary
/s/ Bartholomew F. Palmisano, Jr.
--------------------------------------------------
Bartholomew F. Palmisano, Jr.
Chief Financial Officer, Assistant Secretary
18
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<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
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