<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8 - K/A
----------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 1, 2000
----------------
ORTHALLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 000-22975 95-4632134
(STATE OR JURISDICTION OF (COMMISSION FILE (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) NUMBER) IDENTIFICATION NO.)
----------------
21535 HAWTHORNE BOULEVARD, SUITE 200
TORRANCE, CALIFORNIA 90503
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(310) 792-1300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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ORTHALLIANCE, INC.
FORM 8-K/A
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
Item 7. Financial Statements and Exhibits:
(a) Financial Statements of the Business Acquired:
New Image Orthodontic Group, Inc. Consolidated Financial Statements
And Report of Independent Public Accountants:
Report of Independent Public Accountants................................ 3
Consolidated Balance Sheet as of December 31,1999....................... 4
Consolidated Statement of Operations for the Year Ended
December 31, 1999..................................................... 5
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1999..................................................... 6
Consolidated Statement of Stockholders' Deficit for the
Year Ended December 31, 1999.......................................... 7
Notes to Consolidated Financial Statements............................. 8
(b) Pro Forma Financial Information:
OrthAlliance, Inc. Pro Forma Condensed Combined Balance Sheet
as of December 31, 1999 (unaudited)...................................... 21
OrthAlliance, Inc. Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1999
(unaudited)............................................................... 22
Notes to Pro Forma Condensed Combined Financial Statements (unaudited).... 23
(c) Exhibits.................................................................. 26
Signatures.................................................................... 27
</TABLE>
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF THE BUSINESS ACQUIRED.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of OrthAlliance, Inc.:
We have audited the accompanying consolidated balance sheet of New Image
Orthodontic Group, Inc. (a Georgia corporation) and Subsidiary as of December
31, 1999, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New Image
Orthodontic Group, Inc. and Subsidiary as of December 31, 1999, and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
April 28, 2000
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NEW IMAGE ORTHODONTIC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - DECEMBER 31, 1999
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash and cash equivalents $ 297
Patient receivables, net of allowance for doubtful accounts of $596 641
Amounts due from Allied Practices 3,674
Other current assets 279
--------
Total current assets 4,891
Property and equipment, net 3,042
Service agreements, net 38,180
Other, net 577
--------
Total assets $ 46,690
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of notes payable to Allied Practices $ 2,199
Accounts payable 661
Accrued liabilities 1,521
Patient prepayments 5,110
Amounts due to Allied Practices 663
--------
Total current liabilities 10,154
Notes payable to Allied Practices 11,389
Unsecured Class A subordinated zero coupon notes 10,746
Non-current deferred tax liabilities 8,621
Commitments and contingencies:
Series A redeemable preferred stock, $1 stated value; 6,575 shares authorized,
issued and outstanding; redemption and liquidation values of $8,614 8,303
Stockholders' deficit:
Preferred stock, $1 stated value, 18,425 shares authorized, no shares
issued and outstanding -
Series B preferred stock, no par value, 25,000 shares authorized, 3,964
shares issued and outstanding, liquidation value of $4,402 2,970
Common stock, no par value, 100,000 shares authorized, 5,751 shares issued
and outstanding 93
Contributed capital 8,500
Accumulated deficit (14,086)
--------
Total stockholders' deficit (2,523)
--------
Total liabilities and stockholders' deficit $ 46,690
========
</TABLE>
The accompanying notes are an integral part of this consolidated balance
sheet.
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NEW IMAGE ORTHODONTIC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C>
Net revenues $ 22,796
Costs and expenses:
Salaries and benefits 10,734
Orthodontic supplies 3,290
Rent 3,275
--------
Total direct expenses 17,299
General and administrative 5,246
Depreciation and amortization 2,335
--------
Total operating expenses 24,880
--------
Operating loss (2,084)
Interest expense 2,777
Interest income (28)
--------
Net loss $ (4,833)
========
Basic and diluted loss per share $ (1.05)
========
Weighted average number of common shares:
Basic and diluted 5,635
========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
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NEW IMAGE ORTHODONTIC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss $(4,833)
Adjustments to reconcile net loss to net cash used in operating
activities:
Non-cash interest expense 1,549
Depreciation and amortization 2,335
Changes in assets and liabilities, excluding effects of acquisitions:
Patient receivables, net of allowance for doubtful accounts 264
Amounts due from Allied Practices (345)
Other assets (42)
Accounts payable and accrued liabilities 362
Patient prepayments 125
Amounts due to Allied Practices 286
-------
Net cash used in operating activities (299)
Cash flows used in investing activities:
Payments for practice affiliations (660)
Capital expenditures (1,656)
Proceeds from sale of practice assets 120
-------
Net cash used in investing activities (2,196)
Cash flows provided by financing activities:
Proceeds from cash advances and issuance of notes payable to
Allied Practices and unsecured Class A subordinated zero coupon notes 2,850
Repayment of notes payable to Allied Practices (1,950)
Contribution of capital - Goldman Sachs 1,650
Proceeds from exercise of Goldman Sachs options 6
-------
Net cash provided by financing activities 2,556
Increase in cash and cash equivalents 61
Cash and cash equivalents at beginning of year 236
-------
Cash and cash equivalents at end of year $ 297
=======
Supplemental cash flow information:
Cash paid during the year for interest $ 1,182
=======
Non-cash investing activities:
Acquisition of service agreements:
Fair value of assets acquired $ 1,336
Less: cash paid for practice affiliations (660)
-------
Notes payable and liabilities assumed $ 676
=======
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
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NEW IMAGE ORTHODONTIC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B PREFERRED STOCK COMMON STOCK
------------------------ ------------------ CONTRIBUTED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1999 3,964 $2,720 5,173 $ 87 $ - $ (8,144) $(5,337)
Stock options exercised - - 578 6 - - 6
Contribution of capital -
Goldman Sachs - - - - 8,500 - 8,500
Accrued dividends of
Series A and Series B
preferred stock - 250 - - - (1,035) (785)
Accretion of Series A
preferred stock - - - - - (74) (74)
Net loss - - - - - (4,833) (4,833)
------ ------ ------ ------ -------- -------- -------
Balances, December 31, 1999 3,964 $2,970 5,751 $ 93 $ 8,500 $(14,086) $(2,523)
====== ====== ====== ====== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
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NEW IMAGE ORTHODONTIC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
(a) ORGANIZATION
New Image Orthodontic Group, Inc. (the "Company"), a Georgia corporation, was
founded in February 1997 to provide business operations, financial, marketing
and administrative services to orthodontic practices ("Allied Practices")
pursuant to long-term management service agreements ("Service Agreements").
These Service Agreements are generally for a term of 40 years subject to prior
termination by either party in the event the other party becomes subject to
voluntary or involuntary bankruptcy proceedings or materially breaches the
agreement, subject to a cure period. As of December 31, 1999, the Company
provided management services to 30 orthodontic practices in 9 states.
Imagix LLC ("Imagix"), a Georgia corporation, was formed in 1999 to provide
practice management services to children's dental and orthodontic centers.
Imagix is a wholly owned subsidiary and accordingly the consolidated financial
statements include the accounts of the Company and Imagix.
On February 29, 2000, the Company completed a Purchase and Sale Agreement with
OrthAlliance New Image, Inc. whereby OrthAlliance New Image, Inc. acquired
substantially all of the assets of the Company. See note 13.
(b) SERVICE AGREEMENTS WITH ALLIED PRACTICES
The parties to each Service Agreement include the Company and the Allied
Practice, which typically is a professional corporation or association owned by
the related orthodontist. 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 prohibits, hygienists and dental
assistants); purchase and maintain inventory; perform payroll and accounting
functions; provide billing and collection services with respect to patients,
insurance companies, and third-party payors; design and execute a marketing
plan; and manage and organize the Allied Practices' files and records, including
patient records where permitted by applicable law. In exchange for performing
the services described above, the Company receives a management fee based on the
fee structure described below.
(c) CALCULATION OF MANAGEMENT FEES
Management fees are calculated pursuant to the Service Agreements based upon the
Allied Practice's adjusted patient revenue calculated on the accrual basis.
Generally, the management fee is a percentage of patient revenue ("Fee
Percentage") determined based on two factors i) the dollar amount of patient
revenues and ii) the overhead
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expenses of the practice as a percentage of patient revenues. The Fee
Percentage generally ranges from 8% to 19.5%. In some cases, the Allied Practice
guarantees a minimum level of management fees to be paid to the Company over the
term of the management agreement. Certain Service Agreements provide for certain
management fee decreases to provide the orthodontist with a minimum compensation
level. The Company's average Fee Percentage for the year ended December 31, 1999
was 16.6%.
Patient revenue is recognized as services are performed. For orthodontic
services, approximately 24% of the orthodontic contract revenues are recognized
at the time of initial treatment. The balance of the contract revenue is
realized evenly over the remaining treatment period. The 24% 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 reported by the Company include certain of the expenses to operate the
orthodontic offices and all of the expenses of any corporate offices, facilities
or functions.
The difference in the timing of the recognition of patient revenue and the
collection of cash related thereto results in unbilled patient receivables or
patient prepayments. Unbilled patient receivables represent the earned revenue
in excess of billings to patients as of the end of each period. Patient
prepayments represent collections from patients or their insurance companies
which are received in advance of the performance of the related services.
Patient receivables are recorded at net realizable value on the date of purchase
and subsequent collections are used to pay Allied Practice operating expenses,
the Company's management fee, and payments to the Allied Practices. Generally,
any subsequent uncollectible accounts are recorded as a reduction of net
revenues, which reduces the Company's management fees at the applicable fee
percentage.
The Company is responsible for the payment of all operating expenses incurred by
the Allied Practice, except for compensation to affiliated orthodontists and
other expenses of the Allied Practices that the Company is prohibited from
paying. Expenses that are the responsibility of the Company include the
following: (i) salaries, benefits, payroll taxes, workers compensation, health
insurance and other benefit plans, and other direct expenses of all employees of
the Company at each practice office, excluding those costs associated with
orthodontists and any other classification of employee which the Company is
prohibited from employing by applicable state laws or regulations; (ii) direct
costs of all employees or consultants that provide services to each practice
office except for orthodontists and other employees of the Allied Practices that
the Company is prohibited from employing, (iii) dental and office supplies as
permitted by applicable state laws or regulations, (iv) lease or rent payments
as permitted by state laws or regulations, utilities, telephone and maintenance
expenses for practice facilities, (v) property taxes on the Company's assets
located at Allied Practice offices, (vi) property, casualty, and liability
insurance premiums, (vii) orthodontists recruiting expenses, and (viii)
advertising and other marketing expenses attributable to the promotion of
practice offices.
All of the above expenses are paid directly to the third party provider of the
goods or services indicated. All of the above expenses are incurred by the
Company. Such expenses are classified together with similar expenses of the
Company in the consolidated statement of operations. In exchange for incurring
these expenses and providing management services, the Company records revenue in
amounts equal to those incurred expenses.
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<PAGE> 10
The Allied Practices retain the responsibility for the payment of any and all
direct employment expenses, including benefits, for any orthodontist or other
employee that the Company is prohibited from employing by applicable state laws
or regulations. In addition, the Allied Practices retain the responsibility for
the payment of continuing education expenses, seminars, professional licenses,
professional membership dues and all other expenses of any orthodontist.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and its wholly owned
subsidiary. The Company does not consolidate the operations of the Allied
Practices which it manages as the Company's arrangements with its Allied
Practices do not meet the requirements for consolidation as set forth in
Emerging Issues Task Force consensus opinion 97-2 ("EITF 97-2"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
(b) 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(c) CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
(d) CONCENTRATION OF CREDIT RISK
Patient revenue is earned in nine states with a concentration in Texas. The
Allied Practices extend credit to certain patients. The Company reviews the
allowance for doubtful accounts for the Allied Practices based upon the credit
risk of specific customers, historical experience and other information. An
allowance for doubtful accounts is established for patient accounts receivable
estimated to be uncollectible and is adjusted periodically based upon
management's evaluation. The Company's exposure to credit risk with respect to
accounts receivable is limited due to the large number of payors and their
geographic dispersion.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost or fair value at acquisition date if
acquired upon affiliation of an Allied Practice. Routine repairs and maintenance
are expensed as incurred. Depreciation expense is provided using the
straight-line method over the estimated remaining useful lives of the assets as
follows:
Orthodontic equipment 5 to 10 years
Furniture and fixtures 5 to 7 years
(f) SERVICE AGREEMENTS
The Company's acquisition of Service Agreements involves the purchase of
tangible and intangible assets and the assumption of certain liabilities of the
Allied Practices. The Company allocates the purchase price to the tangible
assets acquired and liabilities assumed based on estimated fair values. In
connection with each acquisition, the Company enters into Service Agreements
with the Allied Practices that are generally for terms of 40 years. The Service
Agreements can be terminated by either party only with cause, which is primarily
bankruptcy or material default. Service Agreement intangibles are being
amortized using the straight-line method over 25 years. The
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Company continually evaluates whether events and circumstances have occurred
that indicate the remaining useful life of the intangible assets may warrant
revision or that the remaining balance of the intangible assets may not be
recoverable. As of December 31, 1999, there were no events or circumstances to
indicate that any portion of the recorded Service Agreements may not be
recoverable.
Amortization expense related to Service Agreements for the year ended December
31, 1999 was approximately $1,660. Accumulated amortization related to Service
Agreements as of December 31, 1999 was $3,241.
(g) OTHER, NET
Other, net consist mainly of deferred costs related to the issuances of debt.
These costs are amortized using the straight-line method over the term of the
related debt. Amortization expense was $89 for the year ended December 31, 1999.
Accumulated amortization was $150 as of December 31, 1999.
(h) NET REVENUES
Net revenues consist of management fee income and reimbursed practice operating
expenses. Such reimbursed practice operating expenses were $17,722 for the year
ended December 31, 1999.
(i) INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax assets and liabilities for expected future
tax consequences of events that have been recognized in the financial statements
or tax returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial statement carrying
amounts and the tax basis of such assets and liabilities using statutory tax
rates and laws in effect in the years in which the differences are expected to
reverse.
(j) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments which include cash and cash equivalents,
patient receivables, accounts payables, amounts due to orthodontic practices,
other current liabilities, long-term debt and Series A redeemable preferred
stock are stated at amounts considered to be representative of their respective
fair values.
(k) NEW ACCOUNTING PRONOUNCEMENTS
In January 1999 the Company implemented Statement of Position 98-5 ("SOP 98-5")
"Reporting on Costs of Start-up Activities." SOP 98-5 requires net costs of
start-up activities, including organizational costs, to be expensed as incurred.
In addition, SOP 98-5 requires that previously capitalized start-up costs be
expensed upon the effective date. The Company does not have any start-up costs
capitalized as of December 31, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that entities recognize all derivatives as either assets or liabilities in the
statement of
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financial position and measure those instruments at fair value. The
Company does not have any derivative instruments as of December 31, 1999.
The Company has adopted Staff Accounting Bulletin Number 101, "Revenue
Recognition Issues", issued December 3, 1999 ("SAB 101"). This pronouncement
states that revenue is generally realized or realizable and earned when all of
the following criteria are met: i) pervasive evidence of an arrangement exists,
ii) delivery has occurred or services rendered, iii) the seller's price to the
buyer is fixed or determinable and iv) collectibility is reasonably assured. The
adoption of SAB 101 did not have a material impact on the Company's financial
position or the results of its operations.
3. ORTHODONTIST AFFILIATIONS
During 1999, the Company entered into Service Agreements with two orthodontists
with three office locations for a total consideration (including acquisition
costs) of $1,336 which consisted of $660 in cash and $676 of notes payable and
liabilities assumed.
4. PROPERTY AND EQUIPMENT
Property and equipment, net consist of the following as of December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $ 2,713
Orthodontic equipment 1,269
---------
3,982
Less: accumulated depreciation (940)
---------
$ 3,042
=========
</TABLE>
5. LONG-TERM DEBT
Long-term debt as of December 31, 1999 is summarized in the following table:
<TABLE>
Notes payable
to Allied
Practices Class A Notes
------------ ------------
<S> <C> <C>
Notes payable to Allied Practices $13,588 $ --
Unsecured Class A subordinated zero-coupon notes (net of
unamortized original issue discount) -- 10,746
------- -------
13,588 10,746
Less: current portion 2,199 --
------- -------
$11,389 $10,746
======= =======
</TABLE>
The notes payable to Allied Practices were issued in connection with the
affiliations of such practices with the Company. These notes bear interest at
rates ranging from 9% to 10% and typically mature over a seven-year period from
their original dates of issuance. Notes payable to Allied Practices with a
principal balance of $2,889 are secured by the assets of the related Allied
practice.
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At the option of the holders, any or all of the then outstanding notes payable
to Allied Practices may be converted into shares of the Company's common stock
on the date that a registration statement filed with the Securities and Exchange
Commission ("SEC") in connection with an initial public offering of the
Company's common stock is declared effective ("IPO").
The Class A subordinated zero-coupon notes ("Class A Notes") were issued to
Goldman Sachs for cash proceeds of $15,000 and had a maturity value of $24,158.
This original issue discount of $9,158 represents an effective interest rate of
10% per annum and is being amortized, as interest expense, using the effective
interest method. Such amortization amounted to $1,473 for the year ended
December 31, 1999.
The Class A Notes are mandatorily redeemable in the event of (i) an underwritten
IPO, (ii) any merger involving the Company which results in greater than 50%
dilution of the Company's pre-merger voting common stock ownership, or (iii) the
sale of substantially all of the Company's assets. The redemption price would be
equal to the issue price plus accrued original issue discount at 10% per annum.
At the option of the holder, the Class A Notes may be converted into shares of
the Company's common stock on the date that a registration statement filed with
the SEC in connection with an IPO of the Company's common stock is declared
effective. The notes (issue price plus accrued original issue discount) may be
converted, in whole or in part, at the IPO price per share.
In November 1999, Goldman Sachs contributed Class A Notes with a redemption
value of $6,850 to the capital of the Company. In addition, cash advances from
Goldman Sachs of $1,650, made to the Company for the year ended December 31,
1999, were also contributed to the Company's capital.
The aggregate maturities of long-term notes payable as of December 31, 1999 and
for each of the next five years are:
Notes Payable
to Allied
Practices Class A Notes
----------------- -------------
2000 $ 2,199 $ -
2001 2,297 -
2002 2,151 8,053
2003 2,151 6,074
2004 3,512 -
Thereafter 1,278 -
------------ ----------
13,588 14,127
Less unamortized original
issue discount - (3,381)
------------ ----------
$ 13,588 $ 10,746
============ ==========
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6. PREFERRED AND COMMON STOCK
On February 28, 1997, the Company sold 6,375,000 shares of Series A preferred
stock and 2,401,432 shares of common stock for aggregate consideration of $5,883
(net of issuance costs of $467) primarily to Goldman Sachs. In connection with
this sale, the Company sold to Goldman Sachs an option, for $25 cash, as
subsequently amended, to purchase, in the aggregate, up to 9,000,000 additional
securities units. Each unit consists of a Class A Note in the principal amount
of $1 and .222 shares of common stock (aggregating approximately 2,000,000
shares), at a purchase price of $1 per unit. The option will expire upon the
earlier of (i) an IPO or (ii) February 26, 2020. Goldman Sachs exercised the
remaining portion of the option in 1999 and purchased 3,000,000 units for
consideration of $3,000. Goldman Sachs waived their right to receive common
stock shares on the last 400,000 units acquired in 1999.
In connection with the February 28, 1997 financing, the Company agreed to pay a
fee to its initial venture capitalist ranging from 2.5% to 5% of the first
$25,000 of funds invested in the Company by Goldman Sachs. During the year ended
December 31, 1999, the Company paid its initial venture capitalist $150. One of
the Company's directors is a principal of the Company's initial venture
capitalist.
At inception, the Company issued 360,000 shares of restricted common stock and
warrants to purchase an aggregate of 288,000 shares of common stock to certain
officers and orthodontists that participated in the founding of the Company. The
restricted shares vest 25% per year over a four-year period with accelerated
vesting for certain of the stock issuances in the event certain performance
targets are achieved. The warrants have an exercise price of $12.50 per share
and expire in February 2004. The warrants vest 20% per year over a five-year
period with accelerated full vesting in the event of an IPO. The fair value of
the stock and warrants was approximately $8.
The holders of the Series A preferred stock are entitled to receive dividends,
if declared by the Board of Directors. Dividends accrue at 10% per annum of the
stated value of $1 per share and are cumulative whether or not declared.
Dividends may not be paid on common stock if any Series A preferred stock
dividends have not been paid. The holders of Series A preferred stock are
entitled to one vote for each share of Series A preferred, and the holders of
shares of Series A preferred and common stock vote together as a single class.
The holders of the Series A preferred stock have the right to require the
Company to redeem all of the outstanding Series A preferred stock at the
earliest of (i) the seventh anniversary of the date of issuance, (ii) an IPO,
(iii) any
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merger which results in dilution greater than 50% to the pre-merger
common stockholders and (iv) the sale of substantially all of the Company's
assets. In the event the Series A preferred stock is redeemed, the redemption
price is equal to the original issue price plus any accumulated but unpaid
dividends. The redemption price of the Series A preferred stock was
approximately $8,614 as of December 31, 1999 of which $2,039 represented
cumulative dividends in arrears. The Company has no funding requirements prior
to the redemption date.
The book value of the Series A preferred stock as of December 31, 1999 was
$8,303. The difference between the book value and redemption value represents
unamortized original issue discount and issuance costs related to the Series A
preferred stock. These are being accepted over the term of the Series A notes.
Such accretion for the year ended December 31, 1999 was approximately $75.
At the option of the holders, the Series A preferred stock may be converted into
shares of the Company's common stock on the date that a registration statement
filed with the SEC in connection with an IPO is declared effective. The Series A
preferred stock (stated value plus unpaid cumulative dividends) may be converted
in whole or in part, at the IPO price per share.
The holders of the Series B preferred stock are entitled to receive dividends,
if declared by the Board of Directors. Dividends on the Series B preferred stock
are payable annually in arrears. Dividends accrue at 6% per annum of the stated
value of $1 per share and are cumulative whether or not declared. Dividends may
not be paid on common stock if any Series B preferred stock dividends have not
been paid. For purposes of dividends and liquidation preferences, the Series B
preferred stock and Series A preferred stock are considered to be parity
securities. The holders of Series B preferred stock do not have voting rights,
except for matters that would alter or change the rights, preferences or
privileges of the Series B preferred stockholders.
The Series B preferred stock must be converted into shares of the Company's
common stock on the date that a registration statement filed with the SEC in
connection with an IPO is declared effective. The Series B preferred stock
(stated value plus unpaid cumulative dividends) will be converted at the IPO
price per share.
In the event of liquidation, dissolution or winding up of the business, the
holders of the Series A and Series B preferred stock would be entitled to
receive a liquidation payment prior to any distribution to common stockholders.
The liquidation payment would be equal to $1 per share plus the amount of any
cumulative dividends accrued and unpaid with respect to such shares. The
liquidation value of the Series B preferred stock was approximately $4,402 as of
December 31, 1999 of which $438 represented cumulative dividends in arrears.
7. STOCK INCENTIVE PLANS
The Company has adopted two separate Stock Incentive Plans ("the Plans"), which
provide for issuance of stock options and restricted stock awards to employees,
consultants, directors and advisors. Options and restricted stock awards may be
granted under the Plans with an exercise price not less than the fair value of
the Company's common stock on the date of the grant, as determined by the Board
of Directors in the absence of a readily available market for the Company's
stock. Options become exercisable and expire as determined by the Board of
Directors, generally over six years.
The Company accounts for the Plans under APB Opinion No. 25, "Accounting for
Stock Issued to Employees", as permitted by SFAS 123 "Accounting for Stock-Based
Compensation", ("SFAS 123") and thus recognizes no
15
<PAGE> 16
compensation expense for options granted to employees with exercise prices that
are equal to or greater than the fair value of the Company's stock, as
determined by the Board of Directors, on the date of the grant.
SFAS 123 requires certain pro forma and other disclosures to reflect the impact
on net loss and earnings per share as if the Company had accounted for its
employee stock options under the fair value method. The fair value method for
these options was estimated at the date of grant using a minimum value pricing
model with the following weighted average assumptions for 1999: a risk free
interest rate of 6.75%; no dividend yield and the expected option life of five
years. Under this method, no compensation expense would have been recognized for
stock options issued to employees.
In 1997, the Company awarded 790,000 shares of restricted common stock to
employees of the Company. The restricted common stock vests over a period of
five years, with accelerated vesting for certain of the stock issuances in the
event certain performance targets are achieved. During the year ended December
31, 1999, 2,000 shares of restricted common stock were forfeited by employees
and by consultants who did not meet vesting requirements. The fair value of the
restricted stock at the award dates was approximately $13,000, which is being
amortized over the vesting periods.
The following stock options were outstanding:
<TABLE>
<CAPTION>
Number of Exercise Price
Options Per Share
---------- -----------------
<S> <C> <C>
Balance at January 1, 1999 410,000 $2.50 - 7.88
Granted 16,000 $6.88 - 7.88
Canceled 15,000 $2.50
----------
Balance at December 31, 1999 411,000 $2.50 - 7.88
==========
</TABLE>
The following table summarizes information concerning currently outstanding and
exercisable options under the Plans:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------- ----------------------------
Weighted-
Average Weighted
Remaining Average Weighted-
Range of Number Contractual Exercise Number Average
Exercise Price Outstanding Life Price Outstanding Exercise Price
- ------------------ -------------- ------------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
$2.50 - $3.50 80,000 8.3 $2.66 46,000 $2.57
$6.88 - $7.88 331,000 3.4 6.93 331,000 6.93
---------- ---------
411,000 4.4 6.10 377,000 6.40
========== =========
</TABLE>
16
<PAGE> 17
8. INCOME TAXES
The Company has no income tax benefit or expense for the year ended December 31,
1999.
A reconciliation of the income tax benefit calculated at the statutory federal
income tax rate to the actual income tax benefit or expense provided for the
year ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal income tax benefit at statutory rate $ (1,643)
State taxes, net of federal benefit (290)
Effect of disallowed expenses 17
Increase in valuation allowance 1,916
---------
$ -
=========
Deferred tax assets and liabilities consist of the
following at December 31, 1999:
Deferred tax assets:
Property and equipment $ 18
Patient prepayments 820
Net operating loss carryforward 4,126
Accrued liabilities 321
---------
Total deferred tax assets 5,285
Deferred tax liabilities:
Patient receivables (455)
Service agreements and other intangibles (8,525)
Other (12)
---------
Total deferred tax liabilities (8,992)
Less: valuation allowance (4,914)
---------
Net deferred tax liability $ (8,621)
=========
</TABLE>
As of December 31, 1999, the Company had available net operating loss
carryforwards of approximately $10,328 available to reduce future federal income
taxes, if any. Of these carryforwards, $2,782, $3,462 and $4,084 will expire in
2012, 2018 and 2019, respectively.
9. 401(K) PLAN
The Company maintains a defined contribution 401(k) plan for the benefit of
employees meeting certain eligibility requirements. Participants in the
Company's 401(k) plan can elect to contribute the lesser of amounts allowed
under IRS regulations or 15% of their annual salary.
10. RELATED PARTY TRANSACTIONS
In connection with the purchase of the orthodontic practice of the Company's
chairman, the Company issued a note payable to its chairman. During the year
ended December 31, 1999 the Company's chairman received principal payments of
$26 and interest payments of $14. In addition, the Company assumed a
pre-existing office
17
<PAGE> 18
lease of the Company's Chairman. Rent expense under the lease was approximately
$38 during the year ended December 31, 1999.
The Company carries a broad range of insurance coverage, including general
liability, comprehensive property damage, workers' compensation, employers'
liability, directors' and officers' liability and other coverage customary in
the industry. The Company and the existing Allied Practices maintain
professional liability insurance coverage on a claims-made basis. Such insurance
provides coverage for claims asserted when the policy is in effect, regardless
of when the events that caused the claim occurred.
11. EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings per Share, the Company computes basic
and diluted loss attributable to common stockholders per share of common stock
by dividing the net loss for the year by the weighted average number of shares
of common stock shares outstanding during the year.
The following table sets forth the computation of basic and diluted loss per
share for the year ended December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Net loss $(4,833)
Less: preference dividends on Series A and
Series B preferred stock (1,035)
Less: accretion to Series A preferred stock (75)
-------
Loss attributable to common stockholders $(5,943)
=======
Determination of shares:
Weighted average number of common stock shares
outstanding 5,635
Assumed conversion of diluted securities -
Diluted common stock shares outstanding 5,635
=======
Basic and diluted net loss per share $ (1.05)
=======
Certain securities which could potentially dilute EPS in the future have been
excluded from the computation of diluted EPS because to do so would have been
anti-dilutive, or because conversion contingencies were not met as of December
31, 1999. These securities are as follows as of December 31, 1999:
Common Stock shares issuable in the future pursuant to
options and warrants outstanding 699
=======
Additionally, the Class A Notes, Class A preferred stock
and Class B preferred stock may, at the option of the
respective security holders, be converted into
shares of the Company's common stock on the date that
a registration statement filed with the SEC in connection
with an IPO is declared effective. These securities are
convertible at the IPO price.
</TABLE>
18
<PAGE> 19
12. COMMITMENTS AND CONTINGENCIES
The Company may, in the normal course of business, become a defendant or
plaintiff in various matters. Although a successful claim for which the Company
is not fully insured could have a material effect on the Company's financial
condition, management is of the opinion that it maintains insurance at levels
sufficient to insure itself against the normal risk of operations.
The Company rents office space and office equipment under noncancelable
operating leases through 2009. The original lease terms are generally five to
ten years with options to renew the leases for specified periods subsequent to
their original terms. The leases have other provisions, including sharing of
certain executory costs and scheduled rent increases. Rent expense under
operating leases was approximately $3,275 for the year ended December 31, 1999.
Future minimum lease commitments for all non-cancelable leases as of December
31, 1999 are:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 1,785
2001 1,590
2002 1,171
2003 528
2004 227
Thereafter 525
---------
$ 5,826
=========
</TABLE>
13. SUBSEQUENT EVENTS (UNAUDITED)
Goldman Sachs provided additional capital contributions to the Company of $575
between January 1, 2000 and February 29, 2000 for working capital needs.
On February 29, 2000, the Company entered into a Purchase and Sale Agreement
with OrthAlliance New Image, Inc. Under the terms of this agreement, the Company
sold substantially all of its assets to OrthAlliance New Image, Inc., with the
primary exception of the Company's wholly owned subsidiary, Imagix, in exchange
for aggregate consideration including transaction costs of $33,805 including the
assumption of certain liabilities. The transaction was effective March 1, 2000.
Imagix was not material to the financial position of the Company or the results
of its operations.
19
<PAGE> 20
(B) PRO FORMA FINANCIAL INFORMATION.
ORTHALLIANCE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999
On March 1, 2000 OrthAlliance, Inc. ("OrthAlliance" or the "Company"), through
OrthAlliance New Image, Inc., a wholly owned subsidiary, closed a Purchase and
Sale Agreement with New Image Orthodontic Group, Inc. ("New Image"), a privately
held Georgia corporation based in Atlanta, Georgia. The Company acquired
substantially all the assets of New Image (the "Acquisition"). New Image was
founded in February 1997 and provided business operations, financial and
marketing and administrative services to orthodontic practices across the United
States in accordance with long term service agreements. See the Company's
Current Report on Form 8-K dated March 1, 2000.
The acquisition has been accounted for as a purchase, with the assets acquired
and liabilities assumed recorded at initial estimates of fair values, and the
results of New Image's operations included in the Company's consolidated
financial statements from the date of acquisition. The Acquisition includes
practice management agreements with 36 orthodontic practitioners operating in 50
locations with over $33.0 million in annualized revenues. Collectively, the
consideration and transaction costs associated with this transaction totaled
approximately $33.8 million. Of this amount, $5.5 million was paid in cash,
approximately $13.4 million of debt was assumed and $12.9 million in promissory
notes were issued to the sellers, with interest rates ranging from 9% to 10%.
The following pro forma condensed combined financial statements are presented to
illustrate the effect of the acquisition on the historical financial position
and operating results of OrthAlliance and New Image. The following pro forma
condensed combined balance sheet of OrthAlliance at December 31, 1999 gives
effect to the acquisition as if it occurred as of that date. The pro forma
condensed combined statement of operations for the year ended December 31, 1999
gives effect to the acquisition as if it occurred as of January 1, 1999.
The pro forma adjustments included in the unaudited pro forma condensed combined
financial statements represent the Company's preliminary determination of these
adjustments based on currently available information and on certain assumptions
that the Company's management believes are reasonable. There can be no
reasonable assurance that the actual adjustments will not differ significantly
from the pro forma adjustments. The unaudited condensed financial statements are
not necessarily indicative of the financial position of either future results of
operations or results that might have been achieved if the forgoing transaction
had been effective as of the dates indicated or to project future results of
operations for any period.
The unaudited pro forma condensed combined financial statements should be read
in conjunction with the Company's and New Image's historical consolidated
financial statements, including the notes thereto.
20
<PAGE> 21
ORTHALLIANCE, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ORTHALLIANCE NEW IMAGE ADJUSTMENTS PRO FORMA
------------ --------- ----------- ---------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 11,189 $ 297 $ (5,520) (a)(b) $ 5,966
Patient receivables, net................ 10,520 641 -- 11,161
Unbilled patient receivables, net....... 3,436 -- -- 3,436
Amounts due from Allied Practices....... 10,630 3,674 -- 14,304
Income tax receivable................... 509 -- -- 509
Current deferred tax assets............. 104 -- -- 104
Other current assets.................... 2,010 279 (53) (a)(c) 2,236
--------- --------- --------- ---------
Total current assets..................... 38,398 4,891 (5,573) 37,716
Property and equipment, net................ 6,333 3,042 (515) (a)(c) 8,860
Notes receivable, net...................... 4,920 -- -- 4,920
Non-current deferred tax assets............ 1,486 -- -- 1,486
Intangible assets, net..................... 83,620 38,180 (4,346) (a)(c) 117,454
Other, net................................. 502 577 (577) (a) 502
--------- --------- --------- ---------
Total assets............................. $ 135,259 $ 46,690 $ (11,011) $ 170,938
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 2,549 $ 661 $ (41) (a)(c) $ 3,169
Accrued liabilities..................... 2,299 1,521 960 (a)(b) 4,780
Patient prepayments..................... 6,240 5,110 -- 11,350
Practice affiliations payable........... 3,610 -- -- 3,610
Current portion of notes payable........ -- 2,199 7,520 9,719
Deferred tax liabilities................ 182 -- -- 182
Amounts due to Allied Practices......... 1,988 663 -- 2,651
--------- --------- --------- ---------
Total current liabilities............ 16,868 10,154 8,439 35,461
--------- --------- --------- ---------
Line of credit borrowings.................. 47,500 -- -- 47,500
Notes payable.............................. 2,144 22,135 (5,604) (a)(b) 18,675
Non-current deferred tax liabilities....... 935 8,621 (8,621) (a) 935
Redeemable preferred stock................. -- 8,303 (8,303) (a) --
--------- --------- --------- ---------
Total liabilities........................ 67,447 49,213 (14,089) 102,571
--------- --------- --------- ---------
Commitments and Contingencies
Stockholders' equity:
Preferred Stock.......................... -- 2,970 (2,970) (a) --
Common Stock............................. 13 8,593 (8,593) (a) 13
Additional paid-in capital............... 65,145 -- 555 (b) 65,700
Retained earnings (accumulated deficit).. 5,457 (14,086) 14,086 (a) 5,457
Treasury stock........................... (2,803) -- -- (2,803)
--------- --------- --------- ---------
Total stockholders' equity.............. 67,812 (2,523) 3,078 68,367
--------- ---------- --------- ---------
Total liabilities and stockholders'equity. $ 135,259 $ 46,690 $ (11,011) $ 170,938
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this pro forma condensed
combined balance sheet.
21
<PAGE> 22
ORTHALLIANCE, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ORTHALLIANCE NEW IMAGE ADJUSTMENTS PRO FORMA
------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues....................... $95,703 $ 22,796 $ -- $118,499
------- -------- -------- --------
Costs and expenses:
Salaries and benefits............ 28,423 10,734 (1,526) (h) 37,631
Orthodontic and dental supplies.. 9,438 3,290 -- 12,728
Rent............................. 8,252 3,275 (174) (h) 11,353
------- -------- -------- --------
Total direct expenses......... 46,113 17,299 (1,700) 61,712
General and administrative....... 26,686 5,246 (1,852) (d)(h) 30,080
Depreciation and amortization.... 3,983 2,335 (481) (e)(f) 5,837
------- -------- -------- --------
Total operating expenses...... 76,782 24,880 (4,033) 97,629
------- -------- -------- --------
Operating income (loss).......... 18,921 (2,084) 4,033 20,870
Interest income.................. 416 28 -- 444
Interest expense................. (2,450) (2,777) (225) (g) (5,452)
------- -------- -------- --------
Income (loss) before income taxes.. 16,887 (4,833) 3,808 15,862
Provision (benefit) for income
taxes.............................. 7,304 -- (410) (i) 6,894
------- -------- -------- --------
Net income (loss).................. $ 9,583 $ (4,833) $ 4,218 $ 8,968
======= ======== ======== ========
Basic and diluted net income
(loss) per share................... $ 0.72 $ (1.05) $ 0.68
======= ======== ========
Weighted average number of
Common shares outstanding (in
thousands):
Basic......................... 13,271 5,635 13,271
======= ======== ========
Diluted....................... 13,283 5,635 13,283
======= ======== ========
</TABLE>
The accompanying notes are an integral part of this pro forma condensed combined
financial statement.
22
<PAGE> 23
ORTHALLIANCE, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1. PRO FORMA ADJUSTMENTS TO THE CONDENSED COMBINED BALANCE SHEET
(a) To eliminate certain assets and liabilities that were not purchased or
assumed in the acquisition. Imagix, Inc., a wholly owned subsidiary of New
Image, was not acquired, and therefore its related assets and liabilities
were included in the adjustment. In addition, certain assets and liabilities
of New Image were not acquired by the Company, including certain other
assets and accrued liabilities and recorded intangible assets. See Note 2
for a detail of such items.
(b) To reflect the following components of the purchase price:
- - Cash payment of $5.5 million.
- - Issuance of 273,000 stock options to the New Image orthodontists with
exercise prices ranging from $7.50 to $12.00. The fair value of these
stock options was calculated using the Black Scholes option pricing
model to be approximately $0.6 million.
- - Issuance of $12.6 million of notes payables to Goldman Sachs with
interest rates ranging from 9% to 10%.
- - Estimated acquisition costs of $1.5 million. These costs are assumed to
be funded through working capital.
- - In addition to the elements of purchase price identified above, the
Company assumed $13.6 million of notes payable to New Image
orthodontists. These notes payable bear interest of approximately 9%
per annum. These notes payable are already included on the New Image
balance sheet on December 31, 1999 and therefore no pro forma adjustment
is necessary.
(c) To reflect the preliminary allocation of purchase price in excess of
net book value of assets. See Note 2 for detail of such items.
NOTE 2. RECONCILIATION OF ADJUSTMENTS FOR PRO FORMA CONDENSED COMBINED BALANCE
SHEET.
<TABLE>
<CAPTION>
(a) (c)
ASSETS AND (b) ALLOCATION TOTAL
LIABILITIES PURCHASE OF PRO FORMA
NOT ACQUIRED PRICE EXCESS ADJUSTMENTS
------------ --------- ------------ -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents.... $ (20) $ (5,500) $ -- $ (5,520)
Other current assets......... (4) -- (49) (53)
Property and equipment,
net........................ (334) -- (181) (515)
Intangible assets, net....... (38,180) -- 33,834 (4,346)
Other, net................... (577) -- -- (577)
Accounts payable............. (5) -- (36) (41)
Accrued liabilities.......... (540) 1,500 -- 960
Current portion of notes
payable.................... -- -- 7,520 7,520
Non current portion notes
payable.................... (10,746) 12,662 (7,520) (5,604)
Non-current deferred tax
liabilities................ (8,621) -- -- (8,621)
Redeemable preferred stock... (8,303) -- -- (8,303)
Preferred Stock.............. (2,970) -- -- (2,970)
Common Stock................. (8,593) -- -- (8,593)
Additional paid-in capital... -- 555 -- 555
Retained earnings
(accumulated deficit)...... 14,086 -- -- 14,086
</TABLE>
23
<PAGE> 24
NOTE 3. PURCHASE PRICE CALCULATION AND ALLOCATION
The final allocation of the purchase price will be determined after the
completion of the acquisition and will be based on a comprehensive final
evaluation of the fair value of New Image's tangible and identifiable intangible
assets acquired and liabilities assumed at the time of the Acquisition. The
preliminary allocation is summarized as follows:
Calculation of purchase price:
<TABLE>
<CAPTION>
<S> <C>
Cash payment $ 5,500
Acquisition costs 1,500
Issuance and assumption of notes payable 26,250
Issuance of stock options 555
---------
Total purchase price 33,805
Historical tangible net book value
of assets acquired (42)
---------
Purchase price in excess of
net book value of assets $ 33,847
=========
</TABLE>
Allocation of purchase price in excess of net book value of assets:
<TABLE>
<CAPTION>
<S> <C>
Prepaid and other current assets $ (54)
Property and equipment (515)
Intangible assets 33,835
Accounts payable and accrued liabilities 581
----------
Purchase price in excess of
net book value of assets $ 33,847
==========
</TABLE>
NOTE 4. PRO FORMA ADJUSTMENTS TO THE CONDENSED COMBINED STATEMENT OF OPERATIONS
(d) To eliminate general and administrative expenses of $303 related to
Imagix, Inc., a wholly-owned subsidiary of New Image Orthodontic Group,
which was not acquired by the Company.
(e) To reflect combined amortization expense based on the intangible assets
resulting from the Acquisition. The Acquisition resulted in estimated
intangible assets of approximately $33.8 million that will be amortized
over 25 years using the straight-line method. The resulting adjustment
reduced amortization expense by $396.
(f) To adjust depreciation expense based on the Company's estimate
of the fair value of property and equipment acquired. The resulting
adjustment reduced depreciation expense by $85.
(g) Adjustment to combined 1999 interest expense to reflect the cost of
borrowings and liabilities assumed associated with the Acquisition.
These borrowings are as follows and are assumed to have accrued interest
over the year ended December 31, 1999:
24
<PAGE> 25
- - Line of credit borrowings to fund cash payment of $5.5 million. Interest
rate of approximately 9% represents the Company's average interest rate on
its line of credit for the year ended December 31, 1999.
- - New Image orthodontist notes assumed of $13.6 million. An interest rate of
9% represents the weighted average interest rate for these notes.
- - Notes payable to Goldman Sachs issued to fund the balance of the purchase
price. The interest rates on these notes are between 9% and 10%, with an
approximate weighted average of 9.5%.
The pro forma interest adjustment calculation related to the Goldman Sachs
notes payable does not take into account the scheduled principal payments
that may have been paid during the year. Management believes that the
company should generate sufficient cash flow to fund some or all of these
principal payments which would have resulted into a reduction in interest
expense of up to $1.0 million or an addition to its pro forma diluted
earnings per share of approximately $0.04 (tax effected).
(h) Adjustment to reflect the reduction in expense that will have a continuing
impact as a result of eliminating the New Image corporate overhead
structure, net of incremental corporate overhead costs to be incurred by
OrthAlliance directly attributable to the Acquisition. These adjustments
affect the following expense items:
<TABLE>
<S> <C>
Salaries and benefits $ (1,526)
Rent (174)
General and administrative (1,549)
</TABLE>
(i) Adjustment to combined 1999 income tax expense to utilize New Image's
current year operating loss and to reflect the tax impact of the pro forma
expense adjustments above. The combined effective tax rate is approximately
43%.
The unaudited pro forma condensed combined financial statement of operations
does not reflect the intergration costs related to the acquisition.
25
<PAGE> 26
(C) EXHIBITS.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ORTHALLIANCE, INC.
(Registrant)
Date: May 15, 2000 By: /s/ James C. Wilson
----------------------------
James C. Wilson,
Chief Financial Officer
(Principal Financial
and Accounting Officer)
27
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------ -----------
<S> <C>
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants
</TABLE>
28
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 8-K, into the Company's previously filed S-1
Registration Statement File No. 333-27143, S-4 Registration Statement File No.
333-84197 and S-8 Registration Statements File Nos. 333-32392, 333-48831,
333-48833, and 333-61461.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
May 15, 2000
