UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
Commission File No.: 001-13457
ORTHODONTIC CENTERS OF AMERICA, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 72-1278948
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3850 North Causeway Boulevard, Suite 1040
Metairie, Louisiana 70002
----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(504) 834-4392
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
At October 26, 2001, there were 49,984,157 outstanding shares of the
Registrant's Common Stock, $.01 par value per share.
ORTHODONTIC CENTERS OF AMERICA, INC.
TABLE OF CONTENTS
Page
----
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2001 (Unaudited) and December 31, 2000.........................................................4
Condensed Consolidated Statements of Income -
Nine months ended September 30, 2001 and 2000 (Unaudited)....................................................5
Condensed Consolidated Statements of Income -
Three months ended September 30, 2001 and 2000 (Unaudited)...................................................6
Condensed Consolidated Statements of Cash Flow -
Nine months ended September 30, 2001 and 2000 (Unaudited)....................................................7
Notes to Condensed Consolidated Financial Statements - September 30, 2001....................................8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................................20
Part II. Other Information
Item 1. Legal Proceedings.......................................................................................21
Item 5. Other Information.......................................................................................21
Item 6. Exhibits and Reports on Form 8-K........................................................................21
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report may not be based on historical facts
and are "forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements may be identified by reference to a
future period(s) or by the use of forward looking terminology, such as
"anticipate," "estimate," "believe," "expect," "foresee," "may" or "will." These
forward-looking statements include the statements regarding the Company's future
growth, deferred tax asset, liquidity, capital resources, acquisition of service
agreements and the proposed merger with OrthAlliance, Inc. The Company cautions
you not to place undue reliance on these forward-looking statements, in that
they involve certain risks and uncertainties that could cause actual results to
differ materially from anticipated results. These risks and uncertainties
include failure or delay in obtaining required stockholder approval or meeting
other conditions to closing the proposed merger, the companies' failure to
consummate the proposed merger, inability to successfully integrate the
companies after the proposed merger, adverse changes in the companies' financial
results and conditions, failure to consummate proposed developments or
acquisitions, the ability of the Company to effectively manage an increasing
number of Orthodontic Centers, changes in the general economy of the United
States and the specific markets in which the Orthodontic Centers are or are
proposed to be located, risks relating to the Company's foreign operations,
unexpected operating results, changes in the Company's operating or expansion
strategy, the ability of the
2
Company to attract and retain qualified personnel and orthodontists, the ability
of the Company to effectively market its services and products, existing and
future regulations affecting the Company's business, the Company's dependence on
existing sources of funding, and other factors generally understood to affect
the financial results of orthodontic practice management companies and other
factors as may be identified from time to time in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 and other filings with the
Securities and Exchange Commission or in other public announcements by the
Company. The Company undertakes no obligation to update these forward-looking
statements to reflect events or circumstances that occur after the date of this
Report.
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Orthodontic Centers of America, Inc.
Condensed Consolidated Balance Sheets
September 30, December 31,
2001 2000 (1)
------------- ------------
(Unaudited)
(in thousands)
ASSETS:
Current assets:
Cash and cash equivalents ........................................... $ 11,133 $ 4,690
Investments ......................................................... -- 999
Service fees receivable, net of allowance for uncollectible amounts . 50,757 35,350
Deferred income taxes ............................................... 1,469 1,978
Current portion of advances to orthodontic entities ................. 9,329 7,644
Supplies inventory .................................................. 8,589 7,306
Prepaid expenses and other assets ................................... 5,595 3,782
-------- --------
Total current assets ............................................ 86,872 61,749
Property, equipment and improvements, net ................................ 88,776 76,686
Advances to orthodontic entities, less current portion ................... 10,595 9,057
Deferred income taxes .................................................... 24,539 24,030
Intangible assets ........................................................ 207,012 194,544
Other assets ............................................................. 4,201 1,881
-------- --------
Total assets ............................................................. $421,995 $367,947
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable .................................................... $ 8,431 $ 7,855
Accrued salaries and other current liabilities ...................... 7,923 4,054
Deferred revenue .................................................... 1,876 2,516
Income taxes payable ................................................ 777 2,913
Amounts payable to orthodontic entities ............................. 3,374 2,412
Current portion of notes payable to affiliated orthodontists ........ 1,211 2,426
-------- --------
Total current liabilities ....................................... 23,592 22,176
Long-term debt, less current portion ..................................... 54,265 58,575
Non-controlling interest in subsidiary ................................... 47 --
Stockholders' equity:
Preferred stock ..................................................... -- --
Common stock, $.01 par value per share, 100,000,000 shares
authorized, 49,635,848 shares outstanding at September 30, 2001
and 48,600,000 shares outstanding at December 31, 2000 ............ 496 487
Additional paid-in capital .......................................... 180,041 168,661
Retained earnings ................................................... 165,407 121,581
Accumulated other comprehensive income .............................. (121) (127)
Due from key employees for stock purchase program ................... (488) (1,604)
Capital contribution receivable from shareholders ................... (1,244) (1,802)
-------- --------
Total stockholders' equity ...................................... 344,091 287,196
-------- --------
Total liabilities and stockholders' equity ............................... $421,995 $367,947
======== ========
------------------
(1) The consolidated balance sheet at December 31, 2000 has been derived from
the Company's audited consolidated financial statements at that date, but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
4
Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
Nine months ended
September 30,
-------------------------
2001 2000
-------- --------
(in thousands, except per
share data)
Fee revenue ............................................ $246,552 $194,849
Direct expenses:
Employee costs .................................... 71,011 57,240
Orthodontic supplies .............................. 19,718 15,517
Rent .............................................. 21,597 17,471
Marketing and advertising ......................... 19,980 16,202
-------- --------
Total direct expenses ......................... 132,306 106,430
General and administrative ............................. 26,939 20,894
Depreciation and amortization .......................... 13,504 11,056
-------- --------
Operating profit ....................................... 73,803 56,469
Interest expense, net .................................. 3,352 2,917
Non-controlling interest in subsidiary ................. 47 --
-------- --------
Income before income taxes ............................. 70,404 53,552
Provision for income taxes ............................. 26,578 20,163
-------- --------
Income before cumulative effect of change in
accounting principle .............................. 43,826 33,389
Cumulative effect of change in accounting
principle, net of income tax benefit .............. -- (50,576)
-------- --------
Net income (loss) ...................................... $ 43,826 $(17,187)
======== ========
Net income (loss) per share:
Basic before cumulative effect of change
in accounting principle ....................... $ 0.90 $ 0.69
Cumulative effect of change in accounting
principal, net of income tax benefit, per share -- (1.05)
-------- --------
Basic ............................................. $ 0.90 $ (0.36)
======== ========
Diluted before cumulative effect of change
in accounting principle ....................... $ 0.87 $ 0.67
Cumulative effect of change in accounting
principle, net of income tax benefit, per share -- (1.02)
-------- --------
Diluted ........................................... $ 0.87 $ (0.35)
======== ========
Average shares outstanding:
Basic ............................................. 48,863 48,343
======== ========
Diluted ........................................... 50,133 49,482
======== ========
See notes to condensed consolidated financial statements.
5
Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Income (Unaudited)
Three months ended
September 30,
------------------------
2001 2000
------- -------
(in thousands, except per
share data)
Fee revenue .......................... $86,840 $69,725
Direct expenses:
Employee costs .................. 25,359 20,623
Orthodontic supplies ............ 7,025 5,736
Rent ............................ 7,709 6,276
Marketing and advertising ....... 7,282 6,030
------- -------
Total direct expenses ....... 47,375 38,665
General and administrative ........... 9,521 7,462
Depreciation and amortization ........ 4,490 3,846
------- -------
Operating profit ..................... 25,454 19,752
Interest expense, net ................ 1,105 1,152
Non-controlling interest in subsidiary (33) --
------- -------
Income before income taxes ........... 24,382 18,600
Provision for income taxes ........... 9,204 7,022
------- -------
Net income ........................... $15,178 $11,578
======= =======
Net income per share:
Basic ........................... $ 0.31 $ 0.24
======= =======
Diluted ......................... $ 0.30 $ 0.23
======= =======
Average shares outstanding:
Basic ........................... 48,962 48,503
======= =======
Diluted ......................... 50,123 49,967
======= =======
See notes to condensed consolidated financial statements.
6
Orthodontic Centers of America, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended
September 30,
-------------------------
2001 2000
-------- --------
(in thousands)
Operating activities:
Net income (loss) ................................................... $ 43,826 $(17,187)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for bad debt expense .................................. 416 277
Depreciation and amortization ................................... 13,504 11,056
Deferred income taxes ........................................... -- (5,888)
Cumulative effect of change in accounting
principle, net of income tax benefit ......................... -- 50,576
Changes in operating assets and liabilities:
Service fees receivable ..................................... (15,823) (10,089)
Supplies inventory .......................................... (1,283) 555
Prepaid expenses and other .................................. (4,134) (1,929)
Advances/amounts payable to orthodontic entities ............ (2,261) (116)
Accounts payable and other current liabilities .............. 1,669 2,378
-------- --------
Net cash provided by operating activities .............................. 35,914 29,633
-------- --------
Investing activities:
Purchases of property, equipment and improvements ................... (19,565) (13,690)
Proceeds from sales of available-for-sale investments ............... 999 983
Intangible assets acquired .......................................... (17,701) (16,845)
-------- --------
Net cash used in investing activities .................................. (36,267) (29,552)
-------- --------
Financing activities:
Proceeds from long-term debt ........................................ 3,128 4,468
Repayment of long-term debt ......................................... (8,966) (4,069)
Issuance of common stock ............................................ 12,634 1,099
-------- --------
Net cash provided by financing activities .............................. 6,796 1,498
-------- --------
Change in cash and cash equivalents .................................... 6,443 1,579
Cash and cash equivalents at beginning of period ....................... 4,690 5,822
-------- --------
Cash and cash equivalents at end of period ............................. $ 11,133 $ 7,401
======== ========
Supplemental cash flow information:
Cash paid during period for:
Interest ........................................................ $ 3,414 $ 2,874
======== ========
Income taxes .................................................... $ 29,714 $ 23,128
======== ========
Supplemental disclosures of non-cash investing and financing activities:
Notes payable and common stock issued
to obtain service agreements .................................... $ 796 $ 1,684
======== ========
See notes to condensed consolidated financial statements.
7
Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2001
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Orthodontic Centers of America, Inc. (the "Company") provides
integrated business services to orthodontists throughout the United
States and in Japan, Mexico, Puerto Rico and Spain.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments considered necessary for a
fair presentation have been included. Operating results for the three
and nine month periods ended September 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's
most recent Annual Report on Form 10-K.
The Company provides business operations, financial, marketing and
administrative services to orthodontic practices. These services are
provided under management and consulting agreements (hereinafter
referred to as "Service Agreements") with the orthodontist and their
wholly-owned orthodontic entities (hereinafter referred to as
"Affiliated Orthodontists").
The financial statements include service fees earned under the Service
Agreements and the expenses of providing the Company's services, which
generally includes all expenses of the orthodontic practices except for
orthodontist compensation and certain expenses directly related to the
orthodontic entities, such as professional insurance coverage.
2. REVENUE RECOGNITION
Fee revenue consists of service fees earned by the Company under the
Service Agreements. Effective January 1, 2000, the Company changed its
method of revenue recognition for service fees earned under its Service
Agreements with Affiliated Orthodontists. Fee revenue is recognized as
service fees are contractually due under the Company's Service
Agreements, except that recognition of a portion of the service fees is
deferred because patient contract revenues are calculated on a
straight-line basis over the term of the patient contracts and are
reduced by amounts to be retained by Affiliated Orthodontists. The
amounts to be retained by Affiliated Orthodontists is the Company's
estimate of the Affiliated Orthodontists' proportionate share of
straight-line patient contract revenues, reduced by the amount of
Company expenses incurred and not yet reimbursed by the Affiliated
Orthodontists. In addition, newly developed orthodontic centers
typically generate operating losses during their initial 12 months of
operations. Under the terms of the Company's Service Agreements, the
Company is entitled to service fees relating to operating losses as the
losses are incurred; however, the Company defers recognition of fee
revenue relating to operating losses generated by an affiliated
practice to the extent that service fees relating to such operating
losses are not collateralized by the Affiliated Orthodontist's patient
fees receivable.
8
Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
Affiliated Orthodontists typically pledge their billed and unbilled
patient fees receivable to the Company as collateral for the Company's
service fees. The Company is responsible for billing and collection of
the patient fees receivable, which are conducted in the name of the
applicable Affiliated Orthodontist. Collections from patient fees
receivable are generally deposited into depository bank accounts that
the Company establishes and maintains.
The Company generally collects its service fees receivable from funds
that are collected from patient fees receivable and deposited into
depository bank accounts. This results in deferral of collection of a
portion of the Company's service fees receivable until the related
patient fees receivable that have been pledged to the Company are
collected and the funds are deposited into a depository bank account.
This deferral is generally for a period that averages less than 90
days, as patient fees receivable are generally collected within that
period of time. The Company does not generally charge Affiliated
Orthodontists any interest on these deferred balances of service fees
receivable. For newly-developed centers (which typically generate
operating losses during their first 12 months of operations), the
Company generally defers payment of a portion of its service fees
relating to unreimbursed expenses over a five-year period that
generally commences in the second year of the center's operations, and
charges the Affiliated Orthodontists interest on those deferred amounts
at market rates. Under the Company's revenue recognition policy, those
unreimbursed expenses are not recognized as revenue or recorded as
service fees receivable until such revenue is collateralized by patient
fees receivable pledged by Affiliated Orthodontists. Pledged patient
fees receivable which prove to be uncollectible have the effect of
reducing the amount of service fees receivable collected by the
Company.
In some cases, the Company assists Affiliated Orthodontists in
obtaining financing for their share of operating expenses by providing
a guaranty of loans from a third-party lender. Information about
amounts guaranteed by the Company is provided in "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES."
3. INTANGIBLE ASSETS
The Company affiliates with a practicing orthodontist by acquiring
substantially all of the non-professional assets of the orthodontist's
practice, either directly or indirectly through a stock purchase, and
entering into a Service Agreement with the orthodontist. The terms of
the Service Agreements range from 20 to 40 years, with most ranging
from 20 to 25 years. The acquired assets generally consist of
equipment, furniture, fixtures and leasehold interests. The Company
records these acquired tangible assets at their fair value as of the
date of acquisition, and depreciates or amortizes the acquired assets
using the straight-line method over their useful lives. The remainder
of the purchase price is allocated to an intangible asset, which
represents the costs of obtaining the Service Agreement, pursuant to
which the Company obtains the exclusive right to provide business
operations, financial, marketing and administrative services to the
orthodontist 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.
9
Orthodontic Centers of America, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
The Company may issue shares of its common stock as consideration when
it acquires the assets of and enters into Service Agreements with
practicing orthodontists. The Company values the shares of stock issued
in these transactions at the average closing market price during a few
days prior to the date on which the particular transaction is closed.
Service Agreements are amortized over the shorter of their term or 25
years. Amortization expense for the three months ended September 30,
2001 and 2000 was $2.0 million and $1.7 million respectively.
Accumulated amortization was $26.8 million and $20.7 million as of
September 30, 2001 and December 31, 2000, respectively. Intangible
assets and the related accumulated amortization are written off when
fully amortized.
4. EARNINGS PER SHARE
Basic and diluted earnings per share are based on the weighted average
number of shares of common stock and common equivalent shares (stock
options) outstanding during the period.
5. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2000, the Company adopted a change in accounting
for revenue in connection with Securities and Exchange Commission Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
Financial Statements." The cumulative effect of this accounting change,
calculated as of January 1, 2000, was $50.6 million, net of income tax
benefit of $30.6 million. The Company recognized revenue that was
included in the cumulative effect adjustment of $22.1 million during
the nine months ended September 30, 2001 and $45.4 million during the
nine months ended September 30, 2000.
6. NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Financial Accounting Standards Board Statement FASB
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, on January 1, 2001. As the Company had no
derivatives at the date of adoption, there was no financial statement
impact.
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets,"
effective for fiscal years beginning after December 31, 2001. SFAS No.
141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, and prohibits the
use of the pooling-of-interests method for such transactions. SFAS 142
requires that goodwill and intangible assets with indefinite lives,
including such assets recorded in past business combinations, no longer
be amortized to earnings, but instead be tested for impairment
annually. Intangible assets with finite lives will continue to be
amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The
Company will adopt SFAS No. 142 on January 1, 2002, and amortization of
goodwill and intangible assets with indefinite lives acquired prior to
July 1, 2001 would cease upon such adoption. The Company anticipates
that it would apply provisions of SFAS No. 141 and No. 142 in recording
the Company's proposed business combination with OrthAlliance, Inc. The
Company has not yet determined the impact that these statements on
accounting standards will have on the Company's consolidated financial
position or results of operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's business was established in 1985 by Dr. Gasper Lazzara, Jr. and
Bartholomew F. Palmisano, Sr. The Company managed 621 orthodontic centers (the
"Orthodontic Centers") throughout the United States and in Japan, Mexico, Puerto
Rico and Spain at September 30, 2001.
The following table sets forth certain information relating to the growth in the
number of Orthodontic Centers for the periods shown:
Nine
months
Year ended December 31, ended
------------------------------------------------------- September 30,
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- -------------
Number of centers at beginning of period ... 145 247 360 469 537 592
Number of centers developed during period .. 53 58 54 36 18 26
Number of centers acquired during period ... 68 78 66 32 45 4
Number of centers consolidated during period (19) (23) (11) -- (8) (1)
---- ---- ---- ---- ---- ----
Number of centers at end of period ......... 247 360 469 537 592 621
==== ==== ==== ==== ==== ====
Of the 621 Orthodontic Centers at September 30, 2001, 332 were developed by the
Company, 365 were existing orthodontic practices the assets of which were
acquired by the Company and 76 were consolidated into another Orthodontic
Center. The Company expects that future growth in the number of Orthodontic
Centers will come from both developing Orthodontic Centers with existing and
newly recruited orthodontists affiliated with the Company ("Affiliated
Orthodontists") and acquiring the assets of, and entering into service and
consulting agreements with, existing orthodontic practices.
Generally, when the Company develops a new Orthodontic Center, all patients
treated at the Orthodontic Center are new patients and, in the first several
months after commencing operations, the Orthodontic Center is open only for a
limited number of days each month as new patients are added. The Orthodontic
Centers have generally become increasingly more productive and profitable as
more new patients are added and existing patients return for monthly follow-up
visits. After 26 months of operations, the Orthodontic Center's growth in
patient base has typically begun to stabilize as the initial patients complete
treatment. At that point, an Orthodontic Center can increase the number of
patients treated by improving the efficiency of its clinical staff, increasing
patient treatment intervals and by adding operating days or orthodontists.
The Orthodontic Centers may also increase revenue by implementing periodic price
increases. Patient contracts are generally payable in equal monthly installments
throughout the term of treatment (which averages about 26 months), except for
the last month when a final payment is made. During the first quarter of 2000,
approximately 30% of the Orthodontic Centers implemented a fee increase from
$109 per month to $119 per month, with an increase in the final payment from
$436 to $476. In the first nine months of 2001, an additional 33% of the
Orthodontic Centers implemented such fee increase.
The Company provides a wide range of services to its Affiliated Orthodontists
under either a service agreement or a consulting agreement. The specific form of
the agreement is based upon the dental regulatory provisions of the particular
state in which an orthodontic center is located. The service agreement is used
in the majority of states, with some minor variations from state to state. The
consulting agreement, also with some variations from state to state, is used in
states with particularly stringent laws relating to the practice of dentistry.
The Company enters into a separate service or consulting agreement with each
Affiliated Orthodontist practice owner. If an Affiliated Orthodontist operates
his or her practice
11
through a professional corporation or association or other similar entity, that
entity is a party to the agreement, as well as the Affiliated Orthodontist
practice owner.
Under the service agreement, the Company provides its Affiliated Orthodontists
with a comprehensive range of business services in exchange for monthly service
fees based on a percentage of the Affiliated Orthodontists' new patient contract
balances during the first month of the term of the patient contract, plus the
balance of the patient contract balance allocated equally over the remaining
term of the patient contract, minus amounts retained by the Affiliated
Orthodontists. These service fees generally represent reimbursement of direct
and indirect expenses that the Company incurs in providing services to an
Affiliated Orthodontist (including employee costs, marketing and advertising
costs, office rent, utilities expense, supply costs and general and
administrative expenses), a percentage of the operating profits of the
Affiliated Orthodontist's practice on a cash basis and, in some cases,
hourly-based service fees. Excluding reimbursement of direct and indirect
expenses and any hourly-based service fees, the Company's service fees generally
range from 40% to 50% of a mature practice's cash operating profits (in some
cases, after reduction for any hourly-based service fees or hourly-based amounts
retained by an Affiliated Orthodontist).
The types of services the Company provides to Affiliated Orthodontists under the
consulting agreements are generally similar to the services the Company provides
under the service agreements. Fees paid to the Company by Affiliated
Orthodontists under the consulting agreements are a combination of, depending on
the service being performed, cost-based types of fees, flat monthly fees and
hourly fees. Among other differences from the service agreements, some
consulting agreements have shorter terms than the service agreements, some do
not give the Company a right to purchase the Affiliated Orthodontist's interest
in the practice assets following termination, no matter the reason, and some
require more limited non-competition agreements from the Affiliated Orthodontist
after termination of the consulting agreement than do most of the service
agreements. In addition, the consulting agreements emphasize that the Affiliated
Orthodontist has ultimate control and authority over his or her practice's
business management, including such matters as advertising, hiring and
termination of staff and the purchase of equipment and supplies.
Affiliated Orthodontists generally pledge to the Company the Affiliated
Orthodontists' patient fees receivable arising from the provision of orthodontic
services during each month. These patient fees receivable include billed
receivables, which represent amounts owed for orthodontic services for which the
patient has been billed, and unbilled receivables, which represent amounts owed
for orthodontic services for which the patient has not yet been billed. Laws
governing the practice of dentistry (including orthodontics) and the policies of
state dental boards in states in which the Company operates generally restrict
its ability to own these patient fees receivable, and require that patient fees
receivable be billed and collected in the name of the Affiliated Orthodontists
and that, at least initially, collections from patient fees receivable belong to
the Affiliated Orthodontist. This would restrict the Company's ability to sell,
factor or transfer these pledged patient fees receivable. The Company is
responsible for billing and collecting these patient fees receivable, which are
done in the name of the applicable Affiliated Orthodontist. Once funds are
collected in payment of patient fees receivable, the funds are generally
deposited into a bank account that the Company establishes and maintains. The
Company generally has sole signatory authority over these bank accounts and the
exclusive responsibility for any disbursements. Affiliated Orthodontists
generally agree that they will not modify, close or withdraw any funds from
these bank accounts. The Company sweeps funds deposited into these accounts into
its central bank account on a regular basis. Collections from patient fees
receivable are included in determining a practice's cash operating profits for
purposes of calculating amounts retained by an Affiliated Orthodontist under the
terms of his or her service agreement with us. Generally, an Affiliated
Orthodontist retains 50% to 60% of his or her practice's cash operating profits
(in some cases after reduction for any hourly-based service fees or hourly-based
amounts retained by the Affiliated Orthodontist) plus any hourly-based amounts
retained by the Affiliated Orthodontist.
12
Effective January 1, 2000, the Company changed its revenue recognition pursuant
to Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the Securities and
Exchange Commission staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. Effective January 1,
2000, the Company recognizes revenue based on a straight-line allocation of
patient contract revenue over the terms of the patient contracts (which average
about 26 months), minus the portion of that straight-line allocation retained or
to be retained by Affiliated Orthodontists. Amounts retained or to be retained
by an Affiliated Orthodontist are estimated using the percentage of practice
operating profits that may be retained by the Affiliated Orthodontist under his
or her service agreement. Amounts retained or that may be retained by an
Affiliated Orthodontist equal the Affiliated Orthodontist's proportionate share
of the straight-line allocation of patient contract revenue that is collected
during the relevant period and the Affiliated Orthodontist's proportionate share
of patient receivables representing any remaining portion of that allocation,
minus any operating losses, depreciation, interest on outstanding loans, bad
debt or other expenses that the Company has incurred but for which the Company
has not been reimbursed by the Affiliated Orthodontist. These unreimbursed
expenses reduce amounts retained by an Affiliated Orthodontist only up to the
amounts that would otherwise be retained by the Affiliated Orthodontist. Any
remaining unreimbursed expenses would reduce amounts retained or to be retained
by the Affiliated Orthodontist in subsequent periods.
Operating expenses of the Orthodontic Centers are the Company's expenses and are
recognized as incurred. Employee costs consist of wages, salaries and benefits
paid to all of the Company's employees, including orthodontic assistants,
business staff and management personnel. General and administrative expenses
consist of provision for losses on receivables, professional service fees,
maintenance and utility costs, office supply expense, telephone expense, taxes,
license fees, printing expense and shipping expense.
The Company does not have a controlling financial interest in its Affiliated
Orthodontists' practices. In accordance with guidance in Emerging Issues Task
Force No. 97-2, the Company does not consolidate the patient revenue and other
operations and accounts of its Affiliated Orthodontists within the Company's
financial statements.
BUSINESS COMBINATION WITH ORTHALLIANCE
On May 16, 2001, the Company entered into a merger agreement with OrthAlliance,
Inc., whereby a wholly-owned subsidiary of the Company would merge into
OrthAlliance and OrthAlliance would become a wholly-owned subsidiary of the
Company. In the merger, stockholders of OrthAlliance would receive shares of the
Company's common stock in exchange for their shares of OrthAlliance common
stock, except for holders of OrthAlliance Class B common stock who properly
exercise their appraisal rights under Delaware law. The transaction, which is
subject to approval by OrthAlliance stockholders and other conditions, is
currently anticipated to close in November 2001 and to be accounted for as a
purchase. OrthAlliance has scheduled a special meeting of its shareholders to be
held on November 7, 2001, at which OrthAlliance shareholders are to consider and
vote upon a proposal to approve the merger agreement. OrthAlliance is a leading
provider of practice management and consulting services to orthodontic and
pediatric dental practices in the United States.
13
RESULTS OF OPERATIONS
The following table sets forth the percentages of fee revenue represented by
certain items in the Company's condensed consolidated statements of income.
Nine months Three months
ended ended
September 30, September 30,
------------------- -------------------
2001 2000 2001 2000
----- ----- ----- -----
Fee revenue ............................. 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Direct expenses:
Employee costs ..................... 28.8 29.4 29.2 29.6
Orthodontic supplies ............... 8.0 8.0 8.1 8.2
Rent ............................... 8.8 9.0 8.9 9.0
Marketing and advertising .......... 8.1 8.2 8.4 8.7
----- ----- ----- -----
Total direct expenses .......... 53.7 54.6 54.6 55.5
General and administrative .............. 10.9 10.7 11.0 10.7
Depreciation and amortization ........... 5.5 5.7 5.1 5.5
----- ----- ----- -----
Operating profit ........................ 29.9 29.0 29.3 28.3
Interest expense ........................ 1.3 1.5 1.2 1.6
Non-controlling interest ................ -- -- -- --
----- ----- ----- -----
Income before income taxes .............. 28.6 27.5 28.1 26.7
Provision for income taxes .............. 10.8 10.4 10.6 10.1
----- ----- ----- -----
Income before cumulative effect of change
in accounting principle ............ 17.8 17.1 17.5 16.6
Cumulative effect of change in accounting
principle, net of income tax benefit -- (25.9) -- --
----- ----- ----- -----
Net income (loss) ....................... 17.8% (8.8%) 17.5% 16.6%
===== ===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
FEE REVENUE
Fee revenue increased $51.7 million, or 26.5%, to $246.6 million for the nine
months ended September 30, 2001 from $194.8 million for the nine months ended
September 30, 2000. Approximately $40.7 million of this increase was
attributable to the growth of fee revenue of Orthodontic Centers open throughout
both periods, and approximately $11.0 million of the increase was attributable
to the growth in fee revenue of Orthodontic Centers opened since January 1,
2000. The number of the Affiliated Orthodontists' patient contracts increased to
approximately 401,000 at September 30, 2001 from approximately 327,000 at
September 30, 2000. The Company recognized revenue that was included in the
cumulative effect adjustment of $22.1 million during the nine months ended
September 30, 2001 and $45.4 million during the nine months ended September 30,
2000.
EMPLOYEE COSTS
Employee costs increased $13.8 million, or 24.1 %, to $71.1 million for the nine
months ended September 30, 2001 from $57.2 million for the nine months ended
September 30, 2000. As a percentage of fee revenue, however, employee costs
decreased to 28.8% for the nine months ended September 30, 2001 from 29.4% for
the nine months ended September 30, 2000, primarily due to efficiencies achieved
through a general change to longer patient treatment intervals by the Affiliated
Orthodontists, which resulted in fewer treatments per patient contract and lower
employee costs per patient. As a result of developments in orthodontic
technology, a patient may be seen every six to eight weeks, rather than the
14
traditional four weeks, without compromising quality of care. Consistent with
industry trends, the Affiliated Orthodontists have begun increasing the
intervals between patient treatments. Patients who received orthodontic
treatment in the Orthodontic Centers during the nine months ended September 30,
2001 averaged 45.9 days between office visits, compared to an average of 43.9
days for patients who received treatment during the nine months ended September
30, 2000. This increase in patient treatment interval reduces the number of
office visits during the term of a patient's treatment, which continues to
average about 26 months, and results in lower employee costs per patient. The
increased interval does not, however, reduce the amount of treatment fees per
patient. Therefore, the increased interval reduces the employee costs incurred
with respect to an individual patient relative to the patient's treatment fee.
ORTHODONTIC SUPPLIES
Orthodontic supplies expense increased $4.2 million, or 27.1%, to $19.7 million
for the nine months ended September 30, 2001 from $15.5 million for the nine
months ended September 30, 2000. As a percentage of fee revenue, orthodontic
supplies expense remained at 8.0% for the nine months ended September 30, 2001
and 2000.
RENT
Rent expense increased $4.1 million, or 23.6%, to $21.6 million for the nine
months ended September 30, 2001 from $17.5 million for the nine months ended
September 30, 2000, primarily due to Orthodontic Centers affiliated, opened or
relocated after September 30, 2000. As a percentage of fee revenue, however,
rent expense decreased to 8.8% for the nine months ended September 30, 2001 from
9.0% for the nine months ended September 30, 2000.
MARKETING AND ADVERTISING
Marketing and advertising expense increased $3.8 million, or 23.3%, to $20.0
million for the nine months ended September 30, 2001 from $16.2 million for the
nine months ended September 30, 2000, primarily due to increases in marketing
and advertising related to growth in fee revenue for existing Orthodontic
Centers and marketing and advertising for Orthodontic Centers added after
September 30, 2000. As a percentage of fee revenue, however, marketing and
advertising expense decreased to 8.1% for the nine months ended September 30,
2001 from 8.2% for the nine months ended September 30, 2000.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased $6.0 million, or 28.9%, to $26.9
million for the nine months ended September 30, 2001 from $20.9 million for the
nine months ended September 30, 2000, primarily due to the addition of
Orthodontic Centers and increases in the Affiliated Orthodontists' patient base
after September 30, 2000. As a percentage of fee revenue, general and
administrative expense increased to 10.9% for the nine months ended September
30, 2001 from 10.7% for the nine months ended September 30, 2000, primarily due
to accounting and legal costs associated with the Company's proposed business
combination with OrthAlliance.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $2.4 million, or 22.1%, to $13.5
million for the nine months ended September 30, 2001 from $11.1 million for the
nine months ended September 30, 2000, due to fixed assets acquired and service
agreements entered into for Orthodontic Centers developed, acquired or relocated
after September 30, 2000. As a percentage of fee revenue, however, depreciation
and amortization expense decreased to 5.5% for the nine months ended September
30, 2001 from 5.7% for the nine months ended September 30, 2000.
15
OPERATING PROFIT
Operating profit increased $17.3 million, or 30.6%, to $73.8 million for the
nine months ended September 30, 2001 from $56.5 million for the nine months
ended September 30, 2000. As a percentage of fee revenue, operating profit
increased to 29.9% for the nine months ended September 30, 2001 from 29.0% for
the nine months ended September 30, 2000, as a result of the factors discussed
above.
INTEREST
Net interest expense increased $435,000, or 14.9%, to $3.4 million for the nine
months ended September 30, 2001 from $2.9 million for the nine months ended
September 30, 2000, due to an increase since September 30, 2000 in the average
balance of borrowings under the Company's $100.0 million revolving line of
credit associated with expansion in new and existing markets in the United
States and foreign countries. As a percentage of fee revenue, net interest
expense decreased to 1.3% for the nine months ended September 30, 2001 from 1.5%
for the nine months ended September 30, 2000.
NON-CONTROLLING INTEREST
In the first quarter of 2001, the Company finalized an arrangement with its
Affiliated Orthodontists in Japan pursuant to which these Affiliated
Orthodontists acquired a 16% ownership interest in the Company's Japanese
subsidiary.
PROVISION FOR INCOME TAXES
Provision for income taxes increased $6.4 million, or 31.8%, to $26.6 million
for the nine months ended September 30, 2001 from $20.2 million for the nine
months ended September 30, 2000. The Company's effective income tax rate was
37.8% for the nine months ended September 30, 2001 and 2000. The Company's
change in accounting principle pursuant to SAB 101 effective January 1, 2000
resulted in deferred tax assets of $25.5 million as of September 30, 2001,
because the Company has not received approval from taxing authorities to change
its tax accounting method of recognizing revenue. The Company cannot assure you
that it will receive any such approval. Failure to obtain this approval could
have an adverse effect on the Company's cash flow from operating activities. The
Company has provided no valuation allowance for deferred tax assets. The Company
believes that the deferred tax assets at September 30, 2001 are realizable
through carrybacks and future reversals of existing taxable temporary
differences.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2000, the Company recorded a cumulative effect of a change
in accounting principle of $50.6 million, net of an income tax benefit of $30.6
million, with respect to the Company's change in revenue recognition effective
as of January 1, 2000 pursuant to SAB 101.
NET INCOME (LOSS)
Net income increased $61.0 million, or 355.0%, to $43.8 million for the nine
months ended September 30, 2001 from a net loss of $17.2 million for the nine
months ended September 30, 2000. As a percentage of fee revenue, net income
after the cumulative effect of change in accounting principle increased to 17.8%
for the nine months ended September 30, 2001 from (8.8)% for the nine months
ended September 30, 2000, as a result of the factors discussed above.
16
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
FEE REVENUE
Fee revenue increased $17.1 million, or 24.5%, to $86.8 million for the three
months ended September 30, 2001 from $69.7 million for the three months ended
September 30, 2000. Approximately $13.9 million of this increase was
attributable to the growth of fee revenue of Orthodontic Centers open throughout
both periods, and approximately $3.2 million of the increase was attributable to
the growth in fee revenue of Orthodontic Centers opened since September 30,
2000. The Company recognized revenue that was included in the cumulative effect
adjustment of $5.2 million during the three months ended September 30, 2001 and
$13.5 million during the three months ended September 30, 2000.
EMPLOYEE COSTS
Employee costs increased $4.7 million, or 23.0%, to $25.4 million for the three
months ended September 30, 2001 from $20.6 million for the three months ended
September 30, 2000. As a percentage of fee revenue, however, employee costs
decreased to 29.2% for the three months ended September 30, 2001 from 29.6% for
the three months ended September 30, 2000, primarily due to efficiencies
achieved through a general change to longer patient treatment intervals by the
Affiliated Orthodontists, which resulted in fewer treatments per patient
contract and lower employee costs per patient. As a result of developments in
orthodontic technology, a patient may be seen every six to eight weeks, rather
than the traditional four weeks, without compromising quality of care.
Consistent with industry trends, the Affiliated Orthodontists have begun
increasing the intervals between patient treatments. This increase in patient
treatment interval reduces the number of office visits during the term of a
patient's treatment, which continues to average about 26 months, and results in
lower employee costs per patient. The increased interval does not, however,
reduce the amount of treatment fees per patient. Therefore, the increased
interval reduces the employee costs incurred with respect to an individual
patient relative to the patient's treatment fee.
ORTHODONTIC SUPPLIES
Orthodontic supplies expense increased $1.3 million, or 22.5%, to $7.0 million
for the three months ended September 30, 2001 from $5.7 million for the three
months ended September 30, 2000. As a percentage of fee revenue, orthodontic
supplies expense decreased to 8.1% for the three months ended September 30, 2001
from 8.2% for the three months ended September 30, 2000.
RENT
Rent expense increased $1.4 million, or 22.8%, to $7.7 million for the three
months ended September 30, 2001 from $6.3 million for the three months ended
September 30, 2000, primarily due to Orthodontic Centers affiliated, opened or
relocated after September 30, 2000. As a percentage of fee revenue, however,
rent expense decreased to 8.9% for the three months ended September 30, 2001
from 9.0% for the three months ended September 30, 2000.
MARKETING AND ADVERTISING
Marketing and advertising expense increased $1.3 million, or 20.8%, to $7.3
million for the three months ended September 30, 2001 from $6.0 million for the
three months ended September 30, 2000, primarily due to increases in marketing
and advertising related to growth in fee revenue for existing Orthodontic
Centers and marketing and advertising for Orthodontic Centers added after
September 30, 2000. As a percentage of fee revenue, however, marketing and
advertising expense decreased to 8.4% for the three months ended September 30,
2001 from 8.7% for the three months ended September 30, 2000.
17
GENERAL AND ADMINISTRATIVE
General and administrative expense increased $2.1 million, or 27.6%, to $9.5
million for the three months ended September 30, 2001 from $7.5 million for the
three months ended September 30, 2000, primarily due to the addition of
Orthodontic Centers and increases in the Affiliated Orthodontists' patient base
after September 30, 2000. As a percentage of fee revenue, general and
administrative expense increased to 11.0% for the three months ended September
30, 2001 from 10.7% for the three months ended September 30, 2000, primarily due
to accounting and legal costs associated with the Company's proposed business
combination with OrthAlliance.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $644,000, or 16.7%, to $4.5
million for the three months ended September 30, 2001 from $3.8 million for the
three months ended September 30, 2000, due to fixed assets acquired and service
agreements entered into for Orthodontic Centers developed, acquired or relocated
after September 30, 2000. As a percentage of fee revenue, depreciation and
amortization expense decreased to 5.1% for the three months ended September 30,
2001 from 5.5% for the three months ended September 30, 2000.
OPERATING PROFIT
Operating profit increased $5.7 million, or 28.9%, to $25.5 million for the
three months ended September 30, 2001 from $19.8 million for the three months
ended September 30, 2000. As a percentage of fee revenue, operating profit
increased to 29.3% for the three months ended September 30, 2001 from 28.3% for
the three months ended September 30, 2000, as a result of the factors discussed
above.
NON-CONTROLLING INTEREST
In the first quarter of 2001, the Company finalized an arrangement with its
Affiliated Orthodontists in Japan pursuant to which these Affiliated
Orthodontists acquired a 16% ownership interest in the Company's Japanese
subsidiary.
PROVISION FOR INCOME TAXES
Provision for income taxes increased $2.2 million, or 31.1%, to $9.2 million for
the three months ended September 30, 2001 from $7.0 million for the three months
ended September 30, 2000. The Company's effective income tax rate was 37.8% for
the three months ended September 30, 2001 and 2000. The Company's change in
accounting principle pursuant to SAB 101 effective January 1, 2000 resulted in
deferred tax assets of $25.5 million as of September 30, 2001, because the
Company has not received approval from taxing authorities to change our tax
accounting method of recognizing revenue. The Company cannot assure you that it
will receive any such approval. Failure to obtain this approval could have an
adverse effect on the Company's cash flow from operating activities. The Company
has provided no valuation allowance for deferred tax assets. The Company
believes that the deferred tax assets at September 30, 2001 are realizable
through carrybacks and future reversals of existing taxable temporary
differences.
NET INCOME
Net income increased $3.6 million, or 31.1%, to $15.2 million for the three
months ended September 30, 2001 from $11.6 million for the three months ended
September 30, 2000. As a percentage of fee revenue, net income increased to
17.5% for the three months ended September 30, 2001 from 16.6% for the three
months ended September 30, 2000.
18
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes cash flow information for the Company at
September 30, 2001, and 2000:
Nine months ended September 30,
-------------------------------
2001 2000
---- ----
Net cash provided by operating activities........ $ 35.9 million $ 29.6 million
Net cash used in investing activities............ $ (36.3) million $ (29.6) million
Net cash provided by financing activities........ $ 6.8 million $ 1.5 million
Net cash provided by operating activities increased during the nine months ended
September 30, 2001, as compared to the nine months ended September 30, 2000,
primarily due to increased net income during the first nine months of 2001, as
compared to the same period of 2000. The Company's working capital at September
30, 2001 was $63.3 million, an increase of $23.7 million, or 59.8%, from $39.6
million at December 31, 2000, including cash and cash equivalents of $11.1
million at September 30, 2001, compared to $4.7 million at December 31, 2000.
Net cash provided by financing activities increased during the nine months ended
September 30, 2001, as compared to the nine months ended September 30, 2000,
primarily due to increased issuance of the Company's common stock related to the
exercise of stock options during the first nine months of 2001, as compared to
the same period of 2000. The Company used the proceeds from the exercise of
these options to repay a portion of the indebtedness outstanding under the
Company's revolving line of credit.
The Company's capital expenditures consist primarily of the costs associated
with the development of additional Orthodontic Centers. The average cost of
developing a new Orthodontic Center in the United States is about $325,000,
which includes capitalizable costs of equipment and leasehold improvements, as
well as working capital and start-up losses associated with the initial
operations of the Orthodontic Center. These costs are shared by the Company and
the particular Affiliated Orthodontist. The Company bears an Affiliated
Orthodontist's share of these costs until it is reimbursed by the Affiliated
Orthodontist. In some cases, the Company assists Affiliated Orthodontists in
obtaining financing for their share of these costs by providing a guaranty of
loans from the Company's primary lender. At September 30, 2001, the outstanding
balance of these amounts guaranteed by the Company was $2.2 million, compared to
about $2.9 million at December 31, 2000. The Company also intends to continue to
make advances of about $40,000 to newly-affiliated Affiliated Orthodontists
during the first year of an Orthodontic Center's operations, which advances bear
no interest and typically are repaid during the second year of the Orthodontic
Center's operations. The Company intends to fund these advances and any
continued financing through a combination of bank borrowings and cash from
operations.
In October 1998, the Company entered into a $100.0 million revolving line of
credit with a lending group that currently consists of First Union National
Bank, Bank of America FSB, Bank One, N.A., Hibernia National Bank and Wachovia
Bank, N.A. The line of credit provides an aggregate of $100.0 million for
general working capital needs and expansion of the number of orthodontic
centers, and bears interest at varying rates above the lender's prime rate or
LIBOR. Amounts borrowed under the line of credit are secured by a security
interest in all of the Company's assets, including its accounts receivable and
equipment. At September 30, 2001, $53.9 million of indebtedness was outstanding
under the line of credit, compared to $57.4 million at December 31, 2000.
The Company expects to require cash in the future primarily for developing
additional Orthodontic Centers, acquiring assets from and affiliating with
additional orthodontists, capital expenditures, repayment of long-term debt,
payment of income taxes and general corporate purposes. In addition, in the
merger agreement with OrthAlliance, Inc., the Company agreed that, at the
effective time of the proposed merger with OrthAlliance, the Company would pay
in full all borrowings and accrued interest owing under OrthAlliance's revolving
line of credit. The Company is currently making arrangements to
19
finance the repayment of the amounts owed under OrthAlliance's revolving line of
credit, concurrent with completion of the proposed merger.
The Company's cash needs could significantly change depending upon its ability
to recruit orthodontists, find appropriate sites, enter into long-term service
or consulting agreements and acquire the assets of existing orthodontic
practices. The Company believes that the combination of funds available under
its revolving line of credit, any additional credit facility or other borrowings
and cash flow from operations will be sufficient to meet its anticipated funding
requirements during the remainder of 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the nine months ended September 30, 2001, there were no material changes
to the quantitative and qualitative disclosures about market risks presented in
the Company's Annual Report on Form 10-K for the year ended December 31, 2000.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 15, 1999, Sam Callender, D.D.S. and his limited liability company,
Colorado Orthodontics, LLC, filed an action in the District Court of the City
and County of Denver, Colorado against the Company, its wholly-owned subsidiary,
Orthodontic Centers of Colorado, Inc. ("OCA-Colorado"), and Dr. Ronald M.
Roncone. On August 14, 2000, the plaintiffs amended their complaint to add
Bartholomew F. Palmisano, Sr. as a defendant in the action. On November 19,
1999, the lawsuit was removed to the United States District Court for the
District of Colorado. In their complaint, the plaintiffs alleged that the
Company and OCA-Colorado breached the terms of the service agreement between
OCA-Colorado and Dr. Callender, and that the Company and Dr. Roncone allegedly
made certain fraudulent representations to Dr. Callender in connection with his
decision to enter into the services agreement and a related asset purchase
agreement with OCA-Colorado. The complaint also alleged that the Company and Dr.
Roncone tortiously interfered with the proposed sale of a portion of Dr.
Callender's interest in his limited liability company to another orthodontist,
and that the Company and Dr. Roncone allegedly breached certain fiduciary duties
to the plaintiffs in connection with that sale. The complaint sought an
unspecified amount of actual and punitive damages, and a declaratory judgment
that Dr. Callender's service agreement has been terminated. On January 31, 2000,
the Company and OCA-Colorado filed an answer generally denying the plaintiffs'
claims, as well as a counterclaim against the plaintiffs, which alleged, among
other things, that the plaintiffs breached the terms of the service agreement,
and sought compensatory and other damages. On March 14, 2001, the court stayed
proceedings in the case due to a potential settlement and dismissal of the
action and counterclaim. On September 1, 2001, Dr. Callender and his limited
liability company transferred their orthodontic practice to another Affiliated
Orthodontist who is continuing the affiliation of the practice with the Company
and OCA-Colorado, and the lawsuit and counterclaim were dismissed.
ITEM 5. OTHER INFORMATION
On October 10, 2001, the Company appointed Dr. Dennis J. L. Buchman, Dr. Hector
M. Bush and Dr. Jack P. Devereux, Jr. to the Company's Board of Directors. On
October 31, 2001 the Company also appointed David W. Vignes to the Company's
Board of Directors. The Company's current directors also include Bartholomew F.
Palmisano, Sr., Dr. John J. Sheridan, Ashton J. Ryan, Jr. and Edward J. Walters,
Jr.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit number Description
-------------- -----------
3.1 Bylaws of the Registrant (incorporated by reference to exhibits
filed with the Registrant's Registration Statement on Form S-1,
Registration Statement No. 33-85326)
3.2 Restated Certificate of Incorporation of the Registrant
(incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration Statement
No. 33-85326)
4 Specimen Stock Certificate (incorporated by reference to exhibits
filed with the Registrant's Registration Statement on Form S-1,
Registration Statement No. 33-85326)
10.1 Agreement and Plan of Merger, dated as of May 16, 2001, among the
Registrant, OCA Acquisition Corporation and OrthAlliance, Inc.
(incorporated by reference to exhibits filed with the Registrant's
Current Report on Form 8-K filed on May 18, 2001)
21
(b) REPORTS ON FORM 8-K
During the three months ended September 30, 2001, the Company did not
file any current reports on Form 8-K.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Orthodontic Centers of America, Inc.
------------------------------------
(Registrant)
Date: November 2, 2001 /s/ Bartholomew F. Palmisano, Sr.
------------------------------------
Bartholomew F. Palmisano, Sr.
Chairman of the Board, President
and Chief Executive Officer
/s/ John C. Glover
------------------------------------
John C. Glover
Chief Financial Officer
23
EXHIBIT INDEX
Exhibit number Description
-------------- -----------
3.1 Bylaws of the Registrant (incorporated by reference to exhibits
filed with the Registrant's Registration Statement on Form S-1,
Registration Statement No. 33-85326)
3.2 Restated Certificate of Incorporation of the Registrant
(incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration Statement
No. 33-85326)
4 Specimen Stock Certificate (incorporated by reference to exhibits
filed with the Registrant's Registration Statement on Form S-1,
Registration Statement No. 33-85326)
10.1 Agreement and Plan of Merger, dated as of May 16, 2001, among the
Registrant, OCA Acquisition Corporation and OrthAlliance, Inc.
(incorporated by reference to exhibits filed with the Registrant's
Current Report on Form 8-K filed on May 18, 2001)