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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
XXX QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999, 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.: 000-25256
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 5, 1999, there were 48,081,961 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 -
June 30, 1999 and December 31, 1998................ 4
Condensed Consolidated Statements of Income -
Six months ended June 30, 1999
and 1998........................................... 5
Condensed Consolidated Statements of Income -
Three months ended June 30, 1999
and 1998........................................... 6
Condensed Consolidated Statements of Cash Flow -
Six months ended June 30, 1999 and 1998............ 7
Notes to Condensed Consolidated Financial
Statements - June 30, 1999......................... 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........................................ 19
Part II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders................................... 20
Item 6. Exhibits and Reports on Form 8-K................... 20
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report may not be based on historical
facts and are "forward looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements may be
identified by reference to a future period(s) or by the use of forward-looking
terminology, such as "anticipate," "estimate," "believe," "expect," "foresee,"
"may" or "will." These forward-looking statements include the statements
regarding the Company's future growth, addition of Orthodontic Centers,
liquidity, capital resources, and Year 2000 compliance. 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
2
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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 Annual Report on Form 10-K for the
year ended December 31, 1998 and other filings with the Securities and Exchange
Commission or in other public announcements by the Company.
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Part 1. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Orthodontic Centers of America, Inc.
Condensed Consolidated Balance Sheets
June 30 December 31
1999 1998 (1)
------- -----------
(Unaudited)
(in thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 4,028 $ 1,601
Investments --- 1,187
Patient receivables, net 23,323 20,163
Unbilled patient receivables, net 55,318 46,314
Deferred income tax asset 4,399 4,399
Amounts receivable from
orthodontic entities 6,857 5,817
Supplies inventory 7,905 5,890
Prepaid expenses and other assets 1,825 1,663
-------- --------
Total current assets 103,655 87,034
Property, equipment & improvements, net 54,756 48,565
Amounts receivable from orthodontic
entities, less current portion 9,735 8,412
Intangible assets 160,491 152,438
Other assets 482 349
-------- --------
Total assets $329,119 $296,798
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and other current
liabilities $ 16,709 $ 18,727
Current portion of long-term debt 5,044 8,673
-------- --------
Total current liabilities 21,753 27,400
Deferred income taxes 15,580 15,580
Long-term debt, less current portion 37,990 22,659
Stockholders' Equity:
Preferred stock --- ---
Common stock, $.01 par value per share,
100,000,000 shares authorized, 48,015,277
shares outstanding at June 30, 1999 and
47,849,000 shares outstanding
at December 31, 1998 480 478
Additional paid-in capital 161,568 159,936
Due from key employees (5,236) (5,236)
Capital contribution received
from shareholders (2,618) (2,618)
Retained earnings 99,602 78,599
-------- --------
Total stockholders' equity 253,796 231,159
-------- --------
Total liabilities and
stockholders' equity $329,119 $296,798
======== ========
(1) The consolidated balance sheet at December 31, 1998 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.
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
Six Months Ended
June 30
------------------
1999 1998
-------- -------
(in thousands, except
per share data)
Net revenue $104,449 $79,221
Direct expenses:
Employee costs 28,264 21,732
Orthodontic supplies 7,846 6,230
Rent 8,551 6,548
Marketing and advertising 7,679 6,826
-------- -------
52,340 41,336
General and administrative 10,718 8,395
Depreciation and amortization 5,802 4,188
-------- -------
Operating profit 35,589 25,302
Interest expense (972) (82)
Interest income 210 425
-------- -------
Income before income taxes 34,827 25,645
Provision for income taxes 13,147 9,836
-------- -------
Income before cumulative effect of a
change in accounting principle 21,680 15,809
Cumulative effect of a change in
accounting principle, net of
income tax benefit of $410 (678) -
-------- -------
Net income $ 21,002 $15,809
======== =======
Net income per share:
Basic $ 0.44 $ 0.33
======== =======
Diluted before cumulative
effect of change in
accounting principle $ 0.45 $ 0.33
Cumulative effect of change in
accounting principle $ 0.02 $ ---
-------- -------
Diluted net income per share $ 0.43 $ 0.33
======== =======
Average shares outstanding
Basic 47,941 47,577
======== =======
Diluted 48,665 48,572
======== =======
See notes to condensed consolidated financial statements.
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended
June 30
---------------------
1999 1998
--------- ---------
(in thousands, except
per share data)
Net revenue $55,401 $41,527
Direct expenses:
Employee costs 14,958 11,324
Orthodontic supplies 4,112 3,219
Rent 4,524 3,414
Marketing and advertising 4,080 3,757
------- -------
27,674 21,714
General and administrative 5,707 4,378
Depreciation and amortization 3,097 2,192
------- -------
Operating profit 18,923 13,243
Interest expense (531) (74)
Interest income 119 110
------- -------
Income before income taxes 18,511 13,279
Provision for income taxes 6,988 5,013
------- -------
Net income $11,523 $ 8,266
======= =======
Net income per share:
Basic $0.24 $0.17
======= =======
Diluted $0.24 $0.17
======= =======
Average shares outstanding
Basic 47,975 47,720
======= =======
Diluted 48,633 48,834
======= =======
See notes to condensed consolidated financial statements.
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended
June 30
--------------------
1999 1998
-------- --------
(in thousands)
Operating activities:
Net income $ 21,002 $ 15,809
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt expense 1,082 1,133
Depreciation and amortization 5,802 4,188
Deferred income taxes - 1,436
Cumulative effect of change in accounting
principle 1,088 ---
Changes in operating assets and liabilities
Patient receivables (3,766) (4,067)
Unbilled patient receivables and
patient prepayments (9,521) (5,995)
Supplies inventory, prepaid expenses
and other (2,209) (1,805)
Amounts receivable from/payable to
orthodontic entities (1,040) (221)
Accounts payable and other current
liabilities (2,069) (2,692)
-------- --------
Net cash provided by operating activities 10,369 7,786
Investing Activities:
Purchase of property, equipment
and improvements (9,268) (9,521)
Net proceeds from
available-for-sale investments 1,187 20,861
Advances to orthodontic entities (2,239) (3,091)
Payments from orthodontic entities 916 908
Intangible assets acquired (9,183) (25,572)
-------- --------
Net cash used in investing activities (18,587) (16,415)
Financing activities:
Issuance of common stock 866 (104)
Proceeds from long term debt 12,418 3,000
Repayment of long-term debt (2,639) (3,873)
-------- --------
Net cash provided by
(used in) financing activities 10,645 (977)
-------- --------
Change in cash
and cash equivalents 2,427 (9,606)
Cash & cash equivalents at
beginning of period 1,601 9,865
-------- --------
Cash & cash equivalents at
end of period $ 4,028 $ 259
======== ========
Supplemental cash flow information:
Interest paid $ 972 $ 82
======== ========
Income taxes paid $ 19,118 $ 14,385
======== ========
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 $ 2,693 $ 9,279
======== ========
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, 1999
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 510 orthodontic centers
located throughout the United States and in two countries outside the
United States as of June 30, 1999.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals and
adjustments necessary to convert the Company's cash basis accounting
records to the accrual basis) considered necessary for a fair presentation
have been included. Operating results for the three and six month periods
ended June 30, 1999 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1999. 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, 1998.
2. REVENUE RECOGNITION
The Company provides business operations, financial, marketing and
administrative services to orthodontists and their 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 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
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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 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. CHANGE IN ACCOUNTING PRINCIPLE
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
companies to expense start-up costs, including organizational costs, as
incurred. Upon adoption of SOP 98-5, a company is required to record any
previously capitalized start-up or organizational costs as a cumulative
expense. SOP 98-5 is effective for fiscal years beginning after December
15, 1998. On January 1, 1999, the Company wrote off $680,000 (net of
income tax benefit of $410) in accordance with SOP 98-5.
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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 510 orthodontic centers
(the "Orthodontic Centers") throughout the United States and in Japan and Mexico
at June 30, 1999.
The following table sets forth certain information relating to the growth
in the number of Orthodontic Centers for the periods shown:
<TABLE>
<CAPTION>
Year ended December 31, Six months ended
-------------------------------------------- June 30,
1994 1995 1996 1997 1998 1999
----- ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Number of centers at
beginning of period 55 75 145 247 360 469
Number of centers
developed during period 22 44 53 58 54 23
Number of centers
acquired during period 1 29 68 78 66 18
Number of centers
consolidated during period (3) (3) (19) (23) (11) ---
---- ---- ---- ---- ---- ----
Number of centers
at end of period 75 145 247 360 469 510
==== ==== ==== ==== ==== ====
</TABLE>
Of the 510 Orthodontic Centers at June 30, 1999, 275 were developed by the
Company, 302 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 who are affiliated with
the Company and acquiring the assets of, and affiliating with, existing
practices of other orthodontists.
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, a Orthodontic Center's growth in patient
base has typically begun to stabilize as the initial patients complete
treatment. At June 30, 1999, 248 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 orthodontic
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 and their professional
corporations or other entities ("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
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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.
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 approximately $900,000
for the three months ended June 30, 1999. In addition, a $25,000 annual fee is
earned by the Company for 42 free-standing Orthodontic Centers.
The terms of consulting agreements 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
generally limited to compensation for the specific consulting services performed
and is generally 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 the first quarter of 1999, the
Orthodontic Centers generally implemented a fee increase from $98 per month to
$109 per month, with an increase in the final payment from $398 to $436.
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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.
Six months ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Net revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Direct expenses
Employee cost 27.1 27.4 27.0 27.3
Orthodontic supplies 7.5 7.9 7.4 7.8
Rent 8.1 8.3 8.2 8.2
Marketing and advertising 7.4 8.6 7.4 9.0
----- ----- ----- -----
Total direct expenses 50.1 52.2 50.0 52.3
General and administrative 10.3 10.6 10.3 10.5
Depreciation and amortization 5.6 5.3 5.5 5.3
----- ----- ----- -----
Operating profit 34.0 31.9 34.2 31.9
Interest (income) expense 0.7 (0.5) 0.8 (0.1)
----- ----- ----- -----
Income before income taxes 33.3 32.4 33.4 32.0
Provision for income taxes 12.5 12.4 12.6 12.1
----- ----- ----- -----
Net income 20.8% 20.0% 20.8% 19.9%
===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
NET REVENUE. Net revenue increased $25.2 million, or 31.8%, to $104.4 million
for the six months ended June 30, 1999 from $79.2 million for the six months
ended June 30, 1998. Approximately $8.2 million of this increase was
attributable to the 160 (net of consolidations) Orthodontic Centers opened since
January 1, 1998, approximately $16.5 million to the growth in net revenue of the
350 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 233,000 at June 30, 1999
from approximately 156,000 at June 30, 1998.
EMPLOYEE COSTS. Employee costs increased $6.5 million, or 30.1%, to $28.3
million for the six months ended June 30, 1999 from $21.7 million for the six
months ended June 30, 1998. As a percentage of net revenue, however, employee
costs decreased to 27.1% for the six months ended June 30, 1999 from 27.4% for
the six months ended June 30, 1998. The percentage decrease primarily reflects
efficiencies achieved through general changes in patient treatment schedules by
the Affiliated Orthodontists.
ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased $1.6 million, or
25.9%, to $7.8 million for the six months ended June 30, 1999 from $6.2 million
for the six months ended June 30, 1998. As a percentage of net revenue,
however, orthodontic supplies expense decreased to 7.5% for the six months ended
June 30, 1999 from 7.9% the six months ended June 30, 1998, due to cost
improvements attained through bulk purchasing.
RENT. Rent expense increased $2.0 million, or 30.6%, to $8.5 million for the six
months ended June 30, 1999 from $6.5 million for the six months ended June 30,
1998. The increase in this expense was attributable to Orthodontic Centers
affiliated, opened or relocated after June 30, 1998. As a percentage of net
revenue, however, rent expense decreased to 8.1% for the six months ended June
30, 1999 from 8.3% for the six months ended June 30, 1998. The
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decrease in the percentage was attributable to a decrease in average rent per
Orthodontic Center.
MARKETING AND ADVERTISING. Marketing and advertising expense increased
$900,000, or 12.5%, to $7.7 million for the six months ended June 30, 1999 from
$6.8 million for the six months ended June 30, 1998. The increase in this
expense resulted primarily from the addition of Orthodontic Centers after June
30, 1998. As a percentage of net revenue, however, marketing and advertising
expense decreased to 7.4% for the six months ended June 30, 1999 from 8.6% for
the six months ended June 30, 1998. The decrease in this expense as a percentage
of net revenue is attributable to the initiation of certain marketing strategies
designed to eliminate costs not related to the purchase of media advertisements.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased $2.3
million, or 27.7%, to $10.7 million for the six months ended June 30, 1999 from
$8.4 million for the six months ended June 30, 1998. The increase in general
and administrative expense resulted primarily from the addition of Orthodontic
Centers after June 30, 1998. As a percentage of net revenue, however, general
and administrative expense decreased to 10.3% for the six months ended June 30,
1999 from 10.6% for the six months ended June 30, 1998. 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
June 30, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$1.6 million, or 38.5%, to $5.8 million for the six months ended June 30, 1999
from $4.2 million for the six months ended June 30, 1998. As a percentage of
net revenue, depreciation and amortization expense increased to 5.6% for the six
months ended June 30, 1999 from 5.3% for the six months ended June 30, 1998.
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, 1998.
OPERATING PROFIT. Operating profit increased $10.3 million, or 40.7%, to $35.6
million for the six months ended June 30, 1999 from $25.3 million for the six
months ended June 30, 1998. As a percentage of net revenue, operating profit
increased to 34.0% for the six months ended June 30, 1999 from 31.9% for the six
months ended June 30, 1998 as a result of the factors discussed above.
INTEREST. The Company incurred net interest expense of $760,000 for the six
months ended June 30, 1999 compared to a net interest income of $340,000 for the
six months ended June 30, 1998, as a result of interest incurred on borrowings
under the Company's $100 million revolving line of credit.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $3.3 million,
or 33.7%, to $13.1 million for the six months ended June 30, 1999 from $9.8
million for the six months ended June 30, 1998. The Company's effective income
tax rate was 37.7% for the six months ended June 30, 1999 and 39.0% for the six
months ended June 30, 1998.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. Pursuant to AICPA's
adoption of SOP 98-5, Reporting on the Costs of Start-Up Activities, the Company
recorded a cumulative effect of a change in accounting principle of $680,000
(net of an income tax benefit of $410,000) in the six months ended June 30,
1999.
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NET INCOME. Net income increased $5.9 million, or 32.8%, to $21.0 million for
the six months ended June 30, 1999 from $15.1 million for the six months ended
June 30, 1998. As a percentage of net revenue, net income increased to 20.8%
for the six months ended June 30, 1999 from 20.0% for the six months ended June
30, 1998 as a result of the factors discussed above.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
NET REVENUE. Net revenue increased $13.9 million, or 33.4%, to $55.4 million for
the three months ended June 30, 1999 from $41.5 million for the three months
ended June 30, 1998. Approximately, $4.2 million of this increase was
attributable to the 141 (net of consolidations) Orthodontic Centers opened since
January 1, 1998, approximately $9.2 million to the growth in net revenue of the
350 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 233,000 at June 30, 1999
from approximately 156,000 at June 30, 1998.
EMPLOYEE COSTS. Employee costs increased $3.6 million, or 32.1%, to $14.9
million for the three months ended June 30, 1999 from $11.3 million for the
three months ended June 30, 1998. As a percentage of net revenue, however,
employee costs decreased to 27.0% for the three months ended June 30, 1999 from
27.3% for the three months ended June 30, 1998. The percentage decrease
primarily reflects efficiencies achieved through general changes in patient
treatment schedules by the Affiliated Orthodontists.
ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased $900,000, or 27.7%,
to $4.1 million for the three months ended June 30, 1999 from $3.2 million for
the three months ended June 30, 1998. As a percentage of net revenue, however,
orthodontic supplies expense decreased to 7.4% for the three months ended June
30, 1999 from 7.8% the three months ended June 30, 1998, due to cost
improvements attained through bulk purchasing.
RENT. Rent expense increased $1.1 million, or 32.6%, to $4.5 million for the
three months ended June 30, 1999 from $3.4 million for the three months ended
June 30, 1998. The increase in this expense was attributable to Orthodontic
Centers affiliated, opened or relocated after June 30, 1998. As a percentage of
net revenue, however, rent expense remained constant at 8.2% for the three
months ended June 30, 1999 and for the three months ended June 30, 1998.
MARKETING AND ADVERTISING. Marketing and advertising expense increased
$300,000, or 8.6%, to $4.1 million for the three months ended June 30, 1999 from
$3.8 million for the three months ended June 30, 1998. The increase in this
expense resulted primarily from the addition of Orthodontic Centers after June
30, 1998. As a percentage of net revenue, however, marketing and advertising
expense decreased to 7.4% for the three months ended June 30, 1999 from 9.0% for
the three months ended June 30, 1998. The decrease in this expense as a
percentage of net revenue is attributable to the initiation of certain marketing
strategies designed to eliminate costs not related to the purchase of media
advertisements.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased $1.3
million, or 30.3%, to $5.7 million for the three months ended June 30, 1999 from
$4.4 million for the three months ended June 30, 1998. The increase in general
and administrative expense resulted primarily from the addition of Orthodontic
Centers after June 30, 1998. As a percentage of net revenue,
14
<PAGE>
however, general and administrative expense decreased to 10.3% for the three
months ended June 30, 1999 from 10.5% for the three months ended June 30, 1998.
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 June 30, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$900,000, or 41.4%, to $3.1 million for the three months ended June 30, 1999
from $2.2 million for the three months ended June 30, 1998. As a percentage of
net revenue, depreciation and amortization expense increased to 5.5% for the
three months ended June 30, 1999 from 5.3% for the three months ended June 30,
1998. 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, 1998.
OPERATING PROFIT. Operating profit increased $5.7 million, or 42.9%, to $18.9
million for the three months ended June 30, 1999 from $13.2 million for the
three months ended June 30, 1998. As a percentage of net revenue, operating
profit increased to 34.2% for the three months ended June 30, 1999 from 31.9%
for the three months ended June 30, 1998 as a result of the factors discussed
above.
INTEREST. The Company incurred net interest expense of $410,000 for the three
months ended June 30, 1999 compared to a net interest income of $40,000 for the
three months ended June 30, 1998, as a result of interest incurred on borrowings
under the Company's $100 million revolving line of credit.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $2.0 million,
or 39.4%, to $7.0 million for the three months ended June 30, 1999 from $5.0
million for the three months ended June 30, 1998. The Company's effective
income tax rate was 37.7% for the three months ended June 30, 1999 and 39.0% for
the three months ended June 30, 1998.
NET INCOME. Net income increased $3.2 million, or 39.4%, to $11.5 million for
the three months ended June 30, 1999 from $8.3 million for the three months
ended June 30, 1998. As a percentage of net revenue, net income increased to
20.8% for the three months ended June 30, 1999 from 19.9% for the three months
ended June 30, 1998 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $10.4 million
for the six month period ended June 30, 1999 as compared to $7.7 million in the
comparable period of 1998. The $21.0 million in net income for the six month
period ending June 30, 1999, was offset by increases in working capital accounts
required to fund the Company's growth. Net billed and unbilled patient
receivables at June 30, 1999 increased $12.2 million over December 31, 1998
levels as a result of increases in the number of patients treated and the fees
for treatment in the Orthodontic Centers. The following table presents certain
information with respect to Orthodontic Centers open less than 26 months and
those open greater than 26 months as of the date indicated:
15
<PAGE>
Six months ended
June 30,
1999 1998
------ ------
(Increase) decrease in patient receivables:
Orthodontic Centers affiliated over 26 months
Patient receivables $ (363) $ (695)
Unbilled patient receivables and
patient prepayments (2,034) (971)
-------- --------
(2,397) (1,666)
Orthodontic Centers affiliated less than 26 months
Patient receivables (2,797) (3,372)
Unbilled patient receivables and
patient prepayments (7,010) (5,024)
-------- --------
( 9,807) ( 8,396)
-------- --------
Total increase in patient receivables $(12,204) $(10,062)
======== ========
16
<PAGE>
The Company expects that available cash, cash equivalents, available for
sale investments, cash flow from operations and existing short-term lines of
credit will be sufficient to meet the Company's normal operating requirements,
including acquisitions of management and consulting contracts during the
remainder of 1999. The Company has a $100 million revolving line of credit
available for expansion and general working capital needs. During the twelve
month period ended June 30, 1999, the Company expended $73.9 million of cash for
fixed assets, intangible assets, repayment of long-term debt and income taxes.
However, the Company's cash and cash equivalents increased by $2.4 million
during the three months ended June 30, 1999, as summarized below. The remainder
of the cash expenditures were financed from the Company's cash flow from
operations and revolving line of credit.
Six months ended
June 30,
1999 1998
------- ------
Cash, cash equivalents and available for sale
investments at beginning of period. $1,601 $ 9,865
(Decrease)/increase in cash, cash equivalents
and available for sale investments. 2,427 (9,606)
------ -------
Cash and cash equivalents at end of period $4,028 $ 259
====== =======
YEAR 2000
Many software applications and operational programs were not designed to
recognize calendar dates beginning January 1, 2000. The failure of such
applications or systems to recognize properly the dates beginning in the Year
2000 could result in miscalculations or system failures. As a result, many
companies and governmental agencies may need to upgrade their computer systems
and software to comply with Year 2000 requirements, or risk disruption of normal
business activities. Such disruption could adversely affect the Company and
other businesses that depend on computer information systems and the continued
functioning of basic services in order to conduct business.
The Company has conducted a comprehensive review of its computer systems,
technology and equipment, and has developed a plan to identify, assess and
remediate potential malfunctions and failures that may result from the inability
of computers and embedded computer chips within the Company's information
systems, technology and equipment to appropriately identify, process and utilize
date-sensitive information relating to dates after December 31, 1999. The
Company has formed a Year 2000 task force, comprised of employees of the Company
who use or depend upon the Company's information systems, to spearhead the
Company's Year 2000 compliance program. The Company recently upgraded its
computer system in anticipation of growth in the number of Affiliated
Orthodontists and Orthodontic Centers and in order for the Company to continue
to offer Affiliated Orthodontists efficient management services. The Company
believes that this upgrade will adequately address computer systems issues
relating to the Year 2000. The Company has been informed by the vendors of the
Company's material hardware and software components that these products are
currently Year 2000 compliant and capable of properly processing information
relating to dates beginning
17
<PAGE>
January 1, 2000. The Company has also begun testing, and will continue to test,
its information systems and equipment for Year 2000 compliance.
During the execution of the Company's Year 2000 conversion project, the
Company has incurred and will continue to incur internal staff costs as well as
consulting and other expenses related to enhancements necessary to prepare the
systems for the Year 2000. Through June 30, 1999, the Company incurred a total
of approximately $40,000 in costs with respect to Year 2000 conversion,
including $2,700 in connection with acquiring Year 2000 compliant hardware,
software and other equipment. The primary source of funds for these costs, and
additional costs and expenses to be incurred, is the Company's operating cash
flows. Additional 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 Company's internal information systems are an integral part of its
business, and the Company's continued success depends in part upon the Company's
ability to store, retrieve, process and manage significant databases. In the
event that the Company's Year 2000 compliance efforts prove to be unsuccessful,
the Company could experience significant difficulty in conducting its business
in the Year 2000 as it has in the past, which could result in lost revenues,
increased operating costs, loss of customers and other business interruptions,
any of which could have a material adverse effect on the Company's business,
results of operations and financial condition. For example, failures or
malfunctions of the Company's information systems or equipment could prevent
automated patient scheduling and accounts receivable management, including
billing and collections functions, and could disrupt the operations and patient
treatment at one or more Orthodontic Centers. Moreover, the failure to
adequately address Year 2000 compliance issues could result in claims of
mismanagement, misrepresentation or breach of contract. In addition, the
failure of certain critical pieces of dental equipment could result in personal
injury or misdiagnosis of patients by the Company's Affiliated Orthodontists.
Related litigation could be costly and time-consuming to defend.
In addition to the Company's information systems and equipment utilizing
embedded computer chips, the Year 2000 issue may affect the systems and
equipment of vendors, utilities, suppliers, Affiliated Orthodontists, payers and
other parties with which the Company interacts. The Company has contacted those
outside parties that it views as critical to its operations, and is coordinating
its efforts to address the Year 2000 issue with those entities. As additional
Affiliated Orthodontists affiliate with the Company, the Company intends to
review their operations for Year 2000 compliance issues. There can be no
assurance, however, that the systems of other parties 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.
The Company has developed contingency plans for handling critical areas of its
operations in the event that its Year 2000 compliance program proves to be
unsuccessful.
18
<PAGE>
The Company will continue to test these contingency plans during the third and
fourth quarters of 1999 to validate their effectiveness, and will refine the
plans as additional information becomes available. Contingency plans are subject
to variables and uncertainties and there can be no assurance that the Company
will correctly anticipate the level, impact or duration of non-compliance of its
computer hardware, software, systems and equipment, or that of its Affiliated
Orthodontists, suppliers, vendors or service providers (which may supply
inaccurate information to the Company or otherwise be unable to provide their
service or product free of defect or disruption arising from Year 2000
problems), or that the Company's contingency plans will be sufficient to
mitigate the impact of such non-compliance. Thus, there can be no assurance that
the Year 2000 problem, even after giving effect to the implementation of
applicable contingency plans, will not materialize and such occurrence could
have a material adverse impact on the Company's business, financial condition,
results of operations and cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
During the three months ended June 30, 1999 there were no material changes to
the quantitative and qualitative disclosures about market risks presented in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
19
<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 Thursday,
May 13,1999. At this meeting, the following matters were voted upon by the
Company's stockholders:
(a) Election of Class II Directors
Michael C. Johnsen, Ashton J. Ryan, Jr. and Edward J. Walters, Jr. were
elected to serve as Class II directors of the Company until the annual
meeting of stockholders in 2002 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
- ---- ---------- ------------------- -----------
Michael C. Johnsen 33,326,172 633,075 14,043,329
Ashton J. Ryan, Jr. 33,682,967 276,280 14,043,329
Edward J. Walters, Jr. 33,063,972 895,275 14,043,329
The terms of the following directors continued following the meeting:
Name Term Expires
- ---- ------------
Gasper Lazzara, Jr., DDS 2000
Bartholomew F. Palmisano, Sr. 2000
Geoffrey L. Faux 2001
A Gordon Tunstall 2001
(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 ending December
31, 1999 by the following vote:
Votes Cast Votes Cast Abstentions/
In Favor Against or Withheld Non Votes
---------- ------------------- ------------
33,954,677 1,050 3,520
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit number Description
-------------- -----------
27 Financial Data Schedule
20
<PAGE>
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K for the three months ended June
30, 1999.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Orthodontic Centers of America, Inc.
------------------------------------
(Registrant)
Date: August 13, 1999 /s/ Bartholomew F. Palmisano, Sr.
-------------------------------------
Bartholomew F. Palmisano, Sr.
Co-Chief Executive Officer, Senior Vice President,
Treasurer
/s/ Bartholomew F. Palmisano, Jr.
------------------------------------
Bartholomew F. Palmisano, Jr.
Chief Financial Officer, Secretary
22
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