<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1997.
REGISTRATION NO. 333-27143
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
PRE-EFFECTIVE AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
ORTHALLIANCE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8741 95-4632134
(State or other jurisdiction (Primary Standard Industrial (I.R.S. employer
of incorporation or organization) Classification Code Number) identification no.)
</TABLE>
23848 HAWTHORNE BOULEVARD, SUITE 200, TORRANCE, CALIFORNIA 90505
(310) 791-5656
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
SAM WESTOVER
CHIEF EXECUTIVE OFFICER
ORTHALLIANCE, INC.
23848 HAWTHORNE BOULEVARD, SUITE 200
TORRANCE, CALIFORNIA 90505
(310) 791-5656
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES OF ALL CORRESPONDENCE TO:
<TABLE>
<C> <C>
PAUL A. QUIROS, ESQ. F. MITCHELL WALKER, ESQ.
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. BASS, BERRY & SIMS PLC
FIRST UNION PLAZA, SUITE 1400 2700 FIRST AMERICAN CENTER
999 PEACHTREE STREET, N.E. NASHVILLE, TENNESSEE 37238
ATLANTA, GEORGIA 30309 (615) 742-6200
(404) 817-6000 (615) 742-6293 (FAX)
(404) 817-6050 (FAX)
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 19, 1997
PROSPECTUS
2,600,000 SHARES
LOGO ORTHALLIANCE
CLASS A COMMON STOCK
---------------------
The 2,600,000 shares of Class A Common Stock ("Common Stock") offered
hereby are being sold by OrthAlliance, Inc. (the "Company" or "OrthAlliance").
Prior to this offering (the "Offering"), there has been no public market for the
Common Stock. It is currently anticipated that the initial public offering price
will be between $10.00 and $12.00 per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price. The Common Stock and the Company's Class B Common Stock are each
entitled to one vote per share and will vote as a single class on all matters
presented to the Company's stockholders. The Company has made application for
the Common Stock to be listed for trading on The Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "ORAL."
The Company has filed a shelf registration statement with the Securities
and Exchange Commission relating to the separate offering of up to 2,500,000
shares of Common Stock to be used in connection with future affiliations with
Allied Practices and resales of the shares issued thereunder by the recipients
of such shares.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=============================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $1.7 million payable by the Company.
(3) The Company has granted the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
390,000 additional shares of Common Stock on the same terms and conditions
as set forth above. If all such shares are purchased by the Underwriters,
the total Price to Public will be $ , the total Underwriting
Discount will be $ and the total Proceeds to Company will be
$ . See "Underwriting."
---------------------
The shares of Common Stock are offered subject to receipt and acceptance by
the several Underwriters, to prior sale and to the Underwriters' right to reject
any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that certificates for the shares of Common Stock
will be available for delivery on or about , 1997.
---------------------
J.C.Bradford & Co. Oppenheimer & Co., Inc.
, 1997
<PAGE> 3
LOGO
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZATION AND SHORT-COVERING TRANSACTIONS. FOR A DESCRIPTION OF
THESE ACTIVITIES SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
Simultaneously with and as a condition to the closing of the Offering, 55
separate orthodontic practices (collectively, the "Founding Practices") will
transfer certain operating assets to OrthAlliance in exchange for cash and
shares of Common Stock (in accordance with Staff Accounting Bulletin No. 48) and
OrthAlliance will become a party to long-term management or consulting services
agreements with the Founding Practices (the "Transfers"). The number of shares
of Common Stock issued in connection with the Transfers will depend on the
initial public offering price of the Common Stock.
As a result of the merger of each of Premier Orthodontic Group, Inc.
("Premier") and US Orthodontic Care, Inc. ("USOC") with and into OrthAlliance,
effective prior to the closing of the Offering (the "Merger"), OrthAlliance
succeeds to the rights of Premier and USOC under agreements with the Founding
Practices. See "Certain Transactions." The term "Allied Practice" includes each
of the Founding Practices and any orthodontic practice with which the Company
enters into long-term management or consulting services agreements in the
future. Unless otherwise indicated by the context, references herein to practice
management services, agreements or rights include consulting and other similar
arrangements, which the Company has or will enter into with certain Allied
Practices to comply with applicable regulations regarding practice management in
certain states. As used herein, the term "Allied Orthodontists" refers to
orthodontists affiliated with an Allied Practice. The Company has conducted no
operations and generated no revenues to date.
THE COMPANY
OrthAlliance was recently organized to create a national provider of
practice management services to orthodontic practices in the United States. The
Company will manage the business aspects of the Allied Practices (subject to
applicable state law), thereby allowing Allied Orthodontists to focus on
delivering cost-effective, high quality patient care, and will provide capital
for the development and growth of such practices. The Company will affiliate
with Allied Practices pursuant to long-term management services agreements and
will generate revenues by providing management, marketing and development
services to Allied Practices. The Company intends to aggressively expand its
network of Allied Practices by acquiring certain operating assets of and
entering into long-term management services agreements with additional practices
throughout the United States (herein sometimes referred to as the "affiliation"
with other practices.)
The Company has entered into definitive agreements, to be consummated
simultaneously with the closing of this Offering, to acquire certain operating
assets of, or the stock of entities holding certain operating assets of, and
enter into long-term management services agreements with, each of the 55
Founding Practices, which include 82 orthodontists operating 147 offices located
in 16 states. See "The Company" and "Business -- Agreements with Allied
Practices and Allied Orthodontists." Management believes that the Founding
Practices are leading practices in their markets, and the Founding Practices
were selected based upon a variety of factors, including size, profitability,
historical growth and reputation for high quality care, both among local
consumers of orthodontic services and within the orthodontic services industry.
The United States orthodontic industry is highly fragmented, with over 90%
of the approximately 9,000 practicing orthodontists in the United States
operating as sole practitioners. Management believes that less than 2% of the
orthodontists currently practicing in the United States are affiliated with
publicly held practice management companies.
Management believes that the Company's operating strategy will enable
Allied Practices to compete more effectively with and realize greater
profitability than traditional orthodontic practices, thereby inducing
additional orthodontists to affiliate with the Company. Key elements of the
Company's operating strategy are:
- Emphasizing quality patient care by (i) relieving the Allied
Orthodontists from various time-consuming administrative
responsibilities, (ii) affiliating with high quality practices
conducted by orthodontists who have completed accredited graduate
orthodontic training programs, and (iii) recommending practice
standards, procedures and protocols under the direction of the
Company's board of advisors, composed of the Allied Orthodontists in
the Founding Practices;
3
<PAGE> 5
- Capitalizing on the best demonstrated practices of Allied
Orthodontists through identification and promotion of successful
practice-level strategies including, but not limited to, treatment,
delivery of patient care, marketing, financing and cost control
strategies;
- Achieving operating efficiencies and economies of scale through (i)
the implementation of national purchasing discounts for professional
and clerical supplies and equipment, (ii) the reduction of certain
expenses common to all Allied Practices, including, but not limited
to, insurance and employee benefits, and (iii) work flow and patient
flow enhancements and programs; and
- Increasing market penetration and expansion through (i) local
marketing programs, supported by demographic and economic analysis,
and (ii) patient payment plans designed to enhance the affordability
of orthodontic services.
There can be no assurance that the Company will be able to implement
successfully these operating strategies. Costs could increase if operating
efficiencies and economies of scale are not realized; however, management
believes that improved quality patient care and the use of best demonstrated
practices which allow the Allied Orthodontists to increase the number of
patients treated could result in higher patient revenue.
The Company intends to implement a growth strategy focused on (i)
affiliating with additional orthodontic practices that fit the OrthAlliance
model of high quality and strong financial performance; (ii) expanding Allied
Practices by providing capital, support and consultation for satellite office
expansion; (iii) assisting the Allied Practices with their internal growth by
increasing gross revenues through increased patient volume; and (iv) enhancing
profitability through operational efficiencies.
PENDING TRANSFERS
The Company plans to use shares subject to its shelf registration statement
filed with the Securities and Exchange Commission (the "Commission") relating to
the separate offering of up to 2,500,000 shares of Common Stock (the "Shelf
Registration") to acquire certain operating assets of, or the stock of entities
holding certain operating assets of, additional orthodontic practices and enter
into long-term management services agreements with such entities. The Company
has entered into negotiations with four orthodontic practices with four
orthodontists operating 12 offices in four states (collectively, the "Pending
Transfers"). The aggregate consideration to be paid by the Company with respect
to the Pending Transfers, if consummated, will be approximately $3.1 million,
payable up to 20% in cash and the remainder with shares of Common Stock valued
at either (i) the initial public offering price for Pending Transfers closed
within seven days following the closing of the Offering, or (ii) the average
closing price of the Common Stock as reported on the Nasdaq National Market for
the five consecutive trading days ending two days prior to the closing date for
Pending Transfers closed after such seventh trading day. Unlike the Founding
Practices, which shall be accounted for in accordance with Staff Accounting
Bulletin No. 48, "Transfers of Nonmonetary Assets by Promoters or Shareholders"
("SAB 48"), the Pending Transfers will be accounted for under the purchase
method pursuant to Accounting Principles Board Opinion No. 16 "Business
Combinations" ("APB 16") and will result in subsequent annual noncash
amortization charges for intangible assets in the Company's statements of
operations. Each of the Pending Transfers is subject to, among other conditions,
execution of definitive agreements, the completion of the Offering, the
effectiveness of the Shelf Registration and satisfactory due diligence review of
each practice by the Company.
4
<PAGE> 6
THE OFFERING
Common Stock offered by the
Company.................. 2,600,000 shares
Common Stock to be
outstanding after the
Offering................. 10,767,802 shares(1)
Class B Common Stock to be
outstanding after the
Offering................. 250,000 shares
Use of Proceeds............ To fund the cash portion of the consideration paid
to the Founding Practices; to repay certain
indebtedness; and for general corporate purposes,
which are expected to include future acquisitions
(including the Pending Transfers) and certain of
the development costs of satellite offices. See
"Use of Proceeds."
Class B Common Stock....... In connection with the Merger, 250,000 shares of
Class B Common Stock will be issued to the
stockholders of USOC and Premier as part of the
Merger consideration. The stockholders of USOC and
Premier are responsible for the organization of the
Company, and the Class B Common Stock was created
to allow the stockholders of USOC and Premier to
receive additional shares of Common Stock provided
that the market price of the Common Stock
appreciates to the various Conversion Prices
described below. No other shares of Class B Common
Stock will be authorized or issued. Holders of
Class B Common Stock are entitled to one vote per
share and such shares shall be voted with the
Common Stock on all matters presented to the
holders of Common Stock. The shares of Class B
Common Stock are not transferable, except to the
holder's spouse, parents, siblings, lineal
descendants, a trust for the benefit of any such
person or as determined by will or the laws of
descent. See "Description of Capital Stock."
Conversion of Class B
Common Stock.............. At any time following 180 days from the date of
this Prospectus, each share of Class B Common Stock
shall automatically convert into Common Stock (i)
at the ratio of eight shares of Common Stock for
each share of Class B Common Stock upon the
attainment of certain average closing price
calculations for the Common Stock (the "Conversion
Prices"), as determined on the Nasdaq National
Market, other over-the-counter market or an
exchange, as then applicable (the "Trading
Market"), or (ii) if not converted pursuant to
subparagraph (i), at the ratio of one share of
Common Stock for each share of Class B Common Stock
upon the sixth anniversary of the date of this
Prospectus (the "Final Conversion Date"). The
maximum number of shares of Common Stock that may
be issued upon conversion of the Class B Common
Stock is 2,000,000. The shares of Class B Common
Stock convertible pursuant to subparagraph (i)
above will convert in five increments of up to
50,000 shares of Class B Common Stock (20% of the
total number of shares of Class B Common Stock
issued) upon the attainment of each of the five
specified Conversion Prices. At each automatic
conversion, each holder of Class B Common Stock
will be deemed to have converted a pro rata share
of such Class B Common Stock then outstanding. The
Conversion Prices shall be established at premiums
to the initial public offering price. Each
Conversion Price will be
5
<PAGE> 7
deemed to have been achieved at the end of the
trading day on which the average closing price of
the Common Stock for the preceding 20 consecutive
trading days exceeds such Conversion Price. The
closing prices will be those reported on the
Trading Market. The initial Conversion Price is
equal to 150% of the price to public in the
Offering, and each of the subsequent Conversion
Prices is equal to 120% of the preceding Conversion
Price. Therefore, if the price to public in the
Offering is the mid-point of the estimated initial
public offering price range ($11.00), the five
Conversion Prices at which up to 50,000 shares of
the outstanding Class B Common Stock shall be
automatically converted to Common Stock are $16.50,
$19.80, $23.76, $28.51 and $34.21, respectively. If
any Conversion Prices are attained within 180 days
after the date of this Prospectus, the portion of
shares of Class B Common Stock that would have
otherwise converted, shall automatically convert
into Common Stock on the 181st day after the date
of this Prospectus. In the event that there are any
shares of Class B Common Stock outstanding on the
Final Conversion Date, all such shares shall
automatically convert into an equal number of
shares of Common Stock. The holders of the Class B
Common Stock may convert each share of Class B
Common Stock into one share of Common Stock at any
time after 180 days from the date of this
Prospectus but on or before the Final Conversion
Date.
Proposed Nasdaq National
Market symbol............ ORAL
- ---------------
(1) Includes (i) 1,750,000 shares of Common Stock issued by OrthAlliance in
connection with the Merger, and (ii) 6,417,802 shares of Common Stock to be
issued in connection with the Transfers, but excludes 1,197,634 shares of
Common Stock issuable pursuant to options granted for the purchase of Common
Stock under the Company's stock option plans or issuable upon the exercise
of outstanding warrants to purchase shares of Common Stock. The actual
number of shares issued in connection with the Transfers will be determined
by dividing $70.6 million by the initial public offering price. See "The
Company," "Management -- Stock Plans," "Certain Transactions" and
"Description of Capital Stock -- Warrants."
The preceding summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes (i) the Underwriters' over-allotment option is not
exercised, (ii) the consummation of the Merger and the Transfers and (iii) an
initial offering price of $11.00 per share. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors."
Unless otherwise indicated, the industry information used in this
Prospectus is derived from the 1995 Journal of Clinical Orthodontists
Orthodontic Practice Study (the "JCO Study") and relates to 1994 unless
otherwise indicated. Comparable information for 1995 and 1996 is not expected to
be available until the release of the 1997 JCO Study in late 1997 or early 1998.
The information compiled in the 1995 JCO Study relates to orthodontists who have
completed accredited graduate orthodontic training programs and does not include
general dentists who also perform certain orthodontic services.
6
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following information is derived from the audited and unaudited
financial statements of OrthAlliance included elsewhere in this Prospectus.
Except as indicated, this information does not reflect the effects of the
Merger, the Transfers or the Offering. For certain information concerning the
Transfers of the Founding Practices, see Note 5 of Notes to Financial Statements
of the Company.
<TABLE>
<CAPTION>
THE PERIOD
FROM OCTOBER 21,
1996 TO SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
---------------- -------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net revenue................................................. $ -- $ --
Total expenses(2)........................................... -- 4,090
Operating loss.............................................. -- 4,090
---------- -------
Net loss.......................................... $ -- $ 4,090
========== =======
Net loss per share................................ $ -- $ .37
========== =======
Number of shares used in net loss per share calculation..... -- 11,068
========== =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------
HISTORICAL AS ADJUSTED(3)
---------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ -- $ 7,811
Working capital............................................. (900) 12,397
Total assets................................................ -- 18,619
Long-term debt.............................................. -- --
Stockholders' (deficit) equity.............................. (900) 15,459
</TABLE>
- ---------------
(1) OrthAlliance has conducted no significant operations to date and will not
conduct significant operations until the Merger, the Transfers and the
Offering are completed. The Company was incorporated on October 21, 1996.
(2) Represents compensation expense related to the issuance of warrants and to
consulting services. See Note 1 and Note 3 of Notes to Financial Statements
of the Company.
(3) As adjusted gives effect to the Merger, the Transfers and the sale of 2.6
million shares of Common Stock offered by the Company at an assumed initial
public offering price of $11.00 per share and the application of the
estimated net proceeds therefrom. See "Use of Proceeds" and Unaudited Pro
Forma Combined Balance Sheet and the notes thereto.
7
<PAGE> 9
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information contained in this
Prospectus, the following risk factors should be considered carefully in
evaluating the Company and its business before purchasing shares of Common Stock
offered hereby. This Prospectus contains forward-looking statements that involve
risks and uncertainties. Actual results could differ from those discussed in the
forward-looking statements as a result of certain factors, including those set
forth below and elsewhere in this Prospectus.
Absence of Combined Operating History. OrthAlliance was founded in October
1996 and has conducted no operations and generated no revenues to date. As a
result of the Merger, OrthAlliance succeeds to the rights of Premier and USOC
under agreements to acquire by transfer pursuant to SAB 48 certain operating
assets of and enter into long-term management services agreements with the
Founding Practices. The Founding Practices have been operating as separate,
independent entities and there can be no assurance that management will be able
to operate the Company successfully, manage the Founding Practices' operations,
achieve any cost savings as a result of the Transfers or institute the necessary
systems and procedures to manage the Company on a profitable basis. The combined
historical financial results of the Founding Practices cover periods when the
Founding Practices were not under common control or management and, therefore,
may not be indicative of the Company's future financial or operating results.
The Company may experience delays, complications and expenses in implementing,
integrating and operating such systems, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the management group has been assembled recently and
there can be no assurance that such persons will be able to effectively oversee
the implementation of the Company's operating, growth, acquisition and business
strategies. The inability of the Company to successfully integrate or operate
the Founding Practices could have a material adverse effect on the Company's
business, financial condition and results of operations and make it unlikely
that the Company's acquisition program will be successful. The Transfers include
the assumption of certain liabilities, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See Unaudited Pro Forma Combined Balance Sheet and the notes thereto, "Certain
Transactions," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Management."
Dependence on Allied Orthodontists. The Company receives fees for services
provided to Allied Practices under management services agreements, but does not
employ orthodontists or control or own the practices of its Allied
Orthodontists. The Company's revenue is dependent on revenue generated by the
Allied Practices, which in turn is largely dependent on the efforts of the
Allied Orthodontists and, therefore, the performance of Allied Orthodontists is
essential to the Company's success. The long-term management services agreements
with Allied Practices have 20 year terms, subject to prior termination by either
party for, among other things, a material default by the other party or a change
of control (as defined therein) applicable to the Company. Any material loss of
revenue by the Company's Allied Orthodontists or termination of such long-term
management services agreements could have a material adverse effect on the
Company's business, financial condition and results of operations. If an Allied
Practice lacks sufficient funds to pay its operating expenses, the Company will
be required to advance funds to pay such expenses. Advances will be in the form
of a loan from the Company to the Allied Practice. Funding for such loans (if
necessary) will be from the Company's working capital or credit facility, which
the Company anticipates it will obtain following the Offering. The Company may
not have working capital or available credit to fund such advances which would
have a material adverse effect on the operations of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Business -- Agreements with Allied Practices and
Allied Orthodontists."
Risks Related to Additional Affiliations and Growth Strategy. One of the
Company's primary business strategies is to increase revenue and expand the
markets it serves beyond the Founding Practices by acquiring certain operating
assets of and entering into long-term management services agreements with
additional orthodontic practices. Competition for such affiliations has
increased significantly in recent years and, as a result, there may be fewer
candidates available for affiliation with the Company. There can be no assurance
that the Company will be able to identify additional practices or contract with
such practices on favorable terms. Further, such arrangements involve a number
of risks, including diversion of management's attention, dependence on
8
<PAGE> 10
retaining, hiring and training key personnel, and risks associated with the
assumption of certain contingent legal liabilities, some or all of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, there can be no assurance that the
Founding Practices or other Allied Practices will achieve anticipated revenues
and earnings. To the extent that the Company is unable to enter into
affiliations with additional orthodontic practices, its ability to expand its
operations and increase its revenues to the degree desired would be reduced
significantly and would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Operating Strategy" and " -- Growth Strategy."
Risks Related to the Company's Affiliation Strategy. The Company intends
to finance future affiliations with cash, the issuance of shares of Common Stock
or the issuance of indebtedness as consideration. In the event that the Common
Stock does not maintain a sufficient market value, or potential acquisition
candidates are unwilling to accept Common Stock as partial consideration for
their practices, the Company may be required to use its cash resources, if
available, to initiate and maintain its acquisition program. If the Company
lacks sufficient cash resources to pursue acquisitions, its growth could be
limited unless it is able to obtain additional capital through debt or equity
financing. There can be no assurance that the Company will be able to obtain
such financing if and when it is needed or that, if available, such financing
can be obtained on favorable terms. The inability to obtain such financing could
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, issuing shares of Common Stock as
consideration for (or in order to provide financing for) future acquisitions
could result in significant dilution to existing stockholders. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Growth
Strategy."
Risks Related to the Company's Ability to Continue Internal
Growth. Certain of the Founding Practices have experienced significant growth
in the past, principally through growth of operations of existing orthodontic
offices and the opening of new offices. There can be no assurance that the
Company will be able to expand its market presence in its current locations or
successfully enter other markets by providing financial resources to the Allied
Practices required for opening new orthodontic offices. Such offices may incur
substantial costs, delays or other operational or financial problems. The
ability of the Company to continue its growth will depend on a number of
factors, including the availability of working capital to support such growth,
existing and emerging competition and the Company's ability to maintain
profitability while facing pricing pressures and rising overhead costs. The
Company must also manage costs in a changing regulatory environment, adapt its
infrastructure and systems to accommodate growth, and recruit and train
additional qualified personnel. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Operating Strategy" and " -- Growth Strategy."
Risks Related to Changes in Government Regulation. The orthodontic
industry and orthodontic practices are regulated extensively at the state and
federal levels. The Company will not control the practice of orthodontics by its
Allied Orthodontists as required by certain regulatory requirements directly
applicable to the orthodontists and their practices. The laws of many states
prohibit non-orthodontic entities (such as OrthAlliance) from practicing
orthodontics, owning all or certain assets of an orthodontic practice, employing
orthodontists or controlling the content of an orthodontist's advertisements.
The laws of many states also prohibit orthodontists from paying any portion of
fees received for orthodontic services in consideration for the referral of a
patient. In addition, many states impose limits on the tasks that may be
delegated by an orthodontist to other staff members. There can be no assurance
that any review of the Company's business relationships by regulatory
authorities or the courts will not result in determinations that could adversely
affect the operations of the Company or that the regulatory environment will not
change to restrict the Company's existing or future operations. These laws and
their interpretations vary from state to state and are enforced by regulatory
authorities with broad discretion. There can be no assurance that the legality
of the Company's long-term management services agreements will not be
successfully challenged or that enforceability of the provisions thereof will
not be limited. See "Business -- Agreements with Allied Practices and Allied
Orthodontists." The laws and regulations of certain states in which the Company
may seek to expand may require the Company to change the form of relationships
entered into with orthodontists in a manner which may restrict the Company's
operations in those states or may prevent the Company from acquiring the assets
of or managing or providing consulting services to orthodontic practices in
9
<PAGE> 11
those states. In addition, there can be no assurance that the laws and
regulations of states in which the Founding Practices presently maintain
operations will not change or be interpreted in the future to either restrict or
adversely affect the Company's relationships with Allied Orthodontists in those
states. See "Business -- Government Regulation."
Risks Related to Future Health Care Reform. The United States Congress has
considered various health care reform proposals, including comprehensive
revisions to the current health care system. It is uncertain what legislative
proposals will be adopted in the future or what actions federal or state
legislatures or third-party payors may take in anticipation of or in response to
any health care reform proposals or legislation. Health care reform legislation
adopted by Congress could have a material adverse effect on the operations of
the Company, and changes in the health care industry, such as the growth of
managed care organizations and provider networks, may result in lower payment
levels for the services of the Allied Orthodontists.
Dependence on Enforceability of Operative Agreements. To effect the
consummation of the Transfers, the Company, as successor to Premier and USOC,
required the Founding Practices and certain of their orthodontists to execute
three agreements (collectively, the "Operative Agreements"): (i) a purchase and
sale agreement, stock purchase and sale agreement or agreement and plan of
reorganization by and between the Founding Practice and OrthAlliance; (ii) a
long-term management services agreement by and between the Founding Practice and
OrthAlliance; and (iii) employment agreements by and between the Founding
Practice and certain of its orthodontists. The consummation of the Transfers and
the subsequent viability of the Company are dependent on the initial and
continuing enforceability of the Operative Agreements. While OrthAlliance has
attempted to structure the Operative Agreements in accordance with applicable
law, there can be no assurance that the enforceability of certain non-compete
and other provisions will not be successfully challenged. Further, because each
of the employment agreements is between the Allied Orthodontist and the Allied
Practice, there can be no assurance that the parties thereto will not terminate
or amend the terms and conditions of such employment agreements. See
"Business -- Agreements with Allied Practices and Allied Orthodontists."
Dependence on Key Personnel. The success of the Company is dependent upon
the continued services of the Company's senior management, including Sam
Westover, Chief Executive Officer, Robert S. Chilton, Chief Financial Officer
and P. Craig Hethcox, Chief Operating Officer. The loss of the services of
Messrs. Westover, Chilton or Hethcox or other Company senior management could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management."
Risks Related to Competition. The business of providing orthodontic
services is highly competitive in each market in which the Company operates.
Each of the Company's Allied Orthodontists faces competition from other
orthodontists or general dentists in the communities served, some of whom have
more established practices in the market. The Company is aware of several other
companies currently developing, consolidating and managing orthodontic practices
throughout much of the United States, and the Company may encounter substantial
competition from those entities, as well as new market entrants. Other
competitors involved in managing multiple practices may have greater marketing,
financial and other resources and more established operations than the Company.
The Company expects that the level of competition with regional or national
management concerns will remain high in the future, which could limit the
Company's ability to maintain or increase its market share or maintain or
increase gross margins, either of which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Competition."
Liability Risks Associated with Providing Orthodontic Services. Each of
the Allied Orthodontists provides orthodontic services to the public and may be
exposed to the risk of professional liability and other claims. Claims relating
to orthodontic treatment, temporomandibular joint syndrome-related claims and
claims for failure to diagnose periodontal disease, if successful, could result
in substantial damage awards to the claimants which may exceed the limits of any
applicable insurance coverage of the Allied Practice and, potentially, the
Company as an affiliate of the Allied Practice. The Company does not engage in
the practice of orthodontics, and, as a result, cannot purchase malpractice
insurance. Each of the Allied Practices or the Company on its behalf will be
required to maintain certain levels of general liability and malpractice
insurance. The Company will not control the practice of orthodontics by its
Allied Orthodontists or the compliance with regulatory and other requirements
directly applicable to the Allied Orthodontists and the Allied Practices.
Although the Company maintains liability
10
<PAGE> 12
insurance for itself (with limits and retention amounts to be negotiated), and
intends to be named as an additional insured party on the liability insurance
policies of the Allied Orthodontists (where permitted by insurers and applicable
state law), successful malpractice claims against the Company or the Allied
Orthodontists could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that claims not covered by the Company's insurance (e.g., claims for
punitive damages) will not arise. See "Business -- Litigation and Insurance."
Claims against the Company, the Allied Practices and/or the Allied
Orthodontists, regardless of their merit or eventual outcome, may also have a
material adverse effect on the Company's ability to attract patients to Allied
Practices or expand its business. Further, because insurance policies must be
renewed annually, there can be no assurance that the Company, the Allied
Practices and/or the Allied Orthodontists, will be able to obtain liability
insurance coverage in the future on acceptable terms, if at all.
Substantial Proceeds of Offering Payable to Founding Practices and
Affiliates. Approximately $13.8 million of the net proceeds of this Offering
will be used to pay the cash portion of the purchase price of the purchase and
sale agreements and agreements and plans of reorganization in the Transfers.
Approximately $900,000 of the net proceeds of the Offering will be used to pay
accrued consulting fees to certain affiliates of the Company. In addition,
approximately $3.0 million of the net proceeds from the Offering will be used to
repay indebtedness assumed by the Company in connection with the Merger and the
Transfers. See "The Company," "Use of Proceeds" and "Certain Transactions."
Control by Existing Management and Stockholders. Following the completion
of the Transfers, the Merger and the Offering, the Allied Orthodontists, the
executive officers and directors of the Company and entities affiliated with
such persons will beneficially own approximately 70.4% of the then outstanding
shares of Common Stock and Class B Common Stock and will exercise control over
the Company's affairs. These stockholders acting together will be able to elect
the Board of Directors of the Company and approve or disapprove any matter
submitted to a vote of stockholders, including amendments to the Company's
Certificate of Incorporation (the "Certificate"), mergers, share exchanges, the
sale of all or substantially all of the Company's assets, going private
transactions or other fundamental corporate transactions. See "Principal
Stockholders" and "Description of Capital Stock."
In addition, certain Allied Orthodontists, officers, directors and existing
stockholders of the Company will own an aggregate of 250,000 shares of the Class
B Common Stock, each such share is entitled to one vote per share and is
entitled to vote with the Common Stock on all matters submitted to a vote of the
Company's stockholders. The Class B Common Stock will automatically convert into
shares of Common Stock at a ratio of eight shares of Common Stock for each share
of Class B Common Stock upon the attainment of the Conversion Prices. Attainment
of each of the Conversion Prices will result in conversion of the Class B Common
Stock into a maximum of 2,000,000 shares of Common Stock, further increasing the
holders' of such shares control over the Company's affairs. In the event all of
the Class B Common Stock is converted into the maximum number of shares of
Common Stock possible, through the achievement of all of the Conversion Prices
on or before the Final Conversion Date, the Allied Orthodontists, the officers
and directors of the Company and entities affiliated with such persons would
beneficially own approximately 70.9% of the then outstanding shares of Common
Stock and Class B Common Stock (assuming no other issuances of capital stock).
If the Conversion Prices are not achieved prior to the Final Conversion Date,
all outstanding shares of Class B Common Stock will convert to shares of Common
Stock at a ratio of one share for one share on such date. See "Description of
Capital Stock -- Common Stock and Class B Common Stock."
Shares Eligible for Future Sale. All of the shares of Common Stock being
sold in this Offering will be freely tradeable unless acquired by affiliates of
the Company. The market price of the Common Stock could be adversely affected by
the sale of substantial amounts of Common Stock of the Company in the public
market following this Offering. Upon the closing of this Offering, the owners of
the Founding Practices will receive, in the aggregate, 6,417,802 shares of
Common Stock (assuming an initial public offering price of $11.00) as a portion
of the consideration for the affiliation of their orthodontic practices with the
Company. The 6,417,802 shares received by the owners of the Founding Practices
are not being offered by this Prospectus; however, holders of such shares have
certain incidental registration rights pursuant to the purchase and sale
agreements and agreements and plans of reorganization between OrthAlliance and
the Founding Practices, whereby the Company must use its reasonable efforts to
register such shares under certain circumstances during the twenty-four months
11
<PAGE> 13
following the closing of the Transfers. See "Description of Capital
Stock -- Registration Rights." Certain other stockholders of OrthAlliance will
hold, in the aggregate, an additional 1,750,000 shares of Common Stock and
250,000 shares of Class B Common Stock. See "Certain Transactions." None of the
1,750,000 shares of Common Stock were acquired in transactions registered under
the Securities Act and, accordingly, such shares may not be sold except in
transactions registered under the Securities Act or pursuant to an exemption
from registration thereunder. The 250,000 shares of Class B Common Stock are not
transferable, except to the holder's spouse, parents, siblings, lineal
descendants, a trust for the benefit of any such person or as determined by will
or the laws of descent.
The Company, all of the owners of the Founding Practices, and the executive
officers, directors and 5% or greater shareholders of the Company will be
restricted from offering or selling shares of Common Stock for a period of 365
days (the "Lock-up Period") after the date hereof without the prior written
consent of J.C. Bradford & Co. and Oppenheimer & Co., Inc., as representatives
of the underwriters (the "Representatives"), except in connection with
acquisitions or the exercise of warrants or options granted under the Company's
stock option plans. See "Underwriting." After the Lock-up Period, all of such
shares may be sold in accordance with Rule 144 promulgated under the Securities
Act of 1933, as amended (the "Securities Act"), subject to the volume, holding
period and other limitations of Rule 144.
The Company has filed the Shelf Registration for use in connection with
future acquisitions. These shares generally will be freely tradable upon
issuance to persons not deemed to be affiliates of the Company, unless the
Company contractually restricts the sale or other transfer of such shares.
Initially, the Company will issue such shares subject to a Lock-up Period of up
to 180 days from the date of this Prospectus.
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
Offering, there has been no public market for the Common Stock. The Company has
filed an application for the Common Stock to be approved for quotation on the
Nasdaq National Market, however, there can be no assurance that, following the
Offering, a regular trading market for the Common Stock will develop or be
sustained. The initial public offering price has been determined by negotiation
among the Company and the Representatives and may bear no relationship to the
market price of the Common Stock after this Offering. See "Underwriting." The
market price of the Common Stock could be subject to significant fluctuations in
response to variations in quarterly operating results and other factors. In
addition, the stock market in recent years has experienced extreme price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of companies. Factors such as actual or anticipated
operating results, growth rates, changes in estimates by analysts, market
conditions in the industry, announcements by competitors, regulatory actions and
general economic conditions will vary over time. As a result of the foregoing,
the Company's operating results and prospects periodically may be below the
expectations of public market analysts and investors. Any such event would
likely result in a material adverse effect on the price of the Common Stock.
Immediate and Substantial Dilution; Absence of Dividends. The purchasers
of the Common Stock offered hereby will experience immediate dilution of $9.60
per share in the net tangible book value of such shares, because the initial
public offering price is substantially higher than the pro forma net tangible
book value per share. Existing stockholders will receive an increase of $2.52
per share in the pro forma net tangible book value of their shares. In the event
the Company issues additional shares of Common Stock in the future, including
shares which may be issued in connection with future affiliations, purchasers of
Common Stock in this Offering may experience further dilution in the net
tangible book value per share of the Common Stock. See "Dilution." Except for
the payment of $13.8 million cash consideration to be paid to the Founding
Practices in connection with the Transfers, which is recorded as a cash
dividend, the Company has never paid any cash dividends and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. See
"Dividend Policy."
Anti-takeover Effect of Certain Provisions. Certain provisions of
OrthAlliance's Certificate, Bylaws and the Delaware General Corporation Law
("DGCL") could delay or impede the removal of incumbent directors and could make
a merger, tender offer or proxy contest involving the Company more difficult, or
could discourage a third party from attempting to acquire control of the
Company, even if such events would benefit the interests of the stockholders. In
particular, OrthAlliance's Certificate provides for a "staggered" Board of
Directors in three classes, which could have the effect of delaying a change in
control of the Company. In
12
<PAGE> 14
addition, although OrthAlliance has no current plans to issue any preferred
stock, the Certificate authorizes the Board of Directors to issue "blank check"
preferred stock of the Company, in one or more series, without stockholder
approval of the issuance and upon such terms and conditions, and having such
rights, privileges and preferences, as the Board of Directors may determine. See
"Description of Capital Stock -- Preferred Stock" and "Certain Provisions of the
Certificate, Bylaws and Delaware Law." Certain of the Company's senior
management personnel have entered into employment agreements with the Company
which contain "change in control" provisions. The "change in control" provisions
may hinder, delay, deter or prevent a tender offer, proxy contest or other
attempted takeover because covered employees terminated within 12 months of a
change in control would be paid an amount equal to three times (i) their
existing annual base compensation and (ii) the maximum possible cash bonus. In
addition, the Company must pay any accrued salary, benefits or reimbursements to
such employee. See "Management -- Employment Agreements." The Service Agreements
entered into with the Allied Orthodontists provide that said agreements may be
terminated by the Allied Practices pursuant to a change of control, defined
therein, which does not include transactions approved by the Company's Board of
Directors. OrthAlliance is also subject to Section 203 of the DGCL which
prohibits a publicly held Delaware corporation from engaging in a "business
combination" (as defined in Section 203 of the DGCL) with an "interested
stockholder" (defined in Section 203 of the DGCL, generally, as a person owning
15% or more of the Company's outstanding voting stock) for a period of three
years after the date of the transaction in which such person became an
interested stockholder, unless certain conditions are met.
13
<PAGE> 15
THE COMPANY
OrthAlliance was recently organized to create a national provider of
practice management services to orthodontic practices in the United States.
Premier and USOC, predecessors to OrthAlliance, were formed in 1996
independently of each other to acquire certain operating assets of and to enter
into long-term management services agreements with orthodontic practices. The
management of Premier and USOC determined to combine the two companies to form
OrthAlliance. Prior to the closing of the Offering, Premier and USOC will be
merged with and into OrthAlliance (previously defined as the Merger), and
pursuant thereto the Company will succeed to the rights of Premier and USOC
under the agreements with the Founding Practices and acquire all tangible and
intangible assets and liabilities of Premier and USOC. See "Certain
Transactions" and "Note 1 to Notes to the Financial Statements of the Company."
Simultaneously with and as a condition to the closing of the Offering,
OrthAlliance will acquire, by transfer pursuant to SAB 48, certain operating
assets or the stock of entities holding certain operating assets of, the 55
separate Founding Practices in exchange for cash and shares of Common Stock and
will enter into long-term management or consulting services agreements with the
Founding Practices (previously defined as the Transfers). See
"Business -- Agreements with Allied Practices and Allied Orthodontists." In
Transfers requiring stock acquisitions, the Company generally will acquire the
stock of the entity (the "Original Entity") through which the applicable
Founding Practice previously operated and generated revenues. Before the
Company's acquisition of the Original Entity, the stockholder(s) of the Original
Entity will form a new entity (the "New Entity") through which the Founding
Practice will provide orthodontic services and which will hold all assets that
the Company is unable to own pursuant to applicable state law or which the
Company does not desire to acquire from the Allied Practice. At the time of
transfer of the stock of the Original Entity to OrthAlliance, the Original
Entity will hold the operating assets of the Original Entity that the Company is
permitted to own.
The aggregate consideration paid by the Company to the Founding Practices
is approximately $84.4 million, composed of 6,417,802 shares of Common Stock
(assuming $11.00 per share), approximately $13.8 million in cash, all of which
is payable at the closing of the Transfers. The actual number of shares of
Common Stock issued to the Founding Practices in the Transfers will be
determined by dividing $70.6 million by the initial public offering price. In
the event the price to the public is higher than the mid-point of the estimated
initial public offering price range, the aggregate number of shares will be
reduced accordingly, and in the event the price to the public is lower, the
aggregate number of shares will be increased accordingly. Cash proceeds from the
Offering will be used to pay the cash portion of the consideration. See "Certain
Transactions," "Use of Proceeds," "Business -- Agreements with Allied Practices
and Allied Orthodontists," and the Unaudited Pro Forma Combined Balance Sheet
and the notes thereto.
The Company maintains its principal executive office at 23848 Hawthorne
Boulevard, Suite 200, Torrance, California 90505, and its telephone number is
(310) 791-5656.
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered
hereby are estimated to be approximately $24.9 million (approximately $28.9
million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $11.00 per share and after
deducting underwriting discounts and other estimated offering expenses payable
by the Company.
The Company intends to use the net proceeds from the Offering as follows:
(i) approximately $13.8 million will be used to pay the cash portion of the
consideration paid to the Founding Practices; (ii) approximately $3.0 million
will be used to repay certain indebtedness assumed by the Company in the Merger
and the Transfers; (iii) approximately $900,000 will be used to pay accrued
consulting fees; and (iv) the balance will be used for general corporate
purposes including financing the expansion of the Company's business through
affiliations with additional orthodontic practices and the development of
satellite offices for the Allied Practices. Currently, the Company has entered
into negotiations to acquire net assets of four additional orthodontic entities.
The aggregate consideration to be paid by the Company with respect to the
Pending Transfers will be approximately $3.1 million, of which up to 20% is
payable in cash and the remainder with shares of Common Stock issued pursuant to
the Shelf Registration. The actual number of shares to be issued will be
determined based upon the market price of the Common Stock, calculated pursuant
to the following formula: (i) the initial public offering price for Pending
Transfers closed within seven days following the closing of the Offering, or
(ii) the average closing price of the Common Stock as reported on the Nasdaq
National Market for the five consecutive trading days ending two days prior to
the closing date for Pending Transfers closed after such seventh trading day.
The Pending Transfers will be accounted for under the purchase method pursuant
to APB 16.
The indebtedness to be repaid consists of, among other things, certain debt
incurred by Premier to finance organizational costs and working capital (the
"Premier Note"). The principal amount of the Premier Note is $1.01 million and
it accrues interest at a specified prime rate plus one percent (1.0%). Following
completion of the Offering, the principal and interest due and payable is
anticipated to be approximately $1.06 million. See "Certain Transactions."
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term, interest-bearing, investment
grade securities.
DIVIDEND POLICY
Except for the payment of $13.8 million cash consideration to be paid to
the Founding Practices in connection with the Transfers, which is recorded as a
cash dividend, the Company has never declared or paid dividends on its Common
Stock or Class B Common Stock. Prior to the Transfers, the Founding Practices,
some of which are sole proprietorships, C corporations or S corporations, made
distributions of earnings to their owners and stockholders, as applicable. The
Company expects that future earnings, if any, will be retained for the growth
and development of the Company's business and, accordingly, the Company does not
anticipate that any dividends will be declared or paid on the Common Stock for
the foreseeable future. The declaration, payment and amount of future dividends,
if any, will depend upon the future earnings, results of operations, financial
position and capital requirements of the Company, among other factors. The
Company may borrow funds under credit agreements which may limit the ability of
the Company to pay dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
15
<PAGE> 17
DILUTION
As of June 30, 1997, after giving effect to the Merger and the Transfers,
the pro forma net tangible book value of the Company was $(9.4) million, or
$(1.12) per share. The pro forma net tangible book value per share is determined
by dividing the Company's pro forma net tangible book value (total tangible
assets less total liabilities) by the number of shares of Common Stock and Class
B Common Stock to be outstanding after the Merger and the Transfers. After
giving effect to the sale by the Company of the 2,600,000 shares of Common Stock
offered hereby and after deducting underwriting discounts and commissions and
estimated offering expenses, the pro forma net tangible book value of the
Company as of June 30, 1997 would have been $15.5 million, or $1.40 per share.
This represents an immediate increase in net tangible book value of $2.52 per
share to existing stockholders and an immediate dilution in net tangible book
value of $9.60 per share to new investors purchasing shares of Common Stock in
this Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $11.00
Pro forma net tangible book value before Offering......... $(1.12)
Increase attributable to new investors.................... 2.52
------
Pro forma net tangible book value after Offering............ 1.40
------
Dilution in net tangible book value to new investors........ $ 9.60
======
</TABLE>
The following table sets forth on a pro forma basis, giving effect to the
Merger and Transfers as of June 30, 1997, the number of shares of Common Stock
and Class B Common Stock purchased from the Company, the total consideration
paid to the Company, and the average price per share paid to the Company by
existing stockholders and the new investors purchasing shares of Common Stock in
this Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........ 8,417,802 76.4% $ (9,439,000) (49.3)% $(1.12)
New investors................... 2,600,000 23.6 28,600,000 149.3 11.00
---------- ----- ------------ -----
Total(2).............. 11,017,802 100.0% $ 19,161,000 100.0%
========== ===== ============ =====
</TABLE>
- ---------------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity of OrthAlliance and the Founding Practices before the
Offering, adjusted to reflect the payment of $13.8 million in cash as
partial consideration for the Transfers. See "Use of Proceeds" and
"Capitalization."
(2) Does not include 1,197,634 shares of Common Stock issuable upon the exercise
of options for the purchase of Common Stock pursuant to the Company's stock
plans or issuable upon the exercise of warrants to purchase Common Stock.
See "Management -- Stock Plans" and "Description of Capital Stock --
Warrants."
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the current portion of long-term debt and
the total capitalization (i) of the Company as of June 30, 1997, (ii) on a pro
forma basis to reflect the Merger and Transfers and (iii) on a pro forma as
adjusted basis to give effect to the Merger and Transfers, the sale of the
2,600,000 shares of Common Stock offered hereby (assuming an initial public
offering price of $11.00 per share) and the application of the net proceeds
therefrom. See "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the OrthAlliance financial statements and notes thereto and the
Unaudited Pro Forma Combined Balance Sheet and the notes thereto included in
this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
---------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA(1) AS ADJUSTED(1)(2)
---------- ------------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt........................ $ -- $ -- $ --
====== ======= ========
Long-term debt, less current portion..................... -- 3,012 --
------ ------- --------
Stockholders' equity:
Preferred Stock $.001 par value; 20,000,000 shares
authorized(3); no shares issued and outstanding,
pro forma or as adjusted.......................... -- -- --
Class A Common Stock, $.001 par value; 70,000,000
shares authorized, one share issued and
outstanding at June 30, 1997(3); 8,167,802 issued
and outstanding pro forma; 10,767,802 issued and
outstanding as adjusted(4)........................ -- 8 11
Class B Common Stock, $.001 par value; 250,000
shares authorized(3), no shares issued and
outstanding at June 30, 1997; 250,000 issued and
outstanding pro forma and as adjusted(4).......... -- -- --
Additional paid-in capital.......................... 3,190 10,877 35,772
Accumulated deficit(5).............................. (4,090) (20,324) (20,324)
------ ------- --------
Total Stockholders' (deficit) equity........... (900) (9,439) 15,459
------ ------- --------
Total capitalization...................... $ (900) $(6,427) $ 15,459
====== ======= ========
</TABLE>
- ---------------
(1) See Unaudited Pro Forma Combined Balance Sheet and the notes thereto
included elsewhere in this Prospectus for a discussion of the assumptions
made and adjustments applied in preparation of this information.
(2) Gives effect to the sale of 2.6 million shares of Common Stock offered by
the Company at an assumed initial public offering price of $11.00 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
(3) Reflects an amendment to the Company's Certificate filed subsequent to June
30, 1997 to increase the authorized capital stock and to designate classes
of common stock.
(4) Does not include 1,197,634 shares of Common Stock issuable upon the exercise
of outstanding options for the purchase of Common Stock pursuant to the
Company's stock plans or issuable upon the exercise of warrants to purchase
Common Stock. See "Management -- Stock Plans" and "Description of Capital
Stock -- Warrants."
(5) Pro Forma and Pro Forma As Adjusted includes the accrual for a cash dividend
of $13.8 million representing payments to certain of the Founding Practices.
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<PAGE> 19
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following information is derived from the audited and unaudited
financial statements of OrthAlliance included elsewhere in this Prospectus.
Except as indicated, this information does not reflect the effect of the Merger,
the Transfers or the Offering. For certain information concerning the Transfers
of the Founding Practices, see Note 5 of Notes to Financial Statements of the
Company.
<TABLE>
<CAPTION>
THE PERIOD
FROM
OCTOBER 21, SIX MONTHS
1996 ENDED
TO DECEMBER 31, JUNE 30,
1996 1997
--------------- ------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net revenue................................................. $ -- $ --
------- -------
Total expenses(2)........................................... -- 4,090
Operating loss.............................................. -- 4,090
------- -------
Net loss.......................................... $ -- $ 4,090
======= =======
Net loss per share................................ $ -- $ .37
======= =======
Number of shares used in net loss per share calculation..... -- 11,068
======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------
HISTORICAL AS ADJUSTED(3)
---------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ -- $ 7,811
Working capital............................................. (900) 12,397
Total assets................................................ -- 18,619
Long-term debt, less current portion........................ -- --
Stockholders' (deficit) equity.............................. (900) 15,459
</TABLE>
- ---------------
(1) OrthAlliance has conducted no significant operations to date and will not
conduct significant operations until the Merger, the Transfers and the
Offering are completed. The Company was incorporated on October 21, 1996.
(2) Represents compensation expense related to the issuance of warrants and to
consulting services. See Note 1 and Note 3 of Notes to the Financial
Statements of the Company.
(3) As adjusted gives effect to the Merger, the Transfers and the sale of 2.6
million shares of Common Stock offered by the Company at an assumed initial
public offering price of $11.00 per share and the application of the
estimated net proceeds therefrom. See "Use of Proceeds" and Unaudited Pro
Forma Combined Balance Sheet and the notes thereto.
18
<PAGE> 20
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following information is derived from the audited and unaudited
financial statements of USOC, a predecessor of OrthAlliance, included elsewhere
in this Prospectus. Except as indicated, this information does not reflect the
effect of the Merger, the Transfers or the Offering.
<TABLE>
<CAPTION>
THE PERIOD
FROM INCEPTION
(FEBRUARY 7,
1996) TO SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
USOC STATEMENT OF OPERATIONS DATA:
Net revenue............................................... $ 0 $ 0
Total expenses............................................ 3,132 972
Operating loss............................................ 3,132 972
------- -------
Net loss........................................ $ 3,132 $ 964
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
USOC BALANCE SHEET DATA:
Cash and Cash Equivalents................................. $ 60 $ 20
Working capital........................................... (1,059) (412)
Total assets.............................................. 89 260
Long-term debt, less current portion...................... 0 0
Stockholders' (deficit) equity............................ (1,032) (384)
</TABLE>
The following information is derived from the audited and unaudited
financial statements of Premier, a predecessor of OrthAlliance, included
elsewhere in this Prospectus. Except as indicated, this information does not
reflect the effect of the Merger, Transfers or the Offering.
<TABLE>
<CAPTION>
THE PERIOD
FROM INCEPTION
(NOVEMBER 26,
1996) TO SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
PREMIER STATEMENT OF OPERATIONS DATA:
Net revenue............................................... $ 0 $ 0
Total expenses............................................ 255 503
Operating loss............................................ 255 503
Net loss........................................ $ 255 $ 490
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
PREMIER BALANCE SHEET DATA:
Cash and Cash Equivalents................................. $ 0 $ 564
Working capital........................................... (260) (230)
Total assets.............................................. 5 599
Long-term debt, less current portion...................... 0 1,010
Stockholders' (deficit) equity............................ (255) (745)
</TABLE>
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions, and the actual
events or results may differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk Factors,"
as well as those discussed elsewhere in this Prospectus. The historical results
set forth in this discussion and analysis are not indicative of trends with
respect to any actual or projected future financial performance of the Company.
The following should be read in conjunction with the financial statements and
related notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
OrthAlliance has conducted no significant operations to date but will
acquire as a result of the Transfers certain operating assets and, in some
cases, liabilities of the Founding Practices. In addition, OrthAlliance will
enter into either a service agreement ("Service Agreement") or a consulting and
business services agreement ("Consulting Agreement") with each of the Founding
Practices (the Service Agreements and Consulting Agreements are referred to
herein collectively as "Management Agreements"). Under the Service Agreements,
the Company will provide practice management services to the Founding Practices
in exchange for certain management fees. Under the Consulting Agreements, which
allow the Company and the Founding Practice to comply with certain state law
restrictions on practice management, the Company will provide consulting
services in exchange for similar fees.
Under the Management Agreements, the Company will act as manager and
administrator of each Allied Practice and will assume substantially all
operating expenses to third parties of the Allied Practice. In exchange for
assuming these expenses and providing management services, the Company will
record revenues in amounts equal to the assumed expenses plus a management fee,
as described below. In general, the Management Agreements provide for the
payment of fees to the Company based on a negotiated percentage of the "Adjusted
Patient Revenue" of the Allied Practices. Adjusted Patient Revenue is net
patient revenue, as determined under generally accepted accounting principles,
including adjustments for contractual allowances and other discounts, plus an
adjustment for uncollectible accounts. Patient revenue is recognized as
orthodontic services are performed, with approximately 20% being recognized at
the time of initial treatment. 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 the practice
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
orthodontic personnel, orthodontic supplies, and associated administrative
services.
The management fee is paid monthly to the Company by each Allied Practice
based upon the practice's Adjusted Patient Revenue calculated on the accrual
basis using the revenue recognition criteria noted above. There are three fee
structures by which the management fee may be calculated under the Management
Agreements:
(i) a designated percentage of Adjusted Patient Revenue, ranging from
14% to 17%, subject to an annual adjustment based upon improvements in the
Allied Practice's operating margin in the most recent fiscal year as
compared with the immediately preceding fiscal year. No annual adjustment
shall be made which would result in reducing the designated 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 orthodontic
compensation. The average designated percentage is 16.9% for those Founding
Practices under this arrangement.
(ii) a designated percentage ranging from 13.5% to 17% of Adjusted
Patient Revenue with a potential annual adjustment of 25% of the increase
in operating margin (as defined in subparagraph (i) above) in a
20
<PAGE> 22
fiscal year as compared to the preceding fiscal year multiplied by the
Adjusted Patient Revenue for the current fiscal year. The supplemental fee
for improvement in operating margin, if applicable, shall be paid in a lump
sum payment upon final determination of the Allied Practice's operating
margin for the fiscal year. The average designated percentage is 16.3% for
the Founding Practices under this arrangement.
(iii) a fixed dollar fee with annual fixed dollar increases for each
year of the Management Agreement.
Pursuant to the Management Agreements, the Company incurs the expenses
necessary to manage and administer each Allied Practice and such expenses are
paid from funds generated by such Allied Practice. The Company generally is
required to employ the personnel for operation of the Allied Practice (except
the Allied Orthodontist and certain clinical personnel), establish appropriate
business systems, perform payroll and accounting functions, provide billing and
collection services, purchase and maintain inventory, provide certain equipment
and furnishings, arrange legal services unrelated to malpractice litigation,
formulate a marketing plan, manage and organize the Allied Practices records and
advise each Allied Practice regarding practice expansion. In addition, the
Company is required to pay the operating expenses of each Allied Practice,
except for the salaries of the Allied Orthodontists and, in certain states
according to applicable law, other professional staff. The Company will also
incur personnel and administrative expenses in connection with maintaining
corporate offices, from which the Company will provide management,
administrative, marketing, development and acquisition services. The Management
Agreements have an initial term of 20 years, subject to prior termination by
either party in the event the other party (i) becomes subject to bankruptcy
proceedings or (ii) materially breaches the Management Agreement and such party
fails to cure the breach within 90 days. In addition, the Allied Practices may
terminate the Management Agreements upon the occurrence of a change in control
(as defined therein).
Management fees are due in arrears on the date each Allied Practice's
monthly financial statements are completed. Within 45 days following the end of
each calendar quarter, the Company will prepare quarterly financial statements
for each Allied Practice. In the event of a quarterly adjustment to the Allied
Practice's Adjusted Patient Revenue, amounts owing to an Allied Practice (as a
result of such adjustment) will be remitted by the Company to the Allied
Practice. Any amounts owing to the Company by an Allied Practice will be deemed
an operating expense of the Allied Practice to be paid to the Company from the
Adjusted Patient Revenue of the Allied Practice.
Each Management Agreement provides that the Company advance funds, if
required, to the Allied Practice to pay operating expenses of such practice,
including Allied Practice operating expenses incurred by the Company and certain
expenses required to be paid by the Allied Practice. Advances will be evidenced
by a note from the Allied Practice and repaid upon mutually agreed upon terms
and conditions generally to include interest at the prime rate published in The
Wall Street Journal plus one percent. Advances are deemed operating expenses of
an Allied Practice to be incurred by the Company and to be paid from the Allied
Practice's Adjusted Patient Revenue. The Company will fund advances from working
capital or borrowings pursuant to a credit facility which the Company
anticipates it will establish following the closing of the Offering. See
"Liquidity and Capital Resources."
In accordance with SAB 48 published by the Commission, the acquisition of
the assets and assumption of certain liabilities of all of the Founding
Practices pursuant to the Transfers are accounted for by the Company at the
transferors' historical cost basis, with the shares of Common Stock to be issued
in those transactions being valued at the historical cost of the nonmonetary
assets acquired net of liabilities assumed. The cash consideration will be
reflected as a dividend by the Company to the owners of the Founding Practices.
The Pending Transfers and the Company's future acquisitions of certain of the
assets and liabilities of Allied Practices will generally result in subsequent
annual noncash amortization charges for intangible assets in the Company's
statements of operations.
The Company intends to implement a growth strategy focused on (i)
affiliating with additional orthodontic practices that fit the OrthAlliance
model of a high quality practice with strong financial performance; (ii)
expanding Allied Practices by providing capital, support and consultation for
satellite office expansion; (iii) assisting the Allied Practices with their
internal growth by increasing gross revenues through increased patient volume;
and (iv) enhancing profitability through operational efficiencies.
21
<PAGE> 23
RESULTS OF OPERATIONS
OrthAlliance has conducted no significant operations to date and will not
conduct significant operations until the Transfers, the Merger and the Offering
are completed. From inception through June 30, 1997, USOC and Premier incurred
development costs of $4.4 million and $745,200, respectively. OrthAlliance did
not incur development costs during this period. See the Company's Financial
Statements and Unaudited Pro Forma Combined Balance Sheet and notes thereto.
LIQUIDITY AND CAPITAL RESOURCES
If the Transfers had occurred on June 30, 1997, the Company would have had
a pro forma working capital deficit of approximately $9.4 million, including the
accrual of $13.8 million for cash dividends payable to the Founding Practices.
The Company anticipates the primary uses of capital will include
affiliation with orthodontic practices (including the Pending Transfers, the
cash portion of which could be as much as $620,000), certain costs related to
the development of satellite offices and funding working capital needs of the
Company and the Allied Practices. The Company estimates that it will incur
capital expenditures of approximately $50,000 for the remainder of fiscal 1997,
which do not include amounts that the Company may provide to an Allied Practice
to fund certain of the development costs of a satellite office. The Company
intends to provide or arrange for capital for practice expansion, market
research, site selection, office design and marketing support for satellite
office development. Total development costs will vary by geographic location,
but are currently anticipated to be approximately $250,000 per office. In
addition as described above, the Company, pursuant to the Management Agreements,
is required to advance funds, if necessary, to such Allied Practice for the
purpose of paying such expenses. The advances will be funded from the Company's
working capital or credit facility discussed below. As part of its growth
strategy, the Company intends to enter into affiliations with additional
orthodontic practices that will involve the payment of cash and issuance of
Common Stock.
Management believes that the proceeds of the Offering, after application of
the use of proceeds, combined with the Company's anticipated cash flow from
operations will be sufficient to fund the planned capital needs and ongoing
operations of the Company for the next 18 months. Additional capital may be
required by the Company's acquisition program. The Company is currently
negotiating with various lenders to obtain a revolving credit facility which if
obtained will be available to fund additional working capital needs (if any) and
possible future acquisitions. There can be no assurance that the Company will be
able to obtain financing on favorable terms. In addition, the Company is
concurrently with the Offering registering 2,500,000 additional shares of Common
Stock pursuant to the Shelf Registration, which, when combined with the
Company's cash resources, will be used to support the Company's planned
acquisition program.
22
<PAGE> 24
BUSINESS
GENERAL
OrthAlliance was recently organized to create a national provider of
practice management services to orthodontic practices in the United States. The
Company will manage the business aspects of the Allied Practices (subject to
applicable state law), thereby allowing Allied Orthodontists to focus on
delivering cost-effective, high quality patient care, and will provide capital
for the development and growth of such practices. The Company will affiliate
with Allied Practices pursuant to long-term management services agreements and
will generate revenues by providing management, marketing and development
services to Allied Practices. The Company intends to aggressively expand its
network of Allied Practices by acquiring certain operating assets of and
entering into long-term management services agreements with additional
orthodontic practices throughout the United States.
The Founding Practices and Their Allied Orthodontists. The Company has
entered into definitive agreements, to be consummated simultaneously with the
closing of this Offering, to acquire (by transfer pursuant to SAB 48) certain
operating assets of or the stock of certain entities holding the assets of, and
enter into Management Agreements with, 55 Founding Practices, which include 82
orthodontists operating 147 offices located in 16 states. Management believes
that the Founding Practices are leading practices in their markets and the
Founding Practices were selected based upon a variety of factors, including
size, profitability, historical growth and reputation for high quality care,
among local consumers of orthodontic services and within the orthodontic
services industry. Some of the Founding Practices were referred to the Company
by certain Allied Orthodontists. Potential Founding Practices were subject to
peer review which evaluated practices on the quality of patient care and the use
of effective practice procedures. Management intends to capitalize on the
reputations and relationships of the Founding Practices and their Allied
Orthodontists to assist the Company in affiliating with additional orthodontic
practices.
Management believes that the Company's management, marketing, recruiting
and growth strategies, as applied to the Founding Practices, will maximize the
Company's revenues. Each Allied Orthodontist of the Founding Practices will
initially be a member of the Company's Board of Advisors, highlighting the
expertise of the Allied Orthodontists of the Founding Practices. The Board of
Advisors will advise management on a broad range of issues, including treatment,
risk management, quality assurance, credentialing, managed care, product
evaluation, professional resources and marketing. The members of the Board of
Advisors will also recommend professional standards for both treatment quality
and delivery of patient care, and provide a peer review process.
Services of the Company. Pursuant to the OrthAlliance model, the Company
provides fee-based management services to its Allied Practices thereby allowing
Allied Orthodontists to concentrate on providing cost effective, high quality
patient care. The Company does not practice orthodontics or dentistry, but
generally acquires certain operating assets of an orthodontic practice, employs
the employees (except orthodontists, and where applicable law requires,
hygienists and dental assistants), and enters into Management Agreements with
the Allied Practices. Where state law allows and upon request by an Allied
Practice, the Company may lease equipment or office space to the Allied
Practices and employ orthodontic assistants for the Allied Practices. Each
Allied Practice, 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.
The Company will generate revenues by providing management services to the
Allied Practices, including billing and collections, cash management,
purchasing, inventory management, payroll processing, employee benefits
administration, advertising and marketing, financial reporting and analysis,
productivity reporting and analysis, training, associate orthodontist recruiting
and capital for satellite office development and acquisitions. Management
believes, based on its experience with the Founding Practices and data available
to it, that the Company's emphasis on high quality patient care and its
business, marketing, technological and practice-growth support systems will
appeal to orthodontists inclined to affiliate with the Company.
THE ORTHODONTIC INDUSTRY
Orthodontics, the art and science of correcting the misalignment of teeth,
historically has been one of the most profitable specialties in dentistry. The
field of orthodontics has evolved greatly since the turn of the century,
23
<PAGE> 25
a process which management believes will continue. Orthodontic research and
education have aided the development of new materials and techniques of
orthodontic treatment, including the use of computers to help solve complex
cases. In 1994, orthodontists in the United States conducted examinations of
nearly 2.5 million potential new patients and initiated treatment for
approximately 1.5 million patients. The typical orthodontist initiated treatment
for approximately 170 patients in 1994 and maintained approximately 380 active
cases.
The primary target market for orthodontic treatment is children ages 8 to
18. In 1994, approximately 80%, or 1.2 million, of all patients treated were
children. The U.S. Census Bureau estimates that as of July 1, 1996, there were
approximately 37.6 million children and adolescents between the ages of 10 and
19. Management believes that as many as 50% of these children and adolescents
could benefit from orthodontic treatment, presenting an attractive opportunity
for the Company. In addition to the traditional juvenile market, the adult
market has been a rapidly growing market for orthodontic services. Management
believes the market for adults has grown rapidly over the last 15 years as a
result of several factors. Adults today are more conscious about their
appearance, which may be improved by orthodontic treatment they may not have
received as children. Moreover, many adults today are more willing to undergo
orthodontic treatment in light of the development of new orthodontic materials
and techniques that allow the orthodontist largely to conceal the bands and
brackets used during treatment because they match the color of the teeth. Based
on statistics obtained from the 1995 JCO Study, management believes that the
adult market for orthodontic services remains untapped, as the number of adults
who need or want orthodontic treatment substantially exceeds the number of
patients currently seeking treatment. In 1994, standard case fees averaged
approximately $3,500 for children and $3,800 for adults.
Currently, there are approximately 9,000 practicing orthodontists in the
United States, nearly all of whom have graduated from accredited graduate
programs of orthodontics. The industry is highly fragmented, with approximately
90% of the practicing orthodontists acting as sole practitioners and the balance
practicing in multiple-doctor practices (generally two orthodontists) or in
groups affiliated with competitors of the Company. The training and
qualification of an orthodontist is extremely rigorous. Generally, a dentist
must graduate in the top 10% of his or her class at an accredited graduate
school of dentistry, pass national and state board examinations, and complete an
accredited graduate orthodontic program to become an orthodontist. These
programs typically are structured as two- or three-year programs. Each year
about 200 new orthodontists graduate from accredited orthodontic programs.
OPERATING STRATEGY
Management believes that the Company's operating strategy will enable
Allied Practices to compete more effectively and realize significantly greater
profitability than other orthodontic practices, thereby providing an inducement
for additional orthodontists to affiliate with the Company. Key elements of the
Company's operating strategy include:
Emphasizing Quality Patient Care. Management believes that the services
and support it provides its Allied Orthodontists will positively impact the
level of patient care by increasing the Allied Orthodontists' time to
concentrate on patient care. Management believes that the primary hindrances to
consistent delivery of quality patient care are (i) the discrepancy in
qualifications among practicing orthodontists and (ii) the amount of time each
orthodontist spends on patient care. The qualifications of providers of
orthodontic services vary from general dentists who have taken weekend courses
in orthodontics to graduates of accredited three-year programs. Nearly all
Allied Orthodontists affiliated with the Founding Practices are graduates of
accredited orthodontic programs. In addition, the Company will establish
clinical care advisory committees consisting of Allied Orthodontists who will
meet periodically to formulate quality assurance programs, to perform peer
review studies, and to consult with each other on current treatments, techniques
and issues. Furthermore, recent orthodontic graduates recruited by the Company
will be required (in most cases) to complete a mentoring program pursuant to
which such graduates will provide treatment under the supervision and guidance
of an experienced Allied Orthodontist for a period of time to refine their
skills before assuming primary responsibility for patient care at a satellite
office of an Allied Practice.
Capitalizing on the Best Demonstrated Practices of Allied
Orthodontists. The Company believes that one of its most valuable practice
management services will be its ability to identify practice-level strategies
that have proven successful for individual Allied Practices and share this
information among other Allied Practices.
24
<PAGE> 26
Management will routinely evaluate the policies and procedures of the Allied
Practices, including such critical areas as treatment quality, delivery of
patient care, practice-building, marketing, patient financing programs and
expense control. The Company will provide Allied Orthodontists with comparative
operating and financial data that will enable Allied Orthodontists to detect
areas of their practices that could be improved. The Company will provide its
own analysis of such operating and financial data and recommend changes to
improve performance. The Company expects that a primary means of identifying and
implementing solutions to particular practice issues will be to consult with
Allied Practices that have had demonstrated success in a certain area. The
Company generally will seek to facilitate communication among Allied Practices
through periodic conferences and meetings and, ultimately, through a proprietary
intranet system.
Achieving Operating Efficiencies and Economies of Scale. The Company
intends to implement a variety of operating procedures and systems to improve
the productivity and profitability of each orthodontic practice which becomes an
Allied Practice and to achieve economies of scale. The Company will implement
centralized payroll processing, inventory control and national group purchasing
contracts. The Company plans to implement appropriate credit and collection
policies which will accommodate specific needs of the target market of each
Allied Practice. Management believes that patient flow and work flow could be
enhanced by physical improvements in designs to facilities, which should result
in an increase in the number of patients seen and an increase in employee and
orthodontist productivity. If such physical improvement in design is supported
by an adequate return on investment, the Allied Practice and the Company may
undertake such design changes. Operating efficiencies and economies will be
instituted on a per market or per Allied Practice need basis after thorough
analysis, including review of work flow, patient flow, aged accounts receivable
history, facilities, employee work load and productivity, and employee and
patient satisfaction.
Increasing the Affordability of Orthodontic Care through Flexible Payment
Plans. The Company will assist Allied Practices in developing and implementing
payment plans designed to make orthodontic services more affordable to
prospective patients, thereby making orthodontic services available to a larger
segment of the population in their respective markets. Many of the Founding
Practices have historically received a down payment of approximately 20% of the
total cost of services, which is typical in the orthodontics industry and is
based on the costs incurred by an orthodontic practice at the time treatment is
initiated. Recognizing that orthodontic services are largely discretionary and
that a significant down payment is often a deterrent to prospective patients,
the Company believes that flexible payment plans are an effective means of
increasing patient volume. Management believes that the markets in which Allied
Practices are located are different and payment plans should be tailored to
respond to the various market demands and opportunities. The Company will make
general recommendations to all Allied Practices with respect to instituting
flexible payment plans and will develop and implement market-tailored plans upon
the request of individual Allied Practices. In addition, the Company will
provide the working capital necessary for the Allied Practices to implement
flexible payment plans which may result in the reduction or elimination of down
payments.
Stimulating Demand in Local Markets Through Aggressive Marketing. In
consultation with and upon approval of the Allied Practices, the Company intends
to develop and implement aggressive and innovative marketing plans to augment
each Allied Practice's referral and other marketing systems currently in place.
Management believes that the orthodontic industry has not taken advantage of the
gains that can be achieved through strategic direct marketing and intends to,
upon request of an Allied Practice, implement aggressive direct marketing
campaigns. In addition, certain of the Founding Practices have developed
referral systems with local dentists, to achieve above-average practice revenues
and growth. Upon the request of an Allied Practice and in appropriate markets,
the Company will attempt to reach potential patients through print, local
television and radio advertising.
GROWTH STRATEGY
Management believes the continued growth of the Founding Practices and the
financial support for the development of new Allied Practices are key components
of the future success of the Company. To increase the Company's revenues and
profits and gain market share, management intends to initiate a growth strategy
25
<PAGE> 27
designed to increase the number of Allied Practices and Allied Orthodontists
over time. Management's expansion strategy includes:
Affiliations with Orthodontic Practices. Management believes that the
Company's target market for affiliations includes approximately half of the
orthodontic practices in the United States (approximately 4,500 practices),
because these practices fit the OrthAlliance model of high quality and
opportunity for revenue and earnings growth. Management believes that
affiliation will be an attractive option for many orthodontists because the
Company intends to (i) provide the capital to open and integrate new orthodontic
offices into existing Allied Practices, (ii) identify and recruit qualified
associate orthodontists for the Allied Practices, (iii) design and offer
business and clinical systems for each Allied Practice, (iv) with the approval
of the Allied Orthodontist, hire the necessary business and non-orthodontic
personnel for each new Allied Practice, (v) help increase each Allied Practice's
market share and the number of new patients seen by recommending successful
marketing and advertising strategies, and (vi) reduce the time Allied
Orthodontists spend on administrative and business related tasks, allowing them
to focus on delivering quality patient care. The Company has filed the Shelf
Registration for shares of Common Stock to be used in connection with future
affiliations with Allied Practices.
Developing Orthodontic Satellite Offices. Where management determines
market demand will support practice expansion, the Company will assist Allied
Practices in developing satellite offices to be integrated into Allied Practices
to increase market share and revenues. The Company intends to provide capital
for practice expansion, market research, site selection, office design and
marketing support for satellite office development. Management believes the
Company's recruiting strategy complements growth through the addition of
satellite offices. Experienced associate orthodontists and recently graduated
orthodontists, who have completed a mentoring program, would be well suited to
assume primary responsibility for patient care at newly-established satellite
offices. See "-- Allied Practice Operations and Locations."
Internal Growth through Improved Operating Efficiencies. A fundamental
element of management's growth strategy is internal Allied Practice growth
through improving each practice's operating efficiencies. The Company intends to
offer a variety of operating procedures and systems to improve the productivity
and profitability of the Allied Practices. The Company's operating systems and
strategies, together with its recruiting, training, marketing and business
management services should allow Allied Orthodontists to focus their attention
on providing patient care, resulting in increased patient flow and enhanced
revenues. The Company plans to implement payroll processing, employee benefits
administration, financial reporting and analysis, inventory management and
national group purchasing discounted contracts and intends to implement
appropriate credit and collection policies which accommodate specific needs of
the general target markets of each Allied Practice. Operating efficiencies and
economies will be instituted on a per market or per Allied Practice need basis
after thorough analysis, including review of work flow, patient flow, aged
accounts receivable history, facilities, employee work load and productivity,
employee satisfaction and patient satisfaction.
ALLIED PRACTICE OPERATIONS AND LOCATIONS
Payment Plan; Case Fees. At the initial orthodontic treatment, the patient
signs a contract outlining the terms of the treatment, including the anticipated
length of treatment and the total fees. Each Allied Orthodontist determines the
appropriate fee to charge for services to patients based upon market conditions
in the area served by that Allied Orthodontist. Generally, the amount of fees
charged by the Allied Orthodontists are 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. Depending on the patient's credit history, the down payment will
range from a substantial down payment to no down payment. Patients are typically
required to pay equal monthly installments although each Allied Practice will
offer a payment plan tailored to its market and patients.
If the treatment period exceeds the period originally estimated by the
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.
26
<PAGE> 28
Other payment plans with lower monthly payments are available for patients
who have insurance coverage for the treatment. Approximately 40% of the patients
treated at the Allied Practices have some form of orthodontic insurance
coverage. Payments for 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 and is not waived or discounted by the Allied
Practice.
Information Systems ("IS"). The Company plans to implement a comprehensive
IS strategy over the next several years. The Company will implement a
communications and data transmission program utilizing a proprietary intranet
system and commercially available integration technology. Typically, an
orthodontic practice utilizes two types of systems. The first system is the
accounting and general ledger system and the second is the production system.
The accounting and general ledger system will be implemented promptly upon the
Allied Practice's affiliation with the Company. The production system, which
provides patient and practice management functions, will take more time to
implement. While it is the Company's stated objective to protect the computer
system and applications investment of each Allied Practice, management intends
to use a combination of integration and interface technologies to tie together
the disparate systems.
Purchasing. The Company plans to coordinate quantity discounts of
equipment, office furniture, inventory and supplies for the Allied Practices in
order to reduce per unit costs. In addition, the Company will negotiate
arrangements with other suppliers, such as casualty insurance carriers, that
should provide cost savings to the Allied Practices.
Locations. Upon consummation of the Transfers, the Company will provide
management services to the following locations:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
STATE ORTHODONTISTS(1) OFFICES CITIES
- ----- ---------------- --------- ---------
<S> <C> <C> <C>
Alabama............................................ 3 3 3
Arizona............................................ 2 2 2
California......................................... 14 21 17
Florida............................................ 18 31 23
Georgia............................................ 17 38 27
Indiana............................................ 8 14 13
Kentucky........................................... 2 6 6
Michigan........................................... 1 1 1
Minnesota.......................................... 2 2 2
Mississippi........................................ 2 6 6
Pennsylvania....................................... 2 3 3
South Carolina..................................... 3 5 5
Tennessee.......................................... 2 3 3
Texas.............................................. 4 8 8
Utah............................................... 2 2 2
Virginia........................................... 2 2 2
-- --- ---
Total.................................... 84 147 123
== === ===
</TABLE>
- ---------------
(1) The Founding Practices include an aggregate of 82 Allied Orthodontists, two
of whom operate in two states.
AGREEMENTS WITH ALLIED PRACTICES AND ALLIED ORTHODONTISTS
Each Allied Practice has entered into three material agreements in
connection with the Transfers: (i) an acquisition agreement, which may be in the
form of a purchase and sale agreement whereby OrthAlliance agrees to acquire
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; (ii) either a Service
Agreement or a Consulting Agreement (depending upon the applicable regulatory
requirements), whereby OrthAlliance agrees to provide management or consulting
services to the Allied Practice; and (iii) an Employment Agreement between the
Allied Practice and each related Allied Orthodontist who is an equity holder
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<PAGE> 29
in the Allied Practice or who provides orthodontic services through such
practice for more than ten days each month. Pursuant to the Merger, the
agreements that were originally executed between an Allied Practice and either
USOC or Premier, will become agreements of OrthAlliance and will be effective
upon the closing of the Offering.
Acquisition Agreements. The Company will acquire by transfer (in
accordance with SAB 48) certain operating assets or stock of each Founding
Practice pursuant to an asset purchase and sale agreement, an agreement and plan
of reorganization or a stock purchase and sale agreement. The Pending Transfers
and future acquisitions of assets of Allied Practices will be accounted for
under the purchase method pursuant to APB 16. Each asset purchase and sale
agreement generally provides for the sale by the Allied Practice of its
equipment, licenses (to the extent assignable by law), 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. Up to 20% of the
aggregate purchase price to be paid for assets transferred to the Company is
generally payable in cash, as determined by each Allied Practice, with the
remainder payable in shares of Common Stock. The aggregate consideration paid by
the Company in connection with the Transfers is approximately $84.4 million.
Certain liabilities, including patient prepayments, of the Founding Practices
have been assumed totaling $4.2 million. See "Certain Transactions."
Each stock purchase and sale agreement generally provides for the exchange
of the stock of an entity holding certain assets of the Allied Practice by its
stockholder(s) and the payment of consideration to its stockholder(s), which
consideration is generally the same as the consideration being paid pursuant to
the asset purchase and sale agreements. Each agreement and plan of
reorganization generally provides for the transfer of certain assets of the
Allied Practice to OrthAlliance, the cancellation or retirement of each share of
stock in an entity holding certain assets of the Allied Practice, and the
payment of consideration to the stockholders of such entity, which consideration
is generally the same as the consideration being paid pursuant to the asset
purchase and sale agreements. Each asset purchase and sale agreement, stock
purchase and sale agreement and agreement and plan of reorganization provides
for certain incidental registration rights with respect to the shares of Common
Stock paid to the Allied Practice or the Allied Orthodontist, as the case may
be. See "Description of Capital Stock -- Registration Rights."
In Transfers requiring stock acquisitions, the Company generally will
acquire the stock of the Original Entity through which the applicable Founding
Practice has historically operated and generated revenue. The New Entity through
which the Founding Practice will provide orthodontic services on a going forward
basis is formed to ensure that the Company does not violate applicable state law
or regulation regarding the corporate practice of orthodontics. See "Risk
Factors -- Risks Related to Changes in Government Regulation," "The Company" and
"Business -- Government Regulation."
Service Agreements. The parties to each Service Agreement include the
Company, as successor through the Merger, and the Allied Practice, which
typically is a professional corporation or association owned by the related
Allied Orthodontist. 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, 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 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, 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 Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview.
The term of each Service Agreement is 20 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
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<PAGE> 30
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.
Each Service Agreement is 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 with 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, as successor through the Merger, 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 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 in Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview.
Pursuant to both the Service Agreements and Consulting Agreements, the
Company's Allied Orthodontists maintain full control over and ownership of their
orthodontic practices, determine which personnel will be affiliated with the
Allied Practices and set their own standards of practice to promote quality
orthodontic care. The Company does not engage in the practice of orthodontics or
dentistry. Each Allied Orthodontist is responsible for compliance of his or her
Allied Practice with state and local regulations applicable to the practice of
orthodontics and with licensing or certification requirements. Each Allied
Practice, 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 each Allied Orthodontist acquires and pays for malpractice
insurance coverage.
Employment Agreements. Each Allied Orthodontist who is or becomes an
equity holder in an Allied Practice or who provides orthodontic 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 Orthodontist 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), (ii) by the Allied Orthodontist in the event of a material
breach by the Allied Practice, and (iii) by the Allied Orthodontist in the event
of the Company's bankruptcy. The Allied Orthodontist 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.
GOVERNMENT REGULATION
General. The field of orthodontics is highly regulated, and there can be
no assurance that the regulatory environment in which the Company operates will
not change significantly in the future. In general, regulation of
29
<PAGE> 31
healthcare companies is increasing. Every state imposes licensing requirements
on individual orthodontists and on facilities operated by and services rendered
by orthodontists. In addition, federal and state laws regulate health
maintenance organizations and other managed care organizations for which
orthodontists may be providers. In connection with the entry into new markets,
the Company, Allied Practices and Allied Orthodontists may become subject to
compliance with additional regulations.
The operations of the Allied Practices must meet federal, state and local
regulatory standards in the areas of safety and health. Historically, compliance
with those standards has not had any material adverse effect on the operations
of the Founding Practices. Based on its familiarity with the historical
operations of the Founding Practices and the activities of the Company's Allied
Orthodontists, management believes that the Allied Practices are in compliance
in all material respects with all applicable federal, state and local laws and
regulations relating to safety and health.
State Legislation. The laws of several states prohibit orthodontists from
splitting fees with non-orthodontists. Furthermore, many states prohibit
nonorthodontic entities from practicing orthodontics, employing orthodontists,
or in some circumstances, employing orthodontic assistants. The laws of some
states prohibit advertising orthodontic services under a trade or corporate name
and require that all advertising be in the name of the orthodontist. A number of
states also regulate the content of advertisement of orthodontic services and
the use of promotional gift items. A number of states limit the ability of a
non-licensed dentist or non-orthodontist to own equipment or offices used in an
orthodontic practice. Some of these states allow leasing of equipment and office
space to an orthodontic practice, under a bona-fide lease, if the equipment and
office remain in the complete care and custody of the orthodontist. Management
believes, based on its familiarity with the historical operations of the
Founding Practices, the activities of the Company's Allied Orthodontists and
applicable regulations, that the Company's current and planned activities do not
constitute the prohibited practices contemplated by these statutes and
regulations. There can be no assurance, however, that future interpretations of
such laws, or the enactment of more stringent laws, will not require structural
and organizational modifications of the Company's initial relationships with its
Allied Orthodontists or the operation of the Allied Practices. In addition,
statutes in some states could restrict expansion of Company operations in those
jurisdictions. The Company either enters into a Service Agreement or Consulting
Agreement depending upon applicable state regulations.
Regulatory Compliance. The Company monitors developments in laws and
regulations relating to the practice of orthodontics and dentistry. The Company
may be required to modify its agreements, operations and marketing strategies
from time to time in response to changes in the business and regulatory
environment. The Company intends to structure all of its agreements, operations
and marketing in accordance with applicable law, although there can be no
assurance that its arrangements will not be successfully challenged or that
required changes may not materially affect the Company's business, financial
condition and results of operations.
COMPETITION
The Company anticipates facing substantial competition from other entities
as OrthAlliance seeks to affiliate with additional orthodontic practices. The
Company is aware of several practice management companies that are focused in
the area of orthodontics. Additional entities may enter this market and compete
with the Company. Certain of these competitors have greater financial or other
resources than the Company.
The business of providing orthodontic services is highly competitive in
each market in which the Founding Practices and other practices operate.
Founding Practices compete with orthodontists who maintain single offices or
operate a single satellite office, as well as with orthodontists that maintain
group practices or operate in multiple offices. Founding Practices also compete
with general dentists and pedodontists who provide certain orthodontic services,
some of whom have more established practices. The provision of orthodontic
services by such dentists and pedodontists has increased in recent years. There
can be no assurance that the Company or the Allied Practices will be able to
compete effectively within their markets.
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<PAGE> 32
EMPLOYEES
Upon completion of the Transfers and the Merger, OrthAlliance will employ
an aggregate of approximately 542 full-time employees. None of the Company's
employees are represented by a collective bargaining agreement. OrthAlliance
considers its relationship with its employees to be good.
PROPERTIES
The Company leases approximately 1,700 square feet of office space in
Torrance, California for its headquarters and approximately 500 square feet of
office space in its Atlanta, Georgia office.
INTELLECTUAL PROPERTY
OrthAlliance has applied for federal registration of the service mark
"OrthAlliance." Management intends to utilize the service mark, as allowed by
applicable law, in the Company's marketing and advertising campaigns in order to
associate the name OrthAlliance with a reputation for nationwide quality
orthodontic care.
LITIGATION AND INSURANCE
The Company does not have any pending litigation that if adversely
determined would have a material adverse effect on the Company. The Allied
Practices provide orthodontic services to the public and are exposed to the risk
of professional liability and other claims. Such claims, if successful, could
result in substantial damage awards to the claimants that may exceed the limits
of any applicable insurance coverage. Although the Company does not control the
practice of orthodontics by the Allied Practices, it could be asserted that the
Company should be held liable for malpractice of an Allied Orthodontist.
The Company maintains general liability insurance for itself and on behalf
of the Allied Practices and it is anticipated that, where permitted by
applicable law and insurers, the Company will be named as an additional insured
under the policies of the Allied Practices. There can be no assurance that any
claims against the Company or any of the Allied Practices will not be
successful, or if successful, will not exceed the limits of available insurance
coverage or that such coverage will continue to be available at acceptable
rates.
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<PAGE> 33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Sam Westover.................................... 42 President, Chief Executive Officer and
Director
Robert S. Chilton............................... 39 Chief Financial Officer
P. Craig Hethcox................................ 45 Chief Operating Officer
Paul H. Hayase.................................. 42 Senior Vice President -- Human Resources,
General Counsel and Secretary
Randall K. Bennett, D.D.S., M.S................. 42 Director
Douglas D. Durbin, D.M.D., M.S.D................ 42 Director(1)
U. Bertram Ellis, Jr............................ 43 Director(1)
Craig L. McKnight............................... 46 Director(1)
Randall A. Schmidt, D.D.S., M.S.D............... 40 Director(1)
W. Dennis Summers............................... 48 Director(1)
Jonathan E. Wilfong............................. 48 Chairman of the Board of Directors and
Consultant
</TABLE>
- ---------------
(1) Dr. Durbin, Dr. Schmidt, Mr. Summers, Mr. McKnight and Mr. Ellis will be
elected to serve as Directors immediately preceding consummation of the
Transfers.
Sam Westover has served as a Director, President and Chief Executive
Officer of OrthAlliance since October 1996. From August 1993 until July 1996,
Mr. Westover served as President and Chief Executive Officer of Systemed Inc., a
pharmacy benefit management company, where he also served as a Director from
July 1992 until February 1997. From January 1993 until August 1993, Mr. Westover
served as Senior Vice President, Chief Financial Officer and Treasurer of
Wellpoint Health Networks Inc., a health insurance company. Prior to joining
Wellpoint, Mr. Westover served as Chief Financial Officer and Senior Vice
President, Corporate Financial Services of Blue Cross of California, a position
to which he was named in May 1990.
Robert S. Chilton has served as Chief Financial Officer of OrthAlliance
since May 1997. From April 1994 until May 1997, Mr. Chilton served as Vice
President/Controller of E & S Ring Management Corporation, a real estate
management firm. Mr. Chilton was Controller of Karl Storz Endoscopy-America,
Inc., a medical device manufacturer and distributor, from October 1987 until
April 1994. Mr. Chilton is a Certified Public Accountant, and from February 1985
to October 1987 was employed by KPMG Peat Marwick.
P. Craig Hethcox will become Chief Operating Officer of OrthAlliance upon
the consummation of the Transfers. From January 1997 to the date of the Merger,
Mr. Hethcox has served as Chief Executive Officer of USOC. From July 1994 to
December 1996, Mr. Hethcox served as Chief Operating Officer for Equimed, Inc.,
where he directed the corporate operations for sixty-five ophthalmology,
oncology and surgical center entities. From 1988 to June 1994, Mr. Hethcox
served as Vice President of Operations for Medical Care America, where he was
responsible for the operations of the then largest practice management company
with surgical centers. Mr. Hethcox also held senior management positions with
Medical Corporation of America, Inc., and Omni Eye Services, Inc., both
ophthalmology practice management operations, and was Chief Executive Officer of
Lakeside Community Hospital.
Paul H. Hayase has served as Senior Vice President -- Human Resources,
General Counsel and Secretary of OrthAlliance since October 1996. From August
1995 until January 1997, Mr. Hayase served as Vice President -- Human Resources,
General Counsel and Secretary of Systemed Inc. Mr. Hayase served as Senior
Counsel of Ralphs Grocery Company, a supermarket chain in California, from
November 1993 to August 1995. From January 1985 to November 1993, Mr. Hayase
served as Senior Vice President, General Counsel of Knapp Communications
Corporation, a magazine publishing company.
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<PAGE> 34
Randall K. Bennett, D.D.S., M.S. has served as a Director of OrthAlliance
since its inception. Dr. Bennett has practiced orthodontics in Salt Lake City,
Utah since 1989 and he practiced in Beverly Hills, California from 1988 to 1989.
Dr. Bennett graduated from Loma Linda University in 1988 with an M.S. degree in
orthodontics and from the University of Alberta in 1981 with a D.D.S. degree.
Douglas D. Durbin, D.M.D., M.S. has agreed to serve and will be elected a
Director of OrthAlliance immediately preceding the consummation of the
Transfers. Dr. Durbin has served as President of The Kentucky Center for
Orthodontics and Dento-Facial Orthopedics, a Founding Practice, since 1983, and
manages six practice locations and 20 employees. Dr. Durbin is a member of the
American Association of Orthodontists, the American Dental Association and the
Kentucky Association of Orthodontists, a Diplomate of the American Board of
Orthodontics and has served as Secretary, Treasurer, and President of the
Bluegrass Dental Society. Dr. Durbin graduated from the University of Kentucky
College of Dentistry with a D.M.D. degree in 1978 and received his M.S.D. and
Certificate in Orthodontics from the University of Kentucky College of Dentistry
in 1983.
U. Bertram Ellis, Jr. has agreed to serve and will be elected a Director of
OrthAlliance immediately preceding the consummation of the Transfers. Since
April 1996, Mr. Ellis has served as President, Chief Executive Officer and Chief
Operating Officer of Broadcast Development Corporation. Since 1996, Mr. Ellis
has served as Chairman of the Board and Chief Executive Officer of IXL Holdings,
Inc. ("IXL"), a multimedia company. Mr. Ellis founded and served as President
and Chief Executive Officer of Ellis Communications, Inc., a media company, from
1993 to April 1996. From 1992 to 1993, Mr. Ellis was President and Chief
Executive Officer of American Innovations, Inc., a manufacturer of hairbows that
filed a petition pursuant to Chapter 11 of the U.S. Bankruptcy Code in 1993.
From 1986 until 1992, Mr. Ellis served as the President, Chief Executive Officer
and Chief Operating Officer of Act III Broadcasting, a broadcast group of eight
Fox-affiliate stations. Mr. Ellis serves as a director of NOVA Information
Systems, Inc., Promus Hotel Corporation, Endeavor Technologies, Inc., First
Union National Bank of Georgia and Upper Chattahoochee RiverKeeper.
Craig L. McKnight has agreed to serve and will be elected a Director of
OrthAlliance immediately preceding the consummation of the Transfers. Since
March 1995, Mr. McKnight has served as Executive Vice President of Magellan
Health Services ("Magellan"), which was previously known as Charter Medical
Corporation, and since October 1995 Mr. McKnight has also served as Chief
Financial Officer of Magellan. From June 1994 to March 1995, Mr. McKnight was
responsible for the Health Care Practice of Coopers & Lybrand, L.L.P. in
Philadelphia, Pennsylvania, and, prior thereto, was responsible for the Health
Care Practice of Coopers & Lybrand, L.L.P. in California.
Randall A. Schmidt, D.D.S., M.S.D. has agreed to serve and will be elected
a Director of OrthAlliance immediately preceding the consummation of the
Transfers. Dr. Schmidt has been in the practice of orthodontics since 1983 in
northwest Indiana, where he is a co-owner of Orthodontic Affiliates, P.C., a
Founding Practice. Dr. Schmidt is a member of the American Association of
Orthodontists, American Dental Association and the Indiana Society of
Orthodontists. Dr. Schmidt graduated from Indiana University in 1981 with a
D.D.S. degree and received his M.S.D. and Certificate in Orthodontics from
Indiana University in 1983.
W. Dennis Summers has agreed to serve and will be elected a Director of
OrthAlliance immediately preceding the consummation of the Transfers. Since
1984, Mr. Summers has served as a principal of Roberts, Isaf & Summers, P.C.
(and its predecessor firms), a law firm located in Atlanta, Georgia. Mr. Summers
specializes in corporate and business matters.
Jonathan E. Wilfong has served as Chairman of the Board of Directors of
OrthAlliance since May 1997. Mr. Wilfong has served as an executive consultant
to OrthAlliance since its inception and has served as consultant to USOC since
June 1996. Mr. Wilfong is the founder and a principal of Newfound Capital
Associates, an investment banking advisory firm founded in 1996 that specializes
in advising high growth businesses on capital formation strategies and
acquisition transactions. Mr. Wilfong is a Certified Public Accountant, and from
1983 to 1996 was a partner with Price Waterhouse LLP in Atlanta, Georgia and
Greenville, South Carolina.
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<PAGE> 35
BOARD OF DIRECTORS
The Company's Board of Directors is divided into three classes which
consist, as nearly as practicable, of one-third of the total number of directors
serving on the Board of Directors. The Board of Directors will have up to nine
members, is currently composed of three members and immediately prior to
consummation of the Acquisition will increase to eight members, as named herein.
The members of each class serve staggered three-year terms following the initial
terms of such classes. The initial terms of Class I, Class II and Class III
directors expire at the annual stockholders' meetings in 1998, 1999 and 2000,
respectively. Dr. Durbin and Mr. Summers will be members of Class I; Dr. Bennett
is a member and Dr. Schmidt and Mr. Ellis will be members of Class II; and
Messrs. Westover and Wilfong are members and Mr. McKnight will be a member of
Class III.
BOARD COMMITTEES
The Board of Directors has established an Executive Committee, a Nominating
Committee, an Audit Committee and a Compensation Committee. Messrs. Westover and
Wilfong and Drs. Bennett and Durbin will serve on the Executive Committee.
Messrs. Summers, Westover and Wilfong will serve on the Nominating Committee.
Mr. Wilfong and Dr. Bennett will each serve on the Audit Committee and the
Compensation Committee. The Executive Committee is authorized by the Board of
Directors to take all action which may be delegated by the Board of Directors
under the DGCL. The Nominating Committee recommends candidates for election to
the Company's Board of Directors, examines the performance of incumbent
Directors and makes recommendations concerning the retention of such Directors.
The Audit Committee recommends the annual appointment of the Company's auditors,
with whom the Audit Committee reviews the scope of audit and non-audit
assignments and related fees, accounting principles used by the Company in
financial reporting and the adequacy of the Company's internal control
procedures. The Compensation Committee administers the 1997 Employee Stock
Option Plan. See "Stock Plans -- Administration of the Stock Plans." The
Compensation Committee also has the responsibility for reviewing and approving
salaries, bonuses, and other compensation and benefits of executive officers,
and advising management regarding benefits and other terms and conditions of
compensation.
DIRECTOR COMPENSATION
Members of the Board of Directors are reimbursed for their out-of-pocket
expenses for each meeting attended but otherwise serve without cash
compensation. The Company has adopted the 1997 Non-Employee Director Stock Plan,
pursuant to which each non-employee director (the "Outside Directors") receives
a nondiscretionary grant to purchase 5,000 shares of Common Stock upon his or
her election to the Board and, if serving as an Outside Director following the
annual meeting each year, an additional nondiscretionary grant for the purchase
of 5,000 shares of Common Stock. See "-- Stock Plans -- 1997 Non-Employee
Director Stock Plan."
EXECUTIVE COMPENSATION
OrthAlliance was incorporated in October 1996 and did not conduct any
operations prior to that time. The Company anticipates that during fiscal 1997
its President and Chief Executive Officer and the three other most highly
compensated executive officers who are anticipated to receive annualized
compensation in excess of $100,000 will be, respectively, Messrs. Westover,
Hethcox, Hayase and Chilton. Their expected annualized base salaries for 1997
are $250,000, $185,000, $165,000 and $135,000, respectively. See "-- Employment
Agreements."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Westover,
Hethcox and Hayase providing for annual base salaries of $250,000, $185,000 and
$165,000, respectively, with each person being eligible for a cash bonus of up
to 30% of his base salary. Additionally, the agreements provide for the grant of
options for the purchase of Common Stock to each of Messrs. Westover, Hethcox
and Hayase for 300,000, 100,000 and 75,000 shares of Common Stock, respectively,
and such options will vest (i) 20% upon the closing
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<PAGE> 36
of the Offering and (ii) 20% per year on the first through the fourth
anniversary dates of the date of this Prospectus. These options expire ten years
from the date of grant and are exercisable at the initial public offering price.
Each employment agreement is for an initial term of five years with an automatic
renewal for successive one year terms unless prior notice of termination is
provided. The Company may terminate an employment agreement (i) for cause, (ii)
without cause upon 30 days prior notice, or (iii) upon death or disability of
the employee. The employee may terminate the employment agreement within 120
days after a constructive termination (as defined therein). If the employee is
terminated by the Company without cause or the employee terminates the
employment agreement within 120 days following a constructive termination, the
Company is required to pay such employee a lump sum severance equal to two times
the applicable annual base salary. Each employment agreement contains a
provision that if the employee is terminated within a twelve-month period
following a change in control of the Company (as defined therein), the Company
will pay such employee three times the sum of (i) the employee's annual base
compensation and (ii) the maximum possible cash bonus for such year. In
addition, upon a change in control, the Company will pay the employee any
accrued salary, benefits or reimbursements and the employee's options will fully
vest and become immediately exercisable for the longer of (i) 90 days from the
change in control or (ii) the time period specified in the stock plan. Each
agreement prohibits the employee from competing with the Company for a period of
two years following termination of employment.
The Company has entered into a letter agreement with Mr. Chilton providing
for an annual base salary of $135,000, and a cash bonus of up to 30% of his
annualized base salary. Additionally, the Company has granted Mr. Chilton an
option for the purchase of 50,000 shares of Common Stock, with a vesting
schedule consistent with the vesting schedule for Messrs. Westover, Hethcox and
Hayase discussed above.
All options for the purchase of Common Stock granted to management
personnel discussed herein have an exercise price equal to the price of the
Common Stock to the public in the Offering.
STOCK PLANS
OrthAlliance has adopted the 1997 Employee Stock Option Plan and the 1997
Non-Employee Director Stock Plan (together, the "Stock Plans"). The Company
intends to register the shares of Common Stock issuable upon exercise of options
granted under the Stock Plans and, upon registration, such shares will be
eligible for resale in the public market, subject to applicable rules and
regulations of the Securities Act.
1997 Employee Stock Option Plan. The Board of Directors has adopted and
the stockholder has approved the Company's 1997 Employee Stock Plan (the
"Employee Plan"). Awards under the Employee Plan are to be determined by the
Compensation Committee and granted to officers and employees of the Company in
the form of non-qualified or incentive stock options. The Employee Plan may be
terminated by the Board of Directors at any time.
A total of 1,000,000 shares of Common Stock are reserved for issuance
pursuant to the Employee Plan, subject to certain anti-dilution provisions.
Options for the purchase of 600,000 shares of Common Stock have been granted to
certain officers of the Company at an exercise price equal to the price to the
public in the Offering, which options vest 20% upon the closing of the Offering
with the balance vesting 20% per year on the first through fourth anniversary
dates of the date of this Prospectus. All options expire ten years from the date
of grant. See "Management -- Employment Agreements."
1997 Non-Employee Director Stock Plan. The Board of Directors has adopted
and the stockholder has approved the 1997 Non-Employee Director Stock Option
Plan (the "Non-Employee Director Plan"). Awards under this plan are to be
granted to non-employee directors ("Outside Directors") of the Company. The plan
is intended to allow Outside Directors receiving grants to be Non-Employee
Directors, as defined in Rule 16b-3 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), with respect to the Company's Stock Plans and,
accordingly, is intended to be self-governing with respect to the Outside
Directors.
A total of 200,000 shares of Common Stock are reserved for issuance to the
Outside Directors pursuant to the Non-Employee Director Plan. Each person who is
elected or appointed as an Outside Director will be granted a nondiscretionary
option to purchase 5,000 shares of Common Stock at the time of his or her
election or appointment. Commencing in 1998, each person who continues to serve
as an Outside Director following the
35
<PAGE> 37
annual meeting each year will receive a nondiscretionary option to purchase
5,000 shares of Common Stock. Options issued to Outside Directors pursuant to
this plan will be non-qualified stock options, and will expire ten years from
the date of grant. The exercise price of such options shall be equal to the
average closing bid price for the five trading days before the Company's annual
meeting of stockholders for the annual grants and for the five trading days
before election or appointment for the initial grants. Options issued to Outside
Directors become exercisable on the first anniversary of the date of grant.
Administration of the Stock Plans. The Employee Plan is administered by
the Compensation Committee of the Board of Directors. The Non-Employee Director
Plan is intended to be self-governing. With respect to the Employee Plan, the
Compensation Committee determines the persons to whom, and the times at which,
awards are granted, the types of awards granted, certain amendments to the plan
(as permitted) and all other related terms and conditions of the awards, subject
to the terms, conditions and limitations set forth therein. Under the Employee
Plan, the Compensation Committee must consist of at least two directors, and
with respect to grants of options or awards to any persons subject to Section 16
of the Exchange Act, the Compensation Committee must consist of at least two
directors who are Non-Employee Directors under Rule 16b-3.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate provides that no director of the Company shall be
liable for breach of fiduciary duty as a director except for (i) any breach of
the director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law; (iii) for willful or negligent violations of certain
provisions of the DGCL imposing certain requirements with respect to stock
repurchases, redemptions and dividends; or (iv) any transaction from which the
director derived an improper personal benefit.
Under Section 145 of the Delaware General Corporation Law (the "DGCL"), a
corporation may indemnify any of its directors and officers against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with a threatened,
pending or completed action, suit or proceeding brought against such officer or
director by reason of the fact that he or she is or was a director or officer
(i) if any such person acted in good faith and in a manner reasonably believed
to be in or not opposed to the best interests of the corporation and (ii) in
connection with any criminal action or proceeding if such person had no
reasonable cause to believe such conduct was unlawful. In actions brought by or
in the right of the corporation, however, Section 145 provides that no
indemnification for expenses may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of such person's duty to the
corporation unless, and only to the extent that, the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
review of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Pursuant to the Company's Certificate and Bylaws, the Company is obligated
to indemnify each of its directors and officers to the fullest extent permitted
by the DGCL. In addition, the Bylaws provide that the Company may purchase and
maintain insurance on behalf of any director or officer of the Company against
any liability asserted against and incurred by such director or officer, whether
or not the Company would have the power to indemnify such officer or director
against such liability under the provisions of the DGCL.
COMPENSATION COMMITTEE INTERLOCKS
The Company had no Compensation Committee prior to May 1997. Prior thereto,
the Board of Directors of the Company, and of USOC and Premier, respectively,
determined executive compensation. No executive officer of the Company serves as
a member of a compensation committee or as a director of any entity of which any
of the Company's directors serve as an executive officer.
36
<PAGE> 38
CERTAIN TRANSACTIONS
USOC and Premier will complete the Merger prior to the consummation of the
Transfers of the Founding Practices. The Company was created as a shell
corporation to be activated in connection with the Offering. Prior to the
Merger, the sole stockholder of the Company held a minority interest in Premier,
there were two common investors between USOC and Premier, and there were no
common owners between USOC and the Company. The stockholders of USOC and Premier
are considered promoters; therefore, the Merger will be treated as part of the
SAB 48 transaction with the Founding Practices that will result in carryover
basis of assets and liabilities of USOC and Premier. In the Merger, the
outstanding capital stock of USOC and Premier will be automatically converted
into an aggregate of 1,750,000 shares of Common Stock and 250,000 shares of
Class B Common Stock. The stockholders of USOC and Premier shall receive 70% and
30%, respectively, of the Common Stock and Class B Common Stock issued as
consideration in the Merger.
The following reflects the distribution of the 70% of the Common Stock and
Class B Common Stock received from OrthAlliance by the stockholders of USOC in
connection with the Merger:
<TABLE>
<CAPTION>
CLASS B
NAME COMMON STOCK COMMON STOCK
- ---- ------------ ------------
<S> <C> <C>
Robert N. Pickron....................................... 557,170 79,596
Jonathan E. Wilfong..................................... 111,512 15,930
Marc Cooper............................................. 54,517 7,788
Peter Mills............................................. 50,800 7,257
Paul L. Ouellette....................................... 49,561 7,080
Robert D. Garces........................................ 47,083 6,726
William K. Farrar, Jr. ................................. 44,605 6,372
Hilbert Dreesen......................................... 39,649 5,664
The trustees of Marc Cooper Family Irrevocable GST
Trust................................................. 27,258 3,894
Whitetail Investments, LLC(1)........................... 26,763 3,823
Irrevocable Trust for the Benefit of Jessica Elizabeth
Pickron, T/U/A/ dated July 1, 1997.................... 24,780 3,540
Irrevocable Trust for the Benefit of John Norton
Pickron, T/U/A/ dated July 1, 1997.................... 24,780 3,540
Irrevocable Trust for the Benefit of Matthew Inaba
Pickron, T/U/A/ dated July 1, 1997.................... 24,780 3,540
Randall A. Schmidt...................................... 18,833 2,690
Irrevocable Trust for the Benefit of Allison Lindsey
Pickron, T/U/A/ dated July 1, 1997.................... 9,912 1,416
R.O. Parsons and Patricia Parsons....................... 9,912 1,416
Ben B. Pence............................................ 9,912 1,416
Peoples Bank SB Cust FBO Gilbert Carter IRA............. 9,912 1,416
The Sands Family Trust.................................. 9,912 1,416
Douglas Drymon Durbin................................... 7,434 1,062
Michael D. Goodwin and Patricia Y. Goodwin.............. 6,145 878
Keith S. Crawford....................................... 4,956 708
K. Robert Crowe......................................... 4,956 708
Orthodontic Affiliates, P.C. Profit Sharing Plan........ 4,956 708
Thomas Pickron.......................................... 4,956 708
Douglas E. Smith........................................ 4,956 708
The Surber Family Trust................................. 4,956 708
Gilbert V. Carter....................................... 4,262 609
James M. Callender and Pamela R. Callender.............. 2,478 354
Daniel J. Enger, Jr. ................................... 2,478 354
Terry Kreitzberg........................................ 2,478 354
MC Investments, LLC(2).................................. 2,478 354
Ronald G. Philipp....................................... 2,478 354
Daniel B. Snead, D.M.D., P.A. Profit Sharing Plan and
Trust................................................. 2,478 354
Mark D. Thebaut......................................... 2,478 354
Stephen C. Trawick...................................... 2,478 354
Paul Yurfest............................................ 2,478 354
Michael J. DeVito....................................... 1,488 211
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
CLASS B
NAME COMMON STOCK COMMON STOCK
- ---- ------------ ------------
<S> <C> <C>
Don E. Lahrman.......................................... 991 142
Michael J. DeVito, Smith Barney
Prototype PS Plan FBO Michael J. DeVito TTEE.......... 991 142
--------- -------
TOTAL......................................... 1,225,000 175,000
</TABLE>
- ---------------
(1) The members of Whitetail Investments, LLC are Clifford G. McGehee, Jan L.
Baxt Profit Sharing Trust, Katherine G. Worth, Marilyn M. Elkins, Robert D.
Garces, Dorothy B. McGehee and Thomas R. Fuller. The shares will be
distributed as provided in the operating agreement relating to Whitetail
Investments, LLC.
(2) The members of MC Investments, LLC are Howard C. Chandler, Jr. and Chris A.
Mack. The shares will be distributed as provided in the operating agreement
relating to MC Investments, LLC.
The following reflects the distribution of the 30% of the Common Stock and
Class B Common Stock received from OrthAlliance by the stockholders of Premier
in connection with the Merger:
<TABLE>
<CAPTION>
CLASS B
NAME COMMON STOCK COMMON STOCK
- ---- ------------ ------------
<S> <C> <C>
Premier Orthodontic Ventures, LLC ("POV LLC")............. 378,000 54,000
Sam Westover.............................................. 63,000 9,000
Randall K. Bennett........................................ 42,000 6,000
J. Dalton Gerlach......................................... 42,000 6,000
------- ------
TOTAL........................................... 525,000 75,000
</TABLE>
The following reflects the distribution to the members of POV LLC of the
Common Stock and Class B Common Stock received in the Merger by POV LLC:
<TABLE>
<CAPTION>
CLASS B
CLASS A MEMBERS COMMON STOCK(1) COMMON STOCK(1)
- --------------- --------------- ---------------
<S> <C> <C>
Sam Westover........................................... 75,070 24,000
Randall K. Bennett..................................... 56,302 18,000
J. Dalton Gerlach...................................... 18,768 6,000
Paul H. Hayase......................................... 18,768 6,000
------- ------
TOTAL........................................ 168,908 54,000
------- ------
CLASS B MEMBERS
- -------------------------------------------------------
Victor S. Sands........................................ 36,364 --
Deon Benson............................................ 9,091 --
Oles B. Drobocky....................................... 36,364 --
Lawrence Hutta......................................... 18,182 --
Thomas Pickron......................................... 27,273 --
J. Dalton Gerlach...................................... 54,545 --
Len Kessler............................................ 18,182 --
Raymond McLendon....................................... 9,091 --
------- ------
TOTAL........................................ 209,092 --
</TABLE>
- ---------------
(1) Assumes an initial public offering price of $11.00 per share and assumes
redemption of all Class A and Class B members' interests immediately
following the closing of the Offering. The exact number of shares of Common
Stock to be distributed to the Class B members will be determined by
multiplying the capital contribution of each Class B member by two and
dividing the product thereof by the market price per share of the Common
Stock, except with respect to Mr. Gerlach, a Class A and Class B member and
an employee of the Company, who, with respect to his Class B membership
interest, will receive such number of shares of Common Stock equal to three
times his capital contribution. All shares of Common Stock held by POV LLC
after redemption of the Class B members' interests will be distributed pro
rata to the Class A members in accordance with their membership interests.
As determined by POV LLC, Class B Common Stock received by POV LLC in the
Merger shall be distributed to the Class A members in the same proportion as
the Common Stock.
38
<PAGE> 40
In connection with the redemption of all membership interests by POV LLC,
each Class B member of POV LLC, excluding Mr. Gerlach, will also receive a cash
payment equal to the amount of such Class B member's capital contribution plus a
dividend of six percent per annum from the date of such capital contribution.
In January 1997, POV LLC loaned $1.01 million to Premier, and in connection
with the Merger, the promissory note evidencing this debt obligation (the
"Premier Note") will become the obligation of OrthAlliance. POV LLC will
receive, out of proceeds of the Offering, an aggregate of approximately $1.06
million, which includes repayment of the principal amount of the Premier Note
and accrued interest of approximately $50,000. In addition, Premier succeeded to
the obligations of POV LLC with regards to certain letter agreements entered
into with each of Messrs. Westover, Hayase and Gerlach which provide that
OrthAlliance, as the successor to Premier, must pay such persons consulting fees
of $260,400, $156,280 and $165,000, respectively, upon the closing of the
Offering. See "Use of Proceeds."
Simultaneously with and as a condition to the closing of the Offering,
OrthAlliance will close the Transfers pursuant to which it will acquire certain
operating assets of, or the stock of an entity holding certain assets of, 56
separate Founding Practices in exchange for cash and shares of Common Stock and
enter into Management Agreements with the Founding Practices. Each of the
Founding Practices transactions was individually negotiated between the Company
and such Founding Practice with respect to all material terms, including without
limitation, valuation. One of the Company's directors and the Company's
President and Chief Executive Officer negotiated such agreements on the
Company's behalf. The aggregate consideration to be paid by OrthAlliance to the
Founding Practices is approximately $84.4 million, consisting of 6,417,802
shares of Common Stock (assuming an initial public offering price of $11.00 per
share and approximately $13.8 million in cash, all of which is payable upon
closing of the Transfers. The aggregate consideration to be paid for the
Founding Practices will not change; however, the actual number of shares of
Common Stock issued to the Founding Practices will increase or decrease
depending upon the public offering price of the Common Stock in the Offering.
The exact number of shares will be determined by dividing $70.6 million by the
price to the public in the Offering. The cash portion of the consideration will
be paid from proceeds received by the Company in the Offering. Drs. Bennett,
Durbin and Schmidt, all of whom are or will be directors of the Company, and Dr.
Pickron, a beneficial owner of more than 5% of the Common Stock following
completion of the Transfers, will receive 211,948, 101,965, 185,564 and 363,091
shares of Common Stock, respectively, and $582,857, $280,403, $107,432 and
$998,501 in cash, respectively, as a result of the Transfers. The consideration
that the Company has agreed to pay each of the Founding Practices of Drs.
Pickron, Durbin, Schmidt and Bennett was calculated in the same manner as the
consideration for each of the other Founding Practices.
The following table provides certain information concerning the
stockholders of the Founding Practices:
<TABLE>
<CAPTION>
CONSIDERATION TO BE RECEIVED:
DEBT AND --------------------------------------
ASSETS TO BE LIABILITIES CASH VALUE OF NUMBER OF
FOUNDING PRACTICE: CONTRIBUTED(1) ASSUMED(1) DISTRIBUTION SHARES SHARES(2)
- ------------------ -------------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Sammy A. Caves, D.M.D. ........... $ 237,993 $ 34,352 $ 648,451 $ 2,593,805 235,800
Keith S. Crawford, D.M.D. ........ 8,938 68,847 0 859,442 78,131
Michael J. DeVito, D.D.S. ........ 218,518 7,513 100,000 730,366 66,397
Douglas D. Durbin, D.M.D.,
M.S. ........................... 272,302 16,107 280,403 1,121,612 101,965
John Huang, D.D.S. ............... 159,924 9,461 0 823,406 74,855
Daniel J. Enger, Jr., D.D.S. ..... 156,013 7,489 50,000 835,973 75,998
David Tod Garner, D.D.S. ......... 113,037 31,526 0 965,220 87,746
Suellen Rodeffer, D.D.S. ......... 113,037 31,526 0 965,220 87,747
Frederick A. Ghiz, D.D.S.,
M.S. ........................... 125,053 210,000 123,429 493,714 44,883
Paul J. Giorgetti, D.D.S. ........ 23,862 2,385 83,862 335,450 30,495
John Goode, D.D.S. ............... 47,231 112,570 215,825 863,299 78,482
Michael D. Goodwin, D.D.S.,
M.S. ........................... 203,705 208,421 119,852 479,407 43,582
Jack L. Green, Jr., D.D.S. ....... 84,632 83,567 0 1,260,673 114,607
William Griffin, D.D.S. .......... 127,226 11,234 195,647 782,587 71,144
Donald R. Halliburton, D.D.S. .... 85,214 11,627 340,555 1,362,219 123,838
John E. Horvath, D.D.S. .......... 92,508 43,284 196,286 785,142 71,377
Stuart Kimmel, D.D.S. ............ 60,386 7,902 215,300 861,195 78,290
Don E. Lahrman, D.D.S., M.S.D. ... 79,042 124,176 131,537 526,150 47,832
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
CONSIDERATION TO BE RECEIVED:
DEBT AND --------------------------------------
ASSETS TO BE LIABILITIES CASH VALUE OF NUMBER OF
FOUNDING PRACTICE: CONTRIBUTED(1) ASSUMED(1) DISTRIBUTION SHARES SHARES(2)
- ------------------ -------------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Causey C. Lee, D.D.S. ............ 227,024 28,440 180,593 722,373 65,670
Robert P. Lorentz, D.D.S.,
M.S. ........................... 88,663 27,622 230,031 920,124 83,648
George T. Mitchell, D.D.S. ....... 78,766 47,714 140,535 562,141 51,104
Winston C. Morris, D.M.D. ........ 123,211 95,937 177,912 711,650 64,695
R. O. Parsons, D.M.D., M.S.D. .... 675,443 13,630 633,223 2,532,891 230,263
Ben B. Pence, D.M.D. ............. 36,727 55,337 292,378 1,169,513 106,319
Ronald G. Philipp, D.M.D. ........ 18,231 47,356 77,306 695,751 63,250
R. N. Pickron, D.D.S. ............ 951,043 333,574 998,501 3,994,004 363,091
Greg A. Shoup, D.D.S. ............ 276,109 96,844 289,887 1,102,702 100,246
Richard L. Rothstein, D.M.D. ..... 202,290 7,062 240,764 963,057 87,551
Victor S. Sands, D.D.S. .......... 72,670 0 595,128 2,380,512 216,410
Randall A. Schmidt, D.D.S. ....... 219,686 90,138 107,432 2,041,206 185,564
Thomas W. Surber, D.D.S. ......... 221,451 90,862 216,590 1,949,306 177,210
Gregory P. Scott, D.D.S. ......... 41,289 7,613 144,527 818,984 74,453
Arthur B. Silver, D.D.S. ......... 67,094 2,006 176,615 706,460 64,224
Gerald N. Smernoff, D.D.S. ....... 80,186 0 268,228 1,072,913 97,538
Douglas E. Smith, D.D.S. ......... 298,960 3,891 466,662 1,866,649 169,695
D. B. Snead, D.M.D. .............. 144,955 202,055 142,624 570,495 51,863
Gilbert H. Snow, D.D.S. .......... 94,273 17,512 624,200 2,496,799 226,982
Mark D. Thebaut, D.D.S. .......... 86,784 118,062 173,464 739,504 67,228
Stephen C. Trawick, D.D.S. ....... 72,604 28,811 0 1,178,687 107,153
Mark A. Yaffey, D.D.S. ........... 39,394 14,301 193,084 772,336 70,212
Paul Yurfest, D.D.S. ............. 241,479 9,253 243,909 975,638 88,694
Randall K. Bennett, D.D.S. ....... 32,860 223,888 582,857 2,331,429 211,948
Kenneth Brehnan, D.D.S. .......... 17,925 80,475 335,548 1,342,192 122,017
John W. Bryant, D.D.S. ........... 14,854 34,208 142,053 568,212 51,656
Raymond Fortson, D.D.S. .......... 98,633 166,548 0 1,535,638 139,603
Joseph W. Gray, D.D.S., M.S. ..... 86,095 237,509 359,061 1,315,511 119,592
Gregg G. Hipple, D.D.S., M.S. .... 128,006 101,795 0 2,301,200 209,200
Robert E. Hirschfield, D.D.S. .... 152,238 167,371 418,714 1,674,855 152,260
Joseph C. Jackson, Jr., D.D.S. ... 211,086 155,957 213,603 704,722 64,066
Malko Karkenny, D.D.S. ........... 9,350 4,727 155,922 623,687 56,699
Richard C. Hayes, D.D.S., M.S..... 9,350 4,727 155,922 623,687 56,699
Joel Martinez, D.D.S. ............ 363,626 45,538 326,347 1,305,389 118,672
B. C. McConnell, Jr., D.D.S. ..... 177,297 19,604 287,017 1,148,068 104,370
Raymond A. McLendon, D.D.S. ...... 62,306 14,971 0 484,098 44,009
Brian J. Nettleman, D.D.S. ....... 0 59,740 273,363 1,093,452 99,405
Robert C. Penny, D.D.S., M.S. .... 67,970 64,849 235,751 943,006 85,728
A. Paul Serrano, D.D.S. .......... 118,824 193,721 463,954 1,855,817 168,711
Lesley O. Starnes, D.D.S.,
M.S. ........................... 51,538 49,040 213,605 854,422 77,675
Keith J. Stewart, D.D.S. ......... 19,913 86,987 0 1,178,627 107,148
Cary A. Williams, D.M.D. ......... 4,828 107,130 280,809 1,123,237 102,112
---------- ---------- ----------- ----------- ---------
TOTAL................... $8,193,652 $4,178,792 $13,759,266 $70,595,824 6,417,802
========== ========== =========== =========== =========
</TABLE>
- ---------------
(1) Assets to be contributed reflect the historical book value of the assets of
each practice, including their patient receivable balance, as of June 30,
1997. Patient prepayments are included in debt and liabilities assumed. See
"Business -- Agreements with Allied Practices and Allied
Orthodontists -- Acquisition Agreements."
(2) Assumes an initial offering price of $11.00.
USOC entered into a consulting agreement with Newfound Capital Associates
("Newfound") and Newfound's President, Mr. Wilfong. OrthAlliance succeeds to the
rights and obligations of USOC under the consulting agreement through the
Merger. In addition, Mr. Wilfong entered into a separate consulting agreement
with OrthAlliance. Mr. Wilfong agreed to provide financial and general business
services to the Company, and
40
<PAGE> 42
the Company has agreed to pay Mr. Wilfong consulting fees of $300,000 for such
services, of which $250,000 is payable upon completion of the Offering and will
be paid from the proceeds received in the Offering. See "Use of Proceeds." The
payment of this consulting fee is directly related to the services performed by
Mr. Wilfong in connection with the Offering. Pursuant to these consulting
agreements and in addition to the consulting fee, the Company granted Mr.
Wilfong a warrant to purchase 150,000 shares of Common Stock with an exercise
price per share equal to the initial public offering price. OrthAlliance will
record compensation expense related to this warrant. A warrant granted to Mr.
Wilfong by USOC to purchase 168,750 shares of USOC's common stock will be
converted in the Merger to a warrant to purchase an equal number of shares of
Common Stock at an exercise price equal to the initial public offering price net
of the underwriting discount. Both of these warrants are exercisable for a
five-year term commencing on the date of this Prospectus. Mr. Wilfong will
continue to provide consulting services to the Company until the earlier of (i)
the termination of the consulting agreements on September 30, 1997 or (ii) the
occurrence of other specified events set forth in the agreements. Pursuant to
the terms of the stock purchase warrants, Mr. Wilfong has certain incidental
registration rights for the registration of the shares of Common Stock
underlying the warrants. See "Description of Capital Stock -- Registration
Rights."
USOC entered into a consulting agreement with Premier Management, Inc.
("PMI") and PMI's President, Robert D. Garces. The Company succeeds to the
rights and obligations of USOC under the consulting agreement through the
Merger. Under his consulting agreement, Mr. Garces has agreed to provide
financial and general business services to the Company, and the Company has
agreed to pay Mr. Garces a consulting fee of $100,000 for such services, payable
upon the closing of the Offering and will be paid from the proceeds received in
the Offering. See "Use of Proceeds." The payment of this consulting fee is
directly related to services performed by Mr. Garces in connection with the
Offering. In addition to the consulting fee, USOC granted to Mr. Garces a
warrant to purchase 56,250 shares of Common Stock. OrthAlliance will record
compensation expense related to this warrant. In the Merger, such warrant shall
be converted into a warrant of the Company to purchase an equal number of shares
of Common Stock with an exercise price equal to the initial public offering
price net of the underwriting discount, exercisable for a five-year term
commencing on the date of this Prospectus. Mr. Garces will continue to provide
services until the earlier of the termination of the consulting agreement on
September 30, 1997 or the occurrence of other specified events. Pursuant to the
terms of the stock purchase warrant, Mr. Garces has certain incidental
registration rights for the registration of the shares of Common Stock
underlying the warrants. See "Description of Capital Stock -- Registration
Rights."
USOC entered into an employment agreement with Mr. Hethcox providing for
the payment of $18,000 per month and the issuance of options to purchase 50,000
shares of USOC's common stock. Pursuant to this agreement, Mr. Hethcox received
total payments of approximately $108,000. The option for 50,000 shares of USOC
common stock has been cancelled. The USOC employment agreement terminates on the
date of the Merger and at such time Mr. Hethcox's employment agreement with
OrthAlliance will be effective. In connection with his employment, OrthAlliance
granted to Mr. Hethcox a warrant to purchase 50,000 shares of Common Stock, with
an exercise price of $0.01 a share, exercisable for a five-year term commencing
on the date of this Prospectus. OrthAlliance will record compensation expense
related to this warrant. See Note 4 to Notes to Financial Statements of
OrthAlliance.
Certain of the Allied Orthodontists have received warrants to purchase an
aggregate of 90,000 shares of Common Stock with an exercise price per share
equal to the initial public offering price, exercisable for a five-year term
commencing on the date of this Prospectus for referring other Allied
Orthodontists to the Company. The Company will record compensation expense
related to these warrants in the second quarter of 1997. Warrants for the
purchase of shares of Common Stock have been granted to the following Allied
Orthodontists: 31,600 to Dr. Schmidt, 13,090 to Dr. Parsons, 5,833 to Dr.
Griffin, 5,432 to Dr. Smith, 5,088 to Dr. Sands, 4,717 to Dr. Shoup, 3,312 to
Dr. Garner, 3,306 to Dr. DeVito, 3,263 to Dr. Trawick, 3,052 to Dr. Scott, 3,005
to Dr. Crawford, 2,508 to Dr. Lahrman, 1,747 to Dr. Snead, 1,332 to Dr. Lee,
1,021 to Dr. Goodwin and 1,694 to Dr. Yaffey.
At the determination of the Company's executive officers, certain Allied
Orthodontists may be paid fees for: (i) preparing educational and seminar
materials for the Company, (ii) consulting with other Allied Orthodontists on
matters requested by management, (iii) identifying and performing due diligence
on additional orthodontic
41
<PAGE> 43
practices which may affiliate with the Company, and (iv) other matters requested
from time to time by management in the normal course of operating the Company's
business. It is not presently known by management which Allied Orthodontists
will be requested to perform such services in the future and, therefore,
management does not know the amount of fees or the Allied Orthodontists to whom
such fees may be paid.
Dr. Pickron received cash compensation from USOC in 1996 totalling $150,000
for serving as its Chief Executive Officer.
42
<PAGE> 44
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of the date of this
Prospectus regarding the beneficial ownership of the Common Stock and Class B
Common Stock (assuming completion of the Merger and the Transfers), and as
adjusted to reflect the consummation of this Offering, by (i) each person who is
known by the Company to be the beneficial owner of more than five percent (5%)
of the outstanding shares of the Common Stock or Class B Common Stock, (ii) each
director and named executive officer of the Company and (iii) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES OF PERCENT OF
SHARES OF PERCENT OF COMMON STOCK CLASS B CLASS B
COMMON STOCK BENEFICIALLY OWNED COMMON STOCK COMMON STOCK
BENEFICIALLY ---------------------------------- BENEFICIALLY BENEFICIALLY
NAME OWNED(1) PRIOR TO OFFERING AFTER OFFERING OWNED OWNED
- ---- ------------ ----------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert N. Pickron,
D.D.S.(2)................. 1,004,513 12.3% 9.3% 91,632 36.7%
Jonathan E. Wilfong(3)...... 430,262 5.1 3.9 15,930 6.4
Randall K. Bennett, D.D.S.,
M.S.(4)................... 310,250 3.8 2.9 24,000 9.6
Sam Westover(5)............. 198,070 2.4 1.8 33,000 13.2
Randall A. Schmidt, D.D.S.,
M.S.D. (6)................ 238,465 2.9 2.2 3,051 1.2
Douglas D. Durbin, D.M.D.,
M.S.D.(7)................. 109,399 1.3 1.0 1,062 *
Robert S. Chilton(8)........ 10,000 * * -- --
U. Bertram Ellis, Jr........ -- -- -- -- --
Paul H. Hayase(9)........... 33,768 * * 6,000 2.4
P. Craig Hethcox(10)........ 70,000 * * -- --
Craig L. McKnight........... -- -- -- -- --
W. Dennis Summers........... -- -- -- -- --
All directors and executive
officers as a group (11
persons)(11).............. 1,400,214 16.1 12.4 83,043 33.2
</TABLE>
- ---------------
* Less than one percent of the outstanding class of common stock.
(1) Unless otherwise indicated, each of the stockholders listed has sole voting
and investment power with respect to the shares of Common Stock or Class B
Common Stock beneficially owned by such stockholder. Shares of Common Stock
subject to options or warrants exercisable within 60 days are deemed
outstanding for computing the percentage of ownership of the holder. The
address of all persons listed, except Mr. Wilfong and Dr. Pickron, is 23848
Hawthorne Boulevard, Suite 200, Torrance, California 90505 unless otherwise
indicated.
(2) 363,091 shares of Common Stock received by Dr. Pickron in connection with
the Transfers assumes an initial public offering price of $11.00 per share.
The business address of Dr. Pickron is 3294 Medlock Bridge Road, Building
A, Norcross, Georgia 30092. Includes an aggregate of 84,252 shares of
Common Stock and 12,036 shares of Class B Common Stock shares held in
separate trusts by a third party trustee for the benefit of each of Dr.
Pickron's children and a niece. Dr. Pickron disclaims beneficial ownership
of the 84,252 shares of Common Stock and 12,036 shares of Class B Common
Stock held in such trusts.
(3) The business address of Mr. Wilfong is 536 Manor Ridge Drive, N.W.,
Atlanta, Georgia 30305. Includes 318,750 shares of Common Stock subject to
the exercise of warrants.
(4) 268,250 shares of the Common Stock reflected assumes an initial public
offering price of $11.00 per share, with respect to Dr. Bennett's Class A
membership interest in POV LLC that is anticipated to be redeemed
immediately following the closing of the Offering and the Common Stock
received by Dr. Bennett in connection with the Transfers.
(5) 75,070 shares of the Common Stock reflected assumes an initial public
offering price of $11.00 per share, as a result of Mr. Westover's Class A
membership interest in POV LLC which is anticipated to be redeemed
immediately following the closing of the Offering. Also includes options
for the purchase of 60,000 shares of Common Stock pursuant to the Employee
Plan.
(6) 185,564 shares of Common Stock received by Dr. Schmidt in connection with
the Transfers assumes an initial public offering price of $11.00 per share.
Includes 2,468 shares of Common Stock and 353 shares of Class B Common
Stock held by a profit sharing plan for Dr. Schmidt's benefit. Includes
warrants for the purchase of 31,600 shares of Common Stock.
(7) 101,965 shares of Common Stock received by Dr. Durbin in connection with
the Transfers assumes an initial public offering price of $11.00 per share.
(8) Includes 10,000 options pursuant to the Employee Plan.
(9) 18,768 shares of Common Stock reflected assumes an initial public offering
price of $11.00 per share with respect to Mr. Hayase's Class A membership
interest in POV LLC that is anticipated to be redeemed immediately
following the closing of the Offering. Includes options for the purchase of
15,000 shares of Common Stock pursuant to the Employee Plan.
(10) Includes 70,000 shares of Common Stock subject to the exercise of a warrant
and options pursuant to the Employee Plan.
(11) Includes options and warrants for the purchase of 505,350 shares of the
Company's Common Stock and, as applicable, assumes an initial public
offering price of $11.00. See separate footnotes set forth above.
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<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
The following summary is based upon OrthAlliance's Certificate and Bylaws,
which are included as exhibits to the Registration Statement of which this
Prospectus forms a part. The following discussion is qualified in its entirety
by reference to such exhibits.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Pursuant to the Certificate, the Company has authority to issue 90,250,000
shares of capital stock, consisting of 70,000,000 shares of Common Stock, par
value $.001 per share, 250,000 shares of Class B Common Stock, par value $.001
per share, and the Board of Directors of the Company has authority (without
action by the stockholders) to issue 20,000,000 shares of preferred stock, par
value $.001 per share, in one or more classes or series and to determine the
voting rights, preferences as to dividends and in liquidation, and conversion
and other rights of each such series (the "Preferred Stock"). As of the
completion of the Merger and the Transfers, there will be 8,167,802 shares of
Common Stock and 250,000 shares of Class B Common Stock issued and outstanding.
The Company has no current plans to issue any shares of Preferred Stock.
The rights of the holders of Common Stock and Class B Common Stock
discussed below are subject to such rights as the Board of Directors may
hereafter confer on the holders of Preferred Stock; accordingly, rights
conferred on holders of Preferred Stock that may be issued in the future under
the Certificate may have a material adverse effect on the rights of holders of
Common Stock and Class B Common Stock.
COMMON STOCK AND CLASS B COMMON STOCK
The Common Stock and the Class B Common Stock and the rights, powers and
limitations thereof are identical, except as described below.
Voting Rights. Each holder of shares of Common Stock and Class B Common
Stock shall be entitled to attend all special and annual meetings of the
stockholders of the Company and, share-for-share and without regard to class,
together with the holders of all other classes of stock entitled to attend such
meetings, to cast one vote for each outstanding share of Common Stock or Class B
Common Stock so held upon any matter properly considered and acted upon by the
stockholders, voting together as a single class, except as otherwise required by
law.
Liquidation Rights. In the event of any dissolution, liquidation, or
winding up of the Company, whether voluntary or involuntary, the holders of the
Common Stock and holders of any class or series of stock entitled to participate
therewith as to the distribution of assets (including the Class B Common Stock),
shall be entitled to participate in the distribution of any assets of the
Company remaining after the Company shall have paid, or provided for payment of,
all debts and liabilities of the Company and after the Company shall have paid,
or set aside for payment, to the holders of any class of stock having preference
over the Common Stock and the Class B Common Stock in the event of dissolution,
liquidation or winding up, the full preferential amounts, if any, to which they
are entitled.
Dividends. Dividends may be paid on the Common Stock and the Class B
Common Stock and on any class or series of stock entitled to participate
therewith as to dividends, but only when and as declared by the Board of
Directors. Holders of Common Stock and Class B Common Stock will participate as
one class with respect to any dividends declared and paid on the Common Stock.
Other Rights. The Certificate does not give holders of Common Stock
preemptive or other subscription or conversion rights. Shares of Class B Common
Stock are subject to the conversion provisions described below. The shares of
Class B Common Stock are not transferable, except to a holder's spouse, parents,
siblings, lineal descendants, a trust for the benefit of any such persons or as
determined by will or the laws of descent.
Conversion Rights of Class B Common Stock. At any time following 180 days
after the date of this Prospectus, each share of Class B Common Stock shall
automatically convert into Common Stock (i) at the ratio of eight shares of
Common Stock for each share of Class B Common Stock upon the attainment of the
Conversion Prices or (ii) if not converted pursuant to subparagraph (i), on a
one-for-one basis upon the Final
44
<PAGE> 46
Conversion Date. The shares of Class B Common Stock convertible pursuant to
subparagraph (i) above will convert in five increments of up to 50,000 shares of
Class B Common Stock (20% of the total number of shares of Class B Common Stock
issued) upon the attainment of each of the five specified Conversion Prices.
Upon each such conversion, each holder of Class B Common Stock will be deemed to
have converted a pro rata share of such Class B Common Stock then outstanding.
The Conversion Prices shall be established at premiums to the initial public
offering price, and will be deemed to have been achieved at the end of the
trading day on which the average closing price of the Common Stock for the
preceding 20 consecutive trading days exceeds such Conversion Price. The closing
prices will be those reported on the Trading Market. The initial Conversion
Price is equal to 150% of the price to public in the Offering, and each of the
subsequent Conversion Prices is equal to 120% of the preceding Conversion Price.
Therefore, assuming the price to public in the Offering is the mid-point of the
estimated initial public offering price range ($11.00), the five Conversion
Prices at which up to 50,000 shares of the outstanding Class B Common Stock
shall be automatically converted to Common Stock are $16.50, $19.80, $23.76,
$28.51 and $34.21, respectively. If any Conversion Prices are attained within
180 days after the date of this Prospectus, the portion of shares of Class B
Common Stock that would have otherwise converted, shall automatically convert
into Common Stock on the 181st day after the date of this Prospectus. Upon each
conversion, all fractional shares shall be paid in cash based upon the 20
consecutive trading day average closing price. In the event that there are any
shares of Class B Common Stock outstanding on the Final Conversion Date, all
such shares shall automatically convert into an equal number of shares of Common
Stock. The holders of the Class B Common Stock may convert each share of Class B
Common Stock into one share of Common Stock at any time after 180 days from the
date of this Prospectus but prior to the Final Conversion Date.
PREFERRED STOCK
The Certificate authorizes the Board of Directors, from time to time and
without any stockholder action or approval, to provide for the issuance of up to
20,000,000 shares of Preferred Stock, in one or more series, and to fix the
relative rights and preferences of the shares, including voting powers, dividend
rights, liquidation preferences, redemption rights and conversion privileges. As
of the date hereof, the Board of Directors has not provided for the issuance of
any series of such Preferred Stock, and there are no agreements or
understandings for the issuance of any such Preferred Stock. Because of its
broad discretion with respect to the creation and issuance of Preferred Stock
without stockholder approval, the Board of Directors could adversely affect the
voting power of the holders of Common Stock and Class B Common Stock and, by
issuing shares of Preferred Stock with certain voting, conversion and/or
redemption rights, could discourage any attempt to obtain control of the
Company.
WARRANTS
Warrants for the purchase of 597,634 shares of Common Stock have been
issued and are outstanding or will be issued pursuant to the Merger. The
exercise price per share pursuant to each of the warrants is equal to (i) the
initial public offering price, (ii) the initial public offering price net of
underwriting discount, (iii) the higher of the initial public offer price or the
closing bid price on the first trading day, or (iv) $0.01 per share. For a more
detailed discussion of such warrants, see "Certain Transactions" and
"Underwriting."
REGISTRATION RIGHTS
The Founding Practices have contracted to receive shares of Common Stock
upon the closing of the Transfers pursuant to the terms and conditions of the
acquisition agreements between OrthAlliance and each Founding Practice. Such
agreements set forth certain incidental registration rights for the Founding
Practices, whereby the Company is obligated to use reasonable efforts to
register shares issued as consideration to a Founding Practice if the Company
initiates a public offering and files a registration statement in connection
therewith anytime within 24 months of the closing of the acquisition of the
operating assets or capital stock of the Founding Practice; provided, however,
that such registration rights are subject to any terms, conditions or
limitations required by any underwriter retained by the Company in connection
with such underwritten public offering, and such registration rights may not be
exercised in connection with a registration statement filed by the Company in
connection with the registration of shares issued pursuant to (i) an employee
stock purchase or
45
<PAGE> 47
option plan or (ii) any acquisition or proposed acquisition by the Company. Each
Founding Practice shall bear its proportionate share of underwriters'
commissions and discounts, and shall bear the costs and fees of attorneys and
accountants it retains.
The holders of shares of Common Stock issued upon the exercise of the
warrants issued to Mr. Wilfong, Mr. Garces and J. C. Bradford & Co. have
associated incidental registration rights pursuant to which the Company is
obligated to use reasonable efforts to register such shares if the Company
initiates a public offering and files a registration statement in connection
therewith after the date of this Prospectus, excluding the registration of
shares issued pursuant to (i) an employee stock purchase or option plan or (ii)
any acquisition or proposed acquisition by the Company. The fees and costs of
any registration of the Common Stock issued pursuant to the warrants will be
borne by the Company. In addition, the registration rights associated with the
warrant held by J.C. Bradford & Co. provides that J.C. Bradford & Co. will have
priority over the other holders of incidental registration rights so that not
less than fifty percent of the shares registered pursuant to the exercise of
incidental registration rights by holders of the Company's Common Stock shall be
shares registered by J.C. Bradford & Co., up to all of such shares held.
CERTAIN PROVISIONS OF THE CERTIFICATE, BYLAWS AND DELAWARE LAW
Classification of Board of Directors. The Certificate and the Bylaws of
the Company divide the Board of Directors into three classes, designated Class
I, Class II and Class III, respectively, each class to be as nearly equal in
number as possible. The terms of Class I, Class II and Class III directors will
expire at the 1998, 1999 and 2000 annual meetings of stockholders, respectively,
and in all cases directors elected will serve until their respective successors
are elected and qualified. At each annual meeting of stockholders, directors
will be elected to succeed those in the class whose terms then expire, with each
director so elected to serve for a term expiring at the third succeeding annual
meeting of stockholders after such director's election, and until the director's
successor is elected and qualified. Thus, directors elected stand for election
only once in three years.
Additional Directorships, Vacancies and Removal of Directors. The Bylaws
of the Company provide that the Board of Directors shall consist of up to nine
members. The Certificate and the Bylaws authorize the Board of Directors to
create additional directorships and abolish any vacant directorships.
Newly-created directorships and vacancies may be filled by a majority of
directors then in office to hold office until the next annual meeting of
stockholders, and until their successors shall be elected and qualified. In
addition, in accordance with the DGCL provisions pertaining to a company whose
Board of Directors is classified, the Company's Certificate and Bylaws provide
that directors may be removed only for cause by vote of the holders of a
majority of the shares entitled to vote at an election of directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws require an advance notice procedure for the nomination,
other than by or at the direction of the Board of Directors or the Nominating
Committee thereof, of candidates for election as directors (the "Nomination
Procedure"), as well as for other stockholder proposals to be considered at
annual stockholders' meetings. Notice to the Company from a stockholder who
proposes to nominate a person at a meeting for election as a director generally
must be given not less than 120 nor more than 150 days prior to the anniversary
of the date notice of the annual meeting of stockholders was given in the
preceding year and must contain: (i) the name and record address of the
stockholder who intends to make the nomination; (ii) the name, age and residence
address of the nominee; (iii) the principal occupation or employment of the
nominee; (iv) the class, series and number of shares held of record,
beneficially and by proxy, by the stockholder and the nominee as of the record
date of such meeting (if such record date is publicly available) and as of the
date of such notice; and (v) such other information relating to the nominee
proposed by such stockholder as is required to be included if the Company is
then subject to Regulation 14A under the Securities Exchange Act of 1934,
including the written consent of each nominee to be named in the proxy statement
and to serve as a director of the Company if so elected. The presiding officer
of the meeting may refuse to acknowledge the nomination of any person not made
in compliance with the Nomination Procedure. Similar advance notice must be
given of any other proposed business which a stockholder proposes to bring
before an annual meeting of stockholders. Such notice must contain (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and record
address of the stockholder proposing such business, (iii) the class, series and
number of shares of the
46
<PAGE> 48
Company's stock which are held of record, beneficially and by proxy by the
stockholder as of the record date of such meeting (if such record date is
publicly available) and as of the date of such notice, (iv) a description of all
arrangements or understandings between the stockholder and any other person or
persons (naming such person or persons) in connection with the proposing of such
business by the stockholder, and (v) any material interest of the stockholder in
such business. The purpose of requiring advance notice is to afford the Board of
Directors an opportunity to consider the qualifications of the proposed nominees
or the merits of other stockholder proposals and, to the extent deemed necessary
or desirable by the Board of Directors, to inform stockholders about those
matters. Although the advance notice provisions do not give the Board of
Directors any power to approve or disapprove of stockholder nominations or
proposals for action by the Company, they may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals if the procedures established by the Bylaws are not followed and the
effect of discouraging or deterring a third party from conducting a solicitation
of proxies to elect its own slate of directors or to approve its own proposals,
without regard to whether consideration of such nominees or proposals might be
harmful or beneficial to the Company and its stockholders.
Statutory Business Combination Provision. Section 203 of the DGCL prevents
an "interested stockholder" (defined in Section 203, generally, as a person
owning 15% or more of a corporation's outstanding voting stock) from engaging in
a "business combination" (as defined in Section 203) with a publicly-held
Delaware corporation for three years following the date such person became an
interested stockholder unless (i) before such person became an interested
stockholder, the board of directors of the corporation approved the transaction
in which the interested stockholder became an interested stockholder or approved
the business combination; (ii) upon consummation of the transaction that
resulted in the interested stockholder's becoming an interested stockholder, the
interested stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of two-thirds of the outstanding voting stock of the
corporation not owned by the interested stockholder.
Anti-takeover Effects. The foregoing provisions of the Certificate and
Bylaws and DGCL could discourage potential acquisition proposals and could delay
or prevent a change in control of the Company. These provisions are intended to
enhance the continuity and stability of the Board of Directors and the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change in control of the
Company. These provisions are also designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal and to discourage certain tactics
that may be used in proxy fights. However, such provisions may discourage third
parties from making tender offers for the Company's shares. As a result, the
market price of the Common Stock may not benefit from any premium that might
occur in anticipation of a potential or actual change in control. Such
provisions also may have the effect of preventing changes in the management of
the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is NorWest Shareowner
Services.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for securities
of the Company. No prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares of Common Stock
for sale will have on the market price prevailing from time to time. Sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions described below lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
Upon completion of the Offering, the Company will have 10,767,802 shares of
Common Stock and 250,000 shares of Class B Common Stock outstanding. Of these
shares, the 2,600,000 shares of Common Stock
47
<PAGE> 49
(2,990,000 shares if the Underwriters' over-allotment option is exercised in
full) sold in the Offering will be freely tradeable without restriction or
limitation under the Securities Act, except for shares purchased by "affiliates"
of the Company as that term is defined in Rule 144 under the Securities Act
(which may generally be sold only in compliance with Rule 144).
The Founding Practices have contracted to receive 6,417,802 shares of
Common Stock (assuming an initial public offering price of $11.00) upon the
closing of the Transfers in consideration for certain assets of the Founding
Practices and entering into Management Agreements. Such shares have incidental
registration rights pursuant to the purchase and sale agreements between the
Founding Practices and OrthAlliance, whereby the Company is obligated to use
reasonable efforts to register shares issued as consideration to a Founding
Practice if the Company undertakes a public offering and files a registration
statement in connection therewith any time within 24 months of the closing of
the acquisition of the operating assets of the Founding Practice; provided,
however, that such registration rights are subject to any terms, conditions and
limitations required by any underwriter retained by the Company in connection
with such underwritten public offering, and such registration rights may not be
exercised in connection with registration statements filed by the Company in
connection with the registration of shares issued pursuant to (i) employee stock
purchase or option plans or (ii) any acquisition or proposed acquisition by the
Company.
The shares of Common Stock received by the Founding Practices, the
remaining 1,750,000 issued and outstanding shares of Common Stock and the
250,000 issued and outstanding shares of Class B Common Stock are deemed
"restricted shares" under Rule 144 since they were originally issued and sold by
the Company in private transactions in reliance upon exemptions from the
registration provisions of the Securities Act. The holders of restricted shares
will not be eligible to sell such shares pursuant to Rule 144 until the
expiration of one year from the date such restricted shares were acquired.
Additional restrictions on transferability apply to shares of Class B Common
Stock. See "Description of Capital Stock -- Common Stock."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be affiliates, whose
restricted shares have been fully paid for and held for at least one year from
the date of issuance by the Company may sell such securities in brokers'
transactions or directly to market makers, provided the number of shares sold in
any three-month period does not exceed the greater of 1% of the then outstanding
shares of Common Stock (107,678 shares based on the number of shares to be
outstanding after the Offering) or the average weekly trading volume of the
Common Stock in the public market during the four calendar weeks preceding the
filing of the seller's Form 144. Sales under Rule 144 are also subject to the
availability of current public information concerning the Company. After two
years have elapsed from the date of issuance of restricted shares by the
Company, such shares generally may be sold without limitation by persons who
have not been affiliates of the Company for at least three months. Rule 144 also
provides that affiliates who are selling restricted shares for which they have
fully paid must nonetheless comply with the above restrictions applicable to
restricted shares, notwithstanding the holding period.
All of the Founding Practices and the Company's officers, directors and
five percent (5%) or greater stockholders have agreed to enter into lock-up
agreements (the "Lock-up Agreements") generally providing that for a period of
365 days after the date of this Prospectus, they will not, except for the
exercise of stock options pursuant to the Stock Plans, directly or indirectly,
offer, sell, loan, pledge or otherwise dispose of, or grant any options or other
rights with respect to, any shares of Common Stock or any securities that are
convertible into or exchangeable or exercisable for Common Stock owned by them
without the prior written consent of J.C. Bradford & Co. Similarly, the Company
has agreed generally that, for a period of 365 days after the date of this
Prospectus, it will not, directly or indirectly, issue, offer, sell, grant
options to purchase or otherwise dispose of any of its equity securities or any
other securities convertible into or exchangeable or exercisable for its Common
Stock or any other equity security, except that the Company may grant stock
options under the Stock Plans and issue shares of Common Stock upon the exercise
of options previously granted.
In addition to the restricted shares outstanding upon completion of the
Offering and the Transfers, all of the 95,000 shares of Common Stock which may
be acquired upon the exercise of vested stock options within 365 days following
the date of this Prospectus (collectively, the "Option Shares") are subject to
the Lock-up Agreements but may be eligible for resale following the expiration
of the Lock-up Agreements (subject, in the case of affiliates, to certain
limitations) pursuant to Rule 701 under the Securities Act or a Form S-8
registration
48
<PAGE> 50
statement to be filed by the Company under the Securities Act. See
"Management -- Stock Plans." In addition, all of the 597,634 shares of Common
Stock that may be acquired upon the exercise of warrants will be deemed
restricted securities and may be eligible for resale pursuant to Rule 144.
Shares issuable upon the exercise of such warrants have associated incidental
registration rights pursuant to which the Company is obligated to use reasonable
efforts to register such shares if the Company undertakes an underwritten public
offering and files a registration statement in connection therewith after the
date of this Prospectus, excluding the registration of shares issued pursuant to
(i) an employee stock purchase or option plan or (ii) any acquisition or
proposed acquisition by the Company.
The Company intends to file a registration statement on Form S-8 to
register all shares of Common Stock issuable under the Company's stock option
plans, as soon as practicable after the date of this Prospectus, and the
Company's Form S-8 is expected to become effective immediately upon filing.
Shares covered by such registration statement will be eligible for sale in the
public market after the effective date of such registration statement and
following the expiration of the Lock-up Agreements, subject to Rule 144
limitations applicable to affiliates of the Company. See "Management -- Stock
Plans."
In addition, the Company has filed a registration statement with respect to
2,500,000 shares of Common Stock under the Securities Act for use in connection
with future acquisitions. These shares generally will be freely tradable after
their issuance by persons not affiliated with the Company unless the Company
contractually restricts their sale. The Company anticipates that the agreements
entered into in connection with its future acquisitions will restrict the resale
of all or a portion of the shares issued in those transactions for varying
periods of time.
49
<PAGE> 51
UNDERWRITING
Pursuant to the Underwriting Agreement, and subject to the terms and
conditions thereof, the Underwriters named below, acting through J.C. Bradford &
Co., and Oppenheimer & Co., Inc. as representatives of the several Underwriters
(the "Representatives"), have agreed, severally, to purchase from the Company
the number of shares of Common Stock set forth below opposite their respective
names.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
- ------------------- ---------
<S> <C>
J.C. Bradford & Co..........................................
Oppenheimer & Co., Inc......................................
---------
Total............................................. 2,600,000
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all shares of Common Stock
offered hereby if any of such shares are purchased.
The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose initially to offer the shares of Common Stock to
the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers, who may include the Underwriters, at the
public offering price less a selling concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other brokers or dealers. After
the Offering, the public offering price and such concessions may be changed by
the Representatives. The Representatives have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
The Offering of the shares of Common Stock is made for delivery when, as
and if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any offer for the purchase of shares.
The Company has granted the Underwriters an option, exercisable not later
than 30 days from the date of this Prospectus, to purchase up to an aggregate of
390,000 additional shares of Common Stock to cover over-allotments, if any. To
the extent the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
that the number of shares of Common Stock to be purchased by it shown in the
table above bears to the total number of shares in such table, and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the 2,600,000 shares of
Common Stock offered hereby. If purchased, the Underwriters will sell these
additional shares on the same terms as those on which the 2,600,000 shares are
being offered.
Subject to applicable limitations, the Underwriters, in connection with the
Offering, may place bids for or make purchases of the Common Stock in the open
market or otherwise, for long or short account, or cover short positions
incurred, to stabilize, maintain, or otherwise affect the price of the Common
Stock, which may be higher than the price that might otherwise prevail in the
open market. There can be no assurance that the price of the Common Stock will
be stabilized, or that stabilizing, if commenced, will not be discontinued at
any time. Subject to applicable limitations, the Underwriters may also place
bids or make purchases on behalf of the underwriting syndicate to reduce a short
position created in connection with the Offering.
50
<PAGE> 52
Upon the purchase by the Underwriters of the Common Stock being offered
hereby, the Company has agreed to sell to J.C. Bradford & Co. ("Bradford") for a
purchase price of $0.01 per underlying share of Common Stock, a warrant to
purchase up to 82,634 shares of Common Stock at an exercise price per share
equal to the higher of the initial public offering price or the closing bid
price of the first trading day. The warrant exercise price has been determined
by negotiation between the Company and Bradford as to be within the Conduct
Rules of the National Association of Securities Dealers, Inc. and various state
authorities. The warrant has a term of five years from the effective date of the
Offering, is non-transferrable, and is not exercisable until the earlier of a
subsequent public offering of the Common Stock or 24 months after the date of
this Prospectus. In any event, the shares underlying the warrant may not be
sold, assigned or hypothecated by Bradford or related parties for a period of
one year from the effective date of the Offering except to partners of Bradford.
The terms upon which the Company will be able to obtain additional equity
capital may be adversely affected since Bradford can be expected to exercise or
exchange them at a time when the Company would, in all likelihood, be able to
obtain any needed capital on terms more favorable to the Company than those
provided in the warrant. Any profit realized by Bradford on the sale of the
underlying shares of Common Stock may be deemed additional underwriting
compensation. For a discussion of the registration rights associated with the
warrant, see "Description of Capital Stock -- Registration Rights."
In addition, the warrant for the purchase of 150,000 shares of Common Stock
issued to Jonathan Wilfong is deemed to be compensation received in connection
with or related to the distribution of the Offering. The exercise price per
share is equal to the initial public offering price. The warrant is exercisable
for a five-year term commencing on the date of this Prospectus. Mr. Wilfong has
contractually agreed not to sell or otherwise transfer the shares for a period
of one year from the date of this Prospectus. Pursuant to the terms of the stock
purchase warrant, Mr. Wilfong has certain registration rights for the underlying
shares of Common Stock. See "Description of Capital Stock -- Registration
Rights."
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and their controlling persons, if any, against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
that the Underwriters or any such controlling persons may be required to make in
respect thereof.
The Company has applied for listing of the Common Stock on the Nasdaq
National Market. Prior to this Offering, there has been no public market for the
Common Stock. The offering price will be determined through negotiation among
the Company and the Representatives. Among the factors to be considered in such
negotiations will be the expected results of operations of the Company, among
other things, the financial and operating history and trends of the Company, the
experience of its management, the position of the Company in its industry, and
the economy as a whole. Additionally, consideration will be given to the status
of the securities markets, market conditions for new offerings of securities and
the prices of similar securities of comparable companies. The Representatives
intend to act as market makers with regard to the Common Stock.
Pursuant to the Lock-up Agreements, all of the Company's officers,
directors, five percent or greater stockholders and the beneficial owners of the
Founding Practices have agreed with the Representatives that they will not,
except for the exercise of warrants and stock options pursuant to the Stock
Plans described in this Prospectus, directly or indirectly, offer, sell, loan,
pledge or otherwise dispose of, or grant any options or other rights with
respect to, any shares of Common Stock or any securities that are convertible
into, or exchangeable or exercisable for, Common Stock owned by them for a
period of 365 days following the date of this Prospectus, without the prior
written consent of the Representatives. Similarly, the Company has agreed
generally that, for a period of 365 days after the date of this Prospectus, it
will not, directly or indirectly, issue, offer, sell, grant options to purchase
or otherwise dispose of any of its equity securities or any other securities
convertible into or exchangeable or exercisable for its Common Stock or any
other equity security, except that the Company may issue shares of Common Stock
in connection with acquisitions, grant stock options under its Stock Plans and
issue shares of Common Stock upon the exercise of options previously granted.
The Representatives may, at any time without notice, release all or any portion
of the securities subject to the Lock-up Agreements. After such 365-day period,
such persons will be entitled to sell, distribute or otherwise dispose of the
Common Stock or options to acquire Common Stock, subject to the provisions of
applicable securities laws. See "Shares Eligible for Future Sale."
51
<PAGE> 53
LEGAL MATTERS
The validity of the shares of Common Stock and Class B Common Stock are
being passed upon for the Company by Nelson Mullins Riley & Scarborough, L.L.P.,
Atlanta, Georgia, special securities counsel to the Company. Certain legal
matters in connection with the Offering will be passed upon for the Underwriters
by Bass, Berry & Sims PLC, Nashville, Tennessee.
EXPERTS
The financial statements of the Company, US Orthodontic Care, Inc. and
Premier Orthodontic Group, Inc. as of December 31, 1996 included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement, on Form
S-1 (together with all exhibits, schedules and amendments relating thereto, the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus, which is a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock, reference is hereby made to the
Registration Statement and the exhibits and schedules filed as a part thereof.
Statements contained in this Prospectus concerning the provisions or contents of
any contract, agreement or any other document referred to herein are not
necessarily complete. With respect to each such contract, agreement or document
filed as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matters involved, and each
statement shall be deemed qualified in its entirety by such reference to the
copy of the applicable document filed with the Commission. The Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following Regional Offices of the Commission: New York Regional Office, 7 World
Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional Office,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
Registration Statement and the exhibits and schedules thereto can be obtained
from the Public Reference Section of the Commission upon payment of prescribed
fees. The Registration Statement, including the exhibits and schedules thereto,
is also available on the Commission's Web site at http://www.sec.gov. In
addition, the Company has made application for the Common Stock to be listed for
trading on the Nasdaq National Market. Upon listing, periodic reports, proxy
material and other information concerning the Company, when filed, may be
inspected at the offices of the Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by the Company's independent public
accountants.
52
<PAGE> 54
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OrthAlliance, Inc.
Report of Independent Public Accountants.................. F-2
Balance Sheets as of December 31, 1996 and June 30, 1997
(Unaudited)............................................ F-3
Statements of Operations For the Period From Inception
(October 21, 1996) to December 31, 1996 and for the Six
Months Ended June 30, 1997 (Unaudited)................. F-4
Statements of Stockholder's Deficit For the Period From
Inception (October 21, 1996) to June 30, 1997 and for
the Six Months Ended June 30, 1997..................... F-5
Statements of Cash Flows For the Period From Inception
(October 21, 1996) to December 31, 1996 and for the Six
Months Ended June 30, 1997 (Unaudited)................. F-6
Notes to Financial Statements............................. F-7
US Orthodontic Care, Inc.
Report of Independent Public Accountants.................. F-17
Balance Sheets as of December 31, 1996 and June 30, 1997
(Unaudited)............................................ F-18
Statements of Operations For the Period From Inception
(February 7, 1996) to December 31, 1996 and for the Six
Months Ended June 30, 1996 and 1997 (Unaudited)........ F-19
Statements of Shareholders' (Deficit) Equity For the
Period From Inception (February 7, 1996) to June 30,
1996 and for the Six Months Ended June 30, 1997........ F-20
Statements of Cash Flows For the Period From Inception
(February 7, 1996) to December 31, 1996 and for the Six
Months Ended June 30, 1996 and 1997 (Unaudited)........ F-21
Notes to Financial Statements............................. F-22
Premier Orthodontic Group, Inc.
Report of Independent Public Accountants.................. F-26
Balance Sheets as of December 31, 1996 and June 30, 1997
(Unaudited)............................................ F-27
Statements of Operations For the Period From Inception
(November 26, 1996) to December 31, 1996 and for the
Six Months Ended June 30, 1997 (Unaudited)............. F-28
Statements of Changes in Owners'/Stockholders' Deficit For
the Period From Inception (November 26, 1996) to June
30, 1997 and for the Six Months Ended June 30, 1997.... F-29
Statements of Cash Flows For the Period From Inception
(November 26, 1996) to December 31, 1996 and for the
Six Months Ended June 30, 1997 (Unaudited)............. F-30
Notes to Financial Statements............................. F-31
Unaudited Pro Forma Combined Balance Sheet.................. F-34
Unaudited Pro Forma Combined Balance Sheet as of June 30,
1997................................................... F-35
Notes to Unaudited Pro Forma Combined Balance Sheet....... F-36
</TABLE>
F-1
<PAGE> 55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To OrthAlliance, Inc.:
We have audited the accompanying balance sheet of ORTHALLIANCE, INC. (a
development-stage enterprise, a Delaware corporation, and formerly Premier
Orthodontic Holdings, Inc.) as of December 31, 1996 and the related statements
of operations, stockholder's equity, and cash flow for the period from inception
(October 21, 1996) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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. as of
December 31, 1996 and its operations from inception (October 21, 1996) to
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 2, 1997
(except with respect
to the matter discussed
in the last paragraph
of Note 1 as to which the
date is July 25, 1997)
F-2
<PAGE> 56
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS...................................................... $0 $ 0
== =======
ACCRUED CONSULTING FEES..................................... $0 $ 900
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, .001 par value; 3,000 shares authorized and
1 share issued and outstanding at December 31, 1996 and
June 30, 1997.......................................... 0 0
Additional paid-in capital................................ 0 0
Warrants.................................................. 0 3,190
Deficit accumulated during the development stage.......... 0 (4,090)
-- -------
Total stockholders' deficit....................... 0 (900)
-- -------
Total liabilities and stockholder's deficit....... $0 $ 0
== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 57
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION FOR THE SIX
(OCTOBER 21, MONTHS
1996) TO ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
REVENUE..................................................... $ -- $ --
EXPENSE:
Compensation expense...................................... -- (4,090)
------- -------
NET LOSS.......................................... $ -- $(4,090)
======= =======
Net loss per share.......................................... $ -- $ .37
======= =======
Number of shares used in net loss per share calculation..... -- 11,068
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 58
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDER'S DEFICIT
FOR THE PERIOD FROM INCEPTION (OCTOBER 21, 1996) TO JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEFICIT
ADDITIONAL ACCUMULATED TOTAL
COMMON PAID-IN DURING DEVELOPMENT STOCKHOLDER'S
STOCK CAPITAL WARRANTS STAGE EQUITY
------ ---------- -------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
INITIAL INVESTED CAPITAL (OCTOBER 21,
1996)............................... $0 $0 $ 0 $ 0 $ 0
Subscription receivable............. 0 0 0 0 0
-- -- ------ -------- ------
STOCKHOLDER'S DEFICIT AT DECEMBER 31,
1996................................ 0 0 0 0 0
Issuance of warrants.................. 0 0 3,190 0 3,190
Net loss.............................. 0 0 0 (4,090) (4,090)
-- -- ------ -------- ------
STOCKHOLDER'S DEFICIT AT JUNE 30,
1997................................ $0 $0 $3,190 $(4,090) $ (900)
== == ====== ======== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 59
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION FOR THE SIX
(OCTOBER 21, MONTHS
1996) TO ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss.................................................... $ -- $(4,090)
Adjustments to reconcile net loss to net cash used in
operating activities:
Change in assets and liabilities:
Accrued consulting fees................................ -- 900
------- -------
Net cash used in operating activities............. -- (3,190)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of warrants...................................... -- 3,190
------- -------
NET CHANGE IN CASH
CASH, beginning of period................................... -- --
------- -------
CASH, end of period......................................... $ -- $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 60
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
1. BUSINESS AND ORGANIZATION
OrthAlliance, Inc. (the "Company" or "OrthAlliance") (formerly known as
Premier Orthodontic Holdings, Inc.) was formed to create a provider of practice
management services to orthodontic practices in the United States. As a result
of a planned merger of US Orthodontic Care, Inc. ("USOC") and Premier
Orthodontic Group, Inc. ("Premier") with and into the Company (the "Merger"),
the Company will succeed to the rights of USOC and Premier in connection with
management or consulting services agreements and with respect to the purchase
and sale agreements or agreements and plans of reorganization that USOC and
Premier has with certain orthodontic practices (the "Founding Practices") and
the related long term management services agreements. As a result, the Company
has entered into definitive agreements in which the Founding Practices will
transfer certain operating assets of, and certain liabilities of, or the stock
of an entity holding certain operating assets and certain liabilities of the
Founding Practices (the "Transfers"). The Transfers will occur prior to the
closing of the initial public offering (the "Offering").
The Company has had no operations to date, and the financial statements
have been prepared on the basis that the proposed transaction will occur,
although no assurance can be made that the proposed transaction will be
completed or that the Company will be successful in completing planned future
acquisitions. The Company intends to expand through the acquisition of
management rights to practices throughout the United States. In order to expand,
the Company will need further acquisition financing in the form of debt or
equity financing. There can be no assurance that such financing will be
available.
As of December 31, 1996, the Company received $.01 for the one share of
stock issued in 1996. This amount has been recorded as a subscription receivable
in the accompanying statement of stockholder's equity. The stock of the Company
is owned by a stockholder of Premier.
THE MERGER
OrthAlliance was created as a shell corporation to become active in
connection with the Offering. Prior to the Merger, the sole stockholder of
OrthAlliance holds a minority interest in Premier. There are two common
stockholders who owned common stock in USOC and Premier, and there are no common
stockholders between USOC and OrthAlliance. The stockholders in USOC and Premier
are considered promoters; therefore, the Merger will be accounted for pursuant
to Staff Accounting Bulletin No. 48, "Transfers of NonMonetary Assets By
Promoters and Shareholders," ("SAB No. 48") as will the transfers with the
orthodontic practices. This transfer will result in carryover basis of the
assets and liabilities of USOC and Premier. The assets acquired in the Merger by
OrthAlliance generally include cash, other current assets, equipment, other
assets, and contract rights. The liabilities to be received include accounts
payable, accrued liabilities, and notes payable. The historical cost basis will
be the carrying value on Premier's and USOC's respective balance sheet at the
date of transfer, except contract rights which have an historical cost basis of
zero. The contract rights become effective if and when the Offering is
effective. USOC and Premier have incurred certain issuance and organizational
expenses, the benefits of which will be transferred to the Company.
In the Merger, the outstanding common stock of USOC and Premier will be
converted into an aggregate of 1,750,000 shares of Class A Common Stock ("Common
Stock") and 250,000 shares of Class B Common Stock ("Class B Common Stock") of
the Company. Each share of USOC common stock will convert into .496 shares of
Common Stock and .071 shares of Class B Common Stock. The 100 shares of Premier
common stock will convert into 525,000 shares of Common Stock and 75,000 shares
of Class B Common Stock. The USOC and Premier stockholders, respectively, will
receive an aggregate of 1,225,000 and 525,000 shares of Common Stock and 175,000
and 75,000 shares of Class B Common Stock, respectively.
F-7
<PAGE> 61
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Premier is owned by certain individuals and Premier Orthodontic Ventures,
LLC ("POV LLC"). POV LLC has two classes of membership interests, Class A and
Class B. Immediately following completion of the Offering, POV LLC intends to
redeem all of its membership interests. The redemption provisions require that
POV LLC distribute shares of Common Stock with a market value equal to two times
the Class B members' capital contribution, except with respect to one Class B
member who shall receive shares of Common Stock with a value equal to three
times his Class B capital contribution. The exact number of shares of Common
Stock to be distributed to the Class B members will be determined by multiplying
the capital contribution by two (or three with respect to one Class B member)
and dividing the product thereof by the market price per share of the Common
Stock. As a result, the exact number of shares distributed to the Class B
members will vary according to the initial public offering price. All shares of
Common Stock held by POV LLC after redemption of the Class B members' interest
will be distributed pro rata to the Class A members in accordance with their
membership interests. All of the Class B Common Stock received by POV LLC in the
Merger shall be distributed pro rata to the Class A members.
USOC has warrants for the purchase of 225,000 shares of common stock
outstanding prior to the Merger. Assuming the warrants are not converted prior
to the Merger, the warrants are convertible into warrants of OrthAlliance with
the right to acquire an equal number of shares of Common Stock. USOC has
recorded compensation expense related to certain of these options and warrants
at the date of grant. OrthAlliance will record additional compensation expense
of $2,475,000 (unaudited) related to these warrants in the third quarter of 1997
upon successful completion of the Offering. The compensation expense is based on
the assumed initial public offering price of $11.00.
THE TRANSFERS
In the Transfers, OrthAlliance will acquire certain operating assets or the
stock of entities holding certain operating assets of the 55 separate Founding
Practices in exchange for cash and shares of Common Stock and will enter into
long-term management services agreements with each practice. The Founding
Practices will receive 6,417,802 shares of Common Stock (based on an assumed
initial public offering price of $11.00 per share) and approximately $13,759,000
in cash. Each Founding Practice transaction was individually negotiated between
the Company and the Founding Practice as to all material terms, including, but
not limited to, valuation. Of the total consideration for each transaction, the
Founding Practice could elect to receive up to 20% in cash and the balance in
shares of Common Stock. The actual number of shares shall be calculated by
subtracting the cash portion from the total consideration and dividing such
amount by the initial public offering price. The Transfers are part of the SAB
48 transaction described above. The assets and liabilities of the Founding
Practices will carryover at their historical costs to OrthAlliance. The assets
to be transferred include billed and unbilled receivables, supplies inventory,
other receivables, prepaid expenses, net equipment and certain other current and
non-current assets. The liabilities to be transferred include long-term debt,
patient prepayments and certain miscellaneous accruals. The cash paid to the
Founding Practices will be recorded as a dividend by the Company. A limited
amount of personal assets will be retained by Founding Practices.
In Transfers requiring stock acquisitions, the Company generally will
acquire the stock of the entity (the "Original Entity") through which the
applicable Founding Practice previously operated and generated revenues. Before
the Company's acquisition of the Original Entity, the stockholder(s) of the
Original Entity will form a new entity (the "New Entity") through which the
Founding Practice will provide orthodontic services and which will hold all
assets that the Company is unable to own pursuant to applicable state law or
which the Company does not intend to acquire from the Founding Practice. At the
time of transfer of the stock of the Original Entity to OrthAlliance, the
Original Entity will hold the operating assets of the Original Entity that the
Company is permitted to own. Since the Original Entity and the New Entity are
under common control and owned by the same stockholders, there is no step-up in
basis of the assets for accounting purposes. Each Stockholder of the Founding
Practices and each stockholder of the Original Entity is a promoter under SAB
No. 48.
F-8
<PAGE> 62
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
POST MERGER AND TRANSFERS
Following is a table of the anticipated ownership by group related to each
class of the Company's shares of common stock after the Merger, the Transfers
and the Offering (assuming 2,600,000 shares offered to the public at a price of
$11.00 per share):
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------ ------------
<S> <C> <C>
Founding practice owners................................ 59.6% --%
USOC stockholders....................................... 11.4 70.0
Premier stockholders.................................... 4.9 30.0
The public stockholders................................. 24.1 --
----- -----
100.0% 100.0%
===== =====
</TABLE>
See also Note 5 for further discussion of post Merger and post Transfers
transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from managing the practices will be recognized on a monthly basis
as the services are provided. The revenue of OrthAlliance will consist of the
sum of the management fees and such amounts equal to the operating expenses of
the orthodontic practice assumed by OrthAlliance under such management
agreements. In general, the management agreements provide for the payment of
fees to the Company based on a negotiated percentage of the "Adjusted Patient
Revenue" of the orthodontic practice. Adjusted Patient Revenue is net patient
revenue, as determined under generally accepted accounting principles, including
adjustments for contractual allowances and other discounts, plus an adjustment
for uncollectible accounts. Patient revenue is recognized as orthodontic
services are performed, with approximately 20% being recognized at the time of
initial treatment. 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 the practice 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 orthodontic
personnel, orthodontic supplies, and associated administrative services.
Expenses not required to be paid by OrthAlliance pursuant to the agreements
primarily consist of professional expenses of the orthodontist. See Note 5.
INTERIM UNAUDITED FINANCIAL INFORMATION
The financial statements as of and for the six months ended June 30, 1997
are unaudited; however, in the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the unaudited financial statements for this interim period have
been included. The results of interim periods are not necessarily indicative of
the results to be obtained for a full year.
ACCOUNTING PRONOUNCEMENTS
The Company anticipates that the Emerging Issues Task Force of the
Financial Accounting Standards Board will be evaluating certain matters relating
to the physician/orthodontic practice management industry such as the ability to
consolidate the revenues of a physician/orthodontic practice through a
contractual management agreement, mergers between physician/orthodontic
practices and management entities and merger transactions that qualify for
pooling-of-interest treatment. The Company expects this evaluation will include
a review of accounting for business combinations. The Company is unable to
predict the impact, if any, that this review may
F-9
<PAGE> 63
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
have on the Company's acquisition strategy, allocation of purchase price related
to acquisitions, and amortization life assigned to intangible assets.
3. COMMITMENTS AND CONTINGENCIES
The Company will be subject to certain government regulation at the federal
and state levels. In compliance with certain regulatory requirements, the
Company will not control the practice of orthodontics. There can be no assurance
that the legality of any long-term management services agreements that will be
entered into will not be successfully challenged. There also can be no assurance
that the laws and regulations of states in which the Company will maintain
operations will not change or be interpreted in the future to restrict or
further restrict the Company's relationships with orthodontists.
Orthodontists may be subject to legal liability suits while under
management or consulting services agreements with the Company. The Company will
not control or employ the orthodontists; however, the Company intends to acquire
certain liability insurance for itself.
The Company has granted warrants to purchase shares of Common Stock to J.C.
Bradford & Co., as part of the Offering. The warrant is for the purchase of
82,634 shares of Common Stock at an exercise price equal to the higher of (i)
the initial public offering price or (ii) the closing bid price the first
trading day after the date of the Offering. Additionally, the Company has agreed
to pay an aggregate of approximately $900,000 to Jonathan E. Wilfong, Robert D.
Garces, Sam Westover, Paul H. Hayase, and J. Dalton Gerlach upon successful
completion of the Offering. The services have been performed by these
consultants in connection with the Merger, the Transfers and the successful
filing of the registration statement related to the Offering, which were
performed during the second quarter of 1997. The Company recorded compensation
expense of $900,000 regarding these services in the second quarter of 1997.
4. STOCK OPTIONS AND WARRANTS
The Company accounts for the issuance of options and warrants to employees
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"). Options and warrants issued to
employees at an exercise price at or above fair value at the date of grant would
require no compensation expense to be recorded under APB No. 25. Options and
warrants issued to nonemployees will be accounted for under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS No. 123"). Options and warrants issued to nonemployees will require
compensation expense to be recorded for the fair value of the equity instrument
granted. The Company will provide the pro forma disclosure of net income and
earnings per share in the notes to the financial statements as if the fair
value-based method of accounting had been applied to awards as required by SFAS
No. 123.
On January 1, 1997, USOC granted an option to an officer of USOC (who will
become an officer of the Company upon consummation of the Transfers) for the
purchase of 50,000 shares of common stock at an exercise price of $.01 per
share. USOC recorded compensation expense (based upon a fair market value of
$5.00 established by USOC's unrelated third party equity sales) related to such
option of $250,000 in the first quarter of fiscal 1997. On June 10, 1997, the
option was cancelled and an OrthAlliance warrant was issued for the purchase of
50,000 shares of Common Stock with an exercise price per share of $0.01. The
cancellation of the option and the issuance of the warrant created a new
measurement date. OrthAlliance recorded compensation expense of $550,000
(unaudited) in the second quarter of fiscal 1997 for the difference between the
assumed initial public offering price and the exercise price.
On May 13, 1997, OrthAlliance issued warrants for the purchase of 90,000
shares of Common Stock to owners of certain of the Founding Practices. These
warrants were issued for referring other orthodontists to the
F-10
<PAGE> 64
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company. The exercise price per share is equal to the initial public offering
price. OrthAlliance recorded compensation expense of $990,000 (unaudited and
based upon an assumed initial public offering price of $11.00) related to these
warrants in the second quarter of fiscal 1997 (the period of grant) in
accordance with SFAS No. 123.
On May 13, 1997, a warrant to purchase 150,000 shares of Common Stock of
OrthAlliance was issued to a consultant and director of the Company, at an
exercise price equal to the initial public offering price. OrthAlliance recorded
compensation expense of approximately $1,650,000 (unaudited) in the second
quarter of fiscal 1997 for the fair value of the warrant based on the assumed
initial public offering price of $11.00.
USOC also has warrants to purchase 225,000 shares of its common stock
outstanding to certain consultants. These warrants have an exercise price equal
to the initial public offering price, net of the underwriting discount. The
warrants expire five years from the effective date of the Offering. The fair
value at the date of grant ($337,500, based on an equity transaction of USOC)
was recorded as salaries, wages and benefits expense by USOC. These warrants
will convert in the Merger into the right to acquire an equal number of shares
of Common Stock. OrthAlliance will record compensation expenses of $2,475,000
(unaudited) related to these warrants in the third quarter of 1997 upon
successful completion of the Offering. (See Note 1 "The Merger" for further
discussion).
As discussed in Note 3, the Company has granted a warrant for the purchase
of 82,634 shares of Common Stock to J.C. Bradford & Co. The Company will record
the value of these warrants as an adjustment to additional paid-in-capital upon
completion of the Offering.
5. TRANSACTIONS WITH FOUNDING PRACTICES
As discussed in Note 1, the Company plans to complete, through a series of
stock acquisitions and asset transfers, the acquisition of certain assets and
assumption of certain liabilities of the Founding Practices (the "Transfers")
concurrently with an initial public offering of shares of its Common Stock.
The Founding Practices will enter into 20-year service agreements with
OrthAlliance. Additionally, the orthodontists at the Founding Practices will
enter into employment and noncompete agreements with the Founding Practices.
The Company will not employ orthodontists or control the practice of
orthodontics by the orthodontists employed by the Founding Practices. As
OrthAlliance will not be acquiring the future patient revenues earned by the
Practices, the Transfers are not deemed to be business combinations. In
accordance with SAB No. 48, the transferred nonmonetary assets and assumed
liabilities will be accounted for at the historical cost basis of the Founding
Practices. Each of the stockholders of the Founding Practices is deemed to be a
promoter of the Offering. Any monetary assets included in the Transfers will be
recorded at fair value. The resulting value of the net assets acquired by
OrthAlliance will be recorded as the value of the stock consideration tendered.
Cash consideration paid to selling orthodontists in conjunction with the
Transfers will be reflected as a dividend paid by OrthAlliance.
AGREEMENTS WITH FOUNDING PRACTICES
The Company is party to management service agreements with orthodontic
practices which are either Service Agreements or Consulting Agreements. The type
of management service agreement is determined by the Company and each Founding
Practice based primarily on applicable state regulations. The types of
management service agreements are as follows:
Service Agreements. The parties to each Service Agreement include the
Company, as successor through the Merger, and the Founding Practice, which
typically is a professional corporation or association owned by the
F-11
<PAGE> 65
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
related orthodontist. Each Service Agreement generally requires the Company to
perform the following services for the Founding Practices: provide and maintain
specified furnishings and equipment; provide necessary employees (except
orthodontists 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 Founding Practice's files and
records, including patient records where permitted by applicable law. If the
Founding Practice lacks sufficient funds to pay its current expenses, the
Company is also required to advance funds to the Founding 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 below.
The term of each Service Agreement is 20 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 Founding 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 Founding 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 Founding Practice.
Each Service Agreement is 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 Founding Practice's consent to any entity
under common control with the Company. The Company and the Founding 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 Founding Practice's intentional or negligent acts or omissions.
In the case of the Founding 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, as successor through the Merger, and the Founding 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 Founding Practice in the event the Founding Practice is unable to
pay its current expenses, termination of the Consulting Agreement, repurchase of
assets and assumption of liabilities by the Founding Practice upon expiration or
termination, assignment, and indemnification.
The services provided by the Company to the Founding Practice under each
Consulting Agreement generally include consulting with respect to equipment and
office needs; preparing staffing models appropriate for a Founding 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 Founding 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.
CALCULATION OF MANAGEMENT FEES
The management fee is paid pursuant to the Service and Consulting
Agreements monthly to the Company by each Founding Practice based upon the
practice's adjusted patient revenue calculated on the accrual basis using
F-12
<PAGE> 66
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the revenue recognition criteria discussed in Note 2. There are three economic
models by which the management fee may be calculated under the two management
service agreements discussed above which are as follows:
(i) a designated percentage of adjusted patient revenue, ranging from
14% to 17%, subject to an annual adjustment based upon improvements in the
Founding Practice's operating margin in the most recent fiscal period as
compared with the immediately preceding fiscal period. No annual adjustment
shall be made which would result in reducing the designated 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. Adjusted patient revenue under the agreement
is net patient revenue as determined under generally accepted accounting
principles, including adjustments for contractual allowances and other
discounts, plus an adjustment for uncollectible accounts. Operating profit
is equal to adjusted patient revenue less operating expenses, excluding the
management fee and such expenses associated with the Founding Practices
which the Company is prohibited from incurring, primarily consisting of
orthodontist compensation. The average designated percentage is 16.9% for
those Founding Practices under this arrangement.
(ii) a designated percentage ranging from 13.5% to 17% of adjusted
patient revenue with a potential annual adjustment of 25% of the increase
in operating margin (as defined above) in a fiscal year as compared to the
preceding fiscal year multiplied by the Adjusted Patient revenue for the
current fiscal year. The supplemental fee, if applicable, shall be paid in
a lump sum payment upon final determination of the improvement in the
Founding Practice's operating margin as compared to the prior fiscal year
period. The average designated percentage is 16.3% for those Founding
Practices under this arrangement.
(iii) a fixed dollar fee with annual established fixed increases for
each year of the management agreement.
COMBINED ADJUSTED PATIENT REVENUE OF THE FOUNDING PRACTICES
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
---------------- ----------------
ADJUSTED ADJUSTED
PATIENT REVENUE PATIENT REVENUE
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Practices participating under (i)........................... $39,896,000 $20,707,000
Practices participating under (ii).......................... 14,873,000 7,488,000
Practices participating under (iii)......................... 3,664,000 2,005,000
----------- -----------
Totals for Founding Practices..................... $58,433,000 $30,200,000
=========== ===========
</TABLE>
RECEIVABLES FROM FOUNDING PRACTICES
The difference in the timing of the recognition of patient revenue and cash
collections results in unbilled receivables in instances where recognition of
revenue precedes the patient's payment plan. The following table presents the
combined uncollected patient receivables, and unbilled patient receivables of
the Founding Practices net of allowance for bad debts. These amounts are not
receivables of the Company, but the net position of these receivables will be
acquired as part of the Transfers. Patient prepayments are recorded as
liabilities assumed by OrthAlliance.
F-13
<PAGE> 67
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED PATIENT RECEIVABLES, NET, OF THE FOUNDING PRACTICES
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Patient receivables, net of allowances of $251,000 and
$181,000, respectively.................................... $4,689,000 $3,436,000
Unbilled patient receivables, net of allowances of $149,000
and $136,000, respectively................................ 2,810,000 2,579,000
---------- ----------
Patient receivables, net of allowances............ $7,499,000 $6,015,000
========== ==========
</TABLE>
After the transfer of certain assets and certain liabilities of an
orthodontic practice, the Company will continue to purchase patient accounts
receivable generated by the Founding Practice and will record these receivables
on the balance sheet of OrthAlliance. These accounts receivable will become
assets of OrthAlliance. The receivables will be recorded at net realizable value
on the date of purchase. Any subsequent uncollectible account will be written
off by OrthAlliance and will be funded by the Allied Practice. All of the
accounts receivable will be assigned to the Company, which will generate the
funds required for (i) the expenses incurred by the Company to manage and
administer the Allied Orthodontist practice, (ii) the management fees, and (iii)
salaries for other employees of the Allied Practices with the balance due the
Allied Orthodontist. The Company will settle on a monthly basis for the amounts
noted above.
OPERATING EXPENSES OF FOUNDING PRACTICES
Subsequent to the Transfers, the operating expenses of the Founding
Practices will be the responsibility of OrthAlliance. The Company shall be
responsible for the payment of all operating expenses incurred by the practice
as required to operate an orthodontic office. These expenses will include the
following:
- 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 law
- Direct costs of all employees or consultants that provide services to
each practice office
- Dental and office supplies as permitted by law
- Lease or rent payments as permitted by law, utilities, telephone and
maintenance expenses for practice facilities
- Property taxes on OrthAlliance assets located at practice offices
- Property, casualty, liability and malpractice insurance premiums
- Orthodontists recruiting expenses
- Interest on advances to practice bank accounts
- Advertising and other marketing expenses attributable to the promotion of
practice offices
All of the above expenses shall be paid directly to the third party
provider of the goods or services indicated. All of the above items will be
incurred by OrthAlliance. In exchange for incurring these expenses and providing
management services, the Company will record revenue in amounts equal to those
incurred expenses plus a management fee based on varying percentages of the
revenues of the Founding Practices.
The Founding Practices will retain 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 law. In
addition, the Founding Practices will retain responsibility for the payment of
continuing education expenses, seminars, professional licenses, professional
membership dues and all other expenses of any orthodontist.
F-14
<PAGE> 68
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The combined historical expenses of the Founding Practices for the year
ended December 31, 1996 and the six months ended June 30, 1997 were:
COMBINED DETAIL OF THE FOUNDING PRACTICES' EXPENSES
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Salaries, wages and benefits of employees, excluding the
orthodontists......................................... $14,540,000 $ 7,800,000
Orthodontic supplies.................................... 5,404,000 2,590,000
Rent.................................................... 3,906,000 1,999,000
Advertising and marketing............................... 1,288,000 625,000
General and administrative expenses..................... 8,417,000 4,833,000
Depreciation and amortization on acquired assets........ 837,000 385,000
----------- -----------
Total expenses................................ $34,392,000 $18,232,000
=========== ===========
</TABLE>
The presentation of the Founding Practices' Expenses above is presented
solely for the purpose of providing disclosure to potential investors regarding
the group of entities with which OrthAlliance will be contracting to provide
future services. The historical expenses incurred by the Founding Practices (as
noted above) will not be assumed by OrthAlliance and are not necessarily
indicative of the expenses to be incurred by the Company in the future.
HISTORICAL INFORMATION OF FOUNDING PRACTICES
The combined historical financial information of the Founding Practices
presented herein is not related to the financial position or results of
operations of OrthAlliance. This information is presented solely for the purpose
of providing disclosures to potential investors regarding the group of entities
with which OrthAlliance will be contracting to provide future services due to
the significant relationships between OrthAlliance and the Founding Practices.
The Founding Practices' financial information is presented on a combined
historical basis due to the fact that their Service and Consulting Agreements
with the Company will be effective on the completion of the Offering. The
Founding Practices were not operated under common control or management during
the fiscal year ended December 31, 1996 or during the six months ended June 30,
1997.
6. SUBSEQUENT EVENT (UNAUDITED)
On June 10, 1996, USOC issued 320,000 shares of common stock to three
consultants, one of whom is now a director of OrthAlliance. These consultants
also will receive $400,000 upon a successful completion of the Offering. USOC
recorded compensation expense of approximately $480,000 related to this share
issuance. Each USOC share will convert into .496 shares of OrthAlliance Common
Stock and .071 shares of OrthAlliance Class B Common Stock. Since these shares
were issued more than one year ago, there is no additional compensation related
to these shares. The Company recorded consulting fees in the second quarter of
1997.
Subsequent to year end, OrthAlliance issued warrants to purchase 50,000
shares of Common Stock to an officer of USOC to replace a previously issued
option in USOC. The previously issued option was cancelled by USOC. OrthAlliance
recorded compensation expense of $550,000 (unaudited) on the warrant in the
second quarter of 1997. The Company also issued a warrant to purchase 150,000
shares of Common Stock of OrthAlliance to a consultant and director on May 13,
1997. OrthAlliance recorded compensation expense of $1,650,000 (unaudited) in
the second quarter of 1997 for the fair value of the warrant based on an assumed
initial
F-15
<PAGE> 69
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
public offering price of $11.00. Additionally, in connection with the Merger,
warrants to purchase 225,000 shares of Common Stock were assumed by OrthAlliance
from USOC. OrthAlliance will record compensation expense of $2,475,000
(unaudited) in the third quarter of 1997 upon successful completion of the
Offering related to the warrants to purchase 225,000 shares of Common Stock.
Subsequent to December 31, 1996, the Company adopted the 1997 Employee
Stock Option Plan and the 1997 Non-Employee Director Stock Plan. A total of
1,200,000 shares of Common Stock are reserved for issuance under these plans.
Options to purchase 600,000 shares of Common Stock have been granted to certain
officers of the Company under the 1997 Employee Stock Plan at an exercise price
equal to the price to the public in the Offering.
In the third quarter of 1997, OrthAlliance is planning an initial public
offering of its common stock and will simultaneously exchange cash and shares of
its common stock for certain assets and liabilities of the Founding Practices.
OrthAlliance will begin to manage the administrative functions of the Founding
Practices under the terms of the management service agreements upon the
effective date of the Offering.
F-16
<PAGE> 70
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To US Orthodontic Care, Inc.:
We have audited the accompanying balance sheet of US ORTHODONTIC CARE, INC.
(a development-stage enterprise and a Georgia corporation) as of December 31,
1996 and the related statements of operations, shareholders' deficit, and cash
flows for the period from inception (February 7, 1996) to December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 US Orthodontic Care, Inc. as
of December 31, 1996 and the results of its operations and its cash flows for
the period from inception (February 7, 1996) to December 31, 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 4, 1997
F-17
<PAGE> 71
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 59,940 $ 20,430
Deferred issuance costs................................... 0 210,109
Other current assets...................................... 2,250 500
----------- -----------
Total current assets.............................. 62,190 231,039
----------- -----------
EQUIPMENT, at cost.......................................... 29,441 34,281
Less accumulated depreciation............................. (2,786) (5,814)
----------- -----------
Equipment, net.................................... 26,655 28,467
----------- -----------
Total assets...................................... $ 88,845 $ 259,506
=========== ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 847,203 $ 643,464
Accrued salaries.......................................... 100,000 0
Due to related party...................................... 173,754 0
----------- -----------
Total current liabilities......................... 1,120,957 643,464
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' (DEFICIT) EQUITY:
Common stock; no par value; 10,000,000 shares authorized,
2,195,214 and 2,471,714 shares issued and outstanding
at December 31, 1996 and June 30, 1997, respectively... 0 0
Additional paid-in capital................................ 1,760,000 3,122,250
Warrants.................................................. 339,750 589,750
Deficit accumulated during the development stage.......... (3,131,862) (4,095,958)
----------- -----------
Total shareholders' (deficit) equity.............. (1,032,112) (383,958)
----------- -----------
Total liabilities and shareholders' (deficit)
equity.......................................... $ 88,845 $ 259,506
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE> 72
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION FOR THE SIX FOR THE SIX
(FEBRUARY 7, MONTHS MONTHS
1996) TO ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUES................................................ $ 0 $ 0 $ 0
EXPENSES:
Salaries, wages, and benefits......................... (1,878,205) (1,304,828) (514,419)
General and administrative............................ (1,253,657) (99,241) (457,586)
----------- ----------- -----------
Total expenses................................ (3,131,862) (1,404,069) (972,005)
----------- ----------- -----------
OTHER INCOME (EXPENSE), NET............................. 0 0 7,909
----------- ----------- -----------
NET LOSS................................................ $(3,131,862) $(1,404,069) $ (964,096)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE> 73
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE PERIOD FROM INCEPTION (FEBRUARY 7, 1996) TO JUNE 30, 1997
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING THE SHAREHOLDERS'
------------------ PAID IN DEVELOPMENT (DEFICIT)
SHARES AMOUNT CAPITAL STAGE WARRANTS EQUITY
--------- ------ ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 7, 1996... 0 $0 $ 0 $ 0 $ 0 $ 0
Common stock issued to
Incorporator............. 1,576,714 0 400,000 0 0 400,000
Common stock issued to
directors and
consultants.............. 495,000 0 742,500 0 0 742,500
Common stock issued to
investors................ 123,500 0 617,500 0 0 617,500
Warrants granted to
consultants.............. 0 0 0 0 339,750 339,750
Net loss.................... 0 0 0 (3,131,862) 0 (3,131,862)
--------- -- ---------- ----------- -------- -----------
BALANCE AT DECEMBER 31,
1996........................ 2,195,214 0 1,760,000 (3,131,862) 339,750 (1,032,112)
Common Stock issued to
investors................ 276,500 0 1,362,250 0 0 1,362,250
Warrants granted to
officer.................. 0 0 0 0 250,000 250,000
Net loss.................... 0 0 0 (964,096) 0 (964,096)
--------- -- ---------- ----------- -------- -----------
BALANCE AT JUNE 30, 1997
(unaudited)................. 2,471,714 $0 $3,122,250 $(4,095,958) $589,750 $ (383,958)
========= == ========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE> 74
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
(FEBRUARY 7, FOR THE SIX FOR THE SIX
1996) TO MONTHS ENDED MONTHS ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1997
------------------ ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $(3,131,862) $(1,404,069) $ (964,096)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation............................... 2,786 270 3,028
Compensation expense related to stock
grants and warrants...................... 1,080,000 1,080,000 250,000
Changes in assets and liabilities:
Due from incorporator.................... 0 0 (210,109)
Deferred issuance costs.................. 0 (205,142) 0
Other assets............................. (2,250) (2,250) 1,750
Accounts payable......................... 847,203 56,168 (203,739)
Accrued salaries......................... 100,000 83,111 (100,000)
Due to Incorporator...................... 173,754 0 (173,754)
----------- ----------- -----------
Total adjustments..................... 2,201,493 1,012,157 (432,824)
----------- ----------- -----------
Net cash used in operating
activities.......................... (930,369) (391,912) (1,396,920)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment......................... (29,441) (10,338) (4,840)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued to Incorporator........... 400,000 400,000 0
Common stock issued to investors.............. 617,500 0 1,362,250
Warrants granted to consultants............... 2,250 2,250 0
----------- ----------- -----------
Net cash provided by financing
activities.......................... 1,019,750 402,250 1,362,250
----------- ----------- -----------
NET CHANGE IN CASH.............................. 59,940 0 (39,510)
CASH, beginning of period....................... 0 0 59,940
----------- ----------- -----------
CASH, end of period............................. $ 59,940 $ 0 $ 20,430
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE> 75
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 IS UNAUDITED UNLESS INDICATED)
1. BUSINESS AND ORGANIZATION
US Orthodontic Care, Inc. ("USOC" or the "Company") was incorporated as a
Georgia corporation on February 7, 1996 to effect the transfer (the "Transfers")
of certain operating assets and certain liabilities of, or the stock of an
entity holding certain assets and certain liabilities of orthodontic practice
entities (the "Founding Practices"). USOC and Premier Orthodontic Group, Inc.
("Premier") will be merged with and into OrthAlliance Inc., a newly formed
company ("OrthAlliance") (the "Merger"). The stockholders of USOC and Premier
are considered promoters; therefore, the Merger will be accounted for pursuant
to Staff Accounting Bulletin No. 48, "Transfers of Nonmonetary Assets by
Promoters and Shareholders," as will the Transfers. The Merger will result in
carryover basis of assets and liabilities of USOC and Premier. In the Merger,
the outstanding capital stock of USOC and Premier will be automatically
converted into 1,750,000 shares of Class A Common Stock of OrthAlliance (the
"Common Stock") and 250,000 shares of Class B Common Stock of OrthAlliance (the
"Class B Common Stock"). USOC will receive 1,225,000 shares of Class A Common
Stock and 175,000 shares of Class B Common Stock in the Merger. The stockholders
of USOC and Premier shall receive 70% and 30%, respectively, of the Common Stock
and Class B Common Stock issued as consideration in the Merger.
Although USOC has not conducted any operations to date, other than the
initial capitalization and expenses incurred in connection with the Transfers
and an initial public offering of shares of Common Stock (the "Offering"), it
has entered into agreements to acquire, simultaneously with and as a condition
to the consummation of the Offering, the stock of entities holding certain
assets and certain liabilities of, or certain assets and liabilities of
established orthodontic practices. These agreements and the rights thereto are
being acquired by OrthAlliance pursuant to the Merger. The financial statements
have been prepared on the basis that the proposed transactions will occur,
although no assurance can be made that the proposed transactions will be
completed or that OrthAlliance will be successful in completing planned future
acquisitions of orthodontic practices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Deferred Issuance Costs
The Company incurred costs associated with a proposed initial public
offering of $450,000 in 1996. As this offering did not occur, the Company
expensed those items.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
provided using the straight-line method over the assets' estimated useful lives
of five to seven years.
Equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Computer equipment.......................................... $15,932 $20,772
Furniture and fixtures...................................... 13,509 13,509
------- -------
29,441 34,281
Less accumulated depreciation............................. (2,786) (5,814)
------- -------
$26,655 $28,467
======= =======
</TABLE>
F-22
<PAGE> 76
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The carrying values of cash and accounts payable approximate their fair
values principally because of the short-term maturities of these instruments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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.
Interim Unaudited Financial Information
The financial statements as of and for the six months ended June 30, 1997
are unaudited; however, in the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the unaudited financial statements for this interim period has
been included. The results of interim periods are not necessarily indicative of
the results to be obtained for a full year.
Stock Options and Warrants
The Company accounts for the issuance of options and warrants to employees
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"). Options and warrants issued to
employees at an exercise price at or above fair value at the date of grant would
require no compensation expense to be recorded under APB No. 25. Options and
warrants issued to nonemployees will be accounted for under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS No. 123"). Options and warrants issued to nonemployees will require
compensation expense to be recorded for the fair value of the equity instrument
granted.
Accounting Pronouncements
The Company anticipates that the Emerging Issues Task Force of the
Financial Accounting Standards Board will be evaluating certain matters relating
to the orthodontic/physician practice management industry such as the ability to
consolidate the revenues of an orthodontic/physician practice through a
contractual management agreement, mergers between orthodontic/physician
practices and management entities and merger transactions that qualify for
pooling-of-interest treatment. The Company expects this evaluation will include
a review of accounting for business combinations. The Company is unable to
predict the impact, if any, that this review may have on the Company's
acquisition strategy, allocation of purchase price related to acquisitions, and
amortization life assigned to intangible assets.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS No. 121") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." At December 31, 1996 and
June 30, 1997, the Company had no significant long-lived assets. Under SFAS No.
121, the Company will analyze intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. If this review indicates that the carrying amount of the asset
may not be recoverable, as determined based on the estimated future operations
that result from the assets acquired, the carrying value of the asset will be
reduced to fair value. Among the factors that the Company will continually
evaluate are unfavorable changes in each orthodontic group's relative market
share and local market competitive environment, current period and forecasted
operating and cash flow levels of the orthodontic group and the impact on the
management fee earned by the Company, and legal factors governing the practice
of orthodontics.
F-23
<PAGE> 77
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. SHAREHOLDERS' (DEFICIT) EQUITY
In April 1996, 1,576,714 shares of common stock were issued at a total
price of $400,000 to Dr. Robert N. Pickron (the "Incorporator"). Management
believes that the $.2537 per share received in consideration for those shares
represented the fair value of the shares at that date. On June 10, 1996, an
additional 495,000 shares were issued to certain consultants of the Company in
consideration for services provided to that date. Management believes that the
fair value of the shares issued at that date, as calculated for compensation
expense, was $1.50 per share. The fair value of these shares was recorded as
compensation expense of $742,500 and is included in salaries, wages and benefits
in the accompanying statement of operations.
On October 23, 1996, USOC offered 400,000 shares of common stock to
affiliates of anticipated Founding Practices and other unrelated investors
through a private placement memorandum ("PPM") at a price of $5.00 per share. As
of December 31, 1996, 123,500 shares were issued under the PPM for net proceeds
of $617,500.
On February 4, 1997, the Company offered the shares not sold in the PPM
discussed above (276,500 shares) at $5.00 per share through a second PPM to
affiliates of anticipated Founding Practices and other unrelated accredited
investors.
4. INCOME TAXES
As reflected in the accompanying statements of operations, the Company
incurred a loss from operations during the period from inception (February 7,
1996) to December 31, 1996 and for the six months ended June 30, 1997. Due to
the limited operations of the Company since its inception and the pending
Offering, a valuation allowance has been recorded to fully reserve for the
deferred tax benefits generated from tax deferred issuance costs. There is no
significant difference in the tax and book bases of the Company's assets or
liabilities that would give rise to deferred tax balances.
5. RELATED-PARTY TRANSACTIONS
The Incorporator funded expenses of USOC from the date of inception through
December 31, 1996, as only a portion of the funds provided from the PPM was
available for use prior to year-end. Of the amount funded by the Incorporator,
$173,754 is included in a current liability on the accompanying balance sheet as
of December 31, 1996 and was reimbursed by USOC after December 31, 1996. The
remaining amount funded by the Incorporator ($400,000) was repaid through the
issuance of 1,576,714 shares of common stock and is included in additional
paid-in capital on the accompanying balance sheet.
6. STOCK OPTIONS AND WARRANTS
The Company will record compensation expense on its warrants for the
difference between the fair market value and their exercise price. Fair market
value was based upon equity transactions with unrelated third parties.
At December 31, 1996, the Company had warrants outstanding to consultants
of the Company and a future directors of OrthAlliance to purchase 225,000 shares
of common stock at an exercise price equal to the initial public offering price
net of the underwriting discount. The warrants expire five years from the
effective date of the Offering. The fair value at the date of grant of these
warrants of $337,500 ($1.50 per share based upon valuations of the Company at
the time of issuance) was recorded as salaries, wages and benefits in the
accompanying statement of operations for the period from inception (February 7,
1996) to December 31, 1996. The warrants discussed above will convert in the
Merger into warrants of OrthAlliance with the right to acquire an equal number
of shares of Common Stock of OrthAlliance.
F-24
<PAGE> 78
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On January 1, 1997, the Company granted an option to an officer for the
purchase of 50,000 shares of common stock at an exercise price of $.01 per
share. The Company recorded compensation expense (based upon unrelated third
party equity transactions of USOC at a price of $5.00) related to such option of
$250,000 in the first quarter of fiscal 1997. On June 10, 1997, the option was
cancelled and a warrant was issued for the purchase of 50,000 shares of
OrthAlliance Common Stock with an exercise price of $.01 per share. The
cancellation of the option and the issuance of a warrant created a new
measurement date. OrthAlliance will record compensation expense of $550,000
(unaudited) in the second quarter of 1997 for the difference between the assumed
initial public offering price and the exercise price.
F-25
<PAGE> 79
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Premier Orthodontic Group, Inc.:
We have audited the accompanying balance sheet of PREMIER ORTHODONTIC
GROUP, INC. (a development-stage enterprise and a Delaware corporation) as of
December 31, 1996 and the related statement of operations, owners' deficit, and
cash flows for the period from inception (November 26, 1996) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 Premier Orthodontic Group,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for the period from inception (November 26, 1996) to December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 11, 1997
F-26
<PAGE> 80
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 0 $ 563,815
--------- ---------
EQUIPMENT, at cost.......................................... 4,971 21,848
Less accumulated depreciation............................. (166) (1,911)
--------- ---------
Equipment, net......................................... 4,805 19,937
OTHER ASSETS................................................ 0 14,863
--------- ---------
Total assets...................................... $ 4,805 $ 598,615
========= =========
LIABILITIES AND OWNERS'/STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................. $ 20,241 $ 94,080
Accrued consulting fees................................... 239,735 239,735
--------- ---------
Total current liabilities......................... 259,976 333,815
NOTE PAYABLE................................................ 0 1,010,000
COMMITMENTS AND CONTINGENCIES
OWNERS'/STOCKHOLDERS' DEFICIT ACCUMULATED DURING THE
DEVELOPMENT STAGE, $.001 par value; 3,000 shares
authorized; 100 shares issued and outstanding at June 30,
1997...................................................... (255,171) (745,200)
--------- ---------
Total liabilities and owners'/stockholders'
deficit......................................... $ 4,805 $ 598,615
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 81
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION FOR THE SIX
(NOVEMBER 26, MONTHS
1996) TO ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
REVENUES.................................................... $ 0 $ 0
----------- -----------
EXPENSES:
Consulting fees........................................... (239,735) (157,546)
General and administrative................................ (15,436) (345,767)
----------- -----------
Total expenses.................................... (255,171) (503,313)
----------- -----------
OTHER INCOME (EXPENSE), NET................................. 0 13,284
----------- -----------
NET LOSS.................................................... $ (255,171) $ (490,029)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE> 82
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN OWNERS'/STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (NOVEMBER 26, 1996) TO JUNE 30, 1997
<TABLE>
<S> <C>
INITIAL INVESTED CAPITAL (NOVEMBER 26, 1996)................ $ 0
Net loss.................................................. (255,171)
---------
OWNERS' DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE AT
DECEMBER 31, 1996......................................... (255,171)
Net loss.................................................. (490,029)
---------
OWNERS'/STOCKHOLDERS' DEFICIT ACCUMULATED DURING THE
DEVELOPMENT STAGE AT JUNE 30, 1997 (unaudited)............ $(745,200)
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-29
<PAGE> 83
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
(NOVEMBER 26, FOR THE SIX
1996) TO MONTHS ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(255,171) $(490,029)
--------- ---------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation........................................... 166 1,745
Changes in assets and liabilities:
Other assets......................................... 0 (14,863)
Accounts payable and accrued liabilities............. 20,241 73,839
Accrued consulting fees.............................. 239,735 0
--------- ---------
Total adjustments................................. 260,142 60,721
--------- ---------
Net cash provided by (used) in operating
activities...................................... 4,971 (429,308)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment..................................... (4,971) (16,877)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable................................ 0 1,010,000
--------- ---------
NET CHANGE IN CASH.......................................... 0 563,815
CASH, beginning of period................................... 0 0
--------- ---------
CASH, end of period......................................... $ 0 $ 563,815
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE> 84
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 IS UNAUDITED UNLESS INDICATED)
1. BUSINESS AND ORGANIZATION
Premier Orthodontic Group, Inc., a Delaware corporation ("Premier" or the
"Company"), was incorporated on January 30, 1997. Premier Orthodontic Ventures,
LLC ("Premier LLC"), formed on November 26, 1996, incurred certain expenses on
behalf of the Company from November 26, 1996 to January 30, 1997. Upon the
incorporation of the Company on January 30, 1997, the Company reimbursed the
expenses incurred by Premier LLC on behalf of the Company from the proceeds of
the loan discussed in Note 7. The accompanying financial statements have been
prepared based on the expenses incurred by Premier LLC on behalf of the Company
from November 26, 1996 to December 31, 1996.
The Company was incorporated to effect the transfer (the "Transfers") of
certain operating assets of, and certain liabilities of, or the stock of an
entity holding certain assets of and certain liabilities of multiple orthodontic
entities (the "Founding Practices"). Premier and US Orthodontic Care, Inc.
("USOC") intend to merge with and into a newly formed company, OrthAlliance,
Inc. ("OrthAlliance") (the "Merger"). Prior to the Merger, the sole stockholder
of OrthAlliance held a minority interest in Premier. The stockholders of USOC
and Premier are considered promoters; therefore, the Merger will be accounted
for pursuant to Staff Accounting Bulletin No. 48, "Transfers of Nonmonetary
Assets by Founding Promoters and Shareholders," as will the Transfers. The
Merger will result in carryover basis of assets and liabilities of USOC and
Premier. In the Merger, the outstanding capital stock of USOC and Premier will
be automatically converted into 1,750,000 shares of Class A common stock and
250,000 shares of Class B common stock. The stockholders of USOC and Premier
shall receive 70% and 30%, respectively, of the Class A common stock and Class B
common stock issued as consideration in the Merger.
Although Premier has not conducted any operations to date, other than the
initial capitalization and expenses incurred in connection with the Transfers
and a proposed public offering (the "Offering"), it has entered into agreements
to acquire, simultaneous with and as a condition to the consummation of the
Offering, the stock of an entity holding the assets and certain liabilities of,
or certain assets and liabilities of established orthodontic practices
("Founding Practices"). These agreements and the rights thereto are being
acquired by OrthAlliance pursuant to the merger of USOC and Premier with and
into OrthAlliance. The financial statements have been prepared on the basis that
the proposed transaction will occur, although no assurance can be made that the
proposed transaction will be completed or that OrthAlliance will be successful
in completing planned future acquisitions of orthodontic practices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Equipment
Equipment is stated at cost, less accumulated deprecation. Depreciation is
provided using the straight-line method over the assets' estimated useful lives
of five to seven years.
Equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
Computer equipment.......................................... $4,971 $20,225
Furniture and fixtures...................................... 0 1,623
Less accumulated depreciation............................. (166) (1,911)
------ -------
$4,805 $19,937
====== =======
</TABLE>
F-31
<PAGE> 85
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The carrying values of financial instruments approximate their fair values
principally because of the short-term maturities of these instruments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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.
Interim Unaudited Financial Information
The financial statements as of and for the six months ended June 30, 1997
are unaudited; however, in the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the unaudited financial statements for this interim period has
been included. The results of interim periods are not necessarily indicative of
the results to be obtained for a full year.
Accounting Pronouncements
The Company anticipates that the Emerging Issues Task Force of the
Financial Accounting Standards Board will be evaluating certain matters relating
to the orthodontic/physician practice management industry such as the ability to
consolidate the revenues of an orthodontic/physician practice through a
contractual management agreement, mergers between orthodontic/physician
practices and management entities and merger transactions that qualify for
pooling-of-interest treatment. The Company expects this evaluation will include
a review of accounting for business combinations. The Company is unable to
predict the impact, if any, that this review may have on the Company's
acquisition strategy, allocation of purchase price related to acquisitions, and
amortization life assigned to intangible assets.
On November 26, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS No. 121") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." At December 31, 1996 and
June 30, 1997, the Company had no significant long-lived assets. Under SFAS No.
121, the Company will analyze intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. If this review indicates that the carrying amount of the asset
may not be recoverable, as determined based on the estimated future operations
that result from the assets acquired, the carrying value of the asset will be
reduced to fair value. Among the factors that the Company will continually
evaluate are unfavorable changes in each orthodontic group's relative market
share and local market competitive environment, current period and forecasted
operating and cash flow levels of the orthodontic group and the impact on the
management fee earned by the Company, and legal factors governing the practice
of orthodontics.
3. INCOME TAXES
As reflected in the accompanying statement of operations, the Company
incurred a loss from operations during the period from inception (November 26,
1996) to December 31, 1996 and for the six months ended June 30, 1997. Due to
the limited operations of the Company since its inception and the pending
Offering, a valuation allowance has been recorded to fully reserve for the
deferred tax benefits generated from tax deferred issuance costs. There is no
significant difference in the tax and book bases of the Company's assets or
liabilities that would give rise to deferred tax balances.
F-32
<PAGE> 86
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. RELATED-PARTY TRANSACTIONS
The incorporators of Premier funded expenses of Premier from the date of
inception through the end of the year. Of the amount funded by the founders,
$17,630 is reflected as a current liability on the accompanying balance sheet as
of December 31, 1996 and was reimbursed by Premier after year-end.
5. COMMITMENTS AND CONTINGENCIES
The Company has agreed to pay certain consultants approximately $500,000
upon completion of the Offering. OrthAlliance assumed the payment of these
consulting fees in the Merger and expensed these fees in the second quarter of
1997.
OrthAlliance will be subject to certain government regulation at the
federal and state levels. In compliance with certain regulatory requirements,
OrthAlliance will not control the practice of orthodontists. Long-term service
and consulting services agreement may be challenged by certain states as to
their legality. There also can be no assurance that the laws and regulations of
states in which OrthAlliance will maintain operations will not change or be
interpreted in the future to restrict OrthAlliance's relationships with
orthodontists.
6. SUBSEQUENT EVENTS
In January 1997, Premier LLC loaned the Company $1,010,000. The Company
will pay the total amount of the loan to Premier LLC of $1,010,000 in cash, plus
accrued interest at prime plus 1% from the proceeds of the Offering.
OrthAlliance will assume the loan to Premier LLC in the Merger and will pay such
loan with a portion of the proceeds of the Offering.
F-33
<PAGE> 87
ORTHALLIANCE, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
Simultaneously with and as a condition to the closing of the proposed
public offering (the "Offering"), OrthAlliance, Inc. (the "Company" or
"OrthAlliance") will acquire certain operating assets of separate orthodontic
practices (collectively, the "Founding Practices") in exchange for cash and
shares of Class A common stock, $.001 par value per share (the "Common Stock"),
and enter into long-term management or consulting services agreements with the
Founding Practices (the "Transfers"). The number of shares of Common Stock
issued in the Transfers will depend on the Offering price of the Common Stock.
As a result of the merger of Premier Orthodontic Group, Inc. ("Premier") and US
Orthodontic Care, Inc. ("USOC") with and into OrthAlliance, effective prior to
the closing of the initial public offering (the "Merger"), OrthAlliance succeeds
to the rights of Premier and USOC under agreements with the Founding Practices.
USOC and Premier will be merged with and into OrthAlliance prior to the
Transfers with the Founding Practices. OrthAlliance was created as a shell
corporation to begin business operations in connection with the Offering. Prior
to the Merger, the sole stockholder of OrthAlliance held a minority interest in
Premier. There were two common stockholders who owned common stock in USOC and
Premier, and there are no common stockholders between USOC and OrthAlliance. The
stockholders of USOC and Premier are considered promoters; therefore, the Merger
will be accounted for pursuant to Staff Accounting Bulletin No. 48, "Transfers
of Nonmonetary Assets by Promoters and Shareholders" ("SAB No. 48") as will the
transfers with the Founding Practices (the owners of the Founding Practices are
also considered promoters). As a result, these transactions will result in the
carryover basis of assets and liabilities of USOC and Premier. In the Merger,
the outstanding capital stock of USOC and Premier will be automatically
converted into an aggregate of 1,750,000 shares of Common Stock and 250,000
shares of Class B common stock. The stockholders of USOC and Premier shall
receive 70% and 30%, respectively, of the Common Stock and Class B common stock
issued as consideration in the Merger.
The following unaudited pro forma combined balance sheet gives effect to
the Merger, the Transfers and the Offering, and is based upon the historical
financial statements of OrthAlliance, Premier, USOC, and the Founding Practices
as a group.
The unaudited pro forma combined balance sheet gives effect as if such
events had occurred on June 30, 1997. The unaudited pro forma combined balance
sheet should be read in conjunction with other financial information, including
the financial statements of USOC, Premier and OrthAlliance, included elsewhere
in this Prospectus.
The Company will not employ orthodontists or control the practice of
orthodontics. As the Company will not be acquiring the future patient revenues
earned by the Founding Practices, the Transfers are not deemed to be business
combinations. In accordance with SAB No. 48 the Transfers will be accounted for
at the historical cost basis with the shares of common stock to be issued in
those transactions being valued at the historical cost of the nonmonetary assets
acquired net of liabilities assumed.
The unaudited pro forma combined balance sheet is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have been achieved if the Transfers had
been consummated on the date indicated, nor is it necessarily indicative of the
future operating results of the Company.
F-34
<PAGE> 88
ORTHALLIANCE, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED PRO POST
FOUNDING PRO FORMA FORMA OFFERING PRO FORMA
ORTHALLIANCE PREMIER USOC PRACTICES ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
------------ ------- ------- --------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash
equivalents........... $ -- $ 564 $ 20 $ 2,881 $ (2,881)(2) $ 584 $ 7,227(4) $ 7,811
Patient receivables,
net................... -- -- -- 3,436 -- 3,436 -- 3,436
Unbilled patient
receivables, net...... -- -- -- 2,579 -- 2,579 -- 2,579
Deferred issuance
costs................. -- -- 210 -- -- 210 (210)(4) --
Deferred income taxes... -- -- -- -- 1,730(3) 1,730 -- 1,730
Other current assets.... -- -- 1 1,507 (1,507)(2) 1 -- 1
------ ------ ------ ------- -------- ------- -------- -------
Total current
assets.......... -- 564 231 10,403 (2,658) 8,540 7,017 15,557
Equipment and
improvements, net..... -- 20 29 4,665 (2,589)(2) 2,125 -- 2,125
Notes receivable from
Founding Practices.... -- -- -- -- 819(2) 819 -- 819
Other assets............ -- 15 -- 941 (838)(2) 118 -- 118
------ ------ ------ ------- -------- ------- -------- -------
Total assets...... $ -- $ 599 $ 260 $16,009 $ (5,266) $11,602 $ 7,017 $18,619
====== ====== ====== ======= ======== ======= ======== =======
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Amounts drawn in excess
of cash............... $ -- $ -- $ -- $ 200 $ (200)(2) $ -- $ -- $ --
Accounts payable and
other current
liabilities........... 900 334 644 614 (400)(2) 2,092 (900)(4) 982
(210)(4)
Patient prepayments..... -- -- -- 1,963 -- 1,963 -- 1,963
Payable to Founding
Practices............. -- -- -- -- 13,759(2) 13,759 (13,759)(4) --
Deferred income taxes... -- -- -- -- 215(3) 215 -- 215
Current portion of
long-term debt........ -- -- -- 878 (878)(2) -- -- --
------ ------ ------ ------- -------- ------- -------- -------
Total current
liabilities..... 900 644 3,655 12,496 18,029 (14,869) 3,160
Long-term debt, less
current portion....... -- 1,010 -- 3,196 (1,194)(2) 3,012 (3,012)(4) --
------ ------ ------ ------- -------- ------- -------- -------
Total
liabilities..... 900 1,344 644 6,851 11,302 21,041 (17,881) 3,160
------ ------ ------ ------- -------- ------- -------- -------
STOCKHOLDERS' EQUITY
(DEFICIT)
OrthAlliance, Inc.:
Class A Common Stock
$.001 par value,
70,000,000 shares
authorized, one
share issued and
outstanding and
10,767,802(a)
issued and
outstanding pro
forma as
adjusted.......... -- -- -- -- 2(2) 8 3(4) 11
6(2)
Class B Common Stock
$.001 par value,
250,000 shares
authorized, no
shares issued and
outstanding and
250,000 issued and
outstanding pro
forma as
adjusted.......... -- -- -- -- --(2) -- -- --
Additional paid-in
capital............. -- -- -- -- 4,834(2) 5,212 24,895(4) 29,198
(8)(2) (909)(5)
1,515(3)
3,122(1)
(4,096)(1)
(745)(1)
590(1)
Warrants.............. 3,190 -- -- -- 2,475(1) 5,665 909(5) 6,574
Accumulated deficit... (4,090) -- -- -- (13,759)(2) (20,324) -- (20,324)
(2,475)(1)
US Orthodontic Care, Inc.:
Common Stock; no par
value, 10,000,000
shares authorized,
2,471,714 shares
issued and
outstanding........... -- -- -- -- -- -- -- --
Additional paid-in
capital............... -- -- 3,122 -- (3,122)(1) -- -- --
Warrants................ -- -- 590 -- (590)(1) -- -- --
Accumulated deficit..... -- -- (4,096) -- 4,096(1) -- -- --
Premier Orthodontic Group,
Inc.:
Common Stock; $.001 par
value, 3,000 shares
authorized 100 shares
issued and
outstanding........... -- -- -- -- -- -- -- --
Additional paid-in
capital............... -- -- -- -- -- -- -- --
Accumulated deficit..... -- (745) -- -- 745(1) -- -- --
Combined Founding
Practices' Equity....... -- -- -- 9,158 (9,158)(2) -- -- --
------ ------ ------ ------- -------- ------- -------- -------
Total stockholders
equity/deficit... (900) (745) (384) 9,158 (16,568) (9,439) 24,898 15,459
------ ------ ------ ------- -------- ------- -------- -------
Total liabilities
and
stockholders'
equity/deficit... $ -- $ 599 $ 260 $16,009 $ 5,266 $11,602 $ 7,017 $18,619
====== ====== ====== ======= ======== ======= ======== =======
</TABLE>
(a) Includes 6,417,802 shares issued in the Transfers, 1,750,000 shares issued
in the Merger and 2,600,000 shares issued in the Offering.
See accompanying notes to unaudited pro forma combined balance sheet.
F-35
<PAGE> 89
ORTHALLIANCE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following is a summary of the adjustments reflected in the unaudited
combined pro forma balance sheet:
(1) USOC and Premier, pursuant to the Merger, will transfer their assets
and liabilities into OrthAlliance prior to the purchase and sale
agreements with the orthodontic practices. The stockholders of USOC
and Premier are considered promoters; therefore, this transfer will be
accounted for pursuant to SAB No. 48 as will the transfers with the
orthodontic practices. This transfer will result in a carryover basis
of the assets and liabilities of USOC and Premier. The assets to be
received by OrthAlliance generally include cash, other current assets,
equipment, other assets, and contract rights. The liabilities to be
assumed generally include accounts payable, accrued liabilities, and
notes payable. The historical cost basis will be their respective
carrying value on Premier's and USOC's respective balance sheet at the
date of transfer, except contract rights which have a historical cost
basis of zero.
In the Merger, the outstanding common stock of USOC and Premier will
be converted into an aggregate of 1,750,000 shares of Class A Common
Stock ("Common Stock") and 250,000 shares of Class B Common Stock
("Class B Common Stock") of the Company. Each share of USOC Common
Stock will convert into .496 shares of Common Stock and .071 shares of
Class B Common Stock. The 100 shares of Premier common stock will
convert into 525,000 shares of Common Stock and 75,000 shares of Class
B Common Stock. The USOC and Premier stockholders, respectively, will
receive an aggregate of 1,225,000 and 525,000 shares of Common Stock
and 175,000 and 75,000 shares of Class B Common Stock, respectively.
Premier is owned by certain individuals and Premier Orthodontic
Ventures, LLC ("POV LLC"). POV LLC has two classes of membership
interests, Class A and Class B. Immediately following completion of
the Offering, POV LLC intends to redeem all of its membership
interests. The redemption provisions require that POV LLC distribute
shares of Common Stock with a market value equal to two times the
Class B members' capital contribution, except with respect to one
Class B member who shall receive shares of Common Stock with a value
equal to three times his Class B capital contribution. The exact
number of shares of Common Stock to be distributed to the Class B
members will be determined by multiplying the capital contribution by
two (or three with respect to one Class B member) and dividing the
product thereof by the market price per share of the Common Stock. As
a result, the exact number of shares distributed to the Class B
members will vary according to the initial public offering price. All
shares of Common Stock held by POV LLC after redemption of the Class B
members' interest will be distributed pro rata to the Class A members
in accordance with their membership interests. All of the Class B
Common Stock received by POV LLC in the Merger shall be distributed
pro rata to the Class A members.
USOC had warrants for the purchase of 225,000 shares of common stock
outstanding prior to the Merger. Assuming the warrants are not
converted prior to the Merger, the warrants will convert in the Merger
into warrants of OrthAlliance with the right to acquire an equal
number of shares of Common Stock of OrthAlliance. USOC has recorded
compensation expense related to certain of these warrants at the date
of grant. OrthAlliance will record additional compensation expense of
$2,475,000 (unaudited) related to these warrants in the third quarter
of 1997 upon successful completion of the Offering. The compensation
expense is based on the assumed initial public offering price of
$11.00. Because the value of the outstanding warrants is related to an
initial public offering, the intrinsic value of the USOC warrants has
been transferred to the Company's warrants.
OrthAlliance has warrants to purchase 290,000 shares of Common Stock
outstanding prior to the Offering. OrthAlliance recorded compensation
expense of $3,190,000 (unaudited) related to 290,000 of these warrants
in the second quarter of 1997 based on the assumed initial public
offering price of $11.00 and will record the fair value of the
remaining 82,634 as an adjustment to additional paid-in-capital upon
completion of the Offering.
(2) Reflects the issuance of 6,417,802 shares of Common Stock of the
Company and cash of $13,759,000 in exchange for certain operating
assets of the Founding Practices, and to remove certain assets,
liabilities and owners' equity not acquired as part of the Transfers,
based on an assumed Offering price of $11.00 per share. The Founding
Practices will receive up to twenty percent of their practice asset
F-36
<PAGE> 90
ORTHALLIANCE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
values in cash and the remainder in Common Stock. The operating assets
and liabilities assumed from the Founding Practices reflected herein
are as follows (in thousands):
<TABLE>
<S> <C>
Billed patient receivables, net of allowances of $181....... $ 3,436
Unbilled patient receivables, net of allowances of $136..... 2,579
Other assets................................................ 102
Equipment and improvements, net............................. 2,076
Notes receivable from Founding Practices.................... 819
Accounts payable and accrued liabilities.................... (213)
Patient prepayments......................................... (1,963)
Long-term debt.............................................. (2,002)
-------
Total............................................. $ 4,834
=======
</TABLE>
The above amounts have been reflected as a pro forma adjustment to
increase additional paid-in-capital.
(3) Reflects the establishment of deferred income taxes for tax deferred
issuance costs for the Company after the Transfers. Assuming
completion of the Transfers, management believes that it is more
likely than not that the deferred tax assets will be realized. USOC
and Premier incurred costs of approximately $3,387,000 from inception
through December 31, 1996 and approximately $1,454,000 for the six
months ended June 30, 1997 related to issuance costs as noted in the
respective statements of stockholders equity for USOC and Premier.
These costs were expensed. The Company will defer future issuance
costs beginning with the second quarter of 1997. These future issuance
costs will be offset against the proceeds of the Offering and will be
expense if the Offering is not completed.
(4) The summary of the Post Offering Adjustments are as follows:
<TABLE>
<S> <C>
Gross proceeds of the Offering.............................. $28,600
Underwriting discount....................................... (2,002)
Estimated expenses.......................................... (1,700)
Payment of dividend to Founding Practices................... (13,759)
Payment of long term debt assumed in the Merger and
Transfers................................................. (3,012)
Payment of consulting fees.................................. (900)
-------
Net cash received in Offering..................... $ 7,227
=======
</TABLE>
Deferred issuance costs of $210 are assumed to be paid with the
proceeds of the Offering as a component of the estimated expenses of
$1,700.
(5) Reflects the J.C. Bradford & Co. warrant as a reduction of additional
paid in capital at the assumed initial public offering price of $11.00
per share.
F-37
<PAGE> 91
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED HEREBY
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
The Company........................... 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Dilution.............................. 16
Capitalization........................ 17
Selected Financial Data............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 23
Management............................ 32
Certain Transactions.................. 37
Principal Stockholders................ 42
Description of Capital Stock.......... 44
Shares Eligible for Future Sale....... 47
Underwriting.......................... 50
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 52
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1997 (FOR 25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
2,600,000 SHARES
[ORTHALLIANCE LOGO]
CLASS A COMMON STOCK
-------------------
PROSPECTUS
-------------------
J.C.BRADFORD & CO.
, 1997
======================================================
<PAGE> 92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses of this Offering to be incurred
by the Company in connection with this registration statement, other than
underwriting discounts and commissions. All the amounts shown are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq National
Market Application and Listing Fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 8,667
Nasdaq National Market Application and Listing Fee.......... 47,917
NASD Filing Fee............................................. 4,000
Blue Sky Fees and Expenses.................................. 10,000
Accounting Fees and Expenses................................ 600,000
Legal Fees and Expenses..................................... 500,000
Printing and Engraving Costs................................ 370,000
Transfer Agent Fees and Expenses............................ 5,000
Miscellaneous............................................... 154,416
----------
Total............................................. $1,700,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate provides that no director of the Company shall be liable
for breach of fiduciary duty as a director except for (i) any breach of the
director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law; (iii) for willful or negligent violations of certain
provisions of the DGCL imposing certain requirements with respect to stock
repurchases, redemptions and dividends; or (iv) any transaction from which the
director derived an improper personal benefit. Pursuant to the Company's
Certificate and Bylaws, the Company is obligated to indemnify each of its
directors and officers to the fullest extent permitted by the DGCL. In addition,
the Bylaws allow the Company to purchase and maintain insurance on behalf of any
director or officer of the Company against any liability asserted against and
incurred by such director or officer, whether or not the Company would have the
power to indemnify such officer or director against such liability under the
provisions of the DGCL.
Under Section 145 of the Delaware General Corporation Law (the "DGCL"), a
corporation may indemnify any of its directors and officers against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with a threatened,
pending or completed action, suit or proceeding brought against him by reason of
the fact that he is or was a director or officer (i) if any such person acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation and (ii) in connection with any criminal
action or proceeding if such person had no reasonable cause to believe such
conduct was unlawful. In actions brought by or in the right of the corporation,
however, Section 145 provides that no indemnification for expenses may be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable for negligence or misconduct in the performance of such
person's duty to the corporation unless, and only to the extent that, the Court
of Chancery of the State of Delaware or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in review of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
The Underwriting Agreement will provide for the indemnification by the
Underwriters of the Company, each of the Company's directors, each of the
Company's officers who signs this Registration Statement and each person who
controls the Company within the meaning of the Securities Act, solely with
respect to information provided by the Underwriters for inclusion in this
Registration Statement.
II-1
<PAGE> 93
The Company intends to obtain insurance which provides general coverage for
its directors and executive officers in amounts to be determined. In addition,
the Company intends to obtain insurance coverage for its directors and executive
officers in amounts to be determined with respect to the Offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities of the Company issued or
sold within the past three years which were not registered under the Securities
Act:
(i) In October, 1996, the Company issued one share of Common Stock to
Sam Westover for $.01 per share;
(ii) Effective prior to the completion of the Offering, Premier
Orthodontic Group, Inc. ("Premier") and US Orthodontic Care, Inc. ("USOC")
will merge with and into the Company. As a result of the merger, holders of
Premier common stock will receive 525,000 shares of Common Stock and 75,000
shares of Class B Common Stock and holders of USOC common stock will
receive 1,225,000 shares of Common Stock and 175,000 shares of Class B
Common Stock;
(iii) Simultaneously with the completion of this Offering, the Company
will issue 6,417,802 shares of its Common Stock in connection with the
acquisition of the practice management or consulting rights to and certain
assets of the Founding Practices.
Each of these transactions was completed without registration of the
relevant security under the Securities Act in reliance upon the exemptions
provided by Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder on the basis that such transactions did not involve a
public offering, the purchasers were sophisticated with access to the kind of
information registration would provide and that such purchasers acquired such
securities without a view toward the distribution thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1+ -- Form of Underwriting Agreement
2.1+ -- Agreement and Plan of Merger between OrthAlliance, USOC and
Premier.
2.2+ -- Amended and Restated Form of Purchase and Sale Agreement
between OrthAlliance and Founding Practices.
2.3+ -- Amended and Restated Form of Agreement and Plan of
Reorganization between OrthAlliance and Founding Practices.
2.4+ -- Form of Stock Purchase and Sale Agreement between
OrthAlliance and stockholders of Founding Practices.
3.1+ -- Amended and Restated Certificate of Incorporation of
OrthAlliance.
3.2+ -- Amended and Restated Bylaws of OrthAlliance.
4.1+ -- Form of certificate evidencing ownership of Common Stock of
OrthAlliance.
5.1+ -- Opinion of Nelson Mullins Riley & Scarborough, L.L.P.
regarding legality.
10.1+ -- Amended and Restated Form of Service Agreement between
OrthAlliance and Founding Practices (Fixed Percentage Fee).
10.2+ -- Form of Service Agreement between OrthAlliance and Founding
Practices (Variable Percentage Fee).
10.3+ -- Amended and Restated Form of Consulting and Business
Services Agreement between OrthAlliance and Founding
Practices (Variable Percentage Fee).
10.4+ -- Form of Consulting and Business Services Agreement between
OrthAlliance and Founding Practices (Fixed Percentage Fee).
10.5+ -- Form of Consulting and Business Services Agreement between
OrthAlliance and Founding Practices (Fixed Dollar Fee).
</TABLE>
II-2
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.6 -- 1997 Non-Employee Director Stock Plan.
10.7 -- Amended and Restated 1997 Employee Stock Option Plan.
10.8+ -- Employment Agreement between OrthAlliance and Sam Westover.
10.9+ -- Consulting Agreement between OrthAlliance and Jonathan
Wilfong.
10.10+ -- Form of Employment Agreement between Allied Orthodontist and
Founding Practice.
10.11+ -- Letter Agreement dated April 18, 1997 between the Company
and Robert S. Chilton.
21.1+ -- List of subsidiaries of OrthAlliance.
23.1+ -- Consent of Nelson Mullins Riley & Scarborough, L.L.P.
(contained in Exhibit 5.1 hereto).
23.2 -- Consent of Arthur Andersen LLP, Independent Public
Accountants.
24.1+ -- Power of Attorney
27.1 -- Financial Data Schedule (for SEC use only).
99.1+ -- Consent of Drs. Durbin and Schmidt, Mr. Summers, Mr.
McKnight and Mr. Ellis to serve as directors.
</TABLE>
- ---------------
+ Previously filed.
(b) Financial Statement Schedules
All schedules are omitted since the required information is not present in
amounts sufficient to require submission of the schedule, or because the
information required is included in the financial statements and notes hereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Representatives to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Pre-Effective Amendment No. 5 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Torrance, State of California, on August 18,
1997.
OrthAlliance, Inc.
By: /s/ SAM WESTOVER
------------------------------------
Sam Westover
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Pre-Effective Amendment No. 4 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ SAM WESTOVER Chief Executive Officer, August 18, 1997
- ----------------------------------------------------- President and Director
Sam Westover (principal executive
officer)
/s/ ROBERT S. CHILTON Chief Financial Officer August 18, 1997
- ----------------------------------------------------- (principal financial and
Robert S. Chilton accounting officer)
/s/ JONATHAN E. WILFONG Director August 18, 1997
- -----------------------------------------------------
Jonathan E. Wilfong
/s/ RANDALL K. BENNETT, D.D.S.* Director August 18, 1997
- -----------------------------------------------------
Randall K. Bennett, D.D.S.
* Signed by Jonathan Wilfong pursuant to power of attorney previously filed.
</TABLE>
II-4
<PAGE> 96
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<C> <C> <S> <C>
1.1+ -- Form of Underwriting Agreement..............................
2.1+ -- Agreement and Plan of Merger between OrthAlliance, USOC and
Premier.....................................................
2.2+ -- Amended and Restated Form of Purchase and Sale Agreement
between OrthAlliance and Founding Practices. ...............
2.3+ -- Amended and Restated Form of Agreement and Plan of
Reorganization between OrthAlliance and Founding
Practices. .................................................
2.4+ -- Form of Stock Purchase and Sale Agreement between
OrthAlliance and stockholders of Founding Practices. .......
3.1+ -- Amended and Restated Certificate of Incorporation of
OrthAlliance. ..............................................
3.2+ -- Amended and Restated Bylaws of OrthAlliance. ...............
4.1+ -- Form of certificate evidencing ownership of Common Stock of
OrthAlliance. ..............................................
5.1+ -- Opinion of Nelson Mullins Riley & Scarborough, L.L.P.
regarding legality. ........................................
10.1+ -- Amended and Restated Form of Service Agreement between
OrthAlliance and Founding Practices (Fixed Percentage
Fee). ......................................................
10.2+ -- Form of Service Agreement between OrthAlliance and Founding
Practices (Variable Percentage Fee). .......................
10.3+ -- Amended and Restated Form of Consulting and Business
Services Agreement between OrthAlliance and Founding
Practices (Variable Percentage Fee). .......................
10.4+ -- Form of Consulting and Business Services Agreement between
OrthAlliance and Founding Practices (Fixed Percentage
Fee) .......................................................
10.5+ -- Form of Consulting and Business Services Agreement between
OrthAlliance and Founding Practices (Fixed Dollar Fee). ....
10.6 -- 1997 Non-Employee Director Stock Plan. .....................
10.7 -- Amended and Restated 1997 Employee Stock Option Plan. ......
10.8+ -- Employment Agreement between the OrthAlliance and Sam
Westover. ..................................................
10.9+ -- Consulting Agreement between OrthAlliance and Jonathan
Wilfong. ...................................................
10.10+ -- Form of Employment Agreement between Allied Orthodontist and
Founding Practice. .........................................
10.11+ -- Letter Agreement dated April 18, 1997 between the Company
and Robert S. Chilton. .....................................
21.1+ -- List of subsidiaries of OrthAlliance. ......................
23.1+ -- Consent of Nelson Mullins Riley & Scarborough, L.L.P.
(contained in Exhibit 5.1 hereto). .........................
23.2 -- Consent of Arthur Andersen LLP, Independent Public
Accountants. ...............................................
24.1+ -- Power of Attorney...........................................
27.1 -- Financial Data Schedule (for SEC use only)..................
99.1+ -- Consent of Drs. Durbin and Schmidt, Mr. Summers, Mr.
McKnight and Mr. Ellis to serve as directors. ..............
</TABLE>
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+ Previously filed.
<PAGE> 1
EXHIBIT 10.6
ORTHALLIANCE, INC.
1997 NON-EMPLOYEE DIRECTOR STOCK PLAN
<PAGE> 2
ORTHALLIANCE, INC.
1997 NON-EMPLOYEE DIRECTOR STOCK PLAN
ARTICLE I
DEFINITIONS
As used herein, the following terms have the following meanings unless
the context clearly indicates to the contrary:
1.1 "Board" shall mean the Board of Directors of the Company.
1.2 "Change in Control" shall mean the occurrence of either of the
following events:
(a) any of the following events:
(i) the dissolution or liquidation of the
Company; or
(ii) a reorganization, merger or consolidation of
the Company with one or more other
corporations (except with respect to a
transaction, the sole purpose of which is to
change the domicile or name of the Company),
as a result of which the Company ceases to
exist or becomes a subsidiary of another
corporation (which shall be deemed to have
occurred if another corporation shall own,
directly or indirectly, more than fifty
percent (50%) of the aggregate voting power
of all outstanding equity securities of the
Company); or
(iii) a sale of all or substantially all of the
Company's assets; or
(b) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act), other than any person
who is a stockholder of the Company on or before the
effective date of the Plan, by the acquisition or
aggregation of securities is or becomes the
beneficial owner, directly or indirectly, of
securities of the Company representing fifty percent
(50%) or more of the combined voting power of the
Company's then outstanding securities ordinarily (and
apart from rights accruing under special
circumstances) having the right to vote at elections
of Directors (the "Base Capital Stock"); except that
any change in the relative beneficial ownership of
the Company's securities by any person resulting
solely from a reduction in the aggregate number of
outstanding shares of Base Capital Stock, and any
decrease thereafter in such person's ownership of
securities, shall be disregarded until such person
increases in any manner, directly or indirectly, such
person's beneficial ownership of any securities of
the Company.
<PAGE> 3
1.3 "Code" shall mean the Internal Revenue Code of 1986, as
amended, including effective date and transition rules (whether or not
codified). Any reference herein to a specific section of the Code shall be
deemed to include a reference to any applicable corresponding provision of
future law.
1.4 "Company" shall mean OrthAlliance, Inc., a Delaware
corporation.
1.5 "Director" shall mean a member of the Board.
1.6 "Disabled Optionee" shall mean an Optionee who suffers a
Disability.
1.7 "Disability" shall mean shall mean a physical or mental
infirmity which impairs an Optionee's ability to substantially perform his
duties with the Company for a period of 180 consecutive days, as determined by
an independent physician selected by agreement between the Company and the
Optionee or, failing such agreement, selected by two physicians (one of which
shall be selected by the Company and the other by the Optionee).
1.8 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended. Any reference herein to a specific section of the Exchange Act shall
be deemed to include a reference to any applicable corresponding provision of
future law.
1.9 "Exercise Price" shall mean the price at which an Optionee may
purchase a share of Stock under a Stock Option Agreement, determined in
accordance with Section 5.3 of this Plan.
1.10 "Fair Market Value" on any date shall mean (i) the average
closing sales price of the Stock on the national securities exchange having the
greatest volume of trading in the Stock during the five (5) trading days
preceding such date; (ii) if the Stock is not traded on any national securities
exchange, the average of the closing bid prices of the Stock on the
over-the-counter market for the five (5) trading days preceding the date such
value is to be determined; or (iii) if the Stock is not traded on a national
securities exchange or an over-the-counter market, the fair market value as
determined in good faith by the Board based on such relevant facts as may be
available, including, without limitation, the price at which recent sales of
Stock have been made, the book value of the Stock and the Company's current and
future earnings.
1.11 "Non-Employee Director" shall mean a member of the Board who
is considered a "non-employee director" as such term is defined in Rule 16b-3.
1.12 "Option" shall mean the right and option to purchase Stock
granted pursuant to the provisions of Article V hereof.
1.13 "Optionee" shall mean a person to whom an Option has been
granted hereunder or his or her permitted assign.
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<PAGE> 4
1.14 "Plan" shall mean the OrthAlliance, Inc. 1997 Non-Employee
Director Stock Plan, the terms of which are set forth herein.
1.15 "Rule 16b-3" shall mean Rule 16b-3 promulgated under the
Exchange Act, as the same may be in effect or set forth from time to time.
1.16 "Stock" shall mean the Class A Common Stock, $.001 par value
per share, of the Company, subject to the antidilution provisions of Section 4.2
of this Plan.
1.17 "Stock Option Agreement" shall mean a written agreement
between the Company and an Optionee under which the Optionee may purchase Stock
hereunder, in substantially the form attached hereto.
ARTICLE II
THE PLAN
2.1 Name. This Plan shall be known as the "OrthAlliance, Inc. 1997
Non-Employee Director Stock Plan."
2.2 Purpose. The purpose of the Plan is to advance the interests
of the Company, its subsidiaries and its stockholders by affording the
Non-Employee Directors of the Company an opportunity to acquire or increase
their proprietary interests in the Company. The objective of the Plan is to (i)
attract able persons to serve as Non-Employee Directors of the Company and (ii)
promote the growth and profitability of the Company and its subsidiaries by
providing Optionees with an additional incentive to achieve the Company's
objectives through participation in its success and growth and by encouraging
their continued association with or service to the Company.
2.3 Effective Date. The effective date of this Plan is May 13,
1997, subject to stockholder approval of the Plan on or before the next annual
meeting of the Company's stockholders.
2.4 Participants. All Non-Employee Directors of the Company shall
participate in the Plan.
ARTICLE III
ADMINISTRATION
3.1 Self-Governing Plan. This Plan shall be self-governing and
provides for automatic grants of Options in accordance with the provisions of
Article V hereof. This Plan is intended to be a "formula plan" within the
meaning of Note 3 to Rule 16b-3 and the Board shall have no discretion as to (i)
the selection of persons to whom Options are to be granted, (ii) the timing
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<PAGE> 5
of such grants, (iii) the number of shares subject to any Option, (iv) the
Exercise Price of any Option, (v) the period(s) during which any Option may be
exercised or (vi) the expiration date of any Option.
3.2 Interpretation; Rules. Subject to Sections 3.1 and 7.1 and the
other provisions of the Plan, the Board shall have complete authority to
interpret the Plan, to prescribe, amend and rescind rules and regulations
relating to it and to make all other determinations necessary or advisable for
the administration of the Plan, including, without limitation, amending or
altering the Plan as may be required to comply with or to conform to any
federal, state or local laws or regulations.
3.3 No Liability. No Director shall be liable to any person for
any act or determination made in good faith with respect to the Plan or any
Option granted hereunder.
ARTICLE IV
SHARES OF STOCK SUBJECT TO PLAN
4.1 Limitations. Subject to adjustment pursuant to the
antidilution provisions of Section 4.2 hereof, the maximum number of shares of
Stock that may be issued hereunder shall be Two Hundred Thousand (200,000).
Shares of Stock subject to an Option may be either authorized and unissued
shares or shares issued and later acquired by the Company. The shares covered by
any unexercised portion of an Option that has terminated for any reason (except
as set forth in the following paragraph) may again be optioned under this Plan,
and such shares shall not be considered as having been optioned or issued in
computing the number of shares of Stock remaining available for Options
hereunder.
4.2 Antidilution.
(a) If (i) the outstanding shares of Stock are increased,
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Company by reason of merger (excluding mergers of
orthodontic practices with and into the Company), consolidation, reorganization,
recapitalization, reclassification, combination or exchange of shares, or stock
split or stock dividend (excluding the conversion of the Company's Class B
Common Stock into shares of Stock as set forth in the Company's Amended and
Restated Certificate of Incorporation), (ii) any spin-off, split-off or other
distribution of assets materially affects the price of the Company's stock, or
(iii) there is any assumption and conversion to this Plan by the Company of an
acquired company's outstanding option grants, then:
(A) the aggregate number and kind of shares of Stock for which
Options may be granted hereunder shall be adjusted appropriately by the
Board; and
(B) the rights of Optionees (concerning the number of shares
of Stock subject to Options and the Exercise Price) under outstanding
Options shall be adjusted appropriately by the Board.
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<PAGE> 6
(b) If not provided in a Stock Option Agreement to the
contrary, if a Change in Control occurs, the Board, in its discretion, may
provide:
(i) notwithstanding other provisions hereof, that all
Options granted under this Plan shall become exercisable
immediately, notwithstanding the provisions of the respective
Stock Option Agreements regarding exercisability, and that all
such Options shall terminate ninety (90) days after the Board
gives written notice of the immediate right to exercise all
such Options and of the decision to terminate all Options not
exercised within such 90-day period; or
(ii) notice to all Optionees that all Options granted
under this Plan shall be assumed by the successor corporation
or substituted on an equitable basis with options issued by
such successor corporation.
(c) If the Company is to be liquidated or dissolved in
connection with a Change in Control, the provisions of Section 4.2(b) shall
apply. In all other instances, the adoption of a plan of dissolution or
liquidation of the Company shall, notwithstanding other provisions hereof, cause
all then-remaining restrictions pertaining to Options under the Plan to lapse,
and shall cause every Option outstanding under the Plan to terminate to the
extent not exercised prior to the adoption of the plan of dissolution or
liquidation by the stockholders; provided, however, that, notwithstanding any
other provisions hereof, the Board may declare all Options granted under the
Plan to be exercisable at any time on or before the fifth (5th) business day
following such adoption, notwithstanding the provisions of the respective Stock
Option Agreements regarding exercisability.
(d) The adjustments described in paragraphs (a) through
(c) of this Section 4.2, and the manner of their application, shall be
determined solely by the Board, and any such adjustment may provide for the
elimination of fractional share interests. The adjustments required under this
Article IV shall apply to any successors of the Company and shall be made
regardless of the number or type of successive events requiring such
adjustments.
ARTICLE V
OPTIONS
5.1 Types of Options Granted. All Options granted under this Plan
shall be non-qualified stock options (i.e., stock options which do not qualify
as incentive stock options under Sections 422 and 423 of the Code).
5.2 Option Grants. Automatic grants of Options shall be made as
follows:
(a) An initial grant of an Option to purchase 5,000
shares of Stock shall be made to each Non-Employee Director on the date he or
she is initially elected or appointed to the Board as a Non-Employee Director;
and
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<PAGE> 7
(b) Commencing in 1998, and continuing each year
thereafter as long as Stock is available for grant pursuant to this Plan, an
annual grant of an Option to purchase 5,000 shares of Stock shall be made on the
date of the annual meeting of the Company's stockholders to each Non-Employee
Director who continues as such following such annual meeting.
5.3 Exercise Price. The Exercise Price of the Stock subject to
each Option shall be equal to: (i) for initial grants, 100% of the Fair Market
Value of the Company's Stock on the date of the Non-Employee Director's election
or appointment as a Director or the initial public offering price for options
granted before the effective date of the Company's initial offering of shares of
Stock; and (ii) for annual grants, 100% of the Fair Market Value of the
Company's Stock on the date of the annual meeting of stockholders relating
thereto.
5.4 Exercise Period. Each Option shall vest and become exercisable
on the first anniversary of the grant date of the Option and shall terminate and
cease to be exercisable after the expiration of ten (10) years from the grant
date of the Option (the "Exercise Period"). No Option shall be exercisable prior
to the expiration of six (6) months from the grant date of such Option, other
than in the case of the death or Disability of the Optionee.
5.5 Stock Option Agreement; Copy of Plan. Each Option granted
hereunder shall be evidenced by a written Stock Option Agreement executed by the
Company and the Optionee in substantially the form attached hereto. The terms of
the Option, including the Exercise Period and Exercise Price, shall be stated in
the Stock Option Agreement. Every Optionee shall be given a copy of the Plan.
5.6 Termination of Service; Death or Disability. In the event an
Optionee ceases to be a Director by reason of his or her death or Disability,
the Optionee or the Optionee's, heirs, administrators, executors or personal
representatives may exercise the Optionee's Options, to the extent such Options
are vested and purchasable on the date of such death or Disability, at any time
prior to the earlier of (i) the last day of the one year period following the
Optionee's death or the beginning of the Optionee's Disability or (ii) the
expiration of the Optionee's Options.
5.7 Termination of Service; Other. In the event an Optionee ceases
to be a Director for any reason other than his or her death or Disability, the
Optionee (or his or her personal representative) may exercise his or her
Options, to the extent such Options are vested and purchasable on the date of
termination, at any time prior to the earlier of (i) the last day of the one
year period following the date the Optionee ceases to be a Director or (ii) the
expiration of the Optionee's Options.
5.8 Option Exercise.
(a) An Option may be exercised at any time or from time
to time during the Exercise Period as to any or all full shares which are
subject to the Option, but not at any time as to less than one hundred (100)
shares unless the remaining vested shares purchasable under the Option are less
than one hundred (100) shares.
- 6 -
<PAGE> 8
(b) An Option shall be exercised by (i) delivery to the
Company at its principal office of a written notice of exercise with respect to
a specified number of shares of Stock and (ii) payment to the Company at that
office of the full amount of the Exercise Price for such number of shares in
accordance with Section 5.8(c). If requested by an Optionee, an Option may be
exercised with the involvement of a stockbroker in accordance with the federal
margin rules set forth in Regulation T (in which case the certificates
representing the underlying shares will be delivered by the Company directly to
the stockbroker).
(c) The Exercise Price is to be paid in full in cash by a
certified or cashier's check payable to the Company upon the exercise of the
Option and the Company shall not be required to deliver certificates for the
shares purchased until such payment has been made. In lieu of cash, (i) all or
any portion of the Exercise Price may be paid by tendering to the Company shares
of Stock duly endorsed for transfer and owned by the Optionee, or by
authorization to the Company to withhold shares of Stock otherwise issuable upon
exercise of the Option, in each case to be credited against the Exercise Price
at the Fair Market Value of such shares on the date of exercise (however, no
fractional shares may be so transferred, and the Company shall not be obligated
to make any cash payments in consideration of any excess of the aggregate Fair
Market Value of shares transferred over the aggregate Exercise Price); or (ii)
full payment may be effected through a broker-dealer sale and remittance
procedure pursuant to which the Optionee (A) shall provide irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Company, out of the sale proceeds available on
the settlement date, sufficient funds to cover the aggregate Exercise Price
(plus all applicable Federal and State income and employment taxes required to
be withheld by the Company by reason of such purchase) and (B) shall provide
written directives to the Company to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the sale
transaction.
(d) In addition to and at the time of payment of the
Exercise Price, the Company may withhold, or require the Optionee to pay to the
Company in cash, the amount of any federal, state and local income, employment
or other withholding taxes which the Company determines are required to be
withheld under federal, state or local law in connection with the exercise of an
Option; provided, however, that all or any portion of such tax obligations may,
upon the election of the Optionee, be paid by tendering to the Company whole
shares of Stock duly endorsed for transfer and owned by the Optionee, or by
authorization to the Company to withhold shares of Stock otherwise issuable upon
exercise of the Option, in either case in that number of shares having a Fair
Market Value on the date of exercise equal to the amount of such taxes thereby
being paid.
(e) The holder of an Option shall not have any of the
rights of a stockholder with respect to the shares of Stock subject to the
Option until such shares have been issued and transferred to the Optionee upon
the exercise of the Option.
(f) Notwithstanding anything to the contrary herein or in
a Stock Option Agreement, a given Option shall not be exercisable to the extent
the exercise thereof would cause the Company to be a reporting company under the
Exchange Act.
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<PAGE> 9
5.9 Nontransferability of Option. No Option shall be transferable
by an Optionee other than by will or the laws of descent and distribution.
During the lifetime of an Optionee, Options shall be exercisable only by such
Optionee (or by such Optionee's guardian or legal representative, should one be
appointed).
5.10 Service Rights. Nothing in the Plan or in any Stock Option
Agreement shall confer on any person any right to continue as a Director of the
Company, or shall interfere in any way with the right of the stockholders of the
Company to terminate such person's service as a Director at any time.
ARTICLE VI
STOCK CERTIFICATES
6.1 Certificates. The Company shall not be required to issue or
deliver any certificate for shares of Stock purchased upon the exercise of any
Option granted hereunder or any portion thereof, prior to fulfillment of all of
the following conditions:
(a) The authorization to list such shares on all stock
exchanges or over-the-counter markets on which the Stock is then listed or
quoted;
(b) The completion of any registration or other
qualification of such shares which the Board shall deem necessary or advisable
under any federal or state law or under the rulings or regulations of the
Securities and Exchange Commission or any other governmental regulatory body;
(c) The obtaining of any approval or other clearance from
any federal or state governmental agency or body which the Board shall determine
to be necessary or advisable; and
(d) The lapse of such reasonable period of time following
the exercise of the Option as the Board from time to time may establish for
reasons of administrative convenience.
6.2 Legends. Stock certificates issued and delivered to Optionees
shall bear such restrictive legends as the Company shall deem necessary or
advisable pursuant to applicable federal and state securities laws.
ARTICLE VII
TERMINATION AND AMENDMENT OF PLAN
7.1 Termination and Amendment. The right to amend the Plan at any
time and from time to time and the right to terminate the Plan at any time are
hereby specifically reserved to the Board, provided always that no such
termination shall terminate any outstanding Options granted under the Plan and
provided further that no amendment to the Plan shall (i) be made without
stockholder approval if stockholder approval of the amendment is at the time
required for Options under the Plan to qualify for the exemption from Section 16
of the Exchange Act provided by Rule 16b-3, or any successor rule, or by the
rules of any stock exchange or over-
- 8 -
<PAGE> 10
the-counter market on which the Stock may then be listed, or (ii) otherwise
amend the Plan in any manner that would cause Options under the Plan not to
qualify for the exemption provided by Rule 16b-3, or any successor rule. No
amendment or termination of the Plan shall, without the written consent of the
holder of an outstanding Option awarded under the Plan, adversely affect the
rights of such Optionee with respect thereto.
Notwithstanding anything contained in the preceding paragraph or any
other provision of the Plan or any Stock Option Agreement, the Board shall have
the power to amend the Plan in any manner deemed necessary or advisable for
Options granted under the Plan to qualify for the exemption provided by Rule
16b-3 (or any successor rule relating to exemption from Section 16(b) of the
Exchange Act). Any such amendment shall, to the extent deemed necessary or
advisable by the Board, be applicable to any outstanding Options granted under
the Plan notwithstanding any contrary provisions contained in any Stock Option
Agreement. In the event of any such amendment of the Plan, the holder of any
Option shall, upon request by the Board and as a condition to the exercisability
of such Option, execute a conforming amendment in a form prescribed by the Board
to his or her Stock Option Agreement within such reasonable time as the Board
shall specify in such request.
ARTICLE VIII
RELATIONSHIP TO OTHER COMPENSATION PLANS
The adoption of the Plan shall not affect any other stock option,
incentive, or other compensation plans in effect for the Company or any of its
subsidiaries; nor shall the adoption of the Plan preclude the Company or any of
its subsidiaries from establishing any other form of incentive or other
compensation plan for employees or Directors of the Company or any of its
subsidiaries.
ARTICLE IX
MISCELLANEOUS
9.1 Plan Binding on Successors. The Plan shall be binding upon the
successors and assigns of the Company.
9.2 Singular, Plural; Gender. Whenever used herein, nouns in the
singular shall include the plural and the masculine pronoun shall include the
feminine gender and vice versa.
9.3 Headings Not Part of Plan. Headings of Articles and Sections
hereof are inserted for convenience and reference and do not constitute part of
the Plan.
9.4 Interpretation. All transactions under this Plan are intended
to comply with all applicable conditions of Rule 16b-3 or its successors under
the Exchange Act.
- 9 -
<PAGE> 11
9.5 Governing Law. This Plan shall be governed by, and construed
in accordance with, the laws of the State of Delaware without regard to
conflicts of laws principles.
* * * *
- 10 -
<PAGE> 12
OrthAlliance, Inc.
1997 Non-Employee Director Stock Plan
Form of Stock Option Agreement
ORTHALLIANCE, INC.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement"), entered into as of this
_____ day of ________________, 1997 by and between OrthAlliance, Inc., a
Delaware corporation (the "Company"), and _________________ (the "Optionee").
WHEREAS, on May 13, 1997, the Board of Directors of the Company adopted
a stock option plan known as the "OrthAlliance, Inc. 1997 Non-Employee Director
Stock Plan" (the "Plan") and recommended that the Plan be approved by the
Company's stockholders; and
WHEREAS, on August 11, 1997, the stockholder of the Company approved
the Plan; and
WHEREAS, Optionee has been granted an Option (as defined below) to
purchase five thousand (5,000) shares of the Company's Class A Common Stock, par
value $.001 per share (the "Stock") and the Company and the Optionee desire to
enter into a written agreement with respect to the Option in accordance with the
Plan.
NOW, THEREFORE, as an incentive to serve as a Non-Employee Director of
the Company and to encourage stock ownership, and also in consideration of the
mutual covenants contained herein, the parties hereto agree as follows:
1. Incorporation of Plan. This Option is granted pursuant to the
provisions of the Plan and the terms and conditions of the Plan are incorporated
herein by reference and made a part hereof. A copy of the Plan has been
delivered to, and receipt is hereby acknowledged by, the Optionee.
Notwithstanding anything in this Agreement to the contrary, to the extent the
terms of this Agreement conflict with or otherwise attempt to exceed the
authority set forth under the Plan, the Plan shall govern and control in all
respects. Unless otherwise defined herein, capitalized terms used in this
Agreement shall have the meanings given such terms in the Plan.
2. Grant of Option. Subject to the terms, restrictions, limitations,
and conditions stated herein and the terms of the Plan, the Company hereby
evidences its grant to the Optionee of the right and option (the "Option") to
purchase all or any part of five thousand (5,000) shares of Stock.
3. Vesting Date. The Option shall vest and become exercisable upon the
first anniversary of the date the Option is granted under Section 5.2(a) or (b)
of the Plan (the "Grant Date").
<PAGE> 13
4. Expiration Date. The Option shall expire and shall cease to be
exercisable after the expiration of ten (10) years from the Grant Date. In the
event this Option is not exercised with respect to all or any part of the shares
of Stock subject to this Option prior to its expiration, the shares with respect
to which this Option has not been exercised shall no longer be subject to
Section 5.3 of this Option.
5. Exercise Price. The price per share to be paid by the Optionee for
the shares of stock subject to this Option (the "Exercise Price") shall be
determined in accordance with the Plan and specified on Schedule A.
6. Restrictions on Transferability. No Option shall be transferable by
Optionee other than by will or the laws of descent and distribution. During the
lifetime of Optionee, Options shall be exercisable only by Optionee (or by
Optionee's guardian or legal representative, should one be appointed).
7. Notice of Exercise of Option. This Option may be exercised by the
Optionee, or by the Optionee's administrators, executors or personal
representatives, by a written notice (in substantially the form of the Notice of
Exercise attached hereto as Schedule B) signed by the Optionee, or by such
administrators, executors or personal representatives, and delivered or mailed
to the Company as specified in Section 15(c) hereof to the attention of the
President, Vice President, General Counsel or such other officer as the Company
may designate. Any such notice shall (a) specify the number of shares of Stock
which the Optionee or the Optionee's administrators, executors or personal
representatives, as the case may be, then elects to purchase hereunder, (b)
contain such information as may be reasonably required pursuant to Section 13
hereof, and (c) be accompanied by (i) a certified or cashier's check payable to
the Company in payment of the total Exercise Price applicable to such shares as
provided herein, (ii) shares of Stock owned by the Optionee and duly endorsed or
accompanied by stock transfer powers having a Fair Market Value equal to the
total Exercise Price applicable to such shares purchased hereunder, or (iii) a
certified or cashier's check accompanied by the number of shares of Stock whose
Fair Market Value when added to the amount of the check equals the total
Exercise Price applicable to such shares purchased hereunder, or (iv) payment
through a broker-dealer sale and remittance procedure pursuant to which Optionee
shall provide irrevocable written instructions to a designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the Company, out
of the sale proceeds available on the settlement date, sufficient funds to cover
the aggregate Exercise Price (plus all applicable Federal and State income and
employment taxes required to be withheld by the Company by reason of such
exercise) and written directives to the Company to deliver the certificates for
the purchased shares directly to such brokerage firm in order to complete the
sale transaction. Upon receipt of any such notice and accompanying payment, and
subject to the terms hereof, the Company agrees to issue to the Optionee or the
Optionee's administrators, executors or personal representatives, as the case
may be, stock certificates for the number of shares specified in such notice
registered in the name of the person exercising this Option.
8. Adjustment in Option. The number of shares of Stock subject to this
Option, the Exercise Price and other matters are subject to adjustment during
the term of this Option in accordance with the Plan.
- 2 -
<PAGE> 14
9. Service as a Director. Nothing in this Stock Option Agreement shall
confer upon the Optionee any right with respect to continuance of service as a
Director of the Company, or shall interfere in any way with the right of the
stockholders of the Company to terminate such person's service as a Director at
any time.
10. Termination of Service as a Director. In the event of the
termination of the Optionee's service as a Director for any reason other than
his or her death or Disability, the Optionee (or his or her personal
representative) may exercise this Option, to the extent such Option is vested
and purchasable on the date of termination, at any time prior to the earlier of
(i) the last day of the one year period following the date the Optionee ceases
to be a Director or (ii) the expiration of the Optionee's Option.
11. Disabled Optionee. In the event of termination of service as a
Director of the Company because of the Optionee's becoming a Disabled Optionee,
the Optionee (or his or her legal representative) may exercise this Option, to
the extent such Option is vested and purchasable on the date of termination, at
any time prior to the earlier of (a) the last day of the one year period
following the beginning of the Optionee's Disability or (b) the expiration date
of this Option.
12. Death of Optionee. In the event of the Optionee's death, the
Optionee's administrators, executors or personal representatives or persons to
whom all or a portion of this Option is transferred in accordance with Section 6
hereof may exercise this Option at any time prior to the earlier of (a) the last
day of the one year period following the Optionee's death or (b) the expiration
date of this Option. If the Optionee was a Director of the Company at the time
of death, this Option may be so exercised to the extent of the number of shares
that were vested and purchasable hereunder at the date of death. If the
Optionee's service as a Director of the Company terminated prior to his or her
death, this Option may be exercised only to the extent of the number of shares
covered by this Option which were vested and purchasable hereunder at the date
of such termination.
13. Compliance with Regulatory Matters. The Optionee acknowledges that
the issuance of Stock of the Company is subject to limitations imposed by
federal and state law and the Optionee hereby agrees that the Company shall not
be obligated to issue any shares of Stock upon exercise of this Option that
would cause the Company to violate law or any rule, regulation, order or consent
decree of any regulatory authority (including without limitation the Securities
and Exchange Commission) having jurisdiction over the affairs of the Company.
The Optionee agrees that he or she will provide the Company with such
information as is reasonably requested by the Company or its counsel to
determine whether the issuance of Stock complies with the provisions described
by this Section 13.
14. Investment Representation of Optionee.
(a) Optionee represents to the Company the following: (i) that
Optionee has read and understands the terms and provisions of the Plan, and
hereby accepts this Agreement subject to all the terms and provisions of the
Plan; and (ii) Optionee understands that, unless at the time of exercise of the
Option, a registration statement under the Securities Act of 1933, as amended,
- 3 -
<PAGE> 15
is in effect covering the Stock, as a condition to the exercise of the Option
the Company may require Optionee to represent that Optionee is acquiring the
Stock for Optionee's own account only and not with a view to, or for sale in
connection with, any distribution of the Stock.
(b) The Optionee understands and agrees that the certificate or
certificates representing any shares of Stock acquired hereunder may bear an
appropriate legend relating to registration and resale under federal and state
securities laws.
(c) The Optionee shall not have any rights of a stockholder of
the Company with respect to the shares of Stock which may be purchased upon
exercise of this Option, unless and until such shares shall have been issued and
delivered and his/her name has been entered as a stockholder on the stock
transfer records of the Company.
15. Miscellaneous.
(a) This Agreement shall be binding upon the parties hereto and
their representatives, successors and assigns.
(b) This Agreement is executed and delivered in, and shall be
governed by the laws of, the State of Delaware, without regard to conflicts of
laws principles.
(c) Any notice, request, document or other communication given
hereunder shall be deemed to be sufficiently given upon personal delivery to the
other party or upon the expiration of three (3) days after depositing same in
the United States mail, return receipt requested, properly addressed to the
respective parties or such other address as they may give to the other party in
writing in the same manner as follows:
Company: OrthAlliance, Inc.
23848 Hawthorne Blvd., Suite 200
Torrance, California 90505
Attention: Senior Vice President, General Counsel
Optionee:
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
(d) This Agreement may not be modified except in writing
executed by each of the parties hereto.
(e) This Agreement, together with the Plan, contains the entire
understanding of the parties hereto and supersedes any prior understanding
and/or written or oral agreement between them respecting the subject matter
hereof.
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<PAGE> 16
(f) The parties agree that the provisions of this Agreement are
severable and the invalidity or unenforceability of any provision in whole or
part shall not affect the validity or enforceability of any enforceable part of
such provision or any other provisions hereof.
(g) The headings with Sections herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
(h) No waiver of any breach or default hereunder shall be considered
valid unless in writing, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or similar nature.
(i) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf and the Optionee has executed this Agreement, all as of
the day and year first above written.
COMPANY:
ORTHALLIANCE, INC.
By:
----------------------------------
Name:
-------------------------------
Title:
-------------------------------
OPTIONEE:
By:
-------------------------------
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<PAGE> 17
SCHEDULE A
TO
STOCK OPTION AGREEMENT
BETWEEN
ORTHALLIANCE, INC.
AND
[Name of Optionee]
Dated [Date of Agreement]
1. Number of Shares Subject to Option: Five Thousand (5,000) shares of
Stock.
2. Option Exercise Price: $ per share.
-----------------
3. Grant Date:
-------------------------
4. Option Vesting Schedule:
The Option shall vest and may be exercised at any time and from time to
time with respect to five thousand (5,000) shares of Stock on the first
anniversary of the Grant Date.
5. Option Expiration Date:
The Option shall expire and shall cease to be exercisable after the
expiration of ten (10) years from the Grant Date.
6. Change in Control.
Notwithstanding the vesting schedule and option expiration date set
forth above, upon a Change in Control, as defined in the Plan, all Options
granted hereunder shall become exercisable immediately upon the occurrence of
such Change in Control for a period of ninety (90) days after written notice to
Optionee of the right to such Options. Any Options not exercised within such
ninety (90) day period shall terminate after the expiration of such period.
<PAGE> 18
SCHEDULE B
TO
STOCK OPTION AGREEMENT
BETWEEN
ORTHALLIANCE, INC.
AND
[Name of Optionee]
Dated [Date of Agreement]
NOTICE OF EXERCISE
The undersigned hereby notifies OrthAlliance, Inc. (the
"Company") of this election to exercise the undersigned's stock option to
purchase ________________ shares of Stock (as defined under the Plan) pursuant
to the Stock Option Agreement (the "Agreement") between the undersigned and the
Company dated ________________. Accompanying this Notice is (1) a certified or a
cashier's check in the amount of $________________ payable to the Company,
and/or (2) _______________ shares of Stock (as defined under the Plan) presently
owned by the undersigned and duly endorsed or accompanied by stock transfer
powers, having an aggregate Fair Market Value (as defined under the Plan) as of
the date hereof of $__________________, such amounts being equal, in the
aggregate, to the purchase price per share set forth in Section 5 of the
Agreement multiplied by the number of shares being purchased hereby (in each
instance subject to appropriate adjustment pursuant to Section 8 of the
Agreement), and/or (3) evidence of a cashless exercise as set forth in Section 7
of the Agreement.
The undersigned is a resident of the State of .
IN WITNESS WHEREOF, the undersigned has set his/her hand and
seal, this ________ day of ________________, ______.
OPTIONEE [OR OPTIONEE'S ADMINISTRATOR,
EXECUTOR OR PERSONAL REPRESENTATIVE]
---------------------------------------
Name:
----------------------------------
Position (if other than Optionee):
<PAGE> 1
EXHIBIT 10.7
ORTHALLIANCE, INC.
AMENDED AND RESTATED 1997 EMPLOYEE STOCK OPTION PLAN
<PAGE> 2
ORTHALLIANCE, INC.
AMENDED AND RESTATED 1997 EMPLOYEE STOCK OPTION PLAN
ARTICLE I
DEFINITIONS
As used herein, the following terms have the following meanings unless
the context clearly indicates to the contrary:
1.1 "Board" shall mean the Board of Directors of the Company.
1.2 "Change in Control" shall mean the occurrence of either of the
following events:
(a) any of the following events:
(i) the dissolution or liquidation of the
Company; or
(ii) a reorganization, merger or consolidation of
the Company with one or more other
corporations (except with respect to a
transaction, the sole purpose of which is to
change the domicile or name of the Company),
as a result of which the Company ceases to
exist or becomes a subsidiary of another
corporation (which shall be deemed to have
occurred if another corporation shall own,
directly or indirectly, more than fifty
percent (50%) of the aggregate voting power
of all outstanding equity securities of the
Company); or
(iii) a sale of all or substantially all of the
Company's assets; or
(b) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act), other than any person
who is a stockholder of the Company on or before the
effective date of the Plan, by the acquisition or
aggregation of securities is or becomes the
beneficial owner, directly or indirectly, of
securities of the Company representing fifty percent
(50%) or more of the combined voting power of the
Company's then outstanding securities ordinarily (and
apart from rights accruing under special
circumstances) having the right to vote at elections
of directors (the "Base Capital Stock"); except that
any change in the relative beneficial ownership of
the Company's securities by any person resulting
solely from a reduction in the aggregate number of
outstanding shares of Base Capital Stock, and any
decrease thereafter in such person's ownership of
securities, shall be disregarded until such person
increases in any manner, directly or indirectly, such
person's beneficial ownership of any securities of
the Company.
<PAGE> 3
1.3 "Code" shall mean the Internal Revenue Code of 1986, as
amended, including effective date and transition rules (whether or not
codified). Any reference herein to a specific section of the Code shall be
deemed to include a reference to any applicable corresponding provision of
future law.
1.4 "Committee" shall mean a committee of at least two (2)
Directors appointed from time to time by the Board, having the duties and
authority set forth herein in addition to any other authority granted by the
Board; provided, however, that with respect to any Options granted to an
individual who is also a Section 16 Insider, the Committee shall consist of at
least two (2) Directors (who need not be members of the Committee with respect
to Options granted to any other individuals) who are Non-Employee Directors
(within the meaning of Rule 16b-3), and all authority and discretion shall be
exercised by such Non-Employee Directors, and references herein to the
"Committee" shall mean such Non-Employee Directors insofar as any actions or
determinations of the Committee shall relate to or affect Options made to or
held by any Section 16 Insider. At any time that the Board shall not have
appointed a committee as described above, any reference herein to the Committee
shall mean a reference to the Board.
1.5 "Company" shall mean OrthAlliance, Inc., a Delaware
corporation.
1.6 "Director" shall mean a member of the Board and any person who
is an advisory, honorary or emeritus director of the Company if such person is
considered a director for the purposes of Section 16 of the Exchange Act, as
determined by reference to such Section 16 and to the rules, regulations,
judicial decisions, and interpretative or "no-action" positions with respect
thereto of the Securities and Exchange Commission, as the same may be in effect
or set forth from time to time.
1.7 "Disabled Optionee" shall mean an Optionee who suffers a
Disability.
1.8 "Disability" shall mean shall mean a physical or mental
infirmity which impairs an Optionee's ability to substantially perform his
duties with the Company or a Subsidiary for a period of 180 consecutive days, as
determined by an independent physician selected by agreement between the Company
and the Optionee or, failing such agreement, selected by two physicians (one of
which shall be selected by the Company and the other by the Optionee); provided,
however, that "Disability" shall have the meaning set forth in Code Section
22(e)(3) and the regulations promulgated thereunder with respect to an Optionee
granted Incentive Stock Options.
1.9 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended. Any reference herein to a specific section of the Exchange Act shall
be deemed to include a reference to any applicable corresponding provision of
future law.
1.10 "Exercise Price" shall mean the price at which an Optionee may
purchase a share of Stock under a Stock Option Agreement.
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<PAGE> 4
1.11 "Fair Market Value" on any date shall mean (i) the average
closing sales price of the Stock on such date on the national securities
exchange having the greatest volume of trading in the Stock during the thirty
(30) day period preceding such date or, if such exchange was not open for
trading on such date, the next preceding date on which it was open; (ii) if the
Stock is not traded on any national securities exchange, the average of the
closing high bid and low asked prices of the Stock on the over-the-counter
market on the date such value is to be determined, or in the absence of closing
bids on such date, the closing bids on the next preceding date on which there
were bids; or (iii) if the Stock is not traded on a national securities exchange
or the over-the-counter market, the fair market value as determined in good
faith by the Board or the Committee based on such relevant facts as may be
available, including, without limitation, the price at which recent sales of
Stock have been made, the book value of the Stock and the Company's current and
future earnings.
1.12 "For Cause" termination shall mean the termination of an
Optionee's employment as a result of: (i) any act that constitutes on the part
of the Optionee, fraud, dishonesty, gross malfeasance of duty, or conduct
grossly inappropriate to the Optionee's position of employment; or (ii) the
conviction (from which no appeal may be or is timely taken) of the Optionee of a
felony.
1.13 "Incentive Stock Option" shall mean an option to purchase
Stock of the Company which complies with and is subject to the terms,
limitations, and conditions of Section 422 of the Code and any regulations
promulgated with respect thereto.
1.14 "Officer" shall mean a person who constitutes an officer of
the Company for the purposes of Section 16 of the Exchange Act, as determined by
reference to such Section 16 and to the rules, regulations, judicial decisions,
and interpretative or "no-action" positions with respect thereto of the
Securities and Exchange Commission, as the same may be in effect or set forth
from time to time.
1.15 "Option" shall mean an option, including an Incentive Stock
Option, to purchase Stock granted pursuant to the provisions of Article hereof.
1.16 "Optionee" shall mean a person to whom an Option has been
granted hereunder or his permitted assign.
1.17 "Plan" shall mean the OrthAlliance, Inc. Amended and Restated
1997 Employee Stock Option Plan, the terms of which are set forth herein and
which completely amends and restates the OrthAlliance, Inc. 1997 Employee Stock
Option Plan.
1.18 "Purchasable" shall refer to Stock which may be purchased by
an Optionee under the terms of this Plan on or after a certain date specified in
an applicable Stock Option Agreement.
1.19 "Section 16 Insider" shall mean any person who is subject to
the provisions of Section 16 of the Exchange Act.
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<PAGE> 5
1.20 "Stock" shall mean the Class A Common Stock, $.001 par value
per share, of the Company, subject to applicable provisions of Section 5.2.
1.21 "Stock Option Agreement" shall mean a written agreement
between the Company and an Optionee under which the Optionee may purchase Stock
hereunder, as provided in Article VI hereof.
1.22 "Subsidiary" shall mean any corporation in which the Company
directly or indirectly owns stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock of such corporation.
ARTICLE II
THE PLAN
2.1 Name. This Plan shall be known as the "OrthAlliance, Inc.
Amended and Restated 1997 Employee Stock Option Plan."
2.2 Purpose. The purpose of the Plan is to advance the interests
of the Company, its Subsidiaries and its stockholders by affording certain
officers and employees of the Company and its Subsidiaries an opportunity to
acquire or increase their proprietary interests in the Company. The objective of
the Options is to promote the growth and profitability of the Company and its
Subsidiaries by providing Optionees with an additional incentive to achieve the
Company's objectives through participation in its success and growth and by
encouraging their continued association with or service to the Company and its
Subsidiaries.
2.3 Effective Date. The effective date of this Plan is May 13,
1997, subject to stockholder approval of the Plan on or before May 13, 1998.
ARTICLE III
PARTICIPANTS
The class of persons eligible to participate in the Plan shall consist
of all officers and employees of the Company or any Subsidiary whose
participation in the Plan the Committee determines to be in the best interests
of the Company.
ARTICLE IV
ADMINISTRATION
4.1 Duties and Powers of the Committee. This Plan shall be
administered by the Committee. The Committee shall select one of its members as
its Chairman and shall hold its meetings at such times and places as it may
determine. The Committee shall keep minutes of its meetings and shall make such
rules and regulations for the conduct of its business as it may deem necessary.
The Committee shall have the power to act by unanimous written consent in lieu
of a meeting, and to meet telephonically. In administering this Plan, the
Committee's actions and determinations shall be binding on all interested
parties. The Committee shall have the power to grant Options in accordance with
the provisions of this Plan. Subject to the
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<PAGE> 6
provisions of this Plan, the Committee shall have the discretion and authority
to determine those persons to whom Options will be granted, the number of shares
of Stock subject to each Option, such other matters as are specified herein, and
any other terms and conditions of a Stock Option Agreement. To the extent not
inconsistent with the provisions of this Plan, the Committee may give an
Optionee an election to surrender an Option in exchange for the grant of a new
Option, and shall have the authority to amend or modify an outstanding Stock
Option Agreement or to waive any provision thereof, provided that the Optionee
consents to such action.
4.2 Interpretation; Rules. Subject to the express provisions of
the Plan, the Committee shall have complete authority to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to it, to determine
the details and provisions of each Stock Option Agreement, and to make all other
determinations necessary or advisable for the administration of the Plan,
including, without limitation, the amending or altering of the Plan and any
Options granted hereunder as may be required to comply with or to conform to any
federal, state or local laws or regulations.
4.3 No Liability. Neither any Director nor any member of the
Committee shall be liable to any person for any act or determination made in
good faith with respect to the Plan or any Option granted hereunder.
4.4 Majority Rule. A majority of the members of the Committee
shall constitute a quorum, and any action taken by a majority at a meeting at
which a quorum is present, or any action taken without a meeting evidenced by a
writing executed by all the members of the Committee, shall constitute the
action of the Committee.
4.5 Company Assistance. The Company shall supply full and timely
information to the Committee on all matters relating to eligible persons, their
employment, death, retirement, disability, or other termination of employment,
and such other pertinent facts as the Committee may require. The Company shall
furnish the Committee with such clerical and other assistance as is necessary in
the performance of its duties.
ARTICLE V
SHARES OF STOCK SUBJECT TO PLAN
5.1 Limitations. Subject to any antidilution adjustment pursuant
to the provisions of Section hereof, the maximum number of shares of Stock that
may be issued hereunder shall be One Million (1,000,000). The amount of Stock
subject to the Plan may be increased from time to time in accordance with
Article VIII hereof; provided, however, that the total number of shares of Stock
issuable pursuant to Incentive Stock Options shall not exceed One Million
(1,000,000) (other than pursuant to antidilution adjustments) without
stockholder approval. Shares subject to an Option may be either authorized and
unissued shares or shares issued and later acquired by the Company. The shares
covered by any unexercised portion of an Option that has terminated for any
reason (except as set forth in the following paragraph) may again be optioned
under this Plan, and such shares shall not be considered as having been optioned
or issued in computing the number of shares of Stock remaining available for
Options hereunder.
-5-
<PAGE> 7
If Options are issued in respect of options to acquire stock of any
entity acquired, by merger or otherwise, by the Company or any Subsidiary, to
the extent that such issuance shall not be inconsistent with the terms,
limitations and conditions of Code Section 422 (only with respect to Options
which are Incentive Stock Options) or Rule 16b-3 under the Exchange Act, the
aggregate number of shares of Stock for which Options may be granted hereunder
shall automatically be increased by the number of shares subject to the Options
so issued.
5.2 Antidilution.
(a) If (i) the outstanding shares of Stock are increased,
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Company by reason of merger (excluding mergers of
orthodontic entities with and into the Company), consolidation, reorganization,
recapitalization, reclassification, combination or exchange of shares, or stock
split or stock dividend (excluding the conversion of the Company's Class B
Common Stock into shares of Stock as set forth in the Company's Amended and
Restated Certificate of Incorporation), (ii) any spin-off, split-off or other
distribution of assets materially affects the price of the Company's stock, or
(iii) there is any assumption and conversion to this Plan by the Company of an
acquired company's outstanding option grants, then:
(A) the aggregate number and kind of shares of Stock
for which Options may be granted hereunder shall be adjusted
appropriately by the Committee; and
(B) the rights of Optionees (concerning the number of
shares of Stock subject to Options and the Exercise Price)
under outstanding Options shall be adjusted appropriately by
the Committee.
(b) If not provided in a Stock Option Agreement to the
contrary, if a Change in Control occurs, the Committee, in its discretion, may
provide:
(i) notwithstanding other provisions hereof,
that all Options granted under this Plan shall become
exercisable immediately, notwithstanding the provisions of the
respective Stock Option Agreements regarding exercisability,
and that all such Options shall terminate ninety (90) days
after the Committee gives written notice of the immediate
right to exercise all such Options and of the decision to
terminate all Options not exercised within such 90-day period;
or
(ii) notice to all Optionees that all Options
granted under this Plan shall be assumed by the successor
corporation or substituted on an equitable basis with options
issued by such successor corporation.
(c) If the Company is to be liquidated or dissolved in
connection with a Change in Control, the provisions of Section 5.2(b) shall
apply. In all other instances, the adoption of a plan of dissolution or
liquidation of the Company shall, notwithstanding other provisions hereof, cause
all then-remaining restrictions pertaining to Options under the Plan to lapse,
and shall cause every Option outstanding under the Plan to terminate to the
extent not exercised prior to the adoption of the plan of dissolution or
liquidation by the stockholders; provided, however,
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<PAGE> 8
that, notwithstanding any other provisions hereof, the Committee may declare all
Options granted under the Plan to be exercisable at any time on or before the
fifth (5th) business day following such adoption, notwithstanding the provisions
of the respective Stock Option Agreements regarding exercisability.
(d) The adjustments described in paragraphs (a) through
(c) of this Section 5.2, and the manner of their application, shall be
determined solely by the Committee, and any such adjustment may provide for the
elimination of fractional share interests; provided, however, that any
adjustment made by the Committee shall be made in a manner that will not cause
an Incentive Stock Option to be other than an Incentive Stock Option under
applicable statutory and regulatory provisions. The adjustments required under
this Article V shall apply to any successors of the Company and shall be made
regardless of the number or type of successive events requiring such
adjustments.
ARTICLE VI
OPTIONS
6.1 Types of Options Granted. The Committee may, under this Plan,
grant either Incentive Stock Options or Options which do not qualify as
Incentive Stock Options. Within the limitations provided in this Plan, both
types of Options may be granted to the same person at the same time, or at
different times, under different terms and conditions, as long as the terms and
conditions of each Option are consistent with the provisions of this Plan.
Without limitation of the foregoing, Options may be granted subject to
conditions based on the financial performance of the Company or any other factor
the Committee deems relevant. Neither the Company, nor any Subsidiary or any
other person warrants or otherwise represents that (i) any Option granted under
this Plan shall be considered an Incentive Stock Option for applicable tax
purposes, or (ii) favorable or desirable tax treatment or characterization will
be applicable in respect of any Option or Stock.
6.2 Option Grant and Agreement. Each Option granted hereunder
shall be evidenced by minutes of a meeting or the written consent of the
Committee and by a written Stock Option Agreement executed by the Company and
the Optionee. The terms of the Option, including the Option's duration, time or
times of exercise and exercise price, shall be stated in the Stock Option
Agreement. No Incentive Stock Option may be granted more than ten (10) years
after the earlier to occur of the effective date of the Plan or the date the
Plan is approved by the Company's stockholders. Every Optionee shall be given a
copy of the Plan.
6.3 Optionee Limitations. The Committee shall not grant an
Incentive Stock Option to any person who, at the time the Incentive Stock Option
is granted:
(a) is not an employee of the Company or any of its
Subsidiaries; or
(b) owns or is considered to own stock possessing at
least 10% of the total combined voting power of all classes of stock of the
Company or any of its Subsidiaries (within the meaning of Code Sections 422 and
424); provided, however, that this limitation shall not apply if at the time an
Incentive Stock Option is granted the Exercise Price is at least 110% of
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<PAGE> 9
the Fair Market Value of the Stock subject to such Option and such Option by its
terms would not be exercisable after five (5) years from the date on which the
Option is granted. For the purpose of this subsection (b), a person shall be
considered to own (i) the Stock owned, directly or indirectly, by or for his or
her brothers and sisters (whether by whole or half blood), spouse, ancestors and
lineal descendants; (ii) the stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust in proportion to such person's stock
interest, partnership interest or beneficial interest therein; (iii) the stock
which such person may purchase under any outstanding options of the Company or
of any Subsidiary; and (iv) or stock otherwise considered to be owned by such
person pursuant to Code Sections 422 and 424.
6.4 $100,000 Limitation. Except as provided below, the Committee
shall not grant an Incentive Stock Option to, or modify the exercise provisions
of, any outstanding Incentive Stock Option held by any person who, at the time
the fIncentive Stock Option is granted (or modified), would thereby receive or
hold any Incentive Stock Options of the Company and any Subsidiary, such that
the aggregate Fair Market Value (determined as of the respective dates of grant
or modification of each Option) of the Stock with respect to which such
Incentive Stock Options are exercisable for the first time during any calendar
year is in excess of $100,000 (or such other limit as may be prescribed by the
Code from time to time); provided, that the foregoing restriction on
modification of outstanding Incentive Stock Options shall not preclude the
Committee from modifying an outstanding Incentive Stock Option if, as a result
of such modification and with the consent of the Optionee, such Option no longer
constitutes an Incentive Stock Option; and provided further that, if the
$100,000 limitation (or such other limitation prescribed by the Code) described
in this Section 6.4 is exceeded, the Incentive Stock Option, the granting or
modification of which resulted in the exceeding of such limit, shall be treated
as an Incentive Stock Option up to the limitation and the excess shall be
treated as an Option not qualifying as an Incentive Stock Option.
6.5 Exercise Price. The Exercise Price of the Stock subject to
each Option shall be determined by the Committee. Subject to the provisions of
Section hereof, the Exercise Price of an Incentive Stock Option shall not be
less than the Fair Market Value of the Stock as of the date such Option is
granted (or in the case of an Incentive Stock Option that is subsequently
modified, on the date of such modification).
6.6 Exercise Period. The period for the exercise of each Option
granted hereunder shall be determined by the Committee, but the Stock Option
Agreement with respect to each Option intended to be an Incentive Stock Option
shall provide that such Option shall not be exercisable after the expiration of
ten (10) years from the date of grant (or modification) of the Option. In
addition, no Option granted to a Section 16 Insider shall be exercisable prior
to the expiration of six (6) months from the date such Option is granted, other
than in the case of the death or Disability of the Optionee.
6.7 Option Exercise.
(a) Unless otherwise provided in the Stock Option
Agreement or Section 6.6 hereof, an Option may be exercised at any time or from
time to time during the term of the Option as to any or all full shares which
have become Purchasable under the provisions of the
-8-
<PAGE> 10
Option, but not at any time as to less than one hundred (100) shares unless the
remaining shares that have become so Purchasable are less than one hundred (100)
shares. The Committee shall have the authority to prescribe in any Stock Option
Agreement that the Option may be exercised only in accordance with a vesting
schedule during the term of the Option.
(b) An Option shall be exercised by (i) delivery to the
Company at its principal office of a written notice of exercise with respect to
a specified number of shares of Stock and (ii) payment to the Company at that
office of the full amount of the Exercise Price for such number of shares in
accordance with Section 6.7(c). If requested by an Optionee, an Option may be
exercised with the involvement of a stockbroker in accordance with the federal
margin rules set forth in Regulation T (in which case the certificates
representing the underlying shares will be delivered by the Company directly to
the stockbroker).
(c) The Exercise Price is to be paid in full in cash by a
certified or cashier's check payable to the Company upon the exercise of the
Option and the Company shall not be required to deliver certificates for the
shares purchased until such payment has been made; provided, however, that the
Committee may provide in a Stock Option Agreement (or may otherwise determine in
its sole discretion at the time of exercise) that in lieu of cash, all or any
portion of the Exercise Price may be paid by tendering to the Company shares of
Stock duly endorsed for transfer and owned by the Optionee, or by authorization
to the Company to withhold shares of Stock otherwise issuable upon exercise of
the Option, in each case to be credited against the Exercise Price at the Fair
Market Value of such shares on the date of exercise (however, no fractional
shares may be so transferred, and the Company shall not be obligated to make any
cash payments in consideration of any excess of the aggregate Fair Market Value
of shares transferred over the aggregate Exercise Price); provided further, the
Committee may provide in a Stock Option Agreement (or may otherwise determine in
its sole discretion at the time of exercise) that, in lieu of cash or shares,
full payment may be effected through a broker-dealer sale and remittance
procedure pursuant to which the Optionee (i) shall provide irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Company, out of the sale proceeds available on
the settlement date, sufficient funds to cover the aggregate Exercise Price
(plus all applicable Federal and State income and employment taxes required to
be withheld by the Company by reason of such purchase) and (ii) shall provide
written directives to the Company to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the sale
transaction.
(d) In addition to and at the time of payment of the
Exercise Price, the Company may withhold, or require the Optionee to pay to the
Company in cash, the amount of any federal, state and local income, employment
or other withholding taxes which the Committee determines are required to be
withheld under federal, state or local law in connection with the exercise of an
Option; provided, however, the Committee may provide in a Stock Option Agreement
(or may otherwise determine in its sole discretion at the time of exercise) that
all or any portion of such tax obligations may, upon the election of the
Optionee, be paid by tendering to the Company whole shares of Stock duly
endorsed for transfer and owned by the Optionee, or by authorization to the
Company to withhold shares of Stock otherwise issuable upon exercise of the
Option, in either case in that number of shares having a Fair Market Value on
the date
-9-
<PAGE> 11
of exercise equal to the amount of such taxes thereby being paid, and subject to
such restrictions as to the approval and timing of any such election as the
Committee may from time to time determine to be necessary or appropriate to
satisfy the conditions of the exemption set forth in Rule 16b-3 under the
Exchange Act, if such rule is applicable. To the extent tax withholding is
required at an applicable time with respect to Options or Stock acquired under
this Plan by an Optionee, the Company, applicable Subsidiary or other entity
upon which such withholding obligation arises shall be entitled to withhold from
such Optionee's compensation (derived from this Plan or otherwise) the
applicable amount required to be withheld).
(e) The holder of an Option shall not have any of the
rights of a stockholder with respect to the shares of Stock subject to the
Option until such shares have been issued and transferred to the Optionee upon
the exercise of the Option.
(f) Notwithstanding anything to the contrary herein or in
a Stock Option Agreement, a given Option shall not be exercisable to the extent
the exercise thereof would cause the Company to be a reporting company under the
Exchange Act.
6.8 Nontransferability of Option. No Option shall be transferable
by an Optionee other than by will or the laws of descent and distribution;
provided, however, that no Option shall be transferable prior to stockholder
approval of the Plan by an Optionee who is a Section 16 Insider. During the
lifetime of an Optionee, Options shall be exercisable only by such Optionee (or
by such Optionee's guardian or legal representative, should one be appointed).
6.9 Termination of Employment or Service. The Committee shall have
the power to specify, with respect to the Options granted to a particular
Optionee, the effect upon such Optionee's right to exercise an Option as a
result of termination of such Optionee's employment or service under various
circumstances, which effect may include immediate or deferred termination of
such Optionee's rights under an Option, or acceleration of the date at which an
Option may be exercised in full; provided, however, that in no event may an
Incentive Stock Option be exercised after the expiration of ten (10) years from
the date of grant thereof.
6.10 Employment Rights. Nothing in the Plan or in any Stock Option
Agreement shall confer on any person any right to continue in the employ of the
Company or any of its Subsidiaries, or shall interfere in any way with the right
of the Company or any of its Subsidiaries to terminate such person's employment
at any time.
6.11 Certain Successor Options. To the extent not inconsistent with
the terms, limitations and conditions of Code Section 422 and any regulations
promulgated with respect thereto, an Option issued in respect of an option held
by an employee to acquire stock of any entity acquired, by merger or otherwise,
by the Company (or any Subsidiary of the Company) may contain terms that differ
from those stated in this Article, but solely to the extent necessary to
preserve for any such employee the rights and benefits contained in such
predecessor option, or to satisfy the requirements of Code Section 424(a).
-10-
<PAGE> 12
ARTICLE VII
STOCK CERTIFICATES
The Company shall not be required to issue or deliver any certificate
for shares of Stock purchased upon the exercise of any Option granted hereunder
or any portion thereof, prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock
exchanges on which the Stock is then listed;
(b) The completion of any registration or other
qualification of such shares which the Committee shall deem necessary or
advisable under any federal or state law or under the rulings or regulations of
the Securities and Exchange Commission or any other governmental regulatory
body;
(c) The obtaining of any approval or other clearance from
any federal or state governmental agency or body which the Committee shall
determine to be necessary or advisable; and
(d) The lapse of such reasonable period of time following
the exercise of the Option as the Board from time to time may establish for
reasons of administrative convenience.
Stock certificates issued and delivered to Optionees shall bear such
restrictive legends as the Company shall deem necessary or advisable pursuant to
applicable federal and state securities laws.
ARTICLE VIII
TERMINATION AND AMENDMENT OF PLAN
8.1 Termination and Amendment. The Board may at any time terminate
the Plan, and may at any time and from time to time and in any respect amend the
Plan; provided, however, that the Board (unless its actions are approved or
ratified by the stockholders of the Company within twelve (12) months of the
date that the Board amends the Plan) may not amend the Plan to:
(a) Increase the total number of shares of Stock issuable
pursuant to Incentive Stock Options under the Plan or materially increase the
number of shares of Stock subject to the Plan, in each case except as
contemplated in Section hereof;
(b) Change the class of employees eligible to receive
Incentive Stock Options that may participate in the Plan or materially change
the class of persons that may participate in the Plan; or
-11-
<PAGE> 13
(c) Otherwise materially increase the benefits accruing
to participants under the Plan.
8.2 Effect on Optionee's Rights. No termination amendment or
modification of the Plan shall affect adversely an Optionee's rights under a
Stock Option Agreement without the consent of the Optionee or his legal
representative.
ARTICLE IX
RELATIONSHIP TO OTHER COMPENSATION PLANS
The adoption of the Plan shall not affect any other stock option,
incentive, or other compensation plans in effect for the Company or any of its
Subsidiaries; nor shall the adoption of the Plan preclude the Company or any of
its Subsidiaries from establishing any other form of incentive or other
compensation plan for employees or Directors of the Company or any of its
Subsidiaries.
ARTICLE X
MISCELLANEOUS
10.1 Replacement or Amended Grants. At the sole discretion of the
Committee, and subject to the terms of the Plan, the Committee may modify
outstanding Options or accept the surrender of outstanding Options and grant new
Options in substitution for them. However no modification of an Option shall
adversely affect an Optionee's rights under a Stock Option Agreement without the
consent of the Optionee or his legal representative.
10.2 Plan Binding on Successors. The Plan shall be binding upon the
successors and assigns of the Company.
10.3 Singular, Plural; Gender. Whenever used herein, nouns in the
singular shall include the plural and the masculine pronoun shall include the
feminine gender and vice versa.
10.4 Headings Not Part of Plan. Headings of Articles and Sections
hereof are inserted for convenience and reference and do not constitute part of
the Plan.
10.5 Interpretation. With respect to Section 16 Insiders,
transactions under this Plan, are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent
any provision of the Plan or action by the Plan administrators fails to so
comply, it shall be deemed void to the extent permitted by law and deemed
advisable by the Plan administrators.
10.6 Governing Law. This Plan shall be governed by, and construed
in accordance with, the laws of the State of Delaware without regard to
conflicts of laws principles.
* * * *
-12-
<PAGE> 14
OrthAlliance, Inc.
Amended and Restated 1997 Employee Stock Option Plan
Form of Stock Option Agreement
ORTHALLIANCE, INC.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement"), entered into as of this
_____ day of ________________, 1997 by and between OrthAlliance, Inc., a
Delaware corporation (the "Company"), and _________________ (the "Optionee").
WHEREAS, on May 13, 1997, the Board of Directors of the Company adopted
a stock option plan known as the "OrthAlliance, Inc. Amended and Restated 1997
Employee Stock Option Plan" (the "Plan") and recommended that the Plan be
approved by the Company's stockholders; and
WHEREAS, on August 11, 1997, the stockholder of the Company approved
the Plan; and
WHEREAS, the Committee has granted the Optionee an Option (as described
below) to purchase the number of shares of the Company's Common Stock (the
"Stock") as set forth below, and in consideration of the granting of the Option
the Optionee intends to remain in the employ of the Company; and
WHEREAS, the Company and the Optionee desire to enter into a written
agreement with respect to the Option in accordance with the Plan; and
WHEREAS, capitalized terms not defined herein shall have the meanings
ascribed to them in the Plan;
NOW, THEREFORE, as an employment incentive and to encourage stock
ownership, and also in consideration of the mutual covenants contained herein,
the parties hereto agree as follows.
1. Incorporation of Plan. This Option is granted pursuant to the
provisions of the Plan and the terms and definitions of the Plan are
incorporated herein by reference and made a part hereof. A copy of the Plan has
been delivered to, and receipt is hereby acknowledged by, the Optionee.
Notwithstanding anything in this Agreement to the contrary, to the extent the
terms of this Agreement conflict with or otherwise attempt to exceed the
authority set forth under the Plan, the Plan shall govern and control in all
respects.
2. Grant of Option. Subject to the terms, restrictions,
limitations, and conditions stated herein and the terms of the Plan, the Company
hereby evidences its grant to the Optionee, not in lieu of salary or other
compensation, of the right and option to purchase all or any part of the number
of shares of Stock (as defined under the Plan), set forth on Schedule A attached
hereto and incorporated herein by reference (the "Option"). The Option shall be
exercisable in
<PAGE> 15
the amounts and at the times specified on Schedule A. The Option shall expire
and shall not be exercisable after the date specified on Schedule A as the
expiration date or on such earlier date as determined pursuant to the Plan.
Schedule A states whether or not the Option is intended to be an Incentive Stock
Option.
3. Purchase Price. The price per share to be paid by the Optionee
for the shares subject to this Option (the "Exercise Price") shall be as
specified on Schedule A, which price shall be an amount not less than the Fair
Market Value of a share of Stock as of the Date of Grant (as defined in Section
11 below) if the Option is an Incentive Stock Option.
4. Exercise Terms. In the event this Option is not exercised with
respect to all or any part of the shares subject to this Option prior to its
expiration, the shares with respect to which this Option was not exercised shall
no longer be subject to this Option.
5. Restrictions on Transferability. No Option shall be
transferable by Optionee other than by will or the laws of descent and
distribution; provided, however, that no Option shall be transferable prior to
stockholder approval of the Plan by Optionee if Optionee is a Section 16
Insider. During the lifetime of Optionee, Options shall be exercisable only by
Optionee (or by Optionee's guardian or legal representative, should one be
appointed).
6. Notice of Exercise of Option. This Option may be exercised by
the Optionee, or by the Optionee's administrators, executors or personal
representatives, by a written notice (in substantially the form of the Notice of
Exercise attached hereto as Schedule B) signed by the Optionee, or by such
administrators, executors or personal representatives, and delivered or mailed
to the Company as specified in Section 15 hereof to the attention of the Senior
Vice President, General Counsel or such other officer as the Company may
designate. Any such notice shall (a) specify the number of shares of Stock which
the Optionee or the Optionee's administrators, executors or personal
representatives, as the case may be, then elects to purchase hereunder, (b)
contain such information as may be reasonably required pursuant to Section 12
hereof, and (c) be accompanied by (i) a certified or cashier's check payable to
the Company in payment of the total Exercise Price applicable to such shares as
provided herein, (ii) shares of Stock owned by the Optionee and duly endorsed or
accompanied by stock transfer powers having a Fair Market Value equal to the
total Exercise Price applicable to such shares purchased hereunder, or (iii) a
certified or cashier's check accompanied by the number of shares of Stock whose
Fair Market Value when added to the amount of the check equals the total
Exercise Price applicable to such shares purchased hereunder, or (iv) payment
through a broker-dealer sale and remittance procedure pursuant to which Optionee
shall provide irrevocable written instructions to a designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the Company, out
of the sale proceeds available on the settlement date, sufficient funds to cover
the aggregate Exercise Price (plus all applicable Federal and State income and
employment taxes required to be withheld by the Company by reason of such
exercise) and written directives to the Company to deliver the certificates for
the purchased shares directly to such brokerage firm in order to complete the
sale transaction. Upon receipt of any such notice and accompanying payment, and
subject to the terms hereof, the Company agrees to issue to the Optionee or the
Optionee's administrators, executors or personal representatives, as the case
may
-2-
<PAGE> 16
be, stock certificates for the number of shares specified in such notice
registered in the name of the person exercising this Option.
7. Adjustment in Option. The number of shares of Stock subject to
this Option, the Exercise Price and other matters are subject to adjustment
during the term of this Option in accordance with the Plan.
8. Termination of Employment.
(a) Except as otherwise specified in Schedule A hereto,
in the event of the termination of the Optionee's employment with the Company or
any of its Subsidiaries, other than a termination that is either (i) For Cause,
or (ii) for reasons of death or Disability or retirement, the Optionee (or his
or her personal representative) may exercise this Option at any time within
ninety (90) days after such termination to the extent of the number of shares
which were Purchasable hereunder at the date of such termination; provided,
however, that if the Optionee is a Section 16 Insider at the time of termination
and the exercise of this Option would subject the Optionee to matching pursuant
to Section 16(b) of the Exchange Act, such Optionee may exercise this Option at
any time within nine (9) months after the date of termination, to the extent of
the number of shares which were Purchasable hereunder at the date of such
termination.
(b) Except as specified in Schedule A, in the event of a
termination of the Optionee's employment that is For Cause, this Option, to the
extent not previously exercised, shall terminate immediately and shall not
thereafter be or become exercisable.
(c) This Option does not confer upon the Optionee any
right with respect to continuance of employment by the Company or by any of its
Subsidiaries. This Option shall not be affected by any change of employment so
long as the Optionee continues to be an employee of the Company or any of its
Subsidiaries.
9. Disabled Optionee. In the event of termination of employment
because of the Optionee's becoming a Disabled Optionee, the Optionee (or his or
her legal representative) may exercise this Option within a period ending on the
earlier of (a) the last day of the one (1) year period following the beginning
of the Optionee's Disability or (b) the expiration date of this Option, to the
extent of the number of shares which were Purchasable hereunder at the date of
such termination.
10. Death of Optionee. Except as otherwise set forth in Schedule A
with respect to the rights of the Optionee upon termination of employment under
Section 8(a) above, in the event of the Optionee's death, the appropriate
persons described in Section 6 hereof or persons
-3-
<PAGE> 17
to whom all or a portion of this Option is transferred in accordance with
Section 5 hereof may exercise this Option at any time within a period ending on
the earlier of (a) the last day of the one (1) year period following the
Optionee's death or (b) the expiration date of this Option. If the Optionee was
an employee of the Company at the time of death, this Option may be so exercised
to the extent of the number of shares that were Purchasable hereunder at the
date of death. If the Optionee's employment terminated prior to his or her
death, this Option may be exercised only to the extent of the number of shares
covered by this Option which were Purchasable hereunder at the date of such
termination.
11. Date of Grant. This Option was granted by the Board or
Committee on the date set forth in Schedule A (the "Date of Grant").
12. Compliance with Regulatory Matters. The Optionee acknowledges
that the issuance of capital stock of the Company is subject to limitations
imposed by federal and state law and the Optionee hereby agrees that the Company
shall not be obligated to issue any shares of Stock upon exercise of this Option
that would cause the Company to violate law or any rule, regulation, order or
consent decree of any regulatory authority (including without limitation the
Securities and Exchange Commission) having jurisdiction over the affairs of the
Company. The Optionee agrees that he or she will provide the Company with such
information as is reasonably requested by the Company or its counsel to
determine whether the issuance of Stock complies with the provisions described
by this Section.
13. Restriction on Disposition of Shares. The shares of Stock
purchased pursuant to the exercise of this Option shall not be transferred by
the Optionee except pursuant to the Optionee's will or the laws of descent and
distribution until such date which is the later of two (2) years after the Date
of Grant or one (1) year after the transfer of the shares of Stock to the
Optionee pursuant to the exercise of such Option.
14. Investment Representation of Optionee
(a) Optionee represents to the Company the following:
(i) that Optionee has read and understands the
terms and provisions of the Plan, and hereby accepts this
Agreement subject to all the terms and provisions of the Plan;
(ii) that Optionee shall accept as binding and
final all decisions or interpretations of the Board or of the
Committee upon any questions arising under the Plan;
(iii) Optionee understands that the existence of
the Plan and the execution of this Agreement are not
sufficient by themselves to cause any exercise of any
Incentive Stock Options granted under the Plan and this
Agreement to qualify for favorable tax treatment through the
application of Section 422(a) of the Code; and that Optionee
must, in order to so qualify, individually meet by Optionee's
own action all applicable requirements of Section 422,
including without limitation, the
-4-
<PAGE> 18
requirement that no disposition of Stock may be made by
Optionee within two (2) years from the date of the grant of
the Option nor within one (1) year after the transfer of such
Stock to Optionee; and
(iv) Optionee understands that, unless at the
time of exercise of the Option, a registration statement under
the Securities Act of 1933, as amended, is in effect covering
the Stock, as a condition to the exercise of the Option the
Company may require Optionee to represent that Optionee is
acquiring the Stock for Optionee's own account only and not
with a view to, or for sale in connection with, any
distribution of the Stock.
(b) The Optionee understands and agrees that the certificate or
certificates representing any shares of Stock acquired hereunder may bear an
appropriate legend relating to registration and resale under federal and state
securities laws.
(c) The Optionee shall not have any rights of a stockholder of the
Company with respect to the shares of Stock which may be purchased upon exercise
of this Option, unless and until such shares shall have been issued and
delivered and his/her name has been entered as a stockholder on the stock
transfer records of the Company.
10. Miscellaneous.
(a) This Agreement shall be binding upon the parties
hereto and their representatives, successors and assigns.
(b) This Agreement is executed and delivered in, and
shall be governed by the laws of, the State of Delaware, without regard to
conflicts of laws principles.
(c) Any notice, request, document or other communication
given hereunder shall be deemed to be sufficiently given upon personal delivery
to the other party or upon the expiration of three (3) days after depositing
same in the United States mail, return receipt requested, properly addressed to
the respective parties or such other address as they may give to the other party
in writing in the same manner as follows:
Company: OrthAlliance, Inc.
23848 Hawthorne Blvd., Suite 200
Torrance, California 90505
Attention: Senior Vice President, General Counsel
Optionee: __________________________________________
__________________________________________
__________________________________________
__________________________________________
-5-
<PAGE> 19
(d) This Agreement may not be modified except in writing
executed by each of the parties hereto.
(e) This Agreement, together with the Plan, contains the
entire understanding of the parties hereto and supersedes any prior
understanding and/or written or oral agreement between them respecting the
subject matter hereof.
(f) The parties agree that the provisions of this
Agreement are severable and the invalidity or unenforceability of any provision
in whole or part shall not affect the validity or enforceability of any
enforceable part of such provision or any other provisions hereof.
(g) The headings with Sections herein are included solely
for convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
(h) No waiver of any breach or default hereunder shall be
considered valid unless in writing, and no such waiver shall be deemed a waiver
of any subsequent breach or default of the same or similar nature.
(i) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Board or Committee has caused this
Stock Option Agreement to be executed on behalf of the Company, and the
Optionee has executed this Stock Option Agreement, all as of the day and year
first above written.
COMPANY:
ORTHALLIANCE, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
OPTIONEE:
By:
--------------------------------
-6-
<PAGE> 20
SCHEDULE A
TO
STOCK OPTION AGREEMENT
BETWEEN
ORTHALLIANCE, INC.
AND
[Name of Optionee]
Dated ________________
1. Number of Shares Subject to Option: ________________ shares of Stock.
2. This Option (Check one) [ ] is [ ] is not an Incentive Stock Option.
3. Option Exercise Price: $_________________ per share.
4. Date of Grant: ________________________
5. Option Vesting Schedule:
Options are exercisable with respect to the number of shares of Stock indicated
below on or after the date indicated next to the number of shares:
No. of Shares Vesting Date
Notwithstanding the vesting schedule set forth above, upon a Change in
Control, as defined in the Plan, all Options granted hereunder shall become
exercisable immediately upon the occurrence of such Change in Control for a
period of ninety (90) days after written notice to Optionee of the right to such
Options. Any Options not exercised within such ninety day period shall terminate
after the expiration of such period.
6. Option Exercise Period:
<PAGE> 21
SCHEDULE B
TO
STOCK OPTION AGREEMENT
BETWEEN
ORTHALLIANCE, INC.
AND
[Name of Optionee]
Dated ________________
NOTICE OF EXERCISE
The undersigned hereby notifies OrthAlliance, Inc. (the
"Company") of this election to exercise the undersigned's stock option to
purchase ________________ shares of Stock (as defined under the Plan) pursuant
to the Stock Option Agreement (the "Agreement") between the undersigned and the
Company dated ________________. Accompanying this Notice is (1) a certified or a
cashier's check in the amount of $________________ payable to the Company,
and/or (2) _______________ shares of Stock (as defined under the Plan) presently
owned by the undersigned and duly endorsed or accompanied by stock transfer
powers, having an aggregate Fair Market Value (as defined under the Plan) as of
the date hereof of $__________________, such amounts being equal, in the
aggregate, to the purchase price per share set forth in Section 3 of the
Agreement multiplied by the number of shares being purchased hereby (in each
instance subject to appropriate adjustment pursuant to Section 5 of the
Agreement), and/or (3) evidence of a cashless exercise as set forth in Section 6
of the Agreement.
The undersigned is a resident of the State of ______________.
IN WITNESS WHEREOF, the undersigned has set his/her hand and
seal, this ________ day of ________________, ______.
OPTIONEE [OR OPTIONEE'S ADMINISTRATOR,
EXECUTOR OR PERSONAL REPRESENTATIVE]
----------------------------------------------
Name:
-----------------------------------------
Position (if other than Optionee):
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
August 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ORTHALLIANCE, INC. FOR THE TWO MONTHS ENDED DECEMBER 31,
1996 AND THE SIX MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 2-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 JUN-30-1997
<PERIOD-START> OCT-21-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 0
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 0
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 (4,090)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 0 (4,090)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 0 (4,090)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 .37
</TABLE>
