SEC Info - Oca, Inc./DE - ‘424B4’ on 11/5/97

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Oca, Inc./DE – ‘424B4’ on 11/5/97

As of: Wednesday, 11/5/97 · Accession #: 950130-97-4800 · File #: 333-36799

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/05/97  Oca, Inc./DE                      424B4                  1:253K                                   Donnelley R R & S… 02/FA

Prospectus — Rule 424(b)(4)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Filing Pursuant to Rule 424B4                         72    430K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Agreements with Affiliated Orthodontists Anti-Takeover Provisions Ashton J. Ryan, Jr Available Information Bartholomew F. Palmisano, Jr Bartholomew F. Palmisano, Sr Business Capitalization Cash and cash equivalents Certain United States Federal Tax Consequences for Non-United States Holders Company, The Competition Depreciation and amortization Description of Capital Stock Dr. Gasper Lazzara, Jr Edward J. Walters, Jr Employee costs Experts General General and administrative Government Regulation Incorporation of Certain Documents by Reference Key Employee Stock Purchase Plan Legal Matters Management Management's Discussion and Analysis of Financial Condition and Results of Operations Marketing and advertising Net income Net revenue Nonrecurring litigation expense Notes to Consolidated Financial Statements Offering, The Operating profit Orthodontic Centers Orthodontic supplies Preferred Stock Price Range of Common Stock and Dividend Policy Principal and Selling Stockholders Prospectus Summary Provision for income taxes Rent Report of Independent Auditors Risk Factors Selected Financial and Operating Data Shares Eligible for Future Sale The Company The Offering Underwriters Use of Proceeds
1	1st Page - Filing Submission
4	Available Information
"	Incorporation of Certain Documents by Reference
5	Prospectus Summary
"	The Company
7	The Offering
"	Risk Factors
10	Government Regulation
11	Competition
12	Shares Eligible for Future Sale
14	Use of Proceeds
"	Price Range of Common Stock and Dividend Policy
15	Capitalization
16	Selected Financial and Operating Data
18	Management's Discussion and Analysis of Financial Condition and Results of Operations
"	General
20	Net revenue
"	Employee costs
"	Orthodontic supplies
"	Rent
"	Marketing and advertising
"	General and administrative
"	Depreciation and amortization
21	Operating profit
"	Provision for income taxes
"	Net income
23	Nonrecurring litigation expense
26	Business
30	Orthodontic Centers
34	Agreements with Affiliated Orthodontists
37	Management
"	Dr. Gasper Lazzara, Jr
"	Bartholomew F. Palmisano, Sr
38	Edward J. Walters, Jr
"	Ashton J. Ryan, Jr
"	Bartholomew F. Palmisano, Jr
"	Key Employee Stock Purchase Plan
40	Principal and Selling Stockholders
42	Description of Capital Stock
"	Preferred Stock
"	Anti-Takeover Provisions
45	Certain United States Federal Tax Consequences for Non-United States Holders
48	Underwriters
51	Legal Matters
"	Experts
53	Report of Independent Auditors
58	Notes to Consolidated Financial Statements
60	Cash and cash equivalents

424B4 1st Page of 72 TOC ↑Top Previous Next ↓Bottom Just 1st
REGISTRATION NO. 333-36799
FILED PURSUANT TO RULE NO. 424(b)(4)

PROSPECTUS

5,200,000 Shares

[LOGO OF ORTHODONTIC CENTERS OF AMERICA APPEARS HERE

COMMON STOCK
----------------

OF THE 5,200,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 2,600,000
SHARES ARE BEING SOLD BY THE COMPANY AND 2,600,000 SHARES ARE BEING SOLD BY
THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS."THE
COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES OF
COMMON STOCK BY THE SELLING STOCKHOLDERS. OF THE 5,200,000 SHARES BEING
OFFERED HEREBY, 4,160,000 SHARES ARE BEING OFFERED INITIALLY IN THE
UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND 1,040,000
SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND
CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." THE
COMMON STOCK OF THE COMPANY IS LISTED ON THE NEW YORK STOCK
EXCHANGE UNDER THE SYMBOL "OCA." ON NOVEMBER 3, 1997, THE
REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NEW YORK
STOCK EXCHANGE WAS $18 PER SHARE.

----------------

SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

----------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

----------------

PRICE $17 3/4 A SHARE

----------------

[Download Table]

UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2) SELLING STOCKHOLDERS
----------- --------------- ----------- --------------------

Per Share......... $17.75 $.89 $16.86 $16.86
Total (3)......... $92,300,000 $4,628,000 $43,836,000 $43,836,000

--------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) Certain Selling Stockholders have granted to the U.S. Underwriters an
option, exercisable within 30 days of the date hereof, to purchase up to
an aggregate of 780,000 additional Shares of Common Stock at the price to
public less underwriting discounts and commissions, for the purpose of
covering over-allotments, if any. If the U.S. Underwriters exercise such
option in full, the total price to public, underwriting discounts and
commissions and proceeds to Selling Stockholders will be $106,145,000 ,
$5,322,200 and $56,986,800, respectively. The Company will not receive any
proceeds from the sale of Shares by the Selling Stockholders. See
"Principal and Selling Stockholders" and "Underwriters."

----------------

The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by King & Spalding, counsel for the Underwriters. It is expected that delivery
of the Shares will be made on or about November 7, 1997 at the office of
Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
immediately available funds.

----------------

MORGAN STANLEY DEAN WITTER
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.

November 3, 1997

424B4 2nd Page of 72 TOC 1st Previous Next ↓Bottom Just 2nd
[LOGO OF ORTHODONTIC CENTERS OF AMERICA APPEARS HERE]

[MAP OF ORTHODONTIC CENTER LOCATIONS APPEARS HERE]

At June 30, 1997, Orthodontic Centers of America, Inc. managed 305
Orthodontic Centers located in 34 states with 167 Affiliated Orthodontists.

424B4 3rd Page of 72 TOC 1st Previous Next ↓Bottom Just 3rd
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, BY THE SELLING STOCKHOLDERS OR BY ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREIN SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.

----------------

TABLE OF CONTENTS

[Download Table]

PAGE
----

Available Information..................................................... 4
Incorporation of Certain Documents by Reference........................... 4
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 14
Price Range of Common Stock and Dividend Policy........................... 14
Capitalization............................................................ 15
Selected Financial and Operating Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 26
Management................................................................ 37
Principal and Selling Stockholders........................................ 40
Description of Capital Stock.............................................. 42
Shares Eligible for Future Sale........................................... 44
Certain United States Federal Tax Consequences for Non-United States
Holders.................................................................. 45
Underwriters.............................................................. 48
Legal Matters............................................................. 51
Experts................................................................... 51
Index to Consolidated Financial Statements................................ F-1

----------------

Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may over-allot in connection with the offering,
and may bid for, and purchase, shares of the Common Stock in the open market.
In addition, Underwriters and selling group members may engage in passive
market making. For a description of these activities, see "Underwriters."

----------------

Industry information used in this Prospectus is derived from the 1995
Journal of Clinical Orthodontists Orthodontic Practice Study (the "1995 JCO
Study"), a biannual study of the United States orthodontic industry, and
relates to 1994 unless otherwise indicated. Comparable information for 1995
and 1996 is not expected to be available until the release of the 1997 JCO
Study. The information compiled in the 1995 JCO Study relates to orthodontists
who have completed accredited graduate orthodontic training programs and does
not include general dentists who also perform certain orthodontic services.
Unless otherwise indicated, statements in this Prospectus referring to beliefs
of management are based upon management's extensive experience in the
orthodontic industry, including the operating history of the Orthodontic
Centers and discussions with numerous orthodontists conducting traditional
orthodontic practices. The average number of case starts for Affiliated
Orthodontists who were affiliated with the Company for at least one year in
1996 was determined by dividing the total number of new case starts for the
year by the weighted average number of such Affiliated Orthodontists during
the year.

424B4 4th Page of 72 TOC 1st Previous Next ↓Bottom Just 4th
AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: Seven World Trade Center, Suite 1300, New
York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained from
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington D.C. 20549, at prescribed rates. The Commission
maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports, proxy statements and other information regarding registrants
that file electronically with the Commission. The Company's Common Stock is
listed on the New York Stock Exchange. Reports, proxy statements and other
information concerning the Company can also be inspected at the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.

This Prospectus constitutes a part of a Registration Statement on Form S-3
(together with amendments and exhibits thereto, the "Registration Statement")
filed by the Company with the Commission under the Securities Act of 1933, as
amended (the "Securities Act"). This Prospectus omits certain of the
information contained in the Registration Statement, and reference is hereby
made to the Registration Statement for further information with respect to the
Company and the Common Stock offered hereby. Any statement contained herein
concerning the provisions of any document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission is not
necessarily complete, and in each instance reference is made to the copy of
such document so filed. Each such statement is qualified in its entirety by
such reference.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, filed with the Commission by the Company pursuant
to the Exchange Act, are incorporated herein by reference and made a part of
this Prospectus:

(1) the Company's Annual Report on Form 10-K for the year ended December
31, 1996, and an amendment thereto on Form 10-K/A-1 filed with the
Commission on April 18, 1997;

(2) the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997; and

(3) the description of the Common Stock as contained in the Company's
Registration Statement on Form 8-A, dated December 6, 1994.

Each document filed by the Company pursuant to Sections 13(a), 14 or 15(d)
of the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of this offering shall be deemed to be incorporated by reference
in this Prospectus and to be a part hereof from the date of filing of such
document. Any statement contained herein, or in a document incorporated or
deemed to be incorporated by reference herein, shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained in this Prospectus or in any subsequently filed document which also
is or is deemed to be incorporated by reference herein, modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.

The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the request of any such person, a copy of any
or all of the foregoing documents incorporated herein by reference, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference in such documents). Written or telephone requests for such copies
should be directed to Investor Relations Department, Orthodontic Centers of
America, Inc., 5000 Sawgrass Village Circle, Suite 25, Ponte Vedra Beach,
Florida 32082, telephone: (904) 280-4500.

424B4 5th Page of 72 TOC 1st Previous Next ↓Bottom Just 5th
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere or incorporated by reference in this Prospectus. Unless the context
otherwise requires, the "Company" refers to Orthodontic Centers of America,
Inc., its subsidiaries and the Predecessor Entities, the "Orthodontic Centers"
refers to the orthodontic centers affiliated, or which will be affiliated, with
the Company, and "Affiliated Orthodontists" refers to the orthodontists who
provide orthodontic services at the Orthodontic Centers or their professional
entities. As of October 18, 1994, the Company completed a combination (the
"Combination Transaction") of the operations of 32 orthodontic practice
entities and two orthodontic management entities that were previously under
common ownership and management (the "Predecessor Entities"). Except as
otherwise indicated, the information in this Prospectus assumes that the over-
allotment option granted to the Underwriters will not be exercised and has been
adjusted to reflect two two-for-one stock splits of the Common Stock, each
effected in the form of a 100% stock dividend as of December 29, 1995 and
September 5, 1996, respectively.

THE COMPANY

The Company is the leading provider of practice management services to
orthodontic practices in the United States, based on annual net revenue, annual
net income, number of affiliated orthodontists and number of orthodontic
centers. The Company develops Orthodontic Centers and manages the business
operations and marketing aspects of the Affiliated Orthodontists' practices,
thereby allowing Affiliated Orthodontists to focus on delivering quality
patient care. Since its inception in 1985, the Company has grown to manage 305
Orthodontic Centers located in 34 states with 167 Affiliated Orthodontists at
June 30, 1997. From January 1, 1985 to June 30, 1997, the Company developed 171
Orthodontic Centers, acquired the assets of, and affiliated with, 178 existing
orthodontic practices and consolidated 44 Orthodontic Centers. The Company's
net revenue for 1996 was $71.3 million, an increase of 71.5% from 1995. The
Company's net income for 1996 was $14.4 million, an increase of 59.4% from
1995.

Management believes that the Company's operating strategy and proprietary
operating systems have allowed Affiliated Orthodontists to realize
significantly greater productivity and profitability than traditional
orthodontic practices. Affiliated Orthodontists practicing in Orthodontic
Centers open throughout 1995 treated an average of 77 patients per nine-hour
patient treatment day during 1996. Orthodontists in the United States treated
an average of 41.5 patients per operating day in 1994. Affiliated Orthodontists
who had been affiliated with the Company for at least one year generated an
average of 512 new case starts during 1996 as compared to the 1994 national
average of approximately 170 new case starts per orthodontist.

The United States orthodontic industry generates approximately $3.6 billion
in annual gross revenues, with the average orthodontic practice generating
gross revenues of approximately $475,000 per year. The industry is highly
fragmented, with approximately 90% of the approximately 9,060 practicing
orthodontists acting as sole practitioners. Of the approximately 1.5 million
patients who initiated orthodontic treatment in 1994, approximately 27% were
adults, primarily between the ages of 25 to 35. Orthodontics is generally an
elective procedure, with approximately 72% of payments for orthodontic services
made directly by the person receiving treatment and standard dental insurance
covering an additional 25% of such payments. Managed care represents a small
percentage of revenues generated in the orthodontic industry.

Key elements of the Company's operating strategy include: (i) emphasizing
quality patient care by affiliating only with orthodontists who have completed
accredited graduate orthodontic training programs and by providing effective
operating systems, support and training for the clinical staff; (ii)
stimulating demand in local markets through aggressive and innovative marketing
and advertising programs, which attract persons seeking orthodontic treatment
and those who may not have otherwise sought treatment; (iii) achieving
operating efficiencies and economies of scale through office designs which
promote increased productivity, innovative patient scheduling systems,
efficient use of orthodontic assistants and centralized purchasing and
distribution programs;

424B4 6th Page of 72 TOC 1st Previous Next ↓Bottom Just 6th
(iv) increasing market penetration by providing patients with affordable
payment plans consisting of low monthly payments, no required down payment and
lower total fees, which attract persons seeking orthodontic treatment and those
who may not have otherwise sought treatment and (v) capitalizing on the
proprietary marketing, informational and financial systems developed by the
Company during its 12 years of operating history.

GROWTH STRATEGY

Since its inception in 1985, the Company has grown to manage 305 Orthodontic
Centers located in 34 states with 167 Affiliated Orthodontists at June 30,
1997. Of these 305 Orthodontic Centers, 209 have been developed or relocated to
new facilities since June 30, 1992. Key elements of the Company's growth
strategy include:

Development of New Orthodontic Centers. From January 1, 1985 to June 30,
1997, the Company developed 171 Orthodontic Centers, including 160 since June
30, 1992. The Company actively markets itself to orthodontists by targeting
military orthodontists, practicing orthodontists and orthodontic students,
including the approximately 200 orthodontists who graduate each year from
accredited United States orthodontic graduate programs, who are interested in
opening new practices. The Company recruits additional orthodontists through
referrals from Affiliated Orthodontists, attending orthodontic conventions,
trade shows and association meetings, visiting orthodontic graduate schools and
advertising in professional journals. The Company also intends to continue to
develop additional Orthodontic Centers with current Affiliated Orthodontists.

Affiliation with Existing Orthodontic Practices. From January 1, 1985 to June
30, 1997, the Company acquired the assets of, and affiliated with, 178 existing
orthodontic practices. The Company actively markets itself to experienced
orthodontists through referrals from Affiliated Orthodontists, attending
orthodontic conventions, trade shows and association meetings, and advertising
in professional journals. Of these existing practices, approximately 87%
generated less than $500,000 of patient revenue during the 12 months prior to
their affiliation with the Company. Management believes that focusing on
orthodontic practices of this size provides the Company with the opportunity to
achieve higher revenue growth rates and lower acquisition costs, relative to
larger practices. Existing practices that have affiliated with the Company have
experienced increased average gross revenue and operating income following
their affiliation. The Company frequently relocates existing practices to new
facilities, including 49 since June 30, 1992. The Company intends to continue
to relocate existing practices to new facilities and also intends to continue
to evaluate additional potential affiliations.

RECENT DEVELOPMENTS

During the three months ended September 30, 1997, the Company developed 15
new Orthodontic Centers, acquired the assets of, and affiliated with, 20
existing orthodontic practices, and consolidated seven Orthodontic Centers, for
a total of 333 Orthodontic Centers as of September 30, 1997. In addition,
during the three months ended September 30, 1997, the Company affiliated with
22 additional Affiliated Orthodontists, for a total of 189 Affiliated
Orthodontists as of September 30, 1997. Of the 22 Affiliated Orthodontists
added during the third quarter of 1997, three are operating in the Company's
new division focusing on traditional, internally-marketed orthodontic
practices, for a total of 11 Affiliated Orthodontists practicing in that
division as of September 30, 1997.

The Company's net revenue for the three months ended September 30, 1997 was
$31.4 million, an increase of $12.6 million, or 66.5%, from $18.9 million for
the same period during 1996. The Company's net income for the three months
ended September 30, 1997 was $5.9 million, an increase of $1.8 million, or
44.7%, from $4.1 million for the same period during 1996. The Company's net
income per share for the three months ended September 30, 1997 was $.13, an
increase of $.03, or 30.0%, from $.10 per share for the same period during
1996. Fully diluted weighted average shares of Common Stock outstanding for the
three months ended September 30, 1997 were 45.8 million, compared to 42.5
million shares for the same period during 1996.

424B4 7th Page of 72 TOC 1st Previous Next ↓Bottom Just 7th
THE OFFERING

[Download Table]

Common Stock offered by:
The Company........................... 2,600,000 shares
The Selling Stockholders.............. 2,600,000 shares (1)
Total............................... 5,200,000 shares (1)

Common Stock offered in:
U.S. Offering......................... 4,160,000 shares (1)
International Offering................ 1,040,000 shares
Total............................... 5,200,000 shares (1)

Common Stock outstanding after the Of-
fering................................. 46,599,804 shares (2)
Use of proceeds......................... The net proceeds to the Company from
the Offering will be used to finance
the development of new Orthodontic
Centers and the acquisition of assets
of, and affiliation with, existing
orthodontic practices, for working
capital and general corporate
purposes, and to fund loans to certain
key employees of the Company under the
Company's 1997 Key Employee Stock
Purchase Plan. See "Use of Proceeds."
New York Stock Exchange Symbol.......... OCA

--------
(1) Assumes the over-allotment option granted to the Underwriters will not be
exercised.
(2) Does not include 2,284,872 shares of Common Stock issuable upon the
exercise of stock options granted under the Company's three stock option
plans, of which options to purchase 2,172,036 shares are currently
outstanding but not exercisable and options to purchase 112,836 shares are
currently outstanding and exercisable.

RISK FACTORS

Prior to making an investment in the Common Stock offered hereby, prospective
purchasers of the Common Stock should take into account the specific
considerations set forth under "Risk Factors" as well as the other information
set forth in this Prospectus.

424B4 8th Page of 72 TOC 1st Previous Next ↓Bottom Just 8th
SUMMARY FINANCIAL AND OPERATING DATA

The summary statement of income data presented below for the years ended
December 31, 1992 through 1996 have been derived from the Company's
consolidated financial statements, which have been audited by Ernst & Young
LLP, independent auditors, whose report on the years ended December 31, 1994,
1995 and 1996 is included elsewhere in this Prospectus. The summary statement
of income and balance sheet data presented below for the six month periods
ended June 30, 1996 and 1997, and as of June 30, 1997, have been derived from
the Company's unaudited consolidated financial statements which, in the opinion
of management, contain all adjustments (consisting of normal recurring accruals
and adjustments necessary to convert the cash basis accounting records to the
accrual basis) necessary for a fair presentation of the Company's results of
operations and financial position for such periods and as of such date. The
data presented below should be read in conjunction with, and are qualified in
their entirety by reference to, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.

[Enlarge/Download Table]

SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF INCOME DATA
(1):
Net revenue............ $14,470 $18,807 $25,357 $41,556 $ 71,273 $29,236 $ 52,379
Direct expense:
Employee costs......... 3,082 4,835 6,842 11,784 19,895 8,402 15,167
Orthodontic supplies... 1,025 1,528 1,908 3,167 5,428 2,244 3,823
Rent................... 1,449 1,586 2,050 3,504 6,114 2,602 4,621
Marketing and
advertising........... 1,036 1,239 2,147 4,323 6,644 2,691 4,206
------- ------- ------- ------- -------- ------- --------
Total direct
expenses............ 6,592 9,188 12,947 22,778 38,081 15,939 27,817
General and
administrative........ 1,457 1,869 2,730 5,108 8,703 3,730 6,147
Depreciation and
amortization.......... 1,199 1,089 920 1,448 2,814 1,060 2,418
------- ------- ------- ------- -------- ------- --------
Operating profit....... 5,222 6,661 8,760 12,222 21,675 8,507 15,997
Interest (expense)
income, net........... (160) (224) (266) 1,995 1,935 1,075 632
Nonrecurring litigation
expense............... -- -- (3,750)(2) -- -- -- --
------- ------- ------- ------- -------- ------- --------
Income before income
taxes................. 5,062 6,437 4,744 14,217 23,610 9,582 16,629
Provision for income
taxes................. 560 331 2,715(3) 5,182 9,208 3,737 6,485
------- ------- ------- ------- -------- ------- --------
Net income............. $ 4,502 $ 6,106 $ 2,029 $ 9,035 $ 14,402 $ 5,845 $ 10,144
======= ======= ======= ======= ======== ======= ========
Net income per common
share (4)............. $ .23 $ .33 $ .13 $ .22
======= ======== ======= ========
Weighted average shares
outstanding (000's)
(4)................... 39,630 43,708 43,376 45,212
OPERATING DATA:
Number of Orthodontic
Centers (5)........... 47 55 75 145 247 162 305
Comparable Orthodontic
Center net revenue
growth (6)............ 44.6% 17.7% 20.6% 16.7% 22.2% 21.1% 18.8%
Comparable mature
Orthodontic Center net
revenue growth (7).... 30.7% 12.1% 13.0% 11.0% 10.5% 10.4% 8.8%
Total case starts...... 9,095 13,051 16,725 28,742 44,910 19,557 31,194
Patient contract
balances of Affiliated
Orthodontists (5)(8):
Net receivables for
services performed
(9)................... $ 4,250 $ 6,693 $ 9,247 $13,758 $ 23,181 $18,390 $ 30,609
For services to be
performed............. 15,767 23,338 30,702 58,418 92,548 66,224 112,265
------- ------- ------- ------- -------- ------- --------
Total patient
contract balances... $20,017 $30,031 $39,949 $72,176 $115,729 $84,614 $142,874
======= ======= ======= ======= ======== ======= ========

[Download Table]

AS OF JUNE 30, 1997
-------------------------
ACTUAL AS ADJUSTED (10)
-------- ----------------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 2,849 $ 43,467
Working capital.................................. 31,916 72,534
Total assets..................................... 153,358 193,976
Total debt....................................... 2,815 2,815
Total stockholders' equity....................... 125,763 166,381

(footnotes appear on the following page)

424B4 9th Page of 72 TOC 1st Previous Next ↓Bottom Just 9th
--------
(1) Prior to October 18, 1994, substantially all of the Predecessor Entities
were S corporations, general partnerships or limited liability companies
and their taxable income was taxed directly to their respective
stockholders, partners or members during such periods.
(2) Nonrecurring charge incurred in connection with settlement of litigation
unrelated to the operating activities of the Company and therefore
excluded from the computation of operating profit. See Note 6 to the
Consolidated Financial Statements.
(3) Includes a one-time, non-cash charge of $2,606,000 for deferred income
taxes relating to the difference between the tax basis and the basis for
financial reporting purposes of assets and liabilities of the Predecessor
Entities acquired by the Company in the Combination Transaction. See Note
9 to the Consolidated Financial Statements.
(4) Amounts represent the full dilutive effect of the exercise of common
equivalent shares (stock options) outstanding during the year. Assuming no
dilution, net income per share for the year ended December 31, 1995 was
$.24 based on weighted average shares outstanding of 38,234,000, for the
year ended December 31, 1996 was $.34 based on weighted average shares
outstanding of 42,388,000, for the six months ended June 30, 1996 was $.14
based on weighted average shares outstanding of 42,009,000 and for the six
months ended June 30, 1997 was $.23 based on weighted average shares
outstanding of 43,821,000.
(5) Presented as of the end of the period.
(6) Represents the growth in net revenue by Orthodontic Centers which were
affiliated with the Company throughout each of the two periods being
compared. The amount of such growth has been significantly affected by the
number of newly-opened Orthodontic Centers included in the computation,
because newly-opened Orthodontic Centers have experienced significant
growth during their first 26 months of operations. The average term of a
patient contract is approximately 26 months, and Orthodontic Centers
typically reach maturity as patients are added during the first 26 months
of operations. There were 13 such comparable Orthodontic Centers in 1991,
21 in 1992, 28 in 1993, 46 in 1994, 53 in 1995, 75 in 1996, 75 in the six
months ended June 30, 1996 and 127 in the six months ended June 30, 1997.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General." The comparable Orthodontic Center net
revenue for 1994 was calculated on a pro forma basis as if the Combination
Transaction had occurred as of January 1, 1993. If comparable Orthodontic
Center net revenue for 1994 was calculated on a pro forma basis as if the
Combination Transaction had not occurred, the comparable Orthodontic
Center net revenue growth for such period would have been 22.7%.
(7) Represents the growth in net revenue by Orthodontic Centers which had been
affiliated with the Company at least 26 months throughout each of the two
periods being compared. There were 11 such comparable mature Orthodontic
Centers in 1991, 11 in 1992, 18 in 1993, 28 in 1994, 43 in 1995, 52 in
1996, 44 in the six months ended June 30, 1996 and 52 in the six months
ended June 30, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General." The comparable
mature Orthodontic Center net revenue for 1994 was calculated on a pro
forma basis as if the Combination Transaction had occurred as of January
1, 1993. If comparable mature Orthodontic Center net revenue for 1994 was
calculated on a pro forma basis as if the Combination Transaction had not
occurred, the comparable mature Orthodontic Center net revenue growth for
such period would have been 13.8%.
(8) The average remaining life of the patient contracts at June 30, 1997 was
approximately 16 months.
(9) Net of allowance for uncollectible amounts and patient prepayments; such
receivables are assigned by the Affiliated Orthodontists to the Company in
payment of its service fee.
(10) Adjusted to give effect to the issuance and sale by the Company of
2,600,000 shares of Common Stock in the offering, after deducting
underwriting discounts and commissions and estimated offering expenses,
and the application of the net proceeds to the Company therefrom. See "Use
of Proceeds" and "Capitalization."

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RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information set forth in or
incorporated by reference into this Prospectus, in connection with an
investment in the shares of Common Stock offered hereby. This Prospectus
contains forward-looking statements, including statements regarding
development and acquisition of additional Orthodontic Centers, affiliation
with additional Affiliated Orthodontists, use of proceeds, advancement of
funds to Affiliated Orthodontists, projections of the Company's financial
condition and results of operations, and funding of the Company's future
expansion, operations and capital expenditures, that could be affected by a
number of risks and uncertainties, including those described below, which
could cause the Company's actual results to differ materially from those
anticipated, estimated or projected.

GOVERNMENT REGULATION

The orthodontic industry and orthodontic practices are regulated extensively
at the state and federal levels. The Company does not control the practice of
orthodontics by the Affiliated Orthodontists or their compliance with the
regulatory requirements directly applicable to orthodontists and their
practices. The laws of many states prohibit non-orthodontic entities (such as
the Company) from practicing orthodontics (which in certain states includes
managing or operating an orthodontic office), splitting professional fees with
orthodontists, owning or controlling the assets of an orthodontic practice,
employing orthodontists, maintaining an orthodontist's patient records or
controlling the content of an orthodontist's advertising. The laws of many
states also prohibit orthodontists from paying any portion of fees received
for orthodontic services in consideration for the referral of a patient. In
addition, many states impose limits on the tasks that may be delegated by an
orthodontist to other staff members. These laws and their interpretation vary
from state to state and are enforced by regulatory authorities with broad
discretion. Congress and certain state legislatures often consider various
types of health care reform, including comprehensive revisions to the current
health care system, which could have a material adverse effect on the
Company's financial position and results of operations. There can be no
assurance that any review of the Company's business relationships by courts or
other regulatory authorities will not result in determinations that could
adversely affect the operations of the Company or that the regulatory
environment will not change to restrict the Company's existing or future
operations. There can be no assurance that the legality of the Company's long-
term service and consulting agreements will not be successfully challenged or
that enforceability of the provisions thereof will not be limited. See
"Business--Agreements with Affiliated Orthodontists." The laws and regulations
of certain states in which the Company may seek to expand may require the
Company to change its contractual relationship with orthodontists in a manner
that may restrict the Company's operations in those states or may prevent the
Company from acquiring the assets of or managing orthodontists' practices in
those states. Further, there can be no assurance that the laws and regulations
of states in which the Company currently maintains operations will not change
or be interpreted in the future to either restrict or adversely affect the
Company's relationships with orthodontists in those states. See "Business--
Government Regulation."

RISKS ASSOCIATED WITH EXPANSION

Since its inception in 1985, the Company has expanded to managing 305
Orthodontic Centers at June 30, 1997 and expects to continue to add additional
Orthodontic Centers. The success of the Company's expansion strategy will
depend on a number of factors, including (i) the Company's ability to
affiliate with orthodontists to open new Orthodontic Centers, the availability
of suitable markets and the Company's ability to obtain good locations within
those markets; (ii) the Company's ability to identify and affiliate with
existing orthodontic practices and to integrate such practices into the
Company's existing operations; (iii) the availability of adequate financing to
fund the Company's expansion strategy; (iv) regulatory constraints and (v) the
ability of the Company to effectively manage additional Orthodontic Centers. A
shortage of available orthodontists with the

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skills required by the Company would have a material adverse effect on the
Company's expansion opportunities. There can be no assurance that the
Company's expansion strategy will continue to be successful or that
modifications to the Company's strategy will not be required. See "Business--
Expansion Strategy."

DEPENDENCE ON AFFILIATED ORTHODONTISTS

The Company receives fees for services provided to orthodontic practices
under service and consulting agreements, but does not employ orthodontists or
control the practices of the Affiliated Orthodontists. The Company's revenue
is dependent on revenue generated by the Affiliated Orthodontists, who are
essential to the Company's success. The long-term agreements with Affiliated
Orthodontists are generally for terms ranging from 20 to 40 years and may be
terminated by either party for "cause," which includes a material default by
or bankruptcy of the other party. Changes in the health care industry, such as
the growth of managed care organizations and provider networks, may result in
lower payment levels for the services of the Affiliated Orthodontists. Any
material loss of revenue by the Affiliated Orthodontists would have a material
adverse effect on the Company's financial position and results of operations.

COMPETITION

The business of providing orthodontic services is highly competitive in each
market in which an Orthodontic Center operates. Each Affiliated Orthodontist
faces competition from other orthodontists and general dentists in the
communities served, many of whom have more established practices in the
market. Other companies are pursuing a strategy similar to that of the Company
in developing and managing orthodontic practices throughout the United States.
Companies with similar objectives and greater access to financial resources
may enter the Company's markets and compete with the Company, which could
limit the ability of, and increase the amount paid by, the Company to
affiliate with additional orthodontists. See "Business--Competition."

RISK OF PROVIDING ORTHODONTIC SERVICES

The Orthodontic Centers provide orthodontic services to the public and are
exposed to the risk of professional liability and other claims. Such claims,
if successful, could result in substantial damage awards to the claimants
which could exceed the limits of any applicable insurance coverage. The
Company does not control the practice of orthodontics by the Affiliated
Orthodontists or their compliance with the regulatory and other requirements
directly applicable to orthodontists and their practices. Each Affiliated
Orthodontist has undertaken, however, to comply with all applicable
regulations and requirements, and the Company is indemnified under its long-
term agreements for claims against the Affiliated Orthodontists. The Company
maintains liability insurance for itself, and Affiliated Orthodontists
generally name the Company as an additional insured party under liability
insurance policies required to be maintained by Affiliated Orthodontists.
However, a successful malpractice claim against the Company or an Affiliated
Orthodontist could have a material adverse effect on the Company's financial
position and results of operations.

DEPENDENCE ON KEY PERSONNEL

The Company's business is dependent upon the continued services of the
Company's senior management, particularly its Chairman of the Board and Chief
Executive Officer, Dr. Gasper Lazzara, Jr., its Chief Financial Officer,
Bartholomew F. Palmisano, Sr., its President, Geoffrey L. Faux, and its Chief
Operating Officer, Michael C. Johnsen. The loss of the services of any of
these individuals could have a material adverse effect on the Company's
financial position or results of operation. The Company's success also depends
on its ability to attract and retain other highly qualified managerial
personnel. See "Management."

CONTROL BY PRINCIPAL STOCKHOLDERS

Upon consummation of this offering, Dr. Lazzara and Mr. Palmisano,
collectively, will beneficially own approximately 17.9% of the Company's
outstanding shares of Common Stock (16.3% if the Underwriters'

424B4 12th Page of 72 TOC 1st Previous Next ↓Bottom Just 12th
over-allotment option is exercised in full). As a result of their holdings,
Dr. Lazzara and Mr. Palmisano together will continue to have a
disproportionate ability to affect the election of the members of the Board of
Directors of the Company (the "Board of Directors"), and thereby substantially
control the affairs and management of the Company and all matters requiring
stockholder approval. Such control could adversely affect the market price of
the Common Stock. See "Principal and Selling Stockholders" and "Description of
Capital Stock."

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Restated Certificate of Incorporation,
Bylaws and Delaware law may make a change in control of the Company more
difficult to effect, even if a change in control were in the stockholders'
interest. These provisions include certain super-majority vote requirements
contained in the Company's Restated Certificate of Incorporation and Bylaws.
In addition, the Company's Restated Certificate of Incorporation allows the
Board of Directors to determine the terms of preferred stock which may be
issued by the Company without approval of the holders of the Common Stock, and
thereby enables the Board of Directors to prevent changes in the management
and control of the Company. The Board of Directors is divided into three
classes of directors elected for staggered three-year terms. Such staggered
terms may affect the ability of the holders of the Common Stock to effect a
change in control of the Company. See "Description of Capital Stock--Anti-
Takeover Provisions."

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Common Stock could be subject to significant
fluctuations in response to variations in financial results or announcements
of material events by the Company or its competitors. Regulatory changes,
developments in the health care industry or changes in general conditions in
the economy or the financial markets could also adversely affect the market
price of the Common Stock. See "Price Range of Common Stock and Dividend
Policy."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of shares of Common Stock in the public market,
or the availability of such shares for future sale, could adversely affect the
market price of the Common Stock and could impair the Company's future ability
to raise additional capital through an offering of its equity securities. Upon
completion of this offering, the Company will have outstanding approximately
46,600,000 shares of Common Stock, of which the 5,200,000 shares sold in this
offering (5,980,000 shares if the Underwriters' over-allotment option is
exercised in full), and shares sold in the Company's prior public offerings
will be freely tradeable without restriction or further registration under the
Securities Act, except for those shares held by "affiliates" (as defined in
the Securities Act) of the Company. Holders of 14,736,770 shares currently are
eligible to sell such shares pursuant to Rule 144 ("Rule 144") under the
Securities Act, subject to the manner of sale, volume, notice and information
requirements of Rule 144. Of these shares, 3,176,034 are subject to
restrictions on transfer as a result of agreements entered into with the
Company in connection with the Combination Transaction. Of such shares,
640,676 shares may not be offered, sold or otherwise transferred prior to
October 1998 without a waiver of the restrictions by the Company or
registration under the Securities Act. In October of each of 1998 and 1999,
one-half of such shares will be released from these restrictions. The
remaining 2,535,358 shares may not be offered, sold or otherwise transferred
prior to December 1997, without a waiver of the restrictions by the Company or
registration under the Securities Act. In December of each of 1997 through
2001, 20% of such shares will be released from these restrictions. The Company
has agreed not to waive compliance with these restrictions for a period of 90
days following the date of this Prospectus without the prior written consent
of Morgan Stanley & Co. Incorporated, on behalf of the Underwriters.

424B4 13th Page of 72 TOC 1st Previous Next ↓Bottom Just 13th
Common Stock issuable under its stock option plans. For information concerning
the Company's 1997 Key Employee Stock Purchase Plan, see "Management--Key
Employee Stock Purchase Plan." The Company intends to issue its equity
securities from time to time in connection with the development and
acquisition of new Orthodontic Centers. Such securities may be issued pursuant
to a shelf registration statement on file with the Commission or in
transactions exempt from registration. Each of the Company, the Company's
directors and executive officers and the Selling Stockholders has agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated on
behalf of the Underwriters, it will not, during the period ending 90 days
after the date of this Prospectus, (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer,
lend or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
or (ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is
to be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The restrictions described in this paragraph do not apply to (x)
the sale of shares of Common Stock offered hereby to the Underwriters, (y) the
issuance by the Company of shares of Common Stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the date of
this Prospectus of which the Underwriters have been advised in writing or (z)
transactions by any person other than the Company relating to shares of Common
Stock or other securities acquired in open market transactions after the
completion of the offering of the shares of Common Stock offered hereby. See
"Underwriters."

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USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,600,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$43.2 million (after deducting underwriting discounts and commissions and
estimated offering expenses). The Company will not receive any of the proceeds
from the sale of shares by the Selling Stockholders. The Company intends to
use the net proceeds from this offering to finance the expansion of the
Company's business operations through the development of new Orthodontic
Centers and the acquisition of assets of, and affiliation with, existing
orthodontic practices, for working capital and general corporate purposes, and
to fund loans to certain key employees of the Company under the Company's 1997
Key Employee Stock Purchase Plan (including approximately $2.6 million upon
consummation of this offering). See "Management--Key Employee Stock Purchase
Plan." Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term, investment grade or
government, interest-bearing securities.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock is listed on the New York Stock Exchange under the symbol
"OCA." The following table sets forth, for the periods indicated, the range of
high and low sale prices per share for the Common Stock, as reported on the
Nasdaq National Market, on which the Common Stock was formerly quoted, and the
New York Stock Exchange.

[Download Table]

HIGH (1) LOW (1)
--------- ---------

1995
First Quarter........................................ $ 4 25/32 $ 2 29/32
Second Quarter....................................... 6 3/8 3 7/8
Third Quarter........................................ 8 3/16 5 15/16
Fourth Quarter....................................... 12 1/16 7
1996
First Quarter........................................ 15 5/8 10 3/8
Second Quarter....................................... 20 3/4 12 5/8
Third Quarter........................................ 22 5/8 11 3/8
Fourth Quarter....................................... 21 3/8 11
1997
First Quarter........................................ 18 3/8 13 1/4
Second Quarter....................................... 18 3/8 11
Third Quarter........................................ 20 16 1/4
Fourth Quarter (through November 3, 1997)............ 20 1/4 16

--------
(1) All share prices have been adjusted to reflect two two-for-one stock
splits, each effected in the form of a 100% stock dividend as of December
29, 1995 and September 5, 1996, respectively.

On November 3, 1997, the reported last sale price for the Company's Common
Stock as reported on the New York Stock Exchange was $18 per share and the
number of holders of record of the Common Stock was 258.

The Company has never declared or paid cash dividends on the Common Stock.
The Company expects that any future earnings will be retained for the growth
and development of the Company's business and, accordingly, the Company does
not anticipate that any cash dividends will be declared or paid on the Common
Stock for the foreseeable future. The declaration, payment and amount of
future cash dividends, if any, will be made from legally available funds of
the Company and will depend upon the future earnings, results of operations,
financial position and capital requirements of the Company, among other
factors. The Company's revolving line of credit limits the ability of the
Company to pay dividends from other than current year earnings, and additional
financial covenants contained in such line of credit, may limit the amount or
payment of dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity."

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CAPITALIZATION

The following table sets forth the current portion of long-term debt and the
total capitalization of the Company at June 30, 1997 and as adjusted to give
effect to the sale of the 2,600,000 shares of Common Stock offered by the
Company hereby and the application of the net proceeds therefrom, which are
estimated to be approximately $43.2 million (after deducting underwriting
discounts and commissions and estimated offering expenses). The following
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.

[Download Table]

AS OF JUNE 30, 1997
--------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)

Current portion of long-term debt........................ $ 816 $ 816
======== ========
Long-term debt, less current portion..................... $ 1,999 $ 1,999
-------- --------
Stockholders' equity:
Preferred Stock, $.01 par value per share; 10,000,000
shares authorized, no shares outstanding.............. -- --
Common Stock, $.01 par value per share; 100,000,000
shares authorized; 43,999,804 shares outstanding and
46,599,804 shares outstanding, as adjusted (1)........ 440 466
Additional paid in capital............................. 93,025 133,617(2)
Retained earnings...................................... 32,298 32,298
-------- --------
Total stockholders' equity........................... 125,763 166,381
-------- --------
Total capitalization............................... $127,762 $168,380
======== ========

--------
(1) Does not include 2,219,872 shares of Common Stock issuable upon the
exercise of stock options granted under the Company's three stock option
plans outstanding at June 30, 1997.
(2) Reflects loans by the Company in the aggregate amount of approximately
$2.6 million to certain key employees of the Company pursuant to the
Company's 1997 Key Employee Stock Purchase Plan. See "Management--Key
Employee Stock Purchase Plan."

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SELECTED FINANCIAL AND OPERATING DATA

The selected statement of income data presented below for the years ended
December 31, 1992 through 1996 have been derived from the Company's
consolidated financial statements. The selected statement of income and
balance sheet data presented below for the six month periods ended June 30,
1996 and 1997, and as of June 30, 1997, have been derived from the Company's
unaudited consolidated financial statements which, in the opinion of
management, contain all adjustments (consisting of normal recurring accruals
and adjustments necessary to convert the cash basis accounting records to the
accrual basis) necessary for a fair presentation of the Company's results of
operations and financial position for such periods and as of such date. The
data presented below should be read in conjunction with, and are qualified in
their entirety by reference to, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.

[Enlarge/Download Table]

[Download Table]

AS OF DECEMBER 31, AS OF
--------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------ ------- ------- ------- -------- --------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash equivalents..... $ 794 $ 1,467 $17,108 $18,779 $ 11,827 $ 2,849
Working capital............... 3,126 5,893 20,896 43,778 40,219 31,916
Total assets.................. 7,189 12,470 37,491 92,573 145,099 153,358
Total debt.................... 1,696 2,354 4,968 4,490 3,397 2,815
Total equity.................. 3,405 7,602 25,735 77,313 114,887 125,763

(footnotes appear on the following page)

424B4 17th Page of 72 TOC 1st Previous Next ↓Bottom Just 17th
--------
(1) Prior to October 18, 1994, substantially all of the Predecessor Entities
were S corporations, general partnerships or limited liability companies
and their taxable income was taxed directly to their respective
stockholders, partners or members during such periods.
(2) Nonrecurring charge incurred in connection with settlement of litigation
unrelated to the operating activities of the Predecessor Entities and
therefore excluded from operating profit. See Note 6 to the Consolidated
Financial Statements.
(3) Includes a one-time, non-cash charge of $2,606,000 for deferred income
taxes relating to the difference between the tax basis and the basis for
financial reporting purposes of assets and liabilities of the Predecessor
Entities acquired by the Company in the Combination Transaction. See Note
9 to the Consolidated Financial Statements.
(4) Amounts represent the full dilutive effect of the exercise of common
equivalent shares (stock options) outstanding during the year. Assuming no
dilution, net income per share for the year ended December 31, 1995 was
$.24 based on weighted average shares outstanding of 38,234,000, for the
year ended December 31, 1996 was $.34 based on weighted average shares
outstanding of 42,388,000, for the six months ended June 30, 1996 was $.14
based on weighted average shares outstanding of 42,009,000 and for the six
months ended June 30, 1997 was $.23 based on weighted average shares
outstanding of 43,821,000.
(5) Presented as of the end of the period.
(6) Represents the growth in net revenue by Orthodontic Centers which were
affiliated with the Company throughout each of the two periods being
compared. The amount of such growth has been significantly affected by the
number of newly-opened Orthodontic Centers included in the computation,
because newly-opened Orthodontic Centers have experienced significant
growth during their first 26 months of operations. The average term of a
patient contract is approximately 26 months, and Orthodontic Centers
typically reach maturity as patients are added during the first 26 months
of operations. There were 13 such comparable Orthodontic Centers in 1991,
21 in 1992, 28 in 1993, 46 in 1994, 53 in 1995, 75 in 1996, 75 in the six
months ended June 30, 1996 and 127 in the six months ended June 30, 1997.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General." The comparable Orthodontic Center net
revenue for 1994 was calculated on a pro forma basis as if the Combination
Transaction had occurred as of January 1, 1993. If comparable Orthodontic
Center net revenue for 1994 was calculated on a pro forma basis as if the
Combination Transaction had not occurred, the comparable Orthodontic
Center net revenue growth for such period would have been 22.7%.
(7) Represents the growth in net revenue by Orthodontic Centers which had been
affiliated with the Company at least 26 months throughout each of the two
periods being compared. There were 11 such comparable mature Orthodontic
Centers in 1991, 11 in 1992, 18 in 1993, 28 in 1994, 43 in 1995, 52 in
1996, 44 in the six months ended June 30, 1996 and 52 in the six months
ended June 30, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General." The comparable
mature Orthodontic Center net revenue for 1994 was calculated on a pro
forma basis as if the Combination Transaction had occurred as of January
1, 1993. If comparable mature Orthodontic Center net revenue for 1994 was
calculated on a pro forma basis as if the Combination Transaction had not
occurred, the comparable mature Orthodontic Center net revenue growth for
such period would have been 13.8%.
(8) The average remaining life of the patient contracts at June 30, 1997 was
approximately 16 months.
(9) Net of allowance for uncollectible amounts and patient prepayments; such
receivables are assigned by the Affiliated Orthodontists to the Company in
payment of its service fee.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The following table sets forth certain information relating to the growth in
the number of Orthodontic Centers for the periods shown:

[Enlarge/Download Table]

SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------- JUNE 30,
1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ----------

Number of centers at
beginning of period........ 11 11 18 31 47 55 75 145 247
Number of centers developed
during period.............. -- 4 9 5 4 22 44 53 30
Number of centers acquired
during period.............. -- 3 5 17 5 1 29 68 39
Number of centers
consolidated during period. -- -- (1) (6) (1) (3) (3) (19) (11)
--- --- --- --- --- --- --- --- ---
Number of centers at end of
period..................... 11 18 31 47 55 75 145 247 305
=== === === === === === === === ===

Of the 305 Orthodontic Centers at June 30, 1997, 171 were developed by the
Company, 178 were existing orthodontic practices the assets of which were
acquired by the Company and 44 were consolidated. The Company expects that
future growth in Orthodontic Centers will come from both developing
Orthodontic Centers with existing and newly-recruited Affiliated Orthodontists
and acquiring the assets of, and affiliating with, existing practices.

Generally, when the Company develops a new Orthodontic Center, all patients
treated at the Orthodontic Center are new patients and, in the first several
months after commencing operations, the Orthodontic Center is open only for a
limited number of days each month as new patients are added. The Orthodontic
Centers have generally become increasingly more productive and profitable as
more new patients are added and existing patients return for monthly follow-up
visits. After 26 months of operations, the Orthodontic Center's growth in
patient base has typically begun to stabilize as the initial patients complete
treatment. At June 30, 1997, 211 of the Orthodontic Centers had operated for
less than 26 months. An Orthodontic Center can increase the number of patients
treated by improving the efficiency of its clinical staff and by adding
operating days or orthodontists. The Orthodontic Centers may also increase
revenue by implementing periodic price increases. Established practices whose
assets were acquired by the Company have typically increased their revenue by
applying the Company's operating strategies and systems, including increased
advertising and efficient patient scheduling.

Since October 18, 1994, the Company has earned its revenue from long-term
service or consulting agreements entered into with Affiliated Orthodontists.
Pursuant to the service agreements, during each month during the term of the
service agreement, the Company earns a fee equal to approximately 24% of the
aggregate amount of all new patient contracts entered into during that
particular month, plus the aggregate of the allocated monthly balance amount
of all patient contracts entered into in prior months, less amounts retained
by the Affiliated Orthodontists. The remaining contract balances are allocated
equally over the remaining months during the terms of the patient contracts,
which average 26 months. Since 1991, approximately 1.3% of the Company's
annual net revenue has been uncollectible. Prior to October 18, 1994, the
Company recognized revenue as services were performed and associated direct
costs were incurred, in accordance with the proportional performance method of
accounting for service contracts. The Company has determined that
approximately 24% of orthodontic services are generally performed during the
first month of a patient's treatment.

The amounts retained by an Affiliated Orthodontist are dependent on his or
her financial performance, based in significant part on profitability on a
cash basis. Amounts retained by an Affiliated Orthodontist who operates a
newly developed Orthodontic Center are typically reduced by operating losses
on a cash basis because of start-up expenses. An Affiliated Orthodontist's
share of these operating losses is added to the Company's fee in the period
during which the operating losses are incurred, with such fees aggregating
$1.8 million for the six months ended June 30, 1997. In addition, a $25,000
annual fee is earned by the Company for 42 Orthodontic Centers with

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respect to which long-term service agreements were entered into with the
Company in the Combination Transaction.

The terms of consulting agreements differ significantly from the terms of
service agreements and vary depending upon the regulatory requirements of the
particular state in which an Orthodontic Center is located. In a limited
number of states, the Company may provide only consulting services to
orthodontists and may not manage an orthodontist's practice. The consulting
fee payable to the Company is determined at the time of affiliation, is
limited to compensation for the specific consulting services performed and is
based on criteria such as the number of hours of operations of the applicable
Orthodontic Centers.

The Company develops and manages the business and marketing aspects of
Orthodontic Centers, including implementing advertising and marketing
programs, preparing budgets, providing staff, purchasing inventory, providing
patient scheduling systems, billing and collecting fees, providing office
space and equipment and maintaining records. Operating expenses of the
Orthodontic Centers are expenses of the Company and are recognized as
incurred.

Employee costs consist of wages, salaries and benefits paid to all employees
of the Company, including orthodontic assistants, business staff and
management personnel. General and administrative expenses consist of provision
for losses on patient contracts and receivables, professional service fees,
maintenance and utility costs, office supply expense, telephone expense,
taxes, license fees, and printing and shipping expense.

Patient contracts are for terms averaging 26 months and are payable in equal
monthly installments throughout the term of treatment, except for the last
month when a final payment is made. During 1996, the Orthodontic Centers
generally implemented a price increase for new patients from $89 per month to
$98 per month with an increase in the final payment from $366 to $398.

RESULTS OF OPERATIONS

The following table sets forth the percentages of net revenue represented by
certain items in the Company's consolidated statements of income:

[Download Table]

SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------- ------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----

Net revenue.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Direct expenses:
Employee costs............................. 27.0 28.4 27.9 28.7 29.0
Orthodontic supplies....................... 7.5 7.6 7.6 7.7 7.3
Rent....................................... 8.1 8.4 8.6 8.9 8.8
Marketing and advertising.................. 8.5 10.4 9.3 9.2 8.0
----- ----- ----- ----- -----
Total direct expenses.................... 51.1 54.8 53.4 54.5 53.1
General and administrative................... 10.8 12.3 12.2 12.8 11.7
Depreciation and amortization................ 3.6 3.5 4.0 3.6 4.6
----- ----- ----- ----- -----
Operating profit............................. 34.5 29.4 30.4 29.1 30.6
Interest (expense) income, net............... (1.0) 4.8 2.7 3.7 1.2
Nonrecurring litigation expense.............. (14.8) -- -- -- --
----- ----- ----- ----- -----
Income before income taxes................... 18.7 34.2 33.1 32.8 31.8
Provision for income taxes................... 10.7 12.5 12.9 12.8 12.4
----- ----- ----- ----- -----
Net income................................... 8.0% 21.7% 20.2% 20.0% 19.4%
===== ===== ===== ===== =====

424B4 20th Page of 72 TOC 1st Previous Next ↓Bottom Just 20th
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

Net Revenue. Net revenue increased $23.2 million or 79.2% to $52.4 million
for the six months ended June 30, 1997 from $29.2 million for the six months
ended June 30, 1996. Approximately $16.3 million of this increase was
attributable to the 179 (net of consolidations) Orthodontic Centers opened
since January 1, 1996, approximately $5.1 million to the growth in net revenue
of the 127 Orthodontic Centers open throughout both periods, and approximately
$1.8 million related to the Affiliated Orthodontists' share of the operating
losses of newly developed Orthodontic Centers. The number of patient contracts
increased to approximately 99,000 at June 30, 1997 from approximately 62,000
at June 30, 1996.

Employee Costs. Employee costs increased $6.8 million or 80.5% to $15.2
million for the six months ended June 30, 1997 from $8.4 million for the six
months ended June 30, 1996. As a percentage of the net revenue, employee costs
increased to 29.0% for the six months ended June 30, 1997 from 28.7% for the
six months ended June 30, 1996. This increase was caused primarily by an
increased percentage of new patient treatment days, which require additional
staff time per patient, associated with the opening of additional Orthodontic
Centers and the recent increase in affiliations with existing orthodontic
practices. These orthodontic practices have tended to have higher employee
cost percentages than a typical Orthodontic Center and have taken
approximately one year to completely convert to the Company's operating
systems.

Orthodontic Supplies. Orthodontic supplies expense increased $1.6 million or
70.4% to $3.8 million for the six months ended June 30, 1997 from $2.2 million
for the six months ended June 30, 1996. As a percentage of net revenue,
however, orthodontic supplies decreased to 7.3% for the six months ended June
30, 1997 from 7.7% for the six months ended June 30, 1996. Cost improvements
attained through bulk purchasing were offset by increased expense associated
with an increased percentage of new patient treatment days, which require
greater orthodontic supplies per patient, associated with the opening of
additional Orthodontic Centers.

Rent. Rent expense increased $2.0 million or 77.6% to $4.6 million for the
six months ended June 30, 1997 from $2.6 million for the six months ended June
30, 1996. The increase in this expense was attributable to Orthodontic Centers
affiliated, opened or relocated after June 30, 1996. As a percentage of net
revenue, however, rent expense decreased to 8.8% for the six months ended June
30, 1997 from 8.9% for the six months ended June 30, 1996.

Marketing and Advertising. Marketing and advertising expense increased $1.5
million or 56.3% to $4.2 million for the six months ended June 30, 1997 from
$2.7 million for the six months ended June 30, 1996. The increase in this
expense resulted primarily from the addition of Orthodontic Centers after June
30, 1996. As a percentage of net revenue, however, marketing and advertising
expense decreased to 8.0% for the six months ended June 30, 1997 from 9.2% for
the six months ended June 30, 1996. The decrease in this expense as a
percentage of net revenue is the result of cost improvements achieved through
bulk media and production purchases.

General and Administrative. General and administrative expense increased
$2.4 million or 64.8% to $6.1 million for the six months ended June 30, 1997
from $3.7 million for the six months ended June 30, 1996. The increase in
general and administrative expense resulted primarily from the addition of
Orthodontic Centers after June 30, 1996. As a percentage of net revenue,
however, general and administrative expense decreased to 11.7% for the six
months ended June 30, 1997 from 12.8% for the six months ended June 30, 1996.
General and administrative expense decreased as a percentage of net revenue as
a result of decreased startup costs for 19 Orthodontic Centers opened or
relocated during the second quarter of 1997.

Depreciation and Amortization. Depreciation and amortization expense
increased $1.3 million or 128.1% to $2.4 million for the six months ended June
30, 1997 from $1.1 million for the six months ended June 30, 1996. As a
percentage of net revenue, depreciation and amortization expense increased to
4.6% for the six months ended June 30, 1997 from 3.6% for the six months ended
June 30, 1996. The increase in this expense is a result of the fixed assets
acquired and service agreements entered into for Orthodontic Centers
developed, acquired or relocated after June 30, 1996.

424B4 21st Page of 72 TOC 1st Previous Next ↓Bottom Just 21st
Operating Profit. Operating profit increased $7.5 million or 88.1% to $16.0
million for the six months ended June 30, 1997 from $8.5 million for the six
months ended June 30, 1996. As a percentage of net revenue, operating profit
increased to 30.6% for the six months ended June 30, 1997 from 29.1% for the
six months ended June 30, 1996 as a result of the factors discussed above.

Interest. Net interest income decreased $500,000 or 41.2% to $600,000 for
the six months ended June 30, 1997 from $1.1 million for the six months ended
June 30, 1996. The decrease in interest income resulted from a decrease in the
Company's average investment balance resulting from the investment of
unexpended proceeds from the Company's June 1995 public offering.

Provision for Income Taxes. Provision for income taxes increased $2.8
million or 73.5% to $6.5 million for the six months ended June 30, 1997 from
$3.7 million for the six months ended June 30, 1996. The Company's effective
income tax rate was 39.0% for both the six months ended June 30, 1997 and
1996.

Net Income. Net income increased $4.3 million or 73.6% to $10.1 million for
the six months ended June 30, 1997 from $5.8 million for the six months ended
June 30, 1996. As a percentage of net revenue, net income decreased to 19.4%
for the six months ended June 30, 1997 from 20.0% for the six months ended
June 30, 1996 as a result of the factors discussed above.

1996 COMPARED TO 1995

Net Revenue. Net revenue increased $29.7 million or 71.5% to $71.3 million
for 1996 from $41.6 million for 1995. Approximately $6.9 million of this
increase was attributable to the growth in net revenue of the 75 Orthodontic
Centers open throughout both periods, $12.1 million was attributable to the 57
Orthodontic Centers (net of consolidations) opened during 1995, $11.0 million
was attributable to the 116 Orthodontic Centers opened during 1996 and
approximately $546,000 was attributable to the Affiliated Orthodontists' share
of the operating losses of newly-developed Orthodontic Centers, which amounts
were advanced by the Company. The remaining difference resulted primarily from
the fact that revenue recognized from the sale of ownership interests in
Orthodontic Centers obtained by the Company in the Combination Transaction was
lower in 1996 than in 1995. The number of patient contracts increased to
approximately 83,000 at December 31, 1996 from approximately 53,000 at
December 31, 1995.

Employee Costs. Employee costs increased $8.1 million or 68.8% to $19.9
million for 1996 from $11.8 million for 1995. This increase was caused by an
increase in the number of patient contracts, which resulted in additional
employee time required to service these contracts. As a percentage of net
revenue, however, employee costs decreased to 27.9% for 1996 from 28.4% for
1995. The decrease in employee costs as a percentage of net revenue resulted
from increased efficiency in scheduling and monitoring employee productivity
for all patient days.

Orthodontic Supplies. Orthodontic supplies expense increased $2.2 million or
71.4% to $5.4 million for 1996 from $3.2 million for 1995. As a percentage of
net revenue, orthodontic supplies remained constant at 7.6% during 1996 and
1995. Cost improvements attained through bulk purchasing were offset by
increased expense associated with an increased percentage of new patient
treatment days, which require greater orthodontic supplies per patient,
associated with the opening of additional Orthodontic Centers.

Rent. Rent expense increased $2.6 million or 74.5% to $6.1 million for 1996
from $3.5 million for 1995. As a percentage of net revenue, rent expense
increased to 8.6% for 1996 from 8.4% for 1995. The increase in this expense as
a percentage of net revenue was attributable to the relatively fixed nature of
the expense in conjunction with the opening of additional Orthodontic Centers,
which typically generate less net revenue during their initial operations.

Marketing and Advertising. Marketing and advertising expense increased $2.3
million or 53.7% to $6.6 million for 1996 from $4.3 million for 1995. The
increase in this expense resulted primarily from the addition of

424B4 22nd Page of 72 TOC 1st Previous Next ↓Bottom Just 22nd
Orthodontic Centers in new advertising markets after December 31, 1995. As a
percentage of net revenue, however, marketing and advertising decreased to
9.3% for 1996 from 10.4% for 1995. The decrease in this expense as a
percentage of net revenue is the result of cost improvements achieved through
bulk media and production purchases.

General and Administrative. General and administrative expense increased
$3.6 million or 70.4% to $8.7 million for 1996 from $5.1 million for 1995.
This increase resulted from the increase in Orthodontic Centers. As a
percentage of net revenue, however, general and administrative expense
decreased to 12.2% for 1996 from 12.3% for 1995.

Depreciation and Amortization. Depreciation and amortization expense
increased $1.4 million or 94.3% to $2.8 million for 1996 from $1.4 million for
1995. As a percentage of net revenue, depreciation and amortization increased
to 4.0% for 1996 from 3.5% for 1995. The increase in this expense is a result
of the fixed assets acquired for Orthodontic Centers developed or relocated
after December 31, 1995 and amortization of service agreements acquired during
1996.

Operating Profit. Operating profit increased $9.5 million or 77.3% to $21.7
million for 1996 from $12.2 million for 1995. As a percentage of net revenue,
operating profit increased to 30.4% for 1996 from 29.4% for 1995, as a result
of the factors discussed above.

Interest. Net interest income decreased $100,000 or 3.1% to $1.9 million for
1996 from $2.0 million for 1995. The decrease resulted from a decrease in the
Company's average investment balances.

Provision for Income Taxes. Provision for income taxes increased $4.0
million or 77.7% to $9.2 million for 1996 from $5.2 million for 1995. The
Company's effective tax rate increased to 39.0% for 1996 from 36.4% for 1995
to reflect the Company's higher income tax bracket for federal purposes and
the Company's blended state tax rate.

Net Income. Net income increased $5.4 million or 59.4% to $14.4 million for
1996 from $9.0 million for 1995. As a percentage of net revenue, net income
decreased to 20.2% for 1996 from 21.7% for 1995 as a result of the factors
discussed above.

1995 COMPARED TO 1994

Net Revenue. Net revenue increased $16.2 million or 63.9% to $41.6 million
for 1995 from $25.4 million for 1994. Approximately $3.9 million of this
increase was attributable to the growth in net revenue of the 53 Orthodontic
Centers open throughout both periods, $4.1 million was attributable to the 22
Orthodontic Centers (net of consolidations) opened during 1994, $5.3 million
was attributable to the 70 Orthodontic Centers opened during 1995 and
approximately $1.7 million was attributable to the Affiliated Orthodontists'
share of the operating losses of newly-developed Orthodontic Centers, which
amounts were advanced by the Company. The remaining increase resulted
primarily from the sale of ownership interests in Orthodontic Centers obtained
by the Company in the Combination Transaction. The number of patient contracts
increased to approximately 53,000 at December 31, 1995 from approximately
33,000 at December 31, 1994.

Employee Costs. Employee costs increased $5.0 million or 72.2% to $11.8
million for 1995 from $6.8 million for 1994. As a percentage of net revenue,
employee costs increased to 28.4% for 1995 from 27.0% for 1994. This increase
was caused primarily by an increased percentage of new patient treatment days,
which require additional staff time per patient, associated with the opening
of additional Orthodontic Centers.

Orthodontic Supplies. Orthodontic supplies expense increased $1.3 million or
66.0% to $3.2 million for 1995 from $1.9 million for 1994. As a percentage of
net revenue, orthodontic supplies increased to 7.6% for 1995 from 7.5% for
1994. Cost improvements attained through bulk purchasing were offset by
increased expense associated with an increased percentage of new patient
treatment days, which require greater orthodontic supplies per patient,
associated with the opening of additional Orthodontic Centers.

424B4 23rd Page of 72 TOC 1st Previous Next ↓Bottom Just 23rd
Rent. Rent expense increased $1.4 million or 70.9% to $3.5 million for 1995
from $2.1 million for 1994. As a percentage of net revenue, rent expense
increased to 8.4% for 1995 from 8.1% for 1994. The increase in this expense as
a percentage of net revenue was attributable to the relatively fixed nature of
the expense in conjunction with the opening of additional Orthodontic Centers,
which typically generate less net revenue during their initial operations.

Marketing and Advertising. Marketing and advertising expense increased $2.2
million or 101.4% to $4.3 million for 1995 from $2.1 million for 1994.
Marketing and advertising expense increased as a percentage of net revenue to
10.4% for 1995 from 8.5% for 1994. The increase in this expense as a
percentage of net revenue is the result of advertising for Orthodontic Centers
opened in new markets (including metropolitan areas with relatively higher
advertising rates), additional grand opening promotions for Orthodontic
Centers relocated in existing markets and an overall increase in the quality
of advertising.

General and Administrative. General and administrative expense increased
$2.4 million or 87.1% to $5.1 million for 1995 from $2.7 million for 1994. As
a percentage of net revenue, general and administrative expense increased to
12.3% for 1995 from 10.8% for 1994 as a result of an increase in bad debt
expense to $958,000 for 1995 from $342,000 for 1994, expenses associated with
being a publicly held company and administrative expenses associated with the
opening of additional Orthodontic Centers.

Depreciation and Amortization. Depreciation and amortization expense
increased $480,000 or 57.4% to $1.4 million for 1995 from $920,000 for 1994.
The increase in this expense is a result of the fixed assets acquired for
Orthodontic Centers developed or relocated after December 31, 1994. As a
percentage of net revenue, however, depreciation and amortization expense
decreased to 3.5% for 1995 from 3.6% for 1994. The decrease resulted from the
full amortization in 1994 of the patient contracts acquired in 1993.

Operating Profit. Operating profit increased $3.4 million or 39.5% to $12.2
million for 1995 from $8.8 million for 1994. As a percentage of net revenue,
however, operating profit decreased to 29.4% for 1995 from 34.5% for 1994, as
a result of the factors discussed above.

Interest. Net interest income was $2.0 million for 1995 compared to net
interest expense of $266,000 for 1994. The interest income resulted from the
investment of the unexpended proceeds from the Company's prior public
offerings.

Nonrecurring Litigation Expense. The Company incurred a nonrecurring
litigation expense of approximately $3.7 million during the second quarter of
1994 in connection with the acquisition by the Company of the practice assets
of two orthodontists as part of the Combination Transaction and as part of the
settlement of the litigation initiated by those orthodontists against the
Company. The $3.7 million consisted of approximately $300,000 in cash and $3.4
million in promissory notes. In addition, the Company issued to the two
orthodontists an aggregate of 1,186,124 shares of Common Stock (after giving
effect to the Company's two subsequent two-for-one stock splits effected in
the form of a 100% stock dividend). Because this litigation was unrelated to
the operating activities of the Company, the nonrecurring litigation expense
is not reflected in the Company's operating profit.

Provision for Income Taxes. Provision for income taxes increased $2.5
million or 90.9% to $5.2 million for 1995 from $2.7 million for 1994. The
Company's effective tax rate decreased to 36.4% for 1995 from 57.2% for 1994.
The 1994 provision reflected a one-time, non-cash charge of $2.6 million for
deferred income taxes resulting from the change in tax status of the
operations of the Company upon completion of the Combination Transaction.

Net Income. Net income increased $7.0 million or 345.3% to $9.0 million for
1995 from $2.0 million for 1994. As a percentage of net revenue, net income
increased to 21.7% for 1995 from 8.0% for 1994, as a result of the factors
discussed above.

424B4 24th Page of 72 TOC 1st Previous Next ↓Bottom Just 24th
QUARTERLY OPERATING RESULTS

The following table sets forth certain unaudited quarterly operating
information of the Company for 1995, 1996 and the first two quarters of 1997.
The Company believes that the following information includes all of the
adjustments, consisting of normal recurring accruals and adjustments necessary
to convert cash basis accounting records of the Company to an accrual basis,
considered necessary for a fair presentation of the Company's consolidated
financial position and its consolidated results of operations for these
periods in accordance with generally accepted accounting principles. Results
of operations for any particular quarter are not necessarily indicative of
results of operations for a full year or predictive of future periods.

[Enlarge/Download Table]

QUARTERS ENDED
---------------------------------------------------------------------------------
1995 1996 1997
-------------------------------- -------------------------------- ---------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS)

Net revenue............. $8,465 $9,236 $11,490 $12,365 $13,719 $15,517 $18,881 $23,156 $24,899 $27,480
Operating profit........ 2,719 2,577 3,318 3,609 3,914 4,592 6,185 6,984 7,467 8,530

SEASONALITY

The Orthodontic Centers have experienced their highest volume of new cases
in the summer and certain other periods when schools are not typically in
session. During these periods, children have a greater opportunity to visit an
orthodontist to commence treatment. Consequently, the Orthodontic Centers have
experienced higher revenue during the first and third quarters of the year as
a result of increased patient starts. During the Thanksgiving and Christmas
seasons, the Orthodontic Centers have experienced reduced volume and fourth
quarter revenue for the Orthodontic Centers has been generally lower as
compared to other periods. Seasonality in recent periods has been mitigated by
the impact of additional Orthodontic Centers.

LIQUIDITY AND CAPITAL RESOURCES

Development and acquisition costs, capital expenditures and working capital
needs have been, and will continue to be, financed through a combination of
cash flow from operations, bank borrowings and the issuance of notes and
shares of Common Stock. The Company intends to continue to lease, rather than
purchase, facilities for the Orthodontic Centers, to maximize the Company's
available capital.

Net cash provided by operations for the years ended December 31, 1994, 1995
and 1996 was $6.2 million, $4.0 million and $6.8 million, respectively. For
the six months ended June 30, 1996, net cash used by operations was $1.3
million, and for the six months ended June 30, 1997, net cash provided by
operations was $3.9 million. The Company's working capital at December 31,
1996 and June 30, 1997 was $40.2 million and $31.9 million, respectively,
including cash and cash equivalents of $11.8 million and $2.8 million,
respectively.

Unbilled patient receivables (which represent patient revenue earned under
patient contracts in excess of the amount billed under such patient contracts)
increased from $18.4 million at December 31, 1996 to $23.7 million at June 30,
1997, with this increase consistent with the increase in the number of patient
contracts. Total current liabilities decreased from $15.9 million at December
31, 1996 to $14.2 million at June 30, 1997 primarily as a result of a decrease
in current and deferred income taxes payable of $2.6 million.

Net cash used in investing activities for the years ended December 31, 1994,
1995 and 1996, was $5.1 million, $42.4 million and $13.2 million,
respectively, and for the six months ended June 30, 1996 and 1997, was $5.9
million and $12.6 million, respectively.

The Company's capital expenditures consist primarily of the costs associated
with the development of additional Orthodontic Centers. The average cost of
developing a new Orthodontic Center is approximately $250,000, including the
cost of equipment, leasehold improvements, working capital and losses
associated with the initial operations of the Orthodontic Center. These costs
are shared by the Company and the particular Affiliated Orthodontist. The
Company assists Affiliated Orthodontists in obtaining financing for their
share of

424B4 25th Page of 72 TOC 1st Previous Next ↓Bottom Just 25th
such costs through the Company's primary lender. The Company provides the
lender a guaranty of these loans. The Company has discontinued financing
Affiliated Orthodontists' share of losses associated with the initial
operations of the Orthodontic Center, which were historically financed by the
Company as an unsecured advance repayable by the Affiliated Orthodontist over
a five-year period and bearing interest at 1.5% per annum above the prime
rate, with repayment beginning upon the attainment of positive cash flow by
the Orthodontic Center (which generally occurs approximately 12 months after
an Orthodontic Center commences operations). At June 30, 1997, approximately
$4.0 million in such advances was outstanding. The Company intends to continue
to make advances of approximately $20,000 to newly-affiliated Affiliated
Orthodontists during the first year of an Orthodontic Center's operations,
which advances bear no interest and typically are repaid during the second
year of the Orthodontic Center's operations. The Company intends to fund such
advances and any continued financing through a combination of bank borrowings,
cash from operations and the remaining net proceeds from the Company's prior
public offerings.

Of the 305 Orthodontic Centers at June 30, 1997, 178 were acquired through
the acquisition of the assets of, and the affiliation with, existing
orthodontic practices. During 1996, the Company acquired the assets of, and
affiliated with, 40 existing orthodontic practices operating at 64 locations
(net of consolidations) at a cost of approximately $32.4 million, consisting
of approximately $11.4 million in cash (including $4.6 million which was due
to orthodontic entities at December 31, 1996 and paid shortly after year end),
an aggregate principal amount of $120,000 of promissory notes issued by the
Company and an aggregate of 1,718,236 shares of Common Stock. Outstanding
indebtedness at June 30, 1997 under promissory notes issued by the Company to
Affiliated Orthodontists to acquire the assets of existing orthodontic
practices was approximately $560,000, with maturities ranging from one to five
years and interest rates ranging from 8.0% to 10.0% per annum. In connection
with the acquisition of certain ownership interests in the Combination
Transaction, the Company issued two promissory notes in the aggregate
principal amount of approximately $3.4 million, each payable in 84 equal
monthly installments, commencing November 1, 1994, and bearing interest at
8.0% per annum. At June 30, 1997, the outstanding principal balance of such
notes was approximately $2.3 million.

The Company's financing activities included proceeds from notes to banks and
Affiliated Orthodontists totaling $138,000 for the year ended December 31,
1994, the repayment of notes to banks and Affiliated Orthodontists of $1.1
million, $1.2 million and $1.2 million for the years ended December 31, 1994,
1995, and 1996, respectively, and $765,000 and $582,000 for the six months
ended June 30, 1996 and 1997, respectively, and the proceeds of $18.0 million,
$41.3 million and $693,000 from the issuance of Common Stock during the years
ended December 31, 1994, 1995 and 1996, respectively. In addition,
distributions of income of $2.6 million were made in the year ended December
31, 1994, including $1.2 million of distributions to orthodontists who were
owners of the Predecessor Entities excluding Dr. Lazzara. Following the
Combination Transaction, such amounts are included in amounts retained by the
Affiliated Orthodontists. The Company does not anticipate that any cash
dividends will be declared or paid by the Company in the foreseeable future.

The Company's revolving line of credit with First Union National Bank, which
was entered into on October 18, 1994, provides an aggregate of $5.0 million
for general working capital needs and expansion of the number of Orthodontic
Centers. The revolving line of credit bears interest at 0.5% per annum above
the prime rate of First Union National Bank and amounts borrowed are secured
by a security interest in all of the Company's assets, including its accounts
receivable and equipment, and are to be repaid over a period of four years. At
June 30, 1997, there were no amounts outstanding under the revolving line of
credit.

The Company expects that future cash requirements will principally be for
developing additional Orthodontic Centers, acquiring assets from and
affiliating with additional Affiliated Orthodontists, capital expenditures,
repayment of long-term debt, payment of income taxes and general corporate
purposes. The Company's cash needs could significantly change depending upon
the Company's ability to recruit orthodontists, find appropriate sites, enter
into long-term service or consulting agreements, and acquire the assets of
existing orthodontic practices. Based upon the Company's anticipated capital
needs for the next 12 months, management believes that the combination of the
net proceeds to the Company from this offering, funds available under the
Company's revolving line of credit, cash flow from operations, and the
proceeds remaining from the Company's prior public offerings will be
sufficient to meet the Company's funding requirements for the next 12 months.

424B4 26th Page of 72 TOC 1st Previous Next ↓Bottom Just 26th
BUSINESS

GENERAL

The Company is the leading provider of practice management services to
orthodontic practices in the United States, based on annual net revenue,
annual net income, number of affiliated orthodontists and number of
orthodontic centers. The Company develops Orthodontic Centers and manages the
business operations and marketing aspects of the Affiliated Orthodontists'
practices, thereby allowing Affiliated Orthodontists to focus on delivering
quality patient care. Since its inception in 1985, the Company has grown to
manage 305 Orthodontic Centers located in 34 states with 167 Affiliated
Orthodontists at June 30, 1997. From January 1, 1985 to June 30, 1997, the
Company developed 171 Orthodontic Centers, acquired the assets of, and
affiliated with, 178 existing orthodontic practices and consolidated 44
Orthodontic Centers.

Management believes that the Company's operating strategy and proprietary
operating systems have allowed Affiliated Orthodontists to realize
significantly greater productivity and profitability than traditional
orthodontic practices. The Company's proprietary office design permits an
Affiliated Orthodontist to treat patients without moving from room to room.
The Company's proprietary patient scheduling system groups appointments by the
type of procedure and dedicates certain days exclusively to new patients.
These operating systems, along with the efficient use of an average of five
orthodontic assistants per Orthodontic Center, have enabled Affiliated
Orthodontists practicing in Orthodontic Centers open throughout 1995 to treat
an average of 77 patients per nine-hour patient treatment day during 1996.
Orthodontists in the United States treated an average of 41.5 patients per
operating day in 1994.

The Company develops and implements aggressive and innovative marketing
plans for the Orthodontic Center, utilizing local television, radio and print
advertising and internal marketing promotions. During 1996, the Company spent
an average of approximately $70,500 per Affiliated Orthodontist on direct
marketing costs and advertising. In contrast, the traditional orthodontist,
who relies primarily on referrals from dentists and other patients, spent an
average of approximately $4,400 on marketing and advertising in 1992. As a
result of this marketing strategy, during 1996, each Affiliated Orthodontist
who had been affiliated with the Company for at least one year generated an
average of 512 new case starts as compared to the 1994 national average of
approximately 170 new case starts per orthodontist.

The Company is not engaged in the practice of orthodontics. The Affiliated
Orthodontists maintain full control over their orthodontic practices,
determine which personnel, including orthodontic assistants, to hire or
terminate and set their own standards of practice in order to promote quality
orthodontic care.

THE ORTHODONTIC INDUSTRY

Industry Overview

In 1994, orthodontists in the United States initiated treatment for
approximately 1.5 million patients. Of these patients, approximately 63% were
between the ages of nine and 18 and the remaining 27% were primarily adults
between the ages of 25 and 35. The number of adults seeking treatment has
increased in recent years from 332,000 case starts in 1989 to approximately
400,000 case starts in 1994. Based upon the results of a 1994 study conducted
by members of the Department of Orthodontics of the University of Florida and
based upon management's experience in the orthodontic industry, management
believes that the total market for orthodontic services substantially exceeds
the number of patients currently seeking treatment.

According to the 1995 JCO Study, the number of orthodontists practicing in
the United States has remained at approximately the same level since 1989. The
United States orthodontic industry includes approximately 9,060 orthodontists
and is currently highly fragmented, with approximately 90% of the practicing
orthodontists acting as sole practitioners. Orthodontists must complete up to
three years of postgraduate studies following completion of dental programs.
Many dentists who are not orthodontists also perform certain orthodontic
services. Data relating to these individuals are not included in the 1995 JCO
Study.

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The United States orthodontic industry generates approximately $3.6 billion
in annual gross revenues, with the average orthodontic practice generating
gross revenues of approximately $475,000 per year. Orthodontics is generally
an elective procedure, with approximately 72% of payments for orthodontic
services made directly by the person receiving treatment and standard dental
insurance covering an additional 25% of such payments. Managed care represents
a small percentage of revenues generated in the orthodontic industry.

The table below presents certain information included in the 1995 JCO Study
concerning the United States orthodontic industry in each of the years
presented:

[Download Table]

1990 1991 1992 1993 1994
---------- ---------- ---------- ---------- ----------

Number of practicing
orthodontists.......... 8,720 8,760 8,856 8,958 9,060
Number of new patient
cases.................. 1,308,000 1,314,000 1,416,960 1,478,070 1,540,200
Average fee per case.... $3,050 $3,221 $3,401 $3,447 $3,492

Management believes, based upon the 1995 JCO Study, that the total number of
new patient cases has increased only moderately because of the reliance of
orthodontists in traditional orthodontic practices on referrals from general
dentists or existing patients for new patients. Orthodontists in the United
States spent an average of approximately $4,400 on marketing and advertising
in 1992. Therefore, to increase revenue many orthodontists have raised the
fees they charge for their services.

Traditional Orthodontic Practice

The traditional orthodontic practice typically includes a sole orthodontist,
who practices at a single primary location or at an average of less than one
satellite office, with an average of approximately three orthodontic
assistants and two business office personnel. At a typical orthodontic office,
chairs are arranged in an open room in a somewhat circular pattern. Both the
orthodontist and orthodontic assistant must complete treatment on a particular
patient before treating the next patient. The traditional orthodontic office
is structured so that the orthodontist rotates from one patient to another, as
an orthodontic assistant completes the orthodontic work. In the traditional
practice, the orthodontist manages all business aspects of the practice, as
the use of third party management services is not typical.

In a typical orthodontic practice, before braces are applied a patient is
required to complete as many as four preliminary appointments, consisting of
an initial examination and sessions for making impressions of the patient's
teeth, taking x-rays and placing spacers between the patient's teeth. The
patient returns for monthly adjustments before the braces are removed and a
retainer is made to maintain the orthodontic treatment. In 1994, standard case
fees in traditional orthodontic practices averaged approximately $3,450 for
children and approximately $3,700 for adults. The charges for preliminary
appointments, including a required down payment, averaged approximately $875
to $925, or approximately 25% of the total fee. Fees are paid each month by
the patient for services performed at that visit.

According to the 1995 JCO Study, the average orthodontist initiated
treatment of approximately 170 patients in 1994, treated approximately 41.5
patients per operating day and maintained approximately 380 active cases. In
addition, the average orthodontic practice consisted of one or two offices and
generated gross fees of $475,000, with the orthodontist realizing net practice
income of approximately $191,000.

OPERATING STRATEGY

Key elements of the Company's operating strategy include:

Emphasizing Quality Patient Care. All Affiliated Orthodontists are graduates
of accredited orthodontic training programs and participate in advisory
committees that meet twice a year to perform peer review studies and to
consult with the Affiliated Orthodontists. The Affiliated Orthodontists have
practiced orthodontics for an average of approximately 15 years and
approximately 26% have held teaching positions. In addition, the

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Company provides operating systems and support that enhance the ability of
Affiliated Orthodontists to provide quality patient care. Senior clinical
technicians and the clinical staff receive training in procedures which
enhance the level of patient service. Quality of care is monitored through
internal peer review procedures administered by the Affiliated Orthodontists
through their advisory committee.

Stimulating Demand in Local Markets Through Aggressive Marketing. The
Company develops and implements aggressive and innovative marketing plans for
each Orthodontic Center, utilizing local television, radio and print
advertising and internal marketing promotions. Based upon the success of the
Orthodontic Centers in attracting new patients, management believes that the
Company's marketing activities, along with the affordable payment plans
provided by the Orthodontic Centers, have resulted in many patients receiving
treatment who otherwise may not have sought orthodontic services. During 1996,
the Company spent on average approximately $70,500 per Affiliated Orthodontist
on direct marketing costs and advertising. In contrast, the traditional
orthodontist, who relies primarily on referrals from dentists and other
patients, spent an average of approximately $4,400 on marketing and
advertising in 1992. During 1996, each Affiliated Orthodontist who had been
affiliated with the Company for at least one year generated an average of 512
new case starts as compared to the 1994 national average of approximately 170
new case starts per orthodontist.

Achieving Operating Efficiencies and Economies of Scale. The Company
implements a variety of operating procedures and systems to improve the
productivity and profitability of the Orthodontic Centers and to achieve
economies of scale. These include Orthodontic Center office designs which
increase the number of patients the clinical staff can treat and enhance
patient comfort and privacy, a scheduling system designed to increase capacity
utilization at each Orthodontic Center, efficient use of orthodontic
assistants and centralized purchasing and distribution systems. During 1996,
Affiliated Orthodontists practicing in Orthodontic Centers open throughout
1995 treated an average of 77 patients per nine-hour patient treatment day.
Orthodontists in the United States treated an average of 41.5 patients per
operating day in 1994.

Increasing Market Penetration with Affordable Payment Plans. The Orthodontic
Centers generally provide a payment plan recommended by the Company which
consists of no down payment, equal monthly payments of $98 per month over the
term of the treatment and a final payment of $398 at completion of the
treatment. Management believes that this payment plan and the Company's
marketing activities have resulted in many patients receiving treatment who
otherwise may not have sought orthodontic services. For a standard case in
which treatment continues for between 26 and 32 months, the total fees charged
by the Affiliated Orthodontists averaged approximately $3,100 in 1996 which
was below the 1994 national average of $3,450 to $3,700 for the same period of
treatment. Management believes that the Orthodontic Centers are able to charge
lower fees because of the operating efficiencies resulting from the office
designs of Orthodontic Centers, the patient scheduling systems, efficient use
of orthodontic assistants and centralized purchasing and distribution systems.

Capitalizing on Information Systems. In addition to providing marketing and
operating expertise, the Company provides Affiliated Orthodontists with
monthly operating data and quarterly financial statements for each Orthodontic
Center, including management's analysis of the financial results and
recommended changes to improve financial and operating performance.

GROWTH STRATEGY

The Company's growth strategy is to develop new Orthodontic Centers and to
affiliate with existing practices in both new and existing markets. At
December 31, 1994, 1995 and 1996, there were 46, 78 and 133 Affiliated
Orthodontists, respectively, and at June 30, 1997, there were 167 Affiliated
Orthodontists. Management believes that orthodontists choose to affiliate with
the Company because the Company provides: (i) the capital required to open an
Orthodontic Center; (ii) the business and clinical systems and staffing
required to operate a new Orthodontic Center; (iii) the opportunity to
substantially increase practice income derived by the orthodontists; (iv) the
opportunity to increase the orthodontists' focus on patient care rather than
administration and (v) the opportunity to eliminate the need for business
development efforts designed to generate referrals from general dentists.

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Since its inception in 1985, the Company has grown to manage 305 Orthodontic
Centers located in 34 states with 167 Affiliated Orthodontists at June 30,
1997. Of these 305 Orthodontic Centers, 209 have been developed or relocated
to new facilities since June 30, 1992. Key elements of the Company's growth
strategy include:

Development of New Orthodontic Centers. From January 1, 1985 to June 30,
1997, the Company developed 171 Orthodontic Centers, including 160 since June
30, 1992. The Company actively markets itself to orthodontists by targeting
military orthodontists, practicing orthodontists and orthodontic students,
including the approximately 200 orthodontists who graduate each year from
accredited United States orthodontic graduate programs, who are interested in
opening new practices. The Company's Professional Development Department,
which includes former practicing orthodontists, recruits additional
orthodontists through referrals from Affiliated Orthodontists, attending
orthodontic conventions, trade shows and association meetings, visiting
orthodontic graduate schools and advertising in professional journals. The
Company also intends to continue to develop additional Orthodontic Centers
with current Affiliated Orthodontists.

Orthodontists who select the Company for affiliation are generally given
their choice of markets in the United States in which to locate where the
Company does not have another Orthodontic Center. The Company also performs
market studies to determine the advantages of locating Orthodontic Centers in
new markets.

The average cost of developing a new Orthodontic Center is approximately
$250,000, including the cost of equipment, leasehold improvements, working
capital and losses associated with the initial operations of the Orthodontic
Center. The costs of developing a new Orthodontic Center are shared by the
Company and the particular Affiliated Orthodontist. The Company assists
Affiliated Orthodontists in obtaining financing of their share of such costs
through the Company's primary lender.

Affiliation with Existing Orthodontic Practices. From January 1, 1985 to
June 30, 1997, the Company acquired the assets of, and affiliated with, 178
existing orthodontic practices. The Company's Professional Development
Department actively markets the Company to experienced orthodontists through
referrals from Affiliated Orthodontists, attending orthodontic conventions,
trade shows and association meetings, and advertising in professional
journals. Of these existing practices, approximately 87% generated less than
$500,000 of patient revenue during the 12 months prior to their affiliation
with the Company. Management believes that focusing on orthodontic practices
of this size provides the Company with the opportunity to achieve higher
revenue growth rates and lower acquisition costs, relative to larger
practices. Existing practices that have affiliated with the Company have
experienced increased average gross revenue and operating income following
their affiliation. The Company frequently relocates existing practices to new
facilities, including 49 since June 30, 1992. The Company intends to continue
to relocate existing practices to new facilities and also intends to continue
to evaluate additional potential affiliations.

Traditional Orthodontic Practices. During 1997, the Company created a new
division which focuses on affiliations with traditional, internally-marketed
orthodontic practices that generate relatively large amounts of patient fees.
At June 30, 1997, there were eight Orthodontic Centers operating in the new
division. Although the Company intends to continue to focus primarily on
practices that advertise, management believes that affiliating with selected
traditional practices will provide the Company with additional opportunities
for growth. According to the 1995 JCO Study, most orthodontists practicing in
the United States do not advertise through mass media. The Company has engaged
the services of Dr. Ronald M. Roncone to assist the Company in developing this
new division. Dr. Roncone operates an orthodontic practice in California and
lectures extensively to other orthodontists on methods of expanding an
orthodontic practice.

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ORTHODONTIC CENTERS

Location

At June 30, 1997, there were 305 Orthodontic Centers located in 34 states.
The following table sets forth information regarding these 305 Orthodontic
Centers:

[Download Table]

NUMBER OF
STATE ADI'S (1) CENTERS
----- -------------------------- ---------

Alabama......... Birmingham 2
Huntsville 1
Montgomery 1
Arizona......... Lake Havasu 1
Phoenix 8
Tucson 2
California...... Fresno 2
Palm Desert 1
Sacramento 3
Salinas 1
San Diego 9
San Jose 2
Colorado........ Colorado Springs 2
Denver 7
Fort Collins 1
Grand Junction 1
Connecticut..... Hartford 5
Florida......... Fort Lauderdale/Miami 12
Fort Myers 2
Gainesville 3
Jacksonville 4
Orlando 7
Panama City 1
Pensacola 1
Tallahassee 1
Tampa 10
West Palm Beach 4
Georgia......... Albany 3
Atlanta 10
Augusta 1
Columbus 1
Savannah 2
Illinois........ Chicago 5
Rockford 1
Indiana......... Indianapolis 3
Kansas.......... Kansas City 1
Kentucky........ Louisville 3
Louisiana....... Alexandria 1
Baton Rouge 1
Lafayette 1
Monroe 1
New Orleans 9
Shreveport 1
Maryland........ Baltimore 7
Rockville/Washington, D.C. 6
Massachusetts... Springfield 3
Michigan........ Grand Rapids 1
Minnesota....... Minneapolis 7
Mississippi..... Gulfport 4
Hattiesburg 1
Jackson 1
Meridian 1
[Download Table]

NUMBER OF
STATE ADI'S (1) CENTERS
----- ------------------------------ ---------

Missouri................ Kansas City 1
Nevada.................. Reno 1
New Jersey.............. Atlantic City 3
Vineland 1
North Carolina.......... Charlotte 3
Greenville 4
Raleigh-Durham 4
Winston-Salem 4
North Dakota............ Minot 2
Ohio.................... Akron 1
Cincinnati 3
Cleveland 7
Columbus 3
Youngstown 2
Oklahoma................ Oklahoma City 3
Oregon.................. Bend 3
Portland 3
Pennsylvania............ Harrisburg 1
Johnstown/Altoona 2
Philadelphia 8
Pittsburgh 2
Rhode Island............ Providence 3
South Carolina.......... Charleston 3
Columbia 2
Greenville 4
Tennessee............... Chattanooga 3
Johnson City/Bristol/Kingsport 3
Knoxville 2
Memphis 1
Nashville 3
Texas................... Austin 4
Dallas/Ft. Worth 5
El Paso 2
Houston 5
San Antonio 3
Victoria 2
Waco 3
Utah.................... Salt Lake City 3
Virginia................ Norfolk 4
Richmond 3
Arlington/Washington, D.C. 4
Washington.............. Seattle 7
West Virginia........... Charleston 3
Wheeling 3
---
Total................................................. 305
===

--------
(1) "ADI" refers to an "area of dominant influence" (as defined by Arbitron
Ratings Company) and is the broadcast coverage area of television and
radio stations in a given market area. Certain Orthodontic Centers
indicated as being located in a particular ADI are located in a state
other than that shown for the ADI above.

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Design

The Orthodontic Centers are generally located either in shopping centers or
professional office buildings. Substantially all of the Orthodontic Centers
include private treatment rooms and large patient waiting areas (rather than
one large treatment area). This allows the Orthodontic Centers to locate in a
broader range of office space than a traditional orthodontic practice. The
Orthodontic Centers typically include up to six treatment rooms and range in
size from approximately 2,000 square feet to 2,500 square feet.

Of the 305 Orthodontic Centers at June 30, 1997, 302 were located in offices
used only by the Affiliated Orthodontists and three were located in space
shared with a general dentist. The Company intends to relocate these three
Orthodontic Centers to free-standing locations as soon as practicable. In its
development of additional Orthodontic Centers, the Company intends to
establish only free-standing Orthodontic Centers and does not intend to share
office space with general dentists.

Staffing and Scheduling

An Orthodontic Center is typically open from 8:30 a.m. to 6:30 p.m. for days
on which patients are scheduled and at least one Saturday every month. In
markets in which there are two or more Orthodontic Centers, each Orthodontic
Center in that market is fully staffed only for days on which the Affiliated
Orthodontist is scheduled to work, ranging from two to 20 days per month.
Staff members dedicated to the Orthodontic Centers in that market, including
the business personnel and the orthodontic assistants, rotate with the
Affiliated Orthodontist among the Orthodontic Centers in the market. On all
other days, the Orthodontic Center is staffed only with a receptionist who
answers the telephone and books appointments.

Patients are scheduled based upon this rotation schedule, if applicable.
Therefore, a particular Orthodontic Center will have appointments available
only for pre-established days each month. To promote efficiency, appointments
for particular types of procedures are grouped together on designated days,
with each Orthodontic Center scheduling specified days on which new patients
are treated and other days each month during which current patients are
treated. This system permits utilization of an Orthodontic Center by a greater
number of patients each day patients are treated.

New patient days. Certain days each month are dedicated solely to seeing new
patients. Longer appointments are scheduled for new patient days to allow for
the initial consultation, preliminary procedures (including teeth impressions
and x-rays) and the placing of spacers between the patient's teeth in
anticipation of the application of the braces at the next appointment. If
orthodontic treatment is recommended by the Affiliated Orthodontist, the
patient then signs a contract for the treatment. The grouping of new patient
appointments separately from the monthly appointments for existing patients
avoids certain inefficiencies which might be created by the longer
appointments required for new patients.

Regular treatment days. Within two weeks after a patient's initial visit, a
patient typically returns to an Orthodontic Center for application of braces
and returns each month thereafter for adjustments to the braces. The patient
makes a monthly payment prior to receiving his or her chart and proceeding to
an inner waiting room. The Affiliated Orthodontist then reviews the status of
the treatment and prescribes any necessary adjustments to the braces. The
patient then proceeds to a private treatment room, where an orthodontic
assistant makes the prescribed adjustments. The patient then returns to the
Affiliated Orthodontist for final examination and adjustments that must be
made by an orthodontist. Before leaving the Orthodontic Center, the patient
makes an appointment for the next month and receives appropriate written
information or instructions regarding his or her activities during the interim
period.

Payment Plan; Case Fees

The Orthodontic Centers generally provide a payment plan recommended by the
Company, which consists of no initial down payment, equal monthly payments of
$98 per month during the term of the treatment and a

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final payment of $398 at the completion of treatment. At the initial
treatment, the patient signs a contract outlining the terms of the treatment,
including the anticipated length of treatment and the total fees. The number
of required monthly payments is fixed at the beginning of the case and
corresponds to the anticipated number of monthly treatments, which averages 26
months. Payment is required from patients at the beginning of each monthly
appointment.

In the event the treatment period exceeds the period originally estimated by
the orthodontist, the patient is not required to pay for the additional months
of treatment. In the event the treatment is completed prior to the scheduled
completion date, the patient is generally required to pay the remaining
balance of the contract less a deduction (equal to 1.5% times the number of
months remaining until the scheduled completion date times the total amount of
the fee). If a patient terminates the treatment prior to the completion of the
treatment period, the patient is required to pay the balance due for all
services rendered to date pursuant to the contract. Patients may transfer to
another Orthodontic Center for the completion of the treatments. In such an
event, the patient would continue to pay the required monthly fees under the
contract. Since 1991, approximately 1.3% of the Company's net revenue have
proven to be uncollectible.

The Orthodontic Centers do not accept payment by Medicare or Medicaid for
services provided. Other payment plans with lower total payments by the
patient are available for patients who have insurance coverage for treatment.
During 1996, approximately 21% of the patients treated at the Orthodontic
Centers had some form of insurance coverage and approximately 14% of the
patient revenue of the Affiliated Orthodontists was paid by a third party
payor. The portion of the fee not covered by insurance is the responsibility
of the patient.

SERVICES AND OPERATIONS

The Company generally manages all of the operations of an Orthodontic Center
other than the provision of orthodontic services. The Company provides
financial, accounting, billing and collection services for an Orthodontic
Center and employs the Orthodontic Center's business personnel. Where
permitted by applicable statutes or regulations, the Company also employs the
orthodontic assistants.

Marketing and Advertising

The Company markets and advertises the services of Orthodontic Centers
through television, radio and print media advertising. The Company tailors
such advertising to the particular local market. The names of the Orthodontic
Center and the Affiliated Orthodontist are prominently featured in each
advertisement. Advertising and direct marketing expenditures averaged
approximately $70,500 per Affiliated Orthodontist in 1996 as compared to a
national average of approximately $4,400 per orthodontist for traditional
practices in 1992.

During 1997, the Company initiated an advertising campaign using a celebrity
spokesperson, with commercials featuring Brett Favre, quarterback of the NFL
Super Bowl champion Green Bay Packers, aired in markets in which the
Orthodontic Centers are located. The Company also began using an outside
advertising agency for the production of broadcast advertisements and the
purchase of advertising time and space (which had historically been done
internally by the Company).

The general public traditionally has had little information about
orthodontic fees prior to consultation with an orthodontist. The advertising
produced by the Company stresses an Orthodontic Center's affordable payment
plan and that the Affiliated Orthodontists are specialists in the field of
orthodontics (not general dentists practicing orthodontics). The
advertisements also emphasize the importance of utilizing a specialist for
orthodontic care and that the Orthodontic Centers are conveniently located in
each market and operate for extended hours and on some weekend days to
accommodate working parents. The advertisements include a toll free national
800 number which routes incoming calls to an Orthodontic Center located in the
caller's area. The Orthodontic Centers typically receive increased inquiries
from prospective patients following a broadcast of the advertisements.
Accordingly, the scheduling of television and radio advertisements is
coordinated to achieve

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optimal use of advertisement expenditures, with the level of advertising
coordinated with available Orthodontic Center capacity to achieve desired new
patient levels at a particular Orthodontic Center.

The Company's Marketing Department is responsible for servicing the
marketing needs of the Orthodontic Centers. Marketing managers within the
Marketing Department design and implement a specific marketing and advertising
program for the Orthodontic Centers located within an assigned geographic
region. Marketing managers are also responsible for maintaining communication
with the local Affiliated Orthodontists and staff in each Orthodontic Center
regarding marketing effectiveness and trends in the particular market. Other
members of the Company's Marketing Department are responsible for media
relations, graphic design and marketing research relating to markets in which
the Orthodontic Centers are or may be located.

New Center Development and Construction

Since 1985, the Company has developed 171 new Orthodontic Centers, including
160 since June 30, 1992. The Company has relocated 49 existing practices to
new facilities since June 30, 1992. The Company's Construction and Leasing
Department is responsible for locating and leasing suitable office space for
new Orthodontic Centers in new markets and new locations within existing
markets. The Construction and Leasing Department also coordinates construction
of the interior of new Orthodontic Centers to accommodate the Company's
proprietary office designs. The Construction and Leasing Department utilizes
the services of a national network of contractors and real estate agents that
regularly assist the Company in developing and constructing Orthodontic
Centers.

Training

Affiliated Orthodontists receive initial training regarding the Company's
operating systems at the Company's training offices in Orlando and
Jacksonville, Florida and in Denver, Colorado to enable an Affiliated
Orthodontist to take advantage of the efficiencies created by the Company's
systems. The Company also employs training teams which travel to each new
Orthodontic Center to train the Orthodontic Center's clinical and business
staff with respect to the Company's operating systems. The Company's Training
Department monitors the operations of each new Orthodontic Center during the
first six months of its operations. In certain instances, follow-up visits by
the training team are conducted six months following the opening of an
Orthodontic Center to maintain operating efficiencies.

Operations

The Company's Operations Department is responsible for servicing the
operational needs of the Orthodontic Centers. Operating managers within the
Operations Department respond to various operational questions and requests
from Orthodontic Centers located within an assigned geographic region,
including those relating to inventory, supplies, equipment and office space.
The Operations Department provides the Affiliated Orthodontist and staff of
each Orthodontic Center with periodic reports regarding that Orthodontic
Center's performance.

The Company maintains an incentive-based compensation program for its
employees which rewards employees based upon their performance and the
operating results of the Orthodontic Centers, including increased collections
and case starts and cost containment efforts.

Financial and Statistical Reporting

The Company provides Affiliated Orthodontists with management and financial
information systems which improve Orthodontic Center efficiencies and provide
cost savings for Orthodontic Center operations. These systems also maintain
greater uniformity in the manner in which services are provided at the
Orthodontic Centers. The Company utilizes information systems which track data
related to the Orthodontic Centers' operations and financial performance. The
Company monitors all expenditures on advertising and reallocates resources
between markets where advertising expenditures need to be increased or
decreased. The Company's

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systems also track new patient cases for each of the Orthodontic Centers to
allow programs to be initiated to better ensure that new patient cases at the
Orthodontic Centers are within projected levels. Billing and collection
information is sent daily by the Orthodontic Centers to the Company for
processing.

The Company also provides Affiliated Orthodontists with monthly operating
data and quarterly financial statements. With the quarterly financial
statements, the Company provides an analysis of the financial results and
recommends changes to improve financial performance of the Orthodontic Center.
This analysis allows the Affiliated Orthodontist and the Company to make
periodic adjustments in marketing and operating the Orthodontic Center.

Purchasing and Distribution

Because of the number of Orthodontic Centers, the Company is able to make
bulk purchases of equipment, office furniture, inventory and supplies in order
to reduce per unit costs. The Company negotiates arrangements with suppliers
that provide cost savings to each of the Orthodontic Centers. Inventory and
supplies are purchased by the Company and distributed on a just-in-time basis
to each Orthodontic Center, thereby limiting storage requirements for
inventory and supplies.

MANAGEMENT INFORMATION SYSTEMS

The Company's operations are supported by the Company's computer system,
including patient scheduling, billing and collection, financial and
statistical reporting, accounting, inventory control and purchasing. The
Company is upgrading its computer system in anticipation of growth in the
number of Affiliated Orthodontists and Orthodontic Centers and in order for
the Company to continue to offer Affiliated Orthodontists efficient management
services. The Company believes that this upgrade will adequately address
computer systems issues relating to the year 2000.

AGREEMENTS WITH AFFILIATED ORTHODONTISTS

The Company provides comprehensive management and marketing services to
Affiliated Orthodontists pursuant to either a service agreement or, in limited
circumstances, a consulting agreement. The selection of either the service
agreement or consulting agreement structure is based upon regulatory
provisions of the particular state in which an Orthodontic Center is located.

Service Agreements

Service agreements are between the Company and an Affiliated Orthodontist.
Pursuant to the service agreement, the Company manages the business and
marketing aspects of Orthodontic Centers, provides capital, facilities and
equipment (including utilities, maintenance and rental), implements a
marketing program, prepares budgets and financial statements, orders and
purchases inventory and supplies, provides a patient scheduling system and
staff, bills and collects patient fees, maintains files and records and
arranges for certain legal and accounting services.

Under a service agreement, the Affiliated Orthodontist pays the Company a
fee equal to approximately 24% of new patient contract balances in the first
month of treatment plus the balance ratably over the remainder of the patient
contracts, less amounts retained by the Affiliated Orthodontists. In addition,
a $25,000 annual fee is earned by the Company for 42 Orthodontic Centers with
respect to which long-term service agreements were entered into with the
Company in connection with the Combination Transaction. Operating expenses of
the Orthodontic Centers are expenses of the Company and are recognized as
incurred. The amounts retained by an Affiliated Orthodontist are dependent on
its financial performance, based in significant part on the Affiliated
Orthodontist's profitability on a cash basis, as provided in the service
agreements.

The service agreements are for terms ranging from 20 to 40 years and may be
terminated by the Company or by the Affiliated Orthodontist only for "cause,"
which includes a material default of or bankruptcy by the

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other party. Upon expiration or termination by either party of a service
agreement, the Affiliated Orthodontist must purchase certain of the related
assets owned by the Company, including all equipment, improvements and
intangible assets, for cash at the then current book value.

The service agreements provide that following termination or expiration of
the employment agreement, the Affiliated Orthodontist will not compete for a
period of two years in an area in which the Affiliated Orthodontist operates
an Orthodontic Center and will limit the methods of advertising in the area in
which the Orthodontic Center is located.

Consulting Agreements

The terms of consulting agreements differ significantly from the terms of
service agreements and will vary depending upon the regulatory requirements of
the particular state in which an Orthodontic Center is located. In a limited
number of states, the Company may provide only consulting services to
orthodontists and may not manage an orthodontist's practice. The consulting
fee payable to the Company is determined at the time of affiliation, is
limited to the consulting services performed and is based on criteria such as
the number of hours of operations of the applicable orthodontic centers.

GOVERNMENT REGULATION

General

The field of orthodontics is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly in the future. In general, regulation of health care companies
is increasing.

Every state imposes licensing and other requirements on individual
orthodontists, and orthodontic facilities and services. In addition, federal
and state laws regulate health maintenance organizations and other managed
care organizations for which orthodontists may be providers. In connection
with its entry into new markets, the Company may become subject to compliance
with additional regulations.

The operations of the Orthodontic Centers must meet federal, state and local
regulatory standards in the areas of safety and health. Historically, those
standards have not had any material adverse effect on the operations of the
Orthodontic Centers. Based on its familiarity with the operations of the
Orthodontic Centers and the activities of the Affiliated Orthodontists,
management believes that the Orthodontic Centers are in compliance in all
material respects with all applicable federal, state and local laws and
regulations relating to safety and health.

State Legislation

The laws of many states prohibit orthodontists from splitting fees with non-
orthodontists and prohibit non-orthodontic entities (such as the Company) from
practicing dentistry, including orthodontics (which in certain states includes
managing or operating an orthodontic office), and from employing orthodontists
or, in certain circumstances, orthodontic assistants. The laws of some states
prohibit advertising of orthodontic services under a trade or corporate name
and require that all advertisements be in the name of the orthodontist. A
number of states also regulate the content of advertisements of orthodontic
services and the use of promotional gift items. A number of states limit the
ability of a non-licensed dentist or non-orthodontist to own or control
equipment or offices used in an orthodontic practice. Some of these states
allow leasing of equipment and office space to an orthodontic practice, under
a bona fide lease, if the equipment and office remain in the complete care and
custody of the orthodontist. Management believes, based on its familiarity
with the operations of the Orthodontic Centers and the activities of the
Affiliated Orthodontists, that the Company's current and planned activities do
not violate these statutes and regulations. There can be no assurance,
however, that future interpretations of such laws, or the enactment of more
stringent laws, will not require structural and organizational modifications
of the Company's existing contractual relationships with the Affiliated
Orthodontists or the operation of the Orthodontic

424B4 36th Page of 72 TOC 1st Previous Next ↓Bottom Just 36th
Centers. In addition, statutes in some states could restrict expansion of
Company operations in those jurisdictions. In response to particular state
regulatory provisions, the Company is required to utilize the management or
consulting agreement structure in certain states. Management plans to use a
form of one of its operating agreements in each of the states in which a
development or acquisition proposal is pending.

Regulatory Compliance

The Company regularly monitors developments in laws and regulations relating
to dentistry. The Company may be required to modify its agreements, operations
and marketing from time to time in response to changes in the business and
regulatory environment. The Company plans to structure all of its agreements,
operations and marketing in accordance with applicable law, although there can
be no assurance that its arrangements will not be successfully challenged or
that required changes may not have a material adverse effect on operations or
profitability.

COMPETITION

The business of providing orthodontic services is highly competitive in each
of the markets in which the Orthodontic Centers operate. Each Affiliated
Orthodontist competes with orthodontists who maintain single offices or
operate a single satellite office, as well as with orthodontists who maintain
group practices or operate in multiple offices. The Orthodontic Centers also
compete with dentists who provide certain orthodontic services. The provision
of orthodontic services by such persons has increased in recent years.

There are other companies currently developing and managing orthodontic
practices on a national basis. There are several companies pursuing similar
strategies in other segments of the health care industry and companies with
similar objectives and substantially greater financial resources may enter the
Company's markets and compete with the Company.

EMPLOYEES

At June 30, 1997, the Company employed 1,406 persons, including 1,109 full-
time employees and 71 employees in the Company's corporate offices. None of
the Company's employees are represented by a collective bargaining agreement.
The Company considers its relationship with its employees to be good. The
Affiliated Orthodontists are not employed by the Company.

LEGAL PROCEEDINGS

The Company does not have any litigation that, separately or in the
aggregate, if adversely determined, would have a material adverse effect on
the Company. The Company and the Affiliated Orthodontists may, from time to
time, be a party to litigation or administrative proceedings which arise in
the normal course of their business. The Affiliated Orthodontists have not
generally performed in the Orthodontic Centers temporal mandibular joint
dysfunction (or "TMJ") procedures, with which substantial litigation has been
associated.

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MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES

The following table sets forth certain information with respect to
directors, executive officers and other key employees of the Company:

[Download Table]

NAME AGE POSITION
---- --- --------

Dr. Gasper Lazzara, Jr. (1)..... 55 Chairman of the Board of Directors, Chief
Executive Officer and Director
Bartholomew F. Palmisano, Sr. 50 Chief Financial Officer, Senior Vice
(1)............................ President, Secretary, Treasurer and
Director
Geoffrey L. Faux................ 41 President and Director
Michael C. Johnsen (1).......... 44 Chief Operating Officer and Director
Edward J. Walters, Jr. (2)(3)... 50 Director
A Gordon Tunstall (2)(3)........ 53 Director
Ashton J. Ryan, Jr. (2)......... 49 Director
Paul J. Spansel................. 37 Executive Vice President and Chief
Administrative Officer
Cynthia A. Harvey............... 40 Vice President of Marketing
Dr. I. R. Lester................ 50 Vice President of Professional Development
Bartholomew F. Palmisano, Jr.... 26 Chief Information Officer
Anthony J. Paternostro.......... 39 Vice President of Insurance Services

--------
(1) Member of Executive Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
(3) Member of Compensation Committee of the Board of Directors.

Dr. Gasper Lazzara, Jr. has served as Chairman of the Board of Directors and
Chief Executive Officer of the Company since its inception, and served as
President of the Company from its inception until June 1997. From 1989 to
October 1994, Dr. Lazzara served as president or managing partner of certain
of the Predecessor Entities. He is a licensed orthodontist and, prior to
founding the Company, maintained a private orthodontic practice for over 25
years. He is a member of the American Association of Orthodontists and is a
Diplomat of the American Board of Orthodontists.

Bartholomew F. Palmisano, Sr. has served as Chief Financial Officer, Senior
Vice President, Secretary, Treasurer and a director of the Company since its
inception. From 1989 to 1994, Mr. Palmisano served as the chief financial
officer of certain of the Predecessor Entities. Mr. Palmisano is a licensed
certified public accountant and attorney.

Geoffrey L. Faux has served as President of the Company since June 1997, and
as a director of the Company since December 1996. Mr. Faux served as Executive
Vice President and Chief Administrative Officer of the Company from September
1996 to June 1997. From 1992 to September 1996, Mr. Faux served as Director,
Investment Banking Group for Prudential Securities Incorporated.

Michael C. Johnsen has served as Chief Operating Officer of the Company
since June 1997 and as a director of the Company since 1994. Mr. Johnsen
served as Vice President of Operations of the Company from its inception until
June 1997. From 1988 to October 1994, Mr. Johnsen served as Vice President of
Operations of certain of the Predecessor Entities. Mr. Johnsen is Dr.
Lazzara's brother-in-law.

424B4 38th Page of 72 TOC 1st Previous Next ↓Bottom Just 38th
Edward J. Walters, Jr. has served as a director of the Company since 1994.
He has been a partner in the law firm of Moore, Walters, Shoenfelt & Thompson
in Baton Rouge, Louisiana since 1976.

A Gordon Tunstall has served as a director of the Company since 1996. He is
the founder and President of Tunstall Consulting, Inc., a provider of
strategic consulting and financial planning services. Mr. Tunstall also serves
as a director of Advanced Lighting Technologies, Inc., Discount Auto Parts,
Inc., L.A.T. Sportswear, Inc. and Romac International, Inc.

Ashton J. Ryan, Jr. has served as a director of the Company since 1996. He
is the President and Chief Executive Officer of First National Bank of
Commerce, New Orleans. Mr. Ryan was formerly a partner with Arthur Anderson &
Co., with which he worked as an accountant from 1971 to 1991.

Paul J. Spansel has served as Executive Vice President and Chief
Administrative Officer of the Company since July 1997. Mr. Spansel served as
Operating Officer of the Company from 1994 to July 1997. He was previously
employed by Texaco, Inc. where he worked in various capacities over a 14 year
period.

Cynthia A. Harvey has served as Vice President of Marketing of the Company
since August 1997. From 1995 to February 1997, Ms. Harvey served as Senior
Product Director of Vistakon, a subsidiary of Johnson & Johnson, and from 1990
to 1995, Ms. Harvey served as Director of Marketing of Neutrogena Corporation,
another subsidiary of Johnson & Johnson.

Dr. I. R. Lester has served as the Company's Vice President of Professional
Development since June 1997, and as a member of the Company's Professional
Development Department since October 1996. Dr. Lester is a licensed dentist
and maintained a private general dentistry practice in Florida from 1982
through 1996.

Bartholomew F. Palmisano, Jr. has served as Chief Information Officer of the
Company since December 1993 and has been employed with the Company since
December 1992. He earned a B.A. in Economics and graduated with honors from
Stanford University in 1992. He was employed as an accountant with Arthur
Andersen & Co. in 1992. Mr. Palmisano is the son of Bartholomew F. Palmisano,
Sr.

Anthony J. Paternostro has served as Vice President of Insurance Services of
the Company since April 1997 and has been employed with the Company since June
1996. From 1991 to 1996, Mr. Paternostro served as Director of Design Services
for Pilot Corporation, a national fuel retailer.

COMPOSITION AND COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors is divided into three classes of directors and is
comprised of seven persons as of the date of this Prospectus. Each class
serves for a term of three years and consists, as nearly as practicable, of
one-third of the total number of directors serving on the Board of Directors.
The Executive Committee of the Board of Directors acts on behalf of the Board
of Directors on all matters concerning the management and conduct of the
business and affairs of the Company except those matters that cannot by law be
delegated by the Board of Directors. The Audit Committee of the Board of
Directors selects and engages on behalf of the Company, subject to the
approval of the stockholders, a firm of certified public accountants whose
duty it is to audit the books and accounts of the Company for the fiscal year
in which they are appointed, and who also report to the Audit Committee. The
Audit Committee is also responsible for determining that the business
practices and conduct of employees and other representatives of the Company
comply with the Company's policies and procedures. The Compensation Committee
of the Board of Directors establishes a general compensation policy for the
Company and has responsibility for approval of increases in directors' fees
and in salaries paid to officers and senior employees earning in excess of an
annual base salary of $75,000. The Compensation Committee also administers the
Company's employee benefit plans, including the Company's three stock option
plans.

KEY EMPLOYEE STOCK PURCHASE PLAN

The Company recently implemented the Orthodontic Centers of America, Inc.
1997 Key Employee Stock Purchase Plan (the "Plan") to encourage ownership of
the Company's Common Stock by executive officers and other key employees of
the Company and thereby align their interests with those of the Company's
stockholders. Under the Plan, from time to time, the Company's executive
officers and certain other key employees will be

424B4 39th Page of 72 TOC 1st Previous Next ↓Bottom Just 39th
permitted to purchase (from the Company, in this offering or on the open
market, as determined by the Company) shares of the Company's Common Stock
with an aggregate value of up to five times the applicable employee's annual
base salary. The purchase price of such shares will equal, with respect to
initial purchases under the Plan, the public offering price set forth on the
cover page of this Prospectus, and thereafter, the reported last sale price
per share of Common Stock on the business day immediately preceding the date
of purchase.

For each employee participating in the Plan, the Company will finance 50% of
the purchase price through a loan from the Company. Each such loan will be
evidenced by a promissory note and will be a full recourse obligation of the
employee, secured by all of the shares of Common Stock acquired by the
employee in connection with the loan. Each such loan will bear a market rate
of interest and the outstanding principal and accrued interest under the loan
will be payable, in one lump-sum payment, on the earlier of (i) the fifth
anniversary of the date of the loan or (ii) termination of the applicable
employee's employment with the Company. A proportionate amount of the
outstanding principal and accrued interest under the loan will be payable upon
the sale or transfer by the employee of shares of Common Stock purchased in
connection with the loan.

The Plan includes a risk sharing provision, whereby during their term of
employment with the Company a participating employee will be responsible for
100% of any losses, but is entitled to only 50% of any gains (with the Company
being entitled to the other 50% of such gains), occurring with respect to the
sale by the employee of shares of Common Stock purchased under the Plan and
held for less than three years. In addition, with respect to the sale by the
employee of shares purchased under the Plan and held for more than three but
less than five years, the employee will be entitled to 100% of any gains and
the principal amount of the loan to the employee from the Company will be
reduced by 50% of any losses during the term of the employee's employment with
the Company.

Upon the purchase of Common Stock by an employee under the Plan, the Company
will also grant options to such employee under the Company's 1994 Incentive
Stock Plan to purchase an aggregate of three times the number of shares of
Common Stock so purchased. The options will be exercisable beginning on the
seventh anniversary of the date of grant at an exercise price equal to the
purchase price paid in the purchase to which the options relate. If, however,
on the fifth anniversary of the date of grant, the employee is employed by the
Company and has repaid in full all indebtedness to the Company and its
affiliates incurred in connection with such purchase, the exercise date of a
proportionate number of options (equal to three times the number of shares of
Common Stock purchased under the Plan in connection with the grant of the
options and held by the employee on such fifth anniversary) will be
accelerated to such fifth anniversary.

The Company anticipates that 15 of the Company's executive officers and
other key employees will initially participate in the Plan, by purchasing an
aggregate of up to 294,992 shares of Common Stock in this offering. It is also
anticipated that Dr. Lazzara and Mr. Palmisano will personally finance 50% of
the purchase price of such shares, on terms comparable to the loan from the
Company, for the remainder of the purchase price. The following table sets
forth certain information regarding these purchases:

[Enlarge/Download Table]

NUMBER OF
NUMBER OF NUMBER OF SHARES SUBJECT NUMBER OF
SHARES TO BE SHARES TO OPTIONS TO SHARES SUBJECT TO
PURCHASED UNDER CURRENTLY BE GRANTED UNDER OPTIONS CURRENTLY
NAME THE PLAN OWNED THE PLAN HELD
---- --------------- --------- ---------------- -----------------

Geoffrey L. Faux........ 56,338 1,000 169,014 130,000
Michael C. Johnsen...... 56,338 6,400 169,014 183,898
Paul J. Spansel......... 45,070 -- 135,210 64,950
Cynthia A. Harvey....... 14,366 -- 43,098 5,000
Dr. I.R. Lester......... 14,197 -- 42,591 --
Bartholomew F.
Palmisano, Jr. ........ 15,211 -- 45,633 39,928
Anthony J. Paternostro.. 28,169 -- 84,507 25,150
Other Key Employees
(eight persons)........ 65,303 1,781 195,909 202,984
------- ----- ------- -------
Total................. 294,992 9,181 884,976 651,910
======= ===== ======= =======

424B4 40th Page of 72 TOC 1st Previous Next ↓Bottom Just 40th
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding beneficial ownership of
the Company's Common Stock as of September 30, 1997, before and after giving
effect to the sale of the shares of Common Stock offered hereby, by (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock; (ii) the Selling Stockholders; (iii) each
director of the Company and (iv) all directors and executive officers of the
Company as a group.

[Download Table]

SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY
PRIOR TO THE SHARES OWNED AFTER THE
OFFERING (1) BEING OFFERING (1)(2)
NAME OF ------------------ OFFERED -----------------
BENEFICIAL OWNER NUMBER PERCENT (1) NUMBER PERCENT
---------------- ---------- ------- --------- --------- -------

Dr. Gasper Lazzara, Jr. (3)..... 6,360,460 14.5% 1,068,974 5,291,486 11.4%
Bartholomew F. Palmisano, Sr.
(4)............................ 4,112,463 9.4 1,068,974 3,043,489 6.5
Geoffrey L. Faux (5)............ 107,338 * -- 107,338 *
Michael C. Johnsen (6).......... 116,836 * -- 116,836 *
Edward J. Walters, Jr. (7)...... 5,400 * -- 5,400 *
A Gordon Tunstall............... 5,000 * -- 5,000 *
Ashton J. Ryan, Jr.............. 1,200 * -- 1,200 *
All Executive Officers and Di-
rectors as a Group
(seven persons)................ 10,541,923 24.0 2,137,948 8,403,975 18.0
Dr. Joseph A. Asercion.......... 278,244 * 53,648 224,596 *
Dr. Dennis Buchman (8).......... 177,684 * 27,399 150,285 *
Dr. Charles E. Cauble........... 476,156 * 15,000 461,156 *
Dr. John S. Clark............... 89,908 * 17,982 71,926 *
Dr. Delbert E. Hale II.......... 335,540 * 69,159 271,381 *
Dr. Michael R. Hebert........... 202,496 * 40,499 161,997 *
Dr. J. Jeff Kincaid............. 256,668 * 40,000 216,668 *
Dr. Richard H. Maness........... 74,764 * 14,953 59,811 *
Dr. Michael F. McCarthy......... 231,256 * 20,000 211,256 *
Dr. Jean-Pierre Pontier......... 106,060 * 24,289 81,771 *
Carol Shoopak................... 191,597 * 38,453 153,144 *
Dr. Scott T. Suter.............. 95,228 * 19,046 76,182 *
Dr. Terry Tippin................ 228,908 * 45,782 183,126 *
Dr. David L. Wyatt.............. 182,396 * 35,842 146,554 *
Pilgrim Baxter & Associates,
Ltd. (9)(10)................... 4,318,700 9.8 -- 4,318,700 9.3
The Capital Group Companies,
Inc. and Capital Research and
Management Company (10)(11).... 2,335,000 5.3 -- 2,335,000 5.0
T. Rowe Price Associates, Inc.
(10)(12)....................... 2,324,100 5.3 -- 2,324,100 5.0

--------
* Less than 1%.
(1) In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options held by that person which are currently exercisable or which will
become exercisable within 60 days following September 30, 1997 are deemed
to be outstanding. Such shares, however, are not deemed outstanding for
the purposes of computing the percentage ownership of any other person.
Except as otherwise indicated in a footnote to this table, the persons in
this table have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them.
(2) Certain Selling Stockholders have granted an option to the Underwriters
to purchase up to an aggregate of 780,000 shares of Common Stock to cover
over-allotments, if any. Such shares will not be sold unless the
Underwriters exercise the over-allotment option, and the above table
assumes that such over-allotment option will not be exercised. If the
Underwriters' over-allotment option is exercised in full, Dr. Lazzara
would sell an additional 362,951 shares, which would result in Dr.
Lazzara beneficially owning 4,928,535 shares of Common Stock or 10.6% of
the shares of Common Stock outstanding, Mr. Palmisano would sell an
additional 362,951 shares, which would result in Mr. Palmisano
beneficially owning 2,680,538 shares of Common Stock or 5.8% of the
shares of Common Stock outstanding and Mr. Johnsen would sell 54,098
shares, which would result in Mr. Johnsen owning 62,738 shares of Common
Stock.

424B4 41st Page of 72 TOC 1st Previous Next ↓Bottom Just 41st
(3) The business address of Dr. Lazzara is 5000 Sawgrass Village Circle,
Suite 25, Ponte Vedra Beach, Florida 32082. In connection with the
settlement of litigation initiated by two orthodontists against the
Company, the orthodontists entered into a voting trust agreement which
provides that, until the later of the time at which the orthodontists own
no shares of Common Stock or October 18, 2004, Dr. Lazzara or a designee
of Dr. Lazzara may vote the shares of the orthodontists. Such
orthodontists hold 889,593 shares of Common Stock which are included in
the table. Dr. Lazzara disclaims beneficial ownership of such shares. Of
the shares deemed beneficially owned by Dr. Lazzara, (i) 151,832 shares
are held by the Gasper and Irene Lazzara Charitable Foundation, of which
Dr. Lazzara and his spouse are the trustees, (ii) 200,000 shares are held
by OCAI Two Limited Partnership, (iii) an aggregate of 685,016 shares are
held in separate trusts by a third party trustee for the benefit of each
of Dr. Lazzara's children and (iv) 1,100,000 shares are held by Ponte
Vedra (1997) Long Term Trust Agreement UTA dtd. 10/30/97. Dr. Lazzara
disclaims beneficial ownership of these shares.
(4) The business address of Mr. Palmisano is 3850 N. Causeway, Suite 990,
Metairie, Louisiana 70002. Of the shares deemed beneficially owned by Mr.
Palmisano, an aggregate of 707,016 shares are held in separate trusts by
a third party trustee for the benefit of each of Mr. Palmisano's children
and 1,358,025 shares are held by Beau Lac (1997) Long Term Trust
Agreement UTA dtd. 10/30/97. Mr. Palmisano disclaims beneficial ownership
of these shares.
(5) Includes options that are currently exercisable to purchase 50,000 shares
of Common Stock and 56,338 shares to be purchased by Mr. Faux in this
offering under the Plan. Mr. Faux holds options to purchase an additional
80,000 shares of Common Stock that are not included in the table above.
(6) Includes options to purchase 54,098 shares of Common Stock that are
exercisable within 60 days following September 30, 1997 and 56,338 shares
to be purchased by Mr. Johnsen in this offering under the Plan. Mr.
Johnsen holds options to purchase an additional 129,800 shares of Common
Stock that are not included in the table above.
(7) Includes options that are currently exercisable to purchase 2,400 shares
of Common Stock.
(8) Shares are held by spouse, Caren Buchman.
(9) The business address is 1255 Drummers Lane, Suite 300, Wayne,
Pennsylvania 19087.
(10) As disclosed in Schedule 13G filed with the Commission.
(11) The business address is 333 South Hope Street, Los Angeles, California
90071.
(12) The business address is 100 East Pratt Street, Baltimore, Maryland 21202.

424B4 42nd Page of 72 TOC 1st Previous Next ↓Bottom Just 42nd
DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company is authorized to issue 100,000,000 shares of Common Stock, $.01
par value per share, and 10,000,000 shares of preferred stock, $.01 par value
per share (the "Preferred Stock"). At June 30, 1997, 43,999,804 shares of
Common Stock were issued and outstanding and no shares of Preferred Stock were
outstanding.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. Stockholders have no right to cumulate
their votes in the election of directors. Accordingly, holders of a majority
of the shares of Common Stock entitled to vote in any election of directors
may elect all of the directors standing for election. Holders of Common Stock
are entitled to receive dividends and other distributions when, as and if
declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, including all distributions to holders of Preferred Stock having
a liquidation preference over the Common Stock.

PREFERRED STOCK

The Board of Directors has the authority, without any further vote or action
of the stockholders of the Company, to issue shares of the Preferred Stock in
one or more series and to determine the relative rights and preferences of the
shares of any such series.

LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS

The Company's Restated Certificate of Incorporation and Bylaws provide for
indemnification of the officers and directors of the Company to the fullest
extent permitted by Delaware law, including some instances in which
indemnification is otherwise discretionary under Delaware law. The Certificate
of Incorporation contains provisions that eliminate the personal liability of
the Company's directors for monetary damages resulting from breaches of their
fiduciary duty other than liability for breaches of the director's duty of
loyalty to the Company or its stockholders, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
violations under Section 174 of the Delaware General Corporation Act, or for
any transaction from which the director derived an improper personal benefit.
The Company believes that these provisions are essential to attracting and
retaining qualified persons as officers and directors.

Currently, there is no pending litigation or proceeding involving a director
or officer of the Company as to which indemnification is being sought, nor is
the Company aware of any threatened litigation that may result in claims for
indemnification by any officer or director.

ANTI-TAKEOVER PROVISIONS

Section 203 of the Delaware General Corporation Law prevents an "interested
stockholder" (defined in Section 203, generally, as a person owning 15% or
more of a corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with a publicly-held Delaware
corporation for three years following the date such person became an
interested stockholder unless (i) before such person became an interested
stockholder, the board of directors of the corporation approved the
transaction in which the interested stockholder became an interested
stockholder or approved the business combination; (ii) upon consummation of
the transaction that resulted in the interested stockholder's becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time of the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by

424B4 43rd Page of 72 TOC 1st Previous Next ↓Bottom Just 43rd
employee stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer); or (iii) following the transaction in which such
person became an interested stockholder, the business combination is approved
by the board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of 66 2/3% of the
outstanding voting stock of the corporation not owned by the interested
stockholder.

Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws may make a change in the control of the Company difficult to
effect, even if a change in control were in the stockholders' interest. These
provisions include certain super-majority vote requirements to remove
directors and to amend certain provisions of the Company's Restated
Certificate of Incorporation. In addition, the Company's Restated Certificate
of Incorporation allows the Board of Directors to determine the terms of the
Preferred Stock which may be issued by the Company without approval of the
holders of the Common Stock. The ability of the Company to issue Preferred
Stock in such manner could enable the Board of Directors to prevent changes in
management and control of the Company. The Board of Directors is divided into
three classes of directors, with directors being elected for staggered three-
year terms. Such staggered terms may affect the ability of the holders of the
Common Stock to change control of the Company.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is First Union
National Bank.

424B4 44th Page of 72 TOC 1st Previous Next ↓Bottom Just 44th
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding
approximately 46,600,000 shares of Common Stock, of which the 5,200,000 shares
sold in this offering (5,980,000 shares if the Underwriters' over-allotment
option is exercised in full), and shares sold in the Company's prior public
offerings will be freely tradeable without restriction or further registration
under the Securities Act, except for those shares held by "affiliates" (as
defined in the Securities Act) of the Company.

Holders of 14,736,770 shares currently are eligible to sell such shares
pursuant to Rule 144, subject to the manner of sale, volume, notice and
information requirements of Rule 144. Of these shares, 3,176,034 are subject
to restrictions on transfer as a result of agreements entered into with the
Company in connection with the Combination Transaction. Of such shares,
640,676 shares may not be offered, sold or otherwise transferred prior to
October 1998 without a waiver of the restrictions by the Company or
registration under the Securities Act. In October of each of 1998 and 1999,
one-half of such shares will be released from these restrictions. The
remaining 2,535,358 shares may not be offered, sold or otherwise transferred
prior to December 1997, without a waiver of the restrictions by the Company or
registration under the Securities Act. In December of each of 1997 through
2001, 20% of such shares will be released from these restrictions. The Company
has agreed not to waive compliance with these restrictions for a period of 90
days following the date of this Prospectus without the prior written consent
of Morgan Stanley and Co. Incorporated, on behalf of the Underwriters.

In addition, 6,000,000 shares of Common Stock are authorized under the
Company's three stock option plans for grants and exercises of stock options
or issuances of restricted stock granted by the Company, of which 2,172,036
shares are issuable upon the exercise of stock options which are currently
outstanding but not exercisable and 112,836 shares are issuable upon the
exercise of stock options which are currently outstanding and exercisable. The
Company has filed registration statements with the Commission registering
shares of Common Stock issuable under its stock option plans. For information
concerning the Company's 1997 Key Employee Stock Purchase Plan, see
"Management--Key Employee Stock Purchase Plan." The Company intends to issue
its equity securities from time to time in connection with the development and
acquisition of new Orthodontic Centers. Such securities may be issued pursuant
to a shelf registration statement filed with the Commission or in transactions
exempt from registration.

Each of the Company, the Company's directors and executive officers and the
Selling Stockholders has agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 90 days after the date of this Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer, lend or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock or (ii) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The
restrictions described in this paragraph do not apply to (x) the sale of
shares of Common Stock offered hereby to the Underwriters, (y) the issuance by
the Company of shares of Common Stock upon the exercise of an option or a
warrant or the conversion of a security outstanding on the date of this
Prospectus of which the Underwriters have been advised in writing or (z)
transactions by any person other than the Company relating to shares of Common
Stock or other securities acquired in open market transactions after the
completion of the offering of the shares of Common Stock offered hereby. See
"Underwriters."

424B4 45th Page of 72 TOC 1st Previous Next ↓Bottom Just 45th
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES FOR NON-UNITED STATES HOLDERS

GENERAL

The following discussion concerns the material United States federal income
and estate tax consequences of the ownership and disposition of shares of
Common Stock applicable to Non-U.S. Holders of such shares of Common Stock. In
general, a "Non-U.S. Holder" is any holder other than (i) a citizen or
resident, as specifically defined for U.S. federal income and estate tax
purposes, of the United States, (ii) a corporation, partnership or any entity
treated as a corporation or partnership for U.S. federal income tax purposes
created or organized in the United States or under the laws of the United
States or of any State thereof (including the District of Columbia), (iii) an
estate the income of which is includible in gross income for United States
federal income tax purposes regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary jurisdiction over
the trust's administration and one or more United States persons have the
authority to control all the substantial decisions of such trust. The
discussion is based on current law, which is subject to change retroactively
or prospectively, and is for general information only. The discussion does not
address all aspects of United States federal income and estate taxation and
does not address any aspects of state, local or foreign tax laws. The
discussion does not consider any specific facts or circumstances that may
apply to a particular Non-U.S. Holder. Accordingly, prospective investors are
urged to consult their tax advisors regarding the current and possible future
United States federal, state, local and non-U.S. income and other tax
consequences of holding and disposing of shares of Common Stock.

DIVIDENDS

The Company does not intend to declare or pay any cash dividends for the
foreseeable future. See "Price Range of Common Stock and Dividend Policy."

In general, dividends paid to a Non-U.S. Holder will be subject to United
States withholding tax at a 30% rate (or a lower rate as may be specified by
an applicable tax treaty) unless the dividends are (i) effectively connected
with a trade or business carried on by the Non-U.S. Holder within the United
States or (ii) if a tax treaty applies, attributable to a United States
permanent establishment or, in the case of an individual, a fixed base in the
United States, maintained by the Non-U.S. Holder. Dividends effectively
connected with such a trade or business or, if a tax treaty applies,
attributable to such permanent establishment or fixed base will generally not
be subject to withholding (if the Non-U.S. Holder files certain forms annually
with the payor of the dividend) but generally will be subject to United States
federal income tax on a net income basis at regular graduated individual or
corporate rates. In the case of a Non-U.S. Holder that is a corporation, such
effectively connected income also may be subject to the branch profits tax
(which is generally imposed on a foreign corporation on the deemed
repatriation from the United States of effectively connected earnings and
profits) at a 30% rate or such lower rate as may be specified by an applicable
income tax treaty. The branch profits tax may not apply if the recipient is a
qualified resident of certain countries with which the United States has an
income tax treaty.

To determine the applicability of a tax treaty providing for a lower rate of
withholding, dividends paid to an address in a foreign country are presumed
under current United States Treasury Regulations to be paid to a resident of
that country, unless the payor has definite knowledge that such presumption is
not warranted or an applicable tax treaty (or United States Treasury
Regulations thereunder) requires some other method for determining a Non-U.S.
Holder's residence. However, under proposed regulations, in the case of
dividends (paid after December 31, 1997 or after December 31, 1999 in the case
of dividends paid to accounts in existence on or before the date that is 60
days after the proposed regulations are published as final regulations), a
Non-U.S. Holder generally would be subject to United States withholding tax at
a 31% rate under the backup withholding rules described below, rather than at
a 30% rate or at a reduced rate under an income tax treaty, unless certain
certification procedures (or, in the case of payments made outside the United
States with respect to an offshore account, certain documentary evidence
procedures) are complied with, directly or through an intermediary. Under
current regulations, the Company must report annually to the United States
Internal Revenue Service (the

424B4 46th Page of 72 TOC 1st Previous Next ↓Bottom Just 46th
"IRS") and to each Non-U.S. Holder the amount of dividends paid to, and the
tax withheld with respect to, each Non-U.S. Holder. These reporting
requirements apply regardless of whether withholding was reduced or eliminated
by an applicable tax treaty. Copies of these information returns also may be
made available under the provisions of a specific treaty or agreement with the
tax authorities of the country in which the Non-U.S. Holder resides.

A Non-U.S. Holder that is eligible for a reduced rate of United States
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund
with the IRS.

SALE OF COMMON STOCK

Generally, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon the sale or other disposition of such
holder's shares of Common Stock unless (i) the gain is effectively connected
with a trade or business carried on by the Non-U.S. Holder within the United
States and, if a tax treaty applies, the gain is attributable to a permanent
establishment or a fixed base maintained by the Non-U.S. Holder in the United
States; (ii) the Non-U.S. Holder is an individual who holds the shares of
Common Stock as a capital asset and is present in the United States for 183
days or more in the taxable year of the disposition, and either (a) such Non-
U.S. Holder has a "tax home" (as specifically defined for U.S. federal income
tax purposes) in the United States (unless the gain from disposition is
attributable to an office or other fixed place of business maintained by such
non-U.S. Holder in a foreign country and a foreign tax equal to at least 10%
of such gain has been paid to a foreign country), or (b) the gain from the
disposition is attributable to an office of other fixed place of business
maintained by such Non-U.S. Holder in the United States; (iii) the Non-U.S.
Holder is subject to tax pursuant to the provisions of U.S. tax law applicable
to certain United States expatriates or (iv) the Company is or has been during
certain periods a "U.S. real property holding corporation" for U.S. federal
income tax purposes (which the Company does not believe that it has been,
currently is or is likely to become) and, assuming that the Common Stock is
deemed for tax purposes to be "regularly traded on an established securities
market," the Non-U.S. Holder held, at any time during the five-year period
ending on the date of disposition (or such shorter period that such shares
were held), directly or indirectly, more than five percent of the Common
Stock.

ESTATE TAX

Shares of Common Stock owned or treated as owned by an individual who is not
a citizen or resident (as specially defined for United States federal estate
tax purposes) of the United States at the time of death will be includible in
the individual's gross estate for United States federal estate tax purposes,
unless an applicable tax treaty provides otherwise, and may be subject to
United States federal estate tax.

BACKUP WITHHOLDING AND INFORMATION REPORTING

As a general rule, under current United States federal income tax law,
backup withholding tax (which generally is a withholding tax imposed at the
rate of 31% on certain payments to persons that fail to furnish the
information required under the U.S. information reporting requirements) and
information reporting requirements apply to the actual and constructive
payment of dividends. The United States backup withholding tax and information
reporting requirements generally, under current regulations, will not apply to
dividends paid on Common Stock to a Non-U.S. Holder at an address outside the
United States, unless the payor has knowledge that the payee is a U.S. person.
Backup withholding and information reporting generally will apply to dividends
paid on Common Stock to addresses inside the United States to beneficial
owners that are not entitled to an exemption, as discussed above and that fail
to provide in the manner required certain identifying information. However,
under proposed regulations, in the case of dividends paid after December 31,
1997, a Non-U.S. Holder generally would be subject to backup withholding at a
31% rate, unless certain certification procedures (or, in the case of payments
made outside the United States with respect to an offshore account, certain
documentary evidence procedures) are complied with, directly or through an
intermediary.

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The payment of the proceeds from the disposition of shares of Common Stock
to or through the United States office of a broker will be subject to
information reporting and backup withholding unless the holder, under
penalties of perjury, certifies, among other things, its status as a Non-U.S.
Holder, or otherwise establishes an exemption. Generally, the payment of the
proceeds from the disposition of shares of Common Stock to or through a non-
U.S. office of a non-U.S. broker will not be subject to backup withholding and
will not be subject to information reporting. In the case of the payment of
proceeds from the disposition of shares of Common Stock to or through a non-
U.S. office of a broker that is a U.S. person or a "U.S.-related person,"
existing regulations require (i) backup withholding if the broker has actual
knowledge that the owner is not a Non-U.S. Holder, and (ii) information
reporting on the payment unless the broker receives a statement from the
owner, signed under penalties of perjury, certifying, among other things, its
status as a Non-U.S. Holder, or the broker has documentary evidence in its
files that the owner is a Non-U.S. Holder and the broker has no actual
knowledge to the contrary. For this purpose, a "U.S.-related person" is (i) a
"controlled foreign corporation" for United States federal income tax purposes
or (ii) a foreign person 50% or more of whose gross income from all sources
for the three-year period ending with the close of its taxable year preceding
the payment (or for such part of the period that the broker has been in
existence) is derived from activities that are effectively connected with the
conduct of a United States trade or business. The IRS recently proposed
regulations addressing the withholding and information reporting rules which
could affect the treatment of the payment of proceeds discussed above. Non-
U.S. Holders should consult their tax advisors regarding the application of
these rules to their particular situations, the availability of an exemption
therefrom, the procedure for obtaining such an exemption, if available, and
the possible application of the proposed regulations addressing the
withholding and information reporting rules.

Backup withholding is not an additional tax. Any amounts withheld from a
payment to a Non-U.S. Holder under the backup withholding rules will be
allowed as a credit against such holder's United States federal income tax
liability, if any, provided that such holder files the required information or
appropriate claim for refund with the IRS.

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UNDERWRITERS

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below for whom Morgan Stanley & Co. Incorporated, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Prudential Securities Incorporated
and Smith Barney Inc. are acting as U.S. Representatives, and the
International Underwriters named below for whom Morgan Stanley & Co.
International Limited, Merrill Lynch International, Prudential-Bache
Securities (U.K.) Inc. and Smith Barney Inc. are acting as International
Representatives, have severally agreed to purchase, and the Company and the
Selling Stockholders have agreed to sell to them, severally, the respective
number of shares of Common Stock set forth opposite the names of such
Underwriters below:

[Download Table]

NUMBER OF
NAME SHARES
---- ---------

U.S. Underwriters:
Morgan Stanley & Co. Incorporated............................. 715,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................... 715,000
Prudential Securities Incorporated............................ 715,000
Smith Barney Inc. ............................................ 715,000
Advest, Inc. ................................................. 50,000
Robert W. Baird & Co. Incorporated............................ 50,000
Sanford C. Bernstein & Co., Inc. ............................. 50,000
BT Alex Brown Incorporated.................................... 100,000
Cowen & Company............................................... 50,000
A.G. Edwards & Sons, Inc. .................................... 100,000
EVEREN Securities, Inc. ...................................... 50,000
Furman Selz LLC............................................... 100,000
GS2 Securities, Inc. ......................................... 50,000
Hambrecht & Quist LLC......................................... 100,000
Interstate/Johnson Lane Corporation........................... 50,000
Johnson Rice & Company L.L.C. ................................ 50,000
Edward D. Jones, L.P.......................................... 50,000
NationsBanc Montgomery Securities, Inc. ...................... 100,000
Oppenheimer & Co., Inc. ...................................... 100,000
Piper Jaffray Inc. ........................................... 50,000
Rauscher Pierce Refsnes, Inc. ................................ 50,000
Raymond James & Associates, Inc. ............................. 50,000
The Robinson-Humphrey Company, LLC............................ 50,000
Wheat, First Securities, Inc. ................................ 50,000
---------
Subtotal.................................................... 4,160,000
---------
International Underwriters:
Morgan Stanley & Co. International Limited.................... 260,000
Merrill Lynch International................................... 260,000
Prudential-Bache Securities (U.K.) Inc. ...................... 260,000
Smith Barney Inc. ............................................ 260,000
---------
Subtotal.................................................... 1,040,000
---------
Total..................................................... 5,200,000
=========

The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively
referred to as the "Underwriters" and the "Representatives,"

424B4 49th Page of 72 TOC 1st Previous Next ↓Bottom Just 49th
respectively. The Underwriting Agreement provides that the obligations of the
several Underwriters to pay for and accept delivery of the shares of Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated
to take and pay for all of the shares of Common Stock offered hereby (other
than those covered by the U.S. Underwriters' over-allotment option described
below) if any such shares are taken.

Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined herein) for the account of anyone
other than a United States or Canadian Person (as defined herein) and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly,
any Shares or distribute any prospectus relating to the Shares outside the
United States or Canada or to anyone other than a United States or Canadian
Person. Pursuant to the Agreement between U.S. and International Underwriters,
each International Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any Shares for the account of any United
States or Canadian Person and (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any Shares or distribute any prospectus
relating to the Shares in the United States or Canada or to any United States
or Canadian Person. With respect to any Underwriter that is a U.S. Underwriter
and an International Underwriter, the foregoing representations and agreements
(i) made by it in its capacity as a U.S. Underwriter apply only to it in its
capacity as a U.S. Underwriter and (ii) made by it in its capacity as an
International Underwriter apply only to it in its capacity as an International
Underwriter. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement
between U.S. and International Underwriters. As used herein, "United States or
Canadian Person" means any national or resident of the United States or
Canada, or any corporation, pension, profit-sharing or other trust or other
entity organized under the laws of the United States or Canada or of any
political subdivision thereof (other than a branch located outside the United
States and Canada of any United States or Canadian Person), and includes any
United States or Canadian branch of a person who is otherwise not a United
States or Canadian Person. All shares of Common Stock to be purchased by the
Underwriters under the Underwriting Agreement are referred to herein as the
"Shares."

Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of
any number of Shares as may be mutually agreed. The per share price of any
Shares so sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per
share amount of the concession to dealers set forth below.

Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has
agreed not to offer or sell, any Shares, directly or indirectly, in any
province or territory of Canada or to, or for the benefit of, any resident of
any province or territory of Canada in contravention of the securities laws
thereof and has represented that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made.
Each U.S. Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing
such Shares, such dealer represents and agrees that it has not offered or
sold, and will not offer or sell, directly or indirectly, any of such Shares
in any province or territory of Canada or to, or for the benefit of, any
resident of any province or territory of Canada in contravention of the
securities laws thereof and that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer of sale is made,
and that such dealer will deliver to any other dealer to whom it sells any of
such Shares a notice containing substantially the same statement as is
contained in this sentence.

Pursuant to the Agreement between U. S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not
offered or sold and, prior to the date six months after the closing date for
the sale of the Shares to the International Underwriters, will not offer or
sell, any Shares to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing

424B4 50th Page of 72 TOC 1st Previous Next ↓Bottom Just 50th
or disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995; (ii) it has complied and
will comply with all applicable provisions of the Financial Services Act of
1986 with respect to anything done by it in relation to the Shares in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received
by it in connection with the offering of the Shares to a person who is of a
kind described in Article 11(3) of the Financial Services Act of 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom
such document may otherwise lawfully be issued or passed on.

Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or
sales to Japanese International Underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and
Exchange Law and otherwise in compliance with applicable provisions of
Japanese law. Each International Underwriter has further agreed to send to any
dealer who purchases from it any of the Shares a notice stating in substance
that, by purchasing such Shares, such dealer represents and agrees that it has
not offered or sold, and will not offer or sell, any of such Shares, directly
or indirectly, in Japan or to or for the account of any resident thereof
except for offers or sales to Japanese International Underwriters or dealers
and except pursuant to any exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with applicable
provisions of Japanese law, and that such dealer will send to any other dealer
to whom it sells any of such Shares a notice containing substantially the same
statement as is contained in this sentence.

The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $.56 a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of $.10 a share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.

Certain of the Selling Stockholders have granted to the U.S. Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase
up to an aggregate of 780,000 additional shares of Common Stock at the public
offering price set forth on the cover page hereof, less underwriting discounts
and commissions. The U.S. Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Common Stock offered hereby. To the extent such
option is exercised, each U.S. Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as the number set forth next to such U.S.
Underwriter's name in the preceding table bears to the total number of shares
of Common Stock set forth next to the names of all U.S. Underwriters in the
preceding table.

Each of the Company and the directors, executive officers and certain other
stockholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will
not, during the period ending 90 days after the date of this Prospectus, (i)
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer, lend or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The
restrictions described in this paragraph do not apply to (x) the sale of
Shares to the Underwriters, (y) the issuance by the Company of shares of
Common Stock upon the exercise of an option or a warrant or the conversion of
a security

424B4 51st Page of 72 TOC 1st Previous Next ↓Bottom Just 51st
outstanding on the date of this Prospectus of which the Underwriters have been
advised in writing or (z) transactions by any person other than the Company
relating to shares of Common Stock or other securities acquired in open market
transactions after the completion of the offering of the Shares.

In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Stock in the offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.

The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.

At the request of the Company, the Underwriters have reserved 294,992 shares
of Common Stock for sale at the public offering price to certain key employees
of the Company pursuant to the Company's 1997 Key Employee Stock Purchase
Plan. The number of shares available for sale to the general public will be
reduced to the extent such individuals purchase such reserved shares. Any
reserved shares not so purchased will be released for sale by the Underwriters
to the general public no later than the closing date of the offering on the
same terms as the other shares offered hereby. See "Management--Key Employee
Stock Purchase Plan."

LEGAL MATTERS

Certain legal matters with respect to the validity of the shares of Common
Stock are being passed upon for the Company and the Selling Stockholders by
Waller Lansden Dortch & Davis, A Professional Limited Liability Company,
Nashville, Tennessee, special counsel to the Company and the Selling
Stockholders. Certain legal matters will be passed upon for the Underwriters
by King & Spalding, Atlanta, Georgia.

EXPERTS

The consolidated financial statements of Orthodontic Centers of America,
Inc. at December 31, 1995 and 1996, and for each of the three years in the
period ended December 31, 1996, appearing in this Prospectus and Registration
Statement and in Orthodontic Centers of America Inc.'s Annual Report (Form 10-
K) for the year ended December 31, 1996, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein and included in Orthodontic Centers of America, Inc.'s Annual
Report (Form 10-K) and incorporated herein by reference. Such consolidated
financial statements are included and incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.

424B4 52nd Page of 72 TOC 1st Previous Next ↓Bottom Just 52nd
ORTHODONTIC CENTERS OF AMERICA, INC.

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(UNAUDITED)

INDEX

[Download Table]

PAGE
----

Report of Independent Auditors............................................ F-2
Consolidated Financial Statements
Consolidated Balance Sheets--December 31, 1995 and 1996 and June 30, 1997
(Unaudited)............................................................. F-3
Consolidated Statements of Income--Years ended December 31, 1994, 1995
and 1996 and Six Months Ended June 30, 1996 (Unaudited) and 1997
(Unaudited)............................................................. F-4
Consolidated Statements of Equity--Years ended December 31, 1994, 1995
and 1996 and Six Months Ended June 30, 1997 (Unaudited)................. F-5
Consolidated Statements of Cash Flows--Years ended December 31, 1994,
1995 and 1996 and Six Months Ended June 30, 1996 (Unaudited) and 1997
(Unaudited)............................................................. F-6
Notes to Consolidated Financial Statements............................... F-7

F-1

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Orthodontic Centers of America, Inc.

We have audited the accompanying consolidated balance sheets of Orthodontic
Centers of America, Inc. as of December 31, 1995 and 1996, and the related
consolidated statements of income, equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Orthodontic Centers of America, Inc. at December 31, 1995 and 1996, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.

ERNST & YOUNG LLP

New Orleans, Louisiana
February 13, 1997

F-2

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ORTHODONTIC CENTERS OF AMERICA, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

[Download Table]

DECEMBER 31
---------------- JUNE 30
1995 1996 1997
------- -------- -----------
(UNAUDITED)
ASSETS

Current assets:
Cash and cash equivalents....................... $18,779 $ 11,827 $ 2,849
Investments..................................... 14,804 12,621 2,552
Patient receivables, net of allowance for
uncollectible billings of $1,281, $2,590 and
$3,130 in 1995, 1996 and 1997, respectively.... 3,860 7,422 10,265
Unbilled patient receivables, net of allowance
for uncollectible amounts of $521, $829 and
$1,074 in 1995, 1996 and 1997, respectively.... 12,265 18,398 23,674
Amounts receivable from orthodontic entities.... 2,260 2,191 2,499
Supplies inventory, prepaid expenses and other
assets......................................... 2,476 3,670 4,299
------- -------- --------
Total current assets.......................... 54,444 56,129 46,138
Property, equipment and improvements, net......... 14,014 24,201 30,083
Investments....................................... 13,089 6,482 8,486
Amounts receivable from orthodontic centers, less
current portion.................................. 4,903 5,369 4,862
Intangible assets................................. 5,928 52,682 63,438
Other assets...................................... 195 236 351
------- -------- --------
Total assets...................................... $92,573 $145,099 $153,358
======= ======== ========

LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities:
Accounts payable................................ $ 313 $ 312 $ 326
Accrued salaries and other accrued liabilities.. 1,081 1,507 2,204
Patient prepayments............................. 2,367 2,639 3,330
Income taxes payable............................ 2,645 2,730 1,969
Amounts payable to orthodontic entities......... 650 5,662 5,300
Deferred income taxes........................... 2,468 2,162 277
Current portion of long-term debt............... 1,142 898 816
------- -------- --------
Total current liabilities..................... 10,666 15,910 14,222
Long-term debt, less current portion.............. 3,348 2,499 1,999
Deferred income taxes............................. 1,246 11,803 11,374
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000
shares authorized, no shares outstanding....... -- -- --
Common stock, $.01 par value per share,
80,000,000 shares authorized at December 31,
1995 and 1996 and 100,000,000 shares authorized
at June 30, 1997; 41,779,528, 43,888,722 and
43,999,804 shares issued and outstanding at
December 31, 1995 and 1996, and at June 30,
1997, respectively............................. 209 439 440
Additional paid-in capital...................... 69,352 92,294 93,025
Retained earnings............................... 7,752 22,154 32,298
------- -------- --------
Total shareholders' equity.................... 77,313 114,887 125,763
------- -------- --------
Total liabilities and shareholders' equity.... $92,573 $145,099 $153,358
======= ======== ========

See accompanying notes.

F-3

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ORTHODONTIC CENTERS OF AMERICA, INC.

CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

[Download Table]

SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)

Net revenue...................... $25,357 $41,556 $71,273 $29,236 $52,379
Direct expenses:
Employee costs................. 6,842 11,784 19,895 8,402 15,167
Orthodontic supplies........... 1,908 3,167 5,428 2,244 3,823
Rent........................... 2,050 3,504 6,114 2,602 4,621
Marketing and advertising ..... 2,147 4,323 6,644 2,691 4,206
------- ------- ------- ------- -------
Total direct expenses............ 12,947 22,778 38,081 15,939 27,817
General and administrative....... 2,730 5,108 8,703 3,730 6,147
Depreciation and amortization.... 920 1,448 2,814 1,060 2,418
------- ------- ------- ------- -------
Operating profit................. 8,760 12,222 21,675 8,507 15,997
Interest expense................. (266) (471) (424) (202) (147)
Interest income.................. -- 2,466 2,359 1,277 779
Nonrecurring litigation expense.. (3,750) -- -- -- --
------- ------- ------- ------- -------
Income before income taxes....... 4,744 14,217 23,610 9,582 16,629
Provision for income taxes....... 2,715 5,182 9,208 3,737 6,485
------- ------- ------- ------- -------
Net income....................... $ 2,029 $ 9,035 $14,402 $ 5,845 $10,144
======= ======= ======= ======= =======
Net income per share:
Assuming no dilution........... $ .24 $ .34 $ .14 $ .23
Assuming full dilution......... $ .23 $ .33 $ .13 $ .22
If all of the Company's
operations had been subject to
income taxes, net income would
be as follows (unaudited):
Historical income before income
taxes......................... $ 4,744
Provision for income taxes..... 1,803
-------
Net income..................... $ 2,941
=======

See accompanying notes.

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ORTHODONTIC CENTERS OF AMERICA, INC.

CONSOLIDATED STATEMENTS OF EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

[Download Table]

ADDITIONAL RETAINED
OWNERS' COMMON PAID-IN EARNINGS TOTAL
EQUITY STOCK CAPITAL (DEFICIT) EQUITY
------- ------ ---------- --------- --------

Balance at January 1, 1994..... $7,602 $ -- $ -- $ -- $ 7,602
Contributions of capital....... 104 -- -- -- 104
Net income from January 1, 1994
to October 17, 1994........... 3,312 -- -- -- 3,312
Distributions to owners........ (2,350) -- -- -- --
------ ---- ------- ------- --------
Balance at October 18, 1994.... 8,668 -- -- -- 8,668
Exchange of common stock for
net assets (25,379,648
shares)....................... (8,668) 63 8,925 -- 320
Initial public offering
(7,600,000 shares)............ -- 19 18,011 -- 18,030
Deferred income taxes recorded
due to change in tax status of
Predecessor Entities in
connection with Combination
Transaction................... -- -- -- (2,606) (2,606)
Net income from October 18,
1994 to December 31, 1994..... -- -- -- 1,323 1,323
------ ---- ------- ------- --------
Balance at December 31, 1994... -- 82 26,936 (1,283) 25,735
Overallotment option of initial
public offering (1,140,000
shares)....................... -- 3 2,552 -- 2,555
Public offering of common stock
(7,200,000 shares)............ -- 18 38,679 -- 38,697
Issuance of shares of common
stock to obtain management
agreements (460,000 shares)... -- 2 1,289 -- 1,291
Two-for-one stock split........ -- 104 (104) -- --
Net income..................... -- -- -- 9,035 9,035
------ ---- ------- ------- --------
Balance at December 31, 1995... -- 209 69,352 7,752 77,313
Issuance of shares under Incen-
tive Option Plan (391,000).... -- 2 691 -- 693
Tax benefit associated with op-
tion exercise................. -- -- 1,705 -- 1,705
Issuance of shares of common
stock to obtain management
agreements (1,718,000 shares
issued)....................... -- 15 20,759 -- 20,774
Two-for-one stock split........ -- 213 (213) -- --
Net income..................... -- -- -- 14,402 14,402
------ ---- ------- ------- --------
Balance at December 31, 1996... -- 439 92,294 22,154 114,887
Issuance of shares of common
stock to obtain management
agreements (38,000 shares is-
sued, net) (unaudited)........ -- -- 483 -- 483
Issuance of shares under option
plan (73,000 shares).......... -- 1 248 -- 249
Net income (unaudited)......... -- -- -- 10,144 10,144
------ ---- ------- ------- --------
Balance at June 30, 1997 (unau-
dited)........................ $ -- $440 $93,025 $32,298 $125,763
====== ==== ======= ======= ========

See accompanying notes.

F-5

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ORTHODONTIC CENTERS OF AMERICA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS, EXCEPT SHARE DATA)

[Download Table]

SIX MONTHS
YEARS ENDED DECEMBER 31 ENDED JUNE 30
------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)

OPERATING ACTIVITIES
Net income....................... $ 2,029 $ 9,035 $14,402 $ 5,845 $10,144
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Provision for bad debt expense. 342 958 1,617 661 785
Depreciation and amortization.. 920 1,448 2,814 1,060 2,418
Deferred income taxes.......... 2,145 823 (3,031) (3,077) (1,529)
Nonrecurring litigation
expense....................... 3,356 -- -- -- --
Changes in operating assets and
liabilities:
Patient receivables.......... (259) (3,233) (4,871) (1,773) (3,276)
Unbilled patient receivables
and patient prepayments..... (2,637) (2,236) (6,169) (3,520) (4,939)
Supplies inventory, prepaid
expenses and other.......... (705) (1,403) (1,235) 33 (744)
Amounts receivable
from/payable to orthodontic
entities.................... (208) (3,350) (1,074) (235) (18)
Accounts payable and other
current liabilities......... 1,222 1,978 2,215 (333) 1,084
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities............ 6,205 4,020 6,816 (1,339) 3,925
INVESTING ACTIVITIES
Purchases of property, equipment
and improvements................ (4,655) (8,230) (12,333) (4,550) (7,480)
Purchase of available-for-sale
investments..................... -- (95,465) (30,000) -- --
Proceeds from sales or maturities
of available-for-sale
investments..................... -- 67,572 38,790 214 8,065
Intangible assets acquired....... (80) (3,998) (6,870) (497) (13,472)
Advances to orthodontic entities. (385) (2,832) (6,160) (1,959) (3,257)
Payments from orthodontic
entities........................ -- 582 3,325 875 3,574
------- ------- ------- ------- -------
Net cash used in investing
activities...................... (5,120) (42,371) (13,248) (5,917) (12,570)
FINANCING ACTIVITIES
Proceeds from long-term debt..... 138 -- -- -- --
Repayment of long-term debt...... (1,105) (1,230) (1,213) (765) (582)
Issuance of common stock......... 18,030 41,252 693 506 249
Capital contributions............ 104 -- -- -- --
Distributions to owners.......... (2,611) -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities............ 14,556 40,022 (520) (259) (333)
------- ------- ------- ------- -------
Increase (decrease) in cash and
cash equivalents................ 15,641 1,671 (6,952) (7,515) (8,978)
Cash and cash equivalents at
beginning of period............. 1,467 17,108 18,779 18,779 11,827
------- ------- ------- ------- -------
Cash and cash equivalents at end
of period....................... $17,108 $18,779 $11,827 $11,264 $ 2,849
======= ======= ======= ======= =======
SUPPLEMENTAL CASH FLOW
INFORMATION
Cash paid during the period for:
Interest....................... $ 266 $ 471 $ 424 $ 202 $ 147
======= ======= ======= ======= =======
Income taxes................... $ 137 $ 2,345 $10,449 $ 7,027 $ 9,560
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING AND FINANCING
ACTIVITIES
Long-term debt and common stock
issued (net of returns) to
obtain management agreements.... $ -- $ 2,043 $20,894 $ 295 $ (348)
======= ======= ======= ======= =======
Long-term debt issued to acquire
property, equipment and
improvements.................... $ 225 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Long-term debt issued related to
litigation settlement........... $ 3,356 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======

See accompanying notes.

F-6

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ORTHODONTIC CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND SIX MONTHS ENDED JUNE 30,
1996 AND 1997
(UNAUDITED)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Orthodontic Centers of America, Inc. (the "Company") manages orthodontic
centers on a national basis. The Company managed 75, 145, 247 and 305
(unaudited) orthodontic centers as of December 31, 1994, 1995, 1996 and June
30, 1997, respectively. As of December 31, 1996 and June 30, 1997, such
centers were located in 28 and 34 (unaudited) states, respectively.

Prior to October 18, 1994, under the terms of contractual agreements with 32
entities which operated the orthodontic centers, two predecessor management
entities provided business operations, financial, marketing and administrative
services to these 32 operating entities. The predecessor management entities
or their owners had an ownership interest in each of the entities which
operated an orthodontic center (collectively, the "Predecessor Entities").
Subsequent to October 17, 1994, these same services are provided under
service, management and consulting agreements with the orthodontic entities
(hereafter referred to as "management agreements"). These management
agreements are generally for a term of 20-40 years. The practicing
orthodontists own the orthodontic entity.

Effective October 18, 1994, the Company acquired all of the common stock
outstanding related to the two predecessor management entities and acquired
the assets and liabilities of predecessor operating entities in exchange for
25,379,648 shares of the Company's common stock (the "Combination
Transaction"). The consolidated financial statements reflect the accounts of
the Company and the Predecessor Entities accounted for in a manner similar to
the pooling-of-interests method. Substantially all of the Predecessor Entities
were dissolved following the Combination Transaction. Significant intercompany
accounts and transactions have been eliminated.

Unaudited Financial Statements

The accompanying unaudited consolidated financial statements as of June 30,
1997 and for the six months ended June 30, 1996 and 1997, have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation S-
X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals and adjustments necessary to convert the cash basis
accounting records to the accrual basis) considered necessary for a fair
presentation have been included. Operating results for the six months ended
June 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.

F-7

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ORTHODONTIC CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Unaudited Pro Forma Net Income Per Share

Net income per share for the year ended December 31, 1994 has been omitted
from the consolidated statements of income because the Company was not a
single entity with its own capital structure during that period. The
computation of pro forma net income and net income per share for the year
ended December 31, 1994 computed as if the Combination Transaction had
occurred at the beginning of the year ended December 31, 1994, and as if the
Company had been a C corporation for the entire year is as follows (in
thousands, except per share data):

[Download Table]

DECEMBER 31
1994
-----------

Historical income before income taxes........................... $ 4,744
Reclassify distributions to practicing orthodontists as a
reduction to net revenue....................................... (1,158)
Changes to the calculation of net revenue under the management
agreements..................................................... 998
Reduction of expenses due to employment agreements.............. (70)
-------
Pro forma income before income taxes............................ 4,514
Provision for income taxes...................................... 1,715
-------
Pro forma net income............................................ $ 2,799
=======
Weighted average shares outstanding............................. 25,464
=======
Pro forma net income per share:
Assuming no dilution.......................................... $ .11
=======
Assuming full dilution........................................ $ .11
=======

The weighted average shares outstanding include the 25,379,648 shares of
common stock issued in the Combination Transaction as if they were outstanding
since January 1, 1994. In addition, the Company issued 7,600,000 shares of its
common stock on December 28, 1994 in an initial public offering (see Note 7).
The effect of outstanding stock options was immaterial.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

Investments

Management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such designation as of each balance
sheet date. All investments held at December 31, 1995 and 1996 are classified
as available-for-sale because management does not have positive intent to hold
until maturity. Available-for-sale investments are carried at fair value.
Investments included in current assets are debt securities

F-8

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ORTHODONTIC CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with a maturity of greater than three months when purchased and a remaining
maturity of less than one year, and which management expects to use in its
current operations. All other investments are considered long-term assets and
have maturities of less than five years. At December 31, 1995 and 1996, the
Company's amortized cost of investments held consisted of $19,353,000 and
$10,060,000, respectively, of U. S. Treasury and U. S. Government Agency
obligations, and $8,531,000 and $9,043,000, respectively, of corporate and
municipal bonds. The unrealized gains and losses on these investments at
December 31, 1995 and 1996 were not significant. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity and included in interest income. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
investments are included in interest income. The cost of investments sold is
based on the specific identification method. Interest on investments
classified as available-for-sale is included in interest income.

FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amount reported in the balance
sheets for cash and cash equivalents approximates its fair value.

Investments: The fair values for marketable debt securities are based on
quoted market prices.

Amounts receivable from orthodontic entities: The carrying amount reported
on the balance sheets for amounts receivable from orthodontic entities
approximate fair value.

Long-term debt: The fair values of the Company's long-term debt are
estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements, and approximate their carrying values.

REVENUE RECOGNITION

The following represent amounts included in the determination of net revenue
(in thousands):

[Download Table]

YEAR ENDED DECEMBER 31
-----------------------
1994 1995 1996
------- ------- -------

Subsequent to October 17, 1994:
Management fees earned............................ $ 6,662 $41,556 $71,273
Prior to October 18, 1994:
Gross center revenue.............................. 21,797 -- --
Less base service fees............................ 3,102 -- --
------- ------- -------
$25,357 $41,556 $71,273
======= ======= =======

Subsequent to October 17, 1994, revenue is earned by the Company under the
management agreements with orthodontic entities equal to approximately 24% of
new patient contract balances in the first month of new contracts plus a
portion of existing contract balances, less amounts retained by the
orthodontic entities. The orthodontic entities retain all orthodontic center
revenue not paid to the Company as the management fee. The amounts retained by
the orthodontic entities are dependent on their financial performance, based
in significant part on the orthodontic entities cash receipts and
disbursements.

Under the terms of the management agreements, the orthodontic entities
assign their receivables (billed and unbilled) to the Company in payment of
their management fees. The Company is responsible for collection.

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ORTHODONTIC CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Unbilled patient receivables represent the earned revenue in excess of
billings to patients as of the end of each period. There are no unbilled
receivables which will not be billed. The Company is exposed to certain credit
risks. The Company manages such risks by regularly reviewing the accounts and
contracts, and providing appropriate allowances. Provisions are made currently
for all known or anticipated losses for billed and unbilled patient
receivables and for loss contracts. Such deductions totaled $342,000, $958,000
and $1,617,000 for the years ended December 31, 1994, 1995 and 1996,
respectively, and have been within management's expectations. At December 31,
1995 and 1996, there were approximately 53,000 and 83,000, respectively,
active patient contracts with balances outstanding. Patient prepayments
represent collections from patients or their insurance companies which are
received in advance of the performance of the related services.

Prior to October 18, 1994, center revenue was recognized in accordance with
the proportional performance method of accounting for service contracts. Under
this method, revenue was recognized as services were performed and the costs
associated therewith were incurred, under the terms of contractual agreements
with each patient. A significant portion, approximately 24%, of the services
were performed in the initial month of the contract. Billings under each
contract, which averaged 26 months, were made equally throughout the term of
the contract, with a final payment at the completion of the treatment. The
base service fees retained by the orthodontist were based on actual hours
worked. The Company did not pay any salaries to the orthodontists. In
addition, prior to October 18, 1994, certain orthodontists also had an
ownership interest in one or more of the Predecessor Entities. The
orthodontists, excluding Dr. Lazzara, who were owners of the Predecessor
Entities, received distributions totaling approximately $1,343,000 for the
period from January 1, 1994 to October 17, 1994. Such distributions are
included as distributions to owners in the consolidated statements of equity.

SUPPLIES INVENTORY

Supplies inventory is valued at the lower of cost or market determined on
the first-in, first-out basis.

PROPERTY, EQUIPMENT AND IMPROVEMENTS

Property, equipment and improvements are stated at cost. Depreciation
expense is provided using the straight-line method over the estimated useful
lives of the assets, which are five to 10 years. Leasehold improvements are
amortized over the original lease term which is generally five to 10 years.
The related depreciation and amortization expense for the years ended December
31, 1994, 1995 and 1996 was $426,000, $1,256,000 and $2,146,000, respectively.

INTANGIBLE ASSETS

Amortization expense for the years ended December 31, 1994, 1995 and 1996,
was $494,000, $192,000 and $668,000, respectively. Accumulated amortization
was $686,000 and $1,353,000, as of December 31, 1995 and 1996, respectively.
Intangible assets and the related accumulated amortization are written off
when fully amortized.

Intangible assets include the costs of obtaining management agreements,
which are amortized over the life of the agreements which is generally 20 to
40 years. Such management agreements represent the exclusive right to provide
business operations, financial, marketing and administrative service to an
orthodontic entity during the term of the management agreement. In the event
the management agreement is terminated, the related orthodontic entity is
required to purchase all of the related assets, including the unamortized
portion of intangible assets, at the current book value.

MARKETING AND ADVERTISING COSTS

Marketing and advertising costs are expensed as incurred.

F-10

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ORTHODONTIC CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

INCOME TAXES

Income taxes for the Company and Predecessor Entities organized as C
corporations are determined by the liability method in accordance with
Statement of Financial Accounting Standards Statement No. 109, Accounting for
Income Taxes. The Company maintains a fiscal year end of September 30 for
income tax reporting purposes.

Income taxes for Predecessor Entities which were organized as partnerships,
limited liability companies or S corporations were the responsibility of the
individual owners and no provision for income taxes has been made in the
consolidated financial statements for these entities.

NET INCOME PER SHARE

Net income per share is based upon the weighted average of common and common
equivalent shares (stock options) outstanding during the year. The number of
common and common equivalent shares utilized in the per share computations for
the years ended December 31, 1995 and 1996 were 38,234,662 and 42,388,005,
respectively, for net income per share assuming no dilution, and 39,630,028
and 43,708,301, respectively, assuming full dilution. The number of common and
common equivalent shares utilized in the per share computations for the six
months ended June 30, 1996 and 1997 (unaudited) were 42,009,000 and
$43,821,000, respectively, assuming no dilution, and 43,376,000 and
45,212,000, respectively, assuming full dilution.

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which the Company will be required to adopt
during the year ending December 31, 1997. The adoption of this Statement is
not expected to have a material effect on the calculation of earnings per
share.

STOCK COMPENSATION ARRANGEMENTS

The Company accounts for its stock compensation arrangements under the
provisions of APB 25, Accounting for Stock Issued to Employees.

3. TRANSACTIONS WITH ORTHODONTIC ENTITIES

Under the terms of the management agreements, the Company has historically
funded the operating losses and capital improvements of orthodontic entities.
Amounts advanced to an orthodontic entity to fund operating losses were
required to be repaid to the Company over five years once the orthodontic
entity generates operating profits. During December 1996, the Company entered
into an agreement with its financial institution whereby the financial
institution finances the operating losses and capital improvements directly to
the orthodontic entity, subject to the financial institution's credit approval
of the orthodontic entity, but where the Company remains a guarantor of the
related debt. At December 31, 1996 and June 30, 1997, the Company was a
guarantor for $2,819,000 and $4,408,000 (unaudited), respectively, under this
agreement.

Amounts receivable from orthodontic entities are classified on the
consolidated balance sheets based upon the expected date of collection.
Collection of amounts due from orthodontic entities is highly dependent on the
entities' financial performance. Therefore, the Company is exposed to certain
credit risk. However, management believes such risk is minimized by the
Company's involvement in certain business aspects of the orthodontic entity.

Amounts payable to orthodontic entities represents the extent that the
patient receivables assigned to the Company exceed the management fee earned
and other amounts currently due the Company.

F-11

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ORTHODONTIC CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. PROPERTY, EQUIPMENT AND IMPROVEMENTS

Property, equipment and improvements consisted of the following (in
thousands):

[Download Table]

DECEMBER 31
---------------
1995 1996
------- -------

Leasehold improvements...................................... $ 8,251 $15,020
Furniture and fixtures...................................... 7,424 12,782
Other equipment............................................. 92 72
Centers in progress......................................... 536 748
------- -------
16,303 28,622
Less accumulated depreciation and amortization.............. 2,289 4,421
------- -------
$14,014 $24,201
======= =======

5. LONG-TERM DEBT AND LINE OF CREDIT

Long-term debt consisted of the following (in thousands):

[Download Table]

DECEMBER 31
-------------
1995 1996
------ ------

Notes payable to affiliated orthodontists, interest rates
ranging from 8% to 10%, with maturity dates ranging from
1997 to 2000, unsecured................................... $1,604 $ 922
Notes payable related to litigation settlement, interest
rate of 8%, payable in 84 monthly installments of
approximately $52,000 including interest through 2001,
secured by the Company's assets........................... 2,886 2,475
------ ------
4,490 3,397
Less current portion........................................ 1,142 898
------ ------
$3,348 $2,499
====== ======

The aggregate maturities of long-term debt as of December 31, 1996 for each
of the next five years are as follows (in thousands):

[Download Table]

1997................................................................. $898
1998................................................................. 735
1999................................................................. 717
2000................................................................. 591
2001................................................................. 456

At December 31, 1996, the Company has an outstanding line of credit of
$5,000,000 with a financial institution, all of which is available for general
working capital needs, the development of new orthodontic centers and the
acquisition of assets from existing orthodontic centers. The Company is
required to maintain certain financial covenants under the terms of this line
of credit. The line of credit agreement also restricts certain activities of
the Company, including limiting the declaration of dividends to current
earnings. At December 31, 1996, the Company was in compliance with the
covenants and restrictions of the agreement.

F-12

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ORTHODONTIC CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. NONRECURRING LITIGATION EXPENSE

In April 1994, two orthodontists previously affiliated with certain of the
Predecessor Entities filed an action against the Company and its stockholders,
Dr. Lazzara and Mr. Palmisano, alleging among other matters, an interest in
all of the Predecessor Entities and alleging breach of fiduciary duties by Dr.
Lazzara and Mr. Palmisano. On October 10, 1994, the parties to the litigation
entered into a definitive agreement of settlement terms pursuant to which the
two orthodontists agreed to withdraw their allegations and dismiss their
lawsuit with prejudice.

Under the terms of the agreement the Company paid to the two orthodontists
$318,000 in cash and issued notes payable in the aggregate amount of
$3,356,000 (see Note 5). In addition, the Company issued to the two
orthodontists an aggregate of 1,186,144 shares of its common stock in
connection with the Combination Transaction. The two orthodontists also agreed
to enter into a five-year non-competition agreement restricting the
orthodontists' ability to own or provide orthodontic services except in
limited circumstances. The two orthodontists have not practiced in affiliated
centers since March 1994.

The excess of the consideration over the net assets acquired represents the
cost to settle the litigation and was estimated to be $3,750,000. The amount
was recorded as a nonrecurring litigation expense and is classified below
operating profit in the consolidated statement of income because the
litigation was unrelated to the operating activities of the Company.

7. ISSUANCE OF COMMON STOCK

On December 28, 1994, the Company completed an initial public offering of
7,600,000 shares of its common stock at $2.75 per share. This offering
resulted in net proceeds (after deducting issuance costs) of $18,030,000. In
connection with the public offering, the Company granted an over-allotment
option to the underwriters for an additional 1,140,000 shares of the Company's
common stock. This option was exercised by the underwriters on January 25,
1995, resulting in net proceeds of $2,555,000.

On June 19, 1995, the Company completed a public offering of 7,200,000
shares of its common stock at $5.75 per share. This offering resulted in net
proceeds to the Company (after deducting issuance costs) of $38,697,000.

On August 15, 1996, the board of directors of the Company declared a two-
for-one stock split of the Company's common stock. This was paid in the form
of a 100% stock distribution on September 5, 1996, to shareholders of record
as of August 28, 1996. Accordingly, all share and per share data for all
periods presented reflect the effects of this split. The par value for the
additional shares issued was transferred from additional paid-in capital to
common stock.

F-13

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ORTHODONTIC CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

8. LEASES

Facilities for the orthodontic centers and administrative offices are rented
under long-term leases accounted for as operating leases. The original lease
terms are generally five to 10 years with options to renew the leases for
specified periods subsequent to their original terms. The leases have other
various provisions, including sharing of certain executory costs and scheduled
rent increases. Minimum rent expense is recorded on a straight-line basis over
the life of the lease. Minimum future commitments as of December 31, 1996 are
as follows (in thousands):

[Download Table]

1997.............................................................. $ 6,477
1998.............................................................. 5,972
1999.............................................................. 5,377
2000.............................................................. 4,110
2001.............................................................. 3,383
Thereafter........................................................ 3,769
-------
$29,088
=======

Many of the lease agreements provide for payments comprised of a minimum
rental payment plus a contingent rental payment based on a percentage of cash
collections and other additional amounts. Rent expense attributable to minimum
and additional rentals along with sublease income was as follows (in
thousands):

[Download Table]

YEARS ENDED DECEMBER
31
----------------------
1994 1995 1996
------ ------ ------

Minimum rentals...................................... $1,388 $2,869 $5,096
Additional rentals................................... 723 710 1,124
Sublease income...................................... (61) (75) (106)
------ ------ ------
$2,050 $3,504 $6,114
====== ====== ======

9. INCOME TAXES

Prior to October 18, 1994, much of the income of the Predecessor Entities
related to entities which were organized as partnerships, limited liability
companies or S-corporations. Since taxes for these entities were the
responsibility of the individual owners, no provision for income taxes has
been made in the consolidated financial statements related to the income for
these entities. As part of the Combination Transaction, the Company received
assets and liabilities from the entities which had not been subject to income
taxes. The basis of these assets and liabilities for financial reporting
purposes exceeded the basis for income tax purposes by $6,858,000 as of
October 18, 1994. The tax effect of this difference, $2,606,000, was recorded
in 1994 in the provision for income taxes as required by Financial Accounting
Standards Board Statement 109, Accounting for Income Taxes. A separate
presentation on the accompanying consolidated statements of income shows a
provision for income taxes and net income for the year ended December 31, 1994
as if all of the Company's operations had been subject to income taxes for the
entire period, and assuming an effective tax rate of 38%.

F-14

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ORTHODONTIC CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the consolidated deferred tax liabilities and assets were as follows (in
thousands):

[Download Table]

DECEMBER 31
--------------
1995 1996
------ -------

Deferred tax liabilities:
Conversion to accrual basis of accounting for income tax
purposes.................................................. $5,255 $ 2,311
Intangible assets.......................................... 20 13,443
Other...................................................... 370 634
------ -------
Total deferred tax liabilities............................... 5,645 16,388
Deferred tax assets:
Property and equipment..................................... 149 124
Allowance for uncollectible billings and amounts........... 685 1,334
Litigation settlement costs................................ 1,097 965
------ -------
Total deferred tax assets.................................... 1,931 2,423
------ -------
Net deferred tax liabilities................................. $3,714 $13,965
====== =======

The Company was able to use the cash basis of accounting for income tax
purposes through its tax year ended September 30, 1995. Beginning with the tax
year ending September 30, 1996, because of its level of cash receipts, the
Company is required to use the accrual basis of accounting for income tax
purposes. All deferred tax liabilities and assets related to differences
between the cash and accrual basis of accounting which existed as of October
1, 1995 have been reclassified in the table above to a single amount. The
related deferred tax liability of $2,311,000 as of December 31, 1996 will
reverse over the period ending September 30, 1997.

Components of the 1994, 1995 and 1996 provision (benefit) for income taxes
are as follows (in thousands):

[Download Table]

SUBSEQUENT YEAR ENDED
PRIOR TO TO DECEMBER 31,
OCTOBER 18, OCTOBER 17, TOTAL --------------
1994 1994 1994 1995 1996
----------- ----------- ------ ------ -------

Current..................... $ 29 $ 541 $ 570 $4,359 $12,239
Deferred.................... (714) 253 (461) 823 (3,031)
Provision due to change in
tax status of Predecessor
Entities in connection with
Combination Transaction.... -- 2,606 2,606 -- --
----- ------ ------ ------ -------
Total....................... $(685) $3,400 $2,715 $5,182 $ 9,208
===== ====== ====== ====== =======

F-15

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ORTHODONTIC CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The reconciliation of income tax computed at the federal statutory rates to
income tax expense (benefit) for 1994, 1995 and 1996 is (in thousands):

[Download Table]

SUBSEQUENT YEAR ENDED
PRIOR TO TO DECEMBER 31,
OCTOBER 18, OCTOBER 17, TOTAL -------------
1994 1994 1994 1995 1996
----------- ----------- ------ ------ ------

Tax at federal statutory rates... $ 893 $ 720 $1,613 $4,876 $8,164
Income of entities not subject to
tax............................. (1,606) -- (1,606) -- --
Other, primarily state income
taxes........................... 28 74 102 306 1,044
Provision due to change in tax
status of Predecessor Entities
in connection with Combination
Transaction..................... -- 2,606 2,606 -- --
------ ------ ------ ------ ------
Total............................ $ (685) $3,400 $2,715 $5,182 $9,208
====== ====== ====== ====== ======

10. BENEFIT PLANS

The Company has reserved 3,400,000 of the authorized shares of common stock
for issuance pursuant to options granted and restricted stock awarded under
the Orthodontic Centers of America, Inc. 1994 Incentive Stock Plan (the
"Incentive Option Plan"). Options may be granted to officers, directors and
employees of the Company, for terms not longer than 10 years at prices not
less than fair market value of the common stock on the date of grant. Granted
options generally become exercisable in four equal annual installments
beginning two years after the grant date, and expire ten years after the grant
date.

The Company has reserved 600,000 of the authorized shares of common stock
for issuance pursuant to options granted and restricted stock awarded under
the Orthodontic Centers of America, Inc. Non-Qualified Stock Option Plan for
Non-Employee Directors (the "Director Option Plan"). The Director Plan
provides for the grant of options to purchase 2,400 shares of common stock on
the first trading date each year to each non-employee director serving the
Company on such date, at prices equal to the fair market value of the common
stock on the date of grant. Granted options generally become exercisable in
four equal annual installments beginning two years after the grant date, and
expire ten years after the grant date, unless canceled sooner due to
termination of service or death.

The Company has reserved 2,000,000 of the authorized shares of common stock
for issuance pursuant to options granted under the Orthodontic Centers of
America, Inc. 1995 Restricted Stock Option Plan (the "Orthodontist Option
Plan"). Options may be granted to orthodontists who own an orthodontic entity
which has a service, management or consulting agreement with the Company, at
prices not less than 100% of the fair market value of the common stock on the
date of grant. Granted options generally become exercisable in four equal
annual installments beginning two years after grant date, and expire ten years
after grant date.

The Company has reserved 200,000 of the authorized shares for issuance under
the 1996 Employee Stock Purchase Plan ("the Employee Purchase Plan"), which
allows participating employees of the Company to purchase shares of common
stock from the Company through a regular payroll deduction of up to 10% of
their respective normal monthly pay. Deducted amounts are accumulated for each
participating employee and used to purchase the maximum number of whole shares
of common stock at a price per share equal to 85% of the closing price of
common stock, as reported on the NASDAQ National market, on the applicable
purchase date or the first trading date of the year, whichever is lower.
Additionally, the Company has reserved 2,000,000 shares of common stock for
issuance to affiliated orthodontists through a stock purchase program that
allows participating affiliated orthodontists to acquire shares of common
stock from the Company. At December 31, 1996, no shares had been issued under
either of these stock purchase plans.

F-16

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ORTHODONTIC CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FASB Statement No. 123, Accounting for Stock-Based Compensation, requires
the Company to disclose pro forma information regarding net income and
earnings per share as if the Company had accounted for its employee stock
options under the fair value method. The fair value was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively: risk-free
interest rates of 7.1% and 6.3%; a dividend yield of 0% for both years,
volatility factors of the expected market price of the Company's common stock
of .612 and .45 , and a weighted-average expected life of the option of 6.9
and 6.7 years.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

Had the Company's stock-based compensation plan been determined based on the
fair value at the grant dates, the Company's net income and earnings per share
would not have been materially different from the amounts reported in the
consolidated statement of income.

A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:

[Download Table]

1994 1995 1996
---------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- --------- -------- --------- --------

Outstanding--beginning
of year................ -- $ -- 938,628 $2.75 1,858,496 $ 2.75
Granted................. 938,628 2.75 952,476 3.55 237,095 12.83
Exercised............... -- -- -- -- (390,868) 2.95
Forfeited............... -- -- (32,608) 2.75 (42,970) 3.24
------- ----- --------- ----- --------- ------
Outstanding-end of year. 938,628 $2.75 1,858,496 $3.24 1,661,753 $ 3.65
======= ===== ========= ===== ========= ======
Exercisable at end of
year................... -- $ -- 6,592 $ 2.75
========= ===== ========= ======
Weighted-average fair
value of options
granted during the
year................... $ 2.40 $ 8.58
========= =========

Of the options outstanding at December 31, 1996, approximately 1,500,000
were issued near the Company's initial public offering (see Note 7) and have
exercise prices which range from $2.75 to $3.25, a weighted average exercise
price of $3.06 and a weighted average remaining contractual life of eight
years. The remaining options outstanding at December 31, 1996 have exercise
prices which range from $4.25 to $20.19, a weighted average exercise price of
$9.85 and a weighted average remaining contractual life of 8.8 years.

The Company sponsors a 401(k) Plan for all employees who have satisfied
minimum service and age requirements. Employees may contribute up to 15% of
their earnings to the plan. The Company matches 40% of an employee's
contribution to the plan, up to a maximum of $600 per year. Plan expense
totaled $24,000, $36,000 and $49,000 for the years ended December 31, 1994,
1995 and 1996, respectively.

F-17

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ORTHODONTIC CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11. ACQUISITION OF MANAGEMENT CONTRACTS

In 1996, the Company finalized agreements with 40 orthodontic entities to
obtain management agreements and acquire other assets for approximately $32.4
million. These orthodontic entities operate 54 centers (net of
consolidations). The consideration to these orthodontic entities included
approximately $120,000 in notes payable, and the issuance of 1,718,000 shares
of the Company's common stock at an average price of approximately $12.09 per
share, with the remainder paid in cash.

In 1995, the Company finalized agreements with ten orthodontic entities to
obtain management agreements and acquire other assets for approximately
$5,900,000. These orthodontic entities operate 29 centers. The consideration
to these orthodontic entities included approximately $752,000 in notes
payable, and the issuance of 460,000 shares of the Company's common stock at
an average price of approximately $2.81 per share, with the remainder paid in
cash.

12. CONTINGENCIES

In the normal course of business, the Company becomes a defendant or
plaintiff in various lawsuits. Although a successful claim for which the
Company is not fully insured could have a material effect on the Company's
financial condition, management is of the opinion that it maintains insurance
at levels sufficient to insure itself against the normal risk of operations.

13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a tabulation of the unaudited quarterly results of
operations for the year ended December 31, 1995 and 1996 and the six-month
period ended June 30, 1997 (in thousands, except per share data):

[Download Table]

QUARTER ENDED
----------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1995 1995 1995 1995
------- ------- --------- --------

Net revenue............................... $ 8,465 $ 9,236 $11,490 $12,365
Operating profit.......................... 2,718 2,577 3,318 3,609
Net income................................ 1,790 1,743 2,534 2,968
Net income per share:
Assuming no dilution.................... $ .05 $ .05 $ .06 $ .08
Assuming full dilution.................. .05 .05 .06 .07

QUARTER ENDED
----------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1996 1996 1996 1996
------- ------- --------- --------

Net revenue............................... $13,719 $15,517 $18,881 $23,156
Operating profit.......................... 3,914 4,592 6,185 6,984
Net income................................ 2,734 3,111 4,075 4,482
Net income per share:
Assuming no dilution.................... $ .07 $ .08 $ .10 $ .10
Assuming full dilution.................. .07 .07 .09 .10

QUARTER ENDED
---------------
MARCH JUNE
1997 1997
------- -------

Net revenue............................... $24,899 $27,480
Operating profit.......................... 7,467 8,530
Net income................................ 4,773 5,371
Net income per share:
Assuming no dilution.................... $ .11 $ .12
Assuming full dilution.................. .11 .12

F-18

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[ARRANGEMENT OF SIX 4/COLOR PHOTOGRAPHS OF PEOPLE SMILING AROUND
ORTHODONTIC CENTERS OF AMERICA CAPTION APPEARS HERE]

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LOGO
[LOGO OF ORTHODONTIC CENTERS OF AMERICA APPEARS HERE]

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[Alternative International Cover Page]
PROSPECTUS

5,200,000 Shares

[LOGO OF ORTHODONTIC CENTERS OF AMERICA APPEARS HERE]

COMMON STOCK
----------------

OF THE 5,200,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 2,600,000
SHARES ARE BEING SOLD BY THE COMPANY AND 2,600,000 SHARES ARE BEING SOLD
BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS."
THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF
SHARES OF COMMON STOCK BY THE SELLING STOCKHOLDERS. OF THE
5,200,000 SHARES BEING OFFERED HEREBY, 1,040,000 SHARES ARE
BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA
BY THE INTERNATIONAL UNDERWRITERS AND 4,160,000 SHARES ARE
BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA
BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." THE
COMMON STOCK OF THE COMPANY IS LISTED ON THE NEW YORK
STOCK EXCHANGE UNDER THE SYMBOL "OCA." ON NOVEMBER
3, 1997, THE REPORTED LAST SALE PRICE OF THE
COMMON STOCK ON THE NEW YORK STOCK EXCHANGE
WAS $18 PER SHARE.

----------------

SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

----------------

PRICE $17 3/4 A SHARE

----------------

[Download Table]

UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2) SELLING STOCKHOLDERS
----------- --------------- ----------- --------------------

Per Share......... $17.75 $.89 $16.86 $16.86
Total (3)......... $92,300,000 $4,628,000 $43,836,000 $43,836,000

----------------

MORGAN STANLEY DEAN WITTER
MERRILL LYNCH INTERNATIONAL
PRUDENTIAL-BACHE SECURITIES
SMITH BARNEY INC.

November 3, 1997

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424B4’ Filing	Date	First	Last	Other Filings

	10/18/04	41		SC 13G
	12/31/99	45		10-K, 10-K/A, 5
	12/31/97	45	62	10-K405
	11/7/97	1	72
Filed on:	11/5/97
	11/3/97	1	72
	9/30/97	6	66	10-Q, S-3
	6/30/97	2	69	10-Q
	4/18/97	4
	3/31/97	4		10-K, 10-Q
	2/13/97	53
	12/31/96	4	69	10-K, 10-K/A
	9/30/96	66		10-Q
	9/5/96	5	64
	8/28/96	64
	8/15/96	64		DEF 14A
	6/30/96	8	62	10-Q
	1/1/96	20
	12/31/95	8	69
	12/29/95	5	14
	10/1/95	66
	9/30/95	66
	6/19/95	64
	1/25/95	64
	12/31/94	8	68
	12/28/94	59	64
	12/6/94	4
	11/1/94	25
	10/18/94	5	65
	10/17/94	56	61
	10/10/94	64
	1/1/94	56	61
	1/1/93	9	17
	12/31/92	8	16
	6/30/92	6	33
				List all Filings

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Filing Submission 0000950130-97-004800 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Oca, Inc./DE – ‘424B4’ on 11/5/97

As of: Wednesday, 11/5/97 · Accession #: 950130-97-4800 · File #: 333-36799

Prospectus — Rule 424(b)(4)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Prospectus — Rule 424(b)(4)
Filing Table of Contents