<PAGE> 1
As Filed with the Securities and Exchange Commission on October 10, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ORTHODONTIC CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 72-1278948
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
3850 N. CAUSEWAY BOULEVARD, SUITE 990, METAIRIE, LOUISIANA 70002
(504) 834-4392
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
BARTHOLOMEW F. PALMISANO, SR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ORTHODONTIC CENTERS OF AMERICA, INC.
3850 N. CAUSEWAY BOULEVARD, SUITE 990,
METAIRIE, LOUISIANA 70002
(504) 834-4392
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With copies to:
<TABLE>
<S> <C>
J. CHASE COLE, ESQ. DONALD J. MURRAY, ESQ.
WALLER LANSDEN DORTCH & DAVIS, PLLC DEWEY BALLANTINE LLP
511 UNION STREET, SUITE 2100 1301 AVENUE OF THE AMERICAS
NASHVILLE, TENNESSEE 37219 NEW YORK, NEW YORK 10019
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF PROPOSED AMOUNT OFFERING PRICE MAXIMUM OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED PER SHARE PRICE AGGREGATE FEE
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<S> <C> <C> <C> <C>
Common stock, $.01 par value............. 4,396,105(1) $28.125(2) $123,640,454(2) $32,642
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</TABLE>
(1) Includes up to 573,405 shares subject to the underwriters' over-allotment
option.
(2) Estimated in accordance with Rule 457(c) based on the average of the high
and low sales price as reported on the New York Stock Exchange on October 6,
2000 solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell these securities and is not soliciting
an offer to buy these securities in any state where the offer or sale is
not permitted.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION OCTOBER 10, 2000
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3,822,700 SHARES
[OCA LOGO]
COMMON STOCK
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We are offering 1,200,000 shares of our common stock and certain of our
stockholders are offering 2,622,700 shares of our common stock. We will not
receive any of the proceeds from the sale of shares by the selling stockholders.
Our common stock is listed on the New York Stock Exchange under the ticker
symbol "OCA." On October 6, 2000, the last reported sale price of our common
stock on the New York Stock Exchange was $29.1875 per share.
BEFORE BUYING ANY OF THESE SHARES, YOU SHOULD CAREFULLY CONSIDER THE RISK
FACTORS DESCRIBED IN "RISK FACTORS," WHICH BEGINS ON PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SECURITIES TO BE ISSUED UNDER THIS
PROSPECTUS OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price $ $
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Underwriting discounts and commissions $ $
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Proceeds, before expenses, to us $ $
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Proceeds, before expenses, to the selling stockholders $ $
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</TABLE>
The underwriters may also purchase up to 286,703 shares of our common stock from
us and 286,702 shares of our common stock from a selling stockholder at the
offering price, less the underwriting discounts and commissions, within 30 days
after the date of this prospectus. The underwriters may exercise this option
only to cover over-allotments, if any. If the underwriters exercise this option
in full, the total underwriting discounts and commissions will be $ , our
total proceeds, before expenses, will be $ , and the selling stockholders'
total proceeds, before expenses, will be $ .
The underwriters are offering the shares of our common stock as described in
"Underwriting." Delivery of the shares will be made on or about ,
2000.
UBS WARBURG LLC
BANC OF AMERICA SECURITIES LLC
DEUTSCHE BANC ALEX. BROWN
U.S. BANCORP PIPER JAFFRAY
RAYMOND JAMES & ASSOCIATES, INC.
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3
[INSIDE FRONT COVER OF PROSPECTUS]
[OCA logo in the top center of the page, and picture of four people jumping,
with electronic display reading "305,146 SMILES"]
[INSIDE FRONT COVER OF PROSPECTUS, FOLD OUT, LEFT PANEL]
[Bar graph showing patient contract balances of $72.2 million as of December 31,
1995, $115.7 million as of December 31, 1996, $181.2 million as of December 31,
1997, $289.7 million as of December 31, 1998, $385.4 million as of December 31,
1999 and $425.7 million as of June 30, 2000]
[Bar graph showing case starts of 28,742 for 1995, 44,910 for 1996, 70,611 for
1997, 95,377 for 1998, 126,307 for 1999, 57,613 for the first six months of 1999
and 73,619 for the first six months of 2000]
[Bar graph showing earnings per share of $0.23 for 1995, $0.33 for 1996, $0.50
for 1997, $0.70 for 1998, $0.96 for 1999, $0.45 for the first six months of 1999
and $0.60 for the first six months of 2000]
[Bar graph showing net revenue of $41.6 million for 1995, $71.3 million for
1996, $117.3 million for 1997, $171.3 million for 1998, $226.3 million for 1999,
$104.4 million for the first six months of 1999 and $137.5 million for the first
six months of 2000]
[INSIDE FRONT COVER OF PROSPECTUS, FOLD OUT, RIGHT PANEL]
[Picture of affiliated orthodontist and patient, with electronic display reading
"566 ORTHODONTIC CENTERS"]
[INSIDE BACK COVER OF PROSPECTUS]
[Picture of orthodontic center located in shopping center, with electronic
display reading "153 LOCAL MEDIA MARKETS"]
<PAGE> 4
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus summary..................... 3
The offering........................... 5
Summary financial and operating data... 6
Risk factors........................... 8
Forward-looking information............ 13
Use of proceeds........................ 14
Price range of common stock............ 15
Dividend policy........................ 15
Capitalization......................... 16
Selected financial data................ 17
Management's discussion and analysis of
financial condition and results of
operations........................... 18
Business............................... 28
Management............................. 43
Principal and selling stockholders..... 45
Underwriting........................... 47
Where you can find more information.... 49
Incorporation of information we file
with the SEC......................... 50
Legal matters.......................... 51
Experts................................ 51
Index to consolidated financial
statements........................... F-1
</TABLE>
<PAGE> 5
Prospectus summary
This summary highlights information contained in other parts of this prospectus.
Because it is a summary, it does not contain all of the information that you
should consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk factors" and our consolidated financial
statements and related notes, and the documents incorporated by reference in
this prospectus, before making an investment decision. Unless otherwise stated
in this prospectus, all information contained in this prospectus assumes no
exercise of the over-allotment option granted to the underwriters.
ORTHODONTIC CENTERS OF AMERICA, INC.
We are the leading provider of integrated business services to orthodontists.
Since 1985, we have executed a retail-oriented approach to developing
orthodontic practices, which we believe has resulted in significant increases in
productivity and profitability for our affiliated orthodontists. As of June 30,
2000, we were affiliated with 387 orthodontists practicing in 566 orthodontic
centers located throughout the United States and parts of Japan, Mexico and
Puerto Rico.
During 1999, we succeeded in growing our net revenue 32.1% and our net income
35.6%, as compared to 1998. During the first six months of 2000, our net revenue
increased 31.7% to $137.5 million and our net income increased 39.5% to $29.3
million, as compared to the first six months of 1999. As of June 30, 2000, our
affiliated orthodontists were treating a total of 305,146 patients, with total
patient contract balances for orthodontic services performed or to be performed
of $425.7 million.
The U.S. orthodontic industry generates about $4.0 billion in annual gross
revenues, with the average orthodontic practice generating gross revenues of
about $600,000 during 1998, according to a biannual study of the U.S.
orthodontic industry. Orthodontics is generally an elective procedure, with
about 75% of payments for orthodontic services made directly by the patient and
standard dental insurance covering about 25%. Managed care represents a small
percentage of revenues generated in the orthodontic industry.
OUR BUSINESS
We provide our affiliated orthodontists with business, operational and marketing
expertise that enables them to realize significantly greater productivity,
practice revenue and patient volume, while maintaining high quality orthodontic
care. Our services include:
+ developing and implementing aggressive marketing plans for our orthodontic
centers, using television, radio and print advertising and internal marketing
programs to increase patient volume;
+ implementing our proprietary operating systems and innovative office designs
to increase productivity;
+ integrating our proprietary, user-friendly management information systems to
provide timely information and to enhance operational and accounting
controls; and
+ combining our proprietary online ordering system and our bulk purchasing
power to reduce orthodontic supply costs.
3
<PAGE> 6
OUR OPERATING STRATEGY
We believe we add value to our affiliated orthodontists' practices by providing
superior and innovative services that are designed to enhance productivity and
increase profitability. Key elements of our operating strategy include:
+ emphasizing high quality patient care;
+ stimulating demand for orthodontic services through marketing and
advertising;
+ increasing market penetration with competitive patient fees and convenient
payment plans;
+ achieving operating efficiencies through proprietary operating systems and
innovative office designs; and
+ providing superior service through management information systems.
We develop and implement marketing plans for our orthodontic centers, using
television, radio and print advertising and internal marketing promotions.
During 1999, we spent an average of $64,426 per affiliated orthodontist on
direct marketing costs and advertising. In contrast, traditional orthodontists,
who rely primarily on referrals from dentists and patients, spent an average of
$4,400 on marketing and advertising in 1998.
We believe our marketing and advertising strategy has allowed our affiliated
orthodontists to generate significantly greater patient volume than traditional
orthodontists. Each of our affiliated orthodontists who had been affiliated with
us for at least one year generated an average of 513 new case starts during
1999, as compared to the 1998 national average of 200 new case starts per
orthodontist. During 1999, our affiliated orthodontists generated a total of
126,307 new case starts, representing patient contract balances for services
performed or to be performed of $369.1 million at December 31, 1999.
Our operating systems and office designs, along with the efficient use of an
average of five orthodontic assistants per orthodontic center, have enabled our
affiliated orthodontists to treat more patients per day as compared to
traditional orthodontists. Our innovative office designs permit an affiliated
orthodontist to treat patients without moving from room to room. Our proprietary
patient scheduling system groups appointments by the type of procedure and
dedicates certain days exclusively to new patients. During 1999, our affiliated
orthodontists practicing in orthodontic centers open throughout 1998 treated an
average of 78 patients per operating day. In comparison, orthodontists in the
United States treated an average of 45 patients per operating day in 1998.
OUR GROWTH STRATEGY
Our growth strategy focuses on enabling our affiliated orthodontists to grow
their practices and enhance their productivity, and on affiliating with
additional orthodontists in the United States and abroad. Key elements of our
growth strategy include:
+ enhancing the productivity and increasing the profitability of existing
centers through increased patient treatment intervals, the use of general
dentists as assistants, internal marketing and other programs;
+ affiliating with additional orthodontists and acquiring and developing
additional orthodontic centers;
+ establishing brand identity for our "Orthodontic Centers of America" network
of affiliated orthodontists, 1-800-4BRACES toll-free telephone number and
www.4braces.com Internet website;
+ continuing to expand in Japan, Mexico and other international markets; and
+ capitalizing on complementary products and services, such as teeth whitening
and non-braces treatment for adults.
4
<PAGE> 7
The offering
Common stock we are offering............ 1,200,000 shares
Common stock the selling stockholders
are offering............................ 2,622,700 shares
Common stock to be outstanding after the
offering................................ 49,968,701 shares
New York Stock Exchange symbol.......... OCA
Use of proceeds......................... We intend to use our net proceeds
from this offering to repay
outstanding indebtedness under our
revolving line of credit. We will
not receive any proceeds from the
sale of common stock by the selling
stockholders.
Risk factors............................ Investing in our common stock
involves significant risks. See
"Risk factors."
The number of shares being offered assumes no exercise of the underwriters'
over-allotment option.
The number of shares of our common stock to be outstanding after the offering is
based on the number of shares outstanding as of September 30, 2000 and does not
include 3,892,498 shares of our common stock issuable upon the exercise of stock
options granted under our three stock option plans as of September 30, 2000,
with a weighted average exercise price of $10.47 per share.
---------------------
Our corporate headquarters are located at 3850 N. Causeway Boulevard, Suite 990,
Metairie, Louisiana 70002, telephone number (504) 834-4392, and at 5000 Sawgrass
Village, Suite 25, Ponte Vedra Beach, Florida 32082, telephone number (904)
280-4500. We were incorporated in Delaware in 1994.
5
<PAGE> 8
Summary financial and operating data
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -------------------
STATEMENT OF INCOME 1995 1996 1997 1998 1999 1999 2000
DATA: (in thousands, except percentage and per share data)
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<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue................. $41,556 $ 71,273 $117,326 $171,298 $226,290 $104,449 $137,532
------- -------- -------- -------- -------- -------- --------
Direct expenses:
Employee costs............ 11,784 19,895 33,429 46,878 61,224 28,264 36,579
Orthodontic supplies...... 3,167 5,428 8,789 13,287 17,136 7,846 10,113
Rent...................... 3,504 6,114 10,299 14,128 18,624 8,551 11,066
Marketing and
advertising............. 4,323 6,644 9,855 15,491 16,874 7,679 10,172
------- -------- -------- -------- -------- -------- --------
Total direct expenses....... 22,778 38,081 62,372 89,784 113,858 52,340 67,930
General and
administrative............ 5,108 8,703 13,356 18,104 23,270 10,718 14,152
Depreciation and
amortization.............. 1,448 2,814 5,640 9,124 12,238 5,802 6,780
------- -------- -------- -------- -------- -------- --------
Operating profit............ 12,222 21,675 35,958 54,286 76,924 35,589 48,670
Interest (expense) income,
net....................... 1,995 1,935 1,143 280 (2,204) (762) (1,607)
------- -------- -------- -------- -------- -------- --------
Income before income
taxes..................... 14,217 23,610 37,101 54,566 74,720 34,827 47,063
Provision for income
taxes..................... 5,182 9,208 14,469 20,753 28,206 13,147 17,766
------- -------- -------- -------- -------- -------- --------
Income before cumulative
effect of change in
accounting principle...... 9,035 14,402 22,632 33,813 46,514 21,680 29,297
Cumulative effect of a
change in accounting
principle, net of income
tax....................... -- -- -- -- 678 678 --
------- -------- -------- -------- -------- -------- --------
Net income.................. $ 9,035 $ 14,402 $ 22,632 $ 33,813 $ 45,836 $ 21,002 $ 29,297
======= ======== ======== ======== ======== ======== ========
Net income per share before
cumulative effect of a
change in accounting
principle(1).............. $ .23 $ .33 $ .50 $ .70 $ .96 $ .45 $ .60
Cumulative effect of a
change in accounting
principle................. -- -- -- -- .02 .02 --
------- -------- -------- -------- -------- -------- --------
Net income per share(1)..... $ .23 $ .33 $ .50 $ .70 $ .94 $ .43 $ .60
======= ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding(1)............ 39,094 43,708 45,414 48,502 48,643 48,665 49,238
OPERATING DATA:
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Number of orthodontic
centers(2)................ 145 247 360 469 537 510 566
Comparable orthodontic
center net revenue
growth(3)................. 16.7% 22.2% 20.0% 19.2% 20.1% 22.7% 23.3%
Total case starts........... 28,742 44,910 70,611 95,377 126,307 57,613 73,619
Patient contract balances of
affiliated
orthodontists(2)(4):
Net receivables for
services performed(5)... $13,758 $ 23,181 $ 41,713 $ 62,151 $ 87,563 $ 74,355 $105,626
For services to be
performed(6)............ 58,418 92,548 139,492 227,501 297,839 288,341 320,085
------- -------- -------- -------- -------- -------- --------
Total patient contract
balances................ $72,176 $115,729 $181,205 $289,652 $385,402 $362,696 $425,711
======= ======== ======== ======== ======== ======== ========
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
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ACTUAL AS ADJUSTED(7)
BALANCE SHEET DATA: (in thousands)
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<S> <C> <C>
Cash and cash equivalents................................... $ 7,725 $ 7,725
Working capital............................................. 120,729 120,729
Total assets................................................ 402,372 402,372
Total debt.................................................. 58,615 26,031
Total equity................................................ 310,277 342,861
</TABLE>
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(1) These amounts represent the full dilutive effect of the exercise of common
equivalent shares (stock options) outstanding during the year. See Note 6 to
our Consolidated Financial Statements that are included elsewhere in this
prospectus.
(2) These amounts are presented as of the end of the period.
(3) These amounts represent the growth in net revenue in the indicated period
relative to the comparable prior-year period by orthodontic centers that
were affiliated with us throughout each of the two periods being compared.
There were 46 of these comparable orthodontic centers in 1994, 53 in 1995,
75 in 1996, 130 in 1997, 227 in 1998, 332 in 1999, 388 in the first six
months of 1999 and 498 in the first six months of 2000. The amount of that
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 about 26
months. Our orthodontic centers have typically reached maturity as patients
are added during the first 26 months of operations.
(4) The average remaining life of the patient contracts at June 30, 2000 was
about 15 months.
(5) These amounts are net of allowance for uncollectible amounts and patient
prepayments. These receivables are assigned to us by our affiliated
orthodontists in payment of our service fee.
(6) Patients generally may discontinue treatment at any time and avoid payment
of the contract balance for services that have not been performed through
that time; however, patients generally must pay for all services performed
prior to termination of treatment. Patients generally may transfer to
another of our orthodontic centers for completion of their treatment and
continue to pay the remaining balance under their existing patient contract.
(7) These amounts reflect our sale of 1,200,000 shares of our common stock in
this offering at an assumed offering price of $29.1875 per share, after
deducting underwriting discounts and commissions and estimated expenses of
this offering payable by us, and the application of our net proceeds from
this offering.
7
<PAGE> 10
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Risk factors
An investment in the shares of our common stock offered involves a high degree
of risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information set forth in or incorporated by
reference into this prospectus, in connection with an investment in shares of
our common stock. If any of the following risks actually occurs, our business,
financial condition or operating results could be harmed, the trading price of
our common stock could decline and you could lose all or part of your
investment.
OUR GROWTH STRATEGY MAY NOT SUCCEED, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR
FINANCIAL PERFORMANCE.
Since we began operating in 1985, we have expanded to being affiliated with 387
orthodontists practicing in 566 orthodontic centers as of June 30, 2000. We
expect to continue to add additional orthodontic centers and affiliated
orthodontists. Our growth, however, will depend on a number of factors,
including:
+ our ability to identify and affiliate with a sufficient number of
orthodontists to open new orthodontic centers or operate within our existing
network of orthodontic centers;
+ our ability to obtain quality locations for orthodontic centers in suitable
markets;
+ our ability to identify and affiliate with a sufficient number of existing
orthodontic practices;
+ the ability of our affiliated orthodontists to add new patients;
+ our ability to implement initiatives designed to increase the productivity of
our orthodontic centers;
+ our ability to obtain adequate financing to fund our expansion strategy;
+ our ability to successfully operate under applicable government regulations;
+ our ability to establish brand identity; and
+ our ability to affiliate with orthodontists in other countries and
successfully operate in those markets.
Our growth strategy may not succeed, and we may have to modify it. We may be
unable to identify and recruit suitable orthodontists. A shortage of available
orthodontists with the skills we require would have a material adverse effect on
our ability to grow. In addition, many of our service agreements include
covenants not to compete, in which we agreed that we would not affiliate with
other orthodontists within a specified area and that we would limit the total
number of orthodontic practices with which we affiliate within a particular
market area. This could limit our ability to add orthodontists and orthodontic
centers within the markets in which we have existing centers.
Our ability to attract additional orthodontists, and our prospects for success
and growth, depend on our ability to integrate an increasing number of
affiliated orthodontists, orthodontic centers and employees. If we fail to
manage our growth, our business may suffer.
OUR AFFILIATED ORTHODONTISTS ARE EXTENSIVELY REGULATED, WHICH MAY ADVERSELY
AFFECT OUR BUSINESS AND LIMIT HOW WE CAN OPERATE.
Federal and state governmental authorities regulate the orthodontic industry and
orthodontic practices extensively. We do not control the practice of
orthodontics by our affiliated orthodontists or their
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8
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RISK FACTORS
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compliance with legal requirements applicable to orthodontists and their
practices. Many states prohibit us, as a non-professional corporation, from:
+ practicing orthodontics, which, in some 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.
Many states also prohibit orthodontists from paying any portion of fees received
for orthodontic services in exchange for a patient referral. In addition, many
states impose limits on the tasks an orthodontist may delegate to other staff
members. These laws and their interpretation vary from state to state, and
regulatory authorities enforce them with broad discretion.
If a court or regulatory authority reviewed our business arrangements with an
affiliated orthodontist and concluded that our arrangements did not comply with
applicable law, we would have to change those arrangements in a way that might
adversely affect us. An affiliated orthodontist may successfully challenge the
legality of our long-term service and consulting agreements, and we may be
unable to enforce non-competition and other provisions of those agreements. The
laws and regulations of states and countries in which we operate or seek to
expand may restrict or adversely affect our relationships with orthodontists in
those states and countries. The laws and regulations of states and countries in
which we currently operate could change or be interpreted in a way that
adversely affects our operations and relationships with affiliated
orthodontists. We may have to change our contractual relationships, alter our
financial arrangements or restrict our operations in those states and countries.
These laws and regulations could also prevent us from acquiring the assets of
orthodontists or managing practices in those states and countries.
OUR FINANCIAL SUCCESS DEPENDS ON THE EFFORTS AND SUCCESS OF OUR AFFILIATED
ORTHODONTISTS, AND OUR BUSINESS COULD SUFFER IF THEY DO NOT SUCCEED OR IF OUR
SERVICE OR CONSULTING AGREEMENTS WITH THEM ARE TERMINATED.
We receive fees for services we provide to orthodontic practices under service
and consulting agreements. These fees are generally tied to the financial
performance of our orthodontic centers, so our success depends on the success of
our affiliated orthodontists. Changes in the healthcare industry, such as the
growth of managed care organizations and provider networks, may result in lower
compensation for the services of our affiliated orthodontists. Our agreements
with affiliated orthodontists have terms ranging from 20 to 40 years, with most
ranging from 20 to 25 years. Affiliated orthodontists may terminate those
agreements for "cause," which generally includes our material breach of the
agreement. In certain cases, an affiliated orthodontist may terminate his or her
agreement without cause, subject to substitution of another affiliated
orthodontist and an obligation not to compete within a specified area. The loss
of a substantial number of our agreements with affiliated orthodontists or a
material loss of revenue by our affiliated orthodontists, for whatever reason,
could materially and adversely affect our financial condition and results of
operations.
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9
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RISK FACTORS
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OTHER ORTHODONTISTS AND DENTISTS COMPETE WITH OUR AFFILIATED ORTHODONTISTS, AND
OTHER COMPANIES COMPETE WITH US.
Orthodontics is a highly competitive business in each market in which our
orthodontic centers operate. Our affiliated orthodontists face competition from
other orthodontists and general dentists in the communities they serve. Many of
these competing orthodontists and general dentists have more established
practices. Providing business services to orthodontic practices is also a
competitive business. We compete with other companies with strategies similar to
ours in providing business services to orthodontic practices. Competitors with
greater access to financial resources may enter our markets and compete with us.
We may not be able to compete successfully with existing or new competitors.
Also, additional competition may make it more difficult for us to affiliate with
additional orthodontists on terms that are favorable to us. Any of these factors
could cause us to become less profitable.
OUR FINANCIAL RESULTS MAY SUFFER IF WE HAVE TO WRITE OFF INTANGIBLE ASSETS.
In connection with our affiliations with existing orthodontic practices, we
recorded intangible assets, net of accumulated amortization, of about $175
million on our balance sheet as of June 30, 2000. We may not realize the value
of these intangible assets. We expect to engage in additional transactions that
will result in our recognition of additional intangible assets and amortization
expense. Part of the amortization generated by these intangible assets is not
deductible for tax purposes. We evaluate on a regular basis whether events and
circumstances have occurred that indicate that all or a portion of the carrying
amount of these intangible assets may no longer be recoverable, and is therefore
"impaired." Under accounting rules, any future determination that impairment has
occurred would require us to write off the impaired portion of unamortized
intangible assets, resulting in a charge to our earnings. Such a write-off could
have a material adverse effect on our financial condition and results of
operations.
WE DEPEND ON A FEW KEY EMPLOYEES, AND IF WE LOSE THEM OUR BUSINESS COULD SUFFER.
Our success depends upon the continued active participation of our senior
management, particularly our Chairman of the Board, Dr. Gasper Lazzara, Jr., our
Chief Executive Officer and President, Bartholomew F. Palmisano, Sr., our Chief
Operating Officer, Michael C. Johnsen, and our Chief Financial Officer,
Bartholomew F. Palmisano, Jr. The loss of the services of any of these officers
could have a material adverse effect on our business. Our success also depends
on our ability to attract and retain other highly qualified managerial
personnel.
OUR FINANCIAL RESULTS MAY BE DAMAGED BY SUCCESSFUL CLAIMS AGAINST OUR AFFILIATED
ORTHODONTISTS.
We provide business services to orthodontists who provide orthodontic treatment
to the public and are exposed to the risk of professional liability and other
claims. Those claims, if successful, could result in substantial damage awards.
Those awards might exceed the limits of any applicable insurance coverage.
Insurance against losses of this type can be expensive. Insurance rates vary
from state to state. We do not control the practice of orthodontics by our
affiliated orthodontists or their compliance with the legal and other
requirements applicable to orthodontists and their practices. A successful
malpractice claim against us or an affiliated orthodontist could have a material
adverse effect on our financial position and results of operations.
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10
<PAGE> 13
RISK FACTORS
--------------------------------------------------------------------------------
ANTITRUST LAWS COULD LIMIT OUR ABILITY TO OPERATE OR EXPAND.
We are subject to a range of antitrust laws that prohibit anticompetitive
conduct, including price fixing, concerted refusals to deal and divisions of
markets. These laws may limit our ability to enter into service or consulting
agreements with separate orthodontists who compete with one another in the same
geographic market.
OUR ANTI-TAKEOVER PROVISIONS MAY PREVENT A CHANGE IN OUR CONTROL, EVEN IF IT
WOULD BENEFIT OUR STOCKHOLDERS.
Some of the provisions of Delaware law and our certificate of incorporation and
bylaws may discourage a change in our control or make it more difficult to
achieve, even if a change in control is in our stockholders' best interests. For
example, some board actions require a supermajority vote rather than a simple
majority vote. In addition, our certificate of incorporation allows our board of
directors to determine the preferences and rights of preferred stock which we
may issue without any vote or approval of the holders of our common stock. The
rights of common stockholders will be subject to and may be adversely affected
by the rights of the holders of any preferred stock that we may issue in the
future. Through the issuance of preferred stock with certain powers, the board
of directors may prevent changes in our management and control. The board of
directors is divided into three classes of directors. Directors from each class
serve staggered three-year terms, which may limit our stockholders' ability to
replace a majority of our directors.
OUR STOCK PRICE MAY FLUCTUATE, AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES OF
OUR COMMON STOCK AT OR ABOVE THE PRICE YOU PAID FOR THEM.
From time to time, the market price of our common stock may fluctuate
significantly in response to a variety of factors, including:
+ variations in our financial results;
+ changes in securities analysts' recommendations about our stock or estimates
about our earnings, or our failure to achieve estimated results;
+ announcements of material events by us or our competitors;
+ regulatory changes;
+ developments in the healthcare or business services industry;
+ changes in general conditions in the economy or financial markets; and
+ other reasons unrelated to our financial results or condition.
SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK, OR THE AVAILABILITY OF THOSE
SHARES FOR FUTURE SALE, COULD ADVERSELY AFFECT OUR STOCK PRICE AND LIMIT OUR
ABILITY TO RAISE CAPITAL.
As of September 30, 2000, we had outstanding about 48.7 million shares of our
common stock. Holders of 1,014,143 shares of our common stock are currently
eligible to sell those shares under Rule 144 under the Securities Act of 1933,
subject to restrictions on transfer as a result of agreements entered into with
us. These shares may not be offered, sold or otherwise transferred prior to
December 2000, without a waiver of the restrictions by us or registration under
the Securities Act. In December 2000 and 2001, 50% of these shares will be
released from these restrictions.
In addition, up to 6,000,000 shares of our common stock may be issued under our
three stock option plans. As of September 30, 2000, 1,848,777 shares of our
common stock were issuable upon the
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11
<PAGE> 14
RISK FACTORS
--------------------------------------------------------------------------------
exercise of stock options which were outstanding but not exercisable, and
2,043,721 shares of our common stock were issuable upon the exercise of stock
options which were outstanding and exercisable. We have registration statements
on file with the SEC registering shares of our common stock issuable under our
stock option plans. We also intend to issue shares of our common stock from time
to time in connection with the development and acquisition of new orthodontic
centers. These shares may be issued under a shelf registration statement on file
with the SEC or in transactions exempt from registration.
The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market after this offering
or the perception that substantial sales could occur. These sales also may make
it more difficult for us to sell common stock in the future.
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12
<PAGE> 15
--------------------------------------------------------------------------------
Forward-looking information
This prospectus contains some forward-looking statements about our financial
condition, results of operations and business. These statements appear in
several sections of this prospectus and generally include any of the words
"believe," "expect," "anticipate," "intend," "estimate," "should," "will,"
"plan" or similar expressions. These forward-looking statements include, without
limitation, statements regarding our future growth, development and acquisition
of additional orthodontic centers, affiliation with additional orthodontic
practices, international expansion, new case starts, national advertising and
branding, legal proceedings, advancement of funds to affiliated orthodontists,
continued leasing of orthodontic center facilities, ancillary services, funding
of our expansion, operations and capital expenditures and payment or nonpayment
of dividends.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions, many of which are unpredictable
and not within our control. Our future results and shareholder values may differ
materially from those expressed in these forward-looking statements because of a
variety of risks and uncertainties, including:
+ general economic and business conditions;
+ our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
+ anticipated trends in our business;
+ existing and future regulations affecting our business; and
+ other risk factors described under "Risk factors" in this prospectus.
We do not intend to update these forward-looking statements after this
prospectus is distributed, even if new information, future events or other
circumstances have made them incorrect or misleading as of any future date. For
all of these statements, we claim the protection of the safe harbor for forward-
looking statements provided in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
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13
<PAGE> 16
--------------------------------------------------------------------------------
Use of proceeds
We estimate that our net proceeds from the sale of the 1,200,000 shares of our
common stock that we are offering will be about $32.6 million, assuming an
offering price of $29.1875 per share and after deducting underwriting discounts
and commissions and the estimated expenses of this offering payable by us. If
the underwriters exercise their over-allotment option in full, our net proceeds
will be about $40.5 million, assuming an offering price of $29.1875 per share
and after deducting underwriting discounts and commissions and the estimated
expenses of this offering payable by us. We will not receive any of the proceeds
from the sale of shares of our common stock that are being offered by the
selling stockholders.
We intend to use all of our net proceeds from this offering to repay outstanding
indebtedness under our revolving line of credit, which totaled $52.9 million as
of June 30, 2000. Borrowings under our revolving line of credit, which expires
on October 8, 2003, bear interest at variable rates based upon the lender's
prime rate or LIBOR and, at June 30, 2000, bore interest at 8.0% per year.
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14
<PAGE> 17
--------------------------------------------------------------------------------
Price range of common stock
Our 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 our common stock, as reported on the New
York Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
---------------------------------------------------------------------------------
<S> <C> <C>
2000:
First quarter............................................... $20.25 $11.06
Second quarter.............................................. 27.44 15.63
Third quarter............................................... 35.31 21.94
Fourth quarter (through October 6, 2000).................... 33.31 26.69
1999:
First quarter............................................... $20.13 $12.50
Second quarter.............................................. 17.25 10.81
Third quarter............................................... 18.94 13.25
Fourth quarter.............................................. 18.00 11.00
1998:
First quarter............................................... $23.25 $15.00
Second quarter.............................................. 24.06 17.63
Third quarter............................................... 20.94 13.00
Fourth quarter.............................................. 20.44 11.75
</TABLE>
At October 6, 2000, the last reported sale price of our common stock was
$29.1875 per share, and the number of holders of record of our common stock was
262.
Dividend policy
We have never declared or paid cash dividends on our common stock. We expect
that any future earnings will be retained for the growth and development of our
business. Accordingly, we do not anticipate that we will declare or pay any cash
dividends on our common stock for the foreseeable future. The declaration,
payment and amount of future dividends, if any, will depend upon our future
earnings, results of operations, financial position and capital requirements,
among other factors. In addition, our revolving line of credit does not permit
us to pay cash dividends.
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15
<PAGE> 18
--------------------------------------------------------------------------------
Capitalization
The following table provides information about our current portion of long-term
debt and total capitalization at June 30, 2000, and as adjusted to give effect
to the sale of 1,200,000 shares of our common stock that we are offering, at an
assumed offering price of $29.1875 per share, and the application of our net
proceeds as described under "Use of Proceeds." The following table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our Consolidated Financial Statements
and related Notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------
ACTUAL AS ADJUSTED
(in thousands)
------------------------------------------------------------------------------------
<S> <C> <C>
Current portion of long-term debt........................... $ 3,842 $ 3,842
======== ========
Long-term debt, less current portion........................ $ 54,773 $ 22,189
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value per share; 10,000,000
shares authorized, no shares outstanding............... -- --
Common stock, $.01 par value per share; 100,000,000 shares
authorized; 48,459,653 shares outstanding actual; and
49,767,153 shares outstanding, as adjusted(1).......... 484 496
Additional paid in capital................................ 163,533 196,105
Capital contribution receivable from stockholders......... (2,491) (2,491)
Due from key employees.................................... (4,981) (4,981)
Retained earnings......................................... 153,732 153,732
-------- --------
Total stockholders' equity.................................. 310,277 342,861
-------- --------
Total capitalization........................................ $365,050 $365,050
======== ========
</TABLE>
------------
(1) Does not include 4,209,970 shares of our common stock issuable upon the
exercise of stock options that were granted under our three stock option
plans as of June 30, 2000, with a weighted average exercise price of $10.33
per share.
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16
<PAGE> 19
--------------------------------------------------------------------------------
Selected financial data
In the table below, we provide you with our selected historical financial data.
We have prepared this statement of income and balance sheet data using our
consolidated financial statements for the five years ended December 31, 1999 and
the six-month periods ended June 30, 2000 and 1999. The consolidated financial
statements for the five years ended December 31, 1999 have been audited by Ernst
& Young LLP, independent auditors. The financial statements for the six-month
periods ended June 30, 2000 and 1999 have not been audited. When you read this
selected historical financial data, it is important that you read along with it
the historical financial statements and related notes in our annual and
quarterly reports filed with the SEC, as well as the section of this prospectus
and our annual and quarterly reports captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -------------------
STATEMENT OF INCOME 1995 1996 1997 1998 1999 1999 2000
DATA: (in thousands, except per share data)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue.......................... $41,556 $ 71,273 $117,326 $171,298 $226,290 $104,449 $137,532
------- -------- -------- -------- -------- -------- --------
Direct expenses:
Employee costs..................... 11,784 19,895 33,429 46,878 61,224 28,264 36,579
Orthodontic supplies............... 3,167 5,428 8,789 13,287 17,136 7,846 10,113
Rent............................... 3,504 6,114 10,299 14,128 18,624 8,551 11,066
Marketing and advertising.......... 4,323 6,644 9,855 15,491 16,874 7,679 10,172
------- -------- -------- -------- -------- -------- --------
Total direct expenses................ 22,778 38,081 62,372 89,784 113,858 52,340 67,930
General and administrative........... 5,108 8,703 13,356 18,104 23,270 10,718 14,152
Depreciation and amortization........ 1,448 2,814 5,640 9,124 12,238 5,802 6,780
------- -------- -------- -------- -------- -------- --------
Operating profit..................... 12,222 21,675 35,958 54,286 76,924 35,589 48,670
Interest (expense) income, net....... 1,995 1,935 1,143 280 (2,204) (762) (1,607)
------- -------- -------- -------- -------- -------- --------
Income before income taxes........... 14,217 23,610 37,101 54,566 74,720 34,827 47,063
Provision for income taxes........... 5,182 9,208 14,469 20,753 28,206 13,147 17,766
------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of
change in accounting principle..... 9,035 14,402 22,632 33,813 46,514 21,680 29,297
Cumulative effect of a change in
accounting principle, net of income
tax................................ -- -- -- -- 678 678 --
------- -------- -------- -------- -------- -------- --------
Net income........................... $ 9,035 $ 14,402 $ 22,632 $ 33,813 $ 45,836 $ 21,002 $ 29,297
======= ======== ======== ======== ======== ======== ========
Net income per share before
cumulative effect of a change in
accounting principle(1)............ $ .23 $ .33 $ .50 $ .70 $ .96 $ .45 $ .60
Cumulative effect of a change in
accounting principle............... -- -- -- -- .02 .02 --
------- -------- -------- -------- -------- -------- --------
Net income per share(1).............. $ .23 $ .33 $ .50 $ .70 $ .94 $ .43 $ .60
======= ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding(1)..................... 39,094 43,708 45,414 48,502 48,643 48,665 49,238
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------- AS OF JUNE 30,
1995 1996 1997 1998 1999 2000
BALANCE SHEET DATA: (in thousands)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents............ $18,779 $ 11,827 $ 9,865 $ 1,601 $ 5,822 $ 7,725
Working capital...................... 43,778 40,219 68,243 59,634 102,276 120,729
Total assets......................... 92,573 145,099 228,975 296,798 367,022 402,372
Total debt........................... 4,490 3,397 10,393 31,332 58,793 58,615
Total equity......................... 77,313 114,887 190,740 231,159 278,527 310,277
</TABLE>
------------
(1) These amounts represent the full dilutive effect of the exercise of common
equivalent shares (stock options) outstanding during the year. See Note 6 to
our Consolidated Financial Statements included elsewhere in this prospectus.
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<PAGE> 20
--------------------------------------------------------------------------------
Management's discussion and analysis of financial condition
and results of operations
GENERAL
Dr. Gasper Lazzara, Jr. and Bartholomew F. Palmisano, Sr. established our
business in 1985. At June 30, 2000, we provided integrated business services to
566 orthodontic centers with 387 affiliated orthodontists throughout the United
States and in Japan, Mexico and Puerto Rico.
The following table provides information about the growth in the number of our
orthodontic centers for the periods shown:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Number of centers at beginning of period........ 75 145 247 360 469 537
Number of centers developed during period....... 44 53 58 54 36 8
Number of centers acquired during period........ 29 68 78 66 32 25
Number of centers consolidated during period.... (3) (19) (23) (11) -- (4)
--- --- --- --- --- ---
Number of centers at end of period.............. 145 247 360 469 537 566
=== === === === === ===
</TABLE>
Of the 566 orthodontic centers at June 30, 2000, 296 were developed by us and
341 were existing orthodontic practices whose assets we acquired, of which 71
were consolidated. We expect that future growth in the number of our orthodontic
centers will come from both developing orthodontic centers with existing and
newly recruited orthodontists and acquiring the assets of, and affiliating with,
existing orthodontic practices.
Generally, when we develop 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. Our orthodontic centers have
generally become increasingly more productive and profitable as more new
patients are added and existing patients return for monthly follow-up visits.
After 26 months of operations, an orthodontic center's growth in patient base
has typically begun to stabilize as the initial patients complete treatment. An
orthodontic center can increase the number of patients treated by improving the
efficiency of its clinical staff, increasing patient treatment intervals and
adding operating days or orthodontists. Our orthodontic centers may also
increase revenue by implementing periodic price increases. Established practices
with which we have affiliated have typically increased their revenue by applying
our operating strategies and systems, including increased advertising and
efficient patient scheduling.
We earn our revenue from long-term service or consulting agreements entered into
with our affiliated orthodontists. Under the service agreements, the affiliated
orthodontist pays us a fee equal to about 24% of new patient contract balances
in the first month of treatment plus the balance ratably over the remainder of
the patient contracts, which average 26 months, less amounts retained by the
affiliated orthodontist. Since January 1, 1997, 1.0% of our annual net revenue
has been uncollectible.
The amounts retained by an affiliated orthodontist depend 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. We add an affiliated orthodontist's share of
these operating losses to our
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18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
fee in the period during which the operating losses are incurred, with these
fees aggregating about $1.6 million for the six months ended June 30, 2000.
The terms of consulting agreements vary depending upon the regulatory
requirements of the particular state in which an orthodontic center is located.
In a limited number of states, we may only provide consulting services to
orthodontists and may not provide management services for an orthodontist's
practice. The consulting fee payable to us is determined at the time of
affiliation, is generally limited to compensation for the specific consulting
services performed and based on criteria such as the number of hours of
operations of the applicable orthodontic centers.
We provide our affiliated orthodontists with business, operational and marketing
services, 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 our
expenses and are recognized as incurred.
Employee costs consist of wages, salaries and benefits paid to all of our
employees, including orthodontic assistants, business staff and management
personnel. General and administrative expenses consist of provision for losses
of patient contracts and receivables, professional service fees, maintenance and
utility costs, office supply expense, telephone expense, taxes, license fees,
printing expense and shipping expense.
Patient contracts are for terms averaging 26 months and are payable in equal
monthly installments throughout the term of treatment, except for the last month
when a final payment is made. During the first quarter of 1999, our affiliated
orthodontists generally implemented a fee increase from $98 per month to $109
per month, with an increase in the final payment from $398 to $436. During the
first six months of 2000, about 30% of our affiliated orthodontists implemented
a fee increase from $109 per month to $119 per month, with an increase in the
final payment from $436 to $476. If a patient discontinues treatment prior to
expiration of the term of his or her contract, the patient is generally required
to pay the fees earned by the affiliated orthodontist through the date of
termination, which may exceed the amount of fees billed through that date.
Patients generally may transfer to another of our orthodontic centers for
completion of their treatment and continue to pay the remaining balance under
their existing patient contract.
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<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table provides information about the percentage of net revenue
represented by some of the items in our consolidated statements of income.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -----------------
1997 1998 1999 1999 2000
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Direct expenses:
Employee costs............................. 28.5 27.4 27.1 27.1 26.6
Orthodontic supplies....................... 7.5 7.8 7.6 7.5 7.4
Rent....................................... 8.8 8.2 8.2 8.1 8.0
Marketing and advertising.................. 8.4 9.0 7.5 7.4 7.4
----- ----- ----- ----- -----
Total direct expenses.............. 53.2 52.4 50.4 50.1 49.3
General and administrative................... 11.4 10.6 10.3 10.3 10.3
Depreciation and amortization................ 4.8 5.3 5.4 5.6 4.9
----- ----- ----- ----- -----
Operating profit............................. 30.6 31.7 33.9 34.0 35.4
Interest (income) expense.................... (1.0) (0.2) 1.0 0.7 1.2
----- ----- ----- ----- -----
Income before income taxes................... 31.6 31.9 32.9 33.3 34.2
Provision for income taxes................... 12.3 12.2 12.5 12.5 12.9
----- ----- ----- ----- -----
Net income................................... 19.3% 19.7% 20.4% 20.8% 21.3%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
NET REVENUE
Net revenue increased $33.1 million, or 31.7%, to $137.5 million for the six
months ended June 30, 2000 from $104.4 million for the six months ended June 30,
1999. We attribute $22.1 million of this increase to the growth in net revenue
of orthodontic centers open throughout both periods and $11.0 million of this
increase to orthodontic centers opened since January 1, 1999. The number of
patient contracts increased to about 305,000 at June 30, 2000 from about 233,000
at June 30, 1999.
EMPLOYEE COSTS
Employee costs increased $8.3 million, or 29.4%, to $36.6 million for the six
months ended June 30, 2000 from $28.3 million for the six months ended June 30,
1999. As a percentage of net revenue, however, employee costs decreased to 26.6%
for the six months ended June 30, 2000 from 27.1% for the six months ended June
30, 1999. The percentage decrease primarily reflects capacity efficiencies
achieved through general changes to patient treatment schedules by our
affiliated orthodontists, which resulted in fewer treatments per patient
contract.
ORTHODONTIC SUPPLIES
Orthodontic supplies expense increased $2.3 million, or 28.9%, to $10.1 million
for the six months ended June 30, 2000 from $7.8 million for the six months
ended June 30, 1999. As a percentage of net revenue, however, orthodontic
supplies expense decreased to 7.4% for the six months ended June 30, 2000 from
7.5% for the six months ended June 30, 1999, due to cost improvements attained
through bulk purchasing and our proprietary inventory control and ordering
system.
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<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
RENT
Rent expense increased $2.5 million, or 29.4%, to $11.1 million for the six
months ended June 30, 2000 from $8.6 million for the six months ended June 30,
1999. We attribute the increase in this expense to orthodontic centers
affiliated, opened or relocated after June 30, 1999. As a percentage of net
revenue, however, rent expense decreased to 8.0% for the six months ended June
30, 2000 from 8.2% for the six months ended June 30, 1999. We attribute the
decrease in the percentage to the growth in revenue for orthodontic centers
developed or affiliated after January 1, 1999, and the relatively fixed nature
of rent expense.
MARKETING AND ADVERTISING
Marketing and advertising expense increased $2.5 million, or 32.5%, to $10.2
million for the six months ended June 30, 2000 from $7.7 million for the six
months ended June 30, 1999. The increase in this expense resulted primarily from
increases in marketing and advertising related to growth in net revenue for
existing orthodontic centers as well as marketing and advertising for
orthodontic centers added after June 30, 1999. As a percentage of net revenue,
marketing and advertising expense remained constant at 7.4% for the six months
ended June 30, 2000 and June 30, 1999.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased $3.4 million, or 32.0%, to $14.1
million for the six months ended June 30, 2000 from $10.7 million for the six
months ended June 30, 1999. The increase in general and administrative expense
resulted primarily from the addition of orthodontic centers and increases in our
affiliated orthodontists' patient base after June 30, 1999. As a percentage of
net revenue, general and administrative expense remained constant at 10.3% for
the six months ended June 30, 2000 and June 30, 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $1.0 million, or 16.9%, to $6.8
million for the six months ended June 30, 2000 from $5.8 million for the six
months ended June 30, 1999. The increase in this expense is a result of the
fixed assets acquired and service agreements entered into for orthodontic
centers developed, acquired or relocated after June 30, 1999. As a percentage of
net revenue, however, depreciation and amortization expense decreased to 4.9%
for the six months ended June 30, 2000 from 5.6% for the six months ended June
30, 1999.
OPERATING PROFIT
Operating profit increased $13.1 million, or 36.8%, to $48.7 million for the six
months ended June 30, 2000 from $35.6 million for the six months ended June 30,
1999. As a percentage of net revenue, operating profit increased to 35.4% for
the six months ended June 30, 2000 from 34.0% for the six months ended June 30,
1999 as a result of the factors discussed above.
INTEREST
Net interest expense increased $850,000, or 110.9%, to $1.6 million for the six
months ended June 30, 2000 from $760,000 for the six months ended June 30, 1999.
As a percentage of net revenue, net interest expense increased to 1.2% for the
six months ended June 30, 2000 from 0.7% for the six months ended June 30, 1999.
The increase in this expense resulted from an increase since June 30, 1999 in
the average balance of borrowings under our $100.0 million revolving line of
credit associated with expansion in new and existing markets and an increase in
the average interest rate charged for those borrowings.
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<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES
Provision for income taxes increased $4.6 million, or 35.1%, to $17.8 million
for the six months ended June 30, 2000 from $13.1 million for the six months
ended June 30, 1999. Our effective income tax rate was 37.8% for the six months
ended June 30, 2000 and for the six months ended June 30, 1999.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
In accordance with the adoption of Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities, we recorded a cumulative effect of a change in
accounting principle of $678,000 (net of an income tax benefit of $410,000) in
the six months ended June 30, 1999.
NET INCOME
Net income increased $8.3 million, or 39.5%, to $29.3 million for the six months
ended June 30, 2000 from $21.0 million for the six months ended June 30, 1999.
As a percentage of net revenue, net income increased to 21.3% for the six months
ended June 30, 2000 from 20.8% for the six months ended June 30, 1999 as a
result of the factors discussed above.
1999 COMPARED TO 1998
NET REVENUE
Net revenue increased $55.0 million, or 32.1%, to $226.3 million for 1999 from
$171.3 million for 1998. We attribute $31.0 million of this increase to the
growth in net revenue of orthodontic centers open throughout 1998 and 1999, and
$24.0 million of this increase to orthodontic centers opened since January 1,
1998. The number of patient contracts increased to about 268,000 at December 31,
1999 from about 195,000 at December 31, 1998.
EMPLOYEE COSTS
Employee costs increased $14.3 million, or 30.6%, to $61.2 million for 1999 from
$46.9 million for 1998. As a percentage of net revenue, however, employee costs
decreased to 27.1% for 1999 from 27.4% for 1998. The percentage decrease
primarily reflects efficiencies achieved through a general change to longer
patient treatment intervals by our affiliated orthodontists, which resulted in
fewer treatments per patient contract.
ORTHODONTIC SUPPLIES
Orthodontic supplies expense increased $3.8 million, or 29.0%, to $17.1 million
for 1999 from $13.3 million for 1998. As a percentage of net revenue, however,
orthodontic supplies expense decreased to 7.6% for 1999 from 7.8% for 1998. Cost
improvements attained through bulk purchasing were partially 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 $4.5 million, or 31.8%, to $18.6 million for 1999 from
$14.1 million for 1998. We attribute the increase in this expense to orthodontic
centers affiliated, opened or relocated after 1998. As a percentage of net
revenue, however, rent remained constant at 8.2% for 1998 and 1999.
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MARKETING AND ADVERTISING
Marketing and advertising expense increased $1.4 million, or 8.9%, to $16.9
million for 1999 from $15.5 million for 1998. The increase in this expense
resulted primarily from increases in marketing and advertising related to growth
in net revenue for existing orthodontic centers as well as marketing and
advertising for orthodontic centers added after 1998. As a percentage of net
revenue, however, marketing and advertising expense decreased to 7.5% for 1999
from 9.0% for 1998. We attribute the decrease in this expense as a percentage of
net revenue to changes in our marketing department designed to eliminate costs
not related to the purchase of media advertisements.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased $5.2 million, or 28.5%, to $23.3
million for 1999 from $18.1 million for 1998. The increase in general and
administrative expense resulted primarily from the addition of orthodontic
centers after 1998. As a percentage of net revenue, however, general and
administrative expense decreased to 10.3% for 1999 from 10.6% for 1998. General
and administrative expense decreased as a percentage of net revenue as a result
of lower average start-up costs for orthodontic centers developed after 1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $3.1 million, or 34.1%, to $12.2
million for 1999 from $9.1 million for 1998. As a percentage of net revenue,
depreciation and amortization expense increased to 5.4% for 1999 from 5.3% for
1998. The increase in this expense is a result of the fixed assets acquired and
service agreements entered into for orthodontic centers developed, acquired or
relocated after 1998.
OPERATING PROFIT
Operating profit increased $22.6 million, or 41.7%, to $76.9 million for 1999
from $54.3 million for 1998. As a percentage of net revenue, operating profit
increased to 33.9% for 1999 from 31.7% for 1998 as a result of the factors
discussed above.
INTEREST
We incurred net interest expense of $2.2 million for 1999, compared to net
interest income of $280,000 for 1998. The increase in net interest expense
resulted from the interest incurred on borrowings under our $100.0 million
revolving line of credit associated with expansion in new and existing markets.
PROVISION FOR INCOME TAXES
Provision for income taxes increased $7.4 million, or 35.9%, to $28.2 million
for 1999 from $20.8 million for 1998. Our effective income tax rate was 37.8%
for 1999 and 1998.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In accordance with the adoption of Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities, we recorded a cumulative effect of a change in
accounting principle of $678,000 (net of an income tax benefit of $410,000)
during 1999.
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OPERATIONS
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NET INCOME
Net income increased $12.0 million, or 35.6%, to $45.8 million for 1999 from
$33.8 million for 1998. As a percentage of net revenue, net income increased to
20.4% for 1999 from 19.7% for 1998 as a result of the factors discussed above.
1998 COMPARED TO 1997
NET REVENUE
Net revenue increased $54.0 million, or 46.0%, to $171.3 million for 1998 from
$117.3 million for 1997. We attribute $19.6 million of this increase to the
growth in net revenue of orthodontic centers open throughout 1997 and 1998, and
$33.8 million of this increase to orthodontic centers opened since January 1,
1997, with the remainder due to increases in other management fees, primarily
our affiliated orthodontists' share of the operating losses of newly developed
orthodontic centers. The number of patient contracts increased to about 195,000
at December 31, 1998 from about 130,000 at December 31, 1997.
EMPLOYEE COSTS
Employee costs increased $13.5 million, or 40.2%, to $46.9 million for 1998 from
$33.4 million for 1997. As a percentage of net revenue, however, employee costs
decreased to 27.4% for 1998 from 28.5% for 1997. The percentage decrease
primarily reflects efficiencies achieved through a general change to longer
patient treatment intervals by our affiliated orthodontists, which resulted in
fewer treatments per patient contract.
ORTHODONTIC SUPPLIES
Orthodontic supplies expense increased $4.5 million, or 51.2%, to $13.3 million
for 1998 from $8.8 million for 1997. As a percentage of net revenue, orthodontic
supplies expense increased to 7.8% for 1998 from 7.5% for 1997. Cost
improvements attained through bulk purchasing were offset by increased expense
associated with an increased percentage of new patient treatment days, which
require greater orthodontic supplies per patient, associated with the opening of
additional orthodontic centers.
RENT
Rent expense increased $3.8 million, or 37.2%, to $14.1 million for 1998 from
$10.3 million for 1997. We attribute the increase in this expense to orthodontic
centers affiliated, opened or relocated after 1997. As a percentage of net
revenue, however, rent expense decreased to 8.2% for 1998 from 8.8% for 1997.
The decrease in the percentage was attributable to the growth in revenue for
orthodontic centers developed or affiliated after January 1, 1998 and the
relatively fixed nature of rent expense.
MARKETING AND ADVERTISING
Marketing and advertising expense increased $5.6 million, or 57.2%, to $15.5
million for 1998 from $9.9 million for 1997. The increase in this expense
resulted primarily from increases in marketing and advertising related to growth
in net revenue for existing orthodontic centers as well as marketing and
advertising for orthodontic centers added after 1997. As a percentage of net
revenue, marketing and advertising expense increased to 9.0% for 1998 from 8.4%
for 1997. We attribute the increase in this expense as a percentage of net
revenue to the initiation of marketing in larger media markets, which generally
have relatively higher advertising rates, after 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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GENERAL AND ADMINISTRATIVE
General and administrative expense increased $4.7 million, or 35.6%, to $18.1
million for 1998 from $13.4 million for 1997. The increase in general and
administrative expense resulted primarily from the addition of orthodontic
centers after 1997. As a percentage of net revenue, however, general and
administrative expense decreased to 10.6% for 1998 from 11.4% for 1997. General
and administrative expense decreased as a percentage of net revenue as a result
of lower average startup costs for orthodontic centers developed after 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $3.5 million, or 61.8%, to $9.1
million for 1998 from $5.6 million for 1997. As a percentage of net revenue,
depreciation and amortization expense increased to 5.3% for 1998 from 4.8% for
1997. The increase in this expense is a result of the fixed assets acquired and
service agreements entered into for orthodontic centers developed, acquired or
relocated after 1997.
OPERATING PROFIT
Operating profit increased $18.3 million, or 50.9%, to $54.3 million for 1998
from $36.0 million for 1997. As a percentage of net revenue, operating profit
increased to 31.7% for 1998 from 30.6% for 1997 as a result of the factors
discussed above.
INTEREST
Net interest income decreased $860,000, or 75.5%, to $280,000 for 1998 from $1.1
million for 1997. The decrease in net interest income resulted from a decrease
in our average investment balance resulting from the investment of unexpended
proceeds from our June 1995 and November 1997 public offerings and borrowings
under our revolving line of credit after January 1, 1998 associated with
expansion in new and existing markets.
PROVISION FOR INCOME TAXES
Provision for income taxes increased $6.3 million, or 43.4%, to $20.8 million
for 1998 from $14.5 million for 1997. Our effective income tax rate was 37.8%
for 1998 and 39.0% for 1997.
NET INCOME
Net income increased $11.2 million to $33.8 million for 1998 from $22.6 million
for 1997. As a percentage of net revenue, net income increased to 19.7% for 1998
from 19.3% for 1997 as a result of the factors discussed above.
QUARTERLY OPERATING RESULTS
The following table provides information about our unaudited quarterly operating
results for 1998, 1999 and the first six months of 2000. We believe that the
following information includes all of the adjustments, consisting of normal
recurring accruals and adjustments necessary to convert our cash basis
accounting records to an accrual basis, considered necessary for a fair
presentation of our consolidated financial position and our consolidated results
of operations for these periods in accordance with generally accepted accounting
principles. Results of operations for any particular
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
quarter are not necessarily indicative of results of operations for a full year
or predictive of future periods.
<TABLE>
<CAPTION>
QUARTERS ENDED
1998 1999 2000
-------------------------------------- -------------------------------------- -----------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
(in thousands)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue........... $37,693 $41,527 $44,697 $47,381 $49,048 $55,401 $59,770 $62,071 $65,765 $71,767
Operating profit...... 12,058 13,243 13,922 15,063 16,666 18,923 20,094 21,241 23,197 25,473
</TABLE>
SEASONALITY
Our orthodontic centers have experienced their highest volume of new cases in
the summer and 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, our 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, our
orthodontic centers have experienced reduced volume and fourth quarter revenue
for our 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
Our development and acquisition costs, capital expenditures and working capital
needs have been, and we expect will continue to be, financed through a
combination of cash flow from operations, bank borrowings and the issuance of
notes and shares of our common stock. We intend to continue to lease, rather
than purchase, facilities for our orthodontic centers, to maximize our available
capital.
Our net cash provided by operations for the six months ended June 30, 2000 was
$20.2 million, for the six months ended June 30, 1999 was $10.4 million, for
1999 was $23.3 million, for 1998 was $22.1 million and for 1997 was $9.0
million. Due to a change of income tax payment methods, cash paid for income
taxes during 1999 exceeded the 1999 provision by $7.0 million. Our working
capital at June 30, 2000 was $121.0 million, at December 31, 1999 was $102.3
million and at December 31, 1998 was $59.6 million, including cash and cash
equivalents at June 30, 2000 of $7.7 million, at December 31, 1999 of $5.8
million and at December 31, 1998 of $1.6 million.
Unbilled patient receivables (which represent patient revenue earned under
patient contracts in excess of the amount billed under those patient contracts)
at June 30, 2000 were $79.4 million, at December 31, 1999 were $65.8 million and
at December 31, 1998 were $46.3 million. These increases were primarily due to
an increase in the number of patients being treated and the amount of the fee
charged for treatment.
Our net cash used in investing activities for the six months ended June 30, 2000
was $20.5 million, for the six months ended June 30, 1999 was $18.6 million, for
1999 was $43.1 million, for 1998 was $43.2 million and for 1997 was $42.7
million.
Our 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 about $255,000, including the cost of equipment,
leasehold improvements, working capital and start-up losses associated with the
initial operations of the orthodontic center. These costs are shared by us and
the particular affiliated orthodontist. We assist affiliated orthodontists in
obtaining financing for their share of these costs through our primary lender by
providing the lender a guaranty of these loans. At June 30, 2000, we guaranteed
about $3.7 million of these loans. We intend to continue to make
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
advances of about $40,000 to newly-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. We intend to fund these advances and any continued financing through
a combination of bank borrowings, cash from operations and our net proceeds from
this offering.
Of the 566 orthodontic centers at June 30, 2000, 341 were acquired through the
acquisition of the assets of, and the affiliation with, existing orthodontic
practices. During 1999, we entered into preliminary or final agreements to
acquire the assets of, and affiliate with, 25 existing orthodontic practices
operating at 32 locations and made payments to practices with which we
affiliated in earlier periods with a total acquisition cost of about $21.7
million, consisting of an aggregate principal amount of $3.6 million of
promissory notes issued by us and an aggregate of 80,000 shares of our common
stock, with the remainder of about $17.2 million being paid in cash. At June 30,
2000, outstanding indebtedness under promissory notes we issued to affiliated
orthodontists to acquire the assets of existing orthodontic practices was about
$5.8 million, with maturities ranging from one to three years and interest rates
ranging from 7.43% to 8.75% per year.
Our financing activities included the repayment of notes to banks and our
affiliated orthodontists in the amount, for the six months ended June 30, 2000
of $1.8 million, for the six months ended June 30, 1999 of $2.6 million, for
1999 of $6.7 million, for 1998 of $7.9 million, and for 1997 of $6.7 million.
Our financing activities also included proceeds from the issuance of our common
stock in the amount, for the six months ended June 30, 2000 of $2.1 million, for
the six months ended June 30, 1999 of $866,000, for 1999 of $114,000, for 1998
of $595,000, and for 1997 of $38.3 million.
We entered into a $100.0 million revolving line of credit with a lending group
consisting of First Union National Bank, Bank of America FSB, Bank One Texas,
N.A. and Citibank, N.A. in October 1998. Wachovia Bank was added to this lending
group in 1999. The line of credit provides an aggregate of $100.0 million for
general working capital needs and expansion of the number of orthodontic
centers, and bears interest at varying rates above the lender's prime rate or
LIBOR. Amounts borrowed under the line of credit are secured by a security
interest in all of our assets, including our accounts receivable and equipment.
At June 30, 2000, $52.9 million of indebtedness was outstanding under the line
of credit. See "Use of Proceeds" and Note 5 to our Consolidated Financial
Statements that are included elsewhere in this prospectus.
We expect that we will require cash in the future primarily 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. Our cash
needs could significantly change depending upon our ability to recruit
orthodontists, find appropriate sites, enter into long-term service or
consulting agreements and acquire the assets of existing orthodontic practices.
We believe that the combination of our net proceeds from this offering, funds
available under our revolving line of credit and cash flow from operations will
be sufficient to meet our anticipated funding requirements for at least the next
12 months.
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Business
OVERVIEW
We are the leading provider of integrated business services to orthodontists.
Since 1985, we have executed a retail-oriented approach to developing
orthodontic practices, which we believe has resulted in significant increases in
productivity and profitability for our affiliated orthodontists. As of June 30,
2000, we were affiliated with 387 orthodontists practicing in 566 orthodontic
centers located throughout the United States and parts of Japan, Mexico and
Puerto Rico.
During 1999, our net revenue increased 32.1% to $226.3 million and our net
income increased 35.6% to $45.8 million, as compared to 1998. During the first
six months of 2000, our net revenue increased 31.7% to $137.5 million, and our
net income increased 39.5% to $29.3 million, as compared to the first six months
of 1999. As of June 30, 2000, our affiliated orthodontists were treating a total
of 305,146 patients, with total patient contract balances for orthodontic
services performed or to be performed of $425.7 million.
We provide our affiliated orthodontists with business, operational and marketing
expertise that enables them to realize significantly greater productivity,
practice revenue and patient volume, while maintaining high quality orthodontic
care. Our services include:
+ developing and implementing aggressive marketing plans for our orthodontic
centers, using television, radio and print advertising and internal marketing
programs to increase patient volume;
+ implementing our proprietary operating systems and innovative office designs
to increase productivity;
+ integrating our proprietary, user-friendly management information systems to
provide timely information and to enhance operational and accounting
controls; and
+ combining our proprietary online ordering system and our bulk purchasing
power to reduce orthodontic supply costs.
We believe that our affiliated orthodontists have experienced significantly
greater operating results than traditional orthodontists, including
significantly greater patient volume, productivity and patient revenue, as
reflected in the following table:
<TABLE>
<CAPTION>
OCA AFFILIATED ORTHODONTISTS(1) TRADITIONAL ORTHODONTISTS(2)
------------------------------- ----------------------------
(average amounts per orthodontist)
<S> <C> <C>
Annual advertising expenditures........... $64,426 $4,400
Treatment fees per patient:
Down payment per patient(3)............. $ 0 $ 976
Total fees per patient(3)(4)............ $ 3,379 $3,904
New case starts per year(5)............... 513 200
Patients treated per operating day(5)..... 78 45
Patient fees per operating day(5)......... $ 6,500 $3,000
</TABLE>
------------
(1) Information for OCA affiliated orthodontists is for 1999.
(2) Information for traditional orthodontists is for 1998, and is derived from
the 1999 Journal of Clinical Orthodontists Orthodontic Practice Study, a
biannual study of the U.S. orthodontic industry. Information for 1999 has
not been published.
(3) For traditional orthodontists, this amount represents a weighted average.
(4) For OCA affiliated orthodontists, this amount represents the standard fee
for a term of treatment that averages 26 months.
(5) For OCA affiliated orthodontists, this amount is based upon orthodontists
who had been affiliated with OCA for at least 12 months as of January 1,
1999.
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BUSINESS
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THE ORTHODONTIC INDUSTRY
INDUSTRY OVERVIEW
The U.S. orthodontic industry generates about $4.0 billion in annual gross
revenues, with the average orthodontic practice generating gross revenues of
about $600,000 per year, according to the 1999 Journal of Clinical Orthodontists
Orthodontic Practice Study, a biannual study by the Journal of Clinical
Orthodontists (JCO) of the U.S. orthodontic industry. Orthodontics is generally
an elective procedure, with about 75% of payments for orthodontic services made
directly by the patient and standard dental insurance covering about 25%.
Managed care represents a small percentage of revenues generated in the
orthodontic industry.
In 1998, orthodontists in the United States initiated treatment for about 1.8
million patients, according to the 1999 JCO Study. Of these patients, 77.6% were
between the ages of nine and 18 and the remaining 22.4% were primarily adults
between the ages of 25 and 35.
A study published in 1994 by members of the Department of Orthodontics of the
University of Florida concluded that many more children could benefit from
orthodontic treatment than were receiving it, due to costs of treatment and lack
of awareness. Based on that study and management's experience in the orthodontic
industry, we believe that the total market for orthodontic services
substantially exceeds the number of patients currently seeking treatment.
According to the 1999 JCO Study, the number of orthodontists practicing in the
United States has remained at about the same level since 1989. The U.S.
orthodontic industry includes about 9,000 orthodontists and is currently highly
fragmented, with about 86% of the practicing orthodontists acting as sole
practitioners. According to the 1999 JCO Study, 9.8% of orthodontists practicing
in the United States are affiliated with a practice management company or other
management services organization. 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 dentists are not included in the 1999 JCO Study.
The following table provides information about the U.S. orthodontic industry for
each of the years presented:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1998*
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 8,934
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 1,786,800
Average fee per case...... $3,050 $3,221 $3,401 $3,447 $3,492 $3,649 $3,703 $3,904
</TABLE>
------------
* Information for 1997 and 1999 has not been published.
TRADITIONAL ORTHODONTIC PRACTICES
According to the 1999 JCO Study, during 1998, the average orthodontist initiated
treatment on 200 patients, treated 45 patients per operating day and maintained
450 active cases. In addition, the average orthodontic practice generated gross
fees of about $600,000. In 1998, standard case fees in traditional orthodontic
practices averaged about $3,890 for children and about $4,180 for adults, with a
weighted average fee of $3,904. The charges for preliminary appointments,
including a required down payment, averaged $970 to $1,050, with a weighted
average of $976, or about 25% of the total fee.
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 about 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
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BUSINESS
--------------------------------------------------------------------------------
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 the business aspects of the practice and typically does not use third
party management services.
OCA AFFILIATED ORTHODONTIC PRACTICES
We believe that our retail-oriented approach to developing orthodontic practices
has resulted in significant increases in productivity and profitability for our
affiliated orthodontists. Orthodontists who had been affiliated with us for at
least three years earned pre-tax income of about $420,000 during 1999, which was
40% higher than the average pre-tax income of $300,000 reported in the 1999 JCO
Study as earned by orthodontists in the United States during 1998.
We develop and implement marketing plans for our orthodontic centers, using
television, radio and print advertising and internal marketing promotions.
During 1999, we spent an average of $64,426 per affiliated orthodontist on
direct marketing costs and advertising. In contrast, traditional orthodontists,
who rely primarily on referrals from dentists and patients, spent an average of
$4,400 on marketing and advertising in 1998.
We believe our marketing and advertising strategy has allowed our affiliated
orthodontists to generate significantly greater patient volume than traditional
orthodontists. Each of our affiliated orthodontists who had been affiliated with
us for at least one year generated an average of 513 new case starts during
1999, as compared to the 1998 national average of 200 new case starts per
orthodontist. During 1999, our affiliated orthodontists generated a total of
126,307 new case starts. At June 30, 2000, the total patient contract balances
of our affiliated orthodontists for orthodontic services performed or to be
performed was $425.7 million.
Our operating systems and office designs, along with the efficient use of an
average of five orthodontic assistants per orthodontic center, have enabled our
affiliated orthodontists to treat more patients per day as compared to
traditional orthodontists. Our innovative office designs permit an affiliated
orthodontist to treat patients without moving from room to room. Our proprietary
patient scheduling system groups appointments by the type of procedure and
dedicates certain days exclusively to new patients. Our affiliated orthodontists
practicing in orthodontic centers open throughout 1998 treated an average of 78
patients per operating day during 1999, as compared to an average of 45 patients
per operating day treated during 1998 by orthodontists in the United States
generally.
OPERATING STRATEGY
We believe we add value to our affiliated orthodontists' practices by providing
superior and innovative services that are designed to enhance productivity and
increase profitability. Key elements of our operating strategy include:
EMPHASIZING HIGH QUALITY PATIENT CARE
We believe that affiliating with orthodontists who provide high quality patient
care is a key to our success. All of our affiliated orthodontists are graduates
of accredited orthodontic training programs and participate in advisory
committees that meet each year to perform peer review studies and to consult
with our affiliated orthodontists. In addition, we provide operating systems and
support that we believe enhance the ability of our 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 on-site evaluations, patient surveys and
peer review procedures administered by our affiliated orthodontists.
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BUSINESS
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STIMULATING DEMAND FOR ORTHODONTIC SERVICES THROUGH MARKETING AND ADVERTISING
We develop and implement aggressive marketing plans for our orthodontic centers,
using television, radio and print advertising and internal marketing promotions.
We tailor advertisements to local markets and prominently feature the names and
locations of our affiliated orthodontists, as well as our 1-800-4BRACES
toll-free telephone number and www.4braces.com Internet website. Calls to our
toll-free number are automatically routed to an orthodontic center located near
the caller. To supplement our advertising program, we have implemented an
internal marketing program designed to assist our affiliated orthodontists in
increasing patient referrals from their existing patients, staff and general
dentists.
We believe our marketing activities, along with the affordable payment plans
provided by our affiliated orthodontists, have allowed our affiliated
orthodontists to generate significantly greater patient volume than traditional
orthodontists. During 1999, each affiliated orthodontist who had been affiliated
with us for at least one year generated an average of 513 new case starts, as
compared to the 1998 national average of 200 new case starts per orthodontist.
Our affiliated orthodontists generated a total of 126,307 new case starts during
1999.
INCREASING MARKET PENETRATION WITH COMPETITIVE PATIENT FEES AND CONVENIENT
PAYMENT PLANS
Our affiliated orthodontists generally provide a payment plan recommended by us
which consists of no down payment, equal monthly payments over the term of the
treatment and a final payment at completion of the treatment. We believe that
this payment plan and our 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 an average of 26 months, the
total fees charged by our affiliated orthodontists averaged $3,379 in 1999,
which was below the 1998 national weighted average of $3,904 for the same period
of treatment. We believe that our affiliated orthodontists are able to charge
lower fees because of the significant operating efficiencies resulting from our
proprietary operating systems and innovative office designs.
ACHIEVING OPERATING EFFICIENCIES THROUGH PROPRIETARY OPERATING SYSTEMS AND
INNOVATIVE OFFICE DESIGNS
We implement a variety of operating procedures and systems designed to enhance
productivity and increase profitability of our orthodontic centers and to
achieve economies of scale, while maintaining quality patient care. These
include innovative office designs which increase the number of patients the
clinical staff can treat and enhance patient comfort and privacy, a proprietary
scheduling system designed to increase capacity utilization at each orthodontic
center, efficient use of orthodontic assistants and centralized inventory
control and purchasing systems. During 1999, our affiliated orthodontists
practicing in orthodontic centers open throughout 1998 treated an average of 78
patients per operating day. In comparison, orthodontists in the United States
treated an average of 45 patients per operating day in 1998.
PROVIDING SUPERIOR SERVICE THROUGH MANAGEMENT INFORMATION SYSTEMS
Since our inception, we have used advanced technology to increase the efficiency
of our orthodontic centers and to improve our integrated business services. Our
operations are supported by our computer systems, including patient scheduling,
billing and collection, financial and statistical reporting, accounting,
inventory control and purchasing. We continue to upgrade our computer systems in
anticipation of growth in the number of affiliated orthodontists and orthodontic
centers and in order for us to continue to offer our affiliated orthodontists
efficient business services. We plan to continue
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to use Internet-related and other available technology to improve efficiency and
reduce costs for our orthodontic centers.
We have implemented a proprietary patient accounting and scheduling computer
system. Our orthodontic centers are connected to this system by a private
computer network, through which we gather data daily so that we may more
accurately project and analyze results for our orthodontic centers. This system
is designed to improve operating results for our orthodontic centers through its
financial and past due account controls, convenient user interface and
integrated scheduling features. We believe that this system has resulted in
improved operating results for our orthodontic centers. We provide affiliated
orthodontists with monthly operating data and quarterly financial statements for
each orthodontic center, including management's analysis of the financial
results and recommended changes to improve financial and operating performance.
We have also implemented an on-line inventory order system, which allows our
orthodontic centers to order supplies directly from vendors through our private
computer network. The order system is designed to reduce supply costs,
associated administrative costs, shipping time and storage requirements, improve
the accuracy of orders placed and improve the flow of information between
vendors and our orthodontic centers.
GROWTH STRATEGY
Our growth strategy focuses on enabling our affiliated orthodontists to grow
their practices and enhance their productivity, and on affiliating with
additional orthodontists in the United States and abroad. Key elements of our
growth strategy include:
ENHANCING PRODUCTIVITY AND INCREASING PROFITABILITY OF EXISTING CENTERS
A key element of our growth strategy is to promote strong growth in comparable
center net revenue. For orthodontic centers open throughout 1998 and 1999, net
revenue during 1999 increased 20.1% from the amount during 1998. We believe,
however, that our orthodontic centers are operating at an average of about
one-third of their potential capacity, which provides opportunities to increase
the productivity and profitability of our existing orthodontic centers, while
maintaining quality care. We have identified and are implementing several
programs designed to enhance the productivity and increase the capacity and
profitability of our existing orthodontic centers, including the following:
Increased patient treatment intervals. As a result of developments in
orthodontic technology, a patient may be seen every six to eight weeks, rather
than the traditional four weeks, without compromising quality of care.
Consistent with industry trends, our affiliated orthodontists have begun
increasing the intervals between patient treatments. During 1999, patients in
our orthodontic centers averaged 39.3 days between office visits, compared to an
average of 36.6 days during 1998 and 34.1 days during 1997. This increase in
patient treatment interval reduces the number of office visits during a
patient's course of treatment, which permits affiliated orthodontists and their
staff to treat additional patients.
Use of general dentists as assistants. In many states, a general dentist may
perform several orthodontic procedures that may not be performed by an
orthodontic assistant. By using a general dentist as an assistant, an affiliated
orthodontist can prescribe certain procedures to be performed by the dentist,
which permits the orthodontist to focus on existing and new patients. These
procedures are performed under the orthodontist's direction to ensure quality
patient care. There are substantially more general dentists in the United States
than orthodontists, providing a large pool of individuals who could perform
these procedures. We believe that this program will provide an attractive
alternative for general dentists. During the fourth quarter of 1999, a limited
number of our affiliated orthodontists began using general dentists to assist
them in performing orthodontic procedures.
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Internal marketing. To supplement our advertising program, we have implemented
an internal marketing program designed to assist our affiliated orthodontists in
increasing patient referrals from their existing patients and staff. Our
affiliated orthodontists also seek to develop strong relationships with general
dentists in their area in order to facilitate mutual referrals of patients. New
patients occasionally require general dental care before they begin orthodontic
treatment, and our affiliate orthodontists may refer these patients to general
dentists in their area. We track these referrals and referrals to our affiliated
orthodontists by general dentists of patients needing orthodontic services.
ADDING CENTERS AND AFFILIATED ORTHODONTISTS
Since our inception in 1985, we have grown to be affiliated with 387
orthodontists practicing in 566 orthodontic centers throughout the United States
and in Puerto Rico, Japan and Mexico, as of June 30, 2000. From January 1, 1985
to June 30, 2000, we developed 296 new orthodontic centers and affiliated with
341 existing orthodontic practices, of which 71 have been consolidated. We
intend to continue to develop new orthodontic centers with new and current
affiliated orthodontists, to affiliate with existing orthodontic practices and
to relocate existing practices to new facilities.
We actively market ourselves to orthodontists by targeting practicing
orthodontists, military orthodontists and orthodontic students, including the
approximately 200 orthodontists who graduate each year from accredited United
States orthodontic graduate programs. Our senior management and recruiting staff
recruit orthodontists through referrals from our affiliated orthodontists,
attending orthodontic conventions, trade shows and association meetings,
visiting orthodontic graduate schools and advertising in professional journals.
Referrals from our affiliated orthodontists have been our greatest source for
recruiting additional orthodontists.
We believe that orthodontists choose to affiliate with us because we provide:
+ capital required to open an orthodontic center;
+ business and clinical systems and staffing required to operate a new
orthodontic center;
+ opportunities to substantially increase practice income;
+ opportunities to focus on patient care rather than administration; and
+ opportunities to reduce the need for business development efforts designed to
generate referrals from general dentists.
The average cost of developing a new orthodontic center is about $255,000,
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 us and the particular
affiliated orthodontist. We assist affiliated orthodontists in obtaining
financing of their share of these costs through our primary lender by providing
the lender a guaranty of these loans.
We generally focus our recruitment of orthodontists with existing practices on
those who generate less than $500,000 of annual patient revenue prior to their
affiliation. We believe that affiliating with existing practices of this size
provides us with the opportunity to achieve higher revenue growth rates and
lower acquisition costs, relative to larger practices. Existing practices that
have affiliated with us have experienced increased average gross revenue and
operating income following their affiliation.
ESTABLISHING BRAND IDENTITY
We are seeking to develop brand identity through advertisements promoting the
"Orthodontic Centers of America" network of affiliated orthodontists, our
1-800-4BRACES toll-free telephone number and our www.4braces.com Internet
website. Our goal is to establish "Orthodontic Centers of America" as
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the preferred name in orthodontic care nationwide. We believe that we have a
sufficient number of orthodontic centers located in communities throughout the
United States to support national advertising, and intend to use national
advertising to promote our network of affiliated orthodontists. We believe that
brand identity and national advertising may permit us to market our orthodontic
centers more efficiently and effectively, including centers located in larger
cities (which typically have higher local advertising rates).
EXPANDING IN INTERNATIONAL MARKETS
We believe that there are large, untapped markets for orthodontic services
outside the United States and that orthodontists in other countries could
benefit from our services. We intend to expand our operations in Japan and
Mexico and to explore opportunities to expand into Canada, Spain and other
countries. Our expansion into any particular country would depend upon its
regulatory environment, market demographics, advertising media and economic
conditions and our ability to attract quality orthodontists and business
personnel in that market. We successfully entered the Japanese market in 1998,
where we were affiliated with 18 orthodontists practicing in 25 orthodontic
centers as of June 30, 2000. We began operating in Mexico in 1999, where we were
affiliated with two orthodontists practicing in two orthodontic centers as of
June 30, 2000.
CAPITALIZING ON COMPLEMENTARY PRODUCTS AND SERVICES
We believe that our orthodontic centers provide an opportunity for our
affiliated orthodontists to offer products and services that complement
orthodontic treatment, such as teeth whitening, porcelain laminates and
non-braces treatment for adults, without making significant investments of
capital and resources. At June 30, 2000, 65 of our orthodontic centers were
offering teeth whitening services using light activated teeth whitening systems.
Our orthodontic centers are also beginning to offer an alternative orthodontic
procedure for adults which uses clear, removable, plastic aligners rather than
braces. In September 2000, we commenced the trial operation of a cosmetic dental
center in Jacksonville, Florida. The cosmetic center offers only cosmetic dental
services, including teeth whitening, porcelain teeth laminates and alternative
orthodontic procedures for adults, and is designed to resemble an upscale
boutique or spa rather than a dental office.
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ORTHODONTIC CENTERS
LOCATION
At June 30, 2000, we provided integrated business services to 566 orthodontic
centers located in 153 market areas in 43 states, Puerto Rico, Japan and Mexico.
The following table provides information about these locations:
<TABLE>
<CAPTION>
NUMBER
OF
ADI(1) CENTERS
----------------------------------------------- -------
<S> <C> <C>
Alabama.............. Birmingham 3
Huntsville 4
Montgomery 1
Arizona.............. Lake Havasu 1
Phoenix 10
Tucson 2
Arkansas............. Jonesboro 1
Little Rock 2
California........... Chico/Redding 2
Eureka 1
Fresno 2
Los Angeles 5
Palm Desert 1
Sacramento 4
Salinas 3
San Diego 9
San Francisco 3
San Jose 5
Colorado............. Colorado Springs 3
Denver 9
Fort Collins 1
Grand Junction 1
Connecticut.......... Hartford 9
Florida.............. Fort Lauderdale/Miami 11
Fort Myers 3
Gainesville 3
Jacksonville 4
Orlando 11
Panama City 1
Pensacola 1
Tallahassee 1
Tampa 11
West Palm Beach 4
Georgia.............. Albany 3
Atlanta 15
Augusta 1
Columbus 1
Savannah 2
Tallahassee, FL 1
Hawaii............... Honolulu 1
Idaho................ Spokane, WA 1
Illinois............. Chicago 4
Peoria 4
Rockford 1
St. Louis, MO 2
</TABLE>
<TABLE>
<CAPTION>
NUMBER
OF
ADI(1) CENTERS
----------------------------------------------- -------
<S> <C> <C>
Indiana.............. Indianapolis 4
Louisville, KY 1
Kansas............... Kansas City, MO 1
Kentucky............. Lexington 2
Louisville 2
Louisiana............ Alexandria 2
Baton Rouge 4
Lafayette 1
Lake Charles 1
Monroe 1
New Orleans 11
Shreveport 1
Maine................ Portland 3
Maryland............. Baltimore 7
Rockville/Washington,
D.C. 8
Massachusetts........ Boston 11
Providence, RI 2
Springfield 3
Michigan............. Detroit 8
Grand Rapids 4
Saginaw 2
Minnesota............ Minneapolis 7
Mississippi.......... Columbus 2
Gulfport 4
Hattiesburg 1
Jackson 4
Meridian 3
New Orleans, LA 1
Missouri............. Kansas City 3
St. Louis 7
Nevada............... Las Vegas 2
Reno 1
New Hampshire........ Boston, MA 1
New Jersey........... Atlantic City 3
Philadelphia, PA 3
Trenton 2
Vineland 1
New Mexico........... Albuquerque 2
Farmington 1
New York............. Albany 2
Buffalo 1
New York City 12
Rochester 3
Syracuse 2
</TABLE>
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<TABLE>
<CAPTION>
NUMBER
OF
ADI(1) CENTERS
----------------------------------------------- -------
<S> <C> <C>
North Carolina....... Charlotte 5
Greenville 5
Raleigh-Durham 4
Winston-Salem 4
North Dakota......... Minot 2
Ohio................. Cincinnati 6
Cleveland 15
Columbus 4
Dayton 2
Toledo 2
Youngstown 2
Oklahoma............. Oklahoma City 5
Tulsa 2
Oregon............... Bend 3
Portland 4
Pennsylvania......... Baltimore, MD 1
Harrisburg 3
Johnstown/Altoona 3
Philadelphia 10
Pittsburgh 1
Scranton 3
Rhode Island......... Providence 1
South Carolina....... Charleston 3
Columbia 3
Florence 1
Greenville 3
Savannah, GA 1
Tennessee............ Chattanooga 3
Johnson
City/Bristol/Kingsport 3
Knoxville 3
Memphis 4
Nashville 6
Texas................ Austin 7
</TABLE>
<TABLE>
<CAPTION>
NUMBER
OF
ADI(1) CENTERS
----------------------------------------------- -------
<S> <C> <C>
Beaumont 1
Brownsville 4
Corpus Christi 1
Dallas/Ft. Worth 20
El Paso 3
Houston 11
Longview/Tyler 2
Odessa 2
San Antonio 3
Shreveport, LA 1
Victoria 2
Waco 3
Utah................. Salt Lake City 6
Virginia............. Arlington/Washington,
D.C. 6
Harrisonburg 1
Norfolk 4
Richmond 3
Washington........... Portland, OR 2
Seattle 8
Spokane 2
West Virginia........ Wheeling 3
Wisconsin............ Milwaukee 5
Wyoming.............. Casper 2
Japan................ Ichinomiya 1
Komaki 1
Kyoto 5
Nanba 1
Sanda 2
Tokyo 15
Mexico............... Mexico City 2
Puerto Rico.......... San Juan 5
---
Total....................................... 566
===
</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. Some 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
Our orthodontic centers are generally located either in shopping centers or
professional office buildings. Substantially all of our orthodontic centers
include private treatment rooms and large patient waiting areas. This allows our
orthodontic centers to locate in a broader range of office space than a
traditional orthodontic practice, which typically uses one large treatment area.
Our orthodontic centers typically include up to six treatment rooms and range in
size from about 2,000 to 2,500 square feet, depending on the needs of the
particular center.
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 each 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, generally ranging from two to 20 days per month. Staff
members dedicated to our 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 by a receptionist who answers the telephone
and books appointments.
The orthodontic centers schedule patients 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, the
orthodontic centers group appointments for particular types of procedures
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 use of an orthodontic center
by a greater number of patients each day patients are treated.
The orthodontic centers dedicate certain days each month to seeing new patients.
They schedule longer appointments 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 the affiliated
orthodontist recommends orthodontic treatment, the patient then signs a contract
for the treatment. The grouping of new patient appointments separately from the
monthly appointments for existing patients avoids 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 every four to eight
weeks for adjustments to the braces. The patient makes a monthly payment prior
to receiving his or her chart and proceeding to a 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 schedules his or her next appointment and
receives appropriate written information or instructions regarding his or her
activities during the interim period.
PAYMENT PLAN
Our affiliated orthodontists generally provide a payment plan that we recommend,
which consists of no initial down payment, equal monthly payments during the
term of the treatment and a final payment 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
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number of required monthly payments is fixed at the beginning of the case and
corresponds to the anticipated number of months of treatment, which averages 26
months.
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
through the date of termination. Patients generally may transfer to another of
our orthodontic centers for the completion of their treatment, and continue to
pay the remaining balance under their existing patient contract. Since January
1, 1997, 1.0% of our net revenue has proven to be uncollectible.
Our affiliated orthodontists have not accepted 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 1999, 17.1% of the patients treated at our orthodontic centers had some
form of insurance coverage, and 12.4% of the patient revenue of our affiliated
orthodontists was paid by a third party payor. The patient is responsible for
any portion of the fee that is not covered by insurance.
SERVICES AND OPERATIONS
We provide integrated business services for our orthodontic centers. We provide
a wide range of services for our orthodontic centers, including marketing and
advertising, management information systems, purchasing, billing, collection and
staffing. Where permitted by applicable statutes or regulations, we also employ
the orthodontic assistants. Our 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.
MARKETING AND ADVERTISING
We market and advertise the services of our orthodontic centers through
television, radio and print media advertising. We tailor this advertising to the
particular local market, and prominently feature the names and locations of the
orthodontic center and the affiliated orthodontist. Our advertising and direct
marketing expenditures averaged $64,426 per affiliated orthodontist in 1999 as
compared to a national average of $4,400 per orthodontist for traditional
practices in 1998.
The general public traditionally has had little information about orthodontic
fees prior to consultation with an orthodontist. The advertising we have
produced stresses our affiliated orthodontists' 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 our
orthodontic centers are conveniently located in each market and operate for
extended hours and on some weekend days to accommodate working parents. The
advertisements also feature our 1-800-4BRACES toll free telephone number which
routes incoming calls to an orthodontic center located in the caller's area. Our
orthodontic centers typically receive increased inquiries 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.
To supplement our advertising program, we have implemented an internal marketing
program designed to assist our affiliated orthodontists in increasing patient
referrals from their existing patients and staff. Our affiliated orthodontists
also seek to develop strong relationships with general dentists in their area in
order to facilitate mutual referrals of patients.
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MANAGEMENT INFORMATION SYSTEMS
We provide our affiliated orthodontists with management and financial
information systems designed to 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 our
orthodontic centers. We use information systems which track data related to our
orthodontic centers' operations and financial performance. We monitor all
expenditures on advertising and reallocate resources between markets where
advertising expenditures need to be increased or decreased. Our systems also
track new patient cases for each of our orthodontic centers on a daily basis so
that changes in operational, advertising and marketing efforts can be made
promptly to better ensure that new patient cases at our orthodontic centers are
within projected levels. Our orthodontic centers send billing and collection
information to us daily for processing.
We have implemented a proprietary patient accounting computer software and
scheduling system. Our orthodontic centers are connected to this system by a
private computer network, through which we gather data and generate
comprehensive reports so that we may more accurately project and analyze results
for our orthodontic centers. This system is designed to improve operating
results for our orthodontic centers through its financial and past due account
controls, convenient user interface and integrated scheduling features.
FINANCIAL AND STATISTICAL REPORTING
We also provide our affiliated orthodontists with monthly operating data and
quarterly financial statements. With the quarterly financial statements, we
provide an analysis of the financial results and recommend changes to improve
financial performance of our orthodontic centers. This analysis allows our
affiliated orthodontists and us to make periodic adjustments in marketing and
operating the orthodontic centers.
PURCHASING
Because of the number of our orthodontic centers, we are able to make bulk
purchases of equipment, office furniture, inventory and supplies in order to
reduce per unit costs and associated administrative expenses. We negotiate
arrangements with suppliers that provide cost savings to each of our orthodontic
centers. We have also implemented an on-line inventory order system, which
allows our orthodontic centers to order supplies directly from vendors through
our private computer network. The order system is designed to improve the
accuracy of orders placed, reduce supply costs, storage requirements and
shipping time and improve the flow of information between vendors and our
orthodontic centers.
OPERATIONS
Our operations department services the operational needs of our orthodontic
centers. Operation managers within the operations department respond to various
operational questions and requests from our orthodontic centers located within
an assigned geographic region, including those relating to inventory, supplies,
equipment and operational efficiencies. The operations department provides the
affiliated orthodontist and staff of each orthodontic center with periodic
reports regarding that orthodontic center's performance. We maintain an
incentive-based compensation program for our employees which rewards employees
based upon their performance and the operating results of our orthodontic
centers, including increased collections and case starts and cost containment
efforts.
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TRAINING
Our affiliated orthodontists receive initial training regarding our operating
systems at our training office in Jacksonville, Florida to enable an affiliated
orthodontist to take advantage of the efficiencies created by our systems. We
also employ training teams which travel to each new orthodontic center to train
the orthodontic center's clinical and business staff with respect to our
operating systems on an ongoing basis. Our training department monitors the
operations of each new orthodontic center during the first six months of its
operations. In some cases, follow-up visits by the training team are conducted
as necessary following the opening of an orthodontic center to maintain
operating efficiencies.
LEASING AND CONSTRUCTION
Our leasing and construction department locates and leases suitable office space
for new orthodontic centers in new markets and new locations within existing
markets. The leasing and construction department also coordinates construction
of the interior of new orthodontic centers to accommodate our proprietary office
designs. This department also relocates and remodels the offices of some of the
existing orthodontic practices with which we affiliate.
AGREEMENTS WITH AFFILIATED ORTHODONTISTS
We provide comprehensive management and marketing services to our affiliated
orthodontists under 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 the dental regulatory provisions of
the particular state in which an orthodontic center is located.
SERVICE AGREEMENTS
Service agreements are between us and an affiliated orthodontist and his or her
professional corporation or other entity. Under a service agreement, we provide
our affiliated orthodontists with business, marketing and operational services,
including providing capital, facilities and equipment (including utilities,
maintenance and rental), implementing a marketing program, preparing budgets and
financial statements, ordering and purchasing inventory and supplies, providing
staff and a patient scheduling system, billing and collecting patient fees, and
maintaining files and records.
Under a service agreement, the affiliated orthodontist pays us a fee equal to
about 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 orthodontist. The amounts retained by an affiliated
orthodontist depend on his or her financial performance, based in significant
part on the affiliated orthodontist's profitability on a cash basis, as provided
in the service agreements.
The terms of our service agreements range from 20 to 40 years, with most terms
ranging from 20 to 25 years. Upon expiration or termination by either party of a
service agreement, the affiliated orthodontist generally may purchase certain of
the related assets owned by us, including all equipment, improvements and
intangible assets, for cash at the then current book value. The service
agreements generally 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.
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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, we may provide only consulting services to orthodontists and
may not manage an orthodontist's practice. The consulting fee payable to us 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 operation of
the applicable orthodontic centers.
GOVERNMENT REGULATION
The field of orthodontics is highly regulated. In general, regulation of
healthcare companies is increasing.
Each state and country in which we operate imposes licensing and other
requirements on 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, we may become subject to compliance
with additional regulations.
The operations of our orthodontic centers must meet federal, state and local
regulatory standards in the areas of safety and health. Historically, those
standards have not had a material adverse effect on the operations of our
orthodontic centers. Based on our familiarity with the operations of our
orthodontic centers and the activities of our affiliated orthodontists, we
believe that our orthodontic centers comply in all material respects with
applicable federal, state and local laws and regulations relating to safety and
health.
The laws of many states prohibit orthodontists from splitting fees with
non-orthodontists and prohibit non-orthodontic entities (such as us) 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. A number of states have enacted anti-kickback laws that prohibit
payments or other remuneration for the referral of patients to health care
providers, including orthodontists. We believe, based on our familiarity with
the operations of our orthodontic centers and the activities of our affiliated
orthodontists, that our current and planned activities do not violate these
statutes and regulations. Future interpretations of these laws, or the enactment
of more stringent laws, could, however, require us to change the structure and
terms of our existing contractual relationships with our affiliated
orthodontists or how we operate our orthodontic centers. In addition, statutes
in some states and countries could restrict expansion of our operations in those
jurisdictions. In response to particular state regulatory provisions, we must
utilize the consulting agreement structure in some states.
We regularly monitor developments in laws and regulations relating to
orthodontics. We may be required to modify our agreements, operations and
marketing from time to time in response to changes in the business and
regulatory environment. We plan to structure all of our agreements, operations
and marketing in accordance with applicable law, although our arrangements could
be successfully challenged and required changes could have a material adverse
effect on our operations or profitability.
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COMPETITION
The business of providing orthodontic services is highly competitive in each of
the markets in which our orthodontic centers operate. Our affiliated
orthodontists compete with orthodontists who operate in single and multiple
offices. Our orthodontic centers also compete with general dentists who provide
certain orthodontic services. The provision of orthodontic services by general
dentists has increased in recent years. Other companies currently provide
management services to orthodontic practices on a national basis. Companies with
similar objectives and substantially greater financial resources may enter our
markets and compete with us.
EMPLOYEES
At June 30, 2000, we employed 2,166 persons, including 1,682 full-time employees
and 110 employees in our corporate offices. None of our employees is represented
by a collective bargaining agreement. We consider our relationship with our
employees to be good. We do not employ our affiliated orthodontists.
INSURANCE
We maintain general liability and property insurance. The cost of insurance
coverage varies, and the availability of some coverage has fluctuated in recent
years. While management believes, based upon its claims experience, that our
current insurance coverage is adequate for our current operations, our coverage
may not be sufficient for all future claims and may not continue to be available
in adequate amounts or at reasonable rates. Our affiliated orthodontists
purchase and maintain their own malpractice liability insurance coverage, and
must use reasonable efforts to have us named as an additional insured party on
their respective insurance policies.
LEGAL PROCEEDINGS
We and our affiliated orthodontists may, from time to time, be party to
litigation or administrative proceedings which arise in the normal course of our
business. We do not have pending any litigation that, if adversely determined,
would have a material adverse effect on us.
--------------------------------------------------------------------------------
42
<PAGE> 45
--------------------------------------------------------------------------------
Management
The following table provides information about our directors, executive officers
and key employees:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH OCA
--------------------------------------------------------------------------------------------
<S> <C> <C>
Dr. Gasper Lazzara, Jr. .................. 58 Chairman of the Board, Director
Bartholomew F. Palmisano, Sr. ............ 54 Chief Executive Officer, President,
Director
Michael C. Johnsen........................ 47 Chief Operating Officer, Director
Bartholomew F. Palmisano, Jr. ............ 30 Chief Financial Officer, Secretary
Paul J. Spansel........................... 40 Vice President
Anthony J. Paternostro.................... 42 Vice President
Dr. Dennis J. Buchman..................... 48 Vice President
John C. Glover............................ 37 Vice President of Investor Relations
Ashton J. Ryan, Jr. ...................... 52 Director
A Gordon Tunstall......................... 56 Director
Edward J. Walters, Jr. ................... 53 Director
</TABLE>
Dr. Gasper Lazzara, Jr. Dr. Lazzara has served as our Chairman of the Board and
as a director since July 1994. He served as our Co-Chief Executive Officer from
September 1998 to July 2000, and he served as our Chief Executive Officer from
July 1994 to September 1998. Dr. Lazzara also served as our President from July
1994 to June 1997. From 1989 to 1994, Dr. Lazzara served as president or
managing partner of certain of our predecessor entities. He is a licensed
orthodontist and, prior to founding OCA, maintained a private orthodontic
practice for over 25 years. He is a member of the American Association of
Orthodontists and a Diplomate of the American Board of Orthodontists. Dr.
Lazzara serves on the board of directors of BriteSmile, Inc.
Bartholomew F. Palmisano, Sr. Mr. Palmisano has served as our Chief Executive
Officer since July 2000, as our President since October 1999 and as a director
since July 1994. He served as a Co-Chief Executive Officer from September 1998
to July 2000. He served as our Chief Financial Officer, Senior Vice President
and Secretary from July 1994 to September 1998. From 1989 to 1994, Mr. Palmisano
served as the chief financial officer of certain of our predecessor entities.
Mr. Palmisano is a licensed certified public accountant and an attorney.
Michael C. Johnsen. Mr. Johnsen has served as our Chief Operating Officer since
June 1997 and as a director since 1994. Mr. Johnsen served as our Vice President
of Operations from July 1994 to June 1997. From 1988 to 1994, Mr. Johnsen served
as vice president of operations of certain of our predecessor entities. Mr.
Johnsen is Dr. Lazzara's brother-in-law.
Bartholomew F. Palmisano, Jr. Mr. Palmisano has served as our Chief Financial
Officer and Secretary since September 1998. He served as our Chief Information
Officer from July 1994 to September 1998. He was employed as an accountant with
Arthur Andersen LLP in 1992. Mr. Palmisano is the son of Bartholomew F.
Palmisano, Sr.
Paul J. Spansel. Mr. Spansel has served as a Vice President of OCA since 1997.
His primary responsibilities include practice development, operations and
special projects. Mr. Spansel has been employed by OCA in various positions
since 1994. He was previously employed by Texaco, Inc., where he worked in
various capacities over a 14-year period.
Anthony J. Paternostro. Mr. Paternostro has served as a Vice President of OCA
since 1997. His primary responsibilities include practice development,
operations and special projects. Mr. Paternostro has been employed by OCA in
various positions since June 1996. From 1991 to 1996, Mr. Paternostro served as
Director of Design Services for Pilot Corporation, a national fuel retailer.
--------------------------------------------------------------------------------
43
<PAGE> 46
MANAGEMENT
--------------------------------------------------------------------------------
Dr. Dennis J. Buchman. Dr. Buchman has served as a Vice President of OCA since
February 2000. His primary responsibilities include doctor relations, practice
development and operations. From our inception in 1985 to February 2000, Dr.
Buchman was one of our affiliated orthodontists.
John C. Glover. Mr. Glover has served as our Vice President of Investor
Relations since February 1998. Mr. Glover served as Director of Investor
Relations of Barnett Banks, Inc. from January 1997 to February 1998. He worked
as a corporate finance associate with J.P. Morgan & Co. in New York, New York
from June 1992 to May 1995 and served in the U.S. Navy from 1984 to 1991.
Ashton J. Ryan, Jr. Mr. Ryan has served as a director of OCA since 1996. He has
served as president and chief executive officer of FirsTrust Corp., New Orleans,
Louisiana, since 1998. From 1993 to 1998, Mr. Ryan served as the president and
chief executive officer of First National Bank of Commerce, New Orleans. Mr.
Ryan was formerly a partner with Arthur Andersen & Co., with which he worked as
an accountant from 1971 to 1991.
A Gordon Tunstall. Mr. Tunstall has served as a director of OCA since 1996. He
is the founder and president of Tunstall Consulting, Inc., a provider of
strategic consulting and financial planning services. Mr. Tunstall also serves
on the boards of directors of Advanced Lighting Technologies, Inc., Horizon
Medical Products, Inc. and Kforce.com.
Edward J. Walters, Jr. Mr. Walters has served as a director of OCA since 1994.
He has been a partner in the law firm of Moore, Walters & Thompson, A
Professional Corporation in Baton Rouge, Louisiana since 1976.
COMPOSITION AND COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors is divided into three classes of directors and currently
consists of six members. Each class serves for a term of three years and
consists, as nearly as practicable, of one-third of the total number of
directors serving on the Board of Directors. The Executive Committee of our
Board of Directors acts on behalf of the Board of Directors on all matters
concerning the management and conduct of our business and affairs except those
matters that cannot by law be delegated by the Board of Directors. The Audit
Committee of the Board of Directors selects and engages on our behalf, subject
to the approval of our stockholders, a firm of independent certified public
accountants to audit our books and accounts for the fiscal year in which the
accountants are appointed, and to report to the Audit Committee. The Audit
Committee also determines whether the business practices and conduct of our
employees and other representatives comply with our policies and procedures. The
Compensation Committee of the Board of Directors establishes our general
compensation policy and approves increases in directors' fees and in salaries
paid to officers and senior employees earning in excess of an annual base salary
of $75,000. The Compensation Committee also administers our employee benefit
plans, including our three stock option plans.
--------------------------------------------------------------------------------
44
<PAGE> 47
--------------------------------------------------------------------------------
Principal and selling stockholders
The following table provides information about ownership of shares of our common
stock at September 30, 2000 by each of our directors, by all of our directors
and executive officers as a group, by the selling stockholders and by each
person that we know to be the beneficial owner of more than 5% of the
outstanding shares of our common stock. Unless otherwise indicated in a footnote
to the following table, each of the stockholders listed below has sole voting
and investment power of the shares of our common stock shown as beneficially
owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING(1) SHARES OWNED AFTER OFFERING(1)
--------------------------- BEING ---------------------------
BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dr. Gasper Lazzara, Jr.(2)(3)....... 4,337,006 8.8% 2,000,000 2,337,006 4.6%
Bartholomew F. Palmisano, Sr.(4).... 3,476,669 7.0 500,000 2,976,669 5.9
Michael C. Johnsen(5)............... 687,475 1.4 100,000 587,475 1.2
Ashton J. Ryan, Jr.(6).............. 6,800 * -- 6,800 *
A Gordon Tunstall(7)................ 3,600 * -- 3,600 *
Edward J. Walters, Jr.(8)........... 13,800 * -- 13,800 *
Bartholomew F. Palmisano, Jr.(9).... 749,993 1.5 22,700 727,293 1.5
All executive officers and directors
as a group (seven persons)........ 8,035,242 16.5 2,622,700 5,412,542 10.8
Massachusetts Financial Services
Company(10)(11)................... 4,010,176 8.3 -- 4,010,176 8.3
500 Boylston Street
Boston, MA 02116
T. Rowe Price Associates, Inc. and
T. Rowe Price New Horizons Fund,
Inc.(10)(12)...................... 3,941,100 6.2 -- 3,941,100 6.2
100 East Pratt Street
Baltimore, MD 21202
</TABLE>
------------
* Less than 1%.
(1) In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of our common stock subject to
options held by that person which are currently exercisable or which will
become exercisable within 60 days after September 30, 2000, are deemed to
be outstanding. These shares, however, are not deemed to be outstanding for
the purposes of computing the percentage ownership of any other person.
(2) Includes options currently exercisable to purchase 667,962 shares of our
common stock. Of the shares deemed beneficially owned by Dr. Lazzara, an
aggregate of 2,494,924 shares are held by limited partnerships of which Dr.
Lazzara is the general partner, 102,375 shares are held in a trust of which
Dr. Lazzara is the trustee, an aggregate of 533,085 shares are held in
separate trusts by a trustee for the benefit of each of Dr. Lazzara's
children, and 496,351 shares are held in a charitable foundation of which
Dr. Lazzara is a co-trustee. Dr. Lazzara disclaims beneficial ownership of
these shares.
(3) Dr. Lazzara has granted an option to the underwriters to purchase up to
286,702 shares of our common stock to cover over-allotments, if any. These
shares will not be sold in this offering unless the underwriters exercise
the option, and the table above assumes that the option will not be
exercised. If the option is exercised in full, Dr. Lazzara would sell an
additional 286,702 shares, which would result in Dr. Lazzara beneficially
owning 2,050,304 shares of common stock, or 4.0% of the shares of common
stock outstanding after the offering.
(4) Includes options currently exercisable to purchase 667,962 shares of our
common stock. Of the shares deemed beneficially owned by Mr. Palmisano,
160,000 shares are held by a limited liability company of which Mr.
Palmisano is the sole member, 160,000 shares are held in a limited
liability company of which Mr. Palmisano's spouse is the sole member and
--------------------------------------------------------------------------------
45
<PAGE> 48
PRINCIPAL AND SELLING STOCKHOLDERS
--------------------------------------------------------------------------------
an aggregate of 707,016 shares are held in separate trusts by trustees for
the benefit of each of Mr. Palmisano's children. Mr. Palmisano disclaims
beneficial ownership of these shares.
(5) Includes options exercisable currently or within 60 days after September
30, 2000 to purchase 100,000 shares of our common stock. Of the shares
deemed beneficially owned by Mr. Johnsen, an aggregate of 533,085 shares
are held by Mr. Johnsen as trustee of trusts for the benefit of Dr.
Lazzara's children, which are also included in the number of shares
beneficially owned by Dr. Lazzara. Mr. Johnsen disclaims beneficial
ownership of these shares.
(6) Includes options currently exercisable to purchase 1,800 shares of our
common stock.
(7) Includes options currently exercisable to purchase 3,600 shares of our
common stock.
(8) Includes options currently exercisable to purchase 10,800 shares of our
common stock. Of the shares deemed beneficially owned by Mr. Walters, 3,000
shares are held in trusts of which Mr. Walters is the trustee. Mr. Walters
disclaims beneficial ownership of these shares.
(9) Includes options currently exercisable to purchase 27,766 shares of our
common stock. Of the shares deemed beneficially owned by Mr. Palmisano, an
aggregate of 707,016 shares are held in trusts, of which Mr. Palmisano is
the co-trustee, for the benefit of Mr. Palmisano's siblings. These shares
are also included in the number of shares beneficially owned by Bartholomew
F. Palmisano, Sr. Mr. Palmisano disclaims beneficial ownership of these
shares.
(10) As disclosed in Schedule 13G filed with the SEC.
(11) Includes 3,693,076 shares to which sole voting power is held.
(12) Includes 498,700 shares to which T. Rowe Price Associates, Inc. has sole
voting power, and 3,000,000 shares as to which T. Rowe New Horizons Fund,
Inc. has sole voting power.
--------------------------------------------------------------------------------
46
<PAGE> 49
--------------------------------------------------------------------------------
Underwriting
OCA, the selling stockholders and the underwriters for the offering named below
have entered into an underwriting agreement concerning the shares being offered.
Subject to conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. UBS Warburg LLC, Banc of
America Securities LLC, Deutsche Bank Securities Inc., U.S. Bancorp Piper
Jaffray Inc. and Raymond James & Associates, Inc. are the representatives of the
underwriters.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------------------------------------------------------------------------
<S> <C>
UBS Warburg LLC.............................................
Banc of America Securities LLC..............................
Deutsche Bank Securities Inc. ..............................
U.S. Bancorp Piper Jaffray Inc. ............................
Raymond James & Associates, Inc. ...........................
---------
Total............................................. 3,822,700
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy up to 286,703 shares
from us and up to 286,702 shares from one of the selling stockholders at the
public offering price less the underwriting discounts and commissions to cover
these sales. If the option is exercised for less than the full amount, shares
will be purchased equally from one of the selling stockholders and us. If any
shares are purchased under this option, the underwriters will severally purchase
shares in approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up to
an additional 573,405 shares.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
-----------------------------------------------------------------------------------------
<S> <C> <C>
Per share................................................... $ $
Total............................................. $ $
</TABLE>
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be about $690,000.
Shares sold by the underwriters to the public will initially be offered at the
public offering price set forth on the cover of this prospectus. Any shares sold
by the underwriters to securities dealers may be sold at a discount of up to
$ per share from the public offering price. Any of these securities dealers
may resell any shares purchased from the underwriters to other brokers or
dealers at a discount of up to $ per share from the public offering price.
If all the shares are not sold at the public offering price, the representatives
may change the offering price and the other selling terms.
We have agreed with the underwriters not to offer, sell, contract to sell, hedge
or otherwise dispose of, directly or indirectly, any of our common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus continuing through the date 90 days
after the date of this prospectus, without the prior written consent of UBS
Warburg LLC. Our executive officers and directors and the selling stockholders
have also agreed to these restrictions.
In connection with this offering, the underwriters may purchase and sell shares
of common stock in the open market. These transactions may include stabilizing
transactions, short sales and purchases to cover positions created by short
sales. Stabilizing transactions consist of bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the
--------------------------------------------------------------------------------
47
<PAGE> 50
UNDERWRITING
--------------------------------------------------------------------------------
offering is in progress. Short sales involve the sale by the underwriters of a
greater number of shares than they are required to purchase in the offering.
Short sales may be either "covered short sales" or "naked short sales." Covered
short sales are sales made in an amount not greater than the underwriters'
over-allotment option to purchase additional shares in the offering. The
underwriters may close out any covered short position by either exercising their
over-allotment option or purchasing shares in the open market. In determining
the source of shares to close out the covered short position, the underwriters
will consider, among other things, the price of shares available for purchase in
the open market as compared to the price at which they may purchase shares
through the over-allotment option. Naked short sales are sales in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position is more likely
to be created if the indemnities are concerned there may be downward pressure on
the price of shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise affect
the market price of the common stock. As a result, the price of the common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the New York Stock Exchange, in
the over-the-counter market or otherwise.
We have agreed to indemnify the several underwriters against some liabilities,
including liabilities under the Securities Act of 1933, and to contribute to
payments that the underwriters may be required to make in respect thereof.
--------------------------------------------------------------------------------
48
<PAGE> 51
--------------------------------------------------------------------------------
Where you can find more information
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file with the SEC at the SEC's following public reference
facilities:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You may also obtain copies of the documents at prescribed rates by writing to
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Please call 1-800-SEC-0330 for further information on
the operations of the public reference facilities. Our SEC filings are also
available at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
This prospectus is part of a registration statement on Form S-3 that we filed
under the Securities Act of 1933. As allowed by SEC rules, this prospectus does
not contain all the information you can find in the registration statement or
the exhibits to the registration statement.
--------------------------------------------------------------------------------
49
<PAGE> 52
--------------------------------------------------------------------------------
Incorporation of information we file with the SEC
The SEC allows us to "incorporate by reference" in this prospectus the
information we file with the SEC, which means:
+ incorporated documents are considered part of this prospectus;
+ we can disclose important information to you by referring you to those
documents; and
+ information contained in this prospectus (or in any other document that we
file with the SEC and incorporate by reference) will automatically update and
supersede the information in this prospectus and any information that was
previously incorporated. Any statement that is so updated or superseded will
not be deemed a part of this prospectus.
We incorporate by reference the documents listed below which we filed with the
SEC under the Securities Exchange Act of 1934:
+ Annual Report on Form 10-K for the year ended December 31, 1999;
+ an Amendment on Form 10-K/A-1 to our Annual Report on Form 10-K for the year
ended December 31, 1999, filed on June 29, 2000;
+ Quarterly Report on Form 10-Q for the quarter ended March 31, 2000;
+ Quarterly Report on Form 10-Q for the quarter ended June 30, 2000; and
+ the section entitled "Description of Common Stock" in our Registration
Statement on Form 8-A, filed on October 7, 1997.
We also incorporate by reference each of the following documents that we will
file with the SEC after the date of the initial filing of the registration
statement and prior to the time we sell all of the shares of our common stock
offered by this prospectus:
+ reports filed under Section 13(a) and (c) of the Exchange Act;
+ definitive proxy or information statements filed under Section 14 of the
Exchange Act in connection with any subsequent stockholders' meeting; and
+ any reports filed under Section 15(d) of the Exchange Act.
You can obtain any of the filings incorporated by reference in this document
through us, or from the SEC through the SEC's web site or at the addresses
listed in "Where you can find more information." Documents incorporated by
reference are available from us without charge, excluding any exhibits to those
documents unless the exhibit is specifically incorporated by reference as an
exhibit in this prospectus. You can obtain documents incorporated by reference
in this prospectus by requesting them in writing or by telephone from us at the
following address:
Orthodontic Centers of America, Inc.
5000 Sawgrass Village Circle, Suite 30
Ponte Vedra Beach, Florida 32082
Attention: Investor Relations
Telephone: (904) 280-6285
You should rely only on the information contained in or incorporated by
reference in this prospectus in considering whether or not to purchase shares of
our common stock in this offering. We have not authorized anyone to provide you
with information that is different from the information in this
--------------------------------------------------------------------------------
50
<PAGE> 53
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
--------------------------------------------------------------------------------
prospectus. You should not assume that the information contained in this
document is accurate as of any date other than the date of this prospectus.
Legal matters
Waller Lansden Dortch & Davis, A Professional Limited Liability Company,
Nashville, Tennessee, special counsel to OCA, has passed on certain legal
matters with respect to the validity of the shares of our common stock offered
under this prospectus. Dewey Ballantine LLP, New York, New York, will pass on
certain legal matters relating to the offering for the underwriters.
Experts
Ernst & Young LLP, independent auditors, have audited our consolidated financial
statements at December 31, 1999 and 1998, and for each of the three years in the
period ended December 31, 1999, as set forth in their report. We have included
our financial statements in this prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
--------------------------------------------------------------------------------
51
<PAGE> 54
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999, AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PAGE
------------------------------------------------------------------
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets--December 31, 1998 and 1999 and
June 30, 2000 (Unaudited)................................. F-3
Consolidated Statements of Income--Years ended December 31,
1997, 1998 and 1999, and six months ended June 30, 1999
(Unaudited) and 2000 (Unaudited).......................... F-4
Consolidated Statements of Cash Flows--Years ended December
31, 1997, 1998 and 1999, and six months ended June 30,
1999 (Unaudited) and 2000 (Unaudited)..................... F-5
Consolidated Statements of Shareholders' Equity--Years ended
December 31, 1997, 1998 and 1999, and six months ended
June 30, 1999 (Unaudited) and 2000 (Unaudited)............ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
--------------------------------------------------------------------------------
F- 1
<PAGE> 55
--------------------------------------------------------------------------------
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, 1998 and 1999, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. 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, 1998 and 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for start-up costs in 1999.
Ernst & Young LLP
New Orleans, Louisiana
March 27, 2000
--------------------------------------------------------------------------------
F- 2
<PAGE> 56
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1998 1999 2000
-----------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,601 $ 5,822 $ 7,725
Investments............................................... 1,187 983 --
Patient receivables, net of allowance for uncollectible
billings of $5,356, $6,403 and $7,158 in 1998, 1999 and
2000, respectively...................................... 20,163 25,976 30,651
Unbilled patient receivables, net of allowance for
uncollectible amounts of $2,209, $3,241 and $3,627 in
1998, 1999 and 2000, respectively....................... 46,314 65,793 79,449
Amounts receivable from orthodontic entities.............. 5,817 7,944 8,574
Deferred income taxes..................................... 4,399 4,455 4,078
Supplies inventory........................................ 5,890 8,195 7,494
Prepaid expenses and other assets......................... 1,663 1,920 3,547
-------- -------- --------
Total current assets............................... 87,034 121,088 141,518
Property, equipment and improvements, net................... 48,565 64,566 68,765
Amounts receivable from orthodontic entities, less current
portion................................................... 8,412 12,586 15,866
Intangible assets........................................... 152,438 167,348 174,597
Other assets................................................ 349 1,434 1,626
-------- -------- --------
Total assets....................................... $296,798 $367,022 $402,372
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,948 $ 2,104 $ 2,849
Accrued salaries and other accrued liabilities............ 2,932 3,647 3,964
Patient prepayments....................................... 4,326 4,206 4,474
Income taxes payable...................................... 7,921 935 3,278
Amounts payable to orthodontic entities................... 1,600 1,900 2,382
Current portion of notes payable to affiliated
orthodontists........................................... 5,118 6,020 3,842
Current portion of long-term debt......................... 3,555 -- --
-------- -------- --------
Total current liabilities.......................... 27,400 18,812 20,789
Notes payable to affiliated orthodontists, less current
portion................................................... 6,159 2,141 1,922
Long-term debt, less current portion........................ 16,500 50,632 52,851
Deferred income taxes....................................... 15,580 16,910 16,533
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 shares
authorized at December 31, 1998 and 1999 and June 30,
2000; 47,849,000, 48,066,000 and 48,460,000 shares
issued and outstanding at December 31, 1999 and 1998 and
at June 30, 2000, respectively.......................... 478 481 484
Additional paid-in capital................................ 159,936 161,465 163,533
Retained earnings......................................... 78,599 124,435 153,732
Due from key employees for stock purchase program......... (5,236) (5,236) (4,981)
Capital contribution receivable from shareholders......... (2,618) (2,618) (2,491)
-------- -------- --------
Total shareholders' equity......................... 231,159 278,527 310,277
-------- -------- --------
Total liabilities and shareholders' equity......... $296,798 $367,022 $402,372
======== ======== ========
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F- 3
<PAGE> 57
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
---------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue........................................ $117,326 $171,298 $226,290 $104,449 $137,532
Direct expenses:
Employee costs................................... 33,429 46,878 61,224 28,264 36,579
Orthodontic supplies............................. 8,789 13,287 17,136 7,846 10,113
Rent............................................. 10,299 14,128 18,624 8,551 11,066
Marketing and advertising........................ 9,855 15,491 16,874 7,679 10,172
-------- -------- -------- -------- --------
Total direct expenses..................... 62,372 89,784 113,858 52,340 67,930
General and administrative......................... 13,356 18,104 23,270 10,718 14,152
Depreciation and amortization...................... 5,640 9,124 12,238 5,802 6,780
-------- -------- -------- -------- --------
Operating profit................................... 35,958 54,286 76,924 35,589 48,670
Interest expense................................... (234) (337) (2,599) (972) (1,922)
Interest income 1,377 617 395 210 315
-------- -------- -------- -------- --------
Income before income taxes......................... 37,101 54,566 74,720 34,827 47,063
Provision for income taxes......................... 14,469 20,753 28,206 13,147 17,766
-------- -------- -------- -------- --------
Net income before cumulative effect of change in
accounting principle............................. 22,632 33,813 46,514 21,680 29,297
Cumulative effect of change in accounting
principle, net of income tax benefit of
$410,000......................................... -- -- (678) (678) --
-------- -------- -------- -------- --------
Net income......................................... $ 22,632 $ 33,813 $ 45,836 $ 21,002 $ 29,297
======== ======== ======== ======== ========
Net income per share:
Basic before cumulative effect of a change in
accounting principle........................... $ .51 $ .71 $ .97 $ .46 $ .61
Cumulative effect of a change in accounting
principle...................................... $ -- $ -- $ (.02) $ (.02) $ --
-------- -------- -------- -------- --------
Basic............................................ $ .51 $ .71 $ .95 $ .44 $ .61
======== ======== ======== ======== ========
Diluted before cumulative effect of a change in
accounting principle........................... $ .50 $ .70 $ .96 $ .45 $ .60
Cumulative effect of a change in accounting
principle...................................... $ -- $ -- $ (.02) $ (.02) $ --
-------- -------- -------- -------- --------
Diluted.......................................... $ .50 $ .70 $ .94 $ .43 $ .60
======== ======== ======== ======== ========
Weighted average shares outstanding:
Basic............................................ 44,576 47,690 47,998 47,941 48,262
======== ======== ======== ======== ========
Diluted.......................................... 45,414 48,502 48,643 48,665 49,238
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F- 4
<PAGE> 58
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................... $ 22,632 $ 33,813 $ 45,836 $ 21,002 $ 29,297
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for bad debt expense................ 1,851 2,295 2,079 1,082 1,141
Depreciation and amortization................. 5,640 9,124 12,238 5,802 6,780
Deferred income taxes......................... (2,225) (2,767) 1,273 410 --
Cumulative effect of change in accounting
principle................................... -- -- 678 678 --
Changes in operating assets and liabilities:
Patient receivables......................... (7,659) (7,848) (6,860) (3,766) (5,275)
Unbilled patient receivables and patient
prepayments............................... (12,724) (14,885) (20,631) (9,521) (13,928)
Supplies inventory.......................... (1,429) (2,663) (2,305) (2,015) (701)
Prepaid expenses and other.................. (132) 228 (1,342) (4,224) (1,819)
Amounts receivable from/payable to
orthodontic entities...................... (590) (1,756) (2,420) (1,040) (146)
Accounts payable and other current
liabilities............................... 3,682 6,568 (5,199) (2,069) 3,403
-------- -------- -------- -------- --------
Net cash provided by operating activities....... 9,046 22,109 23,347 10,369 20,154
INVESTING ACTIVITIES
Purchases of property, equipment and
improvements.................................. (14,952) (17,638) (22,520) (9,268) (7,904)
Purchase of available-for-sale investments...... (21,758) -- -- -- --
Proceeds from sales or maturities of
available-for-sale investments................ 20,000 19,674 204 1,187 983
Intangible assets acquired...................... (25,219) (42,216) (17,178) (9,183) (10,322)
Advances to orthodontic entities................ (2,838) (4,906) (3,951) (2,239) (4,281)
Payments from orthodontic entities.............. 2,094 1,927 370 916 1,001
-------- -------- -------- -------- --------
Net cash used in investing activities........... (42,673) (43,159) (43,075) (18,587) (20,523)
FINANCING ACTIVITIES
Repayment of notes payable to affiliated
orthodontists................................. (6,658) (7,864) (6,742) (2,639) (1,821)
Proceeds from long-term debt.................... -- 20,055 30,577 12,418 2,000
Issuance of common stock........................ 38,323 595 114 866 2,093
-------- -------- -------- -------- --------
Net cash provided by financing activities....... 31,665 12,786 23,949 10,645 2,272
-------- -------- -------- -------- --------
Change in cash and cash equivalents............. (1,962) (8,264) 4,221 2,427 1,903
Cash and cash equivalents at beginning of
year.......................................... 11,827 9,865 1,601 1,601 5,822
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year........ $ 9,865 $ 1,601 $ 5,822 $ 4,028 $ 7,725
======== ======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest...................................... $ 234 $ 337 $ 2,499 $ 972 $ 1,922
======== ======== ======== ======== ========
Income taxes.................................. $ 14,460 $ 19,287 $ 33,931 $ 19,118 $ 15,613
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Long-term debt and common stock issued to obtain
management agreements......................... $ 27,704 $ 13,609 $ 4,512 $ 2,693 $ 717
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F- 5
<PAGE> 59
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DUE
FROM KEY CAPITAL
EMPLOYEES CONTRIBUTIONS
ADDITIONAL FOR STOCK RECEIVABLE TOTAL
COMMON PAID-IN RETAINED PURCHASE FROM SHAREHOLDERS'
STOCK CAPITAL EARNINGS PROGRAM SHAREHOLDERS EQUITY
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997..... $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 (151,000 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
Issuance of shares under
stock option plans,
including tax benefit of
$1,151 (223,000 shares).... 2 2,396 -- -- -- 2,398
Issuance of shares of common
stock to obtain management
agreements (253,000
shares).................... 2 4,206 -- -- -- 4,208
Net income................... -- -- 33,813 -- -- 33,813
---- -------- -------- ------- ------- --------
Balance at December 31, 1998... 478 159,936 78,599 (5,236) (2,618) 231,159
Issuance of shares under
stock option plans,
including tax benefit of
$506 (123,000 shares)...... 1 619 -- -- -- 620
Issuance of shares of common
stock to obtain management
agreements (80,000
shares).................... 2 910 -- -- -- 912
Net income................... -- -- 45,836 -- -- 45,836
---- -------- -------- ------- ------- --------
Balance at December 31, 1999... 481 161,465 124,435 (5,236) (2,618) 278,527
Issuance of shares under
stock option plans,
including tax benefit of
$696 (363,756 shares)
(unaudited)................ 3 1,653 -- -- -- 1,656
Issuance of shares of common
stock to obtain management
agreements (14,950 shares)
(unaudited)................ -- 542 -- -- -- 542
Repayment under Key Employee
Stock Purchase Program
(unaudited)................ -- (127) -- 255 127 255
Net income (unaudited)....... -- -- 29,297 -- -- 29,297
---- -------- -------- ------- ------- --------
Balance at June 30, 2000
(unaudited).................. $484 $163,533 $153,732 $(4,981) $(2,491) $310,277
==== ======== ======== ======= ======= ========
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F- 6
<PAGE> 60
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Orthodontic Centers of America, Inc. (the "Company") provides business services
to orthodontic centers on an international basis. The Company provided business
services to 360, 469, 537 and 566 (unaudited) orthodontic centers as of December
31, 1997, 1998 and 1999 and June 30, 2000, respectively. As of December 31, 1999
and June 30, 2000, such centers were located in 43 states in the United States
and in Puerto Rico, Japan, and Mexico.
The Company provides business operations, financial, marketing and
administrative services to orthodontic practices. These services are provided
under service, management and consulting agreements with the orthodontist and
their wholly owned orthodontic entities (hereafter referred to as "Service
Agreements"). These Service Agreements are for terms ranging from 20 to 40
years. The practicing orthodontists own the orthodontic entities.
UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements as of June 30, 2000
and for the six months ended June 30, 1999 and 2000, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals and adjustments necessary to convert the cash basis accounting records
to the accrual basis) considered necessary for a fair presentation have been
included. Operating results for the six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
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, 1998 and 1999 are classified as
available-for-sale because management does not have positive intent to hold
until maturity. Available-for-sale investments are carried at amortized cost,
which approximates fair value. At
--------------------------------------------------------------------------------
F- 7
<PAGE> 61
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, investments were included in current assets as management
expects to use the proceeds from the sale of the investments in its current
operations. At December 31, 1998, the Company's amortized cost of investments
held consisted of $1,187,000 of municipal bonds. At December 31, 1999, the
Company's amortized cost of investments held consisted of $983,440 of government
bonds. The unrealized gains and losses on these investments at December 31, 1998
and 1999 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.
REVENUE RECOGNITION
Service fees are earned by the Company under the terms of the Service
Agreements. Such fees are 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 the
management fee. 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 Service 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. Such deductions totaled $1,851,000,
$2,295,000 and $2,079,000 for the years ended December 31, 1997, 1998 and 1999,
respectively, and have been within management's expectations. At December 31,
1997, 1998 and 1999, there were approximately 130,000, 195,000 and 268,000,
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.
--------------------------------------------------------------------------------
F- 8
<PAGE> 62
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 5 to 10 years. Leasehold improvements are amortized over the
original lease terms which are generally 5 to 10 years. The related depreciation
and amortization expense for the years ended December 31, 1997, 1998 and 1999
was $3,549,000, $4,575,000 and $6,519,000, respectively.
INTANGIBLE ASSETS
Amortization expense for the years ended December 31, 1997, 1998 and 1999, was
$2,091,000, $4,549,000, and $5,719,000, respectively. Accumulated amortization
was $7,994,000 and $13,713,000 as of December 31, 1998 and 1999, respectively.
Intangible assets and the related accumulated amortization are written off when
fully amortized.
Intangible assets include the costs of obtaining Service Agreements, which are
amortized over the life of the agreements which is generally 20 to 40 years with
most terms ranging from 20 to 25 years. Such Service Agreements represent the
exclusive right to provide business operations, financial, marketing and
administrative service to an orthodontic entity during the term of the Service
Agreement. In the event the Service 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.
The recoverability of management is assessed periodically and takes into account
whether the management should be completely or partially written off or the
amortization period accelerated. In evaluating the value and future benefits of
management, the recoverability from operating income is measured. Under this
approach, the carrying value of agreement would be reduced if it is probable
that management's best estimate of future operating income before agreement
amortization will be less than the carrying amount of agreement over the
remaining amortization period. The Company assesses long-lived assets for
impairment under FASB Statement No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121). Under
those rules, management associated with assets acquired in a purchase business
combination is included in impairment evaluations when events or circumstances
exist that indicate the carrying amounts of those assets may not be recoverable.
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."
STOCK COMPENSATION ARRANGEMENTS
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees."
--------------------------------------------------------------------------------
F- 9
<PAGE> 63
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COSTS OF START-UP ACTIVITIES
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-Up
Activities." The SOP was effective beginning on January 1, 1999, and requires
that start-up costs capitalized prior to January 1, 1999 be written-off and any
future start-up costs be expensed as incurred. The effect of adopting SOP 98-5
resulted in the Company recording a charge on January 1, 1999 for the cumulative
effect of an accounting change of $1,088,000 net of taxes of $410,000 to expense
costs that had previously been capitalized.
3. TRANSACTIONS WITH ORTHODONTIC ENTITIES
The Company has entered into an agreement with a financial institution where (i)
the financial institution finances operating losses and capital improvements for
newly developed orthodontic centers directly to the orthodontic entity, subject
to the financial institution's credit approval of the orthodontic entity, and
(ii) the Company remains a guarantor of the related debt. At December 31, 1998
and 1999, the Company was a guarantor for approximately $6,095,000 and
$4,356,000, respectively, under this agreement. In certain cases, the Company
funds these operating losses and capital improvements without the use of the
agreement with its financial institution. Amounts advanced to an orthodontic
entity by the Company to fund operating losses are required to be repaid to the
Company over five years once the orthodontic entity generates operating profits.
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 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements...................................... $32,728 $45,237
Furniture and fixtures...................................... 27,395 35,603
Other equipment............................................. 53 110
Centers in progress......................................... 1,036 2,666
------- -------
61,212 83,616
Less accumulated depreciation and amortization.............. 12,647 19,050
------- -------
$48,565 $64,566
======= =======
</TABLE>
--------------------------------------------------------------------------------
F- 10
<PAGE> 64
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Notes payable to affiliated orthodontists, interest rates
from 8% to 10%, with maturity dates ranging from 2000 to
2004, unsecured........................................... $11,277 $ 8,161
Senior Credit Facility...................................... 16,500 50,632
Line of credit.............................................. 3,555 --
------- -------
31,332 58,793
Less current portion........................................ 8,673 6,020
------- -------
$22,659 $52,773
======= =======
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1999 for each of
the next five years are as follows (in thousands): 2000--$6,020; 2001--$1,580;
2002--$429; 2003--$50,720; and 2004--$44.
The Company has a syndicated $100,000,000 Senior Revolving Credit Facility
Agreement (the "Senior Credit Facility"). The Senior Credit Facility provides
for an interest rate based on the lender's prime rate or LIBOR, plus the
Applicable Margin, as defined in the Senior Credit Facility. The interest rate
outstanding as of December 31, 1999 ranged from 7.43% to 8.75% per annum, with a
maturity date of October 2003. The Company may utilize the proceeds to refinance
certain existing indebtedness, to finance certain acquisitions of assets of
existing orthodontic centers, and for working capital. The amounts borrowed
under the Senior Credit Facility are secured by security interests in all of the
Company's assets, including its accounts receivable and equipment. The Company
is required to maintain certain financial and nonfinancial covenants under the
terms of the Senior Credit Facility, including a maximum leverage ratio, minimum
fixed charge coverage ratio and minimum consolidated net worth ratio. At
December 31, 1999, the Company was in compliance with the covenants and
restrictions of the Senior Credit Facility.
At December 31, 1999, the Company also had a $5,000,000 line of credit with a
financial institution. There was no outstanding balance on this line of credit
as of December 31, 1999. The line of credit 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, 1999,
the Company was in compliance with the covenants and restrictions of the
agreement.
--------------------------------------------------------------------------------
F- 11
<PAGE> 65
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1998 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Income before cumulative effect of accounting change for
basic and diluted earnings per share................... $22,632 $33,813 $46,514
Cumulative effect of a change in accounting principle, net
of income tax benefit of $410,000......................... -- -- (678)
------- ------- -------
Net income for basic and diluted earnings per share......... $22,632 $33,813 $45,836
======= ======= =======
Denominator:
Denominator for basic earnings per share.................. $44,576 $47,690 $47,998
Effect of dilutive securities
Employee stock options................................. 838 812 645
------- ------- -------
Denominator for diluted earnings per share................ $45,414 $48,502 $48,643
======= ======= =======
</TABLE>
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 5 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 rental commitments as of December 31, 1999 are
as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 8,887
2001........................................................ 6,451
2002........................................................ 5,248
2003........................................................ 3,371
2004........................................................ 2,257
Thereafter.................................................. 5,290
-------
$31,504
=======
</TABLE>
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 amounts. Rent expense attributable to minimum and
additional rentals along with sublease income was as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1998 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals............................................. $ 7,704 $10,446 $13,769
Additional rentals.......................................... 2,682 3,783 5,014
Sublease income............................................. (87) (101) (159)
------- ------- -------
$10,299 $14,128 $18,624
======= ======= =======
</TABLE>
--------------------------------------------------------------------------------
F- 12
<PAGE> 66
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Intangible assets......................................... $14,959 $16,622
Property and equipment.................................... 184 288
Other..................................................... 437 --
------- -------
Total deferred tax liabilities.................... 15,580 16,910
Deferred tax assets:
Patient receivables and prepayments....................... 4,399 4,455
------- -------
Total deferred tax assets......................... 4,399 4,455
------- -------
Net deferred tax liabilities...................... $11,181 $12,455
======= =======
</TABLE>
Components of the provision (benefit) for income taxes before the tax effect of
the change in accounting were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1998 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current..................................................... $16,694 $23,520 $26,933
Deferred.................................................... (2,225) (2,767) 1,273
------- ------- -------
Total............................................. $14,469 $20,753 $28,206
======= ======= =======
</TABLE>
The reconciliation of income tax computed at the federal statutory rates to the
provision for income taxes before the tax effect of the change in accounting is
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1998 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at federal statutory rates.............................. $12,985 $18,460 $25,237
Other, primarily state income taxes......................... 1,484 2,293 2,969
------- ------- -------
Total............................................. $14,469 $20,753 $28,206
======= ======= =======
</TABLE>
9. BENEFIT PLANS
STOCK OPTION PLANS
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
--------------------------------------------------------------------------------
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<PAGE> 67
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 nonemployee 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.
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
year, whichever is lower. Additionally, 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.
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate............................... 6.75% 6.11% 6.25%
Dividend yield
Volatility factor................................... .608 .490 .505
Weighted average expected life...................... 8.01 years 7.43 years 6.65 years
</TABLE>
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 purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's 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
--------------------------------------------------------------------------------
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<PAGE> 68
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
<TABLE>
<CAPTION>
1997 1998 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income........................................ $22,249 $33,111 $44,431
Pro forma earnings per share:
Basic..................................................... $ .50 $ .69 $ .93
Diluted................................................... $ .49 $ .68 $ .91
</TABLE>
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1998 1999
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 3,130,072 $ 9.57 3,272,886 $10.72
Granted............................. 1,609,713 15.44 373,943 16.36 1,254,018 14.26
Exercised........................... (130,753) 3.29 (181,729) 3.54 (122,775) 4.87
Forfeited........................... (10,641) 5.95 (49,400) 4.72 (70,544) 17.42
---------- ---------- ----------
Outstanding--end of year............ 3,130,072 9.57 3,272,886 10.72 4,333,585 11.63
========== ========== ==========
Exercisable at end of year.......... 336,543 3.25 901,575 6.47 1,664,468 10.21
========== ========== ==========
Weighted average fair value of
options granted during the year... $ 10.56 $ 12.05 $ 9.26
========== ========== ==========
</TABLE>
Of the options outstanding at December 31, 1999, approximately 1,048,000 were
issued on or about the date of the Company's initial public offering and have
exercise prices which range from $2.75 to $3.25, a weighted average exercise
price of $3.04, and a weighted average remaining contractual life of 5 years.
The remaining options outstanding at December 31, 1999 have exercise prices
which range from $2.75 to $21.62, a weighed average exercise price of $14.37,
and a weighed average remaining contractual of 7.17 years.
KEY EMPLOYEE STOCK PURCHASE PLAN
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 shareholders. 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
--------------------------------------------------------------------------------
F- 15
<PAGE> 69
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 purchase 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.
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 loan to be financed personally by shareholders
was paid by the Company at the time of the offering and has not been repaid at
December 31, 1999. Therefore, a capital contribution receivable from the
Shareholders had been recorded at December 31, 1999 as a reduction from
shareholders' equity. The total amount due from key employees in conjunction
with the Key Employee Purchase Plan as of December 31, 1999 was $5,236,000. As
the 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,
$52,000, and $59,000 for years ended December 31, 1997, 1998, and 1999,
respectively.
--------------------------------------------------------------------------------
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<PAGE> 70
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. ACQUISITION OF MANAGEMENT CONTRACTS
The following table summarizes the Company's finalized agreements with
orthodontic entities to obtain Management Agreements and to acquire other assets
for the years ended December 31:
<TABLE>
<CAPTION>
COMMON
ORTHODONTIC TOTAL REMAINDER SHARE VALUE STOCK
ENTITY ACQUISITION NOTES PAYABLE (PRIMARILY (AT AVERAGE SHARES
DECEMBER 31, AFFILIATIONS COSTS ISSUED CASH) COST) ISSUED
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997.................. 52 $49,500,000 $13,700,000 $21,755,000 $14,045,000 779,000
1998.................. 70 56,900,000 8,700,000 43,994,000 4,206,000 253,000
1999.................. 32 21,700,000 3,600,000 17,190,000 910,000 80,000
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
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. 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. 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.
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.
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 laws, 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.
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.
--------------------------------------------------------------------------------
F- 17
<PAGE> 71
ORTHODONTIC CENTERS OF AMERICA, INC
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of operations
for the years ended December 31, 1999 and 1998 (in thousands, except per share
data):
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH JUNE SEPTEMBER DECEMBER
1998 1998 1998 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue........................................ $37,693 $41,527 $44,697 $47,381
Operating profit................................... 12,058 13,243 13,922 15,063
Net income......................................... 7,543 8,266 8,701 9,303
Net income per share:
Basic............................................ $ .16 $ .17 $ .18 $ .20
Diluted.......................................... .16 .17 .18 .19
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH JUNE SEPTEMBER DECEMBER
1999 1999 1999 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue........................................ $49,048 $55,401 $59,770 $62,071
Operating profit................................... 16,666 18,923 20,094 21,241
Net income......................................... 9,479 11,523 12,095 12,738
Net income per share:
Basic............................................ $ .20 $ .24 $ .25 $ .26
Diluted.......................................... .19 .24 .25 .26
</TABLE>
--------------------------------------------------------------------------------
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[OCA LOGO]
<PAGE> 73
--------------------------------------------------------------------------------
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of this offering, which are to be paid by OCA, are estimated as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 32,642
NYSE Listing Fee............................................ 21,929
NASD Filing Fee............................................. 12,865
Blue Sky Filing Fees and Expenses........................... 7,500
Printing Expenses........................................... 175,000
Legal Fees and Expenses..................................... 150,000
Auditors' Fees and Expenses................................. 100,000
Transfer Agent and Registrar Fees........................... 5,000
Miscellaneous Expenses...................................... 185,064
--------
Total............................................. $690,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law grants corporations the
power to indemnify their directors, officers, employees and agents in accordance
with the provisions thereof. OCA's Restated Certificate of Incorporation
provides for indemnification of OCA's directors, officers, agents and employees
to the full extent permissible under Section 145 of the Delaware General
Corporation Law. OCA maintains, and pays premiums on, an insurance policy on
behalf of its directors and officers against liability asserted against, or
incurred by, such persons in connection with, or arising from, their capacity as
director or officer.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------------------------------------------------------------------------------------------
<C> <C> <S>
2.1 -- Underwriting Agreement*
4.1 -- Specimen Stock Certificate(1)
5.1 -- Opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company**
23.1 -- Consent of Ernst & Young LLP**
23.2 -- Consent of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company (included in Exhibit 5.1)**
24.1 -- Power of Attorney (included on Page II-4)
</TABLE>
--------------------------------------------------------------------------------
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<PAGE> 74
PART II
--------------------------------------------------------------------------------
------------
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration Statement No. 33-85326.
* To be filed by amendment.
** Filed herewith.
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the SEC are not required under the related instructions or are
inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the restraint in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
--------------------------------------------------------------------------------
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<PAGE> 75
PART II
--------------------------------------------------------------------------------
Signatures
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Metairie, State of Louisiana, on October 6, 2000.
ORTHODONTIC CENTERS OF AMERICA, INC.
By: /s/ BARTHOLOMEW F. PALMISANO, SR.
------------------------------------
Bartholomew F. Palmisano, Sr.
President and Chief Executive
Officer
Power of attorney
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Gasper Lazzara, Jr., D.D.S. and Bartholomew F.
Palmisano, Sr., and each of them, with full power to act without the other, his
true and lawful attorney-in-fact, as agent and with full power of substitution
and resubstitution for him and in his name, place and stead, in any and all
capacity, to sign any or all amendments to this Registration Statement and any
registration statement relating to the same offering as this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agents in full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as they might or be in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, and their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement 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
------------------------------------------------------------------------------------------------------
<C> <S> <C>
/s/ GASPER LAZZARA, JR., D.D.S. Chairman of the Board, October 6, 2000
----------------------------------------------------- Director
Gasper Lazzara, Jr., D.D.S.
/s/ BARTHOLOMEW F. PALMISANO, SR. President and Chief Executive October 6, 2000
----------------------------------------------------- Officer, Director
Bartholomew F. Palmisano, Sr. (principal executive
officer)
/s/ BARTHOLOMEW F. PALMISANO, JR. Chief Financial Officer, October 6, 2000
----------------------------------------------------- Secretary (principal
Bartholomew F. Palmisano, Jr. financial and accounting
officer)
/s/ MICHAEL C. JOHNSEN Chief Operating Officer, October 6, 2000
----------------------------------------------------- Director
Michael C. Johnsen
</TABLE>
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PART II
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------------------------------------------------------------------
<C> <S> <C>
/s/ ASHTON J. RYAN, JR. Director October 6, 2000
-----------------------------------------------------
Ashton J. Ryan. Jr.
/s/ A GORDON TUNSTALL Director October 6, 2000
-----------------------------------------------------
A Gordon Tunstall
/s/ EDWARD J. WALTERS, JR. Director October 6, 2000
-----------------------------------------------------
Edward J. Walters, Jr.
</TABLE>
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PART II
--------------------------------------------------------------------------------
Exhibit index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
-----------------------------------------------------------------------------------------
<C> <C> <S>
2.1 -- Underwriting Agreement*
4.1 -- Specimen Stock Certificate (1)
5.1 -- Opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company**
23.1 -- Consent of Ernst & Young LLP**
23.2 -- Consent of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company (included in Exhibit 5.1)**
24.1 -- Power of Attorney (included on Page II-4)
</TABLE>
------------
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration Statement No. 33-85326.
* To be filed by amendment.
** Filed herewith.
--------------------------------------------------------------------------------
