According to the Company’s FORM 10-Q For The Quarterly Period Ended March 31, 2004, on August 28, 2003, the lawsuits were consolidated and John A. Matis, Trustee was appointed as lead plaintiff. On April 6, 2004, the court granted OCA’s motion and ordered that the lawsuit be dismissed. The court found that the plaintiffs had failed to state a claim that OCA or its officers violated federal securities laws. On May 6, 2004, the court entered a judgment dismissing the case. The plaintiffs have indicated that they will not appeal the court’s ruling on the motion to dismiss.
The original complaint alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of materially false and misleading statements to the market between November 14, 2002 and March 18, 2003. Specifically, the complaint alleges that OCA was at all relevant times a provider of integrated business services to orthodontic and pediatric dental practices. In May 2001, OCA announced that it had entered into a definitive merger agreement whereby a wholly owned subsidiary of OCA would merge into OrthAlliance in a stock-for-stock transaction, with OrthAlliance becoming a wholly owned subsidiary of OCA. Following the May 2001 announcement, a number of OrthAlliance's affiliated practices filed lawsuits against OrthAlliance and/or notified OrthAlliance that it was in default under their service, management service, and consulting agreements and that these practices had stopped paying their service fees. At all relevant times, the Company stated that it had anticipated such lawsuits and that the integration of OrthAlliance and OCA was not only going as planned but also “very very well.”
The complaint further alleges that the statements disseminated by defendants during the Class Period and with respect to the financial well-being of the Company were each materially false and misleading because: (a) the integration of OrthAlliance practices was not going “very very well” but on the contrary, it was going very poorly and, consequently, the Company’s actual revenue and earnings were decreasing; (b) not only had some OrthAlliance practices sued but other OrthAlliance practices had discontinued paying their services fees; (c) the Company continued to recognize revenue from OrthAlliance practices that were in litigation and from those that had stopped paying their service fees and was thereby violating Generally Accepted Accounting Principles ("GAAP"); and (d) the defendants were actively concealing these facts in order to manipulate the Company's earnings outlook and thereby maintain its favorable stock prices.
The Complaint further alleges that on March 18, 2003 the Company announced its financial results for the fourth quarter ended December 31, 2002. The Company reported fourth quarter earnings of $0.17 per share, compared to fourth quarter 2001 earnings of $0.34 per share, on fee revenue of $102.1 million compared to fourth quarter fee 2001 revenue of $104.4 million. The Company attributed the decline in revenue and earnings to “26 OrthAlliance affiliated practices that paid service fees in the fourth quarter of 2001 and stopped paying service fees during the third and fourth quarters of 2002.” On this news, OCA’s share price dropped 41% from a closing price of $9.57 on March 18, 2003 to a closing price of $5.64 on March 19, 2003.