<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 MARCH 31, 2000, 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 8, 2000, there were 48,384,636 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> <C> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999...................................................4
Condensed Consolidated Statements of Income -
Three months ended March 31, 2000
and 1999 ..............................................................................5
Condensed Consolidated Statements of Cash Flow -
Three months ended March 31, 2000 and 1999.............................................6
Notes to Condensed Consolidated Financial
Statements - March 31, 2000............................................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........................................9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk...........................................................................14
Part II. Other Information
Item 5. Other Information..............................................................................15
Item 6. Exhibits and Reports on Form 8-K...............................................................15
</TABLE>
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, liquidity, capital resources
and acquisition of service agreements. We caution you not to place undue
reliance on these forward-looking statements, in that they 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, the availability of suitable new markets and suitable
locations within such markets, failure to consummate proposed developments or
acquisitions, the ability of the Company to effectively manage an increasing
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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, failure to obtain required consents and approvals for the pending
transaction with Apple Orthodontix, Inc. 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. We undertake no
obligation to update these forward-looking statements to reflect events or
circumstances that occur after the date of this report.
3
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Part 1. Financial Information
Item 1. Consolidated Financial Statements
Orthodontic Centers of America, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31 December 31
2000 1999 (1)
--------- ------------
(Unaudited)
(in thousands)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 17,107 $ 5,822
Investments -- 983
Patient receivables, net 28,265 25,976
Unbilled patient receivables, net 72,548 65,793
Deferred income tax asset 4,455 4,455
Amounts receivable from
orthodontic entities 8,292 7,944
Supplies inventory 8,210 8,195
Prepaid expenses and other assets 4,924 1,920
--------- ------------
Total current assets 143,801 121,088
Property, equipment & improvements, net 63,455 64,566
Amounts receivable from orthodontic
entities, less current portion 14,686 12,586
Intangible assets 169,328 167,348
Other assets 1,579 1,434
--------- ------------
Total assets $ 392,849 $ 367,022
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and other current
liabilities $ 23,089 $ 12,792
Current portion of long-term debt 4,911 6,020
--------- ------------
Total current liabilities 28,000 18,812
Deferred income taxes 16,910 16,910
Long-term debt, less current portion 53,615 52,773
Stockholders' Equity:
Preferred stock -- --
Common stock, $.01 par value per share,
100,000,000 shares authorized, 48,290,000
shares outstanding at March 31, 2000 and
48,066,000 shares outstanding
at December 31, 1999 483 481
Additional paid-in capital 163,246 161,465
Due from key employees (5,236) (5,236)
Capital contribution received
from shareholders (2,618) (2,618)
Retained earnings 138,449 124,435
--------- ------------
Total stockholders' equity 294,324 278,527
--------- ------------
Total liabilities and
stockholders' equity $ 392,849 $ 367,022
========= ============
</TABLE>
(1) The consolidated balance sheet at December 31, 1999 has been derived from
the audited consolidated financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
4
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------
2000 1999
-------- --------
(in thousands, except
per share data)
<S> <C> <C>
Net revenue $ 65,765 $ 49,048
Direct expenses:
Employee costs 17,556 13,306
Orthodontic supplies 4,711 3,734
Rent 5,250 4,027
Marketing and advertising 4,865 3,599
-------- --------
32,382 24,666
General and administrative 6,858 5,011
Depreciation and amortization 3,328 2,705
-------- --------
Operating profit 23,197 16,666
Interest expense (788) (441)
Interest income 119 91
-------- --------
Income before income taxes 22,528 16,316
Provision for income taxes 8,504 6,159
-------- --------
Income before cumulative effect of
change in accounting principle 14,024 10,157
Cumulative effect of a change in
accounting principle, net of
income tax benefit of $410 -- (678)
-------- --------
Net income $ 14,024 $ 9,479
======== ========
Net income per share:
Basic $ 0.29 $ 0.20
======== ========
Diluted before cumulative
effect of change in
accounting principle $ 0.29 $ 0.21
Cumulative effect of change in
accounting principle $ -- $ 0.02
-------- --------
Diluted $ 0.29 $ 0.19
======== ========
Average shares outstanding:
Basic 48,290 47,909
======== ========
Diluted 49,071 48,698
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31
------------------------
2000 1999
---------- ----------
(in thousands)
<S> <C> <C>
Operating activities:
Net income $ 14,024 $ 9,479
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt expense 557 573
Depreciation and amortization 3,328 2,705
Deferred income taxes -- --
Cumulative effect of change in accounting
principle -- 1,088
Changes in operating assets and liabilities
Patient receivables (2,490) (2,011)
Unbilled patient receivables and
patient prepayments (7,111) (4,703)
Supplies inventory, prepaid expenses
and other (3,166) (1,526)
Amounts receivable from/payable to
orthodontic entities 167 (151)
Accounts payable and other current
liabilities 9,783 281
---------- ----------
Net cash provided by operating activities 15,092 5,735
Investing activities:
Purchase of property, equipment
and improvements (747) (4,593)
Net proceeds from
available-for-sale investments 983 1,187
Advances to orthodontic entities (2,668) (1,335)
Payments from orthodontic entities 568 411
Intangible assets acquired (2,741) (2,512)
---------- ----------
Net cash used in investing activities (4,605) (6,842)
Financing activities:
Issuance of common stock 1,612 499
Proceeds from long-term debt -- 2,500
Repayment of long-term debt (814) (1,306)
---------- ----------
Net cash provided by
(used in) financing activities 798 1,693
---------- ----------
Change in cash
and cash equivalents 11,285 586
Cash & cash equivalents at
beginning of period 5,822 1,601
---------- ----------
Cash & cash equivalents at
end of period $ 17,107 $ 2,187
========== ==========
Supplemental cash flow information:
Interest paid $ 788 $ 441
========== ==========
Income taxes paid $ 308 $ 5,700
========== ==========
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 $ 717 $ 410
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
6
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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 an international basis. The Company managed 545
orthodontic centers located throughout the United States and in Japan,
Mexico and Puerto Rico as of March 31, 2000.
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 considered necessary for a
fair presentation have been included. Operating results for the three
month period ended March 31, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2000. 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, 1999.
The Company provides business operations, financial, marketing and
administrative services to the orthodontic entities. These services are
provided under service, management or 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.
2. REVENUE RECOGNITION
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
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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 December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition ("SAB 101"). SAB 101
summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to selected revenue recognition issues
in financial statements. Implementation of SAB 101 is required in the
second quarter of 2000. The Company is currently in the process of
evaluating the impact, if any, SAB 101 will have on its consolidated
financial position or results of operations.
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 recorded a change of $678,000 (net of income tax
benefit of $410) in accordance with SOP 98-5.
8
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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 545 orthodontic
centers (the "Orthodontic Centers") throughout the United States and in Japan,
Mexico and Puerto Rico at March 31, 2000.
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 2000
---- ---- ---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of centers at
beginning of period 55 75 145 247 360 469 537
Number of centers
developed during period 22 44 53 58 54 36 4
Number of centers
acquired during period 1 29 68 78 66 32 6
Number of centers
consolidated during period (3) (3) (19) (23) (11) -- (2)
---- ---- ---- ---- ---- ---- -----
Number of centers
at end of period 75 145 247 360 469 537 545
==== ==== ==== ==== ==== ==== =====
</TABLE>
Of the 545 Orthodontic Centers at March 31, 2000, 292 were developed by
the Company, 322 were existing orthodontic practices the assets of which were
acquired by the Company and 69 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 orthodontic 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, 2000, 194 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
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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 March 31, 2000. In addition, a $25,000 annual fee is
earned by the Company for 42 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. During
the first quarter of 2000, approximately 30% of the Orthodontic Centers
implemented a fee increase from $109 per month to $119 per month, with an
increase in the final payment from $436 to $476.
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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>
Three months ended
March 31,
2000 1999
------ ------
<S> <C> <C>
Net revenue 100.0% 100.0%
------ ------
Direct expenses
Employee cost 26.7 27.1
Orthodontic supplies 7.2 7.6
Rent 8.0 8.2
Marketing and advertising 7.4 7.4
------ ------
Total direct expenses 49.3 50.3
General and administrative 10.4 10.2
Depreciation and amortization 5.1 5.5
------ ------
Operating profit 35.2 34.0
Interest (income) expense 1.0 0.7
------ ------
Income before income taxes 34.2 33.3
Provision for income taxes 12.9 12.6
------ ------
Net income 21.3% 20.7%
====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
NET REVENUE. Net revenue increased $16.8 million, or 34.1%, to $65.8 million for
the three months ended March 31, 2000 from $49.0 million for the three months
ended March 31, 1999. Approximately $6.1 million of this increase was
attributable to the 87 (net of consolidations) Orthodontic Centers opened since
January 1, 1999 and approximately $10.7 million was attributable to the growth
in net revenue of the 458 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
286,000 at March 31, 2000 from approximately 214,000 at March 31, 1999.
EMPLOYEE COSTS. Employee costs increased $4.3 million, or 31.9%, to $17.6
million for the three months ended March 31, 2000 from $13.3 million for the
three months ended March 31, 1999. As a percentage of net revenue, however,
employee costs decreased to 26.7% for the three months ended March 31, 2000 from
27.1% for the three months ended March 31, 1999. The percentage decrease
primarily reflects capacity efficiencies achieved through general changes to
patient treatment schedules by the Affiliated Orthodontists.
ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased $1.0 million, or
26.2%, to $4.7 million for the three months ended March 31, 2000 from $3.7
million for the three months ended March 31, 1999. As a percentage of net
revenue, however, orthodontic supplies expense decreased to 7.2% for the three
months ended March 31, 2000 from 7.6% for the three months ended March 31, 1999,
due to cost improvements attained through bulk purchasing.
RENT. Rent expense increased $1.3 million, or 30.4%, to $5.3 million for the
three months ended March 31, 2000 from $4.0 million for the three months ended
March 31, 1999. The increase in this expense was attributable to Orthodontic
Centers affiliated, opened or relocated after March 31, 1999. As a percentage
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of net revenue, however, rent expense decreased to 8.0% for the three months
ended March 31, 2000 from 8.2% for the three months ended March 31, 1999. The
decrease in the percentage was attributable to a decrease in average rent per
Orthodontic Center compared to the average net revenue per Orthodontic Center.
MARKETING AND ADVERTISING. Marketing and advertising expense increased $1.3
million, or 35.2%, to $4.9 million for the three months ended March 31, 2000
from $3.6 million for the three months ended March 31, 1999. The increase in
this expense resulted primarily from the addition of Orthodontic Centers after
March 31, 1999. As a percentage of net revenue, marketing and advertising
expense remained constant at 7.4% for the three months ended March 31, 2000 and
7.4% for the three months ended March 31, 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased $1.9
million, or 36.9%, to $6.9 million for the three months ended March 31, 2000
from $5.0 million for the three months ended March 31, 1999. The increase in
general and administrative expense resulted primarily from the addition of
Orthodontic Centers after March 31, 1999. As a percentage of net revenue,
general and administrative expense increased to 10.4% for the three months ended
March 31, 2000 from 10.2% for the three months ended March 31, 1999. General and
administrative expense increased as a percentage of net revenue primarily as the
result of costs incurred for the Company's annual meeting of Affiliated
Orthodontists in 2000. The 1999 annual meeting of Affiliated Orthodontists was
not held in the first quarter of 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$600,000, or 23.0%, to $3.3 million for the three months ended March 31, 2000
from $2.7 million for the three months ended March 31, 1999. 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, 1999. As a percentage of net revenue, however, depreciation and
amortization expense decreased to 5.1% for the three months ended March 31, 2000
from 5.5% for the three months ended March 31, 1999.
OPERATING PROFIT. Operating profit increased $6.5 million, or 39.2%, to $23.2
million for the three months ended March 31, 2000 from $16.7 million for the
three months ended March 31, 1999. As a percentage of net revenue, operating
profit increased to 35.2% for the three months ended March 31, 2000 from 34.0%
for the three months ended March 31, 1999 as a result of the factors discussed
above.
INTEREST. Net interest expense increased $300,000, or 91.0%, to $700,000 for the
three months ended March 31, 2000 from $400,000 for the three months ended March
31, 1999. As a percentage of net revenue, net interest expense increased to 1.0%
for the three months ended March 31, 2000 from 0.7% for the three months ended
March 31, 1999. The increase in this expense is the result of an increase since
March 31, 1999 in the average balance of borrowings under the Company's $100
million revolving line of credit.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $2.3 million,
or 38.1%, to $8.5 million for the three months ended March 31, 2000 from $6.2
million for the three months ended March 31, 1999. The Company's effective
income tax rate was 37.8% for the three months ended March 31, 2000 and for the
three months ended March 31, 1999.
The amount of income taxes paid decreased from $5.7 million in the three months
ended March 31, 1999 compared to $308,000 in the three months ended March 31,
2000 because of a change in the timing of estimated tax payments which resulted
from a change in the Company's tax year end from September 30 to December 31.
However, during the three months ending June 30, 2000, the Company will be
required to make two estimated tax payments, compared to one payment made in the
comparable prior period.
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
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$678,000 (net of an income tax benefit of $410,000) in the three months ended
March 31, 1999.
NET INCOME. Net income increased $4.5 million, or 48.0%, to $14.0 million for
the three months ended March 31, 2000 from $9.5 million for the three months
ended March 31, 1999. As a percentage of net revenue, net income increased to
21.3% for the three months ended March 31, 2000 from 20.7% for the three months
ended March 31, 1999 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $15.1 million
for the three month period ended March 31, 2000 as compared to $5.7 million in
the comparable period of 1999. The increase was partially due to the timing of
the Company's federal income tax payments. In 1998 the company changed its tax
year end from September 30 to December 31. As a result, there was no federal tax
payment required in the first quarter of 2000, but there was a payment in the
first quarter of 1999. There will be two payments in the second quarter of 2000.
The $14.0 million in net income for the three month period ended March 31, 2000
was partially offset by increases in working capital accounts required to fund
the Company's growth. Net billed and unbilled patient receivables at March 31,
2000 increased $9.2 million over December 31, 1999 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,
2000 1999
-------- --------
<S> <C> <C>
(Increase) decrease in patient receivables:
Orthodontic Centers affiliated more than 26 months
Patient receivables $ (720) $ (220)
Unbilled patient receivables and
patient prepayments (2,926) (848)
-------- --------
(3,646) (1,068)
Orthodontic Centers affiliated less than 26 months
Patient receivables (1,749) (1,453)
Unbilled patient receivables and
patient prepayments (3,829) (3,619)
-------- --------
(5,578) (5,072)
-------- --------
Total increase in patient receivables $ (9,224) $ (6,140)
======== ========
</TABLE>
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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 the cost of entering into service and consulting agreements and
related assets, during the remainder of 2000. 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, 2000, the Company expended $70.9 million
of cash for fixed assets, intangible assets, repayment of long-term debt and
income taxes. However, the Company's cash and cash equivalents 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,
2000 1999
-------- --------
<S> <C> <C>
Cash, cash equivalents and available for sale
investments at January 1 $ 5,822 $ 1,601
(Decrease)/increase in cash, cash equivalents and available
for sale investments, three months ended March 31 11,285 586
-------- --------
Cash and cash equivalents $ 17,107 $ 2,187
======== ========
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
During the three months ended March 31, 2000 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, 1999.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On April 7, 2000, the Company entered into a definitive asset purchase
agreement with Apple Orthodontix, Inc. ("Apple"), whereby the Company would
acquire up to 47 of Apple's service agreements and related practice assets in
exchange for cash. Apple provides practice management services to orthodontic
practices in the United States and Canada and filed a voluntary petition under
Chapter 11 of the U.S. Bankruptcy Code on January 27, 2000. The Company has
proposed to issue shares of the Company's common stock to Apple-affiliated
orthodontists who consent to the Company's acquisition of their service
agreements. The transaction, which management expects will close in June 2000,
is subject to among other things, approval by the U.S. Bankruptcy Court for the
Southern District of Texas and consent by the orthodontists whose service
agreements are to be acquired.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit number Description
-------------- -----------
<S> <C>
3.1 Bylaws of the Registrant (incorporated
by reference to exhibits filed with the
Registrant's Registration Statement on
Form S-1, Registration Statement No.
33-85326)
3.2 Restated Certificate of Incorporation of
the Registrant (incorporated by
reference to exhibits filed with the
Registrant's Registration Statement on
Form S-1, Registration Statement No.
33-85326)
4 Specimen Stock Certificate (incorporated
by reference to exhibits filed with the
Registrant's Registration Statement on
Form S-1, Registration Statement No.
33-85326)
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K for the three months ended
March 31, 2000.
15
<PAGE> 16
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 12, 2000 /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
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit number Description
-------------- -----------
<S> <C>
3.1 Bylaws of the Registrant (incorporated
by reference to exhibits filed with the
Registrant's Registration Statement on
Form S-1, Registration Statement No.
33-85326)
3.2 Restated Certificate of Incorporation of
the Registrant (incorporated by
reference to exhibits filed with the
Registrant's Registration Statement on
Form S-1, Registration Statement No.
33-85326)
4 Specimen Stock Certificate (incorporated
by reference to exhibits filed with the
Registrant's Registration Statement on
Form S-1, Registration Statement No.
33-85326)
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<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-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 17,107 2,187
<SECURITIES> 0 0
<RECEIVABLES> 100,813 72,780
<ALLOWANCES> 0 0
<INVENTORY> 8,210 6,910
<CURRENT-ASSETS> 143,801 94,272
<PP&E> 63,455 51,799
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 392,849 308,947
<CURRENT-LIABILITIES> 28,000 27,561
<BONDS> 0 0
0 0
0 0
<COMMON> 483 479
<OTHER-SE> 155,392 152,789
<TOTAL-LIABILITY-AND-EQUITY> 392,849 308,947
<SALES> 0 0
<TOTAL-REVENUES> 65,765 49,048
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 42,568 32,382
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 788 350
<INCOME-PRETAX> 22,528 16,316
<INCOME-TAX> 8,504 6,1596
<INCOME-CONTINUING> 14,024 10,157
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 (678)
<NET-INCOME> 14,024 9,479
<EPS-BASIC> .29 .20
<EPS-DILUTED> .29 .19
</TABLE>
