Filed pursuant to Rule 424(b)(3)
Registration No. 333-66984
[ORTHALLIANCE LOGO]
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
OrthAlliance, Inc. and Orthodontic Centers of America, Inc. have entered
into a merger agreement which provides that, subject to approval by
OrthAlliance's stockholders and other conditions, a wholly-owned subsidiary of
OCA would merge into OrthAlliance, and OrthAlliance would become a wholly-owned
subsidiary of OCA. Stockholders of OrthAlliance would receive shares of OCA
common stock in exchange for their shares of OrthAlliance Class A and Class B
common stock, except for holders of OrthAlliance Class B common stock who
properly exercise their appraisal rights under Delaware law, with cash to be
paid instead of any fractional shares of OCA common stock.
We cannot complete the merger without the approval of the stockholders of
OrthAlliance. OrthAlliance has scheduled a special meeting of its stockholders
to vote on the merger agreement. In order for the merger agreement to be
approved, a majority of the outstanding shares of OrthAlliance Class A and Class
B common stock, voting together as a single class, that are eligible to vote
must be voted in favor of the merger agreement. The date, time and place of the
special meeting is as follows:
NOVEMBER 7, 2001
9:00 A.M. (PACIFIC TIME)
TORRANCE MARRIOTT HOTEL
3635 FASHION WAY
TORRANCE, CALIFORNIA 90503
The attached Proxy Statement/Prospectus provides you with detailed
information about the proposed merger and the companies involved. We encourage
you to read it carefully. You can also obtain information about OCA and
OrthAlliance from documents each has filed with the Securities and Exchange
Commission.
Your vote is very important, regardless of how many shares you
own. Whether or not you plan to attend the special meeting of stockholders,
please take the time to vote your proxy by completing and mailing the enclosed
proxy card to us. If your proxy is properly given and not revoked without
indicating how you want to vote, your proxy will be counted as a vote in favor
of the merger agreement. If you attend the special meeting of stockholders, you
may vote your shares in person if you wish, even though you previously voted
your proxy.
The Board of Directors of OrthAlliance recommends that stockholders of
OrthAlliance vote "FOR" approval of the merger agreement.
Very truly yours,
/s/ W. DENNIS SUMMERS
W. Dennis Summers
Chairman of the Board and
Interim President and Chief
Executive Officer
[ORTHALLIANCE LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 7, 2001
To the Stockholders of OrthAlliance, Inc.:
This serves as notice to you that a special meeting of stockholders of
OrthAlliance, Inc. will be held on November 7, 2001 at 9:00 a.m., Pacific Time,
at Torrance Marriott Hotel, 3635 Fashion Way, Torrance, California 90503, for
the purpose of considering and voting upon the following:
- Approval and adoption of the Agreement and Plan of Merger, dated as of
May 16, 2001, by and among Orthodontic Centers of America, Inc., OCA
Acquisition Corporation and OrthAlliance, Inc., which provides for the
merger of OCA Acquisition Corporation, a wholly-owned subsidiary of
Orthodontic Centers of America, with and into OrthAlliance, with
OrthAlliance thereby becoming a wholly-owned subsidiary of Orthodontic
Centers of America.
Only holders of record of OrthAlliance Class A and Class B common stock at
the close of business on September 26, 2001 are entitled to notice of, and to
vote at, the special meeting or any adjournments or postponements of the special
meeting.
If the merger agreement is approved and the merger is completed, each share
of OrthAlliance Class A and Class B common stock, other than shares of Class B
common stock held by OrthAlliance stockholders who properly exercise their
appraisal rights under Delaware law, will be converted into a fixed number of
shares of OCA common stock as provided in the merger agreement, with cash to be
paid in lieu of any remaining fractional share interest of OCA common stock.
Please vote your proxy promptly by marking, signing, dating and returning
the enclosed proxy card, whether or not you plan to attend the special
meeting. All OrthAlliance stockholders are cordially invited to attend the
special meeting. To ensure your representation at the special meeting, please
promptly vote your proxy by completing the enclosed proxy card and mailing it in
the enclosed return envelope. This will not prevent you from voting in person,
but will help to secure a quorum and avoid added solicitation costs. You may
revoke your proxy at any time before it is exercised, by written request to
OrthAlliance or by voting a proxy at a later date. Please review the Proxy
Statement/Prospectus attached to this notice for more complete information
regarding the proposed merger and the special meeting.
By Order of the Board of Directors
/s/ Paul H. Hayase
Paul H. Hayase
Senior Vice President,
General Counsel and Secretary
Torrance, California
October 10, 2001
THE BOARD OF DIRECTORS OF ORTHALLIANCE RECOMMENDS THAT STOCKHOLDERS
OF ORTHALLIANCE VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
PROXY STATEMENT
AND PROSPECTUS
[ORTHODONTIC CENTERS LOGO] [ORTHALLIANCE LOGO]
PROSPECTUS PROXY STATEMENT
---------------------
This Proxy Statement/Prospectus provides you with detailed information
about a proposed merger among Orthodontic Centers of America, Inc., its
wholly-owned subsidiary, OCA Acquisition Corporation, and OrthAlliance, Inc., as
well as information about these companies. If the merger is completed, OCA
Acquisition Corporation will merge into OrthAlliance, OrthAlliance will become a
wholly-owned subsidiary of OCA, and OrthAlliance stockholders, other than
holders of OrthAlliance Class B common stock who properly exercise their
appraisal rights under Delaware law, will be issued shares of OCA common stock
in exchange for their shares of OrthAlliance Class A and Class B common stock,
with cash to be paid instead of any fractional shares of OCA common stock. We
encourage you to carefully read and consider this Proxy Statement/Prospectus in
its entirety.
You can obtain additional information about OCA and OrthAlliance from
documents that each has filed with the Securities and Exchange Commission. For
information on how to obtain copies of these documents, you should refer to the
section of this document entitled "WHERE YOU CAN FIND MORE INFORMATION," which
begins on page 93.
OCA common stock is listed on the New York Stock Exchange under the symbol
"OCA." OrthAlliance Class A common stock is quoted on the Nasdaq Stock Market
National Market System under the symbol "ORAL." On October 5, 2001, the closing
price per share of OCA common stock reported on the New York Stock Exchange was
$25.63, and the closing price per share of OrthAlliance Class A common stock
quoted on the Nasdaq Stock Market National Market System was $2.55.
You should carefully consider the risk factors described in Item 7 of OCA's
Annual Report on Form 10-K for the year ended December 31, 2000.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSIONER HAS APPROVED OR DISAPPROVED OF THE SHARES OF OCA COMMON STOCK TO BE
ISSUED UNDER THIS PROXY STATEMENT/ PROSPECTUS OR DETERMINED IF THIS PROXY
STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------
The date of this Proxy Statement/Prospectus is October 5, 2001.
TABLE OF CONTENTS
PAGE
----
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 4
SUMMARY..................................................... 6
SELECTED HISTORICAL FINANCIAL DATA AND UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION.............. 15
ORTHALLIANCE SPECIAL MEETING................................ 24
General................................................... 24
Proxies................................................... 24
Solicitation of Proxies................................... 25
Record Date and Voting Rights............................. 25
Recommendation of OrthAlliance's Board of Directors....... 25
Appraisal Rights.......................................... 26
THE MERGER.................................................. 29
Description of the Merger................................. 29
Exchange Ratio............................................ 29
Appraisal Rights.......................................... 30
Outstanding Options and Warrants.......................... 31
Background of the Merger.................................. 31
OrthAlliance's Reasons for the Merger; Recommendation of
OrthAlliance's Board of Directors...................... 37
OCA's Reasons for the Merger.............................. 40
Fairness Opinion of OrthAlliance's Financial Advisor...... 41
Fairness Opinion of OCA's Financial Advisor............... 45
Accounting Treatment...................................... 53
Certain Federal Income Tax Consequences................... 53
Interests of Certain Persons in the Merger................ 54
Comparison of Rights of Stockholders...................... 55
Restrictions on Resales by Affiliates..................... 55
THE MERGER AGREEMENT........................................ 57
Exchange of Certificates.................................. 57
Conditions to the Merger.................................. 58
Termination of the Merger Agreement....................... 58
Break-Up Fees............................................. 59
Conduct of Business Prior to the Merger and Other
Covenants.............................................. 61
No Other Transactions Involving OrthAlliance.............. 63
Indemnification........................................... 65
Amendment of the Merger Agreement......................... 65
Waiver.................................................... 65
Expenses.................................................. 65
PRICE RANGE OF COMMON STOCK AND DIVIDENDS................... 66
Orthodontic Centers of America............................ 66
OrthAlliance.............................................. 67
ORTHODONTIC CENTERS OF AMERICA.............................. 68
Overview.................................................. 68
OCA's Business............................................ 68
OCA's Operating Strategy.................................. 68
OCA's Growth Strategy..................................... 68
OCA's Affiliated Orthodontic Practices.................... 69
OCA Acquisition Corporation............................... 70
2
PAGE
----
ORTHALLIANCE................................................ 71
Overview.................................................. 71
OrthAlliance's Operating Strategy......................... 71
OrthAlliance's Growth Strategy............................ 72
Payment Plan and Case Fees................................ 73
Agreements with OrthAlliance Allied Practices and Allied
Practitioners.......................................... 73
OrthAlliance Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 76
MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER.............. 89
Board of Directors........................................ 89
Management................................................ 89
COMPARISON OF RIGHTS OF STOCKHOLDERS........................ 90
Voting Rights; Action by Written Consent.................. 90
Classes of Common Stock; Stockholder Conversion Rights.... 90
Stockholder Nominations and Proposals..................... 91
Board of Directors........................................ 91
Change of Control......................................... 91
Removal of Directors...................................... 92
Authorized Capital Stock.................................. 92
Amendment of Certificate of Incorporation and Bylaws...... 92
WHERE YOU CAN FIND MORE INFORMATION......................... 93
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
INFORMATION............................................... 95
LEGAL MATTERS............................................... 95
EXPERTS..................................................... 96
ORTHALLIANCE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS................................................ F-1
ANNEX A -- AGREEMENT AND PLAN OF MERGER..................... A-1
ANNEX B -- PROVISIONS OF SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW RELATING TO APPRAISAL RIGHTS.............. B-1
ANNEX C -- FAIRNESS OPINION OF U.S. BANCORP PIPER JAFFRAY... C-1
ANNEX D -- FAIRNESS OPINION OF BANC OF AMERICA SECURITIES
LLC....................................................... D-1
---------------------
THIS PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO PURCHASE ANY SECURITIES OTHER THAN SHARES OF OCA COMMON STOCK TO
WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER.
3
QUESTIONS AND ANSWERS
ABOUT THE MERGER
Q: WHAT DO I NEED TO DO NOW?
A: Whether or not you plan to attend the special meeting of OrthAlliance
stockholders, please vote your proxy promptly by indicating on the enclosed
proxy card how you want to vote, and by signing and mailing the proxy card
in the enclosed return envelope as soon as possible so that your shares may
be represented at the special meeting of stockholders. If your proxy is
properly given and not revoked without indicating how you want to vote,
your proxy will be counted as a vote in favor of the merger agreement.
You are invited to the special meeting of OrthAlliance stockholders to vote
your shares in person. If you do vote your proxy, you can take it back at
any time until OrthAlliance stockholders vote at the special meeting of
stockholders, and vote another proxy or attend the special meeting and vote
in person.
Regardless of whether you plan to attend the special meeting in person, we
encourage you to vote your proxy promptly. This will help to ensure that a
quorum is present at the special meeting and will help reduce the costs
associated with the solicitation of proxies.
THE BOARD OF DIRECTORS OF ORTHALLIANCE RECOMMENDS THAT STOCKHOLDERS OF
ORTHALLIANCE VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Only if you provide instructions to your broker on how to vote by following
the directions your broker provides. Without instructions from you to your
broker, your shares will not be voted.
Q: WHAT IS THE PURPOSE OF THIS PROXY STATEMENT/PROSPECTUS?
A: This document serves as OrthAlliance's proxy statement and as OCA's
prospectus. As a proxy statement, this document is being provided to
OrthAlliance stockholders because OrthAlliance's Board of Directors is
soliciting the proxies of OrthAlliance stockholders to vote to approve the
merger agreement. As a prospectus, this document is being provided to
OrthAlliance stockholders by OCA because OCA is offering OrthAlliance
stockholders shares of OCA common stock in exchange for their shares of
OrthAlliance Class A and Class B common stock if the merger is completed.
Q: IS THERE OTHER INFORMATION I SHOULD CONSIDER?
A: Yes. Much of the business and financial information that may be important
to you is not included directly in this document. Instead, this information
is incorporated into this document by references to documents separately
filed by OCA and OrthAlliance with the Securities and Exchange Commission.
This means that OCA and OrthAlliance may satisfy their disclosure
obligations to you by referring you to one or more documents separately
filed by them with the SEC. See "WHERE YOU CAN FIND MORE INFORMATION"
beginning on page 93 for a list of documents that OCA and OrthAlliance have
incorporated by reference into this Proxy Statement/Prospectus and for
instructions on how to obtain copies of these documents. The documents are
available to you without charge.
Q: WHAT IF I CHOOSE NOT TO READ THE DOCUMENTS INCORPORATED BY REFERENCE?
A: Information contained in a document that is incorporated into this Proxy
Statement/Prospectus by reference is part of this Proxy
Statement/Prospectus, unless it is superseded by information contained
directly in this Proxy Statement/Prospectus or in documents filed by
OrthAlliance or OCA with the SEC after the date of this Proxy
Statement/Prospectus. Information that is incorporated from another
document is considered to have been disclosed to you whether or not you
choose to read the document.
4
Q: SHOULD I SEND IN MY ORTHALLIANCE STOCK CERTIFICATES NOW?
A: No. After the merger is completed, OrthAlliance stockholders will receive
written instructions on how to exchange their shares of OrthAlliance Class
A and Class B common stock for shares of OCA common stock.
Q: WHOM DO I CONTACT IF I HAVE QUESTIONS ABOUT THE MERGER?
A: If you have more questions about the merger, you should contact:
OrthAlliance, Inc.
21535 Hawthorne Boulevard, Suite 200
Torrance, California 90503
Attention: Paul H. Hayase
Phone Number: (310) 792-1300
5
SUMMARY
This summary highlights selected information from this document. It does
not contain all of the information that is important to you. You should
carefully read this entire document and the documents to which it refers you in
order to understand fully the merger and to obtain a more complete description
of the companies and the legal terms of the merger. For information on how to
obtain copies of documents referred to in this document, you should read the
section of this document entitled "WHERE YOU CAN FIND MORE INFORMATION." Each
item in this summary includes a page reference that directs you to a more
complete description in this document of the topic discussed.
THE COMPANIES (PAGES 68, 70 AND 71)
ORTHODONTIC CENTERS OF AMERICA, INC.
3850 N. Causeway Boulevard, Suite 1040
Metairie, Louisiana 70002
(504) 834-4392
OCA is incorporated in Delaware. Founded in 1985, OCA is the leading
provider of integrated business services to orthodontic practices. As of June
30, 2001, OCA was affiliated with over 400 orthodontists who were treating over
379,000 patients in over 600 orthodontic centers throughout the United States
and in Japan, Mexico and Spain.
OCA ACQUISITION CORPORATION
3850 N. Causeway Boulevard, Suite 1040
Metairie, Louisiana 70002
(504) 834-4392
OCA Acquisition Corporation is incorporated in Delaware and is a
wholly-owned subsidiary of OCA. It was formed on May 15, 2001 solely for the
purpose of entering into the merger agreement and being merged into OrthAlliance
according to the terms of the merger agreement.
ORTHALLIANCE, INC.
21535 Hawthorne Boulevard, Suite 200
Torrance, California 90503
(310) 792-1300
OrthAlliance is incorporated in Delaware. OrthAlliance is a leading
provider of practice management and consulting services to orthodontic and
pediatric dentistry practices in the United States. As of June 30, 2001,
OrthAlliance was affiliated with 226 orthodontists and pediatric dentists
practicing in 397 centers throughout the United States.
THE MERGER (PAGE 29)
OCA, OCA Acquisition Corporation and OrthAlliance entered into a merger
agreement whereby OCA Acquisition Corporation, a wholly-owned subsidiary of OCA,
will merge into OrthAlliance, with OrthAlliance becoming a wholly-owned
subsidiary of OCA, subject to approval by OrthAlliance stockholders and other
conditions. The merger agreement is attached to this Proxy Statement/Prospectus
as Annex A. You should read it carefully.
WHAT ORTHALLIANCE STOCKHOLDERS WILL RECEIVE IN THE MERGER (PAGE 29)
If the merger is completed, OrthAlliance stockholders will receive a fixed
number of shares of OCA common stock for each share of OrthAlliance Class A and
Class B common stock they own (which is referred to as the "exchange ratio"),
except for holders of OrthAlliance Class B common stock who properly exercise
their appraisal rights under Delaware law. The amount of the exchange ratio will
depend upon how many of 184 designated orthodontists and pediatric dentists, who
are owners/employees of
6
professional entities that are parties to OrthAlliance service, management
service or consulting agreements, enter into, along with their professional
entity, amendments to their respective employment agreements and service,
management service or consulting agreements prior to completion of the merger,
as provided in the merger agreement, and the percentage of OrthAlliance's
service fees during the 12 months ended March 31, 2001 represented by those
orthodontists and pediatric dentists. The following chart describes the exchange
ratio in the merger:
ORTHALLIANCE AFFILIATED PRACTITIONERS EXECUTING AMENDMENTS
------------------------------------------------------------
PERCENTAGE OF ORTHALLIANCE ANNUAL
EXCHANGE RATIO NUMBER SERVICE FEES REPRESENTED
-------------- ------------------ ---------------------------------
0.09214.......................... 56 or less or Less than 31.00%
0.10135.......................... At least 57 to 75 and At least 31.00%-40.99%
0.11056.......................... At least 76 to 93 and At least 41.00%-50.99%
0.12899.......................... At least 94 to 112 and At least 51.00%-60.99%
0.16585.......................... 113 or more and 61.00% or more
As of October 5, 2001, 72 of these designated orthodontists and pediatric
dentists, along with their respective professional entity, have signed
amendments to their respective employment agreements and OrthAlliance service,
management service or consulting agreements, representing about 35.98% of
OrthAlliance's service fees during the 12 months ended March 31, 2001. Based
upon those amounts, OrthAlliance stockholders would receive 0.10135 shares of
OCA common stock for each share of OrthAlliance Class A and Class B common stock
in the merger. These amounts, however, may change prior to completion of the
merger.
OCA will not issue any fractional shares of OCA common stock. Instead, an
OrthAlliance stockholder will receive cash equal to the product of (1) the
average of the last reported sale prices per share of OCA common stock as
reported on the New York Stock Exchange for the three trading days immediately
preceding the date on which the merger is completed, times (2) the fraction of a
share of OCA common stock to which the stockholder otherwise would be entitled.
If the merger is completed, each outstanding and unexercised option or
warrant to purchase shares of OrthAlliance Class A or Class B common stock will
no longer represent a right to acquire shares of OrthAlliance Class A or Class B
common stock and will be automatically converted into a right to acquire shares
of OCA common stock. The number of shares underlying each new option, as well as
the exercise price, will be adjusted by the amount of the exchange ratio.
OCA'S STOCK PRICE WILL FLUCTUATE (PAGE 66)
OCA expects the market price of its common stock to fluctuate due to market
factors beyond its control before and following the merger. Because the exchange
ratio, once determined, is fixed and the market price of OCA common stock may
fluctuate, the value of the shares of OCA common stock that OrthAlliance
stockholders will receive in the merger may increase or decrease prior to
completion of the merger. OCA cannot assure you that the market price of OCA
common stock will not decrease before or after completion of the merger.
SPECIAL MEETING (PAGE 24)
A special meeting of the stockholders of OrthAlliance will be held on
November 7, 2001 at the following time and place:
November 7, 2001
9:00 a.m. (Pacific Time)
Torrance Marriott Hotel
3635 Fashion Way
Torrance, California 90503
At the special meeting, stockholders of OrthAlliance will be asked to
approve the merger agreement among OCA, OCA Acquisition Corporation and
OrthAlliance.
7
ORTHALLIANCE'S BOARD OF DIRECTORS RECOMMENDS THAT ORTHALLIANCE
STOCKHOLDERS APPROVE THE MERGER AGREEMENT (PAGE 25)
The Board of Directors of OrthAlliance believes that the proposed merger
among OCA, OCA Acquisition Corporation and OrthAlliance is in the best interests
of OrthAlliance stockholders, and recommends that OrthAlliance stockholders vote
"FOR" the proposal to approve the merger agreement. This belief is based on a
number of factors described in this document, including the receipt of a
fairness opinion from OrthAlliance's financial advisor.
VOTE REQUIRED TO COMPLETE THE MERGER (PAGE 25)
In order for the merger to be approved, a majority of the outstanding
shares of OrthAlliance Class A and Class B common stock, voting together as a
single class, that are entitled to vote at the special meeting must be voted in
favor of the merger agreement.
The following chart describes the OrthAlliance stockholder vote required to
approve the merger agreement:
Number of shares of OrthAlliance Class A and Class B common
stock outstanding on September 26, 2001................... 12,249,127
Number of votes necessary to approve the merger agreement... 6,124,564
Percentage of outstanding shares of OrthAlliance Class A and
Class B common stock necessary to approve the merger
agreement................................................. 50.01%
Number of votes that executive officers and directors of
OrthAlliance can cast as of September 26, 2001............ 330,393
Percentage of votes that executive officers and directors of
OrthAlliance can cast as of September 26, 2001............ 2.70%
RECORD DATE; VOTING POWER (PAGE 25)
You can vote at the special meeting of OrthAlliance stockholders if you
owned OrthAlliance Class A and Class B common stock as of the close of business
on September 26, 2001, the record date set by OrthAlliance's Board of Directors.
Each share of OrthAlliance Class A and Class B common stock is entitled to one
vote.
On September 26, 2001, there were 12,249,127 shares of OrthAlliance Class A
and Class B common stock outstanding and entitled to vote on the merger
agreement.
BACKGROUND OF THE MERGER (PAGE 31)
In 1999, OrthAlliance began to explore various strategic alternatives to
enhance stockholder value, including a sale of the company to OCA or a financial
investor. During 2000, OrthAlliance engaged U.S. Bancorp Piper Jaffray to advise
it in connection with these strategic alternatives and appointed special
committees of OrthAlliance's Board of Directors to evaluate these alternatives
and consider various acquisition proposals. U.S. Bancorp Piper Jaffray contacted
a number of financial investors about their interest in acquiring OrthAlliance,
and OrthAlliance engaged in discussions with several financial investors and OCA
about a potential transaction. In October 2000, OrthAlliance was contacted by a
potential financial buyer about the possibility of engaging in a "going private"
transaction involving OrthAlliance's affiliated practitioners. OrthAlliance
continued to negotiate with this potential financial buyer until it indicated on
May 8, 2001 that it was no longer interested in pursuing a transaction with
OrthAlliance. In April 2001, OCA contacted OrthAlliance to explore a potential
merger of the two companies. During April and May 2001, representatives of OCA
and OrthAlliance had several discussions and meetings about a potential merger
and negotiated the terms of a merger agreement.
8
On May 16, 2001, OCA's Board of Directors and OrthAlliance's special
committee and Board of Directors each met in separate special meetings to
consider the proposed merger between OrthAlliance and OCA and the terms of the
proposed merger agreement. OCA's Board of Directors and OrthAlliance's special
committee and Board of Directors received presentations from their respective
financial advisors, legal counsel, accountants and management regarding the
merger. Following these presentations and discussion among the members of the
respective boards of directors and OrthAlliance's special committee, the merger
agreement was separately approved by OCA's Board of Directors and by
OrthAlliance's special committee and Board of Directors on May 16, 2001.
WHY OCA AND ORTHALLIANCE ARE SEEKING TO MERGE (PAGES 37 AND 40)
The merger will combine the strengths of OCA and OrthAlliance. With
OrthAlliance becoming a wholly-owned subsidiary of OCA, the companies should be
able to achieve superior financial performances compared to each company
operating independently. One reason for this is that the combined companies are
expected to increase revenue growth by adding over 200 orthodontists and
pediatric dentists to OCA's existing base of over 400 affiliated orthodontists.
The combined companies should also provide an increase in operating margin
because OCA would be able to leverage its computer and operating systems and
other resources over a larger base of affiliated practitioners.
BOARD OF DIRECTORS AND MANAGEMENT OF OCA FOLLOWING THE MERGER (PAGE 89)
If the merger is completed, one of the directors of OrthAlliance will be
appointed by OCA's Board of Directors to serve as a director of OCA. That
director will be selected by the Boards of Directors of OCA and OrthAlliance.
Following the merger, Bartholomew F. Palmisano, Sr., currently the Chairman of
the Board, President and Chief Executive Officer of OCA, would continue to serve
in those positions.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 53)
The merger has been structured as a tax-free reorganization for U.S.
federal income tax purposes. Accordingly, OrthAlliance stockholders generally
will not recognize any gain or loss for U.S. federal income tax purposes on the
exchange of their OrthAlliance Class A and Class B common stock for OCA common
stock in the merger, except for OrthAlliance stockholders who receive cash
instead of fractional shares of OCA common stock or OrthAlliance Class B
stockholders who exercise their appraisal rights under Delaware law. OCA and
OrthAlliance, as well as current OCA stockholders, will not recognize any gain
or loss for U.S. federal income tax purposes as a result of the merger.
Determining the actual tax consequences of the merger to you can be complicated,
and will depend on your specific situation and many variables not within our
control. Accordingly, we strongly urge you to consult your own tax advisor for a
full understanding of the merger's tax consequences.
ACCOUNTING TREATMENT (PAGE 53)
We expect that the merger will be treated as a purchase transaction under
generally accepted accounting principles for accounting and financial reporting
purposes.
ORTHALLIANCE'S FINANCIAL ADVISOR SAID THAT THE PROPOSED MERGER
CONSIDERATION WAS FAIR TO ORTHALLIANCE STOCKHOLDERS FROM A FINANCIAL POINT OF
VIEW (PAGE 41)
U.S. Bancorp Piper Jaffray rendered an opinion to a special committee of
the Board of Directors of OrthAlliance that, as of the date of the opinion, the
merger consideration proposed to be received by the stockholders of OrthAlliance
was fair from a financial point of view to the stockholders of OrthAlliance.
This opinion is attached as Annex C to this document. You should read it
carefully.
9
INTERESTS OF ORTHALLIANCE DIRECTORS AND MANAGEMENT IN THE MERGER (PAGE 54)
Directors and executive officers of OrthAlliance will be issued shares of
OCA common stock in the merger on the same basis as other stockholders of
OrthAlliance. The following chart shows the number of shares of OCA common stock
that may be issued to directors and executive officers of OrthAlliance in the
merger:
Shares of OrthAlliance Class A and Class B common stock,
including stock options exercisable within 60 days,
beneficially owned by OrthAlliance executive officers and
directors on September 26, 2001........................... 1,099,292
Maximum number of shares of OCA common stock that may be
received in the merger by OrthAlliance officers and
directors, based upon this beneficial ownership and the
maximum exchange ratio.................................... 182,317
W. Dennis Summers, the Chairman of the Board and Interim President and
Chief Executive Officer of OrthAlliance, is a participant in OrthAlliance's stay
bonus and severance plan whereby, if Mr. Summers' employment is terminated for
any reason within 12 months following the completion of the merger, he would
receive payment of $200,000. In addition, Mr. Summers is to receive a stay bonus
equal to $33,333 at the earlier of three months following the completion of the
merger or termination of his employment by OrthAlliance for any reason other
than for cause following the completion of the merger. Various other
non-executive officers and employees of OrthAlliance are also participants in
this stay bonus and severance plan.
Various other officers of OrthAlliance, including Paul H. Hayase, Senior
Vice President, General Counsel and Secretary of OrthAlliance, Stephen M. Toon,
Senior Vice President and Chief Development Officer of OrthAlliance, and James
C. Wilson, Senior Vice President and Chief Financial Officer of OrthAlliance,
are parties to severance or employment agreements with OrthAlliance under which
they may be entitled to severance payments and benefits upon termination of
their employment following a change in control of OrthAlliance. We anticipate
that the merger would be a change in control for purposes of these agreements.
Dr. Randall K. Bennett, Dr. Larry D. Dormois, Dr. Raymond G. W. Kubisch and
Dr. Stephen G. Tracey, each of whom is a director of OrthAlliance and an
orthodontist or pediatric dentist affiliated with OrthAlliance, are eligible to
receive various financial incentives that OCA is offering to OrthAlliance
affiliated orthodontists and pediatric dentists who amend their employment
agreement and service or consulting agreement with OrthAlliance as provided in
the merger agreement, or who enter into OCA's form of business services
agreement effective as of the merger. These incentives, which consist of varying
amounts of OCA common stock, are conditioned on, among other things, the
completion of the merger. As of October 5, 2001, three of these directors have
signed amendments to their employment agreement and service or consulting
agreement, and are eligible to be granted shares of OCA common stock if the
merger is completed.
ORTHALLIANCE CLASS B STOCKHOLDERS HAVE APPRAISAL RIGHTS (PAGE 26)
Holders of OrthAlliance Class B common stock have the right to exercise
appraisal rights and to receive payment in cash for the fair value of their
shares of OrthAlliance Class B common stock as determined by the Delaware
Chancery Court. Holders of Class B common stock have appraisal rights under
Delaware law because these shares are neither publicly traded nor held of record
by more than 2,000 holders. The fair value of shares of OrthAlliance Class B
common stock as determined by the Delaware Chancery Court may be more or less
than, or the same as, the value of the OCA common stock to be received by
holders of OrthAlliance Class A common stock and OrthAlliance Class B common
stock who do not exercise appraisal rights. To exercise appraisal rights,
holders of OrthAlliance Class B common stock must follow precisely certain
procedures, or the appraisal rights may be lost. These procedures are described
in this Proxy Statement/Prospectus and the relevant provisions of Delaware law,
and include the requirement that the stockholders file certain notices with
OrthAlliance and refrain from voting their
10
shares in favor of the merger. If they exercise their appraisal rights, their
shares of OrthAlliance Class B common stock will not be exchanged for shares of
OCA common stock in the merger, and their only right will be to receive the
appraised fair value of their shares of OrthAlliance Class B common stock in
cash. A copy of the Delaware statute describing these appraisal rights and the
procedures for exercising them is attached as Annex B to this Proxy
Statement/Prospectus. OrthAlliance Class B stockholders who perfect their
appraisal rights and receive cash in exchange for their shares of OrthAlliance
Class B common stock may recognize gain or loss for U.S. federal income tax
purposes.
OrthAlliance Class A stockholders do not have the right under Delaware law
to exercise appraisal rights because OrthAlliance Class A common stock is
publicly traded on the Nasdaq Stock Market National Market System.
WE MUST MEET SEVERAL CONDITIONS TO COMPLETE THE MERGER (PAGE 58)
The completion of the merger depends on a number of conditions being met,
including the following:
- Stockholders of OrthAlliance approving the merger agreement;
- The New York Stock Exchange listing the shares of OCA common stock to be
issued to OrthAlliance stockholders;
- Receipt of all required approvals and the expiration of any regulatory
waiting periods;
- The absence of any governmental order blocking completion of the merger
or of any proceedings by a government body trying to block it;
- Receipt of opinions of legal counsel to OCA and OrthAlliance that the
merger will be treated for U.S. federal income tax purposes as a tax-free
reorganization under the Internal Revenue Code;
- The absence of any material adverse effect on OCA and OrthAlliance in
general; and
- At least 56 of 184 designated OrthAlliance affiliated professionals, and
a number of those OrthAlliance affiliated professionals representing at
least 30% of OrthAlliance's annual service fees, amending their
respective employment agreement and OrthAlliance service, management
service or consulting agreement on terms specified in the merger
agreement. As of October 5, 2001, 72 of these designated orthodontists
and pediatric dentists, along with their respective professional entity,
have signed amendments to their respective employment agreements and
OrthAlliance service, management service or consulting agreements,
representing 35.98% of OrthAlliance's service fees during the 12 months
ended March 31, 2001, which exceed the minimum amounts required under
this condition. These amounts, however, may change prior to completion of
the merger.
In cases where the law permits, a party to the merger agreement could elect
to waive a condition that has not been satisfied and complete the merger
although the party is entitled not to complete the merger. We cannot be certain
whether or when any of these conditions will be satisfied (or waived, where
permissible), or that the merger will be completed.
WE MAY TERMINATE THE MERGER AGREEMENT (PAGE 58)
OrthAlliance and OCA can agree at any time to terminate the merger
agreement without completing the merger, even if the stockholders of
OrthAlliance have already voted to approve it.
OCA can terminate the merger agreement if the Board of Directors of
OrthAlliance recommends, accepts or enters into an agreement or letter of intent
relating to an acquisition proposal other than the one described in this
document, or withdraws or modifies its recommendation of the merger agreement as
described in this document.
OrthAlliance can terminate the merger agreement if its Board of Directors
elects to terminate the merger agreement solely to concurrently enter into an
agreement relating to an acquisition proposal that the Board determines in good
faith is more favorable than the one described in this document, after
11
determining in good faith that the failure to do so would violate the Board's
fiduciary duties and giving notice to OCA.
Moreover, either OCA or OrthAlliance can terminate the merger agreement in
the following circumstances:
- If the merger isn't completed by November 30, 2001;
- If the stockholders of OrthAlliance do not approve the merger agreement;
- If the other party violates, in a significant way, any of its
representations, warranties, covenants or obligations contained in the
merger agreement; and
- If the other party does not satisfy its conditions required to complete
the merger, and these conditions have become incapable of being fulfilled
or cured and have not been waived.
Generally, a party can only terminate the merger agreement in one of these
situations if that party is not in violation of the merger agreement or if its
violations of the merger agreement are not the cause of the event permitting
termination.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 66)
Shares of OCA common stock are listed on the New York Stock Exchange under
the symbol "OCA." On May 16, 2001, the last full trading day prior to the public
announcement of the merger, OCA common stock closed at $29.50 per share. On
October 5, 2001, OCA common stock closed at $25.63 per share. Of course, the
market price of OCA common stock is expected to fluctuate prior to and after
completion of the merger, while the exchange ratio, once determined, is fixed.
You should obtain current stock price quotations for OCA common stock.
Shares of OrthAlliance Class A common stock are quoted on the Nasdaq Stock
Market National Market System under the symbol "ORAL." On May 16, 2001, the last
full trading day prior to the public announcement of the merger, OrthAlliance
Class A common stock closed at $3.24 per share. On October 5, 2001, OrthAlliance
Class A common stock closed at $2.55 per share. Of course, the market price of
OrthAlliance Class A common stock is expected to fluctuate prior to completion
of the merger, while the exchange ratio, once determined, is fixed. You should
obtain current stock price quotations for OrthAlliance Class A common stock.
Shares of OrthAlliance Class B common stock are not publicly traded.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE 95)
This document, and other documents to which you are referred in this
document, contain forward-looking statements that are subject to risks and
uncertainties. These forward-looking statements include information about
possible or assumed future results of our operations or the performance of the
combined companies after the merger. Forward-looking statements generally refer
to a future period and/or include any of the words "believes," "expects,"
"anticipates," "should," "would," "could," "will," "estimates," "plans" or
"intends" or similar expressions. Many possible events or factors could affect
each of our future financial results and performance and that of the combined
company after the merger and could cause those results or performance to differ
materially from those expressed in forward-looking statements. These possible
events or factors include the following:
- Problems or delays in bringing us together, either before or after the
merger is completed;
- Legal and regulatory risks and uncertainties;
- Economic, political and competitive forces affecting our businesses,
markets, constituencies or securities; and
- Inaccuracies in our analyses of these risks and forces, and lack of
success of strategies developed to deal with them.
12
COMPARATIVE UNAUDITED PER SHARE DATA
The following table shows information, for the periods indicated, about
OCA's and OrthAlliance's historical net income per share, dividends per share
and book value per share. The table also provides similar information that
reflects the merger of OCA and OrthAlliance (which is referred to as "pro forma"
information). In presenting the comparative pro forma information for certain
time periods, we have assumed the use of the purchase method of accounting. In
addition, the table provides "pro forma equivalent" information for
OrthAlliance, which was obtained by multiplying the OCA and OrthAlliance pro
forma amounts by assumed exchange ratios of 0.09214 and 0.16585 (the minimum and
maximum amounts of the exchange ratio). It is intended to reflect the fact that
OrthAlliance stockholders will be receiving less than one share of OCA common
stock for each share of OrthAlliance common stock exchanged in the merger.
BOOK VALUE PER SHARE:
DECEMBER 31, JUNE 30,
2000 2001
------------ --------
OCA historical.............................................. $5.76 $6.36
OrthAlliance historical..................................... 5.73 5.82
OCA and OrthAlliance pro forma (1) ......................... 6.31 6.94
OrthAlliance pro forma equivalent (assuming minimum exchange
ratio) (2) ............................................... 0.58 0.64
OrthAlliance pro forma equivalent (assuming maximum exchange
ratio) (3) ............................................... 1.05 1.15
NET INCOME (LOSS) PER SHARE:
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
2000 2001
------------ ----------
Basic:
OCA historical............................................ $(0.05)(4) $0.59
OrthAlliance historical................................... 0.74 0.26
OCA and OrthAlliance pro forma (1) ....................... 1.05(5) 0.61
OrthAlliance pro forma equivalent (assuming minimum
exchange
ratio) (2) ............................................ 0.09 0.06
OrthAlliance pro forma equivalent (assuming maximum
exchange
ratio) (3) ............................................ 0.17 0.10
Diluted:
OCA historical............................................ $(0.06)(4) $0.57
OrthAlliance historical................................... 0.74 0.26
OCA and OrthAlliance pro forma (1) ....................... 1.02(5) 0.60
OrthAlliance pro forma equivalent (assuming minimum
exchange
ratio) (2) ............................................ 0.09 0.06
OrthAlliance pro forma equivalent (assuming maximum
exchange
ratio) (3) ............................................ 0.17 0.10
13
CASH DIVIDENDS PER SHARE:
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
2000 2001
------------ ----------
OCA historical.............................................. -- --
OrthAlliance historical..................................... -- --
OCA and OrthAlliance pro forma (1) ......................... -- --
OrthAlliance pro forma equivalent (assuming minimum exchange
ratio) (2) ............................................... -- --
OrthAlliance pro forma equivalent (assuming maximum exchange
ratio) (3) ............................................... -- --
---------------
(1) Presented as if the merger of OrthAlliance into OCA had been effective
throughout the periods presented.
(2) Calculated by multiplying the OCA and OrthAlliance pro forma amount by an
assumed exchange ratio of 0.09214 (the minimum amount of the exchange
ratio).
(3) Calculated by multiplying the OCA and OrthAlliance pro forma amount by an
assumed exchange ratio of 0.16585 (the maximum amount of the exchange
ratio).
(4) Includes the cumulative effect of a change in accounting principle, net of
income tax benefit, of $1.02 per share. OCA's basic net income per share
before the cumulative effect of a change in accounting principle was $0.99
for the year ended December 31, 2000. OCA's diluted net income per share
before the cumulative effect of a change in accounting principle was $0.96
for the year ended December 31, 2000.
(5) Excludes the cumulative effect of a change in accounting principle.
14
SELECTED HISTORICAL FINANCIAL DATA AND
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following tables show summarized unaudited historical consolidated
financial data for OCA and for OrthAlliance and also show similar pro forma
information reflecting the merger among OCA, OCA Acquisition Corporation and
OrthAlliance. The pro forma information reflects the purchase method of
accounting for the merger.
The unaudited pro forma consolidated balance sheet at June 30, 2001 assumes
that the merger was completed on June 30, 2001. The unaudited pro forma
statements of income for the six months ended June 30, 2001 and the year ended
December 31, 2000 assumes that the merger was completed on January 1, 2000. The
purchase price allocation used in these unaudited pro forma financial statements
is based upon preliminary estimates, which are subject to change as additional
information is obtained.
The items in the following two paragraphs have not been factored into these
pro forma financial statements but could have a material impact on the actual
financial position and operating results of OCA after the merger.
We expect to incur merger-related expenses as a result of combining our
companies. We also anticipate that the merger will provide the combined
companies with financial benefits such as reduced operating expenses and the
opportunity to earn more revenue.
In connection with the proposed merger with OrthAlliance, OCA has
implemented six programs under which it may offer shares of its common stock to
orthodontists and pediatric dentists who are owners and employees of
professional entities that are parties to service, management service or
consulting agreements with OrthAlliance and its subsidiaries. Participation in
each of these programs would be conditioned upon amendment of the orthodontists'
or pediatric dentists' employment agreements and OrthAlliance service,
management service or consulting agreements or execution of new business
services agreements with OCA prior to the merger, execution of a participation
agreement and completion of the proposed merger with OrthAlliance, among other
things.
Because these items have not been factored into the pro forma financial
statements, the pro forma information, while helpful in illustrating the
financial attributes of the combined companies under one set of assumptions,
does not attempt to predict or suggest future results. Also, the information
provided for the six month period ended June 30, 2001 does not necessarily
indicate what the results will be for all of 2001.
The pro forma adjustments in the pro forma financial statements assume an
exchange ratio of 0.10135 shares of OCA common stock for each share of
OrthAlliance Class A and Class B common stock and a price per share of OCA
common stock of $30. This assumed exchange ratio was determined based on the
number of OrthAlliance affiliated practitioners who, along with their respective
professional entity, have signed amendments to their respective employment
agreements and OrthAlliance service, management service or consulting agreements
as of October 5, 2001, and the percentage of OrthAlliance's service fees during
the 12 months ended March 31, 2001 represented by these OrthAlliance affiliated
practitioners. The actual exchange ratio will depend upon how many of 184
designated orthodontists and pediatric dentists who are owners/employees of
professional entities that are parties to OrthAlliance service, management
service or consulting agreements, enter into, along with their professional
entity, amendments to their respective employment agreements and service,
management service or consulting agreements prior to completion of the merger,
as provided in the merger agreement, and the percentage of OrthAlliance's
service fees during the twelve months ended March 31, 2001 represented by those
orthodontists and pediatric dentists.
Assuming the minimum exchange ratio provided in the merger agreement, which
is 0.09214, the purchase price, the adjustment to reflect goodwill from the
merger and shareholders' equity would be $34.30 million, $23.24 million and
$352.63 million, respectively, in the pro forma balance sheet at June 30, 2001;
the number of shares used to compute earnings per share would increase by 1.13
million shares and earnings per share would be the same as the amount presented
in the pro forma condensed consolidated statement of income for the year ended
December 31, 2000; and the number of shares used to compute
15
earnings per share would increase by 1.13 million shares and earnings per share
would be the same as the amount presented in the pro forma condensed
consolidated statement of income for the six months ended June 30, 2001.
Assuming the maximum exchange ratio provided in the merger agreement, which
is 0.16585, the purchase price, the adjustment to reflect goodwill from the
merger and shareholders' equity would be $61.74 million, $50.69 million and
$380.08 million, respectively, in the pro forma condensed consolidated balance
sheet at June 30, 2001; the number of shares used to compute earnings per share
would increase by 2.03 million shares and earnings per share would decrease by
$0.01 from the amount presented in the pro forma condensed consolidated
statement of income for the year ended December 31, 2000; and the number of
shares used to compute earnings per share would have increased by 2.03 million
shares and earnings per share would be the same as the amount presented in the
pro forma condensed consolidated statement of income for the six months ended
June 30, 2001.
OCA believes that the assumptions used in preparing the unaudited pro forma
consolidated financial statements provide a reasonable basis for presenting all
of the significant effects of the merger other than any synergies anticipated by
OCA and nonrecurring charges directly attributable to the merger and that will
result from combining operations, and that the pro forma adjustments give effect
to those assumptions in the unaudited pro forma consolidated balance sheet and
the unaudited pro forma consolidated statements of income.
The information in the following tables is based on the historical
financial information of OCA and OrthAlliance that has been presented in their
prior filings with the Securities and Exchange Commission, and which have been
incorporated by reference into this Proxy Statement/Prospectus. All of the
summary financial information provided in the following tables should be read in
connection with this historical financial information. For information on how to
obtain OCA's and/or OrthAlliance's historical financial information presented in
their prior filings, you should refer to the section of this document captioned
"WHERE YOU CAN FIND MORE INFORMATION." The financial information as of and for
the interim periods ended June 30, 2001 and 2000 has not been audited and in the
respective opinions of management reflects all adjustments, consisting only of
normal recurring adjustments necessary to a fair presentation of such data.
16
ORTHODONTIC CENTERS OF AMERICA, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
STATEMENT OF INCOME DATA:
Fee revenue................................ $71,273 $117,326 $171,298 $226,290 $268,836 $125,124 $159,712
------- -------- -------- -------- -------- -------- --------
Direct expenses:
Employee costs........................... 19,895 33,429 46,878 61,224 78,051 36,617 45,652
Orthodontic supplies..................... 5,428 8,789 13,287 17,136 21,274 9,781 12,693
Rent..................................... 6,114 10,299 14,128 18,624 23,973 11,195 13,888
Marketing and advertising................ 6,644 9,855 15,491 16,874 22,001 10,171 12,698
------- -------- -------- -------- -------- -------- --------
Total direct expenses...................... 38,081 62,372 89,784 113,858 145,299 67,764 84,931
General and administrative................. 8,703 13,356 18,104 23,270 28,360 13,432 17,412
Depreciation and amortization.............. 2,814 5,640 9,124 12,238 15,175 7,210 9,014
------- -------- -------- -------- -------- -------- --------
Operating profit........................... 21,675 35,958 54,286 76,924 80,002 36,718 48,355
Interest (expense) income, net............. 1,935 1,143 280 (2,204) (3,731) (1,765) (2,248)
Non-controlling interest in subsidiary..... -- -- -- -- -- -- (79)
------- -------- -------- -------- -------- -------- --------
Income before income taxes................. 23,610 37,101 54,566 74,720 76,271 34,953 46,028
Provision for income taxes................. 9,208 14,469 20,753 28,206 28,549 13,142 17,374
------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of changes
in accounting principles................. 14,402 22,632 33,813 46,514 47,722 21,811 28,654
Cumulative effect of changes in accounting
principles, net of income tax benefit
(1)(2)................................... -- -- -- (678) (50,576) (50,576) --
------- -------- -------- -------- -------- -------- --------
Net income (loss).................. $14,402 $ 22,632 $ 33,813 $ 45,836 $ (2,854) $(28,765) $ 28,654
======= ======== ======== ======== ======== ======== ========
Net income per share before cumulative
effect of changes in accounting
principles (3)........................... $ 0.33 $ 0.50 $ 0.70 $ 0.96 $ 0.96 $ 0.45 $ 0.59
Cumulative effect of changes in accounting
principles, net of income tax benefit,
per share (1)(2)......................... -- -- -- (.02) (1.02) (1.05) --
------- -------- -------- -------- -------- -------- --------
Net income (loss) per share (3)............ $ 0.33 $ 0.50 $ 0.70 $ 0.94 $ (0.06) $ (0.60) $ 0.59
======= ======== ======== ======== ======== ======== ========
Weighted average shares outstanding (3).... 43,708 45,414 48,502 48,643 49,845 49,238 50,083
Pro forma net income for change in
accounting principle adopted effective
January 1, 2000 (2)(4)................... $ 8,288 $ 12,013 $ 22,276 $ 32,326 N/A N/A N/A
Pro forma net income per share for change
in accounting principle adopted effective
January 1, 2000 (2)(4)................... $ 0.19 $ 0.26 $ 0.46 $ 0.66 N/A N/A N/A
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
OPERATING DATA:
Number of orthodontic centers (5).......... 247 360 469 537 592 566 611
Comparable orthodontic center fee revenue
growth (6)............................... 22.2% 20.0% 19.2% 20.1% 22.6%(7) 22.4% 23.0%
Total case starts.......................... 44,910 70,611 95,377 126,307 160,639 38,004 46,840
17
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 11,827 $ 9,865 $ 1,601 $ 5,822 $ 4,690 $ 7,725 $ 7,322
Working capital........................... 40,219 68,243 59,634 102,276 39,573 37,291 55,731
Total assets (8).......................... 142,460 224,805 292,472 362,816 367,947 324,519 395,110
Total debt................................ 3,397 10,393 31,332 58,793 61,001 58,615 61,347
Total equity.............................. 114,887 190,740 231,159 278,527 287,196 252,215 318,336
---------------
"N/A" Not applicable for the period indicated.
(1) This amount represents a cumulative effect of a change in accounting
principle effective January 1, 1999 related to Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities."
(2) This amount represents a cumulative effect of a change in accounting
principle effective January 1, 2000 related to revenue recognition and Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101").
(3) These amounts represent the dilutive effect of the exercise of common
equivalent shares (stock options) outstanding during the year.
(4) Pro forma amounts were calculated assuming OCA's change in revenue
recognition effective January 1, 2000 pursuant to SAB 101 had been in effect
for all periods presented.
(5) These amounts are presented as of the end of the period.
(6) These amounts represent the growth in fee revenue in the indicated period
relative to the comparable prior-year period by orthodontic centers that
were affiliated with OCA throughout each of the two periods being compared.
There were 53 of these comparable orthodontic centers in 1995, 75 in 1996,
130 in 1997, 227 in 1998, 332 in 1999, 469 in 2000, 468 in the six months
ended June 30, 2000 and 527 in the six months ended June 30, 2001. The
amount of that 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 about 26 months. OCA's affiliated orthodontic centers have typically
reached maturity as patients are added during the first 26 months of
operations.
(7) This amount represents the growth in fee revenue in 2000 for orthodontic
centers open throughout 1999 and 2000, compared to pro forma fee revenue for
these centers in 1999, calculated as if OCA's change in accounting principle
pursuant to SAB 101 effective January 1, 2000 had been in effect throughout
1999 and 2000.
(8) To conform to the balance sheet presentation as of December 31, 2000,
amounts reported as of December 31, 1996, 1997, 1998 and 1999 as patient
prepayments (previously reported as a liability) have been reclassified as a
reduction of service fees receivable.
18
ORTHALLIANCE, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------- -------------------
1997 1998 1999 2000 (1) 2000 (1) 2001 (1)
------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
INCOME STATEMENT DATA:
Net revenues................... $18,081 $ 74,387 $ 95,703 $142,014 $ 66,201 $ 76,789
Costs and expenses
Salaries and benefits........ 5,771 22,880 28,423 42,461 18,468 24,277
Orthodontic supplies......... 1,684 7,436 9,438 13,903 6,180 7,597
Rent......................... 1,751 6,327 8,252 11,761 5,559 6,146
------- -------- -------- -------- -------- --------
Total direct
expenses........... 9,206 36,643 46,113 68,125 30,207 38,020
General and administrative..... 5,403 21,456 26,686 43,410 20,571 25,791
Depreciation and
amortization................. 245 2,426 3,983 6,737 3,142 3,809
Other.......................... 3,392 -- -- -- -- --
------- -------- -------- -------- -------- --------
Total operating
expenses........... 18,246 60,525 76,782 118,272 53,920 67,620
------- -------- -------- -------- -------- --------
Operating (loss) income........ (165) 13,862 18,921 23,742 12,281 9,169
Interest expense............... -- (555) (2,450) (7,371) (3,246) (3,908)
Interest income................ 270 351 416 675 348 375
------- -------- -------- -------- -------- --------
Income before income taxes..... 105 13,658 16,887 17,046 9,383 5,636
Provision for income taxes..... 841 6,123 7,304 7,511 4,120 2,446
------- -------- -------- -------- -------- --------
Net (loss) income.... $ (736) $ 7,535 $ 9,583 $ 9,535 $ 5,263 $ 3,190
======= ======== ======== ======== ======== ========
Net (loss) income per share
(2):
Basic and diluted............ $ (0.18) $ 0.58 $ 0.72 $ 0.74 $ 0.41 $ 0.26
======= ======== ======== ======== ======== ========
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------------------- -------------------
1997 1998 1999 2000 (1) 2000 (1) 2001 (1)
------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SUPPLEMENTAL OPERATING DATA:
Cumulative annual patient
revenues at affiliation, net
(3).......................... $71,226 $109,987 $145,995 $190,807 $183,391 $192,166
Cumulative allied
practitioners................ 99 137 177 225 218 226
Cumulative number of offices... 178 245 318 394 381 397
Cumulative states
represented.................. 18 29 32 32 32 32
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------------------- -------------------
1997 1998 1999 2000 (1) 2000 (1) 2001 (1)
------- -------- -------- -------- -------- --------
(IN THOUSANDS)
(UNAUDITED)
BALANCE SHEET DATA:
Working capital................ $13,329 $ 13,235 $ 21,530 $ 11,525 $ 13,205 $ 15,474
Total assets................... 44,363 88,580 135,259 184,906 177,110 179,672
Total long-term debt (including
current portion)............. -- 15,500 49,644 83,010 80,182 75,892
Stockholders' equity........... 34,028 59,256 67,812 74,060 71,740 77,389
---------------
(1) See Note 3 of Notes to OrthAlliance's Consolidated Financial Statements
included elsewhere in this Proxy Statement/ Prospectus for a description of
the New Image acquisition in March 2000.
(2) See Note 16 of Notes to OrthAlliance's Consolidated Financial Statements
included elsewhere in this Proxy Statement/ Prospectus for an explanation of
shares used in computing net income per share.
(3) Excludes internal same-store growth.
19
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2001
(UNAUDITED)
HISTORICAL
-----------------------
OCA ORTHALLIANCE ADJUSTMENTS PRO FORMA
-------- ------------ ----------- ---------
(IN THOUSANDS)
ASSETS:
Current assets
Cash and cash equivalents................... $ 7,322 $ 6,581 $ -- $ 13,903
Patient receivables......................... -- 17,947 (17,947)(1) --
Unbilled patient receivables................ -- 3,869 (3,869)(1) --
Service fees receivable..................... 44,125 -- 8,488(1) 44,125
(8,488)(2)
Advances to orthodontic entities............ 8,873 13,934 (3,145)(2) 19,662
Deferred income taxes....................... 1,439 135 8,232(3) 9,806
Supplies inventory.......................... 7,361 -- -- 7,361
Prepaid expenses and other assets........... 3,508 472 (325)(4) 3,655
-------- -------- -------- --------
Total current assets................ 72,628 42,938 (17,054) 98,512
Property, equipment and improvements, net..... 81,646 7,761 (1,100)(5) 88,307
Notes receivable.............................. -- 5,789 -- 5,789
Advances to orthodontic entities, less current
portion..................................... 10,513 -- -- 10,513
Deferred income taxes......................... 24,026 697 (12,213)(3) 12,510
Management agreements......................... 202,777 121,656 (25,013)(6) 299,420
Goodwill...................................... -- -- 26,676(7) 26,676
Other assets.................................. 3,520 831 (831)(8) 3,520
-------- -------- -------- --------
Total other assets.................. 322,482 136,734 (12,481) 446,735
-------- -------- -------- --------
Total assets........................ $395,110 $179,672 $(29,535) $545,247
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities
Accounts payable............................ $ 2,497 $ 3,051 $ -- $ 5,548
Accrued salaries and other accrued
liabilities.............................. 5,428 4,171 4,975(9) 14,574
Patient prepayments......................... -- 13,328 (13,328)(1) --
Service fee prepayments..................... -- -- 19,837(2) 19,837
Deferred revenue............................ 1,876 -- -- 1,876
Deferred income tax liabilities............. -- 22 (22)(9) --
Income taxes payable........................ 2,253 54 -- 2,307
Amounts payable to orthodontic entities..... 3,294 4,427 -- 7,721
Current portion of long-term debt and notes
payable.................................. 1,549 2,411 -- 3,960
-------- -------- -------- --------
Total current liabilities........... 16,897 27,464 11,462 55,823
Long-term debt and notes payable, less current
portion..................................... 59,798 73,481 -- 133,279
Deferred income taxes......................... -- 1,338 (1,338)(3) --
Non-controlling interest in subsidiary........ 79 -- -- 79
Shareholders' equity
Common stock................................ 489 13 (13)(10) 501
12(11)
Additional paid-in capital.................. 170,976 65,851 (65,851)(10) 208,694
37,718(11)
Retained earnings........................... 150,232 18,182 (18,182)(10) 150,232
Treasury stock.............................. -- (6,657) 6,657(10) --
Accumulated other comprehensive income...... (127) -- -- (127)
Due from key employees for stock purchase
program.................................. (1,490) -- -- (1,490)
Capital contributions receivable from
shareholders............................. (1,744) -- -- (1,744)
-------- -------- -------- --------
Total shareholders' equity.......... 318,336 77,389 (39,659) 356,066
-------- -------- -------- --------
Total liabilities and shareholders'
equity............................ $395,110 $179,672 $(29,535) $545,247
======== ======== ======== ========
20
---------------
(1) Reflects the reclassification of OrthAlliance patient receivables, unbilled
patient receivables and patient prepayments to service fees receivables to
conform with OCA's financial statement presentation.
(2) Reflects the adjustment of OrthAlliance service fees receivable, notes
receivable and advances due from orthodontists and/or pediatric dentists
and service fee prepayments to conform to OCA's revenue recognition policy.
(3) Reflects the deferred tax effects that would result upon the merger due to
differences between the book and tax basis of OrthAlliance's assets and
liabilities.
(4) Reflects the adjustment of prepaid expenses and other assets related to
insurance policies and other prepayments that are not expected to be
maintained after the merger.
(5) Reflects adjustment to write-off property, equipment and leasehold
improvements that will have no value to OCA.
(6) Reflects the adjustment of service, management service and consulting
agreements to estimated fair value at the completion of the merger. This
estimate of fair value is preliminary and could change substantially after
OCA performs a more complete evaluation of the service, management service
and consulting agreements. This adjustment does not reflect the value of
stock to be issued to OrthAlliance orthodontists and pediatric dentists in
exchange for amending existing employment and service, management service
or consulting agreements or signing new OCA business services agreements
prior to the merger under various incentive programs that may be offered to
those orthodontists and pediatric dentists, which when determined will
increase the value of the service, management service and consulting
agreements.
(7) Reflects the excess of purchase price over the fair value of the net assets
acquired.
The excess of purchase price over tangible assets acquired is computed as
follows:
Total consideration paid computed as total shares of
OrthAlliance Class A and Class B common stock outstanding
of 12.25 million at June 30, 2001 times the assumed
exchange ratio of 0.10135 or 1.24 million shares of OCA
common stock at $30.39 per share.......................... $ 37,730
OrthAlliance's net book value at June 30, 2001.............. $ 77,389
Pro forma adjustments posted (numbers in parentheses below refer to other
footnotes to this pro forma balance sheet):
(2) Adjust receivables to conform to OCA's revenue
recognition policy..................................... $(31,470)
(3) Record deferred tax effects of merger............... (2,621)
(4) Decrease prepaid expenses not expected to be
maintained............................................. (325)
(5) Record adjustment for PP&E with no value............ (1,100)
(6) Service, management service and consulting agreement
adjustment............................................. (25,013)
(8) Write-off of unamortized debt costs................. (831)
(9) Accrual of merger costs............................. (4,975)
--------
Pro forma net book value as of June 30, 2001................ $ 11,054
--------
Pro forma goodwill recorded................................. $ 26,676
========
(8) Reflects the write-off of unamortized deferred debt issuance costs related
to a line of credit which is to be refinanced at or near completion of the
merger.
(9) Represents accrual of estimated merger costs such as $2.5 million for
payments under employment agreements, $2.3 million for financial advisory
and legal fees and expenses and $125,000 for a lease termination payment.
(10) Reflects elimination of the shareholders' equity accounts of OrthAlliance.
(11) Reflects shares of OCA common stock issued in exchange for all outstanding
shares of OrthAlliance Class A and Class B common stock. This adjustment
does not reflect the value of OCA common stock to be issued to OrthAlliance
orthodontists and pediatric dentists in exchange for amending existing
employment and service, management service or consulting agreements or
signing new OCA business services agreements prior to the merger under
various incentive programs that may be offered to those orthodontists and
pediatric dentists.
21
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
HISTORICAL
-----------------------
OCA ORTHALLIANCE ADJUSTMENTS PRO FORMA
-------- ------------ ----------- ---------
(IN THOUSANDS)
Fee revenue................................... $159,712 $76,789 $ (2,366)(1) $234,135
-------- ------- -------- --------
Direct expenses:
Employee costs.............................. 45,652 24,277 -- 69,929
Advertising and marketing................... 12,698 -- 665(2) 13,363
Rent........................................ 13,888 6,146 -- 20,034
Orthodontic supplies........................ 12,693 7,597 -- 20,290
-------- ------- -------- --------
Total direct expenses......................... 84,931 38,020 665 123,616
General and administrative.................. 17,412 25,791 (665)(2) 42,538
Depreciation and amortization............... 9,014 3,809 (79)(3) 12,244
(500)(4)
-------- ------- -------- --------
Operating income.............................. 48,355 9,169 (1,787) 55,737
Interest (expense) income, net................ (2,248) (3,533) -- (5,781)
Non-controlling interest in subsidiary........ (79) -- -- (79)
-------- ------- -------- --------
Income before income taxes.................... 46,028 5,636 (1,787) 49,877
Provision for income taxes.................... 17,374 2,446 (675)(5) 19,145
-------- ------- -------- --------
Net income.......................... $ 28,654 $ 3,190 $ (1,112) $ 30,732
======== ======= ======== ========
Outstanding shares............................ 48,813 12,249 (12,249)(6) 48,813
Common stock equivalents...................... 1,270 1 (1)(6) 1,270
Transaction shares issued..................... -- -- 1,242(7) 1,242
-------- ------- -------- --------
Total outstanding common stock and common
stock equivalents........................... 50,083 12,250 (11,008)(6) 51,325
======== ======= ======== ========
Net income per share -- diluted............... $ 0.57 $ 0.26 $ 0.60
======== ======= ========
---------------
(1) Reflects the adjustment of OrthAlliance's fee revenue to conform to OCA's
revenue recognition policy.
(2) Reflects reclassification of OrthAlliance's advertising and marketing
expenses from general and administrative to conform to OCA's financial
statement presentation.
(3) Reflects change in depreciation expense related to property, equipment and
leasehold improvements that will have no value to OCA.
(4) Reflects change in amortization expense due to the revaluation of service,
management service and consulting agreements. This adjustment does not
reflect the value of OCA common stock to be issued to OrthAlliance
orthodontists and pediatric dentists in exchange for amending existing
employment and service, management service or consulting agreements or
signing new OCA business services agreements prior to the merger under
various incentive programs that may be offered to those orthodontists and
pediatric dentists.
(5) Reflects the income tax effect of pro forma adjustments at OCA's historical
effective income tax rate, as adjusted for tax effects related to the
merger.
(6)Reflects elimination of the shareholders' equity accounts of OrthAlliance.
(7) Reflects shares of OCA common stock to be issued to OrthAlliance
stockholders in the merger.
22
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR YEAR ENDED DECEMBER 31, 2000
(UNAUDITED)
HISTORICAL
-------------------------
OCA ORTHALLIANCE ADJUSTMENTS PRO FORMA
-------- ------------ ----------- ---------
(IN THOUSANDS)
Fee revenue................................. $268,836 $142,014 $(9,377)(1) $401,473
-------- -------- ------- --------
Direct expenses:
Employee costs............................ 78,051 42,461 -- 120,512
Advertising and marketing................. 22,001 -- 5,007(2) 27,008
Rent...................................... 23,973 11,761 -- 35,734
Orthodontic supplies...................... 21,274 13,903 -- 35,177
-------- -------- ------- --------
Total direct expenses....................... 145,299 68,125 5,007 218,431
General and administrative................ 28,360 43,410 (5,007)(2) 66,763
Depreciation and amortization............. 15,175 6,737 (157)(3) 20,665
(1,090)(4)
-------- -------- ------- --------
Operating income............................ 80,002 23,742 (8,130) 95,614
Interest (expense) income, net.............. (3,731) (6,696) -- (10,427)
-------- -------- ------- --------
Income before income taxes.................. 76,271 17,046 (8,130) 85,187
Provision for income taxes.................. 28,549 7,511 (3,069)(5) 32,991
-------- -------- ------- --------
Net income........................ $ 47,722 $ 9,535 $(5,061) $ 52,196
======== ======== ======= ========
Outstanding shares.......................... 48,412(6) 12,858 (12,858)(7) 48,412
Common stock equivalents.................... 1,433 48 (48) 1,433
Transaction shares issued................... -- -- 1,242(8) 1,242
-------- -------- ------- --------
Total outstanding common stock and common
stock equivalents......................... 49,845 12,906 (11,664)(7) 51,087
======== ======== ======= ========
Net income per share -- diluted............. $ 0.96(6) $ 0.74 $ 1.02
======== ======== ========
---------------
(1) Reflects the adjustments of OrthAlliance's fee revenue to conform to OCA's
revenue recognition policy.
(2) Reflects reclassification of OrthAlliance's advertising and marketing
expenses from general and administrative to conform to OCA's financial
statement presentation.
(3) Reflects change in depreciation expense related to property, equipment and
leasehold improvements that will have no value to OCA.
(4) Reflects change in amortization expense due to the revaluation of service,
management service and consulting agreements. This adjustment does not
reflect the value of OCA common stock to be issued to OrthAlliance
orthodontists and pediatric dentists in exchange for amending existing
employment and service, management service or consulting agreements or
signing new OCA business services agreements prior to the merger under
various incentive programs that may be offered to those orthodontists and
pediatric dentists.
(5) Reflects the income tax effect of pro forma adjustments at OCA's historical
effective income tax rate, as adjusted for tax effects related to the
merger.
(6)Reflects OCA's income before the cumulative effect of a change in accounting
principle pursuant to SAB 101 effective January 1, 2000.
(7)Reflects elimination of the shareholders' equity accounts of OrthAlliance.
(8) Reflects shares of OCA common stock to be issued to OrthAlliance
stockholders in the merger.
23
ORTHALLIANCE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is first being mailed on or about October
10, 2001 to all persons who were OrthAlliance stockholders on September 26,
2001.
Along with this Proxy Statement/Prospectus, OrthAlliance stockholders are
being provided with a Notice of Special Meeting and a form of proxy card that is
solicited by OrthAlliance's Board of Directors for use at the special meeting of
OrthAlliance stockholders and at any adjournments or postponements of that
meeting.
At the special meeting, OrthAlliance stockholders will consider and vote
upon a proposal to approve and adopt an Agreement and Plan of Merger, dated as
of May 16, 2001, among OrthAlliance, OCA and OCA's wholly-owned subsidiary, OCA
Acquisition Corporation. The merger agreement provides for the merger of OCA
Acquisition Corporation into OrthAlliance, with OrthAlliance thereby becoming a
wholly-owned subsidiary of OCA.
The special meeting of OrthAlliance stockholders will be held at the
following time and place:
November 7, 2001
9:00 a.m. (Pacific Time)
Torrance Marriott Hotel
3635 Fashion Way
Torrance, California 90503
OCA stockholders are not voting on the merger agreement.
PROXIES
We encourage you to promptly vote your proxy by completing, signing, dating
and returning the enclosed proxy card solicited by OrthAlliance's Board of
Directors, even if you plan to attend the special meeting.
You may revoke any proxy given in connection with this solicitation by:
- Delivering to OrthAlliance's corporate Secretary a written notice
revoking the proxy prior to the taking of the vote at the OrthAlliance
special meeting;
- Delivering a duly executed proxy relating to the same shares bearing a
later date; or
- Attending the meeting and voting in person (although, attendance at the
OrthAlliance special meeting without voting at the meeting will not in
and of itself constitute a revocation of a proxy).
You should address all written notices of revocation and other
communications with respect to the revocation of proxies to the following:
OrthAlliance, Inc.
21535 Hawthorne Boulevard, Suite 200
Torrance, California 90503
Attention: Paul H. Hayase, Secretary
For a notice of revocation or later proxy to be valid, however,
OrthAlliance must actually receive it prior to the vote of OrthAlliance
stockholders at the special meeting. OrthAlliance will vote all shares of
OrthAlliance common stock represented by valid proxies received through this
solicitation and not revoked before they are exercised. If no specification is
made, OrthAlliance will vote the proxies in favor of approval of the merger
agreement.
OrthAlliance is currently unaware of any other matters that may be
presented for action at the OrthAlliance special meeting. If other matters do
properly come before the special meeting, then shares of
24
OrthAlliance Class A and Class B common stock represented by proxies will be
voted (or not voted) by the persons named in the proxies in their discretion.
SOLICITATION OF PROXIES
In addition to the solicitation of proxies by mail, OrthAlliance will
request banks, brokers and other record holders of OrthAlliance Class A and
Class B common stock to send proxy cards and proxy material to the beneficial
owners of OrthAlliance common stock and obtain their voting instructions, if
necessary. OrthAlliance will reimburse these record holders for their reasonable
expenses in so doing. OrthAlliance has also made arrangements with Morrow & Co.,
Inc. to assist them in soliciting proxies from banks, brokers and nominees, and
has agreed to pay Morrow & Co., Inc. $7,500 plus expenses for their services. If
necessary, OrthAlliance may also use several of its regular employees, who will
not be specially compensated, to solicit proxies from OrthAlliance stockholders,
either personally or by telephone, telegram, facsimile or special delivery
letter.
RECORD DATE AND VOTING RIGHTS
OrthAlliance's Board of Directors has fixed September 26, 2001 as the
record date for the determination of OrthAlliance stockholders entitled to
receive notice of and to vote at OrthAlliance's special meeting of stockholders.
Accordingly, only OrthAlliance stockholders of record at the close of business
on September 26, 2001 will be entitled to notice of and to vote at the special
meeting. At the close of business on OrthAlliance's record date, there were
12,249,127 shares of OrthAlliance Class A and Class B common stock entitled to
vote together as a single group at the special meeting, held by approximately
132 holders of record, and the directors and executive officers of OrthAlliance
beneficially owned about 2.70% of the outstanding shares of OrthAlliance Class A
and Class B common stock.
The presence, in person or by proxy, of stockholders holding a majority of
the voting power of all outstanding shares of OrthAlliance Class A and Class B
common stock entitled to vote will constitute a quorum for the special meeting.
Each share of OrthAlliance Class A and Class B common stock outstanding on the
record date entitles the holder of the share to one vote as to the approval of
the merger agreement or any other proposal that may properly come before the
special meeting.
For purposes of determining the presence or absence of a quorum for the
transaction of business, OrthAlliance will count shares of OrthAlliance Class A
and Class B common stock present in person at the special meeting but not
voting, and for which OrthAlliance has received proxies but with respect to
which holders of such shares have abstained, as present at the special meeting.
Abstentions are counted as present at the special meeting for purposes of
determining whether a quorum exists and have the effect of a vote "against" any
matter as to which they are specified. Proxies submitted by brokers that do not
indicate a vote for some or all of the proposals because they don't have
discretionary voting authority and have not received instructions as to how to
vote on those proposals (so-called "broker non-votes") will be counted as
present at the special meeting for purposes of determining whether a quorum
exists and have the effect of a vote "against" any proposal as to which
instructions on how to vote were not provided.
Under OrthAlliance's bylaws and the Delaware General Corporation Law,
approval of the merger agreement requires the affirmative vote of the holders of
a majority of the outstanding shares of OrthAlliance Class A and Class B common
stock, voting together as a single class, that are entitled to vote at the
special meeting. Because approval of the merger agreement requires the
affirmative vote of a majority of the outstanding shares of OrthAlliance Class A
and Class B common stock, abstentions and broker non-votes will have the same
effect as negative votes. Accordingly, OrthAlliance's Board of Directors urges
you to complete, date and sign the accompanying proxy card and return it
promptly in the enclosed, postage-paid envelope.
RECOMMENDATION OF ORTHALLIANCE'S BOARD OF DIRECTORS
OrthAlliance's Board of Directors has approved the merger agreement.
OrthAlliance's Board of Directors believes that the merger is in the best
interests of OrthAlliance and its stockholders and
25
recommends that OrthAlliance stockholders vote "FOR" approval and adoption of
the merger agreement. The conclusion of OrthAlliance's Board of Directors with
respect to the merger is based on a number of factors, including the receipt of
a fairness opinion from OrthAlliance's financial advisor. See "THE
MERGER -- OrthAlliance's Reasons for the Merger; Recommendation of
OrthAlliance's Board of Directors."
APPRAISAL RIGHTS
When the merger is completed, holders of OrthAlliance Class B common stock
who do not vote in favor of the adoption of the merger agreement and who comply
with the procedures prescribed in Section 262 of the Delaware General
Corporation Law will be entitled to a judicial appraisal of the fair value of
their shares, exclusive of any element of value arising from the accomplishment
or expectation of the merger, and to receive payment of the fair value of their
shares in cash, together with a judicially determined fair rate of interest.
Appraisal rights are available to holders of OrthAlliance Class B common stock
under the Delaware General Corporation Law because OrthAlliance Class B common
stock is neither publicly traded nor held of record by more than 2,000 holders.
HOLDERS OF ORTHALLIANCE CLASS A COMMON STOCK ARE NOT ENTITLED TO APPRAISAL
RIGHTS IN CONNECTION WITH THE MERGER BECAUSE SHARES OF ORTHALLIANCE CLASS A
COMMON STOCK ARE QUOTED FOR PUBLIC TRADING ON THE NASDAQ STOCK MARKET NATIONAL
MARKET SYSTEM.
Appraisal rights allow the stockholder to receive cash in the amount of the
fair value of the shares as appraised by the Delaware Court of Chancery in lieu
of consideration the stockholder would otherwise receive in the merger. A person
having a beneficial interest in shares of OrthAlliance Class B common stock that
are held of record in the name of another person, such as a broker or nominee,
must act promptly to cause the record holder to follow the steps summarized
below properly and in a timely manner to perfect whatever appraisal rights the
beneficial owner may have.
The following discussion is not a complete statement of the law pertaining
to appraisal rights under Delaware law. Any holder of OrthAlliance Class B
common stock who wishes to exercise such appraisal rights, or who wishes to
preserve his or her right to do so, should review Section 262 of the Delaware
General Corporation Law, a copy of which is attached as Annex B to this Proxy
Statement/Prospectus, and the following discussion carefully. Because of the
complexity of Section 262 and the need to comply strictly with various technical
requirements, you should read Annex B in its entirety.
The availability of appraisal rights is conditioned upon full compliance
with procedures set forth in Section 262 of Delaware General Corporation Law.
Failure to comply timely and properly with the procedures specified in that
section will result in the complete loss of appraisal rights. Accordingly, any
OrthAlliance Class B stockholder who wishes to receive the value of his or her
OrthAlliance Class B common stock in cash should consult with his or her own
legal counsel.
PROCEDURE FOR THE EXERCISE OF ORTHALLIANCE CLASS B STOCKHOLDERS APPRAISAL
RIGHTS. At least 20 days prior to the special meeting at which the merger
agreement is submitted to OrthAlliance stockholders for approval, OrthAlliance
must notify each holder of Class B common stock that appraisal rights are
available under Section 262 of the Delaware General Corporation Law and include
in such notice a copy of Section 262. THIS PROXY STATEMENT/PROSPECTUS
CONSTITUTES SUCH NOTICE, AND THE APPLICABLE STATUTORY PROVISIONS ARE ATTACHED TO
THIS PROXY STATEMENT/PROSPECTUS AS ANNEX B.
In order to be eligible to exercise appraisal rights, an OrthAlliance Class
B stockholder must:
- Deliver to OrthAlliance a written demand for appraisal of the
stockholder's shares prior to the vote on the merger agreement; and
- Not vote such shares of OrthAlliance Class B common stock in favor of the
merger agreement.
A vote against the adoption of the merger agreement will not in and of
itself constitute a written demand for appraisal satisfying the requirements of
Section 262. The written demand must reasonably inform OrthAlliance of the
identity of the stockholder and that the stockholder intends to demand
26
appraisal of the fair value of the shares of OrthAlliance Class B common stock
that he or she holds. A stockholder's failure to make the written demand prior
to the taking of the vote on the adoption of the merger agreement at the special
meeting of OrthAlliance stockholders will constitute a waiver of appraisal
rights.
If the merger is completed, within 10 days after the effective date of the
merger, OrthAlliance, as the surviving corporation of the proposed merger with
OCA Acquisition Corporation, must notify each dissenting holder of OrthAlliance
Class B common stock who satisfied the statutory requirements for appraisal
rights of the date of the completion of the merger.
JUDICIAL APPRAISAL OF ORTHALLIANCE CLASS B COMMON STOCK. Within 120 days
after the completion of the merger, OrthAlliance or any OrthAlliance Class B
stockholder who has complied with Section 262 may file a petition in the
Delaware Court of Chancery demanding a determination of the fair value of the
holder's shares of OrthAlliance Class B common stock. OrthAlliance is under no
obligation to file such a petition and has no present intention to file such a
petition. Accordingly, it is the obligation of the holders of OrthAlliance Class
B common stock to initiate all necessary action to perfect their appraisal
rights in respect of their shares of OrthAlliance Class B common stock within
the time period prescribed in Section 262.
Within 120 days after the effective date of the merger, any OrthAlliance
Class B stockholder who has complied with the requirements for the exercise of
appraisal rights under Section 262 will be entitled, upon written request, to
receive from OrthAlliance a statement setting forth the aggregate number of
shares of OrthAlliance Class B common stock not voted in favor of the adoption
of the merger agreement and with respect to which demands for appraisal have
been received and the aggregate number of stockholders of such shares.
OrthAlliance must mail such statement within 10 days after receipt of a written
request for the statement or within 10 days after the expiration of the period
for delivery of demands for appraisal, whichever is later.
If a holder of OrthAlliance Class B common stock timely files a petition
for appraisal and a copy of the petition is served upon OrthAlliance,
OrthAlliance will be obligated within 20 days to file with the Delaware Register
in Chancery a duly verified list containing the names and addresses of all
holders of Class B common stock who have demanded payments for their shares and
with whom agreements as to the value of their shares have not been reached.
After notice to such stockholders as required by the court, the Delaware Court
of Chancery is empowered to conduct a hearing on such a petition to determine
those stockholders who have complied with Section 262 and who have become
entitled to appraisal rights under Section 262. The Delaware Court of Chancery
may require the holders of OrthAlliance Class B common stock who demanded
payment for their shares to submit their stock certificates to the Delaware
Register in Chancery for notation on the certificate of the pendency of the
appraisal proceeding. If any stockholder fails to comply with such direction,
the Delaware Court of Chancery may dismiss the proceedings as to such
stockholder.
After determining the holders of OrthAlliance Class B common stock entitled
to an appraisal, the Delaware Court of Chancery will appraise the fair value of
their shares of OrthAlliance Class B common stock, exclusive of any element of
value arising from the accomplishment or expectation of the merger, together
with a fair rate of interest, if any, to be paid upon the amount determined to
be fair value. Holders of OrthAlliance Class B common stock considering seeking
appraisal should be aware that the fair value of their shares of OrthAlliance
Class B common stock as so determined could be more than, the same as or less
than the consideration they would receive pursuant to the merger if they did not
seek appraisal of their shares of OrthAlliance Class B common stock. They should
also be aware that investment banking opinions as to fairness from a financial
point of view are not necessarily opinions as to fair value under Section 262.
The Delaware Supreme Court has stated that proof of value by any techniques or
methods which are generally considered acceptable in the financial community and
otherwise admissible in court should be considered in the appraisal proceedings.
In addition, Delaware courts have decided that the statutory appraisal remedy,
depending on factual circumstances, may or may not be the exclusive remedy of a
stockholder seeking appraisal. The Delaware Court of Chancery will also
determine
27
the amount of interest, if any, to be paid upon the amounts to be received by
persons whose shares of OrthAlliance Class B common stock have been appraised.
The costs of the action may be determined by the court and taxed upon the
parties as the court deems equitable. The court may also order that all or a
portion of the expenses incurred by any stockholder in connection with an
appraisal, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts utilized in the appraisal proceeding, be charged
pro rata against the value of all shares entitled to be appraised.
Any holder of OrthAlliance Class B common stock who has duly demanded an
appraisal in compliance with Section 262 will not, after the effective time of
the merger, be entitled to vote the shares of OrthAlliance Class B common stock
subject to such demand for any purpose or be entitled to the payment of
dividends or other distributions on those shares of OrthAlliance Class B common
stock (except dividends or other distributions payable to holders of record of
OrthAlliance Class B common stock as of a record date prior to the completion of
the merger).
If any stockholder who demands appraisal of his or her shares of
OrthAlliance Class B common stock under Section 262 fails to perfect, or
effectively withdraws or loses, such holder's right to appraisal, the shares of
OrthAlliance Class B common stock of such stockholder will be deemed to have
been converted at completion of the merger into the right to receive the
appropriate number of shares of OCA common stock. A stockholder will fail to
perfect, or effectively lose or withdraw, the holder's right to appraisal if no
petition for appraisal is filed within 120 days after the completion of the
merger, or if the stockholder delivers to OrthAlliance a written withdrawal of
the holder's demand for appraisal and an acceptance of the merger, except that
any such stockholder's attempt to withdraw made more than 60 days after the
completion of the merger will require the written approval of OrthAlliance and,
once a petition for appraisal is filed, the appraisal proceeding may not be
dismissed as to any stockholder absent court approval.
28
THE MERGER
The discussion in this Proxy Statement/Prospectus of the merger of OCA
Acquisition Corporation, a wholly-owned subsidiary of OCA, into OrthAlliance,
with OrthAlliance thereby becoming a wholly-owned subsidiary of OCA, does not
purport to be complete and is qualified by reference to the full text of the
merger agreement and the other annexes attached to, and incorporated by
reference into, this Proxy Statement/Prospectus.
DESCRIPTION OF THE MERGER
Upon completion of the merger, OCA Acquisition Corporation, a wholly-owned
subsidiary of OCA, will merge into OrthAlliance, the separate corporate
existence of OCA Acquisition Corporation will cease, and OrthAlliance will be
the surviving corporation and continue to exist as a Delaware corporation and a
wholly-owned subsidiary of OCA. Subject to the satisfaction or waiver of certain
conditions set forth in the merger agreement, the merger will become effective
upon the filing of articles of merger in the offices of the Secretary of State
of the State of Delaware in accordance with the Delaware General Corporation
Law. See "THE MERGER AGREEMENT -- Conditions to the Merger."
At the effective time of the merger, OrthAlliance stockholders, other than
holders of OrthAlliance Class B common stock who perfect appraisal rights under
Delaware law, will have no further rights as OrthAlliance stockholders, other
than to receive the consideration to be issued to them in the merger. After the
effective time, there will be no transfers on OrthAlliance's stock transfer
books of shares of OrthAlliance common stock. If, after the effective time of
the merger, stock certificates representing shares of OrthAlliance common stock
are presented for transfer to the exchange agent for the merger, they will be
canceled and exchanged for certificates representing shares of OCA common stock
as provided in the merger agreement.
The merger will have the effects set forth in Section 251 of the Delaware
General Corporation Law.
Upon completion of the merger, OCA Acquisition Corporation's articles of
incorporation and bylaws as in effect upon completion of the merger will be
those of OrthAlliance, as the surviving corporation.
EXCHANGE RATIO
At the effective time of the merger, automatically by virtue of the merger
and without any action on the part of any party or stockholder, each share of
OrthAlliance Class A and Class B common stock outstanding immediately prior to
the effective time will become and be converted into the right to receive a
fixed number of shares of OCA common stock. The amount of the exchange ratio
will depend upon how many of 184 designated orthodontists and pediatric dentists
who are owners/employees of professional entities that are parties to
OrthAlliance service, management service or consulting agreements, enter into,
along with their professional entity, amendments to their respective employment
agreements and service, management service or consulting agreements prior to the
merger, as provided in the merger agreement and the percentage of OrthAlliance's
service fees during the 12 months ended March 31, 2001 represented by those
orthodontists and pediatric dentists. The following chart describes the number
of shares of OCA common stock to be exchanged for each share of Class A and
Class B common stock:
ORTHALLIANCE AFFILIATED PRACTITIONERS EXECUTING AMENDMENTS
------------------------------------------------------------
PERCENTAGE OF ORTHALLIANCE ANNUAL
EXCHANGE RATIO NUMBER SERVICE FEES REPRESENTED
-------------- ------------------ ---------------------------------
0.09214.......................... 56 or less or Less than 31.00%
0.10135.......................... At least 57 to 75 and At least 31.00%-40.99%
0.11056.......................... At least 76 to 93 and At least 41.00%-50.99%
0.12899.......................... At least 94 to 112 and At least 51.00%-60.99%
0.16585.......................... 113 or more and 61.00% or more
As of October 5, 2001, 72 of these designated orthodontists and pediatric
dentists, along with their respective professional entity, have signed
amendments to their respective employment agreements and
29
OrthAlliance service, management service or consulting agreements, representing
35.98% of OrthAlliance's service fees during the 12 months ended March 31, 2001.
Based upon those amounts, OrthAlliance stockholders would receive 0.10135 shares
of OCA common stock for each share of OrthAlliance Class A and Class B common
stock in the merger. These amounts, however, may change prior to completion of
the merger.
In the amendment to their respective employment agreement, the OrthAlliance
affiliated orthodontist or pediatric dentist, and his or her professional
entity, would agree to include OrthAlliance as a third party beneficiary and
continue the orthodontist's or pediatric dentist's employment as an orthodontist
or pediatric dentist, as applicable, for a period of at least three years
following the merger. In the amendment to his or her respective OrthAlliance
service, management service or consulting agreement, the OrthAlliance affiliated
orthodontist or pediatric dentist, and his or her professional entity, would
agree to use OCA's proprietary computer software and business systems in
connection with the business functions of his or her practice, maintain the
current status of the advertisement or non-advertisement, as the case may be, of
his or her practice to the general public, unless OCA otherwise agrees, and
continue the orthodontist's or pediatric dentist's employment as an orthodontist
or pediatric dentist, as applicable, for a period of at least three years
following the merger.
The exchange ratio will not be adjusted to reflect any change in the price
of OCA common stock. OCA expects the market price of its common stock to
fluctuate due to market factors beyond its control between the date of this
Proxy Statement/Prospectus and the date on which the merger is completed and
thereafter. Since the exchange ratio, once determined, is fixed and the market
price of OCA common stock is expected to fluctuate and may decrease, the implied
market value of OCA common stock that OrthAlliance stockholders will receive in
the merger may increase or decrease prior to completion of the merger. For
further information concerning the historical market prices of OCA common stock
and OrthAlliance Class A common stock, see "PRICE RANGE OF COMMON STOCK AND
DIVIDENDS." OCA cannot assure you that the market price of OCA common stock will
not decrease before or after the merger.
If, prior to the merger, shares of OCA common stock are changed into a
different number or class of shares due to any reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment, or
if a stock dividend is declared on the shares of OCA common stock with a record
date prior to the merger, the exchange ratio will be adjusted accordingly.
Shares of OrthAlliance Class B common stock with respect to which appraisal
rights have been properly demanded in accordance with Section 262 of the
Delaware General Corporation Law or held directly or indirectly by OCA or
OrthAlliance or any of their respective subsidiaries will not be converted into
OCA common stock automatically at the effective time of the merger. At the
effective time, all shares of OrthAlliance common stock held directly or
indirectly by OCA or OrthAlliance or any of their respective subsidiaries will
be canceled and will cease to exist, and no OCA common stock or other
consideration will be delivered in exchange for such shares. Also at the
effective time, all shares of OCA common stock held by OrthAlliance or its
subsidiaries will become treasury stock and all other shares of OCA common stock
outstanding as of the effective time will remain outstanding.
APPRAISAL RIGHTS
Shares of OrthAlliance Class B common stock as to which appraisal rights
have been properly demanded under Delaware law will not be converted into the
right to receive, or be exchangeable for, OCA common stock. Instead, the holders
of these shares will be entitled to cash payment of the appraisal value of the
shares in accordance with Section 262 of the Delaware General Corporate Law.
However, if any holder of these shares subsequently delivers a written
withdrawal of their demand for appraisal rights, or if any holder fails to
establish his or her entitlement to appraisal rights, the holder will forfeit
his or her appraisal rights and his or her shares of OrthAlliance Class B common
stock will be deemed to have been converted into the right to receive, and to
have become exchangeable for, the consideration due under the merger agreement.
See "ORTHALLIANCE SPECIAL MEETING -- Appraisal Rights."
30
OUTSTANDING OPTIONS AND WARRANTS
At the effective time of the merger, each unexpired option or warrant
granted by OrthAlliance to purchase shares of OrthAlliance Class A or Class B
common stock which is outstanding and unexercised immediately prior to the
effective time will cease to represent a right to acquire shares of OrthAlliance
Class A or Class B common stock and will automatically be assumed by OCA and
converted into an option or warrant, as applicable, to purchase a number of
shares of OCA common stock at an exercise price determined as follows:
- The number of shares of OCA common stock to be subject to an option or
warrant as converted will equal the product of the number of shares of
OrthAlliance Class A or Class B common stock subject to the option or
warrant times the exchange ratio, with any fractional shares of OCA
common stock rounded down to the nearest whole share; and
- The exercise price per share of OCA common stock under an option or
warrant as converted will equal the exercise price per share of
OrthAlliance Class A or Class B common stock subject to the option or
warrant divided by the exchange ratio, with the exercise price rounded up
to the nearest cent.
At the effective time of the merger agreement, the other terms of each
OrthAlliance option or warrant will continue to apply in accordance with its
terms, the applicable stock option plan and applicable law, except that
references to OrthAlliance and its subsidiaries will mean OCA and its
subsidiaries.
BACKGROUND OF THE MERGER
In 1999, OrthAlliance began a review of its business and corporate strategy
in light of the declining market price of OrthAlliance Class A common stock.
In September 1999, representatives of OrthAlliance and OCA engaged in
preliminary discussions about the possibility of pursuing a strategic merger or
acquisition. OCA indicated that it was not interested in pursuing such a
transaction at that time.
On March 9, 2000, OrthAlliance engaged U.S. Bancorp Piper Jaffray to advise
OrthAlliance with respect to strategic and financial alternatives to enhance
stockholder value and created a special committee of OrthAlliance's Board of
Directors to explore proposals for the combination, sale or restructuring of
OrthAlliance. This special committee consisted of three directors of
OrthAlliance, W. Dennis Summers, G. Harry Durity and Craig McKnight. During
Spring 2000, OrthAlliance's Board of Directors and the special committee
received presentations from management and U.S. Bancorp Piper Jaffray as to
various matters, including an overview of several strategic alternatives. U.S.
Bancorp Piper Jaffray then began a process of soliciting indications of interest
from parties who might be interested in buying, or making an equity investment
in, OrthAlliance. U.S. Bancorp Piper Jaffray and OrthAlliance prepared a
confidential offering memorandum describing OrthAlliance and between March 2000
and October 2000, U.S. Bancorp Piper Jaffray contacted approximately 73
potential financial buyers, 37 of whom signed a confidentiality agreement and
received the confidential memorandum. The one potential strategic buyer
identified by U.S. Bancorp Piper Jaffray was OCA, who at that time did not
express an interest in OrthAlliance.
Four potential financial buyers submitted preliminary non-binding
indications of interest during Summer 2000, three of whom conducted a due
diligence review of OrthAlliance and received presentations from OrthAlliance
management. OrthAlliance also received an additional inquiry from another party
proposing a $15 million to $20 million private equity transaction. In late
August 2000, one of the potential financial buyers submitted a non-binding offer
to acquire OrthAlliance and the party that submitted the private equity inquiry
submitted a revised offer. The special committee's attempts to improve either
offer in the succeeding weeks were unsuccessful, and both potential investors
soon informed OrthAlliance that they were no longer interested in a transaction
with OrthAlliance, even at lower transaction values. Effective October 16, 2000,
OrthAlliance's Board of Directors disbanded the special committee, because it
determined that none of the potential investors was interested in proceeding and
that there were no
31
remaining expressions of interest for OrthAlliance to pursue. On October 16,
2000, the closing price of OrthAlliance's Class A common stock was $4.1875 per
share.
In early November, another potential financial buyer contacted U.S. Bancorp
Piper Jaffray to express an interest in participating in a "going private"
transaction and over the next several months engaged in discussions with U.S.
Bancorp Piper Jaffray and OrthAlliance's management. In mid-December 2000, this
potential financial buyer provided a preliminary term sheet to OrthAlliance.
To avoid potential conflicts of interest that could have arisen from the
evaluation of the potential financial buyer's proposal for the acquisition of
OrthAlliance or other proposals submitted by, or with the participation of,
members of OrthAlliance's Board of Directors, management and/or affiliated
orthodontists and pediatric dentists, on January 2, 2001, OrthAlliance's Board
of Directors formed a new special committee to evaluate all anticipated
proposals for the combination, sale or restructuring of OrthAlliance. The
special committee was authorized to consider the terms of any such proposals, to
negotiate definitive agreements with respect to such proposals and to report to
OrthAlliance's Board of Directors the special committee's recommendations and
conclusions with respect to any proposals. In making its determinations, the
special committee was authorized to establish such procedures, review such
information, and engage such financial advisors and legal counsel as it deemed
appropriate. OrthAlliance's Board selected Messrs. Durity and McKnight as the
members of the special committee. Messrs. Durity and McKnight were members of
OrthAlliance's Board of Directors and were not employed by OrthAlliance or any
of OrthAlliance's affiliated practices.
In early January 2001, Bartholomew F. Palmisano, Sr., the Chief Executive
Officer of OCA, engaged in preliminary discussions with W. Dennis Summers, the
Interim Chief Executive Officer of OrthAlliance, regarding the possibility of
the parties pursuing a strategic merger. The parties entered into a
confidentiality agreement to facilitate the exchange of due diligence materials.
On January 5, 2001, Mr. Summers, other representatives of OrthAlliance and two
of OrthAlliance's affiliated practitioners met with Mr. Palmisano in Metairie,
Louisiana to engage in further preliminary discussions. The parties did not
elect to pursue a transaction at that time.
The potential financial buyer conducted due diligence at OrthAlliance's
main business office in mid-January 2001 and indicated that it was interested in
continuing to proceed with a transaction.
On January 24, 2001, OrthAlliance issued a press release stating that its
Board of Directors had adopted resolutions creating a special committee to
explore strategic alternatives to increase stockholder value and that the
special committee was authorized to hire an investment banker and other advisors
to assist the special committee in performing its duties.
On January 31, 2001, OrthAlliance's Board of Directors reconstituted the
special committee due to time conflicts in the business schedule of Mr. Durity,
replacing Mr. Durity with Robert W. Miller, a newly-appointed member of
OrthAlliance's Board. Mr. Miller was not employed by OrthAlliance or any of
OrthAlliance's affiliated practices.
On February 9, 2001, the special committee met with U.S. Bancorp Piper
Jaffray to discuss the firm's relationship with OrthAlliance, its prior efforts
to arrange a strategic transaction for OrthAlliance and its view of
OrthAlliance's long-term prospects. U.S. Bancorp Piper Jaffray informed the
special committee that it was currently in discussions with several potential
bidders, including the potential financial buyer that expressed an interest in
pursuing a "going private" transaction. The special committee also met with
members of OrthAlliance's management to discuss OrthAlliance's financial
condition and future prospects, the status of pending litigation and certain
notices received by OrthAlliance from affiliated practitioners threatening to
terminate their service, management service and consulting agreements with
OrthAlliance.
On February 16, 2001, the special committee again met with U.S. Bancorp
Piper Jaffray and formally engaged U.S. Bancorp Piper Jaffray to serve as its
financial advisor. At the meeting, the special committee then reviewed with its
advisors a draft merger agreement it had received from the potential financial
buyer proposing to acquire OrthAlliance for $4.25 cash per share of OrthAlliance
common stock. Members of the special committee expressed concern over several
provisions in the draft merger agreement, particularly
32
a "break-up" fee of $5 million if the transaction was not completed by August 1,
2001 and several conditions to complete the merger that were not within the
control of OrthAlliance, such as the following conditions:
- OrthAlliance affiliated practitioners representing at least 75% of
OrthAlliance's annual revenue for fiscal year 2000 must have agreed to
extend their employment agreements with OrthAlliance's affiliated
practices until September 30, 2004;
- OrthAlliance affiliated practitioners must have agreed to co-invest in
cash or OrthAlliance common stock approximately $19 million in a parent
company of OrthAlliance's successor; and
- OrthAlliance's revolving credit facility must have remained in place on
substantially the same terms following the financial buyer's acquisition
of OrthAlliance.
The special committee negotiated with the potential financial buyer and
attempted to revise the draft merger agreement to exclude or revise these
conditions and to reduce or restructure the break-up fee.
From February 16 to February 22, 2001, U.S. Bancorp Piper Jaffray reviewed
certain financial and other information concerning OrthAlliance, met with
certain members of OrthAlliance's management and met by telephone with the
potential financial buyer to discuss its proposal. During the same period, the
special committee met by telephone with the potential financial buyer to
negotiate the terms of the draft merger agreement.
On February 22, 2001, Mr. Miller, on behalf of the special committee, and
representatives of the potential financial buyer met in Atlanta, Georgia, to
negotiate the terms of the draft merger agreement. During the meeting, the
potential financial buyer was unwilling to increase the cash price per share to
be paid to OrthAlliance's stockholders and indicated that its initial $4.25 cash
offer would be subject to downward adjustment based on its continuing due
diligence review of OrthAlliance. The potential financial buyer also expressed
hesitation in acquiring OrthAlliance unless the acquisition was structured as an
acquisition led by OrthAlliance affiliated practitioners. At the conclusion of
the meeting, the potential financial buyer informed the special committee that
it was suspending further negotiations until it discussed with certain
OrthAlliance affiliated practitioners their degree of support for the potential
financial buyer's acquisition proposal. Those discussions ensued during March
2001.
On March 30, 2001, the special committee received a term sheet containing a
revised proposal from the potential financial buyer and from certain of
OrthAlliance's affiliated practitioners, including the following members of
OrthAlliance's Board: Dr. Randall K. Bennett, Dr. Douglas D. Durbin, Dr. Raymond
G. W. Kubisch, Dr. Stephen G. Tracey and Dr. Larry D. Dormois. Since the merger
agreement was approved by OrthAlliance's Board of Directors, Dr. Durbin has
resigned from the Board. The revised proposal set forth terms substantially
similar to the terms contained in the draft merger agreement previously
presented to the special committee, although the potential financial buyer now
proposed a formula-based price tied to the average market price per share of
OrthAlliance's Class A common stock prior to execution of a definitive
agreement, rather than a fixed cash price per share. The formula-based price
yielded a price per share of OrthAlliance common stock of $2.79 to
OrthAlliance's stockholders as of the date of the revised proposal.
Between April 6, 2001 and April 24, 2001, the parties and their
representatives engaged in negotiations regarding the terms of the revised
proposal as set forth in a revised draft of the merger agreement. During these
negotiations, the potential financial buyer stated that it would be necessary
for it to maintain a relationship with OrthAlliance's senior lenders following
the potential financial buyer's acquisition of OrthAlliance. The special
committee informed the potential financial buyer that OrthAlliance's senior
lenders would likely require a reduction in their commitments to OrthAlliance
under OrthAlliance's revolving credit facility and/or some form of additional
equity investment or reduction of indebtedness prior to consenting to any
acquisition of OrthAlliance by the potential financial buyer.
In early April 2001, Mr. Summers was contacted by Mr. Palmisano, OCA's
Chief Executive Officer. Mr. Palmisano indicated that OCA might be interested in
acquiring OrthAlliance. On April 10, 2001,
33
Mr. Summers informed the special committee, through its legal counsel, of his
discussions with Mr. Palmisano. The special committee subsequently directed Mr.
Summers to continue discussions with Mr. Palmisano. During April 2001, OCA and
its advisors reviewed due diligence materials provided to them by OrthAlliance.
On April 24, 2001, the special committee was informed that negotiations
between the potential financial buyer and First Union National Bank, the agent
under OrthAlliance's revolving credit facility, over the terms of a consent by
OrthAlliance's senior lenders to the potential financial buyer's acquisition of
OrthAlliance had been suspended by First Union. Between April 24, 2001 and May
4, 2001, the special committee and its advisors attempted to recommence
negotiations between First Union and the potential financial buyer and to
arrange a meeting between First Union and the potential financial buyer.
On April 26, 2001, Mr. Summers informed the special committee that he had
arranged a meeting with OCA to discuss a potential transaction with OCA, and
that OCA was retaining Banc of America Securities LLC to act as its financial
advisor in connection with the potential transaction. On April 27, 2001, Mr.
Summers and the special committee's legal counsel met with Mr. Palmisano and
OCA's legal counsel, and discussed possible transaction structures, including a
stock-for-stock merger of the two companies.
On May 2, 2001, the special committee received a draft merger agreement
from OCA's legal counsel. The special committee and its representatives reviewed
the terms of the draft merger agreement and determined to schedule a meeting
with OCA to further discuss OCA's proposal. Pursuant to the terms of a
confidentiality agreement entered into between OrthAlliance and the potential
financial buyer, the special committee informed the potential financial buyer
that OrthAlliance had received an indication of interest from another bidder.
On May 4, 2001, Mr. Miller, on behalf of the special committee, and Mr.
Palmisano, on behalf of OCA, along with their respective legal counsel and
financial advisors, met in Atlanta, Georgia. Mr. McKnight attended the meeting
by telephone. During the meeting, the parties discussed the terms of the draft
merger agreement, including a proposed condition to OCA's obligation to complete
the merger based on the execution by a minimum number of OrthAlliance's
affiliated practitioners of certain amendments to their existing employment
agreements and service, management service and consulting agreements with
OrthAlliance.
On May 7, 2001, Mr. Miller spoke by telephone with the potential financial
buyer to discuss its progress in meetings with First Union and whether First
Union was willing to recommend to OrthAlliance's other senior lenders that they
approve the potential financial buyer's acquisition of OrthAlliance. The
potential financial buyer indicated that First Union would be in a position to
consent to the execution of a binding agreement between OrthAlliance and the
potential financial buyer on an expedited basis but that it would take between
two to three weeks before all of OrthAlliance's senior lenders would be in a
position to approve the consummation of the acquisition. The potential financial
buyer indicated that First Union and the other senior lenders were still in the
process of assessing the new credit relationship that would be established if
the potential financial buyer were to acquire OrthAlliance. Mr. Miller informed
the potential financial buyer that he was not opposed to entering into a
definitive agreement with a limited financing contingency necessitated by the
senior lenders' inability to deliver a final approval for the transaction in a
timely manner, but that the acquisition price per share originally proposed by
the potential financial buyer would need to be increased to account for the
addition of such a limited financing contingency. In response, the potential
financial buyer proposed a two-tier offer price of either $2.95 per share
contingent upon 70% of OrthAlliance's affiliated practitioners extending their
employment agreements through September 30, 2004 or $2.55 per share contingent
upon 60% of OrthAlliance's affiliated practitioners similarly extending their
employment agreements. The potential financial buyer further stated that its
offer would expire at noon on May 8, 2001.
At a meeting of the special committee on May 7, 2001, the special committee
was informed that OrthAlliance's management had received a preliminary proposal
from a second potential financial buyer with respect to the acquisition of
OrthAlliance through an employee stock ownership plan. The special
34
committee determined that in light of the advanced stages of its negotiations
with the initial potential financial buyer and OCA and the complexities of a
transaction involving an employee stock ownership plan, it was not in a position
to initiate discussions with a new bidder at such time. The special committee,
however, instructed U.S. Bancorp Piper Jaffray to communicate to the potential
bidder that the special committee would consider its proposal along with other
proposals currently being considered by the special committee.
On May 8, 2001, the special committee received a letter from the initial
potential financial buyer sent prior to its noon deadline stating that the
potential financial buyer was rescinding its offer and was no longer interested
in acquiring OrthAlliance. The potential financial buyer stated that pursuing a
transaction with OrthAlliance was not viable for the potential financial buyer
given the position of OrthAlliance's senior lenders and the terms proposed by
the special committee with regard to a limited financing contingency.
Later on May 8, 2001, Mr. Palmisano contacted Messrs. Miller and McKnight
and communicated to the special committee a revised proposal for OCA's
acquisition of OrthAlliance, including the use of a tiered exchange ratio and
changes to the condition to OCA's obligation to complete the merger based upon
the amount of OrthAlliance's affiliated practitioners who amended the terms of
their employment agreements and service, management service and consulting
agreements with OrthAlliance.
At a meeting of the special committee on May 8, 2001, the special committee
and its advisors reviewed OCA's revised proposal and determined that in light of
the rescission of the potential financial buyer's proposal earlier in the day
and the substantial improvement in the terms of OCA's proposal, Mr. Miller would
continue his discussions with Mr. Palmisano.
Between May 8, 2001 and May 11, 2001, representatives of OCA, OrthAlliance
and the special committee continued to negotiate the terms of a merger agreement
between OCA and OrthAlliance.
On May 9, 2001 and May 14, 2001, OCA's Board of Directors met by telephone
with OCA's management and its advisors to discuss the terms of a potential
merger with OrthAlliance, the results of OCA's due diligence review of
OrthAlliance and Banc of America Securities' preliminary views of the proposed
financial terms of the merger. OCA's Board of Directors discussed the merits of
a transaction with OrthAlliance as well as specific terms of the proposed merger
agreement. OCA's Board authorized Mr. Palmisano to continue negotiations with
OrthAlliance.
From February 2001 until May 12, 2001, the special committee periodically
updated OrthAlliance's full Board of Directors as to the general status of its
negotiations with the potential financial buyer and OCA.
On May 12, 2001, OrthAlliance's Board of Directors, together with advisors
to OrthAlliance and the special committee, met in Atlanta, Georgia, to consider
a revised draft of the merger agreement. OrthAlliance's legal counsel reviewed
with OrthAlliance's directors their fiduciary duties in connection with their
consideration of the proposed merger. The special committee's legal counsel
reviewed the principal terms of the draft merger agreement. U.S. Bancorp Piper
Jaffray presented a preliminary analysis of the financial terms of the merger
and the results of its due diligence review of OCA. OrthAlliance's directors
questioned U.S. Bancorp Piper Jaffray regarding certain aspects of its valuation
methodologies and analyses and extensively discussed the advantages and
disadvantages of the proposed merger with OCA. At the conclusion of the meeting,
OrthAlliance's Board instructed the special committee and its advisors to
continue negotiations with OCA.
From May 13, 2001 to May 16, 2001, the parties continued to negotiate
specific terms and conditions of the merger agreement, including provisions that
related to determination of the exchange ratios.
On May 16, 2001, OCA's Board of Directors met in a special meeting held by
telephone to consider the proposed merger with OrthAlliance and the terms of the
proposed merger agreement. OCA's Board received presentations from its advisors
regarding the merger, the terms of the proposed merger agreement and the
directors' fiduciary duties. Banc of America Securities presented a financial
analysis, outlined in
35
materials distributed to OCA's directors, of the exchange ratio in the merger
and delivered its oral opinion, which opinion was subsequently confirmed by
delivery of its written opinion dated May 16, 2001, to OCA's Board of Directors
that as of such date, and based on and subject to the assumptions, limitations
and considerations stated therein, the exchange ratio in the merger was fair
from a financial point of view to OCA. Following these presentations and
discussions among the members of OCA's Board, the definitive merger agreement
was approved by OCA's Board of Directors.
Also on May 16, 2001, the special committee, together with its advisors,
held a meeting by telephone to discuss the proposed merger with OCA. A copy of
the final version of the merger agreement, a fairness opinion from U.S. Bancorp
Piper Jaffray and related analyses and other materials had been delivered to the
special committee prior to the meeting. The special committee discussed with its
advisors the terms of the proposed final version of the merger agreement. U.S.
Bancorp Piper Jaffray then presented a financial analysis, outlined in materials
distributed to the special committee, of OCA's offer and delivered an opinion
addressed to the special committee that the merger consideration proposed to be
received by the stockholders of OrthAlliance was fair to the holders of
OrthAlliance common stock from a financial point of view. Following the delivery
of such opinion, the special committee unanimously determined that:
- The merger, the merger agreement and the transactions contemplated were
advisable, fair to and in the best interests of OrthAlliance and its
stockholders; and
- The special committee recommend to OrthAlliance's Board of Directors that
it approve, accept and declare advisable the merger, the merger agreement
and the transactions contemplated thereby and recommend to OrthAlliance's
stockholders that they approve the merger and the merger agreement.
Following this meeting of the special committee, OrthAlliance's Board of
Directors, together with its advisors and the special committee's legal counsel,
held a meeting by telephone to consider the recommendation of the special
committee and to consider the proposed merger with OCA. A final version of the
merger agreement, the fairness opinion from U.S. Bancorp Piper Jaffray to the
special committee and related analyses and other materials had been delivered to
the directors prior to the meeting. OrthAlliance's legal counsel reviewed with
the directors the fiduciary duties of the directors and discussed the terms of
the proposed final version of the merger agreement. U.S. Bancorp Piper Jaffray
then presented a financial analysis, outlined in materials distributed to
OrthAlliance's Board, of OCA's offer and reviewed its opinion to the special
committee that the merger consideration proposed to be received by the
stockholders of OrthAlliance was fair to the holders of OrthAlliance common
stock from a financial point of view. OrthAlliance's Board extensively discussed
the advantages and disadvantages of entering into a merger agreement with OCA.
In light of the potential conflicts of interests involving the directors who are
practitioners affiliated with OrthAlliance and who might receive incentives,
along with other OrthAlliance affiliated practitioners, to amend their
employment agreements and service, management service or consulting agreements,
the directors held two votes. In the first vote, the directors of OrthAlliance
who were not practitioners affiliated with OrthAlliance determined that:
- The merger, the merger agreement and the transactions contemplated
thereby were advisable, fair to and in the best interests of OrthAlliance
and its stockholders;
- OrthAlliance's Board recommend to OrthAlliance's stockholders that they
approve the merger and the merger agreement; and
- OrthAlliance's management was authorized to finalize the appropriate
documents and execute a definitive merger agreement.
In the second vote, OrthAlliance's full Board of Directors, with one dissent,
adopted these same resolutions.
Final negotiations with respect to the merger agreement and related
schedules continued through the evening of May 16, 2001 and the merger agreement
was executed later that evening. A press release announcing the merger agreement
was issued on May 17, 2001.
36
ORTHALLIANCE'S REASONS FOR THE MERGER; RECOMMENDATION OF ORTHALLIANCE'S BOARD OF
DIRECTORS
OrthAlliance's Board of Directors considered and approved the merger
agreement at a special meeting of the Board held on May 16, 2001. In reaching
its decision to approve the merger and the merger agreement, OrthAlliance's
Board of Directors considered the following factors:
BUSINESS, FINANCIAL CONDITION AND PROSPECTS. In evaluating the terms of
the proposed merger and the merger agreement, OrthAlliance's Board of Directors
considered, among other things, information with respect to the financial
condition, results of operation, business and prospects of OrthAlliance. The
directors particularly considered the future prospects of OrthAlliance,
including the following factors:
- Growth Prospects. The Board believed that OrthAlliance's historically
low stock price and its restricted ability to incur additional
indebtedness had prevented and would continue to prevent OrthAlliance, as
an independent company, from realizing its business strategy of expanding
its network of affiliated orthodontic and pediatric dental practices.
Specifically, although OrthAlliance regularly had met analysts' earnings
estimates, the closing price of OrthAlliance's Class A common stock on
May 16, 2001, the date of the special meeting of OrthAlliance's Board to
consider the merger, was $3.24 per share, a decrease of 73.0% from
OrthAlliance's initial public offering price of $12.00 per share on
August 26, 1997. This low valuation made it difficult for OrthAlliance to
utilize its common stock in connection with acquisitions. In addition,
OrthAlliance's revolving credit facility restricted the amount of new
indebtedness OrthAlliance could incur to fund acquisitions, and
OrthAlliance was approaching limitations on its leverage ratio and its
fixed charge coverage ratio included in its revolving credit facility,
which might also restrict OrthAlliance's ability to affiliate with
additional practices. OrthAlliance's Board had also been informed by
OrthAlliance's management that cash from operations might not be
sufficient to fund OrthAlliance's growth and that OrthAlliance had
reduced the number of new affiliations with orthodontists and pediatric
dentists in order to conserve capital resources. OrthAlliance's Board
further believed that the market price for OrthAlliance Class A common
stock could decline further as a result of anticipated decreases in
acquisition activity and an associated decrease in revenue growth
attributable to acquisitions. OrthAlliance's Board therefore believed
that OrthAlliance was unlikely to be able to fund, except at a minimum
level, the expansion of its network of affiliated practices through
either issuances of equity, the incurrence of additional debt or through
cash from operations.
- Deteriorating Relationship with Certain Affiliated
Practitioners. Because many of OrthAlliance's affiliated practitioners
received shares of OrthAlliance common stock and options to purchase
OrthAlliance common stock in consideration of their affiliation with
OrthAlliance, OrthAlliance's Board of Directors believed that the
significant decline in the price of OrthAlliance's Class A common stock
adversely affected OrthAlliance's relationship with these affiliated
practitioners. In the Board's opinion, the discontent with the market
price of OrthAlliance Class A common stock led several affiliated
practitioners to complain about OrthAlliance's provision of services to
such affiliated practices and led certain of these practitioners to send
notices of default to OrthAlliance, or institute litigation against
OrthAlliance, alleging that OrthAlliance has failed to provide certain
services to the practitioners' affiliated practices.
- Potential Loss of Revenue. OrthAlliance's Board believed that, without a
significant restructuring of OrthAlliance, a potentially significant
portion of OrthAlliance's future service fee revenues were at risk of
being lost beginning in August 2002. Approximately 33.0% of
OrthAlliance's 2000 net revenue was generated by affiliated practices
with affiliated practitioners whose initial employment term expires in
August 2002 and whose employment agreements may be terminated upon one-
year's prior written notice. In light of the level of dissatisfaction
with OrthAlliance by certain of its affiliated practitioners,
OrthAlliance's Board believed there was some risk that some affiliated
practitioners would exercise their right to terminate their employment
agreements with
37
OrthAlliance in August 2001, which might reduce OrthAlliance's future
revenues and decrease the market price of OrthAlliance's Class A common
stock.
ALTERNATIVE TRANSACTIONS. OrthAlliance's Board considered the
opportunities and alternatives available to OrthAlliance if the merger were not
to be undertaken, including the possibilities of continuing to operate
OrthAlliance as an independent entity, a sale of OrthAlliance through a merger
with a company other than OCA and, in respect of each alternative, the timing
and likelihood of actually accomplishing these alternatives. OrthAlliance's
Board concluded that the merger with OCA was the most viable alternative for
addressing the Board's concerns and is more feasible than the alternatives. In
light of the extensive process undertaken by OrthAlliance and U.S. Bancorp Piper
Jaffray to locate a financial or strategic partner, other than OCA,
OrthAlliance's Board concluded it was unlikely that another bidder would make a
definitive proposal to effect a business combination with OrthAlliance which
would result in a transaction that would provide greater value to OrthAlliance's
stockholders. The Board also believed that absent the merger with OCA or a
similar transaction or significant restructuring of OrthAlliance, OrthAlliance
could possibly follow the experience of other orthodontic practice management
companies that have exited the industry because of discontent within their
practice network.
OPPORTUNITY TO PARTICIPATE IN COMBINED COMPANY. The overriding reason for
the merger is that OrthAlliance's Board believes the proposed combination of
OrthAlliance and OCA should generate substantially more value for stockholders
than OrthAlliance could generate on its own or in connection with any other
reasonably possible transaction. The Board considered the fact that the merger
would enable OrthAlliance's stockholders to continue to participate in the
growth of the combined business conducted by OCA and OrthAlliance following the
merger and to benefit from the potential appreciation in value of shares of OCA
common stock, based on the expected revenue growth for OCA that would be
generated by its acquisition of OrthAlliance.
POTENTIAL PREMIUM. OrthAlliance's Board considered the value of the
exchange ratio provided for in the merger agreement relative to the current and
historical market price of OrthAlliance Class A common stock. Specifically,
based on the minimum exchange ratio of 0.09214, and a closing price of OCA
common stock price of $29.50 per share as of May 16, 2001, the value to be
received by OrthAlliance stockholders in the merger represents approximately a
2.23% discount and a 9.16% premium over the average closing price of
OrthAlliance Class A common stock for the 30 and 90 days, respectively, prior to
the announcement of the merger. Based on the maximum exchange ratio of 0.16585,
and a closing price of OCA common stock of $29.50 per share as of May 16, 2001,
the value to be received by OrthAlliance stockholders in the merger represents
approximately a 75.97% and 96.47% premium over the average closing price of
OrthAlliance Class A common stock for the 30 and 90 days, respectively, prior to
the announcement of the merger.
LIQUIDITY OF OCA STOCK. OrthAlliance's Board gave consideration to the
fact that OCA's common stock is a highly liquid currency, which will provide
OrthAlliance's stockholders with an increased ability to sell their stock in an
orderly manner without affecting the stock price. Between April 15, 2001 and May
15, 2001, the 30 day period ending the day before the execution of the merger
agreement, OrthAlliance's average daily trading volume was 61,691 shares per
day, compared to 484,355 shares per day for OCA common stock for the same time
period.
FAIRNESS OPINION. OrthAlliance's Board considered the opinion of the
special committee's financial advisor, U.S. Bancorp Piper Jaffray, to the effect
that the merger consideration proposed to be received by the stockholders of
OrthAlliance was fair to OrthAlliance's stockholders from a financial point of
view.
SPECIAL COMMITTEE RECOMMENDATION. OrthAlliance's Board also considered the
special committee's recommendation that the Board approve the merger agreement.
In determining to make that recommendation, the special committee also
considered the factors described in this section.
FIXED EXCHANGE RATIO. OrthAlliance's Board considered that a fixed
exchange ratio was more favorable under all of the circumstances than an
adjustable exchange ratio, despite the fact that the market price of OCA's
common stock could decrease. Because the exchange ratio, once determined, is
38
fixed, the aggregate number of shares of OCA common stock to be issued in the
merger will also be fixed. Therefore, as OCA's common stock price fluctuates, so
does the value to be received by OrthAlliance stockholders for their shares of
OrthAlliance common stock. The market value of OCA common stock would also be
subject to the fluctuations of the stock market following the merger.
TERMINATION PROVISIONS. OrthAlliance's Board considered as favorable the
provisions of the merger agreement which permit the Board to respond to an
unsolicited proposal with respect to an alternative business combination and to
terminate the merger agreement and approve a superior proposal that the Board
determines in accordance with its fiduciary duties is in the best interest of
OrthAlliance's stockholders.
LIKELIHOOD OF CLOSING. OrthAlliance's Board considered as favorable the
likelihood that the merger would be completed, given OCA's experience,
reputation and financial resources.
TAX CONSEQUENCES. OrthAlliance's Board considered as favorable the
expected qualification of the merger as a tax-free reorganization under Section
368(a) of the Internal Revenue Code.
POTENTIAL NEGATIVE FACTORS. OrthAlliance's Board of Directors also
considered and balanced against the potential benefits of the merger, a number
of potentially negative factors, including, the following:
- The risk that the merger would not be completed, particularly as a result
of the inability to satisfy the condition that a minimum amount of
OrthAlliance's affiliated practitioners amend their employment agreements
and OrthAlliance service, management service or consulting agreements.
See "THE MERGER AGREEMENT -- Conditions to the Merger."
- The potential effect of the public announcement of the merger agreement
on OrthAlliance's operating revenues and operating results and
OrthAlliance's ability to attract and retain key management and other
personnel.
- The possibility that the market value of OCA's common stock might
decrease, causing less aggregate value to be paid to OrthAlliance
stockholders.
- The fact that OrthAlliance's stockholders will not receive the full
benefit of any future growth in the value of their equity that
OrthAlliance may have achieved as an independent company, and the
potential disadvantage to OrthAlliance stockholders if OrthAlliance and
OCA do not perform well as a combined company.
- The possibility that some of the provisions of the merger agreement,
including the non-solicitation and termination fee payment provisions,
might have the effect of discouraging other persons potentially
interested in merging with or acquiring OrthAlliance from pursuing such
an opportunity. See "THE MERGER AGREEMENT -- No Other Transactions
Involving OrthAlliance."
- The possibility that certain members of OrthAlliance's management and
Board of Directors may be deemed to have interests in the merger that are
different from or in addition to their interests as OrthAlliance
stockholders generally. See "-- Interests of Certain Persons in the
Merger."
This discussion of the factors considered by OrthAlliance's Board of
Directors is not intended to be exhaustive, but is believed to include all
material factors considered by OrthAlliance's Board. In view of the number and
wide variety of factors considered in connection with its evaluation of the
merger and the complexity of these matters, OrthAlliance's Board of Directors
did not find it practicable to, nor did it attempt to, quantify, rank or
otherwise assign relative weights to the specific factors that it considered.
Rather, OrthAlliance's Board of Directors conducted an overall analysis of the
factors described above, including thorough discussions with and questioning of
OrthAlliance management and its legal, financial and accounting advisors. In
considering the factors described above, individual members of OrthAlliance's
Board of Directors may have given different weight to different factors.
OrthAlliance's Board of Directors considered all of these factors as a whole and
overall considered the factors to be favorable to, and to support, its
determination.
39
BASED ON A THOROUGH EVALUATION OF THESE FACTORS, ORTHALLIANCE'S BOARD OF
DIRECTORS BELIEVES THE MERGER IS IN THE BEST INTERESTS OF ORTHALLIANCE
STOCKHOLDERS. ORTHALLIANCE'S BOARD OF DIRECTORS RECOMMENDS THAT ORTHALLIANCE
STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
OCA'S REASONS FOR THE MERGER
OCA's Board of Directors believes that the addition of OrthAlliance's
affiliated orthodontists and pediatric dentists will complement OCA's existing
base of over 400 affiliated orthodontists, and enhance OCA's position as the
leading provider of integrated business services to orthodontic practices. OCA's
Board of Directors also believes that the merger will provide the opportunity
for enhanced revenue growth and increased operating margin, and enable OCA to
leverage its computer and operating systems and other resources over a larger
base of affiliated practitioners.
OCA's Board of Directors deliberated and approved the merger agreement at a
special meeting held on May 16, 2001. In reaching its determination to approve
and adopt the merger agreement, OCA's Board of Directors consulted with OCA's
management and financial, accounting and legal advisors, and considered a number
of factors. The following is a discussion of information and factors considered
by OCA's Board of Directors in reaching this determination. This discussion is
not intended to be exhaustive, but includes the material factors considered by
OCA's Board of Directors. In the course of its deliberations with respect to the
merger, OCA's Board of Directors discussed the anticipated impact of the merger
on OCA and OCA's stockholders. In reaching its determination to approve and
recommend the merger agreement, OCA's Board of Directors did not assign any
relative or specific weights to the factors considered in reaching such
determination, and individual members of OCA's Board of Directors may have given
differing weights to different factors.
The following includes the material factors that were considered by OCA's
Board of Directors:
- Its review, based in part on presentations by OCA's management, and
legal, accounting and financial advisors, of:
- The business, operations, technology, dividends, financial condition
and earnings of OrthAlliance on an historical and a prospective basis
and of the combined company on a pro forma basis,
- The historical stock price performance of OrthAlliance Class A common
stock, and
- The potential impact on the market value of OCA common stock following
the merger;
- The opinion of Banc of America Securities LLC that, as of the date of the
opinion and based upon and subject to the assumptions, limitations and
considerations stated in that opinion, the exchange ratio in the merger
was fair from a financial point of view to OCA (see "-- Fairness Opinion
of OCA's Financial Advisor");
- The perceived quality of OrthAlliance's affiliated orthodontists and
pediatric dentists;
- The terms of the merger agreement, including the amount and form of
consideration to be received by OrthAlliance stockholders in the merger,
and the expectation that the merger will be a tax-free transaction to
OCA, its stockholders, OrthAlliance and its stockholders;
- The likelihood that a reasonable amount of OrthAlliance affiliated
orthodontists and pediatric dentists would be willing to extend their
commitment to practice in affiliation with OCA and its subsidiaries, and
the amount and type of incentives that might be needed to encourage those
extensions;
40
- The potential effect of the merger, and announcement of the merger
agreement, on OCA's relationships with its affiliated orthodontists, and
OCA's ability to service a significantly larger number of affiliated
practitioners; and
- The anticipated cost savings, operating efficiencies and opportunities
for revenue enhancement available to the combined companies from the
merger, and the likelihood that these would be achieved following the
merger.
FAIRNESS OPINION OF ORTHALLIANCE'S FINANCIAL ADVISOR
U.S. Bancorp Piper Jaffray was engaged to act as the exclusive financial
advisor in connection with the merger based on U.S. Bancorp Piper Jaffray's
long-standing relationship with OrthAlliance and its reputation, expertise and
experience in similar transactions. On May 16, 2001, U.S. Bancorp Piper Jaffray
rendered to the special committee its oral opinion to the effect that, as of
such date and based upon and subject to certain matters stated in the opinion,
the merger consideration proposed to be received by the stockholders of
OrthAlliance was fair, from a financial point of view, to the holders of
OrthAlliance common stock. U.S. Bancorp Piper Jaffray subsequently confirmed its
oral opinion by delivering a written opinion, dated as of May 16, 2001, to the
OrthAlliance special committee.
The full text of the U.S. Bancorp Piper Jaffray written opinion is attached
as Annex C to this Proxy Statement/Prospectus. U.S. Bancorp Piper Jaffray's
opinion is addressed to the OrthAlliance special committee and does not
constitute a recommendation to any stockholder as to how such stockholder should
vote at OrthAlliance's special meeting of stockholders. U.S. Bancorp Piper
Jaffray's opinion addresses only the fairness, from a financial point of view,
of the proposed merger consideration to the holders of OrthAlliance common
stock, and U.S. Bancorp Piper Jaffray expresses no opinion as to the merits of
the underlying decision by OrthAlliance to engage in the merger. The summary of
U.S. Bancorp Piper Jaffray's opinion in this Proxy Statement/Prospectus is
qualified in its entirety by reference to the full text of the opinion. You
should read the U.S. Bancorp Piper Jaffray opinion carefully and in its
entirety.
In connection with its opinion, U.S. Bancorp Piper Jaffray reviewed certain
publicly available financial and other information concerning OrthAlliance and
OCA and certain internal analyses and other information furnished to, or
discussed with, U.S. Bancorp Piper Jaffray by OrthAlliance and OCA. In addition,
U.S. Bancorp Piper Jaffray relied upon and assumed the accuracy of OrthAlliance
management's concerns that OrthAlliance had limited growth prospects as a
stand-alone company, that OrthAlliance's relationships with certain affiliated
practices were deteriorating due to the decline in the stock price of
OrthAlliance Class A common stock and that there was a potential loss of revenue
in connection with the termination of employment agreements of affiliated
practitioners in August 2002. U.S. Bancorp Piper Jaffray also engaged in
discussions with members of the senior management of OrthAlliance and OCA
regarding the business and prospects of their respective companies and the joint
prospects of a combined company. In addition, U.S. Bancorp Piper Jaffray:
- Reviewed the reported prices and trading activity for OrthAlliance Class
A common stock and OCA common stock;
- Compared certain financial and stock market information for OrthAlliance
and OCA with similar information for certain other companies whose
securities are publicly traded;
- Reviewed the financial terms of certain recent business combinations that
U.S. Bancorp Piper Jaffray deemed comparable in whole or in part;
- Reviewed the terms of the merger agreement and certain related documents;
and
- Performed such other studies and analyses and considered such other
factors as U.S. Bancorp Piper Jaffray deemed appropriate.
U.S. Bancorp Piper Jaffray did not assume responsibility for independent
verification of, and has not independently verified, any information, whether
publicly available or furnished to it, concerning
41
OrthAlliance, OCA or the combined company, including, but not limited to, any
financial information, forecasts or projections considered in connection with
the rendering of its opinion. Accordingly, for purposes of its opinion, U.S.
Bancorp Piper Jaffray assumed and relied upon the accuracy and completeness of
all such information and has not conducted a physical inspection of any of the
properties or assets, and has not prepared or obtained any independent
evaluation or appraisal of any of the assets or liabilities, of OrthAlliance or
OCA.
With respect to the financial forecasts and projections made available to
U.S. Bancorp Piper Jaffray and used in its analyses, including, but not limited
to, the analyses and forecasts of certain synergies expected by OrthAlliance and
OCA to be achieved as a result of the merger, U.S. Bancorp Piper Jaffray has
assumed that they were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of OrthAlliance or
OCA, as the case may be, as to the matters covered. In rendering its opinion,
U.S. Bancorp Piper Jaffray expresses no view as to the reasonableness of such
forecasts and projections, including the synergies, or the assumptions on which
they are based. U.S. Bancorp Piper Jaffray's opinion was necessarily based upon
economic, market and other conditions as in effect on, and the information made
available to it as of, May 16, 2001.
For purposes of rendering its opinion, U.S. Bancorp Piper Jaffray assumed,
in all respects material to its analysis, that:
- The representations and warranties of OrthAlliance, OCA and OCA
Acquisition Corporation contained in the merger agreement are true and
correct;
- OrthAlliance, OCA and OCA Acquisition Corporation will each perform all
of the covenants and agreements to be performed by it under the merger
agreement; and
- All conditions to the obligations of each of OrthAlliance, OCA and OCA
Acquisition Corporation to complete the merger will be satisfied without
waiver of any of these conditions.
U.S. Bancorp Piper Jaffray also assumed that all material governmental,
regulatory or other approvals or consents required in connection with the
completion of the merger will be obtained and that in connection with obtaining
these approvals or consents, or any amendments, modifications or waivers to any
agreements, instruments or orders to which either OrthAlliance or OCA is a party
or is subject, or by which it is bound, no limitations, restrictions or
conditions will be imposed or amendments, modifications or waivers made that
would have a material adverse effect on OrthAlliance or OCA or materially reduce
the contemplated benefits of the merger to OrthAlliance. U.S. Bancorp Piper
Jaffray is expressing no opinion as to the price at which OrthAlliance Class A
common stock or OCA common stock will trade at any time. U.S. Bancorp Piper
Jaffray assumed that the terms were the most beneficial terms from
OrthAlliance's perspective that could, under the circumstances, be negotiated
among the parties and expressed no opinion as to whether any alternative
transaction might be more favorable to OrthAlliance.
The following is a summary of the material analyses and factors considered
by U.S. Bancorp Piper Jaffray in connection with its opinion to the OrthAlliance
special committee dated as of May 16, 2001:
ANALYSIS OF SELECTED PUBLIC COMPANIES. U.S. Bancorp Piper Jaffray compared
certain financial and stock market information for OrthAlliance with similar
information for the following selected publicly held companies:
- American Dental Partners, Inc.;
- Birner Dental Management Services, Inc.;
- Castle Dental Centers, Inc.;
- InterDent, Inc.;
- Monarch Dental Corporation; and
- OCA.
42
U.S. Bancorp Piper Jaffray calculated enterprise value, which U.S. Bancorp Piper
Jaffray defined as equity market value plus debt, less cash and equivalents,
relative to each company's latest 12 months revenue and earnings before
interest, taxes, depreciation and amortization, commonly referred to as EBITDA.
U.S. Bancorp Piper Jaffray also calculated share price relative to each
company's estimated calendar year 2001 and 2002 earnings per share (commonly
referred to as EPS) estimates. All multiples were based on closing stock prices
on May 15, 2001. EPS estimates for the selected companies were based on
estimates as reported by the Institutional Brokers Estimate System (commonly
referred to as IBES) and Advest, Inc., and EPS estimates for OrthAlliance were
based on the internal estimates of the management of OrthAlliance. This analysis
noted that EPS estimates for 2002 were available for only two of the six
companies in this analysis. U.S. Bancorp Piper Jaffray then compared the
multiples for the selected companies to the multiples for OrthAlliance assuming
OrthAlliance common stock prices of $2.59 and $4.66 in the merger. This analysis
indicated multiples of selected valuation data as follows:
SELECTED MULTIPLES
---------------------------------------------
ORTHALLIANCE SELECTED COMPANIES
------------- -----------------------------
$2.59 $4.66 MEDIAN MEAN HIGH LOW
----- ----- ------ ----- ----- ----
Enterprise Value to:
Latest 12 Months Revenue................ 0.7x 0.9x 0.6x 1.3x 5.0x 0.3x
Latest 12 Months EBITDA................. 3.4x 4.2x 4.8x 6.5x 14.2x 3.2x
2001 Price/Earnings Ratio................. 2.9x 5.2x 11.7x 12.0x 23.4x 0.9x
2002 Price/Earnings....................... 2.5x 4.5x 14.1x 14.1x 19.1x 9.3x
ANALYSIS OF SELECTED MERGERS AND ACQUISITIONS. U.S. Bancorp Piper Jaffray
reviewed multiples of revenue and earnings paid in the following two merger and
acquisition transactions, with the acquiror being listed before the target: TA
Associates, Inc./Physicians' Specialty Corp. and Vestar Capital Partners/
Sheridan Healthcare, Inc. For these selected merger and acquisition
transactions, this analysis indicated multiples of enterprise value to the
latest 12 months net revenue of 1.0x to 1.6x; multiples of enterprise value to
the latest 12 months EBITDA of 6.0x to 9.1x; multiples of enterprise value to
the latest 12 months operating income of 7.9x to 11.7x; and multiples of
enterprise value to the latest 12 months net income of 9.6x to 17.4x. This
analysis noted that there have been no acquisitions of publicly-traded practice
management companies since November 1999.
PREMIUM PAID ANALYSIS. U.S. Bancorp Piper Jaffray reviewed the range of
premiums paid in 11 change-of-control transactions of healthcare services
companies with transaction values greater than $50 million completed from
January 1, 1999 to May 15, 2001. These transactions indicated a range of
premiums based on the target company's stock price one-month prior to
announcement of the transaction of (7.6)% to 83.3%, with a mean of 44.8% and a
median of 58.1%, and a one-week prior premium of 2.0% to 85.3%, with a mean of
37.8% and a median of 34.3%. The premium paid in the merger based on a per share
price of $2.59 of OrthAlliance Class A common stock one-month prior, and
one-week prior, to public announcement of the merger were 16.1% and (13.7)%,
respectively. The premium paid in the merger based on a per share price of $4.66
for OrthAlliance Class A common stock for the one-month, and one-week, prior to
public announcement of the merger was 109.0% and 55.3%, respectively.
DISCOUNTED CASH FLOW ANALYSIS. U.S. Bancorp Piper Jaffray performed a
discounted cash flow analysis for OrthAlliance to estimate the present value of
the stand-alone, unleveraged, after-tax free cash flows that OrthAlliance could
generate through December 31, 2005 based on estimates provided by the management
of OrthAlliance. The stand-alone discounted cash flow analysis was determined by
adding the present value at March 31, 2001 of the projected free cash flows
generated by OrthAlliance over the period from April 1, 2001 through December
31, 2005, the present value of OrthAlliance's estimated terminal value in 2005
and OrthAlliance's cash at March 31, 2001, and subtracting OrthAlliance's total
debt on March 31, 2001. The analysis assumed that 70% of practitioner revenue is
renewed in future periods. The range of estimated terminal values for
OrthAlliance was calculated by applying terminal value multiples ranging from
3.0x to 6.0x to the projected 2005 EBITDA of OrthAlliance. The cash flows and
terminal values were discounted to present value using discount rates ranging
from 23.0% to 27.0% to reflect the uncertainty of contract renewals for
OrthAlliance affiliated orthodontists and pediatric dentists.
43
This analysis yielded an implied equity reference range for OrthAlliance common
stock of $0.06 to $5.56 per share, as compared to the closing price per share of
OrthAlliance Class A common stock on May 15, 2001 of $3.20.
CONTRIBUTION ANALYSIS. U.S. Bancorp Piper Jaffray analyzed the relative
contribution of OrthAlliance to the estimated revenues, EBITDA and net income of
the combined company in calendar years 2001, 2002 and 2003 based on estimates
provided by the management of OrthAlliance and, with respect to OCA, estimates
of U.S. Bancorp Piper Jaffray. Assuming that all services fees are paid under
OrthAlliance's existing contracts and that no contracts are renewed upon
expiration, this analysis indicated the following:
- For calendar year 2001, OrthAlliance would have contributed approximately
32.7% of the revenues, 22.2% of the EBITDA and 15.3% of the net income of
the pro forma combined company;
- In calendar year 2002, OrthAlliance would have contributed approximately
28.4% of the revenues, 18.9% of the EBITDA and 12.6% of the net income of
the pro forma combined company; and
- In calendar year 2003, OrthAlliance would have contributed approximately
20.5% of the revenues, 14.0% of the EBITDA and 7.2% of the net income of
the pro forma combined company.
Based on the minimum amount of the exchange ratio, current holders of
OrthAlliance common stock would own approximately 2.2% of the equity of the pro
forma combined company upon completion of the merger. Based on the maximum
amount of the exchange ratio, current holders of OrthAlliance common stock would
own approximately 3.9% of the equity of the pro forma combined company upon
completion of the merger.
The summary set forth above does not purport to be a complete description
of the opinion of U.S. Bancorp Piper Jaffray to the OrthAlliance special
committee or the financial analyses performed and factors considered by U.S.
Bancorp Piper Jaffray in connection with its opinion. The preparation of a
fairness opinion is a complex analytical process involving various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to the particular circumstances,
and, therefore, such an opinion is not readily susceptible to summary
description. U.S. Bancorp Piper Jaffray believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses, without considering all analyses, or selecting
portions of the above summary, without considering all factors and analyses,
could create a misleading or incomplete view of the processes underlying such
analyses and opinion.
In performing its analyses, U.S. Bancorp Piper Jaffray made numerous
assumptions with respect to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of OrthAlliance and OCA. No company, transaction or business used in
such analyses as a comparison is identical to OrthAlliance, the pro forma
combined company or the proposed merger, nor is an evaluation of the results of
such analyses entirely mathematical. Rather, such analyses involve complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the acquisition, public trading or other
values of the companies, businesses or transactions being analyzed. The
estimates contained in such analyses and the ranges of valuations resulting from
any particular analysis are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than those
suggested by such analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty.
U.S. Bancorp Piper Jaffray's opinion and financial analyses were only one
of many factors considered by OrthAlliance's special committee and Board in
their evaluation of the proposed merger and should not be viewed as
determinative of the views of OrthAlliance's management with respect to the
proposed merger consideration or the merger.
44
U.S. Bancorp Piper Jaffray is an internationally recognized investment
banking firm and, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements and
valuations for estate, corporate and other purposes. OrthAlliance selected U.S.
Bancorp Piper Jaffray to serve as its exclusive financial advisor based on U.S.
Bancorp Piper Jaffray's long-standing relationship with OrthAlliance and its
reputation, expertise and experience in similar transactions. U.S. Bancorp Piper
Jaffray has in the past provided financial services to OrthAlliance, including
participation as a lender in OrthAlliance's revolving credit facility, for which
U.S. Bancorp Piper Jaffray has received customary compensation. U.S. Bancorp
Piper Jaffray maintains a market in OrthAlliance Class A common stock and
regularly publishes research reports regarding the health care industry and
publicly owned companies in the health care industry. In the ordinary course of
business, U.S. Bancorp Piper Jaffray may actively trade or hold the securities
and other instruments and obligations of OrthAlliance or OCA for its own account
and the accounts of its customers and, accordingly, may at any time hold a long
or short position in such securities, instruments or obligations.
Pursuant to a letter agreement, dated February 16, 2001, between
OrthAlliance and U.S. Bancorp Piper Jaffray, OrthAlliance agreed to pay U.S.
Bancorp Piper Jaffray $350,000 for rendering its opinion, which amount will be
credited against a transaction fee equal to 1.25% of the transaction value
payable upon completion of the merger. In addition, OrthAlliance has agreed to
reimburse U.S. Bancorp Piper Jaffray for its reasonable out-of-pocket expenses,
not to exceed $50,000 without the prior written consent of OrthAlliance,
including reasonable fees and disbursements of counsel, and to indemnify U.S.
Bancorp Piper Jaffray and certain related parties against certain liabilities,
including certain liabilities under the federal securities laws, relating to, or
arising out of, its engagement.
FAIRNESS OPINION OF OCA'S FINANCIAL ADVISOR
In April 2001, OCA retained Banc of America Securities LLC to act as its
financial advisor in connection with the merger. Banc of America Securities is a
nationally recognized investment banking firm and regularly engages in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. OCA selected Banc of America Securities to act as its financial
advisor on the basis of Banc of America Securities' experience and expertise in
transactions similar to the merger, its reputation in the investment community
and its historical investment banking relationship with OCA.
On May 16, 2001, Banc of America Securities delivered its oral opinion,
which opinion was subsequently confirmed by delivery of its written opinion
dated May 16, 2001, to OCA's Board of Directors that, as of such date, and based
on and subject to the assumptions, limitations and considerations stated
therein, the exchange ratio in the merger was fair from a financial point of
view to OCA.
The full text of the Banc of America Securities opinion to OCA's Board of
Directors is attached as Annex D. You should read this opinion carefully and in
its entirety in connection with this Proxy Statement/Prospectus. However, also
included is the following summary of the Banc of America Securities opinion,
which is qualified in its entirety by reference to the full text of the opinion.
The Banc of America Securities opinion is addressed to the OCA Board of
Directors. It does not constitute a recommendation or advice of any kind to
OrthAlliance stockholders in connection with the merger. The opinion addresses
only the financial fairness of the exchange ratio to OCA. The opinion does not
address the relative merits of the merger or any alternatives to the merger, the
underlying decision of OCA's Board of Directors to proceed with or effect the
merger or any other aspect of the merger. The opinion does not address the
prices at which OCA common stock or OrthAlliance common stock will trade
following the announcement or consummation of the merger. In furnishing its
opinion, Banc of America Securities did not admit that it is an "expert" as that
term is used in the Securities Act of 1933, nor did Banc of America Securities
admit that its opinion constitutes a report or valuation within the
45
meaning of the Securities Act. Statements to that effect are included in Banc of
America Securities' opinion.
For purposes of the opinion, Banc of America Securities:
- Reviewed certain publicly available financial statements and other
business and financial information of OrthAlliance and OCA;
- Reviewed certain internal financial statements and other financial and
operating data concerning OrthAlliance and OCA that were prepared by the
respective managements of OrthAlliance and OCA;
- Analyzed certain financial forecasts prepared by the respective
managements of OrthAlliance and OCA;
- Reviewed and discussed with the respective managements of OCA and
OrthAlliance information relating to certain potential strategic,
financial and operational benefits anticipated to result from the merger
prepared by the respective managements of OCA and OrthAlliance;
- Discussed the past and current operations, financial condition and
prospects of OCA with senior executives of OCA, and the past and current
operations, financial condition and prospects of OrthAlliance with senior
executives of OrthAlliance;
- Reviewed certain pro forma information, prepared by the management of
OCA, reflecting the potential impact of the merger on OCA's earnings per
share, cash flow, consolidated capitalization and financial ratios;
- Reviewed the reported prices and trading activity for OrthAlliance Class
A common stock and OCA common stock;
- Compared the financial performance of OrthAlliance and OCA and the prices
and trading activity of OrthAlliance Class A common stock and OCA common
stock with that of certain other publicly traded companies it deemed
generally relevant;
- Compared certain financial terms of the merger to corresponding financial
terms, to the extent publicly available, of certain other business
combination transactions it deemed generally relevant;
- Reviewed a draft of the merger agreement, dated May 16, 2001, and certain
related documents; and
- Performed such other analyses and considered such other factors as it
deemed appropriate.
In connection with Banc of America Securities' review of the exchange ratio
in the merger, with the consent of OCA's Board of Directors, Banc of America
Securities:
- Did not assume any responsibility for independent verification of any of
the information provided to or reviewed by it for the purpose of its
opinion and relied on such information being complete and accurate in all
material respects;
- Was advised, and assumed, with respect to the financial forecasts
referred to above, including information relating to certain strategic,
financial and operational benefits anticipated from the merger, that such
forecasts were reasonably prepared on bases reflecting the best currently
available estimates and good faith judgments of the respective
managements of OrthAlliance and OCA as to the future financial
performance of OrthAlliance and OCA, respectively;
- Did not make any independent valuation or appraisal of the assets or
liabilities of OCA, nor was it furnished with any such appraisals;
- Assumed that the merger will be treated as a tax-free reorganization for
federal income tax purposes and that the merger will be accounted for as
a purchase for financial accounting purposes;
- Was not asked to, nor did it, offer any opinion as to the material terms
of the merger agreement or any related documents or the obligations
thereunder, or the form of the merger, and assumed that
46
each of OCA and OrthAlliance will comply with all material covenants and
obligations in the merger agreement and that the merger will be validly
consummated without waiver, modification or amendment of any material term,
condition or agreement in the merger agreement;
- Did not participate in negotiations with respect to the terms of the
merger agreement, assumed that such terms are the most beneficial terms
from OCA's perspective that could under the circumstances be negotiated
among the parties and expressed no opinion as to whether any alternative
transaction might be more favorable to OCA; and
- Assumed that the final terms of the merger agreement would not vary
materially from those set forth in the draft dated May 16, 2001.
The Banc of America Securities opinion was necessarily based on economic,
market and other conditions as in effect on, and the information made available
to it as of, the date of its opinion. Accordingly, although developments after
May 16, 2001 may affect its opinion, Banc of America Securities did not assume
any obligation to update, revise or reaffirm its opinion, which speaks only as
of the date of the opinion.
The following is a brief summary of the material financial analyses
performed by Banc of America Securities and reviewed with OCA's Board of
Directors in connection with providing Banc of America Securities' opinion to
OCA's Board. Some of the summaries of financial analyses performed by Banc of
America Securities include information presented in tabular format. In order to
understand fully the financial analyses performed by Banc of America Securities,
you should read the tables together with the text of each summary. The tables
alone do not constitute a complete description of the financial analyses.
Considering the data set forth in the tables without considering the full
narrative description of the financial analyses, including the methodologies and
assumptions underlying the analyses, could create a misleading or incomplete
view of the financial analyses performed by Banc of America Securities. The
following information, to the extent based on market data, is as of May 15,
2001, and does not necessarily indicate current or future market conditions.
Banc of America Securities performed an analysis of the latest 12 month
trading range, an analysis of selected comparable public companies, an analysis
of precedent transactions, an analysis of selected premiums paid and an analysis
of discounted cash flow for OrthAlliance as described below. Based on these
valuation methodologies, and taking into account both the variations in the
exchange ratio based on the number of OrthAlliance's affiliated orthodontists,
pediatric dentists and professional corporations that amend their employment
agreements and service, management service or consulting agreements, as
contemplated by the merger agreement, and the potential adverse effect on
OrthAlliance's future operating results of less than all of the OrthAlliance
orthodontists, pediatric dentists and professional corporations amending their
agreements, Banc of America Securities derived the following aggregate implied
per share equity reference range for OrthAlliance Class A and Class B common
stock, as compared to the merger consideration based on the closing price of OCA
common stock on May 15, 2001:
AGGREGATE IMPLIED PER SHARE
EQUITY REFERENCE RANGE
$4.52 to $7.79
MERGER CONSIDERATION BASED ON
CLOSING STOCK PRICES ON MAY 15, 2001
------------------------------------------
IMPLIED CONSIDERATION PER
SIGNING RATIO EXCHANGE RATIO ORTHALLIANCE SHARE
------------- -------------- -------------------------
Less than 31.00%.................................. 0.09214 $2.59
31.00%-40.99%..................................... 0.10135 $2.85
41.00%-50.99%..................................... 0.11056 $3.11
51.00%-60.99%..................................... 0.12899 $3.62
61% or more....................................... 0.16585 $4.66
47
LATEST TWELVE-MONTH TRADING RANGE ANALYSIS. Banc of America Securities
reviewed the share trading range of OrthAlliance Class A common stock to provide
a perspective on current public market value based on OrthAlliance's trading
performance for the latest twelve-month trading period. Banc of America
Securities reviewed the number of shares of OrthAlliance Class A common stock
traded at specified prices during the twelve-month period prior to May 15, 2001,
as set forth below:
PRICE RANGE PERCENT OF SHARES TRADED
----------- ------------------------
$1.63-$2.75..................................... 23.8%
$2.75-$3.88..................................... 48.9%
$3.88-$5.00..................................... 4.1%
$5.00-$6.13..................................... 11.7%
$6.13-$7.28..................................... 11.4%
SELECTED COMPARABLE PUBLIC COMPANIES ANALYSIS. Based on public and other
available information, Banc of America Securities calculated the multiples of
the aggregate value of OrthAlliance, which Banc of America Securities defined as
equity value plus debt, less cash and cash equivalents, to OrthAlliance's
revenues, earnings before interest, taxes, depreciation and amortization
(commonly referred to as EBITDA) and earnings before interest and taxes
(commonly referred to as EBIT) for the latest 12 months. Banc of America
Securities also calculated the ratios of equity value to book value and the
multiples of share price to earnings per share (commonly referred to as EPS),
for both the latest 12 months and those estimated for calendar year 2001. Banc
of America Securities then compared those results to the results of similar
calculations made with respect to the following companies that Banc of America
Securities deemed to be comparable to OrthAlliance:
- American Dental Partners, Inc.;
- InterDent, Inc.;
- Pediatrix Medical Group, Inc.;
- Hanger Orthopedic Group, Inc.;
- US Oncology, Inc.;
- Ameripath, Inc.;
- Radiologix, Inc.; and
- Monarch Dental Corporation.
Each company was selected because it had an active public trading market
for its equity securities, was a physician practice management company and Banc
of America Securities believed the company had operating characteristics similar
to those of OrthAlliance. The comparable company analysis compared OrthAlliance
to the comparable companies on the basis that the companies selected were the
most relevant given the factors considered above. Consequently, Banc of America
Securities did not include every company that could be deemed to be a
participant in the same industry. Estimated financial data for the selected
companies were based on publicly available research analysts' consensus
estimates, where available, and for OrthAlliance were based on internal
estimates of OrthAlliance management.
48
The following table sets forth multiples indicated by this analysis:
SELECTED
COMPANIES
----------------
MEDIAN AVERAGE ORTHALLIANCE
------ ------- ------------
Aggregate Value to:
Latest 12 Months Revenue.............................. 0.9x 1.1x 0.8x
Latest 12 Months EBITDA............................... 6.7x 7.1x 4.2x
Latest 12 Months EBIT................................. 11.7x 11.9x 5.8x
Equity Value to Book Value.............................. 1.0x 1.1x 0.5x
Stock Price to:
Latest 12 Months EPS.................................. 20.0x 20.2x 6.1x
Estimated Calendar Year 2001 EPS...................... 16.4x 15.2x 7.5x
Banc of America Securities then applied a range of selected multiples for
the selected companies to corresponding data of OrthAlliance, which yielded
implied share prices for OrthAlliance as follows:
IMPLIED
ORTHALLIANCE
MULTIPLE RANGE SHARE PRICE
-------------- ------------
Aggregate Value to:
Latest 12 Months Revenue................................ 0.8x- 1.0x $3.52-$ 5.92
Latest 12 Months EBITDA................................. 5.0x- 7.0x $4.91-$ 9.31
Latest 12 Months EBIT................................... 7.0x-10.0x $5.19-$10.02
Stock Price to:
Latest 12 Months EPS.................................... 9.0x-13.0x $4.91-$ 7.10
Estimated Calendar Year 2001 EPS........................ 11.0x-15.0x $4.82-$ 6.57
No company used in the comparable company analysis is identical to
OrthAlliance. Accordingly, an analysis of the foregoing results is not
mathematical. Rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of
OrthAlliance and other factors that could affect the public trading value of the
companies to which OrthAlliance is being compared.
PRECEDENT TRANSACTIONS ANALYSIS. Banc of America Securities reviewed the
consideration offered in the following eight transactions:
DATE ACQUIROR TARGET
------------------------- --------------------------------- ---------------------------------
February 15, 2001...... Pediatrix Medical Group, Inc. Magella Healthcare Corp.
November 30, 1999...... OrthAlliance New Image Orthodontic Group, Inc.
June 15, 1999.......... TA Associates, Inc. Physicians Specialty Corp.
April 5, 1999.......... Hanger Orthopedic Group Novacare Orthotics & Prosthetics
March 25, 1999......... Vestar Capital Partners Sheridan Healthcare, Inc.
December 14, 1998...... American Oncology Resources, Inc. Physician Reliance Network, Inc.
October 16, 1998....... Gentle Dental Service Corp. Dental Care Alliance
July 28, 1998.......... TA Associates/GTCR CompDent Corp.
49
The selected transactions were chosen because the target companies were
companies that, for purposes of this analysis, Banc of America Securities
considered generally comparable to OrthAlliance. All multiples were based on
publicly available information at the time of announcement of the relevant
transaction.
SELECTED
TRANSACTIONS
----------------
MEDIAN AVERAGE
------ -------
Aggregate Value to:
Latest 12 Months Revenue.................................. 1.5x 1.7x
Latest 12 Months EBITDA................................... 9.5x 10.0x
Latest 12 Months EBIT..................................... 13.5x 13.4x
Banc of America Securities then applied a range of selected multiples for
the selected companies to corresponding data of OrthAlliance, which yielded
implied share prices for OrthAlliance as follows:
IMPLIED
ORTHALLIANCE
MULTIPLE RANGE SHARE PRICE
-------------- ------------
Aggregate Value to:
Latest 12 Months Revenue............................... 1.0x- 1.5x $5.92-$11.92
Latest 12 Months EBITDA................................ 6.0x- 9.0x $7.11-$13.71
Latest 12 Months EBIT.................................. 8.0x-12.0x $6.80-$13.24
No transaction used in the precedent transaction analysis is identical to
the merger. Accordingly, an analysis of the foregoing results is not
mathematical. Rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of
OrthAlliance and other factors that could affect the transactions to which the
merger is being compared.
SELECTED PREMIUMS PAID ANALYSIS. Banc of America Securities analyzed the
premiums paid in 3,396 domestic, all-stock acquisitions announced since 1997, as
reported by Thomson Financial Data, and the premiums paid in the selected
comparable transactions listed above. Banc of America Securities calculated the
premiums offered relative to the stock prices of the acquired companies one day
and one month prior to the announcement of the transactions. The following table
sets forth the median and mean of the premiums paid in these transactions:
PREMIUMS TO CLOSING PRICE
-----------------------------------
ONE DAY PRIOR ONE MONTH PRIOR
---------------- ----------------
MEDIAN AVERAGE MEDIAN AVERAGE
------ ------- ------ -------
All Announced Domestic Stock Transactions
Since 1997 (3,396)................................ 30.1% 23.1% 33.1% 22.9%
Selected Comparable Transactions.................... 11.2% 15.5% 22.7% 21.8%
Banc of America Securities then applied a range of selected premiums for
the selected transactions to corresponding data of OrthAlliance, which yielded
implied share prices for OrthAlliance as follows:
IMPLIED ORTHALLIANCE
PREMIUM RANGE SHARE PRICE
------------- --------------------
Stock Price One Day Prior............................ 20.0%-35.0% $3.84-$4.16
Stock Price One Month Prior.......................... 20.0%-30.0% $2.70-$3.04
DISCOUNTED CASH FLOW ANALYSIS. Banc of America Securities performed
discounted cash flow analyses by using financial cash flow projections of
OrthAlliance for the fiscal year 2001 through fiscal year 2005 prepared by the
respective management of OCA and OrthAlliance assuming a (i) 60% and (ii) 30%
level of OrthAlliance affiliated practitioners electing to amend their
respective employment agreements and OrthAlliance service, management service or
consulting agreements as provided in the merger agreement. In conducting these
analyses, Banc of America Securities assumed that OrthAlliance would perform in
accordance with these projections. Banc of America Securities first estimated
the terminal value of the
50
projected cash flows by applying multiples to OrthAlliance's projected 2005
EBITDA, which multiples ranged from 6.0x to 7.0x. Banc of America Securities
then calculated the present values of the projected cash flows and the terminal
values using discount rates ranging from 13.0% to 17.0%. The 60% signage rate
analysis yielded implied share prices of $3.71 to $5.34, while the 30% signage
rate analysis yielded implied share prices of $1.41 to $3.50.
PRO FORMA ANALYSES. In addition, Banc of America Securities performed an
analysis of relative contribution and an analysis of accretion/dilution for the
combined company as described below.
- Contribution Analysis. Banc of America Securities used the projections
of the respective managements of OrthAlliance and OCA to review the
estimated contribution of each company to the revenue, EBITDA, EBIT and
net income for each of the last 12 months, estimated calendar year 2001
and projected calendar year 2002 assuming a (i) 60% and (ii) 30% level of
OrthAlliance affiliated practitioners elected to amend their respective
employment agreements and OrthAlliance service, management service or
consulting agreements as provided in the merger agreement. These analyses
did not take into account any potential synergies following completion of
the merger. These analyses indicated that OrthAlliance would contribute
the following percentages of the items listed below for the combined
company:
ORTHALLIANCE CONTRIBUTION
---------------------------
30% LEVEL OF 60% LEVEL OF
AMENDMENTS AMENDMENTS
------------ ------------
Revenue
Latest 12 Months.......................................... 33.9% 33.9%
Estimated 2001............................................ 30.8% 30.8%
Projected 2002............................................ 25.2% 26.2%
EBITDA
Latest 12 Months.......................................... 20.8% 20.8%
Estimated 2001............................................ 16.8% 16.8%
Projected 2002............................................ 13.2% 13.8%
EBIT
Latest 12 Months.......................................... 18.6% 18.6%
Estimated 2001............................................ 14.1% 14.1%
Projected 2002............................................ 10.6% 11.3%
Net Income
Latest 12 Months.......................................... 11.5% 11.5%
Estimated 2001............................................ 8.1% 8.1%
Projected 2002............................................ 5.6% 6.3%
Banc of America Securities then compared these percentages to the pro forma
share ownership of OrthAlliance's stockholders in the combined company implied
by the transaction, based on OrthAlliance's and OCA's closing stock prices on
May 15, 2001. Banc of America Securities noted that on a pro forma basis, the
implied ownership of OrthAlliance stockholders in the combined company on a
fully diluted basis was 4.4%, assuming a 60% level of amendments, and 2.5%,
assuming a 30% level of amendments.
- Accretion/Dilution Analysis. Using financial forecasts based on the
projections of the management of OrthAlliance and the projections of the
management of OCA, and assuming pre-tax operating synergies as estimated
by management of OCA, Banc of America Securities reviewed the pro forma
effects of the merger, assuming first a 60% level of amendments and then
a 30% level of amendments. Banc of America Securities compared the
estimated EPS on a stand-alone basis for OCA to the estimated EPS of the
combined company for projected calendar years 2002 through 2005. These
analyses indicated that the proposed merger would be accretive to OCA's
estimated EPS in calendar years 2002 through 2005. The actual results
achieved by the combined company may vary from projected results and the
variations may be material.
51
OTHER FACTORS. In the course of preparing its opinion, Banc of America
Securities also reviewed and considered other information and data, including:
- Research analysts' reports for OCA common stock and OrthAlliance Class A
common stock;
- The historical price performance of OCA common stock and OrthAlliance
Class A common stock; and
- The relative price performance and trading characteristics of OCA common
stock and OrthAlliance Class A common stock and the relationship between
movements in OCA common stock, movements in OrthAlliance Class A common
stock and movements in selected stock indices.
As noted above, the foregoing discussion is merely a summary of the
analyses and examinations that Banc of America Securities considered to be
material to its opinion. It is not a comprehensive description of all analyses
and examinations actually conducted by Banc of America Securities. The
preparation of a fairness opinion is not susceptible to partial analysis or
summary description. Banc of America Securities believes that its analyses and
the summary above must be considered as a whole. Banc of America Securities
further believes that selecting portions of its analyses and the factors
considered, without considering all analyses and factors, would create an
incomplete view of the process underlying the analyses set forth in its
presentation to OCA's Board of Directors. Banc of America Securities did not
assign any specific weight to any of the analyses described above. The fact that
any specific analysis has been referred to in the summary above is not meant to
indicate that that analysis was given greater weight than any other analysis.
Accordingly, the ranges of valuations resulting from any particular analysis
described above should not be taken to be Banc of America Securities' view of
the actual value of OCA or OrthAlliance.
In performing its analyses, Banc of America Securities made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of OCA and
OrthAlliance. The analyses performed by Banc of America Securities involve the
application of complex methodologies and educated judgment and are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than those suggested by these analyses.
These analyses were prepared solely as part of Banc of America Securities'
analysis of the financial fairness of the exchange ratio to be paid by OCA in
the merger and were provided to OCA's Board of Directors in connection with the
delivery of Banc of America Securities' opinion. The analyses do not purport to
be appraisals or to reflect the prices at which a company might actually be sold
or the prices at which any securities have traded or may trade at any time in
the future, and these estimates are inherently subject to uncertainty.
As described above, Banc of America Securities' opinion and presentation to
OCA's Board of Directors were only one of the many factors taken into
consideration by OCA's Board of Directors in evaluating the proposed merger, and
should not be viewed as determinative of the views of OCA's Board or management
with respect to the merger or the exchange ratio provided for in the merger.
Under an engagement letter dated April 25, 2001, OCA agreed to pay Banc of
America Securities a fee of $500,000, which was payable upon delivery of the
fairness opinion and will be credited against a fee equal to the greater of
$1,200,000 or 1.0% of the value of the merger payable upon completion of the
merger. OCA's Board of Directors was aware of this fee structure and took it
into account in considering Banc of America Securities' fairness opinion and in
approving the merger. The engagement letter calls for OCA to reimburse Banc of
America Securities for its reasonable out-of-pocket expenses, including
reasonable fees and disbursements of Banc of America Securities' counsel, up to
$50,000, and OCA has agreed to indemnify Banc of America Securities and related
persons against certain liabilities, including liabilities under the federal
securities laws.
In the ordinary course of its business, Banc of America Securities or its
affiliates actively trade the debt and equity securities of OCA and OrthAlliance
for their own account and for the accounts of customers. Accordingly, Banc of
America Securities or its affiliates may at any time hold a long or short
position in those securities. Banc of America Securities and its affiliates
have, in the past, performed
52
various financial advisory and financing services for OCA, including acting as
documentation agent under OCA's revolving credit facility, and received fees for
rendering such services.
ACCOUNTING TREATMENT
OCA intends to account for the merger as a purchase transaction under
generally accepted accounting principles.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material anticipated U.S. federal income
tax consequences of the merger to OrthAlliance stockholders who hold shares of
OrthAlliance Class A and Class B common stock as a capital asset. The summary is
based on the Internal Revenue Code, applicable Treasury regulations, and
administrative rulings and court decisions in effect as of the date of this
Proxy Statement/Prospectus, all of which are subject to change at any time,
possibly with retroactive effect.
This summary is not a complete description of all of the consequences of
the merger. In particular, this summary does not address U.S. federal income tax
considerations applicable to stockholders subject to special treatment under
U.S. federal income tax law, such as:
- Non-U.S. persons;
- Financial institutions;
- Dealers in securities;
- Insurance companies;
- Tax-exempt entities;
- Holders of shares of OrthAlliance Class B common stock who exercise their
appraisal rights;
- Holders who acquired shares of OrthAlliance Class A and Class B common
stock upon the exercise of an employee stock option or right or otherwise
as compensation; and
- Holders who hold shares of OrthAlliance Class A and Class B common stock
as part of a hedge, straddle or conversion transaction.
In addition, no information is provided in this summary with respect to the tax
consequences of the merger under applicable foreign, state or local laws.
OCA has received an opinion of Waller Lansden Dortch & Davis, PLLC, and
OrthAlliance has received an opinion of Munger, Tolles & Olson LLP, that, as of
the respective dates of the opinions, the merger will be treated for U.S.
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code and that OCA and OrthAlliance will each be a
party to that reorganization within the meaning of Section 368(b) of the
Internal Revenue Code. It is a condition to the obligation of each of OCA and
OrthAlliance to complete the merger that their respective tax counsel confirm
its opinion as of the closing date. These opinions do not bind the Internal
Revenue Service and do not preclude the IRS or the courts from adopting a
contrary position. OCA and OrthAlliance do not intend to obtain a ruling from
the IRS on the tax consequences of the merger.
The opinions of the parties' respective tax counsel regarding the merger
have relied, and the opinions regarding the merger as of the closing date will
each rely, on (1) representations and covenants made by OCA and OrthAlliance,
including those contained in certificates of officers of OCA and OrthAlliance,
and (2) specified assumptions, including an assumption regarding the completion
of the merger in the manner contemplated by the merger agreement. In addition,
the opinions of the parties' respective tax counsel have assumed, and the tax
counsel's ability to provide the opinions at the closing of the merger will
depend on, the absence of changes in existing facts or in law between the date
of this Proxy Statement/ Prospectus and the closing date. If any of those
representations, covenants or assumptions is inaccurate, the parties' respective
tax counsel may not be able to provide one or more of the required opinions to
be
53
delivered at the closing of the merger and/or the tax consequences of the merger
could differ from those described in the opinions that tax counsel have
delivered.
OCA and OrthAlliance expect that, for U.S. federal income tax purposes:
- The merger will be treated as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code;
- No gain or loss will be recognized by OCA or OrthAlliance as a result of
the merger;
- No gain or loss will be recognized by OrthAlliance stockholders on the
exchange of all of their respective shares of OrthAlliance Class A and
Class B common stock solely for shares of OCA common stock in the merger,
except with respect to cash received in lieu of a fractional share of OCA
common stock; and
- The aggregate tax basis of the OCA common stock received by OrthAlliance
stockholders in exchange for all of their respective shares of
OrthAlliance Class A and Class B common stock will be the same as the
aggregate tax basis of shares of OrthAlliance Class A and Class B common
stock surrendered in exchange therefor, reduced by any amount allocable
to a fractional share of OCA common stock for which cash is received.
Generally, cash received by an OrthAlliance stockholder in lieu of a
fractional share of OCA common stock will be treated as received in redemption
of that fractional share interest, and the OrthAlliance stockholder should
generally recognize capital gain or loss for federal income tax purposes
measured by the difference between the amount of cash received and the portion
of the tax basis of the share of OrthAlliance Class A or Class B common stock
allocable to that fractional share of OCA common stock. This gain or loss should
be a long-term capital gain or loss if the holding period for the share of
OrthAlliance Class A or Class B common stock is greater than one year at the
effective time of the merger. The holding period of a share of OCA common stock
received in the merger, including a fractional share interest deemed received
and redeemed as described in this paragraph above, will include the holder's
holding period in OrthAlliance Class A and Class B common stock surrendered in
exchange for OCA common stock.
This discussion of material U.S. federal income tax consequences is
intended to provide only a general summary, and is not a complete analysis or
description of all potential federal income tax consequences of the merger. This
discussion does not address tax consequences that may vary with, or are
contingent on, individual circumstances. In addition, it does not address any
non-income tax or any foreign, state or local tax consequences of the merger.
ACCORDINGLY, ORTHALLIANCE STOCKHOLDERS ARE URGED TO CONSULT WITH THEIR TAX
ADVISORS REGARDING THE TAX CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE
EFFECTS OF U.S. FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND OF
POTENTIAL CHANGES TO APPLICABLE TAX LAW.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of OrthAlliance's management and Board of Directors may be
deemed to have interests in the merger that are in addition to their interests
as OrthAlliance stockholders generally. OrthAlliance's Board of Directors was
aware of these interests and considered them, among other matters, in approving
the merger agreement.
W. Dennis Summers, the Chairman of the Board and Interim President and
Chief Executive Officer of OrthAlliance, is a participant in OrthAlliance's stay
bonus and severance plan, whereby, if Mr. Summers' employment is terminated for
any reason within 12 months following completion of the merger, he will receive
payment of $200,000. In addition, Mr. Summers would receive a stay bonus equal
to $33,333 at the earlier of three months following the completion of the merger
or termination of his employment by OrthAlliance for any reason other than for
cause following the completion of the merger. Various other non-executive
officers and employees of OrthAlliance are also participants in this bonus and
severance plan.
54
Various officers of OrthAlliance, including Paul H. Hayase, Senior Vice
President, General Counsel and Secretary of OrthAlliance, Stephen M. Toon,
Senior Vice President and Chief Development Officer of OrthAlliance, and James
C. Wilson, Senior Vice President and Chief Financial Officer of OrthAlliance,
are parties to severance or employment agreements with OrthAlliance under which
they may be entitled to severance payments and benefits upon termination of
their employment following a change in control of OrthAlliance. We anticipate
that the merger would be a change in control for purposes of these agreements.
Dr. Randall K. Bennett, Dr. Larry D. Dormois, Dr. Raymond G. W. Kubisch and
Dr. Stephen G. Tracey, each of whom is a director of OrthAlliance and an
orthodontist or pediatric dentist affiliated with OrthAlliance, are eligible to
receive various financial incentives that OCA is offering to OrthAlliance
affiliated orthodontists and pediatric dentists who amend their employment
agreement and service, management service or consulting agreement with
OrthAlliance as provided in the merger agreement, or who enter into OCA's form
of business services agreement effective as of the merger. These incentives,
which consist of varying amounts of OCA common stock, are conditioned on, among
other things, the completion of the merger. As of October 5, 2001, three of
these directors have signed amendments to their employment agreement and
service, management service or consulting agreement, and are eligible to be
granted shares of OCA common stock if the merger is completed.
Directors and executive officers of OrthAlliance will receive shares of OCA
common stock in the merger on the same basis as other OrthAlliance stockholders.
The following chart shows the number of shares of OCA common stock that may be
issued to directors and executive officers of OrthAlliance in the merger:
Shares of OrthAlliance Class A and Class B common stock,
including stock options exercisable within 60 days,
beneficially owned by OrthAlliance executive officers and
directors as of September 26, 2001........................ 1,099,292
Shares of OCA common stock that may be received in the
merger by OrthAlliance executive officers and directors
(based on such beneficial ownership and the maximum
exchange ratio)........................................... 182,317
Members of OrthAlliance's Board of Directors have certain interests under
the merger agreement regarding indemnification and continuation of liability
insurance coverage following the merger. See "THE MERGER
AGREEMENT -- Indemnification."
COMPARISON OF RIGHTS OF STOCKHOLDERS
At the effective time of the merger, OrthAlliance stockholders will
automatically become OCA stockholders (except for those holders of OrthAlliance
Class B common stock who properly exercise appraisal rights under Delaware law).
OCA is a Delaware corporation governed by provisions of the Delaware General
Corporation Law and OCA's restated certificate of incorporation and bylaws.
OrthAlliance is a Delaware corporation governed by provisions of the Delaware
General Corporation Law and OrthAlliance's amended and restated certificate of
incorporation and bylaws. See "COMPARISON OF RIGHTS OF STOCKHOLDERS."
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of OCA common stock issuable to OrthAlliance stockholders upon
completion of the merger have been registered under the Securities Act of 1933.
These shares may be traded freely without restriction by those stockholders who
are not deemed to be "affiliates" of OrthAlliance, as that term is defined in
SEC rules under the Securities Act. An "affiliate" of a company generally
includes its directors and executive officers and holders of a significant
amount of the company's voting stock.
55
Shares of OCA common stock received by those OrthAlliance stockholders who
are deemed to be "affiliates" of OrthAlliance, as that term is defined in SEC
rules under the Securities Act, at the time of the OrthAlliance special meeting
may be resold without registration under the Securities Act only as permitted by
Rule 145 under the Securities Act. Under Rule 145, during the one-year period
following completion of the merger, affiliates of OrthAlliance may resell shares
of OCA common stock received by them in the merger subject to limitations on the
number of shares that may be sold during any three-month period and the manner
in which the shares may be sold, including the use of a broker and non-
solicitation of a buyer.
56
THE MERGER AGREEMENT
The following summary of certain terms and provisions of the merger
agreement is qualified in its entirety by reference to the merger agreement,
which is incorporated into this document by reference and, with the exception of
exhibits and schedules to the merger agreement, is attached as Annex A to this
Proxy Statement/Prospectus.
EXCHANGE OF CERTIFICATES
OCA will deposit with EquiServe, as the exchange agent for the merger,
certificates representing the shares of OCA common stock and cash to be paid in
lieu of fractional shares of OCA common stock to which a holder of certificates
formerly representing shares of OrthAlliance Class A and Class B common stock
would otherwise be entitled based on the exchange ratio.
Promptly after the completion of the merger, the exchange agent will mail
to each holder of record of a certificate formerly representing shares of
OrthAlliance Class A or Class B common stock a form letter of transmittal for
use in exchanging such stockholder's OrthAlliance certificates for shares of OCA
common stock and/or cash due under the merger agreement. Upon surrender of an
OrthAlliance certificate for exchange and cancellation to the exchange agent,
together with a duly executed letter of transmittal, the holder of an
OrthAlliance certificate will be entitled to receive the number of whole shares
of OCA common stock and cash for any fractional shares to which such holder has
become entitled in accordance with the merger agreement. OCA will pay to each
OrthAlliance stockholder who would otherwise be entitled to a fractional share
of OCA common stock, after taking into account all OrthAlliance certificates
delivered by the stockholder, an amount in cash to be paid in lieu of fractional
shares, without interest, determined by multiplying such fraction by the average
of the last sale prices of OCA common stock as reported on the New York Stock
Exchange for the three trading days immediately preceding the merger.
OrthAlliance certificates so surrendered will immediately be canceled. No
interest will be paid or accrued on any cash to be paid upon such surrender,
whether in lieu of fractional shares of OCA common stock or with respect to
unpaid dividends or distributions thereon.
ORTHALLIANCE STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL
THEY RECEIVE THE TRANSMITTAL MATERIALS FROM THE EXCHANGE AGENT.
Any part of the OCA common stock certificates and cash deposited with the
exchange agent that remains unclaimed by OrthAlliance stockholders for 12 months
after the merger will be paid to OCA. After that time, OrthAlliance stockholders
may look only to OCA for payment of the shares of OCA common stock, cash in lieu
of fractional shares of OCA common stock and any unpaid dividends and
distributions on OCA common stock deliverable in respect of each share of
OrthAlliance common stock held by the stockholder, in each case, without
interest. OCA, OrthAlliance, the exchange agent and any other person will not be
liable to any former OrthAlliance stockholder for any amounts properly delivered
to a public official pursuant to applicable abandoned property, escheat or
similar laws. If any OrthAlliance certificate is not surrendered prior to the
end of the applicable period under any applicable escheat or similar law, or
immediately prior to the date on which any shares of OCA common stock, any cash
in lieu of fractional shares of OCA common stock or any dividends or
distributions with respect to the certificates would escheat to or become the
property of any governmental authority, then the shares of OCA common stock,
cash and dividends or distributions with respect to the OrthAlliance
certificates will, to the extent permitted by applicable law, become the
property of OCA.
If any certificate formerly representing OrthAlliance common stock is lost,
stolen or destroyed, OCA can require the holder to give an affidavit of that
fact and to post a bond in an amount that OCA or the exchange agent may direct
as indemnity against any claim that may be made with respect to this
OrthAlliance certificate. Upon making such affidavit and/or posting such bond,
the exchange agent will issue the shares of OCA common stock and/or cash due
under the merger agreement.
No dividends or other distributions with respect to OCA common stock
declared after the merger and payable to OCA stockholders of record will be paid
to the holder of any unsurrendered OrthAlliance
57
certificate until the holder of the certificate surrenders the OrthAlliance
certificate. After the proper surrender of an OrthAlliance certificate, the
record holder of the certificate will receive any such dividends or other
distributions, without any interest, which the holder would have received if he
or she had exchanged his OrthAlliance certificate immediately after the merger.
CONDITIONS TO THE MERGER
The obligations of OrthAlliance and OCA to complete the merger are subject
to the satisfaction, or waiver, where legally allowed, at or prior to the
effective time of the merger, of a number of conditions, which are set forth in
the merger agreement. These conditions include:
- Approval of the merger agreement by OrthAlliance stockholders;
- The New York Stock Exchange listing the shares of OCA common stock to be
issued to OrthAlliance stockholders as consideration under the merger
agreement;
- Any waiting period, and any extension, applicable to the completion of
the merger under the Hart-Scott-Rodino Act having expired or being
terminated;
- The absence of any legal prohibition to completion of the merger;
- Absence of an event or change that has a material adverse effect on
either OCA or OrthAlliance;
- The accuracy of the parties' representations and warranties and
performance of the parties' obligations under the merger agreement; and
- Receipt of the required tax opinions.
OCA's obligation to complete the merger is also conditioned upon at least
56 of 184 designated orthodontists and pediatric dentists who are
owners/employees of professional entities that are parties to service or
consulting agreements with OrthAlliance, and a number of those orthodontists and
pediatric dentists representing at least 30% of OrthAlliance's service fees
during the 12 months ended March 31, 2001, executing, along with their
professional entity, amendments to their respective employment agreement and
service, management service or consulting agreement, as provided in the merger
agreement. As of October 5, 2001, 72 of these designated orthodontists and
pediatric dentists, along with their respective professional entity, have signed
amendments to their respective employment agreements and OrthAlliance service,
management service or consulting agreements, representing 35.98% of
OrthAlliance's service fees during the 12 months ended March 31, 2001, which
exceed the minimum amounts required under this condition. These amounts,
however, may change prior to completion of the merger.
We cannot guarantee that the conditions precedent to the merger will be
satisfied or, where legally permitted, waived by the party permitted to do so,
or that the merger will be completed.
TERMINATION OF THE MERGER AGREEMENT
BY MUTUAL AGREEMENT. The merger agreement may be terminated at any time
prior to the completion of the merger, whether before or after approval of the
merger by OrthAlliance stockholders, as set forth in the merger agreement,
including by mutual consent of OCA and OrthAlliance.
BY EITHER PARTY. In addition, the merger agreement may be terminated by
either party if:
- The merger is not completed by November 30, 2001;
- OrthAlliance's stockholders fail to approve the merger agreement;
- The other party materially breaches its representations or covenants set
forth in the merger agreement and fails to cure that breach within the
prescribed time limit; or
- The other party does not satisfy its conditions required to complete the
merger, and these conditions have become incapable of being fulfilled or
cured and have not been waived.
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BY OCA. OCA may terminate the merger agreement if:
- OrthAlliance's Board of Directors fails to recommend in this Proxy
Statement/Prospectus that OrthAlliance's stockholders approve the merger
agreement;
- OrthAlliance's Board of Directors withdraws, modifies in a way adverse to
OCA or discloses its intention to withdraw its approval or recommendation
of the merger agreement;
- OrthAlliance's Board of Directors approves or recommends, or publicly
proposes to approve or recommend, any tender offer, exchange offer,
merger proposal or other proposal or offer to acquire 15% or more of the
equity interest in, or all or substantially all of the assets of,
OrthAlliance or its subsidiaries, other than the merger described in this
Proxy Statement/Prospectus;
- OrthAlliance's Board of Directors recommends a superior acquisition
proposal and withdraws or modifies its approval or recommendation of the
merger agreement, or terminates the merger agreement solely to
concurrently enter into a merger agreement, acquisition agreement, option
agreement or letter of intent with respect to the superior acquisition
proposal, after determining in good faith that the failure to do so would
violate the Board's fiduciary duties and giving notice to OCA. The
superior acquisition proposal must be a bona fide, written tender offer,
exchange offer, merger proposal or other proposal or offer to acquire all
or substantially all of the capital stock or assets of OrthAlliance,
which OrthAlliance's Board of Directors determines, in good faith, is
more favorable to OrthAlliance and its stockholders than the merger
described in this Proxy Statement/ Prospectus, with any required
financing being fully committed and reasonably capable of being obtained,
and is reasonably capable of being completed without undue delay; or
- OrthAlliance accepts or enters into an agreement or letter of intent with
respect to any tender offer, exchange offer, merger proposal or other
proposal or offer to acquire 15% or more of the equity interest in, or
all or substantially all of the assets of, OrthAlliance or its
subsidiaries, other than the merger described in this Proxy
Statement/Prospectus.
BY ORTHALLIANCE. OrthAlliance may terminate the merger agreement if its
Board of Directors elects to terminate the merger agreement solely to
concurrently enter into a merger agreement, acquisition agreement, option
agreement or letter of intent with respect to the superior acquisition proposal,
after determining in good faith that the failure to do so would violate the
Board's fiduciary duties and giving notice to OCA. The superior acquisition
proposal must be a bona fide, written tender offer, exchange offer, merger
proposal or other proposal or offer to acquire all or substantially all of the
capital stock or assets of OrthAlliance, which OrthAlliance's Board of Directors
determines, in good faith, is more favorable to OrthAlliance and its
stockholders than the merger described in this Proxy Statement/Prospectus, with
any required financing being fully committed and reasonably capable of being
obtained, and is reasonably capable of being completed without undue delay.
EFFECTS OF TERMINATION. If the merger agreement is terminated, it will
become void and have no effect, except with respect to the parties' obligations
regarding confidential information, expenses and certain break-up fees payable
upon termination of the merger agreement in some circumstances, as set forth in
the merger agreement. Termination of the merger agreement also will not relieve
or release a breaching party from liability or damages for its breach of the
merger agreement.
BREAK-UP FEES
BREAK-UP FEE TO OCA UPON TERMINATION FOR CERTAIN EVENTS. If the merger
agreement is terminated because:
- OrthAlliance's Board of Directors fails to recommend in this Proxy
Statement/Prospectus that OrthAlliance's stockholders approve the merger
agreement;
- OrthAlliance's Board of Directors withdraws, modifies in a way adverse to
OCA or discloses its intention to withdraw its approval or recommendation
of the merger agreement;
59
- OrthAlliance's Board of Directors approves or recommends, or publicly
proposes to approve or recommend, any tender offer, exchange offer,
merger proposal or other proposal or offer to acquire 15% or more of the
equity interest in, or all or substantially all of the assets of,
OrthAlliance or its subsidiaries, other than the merger described in this
Proxy Statement/Prospectus;
- OrthAlliance's Board of Directors recommends a superior acquisition
proposal and withdraws or modifies its approval or recommendation of the
merger agreement, or terminates the merger agreement solely to
concurrently enter into a merger agreement, acquisition agreement, option
agreement or letter of intent with respect to the superior acquisition
proposal, after determining in good faith that the failure to do so would
violate the Board's fiduciary duties and giving notice to OCA. The
superior acquisition proposal must be a bona fide, written tender offer,
exchange offer, merger proposal or other proposal or offer to acquire all
or substantially all of the capital stock or assets of OrthAlliance,
which OrthAlliance's Board of Directors determines, in good faith, is
more favorable to OrthAlliance and its stockholders than the merger
described in this Proxy Statement/ Prospectus, with any required
financing being fully committed and reasonably capable of being obtained,
and is reasonably capable of being completed without undue delay;
- OrthAlliance accepts or enters into an agreement or letter of intent with
respect to any tender offer, exchange offer, merger proposal or other
proposal or offer to acquire 15% or more of the equity interest in, or
all or substantially all of the assets of, OrthAlliance or its
subsidiaries, other than the merger described in this Proxy
Statement/Prospectus; or
- The merger is not completed by November 30, 2001 or OrthAlliance's
stockholders fail to approve the merger agreement, and, at any time after
May 16, 2001 and before termination of the merger agreement, any tender
offer, exchange offer, merger proposal or other proposal or offer to
acquire 15% or more of the equity interest in, or all or substantially
all of the assets of, OrthAlliance or its subsidiaries, other than the
merger described in this Proxy Statement/Prospectus, is publicly
announced or otherwise communicated to OrthAlliance's stockholders and is
not publicly withdrawn or rescinded, and OrthAlliance or its subsidiary
enters into a definitive agreement with respect to the acquisition
proposal within 12 months after termination of the merger agreement;
then OrthAlliance is to pay $4,000,000 in cash to OCA and reimburse OCA for all
of its reasonable out-of-pocket costs and expenses incurred in connection with
the merger agreement, this Proxy Statement/ Prospectus, other documents or
actions contemplated or related to the merger agreement and any related
financing in an aggregate amount not to exceed $500,000.
BREAK-UP FEE TO ORTHALLIANCE UPON TERMINATION BY OCA FOR NON-SATISFACTION
OF CONDITION TO CLOSING. If OCA terminates the merger agreement solely as a
result of non-satisfaction of the condition that at least 56 of 184 designated
orthodontists and pediatric dentists who are owners/employees of professional
entities that are parties to service, management service or consulting
agreements with OrthAlliance, and a number of those orthodontists and pediatric
dentists representing at least 30% of OrthAlliance's service fees during the 12
months ended March 31, 2001, execute, along with their professional entity,
amendments to their respective employment agreement and OrthAlliance service,
management service or consulting agreement prior to the merger, as provided in
the merger agreement, then:
- OCA will pay $1,000,000 in cash to OrthAlliance; and
- For a period of two years following the date of termination, OCA will not
directly or indirectly solicit or induce any orthodontist, pediatric
dentist or professional entity that was a party to, or an owner and
employer of a professional entity that was a party to, a service,
management service or consulting agreement with OrthAlliance or its
subsidiaries as of May 16, 2001, to terminate their employment agreement
or their service, management service or consulting agreement with
OrthAlliance.
60
CONDUCT OF BUSINESS PRIOR TO THE MERGER AND OTHER COVENANTS
In the merger agreement, OrthAlliance and OCA agreed that, except as
expressly contemplated or permitted by the merger agreement or with the prior
written consent of the other party, each will carry on their respective
businesses in the ordinary course, consistent with past practice. OrthAlliance
and OCA also agreed to refrain from engaging in, or permitting its subsidiaries
to engage in, certain activities which are described in the merger agreement.
OrthAlliance has agreed to refrain from:
- Declaring, setting aside or paying any dividends on, or making any other
distributions in respect of, any of its capital stock during any period,
other than dividends or distributions by a subsidiary of OrthAlliance to
OrthAlliance or another subsidiary of OrthAlliance;
- Repurchasing, redeeming or otherwise acquiring any shares of its capital
stock or any of its subsidiaries, or any securities convertible into or
exercisable for any shares of its capital stock or any of its
subsidiaries, except according to option plans existing on the date of
the merger agreement;
- Splitting, combining or reclassifying any shares of its capital stock, or
issuing or authorizing or proposing the issuance of any other securities
in respect of, in lieu of or in substitution for, shares of its capital
stock;
- Issuing or authorizing its capital stock other than the issuance of
OrthAlliance Class A common stock upon the exercise, conversion or
fulfillment of options issued or existing under OrthAlliance's option
plans, warrants or OrthAlliance Class B common stock, all to the extent
outstanding and in existence on May 16, 2001 and in accordance with their
terms on May 16, 2001;
- Issuing any options or other securities convertible into or exchangeable
for its capital stock;
- Amending its certificate of incorporation or bylaws;
- Making any capital expenditures other than those which are made in the
ordinary course of business consistent with past practice or are
necessary to maintain existing assets in good repair;
- Entering into any new line of business;
- Acquiring or agreeing to acquire any business or division thereof, or
otherwise acquiring any assets other than expenditures for current assets
in the ordinary course of business consistent with past practice and
expenditures for fixed or capital assets in the ordinary course of
business consistent with past practice;
- Changing its methods of accounting, except as required by changes in
generally accepted accounting principles or regulatory accounting
principles as concurred to by OrthAlliance's independent auditors;
- Adopting, amending, terminating or accelerating the payment, right to
payment or vesting of any employee benefit plan or compensation,
severance, bonus or similar arrangement, except as required by applicable
law, the Internal Revenue Code or under any OrthAlliance benefit plan to
which OrthAlliance or a subsidiary of OrthAlliance is a party prior to
May 16, 2001;
- Entering into, amending or terminating any employment, severance,
consulting, change in control or similar agreement, arrangement or
contract with any current or former directors, officers or employees, or,
except for normal increases in the ordinary course of business consistent
with past practice or as required by applicable law, increasing the
compensation or fringe benefits of any director, officer, consultant or
employee or pay any benefit not required by benefit plans or agreements
as in effect on May 16, 2001, nor granting, modifying or awarding stock
options, stock appreciation rights, restricted stock, restricted stock
units or performance units or shares, except that OrthAlliance may employ
a chief executive officer who is reasonably satisfactory to OCA, with
compensation, benefits, severance and other terms of employment that are
commercially reasonable
61
and otherwise comparable to that of a chief executive officer of a
comparable company and approved in advance in writing by OCA;
- Taking or permitting to be taken any action which would disqualify the
merger as a reorganization under Section 368(a) of the Internal Revenue
Code;
- Disposing of any of its material assets other than in the ordinary course
of business, consistent with past practice;
- Incurring any indebtedness in the aggregate amount of greater than
$100,000 other than in the ordinary course of business consistent with
past practice, except that OrthAlliance may, after using reasonable best
efforts to fund the following payments through its available cash flow,
incur additional indebtedness of up to $5,000,000 with respect to the
payment of professional fees, interest and taxes due and payable in the
ordinary course of business, consistent with past practice, and, with the
prior written consent of OCA, the affiliation of new orthodontic or
pediatric dental practices;
- Agreeing to the settlement of any material claim or litigation, other
than claims and litigation that are disclosed in OrthAlliance's Annual
Report on Form 10-K for the year ended December 31, 2000;
- Entering into any agreement that restrains, limits or impedes, in any
material respects, OrthAlliance's ability to compete with or conduct any
business or line of business, including geographic limitations;
- Planning, announcing, implementing or effecting any reduction in force,
lay-off, early retirement program, severance program or other program
concerning the termination of employment of employees of OrthAlliance or
its subsidiaries, other than routine employee terminations in the
ordinary course of business;
- Making, changing or revoking any material tax election or making any
material agreement or settlement regarding taxes with any taxing
authority;
- Entering into, renewing, amending or terminating any material contract,
including any service or consulting agreement, or waiving, releasing or
assigning any material rights or claims, except in the ordinary course of
business and consistent with past practice or as contemplated by the
merger agreement;
- Paying any claims, liabilities or obligations, other than in the ordinary
course of business consistent with past practice or in accordance with
their terms, or liabilities reflected or reserved against in, or
contemplated by, OrthAlliance's 2000 financial statements or incurred in
the ordinary course of business consistent with past practice;
- Violating or failing to perform in any material respect any material
obligation or duty imposed upon it by applicable law; and
- Authorizing, recommending, proposing, announcing its intention or
agreeing to do any of these actions.
In addition, OrthAlliance agreed to:
- Use commercially reasonable efforts to maintain insurance on its tangible
assets and its businesses in amounts and against risks and losses that
are commercially reasonable and consistent with past practice;
- Use its reasonable best efforts to collect outstanding receivables for
service fees, consulting fees, expense reimbursements, advances, loans or
other amounts owed to OrthAlliance or its subsidiaries by orthodontists,
pediatric dentists or professional entities affiliated with OrthAlliance,
and not to generate, create or allow any of these receivables other than
in the ordinary course of business consistent with past practice or in an
aggregate amount that exceeds a specified amount; and
62
- Use all reasonable efforts to keep available the services of its current
officers and employees and preserve its relationships with orthodontists,
pediatric dentists, dentists, professional entities, customers,
suppliers, licensors, lessors, third party payors and others having
business dealings with OrthAlliance to the end that its goodwill and
ongoing business will be unimpaired at the completion of the merger.
OCA has agreed to refrain from:
- Declaring, setting aside or paying any dividends on, or making any other
distributions in respect of, any of its capital stock during any period,
other than dividends or distributions by a subsidiary of OCA to OCA or
another subsidiary of OCA;
- Splitting, combining or reclassifying any shares of its capital stock, or
issuing or authorizing or proposing the issuance of any other securities
in respect of, in lieu of or in substitution for, shares of its capital
stock;
- Amending its certificate of incorporation;
- Taking or permitting to be taken any action which would disqualify the
merger as a reorganization under Section 368 of the Internal Revenue
Code; and
- Authorizing, recommending, proposing, announcing its intention or
agreeing to do any of these actions.
OCA also agreed to repay in full all amounts owed under OrthAlliance's
revolving credit facility at the effective time of the merger, and to terminate
the lenders' commitments, unless the lenders otherwise agree and provide any
required consent to the merger. In addition, OCA agreed to cause the shares of
OCA common stock to be issued in the merger to be approved for listing on the
New York Stock Exchange.
OrthAlliance agreed to cause each director, executive officer and other
person who is an "affiliate" of OrthAlliance for purposes of Rule 145 under the
Securities Act, to deliver to OCA a written agreement intended to ensure
compliance with the Securities Act. OrthAlliance also agreed to call and hold a
special meeting of its stockholders and, through its Board of Directors, to
recommend the merger agreement for approval to its stockholders.
The merger agreement also contains certain other agreements relating to the
conduct of the parties prior to the merger, including those requiring each party
to:
- Apply for and obtain all consents and approvals required to complete the
merger;
- Afford to the other party and its representatives access during normal
business hours to information about its business, properties and
personnel as the other party may reasonably request;
- Take all actions required to comply with any legal requirements to
complete the merger; and
- Promptly prepare and use reasonable efforts to obtain amendments to the
employment agreements and OrthAlliance service and consulting agreements
of orthodontists, pediatric dentists and professional entities that are
parties to those agreements or are owners/employees of professional
entities that are parties to those agreements, as provided in the merger
agreement.
NO OTHER TRANSACTIONS INVOLVING ORTHALLIANCE
OrthAlliance has agreed to "non-solicitation" provisions prohibiting it
from seeking an alternative transaction. Under these non-solicitation
provisions, OrthAlliance agreed that it and its subsidiaries, officers,
directors, employees, attorneys, investment bankers and other representatives
will not directly or indirectly:
- Encourage, solicit, initiate, facilitate, entertain or accept any tender
offer, exchange offer, merger proposal or other proposal or offer to
acquire 15% or more of the equity interest in, or all or
63
substantially all of the assets of, OrthAlliance or its subsidiaries,
other than the merger described in this Proxy Statement/Prospectus;
- Enter into any agreement with respect to any tender offer, exchange
offer, merger proposal or other proposal or offer to acquire 15% or more
of the equity interest in, or all or substantially all of the assets of,
OrthAlliance or its subsidiaries, other than the merger described in this
Proxy Statement/ Prospectus;
- Enter into any arrangement, understanding or agreement requiring it to
abandon, terminate or fail to complete the merger;
- Propose or make any tender offer, exchange offer, merger proposal or
other proposal or offer to acquire 15% or more of the equity interest in,
or all or substantially all of the assets of, OrthAlliance or its
subsidiaries, to any person other than OCA and OCA Acquisition
Corporation;
- Participate in discussions or negotiations with, or furnish or disclose
any information to, any person, other than OCA and OCA Acquisition
Corporation, in connection with or with respect to any tender offer,
exchange offer, merger proposal or other proposal or offer to acquire 15%
or more of the equity interest in, or all or substantially all of the
assets of, OrthAlliance or its subsidiaries, other than the merger
described in this Proxy Statement/Prospectus; or
- Authorize or permit any subsidiary, officer, director, employee,
attorney, investment banker or other representative of OrthAlliance to
take any of these actions.
OrthAlliance also agreed that it will notify OCA within 24 hours after
receiving any request for information or tender offer, exchange offer, merger
proposal or other proposal or offer to acquire 15% or more of the equity
interest in, or all or substantially all of the assets of, OrthAlliance or its
subsidiaries, or any inquiry, proposal, discussions or negotiations with respect
to any such acquisition proposal, and promptly provide OCA with the terms and
conditions of the proposal, copies of any written materials received in
connection with the proposal and the identity of the person making the proposal.
OrthAlliance must keep OCA fully informed of the status and details of any such
acquisition proposal and promptly provide to OCA any non-public information
concerning OrthAlliance provided to any other person in connection with any such
acquisition proposal which was not previously provided to OCA.
OrthAlliance further agreed that its Board of Directors will not withdraw,
or modify in a manner adverse to OCA or OCA Acquisition Corporation, the Board's
approval and recommendation of the merger agreement. OrthAlliance further agreed
that its Board of Directors will not approve or recommend any tender offer,
exchange offer, merger proposal or other proposal or offer to acquire 15% or
more of the equity interest in, or all or substantially all of the assets of,
OrthAlliance or its subsidiaries, other than the merger described in this Proxy
Statement/Prospectus.
However, in response to an unsolicited, bona fide, written tender offer,
exchange offer, merger proposal or other proposal or offer to acquire 15% or
more of the equity interest in, or all or substantially all of the assets of,
OrthAlliance or its subsidiaries, OrthAlliance may, after giving notice to OCA,
take one or more of the following actions if OrthAlliance's Board of Directors
determines in good faith that failure to take the action or actions would
violate the Board's fiduciary duties:
- Participate or engage in discussions or negotiations with the person
making the acquisition proposal;
- Provide information to the person making the acquisition proposal, based
on a confidentiality agreement with terms that are no more favorable to
that person than the terms of the confidentiality agreement between
OrthAlliance and OCA; and
- Authorize and permit its officers, directors, employees, attorneys,
investment bankers and other representatives to take these actions.
In addition, OrthAlliance's Board of Directors may recommend a superior
acquisition proposal and withdraw or modify its approval or recommendation of
the merger agreement, or terminate the merger agreement solely to concurrently
enter into a merger agreement, acquisition agreement, option agreement
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or letter of intent with respect to the superior acquisition proposal, if the
Board determines in good faith that the failure to do so would violate the
Board's fiduciary duties and gives notice to OCA. The superior acquisition
proposal must be a bona fide, written tender offer, exchange offer, merger
proposal or other proposal or offer to acquire all or substantially all of the
capital stock or assets of OrthAlliance, which OrthAlliance's Board of Directors
determines, in good faith, is more favorable to OrthAlliance and its
stockholders than the merger described in this Proxy Statement/Prospectus, with
any required financing being fully committed and reasonably capable of being
obtained, and is reasonably capable of being completed without undue delay.
OrthAlliance may also take or disclose to its stockholders a position
contemplated under the SEC's tender offer rules or make any disclosure to its
stockholders if OrthAlliance's Board of Directors determines in good faith that
the failure to do so would violate the Board's fiduciary duties.
INDEMNIFICATION
OCA agreed to provide indemnification of the directors and officers of
OrthAlliance as provided by OrthAlliance in its certificate of incorporation for
six years after the merger and to provide, for six years after the merger,
directors' and officers' liability insurance for the directors and officers of
OrthAlliance at an annual premium not to exceed 200% of the amount expended by
OrthAlliance as of May 16, 2001.
AMENDMENT OF THE MERGER AGREEMENT
The merger agreement may be amended only by a written instrument signed on
behalf of each of OrthAlliance, OCA and OCA Acquisition Corporation at any time
prior to the effective time of the merger, and before or after OrthAlliance
stockholders approve the merger agreement.
WAIVER
At any time prior to the effective time of the merger, OCA and OrthAlliance
may extend the time for the performance of any of the obligations or other acts
of the other party under the merger agreement, waive any inaccuracies in the
representations and warranties of the other party contained in the merger
agreement or waive compliance with any of the agreements or conditions of the
other party contained in the merger agreement.
EXPENSES
OCA and OrthAlliance will each bear all expenses incurred by it in
connection with the merger agreement and the merger.
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PRICE RANGE OF COMMON STOCK AND DIVIDENDS
ORTHODONTIC CENTERS OF AMERICA
OCA common stock is listed on the New York Stock Exchange under the symbol
"OCA." As of September 26, 2001, OCA common stock was held of record by
approximately 303 persons. The following table sets forth the high and low sale
prices for OCA common stock as reported on the New York Stock Exchange for the
periods indicated:
STOCK PRICES
---------------
HIGH LOW
---- ---
2001
First Quarter............................................. $31.31 $18.50
Second Quarter............................................ 32.98 16.80
Third Quarter............................................. 32.25 21.65
Fourth Quarter (through October 5, 2001).................. 27.25 24.58
2000
First Quarter............................................. $20.25 $11.06
Second Quarter............................................ 27.44 15.63
Third Quarter............................................. 35.31 21.94
Fourth Quarter............................................ 34.94 23.44
1999
First Quarter............................................. $20.13 $12.50
Second Quarter............................................ 17.25 10.81
Third Quarter............................................. 18.94 13.25
Fourth Quarter............................................ 18.00 11.00
OCA has never declared or paid cash dividends on its common stock. OCA
expects that any future earnings will be retained for the growth and development
of its business. Accordingly, OCA does not anticipate that it will declare or
pay any cash dividends on its common stock for the foreseeable future. The
declaration, payment and amount of future dividends, if any, will depend upon
OCA's future earnings, results of operations, financial position and capital
requirements, among other factors. In addition, OCA's revolving credit facility
does not permit it to pay cash dividends.
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ORTHALLIANCE
OrthAlliance Class A common stock is quoted on the Nasdaq Stock Market
National Market System under the symbol "ORAL." Shares of OrthAlliance Class B
common stock are not publicly traded. As of September 26, 2001, OrthAlliance
Class A common stock was held of record by approximately 132 persons. The
following table sets forth the high and low sale prices for OrthAlliance Class A
common stock as quoted on the Nasdaq Stock Market National Market System, for
the periods indicated:
STOCK PRICES
--------------
HIGH LOW
---- ---
2001
First Quarter............................................. $ 3.44 $1.75
Second Quarter............................................ 3.67 1.63
Third Quarter............................................. 3.90 2.16
Fourth Quarter (through October 5, 2001).................. 2.81 2.38
2000
First Quarter............................................. $ 8.25 $5.00
Second Quarter............................................ 7.00 5.50
Third Quarter............................................. 7.28 5.44
Fourth Quarter............................................ 6.00 2.13
1999
First Quarter............................................. $11.88 $7.00
Second Quarter............................................ 8.13 7.00
Third Quarter............................................. 7.44 6.06
Fourth Quarter............................................ 9.31 6.06
Except for the payment in August 1997 of $13.8 million to OrthAlliance's
initial 55 allied practices, which was recorded as a cash dividend, OrthAlliance
has never declared and paid any dividends on either its Class A or Class B
common stock.
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ORTHODONTIC CENTERS OF AMERICA
OVERVIEW
OCA is the leading provider of integrated business services to
orthodontists. Since 1985, OCA has executed a retail-oriented approach to
developing orthodontic practices, which it believes has resulted in significant
increases in productivity and profitability for its affiliated orthodontists. As
of June 30, 2001, OCA was affiliated with over 400 orthodontists practicing in
over 600 orthodontic centers located throughout the United States and parts of
Japan, Mexico, Spain and Puerto Rico. During 2000, OCA's affiliated
orthodontists initiated treatment of about 161,000 patients, representing
initial new patient contract balances of $494.1 million for 2000. As of June 30,
2001, OCA's affiliated orthodontists were treating a total of over 379,000
patients.
OCA'S BUSINESS
OCA provides its affiliated orthodontists with business, operational and
marketing expertise that enables them to realize significantly greater
productivity, practice revenue and patient volume, while maintaining high
quality orthodontic care. OCA's services include:
- Developing and implementing aggressive marketing plans for its affiliated
orthodontists, using television, radio and print advertising and internal
marketing programs to increase patient volume;
- Implementing its proprietary operating systems and innovative office
designs to increase productivity;
- Integrating its proprietary, user-friendly management information systems
to provide timely information and to enhance operational and accounting
controls; and
- Combining its proprietary online ordering system and its bulk purchasing
power to reduce supply costs.
OCA'S OPERATING STRATEGY
OCA believes that it adds value to its affiliated orthodontists' practices
by providing superior and innovative services that are designed to enhance
productivity and increase profitability. Key elements of OCA's operating
strategy include:
- Emphasizing high quality patient care;
- Stimulating demand for orthodontic services through marketing and
advertising;
- Increasing market penetration with competitive patient fees and
convenient payment plans;
- Achieving operating efficiencies through proprietary operating systems
and innovative office designs; and
- Providing superior service through management information systems.
OCA'S GROWTH STRATEGY
OCA's growth strategy focuses on enabling its affiliated orthodontists to
grow their practices and enhance their productivity, and on affiliating with
additional orthodontists in the United States and abroad. Key elements of OCA's
growth strategy include:
- Enhancing the productivity and increasing the profitability of existing
centers through increased patient treatment intervals, the use of general
dentists as assistants, internal marketing and other programs;
- Affiliating with additional orthodontists and orthodontic centers;
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- Establishing brand identity for the "Orthodontic Centers of America"
network of affiliated orthodontists, 1-800-4BRACES toll-free telephone
number and www.4braces.com Internet website;
- Continuing to expand in Japan, Mexico, Spain and other international
markets; and
- Capitalizing on complementary products and services, such as teeth
whitening and non-braces treatment for adults.
OCA'S AFFILIATED ORTHODONTIC PRACTICES
OCA believes that its retail-oriented approach to developing orthodontic
practices has resulted in significant increases in productivity and
profitability for its affiliated orthodontists. OCA's affiliated orthodontists
have experienced significantly greater operating results than traditional
orthodontists, including significantly greater patient volume, productivity and
patient revenue, as reflected in the following table:
OCA AFFILIATED TRADITIONAL
ORTHODONTISTS (1) ORTHODONTISTS (2)
----------------- -----------------
(AVERAGE AMOUNTS PER ORTHODONTIST)
Annual advertising expenditures....................... $66,439 $4,400
Treatment fees per patient:
Down payment per patient (3)........................ $ 0 $ 976
Total fees per patient (3)(4)....................... $ 3,270 $3,904
New case starts per year (5).......................... 538 200
Patients treated per operating day (5)................ 78 45
Patient fees per operating day (5).................... $ 6,000 $3,000
---------------
(1) Information for OCA affiliated orthodontists is for 2000.
(2) Information for traditional orthodontists is for 1998, and is derived from
the 1999 Journal of Clinical Orthodontists Orthodontic Practice Study, a
biennial study of the U.S. orthodontic industry. Information for 1999 and
2000 has not been published.
(3) For traditional orthodontists, this amount represents a weighted average.
(4) For OCA affiliated orthodontists, this amount represents the standard fee
for a term of treatment that averages 26 months.
(5) For OCA affiliated orthodontists, this amount is based upon orthodontists
who had been affiliated with OCA for at least 12 months as of January 1,
2000.
OCA develops and implements marketing and advertising plans for its
affiliated orthodontists, using television, radio and print advertising and
internal marketing promotions. During 2000, OCA spent an average of $66,439 per
affiliated orthodontist on direct marketing costs and advertising. In contrast,
traditional orthodontists, who rely primarily on referrals from dentists and
patients, spent an average of $4,400 on marketing and advertising in 1998.
OCA believes that its marketing and advertising strategy has allowed its
affiliated orthodontists to generate significantly greater patient volume than
traditional orthodontists. Each of OCA's affiliated orthodontists who had been
affiliated with OCA and its subsidiaries for at least one year generated an
average of 538 new case starts during 2000, as compared to the 1998 national
average of 200 new case starts per orthodontist. During 2000, OCA's affiliated
orthodontists generated a total of about 161,000 new case starts, representing
initial new patient contract balances of $494.1 million for 2000, an increase of
33.9% from $369.1 million for 1999.
OCA's operating systems and office designs, along with the efficient use of
an average of five orthodontic assistants per orthodontic center, have enabled
OCA's affiliated orthodontists to treat more patients per day as compared to
traditional orthodontists. OCA's innovative office designs permit an affiliated
orthodontist to treat patients without moving from room to room. OCA's
proprietary patient scheduling system groups appointments by the type of
procedure and dedicates certain days exclusively to new patients. During 2000,
OCA's affiliated orthodontists who practiced in orthodontic centers open
throughout 1999 and 2000 treated an average of 78 patients per operating day, as
compared to an average of 45 patients per operating day treated during 1998 by
orthodontists in the United States generally.
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Orthodontists who had been affiliated with OCA for at least three years
earned pre-tax practice income of about $420,000 during 2000, which was 40.0%
higher than the average pre-tax practice income of $300,000 reported in the 1999
Journal of Clinical Orthodontists Orthodontic Practice Study as earned by
orthodontists in the United States during 1998.
The following table provides information about the growth in the number of
OCA's affiliated orthodontic centers during the periods shown:
YEAR ENDED DECEMBER 31, SIX
-------------------------------- MONTHS ENDED
1996 1997 1998 1999 2000 JUNE 30, 2001
---- ---- ---- ---- ---- -------------
Number of centers at beginning of period........ 145 247 360 469 537 592
Number of centers developed during period....... 53 58 54 36 18 17
Number of centers acquired during period........ 68 78 66 32 45 3
Number of centers consolidated during period.... (19) (23) (11) -- (8) (1)
--- --- --- --- --- ---
Number of centers at end of period.............. 247 360 469 537 592 611
=== === === === === ===
Of OCA's 611 affiliated orthodontic centers at June 30, 2001, 323 were
developed by OCA, 364 were existing orthodontic practices the assets of which
were acquired by OCA and 76 were consolidated into another affiliated
orthodontic center. OCA expects that future growth in the number of its
affiliated orthodontic centers will come from both developing orthodontic
centers with existing and newly recruited orthodontists affiliated with OCA and
its subsidiaries and acquiring the assets of, and entering into service and
consulting agreements with, existing orthodontic practices.
OCA ACQUISITION CORPORATION
OCA Acquisition Corporation is a Delaware corporation and a wholly-owned
subsidiary of OCA. It was formed on May 15, 2001 solely for the purpose of
entering into the merger agreement and being merged into OrthAlliance according
to the terms of the merger agreement.
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ORTHALLIANCE
OVERVIEW
OrthAlliance was incorporated on October 21, 1996 and provides practice
management and consulting services to orthodontic and pediatric dental practices
throughout the United States. OrthAlliance manages or provides consulting
services with respect to certain business aspects of orthodontic and pediatric
dental practices affiliated with OrthAlliance, which are sometimes referred to
as "allied practices," and provides capital for the development and growth of
allied practices.
OrthAlliance's wholly-owned subsidiaries are each incorporated in Delaware
and include PedoAlliance, Inc., OrthAlliance Finance, Inc., OrthAlliance
Properties, Inc., OrthAlliance Services, Inc., OrthAlliance Holdings, Inc., and
OrthAlliance New Image, Inc. The subsidiaries were formed to provide practice
management, patient financing, consulting and other services to allied
orthodontic and pediatric dental practices or their patients. OrthAlliance New
Image was formed specifically in connection with OrthAlliance's acquisition of
substantially all of the assets of New Image Orthodontic Group, Inc., which was
effective March 1, 2000.
On August 26, 1997, OrthAlliance affiliated with 55 allied practices,
including 81 orthodontists and one pediatric dentist operating 147 offices in 16
states, pursuant to long-term management service and consulting agreements, and
commenced its initial operations. From August 26, 1997 to June 30, 2001,
OrthAlliance increased the number of allied practices, including pediatric
dental practices, to a net total of 174, with approximately 226 orthodontists
and pediatric dentists, which are sometimes referred to as "allied
practitioners," operating approximately 397 offices in 32 states at June 30,
2001. OrthAlliance Finance was formed in December 1997 to offer financing
alternatives to the patients of the allied practices. During 2000, OrthAlliance
Finance funded 289 loans to patients for a total value of $0.8 million and had
$1.4 million of loans outstanding as of June 30, 2001.
OrthAlliance provides fee-based management or consulting services to its
allied practices which allows its allied orthodontists and pediatric dentists to
concentrate on providing cost effective, quality patient care. OrthAlliance does
not practice orthodontics or dentistry, but generally acquires certain operating
assets of an orthodontic and pediatric dental practice, employs the practice
staff and administrative employees (except orthodontists and dentists, and where
applicable law requires, hygienists and dental assistants), and enters into
service, management service or consulting agreements with the allied practices.
Pursuant to these agreements, OrthAlliance provides management or consulting
services to the allied practices, including billing and collections, cash
management, purchasing, inventory management, payroll processing, advertising
and marketing, financial reporting and analysis, productivity reporting and
analysis, training, associate orthodontist recruiting and capital for satellite
office development and acquisitions. Where state law allows and upon request by
an allied practice, OrthAlliance leases equipment or office space to the allied
practices.
ORTHALLIANCE'S OPERATING STRATEGY
OrthAlliance's operating strategy focuses on enabling the allied practices
to compete more effectively and realize greater profitability than other
practices, thereby providing an inducement for additional practices to affiliate
with OrthAlliance.
Management of OrthAlliance believes that the services and support that
OrthAlliance provides to its allied orthodontists impact the level of patient
care positively by increasing the allied orthodontists' and pediatric dentists'
time available to concentrate on patient care. The qualifications of providers
of orthodontic and pediatric dental services vary from general dentists who have
taken weekend courses to graduates of accredited three-year programs. Nearly all
allied orthodontists and pediatric dentists affiliated with the allied practices
are graduates of accredited orthodontic or pediatric dental programs.
OrthAlliance established two clinical care advisory committees, one consisting
of allied orthodontists and the other consisting of allied pediatric dentists,
to formulate educational and training programs and to consult with each other on
current treatments, techniques and issues.
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OrthAlliance identifies practice-level strategies that have proven
successful for individual allied practices and shares this information among
other allied practices. OrthAlliance provides its allied orthodontists and
pediatric dentists with comparative operating and financial data to enable the
allied orthodontists and pediatric dentists to detect areas of their practices
that could be improved. OrthAlliance provides its own analysis of such operating
and financial data and recommends changes to improve performance. OrthAlliance
consults with its allied practices that have demonstrated success in a certain
area and generally seeks to facilitate communication among allied practices
through periodic conferences and meetings and through the Internet.
OrthAlliance implements a variety of operating procedures and systems to
improve the productivity and profitability of its allied practices and to
achieve economies of scale including, without limitation, centralized payroll
processing and national group purchasing contracts. Operating efficiencies and
economies are instituted with the allied orthodontist's and pediatric dentist's
consent on a per allied practice need basis.
OrthAlliance assists its allied practices in developing and implementing
payment plans designed to make orthodontic and pediatric dental services more
affordable to prospective patients. Many of OrthAlliance's allied practices
historically receive a down payment of approximately 25% of the total treatment
plan fee at the early stages of the procedure. Recognizing that orthodontic
services are largely discretionary and that a significant down payment is often
a deterrent to prospective patients, OrthAlliance believes that flexible payment
plans or financing opportunities are an effective means of increasing patient
volume. Payment plans are tailored to respond to the various market demands and
opportunities. OrthAlliance makes general recommendations to its allied
practices with respect to instituting flexible payment plans and develops and
implements market-tailored plans at the request of individual allied practices.
In addition, OrthAlliance provides access to working capital necessary for its
allied practices to implement flexible payment plans which may result in the
reduction or elimination of down payments.
In consultation with and upon approval of its allied practices,
OrthAlliance develops and implements marketing plans to augment each allied
practice's referral and other marketing systems. Certain allied practices have
developed referral systems with local dentists. Upon the request of an allied
practice and in appropriate markets, OrthAlliance attempts to assist such allied
practice in reaching potential patients through print, local television and
radio advertising.
ORTHALLIANCE'S GROWTH STRATEGY
OrthAlliance's growth strategy includes affiliation with existing practices
in both new and existing markets, the development of satellite offices for
existing allied practices and internal growth through improved operating
efficiencies.
OrthAlliance offers a variety of operating procedures and systems to
improve the productivity and profitability of its allied practices. OrthAlliance
implements payroll processing, financial reporting and analysis, national group
purchasing, discounted contracts and assists with appropriate credit and
collection policies which accommodate specific needs of its allied practices.
Operating efficiencies and economies are instituted on a per allied practice
need basis.
If management determines market demand supports practice expansion,
OrthAlliance assists allied orthodontists and pediatric dentists in developing
satellite offices to be integrated into allied practices. OrthAlliance provides
a certain amount of capital for practice expansion, market research, site
selection, office design and marketing support for satellite office development.
OrthAlliance targets for affiliations a market that includes approximately
half of the orthodontic and pediatric dental practices in the United States
(approximately 4,500 orthodontic practices and 1,500 pediatric dental
practices), which practices fit OrthAlliance's model of quality and opportunity
for revenue
72
and earnings growth. OrthAlliance believes that affiliation will be an
attractive option for existing practices, because OrthAlliance:
- Provides access to capital to open and integrate new offices into
existing allied practices;
- Makes available best practice ideas from other allied practices;
- Designs and offers business and clinical procedures for allied practices;
- With the approval of the allied orthodontist or pediatric dentist,
employs the necessary business and non-professional personnel for allied
practices;
- Helps allied practices by recommending marketing and advertising
strategies; and
- Assists allied orthodontists and pediatric dentists with administrative
and business related tasks.
OrthAlliance has reduced the number of affiliations with existing practices
in order to conserve capital resources. This is partially due to OrthAlliance's
low stock price, which has made it difficult for OrthAlliance to raise capital
and affiliate with practices.
In addition to traditional affiliations, OrthAlliance believes that a
complementary element to OrthAlliance's growth strategy includes the development
of de novo practices, or new practices. De novo practice development represents
an opportunity for OrthAlliance to build practices from the ground up in key
strategic markets. By drawing on the experiences of its existing members,
OrthAlliance can help to identify and implement the "best practices" for de novo
operations. OrthAlliance has, to date, established two de novo practices.
PAYMENT PLAN AND CASE FEES
In the allied practitioners' offices at the initial orthodontic treatment,
generally the patient signs a contract outlining the terms of the treatment,
including the anticipated length of treatment, total fees and payment terms.
OrthAlliance's allied orthodontists determine the appropriate fee to charge for
services to patients based upon market conditions in the respective areas served
by the allied orthodontists. Generally, the amount charged by OrthAlliance's
allied orthodontists is independent of the patient's source of payment. The
number of required monthly payments is estimated at the beginning of the case
and generally corresponds to the anticipated number of months of treatment.
Generally, OrthAlliance's allied practices require approximately 25% of the
treatment contract to be paid upon installation of the braces, and the remaining
75% evenly over the remainder of the treatment term.
If the treatment period exceeds the period originally estimated by the
allied orthodontist, the patient and the allied orthodontist will determine
whether payment for additional treatment will be required. If the treatment is
completed prior to the scheduled completion date, the patient is required to pay
the remaining balance of the contract. If a patient terminates the treatment
prior to the completion of the treatment period, the patient is required to pay
the balance due for services rendered to date.
Other payment plans with lower monthly payments are available for patients
who have insurance coverage for the treatment. Payments from patients with
insurance may be lower, depending upon the amount of the fee paid on behalf of
the patient by insurance policies. For patients with insurance coverage, the
portion of the fee not covered by insurance is paid by the patient.
AGREEMENTS WITH ORTHALLIANCE ALLIED PRACTICES AND ALLIED PRACTITIONERS
Each of OrthAlliance's allied practices has entered into the following
three material agreements:
- An acquisition agreement, which may be in the form of a purchase and sale
agreement whereby OrthAlliance acquires certain of the assets, or stock
of an entity holding certain assets, of the allied practice, or an
agreement and plan of reorganization, whereby the allied practice
transfers certain assets to OrthAlliance;
73
- Either a service agreement or a consulting agreement, depending upon the
applicable state regulatory requirements or a management service
agreement for OrthAlliance New Image practices, whereby OrthAlliance
provides management or consulting services to the allied practice; and
- An employment agreement between the allied practice and each related
allied practitioner who is an equity holder in the allied practice or who
provides orthodontic or pediatric dental services through such practice
for more than ten days each month.
Each acquisition agreement generally results in the sale by the allied
practice of its equipment, licenses, inventory, accounts receivable, furniture
and other personal property, or some combination thereof based on applicable
state laws or regulations, in exchange for consideration based on the allied
practice's adjusted patient revenue. The aggregate purchase price paid by
OrthAlliance is generally payable in cash, shares of OrthAlliance Class A common
stock, or a promissory note as determined by each allied practice and
OrthAlliance. The aggregate consideration, including acquisition costs, paid by
OrthAlliance in connection with the affiliation of the 174 allied practices net
of consolidation from August 26, 1997 to June 30, 2001 was approximately $218.1
million, comprised of approximately $91.4 million in cash, 8.3 million shares of
OrthAlliance Class A common stock and promissory notes of $30.6 million.
Each service agreement generally requires or permits OrthAlliance to
perform certain services for its allied practices, including providing and
maintaining specified furnishings and equipment; providing necessary employees,
except practitioners and, where applicable law requires, hygienists and dental
assistants; establishing appropriate business systems; purchasing and
maintaining inventory; performing payroll and accounting functions; providing
billing and collection services with respect to patients, insurance companies
and third-party payors; arranging certain legal services not related to
malpractice litigation; designing and executing a marketing plan; advising with
respect to new office locations; and managing and organizing the allied
practice's files and records, including patient records where permitted by
applicable law. If the allied practice lacks sufficient funds to pay its current
expenses, OrthAlliance is required to advance funds to the allied practice for
the purpose of paying such expenses, subject to terms to be agreed upon. In
exchange for performing the services described above, OrthAlliance receives a
management fee based on one of three fee structures. These fees are structured
as follows:
- A designated percentage ranging from 13.5% to 20.0% of adjusted patient
revenue;
- A designated percentage of patient revenue, ranging from 14.0% to 17.0%,
subject to annual adjustments based upon improvements in the allied
practice's operating margin in the most recent calendar year as compared
with the immediately preceding calendar year; or
- A fixed dollar fee with annual fixed dollar increases for each year of
the term of the management agreement.
OrthAlliance has entered into agreements with certain allied practices to
make the payment of such management fees after the first two years contingent on
various factors, including practice profitability compared to acquisition
consideration, timely reporting of information, participation in practice
improvement programs and orthodontist hours worked. Prior patient revenue is not
necessarily indicative of the level of revenue that these practices may be
expected to generate in the future.
The term of each service, management service or consulting agreement is for
20, 25 or 40 years, subject to prior termination by either party in the event
the other party becomes subject to voluntary or involuntary bankruptcy
proceedings or materially breaches the agreement, subject to a cure period. In
addition, the allied practices may terminate the service agreements upon the
occurrence of a change of control of OrthAlliance, which does not include a
transaction approved by OrthAlliance's Board of Directors. Upon the expiration
or termination of the service agreement, the allied practice may, and in certain
circumstances must, repurchase for cash, at book value, certain assets,
including all equipment, and assume certain liabilities of OrthAlliance related
to the allied practice.
Each service agreement is generally not assignable by either party thereto
without the written consent of the other party; however, OrthAlliance may assign
the service agreement without the allied practice's
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consent to any entity under common control with OrthAlliance. OrthAlliance and
the allied practice indemnify each other for costs and expenses incurred by the
other party that are caused directly or indirectly by, as the case may be,
OrthAlliance's or the allied practice's intentional or negligent acts or
omissions. In the case of the allied practice's obligation to indemnify
OrthAlliance, such obligation also applies to intentional or negligent acts and
omissions occurring prior to the date of the service agreement. As of June 30,
2001, OrthAlliance was a party to service agreements with 76 allied practices.
Certain provisions of the consulting agreement are substantially similar to
the service agreement, including provisions relating to OrthAlliance's
obligation to loan funds to the allied practice in the event the allied practice
is unable to pay its current expenses, termination of the consulting agreement,
repurchase of assets and assumption of liabilities by the allied practice upon
expiration or termination, assignment and indemnification.
The services available to the allied practice under each consulting
agreement generally include consulting with respect to equipment and office
needs; preparing staffing models appropriate for an allied practice; advising
and training with respect to business systems; purchasing and maintaining
inventory; advising with respect to and providing or arranging accounting and
bookkeeping services; advising with respect to developing a marketing plan;
assessing the financial feasibility of establishing new offices; providing
billing and collection services; and assisting the allied practice in organizing
and developing filing and recording systems. In exchange for such services,
OrthAlliance receives a consulting fee based on one of the three fee structures.
As of June 30, 2001, OrthAlliance was a party to consulting agreements with 69
allied practices.
Pursuant to both the service agreements and consulting agreements,
OrthAlliance's allied practitioners maintain professional control over and
ownership of their practices, determine which personnel will be allied with the
allied practices and set their own standards of practice. OrthAlliance does not
engage in the practice of orthodontics or dentistry. Each of OrthAlliance's
allied practitioners is responsible for compliance of his or her allied practice
with state and local regulations applicable to the practice of orthodontics and
dentistry and with licensing or certification requirements. Each of
OrthAlliance's allied practices, in its sole discretion, determines the fees to
be charged for services provided to patients based upon market conditions in the
service area and other factors deemed appropriate by the allied practice. Each
allied practice executes payor contracts and acquires and pays for its own
malpractice insurance coverage.
In March 2000, OrthAlliance and OrthAlliance New Image assumed the
obligations of New Image under the various management service agreements between
New Image and the orthodontic practices with whom it had entered into management
service agreements. The form of management service agreements provides for a
variation of the service fee calculation compared to the traditional
OrthAlliance form defined in the service or consulting agreement. Under the
management service agreements, the service fee amount varies monthly depending
on the allied practice's financial performance and represents the residual
amount after the payment of practice expenses and contractually determined
practice distributions. The service fee is affected by two variables, (i) total
allied practice gross revenue, less refunds, and (ii) operating expenses.
Service fees are calculated based on two separate standardized grids set forth
in the management service agreement that determine:
- The percent of practice revenue that is distributed to the allied
practice based on that allied practice's gross revenue, less refunds; and
- Any additional or offsetting percentage of gross revenue, less refunds,
that is distributed to the allied practice based upon that allied
practice's overhead.
Pursuant to the gross revenue grid, in general, OrthAlliance's retained
service fees increase if the allied practice's gross revenue increases and
decrease if the allied practice's gross revenue decreases. Pursuant to the
overhead grid, in general, OrthAlliance's retained service fees decrease if the
allied practice's overhead expenses increase and the retained service fees
increase if the allied practice's overhead decreases. The maximum retained
service fee percentage is 20.0%. The average service fee percentage for
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the OrthAlliance New Image allied practices is approximately 16.1%. In addition,
a few OrthAlliance New Image management service agreements provide for a fixed
percentage service fee.
Each allied practitioner who is or becomes an equity holder in an allied
practice or who provides orthodontic or dental services through an allied
practice for more than 10 days a month is required to execute an employment
agreement with the allied practice. Each employment agreement generally provides
that the allied practitioner will perform professional services for the allied
practice for a period of five years, subject to prior termination (i) for cause
by the allied practice, which generally means death, incapacity, willful
misconduct, conviction for a felony, or chronic alcoholism or drug addiction,
and (ii) by the allied practitioner in the event of a material breach by the
allied practice. The allied practitioner agrees that following termination or
expiration of the employment agreement, he or she will not compete for a period
of two years in the market in which the allied practice operates an office and
will limit the methods of advertising in the area in which an allied practice is
located.
ORTHALLIANCE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL. OrthAlliance derives net revenues by providing services pursuant
to long-term service, management service and consulting agreements with allied
practices. OrthAlliance provides management or consulting services to each
allied practice and assumes substantially all operating expenses except for
compensation to the allied practitioners and other employees that OrthAlliance
cannot employ according to applicable state laws. In exchange for assuming these
expenses and providing services, OrthAlliance records revenues in amounts equal
to the assumed expenses plus a service fee, management service fee or consulting
fee, as described below. In general, the service, management service and
consulting agreements provide for the recognition of fees to OrthAlliance based
on a negotiated percentage of the adjusted patient revenue of allied practices.
The timing of the payment of such service fees is based upon cash collected.
Adjusted patient revenue is net patient revenue, as determined under accounting
principles generally accepted in the United States, including certain accrual
adjustments, including those related to patient prepayments, and adjustments for
contractual allowances and other discounts, plus an adjustment for uncollectible
accounts.
Patient revenue is recognized as services are performed. For orthodontic
services, approximately 20% of the orthodontic contract revenues are recognized
at the time of initial treatment and generally approximates 25% of the total
treatment plan revenues collected by the allied practice. The balance of the
contract revenue is realized evenly over the remaining treatment period. The 20%
estimated revenue at the initial treatment date is based on the estimated costs
incurred by OrthAlliance at that time as compared to the total costs of
providing the contracted services and is consistent with industry standards. The
percentage includes the estimated costs of diagnosis and treatment plan
development, initial treatment by OrthAlliance employees at the allied
practices, orthodontic supplies and associated administrative services.
The service fee is earned and paid monthly to OrthAlliance by each of its
allied practices using one of three different fee structures set forth in its
service and consulting agreements:
- A designated percentage ranging from 13.5% to 20.0% of the adjusted
patient revenue. The average designated percentage is 17.0% for
OrthAlliance's allied practices subject to this fee structure. In some
cases, the allied practice must guarantee a minimum level of service fees
to be paid by the allied practice for a portion of the agreement ranging
from one to 25 years;
- A designated percentage of adjusted patient revenue, ranging from 14.0%
to 17.0%, subject to an annual adjustment based upon improvements in the
allied practice's operating margin in the most recent calendar year as
compared with the immediately preceding calendar year. No annual
adjustment will be made which would result in reducing the designated
percentage below the percentage applicable during the first year of the
service, management service or consulting agreement. Operating margin is
defined as the percentage determined by dividing operating profit by
adjusted patient revenue. Operating profit is equal to adjusted patient
revenue less operating expenses, excluding the service fee and such
expenses associated with the allied practices which
76
OrthAlliance is prohibited from incurring, primarily consisting of
orthodontist compensation. The average designated percentage is 16.2% for
the allied practices subject to this fee structure; or
- A fixed dollar fee with annual fixed dollar increases for each year of
the term of the service, management service or consulting agreement.
OrthAlliance has entered into agreements with certain allied practices to
make the payment of service fees after the first two years contingent on various
factors, including practice profitability compared to acquisition consideration,
timely reporting of information, participation in practice improvement programs
and orthodontist hours worked.
In March 2000, OrthAlliance assumed the obligations of New Image under the
various management service agreements between New Image and the orthodontic
practices with whom it had entered into management service agreements. The form
of management service agreement provides for a variation of the service fee
calculation compared to the traditional OrthAlliance form defined in the service
or consulting agreement. Under the management service agreements, the service
fee amount varies monthly depending on the allied practice's financial
performance and represents the residual amount after the payment of practice
expenses and contractually determined practice distributions. The service fee is
affected by two variables: (1) total allied practice gross revenue, less
refunds, and (2) overhead. Service fees are calculated based on two separate
standardized grids set forth in the management service agreement that determine:
- The percent of practice revenue that is distributed to the allied
practice based on that allied practice's gross revenue, less refunds,
which is referred to as the "gross revenue grid;" and
- Any additional or offsetting percentage of gross revenue, less refunds,
that is distributed to the allied practice based upon that allied
practice's overhead, which is referred to as the "overhead grid."
Pursuant to the gross revenue grid, in general, OrthAlliance's retained service
fees increase if the allied practice's gross revenue increases and decrease if
the allied practice's gross revenue decreases. Pursuant to the overhead grid, in
general OrthAlliance's retained service fees decrease if the allied practice's
overhead expenses increase and the retained service fees increase if the allied
practice's overhead decreases. The maximum retained service fee percentage is
20.0%. The average service fee percentage for the New Image allied practices is
approximately 16.8% at June 30, 2001. In addition, a few New Image management
service agreements provide for a fixed percentage service fee.
Expenses reported by OrthAlliance include certain of the expenses to
operate the orthodontic or pediatric dental offices and all of the expenses of
any corporate offices, facilities or functions. Therefore, salaries and benefits
include the wages, benefits, taxes or other employment costs for all employees
of OrthAlliance, including practice office staff, business office staff and
management personnel. Rent includes facility expenses for both practice offices
and corporate offices. General and administrative expenses include professional
services, such as legal and accounting, utilities, advertising, marketing,
insurance, telephone, license fees, office supplies and shipping expenses.
Advertising and marketing costs, which are included in general and
administration costs, includes practice activities to attract new patients and
corporate activities to attract new orthodontists or pediatric dentists to join
OrthAlliance. Practice supplies include only those expenses required by
OrthAlliance's allied practitioners to provide treatment to patients.
From time to time OrthAlliance may receive notices of alleged defaults of
certain service, management service or consulting agreements. To date,
OrthAlliance believes that such claims of alleged default are without merit and
vigorously defends OrthAlliance's position. However, there is no assurance that
such present or future disputes will be resolved favorably for OrthAlliance.
RESULTS OF OPERATIONS. The consolidated statements of income of
OrthAlliance for the years ended December 31, 1998, 1999 and 2000 include net
income of $7.5 million on net revenues of $74.4 million, net income of $9.6
million on net revenues of $95.7 million, and net income of $9.5 million on net
revenues of $142.0 million, respectively. The unaudited consolidated statements
of income of OrthAlliance
77
for the six months ended June 30, 2000 and 2001 include net income of $5.3
million on net revenues of $66.2 million and net income of $3.2 million on net
revenues of $76.8 million, respectively. For the years 1998, 1999 and 2000 and
the six month periods ended June 30, 2000 and 2001, OrthAlliance had income
before income taxes of $13.7 million, $16.9 million, $17.0 million, $9.4 million
and $5.6 million, respectively. Direct expenses for the fourth quarter of 2000
included approximately $800,000 in expenses incurred in the separation of
OrthAlliance's former chief executive officer and certain other charges.
The following table sets forth certain selected condensed consolidated
income statement data for the periods indicated in thousands of dollars and as a
percentage of total net revenues:
STATEMENT OF OPERATIONS DATA (IN THOUSANDS):
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED JUNE 30,
------------------------------------------------------- -----------------------------------
1998 1999 2000 2000 2001
---------------- ---------------- ----------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED)
Net revenues............... $74,387 100.0% $95,703 100.0% $142,014 100.0% $36,056 100.0% $38,199 100.0%
Costs and expenses
Salaries and benefits..... 22,880 30.8% 28,423 29.7% 42,461 29.9% 9,858 27.3% 12,065 31.6%
Orthodontic supplies...... 7,436 10.0% 9,438 9.9% 13,903 9.8% 3,500 9.7% 3,794 9.9%
Rent...................... 6,327 8.5% 8,252 8.6% 11,761 8.3% 3,048 8.5% 3,019 7.9%
------- ------ ------- ------ -------- ------ ------- ------ ------- ------
Total direct
expenses........... 36,643 49.3% 46,113 48.2% 68,125 48.0% 16,406 45.5% 18,878 49.4%
General and
administrative............ 21,456 28.8% 26,686 27.9% 43,410 30.6% 11,289 31.3% 13,252 34.7%
Depreciation and
amortization.............. 2,426 3.3% 3,983 4.1% 6,737 4.7% 1,732 4.8% 1,916 5.0%
------- ------ ------- ------ -------- ------ ------- ------ ------- ------
Total operating
expenses........... 60,525 81.4% 76,782 80.2% 118,272 83.3% 29,427 81.6% 34,046 89.1%
Operating income........... 13,862 18.6% 18,921 19.8% 23,742 16.7% 6,629 18.4% 4,153 10.9%
Interest expense........... 555 0.8% 2,450 2.6% 7,371 5.2% 1,994 5.5% 1,911 5.0%
Interest income............ 351 0.5% 416 0.4% 675 0.5% 177 0.4% 163 0.4%
------- ------ ------- ------ -------- ------ ------- ------ ------- ------
Income before income
taxes..................... 13,658 18.3% 16,887 17.6% 17,046 12.0% 4,812 13.3% 2,405 6.3%
Provision for income
taxes..................... 6,123 8.2% 7,304 7.6% 7,511 5.3% 2,109 5.8% 1,019 2.7%
------- ------ ------- ------ -------- ------ ------- ------ ------- ------
Net income.......... $ 7,535 10.1% $ 9,583 10.0% $ 9,535 6.7% $ 2,703 7.5% $ 1,386 3.6%
======= ====== ======= ====== ======== ====== ======= ====== ======= ======
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2000 2001
---------------- ----------------
(UNAUDITED) (UNAUDITED)
Net revenues............... $66,201 100.0% $76,789 100.0%
Costs and expenses
Salaries and benefits..... 18,468 27.9% 24,277 31.6%
Orthodontic supplies...... 6,180 9.3% 7,597 9.9%
Rent...................... 5,559 8.4% 6,146 8.0%
------- ------ ------- ------
Total direct
expenses........... 30,207 45.6% 38,020 49.5%
General and
administrative............ 20,571 31.1% 25,791 33.6%
Depreciation and
amortization.............. 3,142 4.7% 3,809 5.0%
------- ------ ------- ------
Total operating
expenses........... 53,920 81.4% 67,620 88.1%
Operating income........... 12,281 18.6% 9,169 11.9%
Interest expense........... 3,246 4.9% 3,908 5.1%
Interest income............ 348 0.5% 375 0.5%
------- ------ ------- ------
Income before income
taxes..................... 9,383 14.2% 5,636 7.3%
Provision for income
taxes..................... 4,120 6.2% 2,446 3.2%
------- ------ ------- ------
Net income.......... $ 5,263 8.0% $ 3,190 4.2%
======= ====== ======= ======
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS AND
SIX MONTHS ENDED JUNE 30, 2000.
- Operating Income and Net Income. OrthAlliance's operating income for the
three months ended June 30, 2001 decreased 37.3% to $4.2 million from
$6.6 million in the comparable period in 2000. Operating income for the
six months ended June 30, 2001 decreased 25.3% to $9.2 million from $12.3
million in the comparable period in 2000. The decrease in operating
income for the quarter and the six month period ended June 30, 2001 is
attributed to the unfavorable effects of approximately $1.6 million of
costs in the three months ended June 30, 2001 associated with
OrthAlliance's strategic alternatives project, and $2.1 million for the
six months ended June 30, 2001, consisting primarily of advisors fees and
expenses, legal and professional fees and other related transaction
costs. These costs have offset the favorable impacts of OrthAlliance's
increased net revenue from acquisitions, store-to-store growth and the
acquisition of New Image, which was effective March 1, 2000.
Net income for the three months ended June 30, 2001 decreased 48.7% to
$1.4 million from $2.7 million in the comparable period in 2000. Net
income for the six months ended June 30, 2001 decreased 39.4% to $3.2
million from $5.3 million in the comparable period in 2000. Despite
increased revenues, net income was reduced during the period due to
expenses of approximately $2.1 million related to the OrthAlliance's
strategic alternatives project for the six months ended June 30, 2001,
costs associated with the severance in November 2000 and the replacement
of
78
OrthAlliance's former President and Chief Executive Officer, higher
interest expenses related to increased borrowings under OrthAlliance's
revolving credit facility and other increased expenses.
- Net Revenues. Net revenues for the three months ended June 30, 2001
increased 5.9% to $38.2 million from $36.1 million in the comparable
period in 2000. Similarly, net revenues for the six months ended June 30,
2001 increased 16.0% to $76.8 million from $66.2 million in the
comparable period in 2000. The increase in net revenues for the three and
six months ended June 30, 2001 is primarily due to an increase in
affiliations of allied practices, the effect of the New Image
acquisition, which was effective March 1, 2000, and an increase in the
internal growth of comparative same-store collections of approximately
6.3% for the current periods. Net revenues as reported by OrthAlliance
include OrthAlliance's contractual service, consulting and management
service fees based in part on patient revenues, as well as reimbursed
expenses of the allied practices.
- Operating Expenses. Total operating expenses increased 15.7% to $34.0
million, or 89.1% of net revenues, for the three months ended June 30,
2001 from $29.4 million, or 81.6% of net revenues, for the comparable
period in 2000. Total operating expenses increased 25.4% to $67.6
million, or 88.1% of net revenues, for the six months ended June 30, 2001
from $53.9 million, or 81.4% of net revenues, for the comparable period
in 2000.
Direct expenses including salaries and benefits, orthodontic and dental
supplies, and rent increased 15.1% to $18.9 million, or 49.4% of net
revenues, for the three months ended June 30, 2001 from $16.4 million, or
45.5% of net revenues, for the comparable period in 2000. Direct expenses
increased 25.9% to $38.0 million, or 49.5% of net revenues, in the six
months ended June 30, 2001 from $30.2 million, or 45.6% of net revenues,
for the comparable period in 2000. Direct expenses have increased in
absolute dollars as a result of the acquisition of New Image and other
allied practices, the expansion and growth of existing allied practices as
well as expenses relating to the resignation and replacement of
OrthAlliance's former President and Chief Executive Officer. In addition,
direct expenses during the six months ended June 30, 2001 include $2.1
million of expenses in connection with OrthAlliance's strategic
alternatives project. The decrease in direct expenses as a percentage of
2000 net revenues is primarily attributable to economies of scale related
to salaries and benefits and other direct expenses.
Salaries and benefits increased 22.4% to $12.1 million, or 31.6% of
revenues, for the three months ended June 30, 2001 from $9.9 million, or
27.3% of net revenues, for the comparable period in 2000. Salaries and
benefits increased 31.5% to $24.3 million, or 31.6% of revenues, for the
six months ended June 30, 2001 from $18.5 million, or 27.9% of net
revenues, for the comparable period in 2000. The increase in salaries and
benefits results primarily from the increased affiliations of allied
practices, the inclusion of New Image for the entire period in 2001 and an
increase in the number of allied practices for which OrthAlliance provides
payroll services. OrthAlliance expects that in future periods salaries and
benefits will increase in absolute dollars, but may vary as a percentage
of net revenues.
General and administrative expenses increased 17.4% to $13.3 million, or
34.7% of net revenues, for the three months ended June 30, 2001 from $11.3
million, or 31.3% of net revenues, for the comparable period in 2000.
General and administrative expenses increased 25.4% to $25.8 million, or
33.6% of net revenues, for the six months ended June 30, 2001 from $20.6
million, or 31.1% of net revenues, for the comparable period in 2000.
General and administrative expenses have shown an increase in absolute
dollars primarily related to the acquisition of New Image and other allied
practices, expansion and growth of previously existing allied practices,
expenses incurred in connection with the strategic alternatives project
and other costs.
Depreciation and amortization expenses increased approximately 10.6% to
$1.9 million, or 5.0% of net revenues, for the three months ended June 30,
2001 from $1.7 million, or 4.8% of net revenues, for the comparable period
in 2000. Depreciation and amortization expenses increased approximately
21.2% to $3.8 million, or 5.0% of net revenues, for the six months ended
June 30, 2001 from
79
$3.1 million, or 4.7% of net revenues, for the comparable period in 2000.
This increase is attributable to the increase in intangible assets
associated with the affiliations of allied practices and the acquisition
of New Image. Intangible assets approximated $121.7 million and $124.0
million at June 30, 2001 and December 31, 2000, respectively. Depreciation
and amortization expenses primarily relate to the depreciation of capital
assets and the amortization of excess cost over the fair value of net
assets acquired and certain other intangibles. OrthAlliance's policy is to
amortize goodwill over the expected period to be benefited, not to exceed
the term of the service, management service and consulting agreements.
- Interest Expense. Interest expense, net of interest income, decreased to
$1.7 million for the three months ended June 30, 2001 from $1.8 million
in the comparable period in 2000. Interest expense, net of interest
income, increased to $3.5 million for the six months ended June 30, 2001
from $2.9 million in the comparable period in 2000. The increase for the
six month period ended June 30, 2001 was primarily due to additional
interest costs associated with increased borrowings under OrthAlliance's
revolving credit facility in support of allied practices and certain debt
obligations issued and assumed in connection with the New Image
acquisition offset by reductions in the effective interest rates.
OrthAlliance's borrowings under the revolving credit facility were $59.5
million and $57.0 million at June 30, 2001 and June 30, 2000,
respectively, and $62.0 million at December 31, 2000. Total debt was
approximately $75.9 million, $81.6 million and $84.0 million at June 30,
2001 and 2000 and at December 31, 2000, respectively.
- Provision for Income Taxes. The provision for income taxes decreased
51.7% to $1.0 million for the three month period ended June 30, 2001 from
$2.1 million for the comparable period in 2000. The provision for income
taxes decreased 40.6% to $2.4 million for the six month period ended June
30, 2001 from $4.1 million for the comparable period in 2000.
OrthAlliance's effective income tax rates for the periods ended June 30,
2001 and 2000 were higher than the statutory tax rate primarily due to
the amortization of certain intangible assets not being deductible for
income tax purposes. The effective tax rate was 42.4% and 43.8% for the
three month periods ended June 30, 2001 and 2000, respectively. The
effective tax rate was 43.4% and 43.9% for the six month periods ended
June 30, 2001 and 2000, respectively.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999.
- Net Income and Operating Income. Net income for the year ended December
31, 2000 of $9.5 million remained at approximately the same level as net
income in 1999. Operating income for the year ended December 31, 2000
increased 25.4% to $23.7 million from $18.9 million in 1999. The increase
in operating income for the year ended December 31, 2000 is attributable
to an overall increase in net revenues related primarily to the
acquisition of New Image and other allied practices and internal same
store growth. Despite achieving higher operating income, net income
remained flat due to the severance of OrthAlliance's former president and
chief executive officer, higher than expected interest rates, higher
taxes and other increased expenses.
- Net Revenues. Net revenues for the year ended December 31, 2000
increased 48.4% to $142.0 million from $95.7 million in 1999. The
increase in net revenues is due primarily to an increase in affiliations
of allied practices, the acquisition of New Image, as well as internal
store to store growth for the year approximating 8.0% compared to 9.0% in
1999. New Image contributed approximately $20.7 million of the total year
2000 revenues. Net revenues as reported by OrthAlliance include
OrthAlliance's contractual service, management service or consulting fees
based in part on adjusted patient revenues, as well as reimbursed
expenses of the allied practices.
- Operating Expenses. Total operating expenses increased 54.0% to $118.3
million, or 83.3% of net revenues, for the year ended December 31, 2000
from $76.8 million, or 80.2% of net revenues, from the prior year.
80
Direct expenses including salaries and benefits, orthodontic and dental
supplies and rent increased 47.7% to $68.1 million, or 48.0% of net
revenues, for the year ended December 31, 2000 from $46.1 million, or
48.2% of net revenues, from the prior year. Direct expenses have increased
in absolute dollars as a result of the acquisition of New Image and other
allied practices, the expansion and growth of existing allied practices,
as well as expenses relating to the resignation of OrthAlliance's former
president and chief executive officer. The amount of severance paid to
OrthAlliance's former president and chief executive officer totaled
approximately $600,000. The decrease in direct expenses as a percentage of
1999 net revenues is primarily attributable to economies of scale related
to salaries and benefits and other direct expenses.
Salaries and benefits increased 49.4% to $42.5 million, or 29.9% of net
revenues, for the year ended December 31, 2000 from $28.4 million, or
29.7% of net revenues from the prior year. Salaries and benefits have
increased in absolute dollars as a result of the acquisition of New Image
and allied practices, the expansion and growth of existing allied
practices, as well as expenses relating to the resignation of
OrthAlliance's former president and chief executive officer.
General and administrative expenses, consisting primarily of
administrative operating costs, non-rent facility costs, professional fees
and overhead costs, increased 62.7% to $43.4 million, or 30.6% of net
revenues, for the year ended December 31, 2000 from $26.6 million, or
27.9% of net revenues, from the prior year. General and administrative
expenses have shown an increase in absolute dollars and as a percentage of
revenue relating primarily to the acquisition of New Image and other
allied practices, expansion and growth of previously existing allied
practices, and higher laboratory costs.
- Depreciation and Amortization. Depreciation and amortization expense
increased approximately 69.1% to $6.7 million, or 4.7% of net revenues,
for the year ended December 31, 2000 from $4.0 million, or 4.1% of net
revenues from the prior year. This increase was attributable to the
increase in intangible assets associated with the acquisition of New Image
and other allied practices in 2000. Intangible assets increased from $83.6
million in 1999 to $124.2 million in 2000. Depreciation and amortization
expense primarily relates to the depreciation of capital assets and the
amortization of excess cost over the fair value of net assets acquired,
often referred to as "goodwill," and certain other intangibles.
OrthAlliance's policy has been to amortize goodwill over the expected
period to be benefited, not to exceed the term of the service, management
service or consulting agreements.
- Interest Expense. For the years ended December 31, 2000 and 1999,
interest expense was approximately $7.4 million and $2.5 million,
respectively and represents interest charges on OrthAlliance's borrowings
on its revolving credit facility and notes payable. The increase was
primarily due to increased borrowings under the revolving credit facility
in support of the acquisition of New Image and other allied practices
affiliated during the period. OrthAlliance borrowings under the revolving
credit facility increased from $47.5 million at December 31, 1999 to $62.0
million as of December 31, 2000. See "-- Liquidity and Capital Resources."
- Provision for Income Taxes. Provision for income taxes for 2000 and 1999
was approximately $7.5 million and $7.3 million, respectively. A
reconciliation of the provision for income taxes for the years ending
December 31, 2000, 1999 and 1998 to the amount computed at the federal
statutory rate is included in Note 15 of Notes to Consolidated Financial
Statements included elsewhere in this Proxy Statement/Prospectus.
OrthAlliance's effective income tax rates for the years ended December 31,
2000 and 1999 were higher than the statutory tax rate primarily due to the
amortization of certain intangible assets which were not deductible for
income tax purposes. The effective tax rate was 44.0% for the year ended
December 31, 2000 compared to 43.0% for the comparable period in 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
- Net Income and Operating Income. Net income for the year ended December
31, 1999 increased 27.2% to $9.6 million from $7.5 million from 1998.
Operating income for the year ended
81
December 31, 1999 increased 36.5% to $18.9 million from $13.9 million from 1998.
The increase in net income and operating income for the year ended December 31,
1999 is attributable to an overall increase in net revenues related to allied
practice acquisitions, internal same store growth and a reduction of
expenses as a percentage of net revenues.
- Net Revenues. Net revenues increased 28.7% from 1998 to 1999, from $74.4
million to $95.7 million. The increase in net revenues is primarily due
to an increase in affiliations of allied practices together with an
increase of approximately 9.0% attributed to internal growth of
comparable existing practices. Net revenues as reported by OrthAlliance
include OrthAlliance's contractual service, management service or
consulting fees based in part on adjusted patient revenues, as well as
reimbursed expenses of the allied practices.
- Operating Expenses. Total operating expenses increased 26.9% to $76.8
million, or 80.2% of net revenues, for the year ended December 31, 1999
from $60.5 million, or 81.4% of net revenues, from the prior year.
Direct expenses including salaries and benefits, orthodontic and dental
supplies and rent increased 25.8% to $46.1 million, or 48.2% of net
revenues, for the year ended December 31, 1999 from $36.6 million, or
49.3% of net revenues from the prior year. Direct expenses have increased
in absolute dollars as a result of the affiliation of additional allied
practices during the period as well as the expansion and growth of
previously existing allied practices. The decrease in direct expenses as a
percentage of 1999 net revenues is primarily attributable to economies of
scale related to salaries and benefits and other direct expenses.
Salaries and benefits increased 24.2% to $28.4 million, or 29.7% of net
revenues, for the year ended December 31, 1999 from $22.9 million, or
30.8% of net revenues from the prior year. The decrease in salaries and
benefits as a percentage of revenues is a result of a significant number
of current year practice affiliations whereby their employees remained
employees of the allied practice's professional corporations. Accordingly,
for these practices, salary and benefit expenses are not reported by
OrthAlliance. OrthAlliance expects that in future periods salaries and
benefits will increase in absolute dollars, but may vary as a percentage
of net revenues.
General and administrative expenses, consisting primarily of
administrative operating costs, non-rent facility costs, professional fees
and overhead costs, increased 24.4% to $26.7 million, or 27.9% of net
revenues, for the year ended December 31, 1999 from $21.5 million, or
28.8% of net revenues, from the prior year. General and administrative
expenses have shown an increase in absolute dollars primarily related to
the acquisition of additional allied practices during the period as well
as the expansion and growth of previously existing allied practices offset
by reductions in marketing, advertising and other costs.
- Depreciation and Amortization. Depreciation and amortization expense
increased approximately $1.6 million in 1999 from 3.3% to 4.1% of net
revenues from the prior year. This increase was attributable to the
increase in intangible assets associated with the affiliation of allied
practices in 1999. Intangible assets increased from $50.9 million to
$83.6 million from 1998 to 1999. Depreciation and amortization expense
primarily relates to the depreciation of capital assets and the
amortization of goodwill and certain other intangibles. OrthAlliance's
policy is to amortize goodwill over the expected period to be benefited,
not to exceed the term of the service, management service or consulting
agreements. For the years ended December 31, 1999 and 1998, depreciation
and amortization expense approximates $4.0 million and $2.4 million,
respectively.
- Interest Expense. For the years ended December 31, 1999 and 1998,
interest expense was approximately $2.5 million and $0.6 million,
respectively, and represents interest charges on OrthAlliance's
borrowings on its revolving credit facility. The increase was primarily
due to increased borrowings under the revolving credit facility in
support of allied practices affiliated during the period. OrthAlliance
borrowings under the revolving credit facility increased from $15.5
million
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at December 31, 1998 to $47.5 million as of December 31, 1999. See
"-- Liquidity and Capital Resources."
- Provision for Income Taxes. Provision for income taxes for 1999 and 1998
approximates $7.3 million and $6.1 million, respectively. A reconciliation
of the provision for income taxes for the years ending December 31, 1999,
1998 and 1997 to the amount computed at the federal statutory rate is
included in Note 15 of Notes to Consolidated Financial Statements included
elsewhere in this Proxy Statement/Prospectus. OrthAlliance's effective
income tax rates for the years ended December 31, 1999 and 1998 were
higher than the statutory tax rate primarily due to the amortization of
certain intangible assets which were not deductible for income tax
purposes. The effective tax rate was 43.0% for the year ended December 31,
1999 compared to 45.0% for the comparable period in 1998.
QUARTERLY OPERATING RESULTS. OrthAlliance's unaudited quarterly operating
information (amounts in thousands, except per share amounts) for the years ended
December 31, 2000 and 1999, and for the three months ended March 31, 2001 and
June 30, 2001 is shown in the following table.
QUARTER ENDED
-----------------
MARCH JUNE
2001 2001
------- -------
Net revenues................................................ $38,590 $38,199
Operating income............................................ 5,015 4,153
Provision for income taxes.................................. 1,427 1,019
Net income.................................................. 1,803 1,386
Basic and diluted net income per share...................... 0.15 0.11
QUARTER ENDED
----------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
2000 2000 2000 2000
------- ------- --------- --------
Net revenues.................................. $30,145 $36,056 $37,049 $38,764
Operating income.............................. 5,652 6,629 6,905 4,556
Provision for income taxes.................... 2,011 2,109 2,155 1,236
Net income.................................... 2,560 2,703 2,840 1,432
Basic and diluted net income per share........ 0.20 0.21 0.22 0.11
QUARTER ENDED
----------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1999 1999 1999 1999
------- ------- --------- --------
Net revenues.................................. $21,302 $23,860 $24,286 $26,255
Operating income.............................. 4,128 4,737 5,049 5,007
Provision for income taxes.................... 1,687 1,997 1,877 1,743
Net income.................................... 2,134 2,356 2,581 2,512
Basic and diluted net income per share........ 0.16 0.18 0.19 0.19
SEASONALITY. Most patients who seek orthodontic treatment are children and
young adults, although the number of adults seeking treatment has been
increasing in recent years, particularly with the introduction of new products
such as Invisalign. Based upon information provided by OrthAlliance's allied
practices, and based upon the results of operations in 1998, 1999 and 2000,
OrthAlliance generally experiences an increase in new patient volume during the
summer months when children are not in school. OrthAlliance also expects the
lowest volume of patient starts during the Thanksgiving and Christmas holiday
season when children are on vacation and when many of the allied practices are
closed. As a consequence, OrthAlliance expects higher patient revenue in the
third quarter and lower patient revenue in the fourth quarter. Accordingly,
OrthAlliance generally expects a stronger third quarter in terms of revenue.
LIQUIDITY AND CAPITAL RESOURCES. OrthAlliance has funded its operations to
date primarily through cash from operations, OrthAlliance's revolving credit
facility and other available capital sources. This
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capital is used for affiliations with new allied practices, development of
allied practice enhancements, development of allied practice satellite offices,
capital asset additions and general working capital needs. As of June 30, 2001
and December 31, 2000, OrthAlliance had a working capital balance of $15.5
million and $11.5 million, respectively. As of June 30, 2001, OrthAlliance's
principal sources of liquidity included cash and short term investments of
approximately $6.6 million and the revolving credit facility, which as of that
date had $15.5 million of available credit. OrthAlliance's working capital
increased 34.3% to $15.5 million at June 30, 2001, and decreased 46.0% to $11.5
million at December 31, 2000 from $21.5 million at December 31, 1999.
Stockholders' equity increased 7.9% to $77.4 million at June 30, 2001 from $71.7
million at June 30, 2000.
OrthAlliance's operating activities generated cash of $11.5 million during
the six month period ended June 30, 2001. Net cash used in financing activities
approximated $9.2 million for the six month period ended June 30, 2001 and
consisted of borrowings and repayments on the revolving credit facility and
other debt and treasury shares purchased. Cash used in investing activities of
$0.7 million for the six month period ended June 30, 2001 consisted of payments
in connection with affiliating allied practices and capital expenditures,
primarily for office and computer equipment used in OrthAlliance operations.
OrthAlliance's operating activities generated cash of $12.7 million during the
year ended December 31, 2000, primarily attributed to net income during the
period, increased patient prepayments and other factors which were offset by
increases in patient and other receivables, compared to $15.2 million during the
year ended December 31, 1999. Net cash used in financing activities totaled
approximately $1.2 million in the year ended December 31, 2000. Cash used in
financing activities consisted of debt repayment and the repurchase of shares of
OrthAlliance's Class A common stock. For the year ended December 31, 2000,
OrthAlliance borrowed approximately $83.0 million and repaid $81.5 million.
OrthAlliance's repurchase of shares of its Class A common stock totaled
approximately $3.8 million. For the year ended December 31, 1999, $28.1 million
was provided by financing activities and resulted primarily from borrowings
under the revolving credit facility. Cash used in investing activities of $17.8
million in the year ended December 31, 2000 consisted of payments in connection
with the acquisition of New Image and the affiliation of allied practices and
capital expenditures, primarily for office and computer equipment used in
OrthAlliance operations. Cash used in investing activities was $35.3 million in
the year ended December 31, 1999 and consisted of payments in connection with
the affiliation of allied practices and capital expenditures, primarily for
office and computer equipment used in OrthAlliance operations. OrthAlliance does
not currently have any material commitments with respect to any capital
expenditures.
On December 30, 1997, OrthAlliance entered into a credit agreement with
First Union National Bank to provide a $25 million revolving line of credit. The
interest on borrowings accrues at either the bank's prime rate or the London
InterBank Offering Rate, plus a margin. Amounts borrowed are secured by security
interests in substantially all of OrthAlliance's assets, which include accounts
receivable, service, management service and consulting agreements and the
capital stock of OrthAlliance's wholly-owned subsidiaries. OrthAlliance expanded
the revolving credit facility on March 26, 1999 from $25.0 million to $55.0
million and from $55.0 million to $75.0 million on April 14, 2000. Outstanding
amounts under the April 14, 2000 agreement are repayable in full on April 13,
2003. As of June 30, 2001 and December 31, 2000 and 1999, the outstanding
balance under this credit facility was $59.5 million, $62.0 million and $47.5
million, respectively. There can be no assurance that OrthAlliance will be able
to renew or replace its revolving credit facility or obtain alternate financing
on reasonable terms, if at all. As of June 30, 2001, OrthAlliance was in
compliance with the terms and covenants of the revolving credit facility.
In 1997, after the completion of OrthAlliance's initial public offering and
the affiliation of its founding 55 allied practices, OrthAlliance acquired
certain operating assets of, or the stock in entities that held certain
operating assets of, 11 additional orthodontic practices. The total
consideration paid for these allied practices was $12.4 million, of which $2.1
million was paid in cash and the balance through the issuance of 863,775 shares
of OrthAlliance Class A common stock.
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For the year ended December 31, 1998, OrthAlliance acquired certain
operating assets of, or the stock in entities that held certain operating assets
of, 36 additional allied practices. The total consideration paid for these
allied practices was $46.8 million, of which $24.5 million was paid in cash,
$2.5 million issued in short-term notes payable and the balance through the
issuance of 1,640,492 shares of OrthAlliance Class A common stock.
For the year ended December 31, 1999, OrthAlliance acquired certain
operating assets of, or the stock in entities that held certain operating assets
of, 36 additional allied practices. The total consideration paid for these
allied practices was $39.5 million, of which $33.0 million was paid in cash,
$5.7 million in long term notes payable and the balance through the issuance of
93,584 shares of OrthAlliance Class A common stock.
For the year ended December 31, 2000, OrthAlliance acquired certain
operating assets of, or the stock in entities that held certain operating assets
of, 43 additional allied practices. Of the 43 allied practices, 31 practices
were acquired on March 1, 2000 by acquiring substantially all of the assets of
New Image Orthodontic Group, Inc., a privately held Georgia corporation based in
Atlanta, Georgia, for a total consideration, including acquisition costs, of
approximately $32.1 million. The acquisition price included a cash payment of
$5.6 million; an estimated $0.3 million in acquisition costs; promissory notes
issued of approximately $12.9 million, with interest rates ranging from 6% to
10% and repayable over a one to five year period; the assumption of
approximately $13.4 million of existing debt due to New Image's former
orthodontic practices, repayable over the next five years at interest rates
approximating 9%; and the issuance of approximately 273,000 stock options.
OrthAlliance's capital resources needed to continue acquisition and
development efforts are expected to be funded through a combination of cash
flows provided by ongoing operations, OrthAlliance's revolving credit facility,
the issuance of equity and debt securities, as described in OrthAlliance's
registration statement on Form S-4 which became effective on August 6, 1999, and
other sources. OrthAlliance management believes that these sources of capital
will be sufficient to meet OrthAlliance's operating capital requirements for the
next twelve months.
OrthAlliance's revolving credit facility and its covenants restrict
OrthAlliance's ability to incur additional indebtedness. In addition,
OrthAlliance's low stock price could further restrict its ability to obtain
adequate capital from other sources at favorable costs, if at all. The
restrictions and limitations of available capital other than from cash flow from
operations could curtail OrthAlliance's business strategy of expanding its
network of allied practices through its traditional acquisition strategy and
result in a reduction of new affiliations with orthodontic practices and
pediatric practices in the future.
OrthAlliance may choose to issue debt or equity to meet its future
long-term capital needs, as management deems appropriate. There can be no
assurance that OrthAlliance will be able to raise such additional working
capital on acceptable terms, if at all. In the event OrthAlliance is unable to
raise additional working capital, further measures would be necessary including,
without limitation, the delay of new allied practice affiliations, the scale
back of its operations or marketing programs and other actions. Certain of such
measures may require third party consents or approvals, including the banks
under the revolving credit facility, and there can be no such assurance that
such consents or approvals can be obtained. OrthAlliance has reduced the number
of new affiliations in order to conserve capital resources.
The service, management service and consulting agreements provide for
short-term advances by OrthAlliance to its allied practices for working capital
requirements and other purposes on terms to be mutually agreed upon. These items
are advanced and repaid in a revolving manner. Generally, advances are repaid
when allied practices deposit patient revenue into their depository accounts.
Advances occur when the allied practice operating expenses paid exceed patient
revenue earned. From time to time, OrthAlliance may enter into short-term loan
agreements with allied practices for office expansion or satellite office
programs. Loans are provided generally at an interest rate at the prime interest
rate plus 1.5% with monthly payments through maturity.
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ACQUISITION OF NEW IMAGE ORTHODONTIC GROUP, INC. On March 1, 2000,
OrthAlliance, through OrthAlliance New Image, a wholly owned subsidiary, closed
a purchase and sale agreement with New Image. OrthAlliance acquired
substantially all the assets of New Image.
New Image was founded in February 1997 and provides business operations,
financial and marketing and administrative services to orthodontic practices
across the United States in accordance with long-term service agreements. The
transaction was accounted for as a purchase and includes practice management
agreements with 36 orthodontic practitioners operating in 50 locations with over
$33 million in annualized revenues.
The collective value of the acquisition of New Image was approximately
$32.1 million. Of this amount, $5.6 million was paid in cash, an estimated $0.3
million was paid for acquisition costs, approximately $13.4 million of debt was
assumed, $12.9 million in promissory notes, with interest rates ranging from 6%
to 10%, were issued to the sellers, and approximately 273,000 stock options were
issued with an aggregate fair value of approximately $0.6 million.
During 2000, OrthAlliance integrated New Image into its business
operations. OrthAlliance management continues to believe that OrthAlliance will
benefit from the economies of scale and synergies resulting from the
acquisition.
INTERNAL REVENUE SERVICE EXAMINATION. The Internal Revenue Service has
completed its examination of OrthAlliance's federal income tax return for the
year ended December 31, 1998. OrthAlliance has agreed with the Internal Revenue
Service's proposed adjustment of approximately $0.6 million of additional tax
payments for the years ended 1998 and 1999 which was paid in March 2001. The
adjustment related to timing differences between book and tax with regard to
certain capitalized practice acquisition costs. OrthAlliance adequately provided
reserves in prior years and the additional tax payments did not result in
additional income tax expense in fiscal year 2000.
STOCK REPURCHASE PLAN. On December 1, 2000, OrthAlliance announced the
extension of its common stock repurchase program to repurchase up to $6.8
million of its Class A common stock. OrthAlliance had initially announced the
program on October 22, 1998. OrthAlliance is authorized to purchase shares on
the Nasdaq Stock Market National Market System at prevailing prices through
December 31, 2001. During 2000, OrthAlliance had repurchased about 900,000
shares amounting to $3.8 million under this program. Share repurchases are
financed by a combination of operating cash flow and borrowings under the
revolving credit facility. The timing and the amount of shares to be purchased
will be determined based on the evaluation of working capital needs and stock
market conditions. During the six months ended June 30, 2001, OrthAlliance has
acquired 4,300 shares of its Class A common stock at a cost of approximately
$13,000. As of June 30, 2001, OrthAlliance's total purchases of Class A common
stock totaled approximately $6.7 million.
OTHER EVENTS. OrthAlliance's Class A common stock is currently quoted on
the Nasdaq Stock Market National Market System under the symbol "ORAL." For
continued inclusion on the Nasdaq Stock Market National Market System,
OrthAlliance must meet certain tests. OrthAlliance disclosed in previous filings
that the continued listing of its Class A common stock was permitted under
temporary amendments to the listing requirements adopted by the Nasdaq Stock
Market. On June 29, 2001, the SEC approved those amendments which include, among
other things, a minimum bid price of $3.00 per share and minimum stockholders'
equity of $10 million. OrthAlliance is currently in compliance with the amended
listing standards.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (which is
commonly referred to as "SFAS") No. 133 "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities on the balance sheet and measure those
86
instruments at fair value. OrthAlliance management anticipates that the adoption
of SFAS No. 133 will not have a material effect on OrthAlliance's results of
operations or financial position.
The SEC issued Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, on December 3, 1999. This pronouncement clarifies existing
revenue recognition principles and states that revenue is generally realized or
realizable and earned when all of the following criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred or services rendered,
the seller's price to the buyer is fixed or determinable and collectibility is
reasonably assured. OrthAlliance management believes OrthAlliance is in
compliance with Staff Accounting Bulletin No. 101.
In April 2000, the Financial Accounting Standards Board (which is commonly
referred to as "FASB") issued FASB Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation: an Interpretation of APB Opinion No.
25. This pronouncement seeks to interpret the application of APB No. 25,
primarily in relation to modifications to the terms of existing awards and to
the scope of APB No. 25. The adoption of FASB Interpretation No. 44 did not have
a material impact on OrthAlliance's results of operations or its financial
position.
In July 2001, FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that all business combinations be accounted for under
the purchase method and requires recognition of identifiable intangible assets
separately from goodwill. This pronouncement is effective for all business
combinations initiated after June 30, 2001. OrthAlliance has evaluated the
requirements of SFAS No. 141 and believes that its intangible assets are fairly
stated and that the adoption of SFAS No. 141 will not have a material impact on
OrthAlliance's results of operations or financial position.
SFAS No. 142 requires that all identifiable intangible assets acquired
shall be recognized and measured initially at fair value. All identifiable
intangible assets should be amortized over the period which it is expected that
they will benefit OrthAlliance and tested for impairment in accordance with SFAS
No. 121. Goodwill and identifiable intangible assets whose useful lives are
indefinite are not to be amortized and are to be tested for impairment annually
or more frequently if circumstances indicate potential impairment. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001. OrthAlliance
believes that its intangible assets, which are based on underlying contractual
rights, are fairly stated; therefore, it will continue to amortize intangible
assets on a basis consistent with current practice. OrthAlliance believes the
adoption of SFAS No. 142 will not have a material effect on OrthAlliance's
results of operations or its financial position.
INFLATION. OrthAlliance does not believe that inflation has had a material
effect on its results of operations. There can be no assurance that
OrthAlliance's business will not be affected by inflation in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. OrthAlliance
does not have any derivative financial instruments as of June 30, 2001. Further,
OrthAlliance is not exposed to interest rate risk as OrthAlliance's revolving
credit facility has a variable interest rate. Therefore, the fair value of these
instruments is not affected by changes in market interest rates. OrthAlliance
believes that the market risk arising from not hedging its financial instruments
is not material.
LEGAL PROCEEDINGS. From time to time, OrthAlliance is involved in various
legal proceedings, claims and litigation matters arising in the ordinary course
of business, including labor and personnel related issues. In the opinion of
management, the outcome of such routine matters will not have a material adverse
effect on OrthAlliance's business, financial condition or results of operations.
From time to time, OrthAlliance has been, and can expect to be, involved in
disputes and/or litigation with certain of its allied practices. Certain allied
practitioners have also sent notices of default to, or commenced litigation
against, OrthAlliance alleging that OrthAlliance has failed to provide certain
services under the service, management service and consulting agreements with
the allied practices. Other litigation
87
alleges that certain provisions of OrthAlliance's service, management service or
consulting agreements may be unenforceable, among other claims. OrthAlliance
vigorously defends against such claims and believes that such claims are without
merit. The number of such claims and notices of default have increased since the
date of OrthAlliance's merger agreement with OCA. OrthAlliance believes that
such claims and disputes will not have a material adverse effect on
OrthAlliance. See "THE MERGER -- OrthAlliance's Reasons For the Merger;
Recommendation of OrthAlliance's Board of Directors."
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MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER
BOARD OF DIRECTORS
After the merger is completed, one member of OrthAlliance's Board of
Directors will be appointed by OCA's Board of Directors to serve as a director
of OCA. This individual will be selected by the Boards of Directors of OCA and
OrthAlliance.
At the effective time of the merger, the directors of OCA Acquisition
Corporation immediately prior to the effective time will be the directors of
OrthAlliance.
MANAGEMENT
The officers of OCA prior to the merger would continue to serve as the
officers of OCA upon the merger.
Following the merger, the then Board of Directors of OrthAlliance will
select the individuals who would serve as the officers of OrthAlliance.
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COMPARISON OF RIGHTS OF STOCKHOLDERS
OrthAlliance stockholders, whose rights are currently governed by
OrthAlliance's amended and restated certificate of incorporation, bylaws and by
the Delaware General Corporation Law, will become stockholders of OCA upon
completion of the merger. As such, the rights of the former OrthAlliance
stockholders will thereafter be governed by OCA's restated certificate of
incorporation, its bylaws and the Delaware General Corporation Law.
While it is impractical to summarize all of the pertinent differences, set
forth below are the material differences between the rights of OrthAlliance
stockholders under OrthAlliance's governing documents and the rights of OCA
stockholders under OCA's governing documents. Because OCA and OrthAlliance are
both organized under the laws of Delaware, the differences in stockholders
rights arise solely from the differences in the governing documents, rather than
governing law.
VOTING RIGHTS; ACTION BY WRITTEN CONSENT
OCA. OCA's restated certificate of incorporation provides that each issued
and outstanding share of OCA common stock entitles the holder to one vote on
each matter with respect to which stockholders are entitled to vote. A majority
of votes cast by OCA stockholders entitled to vote at a OCA stockholder meeting
is sufficient to approve any matter which properly comes before the meeting.
OCA's bylaws provide that stockholders may take action by the unanimous written
consent of all stockholders entitled to vote on any matter accompanied by a
written waiver of any right to dissent signed by each stockholder entitled to
notice of the meeting but not entitled to a vote at it.
ORTHALLIANCE. OrthAlliance's amended and restated certificate of
incorporation provides that each issued and outstanding share of OrthAlliance
Class A and Class B common stock entitles the holder to one vote on each matter
with respect to which stockholders are entitled to vote. A majority of votes by
stockholders of OrthAlliance Class A common stock and Class B common stock that
are voting together as a single class is necessary to decide all matters.
OrthAlliance's bylaws provide that stockholders may take action by the written
consent of no less than the minimum number of votes that would be necessary at a
meeting of the stockholders entitled to vote on any matter.
CLASSES OF COMMON STOCK; STOCKHOLDER CONVERSION RIGHTS
OCA. OCA's governing documents do not provide for classes of OCA common
stock or stock conversion rights for holders of OCA common stock.
ORTHALLIANCE. OrthAlliance's amended and restated certificate of
incorporation provides that holders of OrthAlliance Class B common stock are
prohibited from transferring their shares of Class B common stock, except to the
stockholder's close relatives. Holders of OrthAlliance Class B common stock may
convert these shares into an equal number of shares of OrthAlliance Class A
common stock at any time. In addition, holders of OrthAlliance Class B common
stock are required to convert their shares of Class B common stock to Class A
common stock when the market price of OrthAlliance Class A common stock reaches
and maintains for 20 consecutive trading days certain levels. The first
conversion price equals 150% of Class A common stock's share price at its
initial public offering (which was $12.00 per share), or $18.00 per share. The
second conversion price equals 120% of the first conversion price, or $21.60.
The third conversion price equals 120% of the second, or $25.92. The fourth
conversion price equals 120% of the third, or $31.10. The fifth conversion price
equals 120% of the fourth, or $37.32. Adjustments are made for any stock splits
or stock dividends. When the Class A common stock reaches a conversion price
level, 20% of the total number of shares of Class B common stock outstanding,
allocated on a pro rata basis, will be converted into Class A common stock, with
each such share of Class B common stock being converted into eight shares of
Class A common stock. Six years after August 1997, each remaining share of Class
B common stock will automatically convert into one share of Class A common
stock. OrthAlliance's bylaws provide that OrthAlliance will reserve at all times
shares of Class A common stock sufficient to effect a conversion of all
outstanding shares of Class B common stock.
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STOCKHOLDER NOMINATIONS AND PROPOSALS
OCA. OCA's governing documents do not contain any provisions which require
OCA stockholders to provide advance notice to OCA prior to proposing business or
nominating persons at an annual meeting or a special meeting of stockholders.
ORTHALLIANCE. OrthAlliance's bylaws provide that OrthAlliance stockholders
propose to bring business to be considered, or to nominate individuals for
election of directors, at an annual meeting of stockholders must notify
OrthAlliance not later than 120 calendar days and not earlier than 150 calendar
days prior to the first anniversary of the date of the preceding year's annual
meeting. In the case of a special meeting, OrthAlliance stockholders must notify
OrthAlliance not less than 30 days prior to the date of the meeting.
OrthAlliance's bylaws also require that any stockholder notice of nomination for
election of a director provide certain information concerning the stockholder
and his or her nominee, including, among other things, the information regarding
the nominee as would be required to be included in a proxy statement filed under
the proxy rules of the Securities and Exchange Commission, and the consent of
the nominee to serve as a director of OrthAlliance if elected. The presiding
officer of the meeting may refuse to acknowledge any stockholder proposals or
nominations that are not made in compliance with these procedures.
BOARD OF DIRECTORS
OCA. OCA's Board of Directors is to consist of two to 15 members, as
determined from time to time by OCA's Board of Directors, and as of October 5,
2001 consisted of eight members. Any vacancy arising from a director's early
retirement from the Board of Directors or an increase in the number of members
of the Board of Directors is to be filled by a majority vote of the remaining
directors. The members of OCA's Board of Directors are divided into three
classes, with the classes elected for staggered three-year terms. At each annual
meeting of stockholders, OCA stockholders elect for a term of three years
successors to the class of directors whose term expires at the annual meeting. A
director may resign at any time by providing written notice to OCA, OCA's Board
of Directors, the Chairman of the Board or the President.
ORTHALLIANCE. OrthAlliance's Board of Directors is to consist of up to
nine directors, as determined from time to time by OrthAlliance's Board of
Directors, and as of October 5, 2001 OrthAlliance's Board of Directors consisted
of eight directors. The members of OrthAlliance's Board of Directors are divided
into three classes, with the classes elected for staggered three-year terms. At
each annual meeting of stockholders, OrthAlliance stockholders elect for
three-year terms successors to the class of directors whose term expires at the
annual meeting. However, any vacancy or an increase in the number of members of
OrthAlliance's Board of Directors is to be filled by majority vote of the
OrthAlliance directors then in office, even if less than a quorum or by a
plurality of the votes cast at a meeting of the directors. Any OrthAlliance
director so elected will serve only until the next annual meeting when his or
her successor is elected.
CHANGE OF CONTROL
OCA. OCA's governing documents contain several provisions which make a
change of control of OCA more difficult to accomplish without the approval of
OCA's Board of Directors, including the following:
- OCA's Board of Directors is divided into three classes so that
approximately one-third of the directors will be subject to re-election
at each annual meeting of the stockholders of OCA;
- A director may be removed only for cause by a vote of the holders of at
least two-thirds of the shares entitled to vote; and
- OCA's Board of Directors may determine the rights and preferences of
preferred stock which OCA may issue without stockholder approval.
91
ORTHALLIANCE. OrthAlliance's governing documents contain several
provisions which make a change of control of OrthAlliance more difficult to
accomplish without the approval of OrthAlliance's Board of Directors, including
the following:
- OrthAlliance's Board of Directors is divided into three classes with the
classes elected for staggered three-year terms so that approximately
one-third of the directors will be subject to re-election at each annual
meeting of the stockholders of OrthAlliance;
- Stockholders of OrthAlliance Class A common stock and Class B common
stock will receive the same consideration per share in the event of a
merger, consolidation, purchase or acquisition of property or stock;
- OrthAlliance's Board of Directors may determine the rights and
preferences of preferred stock which OrthAlliance may issue without
stockholder approval; and
- OrthAlliance's bylaws provide that nominations by stockholders for
election of directors at any annual meeting of stockholders must notify
OrthAlliance not later than 120 calendar days and not earlier than 150
calendar days prior to the first anniversary date of the preceding year's
annual meeting. In the case of a special meeting, OrthAlliance
stockholders must notify OrthAlliance not less than 30 days prior to the
date of the meeting.
REMOVAL OF DIRECTORS
OCA. OCA's governing documents provide that a director of OCA may be
removed only for cause by the affirmative vote of the holders of at least
two-thirds of the shares entitled to vote.
ORTHALLIANCE. OrthAlliance's governing documents provide that a director
of OrthAlliance may be removed only for cause by the affirmative vote of the
holders of a majority of the shares entitled to vote.
AUTHORIZED CAPITAL STOCK
OCA:
PAR VALUE
CLASS OF STOCK AUTHORIZED SHARES PER SHARE
-------------- ----------------- ---------
Common..................................................... 100,000,000 $0.01
Preferred.................................................. 10,000,000 $0.01
ORTHALLIANCE:
PAR VALUE
CLASS OF STOCK AUTHORIZED SHARES PER SHARE
-------------- ----------------- ---------
Class A Common............................................. 70,000,000 $0.001
Class B Common............................................. 250,000 $0.001
Preferred.................................................. 20,000,000 $0.001
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS
OCA. The affirmative vote of the holders of at least two-thirds of the
shares entitled to vote is required to amend, repeal or adopt provisions of
OCA's restated certificate of incorporation that are inconsistent with those
pertaining to OCA's Board of Directors, limitation of directors' personal
liability, indemnification, removal of directors and amendments of OCA's
restated certificate of incorporation. OCA's bylaws require an affirmative vote
of two-thirds of the stockholders of OCA common stock to amend or repeal OCA's
bylaws.
ORTHALLIANCE. OrthAlliance maintains the right to amend, repeal or adopt
any provision contained in the amended and restated certificate of incorporation
as prescribed under Delaware General Corporation Law. An affirmative vote of
two-thirds of OrthAlliance stockholders entitled to vote may amend, repeal or
adopt OrthAlliance's bylaws. OrthAlliance's Board of Directors also have the
power to amend, repeal or adopt OrthAlliance's bylaws. Any bylaws adopted by
OrthAlliance's Board of Directors may be amended or repealed by a vote of the
holders of at least two-thirds of the shares entitled to vote.
92
WHERE YOU CAN FIND MORE INFORMATION
OCA has filed with the SEC under the Securities Act of 1933 a registration
statement on Form S-4 that registers the distribution to OrthAlliance
stockholders of the shares of OCA common stock to be issued in connection with
the merger. The registration statement, including the attached exhibits and
schedules, contain additional relevant information about OCA, OrthAlliance and
OCA common stock. The rules and regulations of the SEC allow OCA and
OrthAlliance to omit certain information included in the registration statement
from this Proxy Statement/Prospectus.
In addition, each of OCA and OrthAlliance files reports, proxy statements
and other information with the SEC under the Securities Exchange Act of 1934.
You may read and copy this information at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W., Room 1024 7 World Trade Center, Citicorp Center
Washington, D.C. 20549 Suite 1300 500 West Madison Street, Suite 1400
New York, New York 10048 Chicago, Illinois 60661-2511
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet world wide web site that contains
reports, proxy statements and other information about issuers, like OCA and
OrthAlliance, which file electronically with the SEC. The address of that site
is http://www.sec.gov.
You can also inspect reports, proxy statements and other information about
OCA at the offices of the New York Stock Exchange, 20 Broad Street, New York,
New York 10005.
The SEC allows OCA and OrthAlliance to "incorporate by reference"
information into this Proxy Statement/Prospectus from documents that they have
previously filed with the SEC. This means that OCA and OrthAlliance can disclose
important information to you by referring you to another document filed
separately with the SEC. These documents contain important information about OCA
and OrthAlliance and their respective financial condition, operations and
business. The information incorporated by reference is considered to be a part
of this Proxy Statement/Prospectus, except for any information that is
superseded by other information contained directly in this Proxy
Statement/Prospectus or in documents filed by OrthAlliance or OCA with the SEC
after the date of this Proxy Statement/ Prospectus. Information incorporated
from another document is considered to have been disclosed to you whether or not
you chose to read the document.
This Proxy Statement/Prospectus incorporates by reference the following
documents with respect to OCA:
- OCA's Annual Report on Form 10-K for the year ended December 31, 2000,
Amendment No. 1 to that Annual Report filed on Form 10-K/A on April 27,
2001 and Amendment No. 2 to that Annual Report filed on Form 10-K/A-2 on
October 5, 2001;
- OCA's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001;
- OCA's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001;
- OCA's Current Report on Form 8-K filed March 16, 2001;
- OCA's Current Report on Form 8-K filed May 18, 2001;
- OCA's Annual Report for the Orthodontic Centers of America, Inc. 401(k)
Profit Sharing Plan on Form 11-K for the year ended December 31, 2000;
and
- The description of OCA common stock contained in OCA's Registration
Statement on Form 8-A dated October 7, 1997.
93
OCA incorporates by reference additional documents that OCA may file with
the SEC between the date of this Proxy Statement/Prospectus and the completion
of the merger. These documents include periodic reports, such as Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
well as proxy statements.
This Proxy Statement/Prospectus incorporates by reference the following
documents with respect to OrthAlliance:
- OrthAlliance's Annual Report on Form 10-K for the year ended December 31,
2000;
- OrthAlliance's Quarterly Report on Form 10-Q for the quarter ended March
31, 2001;
- OrthAlliance's Quarterly Report on Form 10-Q for the quarter ended June
30, 2001;
- OrthAlliance's Current Report on Form 8-K filed May 22, 2001; and
- The description of OrthAlliance common stock contained in OrthAlliance's
Registration Statement on Form 8-A dated August 12, 1997.
OCA has supplied all information contained or incorporated by reference in
this Proxy Statement/ Prospectus relating to OCA and its subsidiaries, including
OCA Acquisition Corporation, as well as all pro forma financial information.
OrthAlliance has supplied all information contained in this Proxy
Statement/Prospectus relating to OrthAlliance and its subsidiaries.
You can obtain copies of the documents incorporated by reference in this
Proxy Statement/ Prospectus with respect to OCA and OrthAlliance without charge,
excluding any exhibits to those documents unless the exhibit is specifically
incorporated by reference as an exhibit in this Proxy Statement/Prospectus, by
requesting them in writing or by telephone from OCA or OrthAlliance at the
following:
Orthodontic Centers of America, Inc. OrthAlliance, Inc.
5000 Sawgrass Village Circle, Suite 30 21535 Hawthorne Boulevard, Suite 200
Ponte Vedra Beach, Florida 32082 Torrance, California 90503
Attention: Investor Relations Attention: Paul H. Hayase, Secretary
Telephone: (904) 280-6285 Telephone: (310) 792-1300
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM OCA OR ORTHALLIANCE, PLEASE DO
SO BY OCTOBER 31, 2001 TO RECEIVE THEM BEFORE THE ORTHALLIANCE SPECIAL MEETING.
You can also obtain copies of these documents from the SEC through the SEC's
Internet world wide web site or at the SEC's address described in this section
above.
You should rely only on the information contained in or incorporated by
reference in this Proxy Statement/Prospectus in considering how to vote your
shares. Neither OCA nor OrthAlliance has authorized anyone to provide you with
information that is different from the information in this document. This Proxy
Statement/Prospectus is dated October 5, 2001. You should not assume that the
information contained in this document is accurate as of any date other than
that date. Neither the mailing of this Proxy Statement/Prospectus nor the
issuance of OCA common stock in the merger shall create any implication to the
contrary.
94
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Proxy Statement/Prospectus contains certain forward-looking statements
about the financial condition, results of operations and business of OCA and
OrthAlliance and about the combined companies following the merger. These
statements concern the cost savings, revenue enhancements and other advantages
the companies expect to obtain from the merger, the anticipated impact of the
merger on OCA's financial performance, tax consequences and accounting treatment
of the merger, market prices of OCA common stock and OrthAlliance Class A common
stock and earnings estimates for the combined company. These statements appear
in several sections of this Proxy Statement/Prospectus, including "SUMMARY,"
"THE MERGER -- OCA's Reasons for the Merger," "THE MERGER -- OrthAlliance's
Reasons for the Merger; Recommendation of OrthAlliance's Board of Directors,"
"THE MERGER -- Fairness Opinion of OCA's Financial Advisors" and "THE
MERGER -- Fairness Opinion at OrthAlliance's Financial Advisors." Also, the
forward-looking statements generally include any of the words "believes,"
"expects," "anticipates," "intends," "estimates," "should," "would," "could,"
"will," "plans" or similar expressions.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. The future results and stockholder
values of OCA and OrthAlliance, and of the combined companies, may differ
materially from those expressed in these forward-looking statements. Many of the
factors that could influence or determine actual results are unpredictable and
not within the control of OCA or OrthAlliance. In addition, neither OCA nor
OrthAlliance intends to, nor are they obligated to, update these forward-looking
statements after this Proxy Statement/Prospectus is distributed, even if new
information, future events or other circumstances have made them incorrect or
misleading as of any future date. For all of these statements, OCA and
OrthAlliance claim the protection of the safe harbor for forward-looking
statements provided in Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934.
Factors that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among others, the
following possibilities:
- Cost savings the companies expect from the merger might not be fully
realized or realized within the time frame the companies anticipate;
- Revenues following the merger may be lower than expected;
- Changes in laws or government rules, or the way in which courts interpret
these laws or rules, may adversely affect the companies' businesses;
- Changes in accounting standards, or the interpretation of those
standards, may adversely affect the companies' financial results;
- Business conditions, inflation or securities markets may undergo
significant change;
- General economic and business conditions;
- Our expectations and estimates concerning future financial performance,
financing plans, government regulation and the impact of competition;
- Anticipated trends in our businesses; and
- Existing and future dental statutes and regulations and other laws
affecting our business, or changes in those laws or the interpretation of
those laws.
LEGAL MATTERS
Waller Lansden Dortch & Davis, PLLC, Nashville, Tennessee, counsel to OCA,
will pass upon the validity of the shares of OCA common stock to be issued in
the merger and other certain legal matters concerning the merger on behalf of
OCA. Munger, Tolles & Olson LLP, Los Angeles, California, counsel to
OrthAlliance, will pass upon certain legal matters concerning the merger on
behalf of OrthAlliance.
95
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements appearing in Orthodontic Centers of America, Inc.'s Annual
Report (Form 10-K), as amended by Form 10-K/A and Form 10-K/A-2, for the year
ended December 31, 2000, as set forth in their report, which is incorporated
herein by reference. The financial statements of Orthodontic Centers of America,
Inc. are incorporated by reference in reliance on Ernst & Young LLP's report,
given their authority as experts in accounting and auditing.
The consolidated financial statements of OrthAlliance as of December 31,
2000 and 1999, and for each of the years in the three-year period ended December
31, 2000, included in this registration statement, and appearing in
OrthAlliance's Annual Report on Form 10-K for the year ended December 31, 2000,
incorporated by reference in this registration statement, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein, and incorporated by
reference herein, in reliance upon authority of said firm as experts in giving
said report.
96
ORTHALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and
2000, and as of June 30, 2001 (unaudited).............. F-3
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1999 and 2000 and the Six Months
Ended June 30, 2000 and 2001 (unaudited)............... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000, and the Six Months
Ended June 30, 2000 and 2001 (unaudited)............... F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1998, 1999 and 2000 and
the Six Months Ended June 30, 2001 (unaudited)......... F-6
Notes to Consolidated Financial Statements................ F-7
Report of Independent Public Accountants.................... F-31
Schedule II -- Valuation and Qualifying Accounts for the
Years Ended December 31, 1998, 1999 and 2000.............. F-32
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of OrthAlliance, Inc.:
We have audited the accompanying consolidated balance sheets of
OrthAlliance, Inc. (a Delaware Corporation) and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years ended December 31, 2000. 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 auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the financial position of OrthAlliance, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Los Angeles, California
March 7, 2001
F-2
ORTHALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
-------------------- JUNE 30,
1999 2000 2001
-------- -------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,189 $ 5,075 $ 6,581
Patient receivables, net of allowances of $563, $401 and
$672.................................................... 10,520 18,935 17,947
Unbilled patient receivables, net of allowances of $382,
$100 and $120........................................... 3,436 3,897 3,869
Amounts due from Allied Practices......................... 10,630 14,203 13,934
Income tax receivable..................................... 509 512 --
Current deferred income tax assets........................ 104 168 135
Other current assets...................................... 2,010 555 472
-------- -------- --------
Total current assets............................... 38,398 43,345 42,938
Property and equipment, net................................. 6,333 8,426 7,761
Notes receivable, net of allowances of $38, $53 and $52..... 4,920 6,849 5,789
Non-current deferred tax assets............................. 1,486 1,042 697
Intangible assets, net...................................... 83,620 124,198 121,656
Other intangibles, net...................................... 502 1,046 831
-------- -------- --------
Total assets....................................... $135,259 $184,906 $179,672
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,549 $ 4,609 $ 3,051
Accrued liabilities....................................... 2,299 5,237 4,171
Patient prepayments....................................... 6,240 13,137 13,328
Practice affiliation payable.............................. 3,610 988 --
Income tax payable........................................ -- -- 54
Deferred income tax liabilities........................... 182 23 22
Amounts due to Allied Practices........................... 1,988 2,474 4,427
Current portion of long term debt......................... -- 5,352 2,411
-------- -------- --------
Total current liabilities.......................... 16,868 31,820 27,464
Line of credit borrowings................................... 47,500 62,000 59,500
Notes payable............................................... 2,144 15,658 13,981
Non-current deferred tax liabilities........................ 935 1,368 1,338
-------- -------- --------
Total non-current liabilities...................... 50,579 79,026 74,819
-------- -------- --------
Total liabilities.................................. 67,447 110,846 102,283
-------- -------- --------
Commitments and contingencies............................... -- -- --
Stockholders' equity:
Class A Common Stock, $0.001 par value, 70,000 shares
authorized, 13,198, 13,262 and 13,275 shares issued and
outstanding, respectively............................... 13 13 13
Class B Common Stock, $0.001 par value, 250 shares
authorized, 249, 185 and 173 shares issued and
outstanding, respectively............................... -- -- --
Additional paid in capital.................................. 65,145 65,700 65,851
Retained earnings (deficit)................................. 5,457 14,992 18,182
Treasury stock, at cost, 318, 1,194 and 1,198 shares,
respectively.............................................. (2,803) (6,645) (6,657)
-------- -------- --------
Total stockholders' equity......................... 67,812 74,060 77,389
-------- -------- --------
Total liabilities and stockholders' equity......... $135,259 $184,906 $179,672
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ORTHALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------------- -------------------
1998 1999 2000 2000 2001
------- ------- -------- -------- --------
(UNAUDITED)
Net revenues.................................. $74,387 $95,703 $142,014 $66,201 $76,789
Cost and expenses:
Salaries and benefits....................... 22,880 28,423 42,461 18,468 24,277
Orthodontic supplies........................ 7,436 9,438 13,903 6,180 7,597
Rent........................................ 6,327 8,252 11,761 5,559 6,146
------- ------- -------- ------- -------
Total direct expenses............... 36,643 46,113 68,125 30,207 38,020
General and administrative.................... 21,456 26,686 43,410 20,571 25,791
Depreciation and amortization................. 2,426 3,983 6,737 3,142 3,809
------- ------- -------- ------- -------
Total operating expenses............ 60,525 76,782 118,272 53,920 67,620
Operating income.............................. 13,862 18,921 23,742 12,281 9,169
Interest expense.............................. (555) (2,450) (7,371) (3,246) (3,908)
Interest income............................... 351 416 675 348 375
------- ------- -------- ------- -------
Income before income taxes.................... 13,658 16,887 17,046 9,383 5,636
Provision for income taxes.................... 6,123 7,304 7,511 4,120 2,446
------- ------- -------- ------- -------
Net income.................................... $ 7,535 $ 9,583 $ 9,535 $ 5,263 $ 3,190
======= ======= ======== ======= =======
Basic and diluted net income per share........ $ 0.58 $ 0.72 $ 0.74 $ 0.41 $ 0.26
======= ======= ======== ======= =======
Weighted average number of common shares
outstanding (in thousands):
Basic....................................... 13,006 13,271 12,858 12,949 12,249
======= ======= ======== ======= =======
Diluted..................................... 13,044 13,283 12,906 12,964 12,250
======= ======= ======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ORTHALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------- -------------------
1998 1999 2000 2000 2001
--------- --------- --------- -------- --------
(UNAUDITED)
Cash flows from operating activities:
Net income.......................................... $ 7,535 $ 9,583 $ 9,535 $ 5,263 $ 3,190
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 2,426 3,983 6,737 3,142 3,809
Deferred income tax expense (benefit)............. (226) 1,544 1,149 623 543
Compensation related to issuance of stock
options......................................... -- -- -- -- 88
Loss on disposal of Allied Practice............... -- -- -- -- 214
Changes in assets and liabilities, excluding effects
of acquisitions:
(Increase) decrease in patient receivables.......... (549) (1,149) (7,796) (1,197) 936
(Increase) decrease in due from Allied Practices.... (7,543) (461) (3,573) (1,725) 269
(Increase) decrease in income tax receivable........ (2,409) 1,020 (491) (461) 368
(Increase) decrease in other assets................. (247) (211) 1,660 1,606 267
Increase (decrease) in accounts payable and accrued
liabilities....................................... 427 174 (579) (2,291) (441)
Increase (decrease) in due to Allied Practices...... 425 (470) 463 1,604 1,953
Increase (decrease) in patient prepayments.......... 1,366 1,170 5,645 2,080 289
-------- -------- -------- -------- --------
Net cash provided by operating activities.... 1,205 15,183 12,750 8,644 11,485
Cash flows from investing activities:
Payment for practice affiliations................... (24,477) (33,019) (14,784) (3,516) (1,209)
Increase in notes receivables....................... (2,184) (2,400) (3,402) (1,147) (768)
Principal payments on notes receivable.............. 534 1,087 1,650 743 1,824
Capital expenditures................................ (683) (952) (1,165) (340) (593)
Payments for acquisition of New Image............... -- -- -- (5,500) --
-------- -------- -------- -------- --------
Net cash used in investing activities........ (26,810) (35,284) (17,701) (9,760) (746)
Cash flows from financing activities:
Increase (decrease) in bank overdraft............... 1,363 20 2,076 (807) (2,637)
Borrowings on line of credit........................ 16,500 50,300 83,000 67,500 7,000
Repayment of line of credit borrowings and other
long-term debt.................................... (1,919) (20,094) (81,473) (64,108) (13,583)
Proceeds from exercise of stock options............. 240 -- -- -- --
Treasury shares purchased........................... -- (1,743) (3,846) (1,890) (13)
Payment of deferred financing costs................. -- (419) (920) (810) --
-------- -------- -------- -------- --------
Net cash used provided by financing
activities................................. 16,184 28,064 (1,163) (115) (9,233)
-------- -------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents......................................... (9,421) 7,963 (6,114) (1,231) 1,506
Cash and cash equivalents at beginning of period...... 12,647 3,226 11,189 11,189 5,075
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period............ $ 3,226 $ 11,189 $ 5,075 $ 9,958 $ 6,581
======== ======== ======== ======== ========
Supplemental cash flow information
Cash paid during the year for:
Interest.......................................... $ 280 $ 2,575 $ 5,643 $ 3,885 $ 4,526
Income taxes...................................... $ 8,774 $ 6,711 $ 6,316 $ 3,611 $ 1,522
Issuance of stock options......................... -- -- -- -- --
Non-cash investing and financing activities
Acquisition of management agreements
Fair value of assets acquired................... $ 46,819 $ 39,532 $ 42,555 $ 38,308 $ 1,212
less: issuance of common stock.................. (19,801) (759) (555) (555) (3)
less: cash paid for practice affiliations....... (24,477) (33,019) (14,784) (9,016) (1,209)
-------- -------- -------- -------- --------
Notes payable, affiliation payables and
liabilities assumed.......................... $ 2,541 $ 5,754 $ 27,216 $ 28,737 $ --
======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ORTHALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
COMMON STOCK
---------------------------------
CLASS A CLASS B RETAINED TREASURY STOCK TOTAL
--------------- --------------- PAID-IN EARNINGS ---------------- STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT EQUITY
------ ------ ------ ------ ------- --------- ------ ------- -------------
BALANCES, DECEMBER 31, 1996.......... -- $-- -- $-- $ -- $ -- -- $ -- $ --
Initial public offering of common
stock.............................. 2,990 3 -- -- 30,398 -- -- -- 30,401
Transfers of certain assets and
liabilities by founders............ 7,633 7 250 -- 1,435 3,363 -- -- 4,805
Dividend to shareholders of founding
Allied Practices................... -- -- -- -- -- (13,759) -- -- (13,759)
Issuance of common stock for
intangible assets.................. 864 1 -- -- 10,278 -- -- -- 10,279
Issuance of warrants................. -- -- -- -- 3,038 -- -- -- 3,038
Net loss............................. -- -- -- -- -- (736) -- -- (736)
------ --- --- -- ------- -------- ------ ------- --------
BALANCES, DECEMBER 31, 1997.......... 11,487 11 250 -- 45,149 (11,132) -- -- 34,028
------ --- --- -- ------- -------- ------ ------- --------
Issuance of common stock for
intangible assets.................. 1,640 2 -- -- 19,799 -- -- -- 19,801
Stock options exercised.............. 70 -- -- -- 240 -- -- -- 240
Conversions to Class A common
stock.............................. 1 -- (1) -- -- -- -- -- --
Repurchase of common stock........... -- -- -- -- -- -- (170) (2,348) (2,348)
Net income........................... -- -- -- -- -- 7,535 -- -- 7,535
------ --- --- -- ------- -------- ------ ------- --------
BALANCES, DECEMBER 31, 1998.......... 13,198 13 249 65,188 (3,597) (170) (2,348) 59,256
------ --- --- -- ------- -------- ------ ------- --------
Issuance of common stock from
treasury, for intangible assets.... -- -- -- -- -- (529) 93 1,288 759
Repurchase of common stock........... -- -- -- -- -- -- (241) (1,743) (1,743)
Registration costs................... -- -- -- -- (43) -- -- -- (43)
Net income........................... -- -- -- -- -- 9,583 -- -- 9,583
------ --- --- -- ------- -------- ------ ------- --------
BALANCES, DECEMBER 31, 1999.......... 13,198 13 249 -- 65,145 5,457 (318) (2,803) 67,812
------ --- --- -- ------- -------- ------ ------- --------
Stock option New Image............... -- -- -- -- 555 -- -- -- 555
Repurchase of common stock........... -- -- -- -- -- -- (876) (3,842) (3,842)
Conversions to Class A common
stock.............................. 64 -- (64) -- -- -- -- -- --
Net income........................... -- -- -- -- -- 9,535 -- -- 9,535
------ --- --- -- ------- -------- ------ ------- --------
BALANCES, DECEMBER 31, 2000.......... 13,262 13 185 -- 65,700 14,992 (1,194) (6,645) 74,060
------ --- --- -- ------- -------- ------ ------- --------
Stock option......................... -- -- -- -- 151 -- -- -- 151
Repurchase of common stock........... -- -- -- -- -- -- (4) (12) (12)
Conversions to Class A common
stock.............................. 13 -- (13) -- -- -- -- -- --
Net income........................... -- -- -- -- -- 3,190 -- -- 3,190
------ --- --- -- ------- -------- ------ ------- --------
BALANCES, JUNE 30, 2001
(UNAUDITED)........................ 13,275 $13 172 $-- $65,851 $ 18,182 (1,198) $(6,657) $ 77,389
====== === === == ======= ======== ====== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BUSINESS AND ORGANIZATION
a. ORGANIZATION
OrthAlliance, Inc. ("OrthAlliance"), a Delaware corporation, was
incorporated on October 21, 1996 and provides practice management and consulting
services to orthodontic and pediatric dental practices throughout the United
States. Effective prior to the closing of the initial public offering of shares
of OrthAlliance's Class A Common Stock (the "Offering" or "IPO"), Premier
Orthodontic Group, Inc. ("Premier") and US Orthodontic Care, Inc. ("USOC")
merged with and into OrthAlliance. In the merger, the outstanding common stock
of USOC and Premier converted into shares of Class A Common Stock ("Common
Stock") and shares of Class B Common Stock ("Class B Common Stock"). On August
26, 1997, OrthAlliance acquired (the "Acquisitions") simultaneously with the
closing of the IPO certain operating assets of or the stock of entities holding
certain tangible and intangible assets and assumed certain liabilities of 55
orthodontic practices in exchange for shares of Common Stock and cash. The
Acquisitions were accounted for in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 48.
OrthAlliance's wholly owned subsidiaries, incorporated in Delaware, include
PedoAlliance, Inc. ("PedoAlliance") and OrthAlliance Finance, Inc. ("OA
Finance") were formed in December 1997. PedoAlliance Properties Inc., a wholly
owned subsidiary of PedoAlliance, OrthAlliance Properties, Inc. and OrthAlliance
Services, Inc. were incorporated in California in April 1999. OrthAlliance
Holdings, Inc., incorporated in Texas, and OrthAlliance New Image, Inc. ("OA New
Image") were formed in January 2000. These subsidiaries were formed to provide
practice management, patient financing, consulting and other services
(collectively "Management Services") to allied orthodontic and pediatric dental
practices (the "Allied Practices") or their patients. OrthAlliance, Inc. and its
subsidiaries are collectively referred to as "OrthAlliance" or the "Company".
b. AGREEMENTS WITH ALLIED PRACTICES
The Company is party to management service agreements with the Allied
Practices. These are either "Service Agreements," "Consulting Agreements," or
"Management Service Agreements," collectively "Management Agreements." The term
of each Management Agreement is 20, 25 or 40 years, subject to prior termination
by either party in the event the other party becomes subject to voluntary or
involuntary bankruptcy proceedings or materially breaches the agreement, subject
to a cure period. The type of Management Agreements are determined by the
Company and each Allied Practice based primarily on applicable state laws and
regulations and are as follows:
Service Agreements
The parties to each Service Agreement include the Company and the Allied
Practice, which typically is a professional corporation or association owned by
the related Orthodontist or Pediatric Dentist. Each Service Agreement generally
requires the Company to perform the following services for the Allied Practices:
provide and maintain specified furnishings and equipment; provide necessary
employees (except Orthodontists and Pediatric Dentists, and where applicable law
requires, hygienists and dental assistants); establish appropriate business
systems; purchase and maintain inventory; perform payroll and accounting
functions; provide billing and collection services with respect to patients,
insurance companies, and third-party payors; arrange certain legal services not
related to malpractice litigation; design and execute a marketing plan; advise
with respect to new office locations; and manage and organize the Allied
Practices' files and records, including patient records where permitted by
applicable law. If the Allied Practice lacks
F-7
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
sufficient funds to pay its current operating expenses, the Company is also
required to advance funds to the Allied Practice for the purpose of paying such
expenses. In exchange for performing the services described above, the Company
receives a management fee based on one of the three fee structures described in
section c. below.
The Allied Practices may terminate the Service Agreements upon the
occurrence of a change of control of OrthAlliance (as defined therein, which
does not include a transaction approved by the Company's Board of Directors).
Upon the expiration or termination of the Service Agreement, the Allied Practice
may, and in certain circumstances must, repurchase for cash (at book value)
certain assets, including all equipment, and assume certain liabilities of the
Company related to the Allied Practice.
Service Agreements are generally not assignable by either party thereto
without the written consent of the other party; however, the Company may assign
the Service Agreement without the Allied Practice's consent to any entity under
common control of the Company. The Company and the Allied Practice agree to
indemnify each other for costs and expenses incurred by such other party that
are caused directly or indirectly by, as the case may be, the Company's or the
Allied Practice's intentional or negligent acts or omissions. In the case of the
Allied Practice's obligation to indemnify the Company, such obligation also
applies to intentional or negligent acts and omissions occurring prior to the
date of the Service Agreement.
Consulting Agreements
The parties to each Consulting Agreement include the Company and the Allied
Practice. Certain provisions of the Consulting Agreement are substantially
similar to the Service Agreement, including provisions relating to the Company's
obligation to loan funds to the Allied Practice in the event the Allied Practice
is unable to pay its current operating expenses; termination of the Consulting
Agreement; repurchase of assets and assumption of liabilities by the Allied
Practice upon expiration or termination; assignment; and indemnification.
The services provided by the Company to the Allied Practice under each
Consulting Agreement generally include consulting with respect to equipment and
office needs; preparing staffing models appropriate for an Allied Practice;
advising and training with respect to business systems; purchasing and
maintaining inventory; advising with respect to and providing or arranging
accounting and bookkeeping services; advising with respect to developing a
marketing plan; assessing the financial feasibility of establishing new offices;
providing billing and collection services; and assisting the Allied Practice in
organizing and developing filing and recording systems. In exchange for such
services, the Company receives a consulting fee based on one of the three fee
structures described below.
Management Service Agreements
In March 2000, the Company and OA New Image assumed the obligations of New
Image under the various Management Service Agreements ("MSA") between New Image
and the orthodontic practices with whom it had entered into MSAs. The form of
MSA provides for a variation of the service fee calculation compared to the
traditional Company form defined in the service or consulting agreement. Under
the MSAs, the service fee amount varies monthly depending on the Allied
Practices financial performance and represents the residual amount after the
payment of practice expenses and contractually determined practice
distributions. The service fee is affected by two variables, (1) total Allied
Practice gross revenue, less refunds, and (2) overhead. Service fees are
calculated based on two separate standardized grids set forth in the MSA that
determine (i) the percent of practice revenue that is
F-8
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
distributed to the Allied Practice based on that Allied Practice's gross
revenue, less refunds ("Gross Revenue Grid"), and (ii) any additional or
offsetting percentage of gross revenue, less refunds, that is distributed to the
Allied Practice based upon that Allied's Practice's overhead ("Overhead Grid").
Pursuant to the Gross Revenue Grid, in general, the Company's retained service
fees increase if the Allied Practice's gross revenue increases and decrease if
the Allied Practice's gross revenue decreases. Pursuant to the Overhead Grid, in
general, the Company's retained service fees decrease if the Allied Practice's
overhead expenses increase and the retained service fees increase if the Allied
Practice's overhead decreases. The maximum retained service fee percentage is
20.0%. The average service fee percentage for the OA New Image Allied Practices
is approximately 16.1%. In addition, a few OA New Image MSAs provide for a fixed
percentage service fee.
c. CALCULATION OF MANAGEMENT FEES
Management fees are calculated pursuant to the Management Agreements based
upon the Allied Practice's Adjusted Patient Revenue calculated on the accrual
basis. There are three economic models by which the management fee may be
calculated under the Management Agreements discussed above which are as follows:
(i) a designated percentage ranging from 13.5% to 20.0% of Adjusted
Patient Revenue. The average designated percentage is 17.0% for the Allied
Practices subject to this fee structure. In some cases, the Allied Practice
must guarantee a minimum level of management fees to be paid by the Allied
Practice for a portion of the agreement ranging from one to 25 years.
(ii) a designated percentage of Adjusted Patient Revenue, ranging from
14.0% to 17.0%, subject to an annual adjustment based upon improvements in
the Allied Practice's operating margin in the most recent calendar year as
compared with the immediately preceding calendar year. No annual adjustment
will be made which would result in reducing the designated percentage below
the percentage applicable during the first year of the Management
Agreement. Operating margin is defined as the percentage determined by
dividing operating profit by Adjusted Patient Revenue. Operating profit is
equal to Adjusted Patient Revenue less operating expenses, excluding the
management fee and such expenses associated with the Allied Practices which
the Company is prohibited from incurring, primarily consisting of
orthodontist compensation. The average designated percentage is 16.2% for
the Allied Practices subject to this fee structure.
(iii) a fixed dollar fee with annual established fixed increases for
each year of the Management Agreement.
The Company has entered into agreements with certain Allied Practices to
make the payment of service fees after the first two years contingent on various
factors, including practice profitability compared to acquisition consideration,
timely reporting of information, participation in practice improvement programs
and orthodontist hours worked.
The Company earns revenue by providing services pursuant to Management
Agreements with Allied Practices. The Company provides management or consulting
services to each Allied Practice and assumes substantially all operating
expenses except for compensation to the allied orthodontists and pediatric
dentists ("Allied Practitioners") and other employees that the Company may not
employ according to applicable state laws. In exchange for assuming these
expenses and providing services, the Company records revenues in amounts equal
to the assumed expenses plus a service fee or consulting fee, as described
below.
F-9
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Patient revenue is recognized as services are performed. For orthodontic
services, approximately 20% of the orthodontic patient contract revenues are
recognized at the time of initial treatment. The balance of the contract revenue
is recognized evenly over the remaining treatment period. The 25% estimated
revenue at the initial treatment date is based on the estimated costs incurred
by the Company at that time as compared to the total costs of providing the
contracted services. The percentage includes the estimated costs of diagnosis
and treatment plan development, initial treatment by Company personnel,
orthodontic supplies, and associated administrative services.
Expenses reported by the Company include certain of the expenses to operate
the orthodontic or pediatric dental offices and all of the expenses of any
corporate offices, facilities or functions.
d. PATIENT RECEIVABLES AND PATIENT PREPAYMENTS
The difference in the timing of the recognition of adjusted patient revenue
and the collection of cash related thereto results in unbilled receivables or
patient prepayments. Unbilled patient receivables represent the earned revenue
in excess of billings to patients as of the end of each period. Patient
prepayments represent collections from patients or their insurance companies
which are received in advance of the performance of the related services.
Patient receivables are recorded at net realizable value on the date of
affiliation and subsequent collections are used to pay Allied Practice operating
expenses, the Company's management fee, and payments to the Allied Practices.
Generally, any subsequent uncollectible accounts are recorded as a reduction of
net revenues, which reduces the Company's management fees at the applicable
service fee percentage.
Generally, the Allied Practices require approximately 25% of the treatment
contract to be paid upon installation of the braces, and the remaining 75%
evenly over the remainder of the treatment term.
e. AMOUNTS DUE FROM ALLIED PRACTICES
Amounts due from Allied Practices include short-term advances for operating
capital and short-term receivables related to a timing difference between when
the service fees are paid from the Allied Practice's accounts and when the
service fees are deposited by the Company. These items are advanced and repaid
in a revolving manner. Generally, advances are repaid when Allied Practices
deposit patient revenue into their depository accounts. Advances occur when the
Allied Practice operating expenses paid exceed patient revenue earned. Service
fees outstanding are generally paid within 30 days.
f. OPERATING EXPENSES OF ALLIED PRACTICES
The Company is responsible for the payment of all operating expenses
incurred by the Allied Practice, except for compensation to Allied Practitioners
and other expenses of the Allied Practices that the Company is prohibited from
paying. Expenses that are the responsibility of the Company include the
following: (i) salaries, benefits, payroll taxes, workers compensation, health
insurance and other benefit plans, and other direct expenses of all employees of
OrthAlliance at each practice office, excluding those costs associated with
orthodontists and any other classification of employee which OrthAlliance is
prohibited from employing by applicable state laws or regulations; (ii) direct
costs of all employees or consultants that provide services to each practice
office except for Affiliated Orthodontists and other employees of the Allied
Practices that the Company is prohibited from employing, (iii) dental and office
supplies as permitted by applicable state laws or regulations, (iv) lease or
rent payments as permitted by
F-10
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
state laws or regulations, utilities, telephone and maintenance expenses for
practice facilities, (v) property taxes on OrthAlliance assets located at Allied
Practice offices, (vi) property, casualty, and liability insurance premiums,
(vii) orthodontists recruiting expenses, and (viii) advertising and other
marketing expenses attributable to the promotion of practice offices.
All of the above expenses are paid directly to the third party provider of
the goods or services indicated. All of the above expenses are incurred by
OrthAlliance. Such expenses are classified together with similar expenses of the
Company in the consolidated statements of income. In exchange for incurring
these expenses and providing management services, the Company records revenue in
amounts equal to those incurred expenses.
The Allied Practices retain the responsibility for the payment of any and
all direct employment expenses, including benefits, for any Orthodontist or
other employee that OrthAlliance is prohibited from employing by applicable
state laws or regulations. In addition, the Allied Practices retain the
responsibility for the payment of continuing education expenses, seminars,
professional licenses, professional membership dues and all other expenses of
any Orthodontist.
g. NEW AFFILIATIONS
During the six months ended June 30, 2001, the Company entered into three
practice affiliation agreements with practitioners to provide management
services and acquire certain operating assets for a total cash consideration
(including acquisition costs) of $1.1 million (unaudited). Each acquired
practice operates one location, and the three acquired practices generated
combined historical patient revenue of approximately $1.4 million over the
previous 12 months (unaudited). Prior patient revenue is not necessarily
indicative of the level of revenue that these practices may be expected to
generate in the future.
For the year ended December 31, 2000, the Company entered into or assumed
agreements with 43 Allied Practices. Included were 31 practices acquired from
New Image on March 1, 2000, as well as 2 pediatric dental practices, to provide
management and consulting services and acquire certain operating assets for a
total consideration (including acquisition costs) of $42.6 million. This
consideration consisted of options to acquire Class A Common Stock with a fair
value of $0.6 million, $14.8 million in cash, $27.2 million in practice
affiliation payables and notes payable. These Allied Practices operate 76
locations.
For the year ended December 31, 1999, the Company entered into agreements
with 36 Allied Practices, 11 of which were pediatric dental practices, to
provide management services and acquire certain operating assets for a total
consideration (including acquisition costs) of $39.5 million. This consideration
consisted of 93,584 shares of Common Stock, from the Treasury, with an aggregate
value at various acquisition dates of $0.8 million, payment of $33.0 million in
cash, $5.7 million in practice affiliation payables and notes payable. These
Allied Practices operate 73 locations.
For the year ended December 31, 1998, the Company entered into agreements
with 36 Allied Practices, seven of which were related to pediatric dental
practices, to provide management services and acquire certain operating assets
for a total consideration (including acquisition costs) of $46.8 million. This
consideration consisted of 1,640,492 shares of Common Stock with an aggregate
value at various acquisition dates of $19.8 million, payment of $24.5 million in
cash and the issuance of notes payable in the amount of $2.5 million. These
Allied Practices operate 70 locations.
F-11
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include OrthAlliance, Inc. and its
wholly owned subsidiaries. The Company does not consolidate the operations of
the Allied Practices which it manages as the Company's arrangements with its
Allied Practices do not meet the requirements for consolidation as set forth in
Emerging Issues Task Force consensus opinion 97-2 ("EITF 97-2"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
b. INTERIM ACCOUNTING POLICY
The accompanying unaudited financial statements have not been audited by
independent public accountants, but in the opinion of the Company's management,
such unaudited statements include all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial position
of the Company as of June 30, 2001 and the results of operations and cash flows
for the six months ended June 30, 2000 and 2001. Although the Company's
management believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain information
normally included in financial statements prepared in accordance with generally
accepted accounting principles has been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The results of
operations for the six months ended June 30, 2001 and 2000 are not necessarily
indicative of the results to be expected for the full year.
c. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
d. CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents. All cash
equivalents are recorded at cost, which approximate fair value.
e. PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost or fair value at acquisition date
if acquired upon affiliation with an Allied Practice. Routine maintenance and
repairs are expensed when incurred, while costs of improvements and renewals are
capitalized. Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets or remaining
lease terms as follows:
Furniture, fixtures and equipment............... 5 years
Leasehold improvements.......................... Shorter of 3-10 years or the related lease
term
Depreciation expense for the years ended December 31, 1998, 1999 and 2000
was approximately $0.9 million, $1.2 million, and $1.8 million, respectively.
Depreciation expense was $0.9 million and $1.2 million for the six month periods
ended June 30, 2000 and 2001, respectively (unaudited).
F-12
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
f. INTANGIBLE ASSETS, NET
The Management Agreements with Allied Practices include the acquisition of
certain tangible and intangible assets and the assumption of certain liabilities
of the Allied Practices. The Company allocates the purchase price to the
tangible assets acquired and liabilities assumed based on their estimated fair
values. Intangible assets related to the Management Agreements are being
amortized using the straight-line method over their respective terms. The
Company periodically evaluates whether events and circumstances have occurred
that indicate the remaining useful life of the intangible assets may warrant
revision or that the remaining balance of the intangible assets may not be
recoverable. As of December 31, 1999 and 2000, there were no events or
circumstances to indicate that any portion of the recorded net intangible assets
may not be recoverable.
Amortization expense related to these intangible assets for the years ended
December 31, 1998, 1999 and 2000 was $1.5 million, $2.8 million, and $4.9
million, respectively. Amortization expense was $2.3 million and $2.6 million
for the six month periods ended June 30, 2000 and 2001, respectively
(unaudited).
g. OTHER, NET
Other, net consists primarily of deferred costs related to the Company's
revolving credit facility. These costs are amortized using the straight-line
method over the expected period to be benefited. The amortization of deferred
costs related to the revolving credit facility borrowings is included in
interest expense.
h. NET REVENUES
Net revenues primarily consist of management fee income and reimbursed
practice operating expenses (See Note 1). Such reimbursed practice operating
expenses amounted to $54.4 million, $68.9 million, and $106.1 million for the
years ended December 31, 1998, 1999, and 2000, respectively. Reimbursed practice
operating expenses were $48.4 million and $58.4 million for the six month
periods ended June 30, 2000 and 2001, respectively (unaudited).
i. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
The statement requires recognition of deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Deferred income taxes are provided for
temporary differences in the recognition of certain income and expense items for
financial reporting and tax purposes given the provisions of the enacted tax
laws.
j. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1999 and 2000 and as of June 30, 2001 carrying amounts
of the Company's financial instruments, which include cash and cash equivalents,
notes receivable, accounts payable and accrued liabilities, notes payable and
line of credit borrowings, approximate fair value.
F-13
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
k. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued FASB
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS
138. SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that entities recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Management anticipates that the adoption of
SFAS 133 will not have a material effect on the Company's results of operations
or financial position.
The SEC issued Staff Accounting Bulletin Number 101, Revenue Recognition in
Financial Statements, on December 3, 1999 ("SAB 101"). This pronouncement
clarifies existing revenue recognition principles and states that revenue is
generally realized or realizable and earned when all of the following criteria
are met: i) persuasive evidence of an arrangement exists, ii) delivery has
occurred or services rendered, iii) the seller's price to the buyer is fixed or
determinable and iv) collectibility is reasonably assured. Management believes
the Company is in compliance with SAB 101.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation: an Interpretation of APB Opinion No. 25. This pronouncement seeks
to interpret the application of APB No. 25, primarily in relation to
modifications to the terms of existing awards and to the scope of APB No. 25.
The adoption of FASB Interpretation No. 44 did not have a material impact on the
Company's results of operations or its financial position.
In July 2001, FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that all business combinations be accounted for under
the purchase method and requires recognition of identifiable intangible assets
separately from goodwill. This pronouncement is effective for all business
combinations initiated after June 30, 2001. OrthAlliance has evaluated the
requirements of SFAS No. 141 and believes that its intangible assets are fairly
stated and that the adoption of SFAS No. 141 will not have a material impact on
OrthAlliance's results of operations or financial position.
SFAS No. 142 requires that all identifiable intangible assets acquired
shall be recognized and measured initially at fair value. All identifiable
intangible assets should be amortized over the period which it is expected that
they will benefit OrthAlliance and tested for impairment in accordance with SFAS
No. 121. Goodwill and identifiable intangible assets whose useful lives are
indefinite are not to be amortized and are to be tested for impairment annually
or more frequently if circumstances indicate potential impairment. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001. OrthAlliance
believes that its intangible assets, which are based on underlying contractual
rights, are fairly stated; therefore, it will continue to amortize intangible
assets on a basis consistent with current practice. OrthAlliance believes the
adoption of SFAS No. 142 will not have a material effect on OrthAlliance's
results of operations or its financial position.
L. RECLASSIFICATIONS
Certain prior period reclassifications have been made to conform to
classifications used in the current period.
F-14
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. ACQUISITION OF NEW IMAGE
Effective March 1, 2000, the Company acquired substantially all of the
assets of New Image Orthodontic Group, Inc. ("New Image"), a privately held
Georgia corporation based in Atlanta, Georgia, for a total consideration
(including acquisition costs) of approximately $33.8 million. New Image was
founded in February 1997 and provided business operations, financial, marketing
and administrative services to orthodontic practices in 9 states in accordance
with long term service and employment agreements and had practice management
agreements with 36 orthodontists operating in 50 locations.
Total consideration (including acquisition costs) consisted of $5.6 million
paid in cash, an estimated $0.3 million in acquisition costs, promissory notes
issued of approximately $12.9 million, the assumption of approximately $13.4
million of existing debt due to New Image's former orthodontic practices, and
the issuance of approximately 273,000 stock options with an aggregate fair value
of $0.6 million. The promissory notes issued and assumed have interest rates
ranging from 6% to 10% and are repayable over a one to five year period. The
Company will utilize substantially all the acquired assets in the continued
operation of the business. The acquisition has been accounted for using the
purchase method of accounting. Intangible assets of approximately $32.9 million
resulted from the acquisition. The results of operations of New Image are
included with the results of operations of the Company from March 1, 2000. The
Company obtained the appropriate consents from its lenders with regard to this
transaction.
The following pro forma results of operations are presented to illustrate
the effect of the acquisition on the historical operating results of
OrthAlliance and New Image for the twelve month periods ended December 31, 1999
and December 31, 2000. These pro forma results of operation gives effect to the
acquisition as if it occurred as of January 1, 2000 and January 1, 1999,
respectively. The pro forma results of operations are based on management's
current estimates and may not be indicative of the results of operations that
actually would have occurred if the transaction had been at the dates indicated.
DECEMBER 31, 2000 (UNAUDITED)
--------------------------------------------------------
PRO FORMA
NEW IMAGE ADJUSTMENTS
ORTHALLIANCE (a) (b) PRO FORMA
------------ ------------ -------------- ---------
Net revenues....................... $142,014 $3,803 $ -- $145,817
Operating income (loss)............ 23,742 (84) 323 23,981
Net income (loss).................. 9,535 (448) 440 9,527
Basic and diluted net income per
share............................ $ 0.74 $ 0.74
Weighted average number of common
shares outstanding (in
thousands):
Basic............................ 12,858 12,858
Diluted.......................... 12,906 12,906
F-15
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1999 (UNAUDITED)
--------------------------------------------------------
PRO FORMA
ORTHALLIANCE NEW IMAGE(A) ADJUSTMENTS(B) PRO FORMA
------------ ------------ -------------- ---------
Net revenues....................... $95,703 $22,796 $ -- $118,499
Operating income (loss)............ 18,921 (2,085) 4,436 21,272
Net income (loss).................. 9,583 (4,834 4,750 9,499
Basic and diluted net income per
share............................ $ 0.72 $ 0.72
Weighted average number of common
shares outstanding (in
thousands):
Basic............................ 13,271 13,271
Diluted.......................... 13,283 13,283
---------------
(a) Because the transaction with New Image was effective March 1, 2000, the
results of operations for New Image and the pro forma adjustments are for
the two months period ended February 29, 2000.
(b) Pro forma adjustments are presented to illustrate the effect of the
acquisition on the historical operating results of OrthAlliance and New
Image, as if the acquisition occurred as of that date. The pro forma
adjustments include the effect of increased amortization of goodwill and
interest expense, due to the additional goodwill acquired and increased
debt levels relating to the financing of the acquisition. Other pro forma
adjustments reflect cost savings relating to the elimination of duplicate
general and administrative expenses included in the New Image and
OrthAlliance corporate overhead structures.
4. OTHER CURRENT ASSETS
Other current assets consist of the following:
DECEMBER 31,
------------- JUNE 30,
1999 2000 2001
------ ---- -----------
(UNAUDITED)
Short term receivables................................... $1,566 $ 51 $117
Prepaid expenses and other current assets................ 444 504 355
------ ---- ----
$2,010 $555 $472
====== ==== ====
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following:
DECEMBER 31,
----------------- JUNE 30,
1999 2000 2001
------- ------- -----------
(UNAUDITED)
Furniture and fixtures................................ $ 4,007 $ 4,262 $ 4,284
Equipment............................................. 5,504 7,882 8,283
Leasehold improvements................................ 2,420 3,577 3,572
Construction in progress.............................. 392 538 504
------- ------- -------
12,323 16,259 16,643
less: accumulated depreciation........................ (5,990) (7,833) (8,882)
------- ------- -------
$ 6,333 $ 8,426 $ 7,761
======= ======= =======
F-16
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. NOTES RECEIVABLE, NET
Notes receivable, net, consist of the following:
DECEMBER 31,
--------------- JUNE 30,
1999 2000 2001
------ ------ -----------
(UNAUDITED)
Notes receivable from Allied Practices.................. $3,934 $5,488 $4,412
Patient loans........................................... 1,024 1,414 1,429
------ ------ ------
4,958 6,902 5,841
Allowance for uncollectible accounts.................... (38) (53) (52)
------ ------ ------
$4,920 $6,849 $5,789
====== ====== ======
Certain Allied Practices have signed promissory notes due to the Company.
Generally, principal and interest payments are due monthly, with interest
accruing at prime plus 1%. Generally, these notes have maturity dates ranging
from three to five years, are unsecured and are personally guaranteed by the
respective practitioners. As of December 31, 1999 and 2000, the prime interest
rate was 8.5% and 9.0%, respectively. As of June 30, 2001, the prime rate was
6.75% (unaudited).
During 1999 and 2000, OA Finance financed approximately $1.0 million and
$0.8 million, respectively, of patient loans from certain Allied Practices.
During the six months ended June 30, 2001, OA financed approximately $0.2
million. OA Finance was formed to provide patient financing options to all
Allied Practices. The loans outstanding are generally without recourse and
principal and interest are due monthly, with interest rates varying between 9.9%
and 16.9%, depending on the credit risk of the borrower. The terms of these
loans range from one to five years.
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
DECEMBER 31,
--------------- JUNE 30,
1999 2000 2001
------ ------ -----------
(UNAUDITED)
Bank overdrafts......................................... $2,242 $4,318 $2,637
Accounts payable........................................ 307 291 414
------ ------ ------
$2,549 $4,609 $3,051
====== ====== ======
DECEMBER 31,
--------------- JUNE 30,
1999 2000 2001
------ ------ -----------
(UNAUDITED)
Accrued wages........................................... $1,055 $1,706 $1,737
Accrued interest........................................ 43 1,771 527
Other accrued liabilities............................... 1,201 1,760 1,907
------ ------ ------
$2,299 $5,237 $4,171
====== ====== ======
F-17
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. LINE OF CREDIT BORROWINGS
On December 30, 1997, the Company entered into a credit agreement with
First Union National Bank to provide a $25 million revolving line of credit. The
interest on borrowings accrues at either the bank's prime rate or LIBOR, plus a
margin. Amounts borrowed are secured by security interests in the Company's
assets, which include accounts receivable, Management Agreements and the capital
stock of the Company's wholly owned subsidiaries. The Company expanded the
credit facility ("the Revolving Credit Facility") on March 26, 1999 from $25
million to $55 million and from $55 million to $75 million on April 14, 2000.
Outstanding amounts under the April 14, 2000 agreement are repayable in full on
April 13, 2003. As of March 31, 2001 and December 31, 2000, the outstanding
balances under this credit facility were $64 million and $62 million,
respectively. As of June 30, 2001, the Company believes it was in compliance
with the terms and covenants of the Revolving Credit Facility (unaudited).
F-18
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. NOTES PAYABLE
Notes payable as of December 31, 1999 and 2000 and as of June 30, 2001 are
summarized in the following table:
DECEMBER 31,
---------------- JUNE 30,
1999 2000 2001
------ ------- -----------
(UNAUDITED)
Fixed-rate secured notes payable to New Image
orthodontists:
9% notes payable, payable in annual installments
ranging from $93 to $110, due in 2005, secured by
practice assets................................... $ -- $ 904 $ --
6% note payable, payable in annual installments of
$71, due in 2006, secured by practice assets...... -- 393 321
Fixed-rate unsecured notes payable to New Image
orthodontists:
9% note payable, payable in monthly installments of
$10, due in 2001.................................. -- 127 64
9% note payable, principal maturing in varying
monthly amounts, due in 2002...................... -- 53 28
9% note payable, principal maturing in varying
monthly amounts, due in 2003...................... -- 180 151
9% note payable, payable in annual installments
ranging from $2 to $295, including interest, due
in 2004........................................... -- 4,070 4,255
10% notes payable, principal maturing in varying
quarterly amounts, due in 2004.................... -- 412 362
9% notes payable, payable in annual installments
ranging from $75 to $212, due in 2005............. -- 3,900 2,867
9% notes payable, principal maturing in varying
monthly amounts, due in 2006...................... -- 174 158
9% notes payable, payable in annual installments of
$59, due in 2006.................................. -- 353 294
9% notes payable, payable in monthly installments of
$57, including interest, due in 2007.............. -- 402 344
Fixed-rate unsecured bonds payable to OrthAlliance
orthodontists:
8% note payable, due in 2002......................... 218 218 218
7% notes payable, due in 2003........................ 1,926 2,691 2,691
9% Goldman Sachs Series A Notes, payable in quarterly
installments ranging from $1 to $34, due in 2004..... -- 2,007 1,653
9% Goldman Sachs Series B Notes, payable in quarterly
installments ranging from $4 to $132, due in 2004.... -- 3,626 2,986
10% Goldman Sachs Series C Notes, due on February 28,
2001................................................. -- 1,500 --
------ ------- -------
2,144 21,010 16,392
Less current portion of long-term debt................. -- (5,352) (2,411)
------ ------- -------
$2,144 $15,658 $13,981
====== ======= =======
F-19
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Future maturities of notes payable are as follows as of December 31, 2000:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ -------
2001...................................................... $ 5,352
2002...................................................... 4,023
2003...................................................... 6,125
2004...................................................... 3,952
2005...................................................... 1,558
Thereafter................................................ --
-------
$21,010
=======
10. CLASS B COMMON STOCK
Each share of Class B Common Stock will automatically convert into eight
shares of Class A Common Stock upon the attainment of certain conversion prices.
Twenty percent of the Class B Common Stock shares will convert at each of the
following conversion prices: $18.00, $21.60, $25.92, $31.10, and $37.32. The
conversion will be effected when the average Class A Common Stock closing price
for 20 consecutive trading days exceeds the threshold. Class B Common Stock is
also convertible to an equal number of Class A Common Stock shares at any time
at the option of the holder. Any Class B Common Stock shares not converted to
Class A Common Stock, because the necessary conversion prices were not attained,
will automatically convert to one share of Common Stock upon the sixth
anniversary of the IPO. Class B Common Stock shares are not transferable, except
to a holder's direct relatives or as determined by will or the laws of descent.
The holders of Class B Common Stock enjoy the same share-for-share voting rights
with holders of the Class A Common Stock, with whom they vote as a single class.
11. PREFERRED STOCK
The Company is authorized to issue up to 20.0 million shares of preferred
stock. The Board of Directors, from time to time and without stockholder action
or approval, may fix the relative rights and preferences of the preferred
shares, including voting powers, dividend rights, liquidation preferences,
redemption rights and conversion privileges. No preferred stock was outstanding
as of December 31, 2000 and 1999, respectively.
12. TREASURY STOCK
During the six month period ended June 30, 2001 the Company acquired 4,300
shares of its common stock at a cost of approximately $13 (unaudited).
On December 1, 2000, the Company announced that its common stock repurchase
program ("Stock Repurchase Program"), instituted in October 1998, would be
extended through December 2001. In connection with the program, the Company is
authorized to purchase up to $6.8 million in shares at prices prevailing on the
market. The Company uses the cost method to account for treasury stock. During
2000 and 1999, the Company repurchased 876,100 and 241,286 shares of its Common
Stock, respectively under the Stock Repurchase Program. As of December 31, 2000,
the Company's aggregate purchase price of Common Stock shares held in treasury
was $6.6 million.
During 1998, the Company acquired 170,024 shares of its common stock in
transactions with certain Allied Practices, with a market valuation at the date
of the transactions of $2.3 million. These transactions
F-20
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
included a mutual rescission and forgiveness of a note receivable, with a value
equal to the shares acquired.
13. STOCK OPTIONS AND WARRANTS
The Company has five stock option plans, the Amended and Restated 1997
Employee Stock Option Plan ("1997 Employee Plan"), the 1997 Director Stock
Option Plan ("Director Plan"), the 1997 Orthodontist Stock Option Plan ("1997
Orthodontist Plan"), the 1999 Orthodontist Stock Option Plan ("1999 Orthodontist
Plan"), and 2000 Employee Stock Option Plan ("2000 Employee Plan"). In addition,
the Company issued warrants to certain executives in 1997. Options may be
granted as incentive or nonqualified stock options. The Company accounts for the
1997 Employee Plan and the Director Plan under APB Opinion No. 25, under which
no expense has been recognized.
The Company may grant options to purchase up to 2.0 million shares of
Common Stock under the 1997 Employee Plan, 500,000 shares of Common Stock under
the Director Plan, 300,000 shares of Common Stock under the 1997 Orthodontist
Plan, 280,000 shares of Common Stock under the 1999 Orthodontist Plan and
500,000 shares of Common Stock under the 2000 Employee Plan. The options are
issued with exercise prices equal to the Company's stock price at the date of
grant. Options granted under the 1997 Employee Plan and 2000 Employee Plan vest
over one to five years, are exercisable in whole or in installments, and expire
ten years from date of grant. Options granted under the Director Plan vest over
one year, are exercisable in whole or in installments, and also expire ten years
from date of grant. Options granted under the 1997 Orthodontist Plan and 1999
Orthodontist Plan vest at grant, are exercisable in whole or in installments,
and expire five years and three years, respectively, from the grant date.
In connection with the IPO, the Company issued warrants to purchase 593,622
shares of Common Stock with exercise prices ranging from $0.01 to $14.38. The
weighted average fair value of the warrants granted was $4.74. The vesting
period for those warrants ranged from immediate to one year. These warrants
expire five years from the date of grant and their weighted average exercise
price is $11.01 per warrant. Certain of these warrants have incidental
registration rights pursuant to which the Company is obligated to use reasonable
efforts to register the shares of Common Stock issued upon their exercise if the
Company initiates a public offering and files a registration statement in
connection therewith, excluding the registration of shares issued pursuant to an
employee stock purchase or option plan or an acquisition or proposed acquisition
by the Company.
The following summarizes stock option and warrant activity of the plans:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------ SIX MONTHS ENDED
1998 1999 2000 JUNE 30, 2001
-------------------- -------------------- -------------------- --------------------
WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED NUMBER
AVERAGE SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE SHARES
EXERCISE UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE UNDER
PRICE OPTION PRICE OPTION PRICE OPTION PRICE OPTION
-------- --------- -------- --------- -------- --------- -------- ---------
(UNAUDITED)
Options and warrants outstanding,
beginning of year.................... $11.72 1,243,332 $12.55 1,742,154 $11.12 2,190,664 $ 9.31 3,004,277
Granted............................... 13.10 664,882 7.54 616,642 5.50 1,009,088 2.84 5,436
Exercised............................. 3.44 70,000 0 0 0
Forfeited............................. 12.24 96,000 12.79 168,132 9.95 195,475 9.96 760,000
------ --------- ------ --------- ------ --------- ------ ---------
Options warrants outstanding, end of
year................................. $12.55 1,742,214 $11.12 2,190,664 $ 9.31 3,004,277 $ 9.08 2,249,713
====== ========= ====== ========= ====== ========= ====== =========
Options warrants exercisable, end of
year................................. $12.50 1,043,514 $10.84 1,515,470 $10.71 2,093,862 $11.11 2,198,994
====== ========= ====== ========= ====== ========= ====== =========
F-21
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The shares under option and warrants at December 31, 2000, were in the
following exercise price ranges:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
SHARES CONTRACTUAL AVERAGE SHARES AVERAGE
EXERCISE PRICE UNDER OPTION LIFE(YEARS) EXERCISE PRICE UNDER OPTION EXERCISE PRICE
-------------- ------------ ----------- -------------- ------------ --------------
$ 1.00-3.49............ 182,039 8 $ 3.25 153,241 $ 2.19
$ 3.50-5.99............ 58,380 8 $ 5.46 21,476 $ 5.14
$ 6.00-8.49............ 1,245,294 7 $ 6.53 599,270 $ 6.79
$ 8.50-10.99........... 114,328 6 $ 8.96 81,814 $ 9.12
$11.00-13.49........... 1,008,488 6 $12.01 980,019 $11.69
$13.50-15.99........... 395,748 7 $14.63 258,042 $14.07
--------- ---------
3,004,277 $ 9.31 2,093,862 $ 9.72
========= =========
In accordance with Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), the fair value of option
grants is estimated using the Black-Scholes option pricing model for pro forma
footnote purposes. The following weighted average assumptions were used for
grants:
DECEMBER 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
Risk-Free interest rate.......................... 4.35 - 5.73% 4.62 - 6.92% 5.46 - 6.95%
Dividend yield................................... 0% 0% 0%
Expected volatility.............................. 60% 43% 51%
Expected option life (years)..................... 9 8 9
As permitted by SFAS 123, the Company has chosen to continue accounting for
employee and director stock options at their intrinsic value. Accordingly, no
compensation expense has been recognized for its stock option compensation
plans. Had the fair value method of accounting been applied to the Company's
stock option plans, the tax-effected impact follows (unaudited):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1999 2000
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
Net income.............. $7,535 $6,548 $9,583 $7,560 $9,535 $7,173
Basic EPS............... $ 0.58 $ 0.50 $ 0.72 $ 0.57 $ 0.74 $ 0.56
Diluted EPS............. $ 0.58 $ 0.50 $ 0.72 $ 0.57 $ 0.74 $ 0.56
14. COMMITMENTS AND CONTINGENCIES
The Company leases office space for the use of the Allied Practices and
corporate offices under operating leases, which have current expiration terms at
various dates through 2015. Certain of these leases have renewal options for
specified periods subsequent to their current terms. The annual lease payments
under the lease agreements have provisions for annual increases based on the
Consumer Price Index or other amounts specified within the lease agreements.
F-22
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Future minimum annual lease payments on operating leases as of December 31,
2000 are as follows:
2001...................................................... $ 3,267
2002...................................................... 2,432
2003...................................................... 2,240
2004...................................................... 1,583
2005...................................................... 1,181
Thereafter................................................ 2,361
-------
$13,064
=======
Rent expense for the years ended December 31, 2000, 1999 and 1998
approximated $11.8 million, $8.3 million, and $6.3 million, respectively. Rent
expense was $6.1 million and $5.6 million for the six month periods ended June
30, 2001 and 2000, respectively (unaudited).
The Company may be subject to certain government regulation at the federal
and state levels. To comply with certain regulatory requirements, the Company
does not control the practice of the Orthodontists, or control or employ the
Orthodontists. There can be no assurance that the legality of any long-term
management services agreements that have been entered into will not be
successfully challenged. There also can be no assurance that the laws and
regulations of states in which the Company maintains operations will not change
or be interpreted in the future to restrict or further restrict the Company's
relationship with the Orthodontists.
From time to time, the Company is involved in various legal proceedings,
claims and litigation matters arising in the ordinary course of business,
including labor and personnel related issues. In the opinion of management, the
outcome of such routine matters will not have a material adverse effect on the
Company's business, financial condition or results of operations.
From time to time, the Company has been, and can expect to be, involved in
litigation with certain of its Allied Practices. Such litigation has involved
claims that the Company failed to provide required services under the Management
Agreements with the Allied Practices and that certain provisions of the
Management Agreements may be unenforceable, among other claims. The Company
vigorously defends against such claims and believes that such claims are without
merit. As of December 31, 2000, the Company did not have any pending legal
proceedings that separately, or in the aggregate, if adversely determined, would
have a material adverse effect on the Company.
F-23
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. INCOME TAXES
The provision for income taxes is comprised of the following:
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ----------------
1998 1999 2000 2000 2001
------ ------ ------ ------ ------
(UNAUDITED)
Current
Federal............................. $5,276 $5,063 $5,586 $3,074 $1,657
State............................... 1,073 697 776 423 190
------ ------ ------ ------ ------
6,349 5,760 6,362 3,497 1,847
------ ------ ------ ------ ------
Deferred
Federal............................. (114) 1,357 1,010 547 526
State............................... (112) 187 139 76 73
------ ------ ------ ------ ------
(226) 1,544 1,149 623 599
------ ------ ------ ------ ------
$6,123 $7,304 $7,511 $4,120 $2,446
====== ====== ====== ====== ======
A reconciliation of the statutory federal income tax rate to the effective
tax rate as a percentage of income before income taxes follows:
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -------------
1998 1999 2000 2000 2001
----- ----- ----- ---- ----
(UNAUDITED)
Federal income tax at statutory rate.......... 34% 35% 35% 35% 35%
Effect of amortization of goodwill............ 4 5 6 5 8
State taxes, net of federal benefits.......... 5 3 3 4 3
Other......................................... 2 -- -- -- (3)
-- -- -- -- --
45% 43% 44% 44% 43%
== == == == ==
F-24
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------- -----------------
1999 2000 2000 2001
------- ------- ------- -------
(UNAUDITED)
Current deferred tax assets:
Litigation reserve........................... $ 87 $ 72 $ 87 $ (9)
Patient receivables.......................... -- -- -- --
Patient repayments........................... 12 76 12 81
Other........................................ 5 20 5 63
------- ------- ------- -------
104 168 104 135
------- ------- ------- -------
Non-current deferred tax assets:
Benefit of IRC Section 351 gain on
transferred assets........................ 1,334 970 1,152 868
Start-up costs amortization.................. 99 72 (367) (171)
Other........................................ 53 -- 52 --
------- ------- ------- -------
1,486 1,042 837 697
------- ------- ------- -------
Total deferred tax assets, net....... $ 1,590 $ 1,210 $ 941 $ 832
======= ======= ======= =======
Current deferred tax liabilities:
Patient receivables.......................... $ (182) $ -- $ (182) $ --
Consulting................................... -- (12) -- (12)
Legal........................................ -- (6) -- --
Other........................................ -- (5) -- (10)
------- ------- ------- -------
(182) (23) (182) (22)
Non-current deferred tax liabilities:
Depreciation................................. (561) (538) (560) (541)
Amortization................................. (268) (669) -- (673)
State taxes.................................. (106) (161) (107) (124)
Other........................................ -- -- (265) --
------- ------- ------- -------
(935) (1,368) (932) (1,338)
------- ------- ------- -------
Total deferred tax liabilities....... $(1,117) $(1,391) $(1,114) $(1,360)
======= ======= ======= =======
As a result of the acquisitions of the Allied Practices, temporary
differences were created for the differences between the financial statement
carrying amounts and the tax basis of assets acquired. Such temporary
differences predominantly relate to property and equipment and related
depreciation.
F-25
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share," effective December
15, 1997. Basic earnings per share of Common Stock is computed by dividing the
net income for the year by the weighted average number of shares of Common Stock
outstanding during the year. The following table sets forth the computation of
basic and diluted earnings per share:
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1998 1999 2000 2000 2001
------- ------- ------- ------- -------
(UNAUDITED)
Net income........................... $ 7,535 $ 9,583 $ 9,535 $ 5,263 $ 3,190
Determination of shares:
Weighted average number of common
stock shares outstanding........ 13,006 13,271 12,858 12,949 12,249
Assumed conversion of stock
options......................... 38 12 48 15 1
------- ------- ------- ------- -------
Diluted common stock shares
outstanding..................... 13,044 13,283 12,906 12,964 12,250
======= ======= ======= ======= =======
Basic and diluted net income per
share........................... $ 0.58 $ 0.72 $ 0.74 $ 0.41 $ 0.26
======= ======= ======= ======= =======
Securities, including those issuable pursuant to the conversion of Class B
Common Stock to Class A Common Stock, which could potentially dilute EPS in the
future, were not included in the computation of diluted EPS because of its
anti-dilutive effect or its conversion contingencies were not met. Potential
dilutive shares (in thousands) include the following:
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -------------
1998 1999 2000 2000 2001
------ ------ ------ ----- -----
(UNAUDITED)
Common Stock shares issuable in the future
pursuant to options and warrants
outstanding.................................. 506 1,672 2,812 2,205 2,249
Common Stock shares issuable in the future for
conversion of Class B Common Stock shares.... 1,745 1,745 1,294 1,745 1,294
----- ----- ----- ----- -----
2,251 3,417 4,106 3,950 3,543
===== ===== ===== ===== =====
17. 401(K) PLAN
The Company administrates a voluntary retirement plan ("the Plan") under
section 401(k) of the Internal Revenue Code. The Plan covers all eligible,
non-highly compensated employees with at least twelve months of employment with
the Company. Currently, the Plan does not provide for Company matching
contributions.
F-26
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. RELATED PARTY TRANSACTIONS
For the year ended December 31, 2000, the Company entered into the
following related party transactions:
(i) On December 27, 2000, the Company and its former President and
Chief Executive Officer Sam Westover ("Westover"), entered into a Severance
Agreement and General Release dated December 27, 2000 (the "Westover
Severance Agreement") pursuant to which Westover agreed to resign as
President and Chief Executive Officer of the Company. As part of the
severance, the Company and Westover agreed to a lump sum payout of
approximately $0.6 million payable upon separation. This expense is
reflected in salaries and benefits expenses in the accompanying
consolidated statements of income. Furthermore, to ensure an orderly
transition, the Company and Westover agreed to a one-year consulting
agreement effective January 1, 2001, which requires payment of
approximately $12 per month.
(ii) The Company incurred $51 of legal expenses with a law firm that
has a partner who also serves on the Company's Board of Directors.
(iii) Dr. Randall Bennett, a director and shareholder, served as
Chairman of the OrthAlliance Clinical Advisory Committee as an independent
contractor at the rate of $2 per month. In addition, Dr. Bennett assists in
the development and improvement of OrthAlliance's orthodontic programs,
procedures and training materials as a part-time employee of OrthAlliance
Properties, Inc. for a salary of $2 per month. On April 7, 1998, the
Company loaned $50 to Randall K. Bennett, D.D.S., M.S., P.C. of which Dr.
Bennett, a director of the Company, is the 100% owner, to purchase office
equipment. Interest in the loan accrues at the prime rate plus 1.0% and the
term of the loan is thirty-six months. This loan was fully repaid in April
2001.
For the year ended December 31, 1999, the Company entered into the
following related party transactions:
(i) Referral Commissions for recruiting new Allied Practices of
options to purchase 72,015 shares of Common Stock were granted to an Allied
Orthodontist who was also a director.
(ii) The Company incurred $68 of legal expenses with a law firm that
has a partner who also serves on the Company's Board of Directors.
For the year ended December 31, 1998, the Company entered into the
following related party transaction:
(i) Referral Commissions for recruiting new Allied Practices of $0.2
million and options to purchase 82,042 shares of Common Stock were paid and
granted to an Allied Orthodontist who was also a director.
19. OPERATING SEGMENTS AND RELATED INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" in 1998.
This statement establishes standards for the reporting of information about
operating segments and also requires disclosures about products and services,
geographic areas and major customers.
The Company has two reportable segments organized as business units that
provide management or consulting services to the two distinct types of allied
practices: OrthAlliance Allied Orthodontists and
F-27
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PedoAlliance Allied Dentists. Each business unit provides similar management and
consulting services to the respective Allied Practices and the Company does not
manage the business units separately. The remaining segments identified as "All
Other" derive revenues from interest income and primarily consist of patient
contract financing operations.
Management utilizes multiple views of data to measure segment performance
and to allocate resources to the segments. The accounting policies of the
segments are consistent with those described in the summary of significant
accounting policies, as discussed in Note 2.
The following is a summary of certain financial data for each of the
segments:
ORTHODONTIC PEDIATRIC
PRACTICE PRACTICE ALL OTHERS TOTALS
----------- --------- ---------- --------
Year ended December 31, 1998
Net revenue.............................. $ 72,704 $ 1,683 $ -- $ 74,387
Operating income (loss).................. 13,578 446 (162) 13,862
Depreciation and amortization............ 2,345 81 -- 2,426
Year ended December 31, 1999
Net revenue.............................. $ 86,421 $ 9,282 $ -- $ 95,703
Operating income (loss).................. 16,707 2,562 (348) 18,921
Depreciation and amortization............ 3,843 140 -- 3,983
Year ended December 31, 2000
Net revenue.............................. $127,681 $14,333 $ -- $142,014
Operating income (loss).................. 21,578 3,933 (1,769) 23,742
Depreciation and amortization............ 6,555 159 23 6,737
Six months ended June 30, 2001 (Unaudited)
Net revenue.............................. $ 69,063 $ 7,726 $ -- $ 76,789
Operating income......................... 7,179 2,031 (41) 9,169
Depreciation and amortization............ 3,702 95 12 3,809
Included in the operating income of the orthodontic practice segment are
certain corporate expenses that are not allocated to the pediatric practice
segment or to the "all others" category. Examples of these expenses are
corporate office salaries, rent, overhead expenses, and amortization expense.
A reconciliation between segment operating income and consolidated net
income is set forth below:
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1998 1999 2000 2000 2001
------- ------- ------- ------- -------
(UNAUDITED)
Segment operating income............. $13,862 $18,921 $23,742 $12,281 $ 9,169
Interest income...................... 351 416 675 348 375
Interest expense..................... (555) (2,450) (7,371) (3,246) (3,908)
Provision for income taxes........... (6,123) (7,304) (7,511) (4,120) (2,446)
------- ------- ------- ------- -------
Net income................. $ 7,535 $ 9,583 $ 9,535 $ 5,263 $ 3,190
======= ======= ======= ======= =======
20. INTERNAL REVENUE SERVICE EXAMINATION
The Internal Revenue Service (the "Service") has completed its examination
of the Company's federal income tax return for the year ended December 31, 1998.
The Company has agreed with the
F-28
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Service's proposed adjustment of approximately $0.6 million of additional tax
payments for the years ended 1998 and 1999, which was paid in March 2001. The
resolution did not result in an additional tax provision.
21. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF THE INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED)
a. MERGER WITH ORTHODONTIC CENTERS OF AMERICA, INC.
On May 16, 2001, the Company and Orthodontic Centers of America, Inc.
("OCA") entered into a merger agreement, that is subject to approval by the
stockholders of OrthAlliance and certain other conditions, whereby a
wholly-owned subsidiary of OCA would merge into OrthAlliance in a
stock-for-stock transaction, with the Company becoming a wholly-owned subsidiary
of OCA. Under the terms of the merger agreement, the Company's stockholders
would receive shares of OCA's common stock based on a fixed exchange ratio,
ranging from 0.09214 to 0.16585 of a share of OCA common stock depending on the
percentage of the Company's affiliated orthodontists, pediatric dentists and
professional corporations that amend their employment and service, consulting or
management service agreements in accordance with terms described in the merger
agreement.
b. NASDAQ NOTIFICATION AND HEARING
The Company's common stock is traded on the NASDAQ National Market and is
subject to certain continued listing requirements. As of December 31, 2000 and
March 31, 2001 the Company was not in compliance with Rule 4450(b)(4) which
requires among other things a minimum bid price of $1.00 and tangible net assets
of $4 million. On February 28, 2001 the Company was notified by the National
Market that the Company's stock did not meet the compliance requirements of Rule
4450(b)(4) and that the stock may be subject to removal from the NASDAQ National
Market.
Pursuant to the April 6, 2001 oral hearing before a NASDAQ Listing
Qualifications Panel (the "Panel") the Company requested continued inclusion on
the NASDAQ National Market. On May 14, 2001 the Company was notified by NASDAQ
that the Panel determined to continue the Company's listing on the National
Market pursuant to its pilot program approved by the SEC on May 1, 2001. On
March 7, 2001 NASDAQ proposed certain changes to its listing standards that, if
approved by the SEC, would result in the Company achieving compliance with all
requirements for continued listing. An issuer may satisfy the continued listing
requirements under the pilot program or demonstrate compliance with current
listing requirements. Under the pilot program, the issuer is required to
maintain a minimum bid price of $3.00 per share and minimum stockholders' equity
of $10 million. As the Company has demonstrated compliance, the Company was
placed under the pilot program which was scheduled to extend to July 1, 2001. On
June 29, 2001, the SEC approved certain amendments to the NASDAQ listing
standards which include, among other things, a minimum bid price of $3.00 per
share and minimum stockholders' equity of $10 million. The Company is currently
in compliance with these amended listing standards.
There can be no assurance that the Company will satisfy the NASDAQ National
Market conditions or be able to maintain the continued listing requirements in
the future. If the Company's Common Stock were delisted from the NASDAQ National
Market, trading of the Company's Common Stock, if any, would be conducted on the
NASDAQ Small Cap Market, in the over-the-counter market on the so called "pink
sheets" or, if available, the NASD's Electronic Bulletin Board. In any of those
cases, investors could find it more difficult to dispose of, or to obtain
accurate quotations as to the value of, its Common Stock. The trading price per
share of the Company's Common Stock could be reduced as a result.
F-29
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNT AND DISCLOSURES AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 2001 ARE UNAUDITED.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
c. LEGAL PROCEEDINGS
Legal proceedings with Allied Practitioners have increased since the
announcement of the Company's merger agreement with OCA. Certain Allied
Practitioners have sent notices of default to, or commenced litigation against,
the Company alleging that the Company has failed to provide certain services
under the Management Agreements. Other litigation alleges that certain
provisions of the Management Agreements may be unenforceable, among other
claims. The Company vigorously defends against such claims and believes that
such claims area without merit.
F-30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of OrthAlliance, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of OrthAlliance, Inc.
and subsidiaries included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000 and have issued our report thereon dated March 7,
2001. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule identified as "Schedule
II -- Valuation and Qualifying Accounts" is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data to be set
forth therein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Los Angeles, California
March 7, 2001
F-31
ORTHALLIANCE, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(DOLLARS IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED
BEGINNING TO BALANCE AT
OF COST AND WRITE- END OF
PERIOD EXPENSE OFFS OTHER PERIOD
------------ --------- ------ ----- ----------
Year ended December 31, 1998
Allowance for uncollectible accounts....... $535 $123 $ -- $ 162 $820
Year ended December 31, 1999
Allowance for uncollectible accounts....... $820 $135 $(16) $ 44 $983
Year ended December 31, 2000
Allowance for uncollectible accounts....... $983 $ 32 $(27) $(434)(A) $554
---------------
(A) Represents a reduction of management's estimate of required allowance for
doubtful accounts based upon updated write-off studies.
F-32
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 16, 2001
BY AND AMONG
ORTHODONTIC CENTERS OF AMERICA, INC.,
OCA ACQUISITION CORPORATION
AND
ORTHALLIANCE, INC.
TABLE OF CONTENTS
PAGE
----
ARTICLE I. DEFINED TERMS AND INTERPRETATION............................ A-1
1.1. Defined Terms............................................... A-1
1.2. Interpretation.............................................. A-1
ARTICLE II. THE MERGER.................................................. A-2
2.1. The Merger.................................................. A-2
2.2. Effective Time.............................................. A-2
2.3. Effects of the Merger....................................... A-2
2.4. Conversion of OrthAlliance Common Stock; Exchange Ratio..... A-2
2.5. Anti-Dilution Adjustments................................... A-5
2.6. No Fractional Shares........................................ A-5
2.7. Cancellation of Treasury Stock.............................. A-5
2.8. Dissenting Shares........................................... A-6
2.9. Stock Options............................................... A-6
2.10. Effect on OCA Common Stock.................................. A-6
2.11. Conversion of Merger Sub Shares............................. A-6
2.12. Certificate of Incorporation of the Surviving Corporation... A-6
2.13. Bylaws of the Surviving Corporation......................... A-7
2.14. Directors and Officers of the Surviving Corporation......... A-7
2.15. Tax Consequences; Accounting Treatment...................... A-7
2.16. Closing..................................................... A-7
ARTICLE III. EXCHANGE OF SHARES.......................................... A-7
3.1. Deposit of Exchange Fund with Transfer Agent................ A-7
3.2. Exchange of Shares.......................................... A-7
No Dividends Paid To Holders of Unsurrendered
3.3. Certificates.............................................. A-8
Issuance of Certificate in Name Differing From Surrendered
3.4. Certificate............................................... A-8
3.5. Closing of Stock Transfer Books............................. A-8
3.6. Termination of Exchange Fund................................ A-8
3.7. Lost, Stolen or Destroyed Certificates...................... A-8
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF ORTHALLIANCE.............. A-9
4.1. Corporate Organization...................................... A-9
4.2. Authorization; Binding Agreement............................ A-9
4.3. Consents and Approvals...................................... A-9
4.4. No Conflicts................................................ A-10
4.5. Capitalization.............................................. A-10
4.6. SEC Reports and Financial Statements........................ A-11
4.7. Subsidiaries................................................ A-12
4.8. Absence of Undisclosed Liabilities.......................... A-12
4.9. Investigations; Litigation.................................. A-13
4.10. Compliance with Law......................................... A-13
4.11. Governmental Licenses....................................... A-13
4.12. Absence of Certain Changes or Events........................ A-14
4.13. Title to Assets............................................. A-14
4.14. Assets...................................................... A-15
4.15. Intellectual Property Rights................................ A-15
4.16. Contracts................................................... A-15
4.17. Leases...................................................... A-16
4.18. Affiliated Practices........................................ A-16
4.19. Tax Matters................................................. A-18
4.20. Employee Benefit Matters.................................... A-19
i
PAGE
----
4.21. Environmental Matters....................................... A-21
4.22. Labor Controversies......................................... A-21
4.23. Insurance................................................... A-22
4.24. Billing Practices; Fraud and Abuse.......................... A-22
4.25. Required Stockholder Vote................................... A-22
4.26. Takeover Laws............................................... A-22
4.27. Reorganization.............................................. A-22
4.28. Brokers and Finders......................................... A-23
4.29. Opinion of Financial Advisor................................ A-23
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF OCA....................... A-23
5.1. Corporate Organization...................................... A-23
5.2. Authorization; Binding Agreement............................ A-23
5.3. Consents and Approvals...................................... A-24
5.4. No Conflicts................................................ A-24
5.5. Capitalization.............................................. A-24
5.6. SEC Reports and Financial Statements........................ A-25
5.7. Subsidiaries................................................ A-25
5.8. Absence of Undisclosed Liabilities.......................... A-26
5.9. Litigation; Decrees......................................... A-26
5.10. Compliance with Law......................................... A-26
5.11. Absence of Certain Changes or Events........................ A-26
5.12. Reorganization.............................................. A-26
5.13. Brokers and Finders......................................... A-26
5.14. Opinion of Financial Advisor................................ A-26
5.15 Trading on NYSE............................................. A-26
ARTICLE VI. CERTAIN COVENANTS AND AGREEMENTS............................ A-27
6.1. Conduct of OrthAlliance's Business Pending the Merger....... A-27
6.2. Conduct of OCA's Business Pending the Merger................ A-29
6.3. Access to Information....................................... A-29
6.4. No Solicitation............................................. A-30
6.5. Registration Statement and Proxy Statement.................. A-31
6.6. Stockholders Meeting........................................ A-32
6.7. Affiliates.................................................. A-32
6.8. NYSE Listing................................................ A-32
6.9. Indemnification of OrthAlliance Directors and Officers...... A-32
6.10. Public Statements........................................... A-32
6.11. Expenses and Fees........................................... A-33
6.12. Notification................................................ A-33
6.13. Additional Agreements....................................... A-33
6.14. Reasonable Best Efforts, Cooperation........................ A-33
6.15. OrthAlliance Credit Agreement............................... A-34
6.16. OCA Board of Directors...................................... A-34
ARTICLE VII. CONDITIONS TO CLOSING....................................... A-34
Conditions to Each Party's Obligation to Effect the
7.1. Merger.................................................... A-34
7.2. Conditions to Obligations of OCA............................ A-35
7.3. Conditions to Obligations of OrthAlliance................... A-36
ARTICLE VIII. AMENDMENT; TERMINATION...................................... A-36
8.1. Amendment................................................... A-36
8.2. Termination................................................. A-36
8.3. Effect of Termination....................................... A-37
ii
PAGE
----
8.4. Break-Up Fee and Expense Reimbursement to OCA............... A-37
Break-Up Fee to OrthAlliance and OCA's Non-Solicitation of
8.5. OrthAlliance
Affiliated Professionals.................................... A-38
8.6. Waiver...................................................... A-38
ARTICLE IX. GENERAL..................................................... A-39
9.1. Non-Survival of Representations and Warranties.............. A-39
9.2. Notices..................................................... A-39
9.3. Entire Agreement............................................ A-39
9.4. Governing Law............................................... A-39
9.5. Counterparts; Effectiveness................................. A-40
9.6. Assignment; Successors and Assigns; Parties In Interest..... A-40
9.7. Severability................................................ A-40
9.8. Enforcement of Agreement.................................... A-40
9.9. Remedies Cumulative......................................... A-40
ARTICLE X. DEFINITIONS................................................. A-40
iii
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of May 16, 2001,
is by and among ORTHODONTIC CENTERS OF AMERICA, INC., a Delaware corporation
("OCA"), OCA ACQUISITION CORPORATION, a Delaware corporation ("OCA Merger Sub"),
and ORTHALLIANCE, INC., a Delaware corporation ("OrthAlliance").
RECITALS:
WHEREAS, OCA Merger Sub is a wholly-owned subsidiary of OCA;
WHEREAS, the respective boards of directors of OCA, OCA Merger Sub and
OrthAlliance have determined that it is in the best interests of their
respective companies and stockholders to consummate the business combination
transactions provided for herein, in which OCA Merger Sub will merge with and
into OrthAlliance (the "Merger") and OrthAlliance shall thereby become a
wholly-owned subsidiary of OCA, subject to the terms and conditions set forth
herein;
WHEREAS, OCA, as the sole stockholder of OCA Merger Sub, has approved this
Agreement and the Merger with respect to OCA Merger Sub;
WHEREAS, the parties intend that the Merger be treated as a reorganization
under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder (the "Code"); and
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, the receipt and sufficiency of which
is hereby acknowledged, and intending to be legally bound hereby, the parties
agree as follows:
AGREEMENT:
ARTICLE I.
DEFINED TERMS AND INTERPRETATION
1.1. Defined Terms. Certain terms used in this Agreement have the meanings
ascribed thereto in Article X hereof. Accounting terms used in this Agreement
which are not otherwise defined herein shall have the meaning assigned such
terms under GAAP.
1.2. Interpretation.
(a) When used in this Agreement, the word "including" and words of similar
import shall mean "including, without limitation," and any list of items that
may follow such word shall not be deemed to represent a complete list of, or be
limited to, the contents of the referent of the subject.
(b) Unless the context otherwise requires, when used in this Agreement, the
singular shall include the plural, the plural shall include the singular, and
all nouns, pronouns and any variations thereof shall be deemed to refer to the
masculine, feminine or neuter, as the identity of the Person or Persons may
require.
(c) The headings contained in this Agreement are for reference purposes
only and do not affect in any way the meaning or interpretation of this
Agreement.
(d) In this Agreement, unless a contrary intention appears, (i) the words
"herein," "hereof" and "hereunder" and other words of similar import refer to
this Agreement as a whole and not to any particular Article, Section or other
subdivision, and (ii) references to any Article or Section are to an article or
a section of this Agreement, as applicable, and references to any schedule or
exhibit are to a schedule or exhibit to this Agreement, as applicable.
A-1
(e) The parties hereto have each negotiated the terms hereof, reviewed this
Agreement carefully, and discussed it with their respective legal counsel. It is
the intent of the parties that each word, phrase and sentence and other part
hereof shall be given its plain meaning. No provision of this Agreement shall be
interpreted or construed against any party hereto solely because such party or
its legal representative drafted such provision.
(f) References to any document (including this Agreement) are references to
that document as amended, consolidated, supplemented, novated or replaced by the
parties from time to time. References to any party to this Agreement shall
include references to its respective successors and permitted assigns.
References to law are references to that law as amended, consolidated,
supplemented or replaced from time to time, and shall include references to any
constitutional provision, treaty, decree, convention, statute, act, regulation,
rule, ordinance, subordinate legislation, rule of common law and of equity and
judgment and shall include the requirements of any applicable stock exchange.
References to a judgment shall include references to any order, injunction,
decree, determination or award of any court or tribunal.
(g) All references to "$" or "dollars" shall be to United States dollars
and all references to "days" shall be to calendar days unless otherwise
specified.
ARTICLE II.
THE MERGER
2.1. The Merger. Subject to the terms and conditions of this Agreement, in
accordance with the General Corporation Law of the State of Delaware (the
"DGCL"), at the Effective Time, OCA Merger Sub shall merge with and into
OrthAlliance. OrthAlliance shall be the surviving corporation (hereinafter
sometimes called the "Surviving Corporation") in the Merger, and shall continue
its corporate existence under the laws of the State of Delaware. The name of the
Surviving Corporation shall be "OrthAlliance, Inc." Upon consummation of the
Merger, the separate corporate existence of OCA Merger Sub shall terminate.
2.2. Effective Time. The Merger shall become effective (the "Effective
Time") upon filing of a certificate of merger (the "Certificate of Merger") with
respect to the Merger with the Secretary of State of the State of Delaware (the
"Delaware Secretary") in accordance with the DGCL, or at such later time as
mutually agreed among the parties hereto and set forth in the Certificate of
Merger. The parties hereto shall cause the Certificate of Merger to be filed
with the Delaware Secretary in accordance with the DGCL simultaneously with or
as soon as practicable after the Closing.
2.3. Effects of the Merger. At and after the Effective Time, the Merger
shall have the effects set forth in Section 259 of the DGCL.
2.4. Conversion of OrthAlliance Common Stock; Exchange Ratio.
(a) At the Effective Time, each share of Class A common stock, par value
$.001 per share, of OrthAlliance (the "OrthAlliance Class A Common Stock"), and
each share of Class B common stock, par value $.001 per share, of OrthAlliance
(the "OrthAlliance Class B Common Stock," and, together with the OrthAlliance
Class A Common Stock, the "OrthAlliance Common Stock"), issued and outstanding
immediately prior to the Effective Time (other than OrthAlliance Dissenting
Shares and other than shares of OrthAlliance Common Stock held directly or
indirectly by OCA or OrthAlliance or any of their respective Subsidiaries),
shall, by virtue of this Agreement and without any action on the part of the
holder thereof, be converted into and exchangeable for an amount of shares of
the common stock, par value $.01 per share, of OCA ("OCA Common Stock") equal to
the Applicable Exchange Ratio, subject to Section 2.6.
A-2
(b) For purposes of this Agreement:
(i) "Applicable Exchange Ratio" shall mean:
(A) 0.09214, if, as of the Effective Time, less than the 31% to 40%
Level of OrthAlliance Affiliated Practice Owners and OrthAlliance
Affiliated PCs, shall each have duly executed and delivered to
OrthAlliance (with a complete and accurate copy provided to OCA) an (1)
Amendment to OrthAlliance Affiliated Professional Employment Agreement,
with respect to their applicable OrthAlliance Affiliated Professional
Employment Agreement, and (2) Amendment to OrthAlliance Service and
Consulting Agreement, with respect to their applicable OrthAlliance
Service and Consulting Agreement;
(B) 0.10135, if, as of the Effective Time, at least the 31% to 40%
Level of OrthAlliance Affiliated Practice Owners and OrthAlliance
Affiliated PCs, but less than the 41% to 50% Level of OrthAlliance
Affiliated Practice Owners and OrthAlliance Affiliated PCs, shall each
have duly executed and delivered to OrthAlliance (with a complete and
accurate copy provided to OCA) an (1) Amendment to OrthAlliance
Affiliated Professional Employment Agreement, with respect to their
applicable OrthAlliance Affiliated Professional Employment Agreement,
and (2) Amendment to OrthAlliance Service and Consulting Agreement, with
respect to their applicable OrthAlliance Service and Consulting
Agreement;
(C) 0.11056, if, as of the Effective Time, at least the 41% to 50%
Level of OrthAlliance Affiliated Practice Owners and OrthAlliance
Affiliated PCs, but less than the 51% to 60% Level of OrthAlliance
Affiliated Professionals and OrthAlliance Affiliated PCs, shall each
have duly executed and delivered to OrthAlliance (with a complete and
accurate copy provided to OCA) an (1) Amendment to OrthAlliance
Affiliated Professional Employment Agreement, with respect to their
applicable OrthAlliance Affiliated Professional Employment Agreement,
and (2) Amendment to OrthAlliance Service and Consulting Agreement, with
respect to their applicable OrthAlliance Service and Consulting
Agreement;
(D) 0.12899, if, as of the Effective Time, at least the 51% to 60%
Level of OrthAlliance Affiliated Practice Owners and OrthAlliance
Affiliated PCs, but less than the 61% and Greater Level of OrthAlliance
Affiliated Practice Owners and OrthAlliance Affiliated PCs, shall each
have duly executed and delivered to OrthAlliance (with a complete and
accurate copy provided to OCA) an (A) Amendment to OrthAlliance
Affiliated Professional Employment Agreement, with respect to their
applicable OrthAlliance Affiliated Professional Employment Agreement,
and (B) Amendment to OrthAlliance Service and Consulting Agreement, with
respect to their applicable OrthAlliance Service and Consulting
Agreement; and
(E) 0.16585, if, as of the Effective Time, the 61% or Greater Level
of OrthAlliance Affiliated Practice Owners and OrthAlliance Affiliated
PCs shall each have duly executed and delivered to OrthAlliance (with a
complete and accurate copy provided to OCA) an (A) Amendment to
OrthAlliance Affiliated Professional Employment Agreement, with respect
to their applicable OrthAlliance Affiliated Professional Employment
Agreement, and (B) Amendment to OrthAlliance Service and Consulting
Agreement, with respect to their applicable OrthAlliance Service and
Consulting Agreement.
(ii) "31% to 40% Level of OrthAlliance Affiliated Practice Owners and
OrthAlliance Affiliated PCs" shall mean (A) 57 to 75 of the OrthAlliance
Affiliated Practice Owners (but not including any Practice Improvement
Performance Guarantee Professionals), and (B) such number of OrthAlliance
Affiliated Practice Owners (but not including any Practice Improvement
Performance Guarantee Professionals) with respect to which is attributable
31.00% to 40.99% (rounded to the nearest one-hundredth of a percent) of the
OrthAlliance Annual Service Fees, and (C) each of the OrthAlliance
Affiliated PCs employing such OrthAlliance Affiliated Practice Owners
referenced in clauses (A) and (B).
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(iii) "41% to 50% Level of OrthAlliance Affiliated Practice Owners and
OrthAlliance Affiliated PCs" shall mean (A) 76 to 93 of the OrthAlliance
Affiliated Practice Owners (but not including any Practice Improvement
Performance Guarantee Professionals), and (B) such number of OrthAlliance
Affiliated Practice Owners (but not including any Practice Improvement
Performance Guarantee Professionals) with respect to which is attributable
41.00% to 50.99% (rounded to the nearest one-hundredth of a percent) of the
OrthAlliance Annual Service Fees, and (C) each of the OrthAlliance
Affiliated PCs employing such OrthAlliance Affiliated Practice Owners
referenced in clauses (A) and (B).
(iv) "51% to 60% Level of OrthAlliance Affiliated Practice Owners and
OrthAlliance Affiliated PCs" shall mean (A) 94 to 112 of the OrthAlliance
Affiliated Practice Owners (but not including any Practice Improvement
Performance Guarantee Professionals), and (B) such number of OrthAlliance
Affiliated Practice Owners (but not including any Practice Improvement
Performance Guarantee Professionals) with respect to which is attributable
51.00% to 60.99% (rounded to the nearest one-hundredth of a percent) of the
OrthAlliance Annual Service Fees, and (C) each of the OrthAlliance
Affiliated PCs employing such OrthAlliance Affiliated Practice Owners
referenced in clauses (A) and (B).
(v) "61% and Greater Level of OrthAlliance Affiliated Practice Owners
and OrthAlliance Affiliated PCs" shall mean (A) 113 or more of the
OrthAlliance Affiliated Practice Owners (but not including any Practice
Improvement Performance Guarantee Professionals), and (B) such number of
OrthAlliance Affiliated Practice Owners (but not including any Practice
Improvement Performance Guarantee Professionals) with respect to which is
attributable 61.00% or more (rounded to the nearest one-hundredth of a
percent) of the OrthAlliance Annual Service Fees, and (C) each of the
OrthAlliance Affiliated PCs employing such OrthAlliance Affiliated Practice
Owners referenced in clauses (A) and (B).
(vi) "OrthAlliance Affiliated Practice Owners" shall mean OrthAlliance
Affiliated Professionals who own, beneficially and of record, shares of
capital stock of, or partnership, membership or other equity interests in,
an OrthAlliance Affiliated PC as of the date hereof and the Effective Time.
(vii) "OrthAlliance Annual Service Fees" shall mean the amount of
service, consulting and management service fees paid to OrthAlliance during
the 12 month period from and including April 1, 2000 through and including
March 31, 2001 under the OrthAlliance Service and Consulting Agreements
(excluding any OrthAlliance Service and Consulting Agreement that is
subject to a Practice Improvement Performance Guarantee Agreement and
excluding the Pashley Agreement, and including the adjustments with respect
to the Walters Agreement and the Tringas Agreement, and annualized amounts
with respect to certain OrthAlliance Service and Consulting Agreements
originated since April 1, 2000, as provided in Schedule 4.18(h) of the
OrthAlliance Disclosure Schedule), but excluding all amounts paid, earned
or accrued with respect to reimbursement of center expenses, operating and
non-operating expenses incurred in the operation of the OrthAlliance
Affiliated Practices or other expenses.
(viii) "Amendment to OrthAlliance Affiliated Professional Employment
Agreement" shall mean a written amendment to an OrthAlliance Affiliated
Practice Owner's respective OrthAlliance Affiliated Professional Employment
Agreement, in form and substance satisfactory to OCA and its counsel, which
amendment shall be in full force and effect upon and following the
Effective Time, include OrthAlliance as a third party beneficiary and
provide for an agreement by such OrthAlliance Affiliated Practice Owner and
the applicable OrthAlliance Affiliated PC to continue the employment of
such OrthAlliance Affiliated Practice Owner by such OrthAlliance Affiliated
PC as an orthodontist or pedodontist, as applicable, for a period of at
least three years following the Closing Date.
(ix) "Amendment to OrthAlliance Service and Consulting Agreement"
shall mean a written amendment to the respective OrthAlliance Service and
Consulting Agreement relating to the OrthAlliance Affiliated Practice of an
OrthAlliance Affiliated Practice Owner and the applicable OrthAlliance
Affiliated PC employing such OrthAlliance Affiliated Practice Owner, in
form and
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substance satisfactory to OCA and its counsel, which amendments shall be in
full force and effect upon and following the Effective Time, and provide
for (A) an agreement by such OrthAlliance Affiliated Practice Owner and
OrthAlliance Affiliated PC to continue the employment of such OrthAlliance
Affiliated Practice Owner by such OrthAlliance Affiliated PC as an
orthodontist or pedodontist, as applicable, for a period of at least three
years following the Closing Date, (B) an agreement by such OrthAlliance
Affiliated Practice Owner to guarantee, during the term of his or her
employment by such OrthAlliance Affiliated PC, the payment of service,
consulting and other fees and amounts, reimbursement of center expenses and
other performance by such OrthAlliance Affiliated PC under such
OrthAlliance Service and Consulting Agreement, and (C) an agreement by such
OrthAlliance Affiliated Practice Owner and OrthAlliance Affiliated PC to
utilize only OCA's and its Subsidiaries' proprietary computer software and
operating systems in connection with patient accounting and scheduling,
payroll, supplies ordering and other business functions of such
OrthAlliance Affiliated Practice, and to maintain the current status of
such OrthAlliance Affiliated Practice's advertising or non-advertising, as
the case may be, to the general public, unless otherwise mutually agreed in
writing between OCA or its Subsidiary and such OrthAlliance Affiliated PC.
(c) At the Effective Time, each certificate (each, a "Certificate")
previously representing any such shares of OrthAlliance Common Stock shall
thereafter only represent the right to receive the number of whole shares of OCA
Common Stock, and the cash in lieu of fractional shares, into which the shares
of OrthAlliance Common Stock represented by such Certificate have been converted
pursuant to this Article II. Certificates previously representing shares of
OrthAlliance Common Stock shall be exchanged for certificates representing whole
shares of OCA Common Stock and cash in lieu of fractional shares issued in
consideration therefor upon the surrender of such Certificates in accordance
with Section 3.2 hereof, without any interest thereon.
2.5. Anti-Dilution Adjustments. If, between the date of this Agreement and
the Effective Time, the shares of OCA Common Stock shall be changed into a
different number or class of shares by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment, or
a stock dividend thereon shall be declared with a record date within said period
(any such event, an "Anti-Dilution Event"), the Applicable Exchange Ratio shall
be appropriately and proportionately adjusted to reflect such Anti-Dilution
Event, and all references to the Applicable Exchange Ratio shall thereupon and
thereafter be to the Applicable Exchange Ratio as so adjusted. There shall be no
adjustment in the Exchange Ratio in the event of any change in the price of OCA
Common Stock, OrthAlliance Class A Common Stock or OrthAlliance Class B Common
Stock or any other matter, other than for Anti-Dilution Events. All shares of
OCA Common Stock that are issuable in the Merger shall be deemed for all
purposes to have been issued by OCA at the Effective Time.
2.6. No Fractional Shares. Notwithstanding anything to the contrary
contained herein, no certificates or scrip representing fractional shares of OCA
Common Stock shall be issued upon the surrender for exchange of Certificates, no
dividend or distribution with respect to OCA Common Stock shall be payable on or
with respect to any fractional share, and such fractional share interests shall
not entitle the owner thereof to vote or to any other rights of a stockholder of
OCA. In lieu of the issuance of any such fractional share, OCA shall pay to each
holder who otherwise would be entitled to receive a fractional share of OCA
Common Stock pursuant to the Merger an amount in cash equal to the product of
(x) the Closing Price (as defined below), times (y) the fraction of a share of
OCA Common Stock which such holder would otherwise be entitled to receive
pursuant to Article II hereof. The "Closing Price" means the average of the last
reported sale prices of OCA Common Stock, as reported by the New York Stock
Exchange ("NYSE") Composite Transactions Reporting System (as reported in The
Wall Street Journal or, if not reported therein, in another authoritative source
mutually agreeable to the parties), for the three NYSE trading days immediately
preceding the Closing Date.
2.7. Cancellation of Treasury Stock. At the Effective Time, all shares of
OrthAlliance Common Stock that are owned directly or indirectly by OCA or
OrthAlliance or any of their respective Subsidiaries, shall be canceled and
shall cease to exist and no stock of OCA or other consideration shall be
delivered in exchange therefor.
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2.8. Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, shares of OrthAlliance Class B Common Stock which are outstanding
immediately prior to the Effective Time and with respect to which appraisal
rights shall have been properly demanded in accordance with Section 262 of the
DGCL ("OrthAlliance Dissenting Shares") shall not be converted into the right to
receive, or be exchangeable for, OCA Common Stock or cash in lieu of fractional
shares but, instead, the holders thereof shall be entitled to payment of the
appraised value of such OrthAlliance Dissenting Shares in accordance with the
provisions of Section 262 of the DGCL; provided, however, that (i) if any holder
of OrthAlliance Dissenting Shares shall subsequently deliver a written
withdrawal of his demand for appraisal of such shares, or (ii) if any holder
fails to establish his entitlement to appraisal rights as provided in Section
262 of the DGCL, such holder or holders (as the case may be) shall forfeit the
right to appraisal of such shares of OrthAlliance Common Stock and each of such
shares shall thereupon be deemed to have been converted into the right to
receive, and to have become exchangeable for, as of the Effective Time, OCA
Common Stock and/or cash in lieu of fractional shares, without any interest
thereon, as provided in this Article II. OrthAlliance shall give OCA prompt
notice of any demands for appraisal received by OrthAlliance, withdrawals of
such demands and any other instruments served pursuant to the DGCL and received
by OrthAlliance, and the opportunity to direct all negotiations and proceedings
with respect to demands for appraisal under the DGCL. OrthAlliance shall not,
except with the prior written consent of OCA, make any payment with respect to
any demands for appraisal or offer to settle or settle any such demands.
2.9. Stock Options. At the Effective Time, each unexpired option or
warrant granted by OrthAlliance to purchase shares of OrthAlliance Common Stock
(each a "OrthAlliance Option") which is outstanding and unexercised immediately
prior to the Effective Time shall cease to represent a right to acquire shares
of OrthAlliance Common Stock and shall automatically and without any action on
the part of the holder thereof be assumed by OCA and converted into an option or
warrant, as applicable, to purchase a number of shares of OCA Common Stock at an
exercise price determined as follows:
(a) The number of shares of OCA Common Stock to be subject to such
option or warrant as so converted shall be equal to the product of the
number of shares of OrthAlliance Common Stock theretofore subject to the
option or warrant times the Applicable Exchange Ratio, provided that any
fractional shares of OCA Common Stock resulting from such multiplication
shall be rounded down to the nearest whole share; and
(b) The exercise price per share of OCA Common Stock under such option
or warrant as so converted shall be equal to the exercise price per share
of OrthAlliance Common Stock theretofore under the option or warrant
divided by the Applicable Exchange Ratio, provided that such exercise price
shall be rounded up to the nearest cent.
At the Effective Time, the other terms of each such OrthAlliance Option shall
continue to apply in accordance with the terms thereof, the applicable stock
option plan and applicable law, except that references to OrthAlliance and its
Subsidiaries shall mean OCA and its Subsidiaries.
2.10. Effect on OCA Common Stock. Except for any shares of OCA Common
Stock owned by OrthAlliance or any of its Subsidiaries, which shall be converted
into treasury stock, the shares of OCA Common Stock issued and outstanding
immediately prior to the Effective Time shall be unaffected by the Merger and
such shares shall remain issued and outstanding.
2.11. Conversion of Merger Sub Shares. At the Effective Time, by virtue of
the Merger and without any action on the part of OCA as the sole stockholder of
OCA Merger Sub, each issued and outstanding share of common stock, par value
$.01 per share, of OCA Merger Sub ("OCA Merger Sub Common Stock") will convert
into one share of common stock, par value $.01 per share, of the Surviving
Corporation.
2.12. Certificate of Incorporation of the Surviving Corporation. At the
Effective Time, the certificate of incorporation of OCA Merger Sub, as in effect
at the Effective Time, shall be the certificate of incorporation of the
Surviving Corporation.
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2.13. Bylaws of the Surviving Corporation. At the Effective Time, the
bylaws of OCA Merger Sub, as in effect immediately prior to the Effective Time,
shall be the bylaws of the Surviving Corporation until thereafter amended in
accordance with applicable law and the certificate of incorporation of the
Surviving Corporation.
2.14. Directors and Officers of the Surviving Corporation. At the
Effective Time, the directors of OCA Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation, each to hold
office in accordance with the certificate of incorporation and bylaws of the
Surviving Corporation until their respective successors are duly elected or
appointed and qualified. At the Effective Time, the officers of the Surviving
Corporation shall be the individuals designated therefor by the board of
directors of the Surviving Corporation in accordance with the bylaws of the
Surviving Corporation. At or prior to the Closing, OrthAlliance shall deliver to
OCA written resignations of each of the directors of OrthAlliance, in form and
substance satisfactory to OCA, with such resignations to be effective as of the
Effective Time.
2.15. Tax Consequences; Accounting Treatment. It is intended that the
Merger shall (i) constitute a reorganization within the meaning of Section 368
of the Code and that this Agreement shall constitute a "plan of reorganization"
for the purposes of Section 368 of the Code, and (ii) be accounted for as a
purchase under GAAP.
2.16. Closing. The closing of the transactions contemplated herein (the
"Closing") shall take place at the offices of Waller Lansden Dortch & Davis, A
Professional Limited Liability Company, Nashville, Tennessee at 10:00 a.m.
Nashville time on a date designated by OCA within five Business Days following
the satisfaction, or waiver by the applicable party, of all of the conditions
set forth in Sections 7.1, 7.2 and 7.3 hereof, or at such other location, and on
such other date and/or time, as the parties hereto may mutually agree (the
"Closing Date"). At the Closing, subject to the satisfaction of the terms and
conditions set forth herein, each of OrthAlliance, OCA and OCA Merger Sub will
execute and deliver the instruments, certificates and other documents to be
executed and delivered hereunder or as may be reasonably requested by any party
to consummate the transactions contemplated hereby, all in form and substance
reasonably satisfactory to the parties hereto and their respective counsel.
ARTICLE III.
EXCHANGE OF SHARES
3.1. Deposit of Exchange Fund with Transfer Agent. Promptly following the
Effective Time, OCA shall deposit, or shall cause to be deposited, with
EquiServe or such other bank or trust company (the "Exchange Agent") selected by
OCA and reasonably satisfactory to OrthAlliance, in trust for the benefit of the
holders of Certificates, for exchange in accordance with this Article III,
certificates representing the shares of OCA Common Stock and the cash in lieu of
fractional shares (such cash and certificates for shares of OCA Common Stock,
together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") to be issued or paid pursuant to
Article II in exchange for outstanding shares of OrthAlliance Common Stock.
3.2. Exchange of Shares. Promptly after the Effective Time, OCA shall
cause the Exchange Agent to mail to each holder of record of a Certificate or
Certificates a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
actual delivery of the Certificates to the Exchange Agent) and instructions for
use in effecting the surrender of the Certificates in exchange for certificates
representing the shares of OCA Common Stock and the cash in lieu of fractional
shares into which the shares of OrthAlliance Common Stock represented by such
Certificate or Certificates shall have been converted pursuant to this
Agreement. Upon surrender of a Certificate for exchange and cancellation to the
Exchange Agent, together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor and
the Exchange Agent shall promptly mail to such holder following such surrender
(i) a certificate representing that number of whole shares of OCA Common Stock
to which such holder of OrthAlliance Common
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Stock shall have become entitled pursuant to Article II and (ii) a check
representing the amount of cash in lieu of fractional shares, if any, which such
holder has the right to receive in respect of the Certificate surrendered
pursuant to the provisions of Article II, and the Certificate so surrendered
shall forthwith be cancelled. No interest will be paid or accrued on the cash in
lieu of fractional shares and unpaid dividends and distributions, if any,
payable to holders of Certificates.
3.3. No Dividends Paid To Holders of Unsurrendered Certificates. No
dividends or other distributions declared after the Effective Time with respect
to OCA Common Stock and payable to the holders of record thereof shall be paid
to the holder of any unsurrendered Certificate until the holder thereof shall
surrender such Certificate in accordance with this Article III. After the
surrender of a Certificate in accordance with this Article III, the record
holder thereof shall be entitled to receive any such dividends or other
distributions, without any interest thereon, which theretofore had become
payable with respect to shares of OCA Common Stock represented by such
Certificate.
3.4. Issuance of Certificate in Name Differing From Surrendered
Certificate. If any certificate representing shares of OCA Common Stock is to
be issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of the issuance thereof
that the Certificate so surrendered shall be properly endorsed (or accompanied
by an appropriate instrument of transfer) and otherwise in proper form for
transfer, and that the person requesting such exchange shall pay to the Exchange
Agent in advance any transfer or other taxes required by reason of the issuance
of a certificate representing shares of OCA Common Stock in any name other than
that of the registered holder of the Certificate surrendered, or required for
any other reason, or shall establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not payable.
3.5. Closing of Stock Transfer Books. Upon and after the Effective Time,
there shall be no transfers on the stock transfer books of OrthAlliance of the
shares of OrthAlliance Common Stock which were issued and outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates representing such shares are presented for transfer to the Exchange
Agent, they shall be canceled and exchanged for certificates representing shares
of OCA Common Stock as provided in this Article III.
3.6. Termination of Exchange Fund. Promptly following the first
anniversary of the Effective Time, the Exchange Agent will deliver to OCA all
cash, certificates (including any representing shares of OCA Common Stock) and
other documents in its possession relating to the transactions this Agreement
describes, and the Exchange Agent's duties will terminate. Any portion of the
Exchange Fund that remains unclaimed by the stockholders of OrthAlliance for 12
months after the Effective Time shall be paid to OCA. Any stockholders of
OrthAlliance who have not theretofore complied with this Article III shall
thereafter look only to OCA for payment of their shares of OCA Common Stock,
cash in lieu of fractional shares and unpaid dividends and distributions on OCA
Common Stock deliverable in respect of each share of OrthAlliance Common Stock
such stockholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon. Notwithstanding the foregoing, none of OCA,
OrthAlliance, the Exchange Agent or any other person shall be liable to any
former holder of shares of OrthAlliance Common Stock for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws (collectively, "Escheat Law"). If any Certificate is not
surrendered prior to the end of the applicable period after the Effective Time
under any applicable Escheat Law (or immediately prior to such earlier date on
which any shares of OCA Common Stock, any cash in lieu of fractional shares of
OCA Common Stock or any dividends or distributions with respect to such
Certificates would otherwise escheat to or become the property of any
Governmental Authority) and such shares, cash and dividends or distributions
with respect to such Certificates will, to the extent permitted by applicable
law, become the property of OCA, free and clear of all claims or interest of any
person previously entitled thereto.
3.7. Lost, Stolen or Destroyed Certificates. In the event any Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such Certificate to be lost, stolen or
destroyed and, if required by OCA or the Exchange Agent, the posting by such
person of a bond in such amount as OCA or the Exchange Agent may direct as
indemnity against any claim that may
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be made against OCA or the Exchange Agent with respect to such Certificate, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the shares of OCA Common Stock and cash in lieu of fractional shares
deliverable in respect thereof pursuant to this Agreement.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF ORTHALLIANCE
OrthAlliance hereby represents and warrants to OCA and OCA Merger Sub that,
except as set forth in the disclosure schedule dated as of the date hereof and
signed by an authorized officer of OrthAlliance, with each such exception
included therein specifically identifying the relevant Section hereto to which
it specifically relates (the "OrthAlliance Disclosure Schedule"):
4.1. Corporate Organization. OrthAlliance is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and has the corporate power and authority to own, lease and operate its assets
and properties and to carry on its business as it is currently being conducted.
OrthAlliance is duly qualified and in good standing to transact business as a
foreign corporation in each jurisdiction in which the ownership or use of its
assets and properties and the conduct of its business requires such
qualification, except such jurisdictions, individually or in the aggregate, in
which the failure to be so qualified does not have, and would not be reasonably
expected to have, an OrthAlliance Material Adverse Effect. True, accurate and
complete copies of OrthAlliance's certificate of incorporation, bylaws or other
governing documents, and all amendments thereto, in each case as in effect on
the date hereof, have heretofore been delivered or made available to OCA.
4.2. Authorization; Binding Agreement. OrthAlliance has the corporate
power and authority to enter into this Agreement and the other documents and
instruments to be executed and delivered by OrthAlliance pursuant hereto
(collectively, the "OrthAlliance Documents"), and, subject to receipt of
approval of this Agreement by the stockholders of OrthAlliance, to consummate
the Merger and the other transactions contemplated hereby. The execution and
delivery of this Agreement and the OrthAlliance Documents, and the consummation
of the transactions contemplated hereby, have been duly authorized and approved
by the Board of Directors of OrthAlliance at a meeting duly called and held and
at which a quorum was present and acting throughout, by the requisite
affirmative vote of the directors of OrthAlliance, and the Board of Directors of
OrthAlliance has determined that the Merger is in the best interests of
OrthAlliance and its stockholders, approved this Agreement and the Merger,
recommended to the stockholders of OrthAlliance that they approve and adopt this
Agreement and directed that this Agreement and the transactions contemplated
hereby be submitted to the stockholders of OrthAlliance for approval by such
stockholders at a duly called meeting of such stockholders. No other corporate
proceedings on the part of OrthAlliance are necessary to authorize the execution
and delivery of this Agreement or, except for the adoption of this Agreement by
the requisite vote of OrthAlliance's stockholders in accordance with the DGCL
and the certificate of incorporation and bylaws of OrthAlliance, the
consummation by OrthAlliance of the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by OrthAlliance, and,
assuming due execution and delivery by OCA and OCA Merger Sub, this Agreement
constitutes the valid and binding agreement and obligation of OrthAlliance,
enforceable against OrthAlliance in accordance with its terms (except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or similar laws now or hereafter in effect
affecting creditors' rights generally and general equitable principles,
regardless of whether enforceability is considered in a proceeding in law or in
equity).
4.3. Consents and Approvals. Except for (a) the filing with, and
declaration of effectiveness by, the United States Securities and Exchange
Commission ("SEC") of a registration statement on Form S-4 (such registration
statement and any post-effective amendment thereto relating to this transaction,
or any other registration statement on Form S-4 used in connection with the
Merger, the "Registration Statement") in which will be included as a prospectus
a definitive proxy statement relating to the meeting of stockholders (the
"OrthAlliance Stockholders' Meeting") of OrthAlliance to be held in connection
with
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this Agreement and the transactions contemplated herein (the "Proxy Statement"),
(b) the approval of this Agreement by the requisite vote of the stockholders of
OrthAlliance, (c) the filing of the Certificate of Merger with the Delaware
Secretary, (d) the filing by OCA and OrthAlliance of a pre-merger notification
with the Federal Trade Commission ("FTC") and the Antitrust Division of the
United States Department of Justice ("Antitrust Division") under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and the expiration or termination of any waiting period thereunder, (e)
any filings required under state securities or "Blue Sky" laws, (f) any filings
and consents as may be required under any environmental, health or safety law or
regulation pertaining to any notification, disclosure or required approval
necessitated by the transactions contemplated in this Agreement, (g) requisite
consent to consummation of the Merger by the lenders under the OrthAlliance
Credit Agreement, and (h) such other authorizations, consents, approvals or
filings, the failure of which to obtain or make, individually or in the
aggregate, does not have, and would not reasonably be expected to have, an
OrthAlliance Material Adverse Effect or materially impair or delay the
consummation by OrthAlliance of the transactions contemplated hereby, no
authorization, consents or approvals of or filings or registrations with any
federal, state, local or foreign government, court, administrative, regulatory
or other governmental agency or commission or other governmental authority or
instrumentality (each a "Governmental Authority") or with any third party are
necessary in connection with (i) the execution and delivery by OrthAlliance of
this Agreement and the OrthAlliance Documents and (ii) the consummation by
OrthAlliance of the Merger.
4.4. No Conflicts. Neither the execution or delivery by OrthAlliance of
this Agreement and the other OrthAlliance Documents, nor the consummation by
OrthAlliance of the transactions contemplated hereby or thereby, nor the
compliance by OrthAlliance with the provisions hereof, will: (a) violate or
conflict with or result in any breach of any provision of the certificate of
incorporation, bylaws or other governing documents of OrthAlliance or its
Subsidiaries; (b) violate or conflict with any order, injunction, decree, law,
statute, rule, ordinance or regulation applicable to OrthAlliance or its
Subsidiaries or by which any of their respective properties or assets may be
bound; (c) result in a violation or breach of, constitute a default or give rise
to any right of termination, cancellation or acceleration under, any loan or
credit agreement, note, mortgage, bond, indenture, lease, benefit plan or other
agreement, obligation or instrument applicable to OrthAlliance or any Subsidiary
thereof, or result in the creation of an Encumbrance upon any property or asset
of OrthAlliance or its Subsidiaries or by which any such properties or assets
may be bound, or trigger any right of first refusal or other purchase right
applicable to OrthAlliance or any Subsidiary thereof; or (d) result in the loss
of any license, franchise or permit applicable to OrthAlliance or any Subsidiary
thereof; except in each case, where such violation, conflict, breach, default,
loss or other event, individually or in the aggregate, does not have, and would
not reasonably be expected to have, an OrthAlliance Material Adverse Effect.
4.5. Capitalization.
(a) The authorized capital stock of OrthAlliance consists of 70,000,000
shares of OrthAlliance Class A Common Stock, 250,000 shares of OrthAlliance
Class B Common Stock and 20,000,000 shares of preferred stock, par value $.001
per share ("OrthAlliance Preferred Stock"). As of the date hereof, (i)
12,076,601 shares of OrthAlliance Class A Common Stock are issued and
outstanding, all of which were validly issued and are fully paid, nonassessable
and free of preemptive rights, (ii) 172,526 shares of OrthAlliance Class B
Common Stock are issued and outstanding, all of which were validly issued and
are fully paid, nonassessable and free of preemptive rights, (iii) no shares of
OrthAlliance Preferred Stock are issued and outstanding, and (iv) 1,198,126
shares of OrthAlliance Class A Common Stock, no shares of OrthAlliance Class B
Common Stock and no shares of OrthAlliance Preferred Stock are held in the
treasury of OrthAlliance or any of its Subsidiaries.
(b) There are no shares of OrthAlliance Common Stock reserved for issuance
pursuant to the exercise of outstanding options and warrants other than (i)
2,000,000 shares of OrthAlliance Class A Common Stock reserved for issuance
pursuant to OrthAlliance's Amended and Restated 1997 Employee Stock Option Plan
(the "OrthAlliance 1997 Employee Plan"), (ii) 500,000 shares of OrthAlliance
Class A Common Stock reserved for issuance pursuant to OrthAlliance's 1997
Director Stock Option Plan
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(the "OrthAlliance 1997 Director Plan"), (iii) 300,000 shares of OrthAlliance
Class A Common Stock reserved for issuance pursuant to OrthAlliance's 1997
Orthodontist Stock Option Plan (the "OrthAlliance 1997 Orthodontist Plan"), (iv)
280,000 shares of OrthAlliance Class A Common Stock reserved for issuance
pursuant to OrthAlliance's 1999 Orthodontist Stock Option Plan (the
"OrthAlliance 1999 Orthodontist Plan"), (v) 500,000 shares of OrthAlliance Class
A Common Stock reserved for issuance pursuant to OrthAlliance's 2000 Employee
Stock Option Plan (the "OrthAlliance 2000 Employee Plan," and collectively with
the OrthAlliance 1997 Employee Plan, the OrthAlliance 1997 Director Plan, the
OrthAlliance 1997 Orthodontist Plan and the OrthAlliance 1999 Orthodontist Plan,
the "OrthAlliance Option Plans"), (vi) 593,622 shares of OrthAlliance Class A
Common Stock reserved for issuance pursuant to the exercise of certain warrants
to purchase shares of OrthAlliance Class A Common Stock (the "OrthAlliance
Warrants"), and (vii) 1,922,526 shares of OrthAlliance Class A Common Stock
reserved for issuance upon conversion of outstanding shares of OrthAlliance
Class B Common Stock.
(c) Except for (i) options outstanding to purchase a total of (A) 1,150,859
shares of OrthAlliance Class A Common Stock under the OrthAlliance 1997 Employee
Plan, (B) 295,000 shares of OrthAlliance Class A Common Stock under the
OrthAlliance 1997 Director Plan, (C) 184,169 shares of OrthAlliance Class A
Common Stock under the OrthAlliance 1997 Orthodontist Plan, (D) 274,394 shares
of OrthAlliance Class A Common Stock under the OrthAlliance 1999 Orthodontist
Plan, and (E) 140,000 shares of OrthAlliance Class A Common Stock under the
OrthAlliance 2000 Employee Plan, (ii) warrants outstanding to purchase a total
of 543,622 shares of OrthAlliance Class A Common Stock (the "OrthAlliance
Warrants"), and (iii) 172,526 shares of OrthAlliance Class B Common Stock issued
and outstanding as of the date hereof, OrthAlliance does not have and is not
bound by any outstanding subscriptions, options, warrants, convertible
securities, conversion rights, preemptive or other rights, calls, commitments or
agreements of any character calling for the purchase or issuance of any shares
of OrthAlliance Common Stock or OrthAlliance Preferred Stock or any other equity
security or capital stock of OrthAlliance or any securities representing the
right to purchase or otherwise receive any shares of OrthAlliance Common Stock
or any other equity security or capital stock of OrthAlliance. OrthAlliance has
no outstanding stock appreciation rights, phantom stock rights or similar
rights. OrthAlliance has no outstanding obligations, contingent or otherwise, to
reacquire any shares of OrthAlliance Common Stock. Set forth in Section 4.5 of
the OrthAlliance Disclosure Schedule is a complete and correct list, for each of
the OrthAlliance Plan Options and the OrthAlliance Warrants, of the names of the
optionees or holders thereof, the date of grant or issuance, the OrthAlliance
Option Plan to which any such OrthAlliance Plan Option relates, the number of
shares of OrthAlliance Common Stock subject to each such OrthAlliance Plan
Option and OrthAlliance Warrant, the expiration date of each such OrthAlliance
Plan Option and OrthAlliance Warrant, and the price at which each such
OrthAlliance Plan Option and OrthAlliance Warrant may be exercised.
(d) The holders of bonds, debentures, notes or other indebtedness of
OrthAlliance do not have the right, as such, to vote on this Agreement and the
transactions contemplated herein or other matters with respect to which
stockholders of OrthAlliance may vote. There are no voting trusts, proxies or
other agreements or understandings (collectively, "Voting Arrangements") to
which OrthAlliance or any of its Subsidiaries, directors or executive officers
is a party or is bound with respect to the voting of any shares of capital stock
of OrthAlliance.
4.6. SEC Reports and Financial Statements.
(a) OrthAlliance has timely filed with the SEC all reports, schedules,
forms, registration statements, proxy statements, information statements and
other documents (including all exhibits, post-effective amendments and
supplements) required to be filed by OrthAlliance with the SEC since January 1,
1998 (collectively, the "OrthAlliance SEC Reports"), all of which OrthAlliance
SEC Reports, as amended if applicable, complied when filed in all material
respects with all applicable requirements of the appropriate act and the rules
and regulations thereunder. OrthAlliance has previously delivered or made
available to OCA copies (including all exhibits, post-effective amendments and
supplements) of the OrthAlliance SEC Reports. None of OrthAlliance's
Subsidiaries is or has been required to file any reports, schedules, forms,
registration statements, proxy statements, information statements or other
documents with the SEC. As of
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their respective dates, the OrthAlliance SEC Reports did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) The audited consolidated financial statements and unaudited interim
consolidated financial statements of OrthAlliance included in the OrthAlliance
SEC Reports (collectively, the "OrthAlliance Financial Statements") were
prepared in accordance with GAAP consistently applied throughout the periods
involved (except as may be indicated therein or in the notes thereto) and fairly
present in all material respects the consolidated financial position of
OrthAlliance and its Subsidiaries as of the dates thereof and the results of
their operations and their cash flows for the periods then ended, subject, in
the case of the unaudited interim financial statements, to normal year-end and
audit adjustments and any other adjustments described therein.
4.7. Subsidiaries.
(a) Set forth in Section 4.7 of the OrthAlliance Disclosure Schedule is the
name and state of incorporation of each of OrthAlliance's Subsidiaries and,
except as so disclosed, OrthAlliance does not control, directly or indirectly,
and does not have any direct or indirect equity participation in any other
Person. Each Subsidiary of OrthAlliance is duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation and has the
requisite power and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being conducted. Each
Subsidiary of OrthAlliance is qualified to do business and is in good standing
in each jurisdiction in which the properties it owns, leases or operates or the
nature of the business it conducts makes such qualification necessary, except
where the failure to be so qualified and in good standing, when taken together
with all such other failures with respect to all of OrthAlliance's Subsidiaries,
does not have, and would not reasonably be expected to have, an OrthAlliance
Material Adverse Effect. True, accurate and complete copies of the respective
certificates or articles of incorporation, bylaws or other governing documents,
and all amendments thereto, in each case as in effect on the date hereof, of
OrthAlliance's Subsidiaries have heretofore been delivered or made available to
OCA.
(b) OrthAlliance owns, directly or indirectly, all of the issued and
outstanding shares of the capital stock and equity securities of each of its
Subsidiaries, free and clear of all liens, charges, encumbrances and security
interests whatsoever, and all of such shares are duly authorized and validly
issued and are fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to the ownership thereof. OrthAlliance's
Subsidiaries are not bound by any outstanding subscriptions, options, warrants,
calls, commitments or agreements of any character calling for the purchase or
issuance of any shares of capital stock or any other equity security of any of
OrthAlliance's Subsidiaries or any securities representing the right to purchase
or otherwise receive any shares of capital stock or any other equity security of
any of OrthAlliance's Subsidiaries. There are no outstanding subscriptions,
options, warrants, calls, commitments, agreements or Voting Arrangements of any
character by which OrthAlliance or any of its Subsidiaries will be bound calling
for the voting, purchase or issuance of any shares of the capital stock or
equity securities of any of OrthAlliance's Subsidiaries.
4.8. Absence of Undisclosed Liabilities. None of OrthAlliance or its
Subsidiaries has incurred any liabilities or obligations (whether absolute,
accrued, contingent or otherwise) of any nature, except (a) liabilities,
obligations or contingencies that are accrued or reserved against in the
OrthAlliance 2000 Financial Statements or reflected in the notes thereto, or
were incurred in the ordinary course of business and consistent with past
practices, (b) liabilities, obligations or contingencies that, individually or
in the aggregate, do not have, and would not reasonably be expected to have, an
OrthAlliance Material Adverse Effect, and (c) liabilities and obligations that
are of a nature not required to be reflected in the OrthAlliance 2000 Financial
Statements, and that were incurred in the ordinary course of business consistent
with past practice.
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4.9. Investigations; Litigation.
(a) There is no investigation or review being undertaken or that is pending
by any Governmental Authority with respect to OrthAlliance or any of its
Subsidiaries that, individually or in the aggregate, has, or would reasonably be
expected to have, an OrthAlliance Material Adverse Effect, nor has any
Governmental Authority notified OrthAlliance or any of its Subsidiaries of an
intention to conduct any such investigation or review.
(b) There are no claims, suits, actions, arbitration actions or other
proceedings pending or, to the knowledge of OrthAlliance, threatened against,
relating to or affecting any of OrthAlliance or its Subsidiaries, or their
respective directors and officers, in their capacities as such, or their
respective assets, businesses or properties, which seeks to restrain or enjoin
the consummation of the transactions contemplated herein or which have, or would
reasonably be expected to have, either alone or in the aggregate with all such
claims, actions or other proceedings, an OrthAlliance Material Adverse Effect.
There are no decrees, injunctions, writs or orders of any court or governmental
department or agency applicable to any of OrthAlliance or its Subsidiaries, or
their assets or businesses, or which prohibits or restricts the consummation of
the transactions contemplated herein or which have, or would reasonably be
expected to have, an OrthAlliance Material Adverse Effect. To the knowledge of
OrthAlliance, there are no professional malpractice claims, suit or actions, nor
any disciplinary or similar proceedings before or by any applicable dental board
or similar Governmental Authority, pending or threatened against any of the
OrthAlliance Affiliated Professionals.
4.10. Compliance with Law. OrthAlliance and each of its Subsidiaries is in
compliance with all applicable statutes, regulations, judgments, injunctions,
decrees, orders, ordinances and other laws (collectively, "Laws") of the United
States of America and any applicable foreign jurisdictions, all state and local
governments and other Governmental Authorities, and agencies and courts of any
of the foregoing, to which any of OrthAlliance or its Subsidiaries is subject,
and none of OrthAlliance or its Subsidiaries has received any notice to the
effect that, or otherwise been advised that, any of OrthAlliance or its
Subsidiaries has violated or is not in compliance with any of such Laws, and, to
the knowledge of OrthAlliance, there are no investigations with respect thereto;
except in each case with respect to non-compliance or violations that,
individually or in the aggregate, do not have, and would not reasonably be
expected to have, an OrthAlliance Material Adverse Effect.
4.11. Governmental Licenses.
(a) Section 4.11 of the OrthAlliance Disclosure Schedule contains a
complete and accurate list of each license, permit and other governmental
authorization ("Governmental Licenses") that is held by OrthAlliance or any of
its Subsidiaries or that is required in connection with the business of
OrthAlliance and its Subsidiaries. Each such Governmental License is valid and
in full force and effect and OrthAlliance and its Subsidiaries are and have been
in compliance in all material respects with all of the terms and requirements
thereof. OrthAlliance and its Subsidiaries have all Governmental Licenses
necessary to conduct their businesses as currently conducted, except for
permits, the absence of which, in the aggregate, do not have, and would not
reasonably be expected to have, an OrthAlliance Material Adverse Effect.
(b) No event has occurred or circumstance exists that may (with or without
notice or lapse of time) (i) constitute or result directly or indirectly in a
violation of or a failure to comply with any term or requirement of any
Governmental License, or (ii) result directly or indirectly in the revocation,
withdrawal, suspension, cancellation or termination of, or any modification to,
any Governmental License except as does not have and would not reasonable be
expected to have an OrthAlliance Material Adverse Effect.
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(c) Neither OrthAlliance nor any of its Subsidiaries has received any
notice or other communication from any Governmental Authority or any other
person regarding (i) any actual, alleged, possible or potential violation of or
failure to comply with any term or requirement of any Governmental License or
any failure to obtain any required Governmental License, or (ii) any actual,
proposed, possible or potential revocation, withdrawal, suspension,
cancellation, termination of or modification to any Governmental License.
(d) All applications required to have been filed for the renewal of the
Governmental Licenses have been duly filed on a timely basis with the
appropriate Governmental Authorities, and all other filings required to have
been made with respect to such Governmental Licenses have been duly made on a
timely basis with the appropriate Governmental Authorities except as does not
and would not reasonably be expected to have an OrthAlliance Material Adverse
Effect.
4.12. Absence of Certain Changes or Events. Except as set forth in Section
4.12 of the OrthAlliance Disclosure Schedule, since December 31, 2000, none of
OrthAlliance or its Subsidiaries has: (a) operated other than in the ordinary
course of business consistent with past practice; (b) incurred, experienced or
suffered any OrthAlliance Material Adverse Effect; (c) acquired or agreed to
acquire any material assets, or entered into any OrthAlliance Service and
Consulting Agreements or acquisition agreements (or similar agreements) with any
orthodontists, dentists or professional entities, either directly or indirectly,
by purchase, merger, stock purchase or otherwise, except in the ordinary course
of business, consistent with past practice; (d) transferred, leased, licensed,
sold, mortgaged, pledged, disposed of or encumbered any assets, other than in
the ordinary course of business and consistent with past practice; (e) except in
the ordinary course of business, consistent with past practice, adopted any new,
or amended or otherwise increased, or accelerated the payment or vesting of the
amounts payable or to become payable under any existing, bonus, incentive
compensation, deferred compensation, severance, profit sharing, stock option,
stock purchase, insurance, pension, retirement or other employee benefit plan
agreement or arrangement, entered into any employment, consulting, change in
control, severance or similar agreement with or, except in accordance with the
existing written agreements, granted any severance, change in control or
termination pay to any officer, director, key employee, consultant, agent or
group of employees, or increased the compensation or benefits of any officer,
director, key employee, consultant, agent or group of employees; (f) modified,
amended, canceled or terminated, or suffered or received notice of the
termination or cancellation of, any OrthAlliance Service and Consulting
Agreement, leases, contracts or receivables, or waived, released or assigned any
material rights or claims with respect thereto, except in the ordinary course of
business and consistent with past practice; (g) incurred or modified any
material indebtedness or other liability, except in the ordinary course of
business, consistent with past practice; (h) assumed, guaranteed, endorsed or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for material obligations of any other person, except in the ordinary
course of business and consistent with past practice; (i) made any material
loans, advances or capital contributions to, or investments in, any other person
(other than to its wholly-owned Subsidiaries or in the ordinary course of
business consistent with past practice); (j) instituted, settled or agreed to
settle, any material litigation, action or proceeding before any court,
arbitrator or governmental body; (k) made any tax election or settled or
compromised any tax liability, or made any change in any method of accounting
for taxes or accounting policy with respect to taxes; (l) changed any of the
accounting methods or policies used by it; (m) paid, discharged or satisfied any
material claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction of any such claims, liabilities or obligations, in the ordinary
course of business and consistent with past practice, or claims, liabilities or
obligations reflected or reserved against in, or contemplated by, the
OrthAlliance 2000 Financial Statements; (n) entered into any material
transaction, contract, agreement or commitment, other than this Agreement or in
the ordinary course of business and consistent with past practice; or (o)
agreed, whether in writing or otherwise, to take any action described in this
Section 4.12.
4.13. Title to Assets. OrthAlliance and its Subsidiaries have good and
marketable title to all of their respective assets, free and clear of all
Encumbrances, and no financing statement covering all or any portion of
OrthAlliance's and its Subsidiaries' assets and naming OrthAlliance or a
Subsidiary thereof as
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debtor has been filed in any public office, and neither OrthAlliance nor any
Subsidiary thereof has signed any financing statement or security agreement as
debtor or borrower which financing statement or security agreement covers all or
any portion of the assets of OrthAlliance or its Subsidiaries.
4.14. Assets. OrthAlliance's and its Subsidiaries' material equipment,
furniture, computers and other tangible personal property are in good operating
condition and repair (ordinary wear and tear excepted), free of any material
defects and suitable in all material respects for the operations of
OrthAlliance's and its Subsidiaries' business, as currently conducted, are not
in need of maintenance or repairs except for ordinary, routine maintenance and
repairs that are not material in nature or cost. OrthAlliance's and its
Subsidiaries' inventories of material dental and orthodontic, janitorial and
office supplies and consumables are of a good and merchantable quality usable or
saleable in the ordinary course of business consistent with past practice, is in
a quantity reasonable for the operations of OrthAlliance's and its Subsidiaries'
business, as currently conducted, in the ordinary course of business in
accordance with past practice, and is valued at reasonable amounts not subject
to any material write-down. Set forth in Section 4.14 of the OrthAlliance
Disclosure Schedule is a complete and accurate description of the accounts
receivable, notes receivable, evidences of indebtedness and other rights to
receive payment for service fees, consulting fees, center expense reimbursement,
advances, loans and other amounts payable to OrthAlliance and its Subsidiaries
by OrthAlliance Affiliated PCs and OrthAlliance Affiliated Professionals
("Receivables") as of March 31, 2001. Such Receivables are valid and enforceable
claims and obligations, have arisen only from bona fide transactions in the
ordinary course of business and are collectible in the aggregate amount thereof,
less any applicable reserves recorded on OrthAlliance balance sheet as of March
31, 2001, a copy of which has heretofore been provided to OrthAlliance, which
reserves are adequate and calculated consistent with past practice. Except as
set forth in Section 4.14 of the OrthAlliance Disclosure Schedule, to the
knowledge of OrthAlliance, there are no asserted contests, refusals to pay or
rights of set-off with respect to any of such Receivables.
4.15. Intellectual Property Rights. OrthAlliance and its Subsidiaries have
all right, title and interest in, or a valid and binding license to use, all
intellectual property individually or in the aggregate material to the conduct
of the businesses of OrthAlliance and its Subsidiaries as currently conducted
and taken as a whole. Neither OrthAlliance nor any Subsidiary thereof is in
default (or with the giving of notice or lapse of time, or both, would be in
default) under any license to use such intellectual property. To the knowledge
of OrthAlliance, such intellectual property is not being infringed by any third
party and neither OrthAlliance nor any Subsidiary thereof is infringing any
intellectual property of any third party, except for such defaults and
infringements that, individually or in the aggregate, do not have and would not
be reasonably expected to have an OrthAlliance Material Adverse Effect.
4.16. Contracts.
(a) Set forth in Section 4.16(a) of the OrthAlliance Disclosure Schedule is
a list, including parties and dates, of each of the OrthAlliance Service and
Consulting Agreements. OrthAlliance has heretofore delivered to OCA or its
counsel true, correct and complete copies of all of the OrthAlliance Service and
Consulting Agreements, and all amendments, supplements and other documents
related thereto. Each of the OrthAlliance Service and Consulting Agreements is a
valid and binding obligation of the parties thereto, are unmodified, are in full
force and effect, and are enforceable against each of the parties thereto in
accordance with their respective terms (except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or similar laws now or hereafter in effect affecting creditors'
rights generally and general equitable principles, regardless of whether
enforceability is considered in a proceeding in law or in equity). To the
knowledge of OrthAlliance, except as disclosed in Section 4.16(a) of the
OrthAlliance Disclosure Schedule, no event has occurred which, after notice or
the passage of time or both, would constitute a material default or breach by
any party to any of the OrthAlliance Service and Consulting Agreements, (ii) no
party to any of the OrthAlliance Service and Consulting Agreements has or, to
the knowledge of OrthAlliance, intends, to terminate or adversely modify its
agreement(s) or obligations with respect thereto, or cease performing
thereunder, and (iii) there are no outstanding material disputes under any of
the OrthAlliance Service and Consulting Agreements, and there is no pending or,
to the knowledge of OrthAlliance, threatened, litigation or other legal
proceeding
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with respect to any of the OrthAlliance Service and Consulting Agreements. The
OrthAlliance Service and Consulting Agreements constitute all of the contracts,
agreements and understandings applicable to the provision of administrative,
management or business services to the OrthAlliance Affiliated PCs.
(b) Set forth in Section 4.16(b) of the OrthAlliance Disclosure Schedule is
a list, including parties and dates, of any contract or agreement (whether
written or oral), other than the OrthAlliance Service and Consulting Agreements,
to which OrthAlliance or any of its Subsidiaries is a party to or bound by any
contract or agreement (whether written or oral) (i) with respect to the
employment of any employees, officers, directors or consultants, (ii) which,
upon the consummation of the transactions contemplated by this Agreement, will
(either alone or upon the occurrence of any additional acts or events) result in
any payment or benefits (whether of severance pay or otherwise) becoming due, or
the acceleration or vesting of any rights to any payment or benefits, from OCA,
OrthAlliance, the Surviving Corporation or any of their respective Subsidiaries
to any employee, officer, director or consultant thereof, (iii) which is a
material contract (as defined in Item 601(b)(10) of Regulation S-K of the SEC)
to be performed after the date of this Agreement ("OrthAlliance Material
Contracts"), (iv) which is not terminable on 90 days or less notice involving
the payment of more than $100,000 per annum, or (v) which materially restricts
the conduct of any line of business by OrthAlliance or any of its Subsidiaries.
Each contract, arrangement, commitment or understanding of the type described in
this Section 4.16(b) is referred to herein as a "OrthAlliance Contract."
OrthAlliance has heretofore provided to OCA or its counsel true, correct and
complete copies of each OrthAlliance Contract. Each OrthAlliance Material
Contract is valid and binding and in full force and effect with respect to the
obligations of OrthAlliance or its Subsidiaries and, to the knowledge of
OrthAlliance, is valid and binding, enforceable and in full force and effect
with respect to the obligations of the counterparties thereto (except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or similar laws now or hereafter in effect
affecting creditors' rights generally and general equitable principles,
regardless of whether enforceability is considered in a proceeding in law or in
equity), and OrthAlliance and each of its Subsidiaries has performed in all
material respects all obligations required to be performed by it to date under
each such OrthAlliance Material Contract, and no event or condition exists which
constitutes or, after notice or lapse of time or both, would constitute, a
material default on the part of OrthAlliance or any of its Subsidiaries under
any OrthAlliance Material Contract, or to the knowledge of OrthAlliance, any
other party thereto.
4.17. Leases. OrthAlliance has heretofore delivered to OCA true, correct
and complete copies of each of the lease agreements, and all amendments,
supplements and other documents related thereto, under which OrthAlliance or its
Subsidiaries lease real or personal property that is material to the operations
of OrthAlliance's and its Subsidiaries' business as currently conducted
(collectively, the "Leases"). Each Lease is legal, valid, binding, enforceable
and in full force and effect and will continue to be legal, valid, binding,
enforceable and in full force and effect on identical terms following the
consummation of the transactions contemplated hereby (except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or similar laws now or hereafter in effect
affecting creditors' rights generally and general equitable principles,
regardless of whether enforceability is considered in a proceeding in law or in
equity). Neither OrthAlliance nor any of its Subsidiaries is in breach or
default under any Lease and no event has occurred which, with notice or lapse of
time, would constitute a breach or default of such Lease by OrthAlliance or any
of its Subsidiaries or permit termination, modification or acceleration thereof
by the respective lessor, and no party to any such Lease has repudiated any
provision thereof. There are no disputes, oral agreements or forbearance
programs in effect as to any Lease. All facilities leased under the Leases are
supplied with utilities and other services necessary for the operation of said
facilities.
4.18. Affiliated Practices.
(a) Section 4.18(a) of the OrthAlliance Disclosure Schedule contains
complete and accurate lists separately identifying each of (i) the OrthAlliance
Affiliated PCs, (ii) the OrthAlliance Affiliated Practice Owners, (iii) the
OrthAlliance Affiliated Orthodontists, and (iv) the OrthAlliance Affiliated
Pedodontists, indicating the practice location(s) for each such OrthAlliance
Affiliated PC, OrthAlliance Affiliated Practice Owner, OrthAlliance Affiliated
Orthodontist and OrthAlliance Affiliated Pedodontist.
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(b) To the knowledge of OrthAlliance, each OrthAlliance Affiliated
Orthodontist engages in orthodontic practice only for an OrthAlliance Affiliated
Practice, has graduated from an accredited school of dentistry and orthodontic
residency program, is fully accredited as, and has all necessary Governmental
Licenses to practice as an orthodontist in each applicable state, and carries
all professional malpractice insurance required under his or her respective
OrthAlliance Affiliated Professional Employment Agreement and applicable
OrthAlliance Service and Consulting Agreement.
(c) To the knowledge of OrthAlliance, each OrthAlliance Affiliated
Pedodontist engages in a pedodontic practice only for an OrthAlliance Affiliated
Practice, has graduated from an accredited school of dentistry and pedodontic
residency program, is fully accredited as, and has all necessary Governmental
Licenses to practice as a pedodontist in each applicable state, and carries all
professional malpractice insurance required under his or her respective
OrthAlliance Affiliated Professional Employment Agreement and applicable
OrthAlliance Service and Consulting Agreement.
(d) To the knowledge of OrthAlliance, each OrthAlliance Affiliated
Professional is able to fulfill his or her employment commitment to his or her
applicable OrthAlliance Affiliated PC.
(e) To the knowledge of OrthAlliance: (i) each Governmental License
required to be maintained by an OrthAlliance Affiliated PC or OrthAlliance
Affiliated Professional is valid and in full force and effect and each
OrthAlliance Affiliated PC or OrthAlliance Affiliated Professional is in
compliance in all material respects with all of the terms and requirements
thereof, (ii) no event has occurred or circumstance exists that may (with or
without notice or lapse of time) constitute or result directly or indirectly in
a violation of or a failure to comply with any term or requirement of any
Governmental License maintained by any OrthAlliance Affiliated PC or
OrthAlliance Affiliated Professional, or result directly or indirectly in the
revocation, withdrawal, suspension, cancellation or termination of, or any
modification to, any Governmental License maintained by any OrthAlliance
Affiliated PC or OrthAlliance Affiliated Professional, except as does not have,
and would not reasonably be expected to have, an OrthAlliance Material Adverse
Effect, (iii) no OrthAlliance Affiliated PC or OrthAlliance Affiliated
Professional has received any notice or other communication from any
Governmental Authority or any other person regarding any actual, alleged,
possible or potential violation of or failure to comply with any term or
requirement of any Governmental License maintained by any OrthAlliance
Affiliated PC or OrthAlliance Affiliated Professional or any failure to obtain
any required Governmental License, or any actual, proposed, possible or
potential revocation, withdrawal, suspension, cancellation, termination of or
modification to any Governmental License maintained by any OrthAlliance
Affiliated PC or OrthAlliance Affiliated Professional; (iv) all applications
required to have been filed by each OrthAlliance Affiliated PC and OrthAlliance
Affiliated Professional for the renewal of the Governmental Licenses have been
duly filed on a timely basis with the appropriate Governmental Authorities, and
all other filings required to have been made by each OrthAlliance Affiliated PC
and OrthAlliance Affiliated Professionals with respect to such Governmental
Licenses have been duly made on a timely basis with the appropriate Governmental
Authorities, except as do not have, and would not reasonably be expected to
have, an OrthAlliance Material Adverse Effect.
(f) Section 4.18(f) of the OrthAlliance Disclosure Schedule identifies each
"Market Profitability Index" or other similar provision applicable to any
OrthAlliance Affiliated PC or OrthAlliance Affiliated Professional, identifying
the relevant OrthAlliance Affiliated PC or OrthAlliance Affiliated Professional.
OrthAlliance has never been required to pay any amounts under any Market
Profitability Index provision, has never been requested to pay any amount under
any such provision and has never formulated any requirements for payments under
any such provision.
(g) Section 4.18(g) of the OrthAlliance Disclosure Schedule identifies each
Practice Improvement Performance Guarantee or other similar provision applicable
to any OrthAlliance Affiliated PC or OrthAlliance Affiliated Professional,
identifying the relevant OrthAlliance Affiliated PC or OrthAlliance Affiliated
Professional. Other than as set forth in Section 4.18(g) of the OrthAlliance
Disclosure Schedule, OrthAlliance and its Subsidiaries have never been required
to reduce or defer any payments due to it
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under an OrthAlliance Service and Consulting Agreement pursuant to a Practice
Improvement Performance Guarantee.
(h) Section 4.18(h) of the OrthAlliance Disclosure Schedule sets forth a
complete and accurate schedule of the amount of OrthAlliance Annual Service Fees
attributable to each OrthAlliance Affiliated Practice Owner.
4.19. Tax Matters.
(a) All Tax Returns for all periods ending on or before the Closing Date
that are or were required to be filed by or with respect to OrthAlliance and any
of its Subsidiaries, either separately or as a member of an affiliated group of
corporations, have been filed on a timely basis and in accordance with
applicable laws, regulations and administrative requirements. All such Tax
Returns that have been filed on or before the Closing Date were, when filed, and
continue to be, true, correct and complete in all material respects.
(b) OrthAlliance has provided or made available to OCA all reports of and
communications for all open years from IRS agents and the corresponding agents
of other state, local and foreign Governmental Authorities who have examined the
respective books and records applicable to OrthAlliance and any of its
Subsidiaries. Section 4.19(b) of the OrthAlliance Disclosure Schedule describes
all adjustments in respect of OrthAlliance and any of its Subsidiaries to Tax
Returns filed by, or on behalf of, OrthAlliance, its Subsidiaries or any
affiliated group of corporations of which OrthAlliance or a Subsidiary thereof
is or was a member, for all open taxable years, that have been proposed by any
representative of any governmental agency, and Section 4.19(b) of the
OrthAlliance Disclosure Schedule describes the resulting Taxes, if any, proposed
to be assessed. All deficiencies proposed (plus interest, penalties and
additions to tax that were or are proposed to be assessed thereon, if any) as a
result of such examinations have been paid, reserved against or settled or, as
described in Section 4.19(b) of the OrthAlliance Disclosure Schedule, are being
contested in good faith by appropriate proceedings. Neither OrthAlliance nor any
of its Subsidiaries has given or been requested to give waivers or extensions
(or is or would be subject to a waiver or extension given by any other entity)
of any statute of limitations relating to the payment of Taxes for which
OrthAlliance or any of its Subsidiaries may be liable.
(c) OrthAlliance and its Subsidiaries have paid, or made provision for the
payment of, all Taxes, including personal property taxes, that have or may
become due for all periods ending on or before the Closing Date, including,
without limitation, all Taxes reflected on the Tax Returns referred to in this
Section 4.19, or in any assessment, proposed assessment or notice, received by
OrthAlliance or any Subsidiary of OrthAlliance, except such Taxes, if any, as
are set forth in Section 4.19(c) of the OrthAlliance Disclosure Schedule that
are being contested in good faith and as to which adequate reserves (determined
in accordance with GAAP consistently applied) have been provided. The charges,
accruals and reserves with respect to Taxes reflected in the OrthAlliance 2000
Financial Statements were determined in accordance with GAAP consistently
applied. In all material respects, all Taxes that OrthAlliance and its
Subsidiaries are or were required by law to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the
appropriate Governmental Authority. There are no liens with respect to Taxes
upon any of the properties or assets, real or personal, tangible or intangible,
of OrthAlliance or any of its Subsidiaries (except for Taxes not yet due).
(d) There are no closing agreements, requests for rulings or requests for
technical advice, in respect of any Taxes, pending between OrthAlliance or any
of its Subsidiaries and any Governmental Authority.
(e) No consent to the application of Section 341(f)(2) of the Code has ever
been filed with respect to any property or assets held or acquired or to be
acquired by OrthAlliance or any of its Subsidiaries.
(f) There is no existing tax allocation or sharing agreement that may or
will require that any payment be made by or to OrthAlliance or any of its
Subsidiaries on or after the Closing Date.
(g) No property or asset owned by OrthAlliance or any of its Subsidiaries
is property that OCA is or will be required to treat as being owned by another
person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue
Code of 1954, as amended and in effect immediately before the enactment of the
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Tax Reform Act of 1986, or is "tax-exempt use property" within the meaning of
Section 168(h)(1) of the Code.
(h) Neither OrthAlliance nor any of its Subsidiaries has agreed to, or is
required to make, any adjustment pursuant to Section 481(a) of the Code, nor has
the IRS proposed any such adjustment or change in accounting method with respect
to OrthAlliance or any of its Subsidiaries. OrthAlliance and its Subsidiaries do
not have any application pending with any Governmental Authority requesting
permission for any change in accounting method.
(i) Except as disclosed in Section 4.19(i) of the OrthAlliance Disclosure
Schedule, there is no contract, agreement, plan or arrangement covering any
person that, individually or collectively, as a consequence of this transaction
could give rise to the payment of any amount that would not be deductible by
OCA, the Surviving Corporation, or OrthAlliance or any of its Subsidiaries by
reason of Section 280G of the Code.
(j) Neither OrthAlliance nor any of its Subsidiaries owns an interest in
any (i) domestic international sales corporation, (ii) foreign sales
corporation, (iii) controlled foreign corporation, or (iv) passive foreign
investment company.
(k) Neither OrthAlliance nor any of its Subsidiaries is a party to any
deferred intercompany transaction that will be restored (pursuant to the
Treasury Regulations under Section 1502 of the Code) and will result in income
or loss to OrthAlliance or any of its Subsidiaries due to this Agreement and the
transactions contemplated hereby.
(l) Neither OrthAlliance nor any of its Subsidiaries is, nor has ever been,
a United States real property holding corporation within the meaning of Section
897(c)(2) of the Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code.
(m) None of the assets of OrthAlliance or any of its Subsidiaries directly
or indirectly secure any debt the interest on which is tax-exempt under Section
103(a) of the Code.
4.20. Employee Benefit Matters.
(a) Set forth in Section 4.20 of the OrthAlliance Disclosure Schedule is a
complete and accurate list of each employee benefit plan including, but not
limited to, pension, profit sharing, 401(k), severance, welfare, disability and
deferred compensation, and all other material employee benefit plans,
agreements, programs, policies or arrangements including, but not limited to,
stock purchase, stock option, employment, change-in-control, fringe benefit,
bonus and incentive, whether or not subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), whether formal or informal, oral or
written, legally binding or not, under which any employee, former employee,
director, consultant or independent contractor of OrthAlliance or any Subsidiary
thereof has any present or future right to benefits or under which OrthAlliance
or any Subsidiary thereof has any present or future liability. All such plans,
agreements, programs, policies and arrangements shall be collectively referred
to as the "OrthAlliance Benefit Plans" but shall be separately identified in
such Section 4.20 of the OrthAlliance Disclosure Schedule.
(b) With respect to each OrthAlliance Benefit Plan, OrthAlliance has
delivered or made available to OCA (i) current, accurate and complete copies of
each such OrthAlliance Benefit Plan, including all trust agreements, each
summary plan description or other description, insurance or annuity contracts,
agreements, participant records and any other material documents or instruments
relating thereto; (ii) copies of each Form 5500 Annual Report and accompanying
schedules, each actuarial report (to the extent applicable) and; (iii) with
respect to each such OrthAlliance Benefit Plan which is an employee pension
benefit plan (as such term is defined in section 3(2) of ERISA), intended to
qualify under section 401(a) of the Code, copies of the most recent IRS
determination letter (including copies of any outstanding request for
determination letters).
(c) Each OrthAlliance Benefit Plan has been established and administered in
accordance with its terms, and each such OrthAlliance Benefit Plan and
OrthAlliance and its Subsidiaries are in compliance in
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all material respects with the applicable provisions of ERISA, the Code and
other federal and state applicable laws, rules and regulations with respect
thereto.
(d) Each OrthAlliance Benefit Plan that is an "employee pension benefit
plan" (within the meaning of section 3(2) of ERISA) is qualified under section
401(a) of the Code and its related trust is exempt from federal income tax under
section 501(a) of the Code. No event has occurred or circumstance exists that
will or could give rise to disqualification or loss of tax-exempt status of any
such OrthAlliance Benefit Plan or trust.
(e) No event has occurred and no condition exists that likely could subject
OrthAlliance or any Subsidiary thereof to any tax, fine, lien, penalty or other
liability imposed by ERISA (including any breach of fiduciary responsibility by
any director, officer or employee), the Code or other applicable laws, rules and
regulations.
(f) Neither OrthAlliance nor any Subsidiary thereof sponsors or maintains,
or has ever sponsored or maintained, or has any actual or contingent liability
under or relating to, any plan that is or was a defined benefit plan, as defined
in section 3(35) of ERISA, or that is a Multiemployer Plan within the meaning of
section 4001(a)(3) of ERISA, or that is otherwise subject to title IV of ERISA.
(g) No OrthAlliance Benefit Plan is a "multiple employer welfare
arrangement" within the meaning of section 3(40) of ERISA, except for
OrthAlliance Benefit Plans that are fully insured and with respect to which each
Form M-1 has been timely filed.
(h) All material reports, returns, notices and similar documents pertaining
to each OrthAlliance Benefit Plan that are required to be filed with any
Governmental Authority or distributed to any OrthAlliance Benefit Plan
participant have been duly and timely filed or distributed.
(i) For each OrthAlliance Benefit Plan with respect to which a Form 5500
has been filed, no material change has occurred with respect to the matters
covered by the most recent Form 5500 since the date thereof.
(j) No "prohibited transaction" (as such term is defined in section 406 of
ERISA and section 4975 of the Code) or "accumulated funding deficiency" (as such
term is defined in section 302 of ERISA and section 412 of the Code (whether or
not waived)) has occurred with respect to any OrthAlliance Benefit Plan.
(k) No OrthAlliance Benefit Plan or any related trust or fiduciary thereof
is the direct or indirect subject of a material audit, investigation or
examination by any Governmental Authority or quasi-governmental authority.
(l) The execution of this Agreement and the performance of the transactions
contemplated hereby will not constitute an event under any OrthAlliance Benefit
Plan that may reasonably be expected to result in any payment (whether of
severance pay or otherwise), acceleration, vesting or increase in benefits with
respect to any employee, former employee or director of OrthAlliance or any
Subsidiary thereof.
(m) All contributions and payments made or accrued with respect to all
OrthAlliance Benefit Plans and other benefit obligations are deductible under
section 162 of the Code or section 404 of the Code. No amount or any asset of
any OrthAlliance Benefit Plan is subject to tax as unrelated business taxable
income.
(n) To the knowledge of OrthAlliance, no event has occurred or circumstance
exists that could result in a material increase in premium costs of OrthAlliance
Benefit Plans and other benefit obligations that are insured or a material
increase in benefit costs of such plans and obligations that are self-insured.
(o) Except to the extent required under section 601 et seq. of ERISA and
section 4980B of the Code, OrthAlliance and its Subsidiaries do not provide
health or welfare benefits for any retired or former employee and is not
obligated to provide health or welfare benefits to any active employee following
such employee's retirement or other termination of service.
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(p) OrthAlliance and its Subsidiaries have the right to modify and
terminate each OrthAlliance Benefit Plan with respect to both retired and active
employees.
(q) OrthAlliance and its Subsidiaries have complied in all material
respects with the provisions of section 601 et seq. of ERISA and section 4980B
of the Code.
(r) With respect to any OrthAlliance Benefit Plan, (i) no actions, suits or
claims (other than claims for benefits made in the ordinary course of the
OrthAlliance Benefit Plan's operation) are pending or, to the knowledge of
OrthAlliance, threatened; and (ii) no facts or circumstances exist that
reasonably could give rise to any such actions, suits or claims.
(s) Full payment has been made of all amounts which are due to any of the
OrthAlliance Benefit Plans. Furthermore, OrthAlliance and its Subsidiaries have
made adequate provision for reserves to meet contributions that have not been
made because they are not yet due under the terms of each of the OrthAlliance
Benefit Plans.
(t) All OrthAlliance Affiliated Professionals have, at all times during
their relationship with OrthAlliance and its Subsidiaries, been properly
classified as independent contractors and not employees of OrthAlliance or its
Subsidiaries for purposes of all applicable law, including, without limitation,
for federal, state and local employment tax purposes.
4.21. Environmental Matters.
(a) OrthAlliance and each of its Subsidiaries are in compliance with all
applicable international, federal, state, local and foreign laws and regulations
relating to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, ground water, land
surface or subsurface strata) (collectively, "Environmental Laws"), which
compliance includes, but is not limited to, the possession by OrthAlliance and
its Subsidiaries of all permits and other governmental authorizations required
under applicable Environmental Laws, and compliance with the terms and
conditions thereof, except for noncompliance which, individually or in the
aggregate, does not have, and would not reasonably be expected to have, an
OrthAlliance Material Adverse Effect.
(b) Neither OrthAlliance nor any of its Subsidiaries have received written
notice of, or is the subject of, any actions, causes of action, claims,
investigations, demands or notices by any person asserting an obligation to
conduct investigations or cleanup activities under Environmental Law or alleging
liability under or noncompliance with any Environmental Law (collectively,
"Environmental Claims") that, individually or in the aggregate, has, or would
reasonably be expected to have, an OrthAlliance Material Adverse Effect.
(c) There are no past or present events, conditions, circumstances,
activities, practices, incidents, actions or plans which may interfere with or
prevent continued compliance, or which may give rise to any common law or
statutory liability or otherwise form the basis of any claim, action, suit,
proceeding, hearing or investigation, based on or related to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling, or the emission, discharge, release or threatened release into the
environment, or any pollutant, contaminant, or hazardous or toxic material or
waste (including biohazardous and medical waste) with respect to or affecting
OrthAlliance or any of its Subsidiaries except for such events, conditions,
circumstances, activities, practices, incidents, actions or plans as, singly or
in the aggregate, do not have, and would not reasonably be expected to have, an
OrthAlliance Material Adverse Effect.
4.22. Labor Controversies. There are no controversies pending or, to the
knowledge of OrthAlliance, threatened between any of OrthAlliance or its
Subsidiaries and any representatives of any of their employees and, to the
knowledge of OrthAlliance, there are no organizational efforts being made
involving any unorganized employees of any of OrthAlliance or its Subsidiaries,
except for such controversies and organizational efforts, as, singly or in the
aggregate, do not have, and would not reasonably be expected to have, an
OrthAlliance Material Adverse Effect.
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4.23. Insurance. OrthAlliance and its Subsidiaries maintain insurance
coverage reasonably adequate for their assets and the operation of their
businesses. None of OrthAlliance or its Subsidiaries is in material default with
respect to any policies or binders of indemnity, liability, directors' and
officers,' worker's compensation, health and other forms of insurance policies
or binders in force as of the date hereof and insuring against risks of any of
OrthAlliance and its Subsidiaries. No notice of cancellation or non-renewal with
respect to, or disallowance of any claim under, any such policy has been
received by OrthAlliance or any of its Subsidiaries. Each of OrthAlliance and
its Subsidiaries is named as an additional insured party on the professional
liability insurance policies of their respective OrthAlliance Affiliated
Professionals and/or OrthAlliance Affiliated PCs.
4.24. Billing Practices; Fraud and Abuse. All billing practices by
OrthAlliance and its Subsidiaries to all third party payors, including without
limitation, to the extent applicable, the TRICARE (formerly CHAMPUS) program,
the federal Medicare program, state Medicaid programs, all other state and
federal benefit programs, and all private insurance programs, have been true,
fair and correct and in compliance with all applicable Laws and the policies of
all such third party payors, and neither OrthAlliance nor any of its
Subsidiaries has billed for or received any payment or reimbursement in excess
of amounts allowed by applicable Law; except, in each case, as, singly or in the
aggregate, does not have, and would not reasonably be expected to have, an
OrthAlliance Material Adverse Effect. None of OrthAlliance and its Subsidiaries,
and their respective officers, directors, employees and affiliates and persons
and entities providing professional services for OrthAlliance or any of its
Subsidiaries has engaged in any activities which are prohibited under 42 U.S.C.
sec.sec. 1320a-7b and 1395nn, the regulations in 42 CFR sec.sec. 1001 et seq.,
or any related state or local statutes or regulations, or which are prohibited
by rules of professional conduct, including knowingly and willfully (i) making
or causing to be made a false statement or representation of a material fact in
any application for any benefit or payment, (ii) making or causing to be made
any false statement or representation of a material fact for use in determining
rights to any benefit or payment, (iii) soliciting or receiving any
remuneration, directly or indirectly, in cash or kind, in return for (A)
referring an individual to a person for the furnishing or arranging for the
furnishing of any item or service for which payment may be made in whole or in
part under any federal or state health care program or (B) purchasing, leasing,
or ordering or arranging for or recommending purchasing, leasing or ordering any
good, facility, service, or item for which payment may be made in whole or in
part under any federal or state health care program or (iv) offering or paying
any remuneration, directly or indirectly, in cash or kind, to any person to
induce such person (A) to refer an individual to a person for the furnishing or
arranging for the furnishing of any item or service for which payment may be
made in whole or in part under any federal or state health care program or (B)
to purchase, lease, order, or arrange for or recommend purchasing, leasing, or
ordering any good, facility, service, or item for which payment may be made in
whole or in part under any federal or state health care program; except, in each
case, as, singly or in the aggregate, does not have, and would not reasonably be
expected to have, an OrthAlliance Material Adverse Effect.
4.25. Required Stockholder Vote. The affirmative vote at the OrthAlliance
Stockholders' Meeting of a majority of the outstanding shares of OrthAlliance
Common Stock, voting as a single class, is the only vote of the holders of any
shares of capital stock of OrthAlliance necessary under OrthAlliance's
certificate of incorporation, bylaws and other governing documents, applicable
law and the listing standards and other rules and requirements of any stock
exchange or market on which capital stock of OrthAlliance is listed or quoted,
to approve and adopt this Agreement and the transactions contemplated hereby.
4.26. Takeover Laws. The Board of Directors of OrthAlliance has taken all
necessary and appropriate action so that Section 203 of the DGCL will be
inapplicable to this Agreement and the transactions contemplated hereby.
OrthAlliance, its Subsidiaries and this Agreement and the transactions
contemplated hereby, are not subject to or are exempt from, the requirements of
any "moratorium," "control share," "fair price" or other state anti-takeover
laws and regulations (collectively, "Takeover Laws").
4.27. Reorganization. OrthAlliance has no reason to believe that the
Merger will fail to qualify as a reorganization under Section 368(a) of the
Code.
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4.28. Brokers and Finders. OrthAlliance and its Subsidiaries have not
entered into any contract, arrangement or understanding with any Person or firm
(other than with U.S. Bancorp Piper Jaffray Inc., as reflected in an engagement
letter between such firm and OrthAlliance, a true, complete and correct copy of
which has heretofore been provided to OCA) which may result in the obligation of
OrthAlliance or any of its Subsidiaries to pay any finder's fees, brokerage
fees, agent commissions or similar fees, commissions or payments in connection
with the transactions contemplated hereby, and there is no claim for payment of
any such fees, commissions or payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
4.29. Opinion of Financial Advisor. OrthAlliance has received the opinion
of its financial advisor, U.S. Bancorp Piper Jaffray Inc., to the effect that
the Applicable Exchange Ratio is fair from a financial point of view to the
holders of OrthAlliance Common Stock.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF OCA
OCA hereby represents and warrants to OrthAlliance that, except as set
forth in the disclosure schedule dated as of the date hereof and signed by an
authorized officer of OCA, with each such exception included therein
specifically identifying the relevant Section hereto to which it specifically
relates (the "OCA Disclosure Schedule"):
5.1. Corporate Organization.
(a) OCA is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has the corporate power
and authority to own, lease and operate its assets and properties and to carry
on its business as it is currently being conducted. OCA is duly qualified and in
good standing to transact business as a foreign corporation in each jurisdiction
in which the ownership or use of its assets and properties and the conduct of
its business requires such qualification, except such jurisdictions,
individually or in the aggregate, in which the failure to be so qualified does
not have, and would not be reasonably expected to have, an OCA Material Adverse
Effect. True, accurate and complete copies of OCA's certificate of
incorporation, bylaws or other governing documents, and all amendments thereto,
in each case as in effect on the date hereof, have heretofore been delivered or
made available to OrthAlliance.
(b) OCA Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has the corporate
power and authority to own, lease and operate its assets and properties and to
carry on its business as it is currently being conducted. OCA Merger Sub was
formed solely for the purpose of engaging in the transactions contemplated in
this Agreement and has not engaged in any activities other than in connection
with those transactions. OCA Merger Sub has not incurred any material
obligations or liabilities or entered into any material agreements or
arrangements with any Person except for this Agreement and as contemplated
hereby. True, accurate and complete copies of OCA Merger Sub's certificate of
incorporation, bylaws or other governing documents, and all amendments thereto,
in each case as in effect on the date hereof, have heretofore been delivered or
made available to OrthAlliance.
5.2. Authorization; Binding Agreement. Each of OCA and OCA Merger Sub has
the corporate power and authority to enter into this Agreement and the other
documents and instruments to be executed and delivered by OCA and OCA Merger Sub
pursuant hereto (collectively, the "OCA Documents"), and to consummate the
Merger and the other transactions contemplated hereby. The execution and
delivery of this Agreement and the OCA Documents, and the consummation of the
transactions contemplated hereby, have been duly authorized and approved by the
Board of Directors of OCA at a meeting duly called and held and at which a
quorum was present and acting throughout, by the requisite affirmative vote of
the directors of OCA, and the Board of Directors of OCA has determined that the
Merger is in the best interests of OCA and its stockholders and approved this
Agreement and the Merger. The execution and delivery of this Agreement and the
OCA Documents, and the consummation of the transactions
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contemplated hereby, have been duly authorized and approved by the Board of
Directors of OCA Merger Sub, and by OCA as the sole stockholder of OCA Merger
Sub, and the Board of Directors of OCA Merger Sub has determined that the Merger
is in the best interests of OCA Merger Sub and its stockholders and approved
this Agreement and the Merger. No other corporate proceedings on the part of OCA
or OCA Merger Sub are necessary to authorize the execution and delivery of this
Agreement or the consummation by OCA and OCA Merger Sub of the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by OCA and OCA Merger Sub, and, assuming due execution and delivery by
OrthAlliance, this Agreement constitutes the valid and binding agreement and
obligation of OCA and OCA Merger Sub, enforceable against OCA and OCA Merger Sub
in accordance with its terms (except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
similar laws now or hereafter in effect affecting creditors' rights generally
and general equitable principles, regardless of whether enforceability is
considered in a proceeding in law or in equity).
5.3. Consents and Approvals. Except for (a) the filing with, and
declaration of effectiveness by, the SEC of the Registration Statement in which
will be included as a prospectus the Proxy Statement, (b) the filing of the
Certificate of Merger with the Delaware Secretary, (c) the filing by OCA and
OrthAlliance of a pre-merger notification with the FTC and the Antitrust
Division under the HSR Act, and the expiration or termination of any waiting
period thereunder, (d) approval for listing of OCA Common Stock to be issued in
the Merger on the NYSE, (e) any filings required under state securities or "Blue
Sky" laws, (f) any filings and consents as may be required under any
environmental, health or safety law or regulation pertaining to any
notification, disclosure or required approval necessitated by the transactions
contemplated in this Agreement, (g) requisite consent to consummation of the
Merger by the lenders under the OCA Credit Agreement, and (h) such other
authorizations, consents, approvals or filings, the failure of which to obtain
or make, individually or in the aggregate, does not have, and would not
reasonably be expected to have, an OCA Material Adverse Effect or materially
impair or delay the consummation by OCA or OCA Merger Sub of the transactions
contemplated hereby, no consents or approvals of or filings or registrations
with any Governmental Authority or with any third party are necessary in
connection with (i) the execution and delivery by OCA and OCA Merger Sub of this
Agreement and the OCA Documents and (ii) the consummation by OCA and OCA Merger
Sub of the Merger. Neither OCA nor OCA Merger Sub were, immediately prior to
their execution of this Agreement, an "interested shareholder" of OrthAlliance
within the meaning of Section 203 of the DGCL.
5.4. No Conflicts. Neither the execution or delivery by OCA and OCA Merger
Sub of this Agreement and the other OCA Documents, nor the consummation by OCA
and OCA Merger Sub of the transactions contemplated hereby or thereby, nor the
compliance by OCA with the provisions hereof, will: (a) violate or conflict with
or result in any breach of any provision of the certificate of incorporation,
bylaws or other governing documents of OCA, OCA Merger Sub or their
Subsidiaries; (b) violate or conflict with any order, injunction, decree, law,
statute, rule, ordinance or regulation applicable to OCA, OCA Merger Sub or
their Subsidiaries or by which any of their respective properties or assets may
be bound; (c) result in a violation or breach of, constitute a default or give
rise to any right of termination, cancellation or acceleration under, any loan
or credit agreement, note, mortgage, bond, indenture, lease, benefit plan or
other agreement, obligation or instrument applicable to OCA, OCA Merger Sub or
their Subsidiaries, or result in the creation of an Encumbrance upon any
property or asset of OCA, OCA Merger Sub or their Subsidiaries or by which any
such properties or assets may be bound, or trigger any right of first refusal or
other purchase right applicable to OCA, OCA Merger Sub or any Subsidiary
thereof; or (d) result in the loss of any license, franchise or permit
applicable to OCA, OCA Merger Sub or any Subsidiary thereof; except in each
case, where such violation, conflict, breach, default, loss or other event,
individually or in the aggregate, does not have, and would not reasonably be
expected to have, an OCA Material Adverse Effect.
5.5. Capitalization.
(a) The authorized capital stock of OCA consists of 100,000,000 shares of
OCA Common Stock, and 10,000,000 shares of preferred stock, par value $.01 per
share ("OCA Preferred Stock"). As of the
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date hereof, (i) 49,158,539 shares of OCA Common Stock were issued and
outstanding, all of which were validly issued and are fully paid, nonassessable
and free of preemptive rights, (ii) no shares of OCA Preferred Stock were issued
and outstanding, and (iii) no shares of OCA Common Stock and no shares of OCA
Preferred Stock were held in the treasury of OCA or any of its Subsidiaries.
(b) Except for options, commitments and agreements under OCA's stock option
and stock purchase programs to purchase a total of 4,256,502 shares of OCA
Common Stock, OCA does not have and is not bound by any outstanding
subscriptions, options, warrants, convertible securities, conversion rights,
preemptive or other rights, calls, commitments or agreements of any character
calling for the purchase or issuance of any shares of OCA Common Stock or OCA
Preferred Stock or any other equity security or capital stock of OCA or any
securities representing the right to purchase or otherwise receive any shares of
OCA Common Stock or any other equity security or capital stock of OCA.
(c) The shares of OCA Common Stock to be issued pursuant to the Merger will
be duly authorized and validly issued, and, at the Effective Time, will be fully
paid, nonassessable and free of preemptive rights.
(d) The authorized capital stock of OCA Merger Sub consists of 1,000 shares
of OCA Merger Sub Common Stock. OCA owns beneficially and of record all the
issued and outstanding shares of OCA Merger Sub Common Stock.
5.6. SEC Reports and Financial Statements.
(a) OCA has timely filed with the SEC all reports, schedules, forms,
registration statements, proxy statements, information statements and other
documents (including all exhibits, post-effective amendments and supplements)
required to be filed by OCA with the SEC since January 1, 1998 (collectively,
the "OCA SEC Reports"), all of which OCA SEC Reports, as amended if applicable,
complied when filed in all material respects with all applicable requirements of
the appropriate act and the rules and regulations thereunder. OCA has previously
delivered or made available to OrthAlliance copies (including all exhibits,
post-effective amendments and supplements) of the OCA SEC Reports. None of OCA's
Subsidiaries is or has been required to file any reports, schedules, forms,
registration statements, proxy statements, information statements or other
documents with the SEC. As of their respective dates, the OCA SEC Reports did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
(b) Except as disclosed in the OCA SEC Reports, the audited consolidated
financial statements and unaudited interim consolidated financial statements of
OCA included in the OCA SEC Reports (collectively, the "OCA Financial
Statements") were prepared in accordance with GAAP consistently applied
throughout the periods involved (except as may be indicated therein or in the
notes thereto) and fairly present in all material respects the consolidated
financial position of OCA and its Subsidiaries as of the dates thereof and the
results of their operations and their cash flows for the periods then ended,
subject, in the case of the unaudited interim financial statements, to normal
year-end and audit adjustments and any other adjustments described therein.
5.7. Subsidiaries. Except as disclosed in the OCA SEC Reports, OCA does
not have any Subsidiaries that are required to be disclosed in such OCA SEC
Reports. Each Subsidiary of OCA is duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has the
requisite power and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being conducted in all
material respects. Each Subsidiary of OCA is qualified to do business and is in
good standing in each jurisdiction in which the properties it owns, leases or
operates or the nature of the business it conducts makes such qualification
necessary, except where the failure to be so qualified and in good standing,
when taken together with all such other failures with respect to all of OCA's
Subsidiaries, does not have, and would not reasonably be expected to have, an
OCA Material Adverse Effect.
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5.8. Absence of Undisclosed Liabilities. None of OCA or its Subsidiaries
has incurred any liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of any nature, except (a) liabilities, obligations or
contingencies that are accrued or reserved against in the OCA 2000 Financial
Statements or reflected in the notes thereto, or were incurred in the ordinary
course of business and consistent with past practices, (b) liabilities,
obligations or contingencies that, individually or in the aggregate, do not
have, and would not reasonably be expected to have, an OCA Material Adverse
Effect, and (c) liabilities and obligations that are of a nature not required to
be reflected in the OCA 2000 Financial Statements, and that were incurred in the
ordinary course of business, consistent with past practice.
5.9. Litigation; Decrees. Except as disclosed in the OCA SEC Reports,
there are no claims, suits, actions, arbitration actions, government
investigations or inquiries or other proceedings pending or, to the knowledge of
OCA, threatened against, relating to or affecting any of OCA or its
Subsidiaries, or their assets or businesses, which seeks to restrain or enjoin
the consummation of the transactions contemplated herein or which have, or would
reasonably be expected to have, either alone or in the aggregate with all such
claims, actions or other proceedings, an OCA Material Adverse Effect. Except as
disclosed in the OCA SEC Reports, there are no decrees, injunctions, writs or
orders of any court or governmental department or agency applicable to any of
OCA or its Subsidiaries, or their assets or businesses, or which prohibits or
restricts the consummation of the transactions contemplated herein or which
have, or would reasonably be expected to have, an OCA Material Adverse Effect.
5.10. Compliance with Law. OCA and each of its Subsidiaries is in
compliance with all applicable Laws of the United States of America and any
applicable foreign jurisdictions, all state and local governments and other
Governmental Authorities, and agencies and courts of any of the foregoing, to
which any of OCA or its Subsidiaries is subject, and none of OCA or its
Subsidiaries has received any notice to the effect that, or otherwise been
advised that, any of OCA or its Subsidiaries has violated or is not in
compliance with any of such Laws, and, to the knowledge of OCA, there are no
investigations with respect thereto; except in each case with respect to
non-compliance or violations that, individually or in the aggregate, do not
have, and would not reasonably be expected to have, an OCA Material Adverse
Effect. OCA and its Subsidiaries have all permits necessary to conduct their
businesses as currently conducted, except for permits, the absence of which, in
the aggregate, do not have, and would not reasonably be expected to have, an OCA
Material Adverse Effect, and none of OCA and its Subsidiaries is in violation of
the terms of any such permit, except for delays in filing reports or violations
that do not have, and would not reasonably be expected to have, an OCA Material
Adverse Effect.
5.11. Absence of Certain Changes or Events. Except as disclosed in the OCA
SEC Reports, since December 31, 2000, none of OrthAlliance or its Subsidiaries
has operated other than in the ordinary course of business consistent with past
practice, or incurred, experienced or suffered any OCA Material Adverse Effect.
5.12. Reorganization. OCA has no reason to believe that the Merger will
fail to qualify as a reorganization under Section 368(a) of the Code.
5.13. Brokers and Finders. OCA and its Subsidiaries have not entered into
any contract, arrangement or understanding with any Person or firm (other than
Banc of America Securities LLC) which may result in the obligation of
OrthAlliance or any of its subsidiaries to pay any finder's fees, brokerage
fees, agent commissions or similar fees, commissions or payments in connection
with the transactions contemplated hereby, and there is no claim for payment of
any such fees, commissions or payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
5.14. Opinion of Financial Advisor. The financial advisor of OCA, Banc of
America Securities LLC, has rendered an opinion to the Board of Directors of OCA
to the effect that the Applicable Exchange Ratio is fair from a financial point
of view to OCA.
5.15. Trading on NYSE. Shares of OCA Common Stock are listed for trading
on the NYSE, and trading in OCA Common Stock on the NYSE is not suspended.
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ARTICLE VI.
CERTAIN COVENANTS AND AGREEMENTS
6.1. Conduct of OrthAlliance's Business Pending the Merger. During the
period from the date of this Agreement and continuing until the Effective Time,
except as expressly contemplated or permitted by this Agreement or with the
prior express written consent of OCA, OrthAlliance and each of its Subsidiaries
shall maintain its existence and carry on its respective businesses in the
ordinary course consistent with past practice. Without limiting the generality
of the foregoing, and except as set forth in Section 6.1 of the OrthAlliance
Disclosure Schedule or as otherwise contemplated by this Agreement or as
expressly consented to in writing in advance by OCA, OrthAlliance shall, and
shall cause each of its Subsidiaries to:
(a) not declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock during any period, other
than dividends or distributions by a Subsidiary of OrthAlliance to OrthAlliance
or another Subsidiary of OrthAlliance;
(b) not (i) repurchase, redeem or otherwise acquire any shares of the
capital stock of OrthAlliance or any Subsidiary of OrthAlliance, or any
securities convertible into or exercisable for any shares of the capital stock
of OrthAlliance or any Subsidiary of OrthAlliance, (ii) split, combine or
reclassify any shares of its capital stock, or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for, shares of its capital stock, or (iii) issue, deliver or sell, or authorize
or propose the issuance, delivery or sale of, any shares of its capital stock or
any securities convertible into or exercisable for, or any rights, warrants or
options to acquire, any such shares, or enter into any agreement with respect to
any of the foregoing, except, in the case of clauses (ii) and (iii), for the
issuance of OrthAlliance Class A Common Stock upon the exercise, conversion or
fulfillment of the Warrants, OrthAlliance Class B Common Stock or options issued
or existing pursuant to the OrthAlliance Option Plans all to the extent
outstanding and in existence on the date of this Agreement and in accordance
with their current terms;
(c) not amend its certificate of incorporation, articles of incorporation,
bylaws or other similar governing documents;
(d) not make any capital expenditures other than those which are made in
the ordinary course of business consistent with past practice or are necessary
to maintain existing assets in good repair;
(e) not enter into any new line of business;
(f) not acquire or agree to acquire, by merging or consolidating with, or
by purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or Person or division thereof,
nor otherwise acquire any assets other than expenditures for current assets in
the ordinary course of business consistent with past practice and expenditures
for fixed or capital assets in the ordinary course of business consistent with
past practice;
(g) not change its methods of accounting, except as required by changes in
GAAP or regulatory accounting principles as concurred to by OrthAlliance's
independent auditors;
(h) except as required by applicable law, or to the extent required under
any OrthAlliance Benefit Plan to which OrthAlliance or a Subsidiary thereof is a
party prior to the date hereof, or as required to maintain qualification
pursuant to the Code, not adopt, amend, terminate or accelerate the payment,
right to payment or vesting of any bonus, profit sharing, compensation, stock
option, pension, retirement, deferred compensation, employment or other employee
benefit plan, agreement, trust, fund or arrangement for any employee, director,
officer or retiree (including, without limitation, any OrthAlliance Benefit
Plan);
(i) not enter into, amend or terminate any employment, severance,
consulting, change in control or similar agreement, arrangement or contract
between OrthAlliance or any Subsidiary of OrthAlliance and one or more of its
current or former directors, officers or employees, nor, except for normal
increases in the ordinary course of business consistent with past practice or
except as required by applicable law,
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increase in any manner the compensation or fringe benefits of any director,
officer, consultant or employee or pay any benefit not required by any
OrthAlliance Benefit Plan or agreement as in effect as of the date hereof, nor
grant, modify or award any stock options, stock appreciation rights, restricted
stock, restricted stock units or performance units or shares; provided, however,
that OrthAlliance may employ a chief executive officer who is reasonably
satisfactory to OCA, pursuant to compensation, benefits, severance and other
terms of employment that are commercially reasonable and otherwise comparable to
that of a chief executive officer of a comparable company, including with
respect to severance, change in control, "golden parachute" or other payments
triggered by or resulting from this Agreement, the transactions contemplated
hereby or the consummation thereof, and approved in advance in writing by OCA;
(j) not take or permit to be taken any action which would disqualify the
Merger as a reorganization under Section 368(a) of the Code;
(k) other than activities in the ordinary course of business consistent
with past practice, not sell, lease, encumber, assign or otherwise dispose of,
nor agree to sell, lease, encumber, assign or otherwise dispose of, any of its
material assets, properties or other rights or agreements;
(l) not incur any indebtedness for borrowed money, other than in the
ordinary course of business consistent with past practice, and in any event, in
an aggregate amount of not greater than $100,000 (except that OrthAlliance and
its Subsidiaries may, after using their respective reasonable best efforts to
fund the following payments through OrthAlliance's and its Subsidiaries
available cash flow, incur additional indebtedness of up to $5,000,000 with
respect to the payment of professional fees, interest and taxes due and payable
in the ordinary course of business, consistent with past practice, and, with the
prior written consent of OCA, which shall not be unreasonably held, the
acquisition of capital stock or assets of, or entering into a West Service and
Consulting Agreement with, orthodontists, pedodontists or their professional
entities, capital expenditures and the opening of additional or satellite
offices or practice locations), nor assume, guarantee, endorse or otherwise as
an accommodation become responsible for the obligations of any other Person,
other than in the ordinary course of business consistent with past practice;
(m) not agree to the settlement of any material claim or litigation, other
than claims and litigation that are disclosed in OrthAlliance's Annual Report on
Form 10-K for the year ended December 31, 2000, as filed with the SEC, or in the
OrthAlliance Disclosure Schedule;
(n) not enter into any agreement, understanding or commitment that
restrains, limits or impedes, in any material respects, OrthAlliance's or its
Subsidiaries' ability to compete with or conduct any business or line of
business, including geographic limitations;
(o) not plan, announce, implement or effect any reduction in force,
lay-off, early retirement program, severance program or other program or effort
concerning the termination of employment of employees of OrthAlliance or its
Subsidiaries, other than routine employee terminations in the ordinary course of
business;
(p) not make, change or revoke any material Tax election or make any
material agreement or settlement regarding Taxes with any taxing authority;
(q) not enter into, create, renew, amend, cancel or terminate or give
notice of a proposed renewal, amendment, cancellation or termination of, any
material contract, agreement or lease to which OrthAlliance or any of its
Subsidiaries is a party or by which OrthAlliance or any of its Subsidiaries or
their respective properties is bound, including any Service or Consulting
Agreement, nor waive, release or assign any material rights or claims, except in
the ordinary course of business and consistent with past practice or as
contemplated by this Agreement;
(r) not pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge, settlement or satisfaction, in the ordinary course of
business consistent with past practice or in accordance with their terms, of
liabilities reflected or reserved against in, or contemplated by, the
OrthAlliance 2000 Financial Statements or incurred in the ordinary course of
business consistent with past practice;
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(s) not violate or fail to perform in any material respect any material
obligation or duty imposed upon it by applicable Law;
(t) not authorize, recommend, propose or announce an intention to do any of
the foregoing, nor enter into any contract, agreement, commitment or arrangement
to do any of the foregoing;
(u) use commercially reasonable efforts to maintain with financially
responsible insurance companies insurance on its tangible assets and its
businesses in such amounts and against such risks and losses as are commercially
reasonable and consistent with past practice;
(v) use its reasonable best efforts to collect outstanding Receivables,
shall not generate, create or allow any Receivables other than in the ordinary
course of business consistent with past practice and, in any event, shall not
generate, create or allow any Receivables in an aggregate amount that exceeds
the amount set forth in Section 4.14 of the OrthAlliance Disclosure Schedule;
and
(w) use all reasonable efforts to keep available the services of its
current officers and employees and preserve its relationships with
orthodontists, pedodontists, dentists, professional entities, customers,
suppliers, licensors, lessors, third party payors and others having business
dealings with it to the end that its goodwill and ongoing business shall be
unimpaired at the Effective Time.
6.2. Conduct of OCA's Business Pending the Merger. During the period from
the date of this Agreement and continuing until the Effective Time, except as
expressly contemplated or permitted by this Agreement or with the prior express
written consent of OrthAlliance, OCA shall maintain its existence and carry on
its business in the ordinary course consistent with past practice. Without
limiting the generality of the foregoing, and except as set forth in Section 6.2
of the OCA Disclosure Schedule or as otherwise contemplated by this Agreement or
as expressly consented to in writing in advance by OrthAlliance, OCA shall, and
shall cause each of its Subsidiaries to:
(a) not declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock during any period, other
than dividends or distributions by a Subsidiary of OCA to OCA or another
Subsidiary of OCA;
(b) not split, combine or reclassify any shares of its capital stock, or
issue or authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for, shares of its capital stock;
(c) not amend its certificate of incorporation;
(d) not take or permit to be taken any action which would disqualify the
Merger as a reorganization under Section 368 of the Code; and
(e) not authorize, recommend, propose or announce an intention to do any of
the foregoing, or enter into any contract, agreement, commitment or arrangement
to do any of the foregoing.
6.3. Access to Information.
(a) Upon reasonable notice and subject to applicable Laws relating to the
exchange of information, each of OCA and OrthAlliance shall, and shall cause
each of its respective Subsidiaries to, afford to the officers, employees,
accountants, attorneys, financial advisors and other representatives (each, a
"Representative") of the other party, access during normal business hours during
the period prior to the Effective Time to all its properties, books, contracts,
commitments, records, officers, employees, accountants, counsel and other
representatives and, during such period, it shall, and shall cause its
Subsidiaries to, make available to the other party all information concerning
its business, properties and personnel as the other party may reasonably request
in connection herewith.
(b) All information furnished pursuant to Section 6.3(a) shall be subject
to, and the parties shall hold all such information in confidence in accordance
with, the provisions of the confidentiality agreement, dated as of January 3,
2001 (the "Confidentiality Agreement"), between OCA and OrthAlliance.
(c) Notwithstanding anything in the Confidentiality Agreement or any other
agreement to the contrary, no provision of the Confidentiality Agreement or
investigation by either of the parties or their
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respective Representatives shall affect the representations, warranties,
covenants or agreements of the other set forth herein and the parties shall
remain responsible to the extent provided herein.
6.4. No Solicitation.
(a) OrthAlliance agrees that it and its Subsidiaries, officers, directors,
employees, representatives, consultants, investment bankers, attorneys,
accountants and agents shall not, directly or indirectly, (i) encourage,
solicit, initiate, facilitate, entertain or accept any Acquisition Proposal,
(ii) enter into any agreement with respect to any Acquisition Proposal or enter
into any arrangement, understanding or agreement requiring it to abandon,
terminate or fail to consummate the Merger or any other transactions
contemplated by this Agreement, (iii) propose or make any Acquisition Proposal
to any Person other than OCA and OCA Merger Sub, (iv) participate in any way in
discussions or negotiations with, or furnish or disclose any information to, any
Person (other than OCA and OCA Merger Sub) in connection with or with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal, or (v) authorize or permit its Subsidiaries, officers,
directors, employees, representatives, consultants, investment bankers,
attorneys, accountants and agents to do any of the foregoing; provided, however,
that OrthAlliance, in response to an unsolicited, bona fide, written Acquisition
Proposal, may, after giving notice to OCA and without limiting OrthAlliance's
obligations under Section 8.4, take one or more of the following actions if the
Board of Directors of OrthAlliance determines in good faith that the failure to
take such action or actions would violate the fiduciary obligations of such
Board of Directors under applicable law: (1) participate or engage in such
discussions or negotiations with the Person making such Acquisition Proposal
regarding such unsolicited, bona fide, written Acquisition Proposal, (2) provide
or cause to be provided information to the Person making such Acquisition
Proposal (pursuant to a confidentiality agreement with terms not more favorable
to such third party than the terms of the Confidentiality Agreement between
OrthAlliance and OCA), and (3) authorize and permit its officers, directors,
employees, representatives, investment bankers, attorneys, accountants,
financial advisors and agents to take such actions. OrthAlliance and its
Subsidiaries, officers, directors, employees, representatives, consultants,
investment bankers, attorneys, accountants and agents shall immediately cease
any discussions, activities or negotiations with Persons other than OCA and OCA
Merger Sub that may be ongoing or previously or currently conducted with respect
to any Acquisition Proposal.
(b) In addition, the Board of Directors of OrthAlliance, and each committee
thereof, shall not (A) withdraw or modify, or propose to withdraw or modify, in
a manner adverse to OCA or OCA Merger Sub, the approval and recommendation of
this Agreement or the Merger, or (B) approve or recommend, or propose to approve
or recommend, any Acquisition Proposal other than the Merger; provided, however,
the Board of Directors of OrthAlliance may, if the Board of Directors of
OrthAlliance determines in good faith that the failure to do so would violate
the fiduciary obligations of such Board of Directors under applicable law, after
giving notice to OCA and without limiting OrthAlliance's obligations under
Section 8.4, (i) recommend a Superior Proposal and in connection therewith
withdraw or modify its approval or recommendation of this Agreement and the
Merger, and (ii) terminate this Agreement solely in order to concurrently enter
into a merger agreement, acquisition agreement, option agreement or letter of
intent with respect to such Superior Proposal, but only after the fifth business
day following OCA's receipt of written notice from OrthAlliance advising OCA
that the Board of Directors of OrthAlliance is prepared to accept such Superior
Proposal and describing the terms and conditions of such Superior Proposal and
the Person making such Superior Proposal.
(c) Within 24 hours of receipt thereof, OrthAlliance shall promptly notify
OCA of any request for information or of any Acquisition Proposal, or any
inquiry, proposal, discussions or negotiations with respect to any Acquisition
Proposal, and OrthAlliance shall promptly provide OCA with the terms and
conditions of such request, Acquisition Proposal, inquiry, proposal, discussion
or negotiation, copies of any written materials received by OrthAlliance in
connection with any of the foregoing and the identity of the Person making any
such Acquisition Proposal or such request, inquiry or proposal or with whom any
discussions or negotiations are taking place. OrthAlliance shall keep OCA fully
informed of the status and details (including amendments or proposed amendments)
of any such request or Acquisition Proposal and
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keep OCA fully informed as to the details of any information requested of or
provided by OrthAlliance and as to the details of all discussions or
negotiations with respect to any such request, takeover proposal or inquiry.
OrthAlliance shall promptly provide to OCA any non-public information concerning
OrthAlliance provided to any other Person in connection with any Acquisition
Proposal which was not previously provided to OCA.
(d) Nothing contained in this Section 6.4 shall prohibit OrthAlliance from
taking or disclosing to its stockholders a position contemplated by Rule
14d-9(f) or Rule 14e-2(a) promulgated under the Exchange Act or from making any
disclosure to OrthAlliance's stockholders if the Board of Directors of
OrthAlliance determines in good faith that the failure to do so would violate
the fiduciary obligations of such Board of Directors under applicable law;
provided, however, that, except as otherwise permitted in Section 6.4(b),
neither OrthAlliance nor its Board of Directors nor any committee thereof shall
withdraw or modify, or propose to withdraw or modify, its position with respect
to this Agreement or the Merger or approve or recommend, or propose to approve
or recommend, an Acquisition Proposal.
(e) For purposes of this Agreement:
(i) "Acquisition Proposal" shall mean any tender or exchange offer,
proposal for a merger, consolidation or other business combination
involving OrthAlliance or any Subsidiary of OrthAlliance or any proposal,
inquiry or offer to acquire in any manner, in a single transaction or a
series of related transactions, all or 15% or greater equity interest in,
or all or a substantial portion of the assets of, OrthAlliance or any
Subsidiary of OrthAlliance, other than the transactions contemplated or
permitted by this Agreement; and
(ii) "Superior Proposal" shall mean a bona fide, written Acquisition
Proposal to acquire all or substantially all of the capital stock or assets
of OrthAlliance made by a Person which is not an Affiliate of OrthAlliance
or its Subsidiaries, and with respect to which the Board of Directors of
OrthAlliance determines in good faith that such Acquisition Proposal would
be more favorable to OrthAlliance and its stockholders than the
transactions contemplated hereby, that financing for such transaction, to
the extent required, is fully committed or is reasonably capable of being
obtained by such Person and that such transaction is reasonably capable of
being consummated without undue delay.
6.5. Registration Statement and Proxy Statement. As soon as practicable
following the date hereof, OCA and OrthAlliance shall jointly prepare, and OCA
shall file with the SEC, the Registration Statement in which the Proxy Statement
will be included as a prospectus. Each of OCA and OrthAlliance shall use its
reasonable best efforts to have the Registration Statement declared effective by
the SEC under the Securities Act as promptly as practicable after such filing,
to thereafter cause the Proxy Statement to be mailed to OrthAlliance's
stockholders as promptly as practicable, and to keep the Registration Statement
effective as long as is reasonably necessary to consummate the Merger. OCA shall
also use its reasonable best efforts (other than qualifying to do business in
any jurisdiction in which it is not currently qualified) to obtain all necessary
state securities law or "Blue Sky" permits and approvals required to carry out
the transactions contemplated by this Agreement. The parties will, promptly upon
receipt of written comments from the SEC with respect to the Registration
Statement, the Proxy Statement and the documents incorporated by reference
therein, provide copies thereof to the other party, consult with each other and
prepare written responses to such comments. The parties will promptly furnish to
the other all information concerning such party and other matters relevant to
such party, its stockholders and the transactions contemplated herein, and take
such other actions, as the other party or parties hereto may reasonably request
in connection with the preparation and filing of the Registration Statement and
the Proxy Statement. Each of OCA and OrthAlliance agrees that none of the
information such party provides for inclusion or incorporation by reference in
the Registration Statement or the Proxy Statement will (i) in the case of the
Registration Statement, at the time it becomes effective and at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or (ii) in the case of the Proxy Statement,
at the time of the mailing of the Proxy Statement and at the time of the
OrthAlliance
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Stockholders' Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading. The Registration Statement will comply as to form in
all material respects with the provisions of the Securities Act, and the Proxy
Statement will comply as to form in all material respects with the provisions of
the Exchange Act.
6.6. Stockholders Meeting. OrthAlliance shall take all steps in accordance
with applicable law necessary to duly call, give notice of, convene and hold the
OrthAlliance Stockholders' Meeting to be held as soon as is reasonably
practicable after the date on which the Registration Statement becomes effective
for the purpose of voting upon the approval and adoption of this Agreement.
Subject to Section 6.4(b), OrthAlliance will, through its Board of Directors,
recommend to its stockholders approval and adoption of this Agreement and the
Merger and other transactions contemplated hereby.
6.7. Affiliates. Within 30 days following the date hereof, OrthAlliance
shall deliver to OCA a list of names and addresses of each director, executive
officer and other Person who, in OrthAlliance's reasonable judgment, is an
"affiliate" of OrthAlliance within the meaning of Rule 145 under the Securities
Act, and OrthAlliance shall use its reasonable best efforts to cause each such
person to execute and deliver to OCA, as soon as practicable after the date of
this Agreement and prior to the Effective Time, a written affiliate letter
agreement, in the form and substance of Exhibit A hereto.
6.8. NYSE Listing. OCA shall make all filings required of it to cause the
shares of OCA Common Stock to be issued in the Merger to be approved for listing
on the NYSE, subject to official notice of issuance, as of the Effective Time.
6.9. Indemnification of OrthAlliance Directors and Officers.
(a) OCA agrees that all rights to indemnification and exculpation from
liabilities for acts or omissions (including advancement of expenses, if so
provided) occurring prior to the Effective Time now existing in favor of the
current or former directors or officers of OrthAlliance and its Subsidiaries
(collectively, the "Indemnified Parties") as provided by OrthAlliance or its
Subsidiaries in their respective certificates or articles of incorporation and
bylaws shall survive the Merger and shall continue in full force and effect in
accordance with their terms for a period of six years from and after the
Effective Time and the obligations of OrthAlliance and its Subsidiaries in
connection therewith shall be assumed by OCA.
(b) OCA shall cause each person serving as a director or officer of
OrthAlliance immediately prior to the Effective Time to be covered for a period
of six years from the Effective Time by the directors' and officers' liability
insurance policy maintained by OrthAlliance (provided that OCA may substitute
therefor policies of at least the same coverage and amounts containing terms and
conditions which are not less advantageous than such policy) with respect to
acts or omissions occurring prior to the Effective Time which were committed by
such officers and directors in their capacity as such; provided, however, that
in no event shall OCA be required to expend on an annual basis more than 200% of
the current amount expended by OrthAlliance (the "Insurance Amount") to maintain
or procure insurance coverage, and further provided that if OCA is unable to
maintain or obtain the insurance called for by this Section 6.9, OCA shall use
all reasonable efforts to obtain as much comparable insurance as is available
for the Insurance Amount.
(c) In the event OCA or any of its successors or assigns (i) consolidates
with or merges into any other Person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger, or (ii)
transfers or conveys all or substantially all of its properties and assets to
any Person, then, and in each such case, to the extent necessary, proper
provision shall be made so that the successors and assigns of OCA assume the
obligations set forth in this section.
(d) The provisions of this Section 6.9 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
6.10. Public Statements. OCA and OrthAlliance will consult with each other
and will mutually agree on any press releases or public announcements pertaining
to this Agreement or the transactions
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contemplated hereby and will not issue any such press releases or make any such
public announcements prior to such consultation and agreement, except as may be
required by applicable securities or other Laws or by obligations pursuant to
any applicable listing agreement or standard with or of the NYSE or the Nasdaq
Stock Market, as applicable, in which case the party proposing to issue such
press release or make such public announcement will use its commercially
reasonable best efforts to consult in good faith with the other party before
issuing any such press releases or making any such public announcements.
6.11. Expenses and Fees. All costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby, including legal,
accounting and financial advisory fees and expenses, will be paid by the party
incurring such costs and expenses, except that expenses and fees incurred in
connection with the printing and filing of the Registration Statement and the
Proxy Statement and with filings under the HSR Act (other than legal,
accounting, investment banking and financial advisory fees and expenses, which
shall be paid by the party incurring such fees and expenses) will be shared
equally by OCA and OrthAlliance. The foregoing shall not affect the legal right,
if any, that any party hereto may have to recover expenses from any other party
that breaches its obligations hereunder.
6.12. Notification. Each of OrthAlliance and OCA agree to (a) give prompt
notice to the other party, and to use their respective reasonable best efforts
to prevent or promptly remedy, (i) upon such party obtaining knowledge thereof,
the occurrence or failure to occur, or the impending or threatened occurrence or
failure to occur, of any event whose occurrence or failure to occur would be
likely to cause any of its representations or warranties in this Agreement to be
untrue or inaccurate in any material respect at any time from the date hereof to
the Effective Time, and (ii) any material failure on its part to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder and (b) give prompt notice to the other party of any fact which, if
known by it on the date hereof, would have been required to be set forth or
disclosed by it pursuant to this Agreement.
6.13. Additional Agreements. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger, the proper officers and directors of each party to this
Agreement and their respective Subsidiaries shall take all such necessary action
as may be reasonably requested by OCA.
6.14. Reasonable Best Efforts, Cooperation.
(a) Subject to the terms and conditions of this Agreement, each of OCA and
OrthAlliance agrees to use its respective reasonable best efforts in good faith
to take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or desirable, or advisable under applicable laws, so as
to permit consummation of the Merger as promptly as practicable and otherwise to
enable consummation of the transactions contemplated hereby and shall cooperate
fully with the other party hereto to that end.
(b) Without limitation of the foregoing, each party hereto undertakes and
agrees to:
(i) File as soon as practicable after the date hereof a Notification
and Report Form and related material under the HSR Act with the FTC and the
Antitrust Division. Each party hereto shall use their reasonable best
efforts to obtain an early termination of the applicable waiting period,
shall make any further filings or information submissions pursuant thereto
that may be necessary, proper or advisable, and shall (A) use its
commercially reasonable efforts to comply as expeditiously as possible with
all lawful requests of the FTC or the Antitrust Division for additional
information and documents and (B) not extend any waiting period under the
HSR Act or enter into any agreement with the FTC or the Antitrust Division
not to consummate the transactions contemplated by this Agreement, except
with the prior written consent of the other parties hereto;
(ii) Take all action necessary to ensure that no Takeover Law or
similar statute or regulation is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated hereby and if any
Takeover Law or similar statute or regulation becomes applicable to the
Merger, this Agreement or any of the other transactions contemplated
hereby, take all action necessary to ensure that the Merger and the other
transactions contemplated hereby may be consummated as
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promptly as practicable on the terms contemplated by this Agreement and
otherwise to minimize the effect of such statute or regulation on the
Merger and the other transactions contemplated by this Agreement;
(iii) Use its reasonable best efforts to cause the Merger to qualify
as a reorganization under the provisions of Section 368(a) of the Code and
to forebear from taking any action that would cause the Merger not to
qualify as a reorganization under the provisions of Section 368(a) of the
Code;
(iv) Promptly following the execution and delivery of this Agreement,
prepare and use reasonable efforts to obtain Amendments to OrthAlliance
Affiliated Professional Employment Agreements and Amendments to
OrthAlliance Service and Consulting Agreements from the OrthAlliance
Affiliated Professionals and OrthAlliance Affiliated PCs, and cooperate
with each other in connection therewith; and
(v) Cooperate with each other in obtaining opinions of OCA's Counsel
and OrthAlliance's Counsel, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code, and, in
connection therewith, deliver to such counsel customary representation
letters in form and substance reasonably satisfactory to such counsel.
6.15. OrthAlliance Credit Agreement. At the Effective Time, OCA, on behalf
of OrthAlliance, shall repay in full all borrowings, accrued interest and other
amounts then owing under the OrthAlliance Credit Agreement, and agree to the
termination of the commitments of the lenders under the OrthAlliance Credit
Agreement, unless such lenders otherwise agree in writing and, at or before the
Effective Time, provide the requisite consent under the OrthAlliance Credit
Agreement to consummation by OrthAlliance of the transactions contemplated
hereby.
6.16. OCA Board of Directors. Promptly upon the Effective Time, OCA's
Board of Directors shall increase the size of OCA's Board of Directors to create
a vacancy on such Board, and one individual who is serving as a director of
OrthAlliance as of the date hereof and the Closing Date, and who is selected by
the mutual agreement of the respective Boards of Directors of OCA and
OrthAlliance prior to the Effective Time, shall be appointed to fill such
vacancy as a director of OCA, to hold office in accordance with the certificate
of incorporation and bylaws of OCA.
ARTICLE VII.
CONDITIONS TO CLOSING
7.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each of the parties hereto to effect the Merger shall
be subject to the satisfaction, or the waiver by such party, at or prior to the
Effective Time, of the following conditions:
(a) Stockholder Approval. This Agreement shall have been duly approved and
adopted by the requisite vote of the stockholders of OrthAlliance under
applicable law.
(b) Listing of Shares. The shares of OCA Common Stock which shall be
issued to the stockholders of OrthAlliance upon consummation of the Merger shall
have been authorized for listing on the NYSE, subject to official notice of
issuance.
(c) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the SEC.
(d) HSR Approval. Any waiting period (and any extension thereof)
applicable to the consummation of the Merger under the HSR Act shall have
expired or been terminated.
(e) Approvals. All consents, approvals, orders or authorizations of or
registrations, declarations or filings with any Governmental Authority, which
the failure to obtain, make or occur has or would reasonably be expected to have
the effect of making the Merger or any of the transactions contemplated
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hereby illegal or to have an OrthAlliance Material Adverse Effect or an OCA
Material Adverse Effect, as the case may be, shall have been obtained, shall
have been made or shall have occurred, and shall be in full force and effect.
(f) No Injunctions or Restraints; Illegality. No order, injunction or
decree issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Merger shall be in
effect. No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated or enforced by any Governmental Authority
which prohibits, restricts or makes illegal consummation of the Merger.
7.2. Conditions to Obligations of OCA. The obligation of OCA to effect the
Merger is also subject to the satisfaction, or waiver by OCA, at or prior to the
Effective Time, of the following conditions:
(a) Representations and Warranties of OrthAlliance. Each of the
representations and warranties of OrthAlliance contained in this Agreement (i)
that are qualified by materiality, including the terms "material," "in any
material respects," "in all material respects" and "OrthAlliance Material
Adverse Effect" or words of similar effect, shall be true and correct in all
respects when made and as of the Closing, with the same effect as though such
representations and warranties had been made on and as of the Closing, and (ii)
that are not so qualified by materiality, shall be true and correct in all
material respects when made and as of the Closing, with the same effect as
though such representations and warranties had been made on and as of the
Closing. OCA shall have received a certificate signed on behalf of OrthAlliance
by the Chief Executive Officer and the Chief Financial Officer of OrthAlliance
to the foregoing effect.
(b) Performance of Obligations of OrthAlliance. OrthAlliance shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and OCA shall have
received a certificate signed on behalf of OrthAlliance by the Chief Executive
Officer and the Chief Financial Officer of OrthAlliance to such effect.
(c) Federal Tax Opinion. OCA shall have received an opinion from Waller
Lansden Dortch & Davis, PLLC, counsel to OCA ("OCA's Counsel"), dated the
Effective Time, in form and substance reasonably satisfactory to OCA,
substantially to the effect that, on the basis of facts, representations and
assumptions set forth in such opinion which are consistent with the state of
facts existing at the Effective Time, the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code and that OCA and
OrthAlliance will each be a party to that reorganization. In rendering such
opinion, OCA's Counsel may require and rely upon representations and covenants,
including those contained in certificates of officers of OCA, OrthAlliance and
others, reasonably satisfactory in form and substance to such counsel.
(d) No Material Adverse Change. Since the date of this Agreement, there
shall not have occurred any OrthAlliance Material Adverse Effect. OCA shall have
received a certificate signed on behalf of OrthAlliance by the Chief Executive
Officer and the Chief Financial Officer of OrthAlliance to that effect.
(e) Amendments. Each of at least the 30% Level of OrthAlliance Affiliated
Practice Owners and OrthAlliance Affiliated PCs shall have duly executed and
delivered to OrthAlliance (with a complete and accurate copy provided to OCA) an
(i) Amendment to OrthAlliance Affiliated Professional Employment Agreement, with
respect to their applicable OrthAlliance Affiliated Professional Employment
Agreement, and (ii) Amendment to OrthAlliance Service and Consulting Agreement,
with respect to their applicable OrthAlliance Service and Consulting Agreement.
For purposes of this Agreement, "30% Level of OrthAlliance Affiliated
Practice Owners and OrthAlliance Affiliated PCs" shall mean (A) 56 of the
OrthAlliance Affiliated Practice Owners (but not including any Practice
Improvement Performance Guarantee Professionals), and (B) such number of
OrthAlliance Affiliated Practice Owners (but not including any Practice
Improvement Performance Guarantee Professionals) with respect to which is
attributable 30.00% to 30.99% (rounded to the nearest one-hundredth of a
percent) of the OrthAlliance Annual Service Fees, and (C) each of the
OrthAlliance Affiliated PCs employing such OrthAlliance Affiliated Practice
Owners referenced in clauses (A) and (B).
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7.3. Conditions to Obligations of OrthAlliance. The obligation of
OrthAlliance to effect the Merger is also subject to the satisfaction, or waiver
by OrthAlliance, at or prior to the Effective Time, of the following conditions:
(a) Representations and Warranties. Each of the representations and
warranties of OCA contained in this Agreement (i) that are qualified by
materiality, including the terms "material," "in any material respects," "in all
material respects" and "OCA Material Adverse Effect" or words of similar effect,
shall be true and correct in all respects when made and as of the Closing, with
the same effect as though such representations and warranties had been made on
and as of the Closing, and (ii) that are not so qualified by materiality, shall
be true and correct in all material respects when made and as of the Closing,
with the same effect as though such representations and warranties had been made
on and as of the Closing. OrthAlliance shall have received a certificate signed
on behalf of OCA by the Chief Executive Officer and the Chief Financial Officer
of OCA to the foregoing effect.
(b) Performance of Obligations of OCA. OCA shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and OrthAlliance shall have received
a certificate signed on behalf of OCA by the Chief Executive Officer and the
Chief Financial Officer of OCA to such effect.
(c) Federal Tax Opinion. OrthAlliance shall have received an opinion from
Munger, Tolles & Olson LLP ("OrthAlliance's Counsel"), or other counsel
reasonably satisfactory to OrthAlliance, in form and substance reasonably
satisfactory to OrthAlliance, dated the Effective Time, substantially to the
effect that, on the basis of facts, representations and assumptions set forth in
such opinion which are consistent with the state of facts existing at the
Effective Time, the Merger will be treated as a reorganization within the
meaning of Section 368(a) of the Code and that OCA and OrthAlliance will each be
a party to that reorganization. In rendering such opinion, OrthAlliance's
Counsel may require and rely upon representations and covenants, including those
contained in certificates of officers of OCA, OrthAlliance and others,
reasonably satisfactory in form and substance to such counsel. OCA and
OrthAlliance will cooperate with each other and OrthAlliance's Counsel in
executing and delivering to OrthAlliance's Counsel customary representations
letters in connection with such opinion.
(d) No Material Adverse Change. Since the date of this Agreement, there
shall not have occurred any OCA Material Adverse Effect. OrthAlliance shall have
received a certificate signed on behalf of OCA by the Chief Executive Officer
and the Chief Financial Officer of OCA to that effect.
ARTICLE VIII.
AMENDMENT; TERMINATION
8.1. Amendment. This Agreement may be amended only by a written instrument
signed on behalf of each of OrthAlliance, OCA and OCA Merger Sub at any time
prior to the Effective Time and before or after approval hereof by the
stockholders of OrthAlliance.
8.2. Termination. This Agreement may be terminated as follows:
(a) By mutual written agreement of OrthAlliance and OCA prior to the
Effective Time;
(b) by either OCA or OrthAlliance, upon written notice (signed on behalf of
such party by its duly authorized officer) thereof to the other party:
(i) if the Merger shall not have been consummated by November 30,
2001; provided, however, that the right to terminate this Agreement
pursuant to this Section 8.2(b)(i) shall not be available to any party
whose actions or failure to perform any of its obligations under this
Agreement results in the failure of the Merger to be consummated by such
time; or
(ii) if approval by the stockholders of OrthAlliance required for the
consummation of the Merger shall not have been obtained by reason of the
failure to obtain the required vote at a duly held meeting of such
stockholders or at any adjournment or postponement thereof; provided,
however,
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that the right to terminate this Agreement pursuant to this Section
8.2(b)(ii) shall not be available to OrthAlliance if it is in material
breach of its obligations under Section 6.6;
(c) By OCA, upon written notice (signed on behalf of OCA by its duly
authorized officer) thereof to OrthAlliance, in the event that OrthAlliance
shall have breached, or failed to perform, in any material respects (without
giving effect to any qualification contained therein as to materiality,
including the terms "material," "in any material respects," "in all material
respects" and "OrthAlliance Material Adverse Effect"), any of OrthAlliance's
representations, warranties, covenants or other agreements set forth in this
Agreement, and such breach or failure to perform is either incapable, by its
nature, of being cured or is not cured within 30 calendar days following the
giving of written notice thereof to OrthAlliance;
(d) By OrthAlliance, upon written notice (signed on behalf of OrthAlliance
by its duly authorized officer) thereof to OCA, in the event that OCA shall have
breached, or failed to perform, in any material respects (without giving effect
to any qualification contained therein as to materiality, including the terms
"material," "in any material respects," "in all material respects" and "OCA
Material Adverse Effect"), any of OCA's representations, warranties, covenants
or other agreements set forth in this Agreement, and such breach or failure to
perform is either incapable, by its nature, of being cured or is not cured
within 30 calendar days following the giving of written notice thereof to OCA;
(e) By OCA, upon written notice (signed on behalf of OCA by its duly
authorized officer) thereof to OrthAlliance, if OrthAlliance's Board of
Directors shall (i) have failed to recommend in the Proxy Statement that
OrthAlliance's stockholders approve and adopt this Agreement, or (ii) withdraw,
modify in a manner adverse to OCA, or discloses its intention to so withdraw or
modify, its approval or recommendation of this Agreement and the transactions
contemplated in this Agreement, or (iii) approve or recommend, or propose
publicly to approve or recommend, any Acquisition Proposal;
(f) By OCA, upon written notice (signed on behalf of OCA by its duly
authorized officer) thereof to OrthAlliance, if OrthAlliance's Board of
Directors exercises the rights provided in clause (i) or clause (ii) of the
proviso set forth in Section 6.4(b), or if OrthAlliance accepts another
Acquisition Proposal, or enters into an agreement or letter of intent with
respect to another Acquisition Proposal;
(g) By OrthAlliance, upon written notice (signed on behalf of OrthAlliance
by its duly authorized officer) thereof to OCA, if OrthAlliance's Board of
Directors exercises the right provided in clause (ii) of the proviso set forth
in Section 6.4(b);
(h) By OCA, upon written notice (signed on behalf of OCA by its duly
authorized officer) thereof to OrthAlliance, if any of the conditions set forth
in Sections 7.1 and 7.2 shall have become incapable of fulfillment or cure
(unless due to the action or inaction of OCA) and shall not have been waived by
OCA; and
(i) By OrthAlliance, upon written notice (signed on behalf of OrthAlliance
by its duly authorized officer) thereof to OCA, if any of the conditions set
forth in Sections 7.1 and 7.3 shall have become incapable of fulfillment or cure
(unless due to the action or inaction of OrthAlliance) and shall not have been
waived by OrthAlliance.
8.3. Effect of Termination. This Agreement will thereafter become void and
have no further force and effect and all further obligations of OrthAlliance,
OCA and OCA Merger Sub to each other under this Agreement will terminate without
further obligation or liability on the part of OrthAlliance, OCA or OCA Merger
Sub to the other, except for Sections 6.3(b) and 6.12, this Section 8.3,
Sections 8.4 and 8.5 and Article IX, which shall survive termination; provided,
however, that such termination shall not prejudice any rights and remedies of a
party hereto against another party hereto with respect to breach of such other
party's representations, warranties, covenants, agreements and obligations under
this Agreement or otherwise.
8.4. Break-Up Fee and Expense Reimbursement to OCA. In the event that this
Agreement is terminated (a) pursuant to Sections 8.2(e), 8.2(f) or 8.2(g), or
(b) pursuant to Section 8.2(b) and (i) at any time after the date of this
Agreement and before such termination, an Acquisition Proposal shall have
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been publicly announced or otherwise communicated to the stockholders of
OrthAlliance and shall not have been publicly withdrawn or rescinded, and (ii)
OrthAlliance or its Subsidiary enters into a definitive merger, acquisition,
purchase, option or other agreement with respect to an Acquisition Proposal
within the 12 months immediately following such termination, then, with respect
to (a), on the Business Day immediately following the date of such termination,
and, with respect to (b), on the Business Day immediately following the date
that OrthAlliance or its Subsidiary enters into such definitive merger,
acquisition, purchase, option or other agreement with respect to an Acquisition
Proposal, OrthAlliance shall: (A) reimburse OCA in immediately available funds
for all of OCA's reasonable out-of-pocket costs and expenses (including, without
limitation, filing fees and legal, accounting and financial advisory fees and
expenses) incurred in connection with this Agreement and the transactions
contemplated herein, including due diligence, negotiation, preparation,
execution and delivery of this Agreement, the Registration Statement and all
other documents or actions contemplated hereby or related to this Agreement, the
transactions contemplated hereby and any related financing, in an aggregate
amount not to exceed $500,000, and (B) in addition, pay to OCA $4,000,000 in
cash by wire transfer of immediately available funds to an account designated by
OCA.
8.5. Break-Up Fee to OrthAlliance and OCA's Non-Solicitation of
OrthAlliance Affiliated Professionals. In the event that this Agreement is
terminated by OCA solely as a result of the condition set forth in Section
7.2(e) failing to be satisfied at or before the Effective Time, then:
(a) On the Business Day immediately following the date of such termination,
OCA shall remit to OrthAlliance $1,000,000 in cash by wire transfer of
immediately available funds to an account designated by OrthAlliance, and
(b) For a period of two years following the date of such termination, OCA
shall not (directly or through its Subsidiaries, directors, officers and
Representatives), and OCA shall cause its Subsidiaries, directors and officers
not to, solicit or induce any individual or professional entity that is an
OrthAlliance Affiliated Practice Owner or OrthAlliance Affiliated PC as of the
date hereof to terminate his, her or its applicable OrthAlliance Service or
Consulting Agreement or OrthAlliance Affiliated Professional Employment
Agreement (provided, however, that the parties acknowledge that OCA and its
Subsidiaries do not control the orthodontists, professional entities and other
dental professionals for whose practices OCA and its Subsidiaries provide
business and consulting services, and, accordingly, such restriction shall not
apply to the employment or independent contracting of any such OrthAlliance
Affiliated Practice Owner by a professional entity or individual, other than any
such OrthAlliance Affiliated Practice Owner or OrthAlliance Affiliated PC, that
is a party to a business services agreement, management services agreement,
consulting agreement or other agreement comparable to the OrthAlliance Service
and Consulting Agreements with OCA or a Subsidiary thereof, if OCA and its
Subsidiaries did not solicit or induce such employment or independent
contracting of such OrthAlliance Affiliated Practice Owner).
8.6. Waiver. At any time prior to the Effective Time, the parties hereto
may (a) extend the time for the performance of any of the obligations or other
acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant thereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver will be valid if set forth in an instrument in writing
signed on behalf of that party. The failure of a party to assert any of its
rights hereunder or otherwise shall not constitute a waiver of such right or
rights.
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ARTICLE IX.
GENERAL
9.1. Non-Survival of Representations and Warranties. None of the
representations and warranties contained in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive beyond the Effective Time.
9.2. Notices. All notices, claims, demands and other communications
hereunder shall be in writing and shall be deemed given upon (i) confirmation of
receipt of a facsimile transmission, (ii) confirmed delivery by a standard
overnight carrier or when delivered by hand, or (iii) the expiration of three
Business Days after the day when mailed by registered or certified mail (postage
prepaid, return receipt requested), in each case addressed to the respective
parties at the following addresses (or such other address for a party as shall
be specified by like notice):
(a) If to OCA or OCA Orthodontic Centers of America, Inc.
Merger Sub, to: 3850 N. Causeway Boulevard, Suite 1040
Metairie, Louisiana 70002
Telecopy No.: (504) 833-8832
Attention: Bartholomew F. Palmisano, Sr.
with a copy (which Waller Lansden Dortch & Davis, PLLC
shall not constitute 511 Union Street, Suite 2100
notice) to: Nashville, Tennessee 37219
Telecopy No.: (615) 244-6804
Attention: Donald R. Moody, Esq.
(b) If to OrthAlliance, to: OrthAlliance, Inc.
21535 Hawthorne Boulevard, Suite 200
Torrance, California 90503
Telecopy No.: (310) 792-1350
Attention: W. Dennis Summers
with a copy (which Munger, Tolles & Olson LLP
shall not constitute 3550 South Grand Avenue, Suite 3500
notice) to: Los Angeles, California 90071-1560
Telecopy No.: (213) 683-5137
Attention: Robert B. Knauss, Esq.
And
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
Telecopy No.: (404) 572-5146
Attention: Paul A. Quiros, Esq.
9.3. Entire Agreement. This Agreement (including the schedules and
exhibits thereto, and the other documents and instruments referred to herein,
including the Confidentiality Agreement) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties or any of them, with respect to the subject matter hereof,
including any transaction between or among the parties hereto. No
representation, promise, inducement or statement of intention has been made by
OrthAlliance, OCA or OCA Merger Sub that is not embodied in this Agreement or
the other agreements referred to herein and entered into in connection herewith,
the schedules or exhibits hereto, or the written statements, certificates or
other documents delivered pursuant hereto.
9.4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to the
principles of conflict of laws thereof or of any other
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jurisdiction. If legal action is commenced to enforce this Agreement, the
prevailing party in such action shall be entitled to recover its costs and
reasonable attorneys' fees in addition to any other relief granted.
9.5. Counterparts; Effectiveness. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original but all
of which shall constitute one and the same agreement. This Agreement shall
become effective when each party hereto shall have received counterparts thereof
signed by all the other parties hereto.
9.6. Assignment; Successors and Assigns; Parties In Interest. No party
hereto shall assign this Agreement, or its right or duties hereunder, by
operation of law or otherwise, without first obtaining the written consent of
the other parties hereto, except that OCA Merger Sub may assign this Agreement
and its rights and obligations hereunder to another wholly-owned Subsidiary of
OCA. Subject to the foregoing provisions, all of the rights, benefits, duties,
liabilities and obligations of the parties hereto shall inure to the benefit of
and be binding upon the parties and their respective successors and assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
other person any rights or remedies hereunder.
9.7. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
9.8. Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that the provisions contained in this Agreement
were not performed in accordance with its specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions thereof in any court of the United States
or any state having jurisdiction, without having to post bond therefor or prove
actual damages, this being in addition to any other remedy to which they are
entitled at law or in equity.
9.9. Remedies Cumulative. All rights, powers and remedies provided under
this Agreement or otherwise available in respect hereof at law or in equity
shall be cumulative and not alternative, and the exercise or beginning of the
exercise of any thereof by any party shall not preclude the simultaneous or
later exercise of any other such right, power or remedy by such party.
ARTICLE X.
DEFINITIONS
As used herein, the following terms shall have the following meanings
ascribed thereto (with terms defined in the plural having comparable meaning
when used in the singular, and likewise with respect to terms defined in the
singular):
"Acquisition Proposal" shall have the meaning set forth in Section 6.4.
"Affiliate" means, with respect to any Person, any other Person which,
directly or indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with, such Person.
"Agreement" means this Agreement and Plan of Merger.
"Amendment to OrthAlliance Affiliated Professional Employment Agreement"
shall have the meaning set forth in Section 2.4.
"Amendment to OrthAlliance Service and Consulting Agreement" shall have the
meaning set forth in Section 2.4.
"Anti-Dilution Event" shall have the meaning set forth in Section 2.5.
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"Antitrust Division" shall have the meaning set forth in Section 4.3.
"Applicable Exchange Ratio" shall have the meaning set forth in Section
2.4.
"Balance Sheet" shall have the meaning set forth in Section 4.12.
"Business Day" means a day of the year on which banks are not authorized to
be closed in the City of New Orleans, Louisiana.
"Certificate" shall have the meaning set forth in Section 2.4.
"Certificate of Merger" shall have the meaning set forth in Section 2.2.
"Closing" shall have the meaning set forth in Section 2.16.
"Closing Date" shall have the meaning set forth in Section 2.16.
"Closing Price" shall have the meaning set forth in Section 2.6.
"Code" shall have the meaning set forth in the third recital to this
Agreement.
"Confidentiality Agreement" shall have the meaning set forth in Section
6.3.
"control" of a Person means the possession, directly or indirectly, of the
power to direct or cause the direction of the management policies of a person,
whether through the ownership of voting securities, by contract, as trustee or
executor or otherwise.
"Delaware Secretary" shall have the meaning set forth in Section 2.2.
"DGCL" shall have the meaning set forth in Section 2.1.
"Effective Time" shall have the meaning set forth in Section 2.2.
"Encumbrances" shall mean any liens, claims, charges, encumbrances,
mortgages, pledges, security interests and other interests.
"Environmental Claims" shall have the meaning set forth in Section 4.21.
"Environmental Laws" shall have the meaning set forth in Section 4.21.
"ERISA" has the meaning set forth in Section 4.20.
"Escheat Law" shall have the meaning set forth in Section 3.6.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" shall have the meaning set forth in Section 3.1.
"Exchange Fund" shall have the meaning set forth in Section 3.1.
"FTC" shall have the meaning set forth in Section 4.3.
"GAAP" means generally accepted accounting principles in effect in the
United States consistently applied.
"Governmental Authority" shall have the meaning set forth in Section 4.3.
"Governmental Licenses" shall have the meaning set forth in Section 4.11.
"HSR Act" shall have the meaning set forth in Section 4.3.
"Indemnified Parties" shall have the meaning set forth in Section 6.9.
"Insurance Amount" shall have the meaning set forth in Section 6.9.
"IRS" means the United States Internal Revenue Service.
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"knowledge" means, with respect to an individual, such individual is
actually aware of the particular fact, matter, circumstance or other item, or a
prudent individual could be expected to discover or otherwise become aware of
such fact, matter, circumstance or other item in the course of conducting a
reasonably comprehensive investigation concerning the existence of such fact or
other matter; and, with respect to any other Person (other than an individual),
any individual who is serving as a director, officer, partner, executor or
trustee of such Person (or in any similar capacity) has knowledge of such fact,
matter, circumstance or other item.
"Laws" shall have the meaning set forth in Section 4.10.
"Leases" shall have the meaning set forth in Section 4.17.
"Merger" shall have the meaning set forth in the second recital to this
Agreement.
"NYSE" shall have the meaning set forth in Section 2.6.
"ordinary course of business" means, with respect to any particular Person:
(a) an action is consistent with the past practices of such Person and is taken
in the ordinary course of the normal day-to-day operations of such Person; (b)
such action is not required to be authorized by the board of directors of such
Person (or by any Person or group of Persons exercising similar authority) and
is not required to be specifically authorized by the parent company (if any) of
such Person; and (c) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors (or by
any Person or group of Persons exercising similar authority), in the ordinary
course of the normal day-to-day operations of other Persons that are in the same
line of business as such Person.
"OCA" shall have the meaning set forth in the preamble to this Agreement.
"OCA Common Stock" shall have the meaning set forth in Section 2.4.
"OCA Credit Agreement" shall mean that certain Credit Agreement, dated as
of October 8, 1998, among OCA, First Union National Bank, as agent for the
lenders, Bank of America FSB, as documentation agent, Citibank, N.A., as
syndication agent, and certain lenders named therein.
"OCA Disclosure Schedule" shall have the meaning set forth in preamble of
Article V.
"OCA Documents" shall have the meaning set forth in Section 5.2.
"OCA Financial Statements" shall have the meaning set forth in Section 5.6.
"OCA Material Adverse Effect" means any event, change, occurrence, effect,
fact or circumstance having, or would reasonably be expected to have,
individually or in the aggregate with other events, changes, occurrences,
effects, facts or circumstances, a material adverse effect on (i) the ability of
OCA to perform its obligations under this Agreement or to consummate the
transactions contemplated hereby, or (ii) the business, properties, assets,
liabilities, prospects, results of operations or condition (financial or
otherwise) of OCA and its Subsidiaries (taken as a whole), other than events,
changes, occurrences, effects, facts or circumstances affecting the orthodontic
practice management industry in general, and not specifically relating to OCA or
its Subsidiaries, and other than events, changes, occurrences, effects, facts or
circumstances resulting from this Agreement, the transactions contemplated
hereby or the announcement thereof; provided, however, that any increase or
decrease in the trading price of OCA Common Stock shall not be considered an OCA
Material Adverse Effect nor create any presumption that an OCA Material Adverse
Effect has occurred or will occur.
"OCA Merger Sub" shall have the meaning set forth in the preamble to this
Agreement.
"OCA Merger Sub Common Stock" shall have the meaning set forth in Section
2.11.
"OCA Preferred Stock" shall have the meaning set forth in Section 5.5.
"OCA SEC Reports" shall have the meaning set forth in Section 5.6.
"OCA's Counsel" shall have the meaning set forth in Section 6.3.
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"OCA 2000 Financial Statements" means OCA's audited consolidated financial
statements for the year ended, and as of, December 31, 2000, included in OCA's
Annual Report on Form 10-K for the year ended December 31, 2000, as amended, as
filed with the SEC.
"OrthAlliance" shall have the meaning set forth in the preamble to this
Agreement.
"OrthAlliance Affiliated Orthodontists" means orthodontists who are parties
to OrthAlliance Service and Consulting Agreements or otherwise provide, as
employees and/or equity owners of OrthAlliance Affiliated PCs, orthodontic
services through orthodontic practices managed by OrthAlliance or its
Subsidiaries or with respect to which OrthAlliance or its Subsidiaries provide
consulting services pursuant to the OrthAlliance Service and Consulting
Agreements.
"OrthAlliance Affiliated Pediatric Dentists" means pedodontists who are
parties to OrthAlliance Service and Consulting Agreements or otherwise provide,
as employees and/or equity owners of OrthAlliance Affiliated PCs, pedodontic
services through pedodontic practices managed by OrthAlliance or its
Subsidiaries or with respect to which OrthAlliance or its Subsidiaries provide
consulting services pursuant to the OrthAlliance Service and Consulting
Agreements.
"OrthAlliance Affiliated Professional Employment Agreement" shall mean an
employment agreement pursuant to which an OrthAlliance Affiliated PC employs an
OrthAlliance Affiliated Professional to provide orthodontic or pedodontic
services, as applicable, for the OrthAlliance Affiliated Practice to which the
relevant OrthAlliance Service and Consulting Agreement pertains.
"OrthAlliance Affiliated PC" shall mean a professional corporation or other
professional entity which is a party to an OrthAlliance Service and Consulting
Agreement.
"OrthAlliance Affiliated Practice" shall mean an orthodontic or pedodontic
practice that is owned by an OrthAlliance Affiliated PC or OrthAlliance
Affiliated Professional or otherwise the subject of an OrthAlliance Service and
Consulting Agreement.
"OrthAlliance Affiliated Practice Owner" shall have the meaning set forth
in Section 2.4.
"OrthAlliance Affiliated Professionals" means OrthAlliance Affiliated
Orthodontists and OrthAlliance Affiliated Pediatric Dentists.
"OrthAlliance Annual Service Fees" shall have the meaning set forth in
Section 2.4.
"OrthAlliance Benefit Plans" shall have the meaning set forth in Section
4.20.
"OrthAlliance Class A Common Stock" shall have the meaning set forth in
Section 2.4.
"OrthAlliance Class B Common Stock" shall have the meaning set forth in
Section 2.4.
"OrthAlliance Common Stock" shall have the meaning set forth in Section
2.4.
"OrthAlliance Contracts" shall have the meaning set forth in Section 4.14.
"OrthAlliance's Counsel" shall have the meaning set forth in Section 7.3.
"OrthAlliance Credit Agreement" shall mean that certain Credit Agreement,
dated as of March 26, 1999, among OrthAlliance, First Union National Bank, as
agent for the lenders, and certain lenders named therein.
"OrthAlliance Disclosure Schedule" shall have the meaning set forth in
preamble of Article IV.
"OrthAlliance Dissenting Shares" shall have the meaning set forth in
Section 2.8.
"OrthAlliance Documents" shall have the meaning set forth in Section 4.2.
"OrthAlliance Financial Statements" shall have the meaning set forth in
Section 4.6.
"OrthAlliance Material Adverse Effect" means any event, change, occurrence,
effect, fact or circumstance having, or would reasonably be expected to have,
individually or in the aggregate with other
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events, changes, occurrences, effects, facts or circumstances, a material
adverse effect on (i) the ability of OrthAlliance to perform its obligations
under this Agreement or to consummate the transactions contemplated hereby, or
(ii) the business, properties, assets, liabilities, prospects, results of
operations or condition (financial or otherwise) of OrthAlliance and its
Subsidiaries (taken as a whole), other than events, changes, occurrences,
effects, facts or circumstances affecting the orthodontic practice management
industry in general, and not specifically relating to OrthAlliance or its
Subsidiaries, and other than events, changes, occurrences, effects, facts or
circumstances resulting from this Agreement, the transactions contemplated
hereby or the announcement thereof; provided, however, that any increase or
decrease in the trading price of OrthAlliance Common Stock shall that any
increase or decrease in the trading price of OrthAlliance Common Stock shall not
be considered an OrthAlliance Material Adverse Effect nor create any presumption
that an OrthAlliance Material Adverse Effect has occurred or will occur.
"OrthAlliance Material Contracts" shall have the meaning set forth in
Section 4.16.
"OrthAlliance Option Plans" shall have the meaning set forth in Section
4.5.
"OrthAlliance Options" shall have the meaning set forth in Section 2.9.
"OrthAlliance Plan Options" shall have the meaning set forth in Section
4.5.
"OrthAlliance Preferred Stock" shall have the meaning set forth in Section
4.5.
"OrthAlliance Service and Consulting Agreements" shall mean service
agreements, consulting agreements, management service agreements and similar
agreements pursuant to which OrthAlliance or its Subsidiaries manage or provide
consulting services for the orthodontic and pediatric dental practices of the
OrthAlliance Affiliated PCs and OrthAlliance Affiliated Professionals.
"OrthAlliance SEC Reports" shall have the meaning set forth in Section 4.6.
"OrthAlliance Stockholders' Meeting" shall have the meaning set forth in
Section 4.3.
"OrthAlliance Warrants" shall have the meaning set forth in Section 4.5.
"OrthAlliance 1997 Employee Plan" shall have the meaning set forth in
Section 4.5.
"OrthAlliance 1997 Director Plan" shall have the meaning set forth in
Section 4.5.
"OrthAlliance 1997 Orthodontist Plan" shall have the meaning set forth in
Section 4.5.
"OrthAlliance 1999 Orthodontist Plan" shall have the meaning set forth in
Section 4.5.
"OrthAlliance 2000 Employee Plan" shall have the meaning set forth in
Section 4.5.
"OrthAlliance 2000 Financial Statements" means OrthAlliance's audited
consolidated financial statements for the year ended, and as of, December 31,
2000, included in OrthAlliance's Annual Report on Form 10-K for the year ended
December 31, 2000 as filed with the SEC.
"Pashley Agreement" shall mean the Management Service Agreement, dated July
1, 1998, between Pashley Dental Corporation and New Image Orthodontic Group,
Inc.
"Person(s)" means any individual, corporation, partnership, firm, joint
venture, association, joint-stock company, trust, unincorporated organization,
governmental or regulatory body or other entity.
"Practice Improvement Performance Guarantee Agreement" shall mean any
practice improvement performance guarantee agreement or comparable agreement
between an OrthAlliance Affiliated Professional or OrthAlliance Affiliated PC
and OrthAlliance or a Subsidiary thereof, pursuant to which service or
consulting fees payable under an OrthAlliance Service or Consulting Agreement
may be abated based upon profitability of the applicable OrthAlliance Affiliated
Practice and the value of consideration paid to such OrthAlliance Affiliated
Professional and/or OrthAlliance Affiliated PC upon OrthAlliance's or its
Subsidiary's acquisition of stock or assets from, or entering into an
OrthAlliance Service and Consulting Agreement with, such Person.
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"Practice Improvement Performance Guarantee Professionals" shall mean any
OrthAlliance Affiliated Professional who is a party, or employed by an
OrthAlliance Affiliated PC that is a party, to a Practice Improvement
Performance Guarantee Agreement with OrthAlliance or a Subsidiary thereof.
"Proxy Statement" shall have the meaning set forth in Section 4.3.
"Receivables" shall have the meaning set forth in Section 4.14.
"Registration Statement" shall have the meaning set forth in Section 4.3.
"Representative" shall have the meaning set forth in Section 6.3.
"SEC" shall have the meaning set forth in Section 4.3.
"Securities Act" means the Securities Act of 1933.
"Subsidiary" of any Person means any other Person of which such Person
(either alone or through or together with any other Subsidiary): (i) owns,
directly or indirectly, more than 50% of the stock or other equity interests the
holders of which are generally entitled to vote for the election of the board of
directors or other governing body of such other Person, (ii) is a general
partner, trustee or other entity performing similar functions or (iii) has
control.
"Superior Proposal" shall have the meaning set forth in Section 6.4.
"Surviving Corporation" shall have the meaning set forth in Section 2.1.
"Takeover Laws" shall have the meaning set forth in Section 4.26.
"Taxes" means all taxes, assessments, charges, duties, fees, levies or
other governmental charges including, without limitation, all Federal, state,
local, foreign and other income, franchise, profits, capital gains, capital
stock, transfer, sales, use, occupation, property, excise, severance, windfall
profits, stamp, license, payroll, withholding and other taxes, assessments,
charges, duties, fees, levies or other governmental charges of any kind
whatsoever (whether payable directly or by withholding and whether or not
requiring the filing of a Return), all estimated taxes, deficiency assessments,
additions to tax, penalties and interest and shall include any liability for
such amounts as a result either of being a member of a combined, consolidated,
unitary or affiliated group or of a contractual obligation to indemnify any
person or other entity.
"Tax Returns" means any return, report, rendition or other document or
information required to be supplied to a taxing authority in connection with the
Taxes.
"Tringas Agreement" shall mean the Management Service Agreement, dated
August 1, 1999, between Andrew J. Tringas, D.M.D., M.S., P.A. and New Image
Orthodontic Group, Inc.
"Voting Arrangements" shall have the meaning set forth in Section 4.5.
"Walters Agreement" shall mean the Consulting and Business Services
Agreement, dated January 5, 2001, between Candace G. Walters, D.D.S., M.S.D.,
P.C. and OrthAlliance.
"30% Level of OrthAlliance Affiliated Practice Owners and OrthAlliance
Affiliated PCs" shall have the meaning set forth in Section 7.2(e).
"31% to 40% Level of OrthAlliance Affiliated Practice Owners and
OrthAlliance Affiliated PCs" shall have the meaning set forth in Section 2.4.
"41% to 50% Level of OrthAlliance Affiliated Practice Owners and
OrthAlliance Affiliated PCs" shall have the meaning set forth in Section 2.4.
"51% to 60% Level of OrthAlliance Affiliated Practice Owners and
OrthAlliance Affiliated PCs" shall have the meaning set forth in Section 2.4.
"61% and Greater Level of OrthAlliance Affiliated Practice Owners and
OrthAlliance Affiliated PCs" shall have the meaning set forth in Section 2.4.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
the day and year first above written.
ORTHODONTIC CENTERS OF AMERICA, INC.
By: /s/ BARTHOLOMEW F. PALMISANO, SR.
---------------------------------------
Bartholomew F. Palmisano, Sr.
President and Chief Executive Officer
OCA ACQUISITION CORPORATION
By: /s/ BARTHOLOMEW F. PALMISANO, SR.
---------------------------------------
Bartholomew F. Palmisano, Sr.
President
ORTHALLIANCE, INC.
By: /s/ W. DENNIS SUMMERS
---------------------------------------
W. Dennis Summers
President, Chief Executive Officer and
Chairman of the Board
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ANNEX B
DELAWARE CODE
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER, CONSOLIDATION OR CONVERSION
SECTION 262. Appraisal Rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
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d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice,
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such second notice need only be sent to each stockholder who is entitled to
appraisal rights and who has demanded appraisal of such holder's shares in
accordance with this subsection. An affidavit of the secretary or assistant
secretary or of the transfer agent of the corporation that is required to
give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation
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or by any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings and
may proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not entitled
to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
B-4
ANNEX C
(LETTERHEAD OF U.S. BANCORP PIPER JAFFRAY)
800 Nicollet Mall
Minneapolis, MN 55402-7020
612-303-6000
May 16, 2001
Special Committee of the Board of Directors
OrthAlliance, Inc.
21535 Hawthorne Boulevard
Suite 200
Torrance, CA 90503
Members of the Special Committee of the Board of Directors:
In connection with the proposed transaction ("Transaction") in which
Orthodontic Centers of America, Inc. ("OCA") will acquire all of the outstanding
shares of the common stock of OrthAlliance, Inc. ("OrthAlliance"), you have
requested our opinion as to the fairness, from a financial point of view, to the
stockholders of OrthAlliance of the proposed consideration to be received by the
stockholders of OrthAlliance in the Transaction. It is currently anticipated
that the Transaction will be accomplished through a merger whereby OrthAlliance,
as the surviving corporation of the merger, becomes a wholly-owned subsidiary of
OCA. Under terms of the Agreement and Plan of Merger (the "Agreement"), at the
effective time of the Transaction, each issued and outstanding share of the
common stock of OrthAlliance, other than shares owned directly or indirectly by
OrthAlliance or by OCA, will be converted into a right to receive a minimum of
0.09214 and a maximum of 0.16584 shares of OCA common stock. The precise
exchange ratio will be based on the number of OrthAlliance Affiliated Practice
Owners and OrthAlliance Affiliated PCs (as defined in the Agreement) that have
qualifying contractual agreements with OrthAlliance. The terms and conditions of
the Transaction are more fully set forth in the Agreement.
U.S. Bancorp Piper Jaffray Inc., as a customary part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, underwriting and secondary
distributions of securities, private placements and valuations for estate,
corporate and other purposes. We have acted as exclusive financial advisor to
the Special Committee of the Board of Directors of OrthAlliance in connection
with the Transaction (the "Current Engagement") and will receive fees for our
services, some of which are contingent upon consummation of the Transaction. In
addition, we will receive a separate fee for providing this opinion, which is
not contingent upon the consummation of the Transaction. OrthAlliance has also
agreed to indemnify us against certain liabilities in connection with our
services. We write research on and make a market in the Common Stock of
OrthAlliance. Prior to our engagement by the Special Committee, we were engaged
by the Company to explore strategic alternatives pursuant to a letter dated
March 9, 2000 (the "Prior Engagement") which engagement was terminated at the
time of our engagement by the Special Committee. In the ordinary course of our
business, we and our affiliates may actively trade securities of OrthAlliance
for our own account or the account of our customers and, accordingly, may at any
time hold a long or short position in such securities.
In arriving at our opinion, we have undertaken such review, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have reviewed (i) a draft dated May 16, 2001 of the Agreement,
(ii) certain publicly available financial, business and operating information
relative to OrthAlliance, including the Company's press release dated January
24, 2001, (iii) certain internal financial information, including forecasts and
projections, of OrthAlliance prepared for financial planning purposes and
furnished by OrthAlliance management, (iv) to the extent publicly
C-1
available, information concerning selected transactions deemed comparable to the
proposed Transaction, (v) certain publicly available financial and securities
data of OrthAlliance and selected public companies deemed comparable to
OrthAlliance, (vi) certain publicly available financial and securities data of
OCA; and (vii) certain other financial studies and analyses, and our assessment
of general economic, market and monetary conditions. We had discussions with
members of the management of OrthAlliance concerning the financial condition,
current operating results, relations with OrthAlliance Affiliated Practice
Owners and OrthAlliance Affiliated PCs and business outlook for OrthAlliance on
a stand-alone basis and as a wholly-owned subsidiary of OCA, all of which we
considered in arriving at our opinion. We also had discussions with members of
OCA concerning the financial condition and business outlook for OrthAlliance and
OCA on a combined basis. We considered the results of the Prior Engagement as
well as the Current Engagement.
We have relied upon and assumed the accuracy, completeness and fairness of
the financial statements and other information provided to us by OrthAlliance or
otherwise made available to us, and have not assumed responsibility for the
independent verification of such information. OrthAlliance has advised us that
it does not publicly disclose internal financial information of the type
provided to us and that such information was prepared for financial planning
purposes and not with the expectation of public disclosure. We have relied upon
the assurance of the management of OrthAlliance that the information provided to
us has been prepared on a reasonable basis, and, with respect to financial
planning data and other business outlook information, reflects the best
currently available estimates, is based on reasonable assumptions and that they
are not aware of any information or facts that would make the information
provided to us incomplete or misleading. We have also assumed that there have
been no material changes in the assets, financial condition, results of
operations, business or prospects of OrthAlliance since the respective dates of
their last financial statements made available to us.
We have assumed with your consent that the final form of the Agreement will
be substantially similar to the May 16th draft reviewed by us, without
modification of material terms or conditions by OrthAlliance or OCA.
In arriving at our opinion, we have not performed any appraisals or
valuations of any specific assets or liabilities of OrthAlliance or OCA, and
have not been furnished with any such appraisals or valuations. We express no
opinion regarding the liquidation value of any entity.
This opinion is necessarily based upon the information available to us and
facts and circumstances as they exist and are subject to evaluation on the date
hereof; events occurring after the date hereof could materially affect the
assumptions used in preparing this opinion. We are not expressing any opinion
herein as to the price at which shares of the common stock of OrthAlliance have
traded or may trade at any future time. We have not undertaken to reaffirm or
revise this opinion or otherwise comment upon any events occurring after the
date hereof and do not have any obligation to update, revise or reaffirm this
opinion.
This opinion is solely for the benefit of the Special Committee of the
Board of Directors and for the full Board of Directors of OrthAlliance in
connection with its consideration of the Transaction and does not constitute a
recommendation to any stockholder of OrthAlliance as to how such stockholder
should vote with respect to the Transaction. Our opinion does not address, nor
should it be construed to address, the relative merits of the Transaction, on
the one hand, or any alternative business strategies or alternative transactions
that may be available to OrthAlliance, on the other hand. We were not requested
to opine as to, and this opinion does not address, the basic business decision
to proceed with or effect the Transaction. This opinion shall not be published
or otherwise used, nor shall any public references to us be made, without our
prior written approval. If applicable federal or state securities laws require
this opinion to be published or referred to, our prior written approval will not
be unreasonably withheld.
C-2
Based upon and subject to the foregoing and based upon such other factors
as we consider relevant, it is our opinion that the merger consideration
proposed to be received by the stockholders of OrthAlliance in the Transaction
pursuant to the Agreement is fair, from a financial point of view, to the
stockholders of OrthAlliance as of the date hereof.
Sincerely,
/s/ U.S. BANCORP PIPER JAFFRAY
U.S. BANCORP PIPER JAFFRAY
C-3
ANNEX D
(BANC OF AMERICA SECURITIES LETTERHEAD)
Banc of America
Securities LLC
100 North Tryon Street
Charlotte, NC 28255
May 16, 2001
Board of Directors
Orthodontic Centers of America, Inc.
3850 N. Causeway Boulevard, Suite 1040
Metairie, Louisiana 70002
Members of the Board of Directors:
You have requested our opinion as to the fairness from a financial point of
view to Orthodontic Centers of America, Inc. (the "Purchaser") of the Applicable
Exchange Ratio (as defined below) provided for in connection with the proposed
merger (the "Merger") of OrthAlliance, Inc. (the "Company") with a wholly owned
subsidiary of the Purchaser. We understand that, pursuant to the terms of the
draft Agreement and Plan of Merger, dated as of May 16, 2001 (the "Agreement"),
to be entered into by and among the Company, the Purchaser and OCA Acquisition
Corporation (the "Merger Sub"), the Merger Sub shall merge with and into the
Company, with the Company surviving the Merger as a wholly owned subsidiary of
the Purchaser. We also understand that, pursuant to the Agreement, stockholders
of the Company will receive for each share of Class A common stock, par value
$.001 per share, of the Company (the "Company Class A Common Stock"), and each
share of Class B common stock, par value $.001 per share, of the Company (the
"Company Class B Common Stock," and, together with the Company Class A Common
Stock, the "Company Common Stock"), issued and outstanding immediately prior to
the Effective Time (as defined in the Agreement), other than (i) shares of the
Company which are outstanding immediately prior to the Effective Time and with
respect to which appraisal rights shall have been properly demanded in
accordance with Section 262 of the General Corporation Law of the State of
Delaware or (ii) shares of the Company held directly or indirectly by the
Purchaser or the Company or any of their respective Subsidiaries (as defined in
the Agreement), an amount of shares of the common stock, par value $.01 per
share, of the Purchaser ("Purchaser Common Stock") equal to the Applicable
Exchange Ratio (as defined and set forth in Section 2.4, and subject to Section
2.6, of the Agreement). The terms and conditions of the Merger are more fully
set out in the Agreement.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
business and financial information of the Company and the Purchaser,
respectively;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company and the Purchaser,
respectively, prepared by the managements of the Company and the Purchaser,
respectively;
(iii) analyzed certain financial forecasts prepared by the managements
of the Company and the Purchaser, respectively;
(iv) reviewed and discussed with the managements of the Purchaser and
the Company information relating to certain potential strategic, financial
and operational benefits anticipated to result from the Merger, prepared by
the managements of the Purchaser and the Company, respectively;
(v) discussed the past and current operations, financial condition and
prospects of the Purchaser with senior executives of the Purchaser and
discussed the past and current operations, financial condition and
prospects of the Company with senior executives of the Company;
D-1
(vi) reviewed certain pro forma information, prepared by the
management of the Purchaser, reflecting the potential impact of the Merger
on the Purchaser's earnings per share, cash flow, consolidated
capitalization and financial ratios;
(vii) reviewed the reported prices and trading activity for the
Company Common Stock and the Purchaser Common Stock;
(viii) compared the financial performance of the Company and the
Purchaser and the prices and trading activity of the Company Common Stock
and the Purchaser Common Stock with that of certain other publicly traded
companies we deemed generally relevant;
(ix) compared certain financial terms of the Merger to corresponding
financial terms, to the extent publicly available, of certain other
business combination transactions we deemed generally relevant;
(x) reviewed a draft dated May 16, 2001 of the Agreement and certain
related documents; and
(xi) performed such other analyses and considered such other factors
as we have deemed appropriate.
In connection with our review, with your consent, we have not assumed any
responsibility for independent verification of any of the information provided
to or reviewed by us for the purpose of this opinion and have, with your
consent, relied on such information being complete and accurate in all material
respects. With respect to the financial forecasts referred to above, including
information relating to certain strategic, financial and operational benefits
anticipated from the Merger, we have been advised, and have assumed, that they
have been reasonably prepared on bases reflecting the best currently available
estimates and good faith judgments of the managements of the Company and the
Purchaser as to the future financial performance of the Company and the
Purchaser. With your consent, we have not made any independent valuation or
appraisal of the assets or liabilities of the Purchaser, nor have we been
furnished with any such appraisals. We also have assumed, with your consent,
that the Merger will be treated as a tax-free reorganization for federal income
tax purposes and that the Merger will be accounted for as a purchase for
financial accounting purposes. In addition, representatives of the Purchaser
have advised us, and we therefore also have assumed, that the final terms of the
Agreement will not vary materially from those set forth in the draft reviewed by
us.
Our opinion does not address the Purchaser's underlying business decision
to effect the Merger. We have not been asked to, nor do we, offer any opinion as
to the material terms of the Agreement or any related documents or the
obligations thereunder, or the form of the Merger. In rendering this opinion, we
have assumed, with your consent, that each of the Purchaser and the Company will
comply with all material covenants and obligations set forth in, and other
material terms of, the Agreement and related documents and that the Merger will
be validly consummated in accordance with its terms, without waiver,
modification or amendment of any material term, condition or agreement. We did
not participate in negotiations with respect to the terms of the transactions
contemplated by the Agreement. Consequently, we have assumed that such terms are
the most beneficial terms from the Purchaser's perspective that could under the
circumstances be negotiated among the parties to the Agreement, and we express
no opinion as to whether any alternative transaction might be more favorable to
the Purchaser.
We have acted as sole financial advisor to the Board of Directors of the
Purchaser in connection with this transaction and will receive a fee for our
services, including a fee which is due upon delivery of this opinion and a fee
which is contingent upon the consummation of the Merger. In the past, Banc of
America Securities LLC or its affiliates have provided financing services for
the Purchaser and have received fees for the rendering of these services. Bank
of America, N.A. serves as documentation agent under the Purchaser's senior
revolving credit facility and received fees for rendering such services. In the
ordinary course of our businesses, we and our affiliates may actively trade the
debt and equity securities of the Company and the Purchaser for our own account
or for the accounts of customers and, accordingly, we or our affiliates may at
any time hold long or short positions in such securities.
D-2
It is understood that this letter is for the benefit and use of the Board
of Directors of the Purchaser in connection with and for purposes of its
evaluation of the Merger and is not for the benefit of, and shall not confer
rights or remedies upon, any person other than the Board of Directors. This
opinion may not be disclosed, referred to, or communicated (in whole or in part)
to any third party for any purpose whatsoever except with our prior written
consent in each instance. However, this opinion may be included in any filing
made by the Purchaser in respect of the Merger with the Securities and Exchange
Commission, so long as this opinion is reproduced in such filing in full and any
description of or reference to us or summary of this opinion and the related
analysis in such filing is in form and substance acceptable to us and our
counsel. In furnishing this opinion, we do not admit that we are experts within
the meaning of the term "experts" as used in the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations promulgated
thereunder, nor do we admit that this opinion constitutes a report or valuation
within the meaning of Section 11 of the Securities Act. Our opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to us as of, the date hereof. It should be
understood that subsequent developments may affect this opinion and we do not
have any obligation to update, revise, or reaffirm this opinion. This opinion
does not in any manner address the prices at which the Purchaser Common Stock
will trade following announcement or consummation of the Merger.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, we are of the opinion on the date hereof that
the Applicable Exchange Ratio in the proposed Merger is fair from a financial
point of view to the Purchaser.
Very truly yours,
BANC OF AMERICA SECURITIES LLC
D-3