<PAGE> 1
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 SEPTEMBER 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 November 9, 1999, there were 48,126,095 outstanding shares of the
Registrant's Common Stock, $.01 par value per share.
<PAGE> 2
ORTHODONTIC CENTERS OF AMERICA, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998...............................................4
Condensed Consolidated Statements of Income -
Nine months ended September 30, 1999
and 1998 ..............................................................................5
Condensed Consolidated Statements of Income -
Three months ended September 30, 1999
and 1998 ..............................................................................6
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998..........................................7
Notes to Condensed Consolidated Financial
Statements - September 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 6. Exhibits and Reports on Form 8-K...............................................................20
</TABLE>
2
<PAGE> 3
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 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 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 and other
filings from time to time with the Securities and Exchange Commission or in
other public announcements by the Company.
3
<PAGE> 4
Part 1. Financial Information
Item 1. Consolidated Financial Statements
Orthodontic Centers of America, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1999 1998 (1)
------------ -----------
(Unaudited)
(in thousands)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 5,375 $ 1,601
Investments -- 1,187
Patient receivables, net 24,525 20,163
Unbilled patient receivables, net 60,200 46,314
Deferred income tax asset 4,467 4,399
Amounts receivable from
orthodontic entities 7,488 5,817
Supplies inventory 7,461 5,890
Prepaid expenses and other assets 2,427 1,663
--------- ---------
Total current assets 111,943 87,034
Property, equipment & improvements, net 59,956 48,565
Amounts receivable from orthodontic
entities, less current portion 11,081 8,412
Intangible assets 164,492 152,438
Other assets 823 349
--------- ---------
Total assets $ 348,295 $ 296,798
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and other current
liabilities $ 18,045 $ 18,727
Current portion of long-term debt 5,044 8,673
--------- ---------
Total current liabilities 23,089 27,400
Deferred income taxes 16,779 15,580
Long-term debt, less current portion 42,910 22,659
Stockholders' Equity:
Preferred stock -- --
Common stock, $.01 par value per share,
100,000,000 shares authorized, 48,070,808
shares outstanding at September 30, 1999 and
47,849,000 shares outstanding
at December 31, 1998 481 478
Additional paid-in capital 161,193 159,936
Due from key employees (5,236) (5,236)
Capital contribution received
from shareholders (2,618) (2,618)
Retained earnings 111,697 78,599
--------- ---------
Total stockholders' equity 265,517 231,159
--------- ---------
Total liabilities and
stockholders' equity $ 348,295 $ 296,798
======== ========
</TABLE>
(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.
4
<PAGE> 5
Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------
1999 1998
--------- ---------
(in thousands, except
per share data)
<S> <C> <C>
Net revenue $ 164,219 $ 123,918
Direct expenses:
Employee costs 44,554 34,040
Orthodontic supplies 12,425 9,664
Rent 13,468 10,211
Marketing and advertising 12,302 11,145
--------- ---------
82,749 65,060
General and administrative 16,841 13,029
Depreciation and amortization 8,946 6,605
--------- ---------
Operating profit 55,683 39,224
Interest expense (1,762) (139)
Interest income 336 538
--------- ---------
Income before income taxes 54,257 39,623
Provision for income taxes 20,482 15,112
--------- ---------
Income before cumulative effect of a
change in accounting principle 33,775 24,511
Cumulative effect of a change in
accounting principle, net of
income tax benefit of $410 (678) --
--------- ---------
Net income $ 33,097 $ 24,511
========= =========
Net income per share:
Basic $ 0.69 $ 0.51
========= =========
Diluted before cumulative
effect of change in
accounting principle $ 0.69 $ 0.50
Cumulative effect of change in
accounting principle $ 0.01 $ --
--------- ---------
Diluted net income per share $ 0.68 $ 0.50
========= =========
Average shares outstanding
Basic 47,972 47,641
--------- ---------
Diluted 48,741 48,593
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30
----------------------
1999 1998
-------- --------
(in thousands, except
per share data)
<S> <C> <C>
Net revenue $ 59,770 $ 44,697
Direct expenses:
Employee costs 16,290 12,308
Orthodontic supplies 4,579 3,434
Rent 4,917 3,663
Marketing and advertising 4,623 4,319
-------- --------
30,409 23,724
General and administrative 6,123 4,634
Depreciation and amortization 3,144 2,417
-------- --------
Operating profit 20,094 13,922
Interest expense (790) (57)
Interest income 126 113
-------- --------
Income before income taxes 19,430 13,978
Provision for income taxes 7,335 5,277
-------- --------
Net income $ 12,095 $ 8,701
======== ========
Net income per share:
Basic $ 0.25 $ 0.18
-------- --------
Diluted $ 0.25 $ 0.18
-------- --------
Average shares outstanding
Basic 48,033 47,768
-------- --------
Diluted 48,802 48,634
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30
----------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Operating activities:
Net income $ 33,097 $ 24,511
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt expense 1,527 1,796
Depreciation and amortization 8,946 6,605
Deferred income taxes 1,131 1,436
Cumulative effect of change in accounting
principle 1,088 --
Changes in operating assets and liabilities:
Patient receivables (5,148) (5,848)
Unbilled patient receivables and
patient prepayments (14,844) (10,259)
Supplies inventory, prepaid expenses
and other (2,708) (1,819)
Amounts receivable from/payable to
orthodontic entities (1,519) (622)
Accounts payable and other current
liabilities (709) (2,701)
-------- --------
Net cash provided by operating activities 20,861 13,098
Investing activities:
Purchase of property, equipment
and improvements (16,161) (14,409)
Net proceeds from
available-for-sale investments 1,187 20,861
Advances to orthodontic entities (4,193) (4,739)
Payments from orthodontic entities 1,524 1,708
Intangible assets acquired (13,195) (32,667)
-------- --------
Net cash used in investing activities (30,838) (29,246)
Financing activities:
Issuance of common stock 307 250
Proceeds from long term debt 17,420 12,022
Repayment of long-term debt (3,976) (5,492)
-------- --------
Net cash provided by
financing activities 13,751 6,780
-------- --------
Change in cash
and cash equivalents 3,774 (9,368)
Cash & cash equivalents at
beginning of period 1,601 9,865
-------- --------
Cash & cash equivalents at
end of period $ 5,375 $ 497
======== ========
Supplemental cash flow information:
Interest paid $ 1,663 $ 139
======== ========
Income taxes paid $ 26,039 $ 19,792
======== ========
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 $ 4,134 $ 11,757
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE> 8
Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 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 526
orthodontic centers located throughout the United States and in two
countries outside the United States as of September 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 nine month periods ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31,
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 orthodontists 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
8
<PAGE> 9
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 earnings per share are based on the weighted average number of
shares of common stock outstanding during the period. 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 $410,000) in
accordance with SOP 98-5.
9
<PAGE> 10
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 526 orthodontic
centers (the "Orthodontic Centers") throughout the United States and in Japan
and Mexico at September 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>
Nine months ended
Year ended December 31, September 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 32
Number of centers
acquired during period 1 29 68 78 66 25
Number of centers
consolidated during period (3) (3) (19) (23) (11) --
---- ---- ---- ---- ---- ----
Number of centers
at end of period 75 145 247 360 469 526
==== ==== ==== ==== ==== ====
</TABLE>
Of the 526 Orthodontic Centers at September 30, 1999, 284 were
developed by the Company, 309 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 September 30, 1999, 235 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, extending
the interval between patient treatments 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
10
<PAGE> 11
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 1.2% 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 $700,000
for the three months ended September 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.
11
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RESULTS OF OPERATIONS
The following table sets forth the percentages of net revenue
represented by certain items in the Company's condensed consolidated statements
of income.
<TABLE>
<CAPTION>
Nine months ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Direct expenses
Employee costs 27.1 27.5 27.3 27.5
Orthodontic supplies 7.6 7.8 7.7 7.7
Rent 8.2 8.2 8.2 8.2
Marketing and advertising 7.5 9.0 7.7 9.7
----- ----- ----- -----
Total direct expenses 50.4 52.5 50.9 53.1
General and administrative 10.3 10.5 10.2 10.4
Depreciation and amortization 5.4 5.3 5.3 5.4
----- ----- ----- -----
Operating profit 33.9 31.7 33.6 31.1
Interest (income) expense 0.9 (0.3) 1.1 (0.2)
----- ----- ----- -----
Income before income taxes 33.0 32.0 32.5 31.3
Provision for income taxes 12.4 12.2 12.3 11.8
----- ----- ----- -----
Net income 20.6% 19.8% 20.2% 19.5%
===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
NET REVENUE. Net revenue increased $40.3 million, or 32.5%, to $164.2 million
for the nine months ended September 30, 1999 from $123.9 million for the nine
months ended September 30, 1998. Approximately $14.2 million of this increase
was attributable to the 176 (net of consolidations) Orthodontic Centers opened
since January 1, 1998, approximately $25.2 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 255,000 at
September 30, 1999 from approximately 179,000 at September 30, 1998.
EMPLOYEE COSTS. Employee costs increased $10.5 million, or 30.9%, to $44.6
million for the nine months ended September 30, 1999 from $34.0 million for the
nine months ended September 30, 1998. As a percentage of net revenue, however,
employee costs decreased to 27.1% for the nine months ended September 30, 1999
from 27.5% for the nine months ended September 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 $2.8 million, or
28.6%, to $12.4 million for the nine months ended September 30, 1999 from $9.7
million for the nine months ended September 30, 1998. As a percentage of net
revenue, however, orthodontic supplies expense decreased to 7.6% for the nine
months ended September 30, 1999 from 7.8% for the nine months ended September
30, 1998, due to cost improvements attained through bulk purchasing.
RENT. Rent expense increased $3.2 million, or 31.9%, to $13.4 million for the
nine months ended September 30, 1999 from $10.2 million for the nine months
ended September 30, 1998. The increase in this expense was attributable to
Orthodontic Centers affiliated, opened or relocated after September 30, 1998. As
a percentage of net revenue, rent expense remained constant at 8.2% for
12
<PAGE> 13
the nine months ended September 30, 1999 and the nine months ended September 30,
1998.
MARKETING AND ADVERTISING. Marketing and advertising expense increased $1.2
million, or 10.3%, to $12.3 million for the nine months ended September 30, 1999
from $11.1 million for the nine months ended September 30, 1998. The increase in
this expense resulted primarily from the addition of Orthodontic Centers after
September 30, 1998. As a percentage of net revenue, however, marketing and
advertising expense decreased to 7.5% for the nine months ended September 30,
1999 from 9.0% for the nine months ended September 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 $3.8
million, or 29.3%, to $16.8 million for the nine months ended September 30, 1999
from $13.0 million for the nine months ended September 30, 1998. The increase in
general and administrative expense resulted primarily from the addition of
Orthodontic Centers after September 30, 1998. As a percentage of net revenue,
however, general and administrative expense decreased to 10.3% for the nine
months ended September 30, 1999 from 10.5% for the nine months ended September
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 September 30, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$2.3 million, or 35.4%, to $8.9 million for the nine months ended September 30,
1999 from $6.6 million for the nine months ended September 30, 1998. As a
percentage of net revenue, depreciation and amortization expense increased to
5.4% for the nine months ended September 30, 1999 from 5.3% for the nine months
ended September 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 September 30, 1998.
OPERATING PROFIT. Operating profit increased $16.5 million, or 42.0%, to $55.7
million for the nine months ended September 30, 1999 from $39.2 million for the
nine months ended September 30, 1998. As a percentage of net revenue, operating
profit increased to 33.9% for the nine months ended September 30, 1999 from
31.7% for the nine months ended September 30, 1998, as a result of the factors
discussed above.
INTEREST. The Company incurred net interest expense of $1.4 million for the nine
months ended September 30, 1999 compared to a net interest income of $400,000
for the nine months ended September 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 $5.4 million,
or 35.5%, to $20.5 million for the nine months ended September 30, 1999 from
$15.1 million for the nine months ended September 30, 1998. The Company's
effective income tax rate was 37.8% for the nine months ended September 30, 1999
and 39.0% for the nine months ended September 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 nine months ended September
30, 1999.
13
<PAGE> 14
NET INCOME. Net income increased $8.6 million, or 35.0%, to $33.1 million for
the nine months ended September 30, 1999 from $24.5 million for the nine months
ended September 30, 1998. As a percentage of net revenue, net income increased
to 20.6% for the nine months ended September 30, 1999 from 19.8% for the nine
months ended September 30, 1998, as a result of the factors discussed above.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
NET REVENUE. Net revenue increased $15.1 million, or 33.7%, to $59.8 million for
the three months ended September 30, 1999 from $44.7 million for the three
months ended September 30, 1998. Approximately, $5.8 million of this increase
was attributable to the 118 (net of consolidations) Orthodontic Centers opened
since July 1, 1998, approximately $8.7 million to the growth in net revenue of
the 408 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 255,000 at September 30, 1999
from approximately 179,000 at September 30, 1998.
EMPLOYEE COSTS. Employee costs increased $4.0 million, or 32.3%, to $16.3
million for the three months ended September 30, 1999 from $12.3 million for the
three months ended September 30, 1998. As a percentage of net revenue, however,
employee costs decreased to 27.3% for the three months ended September 30, 1999
from 27.5% for the three months ended September 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 $1.2 million, or
33.3%, to $4.6 million for the three months ended September 30, 1999 from $3.4
million for the three months ended September 30, 1998. As a percentage of net
revenue, orthodontic supplies expense remained constant at 7.7% for the three
months ended September 30, 1999 and the three months ended September 30, 1998.
RENT. Rent expense increased $1.2 million, or 34.2%, to $4.9 million for the
three months ended September 30, 1999 from $3.7 million for the three months
ended September 30, 1998. The increase in this expense was attributable to
Orthodontic Centers affiliated, opened or relocated after September 30, 1998. As
a percentage of net revenue, however, rent expense remained constant at 8.2% for
the three months ended September 30, 1999 and for the three months ended
September 30, 1998.
MARKETING AND ADVERTISING. Marketing and advertising expense increased $300,000,
or 7.0%, to $4.6 million for the three months ended September 30, 1999 from $4.3
million for the three months ended September 30, 1998. The increase in this
expense resulted primarily from the addition of Orthodontic Centers after
September 30, 1998. As a percentage of net revenue, however, marketing and
advertising expense decreased to 7.7% for the three months ended September 30,
1999 from 9.7% for the three months ended September 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.
14
<PAGE> 15
GENERAL AND ADMINISTRATIVE. General and administrative expense increased $1.5
million, or 32.1%, to $6.1 million for the three months ended September 30, 1999
from $4.6 million for the three months ended September 30, 1998. The increase in
general and administrative expense resulted primarily from the addition of
Orthodontic Centers after September 30, 1998. As a percentage of net revenue,
however, general and administrative expense decreased to 10.2% for the three
months ended September 30, 1999 from 10.4% for the three months ended September
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 September 30, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$700,000, or 30.1%, to $3.1 million for the three months ended September 30,
1999 from $2.4 million for the three months ended September 30, 1998. As a
percentage of net revenue, however, depreciation and amortization expense
decreased to 5.3% for the three months ended September 30, 1999 from 5.4% for
the three months ended September 30, 1998.
OPERATING PROFIT. Operating profit increased $6.2 million, or 44.3%, to $20.1
million for the three months ended September 30, 1999 from $13.9 million for the
three months ended September 30, 1998. As a percentage of net revenue, operating
profit increased to 33.6% for the three months ended September 30, 1999 from
31.1% for the three months ended September 30, 1998, as a result of the factors
discussed above.
INTEREST. The Company incurred net interest expense of $660,000 for the three
months ended September 30, 1999 compared to a net interest income of $60,000 for
the three months ended September 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 39.0%, to $7.3 million for the three months ended September 30, 1999 from
$5.3 million for the three months ended September 30, 1998. The Company's
effective income tax rate was 37.8% for the three months ended September 30,
1999 and 39.0% for the three months ended September 30, 1998.
NET INCOME. Net income increased $3.4 million, or 39.0%, to $12.1 million for
the three months ended September 30, 1999 from $8.7 million for the three months
ended September 30, 1998. As a percentage of net revenue, net income increased
to 20.2% for the three months ended September 30, 1999 from 19.5% for the three
months ended September 30, 1998, as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $20.9 million
for the nine month period ended September 30, 1999 as compared to $13.1 million
in the comparable period of 1998. The $33.1 million in net income for the nine
month period ended September 30, 1999 was offset by increases in working capital
accounts required to fund the Company's growth. Net billed and unbilled patient
receivables at September 30, 1999 increased $20.0 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> 16
<TABLE>
<CAPTION>
September 30,
1999 1998
-------- --------
<S> <C> <C>
(Increase) decrease in patient receivables:
Orthodontic Centers affiliated over 26 months
Patient receivables $ (725) $ (768)
Unbilled patient receivables and
patient prepayments (4,035) (1,947)
-------- --------
(4,760) (2,715)
Orthodontic Centers affiliated less than 26 months
Patient receivables (4,423) (5,080)
Unbilled patient receivables and
patient prepayments (10,811) (8,312)
-------- --------
(15,234) (13,392)
-------- --------
Total increase in patient receivables $(19,994) $(16,107)
======== ========
</TABLE>
16
<PAGE> 17
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 service and consulting agreements 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 September 30, 1999, the Company expended $74.0 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
increased by $3.77 million during the nine months ended September 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.
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
------- -------
<S> <C> <C>
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 3,774 (9,368)
------- -------
Cash and cash equivalents at end of period $ 5,375 $ 497
======= =======
</TABLE>
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 and implemented 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
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 January 1, 2000. The Company has also tested, and
will continue to test, its information systems and equipment for Year 2000
compliance.
17
<PAGE> 18
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 September 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. The Company will continue to test these contingency plans
during the fourth quarter 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
18
<PAGE> 19
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 September 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> 20
PART II. OTHER INFORMATION
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, 1999.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements 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 12, 1999 /s/ Bartholomew F. Palmisano, Sr.
---------------------------------
Bartholomew F. Palmisano, Sr.
Co-Chief Executive Officer, President,
Treasurer
/s/ Bartholomew F. Palmisano, Jr.
---------------------------------
Bartholomew F. Palmisano, Jr.
Chief Financial Officer, Secretary
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
number Description
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 5,375 497
<SECURITIES> 0 0
<RECEIVABLES> 84,725 60,608
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 111,943 75,560
<PP&E> 59,956 46,535
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 348,295 270,891
<CURRENT-LIABILITIES> 23,089 14,432
<BONDS> 0 0
0 0
0 0
<COMMON> 481 478
<OTHER-SE> 153,339 149,574
<TOTAL-LIABILITY-AND-EQUITY> 348,295 270,891
<SALES> 0 0
<TOTAL-REVENUES> 164,219 123,918
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 108,536 84,694
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,426 (399)
<INCOME-PRETAX> 54,257 39,623
<INCOME-TAX> 20,482 15,112
<INCOME-CONTINUING> 33,775 24,511
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (678) 0
<NET-INCOME> 33,097 24,511
<EPS-BASIC> .69 .51
<EPS-DILUTED> .68 .50
</TABLE>
