-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WQIrNIxKgXuLukZ8fWDT7kch8PeP3N1+r1U5vDZ15HMunX+bSYBAnn/NR4mk5/ee fS7muIWcfTbymb7pda/9cA== 0000899243-97-001623.txt : 19970815 0000899243-97-001623.hdr.sgml : 19970815 ACCESSION NUMBER: 0000899243-97-001623 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORTHODONTIC CENTERS OF AMERICA INC /DE/ CENTRAL INDEX KEY: 0000931702 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 721278948 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25256 FILM NUMBER: 97660877 BUSINESS ADDRESS: STREET 1: 13000 SAWGRASS VILLAGE CR STREET 2: STE 41 CITY: PONTE VEDRA BEACH STATE: FL ZIP: 32082 BUSINESS PHONE: 9042730004 MAIL ADDRESS: STREET 1: 3850 N CAUSEWAY BLVD STREET 2: STE 990 CITY: METAIRIE STATE: LA ZIP: 70002 10-Q 1 FORM 10-Q 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 JUNE 30, 1997, 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 August 10, 1997, there were 43,999,804 outstanding shares of the Registrant's Common Stock, $.01 par value per share. ORTHODONTIC CENTERS OF AMERICA, INC. TABLE OF CONTENTS Page ---- Part I. Financial Information Item 1. Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - June 30, 1997 and December 31, 1996........................... 3 Condensed Consolidated Statements of Income - Six Months Ended June 30, 1997 and 1996....................... 4 Condensed Consolidated Statements of Income - Three Months Ended June 30, 1997 and 1996..................... 5 Condensed Consolidated Statements of Cash Flow - Six Months Ended June 30, 1997 and 1996....................... 6 Notes to Condensed Consolidated Financial Statements - June 30, 1997.................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 10 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders.......... 17 Item 6. Exhibits and Reports on Form 8-K............................. 18 FORWARD-LOOKING STATEMENTS Statements contained in this Report which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include the statements regarding litigation filed against the Company, locating Orthodontic Centers in locations not shared with a general dentist and funding of the Company's developments, acquisitions and operations. Such forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These risks and uncertainties include regulatory constraints, changes in laws regulating the practice of dentistry or the interpretation of such laws, competition from other orthodontists and practice management companies, failure to consummate proposed developments or acquisitions, the ability of the Company to effectively manage an increasing number of Orthodontic Centers, the general economy of the United States and the specific markets in which the Orthodontic Centers are or are proposed to be located, and other factors as may be identified from time to time in the Company's filings with the Securities and Exchange Commission or in other public announcements by the Company. 2 Part 1. Financial Information Item 1. Consolidated Financial Statements Orthodontic Centers of America, Inc. Condensed Consolidated Balance Sheets June 30 December 31 1997 1996 (1) ----------- ----------- (Unaudited) (in thousands) ASSETS: Current assets: Cash and cash equivalents $ 2,849 $ 11,827 Investments 2,552 12,621 Patient receivables, net 10,265 7,422 Unbilled patient receivables, net 23,674 18,398 Amounts receivable from orthodontic entities 2,499 2,191 Supplies inventory, prepaid expenses and other assets 4,299 3,670 -------- -------- Total current assets 46,138 56,129 Property, equipment & improvements, net 30,083 24,201 Investments 8,486 6,482 Amounts receivable from orthodontic entities, less current portion 4,862 5,369 Intangible assets 63,438 52,682 Other assets 351 236 -------- -------- Total assets $153,358 $145,099 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable and other current liabilities $ 13,129 $ 12,850 Deferred income taxes 277 2,162 Current portion of long-term debt 816 898 -------- -------- Total current liabilities 14,222 15,910 Deferred income taxes 11,374 11,803 Long-term debt, less current portion 1,999 2,499 Stockholders' Equity: Preferred stock --- --- Common stock, $.01 par value per share, 80,000,000 shares authorized, 43,999,804 shares outstanding at June 30, 1997 and 43,888,722 shares outstanding at December 31, 1996 440 439 Additional paid-in capital 93,025 92,294 Retained earnings 32,298 22,154 -------- -------- Total stockholders' equity 125,763 114,887 -------- -------- Total liabilities and stockholders' equity $153,358 $145,099 ======== ======== (1) The consolidated balance sheet at December 31, 1996 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 Orthodontic Centers of America, Inc. Condensed Consolidated Statements of Income (Unaudited) Six Months Ended June 30 --------------------------- 1997 1996 --------------------------- (in thousands, except per share data) Net revenue $52,379 $29,236 Direct expenses: Employee costs 15,168 8,402 Orthodontic supplies 3,823 2,244 Rent 4,621 2,602 Advertising and marketing 4,206 2,691 ------- ------- 27,817 15,939 General and administrative 6,147 3,730 Depreciation and amortization 2,418 1,060 ------- ------- Operating profit 15,997 8,507 Interest expense (147) (202) Interest income 779 1,277 ------- ------- Income before income taxes 16,629 9,582 Provision for income taxes 6,485 3,737 ------- ------- Net income $10,144 $ 5,845 ======= ======= Earnings per common and common equivalent share $ 0.23 $ 0.14 ======= ======= Earnings per common share - assuming full dilution $ 0.22 $ 0.13 ======= ======= See notes to condensed consolidated financial statements. 4 Orthodontic Centers of America, Inc. Condensed Consolidated Statements of Income (Unaudited) Three Months Ended June 30 --------------------------- 1997 1996 --------------------------- (in thousands, except per share data) Net revenue $27,480 $15,517 Direct expenses: Employee costs 7,698 4,418 Orthodontic supplies 2,048 1,145 Rent 2,279 1,411 Advertising and marketing 2,372 1,389 ------- ------- 14,397 8,363 General and administrative 3,249 1,990 Depreciation and amortization 1,304 572 ------- ------- Operating profit 8,530 4,592 Interest expense (69) (98) Interest income 343 606 ------- ------- Income before income taxes 8,804 5,100 Provision for income taxes 3,434 1,989 ------- ------- Net income $ 5,370 $ 3,111 ======= ======= Earnings per common and common equivalent share $ 0.12 $ 0.07 ======= ======= Earnings per common share - assuming full dilution $ 0.12 $ 0.07 ======= ======= See notes to condensed consolidated financial statements. 5 Orthodontic Centers of America, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30 ---------------------- 1997 1996 ---------------------- (in thousands) Operating activities: Net income $ 10,144 $ 5,845 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for bad debt expense 785 661 Depreciation and amortization 2,418 1,060 Deferred income taxes (1,529) (3,077) Changes in operating assets and liabilities Patient receivables (3,276) (1,773) Unbilled patient receivables and patient prepayments (4,939) (3,520) Supplies inventory, prepaid expenses and other (744) 33 Amounts receivable from/payable to orthodontic entities 299 (1,319) Accounts payable and other current liabilities 1,084 (333) -------- ------- Net cash provided by (used in) operating activities $ 4,242 $(2,423) Investing Activities: Purchase of property, equipment and improvements (7,480) (4,550) Net proceeds from available-for-sale investments 8,065 214 Intangible assets acquired (13,168) (497) -------- ------- Cash used in investing activities (12,887) (4,833) Financing activities: Issuance of common stock 249 506 Repayment of long-term debt (588) (765) -------- ------- Cash provided by (used in) financing activities (333) (259) -------- ------- Net change in cash and cash equivalents (8,978) (7,515) Cash & cash equivalents at beginning of period 11,827 18,779 -------- ------- Cash & cash equivalents at end of period $ 2,849 $11,264 ======== ======= Supplemental cash flow information Interest paid $ 147 $ 202 ======== ======= Income taxes paid $ 9,560 $ 7,027 ======== ======= 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 $ (348) $ 295 ======== ======= See notes to condensed consolidated financial statements. 6 Orthodontic Centers of America, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 1997 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 297 orthodontic centers located in 34 states as of June 30, 1997. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments necessary to convert the Company's cash basis accounting records to the accrual basis) considered necessary for a fair presentation have been included. Operating results for the three and six month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. 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, 1996. 2. REVENUE RECOGNITION The Company's services are provided under service and consulting agreements with affiliated orthodontists' orthodontic entities ("management agreements"). These management agreements are for terms of 20-40 years. Net revenue earned by the Company under the management agreements is 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 affiliated orthodontists. The affiliated orthodontists retain all orthodontic center revenue not paid to the Company as the management fee. The amounts retained by the affiliated orthodontists are dependent on their financial performance, based in significant part on their cash 7 Orthodontic Centers of America, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) 2. REVENUE RECOGNITION (CONTINUED) receipts and disbursements. Under the terms of the management agreements, the affiliated orthodontists assign their receivables (billed and unbilled) to the Company in payment of their management fees. The Company is responsible for collections. 3. EARNINGS PER COMMON SHARE Primary and fully 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. All earnings per share numbers reported have been adjusted for the Company's 2-for-1 stock split, effected in the form of a 100% stock dividend, effective September, 1996. The weighted average number of primary and fully diluted outstanding shares for the six months ended June 30, 1997 were 43,821,000 and 45,212,000, respectively. The weighted average number of primary and fully diluted shares outstanding for the six months ended June 30, 1996 were 42,009,000 and 43,376,000, respectively. The weighted average number of primary and fully diluted outstanding shares for the three months ended June 30, 1997 were 43,852,000 and 45,331,000, respectively. The weighted average number of primary and fully diluted shares outstanding for the three months ended June 30, 1996 were 42,216,000 and 42,216,000, respectively. In February, 1997, the Financial Accounting Standards Board issued Statement no. 128, Earnings Per Share, which the Company will be required to adopt during the year ending December 31, 1997. The adoption of this Statement is not expected to have a material effect on the calculation of earnings per share. 4. CONTINGENCIES On March 4, 1996, the Company was served with a complaint filed against the Company, Dr. Lazzara and Mr. Palmisano on February 20, 1996 in the United States District Court for the Southern District of California. The complaint alleges that the Company breached the terms of an agreement with the plaintiff whereby the plaintiff was granted certain rights to recruit orthodontists to affiliate with the Company. The complaint further alleges that the Company interfered with the plaintiff's business advantage by entering into direct negotiations with unnamed orthodontists, and that the Company breached a duty to the plaintiff of good faith and fair dealing. Although the complaint seeks monetary damages, a specific amount was not sought in the complaint. The Company filed an answer to the complaint generally denying the allegations therein. Management believes that the action lacks merit and that the Company has fully performed its obligations under the agreement to date, including the payment of all fees required thereunder. Further, management believes that the Company has meritorious claims that it may assert against the plaintiff. Management intends to defend the action vigorously and does not believe that this action will have a material adverse effect on the Company's results of operations or financial condition. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's business was established in 1989 by Dr. Gasper Lazzara, Jr. and Bartholomew F. Palmisano, Sr. The Company managed 297 orthodontic centers (the "Orthodontic Centers") in 34 states at June 30, 1997. The following table sets forth certain information relating to the growth in the number of Orthodontic Centers for the periods shown: Six months ended Year ended December 31, June 30, 1991 1992 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- ---- ---- Number of centers at beginning of period 18 31 47 55 75 145 247 Number of centers developed during period 9 5 4 22 44 53 30 Number of centers acquired during period 5 17 5 1 29 68 31 Number of centers consolidated during period (1) (6) (1) (3) (3) (19) (11) ---- ---- ---- ---- ---- ---- ---- Number of centers at end of period 31 47 55 75 145 247 297 ==== ==== ==== ==== ==== ==== ==== At June 30, 1997, three Orthodontic Centers were located in a general dentist's office. The Company intends to relocate these three Orthodontic Centers to free-standing locations as soon as practicable. In developing additional Orthodontic Centers, the Company intends to locate the Orthodontic Centers only in free-standing locations. By locating in free-standing locations, Orthodontic Centers have been able to increase available operating days and thereby enhance their revenue producing capability. Of the 297 Orthodontic Centers at June 30, 1997, 164 were developed by the Company and 133 were existing orthodontic practices whose assets were acquired by the Company. 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 entering into long-term agreements with, existing practices. The average cost of developing a new Orthodontic Center is approximately $230,000, including the cost of equipment, leasehold improvements, working capital and funding of losses associated with the initial operations of the Orthodontic Center. The costs of developing a new Orthodontic Center are shared by the Company and the particular Affiliated Orthodontist. The Company assists Affiliated Orthodontists in obtaining financing of their share of such costs through the Company's primary lender. For new developments, the Company has discontinued financing Affiliated Orthodontists' share of losses associated with the initial operations of the Orthodontic Center, which were historically financed by the Company as an unsecured advance repayable by the Affiliated Orthodontist over a 5-year period and bearing interest at 1.5% per annum above the prime rate, with repayment beginning upon the attainment of positive cash flow by the Orthodontic Center (which generally occurs approximately 12 months after an Orthodontic Center commences operations). The Company intends, however, to make advances of approximately $20,000 to newly-affiliated Affiliated Orthodontists during the first year of an Orthodontic Center's operations, which advances bear no interest and typically are repaid during the second year of the Orthodontic Center's operations. The Company is assisting Affiliated Orthodontists in obtaining financing from the Company's primary lender to replace the Company's financing of such Affiliated Orthodontists' share of the costs of previously completed developments. 9 Typically, 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 typically become increasingly more productive and profitable as more new patients are added and existing patients return for monthly follow-up visits. The Company's experience has generally been that after 26 months of operations, the Orthodontic Center's growth in patient base begins to stabilize as patients complete treatment. An Orthodontic Center can increase the number of patients treated through improved efficiency of the clinical staff and additional operating days or Affiliated Orthodontists. Established practices whose assets were acquired by the Company have typically increased their revenue by applying the Company's operating strategies, 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, Affiliated Orthodontists pay a fee to the Company equal to approximately 24% of new patient contract balances of the Affiliated Orthodontists in the first month of treatment plus the balance ratably over the remainder of the patient contract, less amounts retained by the Affiliated Orthodontists. In addition, a $25,000 annual fee is earned by the Company for 42 free-standing Orthodontic Centers with respect to which long-term agreements were entered into with the Company in its October 1994 combination transaction. The amounts retained by an Affiliated Orthodontist are dependent on his or her financial performance, based in significant part on his or her profitability on a cash basis, as provided in the service agreements. In exchange for its fee, the Company provides capital for the development and growth of Orthodontic Centers and manages the business and marketing aspects of Orthodontic Centers, including implementing advertising and marketing programs, preparing budgets, purchasing inventory, providing patient scheduling systems, billing and collecting fees and maintaining records. Operating expenses of the Orthodontic Centers are expenses of the Company and are recognized as incurred. The terms of consulting agreements differ significantly from the terms of service agreements and vary depending upon the regulatory requirements of the particular state in which an Orthodontic Center is located. Currently, in one state, the Company may only provide consulting services to the orthodontists and may not manage the orthodontist's practice. The consulting fee payable to the Company is determined at the time of affiliation, is limited to the consulting services performed and is based on criteria such as the number of hours of operations of the applicable Orthodontic Centers. Employee costs consist of wages, salaries and benefits paid to all employees of the Company, including orthodontic assistants, business staff and management personnel. General and administrative expenses consist of provision for losses of patient contracts and receivables, professional service fees, maintenance and utility costs, office supply expense, telephone expense, taxes, license fees, and printing and shipping expense. Patient contracts are for terms averaging 26 months and are payable in equal monthly installments throughout the term of treatment, except for the last month when a final payment is made. During 1996, the Orthodontic Centers implemented a price increase recommended by the Company from $89 per month with a final payment of $356 to $98 per month with a final payment of $392. 10 SEASONALITY The Orthodontic Centers have experienced their highest volume of new cases in the summer and certain other periods when schools are not typically in session. During these periods, children have a greater opportunity to visit an orthodontist to commence treatment. Consequently, Orthodontic Centers have experienced higher revenue during the first and third quarters of the year as a result of increased patient starts. During the Thanksgiving and Christmas seasons, the Orthodontic Centers have experienced reduced volume and fourth quarter revenue for Orthodontic Centers has been generally lower as compared to other periods. Seasonality in recent periods has been mitigated by the impact of additional Orthodontic Centers. RESULTS OF OPERATIONS The following table sets forth the percentages of net revenue represented by certain items in the Company's condensed consolidated statements of income. Six Months Ended Three Months Ended June 30, June 30, 1997 1996 1997 1996 ---- ---- ---- ---- Net revenue 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- Direct expenses Employee cost 29.0 28.7 28.0 28.5 Orthodontic supplies 7.3 7.7 7.5 7.4 Rent 8.8 8.9 8.3 9.1 Advertising and marketing 8.0 9.2 8.6 9.0 ---- ---- ---- ---- Total direct expenses 53.1 54.5 52.4 54.0 General and administrative 11.7 12.8 11.8 12.8 Depreciation and amortization 4.6 3.6 4.7 3.7 ---- ---- ---- ---- Operating profit 30.6 29.1 31.1 29.5 Interest (income) expense (1.2) (3.7) (1.0) (3.3) ---- ---- ---- ---- Income before income taxes 31.8 32.8 32.1 32.8 Provision for income taxes 12.4 12.8 12.5 12.8 ---- ---- ---- ---- Net income 19.4% 20.0% 19.6% 20.0% ==== ==== ==== ==== SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 NET REVENUE. Net revenue increased 79.2% from $29.2 million for the six months ended June 30, 1996 to $52.4 million for the six months ended June 30, 1997. Approximately $15.2 million of this increase was attributable to the 170 (net of consolidations) Orthodontic Centers opened since January 1, 1996, approximately $6.5 million to the growth in net revenue of the 127 Orthodontic Centers open throughout both periods, and approximately $1.5 million related to the Affiliated Orthodontists' share of the operating losses of newly-developed Orthodontic Centers, which amounts were advanced by the Company. The number of patient contracts increased from approximately 62,000 at June 30, 1996 to approximately 99,000 at June 30, 1997. EMPLOYEE COSTS. Employee costs increased 80.5% from $8.4 million for the six months ended June 30, 1996 to $15.2 million for the six months ended June 30, 1997. As a percentage of net revenue, employee costs increased from 28.7% for the six months ended June 30, 1996 to 29.0% for the six months ended June 30, 1997. This increase was caused primarily by an increased percentage of new patient treatment days, which require additional staff time per patient, associated with the opening of additional Orthodontic Centers and the recent increase in affiliations with existing orthodontic practices. These orthodontic practices have tended to have higher employee cost percentages than a typical Orthodontic Center and have taken approximately one year to completely convert to the Company's operating systems. ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased 70.3% from 11 $2.2 million for the six months ended June 30, 1996 to $3.8 million for the six months ended June 30, 1997. As a percentage of net revenue, however, orthodontic supplies decreased from 7.7% for the six months ended June 30, 1996 to 7.3% for the six months ended June 30, 1997. Cost improvements attained through bulk purchasing were offset by increased expense associated with an increased percentage of new patient treatment days, which require greater orthodontic supplies per patient, associated with the opening of additional Orthodontic Centers. RENT. Rent expense increased 77.6% from $2.6 million for the six months ended June 30, 1996 to $4.6 million for the six months ended June 30, 1997. The increase in this expense was attributable to Orthodontic Centers affiliated, opened or relocated after June 30, 1996. As a percentage of net revenue, however, rent expense decreased from 8.9% to 8.8%. ADVERTISING AND MARKETING. Advertising and marketing expense increased 56.3% from $2.7 million for the six months ended June 30, 1996 to $4.2 million for the six months ended June 30, 1997. The increase in this expense resulted primarily from the addition of Orthodontic Centers after June 30, 1996. As a percentage of net revenue, however, advertising and marketing expense decreased from 9.2% for the six months ended June 30, 1996 to 8.0% for the six months ended June 30, 1997. The decrease in this expense as a percentage of net revenue is the result of cost improvements achieved through bulk media and production purchases. GENERAL AND ADMINISTRATIVE. General and administrative expense increased 64.8% from $3.7 million for the six months ended June 30, 1996 to $6.1 million for the six months ended June 30, 1997. The increase in general and administrative expense resulted primarily from the addition of Orthodontic Centers after June 30, 1996. As a percentage of net revenue, however, general and administrative expense decreased from 12.8% to 11.7%. General and administrative expense decreased as a percentage of net revenue as a result of decreased startup costs for Orthodontic Centers opened or relocated during the second quarter of 1997. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased 128.1% from $1.1 million for the six months ended June 30, 1996 to $2.4 million for the six months ended June 30, 1997. The increase in this expense is a result of the fixed assets acquired and management agreements entered into for Orthodontic Centers developed, acquired or relocated after June 30, 1996. OPERATING PROFIT. Operating profit increased 88.1% from $8.5 million for the six months ended June 30, 1996 to $16.0 million for the six months ended June 30, 1997. As a percentage of net revenue, operating profit increased from 29.1% to 30.6% for the same periods, respectively, as a result of the factors discussed above. INTEREST. Net interest income decreased 41.2% from $1.1 million for the six months ended June 30, 1996 to $600,000 for the six months ended June 30, 1997. The decrease in interest income resulted from a decrease in the Company's average investment balance resulting from the investment of unexpended proceeds from the Company's June 1995 public offering. PROVISION FOR INCOME TAXES. Provision for income taxes increased 73.6% from $3.7 million for the six months ended June 30, 1996 to $6.5 million for the six months ended June 30, 1997. The Company's effective income tax rate was 39.0% for both periods. 12 THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996 NET REVENUE. Net revenue increased 77.1% from $15.5 million for the three months ended June 30, 1996 to $27.5 million for the three months ended June 30, 1997. Approximately $6.8 million of this increase was attributable to the 170 (net of consolidations) Orthodontic Centers opened since March 31, 1996, approximately $4.4 million to the growth in net revenue of the 127 Orthodontic Centers open throughout both periods, and approximately $800,000 related to the Affiliated Orthodontists' share of the operating losses of newly-developed Orthodontic Centers, which amounts were advanced by the Company. The number of patient contracts increased from approximately 62,000 at June 30, 1996 to approximately 99,000 at June 30, 1997. EMPLOYEE COSTS. Employee costs increased 74.2% from $4.4 million for the three months ended June 30, 1996 to $7.7 million for the three months ended June 30, 1997. This increase was caused primarily by an increased number patient treatment days, associated with the opening of additional Orthodontic Centers, the recent increase in affiliations with existing orthodontic practices and the growth in the number of active patients. As a percentage of net revenue, however, employee costs decreased from 28.5% for the three months ended June 30, 1996 to 28.0% for the three months ended June 30, 1997. The percentage decreased as a result of improved staff scheduling in recently affiliated Orthodontic Centers. ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased 78.9% from $1.1 million for the three months ended June 30, 1996 to $2.0 million for the three months ended June 30, 1997. As a percentage of net revenue, orthodontic supplies increased from 7.4% for the three months ended June 30, 1996 to 7.5% for the three months ended June 30, 1997. Cost improvements attained through bulk purchasing were offset by increased expense associated with an increased percentage of new patient treatment days, which require greater orthodontic supplies per patient, associated with the opening of additional Orthodontic Centers. RENT. Rent expense increased 61.5% from $1.4 million for the three months ended June 30, 1996 to $2.3 million for the three months ended June 30, 1997. The increase in this expense was attributable to Orthodontic Centers affiliated, opened or relocated after June 30, 1996. As a percentage of net revenue, however, rent expense decreased from 9.1% to 8.3%. The renegotiation of lease arrangements in certain affiliated Orthodontic Centers resulted in a decreased quarterly rent expense for these centers. ADVERTISING AND MARKETING. Advertising and marketing expense increased 70.7% from $1.4 million for the three months ended June 30, 1996 to $2.4 million for the three months ended June 30, 1997. The increase in this expense resulted primarily from the addition of Orthodontic Centers after June 30, 1996. As a percentage of net revenue, however, advertising and marketing expense decreased from 9.0% for the three months ended June 30, 1996 to 8.6% for the three months ended June 30, 1997. The decrease in this expense as a percentage of net revenue is the result of cost improvements achieved through bulk media and production purchases. GENERAL AND ADMINISTRATIVE. General and administrative expense 13 increased 63.3% from $2.0 million for the three months ended June 30, 1996 to $3.2 million for the three months ended June 30, 1997. The increase in general and administrative expense resulted primarily from the addition of Orthodontic Centers after June 30, 1996. As a percentage of net revenue, however, general and administrative expense decreased from 12.8% to 11.8%. General and administrative expense decreased as a percentage of net revenue as a result of decreased startup costs for Orthodontic Centers opened or relocated during the second quarter of 1997. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased 128.0% from $570,000 for the three months ended June 30, 1996 to $1.3 million for the three months ended June 30, 1997. As a percentage of net revenue, depreciation and amortization expense increased from 3.7% to 4.7%. The increase in this expense is a result of the fixed assets acquired and management agreements entered into for Orthodontic Centers developed, acquired or relocated after June 30, 1996. OPERATING PROFIT. Operating profit increased 85.7% from $4.6 million for the three months ended June 30, 1996 to $8.5 million for the three months ended June 30, 1997. As a percentage of net revenue, operating profit increased from 29.5% to 31.1% for the same periods, respectively, as a result of the factors discussed above. INTEREST. Net interest income decreased 46.0% from $510,000 for the three months ended June 30, 1996 to $270,000 for the three months ended June 30, 1997. The decrease in interest income resulted from a decrease in the Company's average investment balance resulting from the investment of unexpended proceeds from the Company's June 1995 public offering. PROVISION FOR INCOME TAXES. Provision for income taxes increased 72.6% from $2.0 million for the three months ended June 30, 1996 to $3.4 million for the three months ended June 30, 1997. The Company's effective income tax rate was 39.0% for both periods. LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $4.2 million for the six month period ended June 30, 1997 as compared to cash used by operations of $2.4 million in the comparable period of 1996. Included in net cash used by operations for the six months ended June 30, 1997, were estimated tax payments of $9.6 million which exceeded the current quarterly tax provision by $3.1 million. The Company was able to use the cash basis of accounting for income tax purposes through its tax year ended September 30, 1995. Beginning with the tax year ended September 30, 1996, the Company is required to use the accrual basis of accounting for income tax purposes. All deferred tax liabilities and assets related to differences between the cash and accrual basis of accounting which existed on October 1, 1995 will reverse over the two year period ending September 30, 1997. As a result, the Company estimates that its cash outlays for income taxes will exceed its provision for income taxes through the remainder of 1997 by approximately $1.5 million. In addition, the $10.1 million in net income for the period was offset by increases in working capital accounts required to fund the Company's growth. Net billed and unbilled patient receivables at June 30, 1997 increased $8.1 million over December 31, 1996 levels as a result of the increase in the number of patients. The following represents information with regard to the Company's Orthodontic Centers open less than 26 months and those open greater than 26 months: 14 Six months ended June 30, 1997 1996 ---- ---- (Increase) decrease in patient receivables: Orthodontic Centers affiliated over 26 months Patient receivables (863) (599) Unbilled patient receivables and patient prepayments (366) (1,269) ------ ------ (1,229) (1,868) Orthodontic Centers affiliated less than 26 months Patient receivables (2,413) (1,174) Unbilled patient receivables and patient prepayments (4,573) (2,251) ------ ------ (6,986) (3,425) ------ ------ Total increase in patient receivables (8,215) (5,293) ====== ====== The Company expects that available cash, cash equivalents, available for sale investments and existing short-term lines of credit will be sufficient to meet its normal operating requirements, including acquisitions of management and consulting contracts, over the near term. During the 12 month period ended, June 30, 1997, the Company expended $44.1 million of cash for fixed assets, intangible assets, repayment of long-term debt and income taxes. However, the Company's cash, cash equivalents and available for sale investments were reduced by only $25.0 million as summarized below. The remainder of the cash expenditures were financed from the Company's operating cash flow. Six months ended June 30, 1997 1996 ---- ---- Cash, cash equivalents and available for sale investments at January 1. $ 30,930 $ 46,672 Decrease in cash, cash equivalents and available for sale investments, 6 months ended June 30. (17,043) (7,729) -------- -------- Cash, cash equivalents and available for sale investments at June 30. $ 13,887 $ 38,943 ======== ======== 15 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The annual meeting of stockholders of the Company was held on Monday, May 19, 1997. At this meeting, the following matters were voted upon by the Company's stockholders. (a) Elector of Class III Directors Gasper Lazzara, D.D.S. and Bartholomew F. Palmisano, Sr. were elected to serve as Class III directors of the Company until the annual meeting of stockholders in 2000 or until their successors are elected and qualified. The vote was as follows: Votes Cast Votes Cast Abstentions Name In Favor Against or Withheld Non Votes - ---- ---------- ------------------- ----------- Gasper Lazzara, DDS 30,740,977 500 13,147,245 Bartholomew Palmisano 30,740,707 770 13,147,245 The following directors continued in office following the meeting: Name Term Expires - ---- ------------ Geoffrey Faux 1998 A. Gordon Tunstall 1998 Michael C. Johnsen 1999 Edward J. Walters 1999 Ashton J. Ryan, Jr. 1999 (b) Approval of increase in number of authorized shares of common stock Security holders approved an increase in the number of authorized shares of common stock from 80,000,000 shares to 100,000,000 shares. The vote was as follows: Votes Cast Votes Cast Abstentions In Favor Against or Withheld Non Votes ---------- ------------------- ----------- 30,710,244 29,349 13,149,129 (c) Selection of Independent Auditors The stockholders of the Company ratified the appointment of Ernst & Young, LLP as the Company's independent auditors for the fiscal year ended December 31, 1997 by the following vote: Votes Cast Votes Cast Abstentions In Favor Against or Withheld Non Votes ---------- ------------------- ----------- 30,737,932 2,091 13,148,699 16 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 June 30, 1997. 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Orthodontic Centers of America, Inc. (Registrant) Date: August 13, 1997 /s/ Bartholomew F. Palmisano, Sr. ------------------------------------- Bartholomew F. Palmisano, Sr. Chief Financial Officer, Senior Vice President Treasurer and Secretary 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS 6-MOS DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 JUN-30-1997 JUN-30-1996 2,849 11,827 11,032 19,103 33,940 25,820 0 0 0 0 46,138 56,129 36,102 28,622 (6,019) (4,421) 153,358 145,099 11,384 15,910 0 0 0 0 0 0 440 439 93,025 92,294 153,358 145,099 0 0 52,379 29,236 0 0 0 0 36,382 20,729 0 0 (632) (1,075) 16,629 9,582 6,485 3,737 10,144 5,845 0 0 0 0 0 0 10,144 5,845 0.23 0.14 0.22 0.13
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