<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>4
<FILENAME>d93749a1ex99-2.txt
<DESCRIPTION>UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INFO.
<TEXT>
<PAGE>
EXHIBIT 99.2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following tables show unaudited pro forma condensed consolidated
financial information reflecting the merger on November 9, 2001 of a
wholly-owned subsidiary of Orthodontic Centers of America, Inc. ("OCA") with and
into OrthAlliance, Inc. ("OrthAlliance"), whereby OrthAlliance became a
wholly-owned subsidiary of OCA. The pro forma information reflects the purchase
method of accounting for the merger. This pro forma information, while helpful
in illustrating the financial attributes of the combined companies under one set
of assumptions, does not attempt to predict or suggest future results. Also, the
information provided for the nine-month period ended September 30, 2001 does not
necessarily indicate what the results were for all of 2001.
The unaudited pro forma condensed consolidated balance sheet at
September 30, 2001 assumes that the merger was completed on September 30, 2001.
The unaudited pro forma condensed consolidated statements of income for the nine
months ended September 30, 2001 assumes that the merger was completed on January
1, 2001. The pro forma adjustments in these pro forma condensed consolidated
financial statements are based on the exchange ratio in the merger, which was
0.10135 shares of OCA common stock for each share of OrthAlliance common stock,
and a price per share of OCA common stock of $26.
Following the announcement of the merger agreement between OrthAlliance
and OCA, a number of OrthAlliance's affiliated practitioners commenced
litigation against OrthAlliance, alleging, among other things, that OrthAlliance
breached the terms of their service, management service and consulting
agreements by failing to provide certain services, and/or that certain
provisions of their service, management service or consulting agreements may be
unenforceable. OrthAlliance is vigorously defending these lawsuits and believes
that the claims lack merit; however, OCA's management is continuing to assess
the claims and merits of each of these lawsuits, which are at a relatively early
stage, and cannot predict at this time whether OrthAlliance will prevail in each
of these actions.
In estimating the amount of certain adjustments included in these pro forma
financial statements, OCA has assigned no value to advances to orthodontic
entities, property, equipment and improvements, notes receivable, and service,
management service and consulting agreements relating to certain OrthAlliance
affiliated practitioners who are parties to such pending litigation, because of
the inherent uncertainties of the litigation process, the relatively early
stages of these lawsuits and the recentness of the merger, all of which create
uncertainties with respect to the recoverability of these assets. Accordingly,
corresponding adjustments were made to reduce the appropriate asset accounts and
increase the appropriate liability accounts. Such adjustments reduced total
assets on a pro forma basis as of September 30, 2001 by $20.3 million and
increased total liabilities on a pro forma basis as of September 30, 2001 by
$5.7 million, and are included in the amounts presented in the pro forma
condensed financial statements. OCA has not included any adjustments in the pro
forma condensed consolidated statements of income for the nine months ended
September 30, 2001 with respect to fee revenue and expenses attributable to such
affiliated practitioners. OrthAlliance's historical results for the nine months
ended September 30, 2001 included approximately $46.1 million of fee revenue and
approximately $22.1 million of total direct expenses attributable to such
affiliated practitioners. In addition, OCA has not included any adjustments in
the pro forma condensed consolidated statements of income for the nine months
ended September 30, 2001 for any reductions in general and administrative
expenses (including advertising and marketing expenses) and interest expense
related to the servicing and financing of the affiliated practitioners who are
currently in litigation with OrthAlliance. The amount of the reduction in such
expenses has not been determined.
These adjustments do not reflect any proceeds that may be received by
OrthAlliance from these affiliated practitioners in consideration for certain
assets or termination of their service,
1
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management service or consulting agreements. In addition, these adjustments do
not reflect a belief by management that these lawsuits have merit or that the
plaintiffs will ultimately prevail in these actions. Management is attempting to
resolve these matters and continue the relationships with the OrthAlliance
affiliated practitioners who have commenced litigation against OrthAlliance.
Management continues to assess these lawsuits and may adjust its estimation of
the value of these advances to orthodontic entities, property, equipment and
improvements, notes receivable, and service, management service and consulting
agreements as additional information is obtained or the status of the litigation
changes.
OCA believes that the assumptions used in preparing these pro forma
condensed consolidated financial statements provide a reasonable basis for
presenting all of the significant effects of the merger other than any synergies
anticipated by OCA and nonrecurring charges directly attributable to the merger
and that will result from combining operations, and that the pro forma
adjustments give effect to those assumptions in the unaudited pro forma
condensed consolidated balance sheet and the unaudited pro forma condensed
consolidated statements of income. The purchase price allocation and adjustments
used in these pro forma financial statements are based upon preliminary
estimates, which are subject to change as additional information is obtained.
2
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PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2001
(UNAUDITED)
<Table>
<Caption>
HISTORICAL
-----------------------
OCA ORTHALLIANCE ADJUSTMENTS PRO FORMA
--------- ------------ ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Current assets
Cash and cash equivalents..................................... $ 11,133 $ 9,018 $ -- $ 20,151
Patient receivables........................................... -- 18,988 (18,988)(1) --
Unbilled patient receivables.................................. -- 4,123 (4,123)(1) --
Service fees receivable....................................... 50,757 -- 9,436 (1) 51,254
(8,939)(2)
Advances to orthodontic entities.............................. 9,329 15,676 (8,713)(2)(13) 16,292
Deferred income taxes......................................... 1,469 164 17,371(3) 19,004
Supplies inventory............................................ 8,589 -- -- 8,589
Prepaid expenses and other assets............................. 5,595 460 (336)(4) 5,719
--------- --------- --------- ---------
Total current assets..................................... 86,872 48,429 (14,292) 121,009
Property, equipment and improvements, net......................... 88,776 7,049 (3,504)(5)(13) 92,321
Notes receivable.................................................. -- 5,562 (2,437)(6)(13) 3,125
Advances to orthodontic entities, less current portion............ 10,595 -- -- 10,595
Deferred income taxes............................................. 24,539 357 17,291 (3) 42,187
Management agreements............................................. 207,012 120,574 (94,409)(7)(13) 233,177
Goodwill.......................................................... -- -- 66,725 (8) 66,725
Other assets...................................................... 4,201 723 (723)(9) 4,201
--------- --------- --------- ---------
Total other assets....................................... 335,123 134,265 (17,057) 452,331
--------- --------- --------- ---------
Total assets............................................. $ 421,995 $ 182,694 $ (31,349) $ 573,340
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities
Accounts payable.............................................. $ 8,431 $ 4,244 $ -- $ 12,675
Accrued salaries and other accrued liabilities................ 7,923 3,274 10,624 (10)(13) 21,821
Patient prepayments........................................... -- 13,675 (13,675)(1) --
Service fee prepayments....................................... -- -- 20,498 (2) 20,498
Deferred revenue.............................................. 1,876 -- -- 1,876
Deferred income tax liabilities............................... -- 22 (22)(3) --
Income taxes payable.......................................... 777 1,776 -- 2,553
Amounts payable to orthodontic entities....................... 3,374 3,760 (3,760)(2) 3,374
Current portion of long-term debt and notes payable........... 1,211 3,179 -- 4,390
--------- --------- --------- ---------
Total current liabilities................................ 23,592 29,930 13,665 67,187
Long-term debt and notes payable, less current portion............ 54,265 71,623 -- 125,888
Deferred income taxes............................................. -- 1,338 (1,338)(3) --
Non-controlling interest in subsidiary............................ 47 -- -- 47
Shareholders' equity
Common stock.................................................. 496 13 (13)(11) 508
12 (12)
Additional paid-in capital.................................... 180,041 65,895 (65,895)(11) 216,156
36,115 (12)
Retained earnings............................................. 165,407 20,552 (20,552)(11) 165,407
Treasury stock................................................ -- (6,657) 6,657 (11) --
Accumulated other comprehensive income........................ (121) -- -- (121)
Due from key employees for stock purchase program............. (488) -- -- (488)
Capital contributions receivable from shareholders............ (1,244) -- -- (1,244)
--------- --------- --------- ---------
Total shareholders' equity............................... 344,091 79,803 (43,676) 380,218
--------- --------- --------- ---------
Total liabilities and shareholders' equity............... $ 421,995 $ 182,694 $ (31,349) $ 573,340
========= ========= ========= =========
</Table>
3
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------------
(1) Reflects the reclassification of OrthAlliance patient receivables,
unbilled patient receivables and patient prepayments to service fees
receivables to conform with OCA's financial statement presentation.
(2) Reflects the adjustment of OrthAlliance service fees receivable,
advances due from orthodontists and/or pediatric dentists and service
fee prepayments to conform to OCA's revenue recognition policy, as well
as adjustments relating to certain OrthAlliance affiliated
practitioners who are parties to pending litigation with OrthAlliance,
due to uncertainties with respect to the recoverability of these
assets. For additional information about these OrthAlliance affiliated
practitioners, please see footnote (13) below.
(3) Reflects the deferred tax effects that would result from the merger due
to differences between the book and tax base of OrthAlliance's assets
and liabilities. For income purposes, the merger is being treated as a
tax free exchange.
(4) Reflects the adjustment of prepaid expenses and other assets related to
insurance policies and other prepayments that are not being maintained
after the merger.
(5) Reflects the adjustment to write-off property, equipment and leasehold
improvements that will have no value to OCA following the merger, as
well as adjustments relating to certain OrthAlliance affiliated
practitioners who are parties to pending litigation with OrthAlliance,
due to uncertainties with respect to the recoverability of these
assets. For additional information about these OrthAlliance affiliated
practitioners, please see footnote (13) below.
(6) Reflects the adjustment to write-off notes receivable from certain
OrthAlliance affiliated practitioners who are parties to pending
litigation with OrthAlliance, due to uncertainties with respect to the
recoverability of these assets. For additional information about these
OrthAlliance affiliated practitioners, please see footnote (13) below.
(7) Reflects the adjustment of OrthAlliance service, management service and
consulting agreements to estimated fair value at the completion of the
merger. A portion of this adjustment relates to service, management
service and consulting agreements with certain OrthAlliance affiliated
practitioners who are parties to pending litigation with OrthAlliance,
due to uncertainties with respect to the recoverability of these
assets. For additional information about these OrthAlliance affiliated
practitioners, please see footnote (13) below.
This estimate of fair value is preliminary and could change
substantially after OCA performs a more complete evaluation of the
service, management service and consulting agreements and the pending
litigation described in footnote (13) below. In addition, this
adjustment does not reflect the value of OCA common stock which may be
issued to OrthAlliance affiliated orthodontists and pediatric dentists
in exchange for amending existing employment and service, management
service or consulting agreements or signing new OCA business services
agreements under various incentive programs offered to those
orthodontists and pediatric dentists, which when determined will
increase the value of the service, management service and consulting
agreements.
(8) Reflects the excess of purchase price over the fair value of the net
assets acquired.
The excess of purchase price over tangible assets acquired is computed
as follows:
<Table>
<S> <C>
Total consideration paid based upon a total of 1.24 million shares
of OCA common stock (computed as 12.25 million, the total number of
shares of OrthAlliance common stock outstanding at September 30,
2001, times the exchange ratio of 0.10135) and a price per share of
$26.00 and $3.8 million of certain transaction-related costs....................... $36,127
OrthAlliance's net book value at September 30, 2001................................ $79,803
</Table>
4
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Pro forma adjustments posted (numbers in parentheses below refer to
other footnotes to this pro forma balance sheet):
<Table>
<S> <C>
(2) Adjust receivables to conform to OCA's revenue recognition
policy...................................................................... $(34,390)
(3) Record deferred tax effects of merger....................................... 36,022
(4) Record adjustment for prepaid expenses and other assets not
maintained.................................................................. (336)
(5) Record adjustment for property, equipment and improvements
with no value............................................... ............... (3,504)
(6) Record adjustment for notes receivable with no value....... ................ (2,437)
(7) Record adjustment for service, management service and
consulting agreements................................. ..................... (94,409)
(9) Write-off of unamortized debt issuance costs............... ................ (723)
(10) Accrual of merger-related expenses......................... ................ (10,624)
--------
Pro forma net book value as of September 30, 2001................. ................ $(30,598)
--------
Pro forma goodwill recorded....................................... ................ $ 66,725
========
</Table>
(9) Reflects the write-off of unamortized deferred debt issuance costs
relating to OrthAlliance's revolving line of credit, which was repaid
and terminated at the completion of the merger.
(10) Represents the accrual of estimated additional transaction-related
costs, such as $2.6 million of severance payments under employment
agreements, $6.7 million of financial advisory and legal fees and
expenses and $1.3 million of lease termination payments. Certain of
these estimated costs relate to legal fees and expenses incurred or
anticipated to be incurred in connection with pending litigation
between OrthAlliance and certain OrthAlliance affiliated practitioners.
For additional information about these OrthAlliance affiliated
practitioners, please see footnote (13) below.
(11) Reflects elimination of the shareholders' equity accounts of
OrthAlliance.
(12) Reflects shares of OCA common stock issued in exchange for all of the
outstanding shares of OrthAlliance common stock. This adjustment does
not reflect the value of shares of OCA common stock to be issued to
OrthAlliance orthodontists and pediatric dentists in exchange for
amending existing employment and service, management service or
consulting agreements or signing new OCA business services agreements
under various incentive programs offered to those orthodontists and
pediatric dentists.
(13) Following the announcement of the merger agreement between OrthAlliance
and OCA, a number of OrthAlliance's affiliated practitioners commenced
litigation against OrthAlliance, alleging, among other things, that
OrthAlliance breached the terms of their service, management service
and consulting agreements by failing to provide certain services,
and/or that certain provisions of their service, management service or
consulting agreements may be unenforceable. OrthAlliance is vigorously
defending these lawsuits and believes that the claims lack merit;
however, OCA's management is continuing to assess the claims and merits
of each of these lawsuits, which are at a relatively early stage, and
cannot predict at this time whether OrthAlliance will prevail in each
of these actions.
In estimating the amount of certain adjustments included in these pro
forma financial statements, OCA has assigned no value to advances to
orthodontic entities, property, equipment and improvements, notes
receivable, and service, management service and consulting agreements
relating to certain OrthAlliance affiliated practitioners who are
parties to such pending litigation, because of the inherent
uncertainties of the litigation process, the relatively early stages of
these lawsuits and the recentness of the merger, all of which create
uncertainties with respect to the recoverability of these assets.
Accordingly, corresponding adjustments were made to reduce the
appropriate asset accounts and increase the appropriate liability
accounts. Such adjustments reduced total assets on a pro forma basis as
of September 30, 2001 by $20.3 million and increased total liabilities
on a pro forma basis as of September 30, 2001 by $5.7 million, and are
included in the amounts presented in the pro forma financial
statements.
5
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These adjustments do not reflect any proceeds that may be received by
OrthAlliance from these affiliated practitioners in consideration for
certain assets or termination of their service, management service or
consulting agreements. In addition, these adjustments do not reflect a
belief by management that these lawsuits have merit or that the
plaintiffs will ultimately prevail in these actions. Management is
attempting to resolve these matters and continue the relationships with
the OrthAlliance affiliated practitioners who have commenced litigation
against OrthAlliance. Management continues to assess these lawsuits and
may adjust its estimation of the value of these advances to orthodontic
entities, property, equipment and improvements, notes receivable, and
service, management service and consulting agreements as additional
information is obtained or the status of the litigation changes.
6
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PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
<Table>
<Caption>
HISTORICAL
-----------------------
OCA ORTHALLIANCE ADJUSTMENTS PRO FORMA
--------- ------------ --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Fee revenue .............................................. $ 246,552 $ 115,335 $ 2,720(1)(8) $ 359,167
--------- --------- --------- ---------
Direct expenses:
Employee costs ........................................... 71,011 35,585 -- 106,596
Advertising and marketing ................................ 19,718 -- 3,574(2) 23,292
Rent ..................................................... 21,597 8,829 -- 30,426
Orthodontic supplies ..................................... 19,980 11,011 -- 30,991
--------- --------- --------- ---------
Total direct expenses .................................... 132,306 55,425 3,574 (8) 191,305
General and administrative ............................... 26,939 39,152 (3,574)(2) 62,517
Depreciation and amortization ............................ 13,504 5,737 (501)(3) 14,964
(3,776)(4)
--------- --------- --------- ---------
Operating income ......................................... 73,803 15,021 1,557 90,381
Interest (expense) income, net ........................... (3,352) (4,918) -- (8,270)
Non-controlling interest in subsidiary ................... (47) -- -- (47)
--------- --------- --------- ---------
Income before income taxes ............................... 70,404 10,103 1,557 82,064
Provision for income taxes ............................... 26,578 4,543 588(5) 31,709
--------- --------- --------- ---------
Net income .......................................... $ 43,826 $ 5,560 $ 969 $ 50,355
========= ========= ========= =========
Outstanding shares ....................................... 48,863 12,249 (12,249)(6) 48,863
Common stock equivalents ................................. 1,270 -- -- (6) 1,270
Transaction shares issued ................................ -- -- 1,242 (7) 1,242
--------- --------- --------- ---------
Total outstanding common stock and
common stock equivalents .............................. 50,133 12,249 (11,007)(6) 51,375
========= ========= ========= =========
Net income per share - diluted ........................... $ 0.87 $ 0.45 $ 0.98
========= ========= =========
</Table>
----------
(1) Reflects the adjustment of OrthAlliance's fee revenue to conform to
OCA's revenue recognition policy.
(2) Reflects reclassification of OrthAlliance's advertising and marketing
expenses from general and administrative to conform to OCA's financial
statement presentation.
(3) Reflects change in depreciation expense related to property, equipment
and leasehold improvements that will have no value to OCA.
(4) Reflects change in amortization expense due to the revaluation of
OrthAlliance service, management service and consulting agreements.
This adjustment does not reflect the value of shares of OCA common
stock to be issued to OrthAlliance affiliated orthodontists and
pediatric dentists in exchange for amending existing employment and
service, management service or consulting agreements or signing new OCA
business services agreements under various incentive programs offered
to those orthodontists and pediatric dentists.
(5) Reflects the income tax effect of pro forma adjustments at OCA's
effective income tax rate, as adjusted for tax effects related to the
merger.
(6) Reflects elimination of the shareholders' equity accounts of
OrthAlliance.
(7) Reflects shares of OCA common stock issued to OrthAlliance stockholders
in the merger.
(8) As previously disclosed, following the announcement of the merger
agreement between OrthAlliance and OCA, a number of OrthAlliance's
affiliated practitioners commenced litigation against OrthAlliance,
alleging, among other things, that OrthAlliance breached the terms of
their service, management service and consulting agreements by failing
to provide certain services, and/or that certain provisions of their
7
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service, management service or consulting agreements may be
unenforceable. OrthAlliance is vigorously defending these lawsuits and
believes that the claims lack merit; however, OCA's management is
continuing to assess the claims and merits of each of these lawsuits,
which are at a relatively early stage, and cannot predict at this time
whether OrthAlliance will prevail in each of these actions.
In estimating the amount of certain adjustments included in the pro
forma condensed consolidated balance sheet as of September 30, 2001,
OCA has assigned no value to advances to orthodontic entities,
property, equipment and improvements, notes receivable, and service,
management service and consulting agreements relating to certain
OrthAlliance affiliated practitioners who are parties to such pending
litigation, because of the inherent uncertainties of the litigation
process, the relatively early stages of these lawsuits and the
recentness of the merger, all of which create uncertainties with
respect to the recoverability of these assets.
OCA has not included any adjustments in the pro forma condensed
consolidated statements of income for the nine months ended September
30, 2001 with respect to fee revenue and expenses attributable to such
affiliated practitioners. OrthAlliance's historical results for the
nine months ended September 30, 2001 included approximately $46.1
million of fee revenue and approximately $22.1 million of total direct
expenses attributable to such affiliated practitioners. In addition,
OCA has not included any adjustments in the pro forma condensed
consolidated statements of income for the nine months ended September
30, 2001 for any reductions in general and administrative expenses
(including advertising and marketing expenses) and interest expense
related to the servicing and financing of the affiliated practitioners
who are currently in litigation with OrthAlliance. The amount of the
reduction in such expenses has not been determined.
These adjustments also do not reflect any proceeds that may be received
by OrthAlliance from these affiliated practitioners in consideration
for certain assets or termination of their service, management service
or consulting agreements. In addition, these adjustments do not reflect
a belief by management that these lawsuits have merit or that the
plaintiffs will ultimately prevail in these actions. Management is
attempting to resolve these matters and continue the relationships with
the OrthAlliance affiliated practitioners who have commenced litigation
against OrthAlliance. Management continues to assess these lawsuits and
may adjust its estimation of the value of these advances to orthodontic
entities, property, equipment and improvements, notes receivable, and
service, management service and consulting agreements as additional
information is obtained or the status of the litigation changes.
8
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</DOCUMENT>