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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1997, or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to
__________.
COMMISSION FILE NO.: 0-25256
ORTHODONTIC CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-1278948
- ----------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5000 SAWGRASS VILLAGE CIRCLE, SUITE 25
PONTE VEDRA BEACH, FLORIDA 32082
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 280-4500
----------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- ------------------------------------- ------------------------------
COMMON STOCK, $.01 PAR VALUE PER SHARE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
--------------------------------------
(Title of Class)
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 .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the shares of the Registrant's Common Stock held
by non-affiliates of the Registrant on March 25, 1998 was approximately
$857,232,624 based upon the closing price per share of the Registrant's Common
Stock as reported on the New York Stock Exchange on March 25, 1998. As of March
25, 1998, there were 47,550,803 outstanding shares of the Registrant's Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement relating to the
Annual Meeting of Stockholders of the Registrant to be held during 1998 are
incorporated by reference into Part III of this Report.
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FORWARD-LOOKING STATEMENTS
Statements contained in this Report which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements in "Item 1. Business", "Item 3. Market for Registrant's Common Equity
and Related Stockholder Matters" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
development and acquisition of additional Orthodontic Centers and affiliation
with additional orthodontic practices, recruitment of additional Affiliated
Orthodontists, advancement of funds to Affiliated Orthodontists, location of
Orthodontic Centers in facilities not shared with a general dentist, projections
of the Company's future earnings, funding of the Company's expansion, operations
and capital expenditures, payment or nonpayment of dividends and cash outlays
for income taxes.
Such forward-looking statements involve certain risks and uncertainties
that could cause actual results to differ materially from anticipated results.
These risks and uncertainties include regulatory constraints, changes in laws
regulating the practice of dentistry or the interpretation of such laws,
competition from other orthodontists or practice management companies, the
availability of suitable new markets and suitable locations within such markets,
changes in the Company's operating or expansion strategy, failure to consummate
proposed developments or acquisitions of Orthodontic Centers, 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 located or are proposed to be located, and other factors
described in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors" or as may be identified from
time to time in the Company's filings with the Securities and Exchange
Commission or in the Company's press releases.
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PART I
ITEM 1. BUSINESS
GENERAL
Orthodontic Centers of America, Inc. and its subsidiaries (the "Company")
are the leading provider of practice management services to orthodontic
practices in the United States, based on annual net revenue, annual net income,
number of affiliated orthodontists and number of orthodontic centers. The
Company develops orthodontic centers affiliated with the Company ("Orthodontic
Centers") and manages the business operations and marketing aspects of the
orthodontic practices of orthodontists who provide orthodontic services at the
Orthodontic Centers ("Affiliated Orthodontists"), thereby allowing Affiliated
Orthodontists to focus on delivering quality patient care. Since its inception
in 1985, the Company has grown to manage 360 Orthodontic Centers located in 39
states with 205 Affiliated Orthodontists at December 31, 1997. From January 1,
1985 to December 31, 1997, the Company developed 199 Orthodontic Centers,
acquired the assets of, and affiliated with, 217 existing orthodontic practices
and consolidated 56 Orthodontic Centers.
Management believes that the Company's operating strategy and proprietary
operating systems have allowed Affiliated Orthodontists to realize greater
productivity and profitability than traditional orthodontic practices. The
Company's proprietary office design permits an Affiliated Orthodontist to treat
patients without moving from room to room. The Company's proprietary patient
scheduling system groups appointments by the type of procedure and dedicates
certain days exclusively to new patients. These operating systems, along with
the efficient use of an average of five orthodontic assistants per Orthodontic
Center, have enabled Affiliated Orthodontists practicing in Orthodontic Centers
open throughout 1995 to treat an average of 77 patients per nine-hour patient
treatment day during 1997. Orthodontists in the United States treated an average
of 45 patients per operating day in 1996.
The Company develops and implements marketing plans for the Orthodontic
Center, utilizing local television, radio and print advertising and internal
marketing promotions. During 1997, the Company spent an average of approximately
$65,230 per Affiliated Orthodontist on direct marketing costs and advertising.
In contrast, the traditional orthodontist, who relies primarily on referrals
from dentists and other patients, spent an average of approximately $4,400 on
marketing and advertising in 1996. As a result of this marketing strategy,
during 1997, each Affiliated Orthodontist who had been affiliated with the
Company for at least one year generated an average of 505 new case starts as
compared to the 1996 national average of approximately 180 new case starts per
orthodontist.
The Company is not engaged in the practice of orthodontics. The Affiliated
Orthodontists maintain full control over their orthodontic practices, determine
which personnel, including orthodontic assistants, to hire or terminate and set
their own standards of practice in order to promote quality orthodontic care.
THE ORTHODONTIC INDUSTRY
Industry Overview
According to the 1997 Journal of Clinical Orthodontists Orthodontic
Practice Study (the "1997 JCO Study"), in 1996, orthodontists in the United
States initiated treatment for approximately 1.6 million patients. Of these
patients, approximately 80.9% were between the ages of nine and 18 and the
remaining 19.1% were primarily adults between the ages of 25 and 35. The number
of adults seeking treatment has increased in recent years from 332,000 case
starts in 1989 to approximately 480,000 case starts in 1996. Based upon the
results of a 1994 study conducted by members of the Department of Orthodontics
of the University of Florida and based upon management's experience in the
orthodontic industry, management believes that the total market for orthodontic
services substantially exceeds the number of patients currently seeking
treatment.
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According to the 1997 JCO Study, the number of orthodontists practicing in
the United States has remained at approximately the same level since 1989. The
United States orthodontic industry includes approximately 9,115 orthodontists
and is currently highly fragmented, with approximately 90% of the practicing
orthodontists acting as sole practitioners. Orthodontists must complete up to
three years of postgraduate studies following completion of dental programs.
Many dentists who are not orthodontists also perform certain orthodontic
services. Data relating to these individuals are not included in the 1997 JCO
Study.
The United States orthodontic industry generates approximately $3.8 billion
in annual gross revenues with the average orthodontic practice generating gross
revenues of approximately $518,800 per year. Orthodontics is generally an
elective procedure, with approximately 75% of payments for orthodontic services
made directly by the person receiving treatment and standard dental insurance
covering an additional 25% of such payments. Managed care represents a small
percentage of revenues generated in the orthodontic industry.
The table below presents certain information included in the 1997 JCO Study
concerning the United States orthodontic industry in each of the years
presented:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Number of practicing
orthodontists 8,720 8,760 8,856 8,958 9,060 9,098 9,115
Number of new patient cases 1,308,000 1,314,000 1,416,960 1,478,070 1,540,200 1,592,150 1,640,700
Average fee per case $3,050 $3,221 $3,401 $3,447 $3,492 $3,649 $3,703
</TABLE>
Management believes, based upon the 1997 JCO Study, that the total number
of new patient cases has increased only moderately because of the reliance of
orthodontists in traditional orthodontic practices on referrals from general
dentists or existing patients for new patients. Orthodontists in the United
States spent an average of approximately $4,400 on marketing and advertising in
1996. Therefore, to increase revenue many orthodontists have raised the fees
they charge for their services.
Traditional Orthodontic Practice
The traditional orthodontic practice typically includes a sole
orthodontist, who practices at a single primary location or at an average of
less than one satellite office, with an average of approximately three
orthodontic assistants and two business office personnel. At a typical
orthodontic office, chairs are arranged in an open room in a somewhat circular
pattern. Both the orthodontist and orthodontic assistant must complete treatment
on a particular patient before treating the next patient. The traditional
orthodontic office is structured so that the orthodontist rotates from one
patient to another, as an orthodontic assistant completes the orthodontic work.
In the traditional practice, the orthodontist manages all business aspects of
the practice, as the use of third party management services is not typical.
In a typical orthodontic practice, before braces are applied a patient is
required to complete as many as four preliminary appointments, consisting of an
initial examination and sessions for making impressions of the patient's teeth,
taking x-rays and placing spacers between the patient's teeth. The patient
returns for monthly adjustments before the braces are removed and a retainer is
made to maintain the orthodontic treatment. In 1996, standard case fees in
traditional orthodontic practices averaged approximately $3,645 for children and
approximately $3,947 for adults. The charges for preliminary appointments,
including a required down payment, averaged approximately $900 to $1,000, or
approximately 25% of the total fee. Fees are paid each month by the patient for
services performed at that visit.
According to the 1997 JCO Study, the average orthodontist initiated
treatment of approximately 180 patients in 1996, treated approximately 45
patients per operating day and
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maintained approximately 400 active cases. In addition, the average orthodontic
practice consisted of one or two offices and generated gross fees of $518,800,
with the orthodontist realizing net practice income of approximately $224,000.
OPERATING STRATEGY
Key elements of the Company's operating strategy include:
Emphasizing Quality Patient Care. All Affiliated Orthodontists are
graduates of accredited orthodontic training programs and participate in
advisory committees that meet twice a year to perform peer review studies and to
consult with the Affiliated Orthodontists. The Affiliated Orthodontists have
practiced orthodontics for an average of approximately 15 years and
approximately 26% have held teaching positions. In addition, the Company
provides operating systems and support that enhance the ability of Affiliated
Orthodontists to provide quality patient care. Senior clinical technicians and
the clinical staff receive training in procedures which enhance the level of
patient service. Quality of care is monitored through peer review procedures
administered by the Affiliated Orthodontists through their advisory committee.
Stimulating Demand in Local Markets. The Company develops and implements
marketing plans for each Orthodontic Center, utilizing local television, radio
and print advertising and internal marketing promotions. Based upon the success
of the Orthodontic Centers in attracting new patients, management believes that
the Company's marketing activities, along with the affordable payment plans
provided by the Orthodontic Centers, have resulted in many patients receiving
treatment who otherwise may not have sought orthodontic services. During 1997,
the Company spent on average approximately $65,230 per Affiliated Orthodontist
on direct marketing costs and advertising. In contrast, the traditional
orthodontist, who relies primarily on referrals from dentists and other
patients, spent an average of approximately $4,400 on marketing and advertising
in 1996. During 1997, each Affiliated Orthodontist who had been affiliated with
the Company for at least one year generated an average of 505 new case starts as
compared to the 1996 national average of approximately 180 new case starts per
orthodontist.
Achieving Operating Efficiencies and Economies of Scale. The Company
implements a variety of operating procedures and systems designed to improve the
productivity and profitability of the Orthodontic Centers and to achieve
economies of scale. These include Orthodontic Center office designs which
increase the number of patients the clinical staff can treat and enhance patient
comfort and privacy, a scheduling system designed to increase capacity
utilization at each Orthodontic Center, efficient use of orthodontic assistants
and centralized purchasing and distribution systems. During 1997, Affiliated
Orthodontists practicing in Orthodontic Centers open throughout 1996 treated an
average of 77 patients per nine-hour patient treatment day. Orthodontists in the
United States treated an average of 45 patients per operating day in 1996.
Increasing Market Penetration With Affordable Payment Plans. The
Orthodontic Centers generally provide a payment plan recommended by the Company
which consists of no down payment, equal monthly payments of $98 per month over
the term of the treatment and a final payment of $398 at completion of the
treatment. Management believes that this payment plan and the Company's
marketing activities have resulted in many patients receiving treatment who
otherwise may not have sought orthodontic services. For a standard case in which
treatment continues for between 26 and 32 months, the total fees charged by the
Affiliated Orthodontists averaged approximately $3,100 in 1997, which was below
the 1996 national average of $3,650 to $3,950 for the same period of treatment.
Management believes that the Orthodontic Centers are able to charge lower fees
because of the operating efficiencies resulting from the office designs of
Orthodontic Centers, the patient scheduling systems, efficient use of
orthodontic assistants and centralized purchasing and distribution systems.
Capitalizing on Information Systems. In addition to providing marketing
and operating expertise, the Company provides Affiliated Orthodontists with
monthly operating data and quarterly
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financial statements for each Orthodontic Center, including management's
analysis of the financial results and recommended changes to improve financial
and operating performance.
GROWTH STRATEGY
The Company's growth strategy is to develop new Orthodontic Centers and to
affiliate with existing practices in both new and existing markets. At December
31, 1994, 1995, 1996 and 1997 there were 46, 78, 133 and 205 Affiliated
Orthodontists, respectively. Management believes that orthodontists choose to
affiliate with the Company because the Company provides: (i) the capital
required to open an Orthodontic Center; (ii) the business and clinical systems
and staffing required to operate a new Orthodontic Center; (iii) the opportunity
to increase substantially practice income derived by the orthodontists; (iv) the
opportunity to increase the orthodontists' focus on patient care rather than
administration; and (v) the opportunity to eliminate the need for business
development efforts designed to generate referrals from general dentists.
Since its inception in 1985, the Company has grown to manage 360
Orthodontic Centers located in 39 states with 205 Affiliated Orthodontists at
December 31, 1997. Of these 360 Orthodontic Centers, 240 have been developed or
relocated to new facilities since June 30, 1992. Key elements of the Company's
growth strategy include:
Development of New Orthodontic Centers. From January 1, 1985 to December
31, 1997, the Company developed 199 Orthodontic Centers, including 186 since
June 30, 1992. The Company actively markets itself to orthodontists by targeting
military orthodontists, practicing orthodontists and orthodontic students,
including the approximately 200 orthodontists who graduate each year from
accredited United States orthodontic graduate programs, who are interested in
opening new practices. The Company's Professional Development Department, which
includes former practicing orthodontists, recruits additional orthodontists
through referrals from Affiliated Orthodontists, attending orthodontic
conventions, trade shows and association meetings, visiting orthodontic graduate
schools and advertising in professional journals. The Company also intends to
continue to develop additional Orthodontic Centers with current Affiliated
Orthodontists.
Orthodontists who select the Company for affiliation are generally given
their choice of markets in the United States in which to locate where the
Company does not have another Orthodontic Center. The Company also performs
market studies to determine the advantages of locating Orthodontic Centers in
new markets.
The average cost of developing a new Orthodontic Center is approximately
$250,000, including the cost of equipment, leasehold improvements, working
capital and losses associated with the initial operations of the Orthodontic
Center. The costs of developing a new Orthodontic Center are shared by the
Company and the particular Affiliated Orthodontist. The Company assists
Affiliated Orthodontists in obtaining financing of their share of such costs
through the Company's primary lender.
Affiliation with Existing Orthodontic Practices. From January 1, 1985 to
December 31, 1997, the Company acquired the assets of, and affiliated with, 217
existing orthodontic practices. The Company's Professional Development
Department actively markets the Company to experienced orthodontists through
referrals from Affiliated Orthodontists, attending orthodontic conventions,
trade shows and association meetings and advertising in professional journals.
Of these existing practices, approximately 82% generated less than $500,000 of
patient revenue during the 12 months prior to their affiliation with the
Company. Management believes that focusing on orthodontic practices of this size
provides the Company with the opportunity to achieve higher revenue growth rates
and lower acquisition costs, relative to larger practices. Existing practices
that have affiliated with the Company have experienced increased average gross
revenue and operating income following their affiliation. The Company frequently
relocates existing practices to new facilities, including 31 since June 30,
1992. The Company intends to continue to relocate existing practices to new
facilities and also intends to continue to evaluate additional potential
affiliations.
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Traditional Orthodontic Practices. During 1997, the Company created a new
division which focuses on affiliations with traditional, internally-marketed
orthodontic practices that generate relatively large amounts of patient fees. At
December 31, 1997, there were 13 Orthodontic Centers operating in the new
division. Although the Company intends to continue to focus primarily on
practices that advertise, management believes that affiliating with selected
traditional practices will provide the Company with additional opportunities for
growth. According to the 1997 JCO Study, most orthodontists practicing in the
United States do not advertise through mass media. The Company has engaged the
services of Dr. Ronald M. Roncone to assist the Company in developing this new
division. Dr. Roncone operates an orthodontic practice in California and
lectures extensively to other orthodontists on methods of expanding an
orthodontic practice.
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ORTHODONTIC CENTERS
Location
At December 31, 1997, there were 360 Orthodontic Centers located in 39
states. The following table sets forth information regarding these 360
Orthodontic Centers:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
STATE ADI'S (1) CENTERS STATE ADI'S (1) CENTERS
- ----- --------- --------- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Alabama Birmingham 3 Missouri Kansas City 1
Huntsville 2 St. Louis 3
Montgomery 1 Nevada Reno 2
Arkansas Little Rock 1 New Jersey Atlantic City 2
Arizona Lake Havasu 1 Vineland 1
Phoenix 8 New Mexico Roswell 2
Tucson 2 New York New York City/Long Island 13
California Fresno 2 North Carolina Charlotte 3
Palm Desert 1 Greenville 4
Sacramento 3 Raleigh-Durham 4
Salinas 1 Winston-Salem 4
San Diego 9 North Dakota Minot 2
San Jose 2 Ohio Cincinnati 3
Colorado Colorado Springs 2 Cleveland 10
Denver 7 Columbus 3
Fort Collins 1 Dayton 2
Grand Junction 1 Toledo 2
Connecticut Hartford 6 Youngstown 2
Florida Fort Lauderdale/Miami 11 Oklahoma Oklahoma City 4
Fort Myers 2 Tulsa 2
Gainesville 3 Oregon Bend 3
Jacksonville 4 Portland 4
Orlando 7 Pennsylvania Harrisburg 3
Panama City 1 Johnstown/Altoona 3
Pensacola 1 Philadelphia 10
Tallahassee 1 Pittsburgh 2
Tampa 10 Rhode Island Providence 3
West Palm Beach 4 South Carolina Charleston 3
Georgia Albany 3 Columbia 2
Atlanta 11 Florence 1
Augusta 1 Greenville 4
Columbus 1 Tennessee Chattanooga 3
Savannah 2 Johnson City/Bristol/Kingsport 3
Illinois Chicago 3 Knoxville 2
Rockford 1 Memphis 1
Indiana Indianapolis 3 Nashville 4
Kansas Kansas City 1 Texas Austin 6
Kentucky Louisville 3 Brownsville 2
Louisiana Alexandria 1 Corpus Christi 1
Baton Rouge 1 Dallas/Ft. Worth 5
Lafayette 1 El Paso 2
Monroe 1 Houston 9
New Orleans 9 Odessa 1
Shreveport 1 San Antonio 3
Maine Portland 2 Victoria 2
Maryland Baltimore 7 Waco 3
Rockville/Washington. D.C. 6 Utah Salt Lake City 5
Massachusetts Boston 3 Virginia Norfolk 4
Springfield 3 Richmond 3
Michigan Grand Rapids 1 Arlington/Washington D.C. 4
Saginaw 1 Washington Seattle 7
Minnesota Minneapolis 6 West Virginia Wheeling 3
Mississippi Gulfport 4 Wisconsin Milwaukee 2
Hattiesburg 3 ______
Jackson 1 Total 360
Meridian 1 ======
- --------------------------
</TABLE>
(1) "ADI" refers to an "area of dominant influence" (as defined by Arbitron
Ratings Company) and is the broadcast coverage area of television and radio
stations in a given market area. Certain Orthodontic Centers indicated as
being located in a particular ADI are located in a state other than that
shown for the ADI above.
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Design
The Orthodontic Centers are generally located either in shopping centers or
professional office buildings. Substantially all of the Orthodontic Centers
include private treatment rooms and large patient waiting areas (rather than one
large treatment area). This allows the Orthodontic Centers to locate in a
broader range of office space than a traditional orthodontic practice. The
Orthodontic Centers typically include up to six treatment rooms and range in
size from approximately 2,000 square feet to 2,500 square feet.
Of the 360 Orthodontic Centers at December 31, 1997, 357 were located in
offices used only by the Affiliated Orthodontists and three were located in
space shared with a general dentist. The Company intends to relocate these three
Orthodontic Centers to free-standing locations as soon as practicable. In its
development of additional Orthodontic Centers, the Company intends to establish
only free-standing Orthodontic Centers and does not intend to share office space
with general dentists.
Staffing and Scheduling
An Orthodontic Center is typically open from 8:30 a.m. to 6:30 p.m. for
days on which patients are scheduled and at least one Saturday every month. In
markets in which there are two or more Orthodontic Centers, each Orthodontic
Center in that market is fully staffed only for days on which the Affiliated
Orthodontist is scheduled to work, ranging from two to 20 days per month. Staff
members dedicated to the Orthodontic Centers in that market, including the
business personnel and the orthodontic assistants, rotate with the Affiliated
Orthodontist among the Orthodontic Centers in the market. On all other days, the
Orthodontic Center is staffed only with a receptionist who answers the telephone
and books appointments.
Patients are scheduled based upon this rotation schedule, if applicable.
Therefore, a particular Orthodontic Center will have appointments available only
for pre-established days each month. To promote efficiency, appointments for
particular types of procedures are grouped together on designated days, with
each Orthodontic Center scheduling specified days on which new patients are
treated and other days each month during which current patients are treated.
This system permits utilization of an Orthodontic Center by a greater number of
patients each day patients are treated.
Certain days each month are dedicated solely to seeing new patients. Longer
appointments are scheduled for new patient days to allow for the initial
consultation, preliminary procedures (including teeth impressions and x-rays)
and the placing of spacers between the patient's teeth in anticipation of the
application of the braces at the next appointment. If orthodontic treatment is
recommended by the Affiliated Orthodontist, the patient then signs a contract
for the treatment. The grouping of new patient appointments separately from the
monthly appointments for existing patients avoids certain inefficiencies which
might be created by the longer appointments required for new patients.
Within two weeks after a patient's initial visit, a patient typically
returns to an Orthodontic Center for application of braces and returns each
month thereafter for adjustments to the braces. The patient makes a monthly
payment prior to receiving his or her chart and proceeding to an inner waiting
room. The Affiliated Orthodontist then reviews the status of the treatment and
prescribes any necessary adjustments to the braces. The patient then proceeds to
a private treatment room, where an orthodontic assistant makes the prescribed
adjustments. The patient then returns to the Affiliated Orthodontist for final
examination and adjustments that must be made by an orthodontist. Before leaving
the Orthodontic Center, the patient makes an appointment for the next month and
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receives appropriate written information or instructions regarding his or her
activities during the interim period.
Payment Plan; Case Fees
The Orthodontic Centers generally provide a payment plan recommended by the
Company, which consists of no initial down payment, equal monthly payments of
$98 per month during the term of the treatment and a final payment of $398 at
the completion of treatment. At the initial treatment, the patient signs a
contract outlining the terms of the treatment, including the anticipated length
of treatment and the total fees. The number of required monthly payments is
fixed at the beginning of the case and corresponds to the anticipated number of
monthly treatments, which averages 26 months. Payment is required from patients
at the beginning of each monthly appointment.
In the event the treatment period exceeds the period originally estimated
by the orthodontist, the patient is not required to pay for the additional
months of treatment. In the event the treatment is completed prior to the
scheduled completion date, the patient is generally required to pay the
remaining balance of the contract less a deduction (equal to 1.5% times the
number of months remaining until the scheduled completion date times the total
amount of the fee). If a patient terminates the treatment prior to the
completion of the treatment period, the patient is required to pay the balance
due for all services rendered to date pursuant to the contract. Patients may
transfer to another Orthodontic Center for the completion of the treatments. In
such an event, the patient would continue to pay the required monthly fees under
the contract. Since 1991, approximately 1.3% of the Company's net revenue have
proven to be uncollectible.
The Orthodontic Centers do not accept payment by Medicare or Medicaid for
services provided. Other payment plans with lower total payments by the patient
are available for patients who have insurance coverage for treatment. During
1997, approximately 20% of the patients treated at the Orthodontic Centers had
some form of insurance coverage and approximately 13.6% of the patient revenue
of the Affiliated Orthodontists was paid by a third party payor. The portion of
the fee not covered by insurance is the responsibility of the patient.
SERVICES AND OPERATIONS
The Company generally manages all of the operations of an Orthodontic
Center other than the provision of orthodontic services. The Company provides
financial, accounting, billing and collection services for an Orthodontic Center
and employs the Orthodontic Center's business personnel. Where permitted by
applicable statutes or regulations, the Company also employs the orthodontic
assistants.
Marketing and Advertising
The Company markets and advertises the services of Orthodontic Centers
through television, radio and print media advertising. The Company tailors such
advertising to the particular local market. The names of the Orthodontic Center
and the Affiliated Orthodontist are prominently featured in each advertisement.
Advertising and direct marketing expenditures averaged approximately $65,230 per
Affiliated Orthodontist in 1997 as compared to a national average of
approximately $4,400 per orthodontist for traditional practices in 1996.
During 1997, the Company initiated an advertising campaign using a
celebrity spokesperson, with commercials featuring Brett Favre, quarterback of
the NFL 1997 Super Bowl champion Green Bay Packers, aired in markets in which
the Orthodontic Centers are located. The Company also began using an outside
advertising agency for the production of broadcast advertisements and the
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purchase of advertising time and space (which had historically been done
internally by the Company).
The general public traditionally has had little information about
orthodontic fees prior to consultation with an orthodontist. The advertising
produced by the Company stresses an Orthodontic Center's affordable payment plan
and that the Affiliated Orthodontists are specialists in the field of
orthodontics (not general dentists practicing orthodontics). The advertisements
also emphasize the importance of utilizing a specialist for orthodontic care and
that the Orthodontic Centers are conveniently located in each market and operate
for extended hours and on some weekend days to accommodate working parents. The
advertisements include a toll free national 800 number which routes incoming
calls to an Orthodontic Center located in the caller's area. The Orthodontic
Centers typically receive increased inquires from prospective patients following
a broadcast of the advertisements. Accordingly, the scheduling of television
and radio advertisements is coordinated to achieve optimal use of advertisement
expenditures with the level of advertising coordinated with available
Orthodontic Center capacity to achieve desired new patient levels at a
particular Orthodontic Center.
The Company's Marketing Department is responsible for servicing the
marketing needs of the Orthodontic Centers. Marketing managers within the
Marketing Department design and implement a specific marketing and advertising
program for the Orthodontic Centers located within an assigned geographic
region. Marketing managers are also responsible for maintaining communication
with the local Affiliated Orthodontists and staff in each Orthodontic Center
regarding marketing effectiveness and trends in the particular market. Other
members of the Company's Marketing Department are responsible for media
relations, graphic design and marketing research relating to markets in which
the Orthodontic Centers are or may be located.
New Center Development and Construction
Since 1985, the Company has developed 199 new Orthodontic Centers,
including 186 since June 30, 1992. The Company has relocated 31 existing
practices to new facilities since June 30, 1992. The Company's Construction and
Leasing Department is responsible for locating and leasing suitable office space
for new Orthodontic Centers in new markets and new locations within existing
markets. The Construction and Leasing Department also coordinates construction
of the interior of new Orthodontic Centers to accommodate the Company's
proprietary office designs. The Construction and Leasing Department utilizes the
services of a national network of contractors and real estate agents that
regularly assist the Company in developing and constructing Orthodontic Centers.
Training
Affiliated Orthodontists receive initial training regarding the Company's
operating systems at the Company's training offices in Orlando and Jacksonville,
Florida and in Denver, Colorado to enable an Affiliated Orthodontist to take
advantage of the efficiencies created by the Company's systems. The Company also
employs training teams which travel to each new Orthodontic Center to train the
Orthodontic Center's clinical and business staff with respect to the Company's
operating systems. The Company's Training Department monitors the operations of
each new Orthodontic Center during the first six months of its operations. In
certain instances, follow-up visits by the training team are conducted six
months following the opening of an Orthodontic Center to maintain operating
efficiencies.
Operations
The Company's Operations Department is responsible for servicing the
operational needs of the Orthodontic Centers. Operating managers within the
Operations Department respond to various operational questions and requests from
Orthodontic Centers located within an assigned geographic
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<PAGE>
region, including those relating to inventory, supplies, equipment and office
space. The Operations Department provides the Affiliated Orthodontist and staff
of each Orthodontic Center with periodic reports regarding that Orthodontic
Center's performance.
The Company maintains an incentive-based compensation program for its
employees which rewards employees based upon their performance and the operating
results of the Orthodontic Centers, including increased collections and case
starts and cost containment efforts.
Financial and Statistical Reporting
The Company provides Affiliated Orthodontists with management and financial
information systems which improve Orthodontic Center efficiencies and provide
cost savings for Orthodontic Center operations. These systems also maintain
greater uniformity in the manner in which services are provided at the
Orthodontic Centers. The Company utilizes information systems which track data
related to the Orthodontic Centers' operations and financial performance. The
Company monitors all expenditures on advertising and reallocates resources
between markets where advertising expenditures need to be increased or
decreased. The Company's systems also track new patient cases for each of the
Orthodontic Centers to allow programs to be initiated to better ensure that new
patient cases at the Orthodontic Centers are within projected levels. Billing
and collection information is sent daily by the Orthodontic Centers to the
Company for processing.
The Company also provides Affiliated Orthodontists with monthly operating
data and quarterly financial statements. With the quarterly financial
statements, the Company provides an analysis of the financial results and
recommends changes to improve financial performance of the Orthodontic Center.
This analysis allows the Affiliated Orthodontist and the Company to make
periodic adjustments in marketing and operating the Orthodontic Center.
Purchasing and Distribution
Because of the number of Orthodontic Centers, the Company is able to make
bulk purchases of equipment, office furniture, inventory and supplies in order
to reduce per unit costs. The Company negotiates arrangements with suppliers
that provide cost savings to each of the Orthodontic Centers. Inventory and
supplies are purchased by the Company and distributed on a just-in-time basis to
each Orthodontic Center, thereby limiting storage requirements for inventory and
supplies.
MANAGEMENT INFORMATION SYSTEMS
The Company's operations are supported by the Company's computer system,
including patient scheduling, billing and collection, financial and statistical
reporting, accounting, inventory control and purchasing. The Company is
upgrading its computer system in anticipation of growth in the number of
Affiliated Orthodontists and Orthodontic Centers and in order for the Company to
continue to offer Affiliated Orthodontists efficient management services. The
Company believes that this upgrade will adequately address computer systems
issues relating to the year 2000.
AGREEMENTS WITH AFFILIATED ORTHODONTISTS
The Company provides comprehensive management and marketing services to
Affiliated Orthodontists pursuant to either a service agreement or, in limited
circumstances, a consulting agreement. The selection of either the service
agreement or consulting agreement structure is based upon regulatory provisions
of the particular state in which an Orthodontic Center is located.
12
<PAGE>
Service Agreements
Service agreements are between the Company and an Affiliated Orthodontist.
Pursuant to the service agreement, the Company manages the business and
marketing aspects of Orthodontic Centers, provides capital, facilities and
equipment (including utilities, maintenance and rental), implements a marketing
program, prepares budgets and financial statements, orders and purchases
inventory and supplies, provides a patient scheduling system and staff, bills
and collects patient fees, maintains files and records and arranges for certain
legal and accounting services.
Under a service agreement, the Affiliated Orthodontist pays the Company a
fee equal to approximately 24% of new patient contract balances in the first
month of treatment plus the balance ratably over the remainder of the patient
contracts, less amounts retained by the Affiliated Orthodontists. In addition, a
$25,000 annual fee is earned by the Company for 42 Orthodontic Centers with
respect to which long-term service agreements were entered into with the Company
in connection with the Company's October 1994 combination transaction (the
"Combination Transaction"). Operating expenses of the Orthodontic Centers are
expenses of the Company and are recognized as incurred. The amounts retained by
an Affiliated Orthodontist are dependent on its financial performance, based in
significant part on the Affiliated Orthodontist's profitability on a cash basis,
as provided in the service agreements.
The service agreements are for terms ranging from 20 to 40 years. Upon
expiration or termination by either party of a service agreement, the Affiliated
Orthodontist generally must purchase certain of the related assets owned by the
Company, including all equipment, improvements and intangible assets, for cash
at the then current book value. The service agreements provide that following
termination or expiration of the agreement, the Affiliated Orthodontist will not
compete for a period of two years in an area in which the Affiliated
Orthodontist operates an Orthodontic Center and will limit the methods of
advertising in the area in which the Orthodontic Center is located.
Consulting Agreements
The terms of consulting agreements differ significantly from the terms of
service agreements and will 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 provide only 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 limited to
the consulting services performed and is based on criteria such as the number of
hours of operations of the applicable orthodontic centers.
GOVERNMENT REGULATION
General
The field of orthodontics is highly regulated, and there can be no
assurance that the regulatory environment in which the Company operates will not
change significantly in the future. In general, regulation of health care
companies is increasing.
Every state imposes licensing and other requirements on individual
orthodontists, and orthodontic facilities and services. In addition, federal and
state laws regulate health maintenance organizations and other managed care
organizations for which orthodontists may be providers. In connection with its
entry into new markets, the Company may become subject to compliance with
additional regulations.
13
<PAGE>
The operations of the Orthodontic Centers must meet federal, state and
local regulatory standards in the areas of safety and health. Historically,
those standards have not had any material adverse effect on the operations of
the Orthodontic Centers. Based on its familiarity with the operations of the
Orthodontic Centers and the activities of the Affiliated Orthodontists,
management believes that the Orthodontic Centers are in compliance in all
material respects with all applicable federal, state and local laws and
regulations relating to safety and health.
State Legislation
The laws of many states prohibit orthodontists from splitting fees with
non-orthodontists and prohibit non-orthodontic entities (such as the Company)
from practicing dentistry, including orthodontics (which in certain states
includes managing or operating an orthodontic office), and from employing
orthodontists or, in certain circumstances, orthodontic assistants. The laws of
some states prohibit advertising of orthodontic services under a trade or
corporate name and require that all advertisements be in the name of the
orthodontist. A number of states also regulate the content of advertisements of
orthodontic services and the use of promotional gift items. A number of states
limit the ability of a non-licensed dentist or non-orthodontist to own or
control equipment or offices used in an orthodontic practice. Some of these
states allow leasing of equipment and office space to an orthodontic practice,
under a bona fide lease, if the equipment and office remain in the complete care
and custody of the orthodontist. Management believes, based on its familiarity
with the operations of the Orthodontic Centers and the activities of the
Affiliated Orthodontists, that the Company's current and planned activities do
not violate these statutes and regulations. There can be no assurance, however,
that future interpretations of such laws, or the enactment of more stringent
laws, will not require structural and organizational modifications of the
Company's existing contractual relationships with the Affiliated Orthodontists
or the operation of the Orthodontic Centers. In addition, statutes in some
states could restrict expansion of Company operations in those jurisdictions.
In response to particular state regulatory provisions, the Company is required
to utilize the consulting agreement structure in certain states. Management
plans to use a form of one of its operating agreements in each of the states in
which a development or acquisition proposal is pending.
Regulatory Compliance
The Company regularly monitors developments in laws and regulations
relating to dentistry. The Company may be required to modify its agreements,
operations and marketing from time to time in response to changes in the
business and regulatory environment. The Company plans to structure all of its
agreements, operations and marketing in accordance with applicable law, although
there can be no assurance that its arrangements will not be successfully
challenged or that required changes may not have a material adverse effect on
operations or profitability.
COMPETITION
The business of providing orthodontic services is highly competitive in
each of the markets in which the Orthodontic Centers operate. Each Affiliated
Orthodontist competes with orthodontists who maintain single offices or operate
a single satellite office, as well as with orthodontists who maintain group
practices or operate in multiple offices. The Orthodontic Centers also compete
with dentists who provide certain orthodontic services. The provision of
orthodontic services by such persons has increased in recent years.
There are other companies currently developing and managing orthodontic
practices on a national basis. There are several companies pursuing similar
strategies in other segments of the health care industry and companies with
similar objectives and substantially greater financial resources may enter the
Company's markets and compete with the Company.
14
<PAGE>
EMPLOYEES
At December 31, 1997, the Company employed 1,721 persons, including 1,385
full-time employees and 89 employees in the Company's corporate offices. None of
the Company's employees are represented by a collective bargaining agreement.
The Company considers its relationship with its employees to be good. The
Affiliated Orthodontists are not employed by the Company.
INSURANCE
The Company maintains general liability and property insurance. The costs
of insurance coverage varies, and the availability of certain coverage has
fluctuated in recent years. While management believes, based upon its claims
experience, that the Company's current insurance coverage is adequate for its
current operations, there can be no assurance that the coverage will be
sufficient for all future claims or will continue to be available in adequate
amounts or at reasonable rates. The Affiliated Orthodontists purchase and
maintain their own malpractice liability insurance coverage, and are required to
use reasonable efforts to have the Company named as an additional insured party
on their respective insurance policies.
EXECUTIVE OFFICERS OF THE COMPANY
For information regarding the executive officers of the Company, see "Item
10. Directors and Executive Officers of the Registrant" in this Report.
ITEM 2. PROPERTIES
The Company leases an average of between 2,200 and 2,500 square feet of
office space for each Orthodontic Center. The typical lease for office space is
for a term of approximately five years, and generally provides for renewal
options for additional years. The average rental payment is approximately
$3,500 per month. As demand for orthodontic services has increased in a
particular market, the Company has leased and developed new Orthodontic Centers
in that market rather than expand its existing Orthodontic Centers, because the
size of each Orthodontic Center, particularly those located in shopping malls,
has been limited.
The Company leases approximately 5,354 and 2,420 square feet of office
space in Ponte Vedra Beach, Florida for its headquarters under two separate
leases which expire in January 2000 and February 2002, respectively. The
Company also maintains an office in approximately 5,300 square feet of office
space in Metairie, Louisiana under a lease which expires in October 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company does not have pending any litigation that, separately or in the
aggregate, if adversely determined, would have a material adverse effect on the
Company. The Company and its affiliated orthodontists may, from time to time,
be a party to litigation or administrative proceedings which arise in the normal
course of its business. The Company's affiliated orthodontists have not
performed, and will not in the future perform, in Orthodontic Centers temporal
mandibular joint dysfunction (or "TMJ") procedures, with which substantial
litigation has been associated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock ("Common Stock") is listed on the New York Stock
Exchange under the symbol "OCA." The following table sets forth, for the
periods indicated, the range of high and low sale prices per share for the
Common Stock, as reported on the Nasdaq Stock Market National Market, on which
the Common Stock was quoted through October 19, 1997, and on the New York Stock
Exchange beginning October 20, 1997.
HIGH(1) LOW(1)
1995
- ----
First Quarter $ 4 25/32 $ 2 29/32
Second Quarter 6 3/8 3 7/8
Third Quarter 8 3/16 5 15/16
Fourth Quarter 12 1/16 7
1996
- ----
First Quarter $15 5/8 $10 3/8
Second Quarter 20 3/4 12 5/8
Third Quarter 22 5/8 11 3/8
Fourth Quarter 21 3/8 11
1997
- ----
First Quarter $18 3/8 $13 1/4
Second Quarter 17 7/8 11
Third Quarter 20 16 1/4
Fourth Quarter 20 1/4 15 9/16
1998
- ----
First Quarter (through March 25, 1998) $23 1/4 $15
- -----------
(1) All share prices have been adjusted to reflect two two-for-one stock splits
of the Common Stock effected in the form of a 100% stock dividend as of
December 29, 1995 and September 5, 1996, respectively.
At March 25, 1998, the last reported sale price of the Common Stock was $21
1/4 per share, and the number of holders of record of the Common Stock was
approximately 263.
The Company has never declared or paid cash dividends on the Common Stock.
The Company expects that any future earning will be retained for the growth and
development of the Company's business and, accordingly, the Company does not
anticipate that any cash dividends will be declared or paid on the Common Stock
for the foreseeable future. The declaration, payment and amount of future
dividends, if any, will depend upon the future earnings, results of operations,
financial position and capital requirements of the Company, among other factors.
The Company's $5.0 million revolving line of credit with First Union National
Bank limits the ability of the Company to pay dividends from other than current
year earnings, and additional financial covenants contained in such line of
credit, including the requirement to maintain a minimum tangible net worth of
not less than $8.2 million, may limit the amount or payment of dividends.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data of the
Company. The selected financial data in the table is derived from the Company's
consolidated financial statements. The data presented below should be read in
conjunction with the Company's consolidated financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C> <C>
Net revenue $18,807 $25,357 $41,556 $ 71,273 $117,326
Direct expenses:
Employee costs 4,835 6,842 11,784 19,895 33,429
Orthodontic supplies 1,528 1,908 3,167 5,428 8,789
Rent 1,586 2,050 3,504 6,114 10,299
Marketing and advertising 1,239 2,147 4,323 6,644 9,855
------- ------- ------- ------- -------
Total direct expenses 9,188 12,947 22,778 38,081 62,372
General and administrative 1,869 2,730 5,108 8,703 13,356
Depreciation and amortization 1,089 920 1,448 2,814 5,640
------- ------- ------- ------- -------
Operating profit 6,661 8,760 12,222 21,675 35,958
Interest (expense) income, net (224) (266) 1,995 1,935 1,143
Nonrecurring litigation expense -- (3,750)(1) -- -- --
------- ------- ------- ------- -------
Income before income taxes 6,437 4,744 14,217 23,610 37,101
Provision for income taxes(2) 331 2,715(3) 5,182 9,208 14,469
------- ------- ------- ------- -------
Net income $ 6,106 $ 2,029 $ 9,035 $ 14,402 $ 22,632
======= ======= ======= ======== ========
Net income per share(4) $ .23 $ .33 $ .50
======= ======== ========
Weighted average shares(4) 39,094 43,708 45,414
======= ======== ========
OPERATING DATA:
Number of Orthodontic Centers (5) 55 75 145 247 360
Comparable Orthodontic Center net revenue growth (6)
17.7% 20.6% 16.7% 22.2% 20.0%
Comparable mature Orthodontic Center net revenue growth (7) 12.1% 13.0% 11.0% 10.5% 10.1%
Total case starts 13,051 16,725 28,742 44,910 70,611
Patient contract balances of Affiliated Orthodontists (5)(8):
Net receivables for services performed (9) $ 6,693 $ 9,247 $13,758 $ 23,181 $ 41,713
For services to be performed 23,338 30,702 58,418 92,548 139,492
------- ------- ------- ------- -------
Total patient contract balances $30,031 $39,949 $72,176 $115,729 $181,205
======= ======= ======= ======== ========
DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,467 $17,108 $18,779 $ 11,827 $ 9,865
Working capital 5,893 20,896 43,778 40,219 68,243
Total assets 12,470 37,491 92,573 145,099 228,975
Total debt 2,354 4,968 4,490 3,397 10,393
Total equity 7,602 25,735 77,313 114,887 190,740
- ---------------
</TABLE>
(1) Nonrecurring charge incurred in connection with settlement of litigation
unrelated to the operating activities of the Company's predecessor entities
and therefore excluded from operating profit.
(2) Prior to October 18, 1994, substantially all of the Company's predecessor
entities were S corporations, general partnerships or limited liability
companies and their taxable income was taxed directly to their respective
stockholders, partners or members during such periods.
(3) Includes a one-time, non-cash charge of $2,606,000 for deferred income
taxes relating to the difference between the tax basis and the basis for
financial reporting purposes of assets and liabilities of the Company's
predecessor entities acquired by the Company in connection with the
Combination Transaction.
(4) In 1997, the Company adopted FASB No. 128, Earnings per Share. The adoption
had no impact on current year or previously reported earnings per share
amounts. Amounts represent the dilutive effect of the exercise of common
equivalent shares (stock options) outstanding during the year. Basic
earnings, per share for the year ended December 31, 1997 was $0.51
17
<PAGE>
based upon weighted average shares outstanding of approximately 44,576,000,
for the year ended December 31, 1996 was $0.34 based upon weighted average
shares outstanding of approximately 42,388,000 and for the year ended
December 31, 1995 was $0.24 based upon weighted average shares outstanding
of approximately 38,235,000.
(5) Presented as of the end of the period.
(6) Represents the growth in net revenue by Orthodontic Centers which were
affiliated with the Company throughout each of the two periods being
compared. The amount of such growth has been significantly affected by the
number of newly-opened Orthodontic Centers included in the computation,
because newly-opened Orthodontic Centers have experienced significant
growth during their first 26 months of operations. The average term of a
patient contract is approximately 26 months, and Orthodontic Centers
typically reach maturity as patients are added during the first 26 months
of operations. There were 28 such comparable Orthodontic Centers in 1993,
46 in 1994, 53 in 1995, 75 in 1996 and 130 in 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
General." The comparable Orthodontic Center net revenue for 1994 was
calculated on a pro forma basis as if the Combination Transaction had
occurred as of January 1, 1993. If comparable Orthodontic Center net
revenue for 1994 was calculated on a pro forma basis as if the Combination
Transaction had not occurred, the comparable Orthodontic Center net revenue
growth for such period would have been 22.7%.
(7) Represents the growth in net revenue by Orthodontic Centers which has been
affiliated with the Company at least 26 months throughout each of the two
periods being compared. There were 18 such comparable mature Orthodontic
Centers in 1993, 28 in 1994, 43 in 1995, 52 in 1996 and 67 in 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-General." The comparable mature Orthodontic Center net revenue
for 1994 was calculated on a pro forma basis as if the Combination
Transaction had occurred as of January 1, 1993. If comparable mature
Orthodontic Center net revenue for 1994 was calculated on a pro forma basis
as if the Combination Transaction had not occurred, the comparable mature
Orthodontic Center net revenue growth for such period would have been
13.8%.
(8) The average remaining life of the patient contracts at December 31, 1997
was approximately 16 months.
(9) Net of allowance for uncollectible amounts and patient prepayments; such
receivables are assigned by the Affiliated Orthodontists to the Company in
payment of its service fee.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following table sets forth certain information relating to the growth
in the number of Orthodontic Centers for the periods shown:
<TABLE>
<CAPTION>
Year ended December 31,
1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number of centers at beginning of period 11 18 31 47 55 75 145 247
Number of centers developed during period 4 9 5 4 22 44 53 58
Number of centers acquired during period 3 5 17 5 1 29 68 78
Number of centers consolidated during period -- (1) (6) (1) (3) (3) (19) (23)
---- ---- ---- ---- ---- ---- ---- ----
Number of centers at end of period 18 31 47 55 75 145 247 360
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
Of the 360 Orthodontic Centers at December 31, 1997, 199 were developed by
the Company, 217 were existing orthodontic practices the assets of which were
acquired by the Company and 56 were consolidated. The Company expects that
future growth in Orthodontic Centers will come from both developing Orthodontic
Centers with existing and newly-recruited Affiliated Orthodontists and acquiring
the assets of, and affiliating with, existing 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 December 31, 1997, 245 of the Orthodontic Centers had operated for
less than 26 months. An Orthodontic Center can increase the number of patients
treated by improving the efficiency of its clinical staff and by adding
operating days or orthodontists. The Orthodontic Centers may also increase
revenue by implementing periodic price increases. Established practices whose
assets were acquired by the Company have typically increased their revenue by
applying the Company's operating strategies and systems, including increased
advertising and efficient patient scheduling.
The Company earns its revenue from long-term service or consulting
agreements entered into with Affiliated Orthodontists. Pursuant to the service
agreements, during each month during the term of the service agreement, the
Company earns a fee equal to approximately 24% of the aggregate amount of all
new patient contracts entered into during that particular month, plus the
aggregate of the allocated monthly balance amount of all patient contracts
entered into in 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 1.3% 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
19
<PAGE>
these operating losses is added to the Company's fee in the period during which
the operating losses are incurred, with such fees aggregating $4.0 million for
the year ended December 31, 1997. In addition, a $25,000 annual fee is
earned by the Company for 42 Orthodontic Centers with respect to which long-term
service agreements were entered into with the Company in the Combination
Transaction.
The terms of consulting agreements differ significantly from the terms of
service agreements and vary depending upon the regulatory requirements of the
particular state in which an Orthodontic Center is located. In a limited number
of states, the Company may provide only 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 limited to compensation for
the specific consulting services performed and is 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 on 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
generally implemented a price increase for new patients from $89 per month to
$98 per month with an increase in the final payment from $366 to $398.
RESULTS OF OPERATIONS
The following table sets forth the percentages of net revenue represented
by certain items in the Company's consolidated statements of income.
YEAR ENDED DECEMBER 31,
----------------------
1995 1996 1997
------- ------ ------
Net revenue 100.0% 100.0% 100.0%
Direct expenses:
Employee costs 28.4 27.9 28.5
Orthodontic supplies 7.6 7.6 7.5
Rent 8.4 8.6 8.8
Marketing and advertising 10.4 9.3 8.4
----- ----- -----
Total direct expenses 54.8 53.4 53.2
General and administrative 12.3 12.2 11.4
Depreciation and amortization 3.5 4.0 4.8
----- ----- -----
Operating profit 29.4 30.4 30.6
Interest income, net 4.8 2.7 1.0
----- ----- -----
Income before income taxes 34.2 33.1 31.6
Provision for income taxes 12.5 12.9 12.3
----- ----- -----
Net income 21.7% 20.2% 19.3%
===== ===== =====
20
<PAGE>
1997 Compared to 1996
Net Revenue. Net revenue increased $46.0 million or 64.6% to $117.3 million
for 1997 from $71.3 million for 1996. Approximately, $30.9 million of this
increase was attributable to the 233 (net of consolidations) Orthodontic Centers
opened since January 1, 1996, approximately $11.1 million to the growth in net
revenue of the 127 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 130,000 at
December 31, 1997 from approximately 83,000 at December 31, 1996.
Employee Costs. Employee costs increased $13.5 million or 68.0% to $33.4
million for 1997 from $19.9 million for 1996. As a percentage of net revenue,
employee costs increased to 28.5% for 1997 from 27.9% for 1996. The increase
was caused primarily by an increased percentage of new patient treatment days,
which require additional staff time per patient, associated with the opening of
Orthodontic Centers and the recent increase in affiliations with existing
orthodontic practices. These orthodontic practices have tended to have higher
employee cost percentages than a typical Orthodontic Center and have taken
approximately one year to completely convert to the Company's operating systems.
Orthodontic Supplies. Orthodontic supplies expense increased $3.4 million
or 61.9% to $8.8 million for 1997 from $5.4 million for 1996. As a percentage
of net revenue, however, orthodontic supplies expense decreased to 7.5% for 1997
from 7.6% for 1996. 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 $4.2 million or 68.4% to $10.3 million for
1997 from $6.1 million for 1996. The increase in this expense was attributable
to Orthodontic Centers affiliated, opened or relocated after 1996. As a
percentage of net revenue, rent expense increased to 8.8% for 1997 from 8.6% for
1996. 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.
Marketing and Advertising. Marketing and advertising expense increased
$3.3 million or 48.3% to $9.9 million for 1997 from $6.6 million for 1996. The
increase in this expense resulted primarily from the addition of Orthodontic
Centers after 1996. As a percentage of net revenue, however, marketing and
advertising expense decreased to 8.4% for 1997 from 9.3% for 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
$4.7 million or 53.5% to $13.4 million for 1997 from $8.7 million for 1996. The
increase in general and administrative expense resulted primarily from the
addition of Orthodontic Centers after 1996. As a percentage of net revenue,
however, general and administrative expense decreased to 11.4% for 1997 from
12.2% for 1996. General and administrative expense decreased as a percentage of
net revenue as a result of decreased startup costs for 58 Orthodontic Centers
developed after 1996.
Depreciation and Amortization. Depreciation and amortization expense
increased $2.8 million or 100.5% to $5.6 million for 1997 from $2.8 million for
1996. As a percentage of net revenue, depreciation and amortization expense
increased to 4.8% for 1997 from 4.0% for 1996. The increase in this expense is
a result of an increase in fixed assets acquired and service agreements entered
into for Orthodontic Centers developed, acquired or relocated after 1996.
Operating Profit. Operating profit increased $14.3 million or 65.9% to
$36.0 million for 1997 from $21.7 million for 1996. As a percentage of net
revenue, operating profit increased to 30.6% for 1997 from 30.4% for 1996 as a
result of the factors discussed above.
21
<PAGE>
Interest. Net interest income decreased $800,000 or 40.9% to $1.1 million
for 1997 from $1.9 million for 1996. The decrease in net interest income
resulted from a decrease in the Company's average investment balance.
Provision for Income Taxes. Provision for income taxes increased $5.3
million or 57.1% to $14.5 million for 1997 from $9.2 million for 1996. The
Company's effective income tax rate was 39.0% for both 1997 and 1996.
Net Income. Net income increased $8.2 million or 57.1% to $22.6 million
for 1997 from $14.4 million for 1996. As a percentage of net revenue, net
income decreased to 19.3% for 1997 from 20.2% for 1996 as a result of the
factors discussed above.
1996 Compared to 1995
Net Revenue. Net revenue increased $29.7 million or 71.5% to $71.3 million
for 1996 from $41.6 million for 1995. Approximately $6.9 million of this
increase was attributable to the growth in net revenue of the 74 Orthodontic
Centers open throughout both periods, $12.1 million was attributable to the 57
Orthodontic Centers (net of consolidations) opened during 1995, $11.0 million
was attributable to the 116 Orthodontic Centers opened during 1996 and
approximately $546,000 was attributable to the Affiliated Orthodontists' share
of the operating losses of newly-developed Orthodontic Centers, which amounts
were advanced by the Company. The remaining difference resulted primarily from
the fact that revenue recognized from the sale of ownership interests in
Orthodontic Centers obtained by the Company in the Combination Transaction was
lower in 1996 than in 1995. The number of patient contracts increased to
approximately 83,000 at December 31, 1996 from approximately 53,000 at December
31, 1995.
Employee Costs. Employee costs increased $8.1 million or 68.8% to $19.9
million for 1996 from $11.8 million for 1995. This increase was caused by an
increase in the number of patient contracts, which resulted in additional
employee time required to service these contracts. As a percentage of net
revenue, however, employee costs decreased to 27.9% for 1996 from 28.4% for
1995. 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 $2.2 million
or 71.4% to $5.4 million for 1996 from $3.2 million for 1995. As a percentage of
net revenue, orthodontic supplies remained constant at 7.6% during 1996 and
1995. 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 $2.6 million or 74.5% to $6.1 million for
1996 from $3.5 million for 1995. As a percentage of net revenue, rent expense
increased to 8.6% for 1996 from 8.4% for 1995. 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.
Marketing and Advertising. Marketing and advertising expense increased
$2.3 million or 53.7% to $6.6 million for 1996 from $4.3 million for 1995. The
increase in this expense resulted primarily from the addition of Orthodontic
Centers in new advertising markets after December 31, 1995. As a percentage of
net revenue, however, marketing and advertising decreased to 9.3% for 1996 from
10.4% for 1995. The decrease in this expense as a percentage of net revenue is
the result of cost improvements achieved through bulk media and production
purchases.
22
<PAGE>
General and Administrative. General and administrative expense increased
$3.6 million or 70.4% to $8.7 million for 1996 from $5.1 million for 1995. This
increase resulted from the increase in Orthodontic Centers. As a percentage of
net revenue, however, general and administrative expense decreased to 12.2% for
1996 from 12.3% for 1995.
Depreciation and Amortization. Depreciation and amortization expense
increased $1.4 million or 94.3% to $52.8 million for 1996 from $1.4 million for
1995. As a percentage of net revenue, depreciation and amortization increased to
4.0% for 1996 from 3.5% for 1995. The increase in this expense is a result of
the fixed assets acquired for Orthodontic Centers developed or relocated after
December 31, 1995 and amortization of service agreements acquired during 1996.
Operating Profit. Operating profit increased $9.5 million or 77.3% to
$21.7 million for 1996 from $12.2 million for 1995. As a percentage of net
revenue, operating profit increased to 30.4% for 1996 from 29.4% for 1995, as a
result of the factors discussed above.
Interest. Net interest income decreased $100,000 or 3.1% to $1.9 million
for 1996 from $2.0 million for 1995. The decrease resulted from a decrease in
the Company's average investment balances.
Provision for Income Taxes. Provision for income taxes increased $4.0
million or 77.7% to $9.2 million for 1996 from $5.2 million for 1995. The
Company's effective tax rate increased to 39.0% for 1996 from 36.4% for 1995 to
reflect the Company's higher income tax bracket for federal purposes and the
Company's blended state tax rate.
Net Income. Net income increased $5.4 million or 59.4% to $14.4 million
for 1996 from $9.0 million for 1995. As a percentage of net revenue, net income
decreased to 20.2% for 1996 from 21.7% for 1995 as a result of the factors
discussed above.
QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited quarterly operating
information of the Company for 1996 and 1997. The Company believes that the
following information includes all of the adjustments, consisting of normal
recurring accruals and adjustments necessary to convert cash basis accounting
records of the Company to an accrual basis, considered necessary for a fair
presentation of the Company's consolidated financial position and its
consolidated results of operations for these periods in accordance with
generally accepted accounting principles. Results of operations for any
particular quarter are not necessarily indicative of results of operations for a
full year or predictive of future periods.
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------------------------
1996 1997
-------------------------------------- -----------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- ------- ------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue $13,719 $15,517 $18,881 $23,156 $24,899 $27,480 $31,439 $33,508
Operating profit 3,914 4,592 6,185 6,984 7,467 8,530 9,516 10,445
SEASONALITY
</TABLE>
The Orthodontic Centers have experienced their highest volume of new cases
in the summer and certain other periods when schools are not typically in
session. During these periods, children have a greater opportunity to visit an
orthodontist to commence treatment. Consequently, the Orthodontic Centers have
experienced higher revenue during the first and third quarters of the year as a
result of increased patient starts. During the Thanksgiving and Christmas
seasons, the Orthodontic Centers have experienced reduced volume and fourth
quarter revenue for the
23
<PAGE>
Orthodontic Centers has been generally lower as compared to other periods.
Seasonality in recent periods has been mitigated by the impact of additional
Orthodontic Centers.
LIQUIDITY AND CAPITAL RESOURCES
Development and acquisition costs, capital expenditures and working capital
needs have been, and will continue to be, financed through a combination of cash
flow from operations, bank borrowings and the issuance of notes and shares of
Common Stock. The Company intends to continue to lease, rather than purchase,
facilities for the Orthodontic Centers, to maximize the Company's available
capital.
Net cash provided by operations for the years ended December 31, 1995, 1996
and 1997 was $4.0 million, $6.8 million and $9.0 million, respectively. The
Company's working capital at December 31, 1996 and December 31, 1997 was $40.2
million and $68.2 million, respectively, including cash and cash equivalents of
$11.8 million and $9.9 million, respectively. The Company completed a public
offering of 2,600,000 shares of Common Stock in November 1997, which resulted in
net proceeds to the Company of approximately $37.9 million, after payment of
offering expenses.
Unbilled patient receivables (which represent patient revenue earned under
patient contracts in excess of the amount billed under such patient contracts)
increased from $18.4 million at December 31, 1996 to $32.0 million at December
31, 1997, with this increase consistent with the increase in the number of
patient contracts and price changes.
Net cash used in investing activities for the years ended December 31,
1995, 1996 and 1997 was $42.4 million, $13.2 million and $51.2 million,
respectively.
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 is approximately $250,000, including
the cost of equipment, leasehold improvements, working capital and 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 such costs through the Company's primary lender. The Company provides the
lender a guaranty of these loans. The Company has generally discontinued
financing Affiliated Orthodontists' share of losses associated with the initial
operations of the Orthodontic Center, which were historically financed by the
Company as an unsecured advance repayable by the Affiliated Orthodontist over a
five-year period and bearing interest at 1.5% per annum above the prime rate,
with repayment beginning upon the attainment of positive cash flow by the
Orthodontic Center (which generally occurs approximately 12 months after an
Orthodontic Center commences operations). At December 31, 1997, approximately
$5.2 million in such advances was outstanding. The Company intends to continue
to make advances of approximately $20,000 to newly-affiliated Affiliated
Orthodontists during the first year of an Orthodontic Center's operations, which
advances bear no interest and typically are repaid during the second year of the
Orthodontic Center's operations. The Company intends to fund such advances and
any continued financing through a combination of bank borrowings, cash from
operations and the remaining net proceeds from the Company's prior public
offerings.
Of the 360 Orthodontic Centers at December 31, 1997, 217 were acquired
through the acquisition of the assets of, and the affiliation with, existing
orthodontic practices. During 1997, the Company acquired the assets of, and
affiliated with, 52 existing orthodontic practices operating at 72 locations
(net of consolidations) at a cost of approximately $49.5 million, consisting of
24
<PAGE>
an aggregate principal amount of $13.7 million of promissory notes issued by the
Company and an aggregate of 779,000 shares of Common Stock, with the remainder
being paid in cash. Outstanding indebtedness at December 31, 1997 under
promissory notes issued by the Company to Affiliated Orthodontists to acquire
the assets of existing orthodontic practices was approximately $10.4 million,
with maturities ranging from one to three years and interest rates ranging from
8.0% to 10.0% per annum.
The Company's financing activities included the repayment of notes to banks
and Affiliated Orthodontists of $1.2 million, $1.2 million and $3.0 million for
the years ended December 31, 1995, 1996 and 1997, respectively, and the proceeds
of $41.3 million, $693,000 and $38.3 million from the issuance of Common Stock
during the years ended December 31, 1995, 1996 and 1997, respectively.
The Company's revolving line of credit with First Union National Bank,
which was entered into on October 18, 1994, provides an aggregate of $5.0
million for general working capital needs and expansion of the number of
Orthodontic Centers. The revolving line of credit bears interest at 0.5% per
annum above the prime rate of First Union National Bank and amounts borrowed are
secured by a security interest in all of the Company's assets, including its
accounts receivable and equipment. and are to be repaid over a period of four
years. At December 31, 1997, there were no amounts outstanding under the
revolving line of credit.
The Company expects that future cash requirements will principally be for
developing additional Orthodontic Centers, acquiring assets from and affiliating
with additional Affiliated 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 the Company's
ability to recruit orthodontists, find appropriate sites, enter into long-term
service or consulting agreements and acquire the assets of existing orthodontic
practices. Based upon the Company's anticipated capital needs for the next 12
months, management believes that the combination of the net proceeds to the
Company from its November 1997 public offering, funds available under the
Company's revolving line of credit, cash flow from operations, and the proceeds
remaining from the Company's prior public offerings will be sufficient to meet
the Company's funding requirements for the next 12 months.
YEAR 2000
Many software applications and operational programs written in the past
were not designed to recognize calendar dates beginning in the year 2000. The
failure of such applications or systems to properly recognize the dates
beginning in the year 2000 could result in miscalculations or system failures.
The Company's business depends in part upon its ability to store, retrieve,
process and manage significant databases, and periodically, to expand and
upgrade its information processing capabilities. The Company has conducted a
review of its computer systems to identify the systems that could be affected by
the "Year 2000" issue. The Company is upgrading its computer system in
anticipation of growth in the number of Affiliated Orthodontists and Orthodontic
Centers and in order for the Company to continue to offer Affiliated
Orthodontists efficient management services. The Company believes that this
upgrade will adequately address computer systems issues relating to the year
2000, and is developing a plan to resolve the issue. The Company expects its
Year 2000 date conversion project to be completed on a timely basis. During the
execution of this project the Company will incur internal staff costs as well as
consulting and other expenses related to enhancements necessary to prepare the
systems for the year 2000. The expenses of the Year 2000 project are not
expected to have a material effect on the Company's financial position or
results of operations.
The Year 2000 issue may affect the systems of various entities with which
the Company interacts, including the Company's suppliers, and the Company is
coordinating its efforts to address the Year 2000 issue with those entities.
There can be no assurance, however, that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
25
<PAGE>
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company.
RISK FACTORS
This Report contains forward-looking statements, including statements
regarding development and acquisition of additional Orthodontic Centers and
affiliation with additional Affiliated Orthodontists, that could be affected by
a number of risks and uncertainties, including those described below, which
could cause the Company's actual results to differ materially from those
anticipated, estimated or projected.
Risks Associated with Expansion. Since its inception in 1985, the Company
has expanded to managing 360 Orthodontic Centers at December 31, 1997 and
expects to continue to add additional Orthodontic Centers. The success of the
Company's expansion strategy will depend on a number of factors, including (i)
the Company's ability to affiliate with orthodontists to open new Orthodontic
Centers, the availability of suitable markets and the Company's ability to
obtain good locations within those markets; (ii) the Company's ability to
identify and affiliate with existing orthodontic practices and to integrate such
practices into the Company's existing operations; (iii) the availability of
adequate financing to fund the Company's expansion strategy; (iv) regulatory
constraints; and (v) the ability of the Company to effectively manage additional
Orthodontic Centers. A shortage of available orthodontists with the skills
required by the Company would have a material adverse effect on the Company's
expansion opportunities. There can be no assurance that the Company's expansion
strategy will continue to be successful or that modifications to the Company's
strategy will not be required.
Government Regulation. The orthodontic industry and orthodontic practices
are regulated extensively at the state and federal levels. The Company does not
control the practice of orthodontics by the Affiliated Orthodontists or their
compliance with the regulatory requirements directly applicable to orthodontists
and their practices. The laws of many states prohibit non-orthodontic entities
(such as the Company) from practicing orthodontics (which in certain states
includes managing or operating an orthodontic office), splitting professional
fees with orthodontists, owning or controlling the assets of an orthodontic
practice, employing orthodontists, maintaining an orthodontist's patient records
or controlling the content of an orthodontist's advertising. The laws of many
states also prohibit orthodontists from paying any portion of fees received for
orthodontic services in consideration for the referral of a patient. In
addition, many states impose limits on the tasks that may be delegated by an
orthodontist to other staff members. These laws and their interpretation vary
from state to state and are enforced by regulatory authorities with broad
discretion. Congress and certain state legislatures often consider various types
of health care reform, including comprehensive revisions to the current health
care system which could have a material adverse effect on the Company's
financial position and results of operations. There can be no assurance that any
review of the Company's business relationships by courts or other regulatory
authorities will not result in determinations that could adversely affect the
operations of the Company or that the regulatory environment will not change to
restrict the Company's existing or future operations. There can be no assurance
that the legality of the Company's long-term service and consulting agreements
will not be successfully challenged or that enforceability of the provisions
thereof will not be limited. The laws and regulations of certain states in which
the Company may seek to expand may require the Company to change its contractual
relationship with orthodontists in a manner that may restrict the Company's
operations in those states or may prevent the Company from acquiring the assets
of or managing orthodontists' practices in those states. Further, there can be
no assurance that the laws and regulations of states in which the Company
currently maintains operations will not change or be interpreted in the future
to either restrict or adversely affect the Company's relationships with
orthodontists in those states.
26
<PAGE>
Dependence on Affiliated Orthodontists. The Company receives fees for
services provided to orthodontic practices under service and consulting
agreements, but does not employ orthodontists or control the practices of the
Affiliated Orthodontists. The Company's revenue is dependent on revenue
generated by the Affiliated Orthodontists, who are essential to the Company's
success. The long-term agreements with Affiliated Orthodontists are for terms
ranging from 20 to 40 years and may be terminated by either party for "cause,"
which includes a material default by or bankruptcy of the other party. Changes
in the health care industry, such as the growth of managed care organizations
and provider networks, may result in lower payment levels for the services of
the Affiliated Orthodontists. Any material loss of revenue by the Affiliated
Orthodontists would have a material adverse effect on the Company's financial
position and results of operations.
Competition. The business of providing orthodontic services is highly
competitive in each market in which an Orthodontic Center operates. Each
Affiliated Orthodontist faces competition from other orthodontists and general
dentists in the communities served, many of whom have more established practices
in the market. Other companies are pursuing a strategy similar to that of the
Company in developing and managing orthodontic practices throughout the United
States. Companies with similar objectives and greater access to financial
resources may enter the Company's markets and compete with the Company, which
could limit the ability of, and increase the amount paid by, the Company to
affiliate with additional orthodontists.
Risk of Providing Orthodontic Services. The Orthodontic Centers provide
orthodontic services to the public and are exposed to the risk of professional
liability and other claims. Such claims, if successful, could result in
substantial damage awards to the claimants which could exceed the limits of any
applicable insurance coverage. The Company does not control the practice of
orthodontics by the Affiliated Orthodontists or their compliance with the
regulatory and other requirements directly applicable to orthodontists and their
practices. Each Affiliated Orthodontist has undertaken, however, to comply with
all applicable regulations and requirements, and the Company is indemnified
under its long-term agreements for claims against the Affiliated Orthodontists.
The Company maintains liability insurance for itself and is generally named as
an additional insured party under the liability insurance policy required to be
maintained by each Affiliated Orthodontist. However, a successful malpractice
claim against the Company or an Affiliated Orthodontist could have a material
adverse effect on the Company's financial position and results of operations.
Risks Associated with Intangible Assets. As a result of the Company's
various acquisitions of assets or capital stock of, and affiliations with,
Affiliated Orthodontists, intangible assets (net of accumulated amortization) of
approximately $100.1 million, were recorded on the Company's balance sheet at
December 31, 1997. There can be no assurance that the value of such intangible
assets will be realized by the Company. The Company expects to engage in
additional transactions that will result in the recognition of intangible assets
and additional amortization expense. A portion of the amortization generated by
these intangible assets is not deductible for tax purposes. The Company's
policy is to evaluate on a regular basis whether events and circumstances have
occurred that indicate that all or a portion of the carrying amount of such
intangible assets may no longer be recoverable, in which case an additional
charge to earnings would become necessary. Although the Company's net
unamortized balance of intangible assets acquired and anticipated to be acquired
was not considered to be impaired as of December 31, 1997, any future
determination that a significant impairment has occurred would require the
write-off of the impaired portion of unamortized intangible assets, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Dependence on Key Personnel. The success of the Company is dependent upon
the continued services of the Company's senior management, particularly its
Chairman of the Board and Chief Executive Officer, Dr. Gasper Lazzara, Jr., its
Chief Financial Officer, Bartholomew F. Palmisano, Sr., its President, Geoffrey
L. Faux, and its Chief Operating Officer, Michael C. Johnsen. The loss of
27
<PAGE>
the services of any of these individuals could have a material adverse effect on
the Company's financial position and results of operations. The Company's
success also depends on its ability to attract and retain other highly qualified
managerial personnel.
Control by Principal Stockholders. At December 31, 1997, Dr. Lazzara and
Mr. Palmisano, collectively, beneficially owned approximately 16.3% of the
Company's outstanding shares of Common Stock. As a result of their holdings, Dr.
Lazzara and Mr. Palmisano together have a disproportionate ability to affect the
election of the members of the Board of Directors of the Company and thereby
substantially control the affairs and management of the Company and all matters
requiring stockholder approval. Such control could adversely affect the market
price of the Common Stock.
Certain Anti-Takeover Provisions. Certain provisions of the Company's
Restated Certificate of Incorporation, Bylaws and Delaware law may make a change
in control of the Company more difficult to effect, even if a change in control
were in the stockholders' interest. These provisions include certain
supermajority vote requirements contained in the Company's Restated Certificate
of Incorporation and Bylaws. In addition, the Company's Restated Certificate of
Incorporation allows the Board of Directors to determine the terms of preferred
stock which may be issued by the Company without approval of the holders of the
Common Stock, and thereby enables the Board of Directors to prevent changes in
the management and control of the Company. The Board of Directors is divided
into three classes of directors elected for staggered three-year terms. Such
staggered terms may affect the ability of the holders of the Common Stock to
effect a change in control of the Company.
Antitrust. The Company is subject to a range of antitrust laws that
prohibit anticompetitive conduct, including price fixing, concerted refusals to
deal and divisions of markets. Among other ramifications, these laws may limit
the ability of the Company to enter into service or consulting agreements with
separate orthodontists who compete with one another in the same geographic
market.
Possible Volatility of Stock Price. The market price of the Common Stock
could be subject to significant fluctuations in response to variations in
financial results or announcements of material events by the Company or its
competitors. Regulatory changes, developments in the health care industry or
changes in general conditions in the economy or the financial markets could also
adversely affect the market price of the Common Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Appendix A hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors and executive officers of the Company
is incorporated herein by reference to the section captioned "Election of
Directors" in the Company's definitive Proxy Statement relating to the Annual
Meeting of Stockholders of the Company to be held during 1998.
The following table sets forth certain information with respect to the
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
<S> <C> <C>
Dr. Gasper Lazzara, Jr. 55 Chairman of the Board, Chief Executive Officer, Director
Bartholomew F. Palmisano, Sr... 51 Chief Financial Officer, Senior Vice President, Secretary, Treasurer, Director
Geoffrey L. Faux............... 42 President, Director
Michael C. Johnsen............. 45 Chief Operating Officer, Director
Paul J. Spansel................ 37 Vice President of Financial Scheduling
Anthony J. Paternostro......... 39 Vice President of Insurance Services
</TABLE>
DR. GASPER LAZZARA, JR. Dr. Lazzara has served as Chairman of the Board,
Chief Executive Officer and a director of the Company since its inception in
July 1994, and he served as President of the Company from July 1994 to June
1997. From 1989 to 1994, Dr. Lazzara served as president or managing partner of
certain of the Company's predecessor entities. He is a licensed orthodontist
and, prior to founding the Company, maintained a private orthodontic practice
for over 25 years. He is a member of the American Association of Orthodontists
and is a Diplomat of the American Board of Orthodontists.
BARTHOLOMEW F. PALMISANO, SR. Mr. Palmisano has served as Chief Financial
Officer, Senior Vice President, Secretary, Treasurer and a director of the
Company since its inception in July 1994. From 1989 to 1994, Mr. Palmisano
served as the chief financial officer of certain of the Company's predecessor
entities. Mr. Palmisano is a licensed certified public accountant and attorney.
GEOFFREY L. FAUX. Mr. Faux has served as President of the Company since
June 1997, and as a director of the Company since December 1996. Mr. Faux
served as Executive Vice President and Chief Administrative Officer of the
Company from September 1996 to June 1997. From 1992 to September 1996, Mr. Faux
served as Director, Investment Banking Group for Prudential Securities
Incorporated.
MICHAEL C. JOHNSEN. Mr. Johnsen has served as Chief Operating Officer of
the Company since June 1997, and as a director of the Company since 1994. Mr.
Johnsen served as Vice President of Operations of the Company from its inception
in July 1994 to June 1997. From 1988 to 1994, Mr. Johnsen served as Vice
President of Operations of certain of the Company's predecessor entities. Mr.
Johnsen is Dr. Lazzara's brother-in-law.
PAUL J. SPANSEL. Mr. Spansel has served Vice President of Financial
Scheduling of the Company since February 1998. He served as Executive Vice
President and Chief Administrative Officer of the Company from July 1997 through
February 1998. Mr. Spansel served as Operating Officer of the Company from 1994
to July 1997. He was previously employed by Texaco, Inc. where he worked in
various capacities over a 14 year period.
29
<PAGE>
ANTHONY J. PATERNOSTRO. Mr. Paternostro has served as Vice President of
Insurance Services of the Company since April 1997 and has been employed with
the Company since June 1996. From 1991 to 1996, Mr. Paternostro served as
Director of Design Services for Pilot Corporation, a national fuel retailer.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is incorporated herein by
reference to the section captioned "Executive Compensation" in the Company's
definitive Proxy Statement relating to the Annual Meeting of Stockholders of the
Company to be held during 1998. The sections captioned "Comparative Performance
Graph" and "Compensation Committee Report on Executive Compensation" included in
such Proxy Statement are expressly not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to the security ownership of certain beneficial
stockholders and management of the Company is incorporated herein by reference
to the section captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement relating to the Annual
Meeting of Stockholders of the Company to be held during 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions with
respect to the Company is incorporated herein by reference to the section
captioned "Certain Relationships and Related Transactions" in the Company's
definitive Proxy Statement relating to the Annual Meeting of Stockholders of the
Company to be held during 1998.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements, Financial Statement Schedules
and Exhibits
The following consolidated financial statements of the Company are included
in Appendix A hereto.
(1) FINANCIAL STATEMENTS:
Report of Independent Auditors.................................. A-1
Consolidated Balance Sheets - December 31, 1997 and 1996........ A-2
Consolidated Statements of Income - Years Ended
December 31, 1997, 1996 and 1995................................ A-4
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1997, 1996 and 1995................................ A-5
Consolidated Statements of Cash Flows - Years Ended
December 31, 1997, 1996 and 1995................................ A-6
Notes to Consolidated Financial Statements - December 31, 1997.. A-7
(2) FINANCIAL STATEMENT SCHEDULE:
All schedules are omitted, because they are not applicable or not required,
or because the required information is included in the Company's consolidated
financial statements or notes thereto.
(3) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ------------------------
3.1 -- Bylaws of the Registrant (1)
3.2 -- Restated Certificate of Incorporation of the Registrant (1)
4.1 -- Specimen Stock Certificate (1)
9.1 -- Voting Trust Agreement, dated as of October 18, 1994, between John
R. Anderson, D.D.S., P.A., Neal A. Stubbs, D.D.S., P.A., and Gasper
Lazzara, Jr., D.D.S. (1)
10.1 -- Form of Service Agreement (confidential treatment granted as to a
portion of the agreement) (1)
10.2 -- Form of Management Agreement (confidential treatment granted as to a
portion of the agreement) (1)
10.3 -- Form of Consulting Agreement (1)
10.4 -- Employment Agreement between the Registrant and Gasper Lazzara, Jr.,
D.D.S.(1)
10.5 -- Employment Agreement between the Registrant and Bartholomew F.
Palmisano, Sr.(1)
10.6 -- Orthodontic Centers of America, Inc. 1994 Incentive Stock Plan (1)
10.7 -- Orthodontic Centers of America, Inc. 1994 Non-Qualified Stock Option
Plan for Non-Employee Directors (1)
31
<PAGE>
10.8 -- First Union National Bank Defined Contribution Master Plan and Trust
Agreement, and Adoption Agreement relating thereto, between the
Registrant and First Union National Bank (1)
10.9 -- Settlement and Purchase Agreement, dated as of October 10, 1994,
between John R. Anderson, D.D.S., P.A. and Neal A. Stubbs, D.D.S.,
P.A., and Gasper Lazzara, Jr., D.D.S., P.A., Gasper Lazzara, Jr.,
D.D.S., Bartholomew F. Palmisano, Sr., Palmisano & Associates, A
Corporation of Certified Public Accountants, Orthodontic Centers of
America, Inc., a Florida corporation, Orthodontic Centers of
America, Inc., a Louisiana corporation, and the Registrant (1)
10.10 -- Revolving Credit and Security Agreement, dated October 18, 1994,
between the Registrant and First Union National Bank of Florida (1)
10.11 -- Letter of Credit issued to the Registrant by First Union National
Bank of Florida with John R. Anderson, D.D.S., P.A., as beneficiary
(1)
10.12 -- Letter of Credit issued to the Registrant by First Union National
Bank of Florida with Neal A. Stubbs, D.D.S., P.A., as beneficiary
(1)
10.13 -- Form of Exchange Agreement (1)
10.14 -- Form of Dissolution Agreement (1)
10.15 -- Form of Redemption Agreement (1)
10.16 -- Agreement, dated as of October 18, 1994, between the Registrant and
Dr. Gasper Lazzara, Jr. and Bartholomew F. Palmisano, Sr. (1)
10.17 -- Exchange Agreement, dated as of October 18, 1994, between each of
the partners of Anderson, Lazzara, and Stubbs Partnership and the
Registrant (1)
10.18 -- Orthodontic Centers of America, Inc. 1995 Restricted Stock Option
Plan (2)
10.19 -- Orthodontic Centers of America, Inc. 1996 Employee Stock Purchase
Plan (3)
10.20 -- Employment Agreement between the Registrant and Geoffrey L. Faux (4)
10.21 -- Orthodontic Centers of America, Inc. 1997 Key Employee Stock
Purchase Plan Participation Agreement between the Registrant and
Geoffrey L. Faux (filed herewith)
10.22 -- Orthodontic Centers of America, Inc. 1997 Key Employee Stock
Purchase Plan Participation Agreement between the Registrant and
Michael C. Johnsen (filed herewith)
10.23 -- Orthodontic Centers of America, Inc. 1997 Key Employee Stock
Purchase Plan Participation Agreement between the Registrant and
Paul J. Spansel (filed herewith)
10.24 -- Orthodontic Centers of America, Inc. 1997 Key Employee Stock
Purchase Plan Participation Agreement between the Registrant and
Anthony J. Paternostro (filed herewith)
21.1 -- List of subsidiaries of the Registrant (filed herewith)
23.1 -- Consent of Ernst & Young LLP (filed herewith)
27.1 -- Financial Data Schedule (filed herewith)
- ---------------
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration Statement No. 33-85326.
(2) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
(3) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(4) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
The following is a list of all executive compensation plans and
arrangements filed as exhibits to this Annual Report on Form 10-K:
1. Employment Agreement between the Registrant and Gasper Lazzara, Jr.,
D.D.S. (Exhibit 10.4)
32
<PAGE>
2. Employment Agreement between the Registrant and Bartholomew F.
Palmisano, Sr. (Exhibit 10.5)
3. Orthodontic Centers of America, Inc. 1994 Incentive Stock Plan
(Exhibit 10.6)
4. First Union National Bank Defined Contribution Master Plan and Trust
Agreement, and Adoption Agreement relating thereto, between the Registrant and
First Union National Bank (Exhibit 10.8)
5. Orthodontic Centers of America, Inc. 1996 Employee Stock Purchase Plan
(Exhibit 10.19)
6. Employment Agreement between the Registrant and Geoffrey L. Faux
(Exhibit 10.20)
7. Orthodontic Centers of America, Inc. 1997 Key Employee Stock Purchase
Plan Participation Agreement between the Registrant and Geoffrey L. Faux
(Exhibit 10.21)
8. Orthodontic Centers of America, Inc. 1997 Key Employee Stock Purchase
Plan Participation Agreement between the Registrant and Michael C. Johnsen
(Exhibit 10.22)
9. Orthodontic Centers of America, Inc. 1997 Key Employee Stock Purchase
Plan Participation Agreement between the Registrant and Paul J. Spansel (Exhibit
10.23)
10. Orthodontic Centers of America, Inc. 1997 Key Employee Stock Purchase
Plan Participation Agreement between the Registrant and Anthony J. Paternostro
(Exhibit 10.24)
(b) Reports on Form 8-K
No current reports on Form 8-K were filed during the fourth quarter of
1997.
33
<PAGE>
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, in the City of Ponte
Vedra Beach, State of Florida, on March 30, 1998.
ORTHODONTIC CENTERS OF AMERICA, INC.
By: /s/ Gasper Lazzara, Jr., D.D.S.
------------------------------------
Gasper Lazzara, Jr., D.D.S.
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Gasper Lazzara, Jr., D.D.S. Chairman of the Board, March 30, 1998
- -------------------------------------- Chief Executive Officer, Director
Gasper Lazzara, Jr., D.D.S. (principal executive officer)
/s/ Bartholomew F. Palmisano, Sr. Chief Financial Officer, March 30, 1998
- -------------------------------------- Senior Vice President, Treasurer, Director
Bartholomew F. Palmisano, Sr. (principal financial and accounting officer)
/s/ Geoffrey L. Faux President, Director March 30, 1998
- --------------------------------------
Geoffrey L. Faux
/s/ Michael C. Johnsen Chief Operating Officer, Director March 30, 1998
- --------------------------------------
Michael C. Johnsen
/s/ Edward J. Walters, Jr. Director March 30, 1998
- --------------------------------------
Edward J. Walters, Jr.
/s/ A Gordon Tunstall Director March 30, 1998
- --------------------------------------
A Gordon Tunstall
/s/ Ashton J. Ryan, Jr. Director March 30, 1998
- --------------------------------------
Ashton J. Ryan, Jr.
</TABLE>
34
<PAGE>
ORTHODONTIC CENTERS OF AMERICA, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INDEX
PAGE
Report of Independent Auditors................................ A-2
Consolidated Financial Statements
Consolidated Balance Sheets--December 31, 1997 and
1996........................................................ A-3
Consolidated Statements of Income--Years ended
December 31, 1997, 1996 and 1995............................ A-4
Consolidated Statements of Shareholders' Equity--Years ended
December 31, 1997, 1996 and 1995............................ A-5
Consolidated Statements of Cash Flows--Years ended
December 31, 1997, 1996 and 1995........................... A-6
Notes to Consolidated Financial Statements................... A-7
A-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Orthodontic Centers of America, Inc.
We have audited the accompanying consolidated balance sheets of Orthodontic
Centers of America, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Orthodontic Centers of America, Inc. at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
New Orleans, Louisiana
March 23, 1998
A-2
<PAGE>
Orthodontic Centers of America, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(In thousands, except per share data) 1997 1996
- ------------------------------------- ------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................................ $ 9,865 $ 11,827
Investments...................................................... 18,790 12,621
Patient receivables, net of allowance for uncollectible
billings of $3,806 in 1997 and $2,590 in 1996................... 13,865 7,422
Unbilled patient receivables, net of allowance for uncollectible
amounts of $1,464 in 1997 and $829 in 1996...................... 32,018 18,398
Amounts receivable from orthodontic entities..................... 3,213 2,191
Deferred income taxes............................................ 2,080 --
Supplies inventory, prepaid expenses and other assets............ 5,066 3,670
-------- --------
Total current assets............................................... 84,897 56,129
Property, equipment and improvements, net.......................... 35,604 24,201
Investments........................................................ 2,071 6,482
Amounts receivable from orthodontic entities, less current portion. 5,881 5,369
Intangible assets.................................................. 100,121 52,682
Other assets....................................................... 401 236
-------- --------
Total assets....................................................... $228,975 $145,099
======== ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable................................................. $ 442 $ 312
Accrued salaries and other accrued liabilities................... 2,825 1,507
Patient prepayments.............................................. 4,170 2,639
Income taxes payable............................................. 4,116 2,730
Amounts payable to orthodontic entities.......................... 1,200 5,662
Deferred income taxes............................................ -- 2,162
Current portion of long-term debt................................ 3,901 898
-------- --------
Total current liabilities.......................................... 16,654 15,910
Long-term debt, less current portion............................... 6,492 2,499
Deferred income taxes.............................................. 15,089 11,803
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized,
no shares outstanding.......................................... -- --
Common stock, $.01 par value per share; 100,000,000 and 80,000,000
shares authorized at December 31, 1997 and 1996, respectively;
47,372,733 and 43,888,722 shares issued and outstanding at
December 31, 1997 and 1996, respectively....................... 474 439
Additional paid-in capital....................................... 153,334 92,294
Retained earnings................................................ 44,786 22,154
Due from key employees for stock purchase program................ (5,236) --
Capital contribution receivable from shareholders................ (2,618) --
-------- --------
Total shareholders' equity......................................... 190,740 114,887
-------- --------
Total liabilities and shareholders' equity......................... $228,975 $145,099
======== ========
</TABLE>
See accompanying notes.
A-3
<PAGE>
Orthodontic Centers of America, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands, except per share data) 1997 1996 1995
- ------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Net revenue........................... $117,326 $71,273 $41,556
Direct expenses:
Employee costs....................... 33,429 19,895 11,784
Orthodontic supplies................. 8,789 5,428 3,167
Rent................................. 10,299 6,114 3,504
Marketing and advertising............ 9,855 6,644 4,323
-------- ------- -------
Total direct expenses................. 62,372 38,081 22,778
General and administrative............. 13,356 8,703 5,108
Depreciation and amortization.......... 5,640 2,814 1,448
-------- ------- -------
Operating profit....................... 35,958 21,675 12,222
Interest expense....................... (234) (424) (471)
Interest income........................ 1,377 2,359 2,466
-------- ------- -------
Income before income taxes............. 37,101 23,610 14,217
Provision for income taxes............. 14,469 9,208 5,182
-------- ------- -------
Net income............................. $ 22,632 $14,402 $ 9,035
======== ======= =======
Net income per share:
Basic................................ $.51 $.34 $.24
Diluted.............................. $.50 $.33 $.23
======== ======= =======
See accompanying notes.
</TABLE>
A-4
<PAGE>
<TABLE>
<CAPTION>
Orthodontic Centers of America, Inc.
Consolidated Statements of Shareholders' Equity
Due Capital
From Key Contri-
Employees bution
Additional for Stock Receivable Total
Common Paid-In Retained Purchase from Shareholders'
(In thousands, except share data) Stock Capital Earnings Program Shareholders Equity
- --------------------------------- ----- ------- -------- ------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995........................ $ 82 $ 26,936 $(1,283) $ -- $ -- $ 25,735
Over-allotment option of initial public offering
(1,140,000 shares)............................... 3 2,552 -- -- -- 2,555
Public offering of common stock
(7,200,000 shares)............................... 18 38,679 -- -- -- 38,697
Issuance of shares of common stock to obtain
management agreements (460,000 shares)........... 2 1,289 -- -- -- 1,291
Two-for-one stock split........................... 104 (104) -- -- -- --
Net income........................................ -- -- 9,035 -- -- 9,035
---- -------- ------- ------- ------- --------
Balance at December 31, 1995...................... 209 69,352 7,752 -- -- 77,313
Issuance of shares under stock option plans,
including tax benefit of $1,705 (391,000 shares). 2 2,396 -- -- -- 2,398
Issuance of shares of common stock to obtain
management agreements (1,718,000 shares)........ 15 20,759 -- -- -- 20,774
Two-for-one stock split........................... 213 (213) -- -- -- --
Net income........................................ -- -- 14,402 -- -- 14,402
---- -------- ------- ------- ------- --------
Balance at December 31, 1996...................... 439 92,294 22,154 -- -- 114,887
Public offering of common stock (2,600,000 shares) 26 45,720 -- (5,236) (2,618) 37,892
Issuance of shares under stock option plans,
including tax benefit of $848 (131,000 shares)... 1 1,278 -- -- -- 1,279
Issuance of shares of common stock to obtain
management agreements (779,000 shares)........... 8 14,042 -- -- -- 14,050
Net income........................................ -- -- 22,632 -- -- 22,632
---- -------- ------- ------- ------- --------
Balance at December 31, 1997...................... $474 $153,334 $ 44,786 $(5,236) $(2,618) $190,740
==== ======== ======= ======= ======= ========
</TABLE>
See accompanying notes.
A-5
<PAGE>
Orthodontic Centers of America, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands, except share data) 1997 1996 1995
- --------------------------------- ---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income..................................................... $ 22,632 $ 14,402 $ 9,035
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for bad debt expense.............................. 1,851 1,617 958
Depreciation and amortization............................... 5,640 2,814 1,448
Deferred income taxes....................................... (2,225) (3,031) 823
Changes in operating assets and liabilities:
Patient receivables........................................ (7,659) (4,871) (3,233)
Unbilled patient receivables and patient prepayments....... (12,724) (6,169) (2,236)
Supplies inventory, prepaid expenses and other............. (1,561) (1,235) (1,403)
Amounts receivable from/payable to orthodontic entities.... (590) 1,074 (3,350)
Accounts payable and other current liabilities............. 3,682 2,215 1,978
-------- -------- --------
Net cash provided by operating activities...................... 9,046 6,816 4,020
Investing activities
Purchases of property, equipment and improvements.............. (14,952) (12,333) (8,230)
Purchase of available-for-sale investments..................... (21,758) (30,000) (95,465)
Proceeds from sales or maturities of available-for-sale
investments................................................... 20,000 38,790 67,572
Intangible assets acquired..................................... (25,219) (6,870) (3,998)
Advances to orthodontic entities............................... (2,838) (6,160) (2,832)
Payments from orthodontic entities............................. 2,094 3,325 582
-------- -------- --------
Net cash used in investing activities.......................... (42,673) (13,248) (42,371)
Financing activities
Repayment of long-term debt.................................... (6,658) (1,213) (1,230)
Issuance of common stock....................................... 38,323 693 41,252
-------- -------- --------
Net cash provided by (used in) financing activities............ 31,665 (520) 40,022
-------- -------- --------
Increase (decrease) in cash and cash equivalents............... (1,962) (6,952) 1,671
Cash and cash equivalents at beginning of year................. 11,827 18,779 17,108
-------- -------- --------
Cash and cash equivalents at end of year....................... $ 9,865 $ 11,827 $ 18,779
======== ======== ========
Supplemental cash flow information
Cash paid during the year for:
Interest..................................................... $ 234 $ 424 $ 471
Income taxes................................................. $ 14,460 $ 10,449 $ 2,345
======== ======== ========
</TABLE>
See accompanying notes.
A-6
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Consolidated Financial Statements
Years ended December 31, 1997 and 1996
1. Description of Business
Orthodontic Centers of America, Inc. (the "Company") manages orthodontic centers
on a national basis. The Company managed 360, 247 and 145 orthodontic centers as
of December 31, 1997, 1996 and 1995, respectively.
As of December 31, 1997, such centers were located in 39 states.
The Company provides business operations, financial, marketing and
administrative services to the 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. The practicing orthodontists own the orthodontic entities.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Orthodontic
Centers of America, Inc. and its wholly-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Investments
Management determines the appropriate classification of debt securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date. All investments held at December 31, 1997 and 1996 are classified as
available-for-sale because management does not have positive intent to hold
until maturity. Available-for-sale investments
A-7
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Consolidated Financial Statements-(continued)
are carried at fair value. Investments included in current assets are debt
securities with an original maturity of greater than three months and a
remaining maturity of less than one year, and which management expects to use in
its present operations. All other investments are considered long-term assets
and have maturities of less than five years. At December 31, 1997 and 1996 the
Company's amortized cost of investments held consisted of $17,789,000 and
$10,060,000, respectively, of U.S. Treasury and U.S. Government Agency
obligations, and $3,072,000 and $9,043,000, respectively, of corporate and
municipal bonds. The unrealized gains and losses on these investments at
December 31, 1997 and 1996 were not significant. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity and included in interest income. The cost of investments sold is
based on the specific identification method. Interest on investments classified
as available-for-sale is included in interest income.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheets
for cash and cash equivalents approximates their fair value.
Investments: The fair values for marketable debt securities are based on quoted
market prices.
Amounts receivable from orthodontic entities: The carrying amounts reported on
the balance sheets for amounts receivable from orthodontic entities approximate
their fair values.
Long-term debt: The fair values of the Company's long-term debt are estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements, and approximate
their carrying values.
A-8
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Consolidated Financial Statements-(continued)
Revenue Recognition
Revenue is earned by the Company under the management agreements with
orthodontic entities equal to approximately 24% of new patient contract balances
in the first month of new contracts plus a portion of existing contract
balances, less amounts retained by the orthodontic entities. The orthodontic
entities retain all orthodontic center revenue not paid to the Company as
management fees. The amounts retained by the orthodontic entities are dependent
on their financial performance, based in significant part on the orthodontic
entities' cash receipts and 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 collection. Unbilled patient
receivables represent the earned revenue in excess of billings to patients as of
the end of each period. There are no unbilled receivables which will not be
billed. The Company is exposed to certain credit risks. The Company manages such
risks by regularly reviewing the accounts and contracts, and providing
appropriate allowances. Provisions are made currently for all known or
anticipated losses for billed and unbilled patient receivables and for loss
contracts. Such deductions totaled $1,851,000, $1,617,000 and $958,000 for the
years ended December 31, 1997, 1996 and 1995, respectively, and have been within
management's expectations. At December 31, 1997 and 1996, there were
approximately 130,000 and 83,000, respectively, active patient contracts with
balances outstanding. Patient prepayments represent collections from patients or
their insurance companies which are received in advance of the performance of
the related services.
Supplies Inventory
Supplies inventory is valued at the lower of cost or market determined on the
first-in, first-out basis.
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost. Depreciation expense is
provided using the straight-line method over the estimated useful lives of the
assets, which are five to 10 years. Leasehold improvements are amortized over
the original lease term which is generally five to 10 years. The related
depreciation and amortization expense for the years ended December 31, 1997,
1996 and 1995 was $3,549,000, $2,146,000 and $1,256,000, respectively.
Intangible Assets
Amortization expense for the years ended December 31, 1997, 1996 and 1995 was
$2,091,000, $668,000 and $192,000, respectively. Accumulated amortization was
$3,445,000 and $1,354,000, as of December 31, 1997 and 1996, respectively.
Intangible assets and the related accumulated amortization are written off when
fully amortized.
Intangible assets include the costs of obtaining management agreements, which
are amortized over the life of the agreements which is generally 20 to 40 years.
Such management agreements represent the exclusive right to provide business
operations, financial, marketing and administrative service to an orthodontic
entity during the term of the management agreement. In the event the management
agreement is terminated, the related orthodontic entity is generally required to
purchase all of the related assets, including the unamortized portion of
intangible assets, at the current book value.
Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred.
Income Taxes
Income taxes for the Company are determined by the liability method in
accordance with Statement of Financial Accounting Standards 109, Accounting for
Income Taxes. The Company maintains a fiscal year end of September 30 for income
tax reporting purposes.
A-9
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Consolidated Financial Statements-(continued)
Stock Compensation Arrangements
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, Accounting for Stock Issued to Employees.
3. Transactions with Orthodontic Entities
Under the terms of the management agreements, the Company has historically
funded the operating losses and capital improvements of orthodontic centers.
Amounts advanced to an orthodontic entity to fund operating losses were required
to be repaid to the Company over five years once the orthodontic entity
generated operating profits. During December 1996, the Company entered into an
agreement with its financial institution whereby the financial institution
finances the operating losses and capital improvements directly to the
orthodontic entity, subject to the financial institution's credit approval of
the orthodontic entity, but where the Company remains a guarantor of the related
debt. At December 31, 1997, the Company was a guarantor for approximately
$5,613,000 under this agreement.
Amounts receivable from orthodontic entities are classified on the consolidated
balance sheets based upon the expected date of collection. Collection of amounts
due from orthodontic entities is highly dependent on the entities' financial
performance. Therefore, the Company is exposed to certain credit risk. However,
management believes such risk is minimized by the Company's involvement in
certain business aspects of the orthodontic entity.
Amounts payable to orthodontic entities represents the extent that the patient
receivables assigned to the Company exceed the management fee earned and other
amounts currently due the Company.
4. Property, Equipment and Improvements
Property, equipment and improvements consisted of the following:
December 31,
(In thousands) 1997 1996
- -------------- ------ ------
Leasehold improvements.......................... $23,740 $15,020
Furniture and fixtures.......................... 18,884 12,782
Other equipment................................. 338 72
Centers in progress............................. 612 748
------- -------
43,574 28,622
Less accumulated depreciation and amortization.. 7,970 4,421
------- -------
$35,604 $24,201
======= =======
A-10
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Consolidated Financial Statements-(continued)
5. Long-Term Debt and Line of Credit
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
- -------------- ---- ----
<S> <C> <C>
Notes payable to affiliated orthodontists, interest rates from 8% to 10%,
with maturity dates ranging from 1998 to 2000, unsecured.................. $10,393 $ 922
Other notes payable........................................................ -- 2,475
------- ------
10,393 3,397
Less current portion....................................................... 3,901 898
------- ------
$ 6,492 $2,499
======= ======
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1997 for each of
the next three years are as follows (in thousands):
1998 $ 3,901
1999 4,617
2000 1,875
At December 31, 1997, the Company had an outstanding line of credit of
$5,000,000 with a financial institution, all of which is available for general
working capital needs, the development of new orthodontic centers and the
acquisition of assets from existing orthodontic centers. The Company is required
to maintain certain financial covenants under the terms of this line of credit.
The line of credit agreement also restricts certain activities of the Company,
including limiting the declaration of dividends to current earnings. At December
31, 1997, the Company was in compliance with the covenants and restrictions of
the agreement.
6. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any diluted
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. The adoption had no impact on current year or previously reported
earnings per share amounts.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands, except per share data) 1997 1996 1995
- ------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Numerator-net income for basic and diluted earnings per share....... $22,632 $14,402 $ 9,035
======= ======= =======
Denominator:
Denominator for basic earnings per share-weighted-average shares.. 44,576 42,388 38,235
Effect of dilutive securities--Employee stock options............. 838 1,320 859
------- ------- -------
Denominator for diluted earnings per share........................ 45,414 43,708 39,094
======= ======= =======
Basic earnings per share............................................ $ .51 $ .34 $ .24
======= ======= =======
Diluted earnings per share.......................................... $ .50 $ .33 $ .23
======= ======= =======
</TABLE>
A-11
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Consolidated Financial Statements-(continued)
7. Leases
Facilities for the orthodontic centers and administrative offices are rented
under long-term leases accounted for as operating leases. The original lease
terms are generally five to 10 years with options to renew the leases for
specified periods subsequent to their original terms. The leases have other
various provisions, including sharing of certain executory costs and scheduled
rent increases. Minimum rent expense is recorded on a straight-line basis over
the life of the lease. Minimum future commitments as of December 31, 1997 are as
follows (in thousands):
1998 $ 7,280
1999 6,385
2000 5,589
2001 4,769
2002 3,556
Thereafter 4,173
-------
$31,752
=======
Many of the lease agreements provide for payments comprised of a minimum rental
payment plus a contingent rental payment based on a percentage of cash
collections and other additional amounts. Rent expense attributable to minimum
and additional rentals along with sublease income was as follows:
Years ended December 31,
(In thousands) 1997 1996 1995
- -------------- ------ ------ ------
Minimum rentals............. $ 7,704 $5,096 $2,869
Additional rentals.......... 2,682 1,124 710
Sublease income............. (87) (106) (75)
------- ------ ------
$10,299 $6,114 $3,504
======= ====== ======
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the consolidated deferred tax liabilities and assets were as follows:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
- -------------- ------ ------
<S> <C> <C>
Deferred tax liabilities:
Intangible assets.................................................. $14,244 $13,443
Property and equipment............................................. 625 --
Conversion to accrual basis of accounting for income tax purposes.. -- 2,311
Other.............................................................. 752 634
------- -------
Total deferred tax liabilities....................................... 15,621 16,388
Deferred tax assets:
Property and equipment............................................. -- 124
Patient receivables and prepayments................................ 2,612 1,334
Litigation settlement costs........................................ -- 965
------- -------
Total deferred tax assets............................................ 2,612 2,423
------- -------
Net deferred tax liabilities......................................... $13,009 $13,965
======= =======
</TABLE>
A-12
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Consolidated Financial Statements-(continued)
The Company was able to use the cash basis of accounting for income tax purposes
through its tax year ended September 30, 1995. Beginning with the tax year ended
September 30, 1996, because of its level of cash receipts, the Company was
required to use the accrual basis of accounting for income tax purposes. The
related deferred tax liability was completely amortized at December 31, 1997.
Components of the provision (benefit) for income taxes were as follows:
Years ended December 31,
(In thousands) 1997 1996 1995
-------------- ------ ------ ------
Current...................... $16,694 $12,239 $4,359
Deferred..................... (2,225) (3,031) 823
------- ------- ------
Total........................ $14,469 $ 9,208 $5,182
======= ======= ======
The reconciliation of income tax computed at the federal statutory rates to
income tax expense (benefit) is:
Years ended December 31,
(In thousands) 1997 1996 1995
- -------------- ------ ------ ------
Tax at federal statutory rates....... $12,885 $8,164 $4,876
Other, primarily state income taxes.. 1,584 1,044 306
------- ------ ------
Total................................ $14,469 $9,208 $5,182
======= ====== ======
9. Benefit Plans
Stock Option Plan
The Company has reserved 3,400,000 of the authorized shares of common stock for
issuance pursuant to options granted and restricted stock awarded under the
Orthodontic Centers of America, Inc. 1994 Incentive Stock Plan (the "Incentive
Option Plan"). Options may be granted to officers, directors and employees of
the Company, for terms not longer than 10 years at prices not less than fair
market value of the common stock on the date of grant. Grant options generally
become exercisable in four equal installments beginning two years after the
grant date, and expire 10 years after the grant date.
The Company has reserved 600,000 of the authorized shares of common stock for
issuance pursuant to options granted and restricted stock awarded under the
Orthodontic Centers of America, Inc. 1995 Non-Qualified Stock Option Plan for
Non-Employee Directors (the "Director Option Plan"). The Director Option Plan
provides for the grant of options to purchase 2,400 shares of common stock on
the first trading date each year to each non-employee director serving the
Company on such date, at prices equal to the fair market value of the common
stock on the date of grant. Grant options generally become exercisable in four
equal annual installments beginning two years after the grant date, and expiring
10 years after the grant date, unless canceled sooner due to termination of
service or death.
The Company has reserved 2,000,000 of the authorized shares of common stock for
issuance pursuant to options granted under the Orthodontic Centers of America,
Inc. 1995 Restricted Stock Option Plan (the "Orthodontist Option Plan"). Options
may be granted to orthodontists who own an orthodontic entity which has a
service, management or consulting agreement with the Company, at prices not less
than 100% of the fair market value of the common stock on the date of grant.
Grant options generally become exercisable in four equal annual installments
beginning two years after grant date, and expire 10 years after grant date. No
options have been granted under the Orthodontist Option Plan.
The Company has reserved 200,000 of the authorized shares of common stock for
issuance under the 1996 Employee Stock Purchase Plan (the Employee Purchase
Plan), which allows participating employees of the Company to purchase shares of
common stock from the Company through a regular payroll deduction of up to 10%
of their respective normal monthly pay. Deducted amounts are accumulated for
each participating employee and used to purchase the maximum reported on the New
York Stock Exchange on the applicable purchase date or the first trading date of
the year, whichever is lower. Additionally,
A-13
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Consolidated Financial Statements-(continued)
the Company has reserved 2,000,000 shares of common stock for issuance to
affiliated orthodontists through a stock purchase program that allows
participating affiliated orthodontists to acquire shares of common stock from
the Company.
FASB Statement No. 123, Accounting for Stock-Based Compensation, requires the
Company to disclose pro forma information regarding net income and earnings per
share as if the Company had accounted for its employee stock options under the
fair value method. The fair value was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
1997 1996 1995
------ ------ ------
Risk-free interest rate........... 6.75% 6.3% 7.1%
Dividend yield
Volatility factor............... .608 .45 .612
Weighted average expected life.. 8.01 years 6.7 years 6.9 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. No
compensation cost has been recognized for its stock options in the financial
statements. Had the Company's stock-based compensation plan been determined
based on the fair value at the grant dates, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
(In thousands, except per share data) 1997 1996 1995
------------------------------------- ------ ------ ------
Pro forma net income................... $22,090 $14,300 $9,005
Pro forma earnings per share:
Basic................................ $ .50 $ .34 $ .23
Diluted.............................. $ .49 $ .33 $ .23
A-14
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Consolidated Financial Statements-(continued)
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year......... 1,661,753 $ 3.65 1,858,496 $ 3.24 938,628 $2.75
Granted............................... 1,609,713 15.44 237,095 12.83 952,476 3.55
Exercised............................. (130,753) 3.29 (390,868) 2.75 -- --
Forfeited............................. (10,641) 5.95 (42,970) 3.24 (32,608) 2.75
--------- ------ --------- ------ --------- -----
Outstanding-end of year............... 3,130,072 9.57 1,661,753 3.65 1,858,496 $3.24
Exercisable at end of year............ 336,543 3.25 6,592 2.75 --
========= ====== ========= ====== ========= =====
Weighted-average fair value of
options granted during the year..... $10.56 $8.58 $2.40
</TABLE>
Of the options outstanding at December 31, 1997, approximately 1,353,000 were
issued on or about the date of the Company's initial public offering and have
exercise prices which range from $2.75 or $3.25, a weighted-average exercise
price of $3.04 and a weighted average remaining contractual life of 7.0 years.
The remaining options outstanding at December 31, 1997 have exercise prices
which range from $3.25 to $20.50, a weighted average exercise price of $14.54
and a weighted average remaining contractual life of 8.7 years.
Key Employee Stock Purchase Plan
In 1997, the Company implemented the Orthodontic Centers of America, Inc. 1997
Key Employee Stock Purchase Plan (the Key Employee Purchase Plan) to encourage
ownership of the Company's common stock by executive officers and other key
employees of the Company and thereby align their interests with those of the
Company's stockholders. Under the Key Employee Purchase Plan, from time to time,
the Company's executive officers and certain other key employees will be
permitted to purchase (from the Company, during an offering or on the open
market, as determined by the Company) shares of the Company's common stock with
an aggregate value of up to five times the applicable employee's annual base
salary. The purchase price of such shares will equal the public offering price
or the reported last sale price per share of common stock on the business day
immediately preceding the date of purchase, as applicable.
For each employee participating in the Key Employee Purchase Plan, the Company
will finance 50% of the purchase price through a loan from the Company. Each
such loan will be evidenced by a promissory note and will be a full recourse
obligation of the employee, secured by all of the shares of common stock
acquired by the employee in connection with the loan. Each such loan will bear a
market rate of interest and the outstanding principal and accrued interest under
the loan will be payable, in one lump-sum payment, on the earlier of (i) the
fifth anniversary of the date of the loan or (ii) termination of the applicable
employee's employment with the Company. A proportionate amount of the
outstanding principal and accrued interest under the loan will be payable upon
the sale or transfer by the employee of shares of common stock purchased in
connection with the loan.
The Key Employee Purchase Plan includes a risk sharing provision, whereby during
their term of employment with the Company a participating employee will be
responsible for 100% of any losses, but is entitled to only 50% of any gains
(with the Company being entitled to the other 50% of such gains), occurring with
respect to the sale by the employee of shares of common stock purchased under
the Key Employee Purchase Plan and held for less than three years. In addition,
with respect to the sale by the employee of shares purchased under the Key
Employee Purchase Plan and held for more than three but less than five years,
the employee will be entitled to 100% of any gains and the principal amount of
the loan to the employee from the Company will be reduced by 50% of any losses
during the term of the employee's employment with the Company.
A-15
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Consolidated Financial Statements-(continued)
Upon the purchase of common stock by an employee under the Key Employee Purchase
Plan, the Company will also grant options to such employee under the Company's
1994 Incentive Option Plan to purchase an aggregate of three times the number of
shares of common stock so purchased. The options will be exercisable beginning
on the seventh anniversary of the date of grant at an exercise price equal to
the purchase price paid in the purchase to which the options relate. If,
however, on the fifth anniversary of the date of grant, the employee is employed
by the Company and has repaid in full all indebtedness to the Company and its
affiliates incurred in connection with such purchase, the exercisable date of a
proportionate number of options (equal to three times the number of shares of
common stock purchased under the Key Employee Purchase Plan in connection with
the grant of the options and held by the employee on such fifth anniversary)
will be accelerated to such fifth anniversary.
In 1997, 295,000 shares of common stock were purchased under the Key Employee
Purchase Plan. The 50% of the loan not financed by the Company was financed
personally by major shareholders on terms comparable to the loan from the
Company. This loan has been recorded as a capital contribution to the Company
with the corresponding amount due from the key employees recorded as a deduction
from shareholders' equity. The portion of the loan to be financed personally by
shareholders was paid by the Company at the time of the offering and had not
been repaid at December 31, 1997. Therefore, a capital contribution receivable
from the shareholders had been recorded at December 31, 1997 as a deduction from
shareholders' equity. The total amount due from key employees in conjunction
with the Key Employee Purchase Plan as of December 31, 1997 was $5,236,000. As
these loans are repaid, a pro-rata portion of the principal payment will be
distributed to the shareholders who financed the loans.
Defined Contribution Plan
The Company sponsors a 401(k) Plan for all employees who have satisfied minimum
service and age requirements. Employees may contribute up to 15% of their
earnings to the plan. The Company matches 40% of an employee's contribution to
the plan, up to a maximum of $600 per year. Plan expense totaled $49,000,
$49,000 and $36,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
10. Acquisition of Management Contracts
In 1997, the Company finalized agreements with 52 orthodontic entities to obtain
management agreements and acquire other assets for approximately $49.5 million.
These orthodontic entities operate 72 centers (net of consolidations). The
consideration to these orthodontic entities included approximately $13,654,000
in notes payable, and the issuance of 779,000 shares of the Company's common
stock at an average price of approximately $18.03 per share, with the remainder
paid in cash.
In 1996, the Company finalized agreements with 40 orthodontic entities to obtain
management agreements and acquire other assets for approximately $32.4 million.
These orthodontic entities operate 54 centers (net of consolidations). The
consideration to these orthodontic entities included approximately $120,000 in
notes payable, and the issuance of 1,718,000 shares of the Company's common
stock at an average price of approximately $12.09 per share, with the remainder
paid in cash.
In 1995, the Company finalized agreements with ten orthodontic entities to
obtain management agreements and acquire other assets for approximately
$5,900,000. These orthodontic entities operate 29 centers. The consideration to
these orthodontic entities included approximately $752,000 in notes payable, and
the issuance of 460,000 shares of the Company's common stock at an average price
of approximately $2.81 per share, with the remainder paid in cash.
A-16
<PAGE>
Orthodontic Centers of America, Inc.
Notes to Consolidated Financial Statements-(continued)
11. Commitments and Contingencies
In the normal course of business, the Company becomes a defendant or plaintiff
in various lawsuits. Although a successful claim for which the Company is not
fully insured could have a material effect on the Company's financial condition,
management is of the opinion that it maintains insurance at levels sufficient to
insure itself against the normal risk of operations.
12. Quarterly Results of Operations (Unaudited)
The following is a tabulation of the unaudited quarterly results of operations
for the year ended December 31, 1997 and 1996 (in thousands, except per share
data):
Quarter Ended
--------------------------------------------
March June September December
1997 1997 1997 1997
------- ------ --------- --------
Net revenue............ $24,899 $27,480 $31,439 $33,508
Operating profit....... 7,467 8,530 9,516 10,445
Net income............. 4,773 5,370 5,898 6,591
Net income per share:
Basic................ $ .11 $ .12 $ .13 $ .15
Diluted.............. .11 .12 .13 .14
Quarter Ended
--------------------------------------------
March June September December
1996 1996 1996 1996
------- ------ --------- --------
Net revenue............ $13,719 $15,517 $18,881 $23,156
Operating profit....... 3,914 4,592 6,185 6,984
Net income............. 2,734 3,111 4,075 4,482
Net income per share:
Basic................ $ .07 $ .08 $ .10 $ .10
Diluted.............. .07 .07 .09 .10
The earnings per share amounts have been computed according to Statement of
Financial Accounting Standards No. 128, Earnings per Share. The adoption of FAS
128 did not change any of the previously reported per share amounts included
above.
A-17
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
3.1 Bylaws of the Registrant (1)
3.2 Restated Certificate of Incorporation of the Registrant (1)
4.1 Specimen Stock Certificate (1)
9.1 Voting Trust Agreement, dated as of October 18, 1994, between John R.
Anderson, D.D.S., P.A., Neal A. Stubbs, D.D.S., P.A., and Gasper
Lazzara, Jr., D.D.S. (1)
10.1 Form of Service Agreement (confidential treatment granted as to a
portion of the agreement) (1)
10.2 Form of Management Agreement (confidential treatment granted as to a
portion of the agreement) (1)
10.3 Form of Consulting Agreement (1)
10.4 Employment Agreement between the Registrant and Gasper Lazzara, Jr.,
D.D.S. (1)
10.5 Employment Agreement between the Registrant and Bartholomew F.
Palmisano, Sr. (1)
10.6 Orthodontic Centers of America, Inc. 1994 Incentive Stock Plan (1)
10.7 Orthodontic Centers of America, Inc. 1994 Non-Qualified Stock Option
Plan for Non-Employee Directors (1)
10.8 First Union National Bank Defined Contribution Master Plan and Trust
Agreement, and Adoption Agreement relating thereto, between the
Registrant and First Union National Bank (1)
10.9 Settlement and Purchase Agreement, dated as of October 10, 1994, between
John R. Anderson, D.D.S., P.A. and Neal A. Stubbs, D.D.S., P.A., and
Gasper Lazzara, Jr., D.D.S., P.A., Gasper Lazzara, Jr., D.D.S.,
Bartholomew F. Palmisano, Sr., Palmisano & Associates, A Corporation of
Certified Public Accountants, Orthodontic Centers of America, Inc., a
Florida corporation, Orthodontic Centers of America, Inc., a Louisiana
corporation, and the Registrant (1)
10.10 Revolving Credit and Security Agreement, dated October 18, 1994,
between the Registrant and First Union National Bank of Florida (1)
10.11 Letter of Credit issued to the Registrant by First Union National Bank
of Florida with John R. Anderson, D.D.S., P.A., as beneficiary (1)
10.12 Letter of Credit issued to the Registrant by First Union National Bank
of Florida with Neal A. Stubbs, D.D.S., P.A., as beneficiary (1)
10.13 Form of Exchange Agreement (1)
10.14 Form of Dissolution Agreement (1)
10.15 Form of Redemption Agreement (1)
10.16 Agreement, dated as of October 18, 1994, between the Registrant and
Dr. Gasper Lazzara, Jr. and Bartholomew F. Palmisano, Sr. (1)
10.17 Exchange Agreement, dated as of October 18, 1994, between each of the
partners of Anderson, Lazzara, and Stubbs Partnership and the Registrant
(1)
10.18 Orthodontic Centers of America, Inc. 1995 Restricted Stock Option Plan
(2)
10.19 Orthodontic Centers of America, Inc. 1996 Employee Stock Purchase Plan
(3)
10.20 Employment Agreement between the Registrant and Geoffrey L. Faux (4)
10.21 Orthodontic Centers of America, Inc. 1997 Key Employee Stock Purchase
Plan Participation Agreement between the Registrant and Geoffrey L. Faux
(filed herewith)
<PAGE>
10.22 Orthodontic Centers of America, Inc. 1997 Key Employee Stock Purchase
Plan Participation Agreement between the Registrant and Michael C.
Johnsen (filed herewith)
10.23 Orthodontic Centers of America, Inc. 1997 Key Employee Stock Purchase
Plan Participation Agreement between the Registrant and Paul J. Spansel
(filed herewith)
10.24 Orthodontic Centers of America, Inc. 1997 Key Employee Stock Purchase
Plan Participation Agreement between the Registrant and Anthony J.
Paternostro (filed herewith)
21.1 List of subsidiaries of the Registrant (filed herewith)
23.1 Consent of Ernst & Young LLP (filed herewith)
27.1 Financial Data Schedule (filed herewith)
_______________
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration Statement No. 33-85326.
(2) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
(3) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(4) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
<PAGE>
EXHIBIT 10.21
ORTHODONTIC CENTERS OF AMERICA, INC.
1997 KEY EMPLOYEE STOCK PURCHASE PLAN
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT ("Agreement") made as of November 3, 1997 (the
"Effective Date"), between ORTHODONTIC CENTERS OF AMERICA, INC., a Delaware
corporation (the "Company"), and GEOFFREY L. FAUX (the "Employee").
RECITALS:
WHEREAS, the Company adopted the 1997 Key Employee Stock Purchase Plan (the
"Plan") by vote of the Board of Directors as of October 31, 1997; and
WHEREAS, the Board of Directors has determined that it is to the advantage
and best interest of the Company and its stockholders to permit the Employee to
participate in the Plan and to enter into this Agreement, to encourage the
Employee to own shares of the Company's Common Stock, $.01 par value per share
(the "Common Stock"), as an inducement for the Employee to remain in the service
of the Company and its subsidiary corporations, and as an incentive for
increased effort during such service;
NOW, THEREFORE, in consideration of the mutual covenants contained in this
contract, the parties agree as follows:
1. Participation in the Plan. The Company hereby permits the Employee to
participate, and the Employee hereby elects to participate, in the Plan, subject
to all of the terms, conditions and provisions of the Plan and this Agreement.
2. Manner of Participation.
(a) Amount of Common Stock. Pursuant to the Plan, the Employee shall be
permitted to purchase, in the Company's currently pending underwritten public
offering of Common Stock (the "Public Offering") or from the Company, as
determined by the Company, shares of Common Stock with an aggregate value of up
to $999,990.50 (the "Shares"), which amount shall not exceed five (5) times the
Employee's current annual base salary. Such purchase must occur, if at all, on
or within thirty (30) days following the Effective Date, or the rights granted
in Section 1 and this Section shall terminate.
(b) Purchase Price. The purchase price per Share hereunder (the "Purchase
Price") shall equal, with respect to purchases in the Public Offering, the
public offering price set forth on the cover page of the final prospectus filed
by the Company pursuant to Rule 424(b) under the Securities Act of 1933 (the
"1933 Act"), and thereafter, the reported last sale price per share of Common
Stock on the business day immediately preceding the date of purchase.
(c) Loan from the Company. The Company shall finance fifty percent (50%)
of the purchase price of the Shares through a loan from the Company. Such loan
shall be evidenced by a promissory note (the "Note"), in form and substance
acceptable to the Company, which indebtedness shall be a full recourse
obligation of the Employee, shall be secured by all of the Shares and shall bear
interest at the rate of six and one one-hundredth percent (6.01%) per
<PAGE>
annum. The outstanding principal and accrued interest under the Note will be
payable, in one lump-sum payment, on the earlier of (i) November 3, 2002, or
(ii) termination of the Employee's employment with the Company; provided,
however, that a proportionate amount (equal to the amount by which the number of
Shares sold or transferred bears to the total number of Shares purchased) of the
outstanding principal and accrued interest under the Note shall be immediately
due and payable upon the sale or transfer of any of the Shares.
(d) Risk-Sharing. For so long as the Employee shall remain an employee of
the Company, the following provisions shall apply with respect to the Shares:
(i) The Employee shall be solely responsible for one hundred percent
(100%) of any losses occurring with respect to the sale or transfer by the
Employee of any of the Shares prior to the third anniversary of the Effective
Date.
(ii) The Employee shall be entitled to fifty percent (50%) of any
gains (with the Company being entitled to the other fifty percent (50%) of any
such gains), occurring with respect to the sale or transfer by the Employee of
any of the Shares prior to the third anniversary of the Effective Date.
(iii) The Employee shall be entitled to one hundred percent (100%) of
any gains occurring with respect to the sale or transfer by the Employee of any
of the Shares on or following the third anniversary of the Effective Date, but
on or prior to the fifth anniversary of the Effective Date.
(iv) The principal amount of the Note shall be reduced by fifty
percent (50%) of any losses occurring with respect to the sale or transfer by
the Employee of any of the Shares on or following the third anniversary of the
Effective Date, but on or prior to the fifth anniversary of the Effective Date.
(e) Grant of Stock Options. Promptly following purchase of the Shares by
the Employee, the Company shall grant to the Employee, under the COmpany's 1994
Incentive Stock Plan (the "Option Plan"), options (the "Options") to purchase an
aggregate of three (3) times the number of Shares. The Options shall be granted
subject to the terms and conditions of the Option Plan. The Options shall become
exercisable beginning on the seventh anniversary of the Effective Date at an
exercise price equal to the Purchase Price. In the event, however, that on the
fifth anniversary of the Effective Date, the Employee is then employed by the
Company and has repaid in full all outstanding indebtedness and accrued interest
under the Note and under that certain Promissory Note, of even date herewith,
from the Employee to Dr. Gasper Lazzara, Jr. and Mr. Bartholomew F. Palmisano,
Sr., or has made such arrangements and executed such documentation, in form and
substance satisfactory to the Company, for the prompt repayment of such
indebtedness and accrued interest, then the exercise date of a number of Options
equal to three (3) times the number of Shares held by the Employee on such fifth
anniversary will be accelerated to such fifth anniversary.
2
<PAGE>
3. Subject to Provisions of Plan. This Agreement and the rights and benefits
provided for herein are granted pursuant to the Plan and are governed by and
subject to all the terms and conditions and provisions of the Plan, as it exists
on the date of this Agreement and as the Plan is amended from time to time. A
copy of the Plan is attached hereto as Exhibit A and made a part hereof as if
fully set forth herein. In the event of any conflict between the provisions of
the Agreement and the provisions of the Plan, the terms of the Plan shall
control, except as expressly stated otherwise herein. For purposes of this
Agreement, the defined terms in the Plan shall have the same meaning in this
Agreement, except where the context otherwise requires. By executing this
Agreement, the Employee affirms that he or she has carefully read this Agreement
and the Plan and agrees to be bound by the terms and conditions thereof.
4. Transferability. This Agreement and the rights and benefits hereunder are
not transferable or assignable.
5. Committee Authority. Any question concerning the interpretation of this
Agreement or the Plan, any adjustments required to be made under the Plan, and
any controversy which may arise under the Plan or this Agreement shall be
determined by the Compensation Committee (the "Committee") of the Company's
Board of Directors, or by such Board of Directors, in its sole discretion. Such
decision by the Committee or Board of Directors, as applicable, shall be final
and binding.
6. Status of Participant. The Employee shall not be deemed a stockholder of
the Company with respect to any of the shares of Common Stock subject to the
Plan or this Agreement, except to the extent that such shares shall have been
purchased and transferred to him or her.
7. Securities Act of 1933. Unless at the time of purchase of shares of Common
Stock pursuant to this Agreement, there is an effective registration statement
filed with the Securities and Exchange Commission (the "SEC") under the 1933
Act, with respect to such sale of such shares of Common Stock, the Employee's
rights to purchase shares of Common Stock hereunder shall be subject to the
delivery to the Company of a letter, in form satisfactory to the Company's
counsel: (a) representing that the Employee intends to acquire such shares of
Common Stock for investment for his or her own account and without a view to the
resale or distribution thereof; and (b) agreeing that such shares of Common
Stock shall not be sold or transferred by him or her in the absence of an
effective registration statement filed with the SEC under the 1933 Act with
respect to such transfer or an opinion of counsel satisfactory to the Company
that such sale or transfer is not required to be registered under the 1933 Act
or any applicable state securities law.
8. Notice. Whenever any notice is required or permitted hereunder, such
notice must be in writing and personally delivered or sent by mail. Any notice
required or permitted to be delivered hereunder shall be deemed to be delivered
on the date which it is personally delivered, or, whether actually received or
not, on the third business day after it is deposited in the United States mail,
certified or registered, postage prepaid, addressed to the person who is to
receive it at the address which such person has theretofore specified by written
notice delivered in accordance herewith. The Company or the Employee may
change, by written notice to the other, the address previously specified for
receiving notices. Notices delivered to the Company shall be addressed as
follows: Orthodontic Centers of America, Inc., 3850 North Causeway Boulevard,
Suite 990, Metairie, Louisiana 70002, Attention: Chief Financial
3
<PAGE>
Officer. Notices to the Employee shall be hand delivered to the Participant on
the premises of the Company or its subsidiaries, or mailed to the last address
shown on the records of the Company.
9. Information Confidential. The Employee agrees that he or she will keep
confidential all information and knowledge that the Employee has relating to the
manner and amount of his or her participation in the Plan; provided, however,
that such information may be disclosed as required by law and may be given in
confidence to the Participant's spouse, tax and financial advisors, or to a
financial institution to the extent that such information is necessary to secure
a loan.
10. Governing Law. Except as is otherwise provided in the Plan, where
applicable, the provisions of this Agreement shall be governed by the internal
laws of the State of Florida, without regard to the principles of conflicts of
laws thereof.
11. Section 16. If the Employee is subject to the provisions of Section 16 of
the Securities Exchange Act of 1934, by virtue of his or her status as an
officer, director or ten percent (10%) or greater beneficial stockholder of the
Company, the Employee further affirms that he or she has not sold shares of
Common Stock during the six (6) month period immediately preceding the Effective
Date.
12. Miscellaneous. The Agreement contains the entire and only agreement
between the parties respecting the subject matter hereof, and any
representation, promise, or condition in connection therewith not incorporated
herein shall not be binding upon either party. The headings of the various
sections of this Agreement are for convenience of reference only, and shall not
modify, define, limit or expand the express provisions of this Agreement. This
Agreement shall be binding upon and inure to the benefit of any successor or
successors of the Company. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
and the Participant has set his or her hand hereto on the day and year first
above written.
ORTHODONTIC CENTERS OF AMERICA, INC.
By: /s/ Bartholomew F. Palmisano, Sr.
--------------------------------------
Name: Bartholomew F. Palmisano, Sr.
Title: Secretary
EMPLOYEE:
/s/ Geoffrey L. Faux
--------------------------------------
Geoffrey L. Faux
4
<PAGE>
EXHIBIT 10.22
ORTHODONTIC CENTERS OF AMERICA, INC.
1997 KEY EMPLOYEE STOCK PURCHASE PLAN
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT ("Agreement") made as of November 3, 1997 (the
"Effective Date"), between ORTHODONTIC CENTERS OF AMERICA, INC., a Delaware
corporation (the "Company"), and MICHAEL C. JOHNSEN (the "Employee").
RECITALS:
WHEREAS, the Company adopted the 1997 Key Employee Stock Purchase Plan (the
"Plan") by vote of the Board of Directors as of October 31, 1997; and
WHEREAS, the Board of Directors has determined that it is to the advantage
and best interest of the Company and its stockholders to permit the Employee to
participate in the Plan and to enter into this Agreement, to encourage the
Employee to own shares of the Company's Common Stock, $.01 par value per share
(the "Common Stock"), as an inducement for the Employee to remain in the service
of the Company and its subsidiary corporations, and as an incentive for
increased effort during such service;
NOW, THEREFORE, in consideration of the mutual covenants contained in this
contract, the parties agree as follows:
1. Participation in the Plan. The Company hereby permits the Employee to
participate, and the Employee hereby elects to participate, in the Plan, subject
to all of the terms, conditions and provisions of the Plan and this Agreement.
2. Manner of Participation.
(a) Amount of Common Stock. Pursuant to the Plan, the Employee shall be
permitted to purchase, in the Company's currently pending underwritten public
offering of Common Stock (the "Public Offering") or from the Company, as
determined by the Company, shares of Common Stock with an aggregate value of up
to $999,990.50 (the "Shares"), which amount shall not exceed five (5) times the
Employee's current annual base salary. Such purchase must occur, if at all, on
or within thirty (30) days following the Effective Date, or the rights granted
in Section 1 and this Section shall terminate.
(b) Purchase Price. The purchase price per Share hereunder (the "Purchase
Price") shall equal, with respect to purchases in the Public Offering, the
public offering price set forth on the cover page of the final prospectus filed
by the Company pursuant to Rule 424(b) under the Securities Act of 1933 (the
"1933 Act"), and thereafter, the reported last sale price per share of Common
Stock on the business day immediately preceding the date of purchase.
(c) Loan from the Company. The Company shall finance fifty percent (50%)
of the purchase price of the Shares through a loan from the Company. Such loan
shall be evidenced by a promissory note (the "Note"), in form and substance
acceptable to the Company, which indebtedness shall be a full recourse
obligation of the Employee, shall be secured by all of the Shares and shall bear
interest at the rate of six and one one-hundredth percent (6.01%) per
<PAGE>
annum. The outstanding principal and accrued interest under the Note will be
payable, in one lump-sum payment, on the earlier of (i) November 3, 2002, or
(ii) termination of the Employee's employment with the Company; provided,
however, that a proportionate amount (equal to the amount by which the number of
Shares sold or transferred bears to the total number of Shares purchased) of the
outstanding principal and accrued interest under the Note shall be immediately
due and payable upon the sale or transfer of any of the Shares.
(d) Risk-Sharing. For so long as the Employee shall remain an employee of
the Company, the following provisions shall apply with respect to the Shares:
(i) The Employee shall be solely responsible for one hundred percent
(100%) of any losses occurring with respect to the sale or transfer by the
Employee of any of the Shares prior to the third anniversary of the Effective
Date.
(ii) The Employee shall be entitled to fifty percent (50%) of any
gains (with the Company being entitled to the other fifty percent (50%) of any
such gains), occurring with respect to the sale or transfer by the Employee of
any of the Shares prior to the third anniversary of the Effective Date.
(iii) The Employee shall be entitled to one hundred percent (100%) of
any gains occurring with respect to the sale or transfer by the Employee of any
of the Shares on or following the third anniversary of the Effective Date, but
on or prior to the fifth anniversary of the Effective Date.
(iv) The principal amount of the Note shall be reduced by fifty
percent (50%) of any losses occurring with respect to the sale or transfer by
the Employee of any of the Shares on or following the third anniversary of the
Effective Date, but on or prior to the fifth anniversary of the Effective Date.
(e) Grant of Stock Options. Promptly following purchase of the Shares by
the Employee, the Company shall grant to the Employee, under the COmpany's 1994
Incentive Stock Plan (the "Option Plan"), options (the "Options") to purchase an
aggregate of three (3) times the number of Shares. The Options shall be granted
subject to the terms and conditions of the Option Plan. The Options shall become
exercisable beginning on the seventh anniversary of the Effective Date at an
exercise price equal to the Purchase Price. In the event, however, that on the
fifth anniversary of the Effective Date, the Employee is then employed by the
Company and has repaid in full all outstanding indebtedness and accrued interest
under the Note and under that certain Promissory Note, of even date herewith,
from the Employee to Dr. Gasper Lazzara, Jr. and Mr. Bartholomew F. Palmisano,
Sr., or has made such arrangements and executed such documentation, in form and
substance satisfactory to the Company, for the prompt repayment of such
indebtedness and accrued interest, then the exercise date of a number of Options
equal to three (3) times the number of Shares held by the Employee on such fifth
anniversary will be accelerated to such fifth anniversary.
3. Subject to Provision of Plan. This Agreement and the rights and benefits
provided for herein are granted pursuant to the Plan and are governed by and
subject to all the terms and
2
<PAGE>
conditions and provisions of the Plan, as it exists on the date of this
Agreement and as the Plan is amended from time to time. A copy of the Plan is
attached hereto as Exhibit A and made a part hereof as if fully set forth
herein. In the event of any conflict between the provisions of the Agreement and
the provisions of the Plan, the terms of the Plan shall control, except as
expressly stated otherwise herein. For purposes of this Agreement, the defined
terms in the Plan shall have the same meaning in this Agreement, except where
the context otherwise requires. By executing this Agreement, the Employee
affirms that he or she has carefully read this Agreement and the Plan and agrees
to be bound by the terms and conditions thereof.
4. Transferability. This Agreement and the rights and benefits hereunder are
not transferable or assignable.
5. Committee Authority. Any question concerning the interpretation of this
Agreement or the Plan, any adjustments required to be made under the Plan, and
any controversy which may arise under the Plan or this Agreement shall be
determined by the Compensation Committee (the "Committee") of the Company's
Board of Directors, or by such Board of Directors, in its sole discretion. Such
decision by the Committee or Board of Directors, as applicable, shall be final
and binding.
6. Status of Participant. The Employee shall not be deemed a stockholder of
the Company with respect to any of the shares of Common Stock subject to the
Plan or this Agreement, except to the extent that such shares shall have been
purchased and transferred to him or her.
7. Securities Act of 1933. Unless at the time of purchase of shares of Common
Stock pursuant to this Agreement, there is an effective registration statement
filed with the Securities and Exchange Commission (the "SEC") under the 1933
Act, with respect to such sale of such shares of Common Stock, the Employee's
rights to purchase shares of Common Stock hereunder shall be subject to the
delivery to the Company of a letter, in form satisfactory to the Company's
counsel: (a) representing that the Employee intends to acquire such shares of
Common Stock for investment for his or her own account and without a view to the
resale or distribution thereof; and (b) agreeing that such shares of Common
Stock shall not be sold or transferred by him or her in the absence of an
effective registration statement filed with the SEC under the 1933 Act with
respect to such transfer or an opinion of counsel satisfactory to the Company
that such sale or transfer is not required to be registered under the 1933 Act
or any applicable state securities law.
8. Notice. Whenever any notice is required or permitted hereunder, such
notice must be in writing and personally delivered or sent by mail. Any notice
required or permitted to be delivered hereunder shall be deemed to be delivered
on the date which it is personally delivered, or, whether actually received or
not, on the third business day after it is deposited in the United States mail,
certified or registered, postage prepaid, addressed to the person who is to
receive it at the address which such person has theretofore specified by written
notice delivered in accordance herewith. The Company or the Employee may
change, by written notice to the other, the address previously specified for
receiving notices. Notices delivered to the Company shall be addressed as
follows: Orthodontic Centers of America, Inc., 3850 North Causeway Boulevard,
Suite 990, Metairie, Louisiana 70002, Attention: Chief Financial Officer.
Notices to the Employee shall be hand delivered to the Participant on the
premises of the Company or its subsidiaries, or mailed to the last address shown
on the records of the Company.
3
<PAGE>
9. Information Confidential. The Employee agrees that he or she will keep
confidential all information and knowledge that the Employee has relating to the
manner and amount of his or her participation in the Plan; provided, however,
that such information may be disclosed as required by law and may be given in
confidence to the Participant's spouse, tax and financial advisors, or to a
financial institution to the extent that such information is necessary to secure
a loan.
10. Governing Law. Except as is otherwise provided in the Plan, where
applicable, the provisions of this Agreement shall be governed by the internal
laws of the State of Florida, without regard to the principles of conflicts of
laws thereof.
11. Section 16. If the Employee is subject to the provisions of Section 16 of
the Securities Exchange Act of 1934, by virtue of his or her status as an
officer, director or ten percent (10%) or greater beneficial stockholder of the
Company, the Employee further affirms that he or she has not sold shares of
Common Stock during the six (6) month period immediately preceding the Effective
Date.
12. Miscellaneous. The Agreement contains the entire and only agreement
between the parties respecting the subject matter hereof, and any
representation, promise, or condition in connection therewith not incorporated
herein shall not be binding upon either party. The headings of the various
sections of this Agreement are for convenience of reference only, and shall not
modify, define, limit or expand the express provisions of this Agreement. This
Agreement shall be binding upon and inure to the benefit of any successor or
successors of the Company. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
and the Participant has set his or her hand hereto on the day and year first
above written.
ORTHODONTIC CENTERS OF AMERICA, INC.
By: /s/ Bartholomew F. Palmisano, Sr.
--------------------------------------
Name: Bartholomew F. Palmisano, Sr.
Title: Secretary
EMPLOYEE:
/s/ Michael C. Johnsen
--------------------------------------
Michael C. Johnsen
5
<PAGE>
EXHIBIT 10.23
ORTHODONTIC CENTERS OF AMERICA, INC.
1997 KEY EMPLOYEE STOCK PURCHASE PLAN
PARTICIPATION AGREEMENT
-----------------------
THIS PARTICIPATION AGREEMENT ("Agreement") made as of November 3, 1997 (the
"Effective Date"), between ORTHODONTIC CENTERS OF AMERICA, INC., a Delaware
corporation (the "Company"), and PAUL J. SPANSEL (the "Employee").
RECITALS:
WHEREAS, the Company adopted the 1997 Key Employee Stock Purchase Plan (the
"Plan") by vote of the Board of Directors as of October 31, 1997; and
WHEREAS, the Board of Directors has determined that it is to the advantage and
best interest of the Company and its stockholders to permit the Employee to
participate in the Plan and to enter into this Agreement, to encourage the
Employee to own shares of the Company's Common Stock, $.01 par value per share
(the "Common Stock"), as an inducement for the Employee to remain in the service
of the Company and its subsidiary corporations, and as an incentive for
increased effort during such service;
NOW, THEREFORE, in consideration of the mutual covenants contained in this
contract, the parties agree as follows:
1. Participation in the Plan. The Company hereby permits the Employee to
participate, and the Employee hereby elects to participate, in the Plan, subject
to all of the terms, conditions and provisions of the Plan and this Agreement.
2. Manner of Participation.
(a) Amount of Common Stock. Pursuant to the Plan, the Employee shall be
permitted to purchase, in the Company's currently pending underwritten public
offering of Common Stock (the "Public Offering") or from the Company, as
determined by the Company, shares of Common Stock with an aggregate value of up
to $799,992.50 (the "Shares"), which amount shall not exceed five (5) times the
Employee's current annual base salary. Such purchase must occur, if at all, on
or within thirty (30) days following the Effective Date, or the rights granted
in Section 1 and this Section shall terminate.
(b) Purchase Price. The purchase price per Share hereunder (the
"Purchase Price") shall equal, with respect to purchases in the Public Offering,
the public offering price set forth on the cover page of the final prospectus
filed by the Company pursuant to Rule 424(b) under the Securities Act of 1933
(the "1933 Act"), and thereafter, the reported last sale price per share of
Common Stock on the business day immediately preceding the date of purchase.
(c) Loan from the Company. The Company shall finance fifty percent (50%)
of the purchase price of the Shares through a loan from the Company. Such loan
shall be evidenced by a promissory note (the "Note"), in form and substance
acceptable to the Company, which indebtedness shall be a full recourse
obligation of the Employee, shall be secured by all of the Shares and shall bear
interest at the rate of six and one one-hundredth percent (6.01%) per
<PAGE>
annum. The outstanding principal and accrued interest under the Note will be
payable, in one lump-sum payment, on the earlier of (i) November 3, 2002, or
(ii) termination of the Employee's employment with the Company; provided,
however, that a proportionate amount (equal to the amount by which the number of
Shares sold or transferred bears to the total number of Shares purchased) of the
outstanding principal and accrued interest under the Note shall be immediately
due and payable upon the sale or transfer of any of the Shares.
(d) Risk-Sharing. For so long as the Employee shall remain an employee
of the Company, the following provisions shall apply with respect to the Shares:
(i) The Employee shall be solely responsible for one hundred percent
(100%) of any losses occurring with respect to the sale or transfer by the
Employee of any of the Shares prior to the third anniversary of the Effective
Date.
(ii) The Employee shall be entitled to fifty percent (50%) of any
gains (with the Company being entitled to the other fifty percent (50%) of any
such gains), occurring with respect to the sale or transfer by the Employee of
any of the Shares prior to the third anniversary of the Effective Date.
(iii) The Employee shall be entitled to one hundred percent (100%) of
any gains occurring with respect to the sale or transfer by the Employee of any
of the Shares on or following the third anniversary of the Effective Date, but
on or prior to the fifth anniversary of the Effective Date.
(iv) The principal amount of the Note shall be reduced by fifty
percent (50%) of any losses occurring with respect to the sale or transfer by
the Employee of any of the Shares on or following the third anniversary of the
Effective Date, but on or prior to the fifth anniversary of the Effective Date.
(e) Grant of Stock Options. Promptly following purchase of the Shares by
the Employee, the Company shall grant to the Employee, under the Company's 1994
Incentive Stock Plan (the "Option Plan"), options (the "Options") to purchase an
aggregate of three (3) times the number of Shares. The Options shall be granted
subject to the terms and conditions of the Option Plan. The Options shall become
exercisable beginning on the seventh anniversary of the Effective Date at an
exercise price equal to the Purchase Price. In the event, however, that on the
fifth anniversary of the Effective Date, the Employee is then employed by the
Company and has repaid in full all outstanding indebtedness and accrued interest
under the Note and under that certain Promissory Note, of even date herewith,
from the Employee to Dr. Gasper Lazzara, Jr. and Mr. Bartholomew F. Palmisano,
Sr., or has made such arrangements and executed such documentation, in form and
substance satisfactory to the Company, for the prompt repayment of such
indebtedness and accrued interest, then the exercise date of a number of Options
equal to three (3) times the number of Shares held by the Employee on such fifth
anniversary will be accelerated to such fifth anniversary.
3. Subject to Provisions of Plan. This Agreement and the rights and benefits
provided for herein are granted pursuant to the Plan and are governed by and
subject to all the terms and
<PAGE>
conditions and provisions of the Plan, as it exists on the date of this
Agreement and as the Plan is amended from time to time. A copy of the Plan is
attached hereto as Exhibit A and made a part hereof as if fully set forth
herein. In the event of any conflict between the provisions of the Agreement and
the provisions of the Plan, the terms of the Plan shall control, except as
expressly stated otherwise herein. For purposes of this Agreement, the defined
terms in the Plan shall have the same meaning in this Agreement, except where
the context otherwise requires. By executing this Agreement, the Employee
affirms that he or she has carefully read this Agreement and the Plan and agrees
to be bound by the terms and conditions thereof.
4. Transferability. This Agreement and the rights and benefits hereunder are
not transferable or assignable.
5. Committee Authority. Any question concerning the interpretation of this
Agreement or the Plan, any adjustments required to be made under the Plan, and
any controversy which may arise under the Plan or this Agreement shall be
determined by the Compensation Committee (the "Committee") of the Company's
Board of Directors, or such Board of Directors, in its sole discretion. Such
decision by the Committee or Board of Directors, as applicable, shall be final
and binding.
6. Status of Participant. The Employee shall not be deemed a stockholder of
the Company with respect to any of the shares of Common Stock subject to the
Plan or this Agreement, except to the extent that such shares shall have been
purchased and transferred to him or her.
7. Securities Act of 1933. Unless at the time of purchase of shares of Common
Stock pursuant to this Agreement, there is an effective registration statement
filed with the Securities and Exchange Commission (the "SEC") under the 1933
Act, with respect to such sale of such shares of Common Stock, the Employee's
rights to purchase shares of Common Stock hereunder shall be subject to the
delivery to the Company of a letter, in form satisfactory to the Company's
counsel: (a) representing that the Employee intends to acquire such shares of
Common Stock for investment for his or her own account and without a view to the
resale or distribution thereof; and (b) agreeing that such shares of Common
Stock shall not be sold or transferred by him or her in the absence of an
effective registration statement filed with the SEC under the 1933 Act with
respect to such transfer or an opinion of counsel satisfactory to the Company
that such sale or transfer is not required to be registered under the 1933 Act
or any applicable state securities law.
8. Notice. Whenever any notice is required or permitted hereunder, such notice
must be in writing and personally delivered or sent by mail. Any notice
required or permitted to be delivered hereunder shall be deemed to be delivered
on the date which it is personally delivered, or, whether actually received or
not, on the third business day after it is deposited in the United States mail,
certified or registered, postage prepaid, addressed to the person who is to
receive it at the address which such person has theretofore specified by written
notice delivered in accordance herewith. The Company or the Employee may change,
by written notice to the other, the address previously specified for receiving
notices. Notices delivered to the Company shall be addressed as follows:
Orthodontic Centers of America, Inc., 3850 North Causeway Boulevard, Suite 990,
Metairie, Louisiana 70002, Attention: Chief Financial Officer. Notices to the
Employee shall be hand delivered to the Participant on the premises of the
Company or its subsidiaries, or mailed to the last address shown on the records
of the Company.
<PAGE>
9. Information Confidential. The Employee agrees that he or she will keep
confidential all information and knowledge that the Employee has relating to the
manner and amount of his or her participation in the Plan; provided, however,
that such information may be disclosed as required by law and may be given in
confidence to the Participant's spouse, tax and financial advisors, or to a
financial institution to the extent that such information is necessary to secure
a loan.
10. Governing Law. Except as is otherwise provided in the Plan, where
applicable, the provisions of this Agreement shall be governed by the internal
laws of the State of Florida, without regard to the principles of conflicts of
laws thereof.
11. Section 16. If the Employee is subject to the provisions of Section 16 of
the Securities Exchange Act of 1934, by virtue of his or her status as an
officer, director or ten percent (10%) or greater beneficial stockholder of the
Company, the Employee further affirms that he or she has not sold shares of
Common Stock during the six (6) month period immediately preceding the Effective
Date.
12. Miscellaneous. The Agreement contains the entire and only agreement
between the parties respecting the subject matter hereof, and any
representation, promise, or condition in connection therewith not incorporated
herein shall not be binding upon either party. The headings of the various
sections of this Agreement are for convenience of reference only, and shall not
modify, define, limit or expand the express provisions of this Agreement. This
Agreement shall be binding upon and inure to the benefit of any successor or
successors of the Company. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and
the Participant has set his or her hand hereto on the day and year first above
written.
ORTHODONTIC CENTERS OF AMERICA, INC.
By: /s/ Bartholomew F. Palmisano, Sr.
------------------------------------
Name: Bartholomew F. Palmisano, Sr.
Title: Secretary
EMPLOYEE:
/s/ Paul J. Spansel
------------------------------------
Paul J. Spansel
<PAGE>
EXHIBIT 10.24
ORTHODONTIC CENTERS OF AMERICA, INC.
1997 KEY EMPLOYEE STOCK PURCHASE PLAN
PARTICIPATION AGREEMENT
-----------------------
THIS PARTICIPATION AGREEMENT ("Agreement") made as of November 3, 1997 (the
"Effective Date"), between ORTHODONTIC CENTERS OF AMERICA, INC., a Delaware
corporation (the "Company"), and ANTHONY J. PATERNOSTRO (the "Employee").
RECITALS:
WHEREAS, the Company adopted the 1997 Key Employee Stock Purchase Plan (the
"Plan") by vote of the Board of Directors as of October 31, 1997; and
WHEREAS, the Board of Directors has determined that it is to the advantage and
best interest of the Company and its stockholders to permit the Employee to
participate in the Plan and to enter into this Agreement, to encourage the
Employee to own shares of the Company's Common Stock, $.01 par value per share
(the "Common Stock"), as an inducement for the Employee to remain in the service
of the Company and its subsidiary corporations, and as an incentive for
increased effort during such service;
NOW, THEREFORE, in consideration of the mutual covenants contained in this
contract, the parties agree as follows:
1. Participation in the Plan. The Company hereby permits the Employee to
participate, and the Employee hereby elects to participate, in the Plan, subject
to all of the terms, conditions and provisions of the Plan and this Agreement.
2. Manner of Participation.
(a) Amount of Common Stock. Pursuant to the Plan, the Employee shall be
permitted to purchase, in the Company's currently pending underwritten public
offering of Common Stock (the "Public Offering") or from the Company, as
determined by the Company, shares of Common Stock with an aggregate value of up
to $499,999.75 (the "Shares"), which amount shall not exceed five (5) times the
Employee's current annual base salary. Such purchase must occur, if at all, on
or within thirty (30) days following the Effective Date, or the rights granted
in Section 1 and this Section shall terminate.
(b) Purchase Price. The purchase price per Share hereunder (the
"Purchase Price") shall equal, with respect to purchases in the Public Offering,
the public offering price set forth on the cover page of the final prospectus
filed by the Company pursuant to Rule 424(b) under the Securities Act of 1933
(the "1933 Act"), and thereafter, the reported last sale price per share of
Common Stock on the business day immediately preceding the date of purchase.
(c) Loan from the Company. The Company shall finance fifty percent (50%)
of the purchase price of the Shares through a loan from the Company. Such loan
shall be evidenced by a promissory note (the "Note"), in form and substance
acceptable to the Company, which indebtedness shall be a full recourse
obligation of the Employee, shall be secured by all of the Shares and shall bear
interest at the rate of six and one one-hundredth percent (6.01%) per
<PAGE>
annum. The outstanding principal and accrued interest under the Note will be
payable, in one lump-sum payment, on the earlier of (i) November 3, 2002, or
(ii) termination of the Employee's employment with the Company; provided,
however, that a proportionate amount (equal to the amount by which the number of
Shares sold or transferred bears to the total number of Shares purchased) of the
outstanding principal and accrued interest under the Note shall be immediately
due and payable upon the sale or transfer of any of the Shares.
(d) Risk-Sharing. For so long as the Employee shall remain an employee
of the Company, the following provisions shall apply with respect to the Shares:
(i) The Employee shall be solely responsible for one hundred percent
(100%) of any losses occurring with respect to the sale or transfer by the
Employee of any of the Shares prior to the third anniversary of the Effective
Date.
(ii) The Employee shall be entitled to fifty percent (50%) of any
gains (with the Company being entitled to the other fifty percent (50%) of any
such gains), occurring with respect to the sale or transfer by the Employee of
any of the Shares prior to the third anniversary of the Effective Date.
(iii) The Employee shall be entitled to one hundred percent (100%) of
any gains occurring with respect to the sale or transfer by the Employee of any
of the Shares on or following the third anniversary of the Effective Date, but
on or prior to the fifth anniversary of the Effective Date.
(iv) The principal amount of the Note shall be reduced by fifty percent
(50%) of any losses occurring with respect to the sale or transfer by the
Employee of any of the Shares on or following the third anniversary of the
Effective Date, but on or prior to the fifth anniversary of the Effective Date.
(e) Grant of Stock Options. Promptly following purchase of the Shares by
the Employee, the Company shall grant to the Employee, under the Company's 1994
Incentive Stock Plan (the "Option Plan"), options (the "Options") to purchase an
aggregate of three (3) times the number of Shares. The Options shall be granted
subject to the terms and conditions of the Option Plan. The Options shall become
exercisable beginning on the seventh anniversary of the Effective Date at an
exercise price equal to the Purchase Price. In the event, however, that on the
fifth anniversary of the Effective Date, the Employee is then employed by the
Company and has repaid in full all outstanding indebtedness and accrued interest
under the Note and under that certain Promissory Note, of even date herewith,
from the Employee to Dr. Gasper Lazzara, Jr. and Mr. Bartholomew F. Palmisano,
Sr., or has made arrangements and executed such documentation, in form and
substance satisfactory to the Company, for the prompt repayment of such
indebtedness and accrued interest, then the exercise date of a number of Options
equal to three (3) times the number of Shares held by the Employee on such fifth
anniversary will be accelerated to such fifth anniversary.
3. Subject to Provisions of Plan. This Agreement and the rights and benefits
provided for herein are granted pursuant to the Plan and are governed by and
subject to all the terms and
2
<PAGE>
conditions and provisions of the Plan, as it exists on the date of this
Agreement and as the Plan is amended from time to time. A copy of the Plan is
attached hereto as Exhibit A and made a part hereof as if fully set forth
herein. In the event of any conflict between the provisions of the Agreement and
the provisions of the Plan, the terms of the Plan shall control, except as
expressly stated otherwise herein. For purposes of this Agreement, the defined
terms in the Plan shall have the same meaning in this Agreement, except where
the context otherwise requires. By executing this Agreement, the Employee
affirms that he or she has carefully read this Agreement and the Plan and agrees
to be bound by the terms and conditions thereof.
4. Transferability. This Agreement and the rights and benefits hereunder are
not transferable or assignable.
5. Committee Authority. Any question concerning the interpretation of this
Agreement or the Plan, any adjustments required to be made under the Plan, and
any controversy which may arise under the Plan or this Agreement shall be
determined by the Compensation Committee (the "Committee") of the Company's
Board of Directors, or by such Board of Directors, in its sole discretion. Such
decision by the Committee or Board of Directors, as applicable, shall be final
and binding.
6. Status of Participant. The Employee shall not be deemed a stockholder of
the Company with respect to any of the shares of Common Stock subject to the
Plan or this Agreement, except to the extent that such shares shall have been
purchased and transferred to him or her.
7. Securities Act of 1933. Unless at the time of purchase of shares of Common
Stock pursuant to this Agreement, there is an effective registration statement
filed with the Securities and Exchange Commission (the "SEC") under the 1933
Act, with respect to such sale of such shares of Common Stock, the Employee's
rights to purchase shares of Common Stock hereunder shall be subject to the
delivery to the Company of a letter, in form satisfactory to the Company's
counsel: (a) representing that the Employee intends to acquire such shares of
Common Stock for investment for his or her own account and without a view to the
resale or distribution thereof; and (b) agreeing that such shares of Common
Stock shall not be sold or transferred by him or her in the absence of an
effective registration statement filed with the SEC under the 1933 Act with
respect to such transfer or an opinion of counsel satisfactory to the Company
that such sale or transfer is not required to be registered under the 1933 Act
or any applicable state securities law.
8. Notice. Whenever any notice is required or permitted hereunder, such notice
must be in writing and personally delivered or sent by mail. Any notice
required or permitted to be delivered hereunder shall be deemed to be delivered
on the date which it is personally delivered, or, whether actually received or
not, on the third business day after it is deposited in the United States mail,
certified or registered, postage prepaid, addressed to the person who is to
receive it at the address which such person has theretofore specified by written
notice delivered in accordance herewith. The Company or the Employee may change,
by written notice to the other, the address previously specified for receiving
notices. Notices delivered to the Company shall be addressed as follows:
Orthodontic Centers of America, Inc., 3850 North Causeway Boulevard, Suite 990,
Metairie, Louisiana 70002, Attention: Chief Financial Officer. Notices to the
Employee shall be hand delivered to the Participant on the premises of the
Company or its subsidiaries, or mailed to the last address shown on the records
of the Company.
3
<PAGE>
9. Information Confidential. The Employee agrees that he or she will keep
confidential all information and knowledge that the Employee has relating to the
manner and amount of his or her participation in the Plan; provided, however,
that such information may be disclosed as required by law and may be given in
confidence to the Participant's spouse, tax and financial advisors, or to a
financial institution to the extent that such information is necessary to secure
a loan.
10. Governing Law. Except as is otherwise provided in the Plan, where
applicable, the provisions of this Agreement shall be governed by the internal
laws of the State of Florida, without regard to the principles of conflicts of
laws thereof.
11. Section 16. If the Employee is subject to the provisions of Section 16 of
the Securities Exchange Act of 1934, by virtue of his or her status as an
officer, director or ten percent (10%) or greater beneficial stockholder of the
Company, the Employee further affirms that he or she has not sold shares of
Common Stock during the six (6) month period immediately preceding the Effective
Date.
12. Miscellaneous. The Agreement contains the entire and only agreement
between the parties respecting the subject matter hereof, and any
representation, promise, or condition in connection therewith not incorporated
herein shall not be binding upon either party. The headings of the various
sections of this Agreement are for convenience of reference only, and shall not
modify, define, limit or expand the express provisions of this Agreement. This
Agreement shall be binding upon and inure to the benefit of any successor or
successors of the Company. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and
the Participant has set his or her hand hereto on the day and year first above
written.
ORTHODONTIC CENTERS OF AMERICA, INC.
By: /s/ Bartholomew F. Palmisano, Sr.
-----------------------------------
Name: Bartholomew F. Palmisano, Sr.
Title: Secretary
EMPLOYEE:
/s/ Anthony J. Paternostro
----------------------------------
Anthony J. Paternostro
5
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation
---- ----------------------
Orthodontic Centers of Alabama, Inc. Delaware
Orthodontic Centers of Arizona, Inc. Delaware
Orthodontic Centers of California, Inc. Delaware
Orthodontic Centers of Colorado, Inc. Delaware
Orthodontic Centers of Connecticut, Inc. Delaware
Orthodontic Centers of Florida, Inc. Delaware
Orthodontic Centers of Georgia, Inc. Delaware
Orthodontic Centers of Illinois, Inc. Delaware
Orthodontic Centers of Indiana, Inc. Delaware
Orthodontic Centers of Kentucky, Inc. Delaware
Orthodontic Centers of Louisiana, Inc. Delaware
Orthodontic Centers of Maryland, Inc. Delaware
Orthodontic Centers of Massachusetts, Inc. Delaware
Orthodontic Centers of Michigan, Inc. Delaware
Orthodontic Centers of Minnesota, Inc. Delaware
Orthodontic Centers of Mississippi, Inc. Delaware
Orthodontic Centers of Missouri, Inc. Delaware
Orthodontic Centers of Nevada, Inc. Nevada
Orthodontic Centers of New Jersey, Inc. Delaware
Orthodontic Centers of New York, Inc. Delaware
Orthodontic Centers of North Carolina, Inc. Delaware
Orthodontic Centers of North Dakota, Inc. Delaware
Orthodontic Centers of Ohio, Inc. Delaware
Orthodontic Centers of Oklahoma, Inc. Delaware
Orthodontic Centers of Oregon, Inc. Delaware
Orthodontic Centers of Pennsylvania, Inc. Delaware
Orthodontic Centers of Rhode Island, Inc. Delaware
Orthodontic Centers of South Carolina Inc. Delaware
Orthodontic Centers of Tennessee, Inc. Delaware
Orthodontic Centers of Texas, Inc. Delaware
Orthodontic Centers of Utah, Inc. Delaware
Orthodontic Centers of Virginia, Inc. Delaware
Orthodontic Centers of Washington, Inc. Delaware
Orthodontic Centers of West Virginia, Inc. Delaware
Orthodontic Centers of Wisconsin, Inc. Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-02792) of Orthodontic Centers of America, Inc. and in the
Registration Statements (Form S-4 No. 333-05977 and Form S-4 No. 333-42655) and
related Prospectuses of our report dated March 23, 1998, with respect to the
consolidated financial statements of Orthodontic Centers of America, Inc.
included in this Annual Report (Form 10-K) for the year ended December 31, 1997.
Ernst & Young LLP
New Orleans, Louisiana
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,865
<SECURITIES> 20,861
<RECEIVABLES> 51,153
<ALLOWANCES> 5,270
<INVENTORY> 0
<CURRENT-ASSETS> 84,897
<PP&E> 43,574
<DEPRECIATION> 7,970
<TOTAL-ASSETS> 228,975
<CURRENT-LIABILITIES> 16,654
<BONDS> 0
0
0
<COMMON> 474
<OTHER-SE> 190,266
<TOTAL-LIABILITY-AND-EQUITY> 228,975
<SALES> 0
<TOTAL-REVENUES> 117,326
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<TOTAL-COSTS> 81,368
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<LOSS-PROVISION> 1,851
<INTEREST-EXPENSE> (1,143)
<INCOME-PRETAX> 37,101
<INCOME-TAX> 14,469
<INCOME-CONTINUING> 22,632
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<EPS-PRIMARY> .51
<EPS-DILUTED> .50
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