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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 9, 2002 (May 9, 2002)
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ORTHODONTIC CENTERS OF AMERICA, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 1-13457 72-1278948
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(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification Number)
3850 N. CAUSEWAY BOULEVARD, SUITE 800
METAIRIE, LOUISIANA 70002
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(Address of Principal Executive Offices) (Zip Code)
(504) 834-4392
(Registrant's Telephone Number, Including Area Code)
3850 N. CAUSEWAY BOULEVARD, SUITE 1040
METAIRIE, LOUISIANA 70002
(Former Name or Former Address, if Changed from Last Report)
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ITEM 9. REGULATION FD DISCLOSURE
The following information was compiled from recent questions received from
investors and from prior quarterly conference calls. We are providing these
questions and answers in written form to furnish the investment community with
more information that we hope will help investors better understand OCA from a
financial point of view. This also reflects our attempt to comply with
disclosure guidelines contained in the Securities and Exchange Commission's
Regulation FD.
We welcome your feedback regarding this document, and we will continue to use
this channel to communicate with our investors as we find it necessary or
advisable.
o When will you conduct your earnings conference call for the first
quarter of 2002?
Thursday, May 9, 2002 at 1:00 p.m. (Central Time). The dial-in number
is (706) 679-5222, or you can listen to the webcast at www.ccbn.com or
www.vcall.com. An archive of the webcast will be available at these
websites as well as our website (www.4braces.com) for at least the next
two weeks.
o What is the patient count roll-forward for the first quarter of 2002?
The patient count of our affiliated practices as of December 31, 2001
was 484,025. During the first quarter of 2002, our affiliated practices
added 58,655 patient contracts. The number of patients completing
treatment during the first quarter of 2002 totaled 33,678, and the
patients that stopped treatment prior to the completion of treatment
during the quarter totaled 9,820, for a net patient count of 499,182 at
March 31, 2002.
o What is your current diluted EPS expectation for the second quarter of
2002 and the fiscal year 2002?
Based on our results to date, we currently project that our net income
per share should be approximately $0.39 for the second quarter of 2002
and approximately $1.54 for fiscal year 2002. This represents an
increase over our prior expectation of $1.53 for fiscal year 2002
announced in our February 2002 earnings conference call. With one
quarter under our belt, and part of the OrthAlliance integration behind
us, we are better able to project our earnings for 2002, and as a
result are raising our estimate. Of course, these are only our
estimates (thoughtful guesses if you will) about how the second quarter
and 2002 will turn out. We can't assure you that our actual earnings
will turn out to be those amounts. There are a number of factors that
could affect our ability to achieve these estimates, many of which are
beyond our control. Examples of these factors are included in the
section of this document captioned "Cautionary Statement About
Forward-Looking Statements."
o What was your cash flow from operating activities for the first quarter
of 2002? What are your expectations for cash flow from operating
activities for the fiscal year 2002?
Cash flow from operating activities during the first quarter of 2002
was $20.8 million. We currently expect cash flow from operating
activities for fiscal year 2002 to be at least $60 million. As the year
has progressed, we are now better able to determine the potential uses
of cash for 2002. Again, this is only our current estimate of this
amount, which could change and might be wrong. The risks described in
"Cautionary Statement About Forward-Looking Statements" and other
factors could prevent us from achieving this estimate.
o What is your current expectation of your EPS growth rate?
We have built an expansive network of affiliated centers, which we
estimate are operating at an average of less than half of their
potential capacity. We believe we have an unprecedented opportunity for
internal growth. Accordingly, during the near-term, we plan to focus on
"smart"
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growth, and avoid expensive, capital-intensive growth that requires
substantial investments of our cash and stock. We prefer to be a
"free-cash-flowing" company, rather than a company that pursues growth
primarily through high-volume cash and stock issuance (by
"free-cash-flowing," we mean our Cash Provided by Operating Activities
exceeding our Cash Used in Investing Activities). Currently we have an
outstanding opportunity to integrate OrthAlliance and achieve the
potential benefits from the OrthAlliance acquisition.
We expect that much of our future earnings growth will come from less
capital-intensive internal growth and international expansion. We
believe that our internal growth will relate to a combination of
factors, including increased patient fee pricing, same-center growth,
the addition of de novo centers by existing practices, increased use of
general dentist assistants and associates by existing practices,
increased patient treatment intervals, greater cost saving measures,
expansion into ancillary lines of business, new technology-driven
efficiency measures and other initiatives. For example, by assisting
our existing affiliated practices in adding associate orthodontists and
general dentist assistants, the practices can grow (and therefore our
service fees can grow) while expending much less capital than adding
another affiliated practice through a traditional practice affiliation.
Accordingly, we currently expect our earnings per share growth rate to
be about 20% during 2003. For the foreseeable future beyond 2003, we
are comfortable with a long term growth rate of at least 15%, with the
possibility for higher growth rates. These are only our current
estimates (again, think of these as thoughtful guesses), and we can't
assure you that our earnings, if any, will actually grow by this much.
There are a number of factors that could affect our ability to achieve
these estimates, many of which are beyond our control. Examples of
these factors are included in the section of this document captioned
"Cautionary Statement About Forward-Looking Statements."
o What is your current estimate of EPS accretion during the fiscal year
2002 from your merger with OrthAlliance, Inc.?
Given the growing desire among our management to do away with any
delineation between our reporting on OrthAlliance and OCA, we do not
expect to continue to provide accretion data with respect to
OrthAlliance on an ongoing basis. Our goal for OrthAlliance is much
like that for single practice affiliations, to integrate their
operations into our operations. Historical comparisons become
increasingly less meaningful as assumptions for overhead, interest
expense and other items vary, thereby distorting any useful comparison.
As a result of these issues, we will measure our progress with
OrthAlliance by measuring the profitability of OCA and its subsidiaries
as a whole.
o What was the break-out of patient case starts for OrthAlliance
affiliated practices during the first quarter?
Patient case starts for OCA affiliated practices during the first
quarter of 2002 totaled 58,655, of which 6,254 were by OrthAlliance
affiliated practices.
o How long will you break-out data for OrthAlliance? What data will you
provide in this format?
In response to the desires of several investors, we will provide
patient case start data for OrthAlliance separately for each quarter of
2002, at which time we will discontinue reporting the data separately.
We will not provide any other data for OrthAlliance separately.
o What is the current count of OrthAlliance affiliated practitioners who
are litigating with OrthAlliance with the intent of getting out of
their contracts?
To our knowledge, there are currently 55 of these litigating
practitioners.
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o How is the process going with the litigating OrthAlliance doctors? When
will we see some progress with the lawsuits?
Anyone who has dealt with legal matters knows how difficult it can be
to comment on litigation with any precision.
We believe the plaintiffs are attempting to push water uphill. We also
believe that the prevailing motivation behind many of these lawsuits is
that the plaintiffs no longer want to pay service fees to us, nor do
they want to honor the covenants not to compete that they previously
agreed to when they affiliated with OrthAlliance. In our view, these
plaintiffs are having a severe case of buyers' remorse.
We did experience a recent victory in the U.S. District Court for the
Northern District of Indiana, when the court held that a Service
Agreement between OrthAlliance, Inc. and one of its affiliated
practices was valid and enforceable, in that the Service Agreement did
not violate Indiana laws prohibiting the unauthorized practice of
dentistry, and that OrthAlliance was a third party beneficiary of
portions of the Employment Agreements between the practice and its
orthodontist-owners, including the orthodontists' covenant not to
compete. Although this ruling is not binding on courts in which other
OrthAlliance actions are pending, we believe that the court's ruling in
this case supports our view that the plaintiffs' claims in these
actions lack merit, and that OrthAlliance has meritorious claims
against each of these plaintiffs.
Based on our prior experience and discussions with some of these
litigating practitioners or their representatives, we currently believe
that some of these practitioners will settle their lawsuits by paying
us an amount of cash in exchange for termination or modification of
their service, management service and consulting agreements with
OrthAlliance, depending upon the parties' ability to reach an agreement
as to the amount to be paid. We cannot assure you that such an
agreement or settlement will be reached in any of these lawsuits. We
also cannot, at this time, predict the outcome of these lawsuits or
assure you that we will prevail in any of them, nor can we estimate at
this time the amount of damages that we might incur or receive in these
actions.
While we would all prefer not to have these matters, unfortunately some
of this comes along with our business. We have experience in these
matters, and we are confident in the strength of our position.
o What growth do you expect to achieve in foreign markets during 2002?
We are very excited about what is occurring internationally. At this
time, we are not going to provide separate income statement data for
our foreign affiliates. We can tell you that our goal is to add between
15 and 20 affiliated orthodontic centers in Mexico and over 10
affiliated orthodontic centers in Japan during 2002. Once again, this
is just an estimate, so please see "Cautionary Statement About
Forward-Looking Statements."
o What was your cash flow from investing activities during the first
quarter of 2002? What expectations do you have for investment in
intangible assets and in fixed assets during fiscal year 2002? What
expectation do you have for new affiliations and new practitioners for
2002?
Cash flow from investing activities during the first quarter of 2002
was $(9.1) million, of which $(4.3) million was attributable to
investment in intangibles and advances to affiliated practices, while
$(4.8) million was used for investment in fixed assets. Investment in
intangibles generally represents consideration paid to our affiliated
practices in return for amending or initiating service agreements with
us. We currently anticipate that cash flow from investing activities
for fiscal year 2002 will be between approximately $(35) million and
$(45) million. We believe that the majority of this investment will be
directed toward growing existing centers, extending service agreement
terms with our existing affiliated practices and de novo growth
internationally. Relative to previous years, we intend to deliberately
spend less on new
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affiliations with existing practices during 2002. Again, please note
that these are, once again, our current estimates and beliefs, which
could change and be wrong, so please consider the risk factors
described in "Cautionary Statement About Forward-Looking Statements."
o What was your bad debt reserve at March 31, 2002?
Our bad debt reserves (or allowance for uncollectible amounts) were
about $4.0 million, or about 5.6% of our service fees receivable, at
March 31, 2002. This reserve continued to be very adequate relative to
our actual bad debt losses for the first quarter of 2002, and we
believe our reserves are sufficient to cover future and doubtful
accounts for at least the remainder of 2002. Service fees receivable,
net of allowance for uncollectible amounts, was about $67 million at
March 31, 2002.
o How many affiliated doctors and practices did you add during the first
quarter of 2002?
During the first quarter of 2002, we added 12 affiliated practitioners
and six affiliated practices.
o What are you doing to address the projected decline in the number of
orthodontists in the U.S. during the next 10 years? Who will succeed
your retiring practitioners and with whom will you affiliate in the
future?
We believe that the orthodontic profession is not producing specialists
in sufficient quantities to replace retiring ones. It's not just our
problem, it's a problem for the entire profession. Nevertheless,
consumer demand for orthodontics will not go unmet. In fact, it appears
that the shortfall in patient treatment by orthodontists is being
replaced by general dentists. Some studies have estimated that about
one-third or more of orthodontic treatment is currently being delivered
by general dentists. Unless things change in the orthodontic
profession, we believe that this trend will continue.
We are developing a plan to address the issue of manpower among our
affiliated practices. First, and most importantly, we will work on
referrals of new prospects from existing affiliated orthodontists. We
currently are affiliated with less than 6% of the orthodontists
practicing in the United States. Therefore, there are a number of
untapped geographic areas and orthodontists remaining to facilitate
growth. Currently, we are focused on integrating the OrthAlliance
affiliated practices and recruiting those OrthAlliance affiliated
practices that did not amend their contracts with us in connection with
the OrthAlliance merger.
Secondarily, we plan to formalize our program to assist affiliated
practices in training licensed general dentists (or GPs), to work under
the supervision of our affiliated orthodontists. GPs generally need to
be adequately trained before they are able to adequately assist
affiliated orthodontists. We are currently working with our affiliated
practices to create a training program for GPs so that they can
immediately contribute when arriving in an orthodontic practice, and so
that the orthodontic specialist is not burdened with training the GP on
the basics. With the proper application of qualified GPs as assistants
to an orthodontist, the orthodontic specialist generally has more time
to diagnose and monitor treatment, and to see more patients. Our goal
is to assist our busy affiliated orthodontic specialists in being able
to perform fewer routine tasks that can be performed by a GP, so that
greater patient loads can be taken on by the orthodontist and the
stress load on the orthodontist is lessened, all while maintaining
quality care. With the use of GPs assisting orthodontists, our hope is
that our affiliated orthodontists won't become burned out and will be
able to postpone retirement because their workday will be much more
pleasurable. We want to make it clear that we do not advocate GPs
diagnosing patients and prescribing treatment; rather, this system
involves having GPs work under the supervision of orthodontic
specialists. Our affiliated practices currently employ a total of
approximately 35 GPs, and the results have been very positive thus far.
We are also working on a plan to help develop more orthodontists for
the U.S. market through
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international channels. We are currently in contact with reputable
orthodontic programs in a variety of countries to train GPs currently
practicing in the U.S. to be orthodontists. Due to the fact that
American universities have limited their production to only about 200
orthodontists per year, we intend to facilitate training of qualified
professionals at top schools overseas and to assist those practitioners
with establishing an orthodontic practice here in the U.S. upon
completion of their post-doctorate programs.
Another channel we are currently pursuing is recruiting orthodontists
from foreign countries who graduated from U.S. orthodontic programs but
returned to their native countries to practice. In order for these
orthodontists to practice in the United States, they would need to
obtain a license to practice in a U.S. state, which would require
additional training in the U.S. Studies indicate that that
approximately 30% of all U.S. dental school students are foreign
nationals. Many doctors practicing in the U.S. were trained
internationally. We intend to work with dentists from other nations to
facilitate further training here in the U.S. so that those dentists can
become accredited orthodontic specialists in the U.S.
o From a financial point of view, what is the difference between an
OrthAlliance affiliated practitioner and an OCA affiliated
practitioner?
Under most of OrthAlliance's service agreements, our fees are based on
a percentage of the practice's gross revenue, plus reimbursement of
practice expenses. Under most of OCA's service agreements, our fees are
based on a percentage of the practice's operating profits, plus
reimbursement of practice expenses. Although we are compensated
differently under the terms of the contracts for OCA and OrthAlliance,
we endeavor to provide the best quality service to all of our
affiliated practices.
o What is the difference between an affiliated practitioner, center and
practice?
One could view it as the difference between a fireman (i.e., a
practitioner), a fire station (i.e., a center), and a fire department
(i.e., a practice). A fireman puts out the fires, and the fire
department has multiple fire stations. The same goes for our business.
The practitioners treat patients of the practice, and a practice often
has multiple centers. A "center" is a single office in a specific
geographic location in which a practitioner practices his profession. A
"practice" is an orthodontist or pediatric dentist practice-owner
and/or their professional corporations or other entities that are
parties to service, consulting or similar long-term agreements with us
or our subsidiaries, and their orthodontic or pediatric dental
practices for which we provide business services under those
agreements. As of March 31, 2002, we had 367 affiliated practices, 869
affiliated centers and 617 affiliated practitioners.
One important point of clarification is that not all practitioners are
"created equal." We have a number of practitioners who work within
practices who are not owners in the affiliated practice. Rather,
generally they are associates or employees of the practice. To continue
the fire department analogy, these non-owner practitioners would be
considered "fire crew," while the owner would be considered the "fire
chief."
We have historically reported counts of affiliated "practitioners" and
"centers." We recently began focusing on the alternative concept of a
"practice" as a unit of analysis, because we believe it is helpful to
understanding how we manage our business. As a practical matter, our
service agreements are generally with the owner-practitioner and his or
her professional corporation, not the center or the non-owner
practitioner.
As for those who are new to our company, a "practitioner" is a licensed
dentist, and most of the dentists who treat patients in our affiliated
centers have completed a three-year, post-doctorate program at an
accredited university to become an accredited orthodontic specialist.
We also have a handful of affiliated dentists (approximately 60 as of
March 31, 2002) who are not orthodontists working in our affiliated
centers. These doctors are either pediatric dental
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specialists or general dentists who practice under the supervision of
orthodontic specialists.
o How many of your practitioners are pediatric dentists?
We believe there is a tremendous opportunity for us in pediatric
dentistry, which is a specialty like orthodontics. As of March 31,
2002, we had approximately 25 affiliated pediatric dentists, most of
whom were affiliated with OrthAlliance prior to our merger. Pediatric
dentistry is generally a profitable and growing niche of dentistry, and
it is synergistic with our base business of providing business services
to orthodontic practices because the patients of the pediatric dentists
need orthodontists as they grow older. As such, pediatric dentists are
a natural referral source for orthodontic treatment, and pediatric
dentists can operate out of our affiliated orthodontic centers during
the days when those centers would otherwise be closed. This is an area
of growth that doesn't require a big investment in facilities and
provides us with an opportunity to increase revenue and profits. We are
currently recruiting new affiliates in pediatric dentistry, and we hope
to report some positive progress to you for this initiative during the
coming quarters. We are also tailoring our practice management software
systems to the needs of pediatric dentists.
o Where is your recommended patient contract pricing now? Do your
affiliated practices intend to raise their patient fee pricing?
We do not mandate patient contract pricing to our affiliated practices,
who control their practices, including the amount of patient fees they
charge. Generally, we recommend, based on market data, certain pricing
levels, and our affiliated practices usually adopt our recommended
pricing. Our last price recommendation was $119 per month to the
patient over the 26 month treatment term, with a retainer fee (i.e.,
the plastic thing the patient puts in his or her mouth after the braces
are removed) of $476 (i.e., 4 x $119), for a total contract fee of
$3,570 (i.e., 30 x $119). This is considerably less than the recent
national average of approximately $4,200 reported in the 2001 Journal
of Clinical Orthodontics survey of orthodontists in the U.S.,
indicating that our affiliated practices have some room to move upward
in terms of pricing.
We estimate that approximately 70% of our non-OrthAlliance affiliated
practices have adopted our recommended pricing schedule. Some have
moved their pricing higher than this level, while some are still at
lower levels. In addition, management estimates that the OrthAlliance
practitioners generally charge an up-front payment that averages about
25% of the patient contract value, and the total contract exceeds
$4,000 on average for OrthAlliance affiliated practitioners.
At this time, we cannot estimate when we will recommend a patient fee
increase to our affiliated practices. Because our current recommended
patient fee is at a significant discount to the average market patient
fee, we are reviewing our recommended patient fee in each of our
markets. It has long been our philosophy to recommend patient fees that
are at a modest discount (generally 10-15%) to the average fee in the
market, but which do not create a perception of a lack of quality
patient care.
o How is your affiliated practitioners' compensation reflected in your
income statement? What is the relationship between patient-based
contracts or collections of your affiliated practices and fee revenue
reported on your income statement?
First, it is noteworthy that we do not employ our affiliated
practitioners; rather, they engage us to provide business services for
their practices. Therefore, our affiliated practitioners' compensation
is not reflected in our income statement. Our affiliated practitioners
treat patients, and are paid fees by their patients. We provide
services to affiliated practices, and are paid fees for providing those
services. Our services are closely tied to patient activity, and, in
most states, patient contract amounts are a component of the service
fee calculation under our service agreements with affiliated practices.
In a sense, the amounts retained by the affiliated
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practice after payment of our service fees (which include reimbursement
of the practice's operating expenses) represent the affiliated
practitioner's compensation. However, we do not pay the compensation to
the practitioner; rather it is derived by the practitioner from his or
her own practice. The practitioner is the owner of his or her practice,
and like any business owner, his or her compensation can be said to
represent the income generated by the business, after payment of the
expenses and fees owed to providers of goods and services to the
business.
CAUTIONARY STATEMENT ABOUT FORWARD LOOKING STATEMENTS
Certain statements contained in this Report may not be based on historical facts
and are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements may be identified by
their reference to a future period or periods or by the use of forward-looking
terminology, such as "anticipate," "believe," "estimate," "project," "expect,"
"may," "might," "will," "would," "could" or "intend." These forward-looking
statements include, without limitation, those relating to earnings per share,
cash flow, growth, earnings per share accretion from the merger with
OrthAlliance, integration of OrthAlliance with OCA, legal proceedings,
recruiting orthodontists and pediatric dentists in the United States and
internationally, business discipline, and the GP initiative.
We caution you not to place undue reliance on the forward-looking statements
contained in this Report in that actual results could differ materially from
those indicated in such forward-looking statements, due to a variety of factors.
Those factors include, but are not limited to, potential inability to
successfully integrate OrthAlliance and its affiliated centers and practices,
adverse changes in our financial results and conditions, adverse outcomes of
litigation pending against us and OrthAlliance, potential inability to
successfully achieve some or all of our proposed internal growth initiatives,
changes in general economic conditions and business conditions, changes in our
operating or expansion strategy, inability to attract and retain qualified
personnel and orthodontists, inability to effectively market our services and
those of our affiliated practices, the impact of competition and existing and
future regulations affecting orthodontics and our business, legal restrictions
on the use or advertisement of general dentists in orthodontic practices, legal
restrictions on immigration and licensing foreign dentists, our dependence on
existing sources of funding, other factors generally understood to affect the
financial results of orthodontic practice management companies, and other risks
detailed from time to time in our press releases, Annual Report on Form 10-K for
the year ended December 31, 2001 and other filings with the Securities and
Exchange Commission. We undertake no obligation to update these forward-looking
statements to reflect events or circumstances that occur after the date on which
such statements were made.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ORTHODONTIC CENTERS OF AMERICA, INC.
By: /s/ John C. Glover
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John C. Glover
Chief Financial Officer
Date: May 8, 2002
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