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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 MARCH 31, 2001, 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.: 001-13457
ORTHODONTIC CENTERS OF AMERICA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 72-1278948
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3850 North Causeway Boulevard, Suite 1040
Metairie, Louisiana 70002
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(Address of principal executive offices) (Zip Code)
(504) 834-4392
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(Registrant's telephone number, including area code)
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(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
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At May 9, 2001, there were 49,158,539 outstanding shares of the Registrant's
Common Stock, $.01 par value per share.
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ORTHODONTIC CENTERS OF AMERICA, INC.
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 2001 and December 31, 2000 ...................................................... 3
Condensed Consolidated Statements of Income -
Three months ended March 31, 2001 and 2000 ................................................ 4
Condensed Consolidated Statements of Cash Flow -
Three months ended March 31, 2001 and 2000 ................................................ 5
Notes to Condensed Consolidated Financial Statements - March 31, 2001 ..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............................. 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ....................................................... 15
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, deferred tax asset, liquidity,
capital resources and acquisition of service agreements. We caution you not to
place undue reliance on these forward-looking statements, in that they involve
certain risks and uncertainties that could cause actual results to differ
materially from anticipated results. These risks and uncertainties include
regulatory constraints, changes in laws regulating the practice of dentistry or
the interpretation of such laws, competition from other orthodontists and
management companies, the availability of suitable new markets and suitable
locations within such markets, failure to consummate proposed developments or
acquisitions, the ability of the Company to effectively manage an increasing
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, risks relating to the Company's foreign operations, unexpected
operating results 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, 2000
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.
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Orthodontic Centers of America, Inc.
Condensed Consolidated Balance Sheets
March 31, December 31,
2001 2000(1)
------------ ------------
(Unaudited)
(in thousands)
ASSETS:
Current assets:
Cash and cash equivalents ........................................... $ 12,255 $ 4,690
Investments ......................................................... 999 999
Service fee receivable, net of allowance for uncollectible amounts .. 39,480 35,350
Deferred income taxes ............................................... 1,933 1,978
Advances to orthodontic entities .................................... 8,424 7,644
Supplies inventory .................................................. 6,635 7,306
Prepaid expenses and other assets ................................... 3,698 3,782
------------ ------------
Total current assets ............................................ 73,424 61,749
Property, equipment and improvements, net ................................ 76,579 76,686
Advances to orthodontic entities, less current portion ................... 9,975 9,057
Deferred income taxes .................................................... 23,474 24,030
Intangible assets ........................................................ 198,575 194,544
Other assets ............................................................. 1,921 1,881
------------ ------------
Total assets ............................................................. $ 383,948 $ 367,947
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable .................................................... $ 2,996 $ 7,855
Accrued salaries and other current liabilities ...................... 4,631 4,054
Deferred revenue .................................................... 2,106 2,516
Income taxes payable ................................................ 8,735 2,913
Amounts payable to orthodontic entities ............................. 3,359 2,412
Current portion of notes payable to affiliated orthodontists ........ 1,943 2,426
------------ ------------
Total current liabilities ....................................... 23,770 22,176
Notes payable to affiliated orthodontists, less current portion .......... -- --
Long-term debt, less current portion ..................................... 58,600 58,575
Deferred income taxes .................................................... -- --
Non-controlling interest in subsidiary ................................... (110) --
Stockholders' equity:
Preferred stock ..................................................... -- --
Common stock, $.01 par value per share, 100,000,000 shares
authorized, 49,148,000 shares outstanding at March 31, 2001 and
48,600,000 shares outstanding at December 31, 2000 ................ 488 487
Additional paid-in capital ........................................ 169,324 168,661
Retained earnings ................................................... 135,409 121,581
Accumulated other comprehensive income .............................. (127) (127)
Due from key employees for stock purchase program ................... (1,604) (1,604)
Capital contribution receivable from shareholders ................... (1,802) (1,802)
------------ ------------
Total stockholders' equity ...................................... 301,688 287,196
------------ ------------
Total liabilities and stockholders' equity ............................... $ 383,948 $ 367,947
============ ============
----------
(1) The consolidated balance sheet at December 31, 2000 has been derived
from the Company's 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.
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
Three months ended
March 31,
----------------------------
2001 2000
------------ ------------
(in thousands, except per share data)
Net revenue .............................................. $ 77,484 $ 59,282
Direct expenses:
Employee costs ...................................... 22,343 17,573
Orthodontic supplies ................................ 6,237 4,545
Rent ................................................ 6,809 5,314
Marketing and advertising ........................... 6,241 4,865
------------ ------------
Total direct expenses ........................... 41,630 32,297
General and administrative ............................... 8,262 6,621
Depreciation and amortization ............................ 4,390 3,543
------------ ------------
Operating profit ......................................... 23,202 16,821
Interest income (expense), net ........................... (1,099) (786)
Non-controlling interest in subsidiary ................... 110 --
------------ ------------
Income before income taxes ............................... 22,213 16,035
Provision for income taxes ............................... 8,385 6,053
------------ ------------
Income before cumulative effect of change in
accounting principle ................................... 13,828 9,982
Cumulative effect of change in accounting
principle, net of income tax benefit .................. -- (50,576)
------------ ------------
Net income (loss) ........................................ $ 13,828 $ (40,594)
============ ============
Net income (loss) per share:
Basic before cumulative effect of change
in accounting principle ........................... $ 0.28 $ 0.21
Cumulative effect of change in accounting
principal, net of income tax benefit, per share ... -- (1.04)
------------ ------------
Basic ............................................... $ 0.28 $ (0.83)
============ ============
Diluted before cumulative effect of change
in accounting principle ........................... $ 0.28 $ 0.20
Cumulative effect of change in accounting
principle, net of income tax benefit, per share ... -- (1.04)
------------ ------------
Diluted ............................................. $ 0.28 $ (.84)
============ ============
Average shares outstanding:
Basic ............................................... 48,789 48,290
============ ============
Diluted ............................................. 49,948 49,071
============ ============
See notes to condensed consolidated financial statements.
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Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended
March 31,
----------------------------
2001 2000
------------ ------------
(in thousands, except per share data)
Operating activities:
Net income (loss) ......................................... $ 13,828 $ (40,594)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for bad debt expense ........................ 132 91
Depreciation and amortization ......................... 4,390 3,543
Deferred income taxes ................................. 601 (590)
Cumulative effect of change in accounting
principle, net of income tax benefit ............... -- 50,576
Changes in operating assets and liabilities:
Service fee receivables ............................... (4,262) (2,821)
Supplies inventory .................................... 755 (16)
Prepaid expenses and other ............................ (41) (3,150)
Advances to/amounts payable to orthodontic entities ... (751) 3,546
Accounts payable and other current liabilities ........ 1,130 2,612
------------ ------------
Net cash provided by operating activities .................... 15,782 13,197
Investing activities:
Purchases of property, equipment and improvements ......... (2,250) (747)
Proceeds from (sales of) available-for-sale investments ... -- 983
Intangible assets acquired ................................ (5,751) (2,350)
Advances to orthodontic entities .......................... -- --
Payments from orthodontic entities ........................ -- --
------------ ------------
Net cash used in investing activities ........................ (8,001) (2,114)
Financing activities:
Proceeds from long-term debt .............................. 128 269
Repayment of long-term debt ............................... (899) (814)
Issuance of common stock ..................................... 555 747
------------ ------------
Net cash provided by (used in) financing activities .......... (216) 200
Foreign currency translation adjustment ...................... -- --
Change in cash and cash equivalents .......................... 7,565 11,284
Cash and cash equivalents at beginning of period ............. 4,689 5,822
------------ ------------
Cash and cash equivalents at end of period ................... $ 12,254 $ 17,106
============ ============
Supplemental cash flow information:
Cash paid during period for:
Interest .............................................. $ 917 $ 788
============ ============
Income taxes .......................................... $ 1,962 $ 308
============ ============
Supplemental disclosures of non-cash
investing and financing activities:
Notes payable and common stock issued
to obtain Service Agreements ........................... $ 313 $ 717
============ ============
See notes to condensed consolidated financial statements.
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Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2001
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Orthodontic Centers of America, Inc. (the "Company") provides
integrated business services to orthodontists throughout the United
States and in Japan, Mexico, Puerto Rico and Spain.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments considered necessary for a
fair presentation have been included. Operating results for the three
month period ended March 31, 2001 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001. 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, 2000.
The Company provides business operations, financial, marketing and
administrative services to orthodontic practices. These services are
provided under management and consulting agreements (hereinafter
referred to as "Service Agreements") with the orthodontist and their
wholly-owned orthodontic entities (hereafter referred to as "Affiliated
Orthodontists").
The financial statements include service fees earned under the Service
Agreements and the expenses of providing the Company's services, which
generally includes all expenses of the orthodontic practices except for
orthodontist compensation and certain expenses directly related to the
orthodontic entities, such as professional insurance coverage.
2. REVENUE RECOGNITION
Net revenue consists of service fees earned by the Company under the
Service Agreements. Effective January 1, 2000, the Company changed its
method of revenue recognition for service fees earned under its Service
Agreements with Affiliated Orthodontists. The Company recognizes
service fees based on patient contract revenues calculated on a
straight-line basis over the term of the patient contracts, net of
amounts to be retained by the Affiliated Orthodontists. The amounts to
be retained by orthodontists is the Company's estimate of the
Affiliated Orthodontists' proportionate share of straight-line patient
contract revenues, reduced by the amount of Company expenses incurred
and not yet reimbursed by the Affiliated Orthodontists.
Under the terms of the Service Agreements, the Affiliated Orthodontists
assign their patient receivables to the Company in payment of their
service fees. Service fees receivable represents the portion of these
patient receivables that the Company expects to retain and which has
been recognized as net revenue. Affiliated Orthodontists retain patient
revenue not paid to the Company as the service fee. The amounts
ultimately retained by Affiliated Orthodontists are dependent upon the
financial performance of their practices.
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Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
3. IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses long-lived assets for impairment under FASB
Statement No. 121, "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" (FAS 121). Under those rules,
Service Agreements are included in impairment evaluations when events
or circumstances exist that indicate the carrying amounts of those
assets may not be recoverable. The recoverability of Service Agreements
is assessed periodically and takes into account whether the Service
Agreements should be completely or partially written off or the
amortization period accelerated based on management's estimate of
future operating income over the remaining term of the Service
Agreement. If a Service Agreement is considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the Service Agreement exceeds its fair value using
estimated cash flows on a discounted basis.
4. 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.
5. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2000, the Company adopted a change in accounting
for revenue in connection with Securities and Exchange Commission Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
Financial Statements." The cumulative effect of this accounting change,
calculated as of January 1, 2000, was $50.6 million, net of income tax
benefit of $30.6 million. The Company recognized revenue that was
included in the cumulative effect adjustment of $5.8 million during the
three months ended March 31, 2001 and $3.6 million during the three
months ended March 31, 2000. The financial statements for the three
months ended March 31, 2000 have been restated from those included in
the Company's Quarterly Report on Form 10-Q for the three months ended
March 31, 2000 to reflect the Company's change in revenue recognition
pursuant to SAB 101 effective January 1, 2000.
The Company adopted Financial Accounting Standards Board Statement FASB
No. 122, "Accounting for Derivative Instruments and Hedging
Activities," as amended, on January 1, 2001. As the Company had no
derivatives at the date of adoption, there was no financial statement
impact.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's business was established in 1985 by Dr. Gasper Lazzara, Jr. and
Bartholomew F. Palmisano, Sr. The Company managed 603 orthodontic centers (the
"Orthodontic Centers") throughout the United States and in Japan, Mexico, Puerto
Rico and Spain at March 31, 2001.
The following table sets forth certain information relating to the growth in the
number of Orthodontic Centers for the periods shown:
Three
months ended
Year ended December 31, March 31,
---------------------------------------------- ------------
1996 1997 1998 1999 2000 2001
------ ------ ------ ------ ------ ------------
Number of centers at beginning of period ....... 145 247 360 469 537 592
Number of centers developed during period ...... 53 58 54 36 18 9
Number of centers acquired during period ....... 68 78 66 32 45 3
Number of centers consolidated during period ... (19) (23) (11) -- (8) (1)
------ ------ ------ ------ ------ ------
Number of centers at end of period ............. 247 360 469 537 592 603
====== ====== ====== ====== ====== ======
Of the 603 Orthodontic Centers at March 31, 2001, 315 were developed by the
Company, 364 were existing orthodontic practices the assets of which were
acquired by the Company and 76 were consolidated into another Orthodontic
Center. The Company expects that future growth in the number of 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 service and
consulting agreements with, existing orthodontic practices.
Generally, when the Company develops a new Orthodontic Center, all patients
treated at the Orthodontic Center are new patients and, in the first several
months after commencing operations, the Orthodontic Center is open only for a
limited number of days each month as new patients are added. The Orthodontic
Centers have generally become increasingly more productive and profitable as
more new patients are added and existing patients return for monthly follow-up
visits. After 26 months of operations, the Orthodontic Center's growth in
patient base has typically begun to stabilize as the initial patients complete
treatment. At that point, an Orthodontic Center can increase the number of
patients treated by improving the efficiency of its clinical staff, increasing
patient treatment intervals and by adding operating days or orthodontists.
The Orthodontic Centers may also increase revenue by implementing periodic price
increases. Patient contracts are generally payable in equal monthly installments
throughout the term of treatment (which averages about 26 months), except for
the last month when a final payment is made. 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. In the first quarter of 2001, an additional 33% of the Orthodontic
Centers implemented such fee increase.
The Company provides a wide range of services to its Affiliated Orthodontists
under either a service agreement or a consulting agreement. The specific form of
the agreement is based upon the dental regulatory provisions of the particular
state in which an orthodontic center is located. The service agreement is used
in the majority of states, with some minor variations from state to state. The
consulting agreement, also with some variations from state to state, is used in
states with particularly stringent laws relating to the practice of dentistry.
The Company enters into a separate service or consulting agreement with each
Affiliated Orthodontist practice owner. If an Affiliated Orthodontist operates
his or her
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practice through a professional corporation or association or other similar
entity, that entity is a party to the agreement, as well as the Affiliated
Orthodontist practice owner.
Under the service agreement, the Company provides its Affiliated Orthodontists
with a comprehensive range of business services in exchange for monthly service
fees based on a percentage of the Affiliated Orthodontists' new patient contract
balances during the first month of the term of the patient contract, plus the
balance of the patient contract balance allocated equally over the remaining
term of the patient contract, minus amounts retained by the Affiliated
Orthodontists. The types of services the Company provides to Affiliated
Orthodontists under the consulting agreements are generally similar to the
services the Company provide under the service agreements; however, rather than
being based on a percentage of patient contract balances, the service fees paid
to the Company by Affiliated Orthodontists under the consulting agreements are a
combination of, depending on the service being performed, "cost-plus" types of
fees, flat monthly fees and hourly fees. Among other differences from the
service agreements, some consulting agreements have shorter terms than the
service agreements, some do not give us a right to purchase the Affiliated
Orthodontist's interest in the practice assets following termination, no matter
the reason, and some require more limited non-competition agreements from the
Affiliated Orthodontist after termination of the consulting agreement than do
most of the service agreements. In addition, the consulting agreements emphasize
that the Affiliated Orthodontist has ultimate control and authority over his or
her practice's business management, including such matters as advertising,
hiring and termination of staff and the purchase of equipment and supplies.
Effective January 1, 2000, the Company changed its net revenue recognition
pursuant to Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the Securities and
Exchange Commission staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. Effective January 1,
2000, the Company recognizes net revenue based on a straight-line allocation of
patient contract revenue over the terms of the patient contracts (which average
about 26 months), minus the portion of that straight-line allocation retained or
to be retained by Affiliated Orthodontists. Amounts retained or to be retained
by an Affiliated Orthodontist are estimated using the percentage of practice
operating profits that may be retained by the Affiliated Orthodontist under his
or her service agreement. Amounts retained or that may be retained by an
Affiliated Orthodontist equal the Affiliated Orthodontist's proportionate share
of the straight-line allocation of patient contract revenue that is collected
during the relevant period and the Affiliated Orthodontist's proportionate share
of patient receivables representing any remaining portion of that allocation,
minus any operating losses, depreciation, interest on outstanding loans, bad
debt or other expenses that the Company has incurred but for which the Company
has not been reimbursed by the Affiliated Orthodontist. These unreimbursed
expenses reduce amounts retained by an Affiliated Orthodontist only up to the
amounts that would otherwise be retained by the Affiliated Orthodontist. Any
remaining unreimbursed expenses would reduce amounts retained or to be retained
by the Affiliated Orthodontist in subsequent periods.
Operating expenses of the Orthodontic Centers are the Company's expenses and are
recognized as incurred. Employee costs consist of wages, salaries and benefits
paid to all of the Company's employees, including orthodontic assistants,
business staff and management personnel. General and administrative expenses
consist of provision for losses on receivables, professional service fees,
maintenance and utility costs, office supply expense, telephone expense, taxes,
license fees, printing expense and shipping expense.
The Company does not have a controlling financial interest in its Affiliated
Orthodontists' practices. In accordance with guidance in Emerging Issues Task
Force No. 97-2, the Company does not consolidate the patient revenue and other
operations and accounts of its Affiliated Orthodontists within the Company's
financial statements.
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RESULTS OF OPERATIONS
The following table sets forth the percentages of net revenue represented by
certain items in the Company's condensed consolidated statements of income.
Three months ended
March 31,
--------------------
2001 2000
-------- --------
Net revenue ............................................ 100.0% 100.0%
-------- --------
Direct expenses:
Employee costs .................................... 28.8 29.6
Orthodontic supplies .............................. 8.1 7.7
Rent .............................................. 8.8 9.0
Marketing and advertising ......................... 8.0 8.2
-------- --------
Total direct expenses ......................... 53.7 54.5
General and administrative ............................. 10.7 11.2
Depreciation and amortization .......................... 5.7 6.0
-------- --------
Operating profit ....................................... 29.9 28.4
Interest (income) expense .............................. 1.3 1.3
-------- --------
Income before income taxes ............................. 28.7 27.0
Provision for income taxes ............................. 10.8 10.2
-------- --------
Income before cumulative effect of change in
accounting principle .............................. 17.8 16.8
Cumulative effect of change in accounting principle,
net of income tax benefit ......................... -- (85.3)
-------- --------
Net income (loss) ...................................... 17.8% (68.5)%
======== ========
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
NET REVENUE
Net revenue increased $18.2 million, or 30.7%, to $77.5 million for the three
months ended March 31, 2001 from $59.3 million for the three months ended March
31, 2000. Approximately $12.7 million of this increase was attributable to the
growth of net revenue of Orthodontic Centers open throughout both periods, and
approximately $5.5 million of the increase was attributable to the growth in net
revenue of Orthodontic Centers opened since January 1, 2000. The number of the
Affiliated Orthodontists' patient contracts increased to approximately 360,000
at March 31, 2001 from approximately 287,000 at March 31, 2000. The Company
recognized revenue that was included in the cumulative effect of change in
accounting principle of $9.5 million during the three months ended March 31,
2001 and $16.9 million during the three months ended March 31, 2000.
EMPLOYEE COSTS
Employee costs increased $4.7 million, or 27.1%, to $22.3 million for the three
months ended March 31, 2001 from $17.6 million for the three months ended March
31, 2000. As a percentage of net revenue, however, employee costs decreased to
28.8% for the three months ended March 31, 2001 from 29.6% for the three months
ended March 31, 2000, primarily due to efficiencies achieved through a general
change to longer patient treatment intervals by the Affiliated Orthodontists,
which resulted in fewer treatments per patient contract and lower employee costs
per patient. As a result of developments in orthodontic technology, a patient
may be seen every six to eight weeks, rather than the traditional four weeks,
without compromising quality of care. Consistent with industry trends, the
Affiliated Orthodontists have begun increasing the intervals between patient
treatments. During the three months ended March 31, 2001,
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patients in the Orthodontic Centers averaged 45.32 days between office visits,
compared to an average of 42.80 days during the three months ended March 31,
2000. This increase in patient treatment interval reduces the number of office
visits during the term of a patient's treatment, which continues to average
about 26 months, and results in lower employee costs per patient. The increased
interval does not, however, reduce the amount of treatment fees per patient.
Therefore, the increased interval reduces the employee costs incurred with
respect to an individual patient relative to the patient's treatment fee.
ORTHODONTIC SUPPLIES
Orthodontic supplies expense increased $1.7 million, or 37.2%, to $6.2 million
for the three months ended March 31, 2001 from $4.5 million for the three months
ended March 31, 2000. As a percentage of net revenue, orthodontic supplies
expense increased to 8.0% for the three months ended March 31, 2001 from 7.7%
for the three months ended March 31, 2000. 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 $1.5 million, or 28.1%, to $6.8 million for the three
months ended March 31, 2001 from $5.3 million for the three months ended March
31, 2000, primarily due to Orthodontic Centers affiliated, opened or relocated
after March 31, 2000. As a percentage of net revenue, however, rent expense
decreased to 8.8% for the three months ended March 31, 2001 from 9.0% for the
three months ended March 31, 2000.
MARKETING AND ADVERTISING
Marketing and advertising expense increased $1.4 million, or 28.3%, to $6.2
million for the three months ended March 31, 2001 from $4.9 million for the
three months ended March 31, 2000, primarily due to increases in marketing and
advertising related to growth in net revenue for existing Orthodontic Centers
and marketing and advertising for Orthodontic Centers added after March 31,
2000. As a percentage of net revenue, however, marketing and advertising expense
decreased to 8.1% for the three months ended March 31, 2001 from 8.2% for the
three months ended March 31, 2000.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased $1.6 million, or 24.8%, to $8.3
million for the three months ended March 31, 2001 from $6.6 million for the
three months ended March 31, 2000, primarily due to the addition of Orthodontic
Centers and increases in the Affiliated Orthodontists' patient base after March
31, 2000. As a percentage of net revenue, however, general and administrative
expense decreased to 10.7% for the three months ended March 31, 2001 from 11.2%
for the three months ended March 31, 2000, primarily due to costs incurred in
connection with the Company's 2000 annual meeting of Affiliated Orthodontists in
the first quarter of 2000. The Company did not hold its 2001 annual meeting of
Affiliated Orthodontists, which is expected to be held in the fourth quarter of
2001, in the first quarter of 2001.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $847,000, or 23.9%, to $4.4
million for the three months ended March 31, 2001 from $3.5 million for the
three months ended March 31, 2000, due to fixed assets acquired and service
agreements entered into for Orthodontic Centers developed, acquired or relocated
after March 31, 2000. As a percentage of net revenue, however, depreciation and
amortization
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expense decreased to 5.7% for the three months ended March 31, 2001 from 6.0%
for the three months ended March 31, 2000.
OPERATING PROFIT
Operating profit increased $6.4 million, or 37.9%, to $23.2 million for the
three months ended March 31, 2001 from $16.8 million for the three months ended
March 31, 2000. As a percentage of net revenue, operating profit increased to
29.9% for the three months ended March 31, 2001 from 28.4% for the three months
ended March 31, 2000, as a result of the factors discussed above.
INTEREST
Net interest expense increased $313,000, or 39.8%, to $1.1 million for the three
months ended March 31, 2001 from $786,000 for the three months ended March 31,
2000, due to an increase since March 31, 2000 in the average balance of
borrowings under the Company's $100 million revolving line of credit associated
with expansion in new and existing markets. As a percentage of net revenue, net
interest expense increased to 1.4% for the three months ended March 31, 2001
from 1.3% for the three months ended March 31, 2000.
NON-CONTROLLING INTEREST IN SUBSIDIARY
During the three months ended March 31, 2001, the Company finalized an
arrangement with its Affiliated Orthodontists in Japan pursuant to which these
Affiliated Orthodontists acquired 16% of the subsidiary through which the
Company conducts its Japanese operations. In the three months ended March 31,
2001, $110,000 of operating losses was attributable to the non-controlling
interest in such subsidiaries.
PROVISION FOR INCOME TAXES
Provision for income taxes increased $2.3 million, or 38.5%, to $8.4 million for
the three months ended March 31, 2001 from $6.1 million for the three months
ended March 31, 2000. The Company's effective income tax rate was 37.8% for the
three months ended March 31, 2001 and 2000. The Company's change in accounting
principle pursuant to SAB 101 effective January 1, 2000 resulted in deferred tax
assets of $41.1 million as of March 31, 2001, because the Company has not
received approval from taxing authorities to change our tax accounting method of
recognizing revenue. The Company cannot assure you that we will receive any such
approval. Failure to obtain this approval could have an adverse effect on the
Company's cash flow from operating activities. We have provided no valuation
allowance for deferred tax assets. The Company believes that the deferred tax
assets at March 31, 2001 are realizable through carrybacks and future reversals
of existing taxable temporary differences.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
During the three months ended March 31, 2000, the Company recorded a cumulative
effect of a change in accounting principle of $50.6 million, net of an income
tax benefit of $30.6 million, with respect to the Company's change in revenue
recognition effective as of January 1, 2000 pursuant to SAB 101.
NET INCOME (LOSS)
Net income increased $54.4 million, or 134.1%, to $13.8 million for the three
months ended March 31, 2001 from a net loss of $40.6 million for the three
months ended March 31, 2000. As a percentage of net revenue, net income
increased to 17.8% for the three months ended March 31, 2001 from (68.5)% for
the three months ended March 31, 2000, as a result of the factors discussed
above.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash provided by operations was $15.8 million for the three
month ended March 31, 2000, an increase of $2.6 million, or 19.7%, from $13.2
million for the three months ended March 31, 2000. The Company's working capital
at March 31, 2001 was $49.7 million, an increase of $10.1 million, or 25.5%,
from $39.6 million at December 31, 2000, including cash and cash equivalents of
$12.3 at March 31, 2001, compared to $4.7 million at December 31, 2000,
primarily due to the timing of the Company's estimated income tax payments. The
Company's net cash used in investing activities for the three months ended March
31, 2001 was $8.0 million, an increase of $5.9 million, or 281.0%, from $2.1
million for the three months ended March 31, 2000.
The Company's capital expenditures consist primarily of the costs associated
with the development of additional Orthodontic Centers. The average cost of
developing a new Orthodontic Center in the United States is about $255,000,
including the cost of equipment, leasehold improvements, working capital and
start-up losses associated with the initial operations of the Orthodontic
Center. These costs are shared by the Company and the particular Affiliated
Orthodontist. The Company assists Affiliated Orthodontists in obtaining
financing for their share of these costs by providing a guaranty of loans from
the Company's primary lender. In some cases, the Company bears an Affiliated
Orthodontist's share of these costs until it is reimbursed by the Affiliated
Orthodontist. At March 31, 2001, the outstanding balance of these amounts
guaranteed by the Company was $2.8 million, compared to about $2.9 million at
December 31, 2000. The Company also intends to continue to make advances of
about $40,000 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 intends to fund these advances and any continued
financing through a combination of bank borrowings and cash from operations.
During the three months ended March 31, 2001, the Company expended $60.5 million
of cash for fixed assets, intangible assets, repayment of long-term debt and
income taxes. However, the Company's cash and cash equivalents were reduced by
$4.9 million during the three months ended March 31, 2001, as summarized below.
The remainder of the cash expenditures during the three months ended March 31,
2001 were financed from the Company's cash flow from operations and revolving
line of credit.
Three months ended
March 31,
---------------------------
2001 2000
------------ ------------
Cash, cash equivalents and available for sale
investments at January 1 ....................... $ 4,689 $ 5,822
(Decrease)/increase in cash, cash equivalents and
available for sale investments during period ... 7,565 11,284
------------ ------------
Cash and cash equivalents at end of period .......... $ 12,254 $ 17,106
============ ============
In October 1998, we entered into a $100.0 million revolving line of credit with
a lending group that currently consists of First Union National Bank, Bank of
America FSB, Bank One, N.A., Hibernia National Bank and Wachovia Bank, N.A. The
line of credit provides an aggregate of $100.0 million for general working
capital needs and expansion of the number of orthodontic centers, and bears
interest at varying rates above the lender's prime rate or LIBOR. Amounts
borrowed under the line of credit are secured by a security interest in all of
our assets, including our accounts receivable and equipment. At March 31, 2001,
$56.6 million of indebtedness was outstanding under the line of credit, compared
to
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$57.4 million at December 31, 2000. During the three months ended March 31,
2001, amounts borrowed under the Company's line of credit were used to finance
the Company's foreign operations.
The Company expects to require cash in the future primarily for developing
additional Orthodontic Centers, acquiring assets from and affiliating with
additional orthodontists, capital expenditures, repayment of long-term debt,
payment of income taxes and general corporate purposes. The Company's cash needs
could significantly change depending upon its ability to recruit orthodontists,
find appropriate sites, enter into long-term service or consulting agreements
and acquire the assets of existing orthodontic practices. The Company believes
that the combination of funds available under its revolving line of credit and
cash flow from operations will be sufficient to meet its anticipated funding
requirements during the remainder of 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the three months ended March 31, 2001, 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, 2000.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit number Description
3.1 Bylaws of the Registrant (incorporated by reference
to exhibits filed with the Registrant's Registration
Statement on Form S-1, Registration Statement No.
33-85326)
3.2 Restated Certificate of Incorporation of the
Registrant (incorporated by reference to exhibits
filed with the Registrant's Registration Statement on
Form S-1, Registration Statement No. 33-85326)
4 Specimen Stock Certificate (incorporated by reference
to exhibits filed with the Registrant's Registration
Statement on Form S-1, Registration Statement No.
33-85326)
(b) REPORTS ON FORM 8-K
During the three months ended March 31, 2001, the Company filed the
following current reports on Form 8-K:
(i) On January 18, 2001 the Company filed a current report on Form 8-K
reporting information under "Item 9. Regulation FD Disclosure."
(ii) On March 16, 2001, the Company filed a current report on Form 8-K
reporting information under "Item 5. Other Events."
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Orthodontic Centers of America, Inc.
(Registrant)
Date: May 15, 2001 /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
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