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Filed by Orthodontic Centers of America, Inc. pursuant to Rule
425 under the Securities Act of 1933 and deemed filed pursuant
to Rule 14a-12 under the Securities Exchange Act of 1934.
Subject Company: Orthodontic Centers of America, Inc.
Commission File No.: 1-13457
THE FOLLOWING IS A TRANSCRIPT OF A CONFERENCE CALL BY ORTHODONTIC
CENTERS OF AMERICA ON JULY 26, 2001.
ORTHODONTIC CENTERS OF AMERICA
MODERATOR: JOHN GLOVER
JULY 26, 2001
8:00 A.M. MT
Operator: Ladies and gentlemen, thank you for standing by, and
welcome to the Orthodontic Centers of America second
quarter 2001 earnings conference call. During the
presentation, all participants will be in a listen-only
mode. Afterwards, you will be invited to participate in
the question-and-answer session. At that time, if you
have a question, you will need to press the 1 followed
by the 4 on your telephone. As a reminder, this
conference is being recorded Thursday, July 26, 2001. I
would now like to turn the conference over to Mr. John
Glover, Vice President of Investor Relations. Please go
ahead, sir.
John Glover: Thank you, operator. Good morning, ladies and
gentlemen, and welcome to the Orthodontic Centers of
America second quarter 2001 earnings conference call.
I'm joined this morning by Bart Palmisano, Sr., our
Chairman of the Board, Chief Executive Officer, and
President; and Bart Palmisano, Jr., our Chief Financial
Officer. We appreciate you being with us this morning.
Before we get started, I do want to read a statement
regarding today's conference call. During this
conference call, representatives of OCA may make
certain forward-looking statements which are generally
to be identified by their reference to a future period
or by the use of forward-looking terminology such as
the words "anticipate," "believe," "estimate,"
"expect," "may," "might," "will," "would," or "intend."
We caution you that the actual results could differ
materially from those that are indicated in our
forward-looking statements due to a variety of factors.
Information concerning these factors can be found in
the company's annual report, Form 10-K, for the year
ended December 31, 2000, recently filed with the SEC.
In connection with the proposed merger with
OrthAlliance, OCA will file a registration statement on
Form S-4 with the Securities and Exchange Commission.
Investors are urged to read the proxy statement and
prospectus that will be part of the registration
statement, because it will contain important
information about the merger of OCA and OrthAlliance.
After the registration statement is filed with the SEC,
the registration statement and the proxy statement and
prospectus will be available free of charge, both on
the SEC's website and from OCA and OrthAlliance by
directing a request to either of our investor relations
departments.
You all should have received a copy of this morning's
press release. If you have not, or to obtain a copy on
our website, you may go to www.4braces.com to receive
one there, or as well by calling us at 904-280-6211.
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Finally, this conference call will be archived for 90
days, and can be retrieved for replay from our
company's website or through the Vcall, On 24, and
StreetEvent's websites as well. Now I'd like to turn
the call over to our Chief Executive Officer, Bart
Palmisano, Sr.
Bart Palmisano, Sr.: OK. Thanks, John. Once again, we're pleased to report
another quarter of superior growth characterized by
sound execution. OCA's sustained success is a testimony
that a proven operating strategy, when executed well,
will succeed. Our results and track record speak for
themselves. Most importantly, we're excited about the
opportunities ahead and our ability to build long-term
shareholder value. We're proud to be affiliated with a
superior group of orthodontists who continue to deliver
high-quality treatment to patients in their
communities. Clearly, the services we provide translate
into added value for each practice every day.
Let me review some of the highlights for the quarter.
Once again, we're pleased to announce another very
strong quarter -- the 27th consecutive quarter of
either meeting or exceeding street expectations.
Earnings per share, up $0.30, were up 25% for the
quarter. Net revenues of $82.2 million increased 24.9%,
reflecting strong results from growth initiatives. New
patient contract dollars, which we feel is the single
greatest predictor of future revenues, increased
impressively, 27.3%, to a record $150 million in the
quarter. Cash yet to be collected on patient contracts
as of June 30, 2001 stands at $524 million -- over half
a billion dollars. Comparable center net revenue growth
was an outstanding 22.6%, continuing a strong trend of
internal growth. Cash flow from operations for the six
months ended June 30, 2001 was a robust $20.9 million,
and is still growing.
Clearly, by all important metrics, OCA enjoyed a
remarkably strong quarter of continued growth, and we
see no change in that outlook for growth ahead, despite
much of the rhetoric we hear these days. As I've
mentioned to you in prior quarters, while I'm no
economist, I can assure that our business is running
very well. Much like the purchase of a home or other
similarly important once-in-a-lifetime events,
orthodontic treatment appears to be no exception. It's
generally thought to be a non-postponable event, and
our sales figures in new patient contract dollars
suggest strongly we're holding up quite well.
Finally, as many of you already know, early this past
quarter we announced the signing of a definitive merger
agreement with OrthAlliance, Inc., one of the nation's
leading providers of practice management, and
consulting services to orthodontic and pediatric
dentistry practices in the United States. While I will
address the transaction in more depth later on the
call, we believe the transaction makes excellent
strategic sense for a number of reasons. Enthusiasm of
the doctors. You know, we like the deal and we like
their doctors -- they're great guys. We've met most of
the doctors in the last several weeks. They're
excellent practitioners who can all go to the next
level in their practices with OCA's business services.
There's a sound transaction structure. We think it's an
intelligent deal for OCA. The payment price for the
stock of OrthAlliance is predicated upon our having a
certain number of doctors sign amendments to their
agreements. But remember that 100% of the OrthAlliance
doctors come with OCA. The amendments only have to do
with pricing.
Earnings enhancement. You know, the transaction will be
very accretive to OCA, of which many of the
OrthAlliance doctors will become shareholders. OCA's
proven track record of acquisitions. We've done the
same thing with Apple, not to mention the hundreds of
other practices we've brought in over the years. And
what we're doing now is basically recruiting the
OrthAlliance doctors -- the 180-some-odd doctors -- one
at a time. The downside to that is that it takes time;
the good side is that you have guys that you establish
long-term goodwill with. And we're not doing anything
any differently with this transaction than we've done
for years.
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And plus, it's consistent with our strategy. Suffice it
to say, the outstanding strategic opportunity and the
important growth implications of the transaction -- and
we've been fully engaged in committing substantial
resources to completing this merger, and building
strong relationships with OrthAlliance affiliated
orthodontists and pediatric dentists.
We're excited about our prospects for growth and our
continued ability to build shareholder value. We've
focused diligently during the second quarter on meeting
with a majority of OrthAlliance outstanding affiliated
orthodontists and pediatric dentists, and we continue
to be impressed with the high level of professionalism
and commitment to quality. We look forward to welcoming
these highly regarded and exceptionally talented
professionals to our organization sometime late in the
third quarter of 2001.
So let me turn the call over to Bart, Jr., for a
discussion of the finances for the last quarter.
Bart Palmisano, Jr.: Thank you, Bart. Before I get into the discussion of
the quarter, I'd like to just point out an item that
was inadvertently left out of the press release. As
some of you may have noticed, the income-- net income
item doesn't tie out to the individual line items. What
happened was, a line item-- "noncontrolling interest"--
was inadvertently left off of the schedule. The
noncontrolling interest expense number for the three
months ended June 30, 2001, was $190,000. For the six
months ended June 30, it was $80,000. And interest
month net for the quarter-- for the six months ended
June 30, 2001, should be $2,247,000. So just that line
item was inadvertently left off, but if you add that to
your statements you'll get back to the totals that show
for net income.
With that, I'd like to discuss that for the three
months ended June 30, 2001, the company reported
diluted earnings per share of $0.30 per share, a 25%
increase over the $0.24 per share recorded for the
three months ended June 30, 2000. Net income increased
from $11.8 million for the second quarter of 2000 to
$14.8 million for the second quarter of 2001, a 25.3%
increase. And as Bart discussed, net revenue increased
24.9%, from $65.8 million for the three months ended
June 30, 2000, to $82.3 million for the three months
ended June 30, 2001.
We continue to focus our systems and knowledge on
improving our predictor of future growth, which is new
patient contract dollars. Again, as Bart discussed
earlier, new contract balance this time, for the three
months ended June 30, 2001, totaled $149.7 million, a
27.3% increase over the $117.6 million of new contract
balances added for the three months ended June 30,
2000. The number of new contracts increased 23.3%, from
38,004 for the second quarter of 2000 to 46,840 for the
second quarter of 2001. Both results fell within our
expectations for the quarter.
Cash flow from operations for the three months ended
June 30, 2001, was $5.1 million. As we discussed last
quarter, and as was the case last year, the need to
make two estimated income tax payments, on April 15 and
June 15, and this year's total of $17.4 million,
impacted operating cash flow. Given our high pretax
margin, income tax payments really do represent a
material portion of our cash flow expectations.
For the second quarter of 2001, net revenue for centers
open for all of the quarter, and the same quarter of
2000, increased 22.6%. We continue to see growth
influenced by our licensed assistant program, and we
continue to improve internal and external marketing
campaigns to maximize efficiency and allow
orthodontists to serve a larger patient base while
maintaining the highest quality of patient care.
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From the second quarter of 2000 to the second quarter
of 2001, operating income increased 26.4%, from $18.9
million, or 30.2% of net revenue, to $25.5 million, or
30.6% of net revenue.
During the quarter, general and administrative expense
increased to 11.1% of revenue during the quarter,
primarily as a result of significant additional
accounting and legal costs incurred early in the second
quarter related to our change of accounting method and
the filing of our 10-K in addition to certain
noncapitalized costs related to the OrthAlliance
acquisition.
As in prior quarters, we were able to reduce employee
costs as a percentage of revenue and the result of our
scheduling efficiency program.
For the six months ended June 30, 2001, the company
recorded diluted earnings per share of $0.57 per share,
a 28.7% increase over the $0.44 per share recorded for
the six months ended June 30, 2000. Exclusive of the
cumulative effect of accounting adjustment recorded in
the first quarter of 2000, net income increased from
$21.8 million for the first half of 2000 to $28.7
million for the first six months of 2001, a 31.4%
increase. Net revenue increased 27.6%, from $125.1
million for the six months ended June 30, 200, to
$159.7 million for the six months ended June 30, 2001.
New contract dollars for the six months ended June 30,
2001, totaled $288.1 million, a 29.1% increase over the
$223.1 million of new contract balances added for the
six months ended June 30, 2000. Again, this performance
provides an outstanding opportunity for us to continue
to grow at a rapid rate. And the number of new
contracts increased 24%, from $73,619 for the first
half of 2000 to $91,254 for the first half of 2001.
Cash flow from operations for the six months ended June
30, 2001, was $20.9 million, which represents
approximately a 21% increase from the six months ended
June 30, 2000. We made an equal number of tax payments
in both periods. And we continue to rely on internally
generated funds for our growth. Small debt drawings
over the last couple of years have been the result of
Japan operations and the low interest rate there.
Finally, for the first half of 2001, net revenue for
centers open for all the first six months in the same
six-month period of 2000 increased 23.0%.
Now, in order to answer some regularly asked questions
related to the second quarter of 2001: Our bad debt
reserves were 6.1% of gross service fees receivable.
Actual bad debt expense booked continues to run higher
than bad debt experience, and our reserves are
sufficient to cover future and doubtful accounts, we
feel. Gross revenue for the three months ended June 30,
2001, was $102.6 million. Net service fees receivable
were $44.1 million. Finally, some patient-count
roll-forward information. The patient count as of March
31, 2001, was 359,935. We added 46,840 new patient
contracts during the quarter. We had 2,783 acquired
patients -- and this is the result of the closing of
agreements that we had made in prior periods -- those
deals finally closed and those patients joined the
system. Patients completing treatment were 25,383, and
the patients that left before the completion of
treatment were 5,055, for a net patient count of
379,105 at June 30, 2001.
I'd like to thank everybody for their time this
morning, and I'd like to turn it back over to Bart,
Sr., for further discussion.
B. Palmisano, Sr.: OK. Thanks, Bart. By most measures, this was an
outstanding quarter for OCA. We enjoyed record new
patient contract dollars-- which are sales, again-- and
continued superior comp sales net center revenue
growth. And strong cash flow from operations.
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The chief reasons for our continued success can be
boiled down to a number of key factors that are worth
bearing in mind: superior execution of a proven growth
strategy; sound discipline; singular focus; a winning
economic model; and superior revenue and earnings
visibility. You know, once again it's worth mentioning
on this last point that with-- 76% of our revenues were
from patients already in treatment, so you had that
visibility. Now under our change of accounting, it's,
like, 96, 97% is from old patients in treatment, so the
revenue and earnings visibility, which was already
incredible, is even more incredible.
So let me update you on a number of items we think are
essential to our base business going forward. OK, let's
talk about the OrthAlliance transaction, kind of give
you an update. One of the things, I think, to remember
is that, you know, from a strategic perspective all the
other orthodontic companies acquired by OCA -- there's
no other competition after OrthAlliance for getting --
bringing on other orthodontists. They're a good group
of guys. I'm going to talk a little bit about the
orthodontic market in the United States in a second. To
talk about the deal components a little bit, though, we
paid a fixed exchange ratio in proportion to the number
of doctors willing to amend agreements. I think we
designed it fairly intelligently, and it's actually
more accretive at lower percentage rates, but --
because we pay a lesser price, if docs don't sign
amendments. But what you need to bear in mind is that
because we're acquiring the stock of OrthAlliance, we
get 100% of the doctors.
Now, it may take, you know, a per -- we had all the
docs at closing, that's about 180 orthodontic and
pediatric practices. That's important to understand. I
think there's been some confusion that we're only going
to get 40%. No, the 30% -- had we not achieved a 30%
threshold under our merger agreement, we would not --
the merger -- we had the option to opt out of the
merger if we chose to.
What was important to us in dealing with the special
committee and the rest is that we had these percentages
in here, because we didn't really have the
temperature of the doctors. And we've devoted
substantial time and resources to win the doctors over
to the OCA model. And I think they were basically blown
away by what they heard. We kind of teased one another
a little bit about, "Well, we told lies about you
guys," and they told lies about us. And all that may
have been true, and as I told them -- that our lies
were obviously a lot better than their lies were. But
they're a good group of guys, and I think that every
day as we go through recruiting these doctors -- again,
one at a time -- we're winning more and more of them
over. A sizeable number of the doctors have indicated
their willingness to receive services immediately. And
we're working -- in order to do that immediately, even
before the closing, we're working on a licensing
arrangement whereby OCA can begin to give these
services to the doctors. And there are also several
doctors who want to adopt the OCA contract, you know,
which is the profit-sharing type of contract.
We have certain stock-based incentives to the
OrthAlliance doctors which expire tomorrow, on July 27.
But the dialogue is going to continue, you know, even
beyond that date. There may not be the incentives
available for signing the amendments, but that's OK.
Let me also describe a little bit about what happens.
This is also significant to understand. If a doctor's
employment agreement expires, what these agreements
call for -- the OrthAlliance agreements call for -- is
that if an OrthAlliance practitioner decides to leave,
which he can do under the contract, he has to move --
he has to leave the practice where it is, move 10 miles
away, and he can open a new practice, if he chooses,
outside of that 10-mile radius. And OCA would need to
find a replacement that would step into the shoes of
that doctor. And in most markets that we're in right
now, we have OCA doctors who can do that. So the point
is that, you know, we feel that the practices that we
have are fairly solid. We'd like to, over time,
encourage all
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the doctors to stay if we can, but if we can't, you
know, we're prepared to not give up the franchise or
give up the, you know, cash flow in that area. And
we're also making sensible presentations, and the
consolidation of our corporate resources.
We've already downsized Ponte Vedra, and we'll downsize
Torrance over time as we bring more of the OrthAlliance
doctors, using our efficient Internet-driven business
systems. We'll begin to make transitions to our system
immediately, even before the merger closes. And believe
it or not, our Internet-driven business systems give
greater information to the doctors at much lower cost
to OCA. And that's where we see our synergies, or
overhead, really going down.
To talk a little bit about the licensed professional,
or our GP initiative -- just to briefly discuss the
concept. The ability to attract orthodontists is
becoming more and more difficult. And I'll explain that
for you in a second. And so one of the alternatives is
to extend the current orthodontists that we have.
Through our information systems, we determine what
markets had basically insatiable patient demand, but we
didn't have enough orthodontic power -- the doctor,
basically, ran out of time. So we would stop
advertising. And we'd typically have one doctor with
two offices. And so we began to experiment with having
the orthodontist hire a GP to do those kinds of
procedures that the orthodontist doesn't like to do,
doesn't have to do, but, by state regulation you have
to have a licensed professional do it -- like taking
the braces off, for example. Very time consuming, but
anybody can do it; the orthodontist doesn't have to do
that. The orthodontist will determine treatment and
dictate treatment, but doesn't really need to have the
hand for taking braces off, for example. So what we've
done is to experiment with it, and we found that's been
immensely successful. One of our first doctors was a
Dr. Hector Bush in south Atlanta, where he works about
-- our orthodontist hired a general dentist. Dr. Bush
works about 13 days a month, and he had put on the
books $520,000 in new patient contracts in one month.
That's a $6 million run rate.
And we've worked out the kinks, and we -- we have to
really re-think what a mature center is for us. We used
to think it was about a million and a half dollars or
so, and now it's nowhere near that. We have about 29
GPs presently working for affiliated orthodontists, and
we expect that we can use another 40 to 60 more within
our network. We added a couple this quarter. And as we
have better experience with this, we'll train the GP
assistants -- this will be one of the focal points at
our doctors' meeting coming up in October.
As far as recruiting, let me talk to you a little bit
about, you know, the state of the market. It has always
been a challenge. Over the next six to seven years,
it's going to be more challenging. The reason being is
that the American Association of Orthodontists has
indicated that the number of practicing orthodontists
in the United States will decline from 9,000 to 6,000.
We can't get enough of them. The reason for the decline
is the closing of the dental schools, the inability to,
you know, attract professors when a professor can earn
a half-million dollars in private practice. It just
makes it much more difficult. The result is -- and
we're starting to see a little bit of it right now --
that more people are retiring, more orthodontists are
retiring, than are actually graduating from schools.
And it's just a fact of life; it's a fact of the
market.
The other bit of information that I want to tell you is
that the orthodontists perform, by some estimates --
I've heard as low as 30% -- orthodontics performed by
general practitioners. About 30% of orthodontics are
performed by GPs who are not trained, who take these
weekend courses, up to 50%. That's what I'm trying to
say. And people are going to demand that orthodontic
treatment be gotten, you know, before their kids
graduate from high school. And they won't know, they'll
-- and the question is, what are we going to do about,
you know, these changes that have taken place in the
industry?
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I think a couple of things. One is, that we continue to
work on referrals from existing affiliated
orthodontists. We've put in place -- just put in place
-- what we call a mentoring program. In other words,
we've chosen about ten of our doctors who are really,
you know, excellent businessmen as well as
orthodontists, and we said, "Look. If you guys want to
make a few bucks, this is what we'd like you to do. You
will -- of what OCA gets, you guys will have 10% -- a
10% interest, OCA will have a 90% interest. But you
have to recruit the doctors, and, using OCA, we'll set
them up and get them mentored, this new doctor, to
bring him along, to make him the superstar that you are
in your practice. And if you've got to invite him down
-- that's fine. And that at the end of three years, we
will value your interest and OCA will buy it back from
you. We'll give you OCA stock -- and I think they were
pretty excited about that. It gave them an opportunity
to help themselves, and at the same time help us
immensely.
The other thing is that, you know, we've done a
tremendous amount of investigation over about the last
year or so. And we've looked at universities and so
forth. I think what we've come up with would be the
idea of what used to be, in orthodontics, a so-called
preceptorship type of program. But it's going to be --
we're going to go for accreditation. It'll be a real
school, but -- and we want to make it the finest
training school in the world as far as orthodontics
goes. But, not doing it the same way that, you know,
the dental schools, all of whom are losing money, do
it. We would like to use our existing OCA clinics, our
doctor resources, and our technological resources. You
know, the Internet, which nobody else has. And I think
it can be of benefit to our existing practitioners
while at the same time -- you know, we'll be able to
graduate individuals who are highly qualified and who
are being mentored -- they're undergraduate
orthodontists for a period of time until they're able
to go on their own. In exchange for that, we want
somewhere between a five- and seven-year commitment,
like ROTC.
And it's got to be in communities where the resident is
licensed and so forth. We find that there are an
incredible number of underserved markets, and the
dwindling number of orthodontists won't move to those
particular markets. And those communities are
underserved, and we want to take advantage of that.
It's just out there, you know, ready for a skilled
individual.
If this program is successful -- this is looking some
years down the road -- we'll be able to replace not
only our retiring orthodontists, we'll be able to get
into markets that are small and underserved, and we'll
position ourselves to acquire practices of retiring
orthodontists at reasonable costs, not at the kinds of
costs that are being paid right now, you know, just to
get the services of these guys. It's in the formative
stages. We're still working through it. It's not going
to have a negative impact on earnings.
Let me talk a little bit about international -- I don't
want to go too long. In Japan -- we expect Japan to
grow about 50 to 75% this year. And it's strictly de
novo development. Things are going extremely well. For
the last -- about the last four months, the numbers of
telephone calls we've gotten have more than doubled,
almost tripled, for consultations. And that's because
we did some things like reduce prices, better -- our
advertising got a little bit better, and we're starting
-- where the average orthodontist in Japan that we've
seen will start between one and three new patient cases
per month, our average last month was about 30 patients
per doctor, you know, which is pretty amazing. So
that's the power of advertising. And we are going to
begin, for the first time, doing some price advertising
in Yokohama Prefecture. One of the -- we've talked with
the health ministry; the advertising price has been a
gray area, we've stayed away from it. And so I got some
reports this morning on the number of calls in Yokohama
and it's pretty -- it's exceptional. So we'll see; it's
one step at a time. But, again, it's an extremely
vibrant market. And doctors are calling us now. We
don't have any recruiting problem there -- they want to
get part of the marketing program; they want to be part
of the marketing program.
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The same thing is happening in Mexico. We have doctors
calling us that want to come in, and we want to add
about seven offices by year end. The three offices that
we have in Mexico City, they're very profitable, we're
collecting the money, the advertising's working
extremely well. We've just hired a businessman there to
help us to start recruiting orthodontists to get
offices open.
In Spain we've -- we just started again in February.
We're still experimenting with advertising. You know,
we're getting a fair number of telephone calls. Will we
get those telephone calls into contracts? We'll have to
wait and see -- the jury's still out on that. But it's
showing some potential.
And, you know, we're pursuing opportunities in Taiwan,
Korea, and the UK, potentially. We've gotten a lot of
interest from that.
Technologically -- look, no one comes close to having
what we have. I think that one of the things that we
did when we visited the -- we set up these regional
meetings for the OrthAlliance doctors as we began to
tie what our systems were, what we have, and what'll be
out shortly. And I think they were quite impressed. And
we're getting close to having all of our information
accessible on a real-time basis. And I can't tell you
how important it is. For example, a problem came up in
Japan -- we knew about it immediately. We were putting
a lot of contracts on the books, but we weren't
collecting as much as we should have been collecting.
We found a problem going on in each of the clinics that
-- where the clinicians weren't getting certain
documents signed, so these electronic transfers weren't
being made from banks. But we found out about it
immediately. It's the value of having all this on --
real-time information.
There's a program called Abbey Road that we're going to
roll out at the doctors' meeting. It's already
available for them, but we'll officially roll it out;
we need to spend some time with them. But basically, it
takes -- rather than sending out these reports after
the fact, it's real-time. If you want to look at your
financial statements real-time, you can. If you want to
look at all your statistics real-time, you can. As long
as you have the password, you can look at it anywhere
in the world. And we have the statistics with our
report card system and so forth boiled down into such a
small -- into so many concise percentage s, that our
doctors understand if they focus on just those simple
things, they will do well. And it's really one of our
most -- our technological systems are our most
under-appreciated assets by the market, yet it's one of
the things that's made us different from all the rest.
And we really are -- as we get more and more into it,
we really are a business services company. You know,
the types of business services that we give to
orthodontists we could give to lots of other endeavors.
And, you know, we're taking a look at -- given the fact
that we are going to pick up, I guess, about 25
pediatric dentists from the OrthAlliance transaction,
we're forced to get into having systems to handle the
-- what our non-orthodontists -- non-orthodontic
dentists -- pediatric dentists. And what it allows us
to do is -- what it's forced us to think through is the
fact that, really, all of our services are pretty
generic. The only one that we need to improve on a
little bit is the scheduling and billing side, which we
have -- which we're working on right now, because we
have to.
In closing, it all comes down to execution, and we've
demonstrated that we know how to grow practices; that
we're smart, creative operators and we develop
successful solutions in many ways. We're extremely
pleased with the results for the second quarter, and
we're excited about the opportunities that lie ahead.
We're very encouraged about all our growth initiatives
and our ability to execute our operating strategy
soundly. The business discipline that we've exercised
to date will continue to serve us well going forward in
building long-term shareholder value.
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So, operator, I'm sorry I took so long, but I'd like to
open things up to questions and answers now.
Operator: All right, sir. Ladies and gentlemen, if you do have a
question at this time, please press the 1 followed by
the 4 on your telephone. You will hear a three-toned
prompt acknowledging your request. If your question has
been answered and you would like to withdraw your
polling request, you may do so by pressing the 1
followed by the 3. If you are using a speaker phone
today, please pick up your handset before entering your
request. Once again, if you have a question at this
time, please press the 1 followed by the 4. Bill
Bonello with US Bancorp Piper Jaffray, please go ahead.
Bill Bonello: Yeah, thanks. I have a couple of questions. First of
all, just-- you mentioned some of the unusual, or
nonrecurring, SG&A expense during the quarter. Is it
possible to put a dollar estimate on that?
B. Palmisano, Jr.: On the dollar amount of nonrecurring?
B. Bonello: Right.
B. Palmisano, Jr.: It was about $700,000 to $850,000 of nonrecurring.
B. Bonello: OK. And would we see some additional nonrecurring
expenses in the third quarter related to OrthAlliance,
or not necessarily?
B. Palmisano, Jr.: Yeah, I would expect to see some. I don't know exactly
what the amount is at this time, but I would
anticipate, probably at a smaller level than this
quarter.
B. Bonello: OK. And then, can you give us any color at all on what
July looked like in terms of case starts?
B. Palmisano, Sr.: Case starts so far-- we've still got a few selling days
left, but I think case starts, in terms of per center,
are a little bit higher than where they were at this
time last year. That's about where we stand.
B. Palmisano, Jr.: OK. That's just on a per-center basis, and I think
we're within expectations as far as what we expect for
overall growth.
B. Bonello: OK. And then, just curious-- on the cash flow, didn't
that really grow on a year-over-year basis despite the
growth in net income? I'm wondering if you can
reconcile the difference for us, then.
B. Palmisano, Jr.: Yeah, I think that net-- when you do-- when you compute
cash flow from operations according to the new
accounting method, it was about $4 million last year
for the second quarter. It was about $5.1 million this
year. So about a 25% growth rate matches our growth
rate in earnings and revenue.
B. Bonello: OK. I was probably looking at an unadjusted number. And
then, just a final question-- can you give us any color
on where you're at with pricing increases?
B. Palmisano, Jr.: I think we're about where we stood at the end of the
first quarter. We expect probably 60%, two-thirds,
maybe three-quarters of our centers to have increased
fees by the end of this year from $109 per month to
$119 per month. And we'll continue to evaluate the fee
increase. We expect some fee increases next year as
well, but we're evaluating those to see where it makes
the most sense, where we're not affecting elasticity
too much.
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B. Bonello: OK. And that 60 to 75%, that includes the 30% or so
that raised fees last year, or is that additional?
B. Palmisano, Jr.: That includes those that raised fees last year.
B. Bonello: OK. Great, thank you very much.
Operator: Vinit Sethi with Green Light Capital, please go ahead.
Vinit Sethi: Yes, I have three questions. My first is, when are you
planning on filing the SEC merger proxy for the deal?
And I was wondering if you could talk about, then, how
the calendar leads to a closing in the third quarter?
My second question was, can you forecast operating cash
flow, or reiterate the previous forecast for operating
cash flow, for the rest of 2001? And then also, what
percentage of the OrthAlliance doctors have signed up
for you thus far, and what percentage have agreed to
convert to your system? Or, to your economics?
B. Palmisano, Sr.: Why don't you answer the first one, Bart. When are we
going to file the--?
B. Palmisano, Jr.: We expect to file the S-4 very shortly; in a matter of
days. And I think that the timing of it will relate to
any SEC review; whether or not they decide to review
the document. That will dictate when the closing comes.
As far as cash flow from operations for the year, we
talked in terms of $45 to $50 million the last time we
spoke to the market, and we're still comfortable with
that number. Bart, do you want to talk about where we
stand as far as doctor signings?
B. Palmisano, Sr.: Yeah. In terms of-- you know, once again, to reiterate,
when we acquire the stock of OrthAlliance, we acquire
the assets, the biggest asset being all the 180
business services consulting agreements that
OrthAlliance has. In terms of doctors who have said
they want immediate business services from us, it's
somewhat over about 40% at this point. But we're on the
phone constantly talking with them. I think it's going
to be a matter of-- they'll all adopt it, because we
basically said, "Look, you know, you're paying for it
anyway. Now, it's for free. These are services you
aren't getting, and would you like to have more, you
know, purchasing power? Would you like to have, you
know, all this-- the free accounting, the Abbey Road,
knowing where you stand, all the statistical, etc.
etc.? Computer systems-- would you like to have them
for free?" And all those things.
So it's -- what we're overcoming is the fact that we
are a -- there were a lot of lies told about each one
of us. We were told -- it was told that we controlled
their practice, we told them what to buy, etc. And I
think that the remaining doctors will ultimately sign
up, you know, given a little time and given some
success.
V. Sethi: So at this point the other 60% haven't yet signed up,
even though they're getting the services for free?
B. Palmisano, Sr.: Let me explain to you again. We get 100% of the
doctors-- about 180 of the doctors. The 40% is an
amazing percentage , for them to-- they're clamoring
right now. That's why we have to sign this licensing
agreement. They don't want to wait until the close of
the merger. And so we've put together a licensing
agreement which the lawyers should finalize in a day or
so. That is an amazing percentage .
V. Sethi: OK. And then my-- the other thing I had was, how many
have signed up for the economics?
B. Palmisano, Sr.: What economics?
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V. Sethi: How many have switched over to the OCA profit-sharing
arrangement?
B. Palmisano, Sr.: I don't know what that percentage is at this point.
V. Sethi: OK. Thank you.
Operator: Arthur Henderson with Jefferies. Please go ahead.
Arthur Henderson: I just had one question. Excluding the potential ORAL
transaction -- the doctors that come over with that
transaction -- what sort of doctor additions are you
expecting for the remainder of the year? Are they going
to be as low as they were, I guess, during this last
quarter?
B. Palmisano, Sr.: Well, let me tell you. To try to-- the answer is that
we're devoting, you know, resources to getting all of
our systems integrated with these-- this 180
OrthAlliance doctors. It's-- we're spending our time on
doing that right. You know, the possibility is that,
you know, it could be as low, because we're just-- it's
just taking time to do. But any time you have a chance
to sign up 180 doctors, you know, in one fell swoop,
you know, I think that you need to devote some time and
get it done properly. And that's what we're doing.
A. Henderson: Then I think the same logic will be applied to the
actual acquisitions of other practices beyond what
you're doing with ORAL.
J. Glover: I'm sorry-- what's your question, Arthur?
A. Henderson: Well, the question was, I noticed that you didn't have
any -- the only centers that came on line this
particular quarter were developed centers. And that
there weren't any individual acquisitions of individual
businesses or small orthodontic practices. And I assume
that the same logic applies to acquisitions excluding
ORAL for the rest of the year.
B. Palmisano, Sr.: You know, I think that you probably ought to assume
that. You know, the point at which, you know, ORAL--
you know, we get it to the point that's fully
integrated, then I think there are huge opportunities
going forward.
A. Henderson: OK. Thanks, guys.
Operator: Michael Baker with Raymond James. Please go ahead.
Michael Baker: Yes. I had a question with respect to the consolidation
of headquarters. Was wondering if there are going to be
any incremental savings as a result of that beyond the
$7.4 million that you had outlined earlier as part of
back office savings relating to the merger?
B. Palmisano, Sr.: The answer's yes -- there will be some savings from
that.
M. Baker Do you have that incremental piece quantified yet, or
the timing of when that might be realized?
B. Palmisano, Sr.: Well, it's being realized, I guess, as we-- over the
next couple of months. But we-- I don't have it
quantified yet. We're still working on it. We're going
to do-- I think one thing that can be said is that our
business has changed a lot, you know, since 1994, 1995.
Mike, I'll give you an example. Training, for example.
The type-- we'd done training, I think, you know, where
we had a training group that they really weren't busy
very often; it depended on sometimes they were very
busy, sometimes they weren't busy, and it was dependent
upon the numbers -- you know, the amount of
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recruiting. The training that we're going to do now
will be this. But now, vs., you know, 1994, now we have
whatever it is -- 600 centers, really excellent
managers, you know, skilled people. So when someone
comes on, the training that will be done, it's much
more technical than it ever was before. That was a
little bit of a problem. So they'll come down to
Metairie, they'll spend a few days going over, you
know, the Walrus and the technical parts of it, and
then they will spend a couple of weeks with an existing
office in our area, and learn all the aspects of it,
just I guess like Holiday Inn does, when you see -- or
Hilton, you know, when you see trainees. That didn't
exist before.
They'll do that and then when they get into their own
office, it's going to be a much more -- and if we need
to send a person for the grand opening, some period of
time. So the point being is that you don't need a huge
training center with lots of people waiting to train
people, but you take advantage of the resources that
you currently have. That's an example of some of the
synergies that will come out of all this.
M. Baker: And then, I had one point of clarification. The 40% or
over 40% that you referenced earlier-- do those
represent doctors that have extended to three years,
remain under the OrthAlliance economics, and have
agreed to use your business systems? Is that correct?
B. Palmisano, Sr.: That's correct. Those are the ones that want it--
M. Baker: Thank you.
B. Palmisano, Sr.: They want it immediately.
M. Baker: No, I hear you. I just wanted to clarify that.
B. Palmisano, Sr.: OK.
Operator: Robert Mains from Advest, please go ahead.
Robert Mains: You get all the OrthAlliance orthodontists and you've
got somewhere, you know, 40% or so have converted over
to your systems and the three-year hitch. Of the
remainder, are there any that are saying, "Look, I
don't want anything to do with you," and you're
negotiating to have them buy back the practices?
B. Palmisano, Sr.: Oh, yeah, there are some. But they're not-- you know,
they've basically said-- under their agreement, they
can go 10 miles down the road. Some have said, "Well,
gee, we'd like to buy our practices back." OK. Well,
we'll negotiate that when the time comes, and we'll
talk to them when the time comes. And there are some of
those. And if they do want to do that, we'll just
evaluate it on a circumstance-by-circumstance basis,
the way we've always done. And we'll see. But the fact
of the matter is that if, let's say, a doctor
purchased-- we negotiated some buyout of the practice.
You know, it's our intention to take that money and to,
you know, reduce debt with it.
R. Mains: So in terms of modeling, shall we assume that a
substantial proportion of the OrthAlliance revenues end
up on your books and probably some of those will grow a
little faster than others?
B. Palmisano, Sr.: Yes.
R. Mains: OK. You mentioned Japan, you expect 50 to 75% growth.
Is that in offices, or is that in revenues, or both, or
what's the metric there?
B. Palmisano, Sr.: Probably in revenues and offices. Things are going real
well over there right now. And just-- you know, what
we're trying to do is to-- it's kind of a different
model, I
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think, than exists here. You know, the saner model to
have there is to have a senior orthodontist. And there
are so many of these, I guess what I'll call associate
orthodontists that don't mind being to some degree
subservient. They don't want to be businessmen. But
we'd like to-- you know, we're thinking maybe have one
orthodontist and three associate orthodontists under
him, say operating three offices or even four offices,
and having-- you know, and sharing teams and so forth.
So we're not focusing on recruiting doctors right now,
we're focusing on-- with the information we get
concerning telephone calls where we don't have any
offices, we're getting offices built in those areas,
Yokohama being-- and the Chiba. I don't know how
familiar you are with Tokyo. And there's one other one
at Kobe. We're getting an immense number of telephone
calls, because we have-- it's like a 1-800 number--
it's a nationwide number-- in the advertising. So that
the advertising costs can spread, the doctor costs can
spread, the employee costs, which are to some degree
fixed, get spread. That's what we're working on right
now.
And I think, you know, we may be at the point -- we had
a board meeting yesterday, and I think some of the
directors said, "Well, why don't you go back and take a
look at taking that thing public? See what McDonalds
did." You know, McDonalds just -- which was owned 50%
by Japanese -- by Japanese individuals and 50% by
McDonalds -- went public in Japan because a much higher
multiple was gotten. Or -- I don't even know if it's
closed yet, but I'm going to investigate that. But it
really is starting to take off now.
R. Mains: So of the eight centers you developed in the quarter,
were any of them in Japan?
B. Palmisano, Sr.: Three.
R. Mains: Three? Were the other five in the U.S.?
B. Palmisano, Sr.: Yes.
R. Mains: OK. And the two professionals that you recruited, are
those both U.S.?
B. Palmisano, Sr.: Yes.
R. Mains: Both dentists, or orthodontists?
B. Palmisano, Sr.: Both GPs.
R. Mains: OK. And did you have anyone retire or anything else?
That two is a net number as well?
B. Palmisano, Sr.: Yeah.
R. Mains: OK. And then, what number-- I think I just heard you
wrong, and then I'm done. In the commentary, total
contract balances out of the end of the quarter?
B. Palmisano, Sr.: Yeah, $532 million.
R. Mains: OK, very good. Thanks.
Operator: Doug Simpson from Merrill Lynch, please go ahead with
your question.
Doug Simpson: Hello, everybody. Just as a point of clarification --
not to beat a dead horse here, but I'm just trying to
understand -- what is the difference in terms of
contribution to OCA's financial results if 40% of the
OrthAlliance doctors amended their agreement as opposed
to 100%? What would the impact be on your -- on OCA's
reported financials post-merger?
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B. Palmisano, Sr.: If none of them signed this amendment, then 100%--
there would be no change. In other words, we'd still
get all the revenues from the 180 doctors.
D. Simpson: OK.
B. Palmisano, Sr.: OK? Let me just give you some reasons we even wanted
this amendment in here. When we first made the deal
with OrthAlliance and we had-- you know, we had to go
through this-- meet with a special committee and so
forth, we could not speak with any of the doctors. One
of our dearest philosophies is that we only want
doctors who are going to come-- who are going to be
happy, who want to come with us. And we knew about the
competitive bad blood that existed prior to going in.
But we couldn't talk to all the doctors because of
confidentiality. So we said-- I basically said, "Look,
guys. We're not"-- to the special committee-- "we can't
wind up paying, you know, some amount of money and wind
up with two doctors. What we have to do is to feel, you
know, the pulse. We have to be able to meet these guys,
go talk with them, show them what we have." And I think
we negotiated-- that's how we came up with a 30%
threshold. What we did want-- we wanted the doctors to
sign something, even thought it wasn't anything that
dramatic, because we felt that the OrthAlliance
contract was pretty decent. We wanted them to sign
something. We said, "OK. Special committee-- for this
merger to go through, we want 30% to sign amendments
that say two things. One, that they extend to three
years their current commitment; and, No. 2, that they
immediately adopt OCA's systems."
D. Simpson: So it's more of a good-faith type of initiative as
opposed to an accounting impact.
B. Palmisano, Sr.: Oh, right. Right.
D. Simpson: There's no-- OK. OK. And then I guess at the time of
the deal, back in May, you were talking about expected
synergies in the neighborhood of $0.09 cents, you know,
too, and then on top of that you were looking for
further synergies about in the neighborhood of $7.5
million. As you guys have gone through it and had some
more time to work on it, has there been any change in
that at all, or are those still the ranges you're
looking for?
B. Palmisano, Sr.: Those are still the ranges that we're looking at right
now.
D. Simpson: OK. And just as a point of clarification, because the
consensus numbers have widened, the $0.09 accretion, is
that-- have you given a sense as to what base that
would off of?
B. Palmisano, Sr.: That was based on a 60% sign-up rate with-- 60% sign-up
rate, assuming that this-- that the goodwill
amortization rules are going to affect, as everybody
expects them to.
J. Glover: [Unintelligible] and that 40% difference also assumed
our [unintelligible] that went away immediately, which
I guess B. Palmisano, Sr.:, has alluded to. We don't
believe that's going to happen. That's a very
conservative approach.
B. Palmisano, Sr.: Right.
D. Simpson: OK. So you were assuming that 40% of the doctors just
walked away? Just went 10 miles away and opened up
another practice?
J. Glover: Right. End of revenue stream at that [unintelligible].
D. Simpson: OK. That was my confusion for the-- because it didn't
seem like there was any impact on the bottom line. I
was curious why the 60% was a key number.
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B. Palmisano, Sr.: Yeah. I think-- the other thing to consider, too, is,
when we talk about the $0.09, we did mention that some
of that is going to be given back to the doctors in
terms of incentives; in terms of additional stock to
sign up earlier, participate in various programs.
D. Simpson: OK.
B. Palmisano, Sr.: So I think that-- there are those factors that need to
go into it as well.
D. Simpson: OK. And then, just-- maybe just one last question. What
was your amortization of goodwill expense in the
quarter?
B. Palmisano, Jr.: It was a little over $2 million. And that's just
amortization of our identified intangibles.
D. Simpson: OK, great. Thank you.
Operator: Bob Plezia, RJJP, Inc. Please go ahead.
Bob Plezia: To the question somewhat related to the U.S. markets--
your starts per ortho has been practically double what
the average is, and your growth rate has been factors
greater. If this continues, your "share" of market,
which you haven't talked about, is going to be more
significant. Have-- given those parameters, have you
felt any effect anyplace around the country regarding
the economy that's softening in the manufacturing end?
B. Palmisano, Sr.: Not in any of our-- in our major markets. There have
been one or two places where there have been issues
that we've had to address in that regard, but nothing
anywhere near material. We really haven't seen a
tremendous impact of any kind.
B. Plezia: OK. And just going back-- I must have missed it-- in
your talks with AAO you talked about the number of
orthos going from 9,000 to 6,000. In what time period
was that?
B. Palmisano, Sr.: Five to seven years.
B. Plezia: Thank you. That's all I have.
Operator: Jan VanBergen, U.S. Growth, please go ahead.
Jan VanBergen: Good morning, gentlemen. Two questions. First, just on
the numbers on the OrthAlliance. You keep on quoting in
your press releases 226 professionals, but you also
then just talk about 180. What's the different between
the two numbers?
B. Palmisano, Sr.: I think the differences are-- represent associate
doctors. I think the 182 represents practices; there
may be multiple doctors in the practice.
B. Palmisano, Jr.: The rest represent, not dentists, but associate
orthodontists, meaning not owners of the practices but
employees of other orthodontists.
J. VanBergen: I see. So you actually do-- you have to-- if you've
signed everyone up you'd have to do 180 different legal
entities.
B. Palmisano, Sr.: Right.
J. VanBergen: OK. The second question regards with your consolidation
on the Florida operation into Metairie. How many
people, you reckon, will lose their jobs over that? And
secondly, what level of seniority? What I'm trying to
get a feeling of is the people you'll be losing, you
know, above the clerical level or something.
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B. Palmisano, Sr.: We've done a lot of research. In fact, we spoke to the
employees and did the closing of the downsizing on
Tuesday. And I would-- in terms of, you know,
senior-level individuals, I mean, I don't think that
they were really-- what we did was, you know, was to
find out that we had kind of gotten into this sort of
thing where you have people answer the telephone, not
know the answer to a question, refer it to somebody in
Metairie because it's become so technical. And now-- so
to a large extent, by just transferring the telephones
here, they can go directly to the department head that
handles a particular function, so you don't have a
middle man. There was a lot of that. There was a
training I mentioned earlier. In terms of numbers of
people, I would guess probably about-- we've asked, I
would say, about 10 people or so to relocate here to
New Orleans, and that's all positive. And maybe, I'd
say, 15 people or so might have been let go. And
construction is going to remain in Ponte Vedra.
J. VanBergen: [Inaudible] So -- and the people who are relocating
from Florida to Louisiana -- I'd have thought that not
many people wanted to do that, quite truthfully, but
maybe I'm being unfair to Metairie.
B. Palmisano, Sr.: [Laughs] Well, maybe you are. No, actually, we're a
suburb of New Orleans, and New Orleans is really a
delightful place to live. We have a very deep culture.
And I think the people that have come over, we've
invited them over, have-- they've enjoyed what they've
seen. And they just love the company. And they're good
at what they do. And, you know, it's an opportunity for
them. No one has moved here yet-- we've only started
talking with them. But we've got a lot of positive
response. So, you know, we're pretty positive about it.
J. VanBergen: Right. So, I mean, of your sort of, say, middle
management or senior management, you would lose, what,
two or three people or something like that maybe?
B. Palmisano, Sr.: As far as senior management goes, none. As far as--
J. VanBergen: Senior management being what-- the top 10 people in the
company, that sort of--?
B. Palmisano, Sr.: Yeah, I'd say. And, you know, as far as middle
management, it-- not very many.
J. VanBergen: So it shouldn't have a negative -- because I've been
picking up mixed signals. A lot of -- some people
saying it's good and some people saying it's just
terrible and you're ruining the company.
B. Palmisano, Sr.: Well, I think that-- in fact, I went home last night.
My wife pointed out to read these message boards about,
you know, some of the really negative comments. And
those are from employees, I can assure you. The fact of
the matter is, it's something that probably should have
been done a long time ago. You can't have two
headquarters and, you know, with this OrthAlliance
thing facing us as well, you have to consolidate. It's
very difficult-- the reality is that you had two
leaders. It just got to be very confusing and kind of
unproductive. I mean, that's the reality of it. And
it's something that, whether it's me or somebody 10
years from now that does it, it just had to get done.
And it was painful, it wasn't fun, but we felt it was
in the best interest of the business.
J. VanBergen: Interestingly enough, in the field -- I'm not talking
about the Website stuff -- but from the field there's
quite a few people say actually it'll make the whole
thing -- they said this, actually, before you did it.
That it was going to make the whole thing considerably
more efficient [unintelligible].
B. Palmisano, Sr.: Yes, I think it will.
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J. VanBergen: Also, just going back to the -- I'm sorry to beat a
dead horse, but I thought I understood, and I find I
now don't. If the 40% of 180 doctors for OrthAlliance
-- they've signed an agreement. Presumably you get
revenue from those 40 -- I'm not talking about what you
would receive. But if they go into your profit-sharing
agreement, you actually will make -- you make
additional money, don't you?
B. Palmisano, Sr.: Well, to the extent that some of them might choose to,
that might be true. But I think at this point-- and
we're encouraging them that eventually to change to our
method of doing things-- and for that extra revenue we
would give them some restricted shares in OCA. But I
don't think that we have very many of those who've
chosen to do it yet, only because we're just trying to
get the services out. One step at a time. I think
eventually, you know, hopefully we encourage them to do
some of the other things. Because, you know, they do
benefit from-- right now if they want to build a new
office, they need to fund it themselves. If they want
to advertise, they need to fund it themselves. We'd
like to-- you know, we think the sharing makes more
sense. I think that those are opportunities for us to
get doctors to convert to our plan.
J. VanBergen: OK. And also, these 40, though, you won't be-- 40%--
you won't be advertising for them. I mean, they--
advertising isn't part of the deal; or is it?
B. Palmisano, Sr.: No, it's the same agreement as they have with
OrthAlliance. And there are a couple of -- there's at
least one, I think, advertising practice included in
that 40%, and it would just be the same economics as
before, unless that person wants to change.
J. VanBergen: OK. Thank you.
Operator: Jeff Hanissian, Forstmann Asset Management. Please go
ahead. Jeff Hanissian, your line is open for a
question. Bill Bonello, please go ahead with your
follow-up question.
B. Bonello: Hey, guys. Just a couple of points of clarification.
One, to the earlier question about the accretion. I'm
not sure if I understood your answer, Bart. You said
that the $0.09, then there'd be some give-back to the
doctors. Are you saying that it's $0.09 assuming the
give-back to the doctors, or are you saying that the
accretion, you actually believe, will be less than
$0.09?
B. Palmisano, Sr.: We've always talked in terms of $0.09 before some
give-back of a few pennies to the doctors. Let me try
to explain. First of all, in terms of our figuring
out-- you may or may not be aware of this, but when we
came up with the $0.09, we assumed that if only 40% of
the doctors would stay in-- 60% would stay in, and that
40% would eventually leave; would buy out, do whatever,
at some miniscule price. That was baked in. So we came
up with this $0.09 cents. For the part that-- the part
of the accretion that's going to be-- would be given
away, is if we go from 60% to 75%. If you look on one
of the websites, you know, you see that we're giving
away some of that extra accretion, you know, above the
$0.09.
B. Bonello: OK. So it's $0.09, a minimum from your perspective.
B. Palmisano, Sr.: Yeah.
B. Palmisano, Jr.: Yeah, I'm sorry; I had that incorrect.
B. Bonello: OK. And then, just again, like everybody else, beating
a dead horse, but I think people care about this. I
understand you get 100% of the revenue regardless, but
I also understand that-- I think there's a threshold at
51% in terms of what you pay for OrthAlliance when 51%
of the doctors have signed a contract extension to
three years. And if I hear you right, you are saying
you have not reached that threshold yet?
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B. Palmisano, Sr.: Right.
B. Bonello: OK. And are, I mean, are you high 40s? Or-- I was of
the impression you were pretty close to that threshold.
B. Palmisano, Sr.: I think we're pretty close to 40%. Slightly above 40%,
I believe.
J. Glover & Yeah. Right.
B. Palmisano, Jr.:
B. Bonello: OK. Great. And then, of that-- I don't know if you can
answer this or not, but, you know, going back to your
model where you assumed the doc-- if 40% of the doctors
who could leave would leave, do you know what
percentage of those founding doctors whose contracts
come up in, I think, August of next year, do you know
what percentage of those doctors have signed a contract
extension?
Several: I don't know.
J. Glover: I've got the tally, Bart. It's consistent with the
numbers [unintelligible]amendment. So, you know, about
40-ish%-- somewhere in there.
B. Bonello: OK. So-- OK. All right. And then, finally, just
switching gears, somebody asked you about Japan, and
you had made a comment about not really being focused
on adding doctors, and I guess-- I just want to make
sure I understand that. So, should we not look for you
to add more doctors in Japan this year? And what's your
thinking for `02?
B. Palmisano, Sr.: Well, if we never get to add another doctor, I'll be
just happy, as long as we add patient contracts. And I
will tell you and everybody else once again, that this
focus -- the orthodontic industry is changing. There
are more and more ways to extend orthodontists that
exist. And to continue to focus on adding practitioners
is-- doesn't equate, necessarily, to growth. To me,
it's taking advantage of the resources that you have in
place and extending them. And there are any number of
ways that you do that. In Japan-- if a doctor, let's
say, in the United States, you know, can start
comfortably 50 patient cases a month, and if in Japan
you have each office starting about 15 a month, the
models-- and then they have assistants that they can
use, why recruit more orthodontists? You know, why not
use the orthodontists that you have? They can make more
money, they can have these-- we have any number of
doctors who would-- young doctors who want to sign up
with us and don't want to be owner-operators. Why
continue to use the U.S. model with one doctor? Why not
begin to extend it out a little bit? Now, you know,
we-- and I think that what the market needs to focus
on-- and maybe we need to do a better job at explaining
that to them-- is the increase in new patient
contracts. Those are the sales. Our sales are not
recruiting doctors. So any kind of modeling that's
done-- you know, for I think you analysts that were
with us in 1995 and 1996, the best we could do, because
we had all de novos and were just starting up, is say,
"OK. Take doctors, multiply by the number of starts per
office." But it's a whole different ballgame now.
B. Bonello: OK. Thank you.
B. Palmisano, Sr.: Right.
Operator: Adam Weiss, Merrill Lynch, please go ahead with your
question.
Adam Weiss: Hi, Bart.
B. Palmisano, Sr.: Hey, Adam.
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A. Weiss: What's the plan if you take on an OrthAlliance doctor
who wants to sign up for the advertising plan and so
forth-- I don't know if you covered this already-- and
is pretty close to an existing OCA doctor?
B. Palmisano, Sr.: Well, we actually have-- in Atlanta, for example, we
have an OrthAlliance doctor who's advertising--
probably one of the biggest practices in OrthAlliance.
And we've been coexisting for years, and both doing
pretty well out there. If that's the most -- if--
that's a situation that we're resolving with the two
doctors right now. And they're both, you know, good
guys and understand that-- how we'll ultimately resolve
that in terms of, do we advertise under one name or
what we do, I'm not really sure at this moment. In
terms of an OrthAlliance doctor who wants to advertise
all of a sudden where one of our guys is, you know, I
think that-- there aren't any who want to advertise.
They're growing their practices internally now. In a
place of conflict that we have our-- in Tallahassee, we
had to resolve that. Just one doctor there. Just the
one in Atlanta. And I think there's one other.
A. Weiss: So it's not a major issue; it's not popping up,
gushing. It's not keeping you from adding doctors
because one guy's a mile away and you see the other
person as a competitor.
B. Palmisano, Sr.: Correct.
A. Weiss: OK. That's pretty much all I had; thank you.
B. Palmisano, Sr.: All right, Adam.
Operator: Scott Schefrin with Bear Stearns, please go ahead with
your question.
Scott Schefrin: Yes. If you're slightly above the 40% right now, what--
how many shares of OCA will you be giving to the
OrthAlliance shareholders at this time? What's that
ratio?
B. Palmisano, Sr.: Do you know it that is, John or Bart? It's in the
document.
S. Schefrin: There's a cutoff, I think, at 41%. If you're above 41%,
I think it goes to 0.11, but if you're below 40-- if
you're 31 to 40, it's 0.10.
J. Glover: At 40% the less [unintelligible], 50% is 0.1106.
S. Schefrin: And so you're at that level at this time-- the 0.11,
J. Glover: Yes.
S. Schefrin: OK. Would you expect that to ultimately be the final
number of shares you'd have to give out, then, so we
could calculate that now, basically?
J. Glover: Scott, that's-- you know, it's a bit premature, I
think. I think Bart alluded to the fact we've got a
deadline tomorrow wherein most of the doctor stock
incentives expire. So this is a bit premature. And, the
final fixed exchange ratio is a function of those that
have made those amendments or taken on OCA contracts at
closing. So as Bart mentioned, the dialogue continues
from beyond tomorrow all the way till the day of the
closing.
S. Schefrin: OK, yeah, that's great. And lastly, when do you expect
to file a proxy for that, and we could read more?
B. Palmisano, Sr.: Within a matter of days.
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S. Schefrin: Great. Thank you very much.
J. Glover: Operator, I think that's about it. We've been on for
quite a while.
B. Palmisano, Sr.: Well, everyone, thanks very much. We appreciate all of
your interest. I hope we got a few things clarified
today. And we thank you very much for your time. We'll
talk to you soon. That's it, operator.
Operator: Thank you. Ladies and gentlemen, that does conclude the
conference for today. You may all disconnect, and thank
you for participating.
CERTAIN STATEMENTS CONTAINED IN THIS TRANSCRIPT 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,"
"EXPECT," "MAY," "MIGHT," "WILL," "COULD," "WOULD" OR "INTEND." THESE
FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THOSE RELATING TO OCA'S
GROWTH, OCA'S OPERATIONS AND RECRUITING, SHAREHOLDER VALUE, OCA'S PRICING OF
SERVICES, OCA'S REVENUES, BENEFITS TO ORTHALLIANCE'S AFFILIATED ORTHODONTISTS
AND PEDODONTISTS, FILING OF THE REGISTRATION STATEMENT ON FORM S-4 WITH THE SEC,
OCA'S PROVISION OF SERVICES TO ORTHALLIANCE'S AFFILIATED ORTHODONTISTS AND
PEDODONTISTS BEFORE COMPLETION OF THE MERGER, AND EFFECTS, BENEFITS, PROSPECTS
AND COMPLETION OF THE MERGER. WE CAUTION YOU NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS TRANSCRIPT 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,
FAILURE OR DELAY IN OBTAINING REQUIRED STOCKHOLDER APPROVAL, THE COMPANIES'
FAILURE TO CONSUMMATE THE MERGER, INABILITY TO SUCCESSFULLY INTEGRATE THE
COMPANIES AFTER THE MERGER, ADVERSE CHANGES IN THE COMPANIES' FINANCIAL RESULTS
AND CONDITIONS, CHANGES IN GENERAL ECONOMIC CONDITIONS AND BUSINESS CONDITIONS,
CHANGES IN OCA'S OPERATING OR EXPANSION STRATEGY, THE ABILITY OF OCA TO ATTRACT
AND RETAIN QUALIFIED PERSONNEL AND ORTHODONTISTS, THE ABILITY OF OCA TO
EFFECTIVELY MARKET ITS SERVICES AND PRODUCTS, OCA'S EXPECTATIONS AND ESTIMATES
CONCERNING FUTURE FINANCIAL PERFORMANCE, FINANCING PLANS AND THE IMPACT OF
COMPETITION, ANTICIPATED TRENDS IN OCA'S BUSINESS, EXISTING AND FUTURE
REGULATIONS AFFECTING OCA'S BUSINESS, OCA'S DEPENDENCE ON EXISTING SOURCES OF
FUNDING, AND OTHER FACTORS GENERALLY UNDERSTOOD TO AFFECT THE FINANCIAL RESULTS
OF ORTHODONTIC PRACTICE MANAGEMENT COMPANIES, AND OTHER RISKS DETAILED FROM TIME
TO TIME IN OCA'S RELEASES AND ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2000 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.
IN CONNECTION WITH THE PROPOSED MERGER, OCA WILL FILE A REGISTRATION STATEMENT
ON FORM S-4 WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC"). INVESTORS ARE
URGED TO READ THE PROXY STATEMENT/PROSPECTUS THAT WILL BE PART OF THE
REGISTRATION STATEMENT, BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION ABOUT THE
MERGER, OCA AND ORTHALLIANCE. AFTER THE REGISTRATION STATEMENT IS FILED WITH THE
SEC, THE REGISTRATION STATEMENT AND THE PROXY STATEMENT/PROSPECTUS WILL BE
AVAILABLE FREE OF CHARGE, BOTH ON THE SEC'S WEB SITE (WWW.SEC.GOV) AND FROM OCA
AND ORTHALLIANCE BY DIRECTING A REQUEST TO ORTHODONTIC CENTERS OF AMERICA, INC.,
5000 SAWGRASS VILLAGE CIRCLE, SUITE 30, PONTE VEDRA BEACH, FL 32082, ATTENTION:
INVESTOR RELATIONS, OR TO ORTHALLIANCE, INC., 21535 HAWTHORNE BOULEVARD, SUITE
200, TORRANCE, CA 90503, ATTENTION: INVESTOR RELATIONS. ORTHALLIANCE AND ITS
DIRECTORS AND OFFICERS MAY BE DEEMED TO BE PARTICIPANTS IN THE SOLICITATION OF
PROXIES WITH RESPECT TO A SHAREHOLDER MEETING TO BE HELD IN CONNECTION WITH SUCH
MERGER. INFORMATION ABOUT THE PARTICIPANTS IN THE SOLICITATION, INCLUDING THEIR
INTERESTS IN SHARES OF ORTHALLIANCE'S COMMON STOCK, IS SET FORTH IN
ORTHALLIANCE'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000
FILED WITH THE SEC. INVESTORS MAY OBTAIN ADDITIONAL INFORMATION REGARDING THE
INTERESTS OF ORTHALLIANCE AND ITS DIRECTORS AND OFFICERS BY READING THE PROXY
STATEMENT/PROSPECTUS WHEN IT BECOMES AVAILABLE.
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