10-Q 1 e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000 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 JUNE 30, 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.: 000-25256 ORTHODONTIC CENTERS OF AMERICA, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 72-1278948 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification number) 5000 Sawgrass Village, Suite 25 Ponte Vedra Beach, Florida 32082 -------------------------------- ---------------------- (Address of principal executive (Zip Code) offices) (904) 273-0004 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- At July 27, 2000, there were 48,534,988 outstanding shares of the Registrant's Common Stock, $.01 par value per share. 2 ORTHODONTIC CENTERS OF AMERICA, INC. TABLE OF CONTENTS
Page ---- Part I. Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - June 30, 2000 and December 31, 1999.................................4 Condensed Consolidated Statements of Income - Six months ended June 30, 2000 and 1999 ...........................................................5 Condensed Consolidated Statements of Income - Three months ended June 30, 2000 and 1999 ...........................................................6 Condensed Consolidated Statements of Cash Flow - Six months ended June 30, 2000 and 1999.............................7 Notes to Condensed Consolidated Financial Statements - June 30, 2000..........................................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................10 Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................................17 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders................18 Item 6. Exhibits and Reports on Form 8-K...................................18
2 3 FORWARD-LOOKING STATEMENTS Certain statements contained in this Report may not be based on historical facts and are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as "anticipate," "estimate," "believe," "expect," "foresee," "may" or "will." These forward-looking statements include the statements regarding the Company's future growth, addition of Orthodontic Centers, liquidity and capital resources. 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, failure to complete proposed developments or acquisitions, the ability of the Company to effectively manage an increasing number of Orthodontic Centers, some of which are located in foreign countries, 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 Annual Report on Form 10-K for the year ended December 31, 1999 and other 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 4 Part 1. Financial Information Item 1. Financial Statements Orthodontic Centers of America, Inc. Condensed Consolidated Balance Sheets
June 30 December 31 2000 1999(1) --------- ----------- (Unaudited) (in thousands) ASSETS: Current assets: Cash and cash equivalents $ 7,725 $ 5,822 Investments -- 983 Patient receivables, net 30,651 25,976 Unbilled patient receivables, net 79,449 65,793 Deferred income tax asset 4,078 4,455 Amounts receivable from orthodontic entities 8,574 7,944 Supplies inventory 7,494 8,195 Prepaid expenses and other assets 3,547 1,920 --------- --------- Total current assets 141,518 121,088 Property, equipment & improvements, net 68,765 64,566 Amounts receivable from orthodontic entities, less current portion 15,866 12,586 Intangible assets 174,597 167,348 Other assets 1,626 1,434 --------- --------- Total assets $ 402,372 $ 367,022 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable and other current liabilities $ 16,947 $ 12,792 Current portion of long-term debt 3,842 6,020 --------- --------- Total current liabilities 20,789 18,812 Deferred income taxes 16,533 16,910 Long-term debt, less current portion 54,773 52,773 Stockholders' Equity: Preferred stock -- -- Common stock, $.01 par value per share, 100,000,000 shares authorized, 48,459,653 shares outstanding at June 30, 2000 and 48,066,000 shares outstanding at December 31, 1999 484 481 Additional paid-in capital 163,533 161,465 Due from key employees (4,981) (5,236) Capital contribution received from shareholders (2,491) (2,618) Retained earnings 153,732 124,435 --------- --------- Total stockholders' equity 310,277 278,527 --------- --------- Total liabilities and stockholders' equity $ 402,372 $ 367,022 ========= =========
(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 5 Orthodontic Centers of America, Inc. Condensed Consolidated Statements of Income (Unaudited)
Six Months Ended June 30 -------------------------- 2000 1999 --------- --------- (in thousands, except per share data) Net revenue $ 137,532 $ 104,449 Direct expenses: Employee costs 36,579 28,264 Orthodontic supplies 10,113 7,846 Rent 11,066 8,551 Marketing and advertising 10,172 7,679 --------- --------- 67,930 52,340 General and administrative 14,152 10,718 Depreciation and amortization 6,780 5,802 --------- --------- Operating profit 48,670 35,589 Interest expense (1,922) (972) Interest income 315 210 --------- --------- Income before income taxes 47,063 34,827 Provision for income taxes 17,766 13,147 --------- --------- Income before cumulative effect of a change in accounting principle 29,297 21,680 Cumulative effect of a change in accounting principle, net of income tax benefit of $410 -- (678) --------- --------- Net income $ 29,297 $ 21,002 ========= ========= Net income per share: Basic $ 0.61 $ 0.44 ========= ========= Diluted before cumulative effect of change in accounting principle $ 0.60 $ 0.45 Cumulative effect of change in accounting principle -- 0.02 --------- --------- Diluted $ 0.60 $ 0.43 ========= ========= Average shares outstanding: Basic 48,262 47,941 ========= ========= Diluted 49,238 48,665 ========= =========
See notes to condensed consolidated financial statements. 5 6 Orthodontic Centers of America, Inc. Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended June 30 -------------------------- 2000 1999 -------- -------- (in thousands, except per share data) Net revenue $ 71,767 $ 55,401 Direct expenses: Employee costs 19,023 14,958 Orthodontic supplies 5,402 4,112 Rent 5,817 4,524 Marketing and advertising 5,306 4,080 -------- -------- 35,548 27,674 General and administrative 7,294 5,707 Depreciation and amortization 3,452 3,097 -------- -------- Operating profit 25,473 18,923 Interest expense (1,134) (531) Interest income 196 119 -------- -------- Income before income taxes 24,535 18,511 Provision for income taxes 9,262 6,988 -------- -------- Net income $ 15,273 $ 11,523 ======== ======== Net income per share: Basic $ 0.32 $ 0.24 ======== ======== Diluted $ 0.31 $ 0.24 ======== ======== Average shares outstanding Basic 48,351 47,975 ======== ======== Diluted 49,522 48,633 ======== ========
See notes to condensed consolidated financial statements. 6 7 Orthodontic Centers of America, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30 ---------------------- 2000 1999 -------- -------- (in thousands) Operating activities: Net income $ 29,297 $ 21,002 Adjustments to reconcile net income to net cash provided by operating activities: Provision for bad debt expense 1,141 1,082 Depreciation and amortization 6,780 5,802 Deferred income taxes -- -- Cumulative effect of change in accounting principle -- 1,088 Changes in operating assets and liabilities Patient receivables (5,275) (3,766) Unbilled patient receivables and patient prepayments (13,928) (9,521) Supplies inventory, prepaid expenses and other (1,118) (2,209) Amounts receivable from/payable to orthodontic entities (146) (1,040) Accounts payable and other current liabilities 3,403 (2,069) -------- -------- Net cash provided by operating activities 20,154 10,369 Investing activities: Purchase of property, equipment and improvements (7,904) (9,268) Net proceeds from available-for-sale investments 983 1,187 Advances to orthodontic entities (4,281) (2,239) Payments from orthodontic entities 1,001 916 Intangible assets acquired (10,322) (9,183) -------- -------- Net cash used in investing activities (20,523) (18,587) Financing activities: Issuance of common stock 2,093 866 Proceeds from long-term debt 2,000 12,418 Repayment of long-term debt (1,821) (2,639) -------- -------- Net cash provided by (used in) financing activities 2,272 10,645 -------- -------- Change in cash and cash equivalents 1,903 2,427 Cash & cash equivalents at beginning of period 5,822 1,601 -------- -------- Cash & cash equivalents at end of period $ 7,725 $ 4,028 ======== ======== Supplemental cash flow information: Interest paid $ 1,922 $ 972 ======== ======== Income taxes paid $ 15,613 $ 19,118 ======== ======== 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 $ 2,693 ======== ========
See notes to condensed consolidated financial statements. 7 8 Orthodontic Centers of America, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2000 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Orthodontic Centers of America, Inc. (the "Company") manages orthodontic centers. The Company managed 566 orthodontic centers throughout the United States and in two countries outside the United States as of June 30, 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 (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 periods ended June 30, 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. 2. REVENUE RECOGNITION The Company provides business operations, financial, marketing and administrative services to orthodontists and their orthodontic entities. These services are provided under service, management and consulting agreements with the 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. Revenue is earned by the Company under the management agreements equal to approximately 24% of new patient contract balances in the first month of new contracts plus a portion of existing contract balances, less amounts retained by the orthodontic entities. The orthodontic entities retain all orthodontic center revenue not paid to the Company as management fees. The amounts retained by the orthodontic entities are dependent on their financial performance, based in significant part on the orthodontic entities' cash receipts and 8 9 Orthodontic Centers of America, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) 2. REVENUE RECOGNITION (CONTINUED) disbursements. Under the terms of the management agreements, the orthodontic entities assign their receivables to the Company in payment of their management fees. The Company is responsible for collection. 3. EARNINGS PER SHARE Basic and diluted earnings per share are based on the weighted average number of shares of common stock and common equivalent shares (stock options) outstanding during the period. 4. CHANGE IN ACCOUNTING PRINCIPLE In April 1998, the AICPA's Accounting Standards Executive Committee issued SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 requires companies to expense start-up costs, including organizational costs, as incurred. Upon adoption of SOP 98-5, a company is required to record any previously capitalized start-up or organizational costs as a cumulative expense. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. On January 1, 1999, the Company incurred a charge of $678,000 (net of income tax benefit of $410) in accordance with SOP 98-5. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's business was established in 1985 by Dr. Gasper Lazzara, Jr. and Bartholomew F. Palmisano, Sr. The Company managed 566 orthodontic centers (the "Orthodontic Centers") throughout the United States and in Puerto Rico, Japan and Mexico at June 30, 2000. 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, 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---------------- 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 8 Number of centers acquired during period 1 29 68 78 66 32 25 Number of centers consolidated during period (3) (3) (19) (23) (11) -- (4) ---- ---- ---- ---- ---- ---- ---- Number of centers at end of period 75 145 247 360 469 537 566 ==== ==== ==== ==== ==== ==== ====
Of the 566 Orthodontic Centers at June 30, 2000, 296 were developed by the Company, 341 were existing orthodontic practices the assets of which were acquired by the Company and 71 were consolidated. The Company expects that future growth in Orthodontic Centers will come from both developing Orthodontic Centers with existing and newly recruited orthodontists who are affiliated with the Company and acquiring the assets of, and affiliating with, existing practices of other orthodontists. Generally, when the Company develops a new Orthodontic Center, all patients treated at the Orthodontic Center are new patients and, in the first several months after commencing operations, the Orthodontic Center is open only for a limited number of days each month as new patients are added. The Orthodontic Centers have generally become increasingly more productive and profitable as more new patients are added and existing patients return for monthly follow-up visits. After 26 months of operations, an Orthodontic Center's growth in patient base has typically begun to stabilize as the initial patients complete treatment. At June 30, 2000, 248 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, by lengthening the intervals between patient visits and by adding operating days or orthodontists. The Orthodontic Centers may also increase revenue by implementing periodic price increases. Established orthodontic practices whose assets were acquired by the Company have typically increased their revenue by applying the Company's operating strategies and systems, including increased advertising and efficient patient scheduling. The Company earns its revenue from long-term service or consulting agreements entered into with affiliated orthodontists and their professional corporations or other entities ("Affiliated Orthodontists"). Pursuant to the service agreements, during each month during the term of the service agreement, the Company earns a fee equal to approximately 24% of the aggregate amount of all new patient contracts entered into during that particular month, plus the 10 11 aggregate of the allocated monthly balance amount of all patient contracts entered into in prior months, less amounts retained by the Affiliated Orthodontists. The remaining contract balances are allocated equally over the remaining months during the terms of the patient contracts, which average 26 months. Since 1991, approximately 1.2% of the Company's annual net revenue has been uncollectible. The amounts retained by an Affiliated Orthodontist are dependent on his or her financial performance, based in significant part on profitability on a cash basis. Amounts retained by an Affiliated Orthodontist who operates a newly developed Orthodontic Center are typically reduced by operating losses on a cash basis because of start-up expenses. An Affiliated Orthodontist's share of these operating losses is added to the Company's fee in the period during which the operating losses are incurred, with such fees aggregating approximately $860,000 and $1,560,000 for the three and six months ended June 30, 2000, respectively. 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. 11 12 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, ------------------ ------------------ 2000 1999 2000 1999 ------ ------ ------ ------ Net revenue 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ Direct expenses Employee costs 26.6 27.1 26.5 27.0 Orthodontic supplies 7.4 7.5 7.5 7.4 Rent 8.0 8.1 8.1 8.2 Marketing and advertising 7.4 7.4 7.4 7.4 ------ ------ ------ ------ Total direct expenses 49.4 50.1 49.5 50.0 General and administrative 10.3 10.3 10.2 10.3 Depreciation and amortization 4.9 5.6 4.8 5.5 ------ ------ ------ ------ Operating profit 35.4 34.0 35.5 34.2 Interest (income) expense 1.2 0.7 1.3 0.8 ------ ------ ------ ------ Income before income taxes 34.2 33.3 34.2 33.4 Provision for income taxes 12.9 12.5 12.9 12.6 ------ ------ ------ ------ Net income 21.3% 20.8% 21.3% 20.8% ====== ====== ====== ======
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 NET REVENUE. Net revenue increased $33.1 million, or 31.7%, to $137.5 million for the six months ended June 30, 2000 from $104.4 million for the six months ended June 30, 1999. Approximately $11.0 million of this increase was attributable to the 108 (net of consolidations) Orthodontic Centers opened since January 1, 1999, approximately $22.1 million 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 305,000 at June 30, 2000 from approximately 233,000 at June 30, 1999. EMPLOYEE COSTS. Employee costs increased $8.3 million, or 29.4%, to $36.6 million for the six months ended June 30, 2000 from $28.3 million for the six months ended June 30, 1999. As a percentage of net revenue, however, employee costs decreased to 26.6% for the six months ended June 30, 2000 from 27.1% for the six months ended June 30, 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 $2.3 million, or 28.9%, to $10.1 million for the six months ended June 30, 2000 from $7.8 million for the six months ended June 30, 1999. As a percentage of net revenue, however, orthodontic supplies expense decreased to 7.4% for the six months ended June 30, 2000 from 7.5% the six months ended June 30, 1999, due to cost improvements attained through bulk purchasing. RENT. Rent expense increased $2.5 million, or 29.4%, to $11.1 million for the six months ended June 30, 2000 from $8.6 million for the six months ended June 30, 1999. The increase in this expense was attributable to Orthodontic Centers affiliated, opened or relocated after June 30, 1999. As a percentage of net revenue, however, rent expense decreased to 8.0% for the six months ended June 30, 2000 from 8.2% for the six months ended June 30, 1999. The 12 13 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 $2.5 million, or 32.5%, to $10.2 million for the six months ended June 30, 2000 from $7.7 million for the six months ended June 30, 1999. The increase in this expense resulted primarily from the addition of Orthodontic Centers after June 30, 1999. As a percentage of net revenue, marketing and advertising expense remained constant at 7.4% for the six months ended June 30, 1999 and the six months ended June 30, 2000. GENERAL AND ADMINISTRATIVE. General and administrative expense increased $3.4 million, or 32.0%, to $14.1 million for the six months ended June 30, 2000 from $10.7 million for the six months ended June 30, 1999. The increase in general and administrative expense resulted primarily from the addition of Orthodontic Centers after June 30, 1999. As a percentage of net revenue, general and administrative expense remained constant at 10.3% for the six months ended June 30, 1999 and the six months ended June 30, 2000. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased $1.0 million, or 16.9%, to $6.8 million for the six months ended June 30, 2000 from $5.8 million for the six months ended June 30, 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 June 30, 1999. As a percentage of net revenue, however, depreciation and amortization expense decreased to 4.9% for the six months ended June 30, 2000 from 5.6% for the six months ended June 30, 1999. OPERATING PROFIT. Operating profit increased $13.1 million, or 36.8%, to $48.7 million for the six months ended June 30, 2000 from $35.6 million for the six months ended June 30, 1999. As a percentage of net revenue, operating profit increased to 35.1% for the six months ended June 30, 2000 from 34.0% for the six months ended June 30, 1999 as a result of the factors discussed above. NET INTEREST EXPENSE. Net interest expense increased $850,000, or 110.8%, to $1.6 million for the six months ended June 30, 2000 from $760,000 for the six months ended June 30, 1999. As a percentage of net revenue, net interest expense increased to 1.2% for the six months ended June 30, 2000 from 0.7% for the six months ended June 30, 1999. The increase in this expense is the result of an increase in the average balance of borrowings and an increase in the average interest rate under the Company's $100 million revolving line of credit since June 30, 1999. PROVISION FOR INCOME TAXES. Provision for income taxes increased $4.6 million, or 35.1%, to $17.8 million for the six months ended June 30, 2000 from $13.1 million for the six months ended June 30, 1999. The Company's effective income tax rate was 37.8% for the six months ended June 30, 2000 and for the six months ended June 30, 1999. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. Pursuant to AICPA's SOP 98-5, Reporting on the Costs of Start-Up Activities, the Company recorded a cumulative effect of a change in accounting principle of $678,000 (net of an income tax benefit of $410,000) in the six months ended June 30, 1999. NET INCOME. Net income increased $8.3 million, or 39.5%, to $29.3 million for the six months ended June 30, 2000 from $21.0 million for the six months ended June 30, 1999. As a percentage of net revenue, net income increased to 21.3% 13 14 for the six months ended June 30, 2000 from 20.8% for the six months ended June 30, 1999 as a result of the factors discussed above. THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 NET REVENUE. Net revenue increased $16.4 million, or 29.5%, to $71.8 million for the three months ended June 30, 2000 from $55.4 million for the three months ended June 30, 1999. Approximately, $4.9 million of this increase was attributable to the 108 (net of consolidations) Orthodontic Centers opened since January 1, 1999, approximately $11.7 million 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 305,000 at June 30, 2000 from approximately 233,000 at June 30, 1999. EMPLOYEE COSTS. Employee costs increased $4.1 million, or 27.2%, to $19.0 million for the three months ended June 30, 2000 from $14.9 million for the three months ended June 30, 1999. As a percentage of net revenue, however, employee costs decreased to 26.5% for the three months ended June 30, 2000 from 27.0% for the three months ended June 30, 1999. The percentage decrease primarily reflects efficiencies achieved through general changes in patient treatment schedules by the Affiliated Orthodontists. ORTHODONTIC SUPPLIES. Orthodontic supplies expense increased $1.3 million, or 31.4%, to $5.4 million for the three months ended June 30, 2000 from $4.1 million for the three months ended June 30, 1999. As a percentage of net revenue, orthodontic supplies expense increased to 7.5% for the three months ended June 30, 2000 from 7.4% the three months ended June 30, 1999. 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 $1.3 million, or 28.6%, to $5.8 million for the three months ended June 30, 2000 from $4.5 million for the three months ended June 30, 1999. The increase in this expense was attributable to Orthodontic Centers affiliated, opened or relocated after June 30, 1999. As a percentage of net revenue, however, rent expense decreased to 8.1% for the three months ended June 30, 2000 from 8.2% for the three months ended June 30, 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 $1.2 million, or 30.1%, to $5.3 million for the three months ended June 30, 2000 from $4.1 million for the three months ended June 30, 1999. The increase in this expense resulted primarily from the addition of Orthodontic Centers after June 30, 1999. As a percentage of net revenue, marketing and advertising expense remained constant at 7.4% for the three months ended June 30, 1999 and the three months ended June 30, 2000. GENERAL AND ADMINISTRATIVE. General and administrative expense increased $1.6 million, or 27.8%, to $7.3 million for the three months ended June 30, 2000 from $5.7 million for the three months ended June 30, 1999. The increase in general and administrative expense resulted primarily from the addition of Orthodontic Centers after June 30, 1999. As a percentage of net revenue, however, general and administrative expense decreased to 10.2% for the three 14 15 months ended June 30, 2000 from 10.3% for the three months ended June 30, 1999. General and administrative expense decreased as a percentage of net revenue primarily as a result of lower average startup costs for Orthodontic Centers developed after June 30, 1999. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased $360,000, or 11.5%, to $3.5 million for the three months ended June 30, 2000 from $3.1 million for the three months ended June 30, 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 June 30, 1999. As a percentage of net revenue, however, depreciation and amortization expense decreased to 4.8% for the six months ended June 30, 2000 from 5.6% for the six months ended June 30, 1999. OPERATING PROFIT. Operating profit increased $6.6 million, or 34.6%, to $25.5 million for the three months ended June 30, 2000 from $18.9 million for the three months ended June 30, 1999. As a percentage of net revenue, operating profit increased to 35.5% for the three months ended June 30, 2000 from 34.2% for the three months ended June 30, 1999 as a result of the factors discussed above. NET INTEREST EXPENSE. Net interest expense increased $530,000, or 127.7%, to $940,000 for the three months ended June 30, 2000 from $410,000 for the six months ended June 30, 1999. As a percentage of net revenue, net interest expense increased to 1.3% for the three months ended June 30, 2000 from 0.7% for the three months ended June 30, 1999. The increase in this expense is the result of an increase in the average balance of borrowings and an increase in the average interest rate under the Company's $100 million revolving line of credit since June 30, 1999. PROVISION FOR INCOME TAXES. Provision for income taxes increased $2.3 million, or 32.5%, to $9.3 million for the three months ended June 30, 2000 from $7.0 million for the three months ended June 30, 1999. The Company's effective income tax rate was 37.8% for the three months ended June 30, 2000 and for the three months ended June 30, 1999. NET INCOME. Net income increased $3.2 million, or 39.4%, to $11.5 million for the three months ended June 30, 2000 from $8.3 million for the three months ended June 30, 1999. As a percentage of net revenue, net income increased to 21.3% for the three months ended June 30, 2000 from 20.8% for the three months ended June 30, 1999 as a result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $20.2 million for the six month period ended June 30, 2000 as compared to $10.4 million in the comparable period of 1999. The $29.3 million in net income for the six month period ended June 30, 2000, was partially offset by increases in working capital accounts required to fund the Company's growth. Net billed and unbilled patient receivables at June 30, 2000 increased by $18.3 million, or 19.98%, over December 31, 1999 levels as a result of increases in the number of patients treated and the fees for treatment in the Orthodontic Centers. The following table presents certain information with respect to Orthodontic Centers open less than 26 months and those open greater than 26 months as of the date indicated: 15 16
Six months ended June 30, (in thousands) 2000 1999 -------- -------- (Increase) decrease in patient receivables: Orthodontic Centers affiliated over 26 months Patient receivables $ (1,457) $ (363) Unbilled patient receivables and patient prepayments (6,039) (2,034) -------- -------- (7,496) (2,397) Orthodontic Centers affiliated less than 26 months Patient receivables (3,218) (2,797) Unbilled patient receivables and patient prepayments (7,617) (7,010) -------- -------- (10,835) (9,807) -------- -------- Total increase in patient receivables $(18,331) $(12,204) ======== ========
16 17 The Company expects that available cash, cash equivalents, available for sale investments, cash flow from operations and existing short-term lines of credit will be sufficient to meet the Company's normal operating requirements, including acquisitions of service and consulting agreements during the remainder of 2000. The Company has a $100 million revolving line of credit available for expansion and general working capital needs. During the twelve month period ended June 30, 2000, the Company expended $75.8 million of cash for fixed assets, intangible assets, repayment of long-term debt and income taxes. However, the Company's cash and cash equivalents increased by $1.9 million during the six months ended June 30, 2000, as summarized below. The remainder of the cash expenditures were financed from the Company's cash flow from operations and revolving line of credit.
Six months ended June 30, (in thousands) 2000 1999 ------ ------ Cash, cash equivalents and available for sale investments at beginning of period $5,822 $1,601 (Decrease)/increase in cash, cash equivalents and available for sale investments 1,903 2,427 ------ ------ Cash and cash equivalents at end of period $7,725 $4,028 ====== ======
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. During the six months ended June 30, 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. 17 18 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 May 18, 2000. At this meeting, the following matters were voted upon by the Company's stockholders: (a) Election of Class III Directors Gasper Lazzara, Jr., 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 2002 or until their successors are elected and qualified. The vote was as follows:
Votes Cast Votes Cast Against Abstentions/ Name In Favor or Withheld Non Votes ---- ---------- ----------- ------------ Gasper Lazzara, Jr., D.D.S. 38,901,994 1,147,294 8,314,939 Bartholomew F. Palmisano, Sr. 38,901,994 1,147,294 8,314,939
The terms of the following directors continued following the meeting:
Name Term Expires ---- ------------ A Gordon Tunstall 2001 Michael C. Johnsen 2002 Ashton J. Ryan, Jr. 2002 Edward J. Walters, Jr. 2002
(b) 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 ending December 31, 2000 by the following vote:
Votes Cast Votes Cast Abstentions/ In Favor Against or Withheld Non Votes ---------- ------------------- ----------- 40,029,411 9,360 8,325,456
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit number Description 3.1 Bylaws of the Company (incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1, Registration Statement No. 33-85326) 3.2 Restated Certificate of Incorporation of the Company (incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-3, Registration Statement No. 333-36799) 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, 2000. 18 19 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 14, 2000 /s/ Bartholomew F. Palmisano, Sr. --------------------------------------- Bartholomew F. Palmisano, Sr. President and Chief Executive Officer /s/ Bartholomew F. Palmisano, Jr. --------------------------------------- Bartholomew F. Palmisano, Jr. Chief Financial Officer, Secretary 19