<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 MARCH 31, 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.: 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 May 10, 1999, there were 48,002,576 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 -
March 31, 1999 and December 31, 1998............... 3
Condensed Consolidated Statements of Income -
Three months ended March 31, 1999
and 1998........................................... 4
Condensed Consolidated Statements of Cash Flow -
Three months ended March 31, 1999 and 1998......... 5
Notes to Condensed Consolidated Financial
Statements - March 31, 1999........................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 8
Item 3 Quantitative and Qualitative Disclosures about
Market Risk........................................ 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................... 14
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 Security 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, 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
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
March 31 December 31
1999 1998 (1)
-------- --------
(Unaudited)
(in thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 2,187 $ 1,601
Investments --- 1,187
Patient receivables, net 21,836 20,163
Unbilled patient receivables, net 50,944 46,314
Deferred income tax asset 4,399 4,399
Amounts receivable from
orthodontic entities 6,093 5,817
Supplies inventory 6,910 5,890
Prepaid expenses and other assets 1,903 1,663
-------- --------
Total current assets 94,272 87,034
Property, equipment & improvements, net 51,799 48,565
Amounts receivable from orthodontic
entities, less current portion 9,336 8,412
Intangible assets 153,090 152,438
Other assets 450 349
-------- --------
Total assets $308,947 $296,798
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and other current
liabilities $ 19,294 $ 18,727
Current portion of long-term debt 8,267 8,673
-------- --------
Total current liabilities 27,561 27,400
Deferred income taxes 15,580 15,580
Long-term debt, less current portion 24,460 22,659
Stockholders' Equity:
Preferred stock --- ---
Common stock, $.01 par value per share,
100,000,000 shares authorized, 47,869,000
shares outstanding at March 31, 1999 and
47,849,000 shares outstanding
at December 31, 1998 479 478
Additional paid-in capital 160,643 159,936
Due from key employees (5,236) (5,236)
Capital contribution received
from shareholders (2,618) (2,618)
Retained earnings 88,078 78,599
-------- --------
Total stockholders' equity 241,346 231,159
-------- --------
Total liabilities and
stockholders' equity $308,947 $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.
3
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended
March 31
------------------
1999 1998
------- -------
(in thousands, except
per share data)
Net revenue $49,048 $37,693
Direct expenses:
Employee costs 13,306 10,408
Orthodontic supplies 3,734 3,010
Rent 4,027 3,136
Marketing and advertising 3,599 3,069
------- -------
24,666 19,623
General and administrative 5,011 4,014
Depreciation and amortization 2,705 1,998
------- -------
Operating profit 16,666 12,058
Interest expense (441) (8)
Interest income 91 316
------- -------
Income before income taxes 16,316 12,366
Provision for income taxes 6,159 4,823
------- -------
Income before cumulative effect of a
change in accounting principle 10,157 7,543
Cumulative effect of a change in
accounting principle, net of
income tax benefit of $410 (678) -
------- -------
Net income $ 9,479 $ 7,543
======= =======
Net income per share:
Basic $ 0.20 $ 0.16
======= =======
Diluted before cumulative
effect of change in
accounting principle $ 0.21 $ 0.16
Cumulative effect of change in
accounting principle $ 0.02 $ ---
------- -------
Diluted net income per share $ 0.19 $ 0.16
======= =======
Average shares outstanding
Basic 47,909 47,434
======= =======
Diluted 48,698 48,309
======= =======
See notes to condensed consolidated financial statements.
4
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended
March 31
-------------------
1999 1998
(in thousands)
Operating activities:
Net income $ 9,479 $ 7,543
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt expense 573 564
Depreciation and amortization 2,705 1,998
Deferred income taxes - 1,731
Cumulative effect of change in accounting
principle 1,088 ---
Changes in operating assets and liabilities
Patient receivables (2,011) (2,232)
Unbilled patient receivables and
patient prepayments (4,703) (2,649)
Supplies inventory, prepaid expenses
and other (1,526) (1,588)
Amounts receivable from/payable to
orthodontic entities (151) 111
Accounts payable and other current
liabilities 281 (3,871)
------- --------
Net cash provided by operating activities 5,735 1,607
Investing Activities:
Purchase of property, equipment
and improvements (4,593) (4,758)
Net proceeds from
available-for-sale investments 1,187 18,283
Advances to orthodontic entities (1,335) (2,434)
Payments from orthodontic entities 411 547
Intangible assets acquired (2,512) (16,144)
------- --------
Net cash used in investing activities (6,842) ( 4,506)
Financing activities:
Issuance of common stock 499 (288)
Proceeds from long term debt 2,500 ---
Repayment of long-term debt (1,306) (2,419)
------- --------
Net cash provided by
(used in) financing activities 1,693 (2,707)
------- --------
Change in cash
and cash equivalents 586 (5,606)
Cash & cash equivalents at
beginning of period 1,601 9,865
------- --------
Cash & cash equivalents at
end of period $ 2,187 $ 4,259
======= ========
Supplemental cash flow information
Interest paid $ 441 $ 17
======= ========
Income taxes paid $ 5,700 $ 9,275
======= ========
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 $ 410 $ 8,584
======= ========
See notes to condensed consolidated financial statements.
5
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Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 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 491 orthodontic centers
located throughout the United States and in two countries outside the United
States as of March 31, 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 month period ended March 31, 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 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
6
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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.
7
<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 491 orthodontic centers
(the "Orthodontic Centers") throughout the United States and in Japan and Mexico
at March 31, 1999.
The following table sets forth certain information relating to the growth
in the number of Orthodontic Centers for the periods shown:
<TABLE>
<CAPTION>
Three months ended
Year ended December 31, March 31,
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 13
Number of centers
acquired during period 1 29 68 78 66 9
Number of centers
consolidated during period (3) (3) (19) (23) (11) ---
--- --- --- --- --- ---
Number of centers
at end of period 75 145 247 360 469 491
=== === === === === ===
</TABLE>
Of the 491 Orthodontic Centers at March 31, 1999, 265 were developed by the
Company, 293 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 March 31, 1999, 260 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
8
<PAGE>
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 March 31, 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.
9
<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.
Three months ended
March 31,
1999 1998
----- -----
Net revenue 100.0% 100.0%
----- -----
Direct expenses
Employee cost 27.1 27.6
Orthodontic supplies 7.6 8.0
Rent 8.2 8.3
Marketing and advertising 7.4 8.2
----- -----
Total direct expenses 50.3 52.1
General and administrative 10.2 10.6
Depreciation and amortization 5.5 5.3
----- -----
Operating profit 34.0 32.0
Interest (income) expense 0.7 (0.8)
----- -----
Income before income taxes 33.3 32.8
Provision for income taxes 12.6 12.8
----- -----
Net income 20.7% 20.0%
===== =====
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
NET REVENUE. Net revenue increased $11.3 million, or 30.1%, to $49.0 million for
the three months ended March 31, 1999 from $37.7 million for the three months
ended March 31, 1998. Approximately, $4.0 million of this increase was
attributable to the 141 (net of consolidations) Orthodontic Centers opened since
January 1, 1998, approximately $7.2 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 214,000 at March 31, 1999
from approximately 139,000 at March 31, 1998.
EMPLOYEE COSTS. Employee costs increased $2.9 million, or 27.8%, to $13.3
million for the three months ended March 31, 1999 from $10.4 million for the
three months ended March 31, 1998. As a percentage of net revenue, however,
employee costs decreased to 27.1% for the three months ended March 31, 1999 from
27.6% for the three months ended March 31, 1998. 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 $700,000, or 24.0%,
to $3.7 million for the three months ended March 31, 1999 from $3.0 million for
the three months ended March 31, 1998. As a percentage of net revenue, however,
orthodontic supplies expense decreased to 7.6% for the three months ended March
31, 1999 from 8.0% the three months ended March 31, 1998, due to cost
improvements attained through bulk purchasing.
RENT. Rent expense increased $900,000, or 28.4%, to $4.0 million for the three
months ended March 31, 1999 from $3.1 million for the three months ended March
31, 1998. The increase in this expense was attributable to Orthodontic Centers
affiliated, opened or relocated after March 31, 1998. As a percentage of net
revenue, however, rent expense decreased to 8.2% for the three months
10
<PAGE>
ended March 31, 1999 from 8.3% for the three months ended March 31, 1998. The
decrease in the percentage was attributable to the decrease in average rent per
Orthodontic Center.
MARKETING AND ADVERTISING. Marketing and advertising expense increased
$500,000, or 17.3%, to $3.6 million for the three months ended March 31, 1999
from $3.1 million for the three months ended March 31, 1998. The increase in
this expense resulted primarily from the addition of Orthodontic Centers after
March 31, 1998. As a percentage of net revenue, however, marketing and
advertising expense decreased to 7.4% for the three months ended March 31, 1999
from 8.2% for the three months ended March 31, 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 $1.0
million, or 24.8%, to $5.0 million for the three months ended March 31, 1999
from $4.0 million for the three months ended March 31, 1998. The increase in
general and administrative expense resulted primarily from the addition of
Orthodontic Centers after March 31, 1998. As a percentage of net revenue,
however, general and administrative expense decreased to 10.2% for the three
months ended March 31, 1999 from 10.6% for the three months ended March 31,
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 March 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$700,000, or 35.4%, to $2.7 million for the three months ended March 31, 1999
from $2.0 million for the three months ended March 31, 1998. As a percentage of
net revenue, depreciation and amortization expense increased to 5.5% for the
three months ended March 31, 1999 from 5.3% for the three months ended March 31,
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 March 31, 1998.
OPERATING PROFIT. Operating profit increased $4.6 million, or 38.2%, to $16.7
million for the three months ended March 31, 1999 from $12.1 million for the
three months ended March 31, 1998. As a percentage of net revenue, operating
profit increased to 34.0% for the three months ended March 31, 1999 from 32.0%
for the three months ended March 31, 1998 as a result of the factors discussed
above.
INTEREST. The Company incurred net interest expense of $350,000 for the three
months ended March 31, 1999 compared to a net interest income of $310,000 for
the three months ended March 31, 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 $1.4 million,
or 27.7%, to $6.2 million for the three months ended March 31, 1999 from $4.8
million for the three months ended March 31, 1998. The Company's effective
income tax rate was 37.7% for the three months ended March 31, 1999 and 39.0%
for the three months ended March 31, 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 three months ended March 31,
1999.
11
<PAGE>
NET INCOME. Net income increased $2.0 million, or 25.7%, to $9.5 million for
the three months ended March 31, 1999 from $7.5 million for the three months
ended March 31, 1998. As a percentage of net revenue, net income increased to
20.7% for the three months ended March 31, 1999 from 20.0% for the three months
ended March 31, 1998 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $5.7 million
for the three month period ended March 31, 1999 as compared to $1.6 million in
the comparable period of 1998. The $9.5 million in net income for the three
month period ending March 31, 1999 was offset by increases in working capital
accounts required to fund the Company's growth. Net billed and unbilled patient
receivables at March 31, 1999 increased $6.1 million over December 31, 1998
levels as a result of an increase 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:
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
(Increase) decrease in patient receivables:
Orthodontic Centers affiliated over 26 months
- -----------------------------------------------------
Patient receivables $ (220) $ (376)
Unbilled patient receivables and
patient prepayments (848) (418)
-------- --------
(1,068) (794)
Orthodontic Centers affiliated less than 26 months
- -----------------------------------------------------
Patient receivables (1,453) (1,856)
Unbilled patient receivables and
patient prepayments (3,619) (2,231)
-------- --------
( 5,072) ( 4,087)
-------- --------
Total increase in patient receivables $( 6,140) $( 4,881)
======== ========
</TABLE>
12
<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 for
expansion and general working capital needs. During the twelve month period
ended March 31, 1999, the Company expended $70.7 million of cash for fixed
assets, intangible assets, repayment of long-term debt and income taxes.
However, the Company's cash and cash equivalents were reduced by only $2.1
million as summarized below. The remainder of the cash expenditures were
financed from the Company's cash flow from operations and revolving line of
credit.
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
------ -------
<S> <C> <C>
Cash, cash equivalents and available for sale
investments at January 1. $1,601 $ 9,865
(Decrease)/increase in cash, cash equivalents and available
for sale investments, three months ended March 31. 586 (5,606)
------ -------
Cash and cash equivalents $2,187 $ 4,259
====== =======
</TABLE>
YEAR 2000
Many software applications and operational programs were not designed to
recognize calendar dates beginning in the Year 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,
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 and equipment
to identify appropriately and utilize date-sensitive information relating to
periods subsequent to 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.
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 March 31, 1999, the Company had incurred a
total of approximately $34,000 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 system could prevent automated
scheduling and accounts receivable management, including billing and collections
functions. 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 system, the Year 2000 issue may
affect the systems of vendors, suppliers, Affiliated Orthodontists, payers and
other entities 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 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.
The Company has developed and is continuing to develop contingency plans
for handling critical areas of its operations in the event that its Year 2000
compliance program proves to be unsuccessful. Contingency plans, however, 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 computer hardware, software, systems or 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 its contingency plans will
be sufficient to mitigate the impact of 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 March 31, 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.
13
<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 March
31, 1999.
14
<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: May 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
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 2,187 4,259
<SECURITIES> 0 2,578
<RECEIVABLES> 72,780 50,200
<ALLOWANCES> 0 0
<INVENTORY> 6,910 0
<CURRENT-ASSETS> 94,272 67,437
<PP&E> 51,799 39,331
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 308,947 240,254
<CURRENT-LIABILITIES> 27,561 13,506
<BONDS> 0 0
0 0
0 0
<COMMON> 479 476
<OTHER-SE> 152,789 148,537
<TOTAL-LIABILITY-AND-EQUITY> 308,947 240,254
<SALES> 0 0
<TOTAL-REVENUES> 49,048 37,693
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 32,382 25,635
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 350 (308)
<INCOME-PRETAX> 16,316 12,366
<INCOME-TAX> 6,159 4,823
<INCOME-CONTINUING> 10,157 7,543
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (678) 0
<NET-INCOME> 9,479 7,543
<EPS-PRIMARY> .20 .16
<EPS-DILUTED> .19 .16
</TABLE>
