-----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, AICW/bkI4j74N69frCaeviD+FH+OLe3K07C83XN7b/x8J0yYBDRTYOLo7aQfwnes EKVfDnoW41DjisHMg6utFA== 0000899243-96-001485.txt : 19961118 0000899243-96-001485.hdr.sgml : 19961118 ACCESSION NUMBER: 0000899243-96-001485 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96663541 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 FOR 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 SEPTEMBER 30, 1996, 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) 13000 Sawgrass Village, Suite 41 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 5, 1996, there were 42,597,091 outstanding shares of the Registrant's Common Stock, $.01 par value per share. ORTHODONTIC CENTERS OF AMERICA, INC. TABLE OF CONTENTS
Part I. Financial Information Item 1. Consolidated Financial Statements (Unaudited) PAGE September 30, 1996 and December 31, 1995 ............................................... 3 Condensed Consolidated Statements of Income - Nine Months Ended September 30, 1996 and 1995 ............................................................................ 4 Condensed Consolidated Statements of Income - Three Months Ended September 30, 1996 and 1995 ............................................................................ 5 Condensed Consolidated Statements of Cash Flow - Nine Months Ended September 30, 1996 and 1995 ....................................... 6 Notes to Condensed Consolidated Financial Statements - September 30, 1996 ..................................................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................... 10 Part II. Other Information Item 6. Exits and Reports on Form 8-K ....................................................... 17
2 Part 1. Financial Information Item 1. Consolidated Financial Statements Orthodontic Centers of America, Inc. Condensed Consolidated Balance Sheets
September 30 December 31 1996 1995 (1) ----------------- --------------- (Unaudited) (in thousands) ASSETS: Current assets: Cash and cash equivalents $ 11,554 $ 18,779 Investments 13,559 14,804 Patient receivables, net 6,552 3,860 Unbilled patient receivables, net 16,914 12,265 Amounts receivable from orthodontic entities 2,466 2,260 Supplies inventory, prepaid expenses and other assets 3,001 2,476 -------- -------- Total current assets 54,046 54,444 Property, equipment & improvements, net 20,614 14,014 Investments 9,421 13,089 Amounts receivable from orthodontic entities, less current portion 7,670 4,903 Intangible assets 16,343 5,928 Other assets 1,411 195 -------- -------- Total assets $109,505 $92,573 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable and other current liabilities $ 10,091 $ 7,056 Deferred income taxes 1,923 2,468 Current portion of long-term debt 1,038 1,142 -------- -------- Total current liabilities 13,052 10,666 Deferred income taxes --- 1,246 Long-term debt, less current portion 2,604 3,348 Stockholders' Equity: Preferred stock --- --- Common stock, $.01 par value per share, 30,000,000 shares authorized, 42,563,227 shares outstanding at September 30, 1996 and 20,889,764 shares outstanding at December 31, 1995 426 209 Additional paid-in capital 75,750 69,352 Retained earnings 17,673 7,752 -------- -------- Total stockholders' equity 93,849 77,313 -------- -------- Total liabilities and stockholders' equity $109,505 $92,573 ======== ========
(1) The consolidated balance sheet at December 31, 1995 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) Nine Months Ended September 30 ------------------------ 1996 1995 ------------------------ (in thousands, except per share data) Net revenue $48,117 $29,191 Direct expenses: Employee costs 13,414 8,323 Orthodontic supplies 3,675 2,283 Rent 4,177 2,376 Advertising and marketing 4,475 3,079 ------- ------- 25,741 16,061 General and administrative 5,851 3,538 Depreciation and amortization 1,833 979 ------- ------- Operating profit 14,692 8,613 Interest expense (305) (362) Interest income 1,876 1,535 ------- ------- Income before income taxes 16,263 9,786 Provision for income taxes 6,342 3,719 ------- ------- Net income $ 9,921 $ 6,067 ======= ======= Earnings per common and dilutive common equivalent share Assuming no dilution $ 0.24 $ 0.16 ======= ======= Assuming full dilution $ 0.23 $ 0.16 ======= ======= See notes to condensed consolidated financial statements. 4 Orthodontic Centers of America, Inc. Condensed Consolidated Statements of Income (Unaudited) Three Months Ended September 30 --------------------------- 1996 1995 --------------------------- (in thousands, except per share data) Net revenue $ 18,881 $ 11,490 Direct expenses: Employee costs 5,013 3,271 Orthodontic supplies 1,431 879 Rent 1,575 969 Advertising and marketing 1,784 1,294 -------- -------- 9,803 6,413 General and administrative 2,120 1,367 Depreciation and amortization 773 392 -------- -------- Operating profit 6,185 3,318 Interest expense (104) (115) Interest income 599 885 -------- -------- Income before income taxes 6,680 4,088 Provision for income taxes 2,605 1,553 -------- -------- Net income $ 4,075 $ 2,543 ======== ======== Earnings per common and dilutive common equivalent share Assuming no dilution $ 0.10 $ 0.06 ======== ======== Assuming full dilution $ 0.09 $ 0.06 ======== ======== See notes to condensed consolidated financial statements. 5 Orthodontic Centers of America, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30 --------------------------------- 1996 1995 --------------------------------- (in thousands) Operating activities: Net income $ 9,921 $ 6,067 Adjustments to reconcile net income to net cash provided by operating activities: Provision for bad debt expense 947 586 Depreciation and amortization 1,833 979 Deferred income taxes, timing differences (702) 1,567 Changes in operating assets and liabilities Patient receivables, centers affiliated over 26 months (1,035) (644) Unbilled patient receivables and patient prepayments, centers affiliated over 26 months (1,689) (492) Supplies inventory, prepaid expenses and other (258) (354) Accounts payable and other current liabilities 1,204 (281) -------- -------- Net cash provided by operating activities $ 10,221 $ 7,428 Investing Activities: Patient receivables, centers affiliated less than 26 months (2,337) (1,330) Unbilled patient receivables and patient prepayments, centers affiliated less than 26 months (3,228) (1,696) Purchase of property, equipment and improvements (8,080) (6,478) Net proceeds from available-for-sale investments 4,913 --- Intangible assets acquired (3,334) (3,557) -------- -------- Cash used in investing activities (12,066) (13,061) Financing activities: Issuance of common stock 484 41,366 Change in deferred income taxes resulting from tax payments attributable to change from cash to accrual basis for tax purposes (2,173) 0 Amounts receivable from/payable to orthodontic entities (2,723) (4,230) Repayment of long-term debt (968) (1,002) -------- -------- Cash provided by (used in) financing activities (5,380) 36,134 -------- -------- Increase (decrease) in cash and cash equivalents (7,225) 30,501 Cash & cash equivalents at beginning of period 18,779 17,108 -------- -------- Cash & cash equivalents at end of period $ 11,554 $ 47,609 ======== ======== Supplemental cash flow information Interest paid $ 306 $ 115 ======== ======== Income taxes paid $ 8,191 $ 2,269 ======== ========
6 Orthodontic Centers of America, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued) Nine Months Ended September 30 ------------------------ 1996 1995 ------------------------ Supplemental disclosures of non-cash investing and financing activities: Long term debt and common stock issued to acquire intangible and other assets $ 7,433 $ 1,822 ======== ======== Cash, cash equivalents and available for sale investments at July 1, 1996 and 1995 respectively $ 38,763 $53,068 Decrease in cash, cash equivalents and available for sale investments, 3 months ended September 30, 1996 and 1995, respectively (4,229) (5,459) Cash, cash equivalents and available for sale investments at September 30, 1996 and 1995 respectively $34,534 $47,609 ======= ======= See notes to condensed consolidated financial statements. 7 Orthodontic Centers of America, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 1996 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 189 orthodontic centers located in 26 states as of September 30, 1996. 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, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in Orthodontic Centers of America, Inc.'s annual report on Form 10-K for the year ended December 31, 1995. 2. REVENUE RECOGNITION The Company's services are provided under service, management and consulting agreements with the orthodontic entities ("management agreements"). These management agreements are for terms of 20 years. The practicing orthodontists own the orthodontic entity. Net revenue earned by the Company under the management agreements with orthodontic entities 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 orthodontic entities. The Company's management fee also includes a $25,000 annual fee paid to the Company for certain free-standing centers. The orthodontic entities retain all orthodontic center revenue not paid to the Company as the management fee. The amounts retained by the orthodontic entities are dependent on their financial performance, based 8 Orthodontic Centers of America, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) 2. REVENUE RECOGNITION (CONTINUED) in significant part on the orthodontic entities' cash receipts and disbursements. Under the terms of the management agreements, the orthodontic entities 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 two 2-for-1 stock splits, each effected in the form of a 100% stock dividend, effective December, 1995 and September, 1996. The weighted average shares outstanding for the three months ended September 30, 1996 was 42,497,657. Common stock equivalents were immaterial for the three months ended September 30, 1996. The weighted average number of primary and fully diluted shares for the nine months ended September 30, 1996 were 42,172,195 and 43,507,135, respectively. The weighted average shares outstanding for the three and nine months ended September 30, 1995 were 41,749,312 and 37,020,640, respectively. Common stock equivalents were immaterial for the three and nine months ended September 30, 1995. 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. 9 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 189 orthodontic centers (the "Orthodontic Centers") in 26 states at September 30, 1996. The following table sets forth certain information relating to the growth in the number of Orthodontic Centers for the periods shown:
Nine months ended Year ended December 31, September 30, 1991 1992 1993 1994 1995 1996 ----- ----- ------------ ----------- ----- ------------------ Number of centers at beginning of period 18 31 47 55 75 145 Number of centers developed during period 9 5 4 22 44 36 Number of centers acquired during period 5 17 5 1 29 23 Number of centers consolidated during period (1) (6) (1) (3) (3) (15) ---- ---- ---- ---- ---- ---- Number of centers at end of period 31 47 55 75 145 189 ==== ==== ==== ==== ==== ====
- ----------------------------- * At November 6, 1996, six Orthodontic Centers, including five Orthodontic Centers added in August 1995 in connection with the affiliation of an existing practice with the Company, were located in a general dentist's office. The company intends to relocate these six 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 are able to increase available operating days and thereby enhance their revenue producing capability. Of the 189 Orthodontic Centers at September 30, 1996, 119 were developed by the Company and 70 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. Of this amount, approximately $45,000 is financed by the Company to fund the Affiliated Orthodontist's professional entities' ("Affiliated Orthodontic Entities") share of operating losses as an unsecured advance repayable over a five-year period with interest at 1.5% per annum above the prime rate. Repayment commences upon the Orthodontic Center realizing positive cash flow from operations, which generally occurs approximately 12 months after the Orthodontic Center has begun operations. In addition, the Company makes advances of approximately $20,000 to new Affiliated Orthodontic Entities during the first year of an Orthodontic Center's operations which bear no interest and are typically repaid during the second year of the Orthodontic Center's operations. 10 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 Center becomes 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 for the 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, management or consulting agreements entered into with Affiliated Orthodontic Entities. Pursuant to the service and management agreements, Affiliated Orthodontic Entities pay a fee to the Company equal to approximately 24% of new patient contract balances of the Affiliated Orthodontic Entities in the first month of treatment plus the balance ratably over the remainder of the patient contract, less amounts retained by the Affiliated Orthodontic Entity. 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 the Combination Transaction. The amounts retained by an Affiliated Orthodontic Entity are dependent on its financial performance, based in significant part on its profitability on a cash basis, as provided in the service and management 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 and management agreements and vary depending upon the regulatory requirements of the particular state in which an Orthodontic Center is located. Generally, in those states, 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 have begun to implement a price increase from $89 per month with a final payment of $356 to $98 per month with a final payment of $398. 11 SEASONALITY An Orthodontic Center experiences its 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, an Orthodontic Center experiences higher revenue during the first and third quarters of the year as a result of increased patient starts. During the Thanksgiving and Christmas seasons, an Orthodontic Center experiences reduced volume and fourth quarter revenue for an Orthodontic Center is 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.
Nine Months Ended Three Months Ended September 30, September 30, 1996 1995 1996 1995 ---- ---- ---- ---- Net revenue 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- Direct expenses Employee cost 27.9 28.5 26.5 28.5 Orthodontic supplies 7.6 7.8 7.6 7.7 Rent 8.7 8.1 8.3 8.4 Advertising and marketing 9.3 10.5 9.4 11.3 ----- ----- ----- ----- Total direct expenses 53.5 55.0 51.9 55.8 General and administrative 12.2 12.1 11.2 11.9 Depreciation and amortization 3.8 3.4 4.1 3.4 ----- ----- ----- ----- Operating profit 30.5 29.5 32.8 28.9 Interest (income) expense (3.3) (4.0) (2.6) (6.7) ----- ----- ----- ----- Income before income taxes 33.8 33.5 35.4 35.6 Provision for income taxes 13.2 12.7 13.8 13.5 ----- ----- ----- ----- Net income 20.6% 20.8% 21.6% 22.1% ===== ===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1995 NET REVENUE. Net revenue increased 64.8% from $29.2 million for the nine months ended September 30, 1995 to $48.1 million for the nine months ended September 30, 1996. Approximately $9.9 million of this increase was attributable to the 114 (net of consolidations) Orthodontic Centers opened since January 1, 1995, approximately $7.2 million to the growth in net revenue of the 75 Orthodontic Centers open throughout both periods, and approximately $1.8 million related to the Affiliated Orthodontic Entities' 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 46,000 at September 30, 1995 to approximately 71,000 at September 30, 1996. EMPLOYEE COSTS. Employee costs increased 61.2% from $8.3 million for the nine months ended September 30, 1995 to $13.4 million for the nine months ended September 30, 1996. This increase was caused by an increase in the number of patient contracts which required additional employee time to treat these patients. As a percentage of net revenue, however, employee costs decreased from 28.5% for the nine months ended September 30, 1995 to 27.9% for the nine months ended September 30, 1996. The decrease in employee costs as a percentage of net revenue resulted from increased efficiency in scheduling and monitoring employee productivity for all patient days. 12 ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased 61.0% from $2.3 million for the nine months ended September 30, 1995 to $3.7 million for the nine months ended September 30, 1996. As a percentage of net revenue, however, orthodontic supplies decreased from 7.8% for the nine months ended September 30, 1995 to 7.6% for the nine months ended September 30, 1996. Cost improvements attained through bulk purchasing offset the 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 75.8% from $2.4 million for the nine months ended September 30, 1995 to $4.2 million for the nine months ended September 30, 1996. As a percentage of net revenue, rent expense increased from 8.1% to 8.7%. The increase in this expense as a percentage of net revenue was attributable to the relatively fixed nature of the expense in conjunction with the opening of additional Orthodontic Centers, which typically generate less net revenue during their initial operations. ADVERTISING AND MARKETING. Advertising and marketing expense increased 45.3% from $3.1 million for the nine months ended September 30, 1995 to $4.5 million for the nine months ended September 30, 1996. The increase in this expense resulted primarily from the addition of Orthodontic Centers after September 30, 1995. As a percentage of net revenue, however, advertising and marketing expense decreased from 10.5% for the nine months ended September 30, 1995 to 9.3% for the nine months ended September 30, 1996. 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 65.4% from $3.5 million for the nine months ended September 30, 1995 to $5.9 million for the nine months ended September 30, 1996. The increase in general and administrative expense resulted primarily from the addition of Orthodontic Centers after September 30, 1995. As a percentage of net revenue, however, general and administrative expense decreased from 12.2% to 12.1%. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased 87.2% from $980,000 for the nine months ended September 30, 1995 to $1.8 million for the nine months ended September 30, 1996. As a percentage of net revenue, depreciation and amortization expense increased from 3.4% to 3.8%. The increase in this expense is a result of the fixed assets acquired for Orthodontic Centers developed or relocated after September 30, 1995. OPERATING PROFIT. Operating profit increased 70.6% from $8.6 million for the nine months ended September 30, 1995 to $14.7 million for the nine months ended September 30, 1996. As a percentage of net revenue, operating profit increased from 29.5% to 30.5% for the same periods, respectively, as a result of the factors discussed above. INTEREST. Net interest income increased 33.9% from $1.2 million for the nine months ended September 30, 1995 to $1.6 million for the nine months ended September 30, 1996. The increase in interest income resulted from the investment of the unexpended proceeds from the Company's June 23, 1995 public offering. PROVISION FOR INCOME TAXES. Provision for income taxes increased 70.5% from $3.7 million for the nine months ended September 30, 1995 to $6.3 million 13 for the nine months ended September 30, 1996. In 1996, the Company's effective income tax rate increased from 38.0% to 39.0% as a result of higher pretax income which increased the Company's effective federal income tax rate. THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1995 NET REVENUE. Net revenue increased 64.3% from $11.5 million for the three months ended September 30, 1995 to $18.9 million for the three months ended September 30, 1996. Approximately $2.9 million of this increase was attributable to the 94 (net of consolidations) Orthodontic Centers opened since July 1, 1995, approximately $3.8 million to the growth in net revenue of the 95 Orthodontic Centers open throughout both periods, and approximately $700,000 related to the Affiliated Orthodontic Entities' 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 46,000 at September 30, 1995 to approximately 71,000 at September 30, 1996. EMPLOYEE COSTS. Employee costs increased 53.3% from $3.3 million for the three months ended September 30, 1995 to $5.0 million for the three months ended September 30, 1996. The increase in this expense 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. As a percentage of net revenue, however, employee costs decreased from 28.5% for the three months ended September 30, 1995 to 26.5% for the three months ended September 30, 1996. The decrease in employee costs as a percentage of net revenue resulted from increased efficiency in scheduling and monitoring employee productivity for all patient days. ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased 62.7% from $880,000 for the three months ended September 30, 1995 to $1.4 million for the three months ended September 30, 1996. As a percentage of net revenue, however, orthodontic supplies decreased from 7.7% for the three months ended September 30, 1995 to 7.6% for the three months ended September 30, 1996. Cost improvements attained through bulk purchasing offset the 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 62.6% from $970,000 for the three months ended September 30, 1995 to $1.6 million for the three months ended September 30, 1996. The increase in this expense was attributable to Orthodontic Centers opened or relocated after September 30, 1995. As a percentage of net revenue, however, rent expense decreased from 8.4% to 8.3%. ADVERTISING AND MARKETING. Advertising and marketing expense increased 37.9% from $1.3 million for the three months ended September 30, 1995 to $1.8 million for the three months ended September 30, 1996. The increase in this expense resulted primarily from the addition of Orthodontic Centers after September 30, 1995. As a percentage of net revenue, advertising and marketing expense decreased from 11.3% for the three months ended September 30, 1995 to 9.4% for the three months ended September 30, 1996. 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 14 55.1% from $1.4 million for the three months ended September 30, 1995 to $2.1 million for the three months ended September 30, 1996. As a percentage of net revenue, however, general and administrative expense decreased from 11.9% to 11.2%. 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 third quarter of 1996. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased 97.0% from $390,000 for the three months ended September 30, 1995 to $770,000 for the three months ended September 30, 1996. As a percentage of net revenue, depreciation and amortization expense increased from 3.4% to 4.1%. The increase in this expense is a result of the fixed assets acquired for Orthodontic Centers developed or relocated after September 30, 1995. OPERATING PROFIT. Operating profit increased 86.4% from $3.3 million for the three months ended September 30, 1995 to $6.2 million for the three months ended September 30, 1996. As a percentage of net revenue, operating profit increased from 28.9% to 32.8% for the same periods, respectively, as a result of the factors discussed above. INTEREST. Net interest income decreased 35.6% from $770,000 for the three months ended September 30, 1995 to $496,000 for the three months ended September 30, 1996. The decrease in interest income resulted from the decrease in outstanding cash and investments resulting from the investment of unexpended proceeds from the Company's June 23, 1995 public offering. PROVISION FOR INCOME TAXES. Provision for income taxes increased 67.7% from $1.6 million for the three months ended September 30, 1995 to $2.6 million for the three months ended September 30, 1996. In 1996, the Company's effective income tax rate increased from 38.0% to 39.0% as a result of higher net income which increased the Company's effective federal income tax rate. 15 LIQUIDITY AND SOURCES OF CAPITAL. Cash provided by operations was $2.5 million for the nine month period ended September 30, 1996 as compared to the cash provided by operations of $4.4 million in the comparable period for 1995. Included in net cash used by operations for the nine months ended September 30, 1996, were estimated tax payments of $7.4 million which exceeded the current tax provision by $1.1 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 ending 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. This change in income tax accounting method is partially offset by a deduction which will be taken by the Company during 1996 for the benefit received by certain employees in connection with the exercise of non-qualified stock options in April 1996. As a result, the Company estimates that its cash outlays for income taxes will exceed its provision for income taxes in 1996 and 1997 by approximately $5.0 million. In addition, the $9.9 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 September 30, 1996 increased $8.3 million over December 31, 1995 levels as a result of the increase in the number of patients. The Company expects that available cash and existing short-term lines of credit will be sufficient to meet its normal operating requirements, including acquisitions of management and service agreements, over the near term. 16 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, 1996. 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: November 12, 1996 /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 9-MOS 9-MOS DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 SEP-30-1996 SEP-30-1995 11,554 47,609 22,980 0 25,853 16,665 (2,387) (2,017) 0 0 54,046 65,057 24,383 14,563 (3,770) (1,926) 109,505 87,956 13,052 9,534 0 0 0 0 0 0 426 418 93,423 73,822 109,505 87,956 0 0 48,117 29,191 0 0 33,425 20,578 0 0 0 0 (1,371) (1,173) 16,263 9,786 6,342 3,719 0 0 0 0 0 0 0 0 9,921 6,067 .24 .16 .23 .16
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